Credit Acceptance Corporation — 2015 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Credit Acceptance provides financing programs through automobile dealers, primarily for consumers with impaired or limited credit histories. It operates as one reportable segment. About 96.1% of 2015 assigned loan units had FICO scores below 650 or no FICO score.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $825.3 million | $723.5 million | +14.1% |
| Finance charges | $730.5 million | $630.4 million | +15.9% |
| Income before taxes | $474.5 million | $420.9 million | +12.7% |
| Net income | $299.7 million | $266.2 million | +12.6% |
| Diluted EPS | $14.28 | $11.92 | +19.8% |
| Net margin | 36.3% | 36.8% | Down 0.5 percentage points |
| Net cash from operating activities | $404.2 million | $365.2 million | +10.7% |
| Net cash used in investing activities | $(639.5) million | $(363.4) million | Greater outflow |
Fourth-quarter 2015 revenue was $217.8 million and net income was $80.0 million, versus $185.1 million and $73.0 million, respectively, in fourth-quarter 2014.
- Portfolio and growth: Net loans receivable increased to $3.10 billion from $2.51 billion. Consumer-loan assignment dollar volume rose 29.3% to $2.17 billion; unit volume increased 33.2% to 298,288.
- Yield and credit: Average net loans receivable rose to $2.83 billion from $2.36 billion, while portfolio yield declined to 25.8% from 26.7%. Provision for credit losses increased to $41.5 million from $12.8 million; the allowance rose to $243.6 million from $206.9 million.
- Debt and liquidity: Debt was $2.08 billion, up from $1.75 billion; funded debt to equity was 2.2:1. Cash and cash equivalents were $6.3 million, and unused available credit lines totaled $875.6 million. Management reported compliance with debt covenants at year-end.
- Cash and capital: Net financing cash flow was $235.2 million. The company repurchased $86.5 million of stock in 2015 and paid no dividends. Contractual obligations included $726.9 million of forecast Dealer Holdback payments, contingent on collections and repayment of advances.
Material changes versus the prior year
- Higher average loan balances drove finance-charge growth, partly offset by lower portfolio yield on newer assignments.
- Credit-loss provision increased by $28.7 million, reflecting deterioration in certain loan pools despite overall portfolio performance being described as generally consistent with expectations.
- Interest expense rose 34.0% to $76.0 million, as average debt and average debt cost increased. The 2014 comparison included a $21.8 million loss on extinguishment of debt; there was no such loss in 2015.
- Loan assignment growth was supported by a 25.1% increase in active dealers to 9,064. The Purchase Program’s share of assigned units increased to 12.6% from 9.3%.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or volume guidance. Management says operating cash flows and financing alternatives are expected to fund debt maturities and future operations, while warning that restricted or unavailable funding could materially harm liquidity and operations.
- Results depend heavily on forecasts of collections, Dealer Holdback, and vehicle recovery values. A 1% decline in forecast future net loan cash flows as of year-end would have reduced 2015 net income by approximately $10.8 million. Management noted that recent-vintage forecasts are less certain because much of the expected collections remain unrealized.
- Non-prime borrowers are exposed to elevated delinquency, default, repossession, and loss risk. Competition, economic weakness, lower used-car values, rising interest rates, and access to capital are additional risks. Some borrowings carry floating rates.
- The CFPB began supervising the company under its larger-participant auto-finance rule effective August 31, 2015. The company also disclosed inquiries by the Massachusetts Attorney General, the U.S. Department of Justice, and the New York Attorney General. It is cooperating and cannot estimate potential losses or outcomes. Five dealer arbitrations remained; the company said it believed their eventual outcome would not materially affect its financial statements.
- Other notable items: the company issued $250 million of 7.375% senior notes due 2023 and completed two Term ABS financings totaling about $601 million. The financial statements and internal controls received unqualified audit opinions.
Important facts for investors to verify
- Whether loan-pool performance and actual collections support management’s forecasts, especially for 2014–2015 assignments, and whether elevated credit-loss provisions persist.
- How lower yields on new assignments and the changing mix of Dealer Loans versus Purchased Loans affect returns and credit-risk sharing.
- Available borrowing capacity, upcoming ABS amortization and debt maturities, covenant headroom, and sensitivity to higher funding costs.
- Developments, potential financial exposure, and any required disclosures from the CFPB supervision and the Massachusetts, DOJ, and New York investigations.
- Whether growth in assignments and dealer relationships can be sustained without weakening pricing, underwriting, servicing performance, or liquidity.