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Credit Acceptance Announces Fourth Quarter and Full Year 2014 Earnings

Southfield, Michigan, Jan. 29, 2015 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (NASDAQ: CACC) (referred to as the "Company", "Credit Acceptance", "we", "our", or "us") today announced consolidated net income of $73.0 million, or $3.45 per diluted share, for the three months ended December 31, 2014 compared to consolidated net income of $65.9 million, or $2.80 per diluted share, for the same period in 2013. For the year ended December 31, 2014, consolidated net income was $266.2 million, or $11.92 per diluted share, compared to consolidated net income of $253.1 million, or $10.54 per diluted share, for the same period in 2013.

Adjusted net income, a non-GAAP financial measure, for the three months ended December 31, 2014 was $69.4 million, or $3.28 per diluted share, compared to $64.3 million, or $2.73 per diluted share, for the same period in 2013. For the year ended December 31, 2014, adjusted net income was $271.7 million, or $12.17 per diluted share, compared to adjusted net income of $248.3 million, or $10.34 per diluted share, for the same period in 2013.

During the fourth quarter of 2014, we enhanced our methodologies for forecasting the timing of future collections and future dealer holdback payments on loans through the utilization of more recent data, different segmentations and new forecast variables. Implementation of the enhanced forecasting methodologies increased consolidated net income and adjusted net income by $2.2 million and $0.6 million, respectively, for both the three months and year ended December 31, 2014.

Webcast Details

We will host a webcast on January 29, 2015 at 5:00 p.m. Eastern Time to answer questions related to our fourth quarter and full year 2014 results. The webcast can be accessed live by visiting the "Investor Relations" section of our website at creditacceptance.com or by dialing 877-303-2904. Additionally, a replay and transcript of the webcast will be archived in the "Investor Relations" section of our website.


Consumer Loan Performance

Dealers assign retail installment contracts (referred to as "Consumer Loans") to Credit Acceptance. At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan. Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related dealer at a price designed to achieve an acceptable return on capital. If Consumer Loan performance equals or exceeds our initial expectation, it is likely our target return on capital will be achieved.

We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our forecast of Consumer Loan collection rates as of December 31, 2014, with the forecasts as of September 30, 2014, as of December 31, 2013, and at the time of assignment, segmented by year of assignment:

Forecasted Collection Percentage as of (1) Variance in Forecasted Collection Percentage from
Consumer Loan Assignment Year December 31,
2014
September 30,
2014
December 31, 2013 Initial
Forecast
September 30,
2014
December 31, 2013 Initial
Forecast
2005 73.7 % 73.7 % 73.7 % 74.0 % 0.0 % 0.0 % -0.3 %
2006 70.0 % 70.0 % 70.0 % 71.4 % 0.0 % 0.0 % -1.4 %
2007 68.0 % 68.0 % 67.9 % 70.7 % 0.0 % 0.1 % -2.7 %
2008 70.3 % 70.3 % 70.1 % 69.7 % 0.0 % 0.2 % 0.6 %
2009 79.4 % 79.4 % 79.2 % 71.9 % 0.0 % 0.2 % 7.5 %
2010 77.2 % 77.2 % 77.0 % 73.6 % 0.0 % 0.2 % 3.6 %
2011 74.0 % 74.0 % 74.1 % 72.5 % 0.0 % -0.1 % 1.5 %
2012 73.4 % 73.4 % 73.5 % 71.4 % 0.0 % -0.1 % 2.0 %
2013 73.7 % 73.5 % 73.3 % 72.0 % 0.2 % 0.4 % 1.7 %
2014 (2) 72.6 % 72.9 % -- 71.8 % -0.3 % -- 0.8 %

(1) Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment. Contractual repayments include both principal and interest.

(2) The forecasted collection rate for 2014 Consumer Loans as of December 31, 2014 includes both Consumer Loans that were in our portfolio as of September 30, 2014 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments:

Forecasted Collection Percentage as of
2014 Consumer Loan Assignment Period December 31, 2014 September 30, 2014 Variance
January 1, 2014 through September 30, 2014 73.5 % 72.9 % 0.6 %
October 1, 2014 through December 31, 2014 70.0 % -- --

Consumer Loans assigned in 2009 through 2013 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2006 and 2007 have yielded forecasted collection results materially worse than our initial estimates. For all other assignment years presented, actual results have been very close to our initial estimates. For the three months ended December 31, 2014, forecasted collection rates improved for Consumer Loans assigned in 2013 and 2014 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the year ended December 31, 2014, forecasted collection rates improved for Consumer Loans assigned in 2008 through 2010, 2013 and 2014 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The initial forecast for Consumer Loans assigned in the fourth quarter of 2014 was lower than the initial forecast for Consumer Loans assigned in the first nine months of the 2014. The lower initial forecast reflects a change in the mix of business received during the fourth quarter of 2014, including a longer average initial loan term. The average initial term for Consumer Loans assigned in the fourth quarter of 2014 was 48.5 months as compared to 46.3 months for Consumer Loans assigned in the first nine months of the 2014. The average estimated initial yield on Consumer Loans assigned in the fourth quarter of 2014 was comparable to the average estimated initial yield on Consumer Loans assigned in the third quarter of 2014.

Forecasting collection rates accurately at loan inception is difficult. With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast.


The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of December 31, 2014. All amounts, unless otherwise noted, 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 December 31, 2014
Consumer Loan Assignment Year Forecasted
Collection %
Advance % (1) Spread % % of Forecast
Realized (2)
2005 73.7 % 46.9 % 26.8 % 99.9 %
2006 70.0 % 46.6 % 23.4 % 99.6 %
2007 68.0 % 46.5 % 21.5 % 99.3 %
2008 70.3 % 44.6 % 25.7 % 98.9 %
2009 79.4 % 43.9 % 35.5 % 98.9 %
2010 77.2 % 44.7 % 32.5 % 97.7 %
2011 74.0 % 45.5 % 28.5 % 91.3 %
2012 73.4 % 46.3 % 27.1 % 75.8 %
2013 73.7 % 47.6 % 26.1 % 50.3 %
2014 72.6 % 47.7 % 24.9 % 17.0 %

(1) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program as a percentage of the initial balance of the Consumer Loans. Payments of dealer holdback and accelerated dealer holdback are not included.

(2) Presented as a percentage of total forecasted collections.

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2011 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections. Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate declined during the 2005 through 2007 period as we increased advance rates during this period in response to a more difficult competitive environment. During 2008 and 2009, the spread increased as the competitive environment improved and we reduced advance rates. In addition, during 2009, the spread was positively impacted by materially better than expected Consumer Loan performance. During the 2010 through 2013 period, the spread decreased as we again increased advance rates in response to the competitive environment. The decline in the spread from 2013 to 2014 is primarily the result of the performance of 2013 Consumer Loans, which has exceeded our initial expectations by a greater margin than 2014 Consumer Loans.


The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2014 for dealer loans and purchased loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

Consumer Loan Assignment Year Forecasted Collection % (1) Advance % (1)(2) Spread %
Dealer loans 2007 68.0 % 45.8 % 22.2 %
2008 70.7 % 43.3 % 27.4 %
2009 79.4 % 43.4 % 36.0 %
2010 77.3 % 44.4 % 32.9 %
2011 74.0 % 45.2 % 28.8 %
2012 73.3 % 46.1 % 27.2 %
2013 73.6 % 47.1 % 26.5 %
2014 72.5 % 47.2 % 25.3 %
Purchased loans 2007 68.3 % 49.1 % 19.2 %
2008 69.6 % 46.7 % 22.9 %
2009 79.5 % 45.3 % 34.2 %
2010 77.1 % 46.2 % 30.9 %
2011 74.4 % 47.6 % 26.8 %
2012 73.7 % 48.0 % 25.7 %
2013 74.0 % 50.5 % 23.5 %
2014 73.1 % 51.7 % 21.4 %

(1) The forecasted collection rates and advance rates presented for each Consumer Loan assignment year change over time due to the impact of transfers between dealer and purchased loans. Under our portfolio program, certain events may result in dealers forfeiting their rights to dealer holdback. We transfer the dealer's Consumer Loans from the dealer loan portfolio to the purchased loan portfolio in the period this forfeiture occurs.

(2) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program as a percentage of the initial balance of the Consumer Loans. Payments of dealer holdback and accelerated dealer holdback are not included.

Although the advance rate on purchased loans is higher as compared to the advance rate on dealer loans, purchased loans do not require us to pay dealer holdback.

Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last eight quarters as compared to the same period in the previous year:

Year over Year Percent Change
Three Months Ended Unit Volume Dollar Volume (1)
March 31, 2013 -2.9 % -0.4 %
June 30, 2013 8.4 % 10.5 %
September 30, 2013 11.0 % 15.9 %
December 31, 2013 12.6 % 11.3 %
March 31, 2014 14.3 % 16.2 %
June 30, 2014 4.5 % 5.7 %
September 30, 2014 4.7 % 6.1 %
December 31, 2014 19.4 % 25.4 %

(1) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program. Payments of dealer holdback and accelerated dealer holdback are not included.

Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our product, (2) the amount of capital available to fund new loans, and (3) our assessment of the volume that our infrastructure can support. Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.


Unit and dollar volumes grew 19.4% and 25.4%, respectively, during the fourth quarter of 2014 as the number of active dealers grew 14.5% and average volume per active dealer grew 5.0%. We believe the increase in volume per dealer was the result of decreased competition during the fourth quarter of 2014.

The following table summarizes the changes in Consumer Loan unit volume and active dealers:

For the Three Months Ended December 31, For the Years Ended December 31,
2014 2013 % Change 2014 2013 % Change
Consumer Loan unit volume 55,716 46,677 19.4 % 223,998 202,250 10.8 %
Active dealers (1) 5,323 4,650 14.5 % 7,247 6,394 13.3 %
Average volume per active dealer 10.5 10.0 5.0 % 30.9 31.6 -2.2 %

(1) Active dealers are dealers who have received funding for at least one dealer loan or purchased loan during the period.

The following table provides additional information on the changes in Consumer Loan unit volume and active dealers:

For the Three Months Ended December 31, For the Years Ended December 31,
2014 2013 % Change 2014 2013 % Change
Consumer Loan unit volume from dealers active both periods 41,811 39,418 6.1 % 193,291 188,165 2.7 %
Dealers active both periods 3,228 3,228 -- 4,761 4,761 --
Average volume per dealers active both periods 13.0 12.2 6.1 % 40.6 39.5 2.7 %
Consumer Loan unit volume from new dealers 2,746 1,985 38.3 % 29,604 31,414 -5.8 %
New active dealers (1) 639 518 23.4 % 2,413 2,382 1.3 %
Average volume per new active dealers 4.3 3.8 13.2 % 12.3 13.2 -6.8 %
Attrition (2) -15.6 % -14.0 % -7.0 % -7.0 %

(1) New active dealers are dealers who enrolled in our program and have received funding for their first dealer loan or purchased loan from us during the period.

(2) Attrition is measured according to the following formula: decrease in Consumer Loan unit volume from dealers 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.

Consumer Loans are assigned to us as either dealer loans through our portfolio program or purchased loans through our purchase program. The following table summarizes the portion of our Consumer Loan volume that was assigned to us as dealer loans:

For the Three Months Ended December 31, For the Years Ended December 31,
2014 2013 2014 2013
Dealer loan unit volume as a percentage of total unit volume 89.0 % 92.4 % 90.7 % 93.5 %
Dealer loan dollar volume as a percentage of total dollar volume (1) 85.7 % 90.1 % 87.8 % 91.6 %

(1) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program. Payments of dealer holdback and accelerated dealer holdback are not included.

As of December 31, 2014 and 2013, the net dealer loans receivable balance was 87.2% and 89.0%, respectively, of the total net loans receivable balance.

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. Material adjustments are explained in the table footnotes and the subsequent "Floating Yield Adjustment" and "Senior Notes 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, 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 months and year ended December 31, 2014, compared to the same periods in 2013, include the following:

For the Three Months Ended December 31, For the Years Ended December 31,
(In millions, except share and per share data) 2014 2013 % Change 2014 2013 % Change
Adjusted average capital $ 2,430.4 $ 2,154.4 12.8 % $ 2,338.1 $ 2,049.2 14.1 %
Adjusted net income $ 69.4 $ 64.3 7.9 % $ 271.7 $ 248.3 9.4 %
Adjusted interest expense after-tax $ 9.3 $ 10.5 -11.4 % $ 36.9 $ 40.9 -9.8 %
Adjusted net income plus interest expense after-tax $ 78.7 $ 74.8 5.2 % $ 308.6 $ 289.2 6.7 %
Adjusted return on capital 13.0 % 13.9 % -6.5 % 13.2 % 14.1 % -6.4 %
Cost of capital 4.9 % 5.9 % -16.9 % 5.3 % 5.7 % -7.0 %
Economic profit $ 48.9 $ 43.1 13.5 % $ 184.2 $ 173.2 6.4 %
GAAP diluted weighted average shares outstanding 21,171,235 23,575,786 -10.2 % 22,331,401 24,009,593 -7.0 %
Adjusted net income per diluted share $ 3.28 $ 2.73 20.1 % $ 12.17 $ 10.34 17.7 %


Economic profit increased 13.5% and 6.4% for the three months and year ended December 31, 2014, as compared to the same periods in 2013. 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. The following table summarizes the impact each of these components had on the increase in economic profit for the three months and year ended December 31, 2014, as compared to the same periods in 2013:

Year over Year Change in Economic Profit
(In millions) For the Three Months Ended
December 31, 2014
For the Year Ended
December 31, 2014
Increase in adjusted average capital $ 5.5 $ 24.4
Decrease in cost of capital 6.0 8.1
Decrease in adjusted return on capital (5.7) (21.5)
Increase in economic profit $ 5.8 $ 11.0

The increase in economic profit for the three months ended December 31, 2014, as compared to the same period in 2013, was primarily the result of the following:

• A decrease in our cost of capital of 100 basis points primarily due to both a decrease in our cost of debt resulting from the change in mix of our outstanding debt and a decrease in the 30-year treasury rate, which is used in the average cost of equity calculation.

• An increase in adjusted average capital of 12.8% due to growth in our loan portfolio primarily as a result of growth in new Consumer Loan assignments in recent years, which resulted in the dollar volume of new Consumer Loan assignments exceeding the principal collected on our loan portfolio. The growth in new Consumer Loan assignments in recent years was the result of an increase in active dealers, partially offset by a decline in volume per active dealer in recent years.

• A decrease in our adjusted return on capital of 90 basis points primarily as a result of the following:

• A decline in the yield on our loan portfolio decreased the adjusted return on capital by 70 basis points due to lower yields on new Consumer Loan assignments, which was the result of advance rate increases made in recent years in response to the competitive environment.

• Growth in operating expenses decreased the adjusted return on capital by 20 basis points as operating expenses grew 16.4% while adjusted average capital grew 12.8%. The 16.4% increase ($6.6 million) in operating expenses included:

• An increase in salaries and wages expense of $6.0 million, or 27.0%, comprised of the following:

• An increase of $3.2 million in stock-based compensation expense primarily due to a change in the expected vesting of performance-based stock awards and new stock awards granted in the first quarter of 2014.

• An increase of $1.3 million in cash-based incentive compensation expense primarily due to an improvement in Company performance measures during the fourth quarter of 2014.

• Excluding the increases in stock-based and cash-based incentive compensation expenses, salaries and wages expense increased $1.5 million primarily related to an increase of $1.4 million for our support function.

• An increase in sales and marketing expense of $1.2 million, or 14.1%, primarily as a result of an increase in the base salaries of our sales force and an increase in sales commissions related to growth in Consumer Loan unit volume.

The increase in economic profit for the year ended December 31, 2014, as compared to the same period in 2013, was primarily the result of the following:

• An increase in adjusted average capital of 14.1% due to growth in our loan portfolio primarily as a result of growth in new Consumer Loan assignments in recent years, which resulted in the dollar volume of new Consumer Loan assignments exceeding the principal collected on our loan portfolio. The growth in new Consumer Loan assignments in recent years was the result of an increase in active dealers, partially offset by a decline in volume per active dealer.

• A decrease in our cost of capital of 40 basis points primarily due to a decrease in our cost of debt resulting from the change in mix of our outstanding debt.

• A decrease in our adjusted return on capital of 90 basis points primarily as a result of the following:

• A decline in the yield on our loan portfolio decreased the adjusted return on capital by 100 basis points due to lower yields on new Consumer Loan assignments, which was the result of advance rate increases made in recent years in response to the competitive environment.

• Slower growth in operating expenses increased the adjusted return on capital by 20 basis points as operating expenses grew 9.7% while adjusted average capital grew 14.1%. The 9.7% increase ($15.1 million) in operating expenses included:

• An increase in salaries and wages expense of $12.9 million, or 14.8%, comprised of the following:

• An increase of $6.8 million in stock-based compensation expense primarily due to a change in the expected vesting of performance-based stock awards and new stock awards granted in the first quarter of 2014.

• Excluding the increase in stock-based compensation expense, salaries and wages expense increased $6.1 million related to increases of $4.4 million for our support function, $0.9 million for our servicing function and $0.8 million for our originations function.

• An increase in sales and marketing expense of $2.3 million, or 6.7%, primarily as a result of an increase in sales commissions related to growth in Consumer Loan unit volume.

The following table shows adjusted revenue and operating expenses as a percentage of adjusted average capital, the adjusted return on capital, and the percentage change in adjusted average capital for each of the last eight quarters, compared to the same periods in the prior year:

For the Three Months Ended
Dec. 31, 2014 Sept. 30, 2014 Jun. 30, 2014 Mar. 31, 2014 Dec. 31, 2013 Sept. 30, 2013 Jun. 30, 2013 Mar. 31, 2013
Adjusted revenue as a percentage of adjusted average capital (1) 28.3 % 28.3 % 27.8 % 28.8 % 29.5 % 29.8 % 29.9 % 31.0 %
Operating expenses as a percentage of adjusted average capital (1) 7.7 % 6.7 % 7.1 % 7.8 % 7.5 % 7.1 % 7.8 % 8.1 %
Adjusted return on capital (1) 13.0 % 13.6 % 13.0 % 13.2 % 13.9 % 14.3 % 13.9 % 14.4 %
Percentage change in adjusted average capital compared to the same period in the prior year 12.8 % 12.9 % 15.2 % 15.7 % 15.5 % 17.4 % 18.5 % 19.3 %

(1) Annualized

The increase in operating expenses as a percentage of adjusted average capital for the three months ended December 31, 2014, as compared to the three months ended September 30, 2014, was primarily the result of the following:

• An increase in salaries and wages expense of $6.2 million, or 28.2%, which increased operating expenses as a percentage of adjusted average capital by 90 basis points as a result of the following:

• An increase of $3.8 million in stock-based compensation expense primarily due to a change in the expected vesting of performance-based stock awards.

• An increase of $1.5 million in cash-based incentive compensation expense primarily due to an improvement in Company performance measures during the fourth quarter of 2014.

• Excluding the increases in stock-based and cash-based incentive compensation expenses, salaries and wages increased by $0.9 million related to increases of $0.5 million for our support function and $0.2 million each for our servicing function and our originations function.

The following tables provide a reconciliation of non-GAAP measures 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. Certain amounts do not recalculate due to rounding.

For the Three Months Ended
(In millions, except share and per share data) Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
Dec. 31,
2013
Sept. 30,
2013
Jun. 30,
2013
Mar. 31,
2013
Adjusted net income
GAAP net income $ 73.0 $ 74.0 $ 69.4 $ 49.8 $ 65.9 $ 65.1 $ 61.5 $ 60.6
Floating yield adjustment (after-tax) (3.4) (0.9) (0.6) (1.1) (0.9) 0.1 (0.6) (1.1)
Senior notes adjustment (after-tax) (0.5) (0.5) (0.6) 14.1 -- -- -- --
Adjustment to record taxes at 37% 0.3 (1.3) (0.6) 0.6 (0.7) (0.7) (0.2) (0.7)
Adjusted net income $ 69.4 $ 71.3 $ 67.6 $ 63.4 $ 64.3 $ 64.5 $ 60.7 $ 58.8
Adjusted net income per diluted share $ 3.28 $ 3.26 $ 2.98 $ 2.69 $ 2.73 $ 2.72 $ 2.53 $ 2.41
Diluted weighted average shares outstanding 21,171,235 21,895,222 22,658,891 23,528,466 23,575,786 23,708,043 24,017,273 24,426,127
Adjusted revenue
GAAP total revenue $ 185.1 $ 181.7 $ 179.8 $ 176.9 $ 175.3 $ 172.7 $ 169.4 $ 164.7
Floating yield adjustment (5.4) (1.3) (1.0) (1.8) (1.4) -- (0.9) (1.8)
Provision for credit losses 0.7 (4.1) (4.6) (4.7) (4.6) (6.1) (5.4) (5.8)
Provision for claims (8.6) (9.4) (11.0) (11.0) (10.3) (11.0) (10.5) (9.0)
Adjusted revenue $ 171.8 $ 166.9 $ 163.2 $ 159.4 $ 159.0 $ 155.6 $ 152.6 $ 148.1
Adjusted average capital
GAAP average debt $ 1,726.9 $ 1,626.6 $ 1,593.8 $ 1,529.5 $ 1,427.4 $ 1,404.4 $ 1,384.4 $ 1,273.1
GAAP average shareholders' equity 683.3 710.7 732.3 750.4 717.7 676.5 646.3 627.3
Senior notes adjustment 16.0 16.5 17.0 (77.6) -- -- -- --
Floating yield adjustment 4.2 6.7 6.6 9.6 9.3 10.0 8.4 11.8
Adjusted average capital $ 2,430.4 $ 2,360.5 $ 2,349.7 $ 2,211.9 $ 2,154.4 $ 2,090.9 $ 2,039.1 $ 1,912.2
Adjusted revenue as a percentage of adjusted average capital (1) 28.3 % 28.3 % 27.8 % 28.8 % 29.5 % 29.8 % 29.9 % 31.0 %
Adjusted interest expense
GAAP interest expense $ 13.9 $ 13.5 $ 13.3 $ 16.0 $ 16.7 $ 16.1 $ 16.2 $ 16.0
Senior notes adjustment 0.8 0.8 0.9 (0.6) -- -- -- --
Adjusted interest expense (pre-tax) 14.7 14.3 14.2 15.4 16.7 16.1 16.2 16.0
Adjustment to record tax effect at 37% (5.4) (5.3) (5.3) (5.7) (6.2) (6.0) (6.0) (5.9)
Adjusted interest expense (after-tax) $ 9.3 $ 9.0 $ 8.9 $ 9.7 $ 10.5 $ 10.1 $ 10.2 $ 10.1

(1) Annualized

For the Three Months Ended
(In millions) Dec. 31, 2014 Sept. 30, 2014 Jun. 30, 2014 Mar. 31, 2014 Dec. 31, 2013 Sept. 30, 2013 Jun. 30, 2013 Mar. 31, 2013
Adjusted return on capital
Adjusted net income $ 69.4 $ 71.3 $ 67.6 $ 63.4 $ 64.3 $ 64.5 $ 60.7 $ 58.8
Adjusted interest expense (after-tax) 9.3 9.0 8.9 9.7 10.5 10.1 10.2 10.1
Adjusted net income plus interest expense (after-tax) $ 78.7 $ 80.3 $ 76.5 $ 73.1 $ 74.8 $ 74.6 $ 70.9 $ 68.9
Adjusted return on
capital (1) (3)
13.0 % 13.6 % 13.0 % 13.2 % 13.9 % 14.3 % 13.9 % 14.4 %
Economic profit
Adjusted return on capital 13.0 % 13.6 % 13.0 % 13.2 % 13.9 % 14.3 % 13.9 % 14.4 %
Cost of capital (2) (3) 4.9 % 5.2 % 5.4 % 5.8 % 5.9 % 5.8 % 5.4 % 5.6 %
Adjusted return on capital in excess of cost of capital 8.1 % 8.4 % 7.6 % 7.4 % 8.0 % 8.5 % 8.5 % 8.8 %
Adjusted average capital $ 2,430.4 $ 2,360.5 $ 2,349.7 $ 2,211.9 $ 2,154.4 $ 2,090.9 $ 2,039.1 $ 1,912.2
Economic profit $ 48.9 $ 49.7 $ 44.8 $ 40.8 $ 43.1 $ 44.7 $ 43.1 $ 42.3
Operating expenses
GAAP salaries and wages $ 28.2 $ 22.0 $ 24.4 $ 25.6 $ 22.2 $ 20.1 $ 23.1 $ 21.9
GAAP general and administrative 8.9 8.7 8.5 8.2 9.5 8.7 8.3 7.9
GAAP sales and marketing 9.7 8.7 8.8 9.6 8.5 8.5 8.5 9.0
Operating expenses $ 46.8 $ 39.4 $ 41.7 $ 43.4 $ 40.2 $ 37.3 $ 39.9 $ 38.8
Operating expenses as a percentage of adjusted average capital (3) 7.7 % 6.7 % 7.1 % 7.8 % 7.5 % 7.1 % 7.8 % 8.1 %
Percentage change in adjusted average capital compared to the same period in the prior year 12.8 % 12.9 % 15.2 % 15.7 % 15.5 % 17.4 % 18.5 % 19.3 %

(1) Adjusted return on capital is defined as adjusted net income plus adjusted interest expense after-tax divided by adjusted average capital.

(2) 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 periods presented, the average 30 year treasury rate and the adjusted pre-tax average cost of debt were as follows:

For the Three Months Ended
Dec. 31, 2014 Sept. 30, 2014 Jun. 30, 2014 Mar. 31, 2014 Dec. 31, 2013 Sept. 30, 2013 Jun. 30, 2013 Mar. 31, 2013
Average 30 year treasury rate 3.0 % 3.2 % 3.4 % 3.7 % 3.8 % 3.7 % 3.2 % 3.1 %
Adjusted pre-tax average cost of debt (3) 3.4 % 3.5 % 3.5 % 4.4 % 4.7 % 4.6 % 4.7 % 5.0 %

(3) Annualized


For the Years Ended December 31,
(In millions, except share and per share data) 2014 2013
Adjusted net income
GAAP net income $ 266.2 $ 253.1
Floating yield adjustment (after-tax) (6.0) (2.5)
Senior notes adjustment (after-tax) 12.5 --
Adjustment to record taxes at 37% (1.0) (2.3)
Adjusted net income $ 271.7 $ 248.3
Adjusted net income per diluted share $ 12.17 $ 10.34
Diluted weighted average shares outstanding 22,331,401 24,009,593
Adjusted average capital
GAAP average debt $ 1,619.2 $ 1,372.3
GAAP average shareholders' equity 719.2 667.0
Senior notes adjustment (7.0) --
Floating yield adjustment 6.7 9.9
Adjusted average capital $ 2,338.1 $ 2,049.2
Adjusted interest expense
GAAP interest expense $ 56.7 $ 65.0
Senior notes adjustment 1.9 --
Adjusted interest expense (pre-tax) 58.6 65.0
Adjustment to record tax effect at 37% (21.7) (24.1)
Adjusted interest expense (after-tax) $ 36.9 $ 40.9
Adjusted return on capital
Adjusted net income $ 271.7 $ 248.3
Adjusted interest expense (after-tax) 36.9 40.9
Adjusted net income plus interest expense (after-tax) $ 308.6 $ 289.2
Adjusted return on capital (1) 13.2 % 14.1 %
Economic profit
Adjusted return on capital 13.2 % 14.1 %
Cost of capital (2) 5.3 % 5.7 %
Adjusted return on capital in excess of cost of capital 7.9 % 8.4 %
Adjusted average capital $ 2,338.1 $ 2,049.2
Economic profit $ 184.2 $ 173.2

(1) Adjusted return on capital is defined as adjusted net income plus adjusted interest expense after-tax divided by adjusted average capital.

(2) 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 periods presented, the average 30 year treasury rate and the adjusted pre-tax average cost of debt were as follows:

For the Years Ended December 31,
2014 2013
Average 30 year treasury rate 3.3 % 3.4 %
Adjusted pre-tax average cost of debt 3.7 % 4.7 %


Floating Yield Adjustment

The purpose of this non-GAAP 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.

The finance charge revenue we will recognize over the life of the loan 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 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 the floating yield adjustment provides a more accurate reflection of the performance of our business, since both favorable and unfavorable changes in estimated cash flows are treated consistently.

Senior Notes Adjustment

On January 22, 2014, we issued $300 million of 6.125% senior notes due 2021 (the "2021 notes") in a private offering exempt from registration under the Securities Act of 1933. On February 21, 2014, we used the net proceeds from the 2021 notes, together with borrowings under our revolving credit facilities, to redeem in full the $350.0 million outstanding principal amount of our 9.125% senior notes due 2017 (the "2017 notes"). The purpose of this non-GAAP adjustment is to modify our GAAP financial results to treat the issuance of the 2021 notes as a refinancing of the 2017 notes.

Under GAAP, the redemption of the 2017 notes was considered an extinguishment of debt. For the quarter ended March 31, 2014, our GAAP financial results included a pre-tax loss on extinguishment of debt of $21.8 million and additional interest expense of $1.4 million as a result of the one month lag from issuance of the 2021 notes to the redemption of the 2017 notes, which collectively reduced consolidated net income by $14.6 million or $0.62 per diluted share.

Under our non-GAAP approach, the loss on extinguishment of debt and additional interest expense that was recognized for GAAP purposes for the quarter ended March 31, 2014 was deferred as a debt issuance cost and is being recognized ratably as interest expense over the term of the 2021 notes. In addition, for adjusted average capital purposes, the impact of additional outstanding debt related to the one month lag from the issuance of the 2021 notes to the redemptions of the 2017 notes was deferred and is being recognized ratably over the term of the 2021 notes.

We believe the senior notes adjustment provides a more accurate reflection of the performance of our business, since we are recognizing the costs incurred with this transaction in a manner consistent with how we recognize the costs incurred when we periodically refinance our other debt facilities.

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 to our Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 14, 2014, 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 execute our business strategy due to current economic conditions.
  • We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business.
  • The terms of our debt limit how we conduct our business.
  • A violation of the terms of our asset-backed secured financing facilities or revolving secured warehouse facilities could have a materially adverse impact on our operations.
  • The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity and results of operations.
  • Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations and adversely affect our financial condition.
  • Due to 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 flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt.
  • Interest rate fluctuations may adversely affect our borrowing costs, profitability and liquidity.
  • Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition and results of operations.
  • We may incur substantially more debt and other liabilities. This could exacerbate further the risks associated with our current debt levels.
  • The regulation to which we are or may become subject could result in a material adverse effect on our business.
  • Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity and results of operations, the ability of key vendors that we depend on to supply us with services, 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.
  • Changes in tax laws and the resolution of uncertain income tax matters could have a material adverse effect on our results of operations and cash flows from operations.
  • Our dependence on technology could have a material adverse effect on our business.
  • Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.
  • We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.
  • Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace.
  • The concentration of our dealers in several states could adversely affect us.
  • Failure to properly safeguard confidential consumer information could subject us to liability, decrease our profitability and damage our reputation.
  • A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.
  • Reliance on our outsourced business functions could adversely affect our business.
  • Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these 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 offered automobile dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history. Our financing programs are 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 financing programs, consumers are often unable to purchase a vehicle or they purchase an unreliable one. Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our programs is that we provide a significant number of our consumers with an opportunity to 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 STATEMENTS OF INCOME

(In millions, except share and per share data) For the Three Months Ended December 31, For the Years Ended December 31,
2014 2013 2014 2013
(Unaudited) (Unaudited)
Revenue:
Finance charges $ 161.7 $ 151.3 $ 630.4 $ 590.4
Premiums earned 12.8 13.5 52.3 51.5
Other income 10.6 10.5 40.8 40.2
Total revenue 185.1 175.3 723.5 682.1
Costs and expenses:
Salaries and wages 28.2 22.2 100.2 87.3
General and administrative 8.9 9.5 34.3 34.4
Sales and marketing 9.7 8.5 36.8 34.5
Provision for credit losses (0.6) 4.6 12.8 21.9
Interest 13.9 16.7 56.7 65.0
Provision for claims 8.6 10.3 40.0 40.8
Loss on extinguishment of debt -- -- 21.8 --
Total costs and expenses 68.7 71.8 302.6 283.9
Income before provision for income taxes 116.4 103.5 420.9 398.2
Provision for income taxes 43.4 37.6 154.7 145.1
Net income $ 73.0 $ 65.9 $ 266.2 $ 253.1
Net income per share:
Basic $ 3.46 $ 2.81 $ 11.96 $ 10.61
Diluted $ 3.45 $ 2.80 $ 11.92 $ 10.54
Weighted average shares outstanding:
Basic 21,109,349 23,438,153 22,257,104 23,850,789
Diluted 21,171,235 23,575,786 22,331,401 24,009,593

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data) As of
December 31, 2014 December 31, 2013
(Unaudited)
ASSETS:
Cash and cash equivalents $ 6.4 $ 4.2
Restricted cash and cash equivalents 157.6 111.3
Restricted securities available for sale 53.2 53.6
Loans receivable (including $8.7 and $7.5 from affiliates as of December 31, 2014 and December 31, 2013, respectively) 2,719.8 2,408.2
Allowance for credit losses (206.9) (195.4)
Loans receivable, net 2,512.9 2,212.8
Property and equipment, net 20.9 22.3
Income taxes receivable 1.4 1.1
Other assets 33.0 28.1
Total Assets $ 2,785.4 $ 2,433.4
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and accrued liabilities $ 114.4 $ 113.8
Revolving secured line of credit 119.5 102.8
Secured financing 1,333.0 935.6
Mortgage note -- 3.8
Senior notes 300.0 350.2
Deferred income taxes, net 213.4 157.2
Income taxes payable 2.9 19.9
Total Liabilities 2,083.2 1,683.3
Shareholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000 shares authorized, 20,597,671 and 22,943,078 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively 0.2 0.2
Paid-in capital 88.7 63.2
Retained earnings 613.4 686.9
Accumulated other comprehensive loss (0.1) (0.2)
Total Shareholders' Equity 702.2 750.1
Total Liabilities and Shareholders' Equity $ 2,785.4 $ 2,433.4

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions) For the Years Ended December 31,
2014 2013
(Unaudited)
Cash Flows From Operating Activities:
Net income $ 266.2 $ 253.1
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 12.8 21.9
Depreciation 5.5 5.4
Amortization 7.7 7.8
Loss on retirement of property and equipment 0.2 0.1
Provision for deferred income taxes 56.1 8.8
Loss on extinguishment of debt 21.8 --
Stock-based compensation 15.3 8.5
Change in operating assets and liabilities:
Increase in accounts payable and accrued liabilities 0.6 8.0
Increase in income taxes receivable (0.3) --
(Decrease) increase in income taxes payable (17.0) 13.6
Increase in other assets (3.7) (1.5)
Net cash provided by operating activities 365.2 325.7
Cash Flows From Investing Activities:
Increase in restricted cash and cash equivalents (46.3) (18.9)
Purchases of restricted securities available for sale (65.4) (105.7)
Proceeds from sale of restricted securities available for sale 15.9 11.6
Maturities of restricted securities available for sale 49.6 86.2
Principal collected on loans receivable 1,540.1 1,334.4
Advances to dealers (1,471.4) (1,356.6)
Purchases of Consumer Loans (204.3) (124.0)
Accelerated payments of dealer holdback (41.7) (40.4)
Payments of dealer holdback (135.5) (114.2)
Net increase in other loans (0.1) (0.4)
Purchases of property and equipment (4.3) (5.6)
Net cash used in investing activities (363.4 (333.6)
Cash Flows From Financing Activities:
Borrowings under revolving secured line of credit 2,796.2 2,816.6
Repayments under revolving secured line of credit (2,779.5) (2,757.3)
Proceeds from secured financing 1,754.7 1,004.7
Repayments of secured financing (1,357.3) (922.1)
Proceeds from issuance of senior notes 300.0 --
Repayment of senior notes (350.0) --
Principal payments under mortgage note (3.8) (0.2)
Payments of debt issuance costs and debt extinguishment costs (30.4) (5.3)
Repurchase of common stock (343.7) (135.2)
Proceeds from stock options exercised 0.6 0.6
Tax benefits from stock-based compensation plans 13.6 1.3
Net cash provided by financing activities 0.4 3.1
Net increase (decrease) in cash and cash equivalents 2.2 (4.8)
Cash and cash equivalents, beginning of period 4.2 9.0
Cash and cash equivalents, end of period $ 6.4 $ 4.2
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 55.2 $ 57.5
Cash paid during the period for income taxes $ 99.9 $ 119.6

CREDIT ACCEPTANCE CORPORATION

SUMMARY FINANCIAL DATA

Loans Receivable

A summary of changes in Loans receivable is as follows:

(Unaudited)
(In millions) For the Year Ended December 31, 2014
Dealer Loans Purchased Loans Total
Balance, beginning of period $ 2,155.5 $ 252.7 $ 2,408.2
New Consumer Loan assignments (1) 1,471.4 204.3 1,675.7
Principal collected on loans receivable (1,392.6) (147.5) (1,540.1)
Accelerated dealer holdback payments 41.7 -- 41.7
Dealer holdback payments 135.5 -- 135.5
Transfers (2) (20.5) 20.5 --
Write-offs (3.1) (0.1) (3.2)
Recoveries (3) 1.8 0.1 1.9
Net change in other loans 0.1 -- 0.1
Balance, end of period $ 2,389.8 $ 330.0 $ 2,719.8
(In millions) For the Year Ended December 31, 2013
Dealer Loans Purchased Loans Total
Balance, beginning of period $ 1,869.4 $ 240.5 $ 2,109.9
New Consumer Loan assignments (1) 1,356.6 124.0 1,480.6
Principal collected on loans receivable (1,204.6) (129.8) (1,334.4)
Accelerated dealer holdback payments 40.4 -- 40.4
Dealer holdback payments 114.2 -- 114.2
Transfers (2) (17.9) 17.9 --
Write-offs (5.2) (0.1) (5.3)
Recoveries (3) 2.2 0.2 2.4
Net change in other loans 0.4 -- 0.4
Balance, end of period $ 2,155.5 $ 252.7 $ 2,408.2

(1) The dealer loans amount represents advances paid to dealers on Consumer Loans assigned under our portfolio program. The purchased loans amount represents one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program.

(2) Under our portfolio program, certain events may result in dealers forfeiting their rights to dealer holdback. We transfer the dealer's outstanding dealer loan balance to purchased loans in the period this forfeiture occurs.

(3) Represents collections received on previously written off loans.

A summary of changes in the allowance for credit losses is as follows:

(Unaudited)
(In millions) For the Year Ended December 31, 2014
Dealer Loans Purchased Loans Total
Balance, beginning of period $ 185.7 $ 9.7 $ 195.4
Provision for credit losses 13.7 (0.9) 12.8
Write-offs (3.1) (0.1) (3.2)
Recoveries (1) 1.8 0.1 1.9
Balance, end of period $ 198.1 $ 8.8 $ 206.9
(In millions) For the Year Ended December 31, 2013
Dealer Loans Purchased Loans Total
Balance, beginning of period $ 167.4 $ 9.0 $ 176.4
Provision for credit losses 21.3 0.6 21.9
Write-offs (5.2) (0.1) (5.3)
Recoveries (1) 2.2 0.2 2.4
Balance, end of period $ 185.7 $ 9.7 $ 195.4

(1) Represents collections received on previously written off loans.

Source:Credit Acceptance Corporation