Credit Acceptance Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Credit Acceptance provides financing programs to U.S. auto dealers serving consumers who may not qualify for conventional auto financing. It operates one reportable segment, primarily through its Portfolio Program, with a smaller Purchase Program.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $723.5 million | $682.1 million | +6.1% |
| Income before tax | $420.9 million | $398.2 million | +5.7% |
| Net income | $266.2 million | $253.1 million | +5.2% |
| Diluted EPS | $11.92 | $10.54 | +13.1% |
| Operating cash flow | $365.2 million | $325.7 million | +$39.5 million |
| Net loans receivable | $2,512.9 million | $2,212.8 million | +13.6% |
| Total debt | $1,752.5 million | $1,392.4 million | +25.9% |
| Shareholders’ equity | $702.2 million | $750.1 million | -6.4% |
- Net margin was approximately 36.8%, versus 37.1% in 2013. Revenue growth largely reflected a larger average loan portfolio; finance charges rose 6.8% to $630.4 million.
- Average portfolio yield declined to 26.7% from 28.3%, primarily reflecting higher advance rates on new assignments amid competition. Interest expense fell to $56.7 million from $65.0 million as average borrowing cost declined to 3.5% from 4.7%, despite higher average debt.
- Credit-loss provision decreased to $12.8 million from $21.9 million. Provision for claims was $40.0 million, compared with $40.8 million. The 2014 effective tax rate was 36.8%, versus 36.4%.
- Cash and cash equivalents were $6.4 million; restricted cash was $157.6 million and restricted securities were $53.2 million. Restricted balances are not equivalent to unrestricted operating liquidity.
- Net cash used in investing activities was $363.4 million, mainly reflecting loan assignment funding and restricted-cash/securities activity. Financing activities provided $0.4 million after debt issuance and repayments and $343.7 million of share repurchases.
- Funded debt to equity was 2.5:1. The company reported compliance with debt covenants at year-end. The allowance for credit losses was $206.9 million, against gross loans receivable of $2,719.8 million.
Fourth-quarter results and notable changes
- Fourth-quarter 2014 revenue was $185.1 million and net income was $73.0 million; diluted EPS was $3.45. Fourth-quarter 2013 revenue was $175.3 million, net income $65.9 million, and diluted EPS $2.80.
- Consumer Loan assignments reached $1,675.7 million, up 13.2% year over year; unit volume rose 10.8% to 223,998. Active Dealers increased 13.3% to 7,247, while average volume per active Dealer declined 2.2%. Management attributed the per-dealer decline to increased competition during the first three quarters.
- The Portfolio Program represented 90.7% of assigned units, down from 93.5%; the Purchase Program share rose to 9.3%.
- Net income growth was partly offset by a $21.8 million pretax loss on extinguishment of debt after redeeming $350 million of 9.125% senior notes due 2017. The company issued $300 million of 6.125% senior notes due 2021.
- In the fourth quarter, revised collection and Dealer Holdback forecasting methods reduced the credit-loss provision by $2.9 million and increased net income by $2.2 million. Management cautions that a 1% decline in forecast future loan cash flows at year-end would have reduced 2014 net income by approximately $8.7 million.
- Annual share repurchases totaled 2.69 million shares for $343.7 million. A fourth-quarter tender offer purchased 995,698 shares at $125.54 each, for approximately $125.0 million. No cash dividends were paid.
Outlook, funding, and risks
- No specific earnings, revenue, or loan-volume guidance is provided. Management says operating cash flows and available financing alternatives are expected to fund debt maturities and operations, but warns that reduced access to financing could materially harm liquidity and growth.
- Funding sources include a revolving credit line, warehouse facilities, term asset-backed securitizations, and senior notes. A $300.6 million term ABS financing closed in January 2015 at an expected annualized cost of approximately 2.6%. Warehouse facilities and the revolving credit line were extended during 2014.
- Contractual obligations totaled $2.45 billion, including $1.75 billion of debt principal and a forecast $673.2 million of Dealer Holdback. Scheduled debt principal was $354.3 million due in 2015 and $513.1 million in 2016.
- Material risks include uncertainty in forecasting collections and vehicle recovery values; subprime borrower delinquency and loss risk; competition and pressure on advances/yields; substantial debt, refinancing needs, covenant restrictions and variable-rate exposure; and potential regulatory, legal, cybersecurity, and operational risks.
- Regulatory inquiries disclosed include a June 2014 FTC civil investigative demand concerning consumer practices, a December 2014 Massachusetts Attorney General demand concerning non-prime loan origination and collection, and a December 2014 DOJ subpoena concerning subprime auto finance and securitization. The company said it was cooperating. The CFPB had proposed supervision of nonbank indirect auto finance companies meeting an assignment threshold that would include Credit Acceptance; a final rule was expected in 2015.
- Five dealer arbitrations remained pending after one of six matters was dismissed in January 2015. The filing warns adverse outcomes in litigation or investigations could materially affect results; it does not provide a clear quantified estimate of potential exposure.
Most important facts for investors to verify
- Whether actual collections on newer loan cohorts support management’s forecasts, particularly as only 17% of forecast collections for 2014 assignments had been realized by year-end.
- How forecast revisions, allowance levels, and the $8.7 million sensitivity to a 1% cash-flow decline affect future earnings and loan valuations.
- Whether rising debt and scheduled ABS maturities can be refinanced on acceptable terms, and how much usable liquidity remains after accounting for restricted cash and collateral requirements.
- Developments and potential financial or operating consequences from the FTC, DOJ, Massachusetts inquiry, CFPB supervision rulemaking, and pending dealer arbitrations.
- Whether competition, falling average assignment volume per active Dealer, and higher advance rates continue to pressure portfolio yield and returns on capital.