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CACC > SEC Filings for CACC > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for CREDIT ACCEPTANCE CORP

Form 10-Q for CREDIT ACCEPTANCE CORP


1-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, of our 2011 Annual Report on Form 10-K, as well as Item 1- Consolidated Financial Statements, of this Form 10-Q, which is incorporated herein by reference.

Overview

We offer automobile dealers financing programs that enable them 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 product, but who actually end up qualifying for traditional financing.

For the three months ended September 30, 2012, consolidated net income was $53.0 million, or $2.12 per diluted share, compared to $50.0 million, or $1.91 per diluted share, for the same period in 2011. For the nine months ended September 30, 2012, consolidated net income was $159.8 million, or $6.22 per diluted share, compared to $138.0 million, or $5.19 per diluted share, for the same period in 2011. The increase in consolidated net income for the three and nine months ended September 30, 2012 was primarily due to an increase in the size of our Loan portfolio.

Critical Success Factors

Critical success factors include our ability to access capital on acceptable terms, accurately forecast Consumer Loan performance, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit. Economic profit is a financial metric we use to evaluate our financial results and determine incentive compensation. Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.

Access to Capital

Our strategy for accessing capital on acceptable terms needed to maintain and grow the business 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 2.1:1 as of September 30, 2012. We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and
(4) Senior Notes.

Consumer Loan Performance

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 achieve an acceptable return on capital. If Consumer Loan performance equals or exceeds our initial expectation, it is likely our target return on capital will be achieved.

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 September 30, 2012, with the forecasts as of June 30, 2012, as of December 31, 2011, and at the time of assignment, segmented by year of assignment:

                                                                         Variance in Forecasted Collection
                      Forecasted Collection Percentage as of                      Percentage from
  Consumer
    Loan                                                                  June
 Assignment    September                       December     Initial        30,       December     Initial
    Year       30, 2012      June 30, 2012     31, 2011     Forecast      2012       31, 2011     Forecast
    2003            73.8 %            73.8 %       73.7 %       72.0 %       0.0 %        0.1 %        1.8 %
    2004            73.0 %            73.0 %       73.0 %       73.0 %       0.0 %        0.0 %        0.0 %
    2005            73.5 %            73.6 %       73.6 %       74.0 %      -0.1 %       -0.1 %       -0.5 %
    2006            70.0 %            70.0 %       70.0 %       71.4 %       0.0 %        0.0 %       -1.4 %
    2007            68.1 %            68.1 %       68.1 %       70.7 %       0.0 %        0.0 %       -2.6 %
    2008            70.3 %            70.3 %       70.0 %       69.7 %       0.0 %        0.3 %        0.6 %
    2009            79.5 %            79.6 %       79.4 %       71.9 %      -0.1 %        0.1 %        7.6 %
    2010            77.2 %            77.1 %       76.8 %       73.6 %       0.1 %        0.4 %        3.6 %
    2011            73.7 %            73.6 %       73.2 %       72.5 %       0.1 %        0.5 %        1.2 %
   2012 (1)         71.6 %            71.9 %          -         71.1 %      -0.3 %          -          0.5 %


Table of Contents

(1) The forecasted collection rate for 2012 Consumer Loans as of September 30, 2012 includes both Consumer Loans that were in our portfolio as of June 30, 2012 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
                                                                       June
                                                      September         30,
 2012 Consumer Loan Assignment Period                 30, 2012         2012       Variance
January 1, 2012 through June 30, 2012                      72.0 %        71.9 %        0.1 %
July 1, 2012 through September 30, 2012                    70.6 %           -            -

Consumer Loans assigned in 2003 and 2009 through 2011 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2006 and 2007 have yielded forecasted collection results materially worse than our initial estimates. For all other assignment years presented, actual results have been very close to our initial estimates. For the three months ended September 30, 2012, forecasted collection rates were generally consistent with expectations at the start of the period for all assignment years presented. For the nine months ended September 30, 2012, forecasted collection rates improved for Consumer Loans assigned during 2008 and 2010 through 2012 and were generally consistent with expectations at the start of the period for all other assignment years presented.

Forecasting collection rates precisely 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 currently 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 September 30, 2012. 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 September 30, 2012
                                                                                      % of
                                            Forecasted                              Forecast
                                            Collection     Advance                  Realized
      Consumer Loan Assignment Year             %           % (1)      Spread %       (2)
                  2003                            73.8 %      43.4 %       30.4 %       99.6 %
                  2004                            73.0 %      44.0 %       29.0 %       99.5 %
                  2005                            73.5 %      46.9 %       26.6 %       99.4 %
                  2006                            70.0 %      46.6 %       23.4 %       98.8 %
                  2007                            68.1 %      46.5 %       21.6 %       97.8 %
                  2008                            70.3 %      44.6 %       25.7 %       96.1 %
                  2009                            79.5 %      43.9 %       35.6 %       93.1 %
                  2010                            77.2 %      44.7 %       32.5 %       73.8 %
                  2011                            73.7 %      45.5 %       28.2 %       43.9 %
                  2012                            71.6 %      45.9 %       25.7 %       13.5 %

(1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

(2) Presented as a percentage of total forecasted collections.

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2009 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 declined during the 2004 through 2007 period as we increased advance rates during this period in response to a more difficult competitive environment. During 2008 and 2009, the spread increased as the competitive environment improved, and we reduced advance rates. In addition, during 2009, the spread was positively impacted by better than expected Consumer Loan performance. During the 2010 through 2012 period, the spread decreased as we again increased advance rates in response to the competitive environment.


Table of Contents

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of September 30, 2012 for Dealer Loans and Purchased Loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

                                                         Forecasted
                                                         Collection     Advance
                         Consumer Loan Assignment Year       %           % (1)      Spread %
Dealer Loans                         2007                      68.0 %      45.8 %       22.2 %
                                     2008                      70.8 %      43.3 %       27.5 %
                                     2009                      79.6 %      43.5 %       36.1 %
                                     2010                      77.2 %      44.4 %       32.8 %
                                     2011                      73.7 %      45.4 %       28.3 %
                                     2012                      71.6 %      45.5 %       26.1 %

Purchased Loans                      2007                      68.4 %      49.1 %       19.3 %
                                     2008                      69.6 %      46.7 %       22.9 %
                                     2009                      79.4 %      45.3 %       34.1 %
                                     2010                      77.0 %      46.5 %       30.5 %
                                     2011                      74.2 %      46.1 %       28.1 %
                                     2012                      72.5 %      50.2 %       22.3 %

(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.

The advance rates presented for each Consumer Loan assignment year change over time due to the impact of transfers between Dealer and Purchased Loans. Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer's Consumer Loans from the Dealer Loan portfolio to the Purchased Loan portfolio in the period this forfeiture occurs.

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.

Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in
each of the last seven 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, 2011              36.7 %                 59.3 %
June 30, 2011               28.7 %                 41.3 %
September 30, 2011          28.6 %                 40.5 %
December 31, 2011           25.3 %                 32.1 %
March 31, 2012              10.6 %                 10.7 %
June 30, 2012                7.3 %                  7.9 %
September 30, 2012           5.4 %                  3.1 %

(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 product, (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 5.4% and 3.1%, respectively, during the third quarter of 2012 as the number of active Dealers grew 26.6% and average volume per active Dealer declined 16.5%. We believe the decline in volume per Dealer is the result of increased competition. We increased advance rates in April 2012 and September 2012, which positively impacted unit and dollar volumes while reducing the return on capital we expect to earn on new assignments. We believe these advance rate increases had a positive impact on economic profit as we believe the positive impact of the increased dollar volume exceeded the negative impact of the reduced return on capital. Unit volume for the one month ended October 31, 2012 increased by 13.3% as compared to the same period in 2011 and was positively impacted by two additional business days (23 business days in October 2012 compared to 21 business days in October 2011).


Table of Contents

The following table summarizes the changes in Consumer Loan unit volume and active Dealers:

                                    For the Nine Months Ended September 30,
                                    2012              2011          % Change
Consumer Loan unit volume            148,580           137,592              8.0 %
Active Dealers (1)                     4,781             3,603             32.7 %
Average volume per active Dealer        31.1              38.2            -18.6 %

(1) Active Dealers are Dealers who have received funding for at least one Loan during the period.

The following table provides additional information on the changes in Consumer Loan unit volume and active Dealers:

                                                          For the Nine Months Ended September 30,
                                                         2012              2011             % Change
Consumer Loan unit volume from Dealers active both
periods                                                   118,827           128,491               -7.5 %
Dealers active both periods                                 2,841             2,841                  -
Average volume per Dealers active both periods               41.8              45.2               -7.5 %

Consumer Loan unit volume from new Dealers                 20,240            13,812               46.5 %
New active Dealers (1)                                      1,556             1,021               52.4 %
Average volume per new active Dealers                        13.0              13.5               -3.7 %

Attrition (2)                                                -6.6 %            -7.4 %

(1) New active Dealers are Dealers who enrolled in our program and have received funding for their first 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 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.

Consumer Loans are assigned to us as either Dealer Loans through our Portfolio Program or Purchased Loans through our Purchase Program. The following table summarizes the portion of our Consumer Loan volume that was assigned to us as Dealer Loans:

                                              For the Three Months          For the Nine Months
                                               Ended September 30,          Ended September 30,
                                             2012              2011        2012            2011
Dealer Loan unit volume as a percentage
of total unit volume                           93.8 %            92.3 %      93.6 %          92.4 %
Dealer Loan dollar volume as a percentage
of total dollar volume (1)                     92.1 %            90.1 %      91.8 %          90.4 %

(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.

For the three and nine months ended September 30, 2012, Dealer Loan unit and dollar volume as a percentage of total unit and dollar volume were generally consistent with the same periods in 2011.

As of September 30, 2012 and December 31, 2011, the net Dealer Loans receivable balance was 87.7% and 85.4%, respectively, of the total net Loans receivable balance.


Table of Contents

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September
30, 2011

The following is a discussion of our results of operations and income statement
data on a consolidated basis.

(In thousands, except per share data)                   For the Three Months Ended September 30,
                                                          2012                 2011         % Change
Revenue:
  Finance charges                                    $      137,495       $      117,905        16.6 %
  Premiums earned                                            12,206               10,462        16.7 %
  Other income                                                5,977                5,372        11.3 %
    Total revenue                                           155,678              133,739        16.4 %
Costs and expenses:
  Salaries and wages                                         21,720               15,929        36.4 %
  General and administrative                                  6,797                6,044        12.5 %
  Sales and marketing                                         8,129                5,587        45.5 %
  Provision for credit losses                                 9,759                4,550       114.5 %
  Interest                                                   16,289               14,600        11.6 %
  Provision for claims                                        9,122                8,363         9.1 %
    Total costs and expenses                                 71,816               55,073        30.4 %
Income before provision for income taxes                     83,862               78,666         6.6 %
  Provision for income taxes                                 30,874               28,706         7.6 %
Net income                                           $       52,988       $       49,960         6.1 %

Net income per share:
  Basic                                              $         2.13       $         1.92
    Diluted                                          $         2.12       $         1.91

Weighted average shares outstanding:
  Basic                                                      24,908               26,033
  Diluted                                                    24,962               26,136


Table of Contents

The following table highlights changes in net income for the three months ended September 30, 2012, as compared to 2011:

(In thousands)                                              Change
Net income for the three months ended September 30, 2011   $ 49,960
Increase in finance charges                                  19,590
Increase in premiums earned                                   1,744
Increase in other income                                        605
Increase in operating expenses (1)                           (9,086 )
Increase in provision for credit losses                      (5,209 )
Increase in interest                                         (1,689 )
Increase in provision for claims                               (759 )
Increase in provision for income taxes                       (2,168 )
Net income for the three months ended September 30, 2012   $ 52,988

(1) Operating expenses consist of salaries and wages, general and administrative, and sales and marketing expenses.

Finance Charges. For the three months ended September 30, 2012, finance charges increased $19.6 million, or 16.6%, as compared to the same period in 2011. The increase was primarily the result of an increase in the average net Loans receivable balance partially offset by a decrease in the average yield on our Loan portfolio, as follows:

(Dollars in thousands)                                    For the Three Months Ended September 30,
                                                          2012                  2011            Change
Average net Loans receivable balance                 $     1,848,512       $     1,478,779     $ 369,733
Average yield on our Loan portfolio                             29.8 %                31.9 %        -2.1 %

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended September 30, 2012:

                                                                      Year over Year
(In thousands)                                                            Change
                                                                   For the Three Months
                                                                   Ended September 30,
Impact on finance charges:                                                 2012
Due to an increase in the average net Loans receivable balance     $             29,479
Due to a decrease in the average yield                                           (9,889 )
  Total increase in finance charges                                $             19,590

The increase in the average net Loans receivable balance was primarily due to growth in new Loan volume during the last two quarters of 2011 and the first three quarters of 2012, which was primarily a result of an increase in active Dealers. The average yield on our Loan portfolio for the three months ended September 30, 2012 decreased as compared to the same period in 2011 due to lower yields on new Loans, partially offset by improvements in forecasted collection rates during the last two quarters of 2011 and the first two quarters of 2012.

Premiums Earned. For the three months ended September 30, 2012, premiums earned increased $1.7 million, or 16.7%, as compared to the same period in 2011. The increase is primarily due to growth in the size of our reinsurance portfolio which resulted from growth in new Consumer Loan assignments during the last two quarters of 2011 and the first three quarters of 2012.

Other Income. For the three months ended September 30, 2012, other income increased $0.6 million, or 11.3%, as compared to the same period in 2011. The increase is primarily due to an increase in Global Positioning Systems with Starter Interrupt Devices ("GPS-SID") fee income due to increases in both the fee earned per unit and the number of units purchased by Dealers from third party providers.


Table of Contents

Operating Expenses. For the three months ended September 30, 2012, operating expenses increased $9.1 million, or 33.0%, as compared to the same period in 2011. The change in operating expenses is primarily due to the following:

An increase in salaries and wages expense of $5.8 million, or 36.4%, which included a $3.7 million increase in stock-based compensation expense primarily attributable to the 15 year stock award granted to our Chief Executive Officer during the first quarter of the year and a $0.9 million increase in fringe benefits, primarily related to medical claims. Salaries and wages, excluding the increase in stock-based compensation and fringe benefits, increased $1.2 million including an increase of $0.9 million in loan servicing, $0.2 million for support functions and $0.1 million in loan originations.

An increase in sales and marketing expense of $2.5 million, or 45.5%, primarily as a result of the increase in the size of our field sales force.

Provision for Credit Losses. For the three months ended September 30, 2012, the provision for credit losses increased $5.2 million, or 114.5%, as compared to the same period in 2011. Under GAAP, when the present value of forecasted future cash flows decline relative to our expectations at the time of assignment, a . . .

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