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Credit Acceptance Announces Fourth Quarter And Full Year 2012 Earnings

For the three months and year ended December 31, 2012, dealer loan unit and dollar volume as a percentage of total unit and dollar volume were generally consistent with the same periods in 2011.

As of December 31, 2012 and 2011, the net dealer loans receivable balance was 88.0% and 85.4%, 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" section.  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, 2012, compared to the same periods in 2011, include the following:

    For the Three Months Ended December 31,     For the Years Ended December 31,  
 (In millions, except share and per share data)   2012     2011     % Change     2012     2011     % Change  
Adjusted average capital   $ 1,866.0     $ 1,512.8       23.3 %   $ 1,742.8     $ 1,371.1       27.1 %
Adjusted net income   $ 57.3     $ 51.3       11.7 %   $ 216.2     $ 194.1       11.4 %
Adjusted interest expense after-tax   $ 10.2     $ 9.5       7.4 %   $ 39.9     $ 36.0       10.8 %
Adjusted net income plus interest expense after-tax   $ 67.5     $ 60.8       11.0 %   $ 256.1     $ 230.1       11.3 %
Adjusted return on capital     14.5 %     16.1 %     -9.9 %     14.7 %     16.8 %     -12.5 %
Cost of capital     5.5 %     5.8 %     -5.2 %     5.5 %     6.4 %     -14.1 %
Economic profit   $ 42.1     $ 38.8       8.5 %   $ 159.6     $ 143.1       11.5 %
GAAP diluted weighted average shares outstanding     24,926,004       26,258,668       -5.1 %     25,598,956       26,600,855       -3.8 %
Adjusted net income per diluted share   $ 2.30     $ 1.96       17.3 %   $ 8.45     $ 7.30       15.8 %

Economic profit increased 8.5% and 11.5% for the three months and year ended December 31, 2012, respectively, as compared to the same periods in 2011.  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, 2012, as compared to the same periods in 2011:

    Year over Year Change in Economic Profit  
(In millions)   For the Three Months Ended December 31, 2012     For the Year Ended December 31, 2012  
Increase in adjusted average capital   $ 9.1     $ 38.8  
Decrease in cost of capital     1.7       14.1  
Decrease in adjusted return on capital     (7.5 )     (36.4 )
Increase in economic profit   $ 3.3     $ 16.5  

The increase in economic profit for the three months ended December 31, 2012, as compared to the same period in 2011, was the result of the following:

  • An increase in adjusted average capital of 23.3% due to growth in our loan portfolio primarily as a result of an increase in active dealers. 
  • A decrease in our cost of capital of 30 basis points primarily due to a decline in the average cost of debt resulting from the change in the mix of our outstanding debt.
  • A decrease in our adjusted return on capital of 160 basis points primarily as a result of the following:
  • A lower yield on our loan portfolio due to higher advance rates decreased the adjusted return on capital by 150 basis points. 
  • An increase in operating expenses decreased the adjusted return on capital by 30 basis points as operating expenses grew 29.4% while adjusted average capital grew 23.3%.  The 29.4% increase ($8.5 million) in operating expenses primarily included:
  • An increase in salaries and wages expense of $5.0 million, or 31.8%, which included a $3.3 million increase in stock-based compensation expense primarily attributable to the 15 year stock award granted to our Chief Executive Officer during the first quarter of 2012.  Salaries and wages, excluding the increase in stock-based compensation, increased $1.7 million including an increase of $1.1 million in loan servicing, $0.5 million for support functions and $0.1 million in loan originations.
  • An increase in sales and marketing expense of $1.9 million, or 32.8%, primarily as a result of the increase in the size of our field sales force.
  • An increase in general and administrative expenses of $1.6 million, or 21.6%, primarily due to a $1.1 million expense related to the termination of our relationship with a third party ancillary product provider during the fourth quarter of 2012 and a $0.3 million increase in consulting fees.

The increase in economic profit for the year ended December 31, 2012, as compared to the same period in 2011, was the result of the following:

  • An increase in adjusted average capital of 27.1% due to growth in our loan portfolio primarily as a result of an increase in active dealers.
  • A decrease in our cost of capital of 90 basis points due to a decline in the average cost of equity resulting from a decline in the average 30 year treasury rate and a decline in the average cost of debt resulting from the change in the mix of our outstanding debt.
  • A decrease in our adjusted return on capital of 210 basis points primarily as a result of the following:
  • A lower yield on our loan portfolio due to higher advance rates decreased the adjusted return on capital by 180 basis points. 
  • A decrease in other income reduced the adjusted return on capital by 30 basis points primarily as a result of a decrease in Guaranteed Asset Protection ("GAP") profit sharing income, which was a result of the following:
  • Additional income recognized during 2011 as a result of a change we made to our revenue recognition during 2011 to begin recognizing this income as earned over the life of the GAP contracts.
  • A change made to our profit sharing income arrangement during 2012 that increased the total amount of income earned per GAP contract but reduced the amount recognized as other income.  This reduction was more than offset by a higher fee per GAP contract that is recognized as finance charges.
  • New GAP contract unit volume lagged the growth in adjusted average capital due to lower Consumer Loan unit volume growth and a decline in the penetration rate of our GAP product.

Operating expenses remained flat as a percentage of adjusted average capital for the year ended December 31, 2012, as compared to the same period in 2011, as operating expenses grew 28.3% while adjusted average capital grew 27.1%.  The 28.3% increase ($31.7 million) in operating expenses included:

  • An increase in salaries and wages of $19.2 million, or 30.5%, which included a $10.3 million increase in stock-based compensation expense primarily attributable to the 15 year stock award granted to our Chief Executive Officer during the first quarter of 2012 and a $2.0 million increase in fringe benefits, primarily related to medical claims. Salaries and wages, excluding the increase in stock-based compensation and fringe benefits, increased $6.9 million including an increase of $4.2 million in loan servicing, $2.2 million for support functions and $0.5 million in loan originations. 
  • An increase in sales and marketing expenses of $7.6 million, or 32.2%, primarily as a result of the increase in the size of the field sales force.
  • An increase in general and administrative expenses of $4.9 million, or 19.1%, primarily due to a $1.2 million increase in information technology expenses, a $1.1 million expense related to the termination of our relationship with a third party ancillary product provider during the fourth quarter of 2012, a $1.1 million increase in legal expenses and $0.9 million in higher taxes primarily as a result of a property tax refund recognized in the first quarter of 2011. 

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, 2012     Sept. 30, 2012     Jun. 30, 2012     Mar. 31, 2012     Dec. 31, 2011     Sept. 30, 2011     Jun. 30, 2011     Mar. 31, 2011  
Adjusted revenue as a percentage of adjusted average capital (1)     31.0 %     31.7 %     31.9 %     31.8 %     33.2 %     33.9 %     35.0 %     37.9 %
Operating expenses as a percentage of adjusted average capital (1)     8.0 %     8.2 %     8.2 %     8.6 %     7.6 %     7.8 %     8.2 %     9.3 %
Adjusted return on capital (1)     14.5 %     14.8 %     14.9 %     14.6 %     16.1 %     16.4 %     16.9 %     18.0 %
Percentage change in adjusted average capital compared to the same period in the prior year     23.3 %     25.5 %     27.9 %     32.9 %     33.9 %     30.6 %     26.0 %     19.2 %

(1)     Annualized

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