Credit Acceptance Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Credit Acceptance provides automobile financing programs through dealers, primarily for consumers with impaired or limited credit histories. It operates as one reportable segment.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $609.2 million | $525.2 million |
| Net income | $219.7 million | $188.0 million |
| Diluted EPS | $8.58 | $7.07 |
| Net income margin | 36.1% | 35.8% |
| Operating cash flow | $308.6 million | $275.7 million |
| Loans receivable, net | $1,933.5 million | $1,598.6 million |
| Total debt | $1,250.8 million | $997.9 million |
| Shareholders’ equity | $621.9 million | $540.0 million |
| Cash and cash equivalents | $9.0 million | $4.7 million |
Revenue rose 16.0% and net income 16.9%. Finance charges were $538.2 million, or 88.3% of revenue; premiums earned were $47.1 million; other income was $23.9 million. The average net loan balance grew to $1,797.0 million, while portfolio yield declined to 30.0% from 32.3%. Credit-loss provision was $24.0 million, down from $29.0 million. Interest expense increased to $63.4 million; average cost of debt decreased to 5.5% from 6.4%.
FY2012 cash flow included $400.9 million used in investing activities and $96.6 million provided by financing activities. Restricted cash was $92.4 million; restricted securities available for sale were $46.1 million. These restricted balances are not equivalent to unrestricted operating liquidity.
In Q4 2012, revenue was $159.3 million and net income was $59.9 million, compared with $138.0 million and $50.0 million, respectively, in Q4 2011. Diluted EPS was $2.40 versus $1.91.
Material changes and operating developments
- Net loan receivables increased 21.0% year over year; total debt increased 25.3%, primarily reflecting loan growth and share repurchases.
- Consumer Loan assignment dollar volume grew 7.1% and unit volume 6.7%, slower than the 43.5% and 30.2% growth, respectively, in 2011. Active dealers increased 33.0%, but average volume per active dealer declined 19.8%; management attributed the decline to increased competition.
- Management increased dealer advance rates during 2010–2012, supporting volume but reducing expected returns on new assignments. Average portfolio yield also declined.
- Credit-loss allowance increased to $176.4 million from $154.3 million. The fourth-quarter enhancement to Dealer Loan accounting computations increased the 2012 credit-loss provision by $2.8 million and finance charges by $0.8 million; management said the overall portfolio estimates changed little while dealer-level precision improved.
- Operating expenses increased 28.3%. Salaries and wages included a $10.3 million increase in stock-based compensation, primarily related to a long-term CEO award granted in 2012. The filing reports $12.2 million of total stock-based compensation expense, versus $1.9 million in 2011.
Funding, outlook, risks and contingencies
The company completed two 2012 term asset-backed financings of $201.3 million and $252.0 million, with expected annualized costs of approximately 2.8% and 2.0%, respectively. It increased its revolving credit facility to $235.0 million, extended its maturity to June 2015, and reported $191.5 million available to borrow at year-end, subject to borrowing-base limits. It also extended warehouse facility maturities and reduced certain borrowing spreads. The $350.0 million 9.125% senior notes mature in 2017.
Management said operating cash flows and financing alternatives were expected to fund debt maturities and future operations, while warning that unavailable or restricted funding could materially harm liquidity and operations. No specific earnings or volume guidance is provided. The company was in compliance with debt covenants at year-end. Its debt agreements restrict, among other things, additional debt, dividends, repurchases, asset sales and investments. No cash dividends were paid in the periods presented.
- Credit and estimation risk: Results depend on forecasts of collections, recoveries and vehicle collateral values. A 1% decline in forecast future net loan cash flows would have reduced 2012 net income by approximately $7.7 million. Newer loan cohorts remain less seasoned and less certain.
- Leverage and funding risk: Debt was $1,250.8 million at year-end; substantial maturities and secured borrowing arrangements create refinancing, covenant and liquidity exposure. Management reported funded debt to equity of 2.0:1.
- Regulatory and litigation risk: Consumer-finance laws and CFPB supervision may change operating costs or permissible activities. On February 1, 2013, six dealers filed individual arbitrations seeking unspecified damages concerning dealer servicing agreements; the company said it would defend the claims.
- Other risks: Competition, economic downturn, interest-rate increases, dealer concentration, reliance on technology and third-party providers, cybersecurity incidents, and potential consumer claims could adversely affect results. The company reported that prior cybersecurity incidents had not materially affected it.
- Unusual items: A $1.1 million expense followed termination of a third-party product provider relationship in Q4 2012. The company also reported a $1.2 million net-income impact from the enhanced Dealer Loan accounting computations.
The audited financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2012.
Investor verification priorities
- Track realized collections and forecast revisions for newer loan cohorts, particularly 2011–2012 assignments, and assess the allowance against loan growth.
- Review debt maturities, borrowing-base availability, covenant headroom and access to warehouse and asset-backed funding; distinguish restricted from unrestricted cash.
- Assess whether declining yield and dealer volume per active dealer, alongside higher advances, are affecting returns on newly assigned loans.
- Evaluate the continuing earnings and share dilution effects of the 2012 CEO equity awards and other stock-based compensation.
- Monitor the six dealer arbitrations, consumer litigation, regulatory developments and any changes in third-party servicing or ancillary-product arrangements.