Credit Acceptance Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Dollar amounts are in U.S. dollars.
Business context
Credit Acceptance provides financing programs through a nationwide dealer network for consumers who may not qualify for conventional auto financing. Under its Portfolio Program, it advances funds to dealers and shares future collections; under its Purchase Program, it buys consumer loans. The Portfolio Program represented 93.5% of loans assigned by units in 2013. The company reports one operating segment.
Financial performance and position
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $682.1 million | $609.2 million | +12.0% |
| Income before taxes | $398.2 million | $343.1 million | +16.1% |
| Net income | $253.1 million | $219.7 million | +15.2% |
| Diluted EPS | $10.54 | $8.58 | +22.8% |
| Net loans receivable | $2,212.8 million | $1,933.5 million | +14.4% |
| Total debt | $1,392.4 million | $1,250.8 million | +11.3% |
| Shareholders’ equity | $750.1 million | $621.9 million | +20.6% |
Net margin was approximately 37.1% and pretax margin approximately 58.4%, calculated from reported annual totals. Operating cash flow was $325.7 million, versus $308.6 million in 2012. Investing activities used $333.6 million, chiefly reflecting dealer advances, loan purchases, and holdback payments; financing activities provided $3.1 million. Cash and cash equivalents were $4.2 million at year-end, while restricted cash and securities totaled $164.9 million and are not equivalent to unrestricted liquidity.
Finance charges were $590.4 million, up 9.7%; average net loans receivable increased to $2,088.4 million, while average portfolio yield declined to 28.3% from 30.0%. Interest expense was $65.0 million; average cost of debt declined to 4.7% from 5.5%. The credit-loss provision decreased to $21.9 million from $24.0 million, while the year-end allowance rose to $195.4 million from $176.4 million. Provision for claims increased to $40.8 million from $34.8 million. The effective tax rate was 36.4%.
For Q4 2013, revenue was $175.3 million and net income was $65.9 million, compared with $159.3 million and $59.9 million, respectively, in Q4 2012. Diluted EPS was $2.80 versus $2.40.
Material changes and notable items
- Consumer Loan assignment dollar volume rose 8.7% and unit volume 6.4%; active dealers increased 20.2% to 6,394. Average annual loan volume per active dealer fell 11.5%, which management attributed to increased competition.
- Other income increased 68.2% to $40.2 million, primarily reflecting higher GPS-SID vendor fees and vehicle-service-contract profit sharing.
- A second-quarter 2013 enhancement to collection forecasting increased credit-loss provision by $3.0 million and reduced net income by $2.1 million. Management estimated that a 1% decline in forecast future net loan cash flows at year-end would have reduced 2013 net income by approximately $8.9 million.
- The company repurchased 1.216 million shares for $135.2 million during 2013. It paid no dividends.
- In January 2014, the company issued $300 million of 6.125% senior notes due 2021 and planned to redeem $350 million of 9.125% notes due 2017 on February 21, 2014. It expected a $21.7 million pretax debt-extinguishment loss in Q1 2014.
Outlook, risks and contingencies
No quantified earnings or loan-volume guidance is provided. Management stated that operating cash flows and available financing alternatives were expected to fund debt maturities and future operations, while cautioning that restricted access to funding could materially harm liquidity and operations. The company was in compliance with its debt covenants at year-end.
Key risks include the difficulty of forecasting collections on high-risk consumer loans; competition and rising dealer advance rates, which can reduce portfolio yields and returns; substantial debt and dependence on revolving credit, warehouse facilities and asset-backed financing; interest-rate exposure; economic deterioration and weaker used-vehicle collateral values; and regulatory uncertainty. The CFPB’s 2013 indirect-auto-lending bulletin raised fair-lending compliance concerns for dealer compensation practices. The filing also identifies consumer litigation, dealer disputes, cybersecurity, third-party service-provider, and tax risks. Six dealers had filed individual arbitrations seeking unspecified damages concerning their servicing agreements; the company intended to defend them vigorously.
The audited financial statements received an unqualified opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Subsequent completion and financial impact of the planned 2017 senior-note redemption, including the stated Q1 2014 extinguishment loss.
- Loan collection performance, forecast revisions, and allowance adequacy—especially for newer loan vintages, for which a substantial portion of expected collections remained unrealized.
- Whether dealer-volume growth can offset declining volume per dealer and sustain yields amid competitive pressure and higher advances.
- Availability, cost, maturity, and covenant capacity of funding facilities, and the amount of unrestricted liquidity relative to obligations.
- Developments in CFPB and other consumer-finance regulation, the dealer arbitrations and other litigation, and any material tax-audit outcomes.