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| CACC > SEC Filings for CACC > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data in this Form 10-K.
Critical Success Factors
Critical success factors include the ability to accurately forecast Consumer Loan performance and access to capital.
At the time of Consumer Loan acceptance or purchase, we forecast future expected cash flows from the Consumer Loan. Based on these forecasts, an advance or one time payment is made to the related dealer-partner at a level designed to achieve an acceptable return on capital. If Consumer Loan performance equals or exceeds our original expectation, it is likely our target return on capital will be achieved.
Our strategy for accessing the capital required to grow is to: (1) maintain
consistent financial performance; (2) maintain modest financial leverage; and
(3) maintain multiple funding sources. Our funded debt to equity ratio is 1.9:1
at December 31, 2008. We currently use four primary sources of financing: (1) a
revolving secured line of credit with a commercial bank syndicate; (2) revolving
secured warehouse facilities with institutional investors; (3) SEC Rule 144A
asset-backed secured borrowings ("Term ABS 144A") with qualified institutional
investors; and (4) a residual credit facility with an institutional investor.
Consumer Loan Performance
Since the cash flows available to repay Loans are generated, in most cases, from
the underlying Consumer Loans, the performance of the Consumer Loans is critical
to our financial results. The following table compares our forecast of Consumer
Loan collection rates as of December 31, 2008, with the forecasts as of
December 31, 2007 and at the time of assignment, segmented by year of
assignment:
Variance in Forecasted Collection
Forecasted Collection Percentage as of Percentage from
December 31, December 31, Initial December 31, Initial
Loan Assignment Year 2008 2007 (1) Forecast 2007 Forecast
1999 72.1 % 72.0 % 73.6 % 0.1 % (1.5 )%
2000 72.5 % 72.4 % 72.8 % 0.1 % (0.3 )%
2001 67.4 % 67.3 % 70.4 % 0.1 % (3.0 )%
2002 70.4 % 70.6 % 67.9 % (0.2 )% 2.5 %
2003 73.8 % 74.1 % 72.0 % (0.3 )% 1.8 %
2004 73.4 % 73.5 % 73.0 % (0.1 )% 0.4 %
2005 74.1 % 73.8 % 74.0 % 0.3 % 0.1 %
2006 70.3 % 70.9 % 71.4 % (0.6 )% (1.1 )%
2007 67.9 % 71.1 % 70.7 % (3.2 )% (2.8 )%
2008 67.9 % - 69.7 % - (1.8 )%
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(1) These forecasted collection percentages differ from those previously reported in our Annual Report on Form 10-K for the year ended December 31, 2007 as they have been revised for a new methodology for forecasting future collections on Loans that we implemented during the first quarter of 2008.
We forecast future Loan cash flows by comparing Loans in our current portfolio to historical Loans with the same attributes. The attributes include both variables captured at Loan origination like credit bureau data, application data, loan data and vehicle data, as well as variables captured subsequent to Loan origination such as collection and delinquency data. Prior to the second quarter of 2008, our forecasted cash flows were based on an assumption that Loans within our current portfolio would produce similar collection rates as produced by historical Loans with the same attributes. During the second quarter of 2008, we modified our forecast to assume that Loans
originated in 2006, 2007, and 2008 would perform 100 to 300 basis points worse than historical Loans with the same attributes. This modification reduced estimated future net cash flows by $22.2 million or 1.7% of the total undiscounted cash flow stream expected from our Loan portfolio.
During the fourth quarter of 2008, we again realized lower than expected collection rates and as a result implemented an additional modification to our forecasting methodology. This modification reduced estimated future net cash flows by $9.5 million or 0.7% of the total undiscounted cash flow stream expected from our Loan portfolio. The adjustment impacted only Loans originated subsequent to September 30, 2007 with more recent Loans impacted more severely and more seasoned Loans within this time period impacted less severely. Forecasted collection rates on Loans originated on or before September 30, 2007 were not modified as collection results during the fourth quarter of 2008 were consistent with our expectations for these Loans. In addition, during the fourth quarter of 2008, we revised the estimated timing of future collections to reflect recent trends in prepayment frequency. In recent periods we have experienced a reduction in prepayments, which typically result from payoffs that occur when customers reestablish a positive credit history, trade-in their vehicle, and finance another vehicle purchase with a more traditional auto loan. As the availability of traditional financing has been curtailed as a result of current economic conditions, prepayment rates have declined.
As a result of the forecast modifications implemented in the second and fourth quarters of 2008, we now expect Loans originated in 2006, 2007, and 2008 to perform worse than similar Loans originated in 2003 through 2005. The impact of our forecasting changes is summarized in the table below by year of assignment:
Loan Reduction in
Assignment Year Forecasted Performance
2006 100 basis points
2007 200 basis points
2008 400 basis points
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As a result of current economic conditions and uncertainty about future conditions, we are cautious about our forecasts of future collection rates. However, we believe our current estimates are reasonable for the following reasons:
• Our forecasts start with the assumption that Loans in our current portfolio will perform like historical Loans with similar attributes.
• We reduced our forecasts during the second quarter on Loans originated in 2006 through 2008 by 100 to 300 basis points as these Loans began to perform worse than expected.
• Actual Loan performance during the third and fourth quarters of 2008 was consistent with our forecast as of June 30, 2008 for Loans originated prior to October 1, 2007.
• As described above, we further reduced our forecasts during the fourth quarter of 2008 on Loans originated subsequent to September 30, 2007. Although the performance of these Loans was consistent with expectations during the third quarter of 2008, during the fourth quarter of 2008 the performance of these Loans was worse than expected.
• We have adjusted our estimated timing of future net cash flows to reflect recent trends relating to Loan prepayments.
• We have reduced the forecasted collection rate used at Loan inception to price new Loan originations. From September 1, 2008 through January 31, 2009, the forecasted collection rate used at Loan inception was approximately 300 basis points lower than identical Loans originated a year ago. Beginning February 1, 2009, we decreased the forecasted collection rate used at Loan inception by an additional 100 basis points.
• Our current forecasting methodology, when applied against historical data, produces a consistent forecasted collection rate as the Loans age.
• During January and February of 2009, realized net Loan cash flows were consistent with our current forecast.
If the economic environment continues to deteriorate, our Loan collection rates may continue to decline. Knowing this, we set prices at Loan inception to increase the likelihood of achieving an acceptable return on capital, even if collection results are worse than we currently forecast.
The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of December 31, 2008. Payments of dealer holdback and Portfolio Profit Express are not included in the advance percentage paid to the dealer-partner. All amounts 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 December 31, 2008
Forecasted % of Forecast
Loan Assignment Year Collection % Advance % Spread % Realized
1999 72.1 % 48.7 % 23.4 % 99.7 %
2000 72.5 % 47.9 % 24.6 % 99.3 %
2001 67.4 % 46.0 % 21.4 % 98.8 %
2002 70.4 % 42.2 % 28.2 % 98.5 %
2003 73.8 % 43.4 % 30.4 % 98.0 %
2004 73.4 % 44.0 % 29.4 % 97.1 %
2005 74.1 % 46.9 % 27.2 % 95.2 %
2006 70.3 % 46.6 % 23.7 % 82.4 %
2007 67.9 % 46.5 % 21.4 % 55.1 %
2008 67.9 % 44.6 % 23.3 % 21.2 %
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The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), and the spread (the forecasted collection rate less the advance rate) as of December 31, 2008 for Purchased Loans and Dealer Loans separately:
Loan Forecasted
Assignment Year Collection % Advance % Spread %
Purchased Loans 2007 67.6 % 48.9 % 18.7 %
2008 66.9 % 47.0 % 19.9 %
Dealer Loans 2007 68.0 % 45.9 % 22.1 %
2008 68.4 % 43.4 % 25.0 %
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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 following table summarizes changes in Consumer Loan dollar and unit volume in each of the last 12 quarters as compared with the same period in the previous year:
Consumer Loans
Year over Year Percent Change
Three Months Ended Dollar Volume Unit Volume
March 31, 2006 11.1 % 12.6 %
June 30, 2006 6.1 % 6.8 %
September 30, 2006 26.4 % 12.4 %
December 31, 2006 36.1 % 18.2 %
March 31, 2007 41.1 % 25.0 %
June 30, 2007 43.9 % 26.8 %
September 30, 2007 2.2 % 0.2 %
December 31, 2007 23.3 % 13.8 %
March 31, 2008 28.5 % 16.0 %
June 30, 2008 40.6 % 26.1 %
September 30, 2008 27.5 % 26.9 %
December 31, 2008 (21.0 )% (13.4 )%
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During 2008 we reduced advance rates in response to a more favorable competitive environment and projected capital availability. Reducing advance rates increases our return on capital, but reduces Consumer Loan unit volume.
For the three months ended December 31, 2008, as compared to the same period in 2007, unit volume declined by 13.4% and dollar volume declined by 21.0%. Unit volume declined due to a decrease in volume per active dealer-partner, partially offset by an increase in the number of active dealer-partners. Dollar volume declined more than unit volume due to reductions in the average Loan size caused by the pricing changes implemented in the third quarter of 2008.
For the year ended December 31, 2008, as compared to the same period in 2007, unit volume increased by 13.7% and dollar volume increased by 18.9%. Unit volume increased due to an increase in the number of active dealer-partners offset by decreased volume per active dealer-partner. The decrease in volume per active dealer-partner was caused by various pricing changes implemented in 2007 and 2008, partially offset by an improving competitive environment. Dollar volume increased due to the increase in unit volume and an increase in the percentage of Purchased Loans accepted by us. On average, the amount paid to acquire a Purchased Loan is larger than the amount advanced on a Dealer Loan. These increases were partially offset by reductions in the average Loan size during the third and fourth quarters of 2008 caused by various pricing changes implemented in the second and third quarters of 2008.
Results of Operations
The following is a discussion of the results of operations and income statement data for the Company on a consolidated basis:
Year Ended Year Ended Year Ended
December 31, % of December 31, % of December 31, % of
2008 Revenue 2007 Revenue 2006 Revenue
(Dollars in thousands, except per share data)
Revenue:
Finance charges $ 286,823 91.8 % $ 220,473 91.9 % $ 188,605 86.0 %
Premiums earned 3,967 1.3 361 0.2 1,043 0.5
Program fees 193 0.1 283 0.1 13,589 6.2
Other income 21,203 6.8 18,810 7.8 16,095 7.3
Total revenue 312,186 100.0 239,927 100.0 219,332 100.0
Costs and expenses:
Salaries and wages 68,993 22.2 55,396 23.1 41,015 18.7
General and administrative 27,511 8.8 27,271 11.4 36,485 16.6
Sales and marketing 16,703 5.4 17,441 7.3 16,624 7.6
Provision for credit losses 46,029 14.7 19,947 8.3 11,006 5.0
Interest 43,189 13.8 36,669 15.3 23,330 10.6
Provision for claims 2,651 0.8 39 - 226 0.1
Other expense 73 - 52 - - -
Total costs and expenses 205,149 65.7 156,815 65.4 128,686 58.6
Operating income 107,037 34.3 83,112 34.6 90,646 41.4
Foreign currency (loss) gain (25 ) - 69 - (6 ) -
Income from continuing operations
before provision for income taxes 107,012 34.3 83,181 34.6 90,640 41.4
Provision for income taxes 39,944 12.8 29,567 12.3 31,793 14.5
Income from continuing operations 67,068 21.5 53,614 22.3 58,847 26.9
Discontinued operations
Gain (loss) from discontinued United
Kingdom operations 307 0.1 (562 ) (0.2 ) (297 ) (0.1 )
Provision (benefit) for income taxes 198 0.1 (1,864 ) (0.8 ) (90 ) -
Gain (loss) from discontinued
operations 109 - 1,302 0.6 (207 ) (0.1 )
Net income $ 67,177 21.5 % $ 54,916 22.9 % $ 58,640 26.8 %
Net income per common share:
Basic $ 2.22 $ 1.83 $ 1.78
Diluted $ 2.16 $ 1.76 $ 1.66
Income from continuing operations per
common share:
Basic $ 2.22 $ 1.78 $ 1.78
Diluted $ 2.16 $ 1.72 $ 1.67
Gain (loss) from discontinued
operations per common share:
Basic $ 0.00 $ 0.04 $ (0.01 )
Diluted $ 0.00 $ 0.04 $ (0.01 )
Weighted average shares outstanding:
Basic 30,249,783 30,053,129 33,035,693
Diluted 31,105,043 31,153,688 35,283,478
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Continuing Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following table highlights changes for the year ended December 31, 2008, as
compared to 2007:
Year Ended
December 31,
2008
Average outstanding balance of Loan portfolio 33.8 %
Finance charges 30.1 %
Operating expenses 13.1 %
Provision for credit losses 130.8 %
Interest expense 17.8 %
Income from continuing operations 25.1 %
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Income from continuing operations increased for the year ended December 31, 2008 primarily due to the Company being able to achieve operating expense efficiencies while growing the Loan portfolio. The increase in the average outstanding balance of our Loan portfolio, partially offset by a decrease in the average yield on our Loan portfolio of 1.1%, has resulted in an increase in finance charges. The average outstanding balance of our Loan portfolio increased due to an increase in the number of active dealer-partners partially offset by a reduction in volume per active dealer-partner. The average yield on our Loan portfolio decreased primarily due to worsening Loan performance partially offset by more attractive pricing on 2008 originations.
Income from continuing operations grew slower than finance charges due to a significant increase in the provision for credit losses resulting from reductions in forecasted collection rates during the second and fourth quarters of 2008. The increase in the provision for credit losses was partially offset by slower growth in operating expenses and interest expense.
The following table summarizes the changes in active dealer-partners and corresponding Consumer Loan unit volume:
Years Ended December 31,
2008 2007 % Change
Consumer Loan unit volume 121,282 106,693 13.7
Active dealer-partners (1) 3,264 2,827 15.5
Average volume per active dealer-partner 37.2 37.7 (1.3 )
Consumer Loan unit volume from dealer-partners active
both periods 99,176 95,067 4.3
Dealer-partners active both periods 2,020 2,020 -
Average volume per dealer-partner active both periods 49.1 47.1 4.3
Consumer Loan unit volume from new dealer-partners 21,659 19,914 8.8
New active dealer-partners (2) 1,202 1,162 3.4
Average volume per new active dealer-partner 18.0 17.1 5.3
Attrition (3) -10.9 % -10.5 %
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(1) Active dealer-partners are dealer-partners who have received funding for at least one Loan during the period.
(2) New active dealer-partners are dealer-partners who enrolled in our program and have received funding for their first Loan from us during the periods presented.
(3) Attrition is measured according to the following formula: decrease in Consumer Loan unit volume from dealer-partners who have received funding for at least one Loan during the comparable period of the prior year but did not receive funding for any Loans during the current period divided by prior year comparable period Consumer Loan unit volume.
Premiums Earned and Provision for Claims. During the fourth quarter of 2008, we formed VSC Re in order to enhance our control and the security of the trust assets that will be used to pay future vehicle service contract claims. VSC Re currently reinsures vehicle service contracts that are underwritten by two of our three third party insurers. Our financial results for the year ended December 31, 2008 reflect two months of VSC Re activity, including $3.9 million in premiums earned and $2.7 million in provision for claims.
Other Income. The following table highlights the changes, as a percentage of revenue, of other income for the year ended December 31, 2008, as compared to 2007:
Year Ended
Percentage of Revenue, December 31, 2007 7.8 %
Interest income on secured financings -0.5 %
Income from dealer support products and services -0.4 %
Seminars and conventions -0.3 %
Vehicle service contract and GAP profit sharing income 0.7 %
Other -0.5 %
Percentage of Revenue, December 31, 2008 6.8 %
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The decrease in other income, as a percentage of revenue, was primarily a result of:
• Decreased interest income on secured financings due to a decrease in interest rates earned on cash investments relating to secured financing transactions.
• Decreased income from dealer support products and services due to the lower utilization of, and discontinuance of, certain dealer-partner support programs.
• Decreased income from seminars and conventions due to the elimination of our national dealer-partner convention during 2008. Expense from seminars and conventions is recorded in sales and marketing. During 2008 and 2007, seminars and conventions expense was greater than the income earned.
The decreases above were offset by the following:
• An increase in periodic vehicle service contract and GAP profit sharing payments received during the year from third party vehicle service contract and guaranteed asset protection providers. Since we have only received these payments since 2007, the amounts of these payments are currently not estimable due to a lack of historical information. As a result, the revenue related to these payments was recognized in the period the payments were received. For the year ended December 31, 2008 we received a total of $3.7 million in vehicle service contract and GAP profit sharing payments compared to $1.2 million in payments received in 2007.
Salaries and Wages. For the year ended December 31, 2008, salaries and wages expense, as a percentage of revenue, decreased from 23.1% to 22.2%, as compared to 2007. Salaries and wages expense can be categorized into originations, servicing and support functions. Salaries and wages expense related to originations and servicing remained consistent, as a percentage of revenue, while support grew slower than revenue, due to a decrease in stock compensation expense primarily related to restricted stock units granted in the first quarter of 2007.
General and Administrative. The following table summarizes the change in general and administrative expenses, as a percentage of revenue, for the year ended December 31, 2008, as compared to the same period in 2007:
Year Ended
Percentage of Revenue, December 31, 2007 11.4 %
Data processing and computer consulting fees -0.8 %
Legal expense -0.3 %
. . .
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