SOUTHFIELD, Mich., Aug. 6, 2008 (PRIME NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq:CACC) (referred to as the "Company", "we", "our", or "us") announced consolidated net income of $10.3 million, or $0.33 per diluted share, for the three months ended June 30, 2008 compared to consolidated net income of $12.3 million, or $0.39 per diluted share, for the same period in 2007. For the six months ended June 30, 2008 consolidated net income was $28.0 million, or $0.90 per diluted share, compared to consolidated net income of $27.7 million, or $0.88 per diluted share, for the same period in 2007.
Adjusted net income, a non-GAAP financial measure, for the three months ended June 30, 2008 was $20.2 million, or $0.65 per diluted share, compared to $14.9 million, or $0.48 per diluted share, for the same period in 2007. For the six months ended June 30, 2008 adjusted net income was $37.0 million, or $1.19 per diluted share, compared to adjusted net income of $31.0 million, or $0.99 per diluted share, for the same period in 2007.
Loan Performance ----------------
Both GAAP net income and adjusted net income were impacted by lower than expected collection results experienced during the second quarter of 2008 and a reduction in estimated future collection rates.
The following table compares our forecast of consumer loan collection rates as of June 30, 2008, with the forecast as of March 31, 2008, segmented by year of origination:
June 30, 2008 March 31, 2008
Forecasted Forecasted
Loan Origination Year Collection % Collection % Variance
--------------------- -------------- -------------- --------
1999 72.1% 72.1% 0.0%
2000 72.5% 72.4% 0.1%
2001 67.4% 67.3% 0.1%
2002 70.4% 70.4% 0.0%
2003 74.0% 74.0% 0.0%
2004 73.5% 73.5% 0.0%
2005 74.1% 74.1% 0.0%
2006 70.2% 70.6% -0.4%
2007 68.2% 70.6% -2.4%
2008 69.0% 69.7% -0.7%
As of March 31, 2008 we expected net cash flows (undiscounted loan collections less undiscounted dealer holdback payments) of $1.3 billion from our loan portfolio. During the quarter ended June 30, 2008, we reduced our estimate of future net cash flows on these same loans by $22.2 million or 1.7%. A reduction in forecasted collection rates impacts GAAP financial results and adjusted financial results differently. The accounting treatment utilized does not change the amount of the impact, only the period in which the cash impact is recorded. The impact of the forecast revision on both GAAP and adjusted results is summarized below (pre-tax):
GAAP Adjusted
results results
--------- ---------
(In thousands)
Amount of cash impact reflected as a current
period expense through the provision for
credit losses $ (20,782) $ --
Amount of cash impact reflected as a current
period reduction in loan revenue (964) (2,784)
Amount of cash impact to be reflected in future
periods as a reduction in loan yield (486) (19,448)
--------- ---------
Cash impact of reduction in forecast $ (22,232) $ (22,232)
========= =========
Under GAAP accounting, $20.8 million of the $22.2 million cash impact was recorded as a current period expense and $1.0 million was recorded as a current period reduction in loan revenue. The remaining $0.5 million will be recorded as a reduction in loan revenue in future periods. Our adjusted financial results treat the entire $22.2 million as a reduction in loan revenue with a current period impact of $2.8 million. The remaining $19.4 million will be recorded as a reduction in loan revenue in future periods.
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. The amount of the reduction varies based on the initial loan term and the number of months the loan has aged with longer-term, more recent loans impacted more severely. This new expectation is consistent with recent experience and includes both the lower realized collection rates experienced during the second quarter of 2008 as well as lower expected recoveries on repossession sales as a result in a decline in used vehicle values that occurred during the second quarter of 2008. We did not modify our forecast related to 2005 and prior loans as these loans continue to perform as expected.
Although we cannot guarantee that future revisions to our forecast will not be required, we believe our current estimates are realizable for the following reasons:
* The revised forecast, applied to historical loans, produces a consistent result as the loans age. * The risk of a future material forecast revision on 2006 loans has lessened since 73.7% of our forecast has been realized. * 2006 loans have been collected during periods of economic stress including higher levels of unemployment and rising gas prices. * We have assumed significantly lower values for future repossession proceeds based on the decline in used vehicle values experienced to date. * Except for the assumption related to repossession values, we have assumed that loans originated in 2007 and 2008 will perform similarly to loans originated in 2006. The reduction in forecasted repossession values has a greater impact on more recently originated loans.
During July of 2008, realized net loan cash flows were consistent with our revised forecast.
The revised forecasted collection rates are modestly worse than the collection rates we expected when the loans were originated. The following table compares, for each of the last 10 years, our most current forecast of loan performance with our initial forecast:
June 30, 2008
Loan Forecasted Initial % of Forecast
Origination Year Collection % Forecast Variance Realized
---------------- ------------- -------- -------- -------------
1999 72.1% 73.6% -1.5% 99.6%
2000 72.5% 72.8% -0.3% 99.2%
2001 67.4% 70.4% -3.0% 98.6%
2002 70.4% 67.9% 2.5% 98.1%
2003 74.0% 72.0% 2.0% 97.5%
2004 73.5% 73.0% 0.5% 96.2%
2005 74.1% 74.0% 0.1% 92.2%
2006 70.2% 71.4% -1.2% 73.7%
2007 68.2% 70.7% -2.5% 40.0%
2008 69.0% 70.4% -1.4% 9.2%
Although loans originated in 2006 through 2008 are not performing as well as loans originated in 2002 through 2005, they are still expected to produce a substantial amount of Economic Profit. Forecasting future collection rates is difficult. Knowing this, we set prices at loan inception so that an acceptable return on capital will be achieved, even if collection results are materially worse than we forecasted. For dealer loans, a 100 basis point change in the collection rate impacts the after tax return on capital by approximately 35 basis points (approximately 70 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 June 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 June 30, 2008
-------------------------------------------------
Loan Origination Forecasted % of Forecast
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% 98.6%
2002 70.4% 42.2% 28.2% 98.1%
2003 74.0% 43.4% 30.6% 97.5%
2004 73.5% 44.0% 29.5% 96.2%
2005 74.1% 46.9% 27.2% 92.2%
2006 70.2% 46.6% 23.6% 73.7%
2007 68.2% 46.5% 21.7% 40.0%
2008 69.0% 45.3% 23.7% 9.2%
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 June 30, 2008 for purchased loans and dealer loans separately:
Loan Origination Forecasted
Year Collection % Advance % Spread %
---------------- ------------ --------- ---------
Purchased loans 2007 68.2% 49.2% 19.0%
2008 68.3% 47.6% 20.7%
Dealer loans 2007 68.2% 45.8% 22.4%
2008 69.4% 44.0% 25.4%
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 six months of 2008. It is expected that the spread will continue to increase during the remainder of 2008 as the spread on current originations exceeds the average spread for loans originated thus far in 2008. In addition, we implemented an additional pricing change on August 1, 2008 which is expected to further increase the spread on new originations.
Loan volume -----------
The Company experienced strong demand for its product during the quarter. The current 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 June 30,
----------------------------
2008 2007 % change
-------- -------- --------
Consumer loan unit volume 31,639 25,084 26.1%
Active dealer-partners(1) 2,291 1,985 15.4%
-------- --------
Average volume per active dealer-partner 13.8 12.6 9.5%
Consumer loan unit volume from
dealer-partners active both periods 22,031 20,187 9.1%
Dealer-partners active both periods 1,287 1,287 0.0%
-------- --------
Average volume per dealer-partners
active both periods 17.1 15.7 9.1%
Consumer loan unit volume from new
dealer-partners 1,563 1,528 2.3%
New active dealer-partners(2) 291 272 7.0%
-------- --------
Average volume per new active
dealer-partners 5.4 5.6 -3.6%
Attrition(3) 19.5% 19.6%
(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 six 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%
The increase in loan dollar volume during the three months ended June 30, 2008 exceeded the increase in unit volume as a result of an increase in the average loan size. On June 1, the Company implemented a pricing change that reduced the average loan size by approximately 8%. As a result of this change we expect unit volume and dollar volume to grow at roughly the same rate during the third quarter of 2008 and that dollar volume will likely grow slower than unit volume during the fourth quarter of 2008. For the month ended July 31, 2008, consumer loan unit volume and dollar volume increased 51.8% and 57.1%, respectively, as compared to the same period in 2007.
Access to capital -----------------
Since the beginning of 2008, we have:
* Renewed and expanded our bank line of credit to $153.5 million * Renewed our $325.0 million warehouse facility * Completed a $150.0 million asset-backed secured financing with an institutional investor * Completed a $50.0 million two-year revolving credit facility with another institutional investor
Based on our progress to date, we have the financing necessary to support approximately 20% origination growth through the end of 2008. However, in order to continue to grow loan originations in 2009 we will need to secure additional financing and extend the maturity of our warehouse facility. If we are unsuccessful in obtaining additional financing and/or renewing our warehouse facility, we will be required to reduce origination levels.
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 six months ended June 30, 2008 compared to the same periods in 2007 include the following:
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
% %
2008 2007 Change 2008 2007 Change
----------------------------- -----------------------------
Adjusted
average
capital $ 988,619 $ 708,334 39.6% $ 927,002 $ 668,965 38.6%
Adjusted
net
income $ 20,191 $ 14,947 35.1% $ 36,960 $ 31,033 19.1%
Adjusted
interest
expense
after-tax $ 6,602 $ 5,960 10.8% $ 12,916 $ 11,181 15.5%
Adjusted
net
income
plus
interest
expense
after-tax $ 26,793 $ 20,907 28.2% $ 49,876 $ 42,214 18.2%
Adjusted
return on
capital 10.8% 11.8% -8.2% 10.8% 12.6% -14.7%
Cost of
capital 6.3% 7.1% -11.4% 6.5% 7.1% -9.1%
Economic
profit $ 11,178 $ 8,279 35.0% $ 19,838 $ 18,372 8.0%
GAAP
diluted
weighted
average
shares
outstan-
ding 31,088,428 31,312,139 -0.7% 30,970,387 31,297,484 -1.0%
Adjusted
net
income per
diluted
share $ 0.65 $ 0.48 35.4% $ 1.19 $ 0.99 20.4%
Economic profit increased 35.0% for the three months ended June 30, 2008 and increased 8.0% for the six months ended June 30, 2008, 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 June 30, 2008, adjusted average capital grew by 39.6% and adjusted return on capital declined from 11.8% to 10.8%. For the six months ended June 30, 2008, adjusted average capital grew by 38.6% while the adjusted return on capital declined from 12.6% to 10.8%.
Although the return on capital is lower as compared to the prior year period, the return on capital improved during the second quarter of 2008 as compared to the first 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 changes made during these periods in response to a difficult competitive environment. During the latter part of 2007 and during 2008, we reduced advance rates 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, the return on capital improved to 10.8% during the quarter compared to 10.7% during the first quarter of 2008. Since favorable pricing changes have continued during 2008, we expect the return on capital to continue to improve as a result of higher yields on new originations and decreases in expenses as a percentage of capital which will occur as our invested capital grows faster than expenses. However, because the yield on the portfolio declined during the most recent quarter as a result of the revision to our forecast, we do not expect another sequential increase in the return on capital to occur until the fourth quarter of 2008 when the impact of new loan originations will fully offset the decline in loan yields caused by the forecast revision. This expectation assumes that we are able to grow loan originations and produce collection results consistent with our revised expectations.
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 six quarters, compared to the same periods in the prior year:
Three Months Ended
-------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
2007 2007 2007 2007 2008 2008
-------- ------- -------- ------- -------- -------
Adjusted
revenue as a
percentage of
adjusted
average
capital 35.7% 32.3% 32.5% 31.7% 30.7% 28.5%
======== ======= ======== ======= ======== =======
Adjusted
operating
expenses as a
percentage of
adjusted
average
capital 14.1% 13.6% 13.6% 14.7% 13.6% 11.3%
======== ======= ======== ======= ======== =======
Adjusted
return on
capital 13.5% 11.8% 11.8% 10.7% 10.7% 10.8%
======== ======= ======== ======= ======== =======
Percentage
change in
adjusted
average
capital 20.8% 29.4% 34.2% 35.5% 37.4% 39.6%
======== ======= ======== ======= ======== =======
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.
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
% %
2008 2007 Change 2008 2007 Change
---------- ---------- ------ ---------- ---------- ------
Adjusted
net income
-----------
GAAP net
income $ 10,344 $ 12,330 $ 27,964 $ 27,690
Floating
yield
adjustment
(after-
tax) 9,536 617 7,772 699
License fee
yield
adjustment
(after-
tax) 653 1,143 1,197 2,708
(Gain) loss
from
discontin-
ued United
Kingdom
segment
and other
related
items
(after-
tax) 35 164 (4) 191
Litigation -- 315 -- 315
Interest
expense
related to
interest
rate swap
agreement
(1) (375) -- 156 --
Adjustment
to record
taxes at
37%(2) (2) 378 (125) (570)
---------- ---------- ---------- ----------
Adjusted
net
income
(2) $ 20,191 $ 14,947 35.1% $ 36,960 $ 31,033 19.1%
========== ========== ========== ==========
Adjusted
net income
per
diluted
share $ 0.65 $ 0.48 35.4% $ 1.19 $ 0.99 20.2%
-----------
Diluted
weighted
average
shares
outstan-
ding 31,088,428 31,312,139 -0.7% 30,970,387 31,297,484 -1.0%
Adjusted
average
capital
--------
GAAP
average
debt $ 686,148 $ 473,141 $ 635,471 $ 442,928
GAAP
average
share-
holders'
equity 295,771 233,465 285,334 225,721
Floating
yield
adjustment 9,326 8,073 9,078 7,330
License fee
yield
adjustment (2,626) (6,345) (2,881) (7,014)
---------- ---------- ---------- ----------
Adjusted
average
capital $ 988,619 $ 708,334 39.6% $ 927,002 $ 668,965 38.6%
========== ========== ========== ==========
Adjusted
return on
capital
----------
Adjusted
net
income $ 20,191 $ 14,947 $ 36,960 $ 31,033
Adjusted
interest
expense
after-tax 6,602 5,960 12,916 11,181
---------- ---------- ---------- ----------
Adjusted
net
income
plus
interest
expense
after-
tax $ 26,793 $ 20,907 28.2% $ 49,876 $ 42,214 18.2%
========== ========== ========== ==========
Adjusted
return on
capital
(3) 10.8% 11.8% -8.2% 10.8% 12.6% -14.7%
========== ========== ========== ==========
Economic
profit
--------
Adjusted
return on
capital 10.8% 11.8% 10.8% 12.6%
Cost of
capital(4) 6.3% 7.1% 6.5% 7.1%
---------- ---------- ---------- ----------
Adjusted
return on
capital in
excess of
cost of
capital 4.5% 4.7% 4.3% 5.5%
Adjusted
average
capital $ 988,619 $ 708,334 $ 927,002 $ 668,965
---------- ---------- ---------- ----------
Economic
profit $ 11,178 $ 8,279 35.0% $ 19,838 $ 18,372 8.0%
========== ========== ========== ==========
(1) The three months ended June 30, 2008 includes a $0.6 million
reduction in interest expense ($0.4 million after-tax) related
to an interest rate swap on our secured financing that was
completed in October 2007. For the six months ended June 30,
2008 interest expense includes $0.2 million ($0.2 million
after-tax) related to the interest rate swap. The interest rate
swap converts the floating portion of the secured financing debt
to a fixed rate. As rates decreased during the quarter, the
market value of the interest rate swap declined. However, this
decline in market value does not impact the amount of interest
we actually pay on the secured financing. Since we intend to
hold the interest rate swap until maturity, the additional
interest expense recorded in the quarter will reverse by the
maturity date. During the second quarter of 2008, we entered
into a second interest rate swap that we designated as a hedge
as defined under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Changes in fair value
related to this swap were recorded in other comprehensive income
for the three and six months ended June 30, 2008.
(2) 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 six months ended June 30, 2007 differ from
what was reported in the prior year.
(3) Adjusted return on capital is defined as annualized adjusted net
income plus adjusted interest expense after-tax divided by
adjusted average capital.
(4) 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 June 30, 2008 and 2007, the
average 30 year treasury rate was 4.4% and 4.9%, respectively.
The adjusted pre-tax average cost of debt was 6.1% and 8.0%,
respectively. For the six months ended June 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
6.5% and 8.0%, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in thousands) 2008 2007 2008 2007
------------------ ------------------
Adjusted revenue
----------------
GAAP total revenue $ 75,005 $ 58,286 $145,783 $115,637
Floating yield adjustment 15,137 979 12,337 1,110
License fee yield adjustment 1,036 1,814 1,895 4,296
Provision for credit losses (20,782) (3,966) (23,256) (7,690)
-------- -------- -------- --------
$ 70,396 $ 57,113 $136,759 $113,353
======== ======== ======== ========
Adjusted average capital
------------------------
GAAP average debt $686,148 $473,141 $635,471 $442,928
GAAP average shareholders'
equity 295,771 233,465 285,334 225,721
Floating yield adjustment 9,326 8,073 9,078 7,330
License fee yield adjustment (2,626) (6,345) (2,881) (7,014)
-------- -------- -------- --------
$988,619 $708,334 $927,002 $668,965
======== ======== ======== ========
Adjusted revenue as a
percentage of adjusted average
capital 28.5% 32.3% 29.5% 33.9%
======== ======== ======== ========
Adjusted operating expenses
---------------------------
GAAP salaries and wages $ 16,699 $ 13,092 $ 34,439 $ 24,953
GAAP general and administrative 6,627 7,359 13,751 13,276
GAAP sales and marketing 4,542 4,144 9,184 8,616
Litigation -- (500) -- (500)
-------- -------- -------- --------
$ 27,868 $ 24,095 $ 57,374 $ 46,345
======== ======== ======== ========
Adjusted operating expenses as
a percentage of adjusted
average capital 11.3% 13.6% 12.4% 13.9%
======== ======== ======== ========
Percentage change in adjusted
average capital compared to
the same period in the prior
year 39.6% 29.4% 38.6% 25.0%
======== ======== ======== ========
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" 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. * Due to increased competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully. * We may be unable to continue to access funding sources and obtain capital on favorable terms needed to maintain and grow the business. * 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 Six Months Ended
except per share data) June 30, June 30,
---------------------- ----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Revenue:
Finance charges $ 70,827 $ 54,084 $ 134,502 $ 105,497
Other income 4,178 4,202 11,281 10,140
---------- ---------- ---------- ----------
Total revenue 75,005 58,286 145,783 115,637
---------- ---------- ---------- ----------
Costs and expenses:
Salaries and wages 16,699 13,092 34,439 24,953
General and
administrative 6,627 7,359 13,751 13,276
Sales and marketing 4,542 4,144 9,184 8,616
Provision for credit
losses 20,760 3,798 23,409 7,671
Interest 9,884 9,463 20,748 17,751
Other expense 23 33 57 58
---------- ---------- ---------- ----------
Total costs and
expenses 58,535 37,889 101,588 72,325
---------- ---------- ---------- ----------
Operating income 16,470 20,397 44,195 43,312
Foreign currency
(loss) gain -- 34 (13) 38
---------- ---------- ---------- ----------
Income from continuing
operations before
provision for income
taxes 16,470 20,431 44,182 43,350
Provision for income
taxes 6,091 7,938 16,222 15,470
---------- ---------- ---------- ----------
Income from continuing
operations 10,379 12,493 27,960 27,880
---------- ---------- ---------- ----------
Discontinued operations
(Loss) gain from
discontinued United
Kingdom operations (12) (233) 44 (271)
Provision (credit)
for income taxes 23 (70) 40 (81)
---------- ---------- ---------- ----------
(Loss) gain from
discontinued
operations (35) (163) 4 (190)
---------- ---------- ---------- ----------
Net income $ 10,344 $ 12,330 $ 27,964 $ 27,690
========== ========== ========== ==========
Net income per common
share:
Basic $ 0.34 $ 0.41 $ 0.93 $ 0.92
========== ========== ========== ==========
Diluted $ 0.33 $ 0.39 $ 0.90 $ 0.88
========== ========== ========== ==========
Income from continuing
operations per common
share:
Basic $ 0.34 $ 0.41 $ 0.93 $ 0.93
========== ========== ========== ==========
Diluted $ 0.33 $ 0.40 $ 0.90 $ 0.89
========== ========== ========== ==========
(Loss) gain from
discontinued
operations per common
share:
Basic $ -- $ (0.01) $ -- $ (0.01)
========== ========== ========== ==========
Diluted $ -- $ (0.01) $ -- $ (0.01)
========== ========== ========== ==========
Weighted average shares
outstanding:
Basic 30,252,873 30,140,590 30,179,877 30,097,387
Diluted 31,088,428 31,312,139 30,970,387 31,297,484
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) As of
----------------------
June 30, Dec. 31,
2008 2007
---------- ----------
ASSETS: (Unaudited)
Cash and cash equivalents $ 82 $ 712
Restricted cash and cash equivalents 86,892 74,102
Restricted securities available for sale 4,243 3,290
Loans receivable (including $16,723 and
$16,125 from affiliates as of June 30, 2008
and December 31, 2007, respectively) 1,144,409 944,698
Allowance for credit losses (132,259) (134,145)
---------- ----------
Loans receivable, net 1,012,150 810,553
---------- ----------
Property and equipment, net 21,844 20,124
Income taxes receivable 12,426 20,712
Other assets 14,464 12,689
---------- ----------
Total Assets $1,152,101 $ 942,182
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and accrued liabilities $ 81,896 $ 79,834
Line of credit 38,100 36,300
Secured financing 658,284 488,065
Mortgage note and capital lease obligations 6,975 7,765
Deferred income taxes, net 69,116 64,768
---------- ----------
Total Liabilities 854,371 676,732
---------- ----------
Shareholders' Equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000
shares authorized, 30,544,145 and 30,240,859
shares issued and outstanding as of June 30,
2008 and December 31, 2007, respectively 306 302
Paid-in capital 8,647 4,134
Retained earnings 288,965 261,001
Accumulated other comprehensive (loss) income,
net of tax of $109 and $(7) at June 30, 2008
and December 31, 2007, respectively (188) 13
---------- ----------
Total Shareholders' Equity 297,730 265,450
---------- ----------
Total Liabilities and Shareholders' Equity $1,152,101 $ 942,182
========== ==========