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CACC > SEC Filings for CACC > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for CREDIT ACCEPTANCE CORP


30-Apr-2013

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 2012 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 March 31, 2013, consolidated net income was $60.6 million, or $2.48 per diluted share, compared to $50.3 million, or $1.92 per diluted share, for the same period in 2012. The increase in consolidated net income for the three months ended March 31, 2013 was primarily due to an increase in the average balance 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 2.2:1 as of March 31, 2013. 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 March 31, 2013, with the forecasts as of December 31, 2012, and at the time of assignment, segmented by year of assignment:

                                                                                Variance in Forecasted
                                                                                 Collection Percentage
                                   Forecasted Collection Percentage as of                from
                                                     December                  December
         Consumer Loan              March 31,          31,        Initial        31,            Initial
        Assignment Year               2013             2012       Forecast       2012           Forecast
              2004                        73.1 %         73.0 %       73.0 %        0.1 %            0.1 %
              2005                        73.6 %         73.6 %       74.0 %        0.0 %           -0.4 %
              2006                        69.9 %         69.9 %       71.4 %        0.0 %           -1.5 %
              2007                        68.0 %         68.0 %       70.7 %        0.0 %           -2.7 %
              2008                        70.4 %         70.3 %       69.7 %        0.1 %            0.7 %
              2009                        79.5 %         79.5 %       71.9 %        0.0 %            7.6 %
              2010                        77.4 %         77.3 %       73.6 %        0.1 %            3.8 %
              2011                        74.2 %         74.1 %       72.5 %        0.1 %            1.7 %
              2012                        72.7 %         72.2 %       71.4 %        0.5 %            1.3 %


Table of Contents

Consumer Loans assigned in 2009 through 2012 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 March 31, 2013, forecasted collection rates improved for Consumer Loans assigned in 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 March 31, 2013. All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.

                                                            As of March 31, 2013
                                                                                        % of
                                              Forecasted                              Forecast
                                              Collection     Advance                  Realized
       Consumer Loan Assignment Year              %           % (1)      Spread %       (2)
                   2004                             73.1 %      44.0 %       29.1 %       99.6 %
                   2005                             73.6 %      46.9 %       26.7 %       99.5 %
                   2006                             69.9 %      46.6 %       23.3 %       99.1 %
                   2007                             68.0 %      46.5 %       21.5 %       98.2 %
                   2008                             70.4 %      44.6 %       25.8 %       97.2 %
                   2009                             79.5 %      43.9 %       35.6 %       96.3 %
                   2010                             77.4 %      44.7 %       32.7 %       83.4 %
                   2011                             74.2 %      45.5 %       28.7 %       58.5 %
                   2012                             72.7 %      46.3 %       26.4 %       27.4 %
                   2013                             71.5 %      47.2 %       24.3 %        3.3 %

(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.

(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 2005 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 2013 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 March 31, 2013 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                      67.9 %      45.8 %       22.1 %
                                         2008                      70.8 %      43.3 %       27.5 %
                                         2009                      79.5 %      43.5 %       36.0 %
                                         2010                      77.4 %      44.4 %       33.0 %
                                         2011                      74.1 %      45.2 %       28.9 %
                                         2012                      72.7 %      46.1 %       26.6 %
                                         2013                      71.5 %      46.9 %       24.6 %

Purchased Loans                          2007                      68.4 %      49.1 %       19.3 %
                                         2008                      69.7 %      46.7 %       23.0 %
                                         2009                      79.6 %      45.3 %       34.3 %
                                         2010                      77.3 %      46.4 %       30.9 %
                                         2011                      74.4 %      48.0 %       26.4 %
                                         2012                      73.5 %      49.3 %       24.2 %
                                         2013                      71.8 %      51.0 %       20.8 %

(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 five quarters as compared to the same period in the previous
year:

                       Year over Year Percent Change
Three Months Ended   Unit Volume      Dollar Volume (1)
March 31, 2012              10.6 %                 10.7 %
June 30, 2012                7.3 %                  7.9 %
September 30, 2012           5.4 %                  3.1 %
December 31, 2012            2.4 %                  6.0 %
March 31, 2013              -2.9 %                 -0.4 %

(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.

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 decreased 2.9% and 0.4%, respectively, during the first quarter of 2013 as the number of active Dealers grew 21.2% and average volume per active Dealer declined 20.1%. We believe the decline in volume per Dealer is the result of increased competition.


Table of Contents

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

                                      For the Three Months Ended March 31,
                                      2013          2012          % Change
Consumer Loan unit volume              57,105        58,796              -2.9 %
Active Dealers (1)                      4,355         3,594              21.2 %
Average volume per active Dealer         13.1          16.4             -20.1 %

(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 Three Months Ended March 31,
                                                        2013            2012            % Change
Consumer Loan unit volume from Dealers active both
periods                                                  42,207          51,521              -18.1 %
Dealers active both periods                               2,525           2,525                  -
Average volume per Dealers active both periods             16.7            20.4              -18.1 %

Consumer Loan unit volume from new Dealers                3,440           4,089              -15.9 %
New active Dealers (1)                                      678             554               22.4 %
Average volume per new active Dealers                       5.1             7.4              -31.1 %

Attrition (2)                                             -12.4 %          -9.2 %

(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
                                                                    Ended March 31,
                                                                2013              2012
Dealer Loan unit volume as a percentage of total unit volume      94.4 %            93.3 %
Dealer Loan dollar volume as a percentage of total dollar
volume (1)                                                        93.1 %            91.5 %

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

For the three months ended March 31, 2013, Dealer Loan unit and dollar volume as a percentage of total unit and dollar volume were generally consistent with the same period in 2012.

As of March 31, 2013 and December 31, 2012, the net Dealer Loans receivable balance was 88.7% and 88.0%, respectively, of the total net Loans receivable balance.


Table of Contents

Results of Operations

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

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

(In millions, except share and per share data)      For the Three Months Ended March 31,
                                                      2013               2012       % Change
Revenue:
   Finance charges                               $        142.9      $      126.1       13.3 %
   Premiums earned                                         12.0              10.8       11.1 %
   Other income                                             9.8               5.5       78.2 %
  Total revenue                                           164.7             142.4       15.7 %
Costs and expenses:
   Salaries and wages                                      21.9              19.4       12.9 %
   General and administrative                               7.9               7.4        6.8 %
   Sales and marketing                                      9.0               7.8       15.4 %
   Provision for credit losses                              5.8               5.2       11.5 %
   Interest                                                16.0              15.2        5.3 %
   Provision for claims                                     9.0               8.6        4.7 %
  Total costs and expenses                                 69.6              63.6        9.4 %
Income before provision for income taxes                   95.1              78.8       20.7 %
   Provision for income taxes                              34.5              28.5       21.1 %
  Net income                                     $         60.6      $       50.3       20.5 %

Net income per share:
   Basic                                         $         2.49      $       1.92       29.7 %
Diluted                                          $         2.48      $       1.92       29.2 %

Weighted average shares outstanding:
   Basic                                             24,330,027        26,157,672       -7.0 %
   Diluted                                           24,426,127        26,283,801       -7.1 %


Table of Contents

The following table highlights changes in net income for the three months ended March 31, 2013, as compared to 2012:

(In millions)                                          Change
Net income for the three months ended March 31, 2012   $  50.3
Increase in finance charges                               16.8
Increase in premiums earned                                1.2
Increase in other income                                   4.3
Increase in operating expenses (1)                        (4.2 )
Increase in provision for credit losses                   (0.6 )
Increase in interest                                      (0.8 )
Increase in provision for claims                          (0.4 )
Increase in provision for income taxes                    (6.0 )
Net income for the three months ended March 31, 2013   $  60.6

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

Finance Charges. For the three months ended March 31, 2013, finance charges increased $16.8 million, or 13.3%, as compared to the same period in 2012. 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 millions)                      For the Three Months Ended March 31,
                                           2013                2012          Change
Average net Loans receivable balance   $     1,964.3       $     1,649.7     $ 314.6
Average yield on our Loan portfolio             29.1 %              30.6 %      -1.5 %

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended March 31, 2013:

                                                                         Year over
                                                                            Year
(In millions)                                                              Change
                                                                          For the
                                                                           Three
                                                                           Months
                                                                           Ended
                                                                         March 31,
Impact on finance charges:                                                  2013
Due to an increase in the average net Loans receivable balance           $     24.0
Due to a decrease in the average yield                                         (7.2 )
  Total increase in finance charges                                      $     16.8

The increase in the average net Loans receivable balance was primarily due to the growth in new Consumer Loan assignments in recent years, which resulted in the dollar volume of new Consumer Loan assignments exceeding the principal collected on Loans throughout 2012 and the first quarter of 2013. The growth in new Consumer Loan assignments in recent years was the result of an increase in active Dealers, partially offset by a decline in volume per active Dealer. The average yield on our Loan portfolio for the three months ended March 31, 2013 decreased as compared to the same period in 2012 due to higher advance rates on new Consumer Loan assignments, partially offset by improvements in forecasted collection rates throughout 2012 and the first quarter of 2013.

Premiums Earned. For the three months ended March 31, 2013, premiums earned increased $1.2 million, or 11.1%, as compared to the same period in 2012. The increase was primarily due to growth in the size of our reinsurance portfolio, which was the result of premiums written on vehicle service contracts from new Consumer Loan assignments throughout 2012 and the first quarter of 2013.

Other Income. For the three months ended March 31, 2013, other income increased $4.3 million, or 78.2%, as compared to the same period in 2012. The increase was primarily due to a $3.2 million increase in Global Positioning Systems with Starter Interrupt Devices ("GPS-SID") fee income due to an increase in the fee earned per unit partially offset by a decrease in the number of units purchased by Dealers from TPPPs. In addition, income from Dealer support products and services increased by $0.5 million.


Table of Contents

Operating Expenses. For the three months ended March 31, 2013, operating expenses increased $4.2 million, or 12.1%, as compared to the same period in 2012. The change in operating expenses was primarily due to the following:

An increase in salaries and wages expense of $2.5 million, or 12.9%, comprised of the following:

An increase of $1.8 million, excluding stock-based compensation, related to increases of $1.3 million in loan servicing and $0.7 million for support functions, partially offset by a decrease of $0.2 million in loan originations.

An increase of $0.7 million in stock-based compensation expense.

An increase in sales and marketing expense of $1.2 million, or 15.4%, primarily as a result of the increase in the size of our field sales force and an increase in Dealer support products and services.

Provision for Credit Losses. For the three months ended March 31, 2013, the provision for credit losses increased $0.6 million, or 11.5%, as compared to the same period in 2012. Under GAAP, when the present value of forecasted future cash flows decline relative to our expectations at the time of assignment, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established. For purposes of calculating the required allowance, Dealer Loans are grouped by Dealer and Purchased Loans are grouped by month of purchase. As a result, regardless of the overall performance of the portfolio of Consumer Loans, a provision can be required if any individual Loan pool performs worse than expected. Conversely, a previously recorded provision can be reversed if any previously impaired individual Loan pool experiences an improvement in performance.

During the three months ended March 31, 2013, overall Consumer Loan performance exceeded our expectations at the start of the period. However, the performance of certain Loan pools declined from our expectations during the period, resulting in a provision for credit losses of $5.8 million for the three months ended March 31, 2013, of which $6.0 million related to Dealer Loans partially offset by a reversal of a provision of $0.2 million related to Purchased Loans. During the three months ended March 31, 2012, overall Consumer Loan performance was generally consistent with our expectations at the start of the period. However, the performance of certain Loan pools declined from our expectations during the period, resulting in a provision for credit losses of $5.2 million for the three months ended March 31, 2012, of which $6.6 million related to Dealer Loans partially offset by a reversal of a provision of $1.4 million related to Purchased Loans.

Interest. For the three months ended March 31, 2013, interest expense increased $0.8 million, or 5.3%, as compared to the same period in 2012. The following table shows interest expense, the average outstanding debt balance, and the average cost of debt for the three months ended March 31, 2013 and 2012:

. . .

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