SOUTHFIELD, Mich., Oct. 31, 2008 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq:CACC) (referred to as the "Company", "we", "our", or "us") announced consolidated net income of $20.7 million, or $0.67 per diluted share, for the three months ended September 30, 2008, compared to consolidated net income of $14.7 million, or $0.47 per diluted share, for the same period in 2007. For the nine months ended September 30, 2008 consolidated net income was $48.6 million, or $1.57 per diluted share, compared to consolidated net income of $42.4 million, or $1.36 per diluted share, for the same period in 2007.
Adjusted net income, a non-GAAP financial measure, for the three months ended September 30, 2008 was $22.3 million, or $0.72 per diluted share, compared to $15.8 million, or $0.51 per diluted share, for the same period in 2007. For the nine months ended September 30, 2008 adjusted net income was $59.2 million, or $1.91 per diluted share, compared to adjusted net income of $46.8 million, or $1.50 per diluted share, for the same period in 2007.
Refer to our Form 10-Q, filed today with the Securities and Exchange Commission and included on our website at creditacceptance.com, for a complete discussion of the results of operations and financial data for the three and nine months ended September 30, 2008.
Operating Results -----------------
Results for the three and nine months ended September 30, 2008, compared to the same periods in 2007, include the following:
% Change
---------------------------------
Three Months Nine Months
Ended Ended
Sept. 30, 2008 Sept. 30, 2008
--------------- ---------------
Consumer loan unit volume 26.9% 22.0%
Consumer loan dollar volume 27.5% 32.0%
Number of active dealer-partners 16.2% 19.2%
Average loans receivable balance, net 37.7% 35.0%
Loan Performance
----------------
The following table compares our forecast of consumer loan collection rates as of September 30, 2008, with the forecasts as of June 30, 2008, as of December 31, 2007, and at the time of assignment, segmented by year of assignment:
Forecasted Collection Variance in Forecasted
Loan Percentage as of Collection Percentage from
Assign----------------------------------- ------------------------
ment Sept. 30, June 30, Dec. 31, Initial June 30, Dec. 31, Initial
Year 2008 2008 2007(1) Forecast 2008 2007 Forecast
------ ------ ------ ------ ------ ------ ------ ------
1999 72.1% 72.1% 72.0% 73.6% 0.0% 0.1% -1.5%
2000 72.5% 72.5% 72.4% 72.8% 0.0% 0.1% -0.3%
2001 67.4% 67.4% 67.3% 70.4% 0.0% 0.1% -3.0%
2002 70.4% 70.4% 70.6% 67.9% 0.0% -0.2% 2.5%
2003 73.9% 74.0% 74.1% 72.0% -0.1% -0.2% 1.9%
2004 73.5% 73.5% 73.5% 73.0% 0.0% 0.0% 0.5%
2005 74.1% 74.1% 73.8% 74.0% 0.0% 0.3% 0.1%
2006 70.3% 70.2% 70.9% 71.4% 0.1% -0.6% -1.1%
2007 68.2% 68.2% 71.1% 70.7% 0.0% -2.9% -2.5%
2008 68.2% 69.0% -- 69.7% -0.8% -- -1.5%
(1) These forecasted collection percentages differ from those
previously reported in our Annual Report on Form 10-K for the
year ended December 31, 2007 and our 2007 earnings release as
they have been revised for a new methodology for forecasting
future collections on loans that we implemented during the first
quarter of 2008.
Both GAAP net income and adjusted net income for the three and nine months ended September 30, 2008 were negatively impacted by a reduction in our forecasted collection rates during the second quarter of 2008. We forecast future loan cash flows by comparing loans in our current portfolio to historical loans with the same attributes. The attributes include both variables captured at loan origination, like credit bureau data, application data, loan data and vehicle data, as well as variables captured subsequent to loan origination, such as collection and delinquency data. Our forecast as of March 31, 2008 assumed that loans within our current portfolio would produce similar collection rates as produced by historical loans with the same attributes. During the second quarter of 2008, we modified our forecasting methodology, which now assumes that loans originated in 2006, 2007 and 2008 will perform 100 to 300 basis points worse than historical loans with the same attributes.
During the third quarter, actual loan performance for 2007 and prior originations was consistent with our revised forecast. As a result, forecasted collection rates on 2007 and prior loans remained consistent with our forecasts for these same loans three months ago. Actual loan performance was slightly worse than expected for 2008 originations. As a result, the table above shows a decline in the forecasted collection rate for 2008 loans from 69.0% to 68.2%. The forecasted collection rate for 2008 loans as of September 30, 2008 includes both loans that were in our portfolio as of June 30, 2008 and loans received during the most recent quarter. The following table summarizes the change in our forecast for each of these segments:
Forecasted Collection Percentage as of
--------------------------------------
September 30, June 30,
2008 Loan Assignment Period 2008 2008 Variance
----------------------------- ------------- -------- ----------
January 1, 2008 through
June 30, 2008 68.3% 69.0% -0.7%
July 1, 2008 through
September 30, 2008 68.0% -- --
As a result of the current economic uncertainty, we are cautious about our forecasts of future collection percentages. However, we believe our current estimates are reasonable for the following reasons:
* Our forecasts start with the assumption that loans in our
current portfolio will perform like historical loans with
similar attributes.
* We reduced our forecasts during the second quarter on loans
originated in 2006 through 2008 by 100 to 300 basis points based
on recent trends and a concern about the worsening economic
environment.
* Actual loan performance during the third quarter was consistent
with our forecast as of June 30, 2008 for loans originated in
2007 and prior periods.
* Actual loan performance during the third quarter was slightly
below our forecast as of June 30, 2008 for loans originated
during the first six months of 2008, and our forecasted
collection rate for these loans was reduced accordingly.
* We have reduced the forecasted collection rate used at loan
inception to price new loan originations. As of September 1,
2008, the forecasted collection rate used at loan inception is
approximately 300 basis points lower than identical loans
originated a year ago.
* Our current forecasting methodology, when applied against
historical data, produces a consistent result as the loans age.
If the economic environment continues to deteriorate, our loan collection rates may continue to decline. Knowing this, we set prices at loan inception to increase the likelihood of achieving an acceptable return on capital, even if collection results are worse than we currently forecast. A 100 basis point change in the collection rate impacts the after-tax return on capital by approximately 30 basis points for dealer loans and approximately 65 basis points for purchased loans.
The following table presents forecasted consumer loan collection rates, advance rates (includes amounts paid to acquire purchased loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of September 30, 2008. Payments of dealer holdback and accelerated payments of dealer holdback are not included in the advance percentage paid to the dealer-partner. All amounts are presented as a percentage of the initial balance of the consumer loan (principal + interest). The table includes both dealer loans and purchased loans.
As of September 30, 2008
-----------------------------------------------
Forecasted % of Forecast
Loan Assignment Year Collection% Advance% Spread% Realized
-------------------- ----------- ---------- ------- -------------
1999 72.1% 48.7% 23.4% 99.6%
2000 72.5% 47.9% 24.6% 99.2%
2001 67.4% 46.0% 21.4% 98.7%
2002 70.4% 42.2% 28.2% 98.3%
2003 73.9% 43.4% 30.5% 97.8%
2004 73.5% 44.0% 29.5% 96.7%
2005 74.1% 46.9% 27.2% 94.0%
2006 70.3% 46.6% 23.7% 78.5%
2007 68.2% 46.5% 21.7% 48.1%
2008 68.2% 44.9% 23.3% 15.1%
The following table presents forecasted consumer loan collection rates, advance rates (includes amounts paid to acquire purchased loans), and the spread (the forecasted collection rate less the advance rate) as of September 30, 2008 for purchased loans and dealer loans separately:
Loan
Assignment Forecasted
Year Collection % Advance % Spread %
----------- ----------- ----------- -----------
Purchased loans 2007 68.0% 48.9% 19.1%
2008 67.5% 47.2% 20.3%
Dealer loans 2007 68.2% 45.9% 22.3%
2008 68.6% 43.7% 24.9%
Although the advance rate on purchased loans is higher as compared to the advance rate on dealer loans, purchased loans do not require the Company to pay dealer holdback. The increase in the spread between the forecasted collection rate and the advance rate occurred as a result of pricing changes implemented during the first nine months of 2008.
Loan Volume -----------
The Company experienced strong demand for its product during the quarter. During 2008, the competitive environment has allowed the Company to reduce advance rates and maintain strong growth in unit volumes. The following table summarizes changes in loan volume and active dealer-partners during the most recent quarter:
Three Months Ended
September 30,
-------------------------
2008 2007 % change
------ ------ ------
Consumer loan unit volume 27,636 21,784 26.9%
Active dealer-partners (1) 2,270 1,953 16.2%
------ ------
Average volume per active dealer-partner 12.2 11.2 8.9%
Consumer loan unit volume from dealer-
partners active both periods 18,393 17,293 6.4%
Dealer-partners active both periods 1,244 1,244 0.0%
------ ------
Average volume per dealer-partners active
both periods 14.8 13.9 6.4%
Consumer loan unit volume from new
dealer-partners 1,792 1,190 50.6%
New active dealer-partners (2) 300 258 16.3%
------ ------
Average volume per new active dealer-
partners 6.0 4.6 30.4%
Attrition (3) 20.6% 19.5%
(1) Active dealer-partners are dealer-partners who have received
funding for at least one dealer loan or purchased loan during the
period.
(2) New active dealer-partners are dealer-partners who enrolled in
our program and have received funding for their first dealer loan
or purchased loan from us during the periods presented.
(3) Attrition is measured according to the following formula:
decrease in consumer loan unit volume from dealer-partners who
have received funding for at least one dealer loan or purchased
loan during the comparable period of the prior year but did not
receive funding for any dealer loans or purchased loans during
the current period divided by prior year comparable period
consumer loan unit volume.
The increase in unit volume for the quarter resulted from increased volume per active dealer-partner as well as an increase in the number of active dealer-partners.
The following table summarizes consumer loan dollar growth in each of the last seven quarters compared with the same period in the previous year:
Year over Year
Growth in Consumer Loan Dollar Volume
-------------------------------------
Three Months Ended % Change
-------------------------------------
March 31, 2007 41.1%
June 30, 2007 43.9%
September 30, 2007 2.2%
December 31, 2007 23.3%
March 31, 2008 28.5%
June 30, 2008 40.6%
September 30, 2008 27.5%
Unit volume and dollar volume grew at roughly the same rate during the third quarter of 2008 due to various pricing changes implemented at the end of the second quarter and in the third quarter of 2008 that have reduced the average loan size.
The following table summarizes key information regarding purchased loans:
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
2008 2007 2008 2007
------ ------ ------ ------
New purchased loan unit volume
as a percentage of total unit
volume 30.8% 25.5% 31.6% 14.0%
Net purchased loan receivable
balance as a percentage of the
total net receivable balance as
of the end of the period 30.0% 12.1% 30.0% 12.1%
Access to Capital
-----------------
Since the beginning of 2008, we have:
* Expanded our bank line of credit to $153.5 million and renewed
to June 2010
* Renewed our $325.0 million warehouse facility to August 2009
* Completed a $150.0 million asset-backed secured financing with
an institutional investor
* Completed a $50.0 million two-year revolving warehouse facility
with another institutional investor
* Renewed our $50.0 million residual credit facility to August 2009
Based on our available capital, we are targeting a 10% reduction in year-over-year consumer loan unit volume for the fourth quarter of 2008. Our target growth rate in 2009 will depend on our success in securing additional financing and renewing our existing debt facilities. If no additional capital is obtained, during the first six months of 2009, we expect to continue to target unit volumes that are approximately 10% lower than the prior year comparable period.
In August of 2009, our $325.0 million warehouse facility and our $50.0 million residual credit facility (collectively referred to as the "maturing facilities") mature. If we are unsuccessful in renewing the maturing facilities, and alternative financing cannot be obtained, additional reductions in loan origination volumes will be required. Given current conditions in the credit markets, there can be no assurance that the maturing facilities will be renewed or that alternative financing will be obtained. In the event that the maturing facilities are not renewed, no further advances would be made under the maturing facilities. Assuming the Company continues to be in compliance with all debt covenants, the amount outstanding would be repaid over time as the collections on the loans securing the maturing facilities are received.
The following table summarizes targeted loan origination volumes under two scenarios: (1) the maturing facilities are renewed (or replaced) but no other additional capital is obtained during 2009; and (2) no additional capital is obtained during 2009 and the maturing facilities are not renewed.
Estimated Loan Origination Volume
for the Years Ended December 31,
------------------------------------------------------
2009
-----------------------------------------
Assuming Maturing Assuming Maturing
(Dollars in Facilities are Facilities are Not
thousands) 2008 Renewed (or Replaced) Renewed (or Replaced)
---------- --------------------- --------------------
Loan dollar
volume $ 800,000 $ 600,000 $ 550,000
Average loans
receivable
balance, net $1,000,000 $1,100,000 $1,050,000
Adjusted Financial Results
--------------------------
Adjusted financial results are provided to help shareholders understand our financial performance. The financial data below is non-GAAP, unless labeled otherwise. We use adjusted financial information internally to measure financial performance and to determine incentive compensation. The table below shows our results following adjustments to reflect non-GAAP accounting methods. These adjustments are explained in the table footnotes and the subsequent "Floating Yield Adjustment" and "License Fee Yield Adjustment" sections. Measures such as adjusted average capital, adjusted net income, adjusted net income per diluted share, adjusted net income plus interest expense after-tax, adjusted return on capital, adjusted revenue, adjusted operating expenses, and economic profit are all non-GAAP financial measures. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.
Adjusted financial results for the three and nine months ended September 30, 2008, compared to the same periods in 2007, include the following:
Three Months Ended
September 30,
(Dollars in thousands, ----------------------------------
except per share data) 2008 2007 % Change
----------------------------------
Adjusted average capital $ 1,031,581 $ 724,884 42.3%
Adjusted net income $ 22,260 $ 15,754 41.3%
Adjusted interest expense after-tax $ 7,081 $ 5,689 24.5%
Adjusted net income plus interest
expense after-tax $ 29,341 $ 21,443 36.8%
Adjusted return on capital 11.4% 11.8% -3.4%
Cost of capital 6.5% 7.1% -8.5%
Economic profit $ 12,636 $ 8,606 46.8%
GAAP diluted weighted average
shares outstanding 31,024,455 31,139,612 -0.4%
Adjusted net income per diluted
share $ 0.72 $ 0.51 41.2%
Nine Months Ended
September 30,
(Dollars in thousands, ----------------------------------
except per share data) 2008 2007 % Change
----------------------------------
Adjusted average capital $ 961,944 $ 687,604 39.9%
Adjusted net income $ 59,220 $ 46,786 26.6%
Adjusted interest expense after-tax $ 19,996 $ 16,870 18.5%
Adjusted net income plus interest
expense after-tax $ 79,216 $ 63,656 24.4%
Adjusted return on capital 11.0% 12.3% -10.6%
Cost of capital 6.5% 7.1% -8.5%
Economic profit $ 32,466 $ 26,971 20.4%
GAAP diluted weighted average
shares outstanding 30,994,466 31,228,893 -0.8%
Adjusted net income per diluted
share $ 1.91 $ 1.50 27.3%
Economic profit increased 46.8% and 20.4% for the three and nine months ended September 30, 2008, respectively, as compared to the same periods in 2007. Economic profit is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.
For the three months ended September 30, 2008, adjusted average capital grew by 42.3% and adjusted return on capital declined from 11.8% to 11.4%. For the nine months ended September 30, 2008, adjusted average capital grew by 39.9% while the adjusted return on capital declined from 12.3% to 11.0%.
Although the return on capital is lower as compared to the prior year period, the return on capital improved during the third quarter of 2008 as compared to the second quarter of 2008. As we discussed in prior quarters, the decline in the return on capital experienced through the first quarter of 2008 was the result of lower yields produced by loans originated in 2006 and 2007 as a result of pricing reductions made during these periods in response to a difficult competitive environment. During the latter part of 2007 and during 2008, we increased prices which positively impacted the yield and return on capital of new originations. While the sequential improvement in the return on capital was less than it would have been had we not reduced our estimate of future loan collection rates during the second quarter of 2008, the return on capital improved to 11.4% during the quarter compared to 10.8% during the second quarter of 2008.
The following table shows adjusted revenue and adjusted operating expenses as a percentage of adjusted average capital and the percentage change in adjusted average capital for each of the last seven quarters, compared to the same periods in the prior year:
Three Months Ended
-------------------------------------------------------------
Sept.30, Jun.30, Mar.31, Dec.31, Sept.30, Jun.30, Mar.31,
2008 2008 2008 2007 2007 2007 2007
-------- -------- -------- -------- -------- -------- -------
Adjusted
revenue
as a
percen-
tage
of
adjust-
ed
average
capital 28.9% 28.5% 30.7% 31.7% 32.5% 32.3% 35.7%
======== ======== ======== ======== ======== ======== =======
Adjusted
oper-
ating
expen-
ses as
a per-
centage
of ad-
justed
average
capital 10.8% 11.3% 13.6% 14.7% 13.6% 13.6% 14.1%
======== ======== ======== ======== ======== ======== =======
Adjusted
return
on
capital 11.4% 10.8% 10.7% 10.7% 11.8% 11.8% 13.5%
======== ======== ======== ======== ======== ======== =======
Percen-
tage
change
in ad-
justed
average
capital
com-
pared
to the
same
period
in the
prior
year 42.3% 39.6% 37.5% 35.5% 34.2% 29.4% 20.8%
======== ======== ======== ======== ======== ======== =======
The following tables show how non-GAAP measures reconcile to GAAP measures. All after-tax adjustments are calculated using a 37% tax rate as we estimate that to be our long term average effective tax rate. Amounts do not recalculate due to rounding.
Three Months Ended
September 30,
(Dollars in thousands, ------------------------
except per share data) 2008 2007 % Change
----------- ----------- ------
Adjusted net income
-------------------
GAAP net income $ 20,657 $ 14,742 40.1%
Floating yield adjustment
(after-tax) 1,183 1,265
License fee yield adjustment
(after-tax) 506 925
Gain from discontinued United
Kingdom segment and other related
items (after-tax) (326) (1,273)
Litigation -- 91
Interest expense related to
interest rate swap agreement (179) --
Adjustment to record taxes at
37% (1) 419 4
----------- -----------
Adjusted net income (1) $ 22,260 $ 15,754 41.3%
=========== ===========
Adjusted net income per
diluted share $ 0.72 $ 0.51 41.2%
-----------------------
Diluted weighted average
shares outstanding 31,024,455 31,139,612 -0.4%
Adjusted average capital
------------------------
GAAP average debt $ 706,637 $ 477,930 47.9%
GAAP average shareholders' equity 308,990 243,922 26.7%
Floating yield adjustment 18,002 8,348
License fee yield adjustment (2,048) (5,316)
----------- -----------
Adjusted average capital $ 1,031,581 $ 724,884 42.3%
=========== ===========
Adjusted return on capital
--------------------------
Adjusted net income $ 22,260 $ 15,754
Adjusted interest expense after-tax 7,081 5,689
----------- -----------
Adjusted net income plus interest
expense after-tax $ 29,341 $ 21,443 36.8%
=========== ===========
Adjusted return on capital (2) 11.4% 11.8% -3.4%
=========== ===========
Economic profit
---------------
Adjusted return on capital 11.4% 11.8%
Cost of capital (3) 6.5% 7.1%
----------- -----------
Adjusted return on capital in
excess of cost of capital 4.9% 4.7%
Adjusted average capital $ 1,031,581 $ 724,884
----------- -----------
Economic profit $ 12,636 $ 8,606 46.8%
=========== ===========
Nine Months Ended
September 30,
(Dollars in thousands, ------------------------
except per share data) 2008 2007 % Change
----------- ----------- ------
Adjusted net income
-------------------
GAAP net income $ 48,621 $ 42,432 14.6%
Floating yield adjustment
(after-tax) 8,955 1,964
License fee yield adjustment
(after-tax) 1,703 3,632
Gain from discontinued United
Kingdom segment and other related
items (after-tax) (330) (1,082)
Litigation -- 406
Interest expense related to
interest rate swap agreement (23) --
Adjustment to record taxes at
37% (1) 294 (566)
----------- -----------
Adjusted net income (1) $ 59,220 $ 46,786 26.6%
=========== ===========
Adjusted net income per
diluted share $ 1.91 $ 1.50 27.3%
-----------------------
Diluted weighted average
shares outstanding 30,994,466 31,228,893 -0.8%
Adjusted average capital
------------------------
GAAP average debt $ 659,193 $ 454,595 45.0%
GAAP average shareholders' equity 293,219 231,788 26.5%
Floating yield adjustment 12,135 7,669
License fee yield adjustment (2,603) (6,448)
----------- -----------
Adjusted average capital $ 961,944 $ 687,604 39.9%
=========== ===========
Adjusted return on capital
--------------------------
Adjusted net income $ 59,220 $ 46,786
Adjusted interest expense after-tax 19,996 16,870
----------- -----------
Adjusted net income plus interest
expense after-tax $ 79,216 $ 63,656 24.4%
=========== ===========
Adjusted return on capital (2) 11.0% 12.3% -10.6%
=========== ===========
Economic profit
---------------
Adjusted return on capital 11.0% 12.3%
Cost of capital (3) 6.5% 7.1%
----------- -----------
Adjusted return on capital in
excess of cost of capital 4.5% 5.2%
Adjusted average capital $ 961,944 $ 687,604
----------- -----------
Economic profit $ 32,466 $ 26,971 20.4%
=========== ===========
(1) In prior year reports, we adjusted income taxes by equalizing the
tax rate between the two periods presented. Beginning in the
first quarter of 2008, we changed our methodology to normalize
the tax rate to 37%, as we estimate that to be our long term
average effective tax rate. As a result of this change, the
adjustment to income taxes and adjusted net income for the three
and nine months ended September 30, 2007 differ from what was
reported in the prior year.
(2) Adjusted return on capital is defined as annualized adjusted net
income plus adjusted interest expense after-tax divided by
adjusted average capital.
(3) The cost of capital includes both a cost of equity and a cost of
debt. The cost of equity capital is determined based on a formula
that considers the risk of the business and the risk associated
with our use of debt. The formula utilized for determining the
cost of equity capital is as follows: (the average 30 year
treasury rate + 5%) + [(1 - tax rate) x (the average 30 year
treasury rate + 5% - pre-tax average cost of debt rate) x average
debt/(average equity + average debt x tax rate)]. For the three
months ended September 30, 2008 and 2007, the average 30 year
treasury rate was 4.5% and 4.9%, respectively. The adjusted
pre-tax average cost of debt was 6.4% and 7.6%, respectively. For
the nine months ended September 30, 2008 and 2007, the average 30
year treasury rate was 4.5% and 4.9%, respectively. The adjusted
pre-tax average cost of debt was 6.4% and 7.9%, respectively.
Quarter Ended
--------------------------------------------
Sept. 30, Jun. 30, Mar. 31, Dec. 31,
(Dollars in thousands) 2008 2008 2008 2007
----------- ---------- ---------- ----------
Adjusted net income
-------------------
GAAP net income $ 20,657 $ 10,344 $ 17,620 $ 12,481
Floating yield adjustment
(after-tax) 1,183 9,536 (1,765) 1,591
License fee yield adjus-
tment (after-tax) 506 653 544 1,353
(Gain) loss from discon-
tinued United Kingdom
segment and other
related items (after-
tax) (326) 35 (39) (219)
Litigation -- -- -- --
Interest expense related
to interest rate swap
agreement (179) (375) 532 302
Adjustment to record
taxes at 37% 419 (2) (123) (643)
----------- ---------- ---------- ----------
Adjusted net income $ 22,260 $ 20,191 $ 16,769 $ 14,865
=========== ========== ========== ==========
Adjusted revenue
----------------
GAAP total revenue $ 80,107 $ 75,005 $ 70,778 $ 63,232
Floating yield adjustment 1,880 15,137 (2,800) 2,525
License fee yield adjus-
tment 804 1,036 863 2,150
Provision for credit
losses (8,278) (20,782) (2,479) (6,345)
----------- ---------- ---------- ----------
Adjusted revenue $ 74,513 $ 70,396 $ 66,362 $ 61,562
=========== ========== ========== ==========
Adjusted average capital
------------------------
GAAP average debt $ 706,637 $ 686,148 $ 584,794 $ 515,031
GAAP average sharehold-
ers' equity 308,990 295,771 274,897 256,838
Floating yield adjustment 18,002 9,326 9,076 9,784
License fee yield adjus-
tment (2,048) (2,626) (3,136) (4,011)
----------- ---------- ---------- ----------
Adjusted average
capital $ 1,031,581 $ 988,619 $ 865,631 $ 777,642
=========== ========== ========== ==========
Adjusted revenue as a
percentage of adjusted
average capital 28.9% 28.5% 30.7% 31.7%
=========== ========== ========== ==========
Adjusted return on
capital
------------------
Adjusted net income $ 22,260 $ 20,191 $ 16,769 $ 14,865
Adjusted interest expense
after-tax 7,081 6,602 6,313 5,928
----------- ---------- ---------- ----------
Adjusted net income
plus interest
expense after-tax $ 29,341 $ 26,793 $ 23,082 $ 20,793
=========== ========== ========== ==========
Adjusted return on
capital (3) 11.4% 10.8% 10.7% 10.7%
=========== ========== ========== ==========
Adjusted operating
expenses
------------------
GAAP salaries and wages $ 16,766 16,699 $ 17,740 $ 16,823
GAAP general and admini-
strative 6,975 6,627 7,124 6,729
GAAP sales and marketing 4,088 4,542 4,642 4,990
Litigation -- -- -- --
----------- ---------- ---------- ----------
Adjusted operating
expenses $ 27,829 $ 27,868 $ 29,506 $ 28,542
=========== ========== ========== ==========
Adjusted operating expe-
nses as a percentage of
adjusted average capital 10.8% 11.3% 13.6% 14.7%
=========== ========== ========== ==========
Percentage change in
adjusted average capital
compared to the same
period in the prior year 42.3% 39.6% 37.5% 35.5%
=========== ========== ========== ==========
Quarter Ended
---------------------------------
Sept. 30, Jun. 30, Mar. 31,
(Dollars in thousands) 2007 2007 2007
----------- ---------- ----------
Adjusted net income
-------------------
GAAP net income $ 14,742 $ 12,331 $ 15,359
Floating yield adjust-
ment (after-tax) 1,265 617 82
License fee yield adjus-
tment (after-tax) 925 1,143 1,564
(Gain) loss from discon-
tinued United Kingdom
segment and other rela-
ted items (after-tax) (1,273) 164 27
Litigation 91 315 --
Interest expense related
to interest rate swap
agreement -- -- --
Adjustment to record
taxes at 37% 4 378 (948)
----------- ---------- ----------
Adjusted net income $ 15,754 $ 14,948 $ 16,084
=========== ========== ==========
Adjusted revenue
----------------
GAAP total revenue $ 61,058 $ 58,286 $ 57,351
Floating yield adjust-
ment 2,008 979 130
License fee yield adjus-
tment 1,470 1,814 2,483
Provision for credit
losses (5,629) (3,968) (3,723)
----------- ---------- ----------
Adjusted revenue $ 58,907 $ 57,111 $ 56,241
=========== ========== ==========
Adjusted average capital
------------------------
GAAP average debt $ 477,930 $ 473,141 $ 412,715
GAAP average sharehold-
ers' equity 243,922 233,465 217,977
Floating yield adjustment 8,348 8,073 6,587
License fee yield adjus-
tment (5,316) (6,345) (7,684)
----------- ---------- ----------
Adjusted average
capital $ 724,884 $ 708,334 $ 629,595
=========== ========== ==========
Adjusted revenue as a
percentage of adjusted
average capital 32.5% 32.3% 35.7%
=========== ========== ==========
Adjusted return on
capital
------------------
Adjusted net income $ 15,754 $ 14,948 $ 16,084
Adjusted interest
expense after-tax 5,689 5,960 5,221
----------- ---------- ----------
Adjusted net income
plus interest
expense after-tax $ 21,443 $ 20,908 $ 21,305
=========== ========== ==========
Adjusted return on
capital (3) 11.8% 11.8% 13.5%
=========== ========== ==========
Adjusted operating
expenses
------------------
GAAP salaries and wages $ 13,620 $ 13,092 $ 11,861
GAAP general and admini-
strative 7,266 7,359 5,917
GAAP sales and marketing 3,835 4,144 4,472
Litigation (145) (500) --
----------- ---------- ----------
Adjusted operating
expenses $ 24,576 $ 24,095 $ 22,250
=========== ========== ==========
Adjusted operating
expenses as a percentage
of adjusted average
capital 13.6% 13.6% 14.1%
=========== ========== ==========
Percentage change in ad-
justed average capital
compared to the same
period in the prior year 34.2% 29.4% 20.8%
=========== ========== ==========
Floating Yield Adjustment
-------------------------
The purpose of this adjustment is to modify the calculation of our GAAP-based finance charge revenue so that favorable and unfavorable changes in expected cash flows from loans receivable are treated consistently. To make the adjustment understandable, we must first explain how GAAP requires us to account for finance charge revenue, our primary revenue source.
Finance charge revenue equals the cash inflows from our loan portfolio less cash outflows to acquire the loans. Our GAAP finance charge revenue is based on estimates of future cash flows and is recognized on a level-yield basis over the estimated life of the loan. With the level-yield approach, the amount of finance charge revenue recognized from a loan in a given period, divided by the loan asset, is a constant percentage. Under GAAP, favorable changes in expected cash flows are treated as increases to the yield and are recognized over time, while unfavorable changes are recorded as a current period expense. The non-GAAP methodology that we use (the "floating yield" method) is identical to the GAAP approach except that, under the "floating yield" method, all changes in expected cash flows (both positive and negative) are treated as yield adjustments and therefore impact earnings over time. The GAAP treatment always results in a lower carrying value of the loan receivable asset, but may result in either higher or lower earnings for any given period depending on the timing and amount of expected cash flow changes.
We believe floating yield earnings are a more accurate reflection of the performance of our business, since both favorable and unfavorable changes in estimated cash flows are treated consistently.
License Fee Yield Adjustment ----------------------------
The purpose of this adjustment is to make revenue from license fees comparable across time periods. In 2001, we began charging dealer-partners a monthly licensing fee for access to our internet-based Credit Approval Processing System, also known as CAPS.
Effective January 1, 2007, we implemented a change in the way these fees are charged designed to positively impact dealer-partner attrition. We continue to charge a monthly license fee of $599, but instead of collecting the fee in the current period, we collect it from future dealer holdback payments.
As a result of this change, (as of January 1, 2007) we record license fees on a GAAP basis as a yield adjustment, recognizing these fees as finance charge revenue over the term of the dealer loan because collection is dependent on the future cash flows of the loan. Previously, we had recorded the fee as license fee revenue in the month the fee was charged. The current GAAP treatment is more consistent with the cash economics of the business.
To allow for proper comparisons between periods, we make an adjustment to our financial results as though license fees had always been recorded as a yield adjustment. The license fee adjustment will become less significant in future periods. The license fee adjustment is projected to be $2.1 million, $0.8 million and $0.3 million in 2008, 2009 and 2010, respectively. The adjustment will be immaterial starting in 2011.
Cautionary Statement Regarding Forward-Looking Information ----------------------------------------------------------
We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. Statements in this release that are not historical facts, such as those using terms like "may," "will," "should," "believe," "expect," "anticipate," "assume," "forecast," "estimate," "intend," "plan", "target" and those regarding our future results, plans and objectives, are "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements represent our outlook only as of the date of this release. Actual results could differ materially from these forward-looking statements since the statements are based on our current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of our Form 10-K for the year ended December 31, 2007, other risk factors discussed herein or listed from time to time in our reports filed with the Securities and Exchange Commission and the following:
* Our inability to accurately forecast and estimate the amount and
timing of future collections could have a material adverse
effect on results of operations.
* We may be unable to continue to access or renew funding sources
and obtain capital on favorable terms needed to maintain and
grow the business.
* The conditions of the U.S. and international capital markets may
adversely affect lenders the Company has relationships with,
causing us to incur additional cost and reducing our sources of
liquidity which may adversely affect our financial position,
liquidity and results of operations.
* Due to increased competition from traditional financing sources
and non-traditional lenders, we may not be able to compete
successfully.
* We may not be able to generate sufficient cash flow to service
our outstanding debt and fund operations.
* Requirements under credit facilities to meet financial and
portfolio performance covenants.
* Interest rate fluctuations may adversely affect our borrowing
costs, profitability and liquidity.
* The substantial regulation to which we are subject could result
in potential liability.
* Adverse changes in economic conditions, or in the automobile or
finance industries or the non-prime consumer market, could
adversely affect our financial position, liquidity and results
of operations and our ability to enter into future financing
transactions.
* Litigation we are involved in from time to time may adversely
affect our financial condition, results of operations and cash
flows.
* We are dependent on our senior management and the loss of any of
these individuals or an inability to hire additional personnel
could adversely affect our ability to operate profitably.
* Our inability to properly safeguard confidential consumer
information.
* Our operations could suffer from telecommunications or
technology downtime or increased costs.
* Natural disasters, acts of war, terrorist attacks and threats or
the escalation of military activity in response to such attacks
or otherwise may negatively affect our business, financial
condition and results of operations.
Other factors not currently anticipated by management may also materially and adversely affect our results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events or otherwise, except as required by applicable law.
Description of Credit Acceptance Corporation --------------------------------------------
Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history. Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.
Without our product, consumers are often unable to purchase a vehicle or they purchase an unreliable one and are not provided the opportunity to improve their credit standing. As we report to the three national credit reporting agencies, a significant number of our consumers improve their lives by improving their credit score and move on to more traditional sources of financing. Credit Acceptance is publicly traded on the NASDAQ under the symbol CACC. For more information, visit creditacceptance.com.
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(Dollars in thousands, Three Months Ended Nine Months Ended
except per share data) September 30, September 30,
----------------------- -----------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Revenue:
Finance charges $ 75,617 $ 56,743 $ 210,119 $ 162,240
Other income 4,490 4,315 15,771 14,455
----------- ----------- ----------- -----------
Total revenue 80,107 61,058 225,890 176,695
----------- ----------- ----------- -----------
Costs and expenses:
Salaries and wages 16,766 13,620 51,205 38,573
General and admini-
strative 6,975 7,266 20,726 20,542
Sales and marketing 4,088 3,835 13,272 12,451
Provision for credit
losses 8,383 5,931 31,792 13,602
Interest 10,954 9,030 31,702 26,781
Other expense 2 16 59 74
----------- ----------- ----------- -----------
Total costs and
expenses 47,168 39,698 148,756 112,023
----------- ----------- ----------- -----------
Operating income 32,939 21,360 77,134 64,672
Foreign currency
(loss) gain (2) 26 (15) 64
----------- ----------- ----------- -----------
Income from continuing
operations before
provision for income
taxes 32,937 21,386 77,119 64,736
Provision for income
taxes 12,606 7,917 28,828 23,387
----------- ----------- ----------- -----------
Income from continuing
operations 20,331 13,469 48,291 41,349
----------- ----------- ----------- -----------
Discontinued
operations
Gain (loss) from
discontinued United
Kingdom operations 504 (9) 548 (280)
Provision (credit)
for income taxes 178 (1,282) 218 (1,363)
----------- ----------- ----------- -----------
Gain from disconti-
nued operations 326 1,273 330 1,083
----------- ----------- ----------- -----------
Net income $ 20,657 $ 14,742 $ 48,621 $ 42,432
=========== =========== =========== ===========
Net income per common
share:
Basic $ 0.68 $ 0.49 $ 1.61 $ 1.41
=========== =========== =========== ===========
Diluted $ 0.67 $ 0.47 $ 1.57 $ 1.36
=========== =========== =========== ===========
Income from continuing
operations per common
share:
Basic $ 0.67 $ 0.45 $ 1.60 $ 1.38
=========== =========== =========== ===========
Diluted $ 0.66 $ 0.43 $ 1.56 $ 1.32
=========== =========== =========== ===========
Gain from discontinued
operations per common
share:
Basic $ 0.01 $ 0.04 $ 0.01 $ 0.04
=========== =========== =========== ===========
Diluted $ 0.01 $ 0.04 $ 0.01 $ 0.03
=========== =========== =========== ===========
Weighted average
shares outstanding:
Basic 30,310,053 30,015,048 30,223,586 30,069,639
Diluted 31,024,455 31,139,612 30,994,466 31,228,893
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) As of
-----------------------
Sept. 30, Dec. 31,
2008 2007
----------- -----------
ASSETS: (Unaudited)
Cash and cash equivalents $ 934 $ 712
Restricted cash and cash equivalents 82,993 74,102
Restricted securities available for sale 3,933 3,290
Loans receivable (including $16,067 and
$16,125 from affiliates as of September 30,
2008 and December 31, 2007, respectively) 1,155,591 944,698
Allowance for credit losses (119,184) (134,145)
----------- -----------
Loans receivable, net 1,036,407 810,553
----------- -----------
Property and equipment, net 21,550 20,124
Income taxes receivable 10,012 20,712
Other assets 14,527 12,689
----------- -----------
Total Assets $ 1,170,356 $ 942,182
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and accrued liabilities $ 79,845 $ 79,834
Line of credit 82,900 36,300
Secured financing 602,429 488,065
Mortgage note and capital lease obligations 6,608 7,765
Deferred income taxes, net 78,848 64,768
----------- -----------
Total Liabilities 850,630 676,732
----------- -----------
Shareholders' Equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000
shares authorized, 30,570,110 and
30,240,859 shares issued and outstanding
as of September 30, 2008 and December 31,
2007, respectively 306 302
Paid-in capital 9,983 4,134
Retained earnings 309,622 261,001
Accumulated other comprehensive (loss)
income, net of tax of $105 and $(7) at
September 30, 2008 and December 31, 2007,
respectively (185) 13
----------- -----------
Total Shareholders' Equity 319,726 265,450
----------- -----------
Total Liabilities and Shareholders'
Equity $ 1,170,356 $ 942,182
=========== ===========