Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CACC > SEC Filings for CACC > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for CREDIT ACCEPTANCE CORP

Form 10-Q for CREDIT ACCEPTANCE CORP


30-Jul-2014

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 2013 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 June 30, 2014, consolidated net income was $69.4 million, or $3.06 per diluted share, compared to $61.5 million, or $2.56 per diluted share, for the same period in 2013. The increase in consolidated net income for the three months ended June 30, 2014 was primarily due an increase in the average balance of our Loan portfolio. For the six months ended June 30, 2014, consolidated net income was $119.2 million, or $5.15 per diluted share, compared to $122.1 million, or $5.04 per diluted share, for the same period in 2013. The decrease in consolidated net income for the six months ended June 30, 2014 was primarily due to a loss on extinguishment of debt related to the redemption of senior notes during the first quarter of 2014, partially offset by an increase in the average balance of our Loan portfolio.

Critical Success Factors

Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, 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.

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.


Table of Contents

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, 2014, with the forecasts as of March 31, 2014, as of December 31, 2013, and at the time of assignment, segmented by year of assignment:

                      Forecasted Collection Percentage as of (1)                Variance in Forecasted Collection Percentage from
  Consumer
    Loan
 Assignment     June 30,       March 31,     December 31,      Initial       March 31,          December 31,             Initial
    Year           2014          2014            2013          Forecast        2014                 2013                 Forecast
    2005           73.7 %         73.7 %           73.7 %         74.0 %         0.0 %               0.0  %                -0.3  %
    2006           70.0 %         70.0 %           70.0 %         71.4 %         0.0 %               0.0  %                -1.4  %
    2007           68.0 %         68.0 %           67.9 %         70.7 %         0.0 %               0.1  %                -2.7  %
    2008           70.3 %         70.2 %           70.1 %         69.7 %         0.1 %               0.2  %                 0.6  %
    2009           79.3 %         79.3 %           79.2 %         71.9 %         0.0 %               0.1  %                 7.4  %
    2010           77.2 %         77.1 %           77.0 %         73.6 %         0.1 %               0.2  %                 3.6  %
    2011           74.1 %         74.1 %           74.1 %         72.5 %         0.0 %               0.0  %                 1.6  %
    2012           73.4 %         73.4 %           73.5 %         71.4 %         0.0 %              -0.1  %                 2.0  %
    2013           73.3 %         73.3 %           73.3 %         72.0 %         0.0 %               0.0  %                 1.3  %
  2014 (2)         72.8 %         71.9 %              -           72.4 %         0.9 %                 -                    0.4  %

(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.

(2) The forecasted collection rate for 2014 Consumer Loans as of June 30, 2014 includes both Consumer Loans that were in our portfolio as of March 31, 2014 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
                                                                          March 31,
2014 Consumer Loan Assignment Period                 June 30, 2014          2014         Variance
January 1, 2014 through March 31, 2014                   73.1 %             71.9 %           1.2 %
April 1, 2014 through June 30, 2014                      72.5 %                -               -

Consumer Loans assigned in 2009 through 2013 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 June 30, 2014, forecasted collection rates improved for Consumer Loans assigned in 2014 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, 2014, forecasted collection rates improved for Consumer Loans assigned in 2008, 2010 and 2014, and were generally consistent with expectations at the start of the period for all other assignment years presented.

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 currently forecast.


Table of Contents

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, 2014. 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, 2014
                                             Forecasted                                     % of Forecast
     Consumer Loan Assignment Year          Collection %     Advance % (1)     Spread %     Realized (2)
                  2005                         73.7 %              46.9 %         26.8 %       99.8 %
                  2006                         70.0 %              46.6 %         23.4 %       99.5 %
                  2007                         68.0 %              46.5 %         21.5 %       99.0 %
                  2008                         70.3 %              44.6 %         25.7 %       98.6 %
                  2009                         79.3 %              43.9 %         35.4 %       98.7 %
                  2010                         77.2 %              44.7 %         32.5 %       96.1 %
                  2011                         74.1 %              45.5 %         28.6 %       85.3 %
                  2012                         73.4 %              46.3 %         27.1 %       65.2 %
                  2013                         73.3 %              47.6 %         25.7 %       35.3 %
                  2014                         72.8 %              48.1 %         24.7 %        8.3 %

(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 2010 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. The decline in the spread from 2013 to 2014 is primarily the result of the performance of 2013 Consumer Loans, which has exceeded our initial expectations by a greater margin than 2014 Consumer Loans.


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 June 30, 2014 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
                           Consumer Loan Assignment Year    Collection %     Advance % (1)     Spread %
Dealer Loans                           2007                    67.9 %              45.8 %         22.1 %
                                       2008                    70.7 %              43.3 %         27.4 %
                                       2009                    79.3 %              43.5 %         35.8 %
                                       2010                    77.2 %              44.4 %         32.8 %
                                       2011                    74.0 %              45.2 %         28.8 %
                                       2012                    73.3 %              46.1 %         27.2 %
                                       2013                    73.2 %              47.1 %         26.1 %
                                       2014                    72.8 %              47.7 %         25.1 %

Purchased Loans                        2007                    68.3 %              49.1 %         19.2 %
                                       2008                    69.5 %              46.7 %         22.8 %
                                       2009                    79.5 %              45.3 %         34.2 %
                                       2010                    77.1 %              46.3 %         30.8 %
                                       2011                    74.4 %              47.7 %         26.7 %
                                       2012                    73.8 %              48.3 %         25.5 %
                                       2013                    74.2 %              50.9 %         23.3 %
                                       2014                    73.4 %              51.9 %         21.5 %

(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.

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.

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 was 2.5:1 as of June 30, 2014. 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.


Table of Contents

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, 2013          -2.9  %               -0.4  %
June 30, 2013            8.4  %               10.5  %
September 30, 2013      11.0  %               15.9  %
December 31, 2013       12.6  %               11.3  %
March 31, 2014          14.3  %               16.2  %
June 30, 2014            4.5  %                5.7  %

(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 4.5% and 5.7%, respectively, during the second quarter of 2014 as the number of active Dealers grew 10.6% while average volume per active Dealer declined 5.5%. We believe the decline in volume per Dealer is the result of increased competition.

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,
                                     2014          2013      % Change        2014          2013      % Change
Consumer Loan unit volume             50,913      48,706        4.5  %       116,196     105,811        9.8  %
Active Dealers (1)                     4,960       4,484       10.6  %         5,830       5,191       12.3  %
Average volume per active Dealer        10.3        10.9       -5.5  %          19.9        20.4       -2.5  %

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


Table of Contents

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,
                                 2014             2013         % Change        2014            2013        % Change
Consumer Loan unit volume
from Dealers active both
periods                         39,235           41,634          -5.8  %     94,588          94,952          -0.4  %
Dealers active both periods      3,072            3,072             -         3,749           3,749             -
Average volume per Dealers
active both periods               12.8             13.6          -5.8  %       25.2            25.3          -0.4  %

Consumer Loan unit volume
from new Dealers                 2,191            2,649         -17.3  %      8,410          10,093         -16.7  %
New active Dealers (1)             512              615         -16.7  %      1,146           1,293         -11.4  %
Average volume per new
active Dealers                     4.3              4.3             -  %        7.3             7.8          -6.4  %

Attrition (2)                    -14.5  %         -13.9  %                    -10.3  %        -10.1  %

(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        For the Six Months Ended
                                                     June 30,                         June 30,
                                               2014              2013           2014             2013
Dealer Loan unit volume as a percentage
of total unit volume                            91.4 %             93.9 %        91.6 %            94.2 %
Dealer Loan dollar volume as a percentage
of total dollar volume (1)                      88.8 %             92.2 %        89.0 %            92.7 %

(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, 2014 and December 31, 2013, the net Dealer Loans receivable balance was 88.3% and 89.0%, respectively, of the total net Loans receivable balance.


Table of Contents

Results of Operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

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 June 30,
                                                         2014             2013         % Change
Revenue:
  Finance charges                                   $      157.9     $      147.5          7.1  %
  Premiums earned                                           13.6             12.9          5.4  %
  Other income                                               8.3              9.0         -7.8  %
    Total revenue                                          179.8            169.4          6.1  %
Costs and expenses:
  Salaries and wages                                        24.4             23.1          5.6  %
  General and administrative                                 8.5              8.3          2.4  %
  Sales and marketing                                        8.8              8.5          3.5  %
  Provision for credit losses                                4.6              5.4        -14.8  %
  Interest                                                  13.3             16.2        -17.9  %
  Provision for claims                                      11.0             10.5          4.8  %
    Total costs and expenses                                70.6             72.0         -1.9  %
Income before provision for income taxes                   109.2             97.4         12.1  %
  Provision for income taxes                                39.8             35.9         10.9  %
Net income                                          $       69.4     $       61.5         12.8  %
Net income per share:
  Basic                                             $       3.06     $       2.57         19.1  %
Diluted                                             $       3.06     $       2.56         19.5  %
Weighted average shares outstanding:
  Basic                                               22,653,393       23,974,099         -5.5  %
  Diluted                                             22,658,891       24,017,723         -5.7  %


Table of Contents

The following table highlights changes in net income for the three months ended June 30, 2014, as compared to 2013:

(In millions)                                        Change
Net income for the three months ended June 30, 2013 $ 61.5
Increase in finance charges                           10.4
Increase in premiums earned                            0.7
Decrease in other income                              (0.7 )
Increase in operating expenses (1)                    (1.8 )
Decrease in provision for credit losses                0.8
Decrease in interest                                   2.9
Increase in provision for claims                      (0.5 )
Increase in provision for income taxes                (3.9 )
Net income for the three months ended June 30, 2014 $ 69.4

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

Finance Charges. For the three months ended June 30, 2014, finance charges increased $10.4 million, or 7.1%, as compared to the same period in 2013. 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 June 30,
                                          2014               2013          Change
Average net Loans receivable balance $    2,345.6       $    2,067.3     $ 278.3
Average yield on our Loan portfolio          26.9 %             28.5 %      -1.6  %

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended June 30, 2014:

(In millions)                                                   Year over Year Change
                                                                 For the Three Months
Impact on finance charges:                                       Ended June 30, 2014
Due to an increase in the average net Loans receivable balance $                 19.9
Due to a decrease in the average yield                                           (9.5 )
  Total increase in finance charges                            $                 10.4

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 the last three quarters of 2013 and the first two quarters of 2014. 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 June 30, 2014 decreased as compared to the same period in 2013 due to lower yields on new Consumer Loan assignments, which was the result of advance rate increases made in recent years in response to the competitive environment, partially offset by improvements in forecasted collection rates throughout the last three quarters of 2013 and the first two quarters of 2014.

Premiums Earned. For the three months ended June 30, 2014, premiums earned increased $0.7 million, or 5.4%, as compared to the same period in 2013. 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 the last three quarters of 2013 and the first two quarters of 2014.


Table of Contents

Other Income. For the three months ended June 30, 2014, other income decreased $0.7 million, or 7.8%, as compared to the same period in 2013. The decrease was primarily a result of a $0.4 million decrease in Global Positioning Systems with Starter Interrupt Devices ("GPS-SID") fee income resulting from a decrease in the number of units purchased by Dealers from third party providers.

Operating Expenses. For the three months ended June 30, 2014, operating expenses increased $1.8 million, or 4.5%, as compared to the same period in 2013. The change in operating expenses was primarily due to an increase in salaries and wages expense of $1.3 million, or 5.6%, related to increases of $0.6 million for . . .

  Add CACC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CACC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.