UPBD 10-Q
Upbound Group, Inc. (UPBD)
10-Q
2022-11-03
For: 2022-09-30
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-38047
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
(Address, including zip code of registrant’s principal executive offices)
Registrant’s telephone number, including area code: 972 -801-1100
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
| Emerging Growth Company | |||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 26, 2022:
| Class | Outstanding | |||||||
| Common stock, $.01 par value | ||||||||
TABLE OF CONTENTS
| Page No. | ||||||||
Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2022 and 2021 | ||||||||
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three-month and nine-month periods ended September 30, 2022 and 2021 | ||||||||
Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 | ||||||||
Condensed Consolidated Statements of Stockholders' Equity for the nine-month periods ending September 30, 2022 and 2021 | ||||||||
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2022 and 2021 | ||||||||
i
Item 1. Condensed Consolidated Financial Statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Store | |||||||||||||||||||||||
| Rentals and fees | $ | $ | $ | $ | |||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||
| Installment sales | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total store revenues | |||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||
| Royalty income and fees | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Store | |||||||||||||||||||||||
| Cost of rentals and fees | |||||||||||||||||||||||
| Cost of merchandise sold | |||||||||||||||||||||||
| Cost of installment sales | |||||||||||||||||||||||
| Total cost of store revenues | |||||||||||||||||||||||
| Franchise cost of merchandise sold | |||||||||||||||||||||||
| Total cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Store expenses | |||||||||||||||||||||||
| Labor | |||||||||||||||||||||||
| Other store expenses | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Other charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating profit | |||||||||||||||||||||||
| Debt refinancing charges | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Earnings before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net (loss) earnings | $ | ( | $ | $ | $ | ||||||||||||||||||
| Basic (loss) earnings per common share | $ | ( | $ | $ | $ | ||||||||||||||||||
| Diluted (loss) earnings per common share | $ | ( | $ | $ | $ | ||||||||||||||||||
| Cash dividends declared per common share | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
1
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net (loss) earnings | $ | ( | $ | $ | $ | ||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
Foreign currency translation adjustments, net of tax of $(163) and $(251), $(14) and $(240) for the three and nine months ended September 30, 2022 and 2021, respectively | ( | ( | ( | ( | |||||||||||||||||||
| Total other comprehensive (loss) income | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive (loss) income | $ | ( | $ | $ | $ | ||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands, except share and par value data) | |||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, net of allowance for doubtful accounts of $ | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Rental merchandise, net | |||||||||||
| On rent | |||||||||||
| Held for rent | |||||||||||
| Merchandise held for installment sale | |||||||||||
Property assets, net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred tax asset | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Accounts payable – trade | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred tax liability | |||||||||||
| Senior debt, net | |||||||||||
| Senior notes, net | |||||||||||
| Total liabilities | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock at cost, | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units, net of shares withheld for employee taxes | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tax effect of stock awards vested and options exercised | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units, net of shares withheld for employee taxes | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tax effect of stock awards vested and options exercised | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units, net of shares withheld for employee taxes | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tax effect of stock awards vested and options exercised | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
4
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
(Unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||||||||
Vesting of restricted share units, net of shares withheld for employee taxes(1) | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Acima acquisition | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units, net of shares withheld for employee taxes | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
(1)Includes shares released from escrow related to the 2019 Merchant's Preferred acquisition.
See accompanying notes to condensed consolidated financial statements.
5
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash flows from operating activities | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities | |||||||||||
| Depreciation of rental merchandise | |||||||||||
| Bad debt expense | |||||||||||
| Stock-based compensation expense | |||||||||||
| Depreciation of property assets | |||||||||||
| Loss on sale or disposal of property assets | |||||||||||
| Amortization of intangibles | |||||||||||
| Amortization of financing fees | |||||||||||
| Write-off of debt financing fees | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Changes in operating assets and liabilities, net of acquired assets | |||||||||||
| Rental merchandise | ( | ( | |||||||||
| Receivables | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Operating lease right-of-use assets and lease liabilities | ( | ( | |||||||||
| Accounts payable – trade | ( | ||||||||||
| Accrued liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of property assets | ( | ( | |||||||||
| Proceeds from sale of property assets | |||||||||||
| Acquisitions of businesses | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Share repurchases | ( | ( | |||||||||
| Exercise of stock options | |||||||||||
| Shares withheld for payment of employee tax withholdings | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Proceeds from debt | |||||||||||
| Repayments of debt | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
6
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The interim condensed consolidated financial statements of Rent-A-Center, Inc. included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. We suggest these financial statements be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. In our opinion, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly our results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
Use of Estimates
In preparing financial statements in conformity with U.S. generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent losses and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. However, uncertainties, such as the future unknown impacts of the COVID-19 pandemic and other macroeconomic factors, including recent significant increases to the consumer price index, a condensed labor market, wage inflation, and global supply chain issues may affect certain estimates and assumptions inherent in the financial reporting process, which may impact reported amounts of assets and liabilities in future periods and cause actual results to differ from those estimates.
Principles of Consolidation and Nature of Operations
The financial statements included herein include the accounts of Rent-A-Center, Inc. and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context indicates otherwise, references to “Rent-A-Center” refer only to Rent-A-Center, Inc., the parent, and references to the “Company”, “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center and any or all of its direct and indirect subsidiaries. We report four operating segments: Rent-A-Center Business, Acima (formerly Preferred Lease), Mexico, and Franchising.
Our Rent-A-Center Business segment consists of company-owned lease-to-own stores in the United States and Puerto Rico that lease household durable goods to customers on a lease-to-own basis. We also offer merchandise on an installment sales basis in certain of our stores under the names “Get It Now” and “Home Choice.” Our Rent-A-Center Business segment operates through our company-owned stores and e-commerce platform through rentacenter.com.
Our Acima segment, which operates in the United States and Puerto Rico, which includes the operations of Acima Holdings (as defined in Note 2 below) acquired in February 2021 and our previous Preferred Lease virtual and staffed locations, generally offers the lease-to-own transaction to consumers who do not qualify for financing from the traditional retailer through staffed or unstaffed kiosks located within such retailer’s locations, or other virtual options. Virtual locations employ a virtual solution where customers, either directly or with the assistance of a representative of the third-party retailer, initiate the lease-to-own transaction online in the retailers’ locations using our virtual solutions.
Our Mexico segment consists of our company-owned lease-to-own stores in Mexico that lease household durable goods to customers on a lease-to-own basis.
Rent-A-Center Franchising International, Inc., an indirect wholly-owned subsidiary of Rent-A-Center, is a franchisor of lease-to-own stores. Our Franchising segment’s primary source of revenue is the sale of rental merchandise to its franchisees, who in turn offer the merchandise to the general public for rent or purchase under a lease-to-own transaction. The balance of our Franchising segment’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues.
Note 2 - Acquisitions and Divestitures
On February 17, 2021 , we completed the acquisition of Acima Holdings, LLC (“Acima Holdings”). Acima Holdings is a leading platform offering customers virtual lease-to-own solutions at the point-of-sale via web and mobile technology .
In accordance with the agreement and plan of merger entered into in connection with the transaction (the “Merger Agreement”), we issued to the former owners of Acima Holdings an aggregate of 10,779,923 shares of our common stock (the “Aggregate Stock Consideration”) and paid to them aggregate cash consideration of $1.3 billion (the “Aggregate Cash Consideration”). In
7
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
accordance with the terms of the Merger Agreement, the portion of the Aggregate Stock Consideration issued to employee former owners of Acima Holdings is subject to restricted stock agreements providing vesting conditions over a 36-month period that began upon closing of the transaction. The portion of the Aggregate Stock Consideration issued to nonemployee former owners of Acima Holdings were previously subject to the terms of an 18-month lockup agreement, which expired on August 17, 2022. Following the expiration of the lock-up agreement, all shares of our common stock received by non-employee former owners in the transaction have now become transferable. We entered into a Registration Rights Agreement at the closing of the transaction pursuant to which certain former owners of Acima are entitled to registration rights in respect of the portion of the Aggregate Stock Consideration received by them in the transaction.
The aggregate purchase price in accordance with accounting standards under U.S. GAAP was approximately $1.4 billion, including the Aggregate Cash Consideration, and the 2,683,328 shares of the Aggregate Stock Consideration issued to non-employee former owners of Acima Holdings, valued at $51.14 per share, as of the closing date and discounted for lack of marketability on account of the transfer restrictions described above. The Aggregate Cash Consideration for the acquisition was financed with a combination of cash on hand, borrowings under our ABL Credit Facility and proceeds from issuances under our Term Loan Facility, as defined in Note 7, in addition to proceeds from the issuance of new unsecured senior notes. See Note 7 and Note 8 for additional information.
The aggregate purchase price excludes the remaining 8,096,595 shares of the Aggregate Stock Consideration issued to employee former owners of Acima Holdings. Such shares were valued at $414.1 million, based on the per share price of $51.14 as of the date of closing. These shares are instead being recognized as stock-based compensation expense subject to ASC Topic 718, “Stock-based Compensation”, over the required vesting period, and recorded to Other charges in our unaudited Condensed Consolidated Statements of Operations.
Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. The following table provides the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date:
| (in thousands) | February 17, 2021 | ||||
| Aggregate cash consideration | $ | ||||
| Aggregate stock consideration, subject to lockup agreements | |||||
| Total Purchase price | $ | ||||
| ASSETS ACQUIRED | |||||
Receivables, net(1) | $ | ||||
| Prepaid expenses and other assets | |||||
| Rental merchandise | |||||
| On rent | |||||
| Property assets | |||||
| Operating lease right-of-use assets | |||||
| Deferred income taxes | |||||
| Goodwill | |||||
| Other intangible assets | |||||
| Total assets acquired | $ | ||||
| LIABILITIES ASSUMED | |||||
| Accounts payable - trade | |||||
| Accrued liabilities | |||||
| Operating lease liabilities | |||||
| Deferred income taxes | ( | ||||
| Total liabilities assumed | ( | ||||
| Total equity value | $ | ||||
(1) Includes gross contractual receivables of $61.6 million related to merchandise lease contracts, of which $34.7 million were estimated to be uncollectible.
Carrying value for assets and liabilities assumed as part of the acquisition, including receivables, prepaid expenses and other assets, accounts payable and accrued liabilities were recorded as fair value, as of the date of acquisition, due to the short term nature of these balances. Operating lease right-of-use assets and liabilities were recorded as the discounted value of future obligations in accordance with ASC Topic 842, “Leases”. The fair value measurements for acquired intangible assets and
8
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
developed technology were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. Certain fair values were determined based on an independent valuation of the net assets acquired, including $340.6 million of rental merchandise and $520 million of identifiable intangible assets with an estimated weighted average useful life of 8 years, as follows:
| Asset Class | Estimated Fair Value (in thousands) | Estimated Remaining Useful Life (in years) | ||||||
| Merchant relationships | $ | |||||||
| Relationship with existing lessees | ||||||||
| Trade name | ||||||||
| Non-compete agreements | ||||||||
Developed technology, included in Property assets, net, in line with our accounting policies, was also acquired with a value of $170.0 million and an estimated remaining useful life of 10 years. The fair value for these intangible and property assets were estimated using common industry valuation methods for similar asset types, based primarily on cost inputs and projected cash flows.
In addition, we recorded goodwill of $219.5 million in our Acima operating segment, which consists of the excess of the net purchase price over the fair value of the net assets acquired. Goodwill represents expected cost and revenue synergies and other benefits expected to result within our retail partner business from the acquisition of Acima Holdings. The total value of goodwill for tax purposes differs from recorded goodwill as a result of the Aggregate Stock Consideration subject to restricted stock agreements, differences in value assigned to other purchased assets, and acquisition-related expenses. Tax goodwill will be amortized over 15 years.
Acima Holdings' results of operations are reflected in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition.
Subsequent to the date of acquisition, we recorded certain adjustments to the purchase price allocation within the measurement period, including an adjustment to the fair value of rental merchandise decreasing the value of the acquired assets by approximately $17.1 million. The adjustment to the fair value of rental merchandise was based on further assessment of the carrying value of the assets and corresponding evaluation of related (Level 2) market inputs. Total cumulative measurement period adjustments resulted in a decrease to goodwill of approximately $(22.2 ) million. The purchase price allocation for the Acima Holdings acquisition was complete as of December 31, 2021.
In connection with this acquisition, we incurred approximately $23.9 million in acquisition-related expenses including expenses related to legal, professional, and banking transaction fees, which are treated as an addition to goodwill for tax purposes. These costs were included in Other charges in our unaudited Condensed Consolidated Statements of Operations.
The following unaudited pro forma combined results of operations present our financial results as if the acquisition of Acima had been completed on January 1, 2020. These unaudited pro forma results may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma information reflects the step-up and step-down depreciation and amortization adjustments for the fair value of the assets acquired, adjustments to stock compensation expense as a result of Aggregate Stock Consideration subject to restricted stock awards, the adjustments in interest expense due to the elimination of historical debt and placement of the new debt, and the related adjustments to the income tax provision. In addition, the pro forma net income has been adjusted to include transaction expenses and other non-recurring costs as of January 1, 2020. The unaudited pro forma financial information is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Pro Forma total revenues | $ | $ | $ | $ | |||||||||||||||||||
Pro Forma net earnings(1) | |||||||||||||||||||||||
(1)Total pro forma adjustments to net earnings represented increases of $15.0 million and $5.9 million for the three and nine months ended September 30, 2021, and decreases of $98.9 million and $276.9 million for the three and nine months ended September 30, 2020, respectively.
9
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The amounts of revenue and earnings of Acima Holdings included in our Condensed Consolidated Statements of Operations from the acquisition date of February 17, 2021 are as follows:
| (in thousands) | February 17, 2021 - September 30, 2021 | ||||
| (unaudited) | |||||
| Total revenues | $ | ||||
Net earnings(1) | |||||
(1)Net earnings for the period includes amortization of intangible assets acquired upon closing of the Acima Holdings acquisition.
Note 3 - Revenues
The following table disaggregates our revenue for the periods ended September 30, 2022 and 2021:
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
Rent-A-Center Business | Acima(1) | Mexico | Franchising | Consolidated | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Store | |||||||||||||||||||||||||||||
| Rentals and fees | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Installment sales | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total store revenues | |||||||||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Royalty income and fees | |||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) Represents revenues for our Acima segment, as defined in Note 1.
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
Rent-A-Center Business | Acima(1) | Mexico | Franchising | Consolidated | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Store | |||||||||||||||||||||||||||||
| Rentals and fees | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Installment sales | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total store revenues | |||||||||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Royalty income and fees | |||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) Represents revenues for our Acima segment, as defined in Note 1.
10
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
Rent-A-Center Business | Acima(1) | Mexico | Franchising | Consolidated | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Store | |||||||||||||||||||||||||||||
| Rentals and fees | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Installment sales | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total store revenues | |||||||||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Royalty income and fees | |||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
Rent-A-Center Business | Acima(1) | Mexico | Franchising | Consolidated | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Store | |||||||||||||||||||||||||||||
| Rentals and fees | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Installment sales | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total store revenues | |||||||||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||||||||
| Merchandise sales | |||||||||||||||||||||||||||||
| Royalty income and fees | |||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) Represents revenues for our Acima segment, as defined in Note 1.
Lease Purchase Agreements
Rent-A-Center Business, Acima, and Mexico
Rentals and Fees. Rental merchandise is leased to customers pursuant to lease-to-own agreements, which provide for weekly, semi-monthly or monthly terms with non-refundable lease payments. At the expiration of each lease term, customers may renew the lease-to-own agreement for the next lease term. Generally, the customer has the right to acquire title of the merchandise either through a purchase option or through payment of all required lease terms. Customers can terminate the lease-to-own agreement at the end of any lease term without penalty. Therefore, lease-to-own agreements are accounted for as operating leases.
Lease payments received at our Rent-A-Center Business stores, certain Acima staffed locations formerly operating under the Preferred Lease brand, and Mexico stores must be prepaid in advance of the next lease term. Under the Acima Holdings business model, revenues may be earned prior to the lease payment due date, in which case revenue is accrued prior to receipt of the lease payment, net of estimated returns and uncollectible renewal payments. Under both models, rental revenue is recognized over the lease term. See Note 4 for additional information regarding accrued lease revenue.
Cash received for rental payments, including fees, prior to the period in which it should be recognized, is deferred and recognized according to the lease term. At September 30, 2022 and December 31, 2021, we had $31.7 million and $51.7 million, respectively, in deferred revenue included in accrued liabilities related to our lease to own agreements. Revenue related to various payment, reinstatement or late fees is recognized when paid by the customer at the point service is provided. Rental merchandise in our Rent-A-Center Business, former Preferred Lease locations, and Mexico stores is depreciated using the income forecasting method and recognized in cost of rentals and fees in our Consolidated Statement of Operations over the
11
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
lease term. Lease merchandise in Acima Holdings is depreciated over the lease term using a straight-line depreciation method. Under the income forecasting method, the consumption of lease merchandise occurs during periods of rental and depreciation directly coincides with the receipt of rental revenue over the lease-to-own contract period. Depreciation under the straight-line method is recognized each period over the term of the lease-to-own contract irrespective of receipt of revenue payments from the customer.
We also offer additional product plans along with our rental agreements which provide customers with liability protection against significant damage or loss of a product, and club membership benefits, including various discount programs and product service and replacement benefits in the event merchandise is damaged or lost, and payment insurance in the event eligible customers become unemployed. Customers renew product plans in conjunction with their rental term renewals, and can cancel the plans at any time. Revenue for product plans is recognized over the term of the plan. Costs incurred related to product plans are primarily recognized in cost of sales.
Revenue from contracts with customers
Rent-A-Center Business, Acima, and Mexico
Merchandise Sales. Merchandise sales include payments received for the exercise of the early purchase options offered through our lease-to own agreements or merchandise sold through point of sale transactions. Revenue for merchandise sales is recognized when payment is received and ownership of the merchandise passes to the customer. The remaining net value of merchandise sold is recorded to cost of sales at the time of the transaction.
Installment Sales. Revenue from the sale of merchandise in our retail installment stores is recognized when the installment note is signed and control of the merchandise has passed to the customer. The cost of merchandise sold through installment agreements is recognized in cost of sales at the time of the transaction. We offer extended service plans with our installment agreements which are administered by third parties and provide customers with product service maintenance beyond the term of the installment agreement. Payments received for extended service plans are deferred and recognized, net of related costs, when the installment payment plan is complete and the service plan goes into effect. Customers can cancel extended service plans at any time during the installment agreement period and receive a refund for payments previously made towards the plan. At September 30, 2022 and December 31, 2021, we had $2.1 million and $2.6 million in deferred revenue included in accrued liabilities related to extended service plans.
Other. Other revenue consists of revenue generated by other miscellaneous product plans offered to our rental and installment customers. Revenue for other product plans is recognized in accordance with the terms of the applicable plan agreement.
Franchising
Merchandise Sales. Revenue from the sale of rental merchandise is recognized upon shipment of the merchandise to the franchisee.
Royalty Income and Fees. Franchise royalties, including franchisee contributions to corporate advertising funds, represent sales-based royalties calculated as a percentage of gross rental payments and sales. Royalty revenue is accrued and recognized as rental payments and merchandise sales occur. Franchise fees are initial fees charged to franchisees for new or converted franchise stores. Franchise fee revenue is recognized on a straight-line basis over the term of the franchise agreement. At September 30, 2022 and December 31, 2021, we had $3.6 million and $4.1 million, respectively, in deferred revenue included in accrued liabilities related to franchise fees.
Note 4 - Receivables and Allowance for Doubtful Accounts
Installment sales receivables consist primarily of receivables due from customers for the sale of merchandise in our retail installment stores. Installment sales receivables associated with the sale of merchandise at our Get It Now and Home Choice stores generally consist of the sales price of the merchandise purchased and any additional fees for services the customer has chosen, less the customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis. Interest paid on installment agreements for both the nine months ended September 30, 2022 and 2021 was $9.2 million.
Trade and notes receivables consist of amounts due from our lease-to-own customers for renewal and uncollected rental payments, adjusted for the probability of collection based on our assessment of historical collection rates; amounts owed from our franchisees for inventory purchases, earned royalties and other obligations; and other corporate related receivables. Credit is extended to franchisees based on an evaluation of each franchisee’s financial condition and collateral is generally not required. Trade receivables are generally due within 30 days.
12
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Receivables consist of the following:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Installment sales receivables | $ | $ | |||||||||
| Trade and notes receivables | |||||||||||
| Total receivables | |||||||||||
Less allowance for doubtful accounts(1) | ( | ( | |||||||||
| Total receivables, net of allowance for doubtful accounts | $ | $ | |||||||||
1) Lease receivables are accrued on a net basis, adjusted for the probability of collection based on our assessment of historical collection rates, as described above. Therefore, we do not maintain a separate allowance for doubtful accounts related to our lease receivables.
We have established an allowance for doubtful accounts for our installment notes receivable. Our policy for determining the allowance is primarily based on historical loss experience, as well as the results of management’s review and analysis of the payment and collection of the installment notes receivable within the previous year. We believe our allowance is adequate to absorb all expected losses. Our policy is to charge off installment notes receivable that are 120 days or more past due. Charge-offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts.
The allowance for our Franchising trade and notes receivables is determined by considering a number of factors, including the length of time receivables are past due, previous loss history, the franchisee’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Trade receivables that are more than 90 days past due are either written-off or fully reserved in our allowance for doubtful accounts. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
The allowance for doubtful accounts related to Franchising trade and notes receivables was $1.0 million and $0.9 million, and the allowance for doubtful accounts related to installment sales receivables was $11.4 million and $7.6 million at September 30, 2022 and December 31, 2021, respectively.
Changes in our allowance for doubtful accounts are as follows:
| (in thousands) | September 30, 2022 | ||||
| Beginning allowance for doubtful accounts | $ | ||||
Bad debt expense(1) | |||||
| Accounts written off, net of recoveries | ( | ||||
| Ending allowance for doubtful accounts | $ | ||||
(1) Uncollectible installment payments, franchisee obligations, and other corporate receivables are recognized in other store operating expenses in our condensed consolidated financial statements.
Note 5 - Leases
We lease space for all of our Rent-A-Center Business and Mexico stores under operating leases expiring at various times through 2032. In addition, we lease space for certain support facilities under operating leases expiring at various times through 2032. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed upon formulas. We evaluate all leases to determine if it is likely that we will exercise future renewal options and in most cases we are not reasonably certain of exercise due to competing market rental rates and lack of significant penalty, or business disruption incurred by not exercising the renewal options.
In certain situations involving the sale of a Rent-A-Center Business corporate store to a franchisee, we enter into a lease assignment agreement with the buyer, but we remain the primary obligor under the original lease for the remaining active term. These assignments are therefore classified as subleases and the original lease is included in our operating lease right-of-use assets and operating lease liabilities in our Condensed Consolidated Balance Sheets.
We lease vehicles for all of our Rent-A-Center Business stores under operating leases with lease terms expiring twelve months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our Condensed Consolidated Balance Sheets. We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2026 with rental rates adjusted periodically for inflation. Finally, we have a minimal number of equipment leases, primarily related to temporary storage containers and certain back-office technology hardware assets.
13
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In our calculation of operating lease right-of-use assets and operating lease liabilities we have elected not to separate the lease and non-lease components. Furthermore, operating lease right-of-use assets and operating lease liabilities are discounted using our incremental borrowing rate, since the implicit rate is not readily determinable. We do not currently have any financing leases.
Operating lease costs are recorded on a straight-line basis within other store expenses in our Condensed Consolidated Statements of Operations.
Total operating lease costs by expense type:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Operating lease cost included in Other store expenses(1)(2) | $ | $ | $ | $ | |||||||||||||||||||
Operating lease cost included in Other charges(2) | |||||||||||||||||||||||
| Sublease receipts | ( | ( | ( | ( | |||||||||||||||||||
| Total operating lease charges | $ | $ | $ | $ | |||||||||||||||||||
(1) Includes short-term lease costs, which are not significant.
(2) Excludes variable lease costs of $9.4 million and $27.2 million for the three and nine months ended September 30, 2022 compared to $8.4 million and $25.4 million for the three and nine months ended September 30, 2021.
Supplemental cash flow information related to leases:
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Cash paid for amounts included in measurement of operating lease liabilities | $ | $ | |||||||||
| Cash paid for short-term operating leases not included in operating lease liabilities | |||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | |||||||||||
Weighted-average discount rate and weighted-average remaining lease term:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
Weighted-average discount rate(1) | % | % | |||||||||
| Weighted-average remaining lease term (in years) | |||||||||||
(1) The January 1, 2019 incremental borrowing rate was used for leases in existence at the time of adoption of ASU 2016-02.
Reconciliation of undiscounted operating lease liabilities to the present value operating lease liabilities at September 30, 2022:
| (in thousands) | Operating Leases | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total undiscounted operating lease liabilities | |||||
| Less: Interest | ( | ||||
| Total present value of operating lease liabilities | $ | ||||
Note 6 - Income Taxes
14
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 7 - Senior Debt
On February 17, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, providing for a seven-year $875 million senior secured term loan facility (the “Term Loan Facility”) and an Asset Based Loan Credit Facility (the “ABL Credit Facility”) providing for a five-year asset-based revolving credit facility with commitments of $550 million and a letter of credit sublimit of $150 million. Commitments under the ABL Credit Facility may be increased, at our option and under certain conditions, by up to an additional $125 million in the aggregate.
Proceeds from the Term Loan Facility were net of original issue discount of $4.4 million upon issuance from the lenders. In addition, in connection with the closing of the Term Loan Facility and the ABL Credit Facility, we incurred approximately $30.2 million in debt issuance costs, including bank financing fees and third party legal and other professional fees, of which $25.3 million was capitalized in accordance with ASC Topic 470, “Debt” and recorded as a reduction of our outstanding senior debt, net in our Condensed Consolidated Balance Sheets. Remaining debt issuance costs incurred of $4.9 million were expensed and recorded to Other charges in our Condensed Consolidated Statement of Operations.
On September 21, 2021 we entered into a First Amendment to the Term Loan Facility, effective as of September 21, 2021. The amendment effected a repricing of the applicable margin under the Term Loan Facility by reducing the LIBOR floor by 25 basis points from 0.75 % to 0.50 %, and the applicable margin, with respect to any initial term loans, by 75 basis points from 4.00 % to 3.25 %.
In connection with the execution of the First Amendment, we incurred approximately $1.5 million in debt issuance costs, including third party arrangement and other professional fees, of which approximately $1.4 million were expensed as debt refinance charges in our Condensed Consolidated Statement of Operations, and approximately $0.1 million were capitalized and recorded as a reduction to our outstanding senior debt in our Condensed Consolidated Balance Sheets. In addition, in accordance with ASC Topic 470, “Debt”, we recorded approximately $5.4 million in write-offs of unamortized debt issuance costs and original issue discount previously capitalized upon the issuance of the Term Loan Facility on February 17, 2021. The write-offs were recorded as debt refinance charges in our Condensed Consolidated Statement of Operations.
On August 10, 2022, we entered into a First Amendment to the ABL Credit Facility, effective as of August 10, 2022. The amendment effected the replacement of LIBOR with Term Secured Overnight Financing Rate (“Term SOFR”) as the benchmark rate of interest thereunder.
As of September 30, 2022, the total remaining balance of unamortized debt issuance costs and original issue discount related to our senior debt reported in the Condensed Consolidated Balance Sheets were approximately $17.4 million and $2.5 million, respectively. Remaining unamortized debt issuance costs and original issue discount will be amortized to interest expense over the remaining term of the Term Loan Facility.
The amount outstanding under the Term Loan Facility was $861.9 million at September 30, 2022. We had $90.0 million outstanding borrowings under our ABL Credit Facility at September 30, 2022 and borrowing capacity of $373.8 million.
We also utilize the ABL Credit Facility for the issuance of letters of credit. As of September 30, 2022, we have issued letters of credit in the aggregate outstanding amount of $86.2 million primarily relating to workers compensation insurance claims.
Term Loan Credit Agreement
The Term Loan Facility, which matures on February 17, 2028 , amortizes in equal quarterly installments at a rate of 1.00 % per annum of the original principal amount thereof, with the remaining balance due at final maturity. Subject in each case to certain restrictions and conditions, we may add up to $500 million of incremental term loan facilities to the Term Loan Facility or utilize incremental capacity under the Term Loan Facility at any time by issuing or incurring incremental equivalent term debt.
Interest on borrowings under the Term Loan Facility is payable at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin of 3.25 %, subject to a 0.50 % LIBOR floor. The total interest rate on the Term Loan Facility was 6.06 % at September 30, 2022. Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.000% per annum of the original aggregate principal amount thereof, with the remaining balance due at final maturity.
The Term Loan Facility is secured by a first-priority security interest in substantially all of our present and future tangible and intangible personal property, including our subsidiary guarantors, other than the ABL Priority Collateral (as defined below), and by a second-priority security interest in the ABL Priority Collateral, subject to certain exceptions. The obligations under the
15
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Term Loan Facility are guaranteed by us and our material wholly-owned domestic restricted subsidiaries that also guarantee the ABL Credit Facility.
The Term Loan Facility contains covenants that are usual and customary for similar facilities and transactions and that, among other things, restrict our ability and our restricted subsidiaries to create certain liens and enter into certain sale and lease-back transactions; create, assume, incur or guarantee certain indebtedness; consolidate or merge with, or convey, transfer or lease all or substantially all of our and our restricted subsidiaries’ assets, to another person; pay dividends or make other distributions on, or repurchase or redeem, our capital stock or certain other debt; and make other restricted payments. The Term Loan Facility also includes mandatory prepayment requirements related to asset sales (subject to reinvestment), debt incurrence (other than permitted debt) and excess cash flow, subject to certain limitations described therein. These covenants are subject to a number of limitations and exceptions set forth in the documentation governing the Term Loan.
The Term Loan provides for customary events of default, including, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving us and our significant subsidiaries.
The Term Loan Facility was fully drawn at the closing of the Acima Holdings acquisition to fund a portion of the Aggregate Cash Consideration payable in the transaction, repay certain of our outstanding indebtedness and that of our subsidiaries, repay all outstanding indebtedness of Acima Holdings and its subsidiaries and pay certain fees and expenses incurred in connection with the transaction. A portion of such proceeds were used to repay $197.5 million outstanding under the prior term loan facility, dated as of August 5, 2019, among us, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the “Prior Term Loan Facility”).
ABL Credit Agreement
The ABL Credit Facility will mature on February 17, 2026 . We may borrow only up to the lesser of the level of the then-current borrowing base and the aggregate amount of commitments under the ABL Credit Facility. The borrowing base is tied to the amount of eligible installment sales accounts, inventory and eligible rental contracts, reduced by certain reserves.
The ABL Credit Facility bears interest at a fluctuating rate determined by reference to Term SOFR plus an applicable margin of 1.50 % to 2.00 %. The total interest rate on the ABL Credit Facility at September 30, 2022 was 4.783 %. A commitment fee equal to 0.250 % to 0.375 % of the unused portion of the ABL Credit Facility fluctuates dependent upon average utilization for the prior month as defined by a pricing grid included in the documentation governing the ABL Credit Facility. The commitment fee at September 30, 2022 was 0.375 %. We paid $0.7 million of commitment fees during the third quarter of 2022.
Loans under the ABL Credit Facility may be borrowed, repaid and re-borrowed until February 17, 2026, at which time all amounts borrowed must be repaid. The obligations under the ABL Credit Facility are guaranteed by us and certain of our wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations under the ABL Credit Facility and such guarantees are secured on a first-priority basis by all of our and our subsidiary guarantors’ accounts, inventory, deposit accounts, securities accounts, cash and cash equivalents, rental agreements, general intangibles (other than equity interests in our subsidiaries), chattel paper, instruments, documents, letter of credit rights, commercial tort claims related to the foregoing and other related assets and all proceeds thereof related to the foregoing, subject to permitted liens and certain exceptions (such assets, collectively, the “ABL Priority Collateral”) and a second-priority basis in substantially all other present and future tangible and intangible personal property of ours and the subsidiary guarantors, subject to certain exceptions.
The ABL Credit Facility contains covenants that are usual and customary for similar facilities and transactions and that, among other things, restrict our ability and our restricted subsidiaries to create certain liens and enter into certain sale and lease-back transactions; create, assume, incur or guarantee certain indebtedness; consolidate or merge with, or convey, transfer or lease all or substantially all of our and our restricted subsidiaries’ assets, to another person; pay dividends or make other distributions on, or repurchase or redeem, our capital stock or certain other debt; and make other restricted payments.
The ABL Credit Facility also requires the maintenance of a consolidated fixed charge coverage ratio of at least 1.10 to 1.00 at the end of each fiscal quarter only in the event either (i) certain specified events of default have occurred and are continuing or (ii) availability is less than or equal to the greater of $56.25 million and 15% of the line cap then in effect. These covenants are subject to a number of limitations and exceptions set forth in the documentation governing the ABL Credit Facility. The fixed charge coverage ratio as of September 30, 2022 was 0.68 to 1.00, however, neither of the conditions in (i) or (ii) described above were applicable. Therefore, the maintenance of the fixed charge coverage ratio as of September 30, 2022 was not required.
16
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The documentation governing the ABL Credit Facility provides for customary events of default, including, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving us and our significant subsidiaries.
The table below shows the scheduled maturity dates of our outstanding debt at September 30, 2022 for each of the years ending December 31:
| (in thousands) | Term Loan Facility | ABL Credit Facility | Total | ||||||||||||||
| 2022 | $ | $ | $ | ||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total senior debt | $ | $ | $ | ||||||||||||||
Note 8 - Senior Notes
On February 17, 2021, we issued $450 million in senior unsecured notes due February 15, 2029, at par value, bearing interest at 6.375 % (the “Notes”), the proceeds of which were used to fund a portion of the Aggregate Cash Consideration upon closing of the Acima Holdings acquisition. Interest on the Notes is payable in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. In connection with the issuance of the Notes, we incurred approximately $15.7 million in debt issuance costs, including bank financing fees and third party legal and other professional fees, which were capitalized in accordance with ASC Topic 470, “Debt” and recorded as a reduction of our outstanding Notes in our Condensed Consolidated Balance Sheets. Debt issuance costs are amortized as interest expense over the term of the Notes. As of September 30, 2022, the total remaining balance of unamortized debt issuance costs related to our senior notes reported in the Condensed Consolidated Balance Sheets was approximately $12.5 million.
We may redeem some or all of the Notes at any time on or after February 15, 2024 for cash at the redemption prices set forth in the indenture governing the Notes, plus accrued and unpaid interest to, but not including, the redemption date. Prior to February 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at a redemption price of 106.375 % plus accrued and unpaid interest to, but not including, the redemption date. In addition, we may redeem some or all of the Notes prior to February 15, 2024, at a redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” premium. If we experience specific kinds of change of control, we will be required to offer to purchase the Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
The Notes are our general unsecured senior obligations, and are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, structurally subordinated to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries, equal in right of payment to all of our and our guarantor subsidiaries’ existing and future senior indebtedness and senior in right of payment to all of our future subordinated indebtedness, if any. The Notes are jointly and severally guaranteed on a senior unsecured basis by certain of our domestic subsidiaries that have outstanding indebtedness or guarantee other specified indebtedness, including the ABL Credit Facility and the Term Loan Facility.
The indenture governing the Notes contains covenants that limit, among other things, our ability and the ability of some of our restricted subsidiaries to create liens, transfer or sell assets, incur indebtedness or issue certain preferred stock, pay dividends, redeem stock or make other distributions, make other restricted payments or investments, create restrictions on payment of dividends or other amounts to us by our restricted subsidiaries, merge or consolidate with other entities, engage in certain transactions with affiliates and designate our subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions and qualifications. The covenants limiting restricted payments, restrictions on payment of dividends or other amounts to us by our restricted subsidiaries, the ability to incur indebtedness, asset dispositions and transactions with affiliates will be suspended if and while the Notes have investment grade ratings from any two of Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. and Fitch, Inc.
The indenture governing the Notes also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all the then outstanding Notes to be due and payable.
17
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 9 - Fair Value
We follow a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of our non-financial assets and non-financial liabilities, which consist primarily of goodwill. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Our financial instruments include cash and cash equivalents, receivables, payables, borrowings against our ABL Credit Facility and Term Loan Facility, and outstanding Notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at September 30, 2022 and December 31, 2021, because of the short maturities of these instruments. In addition, the interest rates on our Term Loan Facility and ABL Credit Facility are variable and, therefore, we believe the carrying value of outstanding borrowings approximates their fair value.
The fair value of our Notes is based on Level 1 inputs and was as follows at September 30, 2022:
| September 30, 2022 | |||||||||||||||||
| (in thousands) | Carrying Value | Fair Value | Difference | ||||||||||||||
| Senior notes | $ | $ | $ | ( | |||||||||||||
Note 10 - Other Charges
Acima Holdings Acquisition. As described in Note 2, on February 17, 2021, we completed the acquisition of Acima Holdings, a leading provider of virtual lease-to-own solutions. Included in the aggregate consideration issued to the former owners of Acima Holdings were 8,096,595 common shares, valued at $414.1 million, subject to 36-month vesting conditions under restricted stock agreements, which will be recognized over the vesting term as stock compensation expense. During the nine months ended September 30, 2022 and 2021, we recognized approximately $111.5 million and $93.1 million in stock compensation expense related to these restricted stock agreements, respectively.
The fair value of assets acquired as part of the transaction included $520 million in intangible assets and $170 million in developed technology. During the nine months ended September 30, 2022 and 2021, we recognized approximately $50.6 million and $72.4 million in amortization expense and $11.9 million and $9.3 million in incremental depreciation expense related to these assets, respectively.
During the nine months ended September 30, 2022 and 2021, we recognized approximately $0.2 million and $17.3 million in transaction costs associated with the closing of the transaction, respectively.
During the nine months ended September 30, 2021 we recognized approximately $7.9 million in post-acquisition integration costs, including $3.5 million in employee severance, $3.3 million in inventory losses, and $1.1 million in other integration costs, including reorganization advisory fees.
18
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Activity with respect to Other charges for the nine months ended September 30, 2022 is summarized in the below table:
| (in thousands) | Accrued Charges at December 31, 2021 | Charges & Adjustments | Payments & Adjustments | Accrued Charges at September 30, 2022 | |||||||||||||||||||
| Cash charges: | |||||||||||||||||||||||
| Acima Holdings transaction costs | $ | $ | $ | ( | $ | ||||||||||||||||||
Labor reduction costs(1) | ( | ||||||||||||||||||||||
| Other cash charges | ( | ||||||||||||||||||||||
| Total cash charges | $ | $ | ( | $ | |||||||||||||||||||
| Non-cash charges: | |||||||||||||||||||||||
Acima Holdings restricted stock agreements(2) | |||||||||||||||||||||||
Depreciation and amortization of acquired assets(3) | |||||||||||||||||||||||
Asset impairments(4) | |||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Total other charges | $ | ||||||||||||||||||||||
(1) Represents charges incurred for employee severance.
(2) Represents stock compensation expense related to common stock issued to Acima Holdings employees under restricted stock agreements as part of the acquisition proceeds subject to vesting restrictions, as described in Note 2 and Note 12.
(3) Represents amortization of the total fair value of acquired intangible assets and incremental depreciation related to the fair value increase over net book value of acquired software assets in connection with the acquisition of Acima Holdings as described in Note 2.
(4) Primarily represents impairment of software assets.
Note 11 - Segment Information
The operating segments reported below are the segments for which separate financial information is available and for which segment results are evaluated by the chief operating decision makers. Our operating segments are organized based on factors including, but not limited to, type of business transactions, geographic location and store ownership. Within our operating segments, we offer merchandise for lease from certain basic product categories: furniture, including mattresses, tires, consumer electronics, appliances, tools, handbags, computers, smartphones, and accessories.
Segment information as of and for the three and nine months ended September 30, 2022 and 2021 is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||
Rent-A-Center Business | $ | $ | $ | $ | |||||||||||||||||||
Acima(1) | |||||||||||||||||||||||
| Mexico | |||||||||||||||||||||||
| Franchising | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
(1) Represents revenues for our Acima operating segment as defined in Note 1.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Rent-A-Center Business | $ | $ | $ | $ | |||||||||||||||||||
Acima(1) | |||||||||||||||||||||||
| Mexico | |||||||||||||||||||||||
| Franchising | |||||||||||||||||||||||
| Total gross profit | $ | $ | $ | $ | |||||||||||||||||||
(1) Represents gross profit for our Acima operating segment as defined in Note 1.
19
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Operating profit | |||||||||||||||||||||||
| Rent-A-Center Business | $ | $ | $ | $ | |||||||||||||||||||
Acima(1) | |||||||||||||||||||||||
| Mexico | |||||||||||||||||||||||
| Franchising | |||||||||||||||||||||||
| Total segments | |||||||||||||||||||||||
Corporate(2) | ( | ( | ( | ( | |||||||||||||||||||
| Total operating profit | $ | $ | $ | $ | |||||||||||||||||||
(1) Represents operating profit for our Acima segment as defined in Note 1.
(2) Includes stock compensation expense of $42.1 million and $111.5 million recognized for the three and nine months ended September 30, 2022, and $42.8 million and $93.1 million recognized for the three and nine months ended September 30, 2021, related to common stock issued to Acima Holdings employees under restricted stock agreements as part of the acquisition consideration subject to vesting restrictions as described in Note 10.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Depreciation and amortization | |||||||||||||||||||||||
| Rent-A-Center Business | $ | $ | $ | $ | |||||||||||||||||||
Acima(1)(2) | |||||||||||||||||||||||
| Mexico | |||||||||||||||||||||||
| Franchising | |||||||||||||||||||||||
| Total segments | |||||||||||||||||||||||
Corporate(3) | |||||||||||||||||||||||
Total depreciation and amortization | $ | $ | $ | $ | |||||||||||||||||||
(1) Represents depreciation and amortization for our Acima segment as defined in Note 1.
(2)Excludes amortization expense of approximately $14.2 million and $50.6 million for the three and nine months ended September 30, 2022, compared to $29.2 million and $72.4 million for the three and nine months ended September 30, 2021, recorded to Other charges in the Condensed Consolidated Statement of Operations, related to intangible assets acquired upon closing of the Acima Holdings acquisition. See Note 10 for additional information.
(3)Excludes depreciation expense of approximately $3.9 million and $11.9 million for the three and nine months ended September 30, 2022, compared to $4.0 million and $9.3 million for the three and nine months ended September 30, 2021, recorded to Other charges in the Condensed Consolidated Statement of Operations, related to software acquired upon closing of the Acima Holdings acquisition. See Note 10 for additional information.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Capital expenditures | |||||||||||||||||||||||
| Rent-A-Center Business | $ | $ | $ | $ | |||||||||||||||||||
Acima(1) | |||||||||||||||||||||||
| Mexico | |||||||||||||||||||||||
| Franchising | |||||||||||||||||||||||
| Total segments | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total capital expenditures | $ | $ | $ | $ | |||||||||||||||||||
(1) Represents capital expenditures for our Acima segment as defined in Note 1.
20
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| On rent rental merchandise, net | |||||||||||
| Rent-A-Center Business | $ | $ | |||||||||
Acima(1) | |||||||||||
| Mexico | |||||||||||
| Total on rent rental merchandise, net | $ | $ | |||||||||
(1) Represents on-rent rental merchandise for our Acima segment as defined in Note 1.
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Held for rent rental merchandise, net | |||||||||||
| Rent-A-Center Business | $ | $ | |||||||||
Acima(1) | |||||||||||
| Mexico | |||||||||||
| Total held for rent rental merchandise, net | $ | $ | |||||||||
(1) Represents held-for-rent rental merchandise for our Acima segment as defined in Note 1.
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Assets by segment | |||||||||||
| Rent-A-Center Business | $ | $ | |||||||||
Acima(1) | |||||||||||
| Mexico | |||||||||||
| Franchising | |||||||||||
| Total segments | |||||||||||
| Corporate | |||||||||||
| Total assets | $ | $ | |||||||||
(1) Represents total assets for our Acima segment as defined in Note 1.
Note 12 - Common Stock and Stock-Based Compensation
In early December 2021, our Board of Directors authorized a stock repurchase program for up to $500 million (the “December 2021 Program”), which superseded our previous stock repurchase program. Under the December 2021 Program, we may purchase shares of our common stock from time to time in the open market or privately negotiated transactions. We are not obligated to acquire any shares under the program, and the program may be suspended or discontinued at any time. No shares of our common stock were repurchased during the six months ended June 30, 2022. Under the December 2021 Program, 1,218,313 shares of our common stock were repurchased for an aggregate purchase price of approximately $29.8 million during the three months ended September 30, 2022. Subsequent to September 30, 2022 we repurchased an additional 2,318,486 shares for an aggregate purchase price of $45.2 million under the December 2021 Program and approximately $285 million remains available for repurchases. Under previous stock repurchase programs, 335,508 shares of our common stock were repurchased during the three and nine months ended September 30, 2021 for an aggregate purchase price of approximately $20.0 million.
We recognized $2.7 million and $5.6 million in compensation expense related to stock awards issued under the Rent-A-Center, Inc. 2021 Long-Term Incentive Plan (the “2021 Plan”) and 2016 Long-Term Incentive Plan (the “2016 Plan”) during the three months ended September 30, 2022 and 2021, and $11.1 million and $15.0 million during the nine months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022, we granted approximately 713,000 market-based performance units and 406,000 time-vesting units under the 2021 Plan. Performance-based restricted stock units are valued using a Monte Carlo simulation. Time-vesting restricted stock units are valued based on our closing stock price on the trading day immediately preceding the date of the grant, or as of the date of modification in the event an award is modified. The weighted-average grant date fair value of the market-based performance and time-vesting restricted stock units granted during the nine months ended September 30, 2022 was $24.59 and $28.31 , respectively.
As described in Note 2, Aggregate Stock Consideration issued to the former owners of Acima Holdings included 10,779,923 of common shares valued at $51.14 per share, as of the date of closing. Of this total, 2,683,328 common shares were included in the aggregate purchase price of the transaction for financial reporting purposes, while 8,096,595 common shares, valued at $414.1 million, issued under restricted stock agreements and subject to vesting conditions, are recognized as stock compensation expense over the vesting term in accordance with ASC Topic 718, “Stock-based Compensation”. We recognized $42.1 million and $42.8 million in stock compensation expense related to these restricted stock agreements during the three
21
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 13 - Contingencies
From time to time, we, along with our subsidiaries, are party to various legal proceedings and governmental inquiries arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not currently expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred. Nevertheless, we cannot predict the impact of future developments affecting our claims and lawsuits, and any resolution of a claim or lawsuit or reserve within a particular fiscal period may materially and adversely impact our results of operations for that period. In addition, claims and lawsuits against us may seek injunctive or other relief that requires changes to our business practices or operations and it is possible that any required changes may materially and adversely impact our business, financial condition, results of operations or reputation.
Unclaimed Property. We are subject to unclaimed property audits by states in the ordinary course of business. The property subject to review in the audit process includes unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. We routinely remit escheat payments to states and believe we are in compliance with applicable escheat laws.
Acima Consumer Financial Protection Bureau investigation. Prior to the execution of the definitive agreement to acquire Acima Holdings, Acima Holdings received a Civil Investigative Demand dated October 1, 2020 (the “CID”) from the Consumer Financial Protection Bureau (the “CFPB”) requesting certain information, documents and data relating to Acima Holding’s products, services and practices for the period from January 1, 2015 to the date on which responses to the CID are provided in full. The purpose of the CID is to determine whether Acima Holdings extends credit, offers leases, or otherwise offers or provides a consumer financial product or service and whether Acima Holdings complies with certain consumer financial protection laws. We are fully cooperating with the CFPB investigation. The CFPB has not made any allegations in the investigation, and we are currently unable to predict the eventual scope, ultimate timing or outcome of the CFPB investigation.
On the terms and subject to the conditions set forth in the definitive agreement to acquire Acima Holdings, the former owners of Acima Holdings agreed to indemnify Rent-A-Center for certain losses arising after the consummation of the transaction with respect to the CID and certain pre-closing taxes. The indemnification obligations of the former owners of Acima Holdings were limited to an indemnity holdback in the aggregate amount of $50 million, which was escrowed at the closing of the transaction, and will be Rent-A-Center’s sole recourse against the former owners of Acima Holdings with respect to all of the indemnifiable claims under the definitive transaction agreement. In respect of certain pre-closing taxes, a portion of the escrowed funds were released to Acima Holdings’ former owners on the first business day following the date that was 18 months after the closing date of the transaction, in accordance with the definitive agreement. In respect of the CID, other than with respect to any then-pending or unresolved claims for indemnification submitted by Rent-A-Center, remaining escrowed funds of $45 million will be released on the earlier of February 17, 2024 and the date on which a final determination is entered providing for a resolution of the matters regarding the CID.
There can be no assurance that the CID will be finally resolved prior to the release to the former owners of Acima Holdings of the escrowed funds reserved therefor, or that such escrowed amount will be sufficient to address all covered losses or that the CFPB’s ongoing investigation or future exercise of its enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of consumer financial protection laws that could lead to enforcement actions, proceedings or litigation, whether by the CFPB, other state or federal agencies, or other parties, and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to Acima Holdings’ business practices or operations that could materially and adversely affect our business, financial condition, results of operations or reputation.
California Attorney General. The California Attorney General (the “CAG”) issued an investigative subpoena in 2018 seeking information with respect to certain of our Acceptance Now business practices (now part of the Acima segment). In November 2021, the parties reached an agreement in principle regarding the resolution of this matter. On August 2, 2022, the parties finalized the settlement of this matter, which includes a proposed final judgment for approval by the Superior Court of the State of California. In the agreement and in consideration of the final resolution of this matter, we agreed to pay a total of $15.5 million in restitution to consumers and civil penalties along with certain injunctive provisions, including (1) in the case of rental-purchase transactions in California originating through a third-party host retailer, not to charge a cash price on the rental-purchase agreement that is greater than the cash price offered to the consumer by the host retailer, and (2) to implement certain additional customer disclosures, employee training and other compliance requirements and restrictions as set forth in the stipulated agreement. We did not admit to any violations of law or any wrongdoing. Although we disagree with the CAG’s interpretation of the relevant California statutory language regarding the definition of “cash price”, we entered into the
22
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
agreement to avoid the expense, risk and distractions associated with potential protracted litigation. The agreed upon settlement amount of $15.5 million was paid in August 2022.
Massachusetts Attorney General. The Massachusetts Attorney General (the “MAG”) issued a civil investigative demand in 2018 seeking information with respect to certain of our business practices, including regarding account management and certain other business practices in connection with our lease-to-own transactions. Since receiving such demand, we have cooperated with the MAG in connection with its investigation. In June 2021, the MAG provided us with proposed settlement terms including a monetary payment, injunctive provisions regarding certain business practices and compliance requirements. We are continuing to cooperate and discuss resolution of the inquiry with the MAG. We are currently unable to predict the ultimate timing or outcome of the MAG investigation.
Note 14 - (Loss) Earnings Per Common Share
Summarized basic and diluted (loss) earnings per common share were calculated as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net (loss) earnings | $ | ( | $ | $ | $ | ||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares outstanding | |||||||||||||||||||||||
Effect of dilutive stock awards(1) (2) | |||||||||||||||||||||||
| Weighted-average dilutive shares | |||||||||||||||||||||||
| Basic (loss) earnings per common share | $ | ( | $ | $ | $ | ||||||||||||||||||
Diluted (loss) earnings per common share(1) (2) | $ | ( | $ | $ | $ | ||||||||||||||||||
| Anti-dilutive securities excluded from diluted (loss) earnings per common share: | |||||||||||||||||||||||
| Anti-dilutive restricted share units | |||||||||||||||||||||||
| Anti-dilutive performance share units | |||||||||||||||||||||||
| Anti-dilutive stock options | |||||||||||||||||||||||
(1) Weighted-average dilutive shares outstanding for the nine months ended September 30, 2022 and 2021, includes approximately 3.7 million and 8.1 million common shares, respectively, issued in connection with the acquisition of Acima Holdings and subject to vesting conditions under restricted stock agreements.
(2) There was no dilutive effect to the loss per common share for the three months ended September 30, 2022 due to the net loss incurred for the period.
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” These forward-looking statements, include, without limitation, those relating to the potential effects of the pandemic of the respiratory disease caused by a novel coronavirus (“COVID-19”) and ongoing challenging macro-economic conditions on our business, operations, financial performance and prospects, the future business prospects and financial performance of our Company following our acquisition of Acima Holdings, LLC (“Acima Holdings”), cost and revenue synergies and other benefits expected to result from the Acima Holdings acquisition, our expectations, plans and strategy relating to our capital structure and capital allocation, including any share repurchases under the Company's share repurchase program, and other statements that are not historical facts.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially and adversely depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Quarterly Report on Form 10-Q and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. Except as required by law, we expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Factors that could cause or contribute to these differences include, but are not limited to:
•the possibility that the anticipated benefits from the Acima Holdings acquisition may not be fully realized or may take longer to realize than expected;
• the possibility that costs, difficulties or disruptions related to the integration of Acima Holdings operations into our other operations will be greater than expected;
• our ability to (i) effectively adjust to changes in the composition of our offerings and product mix as a result of acquiring Acima Holdings and continue to maintain the quality of existing offerings and (ii) successfully introduce other new product or service offerings on a timely and cost-effective basis;
• changes in our future cash requirements as a result of the Acima Holdings acquisition, whether caused by unanticipated increases in capital expenditures or working capital needs, unanticipated liabilities or otherwise;
• our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;
•the impact of the COVID-19 pandemic and related government and regulatory restrictions issued to combat the pandemic, including adverse changes in such restrictions, the expiration of governmental stimulus programs, and impacts on (i) demand for our lease-to-own products offered in our operating segments, (ii) our Acima retail partners, (iii) our customers and their willingness and ability to satisfy their lease obligations, (iv) our suppliers' ability to satisfy our merchandise needs and related supply chain disruptions, (v) our employees, including our ability to adequately staff our operating locations, (vi) our financial and operational performance, and (vii) our liquidity;
•the general strength of the economy and other economic conditions affecting consumer preferences and spending, including the availability of credit to our target consumers and to other consumers, impacts from the high level of inflation, central bank monetary policy initiatives to address inflation concerns, and possible recession;
•factors affecting the disposable income available to our current and potential customers;
•changes in the unemployment rate;
•capital market conditions, including availability of funding sources for us;
•changes in our credit ratings;
24
•difficulties encountered in improving the financial and operational performance of our business segments;
•risks associated with pricing changes and strategies being deployed in our businesses;
•our ability to continue to realize benefits from our initiatives regarding cost-savings and other EBITDA enhancements, efficiencies and working capital improvements;
•our ability to continue to effectively execute our strategic initiatives, including mitigating risks associated with any potential mergers and acquisitions, or refranchising opportunities;
•failure to manage our store labor and other store expenses, including merchandise losses;
•disruptions caused by the operation of our store information management systems or disruptions in the systems of our host retailers;
•risks related to our virtual lease-to-own business, including our ability to continue to develop and successfully implement the necessary technologies;
•our ability to achieve the benefits expected from our integrated virtual and staffed retail partner offering and to successfully grow this business segment;
•exposure to potential operating margin degradation due to the higher cost of merchandise in our Acima offering and higher merchandise losses than compared to our Rent-A-Center Business segment;
•our transition to more-readily scalable “cloud-based” solutions;
•our ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications;
•our ability to protect our proprietary intellectual property;
•our ability or that of our host retailers to protect the integrity and security of customer, employee and host retailer information, which may be adversely affected by hacking, computer viruses, or similar disruptions;
•disruptions in our supply chain;
•limitations of, or disruptions in, our distribution network;
•rapid inflation or deflation in the prices of our products and other related costs;
•our ability to execute and the effectiveness of store consolidations, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
•our available cash flow and our ability to generate sufficient cash flow to continue paying dividends;
•increased competition from traditional competitors, virtual lease-to-own competitors, online retailers, Buy-Now-Pay-Later and other Fintech companies and other competitors, including subprime lenders;
•our ability to identify and successfully market products and services that appeal to our current and future targeted customer segments and to accurately estimate the size of the total addressable market;
•consumer preferences and perceptions of our brands;
•our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores;
•our ability to enter into new and collect on our rental or lease purchase agreements;
•changes in the enforcement of existing laws and regulations and the enactment of new laws and regulations adversely affecting our business, including any legislative or regulatory enforcement efforts that seek to re-characterize store-based or virtual lease-to-own transactions as credit sales and to apply consumer credit laws and regulations to our business;
•our compliance with applicable statutes or regulations governing our businesses;
•changes in interest rates;
•changes in tariff policies;
•adverse changes in the economic conditions of the industries, countries or markets that we serve;
•information technology and data security costs;
•the impact of any breaches in data security or other disturbances to our information technology and other networks;
•changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;
•changes in our effective tax rate;
•fluctuations in foreign currency exchange rates;
•our ability to maintain an effective system of internal controls, including in connection with the integration of Acima;
•litigation or administrative proceedings to which we are or may be a party to from time to time; and
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•the other risks detailed from time to time in our reports furnished or filed with the United States Securities and Exchange Commission (the “SEC”).
Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and elsewhere in this Quarterly Report on Form 10-Q.
Our Business
We are a leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. We provide a critical service for a large portion of underserved consumers by providing them with access to, and the opportunity to obtain ownership of, high-quality, durable products via small payments over time under a flexible lease-purchase agreement with no long-term debt obligation. Through our Rent-A-Center Business, we provide a fully integrated customer experience through our e-commerce platform and brick and mortar presence. Our Acima business offers lease-to-own solutions through retailers in stores and online enabling such retailers to grow sales by expanding their customer base utilizing our differentiated offering. We were incorporated in the State of Delaware in 1986, and our common stock is traded on the Nasdaq Global Select Market under the ticker symbol “RCII.”
Executive Summary
Our Strategy
Our strategy is focused on growing our business model through emphasis on the following key initiatives:
•executing on market opportunities and enhancing our competitive position across both traditional and virtual lease-to-own solutions;
•accelerating the shift to e-commerce, expanding product categories, including into emerging product categories, and improving the fully integrated customer experience;
•using technology to support frictionless retailer onboarding with seamless integration to retailers′ platforms;
•continuing to generate repeat business while expanding our potential customer base;
•leveraging the integration of the Acima Holdings decision engine and expanding digital payments and communication channels; and
•generating favorable adjusted EBITDA margin and strong free cash flow to fund strategic priorities and deliver and return capital to shareholders.
As we pursue our strategy, we may take advantage of merger and acquisition opportunities from time to time that advance our key initiatives, and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or dispositions or other transactions, although there can be no assurance that any such activities will be consummated.
Recent Developments
Executive Transition. On October 31, 2022, Fahmi W. Karam joined the Company as Executive Vice President - Chief Financial Officer, replacing Maureen B. Short who departed on September 28, 2022.
Dividend. On September 21, 2022, we announced that our board of directors approved a quarterly cash dividend of $0.34 per share for the fourth quarter of 2022. The dividend was paid on October 25, 2022 to our common stockholders of record as of the close of business on October 4, 2022.
Effects of Hurricanes. In September 2022, Hurricanes Fiona and Ian caused significant damage in the continental United States and surrounding territories, primarily including Florida and Puerto Rico. We continue to assess the full impact of damage caused by these storms but do not expect to incur significant charges as a result of the damage and displacement caused by these storms.
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Business and Operational Trends
Macroeconomic Conditions. Beginning in the first quarter of 2020, the worldwide spread of COVID-19 caused significant disruptions to the U.S. and world economies. In response to COVID-19, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), providing U.S. citizens and businesses with various stimulus and income tax relief benefits throughout 2020 and early 2021 to help offset immediate negative financial impacts sustained as a result of COVID-19. In addition, we proactively implemented certain response measures, including providing our Rent-A-Center Business and Acima customers with additional electronic payment methods to facilitate contactless transactions. These response measures resulted in improved customer payment behaviors contributing to higher revenues and lower merchandise losses in 2020 and the first half of 2021.
In the third quarter of 2021 we began to experience negative customer behavioral trends, including increases in delinquent payments and merchandise loss activity, resulting in declining revenues and increased operating expenses, respectively. These negative trends continued to accelerate in the fourth quarter of 2021, following the expiration of government stimulus and relief programs combined with a significant rise in the US consumer price index, resulting in significant pressure on the discretionary income levels of our consumers. This led the Company to tighten our underwriting policies in an effort to improve risk management related to the execution of new leases. The continuation of the above trends combined with the tightening of our underwriting policies, which has reduced the number of active leases and corresponding lease revenue, has continued to negatively impact our financial results, including our results of operations and operating cash flows, through the first three quarters of 2022.
In addition to the negative trends in customer behavior described above, we have also been impacted by other negative macroeconomic trends, including a condensed labor market, which has contributed to wage inflation, and global supply chain disruptions resulting in reduced product availability and rising product costs. Recent wage inflation trends have resulted in higher labor costs for the Company, while supply chain disruptions have partially contributed to declines in our revenue, due to lower product availability, and increased merchandise losses driven by higher product costs.
While the lease-to-own industry has historically remained a resilient business model throughout various economic cycles, providing credit constrained customers with a viable option to obtain merchandise they may not otherwise be able to obtain the full extent to which our risk management strategy, consumer spending behavior, or other macro-economic trends, may impact our business in future periods is uncertain. The continuation of these trends may have a material adverse impact on our financial statements, including our results of operations, operating cash flows, liquidity and capital resources.
See “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional discussion of operational impacts to our business and additional risks associated with COVID-19 and other macroeconomic conditions.
RAC Business E-commerce revenue. In recent years, e-commerce revenues have continued to increase as a percentage of total revenue in our RAC Business segment. For the three-months ended September 30, 2022 e-commerce revenues represented approximately 23% of total lease-to-own store revenues compared to 21% for the three-months ended September 30, 2021. Due to recent trends in consumer shopping behaviors and expectations, the Company believes e-commerce solutions are an important part of its lease-to-own offering. However, the Company is unable to quantify the extent to which e-commerce revenues are incremental compared to what its overall revenues would have been in the absence of those e-commerce transactions. In addition, the profitability of e-commerce transactions can be impacted by different merchandise loss factors compared to traditional store-based transactions in the RAC Business segment. Therefore, the Company is unable to determine with certainty whether the continuation of this trend toward increased e-commerce transactions will have a significant impact to our financial statements in future periods or be favorable or unfavorable to our financial results.
Results of Operations
The following discussion focuses on our results of operations and our liquidity and capital resources. You should read this discussion in conjunction with the condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2022 included in Part I, Item I of this Quarterly Report on Form 10-Q.
Overview
The following briefly summarizes certain of our financial information for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
During the first nine months of 2022, consolidated revenues decreased approximately $157.1 million, while operating profit decreased approximately $137.5 million, primarily due to a decrease in gross profit of $82.6 million driven by lower revenues and increases in other store expenses of $83.6 million described further below.
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Revenues in our Rent-A-Center Business segment decreased approximately $49.2 million for the nine months ended September 30, 2022 due to a 3.2% decrease in same store sales primarily due to decreases in merchandise sales and rentals and fees revenues of $40.7 million and $7.6 million, respectively, reflecting lower demand for consumer durable goods, mainly due to the effects from the wind-down of stimulus programs in 2021, and decreases in lease payments collected primarily due to inflationary pressures on the discretionary income of our consumers driven by recent increases in the consumer price index. Operating profit decreased approximately $85.8 million for the nine months ended September 30, 2022, primarily due to lower revenues described above, in addition to higher merchandise losses of $29.5 million, and increased labor costs of $14.5 million, driven primarily by wage inflation.
The Acima segment revenues decreased approximately $82.2 million for the nine months ended September 30, 2022, due to a $64.2 million decrease in merchandise sales and $17.9 million decrease in rentals and fees revenues, primarily attributable to inflationary pressures on consumer's discretionary income and the wind-down of the stimulus programs in 2021, in addition to effects of changes in our underwriting policies described above. Operating profit decreased approximately $50.5 million for the nine months ended September 30, 2022, primarily due to lower revenues described above and higher merchandise losses of $30.4 million.
The Mexico segment revenues increased by 6.1% for the nine months ended September 30, 2022, contributing to an increase in gross profit of 5.9%, or $1.9 million. Operating profit, however, decreased $1.6 million for the nine months ended September 30, 2022, primarily due to increased labor costs of $1.0 million and higher merchandise losses of $1.1 million.
Revenues for the Franchising segment decreased $28.5 million for the nine months ended September 30, 2022, primarily due to a decrease in inventory purchases by franchisees. Operating profit decreased $0.3 million for the nine months ended September 30, 2022 primarily due to lower revenues described above.
Cash flow from operations was $412.1 million for the nine months ended September 30, 2022. As of September 30, 2022, we held $165.6 million of cash and cash equivalents and had outstanding indebtedness of $1.4 billion.
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The following table is a reference for the discussion that follows.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||||||||||||||
| Store | |||||||||||||||||||||||||||||||||||||||||||||||
| Rentals and fees | $ | 829,459 | $ | 930,849 | $ | (101,390) | (10.9) | % | $ | 2,569,804 | $ | 2,592,788 | $ | (22,984) | (0.9) | % | |||||||||||||||||||||||||||||||
| Merchandise sales | 147,616 | 192,016 | (44,400) | (23.1) | % | 541,265 | 646,038 | (104,773) | (16.2) | % | |||||||||||||||||||||||||||||||||||||
| Installment sales | 16,718 | 17,028 | (310) | (1.8) | % | 52,355 | 52,992 | (637) | (1.2) | % | |||||||||||||||||||||||||||||||||||||
| Other | 1,340 | 1,082 | 258 | 23.8 | % | 3,698 | 3,035 | 663 | 21.8 | % | |||||||||||||||||||||||||||||||||||||
| Total store revenue | 995,133 | 1,140,975 | (145,842) | (12.8) | % | 3,167,122 | 3,294,853 | (127,731) | (3.9) | % | |||||||||||||||||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||||||||||||||||||||||||||
| Merchandise sales | 22,823 | 33,671 | (10,848) | (32.2) | % | 67,849 | 96,342 | (28,493) | (29.6) | % | |||||||||||||||||||||||||||||||||||||
| Royalty income and fees | 6,001 | 6,622 | (621) | (9.4) | % | 19,962 | 20,830 | (868) | (4.2) | % | |||||||||||||||||||||||||||||||||||||
| Total revenues | 1,023,957 | 1,181,268 | (157,311) | (13.3) | % | 3,254,933 | 3,412,025 | (157,092) | (4.6) | % | |||||||||||||||||||||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||||||||||||||||||||||||||
| Store | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of rentals and fees | 310,079 | 344,623 | (34,544) | (10.0) | % | 968,655 | 912,531 | 56,124 | 6.2 | % | |||||||||||||||||||||||||||||||||||||
| Cost of merchandise sold | 179,477 | 228,024 | (48,547) | (21.3) | % | 615,543 | 717,983 | (102,440) | (14.3) | % | |||||||||||||||||||||||||||||||||||||
| Cost of installment sales | 6,032 | 6,291 | (259) | (4.1) | % | 18,379 | 18,566 | (187) | (1.0) | % | |||||||||||||||||||||||||||||||||||||
| Total cost of store revenues | 495,588 | 578,938 | (83,350) | (14.4) | % | 1,602,577 | 1,649,080 | (46,503) | (2.8) | % | |||||||||||||||||||||||||||||||||||||
| Franchise cost of merchandise sold | 22,834 | 33,570 | (10,736) | (32.0) | % | 68,183 | 96,190 | (28,007) | (29.1) | % | |||||||||||||||||||||||||||||||||||||
| Total cost of revenues | 518,422 | 612,508 | (94,086) | (15.4) | % | 1,670,760 | 1,745,270 | (74,510) | (4.3) | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 505,535 | 568,760 | (63,225) | (11.1) | % | 1,584,173 | 1,666,755 | (82,582) | (5.0) | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||||||||||||||
| Store expenses | |||||||||||||||||||||||||||||||||||||||||||||||
| Labor | 156,192 | 163,945 | (7,753) | (4.7) | % | 486,751 | 479,989 | 6,762 | 1.4 | % | |||||||||||||||||||||||||||||||||||||
| Other store expenses | 197,847 | 189,553 | 8,294 | 4.4 | % | 624,306 | 540,698 | 83,608 | 15.5 | % | |||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 40,002 | 45,958 | (5,956) | (13.0) | % | 141,273 | 149,468 | (8,195) | (5.5) | % | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 12,798 | 13,835 | (1,037) | (7.5) | % | 40,208 | 40,794 | (586) | (1.4) | % | |||||||||||||||||||||||||||||||||||||
| Other charges | 61,619 | 88,323 | (26,704) | (30.2) | % | 185,435 | 212,095 | (26,660) | (12.6) | % | |||||||||||||||||||||||||||||||||||||
| Total operating expenses | 468,458 | 501,614 | (33,156) | (6.6) | % | 1,477,973 | 1,423,044 | 54,929 | 3.9 | % | |||||||||||||||||||||||||||||||||||||
| Operating profit | 37,077 | 67,146 | (30,069) | (44.8) | % | 106,200 | 243,711 | (137,511) | (56.4) | % | |||||||||||||||||||||||||||||||||||||
| Debt refinancing charges | — | 6,839 | (6,839) | — | % | — | 15,582 | (15,582) | — | % | |||||||||||||||||||||||||||||||||||||
| Interest, net | 22,744 | 19,712 | 3,032 | 15.4 | % | 60,665 | 52,019 | 8,646 | 16.6 | % | |||||||||||||||||||||||||||||||||||||
| Earnings before income taxes | 14,333 | 40,595 | (26,262) | (64.7) | % | 45,535 | 176,110 | (130,575) | (74.1) | % | |||||||||||||||||||||||||||||||||||||
| Income tax expense | 20,111 | 19,328 | 783 | 4.1 | % | 35,825 | 50,982 | (15,157) | (29.7) | % | |||||||||||||||||||||||||||||||||||||
| Net (loss) earnings | $ | (5,778) | $ | 21,267 | $ | (27,045) | (127.2) | % | $ | 9,710 | $ | 125,128 | $ | (115,418) | (92.2) | % | |||||||||||||||||||||||||||||||
Three Months Ended September 30, 2022, compared to Three Months Ended September 30, 2021
Store Revenue. Total store revenue decreased by $145.9 million, or 12.8%, to $995.1 million for the three months ended September 30, 2022, from $1,141.0 million for the three months ended September 30, 2021. This decrease was primarily due to decreases of approximately $119.0 million and $27.2 million in revenues in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the section “Segment Performance” below.
Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the three months ended September 30, 2022, decreased by $34.5 million, or 10.0%, to $310.1 million as compared to $344.6 million in 2021. The decrease was primarily attributable to decreases of approximately $32.4 million and $2.4 million in
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the Acima and Rent-A-Center Business segments, respectively. Cost of rentals and fees expressed as a percentage of rentals and fees revenue was 37.4% for the three months ended September 30, 2022, as compared to 37.0% in 2021.
Cost of Merchandise Sold. Cost of merchandise sold decreased by $48.5 million, or 21.3%, to $179.5 million for the three months ended September 30, 2022, from $228.0 million in 2021, primarily attributable to decreases of $45.5 million and $2.9 million in the Acima and Rent-A-Center Business segments, respectively. The gross margin percent of merchandise sales decreased to (21.6)% for the three months ended September 30, 2022, from (18.8)% in 2021.
Gross Profit. Gross profit decreased by $63.3 million, or 11.1%, to $505.5 million for the three months ended September 30, 2022, from $568.8 million in 2021, primarily due to decreases of $41.1 million and $21.7 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the section “Segment Performance” below. Gross profit as a percentage of total revenue increased to 49.4% for the three months ended September 30, 2022, as compared to 48.1% in 2021.
Store Labor. Store labor decreased by $7.7 million, or 4.7%, to $156.2 million, for the three months ended September 30, 2022, as compared to $163.9 million in 2021, primarily due to decreases of $6.2 million and $1.7 million in the Acima and Rent-A-Center Business segments, respectively. Store labor expressed as a percentage of total store revenue was 15.7% for the three months ended September 30, 2022, as compared to 14.4% in 2021.
Other Store Expenses. Other store expenses increased by $8.4 million, or 4.4%, to $197.8 million for the three months ended September 30, 2022, as compared to $189.6 million in 2021, primarily due to an increase of $18.9 million in the Rent-A-Center Business segment, partially offset by a decrease of $11.3 million in the Acima segment. Other store expenses expressed as a percentage of total store revenue were 19.9% for the three months ended September 30, 2022, compared to 16.6% in 2021.
General and Administrative Expenses. General and administrative expenses decreased by $6.0 million, or 13.0%, to $40.0 million for the three months ended September 30, 2022, as compared to $46.0 million in 2021, primarily due to decreases in overhead labor and incentive compensation. General and administrative expenses expressed as a percentage of total revenue were 3.9% for both the three months ended September 30, 2022 and 2021.
Other Charges. Other charges decreased by $26.7 million, or 30.2%, to $61.6 million for the three months ended September 30, 2022, as compared to $88.3 million in 2021. Other charges for the three months ended September 30, 2022 primarily included $42.1 million in stock compensation expense related to the vesting of a portion of the equity consideration issued in the acquisition of Acima Holdings and $18.1 million in depreciation and amortization of acquired software and intangible assets. Other charges for the three months ended September 30, 2021 primarily included $42.8 million in stock compensation expense related to equity consideration subject to vesting conditions, $33.2 million in depreciation and amortization of acquired software and intangible assets, $7.2 million in legal settlement reserves, and $4.2 million in other one-time transaction and integration costs related to the acquisition of Acima Holdings.
Operating Profit. Operating profit decreased by $30.0 million, to $37.1 million for the three months ended September 30, 2022, as compared to $67.1 million in 2021, primarily due to the decreases in gross profit of $63.3 million described above, partially offset by a net decrease of $33.2 million in operating expenses, driven by lower labor expenses, general & administrative expenses, and other charges. Operating profit expressed as a percentage of total revenue was 3.6% for the three months ended September 30, 2022, compared to 5.7% in 2021.
Income Tax Expense. Income tax expense for the three months ended September 30, 2022 was $20.1 million, as compared to $19.3 million in 2021.
Nine Months Ended September 30, 2022, compared to Nine Months Ended September 30, 2021
Store Revenue. Total store revenue decreased by $127.8 million, or 3.9%, to $3,167.1 million for the nine months ended September 30, 2022, from $3,294.9 million for the nine months ended September 30, 2021. The decrease was primarily due to decrease of approximately $82.2 million and $49.2 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the section “Segment Performance” below.
Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the nine months ended September 30, 2022, increased by $56.2 million, or 6.2%, to $968.7 million as compared to $912.5 million in 2021. This increase in cost of rentals and fees was primarily attributable to increases of $51.9 million and $3.1 million in the Acima and Rent-A-Center Business segments, respectively. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 37.7% for the nine months ended September 30, 2022 as compared to 35.2% in 2021.
Cost of Merchandise Sold. Cost of merchandise sold decreased by $102.5 million, or 14.3%, to $615.5 million for the nine months ended September 30, 2022, from $718.0 million in 2021, primarily attributable to decreases of $76.7 million and
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$25.5 million in the Acima and Rent-A-Center Business segments, respectively. The gross margin percent of merchandise sales decreased to (13.7)% for the nine months ended September 30, 2022, from (11.1)% in 2021.
Gross Profit. Gross profit decreased by $82.6 million, or 5.0%, to $1,584.2 million for the nine months ended September 30, 2022, from $1,666.8 million in 2021, due primarily to decreases of $57.4 million and $26.6 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the section “Segment Performance” below. Gross profit as a percentage of total revenue decreased to 48.7% for the nine months ended September 30, 2022, as compared to 48.8% in 2021.
Store Labor. Store labor increased by $6.8 million, or 1.4%, to $486.8 million, for the nine months ended September 30, 2022, as compared to $480.0 million in 2021, primarily attributable to an increase of $14.5 million in the Rent-A-Center Business segment, partially offset by a decrease of $8.7 million in the Acima segment. Store labor expressed as a percentage of total store revenue was 15.4% for the nine months ended September 30, 2022, as compared to 14.6% in 2021.
Other Store Expenses. Other store expenses increased by $83.6 million, to $624.3 million for the nine months ended September 30, 2022, as compared to $540.7 million in 2021, due to increases of $45.1 million and $36.6 million in the Rent-A-Center Business and Acima segments, respectively, primarily attributable to an increase of $61.1 million in merchandise losses, as discussed further in the section “Segment Performance” below. Other store expenses expressed as a percentage of total store revenue were 19.7% for the nine months ended September 30, 2022, compared to 16.4% in 2021.
General and Administrative Expenses. General and administrative expenses decreased by $8.2 million, or 5.5%, to $141.3 million for the nine months ended September 30, 2022, as compared to $149.5 million in 2021. General and administrative expenses expressed as a percentage of total revenue were 4.3% for the nine months ended September 30, 2022, compared to 4.4% in 2021.
Other Charges. Other charges decreased by $26.7 million, to $185.4 million for the nine months ended September 30, 2022, as compared to $212.1 million for the nine months ended September 30, 2021. Other charges for the nine months ended September 30, 2022 primarily included $111.5 million in stock compensation expense related to the vesting of a portion of the equity consideration issued in the acquisition of Acima Holdings, $62.5 million in depreciation and amortization of acquired software and intangible assets, $6.8 million in asset impairments, $5.2 million in employee severance, $1.2 million in state sales tax assessment reserves, and $1.2 million in Acima retail partner conversion losses. Other charges for the nine months ended September 30, 2021 primarily included $93.1 million in in stock compensation expense related to equity consideration subject to vesting conditions, $81.7 million in depreciation and amortization of acquired software and intangible assets, related to the acquisition of Acima Holdings, $25.2 million one-time transaction and integration costs related to the acquisition of Acima Holdings, and $10.7 million in legal settlement reserves.
Operating Profit. Operating profit decreased by $137.5 million, to $106.2 million for the nine months ended September 30, 2022, as compared to $243.7 million in 2021, primarily due to the decrease of $82.6 million in gross profit, in addition to an increase of $54.9 million in operating expenses, as described above. Operating profit expressed as a percentage of total revenue was 3.3% for the nine months ended September 30, 2022, compared to 7.1% in 2021.
Income Tax Expense. Income tax expense for the nine months ended September 30, 2022 was $35.8 million, as compared to $51.0 million in 2021, primarily due to a decrease in earnings before taxes of approximately $130.6 million. The effective tax rate was 78.7% for the nine months ended September 30, 2022, compared to 28.9% in 2021, primarily due to the difference between recorded goodwill and goodwill recognized for tax purposes, as a result of the Aggregate Stock Consideration from the Acima Holdings transaction subject to restricted stock agreements. In addition, the effective tax rate for the nine months ended September 30, 2021, was further impacted by discrete income tax items related to excess tax benefits from the vesting of our annual restricted stock award grants and stock option exercises, and the release of domestic and foreign tax valuation allowances.
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Segment Performance
Rent-A-Center Business segment
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 473,755 | $ | 500,986 | $ | (27,231) | (5.4) | % | $ | 1,482,445 | $ | 1,531,686 | $ | (49,241) | (3.2) | % | |||||||||||||||||||||||||||||||
| Gross profit | 334,892 | 356,590 | (21,698) | (6.1) | % | 1,046,332 | 1,072,946 | (26,614) | (2.5) | % | |||||||||||||||||||||||||||||||||||||
| Operating profit | 71,999 | 109,272 | (37,273) | (34.1) | % | 271,283 | 357,036 | (85,753) | (24.0) | % | |||||||||||||||||||||||||||||||||||||
| Change in same store revenue | (5.3) | % | (3.2) | % | |||||||||||||||||||||||||||||||||||||||||||
Stores in same store revenue calculation(1) | 1,760 | 1,760 | |||||||||||||||||||||||||||||||||||||||||||||
(1) Same store sales generally represents revenue earned in stores that were operated by us for 13 months or more and are reported on a constant currency basis as a percentage of total revenue earned in stores of the segment during the indicated period. We exclude from the same store sales base any store that receives a certain level of customer accounts from closed stores or acquisitions. The receiving store will be eligible for inclusion in the same store sales base in the 30th full month following account transfer. Due to the COVID-19 pandemic and related temporary store closures, all 32 stores in Puerto Rico were excluded starting in March 2020 through March 2022.
Revenues. The decrease in revenue for the three and nine months ended September 30, 2022, as compared to 2021, were primarily due to decreases in same store sales of 5.3% and 3.2%, respectively, driven by decreases in rentals and fees of $19.2 million for the three months ended September 30, 2022, and merchandise sales of $40.7 million for the nine months ended September 30, 2022. Decreases in revenue reflect lower demand for consumer durable goods mainly due to the effects from the wind-down of stimulus programs in 2021, combined with recent increases in the US consumer price index and corresponding pressure on the discretionary income of our customers. As of September 30, 2022, the segment's lease portfolio balance was approximately $2.4 million, or 1.7%, lower than the prior year balance as of September 30, 2021.
Gross Profit. Gross profit decreased for the three and nine months ended September 30, 2022, as compared to 2021, driven primarily by the decrease in revenues described above. Gross profit as a percentage of segment revenues was 70.7% and 70.6% for the three and nine months ended September 30, 2022, as compared to 71.2% and 70.0% for the corresponding period in 2021.
Operating Profit. Operating profit as a percentage of segment revenues was 15.2% and 18.3% for the three and nine months ended September 30, 2022, compared to 21.8% and 23.3% for the corresponding period in 2021. The decrease in operating margin for the three and nine months ended September 30, 2022, as compared to 2021, was partially driven by decreases in revenues and gross profit described above, in addition to increases in losses due to customer stolen merchandise of $10.5 million and $25.2 million for the three and nine months ended September 30, 2022, respectively, and increased labor costs of $14.5 million for the nine months ended September 30, 2022, driven by wage inflation. Charge-offs in our Rent-A-Center Business lease-to-own stores due to customer stolen merchandise, expressed as a percentage of Rent-A-Center Business lease-to-own revenues, were approximately 5.8% and 4.6% for the three and nine months ended September 30, 2022, compared to 3.4% and 2.8% for the corresponding periods in 2021. Charge-offs in our Rent-A-Center Business lease-to-own stores due to other merchandise losses, expressed as a percentage of Rent-A-Center Business lease-to-own revenues, were approximately 1.7% for both the three and nine months ended September 30, 2022, compared to approximately 1.8% and 1.6% for the corresponding periods in 2021. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
Acima segment
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 504,448 | $ | 623,445 | $ | (118,997) | (19.1) | % | $ | 1,633,994 | $ | 1,716,174 | $ | (82,180) | (4.8) | % | |||||||||||||||||||||||||||||||
| Gross profit | 152,434 | 193,527 | (41,093) | (21.2) | % | 481,742 | 539,181 | (57,439) | (10.7) | % | |||||||||||||||||||||||||||||||||||||
| Operating profit | 48,885 | 51,884 | (2,999) | (5.8) | % | 94,318 | 144,797 | (50,479) | (34.9) | % | |||||||||||||||||||||||||||||||||||||
Revenues. The decrease in revenues for the three months ended September 30, 2022, as compared to 2021, was primarily due to decreases in rentals and fees revenues and merchandise sales revenues of $82.2 million and $36.9 million respectively. The decrease in revenue for the nine months ended September 30, 2022, as compared to 2021, was primarily due to decreases in merchandise sales revenues and rentals and fees revenues of $64.2 million and $17.9 million, respectively. Consistent with our RAC Business segment, decreases in revenue reflect lower demand for consumer durable goods mainly due to the effects from
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the wind-down of stimulus programs in 2021, combined with recent increases in the US consumer price index and corresponding pressure on the discretionary income of our customers. In addition, decreases in revenue were also attributable to the tightening of our underwriting policies, in an effort to improve risk management related to the execution of new leases, as described further in Business and Operational Trends.
Gross Profit. Gross profit as a percentage of segment revenues decreased to 30.2% and 29.5% for the three and nine months ended September 30, 2022, compared to 31.0% and 31.4% for the corresponding periods in 2021.
Operating Profit. Operating profit as a percentage of segment revenues increased to 9.7% for the three months ended September 30, 2022 compared to 8.3% for the three months ended September 30, 2021, but decreased to 5.8% for the nine months ended September 30, 2022 compared to 8.4% for the nine months ended September 30, 2021. Operating profit margin increased for the three months ended September 30, 2022 as compared to the same period in 2021, partially due to lower revenues described above, in addition to lower customer stolen merchandise losses of $12.6 million. Operating profit margin decreased for the nine months ended September 30, 2022 as compared to the same period in 2021, partially due to lower revenues described above, in addition to higher customer stolen merchandise losses of $29.8 million. Charge-offs in our Acima locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 9.0% and 11.2% for the three and nine months ended September 30, 2022, compared to 9.3% and 8.9% for the three and nine months ended September 30, 2021. Charge-offs in our Acima locations due to other merchandise losses, expressed as a percentage of revenues, were approximately 0.0% and 0.1% for the three and nine months ended September 30, 2022, compared to 0.0% and 0.1% for the corresponding periods in 2021.
Mexico segment
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 16,041 | $ | 15,917 | $ | 124 | 0.8 | % | $ | 48,454 | $ | 45,670 | $ | 2,784 | 6.1 | % | |||||||||||||||||||||||||||||||
| Gross profit | 11,330 | 11,293 | 37 | 0.3 | % | 34,242 | 32,323 | 1,919 | 5.9 | % | |||||||||||||||||||||||||||||||||||||
| Operating profit | 996 | 2,285 | (1,289) | (56.4) | % | 5,011 | 6,659 | (1,648) | (24.7) | % | |||||||||||||||||||||||||||||||||||||
| Change in same store revenue | 0.2 | % | 4.9 | % | |||||||||||||||||||||||||||||||||||||||||||
Stores in same store revenue calculation(1) | 109 | 109 | |||||||||||||||||||||||||||||||||||||||||||||
(1) Same store sales generally represents revenue earned in stores that were operated by us for 13 months or more and are reported on a constant currency basis as a percentage of total revenue earned in stores of the segment during the indicated period. We exclude from the same store sales base any store that receives a certain level of customer accounts from closed stores or acquisitions. The receiving store will be eligible for inclusion in the same store sales base in the 30th full month following account transfer.
Revenues. Revenues were negatively impacted by exchange rate fluctuations of approximately $0.2 million and $0.3 million for the three and nine months ended September 30, 2022, as compared to the same periods in 2021. On a constant currency basis, revenues for the three and nine months ended September 30, 2022 increased approximately $0.3 million and $3.1 million, compared to the corresponding periods in 2021.
Gross Profit. Gross profit was negatively impacted by exchange rate fluctuations of approximately $0.2 million and $0.3 million for the three and nine months ended September 30, 2022, as compared to the same periods in 2021. On a constant currency basis, gross profit for the three and nine months ended September 30, 2022 increased by approximately $0.2 million and $2.2 million as compared to the same periods in 2021. Gross profit as a percentage of segment revenues was 70.6% and 70.7% for the three and nine months ended September 30, 2022, compared to 70.9% and 70.8% for the corresponding periods in 2021.
Operating Profit. Operating profit for the three and nine months ended September 30, 2022 was minimally impacted by exchange rate fluctuations as compared to the same periods in 2021. Operating profit as a percentage of segment revenues decreased to 6.2% and 10.3% for the three and nine months ended September 30, 2022, compared to 14.4% and 14.6% for the corresponding periods in 2021.
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Franchising segment
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 29,713 | $ | 40,920 | $ | (11,207) | (27.4) | % | $ | 90,040 | $ | 118,495 | $ | (28,455) | (24.0) | % | |||||||||||||||||||||||||||||||
| Gross profit | 6,879 | 7,350 | (471) | (6.4) | % | 21,857 | 22,305 | (448) | (2.0) | % | |||||||||||||||||||||||||||||||||||||
| Operating profit | 5,077 | 4,816 | 261 | 5.4 | % | 15,170 | 15,495 | (325) | (2.1) | % | |||||||||||||||||||||||||||||||||||||
Revenues. Revenues decreased for the three and nine months ended September 30, 2022 compared to the corresponding periods in 2021, primarily due a decrease of $28.5 million in inventory purchases by franchisees.
Gross Profit. Gross profit as a percentage of segment revenues was 23.2% and 24.3% for the three and nine months ended September 30, 2022, compared to 18.0% and 18.8% for the corresponding periods in 2021.
Operating Profit. Operating profit as a percentage of segment revenues was 17.1% and 16.8%, for the three and nine months ended September 30, 2022 compared to 11.8% and 13.1% for the corresponding periods in 2021.
Liquidity and Capital Resources
Overview. For the nine months ended September 30, 2022, we generated $412.1 million in operating cash flow. We used cash in the amount of $296.6 million for debt repayments, $60.4 million for dividends, $49.4 million for capital expenditures, and $29.8 for share repurchases, offset by cash proceeds from indebtedness of $90.0 million. We ended the third quarter of 2022 with $165.6 million of cash and cash equivalents and outstanding indebtedness of $1.4 billion.
Analysis of Cash Flow. Cash provided by operating activities increased by $85.9 million to $412.1 million for the nine months ended September 30, 2022, from $326.2 million in 2021, primarily due to a decrease in inventory purchases, partially offset by a decrease of $115.4 million in net earnings.
Cash used in investing activities decreased to $50.2 million for the nine months ended September 30, 2022, compared to $1,319.4 million in 2021, a change of $1,269.2 million, primarily due to the acquisition of Acima Holdings in February 2021.
Cash (used in) provided by financing activities was $(304.5) million for the nine months ended September 30, 2022, compared to $992.8 million in 2021, representing a change of $1,297.3 million. The change was primarily due to debt proceeds of $1.5 billion received in the first quarter of 2021 used to fund the acquisition of Acima Holdings in February 2021, partially offset by debt issuance costs of $46.1 million paid in the first quarter of 2021 in connection with the receipt of debt proceeds, in addition to lower debt repayments of $70.3 million for the nine months ended September 30, 2022, compared to the same period in 2021.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases. Other capital requirements include expenditures for property assets, debt service, and dividends. Our primary sources of liquidity have been cash provided by operations.
We utilize our ABL Credit Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw funds under the ABL Credit Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities. We believe cash flow generated from operations and availability under our ABL Credit Facility will be sufficient to fund our operations during the next 12 months. At October 26, 2022, we had approximately $99.4 million in cash on hand, and $373.8 million available under our ABL Credit Facility.
Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2017 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing. The Protecting Americans from Tax Hikes Act of 2015 (“PATH”) extended the 50% bonus depreciation to 2015 and through September 26, 2017, when it was updated by the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act allows 100% bonus depreciation for certain property placed in service between September 27, 2017 and December 31, 2022, at which point it will begin to phase out. The bonus depreciation provided by the Tax Act resulted in an estimated benefit of $349 million for us in 2021. We estimate the remaining tax deferral associated with bonus depreciation from these Acts is approximately $402 million at December 31, 2021, of which approximately 80%, or $320 million, will reverse in 2022, and the majority of the remainder will reverse between 2023 and 2024.
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Merchandise Losses. Merchandise losses consist of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Customer stolen merchandise(1) | $ | 77,005 | $ | 77,233 | $ | 262,236 | $ | 202,909 | |||||||||||||||
Other merchandise losses(2) | 8,146 | 8,079 | 26,577 | 24,839 | |||||||||||||||||||
| Total merchandise losses | $ | 85,151 | $ | 85,312 | $ | 288,813 | $ | 227,748 | |||||||||||||||
(1)Increase in customer stolen merchandise losses for the nine months ended September 30, 2022, compared to the corresponding period in 2021, is primarily due to increases in the US consumer price index and corresponding pressure on the discretionary income of our consumers, as described in the Results of Operations section above. In addition, the increase for the nine months ended September 30, 2022, is also partly attributable to the timing of the acquisition of Acima Holdings on February 17, 2021, resulting in a partial period of losses for the first quarter of 2021.
(2)Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
Capital Expenditures. We make capital expenditures in order to maintain our existing operations, acquire new capital assets in new and acquired stores and invest in information technology. We spent $49.4 million and $45.9 million on capital expenditures during the nine months ended September 30, 2022 and 2021, respectively.
Acquisitions and New Location Openings. During the first nine months of 2022, we acquired four lease-to-own store locations and customer accounts for an aggregate purchase price of approximately $0.8 million. The store locations were closed upon acquisition and consolidated into existing store operations in our Rent-A-Center Business segment.
The table below summarizes the store location activity for the nine-month period ended September 30, 2022 for our Rent-A-Center Business, Mexico and Franchising operating segments.
| Rent-A-Center Business | Mexico | Franchising | Total | ||||||||||||||||||||
Locations at beginning of period(1) | 1,846 | 123 | 466 | 2,435 | |||||||||||||||||||
| New location openings | 14 | 3 | 1 | 18 | |||||||||||||||||||
| Closed locations | |||||||||||||||||||||||
Merged with existing locations | (12) | (1) | — | (13) | |||||||||||||||||||
Sold or closed with no surviving location | — | — | (15) | (15) | |||||||||||||||||||
Locations at end of period(1) | 1,848 | 125 | 452 | 2,425 | |||||||||||||||||||
Acquired locations closed and accounts merged with existing locations | 4 | — | — | 4 | |||||||||||||||||||
Total approximate purchase price of acquired stores (in millions) | $ | 0.8 | $ | — | $ | — | $ | 0.8 | |||||||||||||||
(1) Does not include locations in our Acima segment.
Senior Debt. On February 17, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a five-year asset-based revolving credit facility with commitments of $550 million and a letter of credit sublimit of $150 million, which commitments may be increased, at our option and under certain conditions, by up to an additional $125 million in the aggregate (as amended on August 10, 2022, the “ABL Credit Facility”). Under the ABL Credit Facility, we may borrow only up to the lesser of the level of the then-current borrowing base and the aggregate amount of commitments under the ABL Credit Facility. The borrowing base is tied to the amount of eligible installment sales accounts, inventory and eligible rental contracts, reduced by certain reserves. The ABL Credit Facility bears interest at a fluctuating rate determined by reference to Term SOFR plus an applicable margin of 1.50% to 2.00%, which, as of October 26, 2022, was 5.935%. A commitment fee equal to 0.250% to 0.375% of the unused portion of the ABL Credit Facility fluctuates dependent upon average utilization for the prior month as defined by a pricing grid included in the documentation governing the ABL Credit Facility. Loans under the ABL Credit Facility may be borrowed, repaid and re-borrowed until February 17, 2026, at which time all amounts borrowed must be repaid.
The obligations under the ABL Credit Facility are guaranteed by us and certain of our wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations under the ABL Credit Facility and such guarantees are secured on a first-priority basis by all of our and our subsidiary guarantors’ accounts, inventory, deposit accounts, securities accounts, cash and cash equivalents, rental agreements, general intangibles (other than equity interests in our subsidiaries), chattel paper, instruments, documents, letter of credit rights, commercial tort claims related to the foregoing and other related assets and all proceeds thereof related to the foregoing, subject to permitted liens and certain exceptions (such assets, collectively, the “ABL Priority Collateral”) and a second-priority basis in substantially all other present and future tangible and intangible personal property of ours and the subsidiary guarantors, subject to certain exceptions.
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On February 17, 2021, we also entered into a term loan credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a seven-year $875 million senior secured term loan facility (as amended on September 21, 2021, the “Term Loan Facility”). Subject in each case to certain restrictions and conditions, we may add up to $500 million of incremental term loan facilities to the Term Loan Facility or utilize incremental capacity under the Term Loan Facility at any time by issuing or incurring incremental equivalent term debt. Interest on borrowings under the Term Loan Facility is payable at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin of 3.25%, subject to a 0.50% LIBOR floor. Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.000% per annum of the original aggregate principal amount thereof, with the remaining balance due at final maturity. The Term Loan Facility is secured by a first-priority security interest in substantially all of present and future tangible and intangible personal property of the Company and the subsidiary guarantors, other than the ABL Priority Collateral, and by a second-priority security interest in the ABL Priority Collateral, subject to certain exceptions. The obligations under the Term Loan Facility are guaranteed by the Company and the Company’s material wholly-owned domestic restricted subsidiaries that also guarantee the ABL Credit Facility.
The Term Loan Facility was fully drawn at the closing of the Acima Holdings acquisition to fund a portion of the Aggregate Cash Consideration, repay certain our outstanding indebtedness under the previous term loan facility, repay all outstanding indebtedness of Acima and its subsidiaries and pay certain fees and expenses incurred in connection with the Acima Holdings acquisition.
At October 26, 2022, we had outstanding borrowings of $861.9 million under our Term Loan Facility and available commitments of $373.8 million under our ABL Credit Facility, net of letters of credit.
See Note 7 of our condensed consolidated financial statements included in this report for additional information regarding our senior debt.
Senior Notes. On February 17, 2021, we issued $450.0 million in senior unsecured notes due February 15, 2029, at par value, bearing interest at 6.375% (the “Notes”), the proceeds of which were used to fund a portion of the Aggregate Cash Consideration upon closing of the Acima Holdings acquisition. Interest on the Notes is payable in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. We may redeem some or all of the Notes at any time on or after February 15, 2024 for cash at the redemption prices set forth in the indenture governing the Notes, plus accrued and unpaid interest to, but not including, the redemption date. Prior to February 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at a redemption price of 106.375% plus accrued and unpaid interest to, but not including, the redemption date. In addition, we may redeem some or all of the Notes prior to February 15, 2024, at a redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” premium. If we experience specific kinds of change of control, it will be required to offer to purchase the Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
Operating Leases. We lease space for all of our Rent-A-Center Business and Mexico stores under operating leases expiring at various times through 2032. In addition we lease space for certain support facilities under operating leases expiring at various times through 2032. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas. As of September 30, 2022, our total remaining obligation for existing store lease contracts was approximately $351.7 million.
We lease vehicles for all of our Rent-A-Center Business stores under operating leases with lease terms expiring 12 months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our Condensed Consolidated Balance Sheets. As of September 30, 2022, our total remaining minimum obligation for existing Rent-A-Center Business vehicle lease contracts was approximately $0.8 million.
We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2026 with rental rates adjusted periodically for inflation. As of September 30, 2022, our total remaining obligation for existing Mexico vehicle lease contracts was approximately $1.6 million.
See Note 5 of our condensed consolidated financial statements included in this report for additional discussion of our store operating leases.
Uncertain Tax Position. As of September 30, 2022, we have recorded $6.4 million in uncertain tax positions. Although these positions represent a potential future cash liability to us, the amounts and timing of such payments are uncertain.
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Seasonality. Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year. Generally, our customers will more frequently exercise the early purchase option on their existing lease purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year, primarily due to the receipt of federal income tax refunds.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. As of September 30, 2022, we believe the impact of any recently issued standards that are not yet effective are either not applicable to us at this time, or will not have a material impact on our consolidated financial statements upon adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by our senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. As a result of such assessment, we may enter into swap contracts or other interest rate protection agreements from time to time to mitigate this risk.
As of September 30, 2022, we had $450 million in Notes outstanding at a fixed interest rate of 6.375%. We also had $861.9 million outstanding under the Term Loan Facility at interest rates indexed to the Eurodollar rate or the prime rate and $90.0 million outstanding under our ABL Credit Facility at interest rates indexed to Term SOFR. Carrying value approximates fair value for such indebtedness. Based on our overall interest rate exposure at September 30, 2022, a hypothetical 1.0% increase or decrease in market interest rates would have the effect of causing an additional $9.7 million additional annualized pre-tax charge or credit to our condensed consolidated statement of operations. We have not entered into any interest rate swap agreements as of September 30, 2022.
Foreign Currency Translation
We are exposed to market risk from foreign exchange rate fluctuations of the Mexican peso to the U.S. dollar as the financial position and operating results of our stores in Mexico are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.
Item 4. Controls and Procedures.
Disclosure controls and procedures. In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of September 30, 2022, our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) were effective.
Changes in internal controls over financial reporting. For the quarter ended September 30, 2022, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – Other Information
Item 1. Legal Proceedings
From time to time, we, along with our subsidiaries, are party to various legal proceedings and governmental inquiries arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not currently expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred. Nevertheless, we cannot predict the impact of future developments affecting our claims and lawsuits, and any resolution of a claim or lawsuit or reserve within a particular fiscal period may materially and adversely impact our results of operations for that period. In addition, claims and lawsuits against us may seek injunctive or other relief that requires changes to our business practices or operations and it is possible that any required changes may materially and adversely impact
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our business, financial condition, results of operations or reputation. Please see Note 13 of our condensed consolidated financial statements included in this report for additional discussion of certain of our legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A of Part 1, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases of our common stock the Company made during the three months ended September 30, 2022:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total number of shares purchased as part of publicly announced plans or programs(1) | Maximum dollar value of shares that may yet be purchased under publicly announced plans or programs (in millions)(1) | |||||||||||||||||||||||||
| August 1, 2022 - August 31, 2022 | 37,789 | $ | 27.43 | 37,789 | $ | 359.0 | |||||||||||||||||||||||
| September 1, 2022 - September 30, 2022 | 1,180,524 | $ | 24.35 | 1,180,524 | $ | 330.2 | |||||||||||||||||||||||
(1) Shares repurchased pursuant to the share repurchase program publicly announced on December 2021 that allows for the repurchase of an aggregate of up to $500.0 million of shares of our common stock through open market and privately negotiated transactions from time to time.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits.
| Exhibit No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 3.3 | |||||
| 3.4 | |||||
| 3.5 | |||||
| 4.1 | |||||
| 4.2 | |||||
| 4.3 | |||||
| 10.1* | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1* | |||||
| 32.2* | |||||
| 101.INS* | XBRL Instance Document - The instance document does not appear in the interactive data files because its XBRL tags are embedded within the inline XBRL document | ||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104* | Cover page Interactive Data File (embedded within the inline XBRL document contained in Exhibit 101) | ||||
| * | Filed herewith. | ||||
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RENT-A-CENTER, INC. | ||||||||
| By: | /S/ FAHMI W. KARAM | |||||||
| Fahmi W. Karam | ||||||||
| EVP, Chief Financial Officer | ||||||||
Date: November 3, 2022
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