Credit Acceptance Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are unaudited. Credit Acceptance provides auto financing to consumers through a nationwide dealer network, primarily serving borrowers who do not qualify for conventional financing.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $525.2 million | $442.1 million | +18.8% |
| Income before tax | $296.4 million | $253.5 million | +16.9% |
| Net income | $188.0 million | $170.1 million | +10.6% |
| Diluted earnings per share | $7.07 | $5.67 | +24.7% |
| Net margin | 35.8% | 38.5% | Down 2.7 percentage points |
| Operating cash flow | $275.6 million | $200.7 million | +37.3% |
| Net loans receivable | $1,598.6 million | $1,218.0 million | +31.2% |
| Total debt | $997.8 million | $685.7 million | +45.5% |
Finance charges, the main revenue source, rose 18.7% to $460.6 million, principally as the average net loan balance grew 26.3% to $1.425 billion. Average portfolio yield fell to 32.3% from 34.4%, partly offsetting portfolio growth. Credit-loss provision increased to $29.0 million from $10.0 million; management said overall loan performance exceeded its expectations at the start of 2011, but certain pools deteriorated. The allowance for credit losses was $154.3 million, versus $126.9 million.
Assignment volume expanded: consumer-loan units increased 30.2% to 178,074, active dealer-partners rose 24.7% to 3,998, and assignment dollar volume reached $1.275 billion, up 43.7%. The Portfolio Program accounted for 92.6% of assigned units at year-end.
Fourth-quarter 2011 revenue was $138.0 million and net income was $50.0 million, compared with $115.4 million and $47.0 million, respectively, in fourth-quarter 2010.
Liquidity, debt and capital
Year-end cash and cash equivalents were $4.7 million; restricted cash was $104.7 million, much of it pledged to secured financings or held for vehicle-service-contract claims. Operating cash flow was $275.6 million, while investing activities used $454.0 million, primarily reflecting dealer advances and loan purchases. Financing activities provided $179.2 million.
Debt rose to $997.8 million, and management reported funded debt to equity of 1.8:1. The company extended and expanded its revolving credit line to $205 million, added a $75 million warehouse facility, issued $100 million of 9.125% senior notes due 2017, and completed a $200.5 million term asset-backed financing. It reported compliance with debt covenants at year-end and stated that operating cash flows and financing alternatives were expected to support maturities and operations; funding availability remains dependent on market conditions. No cash dividends were paid.
Changes, outlook and risks
- Net income increased, driven mainly by loan-portfolio growth, but profit growth lagged revenue growth as credit-loss, interest, claims and tax expenses rose. The effective tax rate increased to 36.6% from 32.9%.
- The company repurchased approximately 1.9 million shares for $125 million in a tender offer during 2011, financed with note proceeds and revolving borrowings; it also spent $4.2 million on fourth-quarter open-market repurchases.
- Management gave no specific earnings or revenue guidance. It described priorities as maintaining access to capital, forecasting loan collections accurately, and growing assignments while targeting economic profit. Unit volume for January 2012 was reported 19.5% above January 2011.
- Key risks include uncertain collections and credit-loss estimates, borrower defaults and vehicle resale values, reliance on dealer-partners, substantial debt and refinancing needs, interest-rate exposure, competition, consumer-protection regulation and CFPB oversight, litigation, and dependence on technology and outsourced services. A 1% decline in forecast future net loan cash flows would have reduced 2011 net income by approximately $6.1 million.
- Disclosed matters include a Missouri Attorney General inquiry concerning consumer title complaints and a dealer-partner arbitration seeking unspecified damages on a purported class basis. The company said it was cooperating with the inquiry and intended to defend the arbitration. The filing states adverse outcomes could materially affect results; it does not provide a clear quantified exposure for these matters.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan collection forecasts and the $154.3 million allowance remain adequate as newer, less-seasoned portfolios mature.
- Whether portfolio growth and rising assignment volumes can sustain returns despite lower yields and increased credit-loss provisions.
- Debt maturities, borrowing-base availability, covenant headroom and access to warehouse, revolving and securitization funding.
- Developments in the Missouri inquiry, dealer arbitration, and CFPB or other consumer-finance regulation.
- The impact of the share repurchases on leverage, liquidity and per-share results, and whether reported restricted cash is available for general corporate use.