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 Income (Loss)
|
|
Total
|
|
Shares
|
|
Amount
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
109,910
|
|
|
$
|
1,099
|
|
|
$
|
838,436
|
|
|
$
|
805,924
|
|
|
$
|
(1,347,677
|
)
|
|
$
|
(11,265
|
)
|
|
$
|
286,517
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
7,323
|
|
|
—
|
|
|
—
|
|
|
7,323
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
521
|
|
|
521
|
|
Exercise of stock options
|
284
|
|
|
3
|
|
|
2,889
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,892
|
|
Vesting of restricted share units
|
218
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares withheld for employee taxes on awards vested & exercised
|
—
|
|
|
—
|
|
|
(1,734
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,734
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
709
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
709
|
|
ASC 842 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,976
|
)
|
|
—
|
|
|
—
|
|
|
(1,976
|
)
|
Balance at March 31, 2019
|
110,412
|
|
|
1,104
|
|
|
840,298
|
|
|
811,271
|
|
|
(1,347,677
|
)
|
|
(10,744
|
)
|
|
294,252
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
94,455
|
|
|
—
|
|
|
—
|
|
|
94,455
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(217
|
)
|
|
(217
|
)
|
Exercise of stock options
|
101
|
|
|
1
|
|
|
1,417
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,418
|
|
Vesting of restricted share units
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,982
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,982
|
|
Balance at June 30, 2019
|
110,562
|
|
|
$
|
1,105
|
|
|
$
|
843,697
|
|
|
$
|
905,726
|
|
|
$
|
(1,347,677
|
)
|
|
$
|
(10,961
|
)
|
|
$
|
391,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total
|
|
Shares
|
|
Amount
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
109,682
|
|
|
$
|
1,097
|
|
|
$
|
831,271
|
|
|
$
|
798,743
|
|
|
$
|
(1,347,677
|
)
|
|
$
|
(10,991
|
)
|
|
$
|
272,443
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,843
|
)
|
|
—
|
|
|
—
|
|
|
(19,843
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,648
|
|
|
1,648
|
|
Exercise of stock options
|
36
|
|
|
—
|
|
|
374
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
374
|
|
Vesting of restricted share units
|
66
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Shares withheld for employee taxes on awards vested & exercised
|
—
|
|
|
—
|
|
|
(195
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(195
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,862
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,862
|
|
ASC 606 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,311
|
)
|
|
—
|
|
|
—
|
|
|
(1,311
|
)
|
Balance at March 31, 2018
|
109,784
|
|
|
1,097
|
|
|
833,311
|
|
|
777,589
|
|
|
(1,347,677
|
)
|
|
(9,343
|
)
|
|
254,977
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
13,753
|
|
|
—
|
|
|
—
|
|
|
13,753
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,125
|
)
|
|
(2,125
|
)
|
Exercise of stock options
|
61
|
|
|
1
|
|
|
596
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
597
|
|
Vesting of restricted share units
|
25
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,133
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,133
|
|
Balance at June 30, 2018
|
109,870
|
|
|
$
|
1,098
|
|
|
$
|
835,040
|
|
|
$
|
791,342
|
|
|
$
|
(1,347,677
|
)
|
|
$
|
(11,468
|
)
|
|
$
|
268,335
|
|
See accompanying notes to consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
Net earnings (loss)
|
$
|
101,778
|
|
|
$
|
(6,090
|
)
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
|
|
|
|
Depreciation of rental merchandise
|
309,211
|
|
|
308,776
|
|
Bad debt expense
|
5,978
|
|
|
5,846
|
|
Stock-based compensation expense
|
2,691
|
|
|
2,995
|
|
Depreciation of property assets
|
30,809
|
|
|
35,017
|
|
Loss on sale or disposal of property assets
|
1,472
|
|
|
2,423
|
|
Amortization of intangibles
|
85
|
|
|
310
|
|
Amortization of financing fees
|
1,958
|
|
|
2,701
|
|
Deferred income taxes
|
10,814
|
|
|
1,492
|
|
Changes in operating assets and liabilities, net of effects of acquisitions
|
|
|
|
Rental merchandise
|
(253,259
|
)
|
|
(229,068
|
)
|
Receivables
|
(2,995
|
)
|
|
(5,700
|
)
|
Prepaid expenses and other assets
|
15,384
|
|
|
10,982
|
|
Operating lease right-of-use assets and lease liabilities
|
5,868
|
|
|
—
|
|
Accounts payable – trade
|
(18,182
|
)
|
|
2,044
|
|
Accrued liabilities
|
(26,194
|
)
|
|
11,178
|
|
Net cash provided by operating activities
|
185,418
|
|
|
142,906
|
|
Cash flows from investing activities
|
|
|
|
Purchase of property assets
|
(5,088
|
)
|
|
(15,695
|
)
|
Proceeds from sale of property assets
|
13,792
|
|
|
14,792
|
|
Hurricane insurance recovery proceeds
|
995
|
|
|
—
|
|
Acquisitions of businesses
|
(155
|
)
|
|
(761
|
)
|
Net cash provided by (used in) investing activities
|
9,544
|
|
|
(1,664
|
)
|
Cash flows from financing activities
|
|
|
|
Exercise of stock options
|
4,310
|
|
|
970
|
|
Shares withheld for payment of employee tax withholdings
|
(1,733
|
)
|
|
(271
|
)
|
Debt issuance costs
|
(157
|
)
|
|
—
|
|
Proceeds from debt
|
5,400
|
|
|
26,850
|
|
Repayments of debt
|
(5,400
|
)
|
|
(125,010
|
)
|
Net cash provided by (used in) financing activities
|
2,420
|
|
|
(97,461
|
)
|
Effect of exchange rate changes on cash
|
366
|
|
|
84
|
|
Net increase in cash and cash equivalents
|
197,748
|
|
|
43,865
|
|
Cash and cash equivalents at beginning of period
|
155,391
|
|
|
72,968
|
|
Cash and cash equivalents at end of period
|
$
|
353,139
|
|
|
$
|
116,833
|
|
See accompanying notes to condensed consolidated financial statements.
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 (“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, 2018
. 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.
These financial statements 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 “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: Core U.S., Acceptance Now, Mexico and Franchising.
Our Core U.S. segment consists of company-owned rent-to-own stores in the United States and Puerto Rico that lease household durable goods to customers on a rent-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 Acceptance Now segment, which operates in the United States and Puerto Rico, generally offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks located within such retailers’ locations. Those kiosks can be staffed by an Acceptance Now employee (staffed locations) or employ a virtual solution where customers initiate the rent-to-own transaction online in the retailers' locations using our virtual solution (virtual locations).
Our Mexico segment consists of our company-owned rent-to-own stores in Mexico that lease household durable goods to customers on a rent-to-own basis.
Rent-A-Center Franchising International, Inc., an indirect, wholly owned subsidiary of Rent-A-Center, is a franchisor of rent-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 rent-to-own transaction. The balance of our Franchising segment’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues.
Newly Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which replaces existing accounting literature relating to the classification of, and accounting for, leases. Under ASU 2016-02, a company must recognize for all leases (with the exception of leases with terms of 12 months or less) a liability representing a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset representing the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged, with certain improvements to align lessor accounting with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers.
Adoption under ASU 2016-02 requires the use of a modified retrospective transition method to measure leases at the beginning of the earliest period presented in the consolidated financial statements. In July 2018, the FASB issued ASU 2018-11, allowing companies to apply a transition method for adoption of the new standard as of the adoption date, with recognition of any cumulative-effects as adjustments to the opening balance of retained earnings in the period of adoption. We adopted these ASU's beginning January 1, 2019 and elected the transition method under ASU 2018-11.
The company's rent-to-own agreements which comprise the majority of our annual revenue fall within the scope of ASU 2016-02 under lessor accounting, however, the new standard does not significantly affect the timing of recognition or presentation of revenue for our rental contracts.
As a lessee, the new standard affected a substantial portion of our lease contracts. As of
June 30, 2019
, we have
$265.8 million
operating lease right-of-use assets and
$271.6 million
operating lease liabilities in our condensed consolidated balance sheet. Upon adoption, we identified impairment losses related to closure of our product service centers and Core U.S. stores resulting in a cumulative-effect decrease of
$2.0 million
, net of tax, to our January 1, 2019 retained earnings balance. There were no significant effects to our condensed consolidated statements of operations or condensed consolidated statements of cash flows.
We elected a package of optional practical expedients in our adoption of the new standard, including the option to retain the current classification for leases entered into prior to the date of adoption; the option not to reassess initial direct costs for capitalization
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
for leases entered into prior to the date of adoption; and the option not to separate lease and non-lease components for our rent-to-own agreements as a lessor, and our real estate, and certain equipment leases, as a lessee.
In conjunction with the adoption of the new lease accounting standard, we implemented a new back-office lease administration and accounting system to support the new accounting and disclosure requirements as a lessee. In addition, we implemented changes to our previous accounting policies, processes, and internal controls to ensure compliance with the new standard.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which allows a company to reclassify to retained earnings the disproportionate income tax effects of the Tax Act on items with accumulated other comprehensive income that the FASB refers to as having been stranded in accumulated other comprehensive income. The adoption of ASU 2018-02 was required for us beginning January 1, 2019. We elected not to exercise the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded.
Note 2 -
Revenues
The following table disaggregates our revenue for the periods ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Core U.S.
|
|
Acceptance Now
|
|
Mexico
|
|
Franchising
|
|
Consolidated
|
(In thousands)
|
|
Store
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
$
|
399,799
|
|
|
$
|
139,104
|
|
|
$
|
12,777
|
|
|
$
|
—
|
|
|
$
|
551,680
|
|
Merchandise sales
|
32,935
|
|
|
37,140
|
|
|
767
|
|
|
—
|
|
|
70,842
|
|
Installment sales
|
17,270
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,270
|
|
Other
|
1,092
|
|
|
145
|
|
|
7
|
|
|
—
|
|
|
1,244
|
|
Total store revenues
|
451,096
|
|
|
176,389
|
|
|
13,551
|
|
|
—
|
|
|
641,036
|
|
Franchise
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
—
|
|
|
—
|
|
|
—
|
|
|
10,673
|
|
|
10,673
|
|
Royalty income and fees
|
—
|
|
|
—
|
|
|
—
|
|
|
4,216
|
|
|
4,216
|
|
Total revenues
|
$
|
451,096
|
|
|
$
|
176,389
|
|
|
$
|
13,551
|
|
|
$
|
14,889
|
|
|
$
|
655,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Core U.S.
|
|
Acceptance Now
|
|
Mexico
|
|
Franchising
|
|
Consolidated
|
(In thousands)
|
|
Store
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
$
|
807,379
|
|
|
$
|
282,297
|
|
|
$
|
25,358
|
|
|
$
|
—
|
|
|
$
|
1,115,034
|
|
Merchandise sales
|
83,493
|
|
|
90,296
|
|
|
1,523
|
|
|
—
|
|
|
175,312
|
|
Installment sales
|
32,706
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,706
|
|
Other
|
1,575
|
|
|
318
|
|
|
15
|
|
|
—
|
|
|
1,908
|
|
Total store revenues
|
925,153
|
|
|
372,911
|
|
|
26,896
|
|
|
—
|
|
|
1,324,960
|
|
Franchise
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
—
|
|
|
—
|
|
|
—
|
|
|
19,129
|
|
|
19,129
|
|
Royalty income and fees
|
—
|
|
|
—
|
|
|
—
|
|
|
8,530
|
|
|
8,530
|
|
Total revenues
|
$
|
925,153
|
|
|
$
|
372,911
|
|
|
$
|
26,896
|
|
|
$
|
27,659
|
|
|
$
|
1,352,619
|
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Core U.S.
|
|
Acceptance Now
|
|
Mexico
|
|
Franchising
|
|
Consolidated
|
(In thousands)
|
|
Store
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
$
|
410,108
|
|
|
$
|
140,799
|
|
|
$
|
11,496
|
|
|
$
|
—
|
|
|
$
|
562,403
|
|
Merchandise sales
|
26,109
|
|
|
38,077
|
|
|
804
|
|
|
—
|
|
|
64,990
|
|
Installment sales
|
17,374
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,374
|
|
Other
|
2,129
|
|
|
135
|
|
|
7
|
|
|
—
|
|
|
2,271
|
|
Total store revenues
|
455,720
|
|
|
179,011
|
|
|
12,307
|
|
|
—
|
|
|
647,038
|
|
Franchise
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
—
|
|
|
—
|
|
|
—
|
|
|
4,880
|
|
|
4,880
|
|
Royalty income and fees
|
—
|
|
|
—
|
|
|
—
|
|
|
3,812
|
|
|
3,812
|
|
Total revenues
|
$
|
455,720
|
|
|
$
|
179,011
|
|
|
$
|
12,307
|
|
|
$
|
8,692
|
|
|
$
|
655,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Core U.S.
|
|
Acceptance Now
|
|
Mexico
|
|
Franchising
|
|
Consolidated
|
(In thousands)
|
|
Store
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
$
|
822,750
|
|
|
$
|
281,623
|
|
|
$
|
22,744
|
|
|
$
|
—
|
|
|
$
|
1,127,117
|
|
Merchandise sales
|
76,693
|
|
|
94,083
|
|
|
1,570
|
|
|
—
|
|
|
172,346
|
|
Installment sales
|
33,778
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,778
|
|
Other
|
4,540
|
|
|
291
|
|
|
24
|
|
|
—
|
|
|
4,855
|
|
Total store revenues
|
937,761
|
|
|
375,997
|
|
|
24,338
|
|
|
—
|
|
|
1,338,096
|
|
Franchise
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
—
|
|
|
—
|
|
|
—
|
|
|
8,514
|
|
|
8,514
|
|
Royalty income and fees
|
—
|
|
|
—
|
|
|
—
|
|
|
7,163
|
|
|
7,163
|
|
Total revenues
|
$
|
937,761
|
|
|
$
|
375,997
|
|
|
$
|
24,338
|
|
|
$
|
15,677
|
|
|
$
|
1,353,773
|
|
Rental-Purchase Agreements
Core U.S., Acceptance Now, and Mexico
Rentals and Fees.
Merchandise is leased to customers pursuant to rental purchase agreements, which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. At the expiration of each rental term, customers renew the rental agreement by pre-paying for the next rental term. Generally, the customer has the right to acquire title of the merchandise either through a purchase option or through payment of all required rental terms. Customers can terminate the agreement at the end of any rental term without penalty. Therefore rental transactions are accounted for as operating leases and rental revenue is recognized over the rental term. Cash received for rental payments, including processing fees, prior to the period in which it should be recognized, is deferred and recognized according to the rental term. Revenue related to various payment, reinstatement or late fees is recognized when paid by the customer at the point service is provided. Rental merchandise is depreciated using the income forecasting method and is recognized in cost of sales over the rental term. We 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. 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. At
June 30, 2019
and
December 31, 2018
, we had
$41.6 million
and
$42.1 million
, respectively, in deferred revenue included in accrued liabilities related to our rental purchase agreements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Revenue from contracts with customers
Core U.S., Acceptance Now, and Mexico
Merchandise Sales.
Merchandise sales include payments received for the exercise of the early purchase option offered through our rental purchase 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 and receive a refund for payments previously made towards the plan. At
June 30, 2019
and
December 31, 2018
, we had
$2.8 million
and
$3.0 million
, respectively, in deferred revenue included in accrued liabilities related to extended service plans.
Other.
Other revenue primarily consisted of external maintenance and repair services provided by the Company’s service department, in addition to other miscellaneous product plans offered to our rental and installment customers. We completed the shut down of our service department operations early in the first quarter of 2019. 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 recognized as rental payments and 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
June 30, 2019
and
December 31, 2018
, we had
$4.4 million
and
$4.1 million
, respectively, in deferred revenue included in accrued liabilities related to franchise fees.
Note 3 -
Receivables and Allowance for Doubtful Accounts
Receivables consist of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Installment sales receivable
|
$
|
52,332
|
|
|
$
|
54,746
|
|
Trade and notes receivables
|
17,683
|
|
|
19,782
|
|
Total receivables
|
70,015
|
|
|
74,528
|
|
Less allowance for doubtful accounts
|
(4,349
|
)
|
|
(4,883
|
)
|
Total receivables, net of allowance for doubtful accounts
|
$
|
65,666
|
|
|
$
|
69,645
|
|
The allowance for doubtful accounts related to installment sales receivable was
$2.9 million
and
$3.6 million
at
June 30, 2019
and
December 31, 2018
, respectively. The allowance for doubtful accounts related to trade and notes receivable was
$1.4 million
and
$1.3 million
at
June 30, 2019
and
December 31, 2018
, respectively.
Changes in our allowance for doubtful accounts are as follows:
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
Beginning allowance for doubtful accounts
|
$
|
4,883
|
|
Bad debt expense
|
5,978
|
|
Accounts written off
|
(6,773
|
)
|
Recoveries
|
261
|
|
Ending allowance for doubtful accounts
|
$
|
4,349
|
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 4 -
Leases
We lease space for all of our Core U.S. and Mexico stores under operating leases expiring at various times through
2024
. 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. We have elected not to use the short-term lease exemption for our real estate leases. Therefore, we include month-to-month leases in operating lease right-of-use assets and operating lease liabilities on our condensed consolidated balance sheet. In certain store sales, we enter into lease assignment agreements with the buyer, but remain as 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 on our condensed consolidated balance sheet.
We lease vehicles for all of our Core U.S. 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 sheet. We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2022 with rental rates adjusted periodically for inflation. Finally, we have a minimal number of equipment leases, primarily related to temporary storage and certain back office technology hardware assets.
For all of the leases described above, we have elected to use the practical expedient not to separate the lease and non-lease components and account for these as a single component. We have also elected the practical expedients that remove the requirement to reassess whether expired or existing contracts contain leases and the requirement to reassess the lease classification for any existing leases prior to the adoption date.
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
|
|
Six Months Ended
|
(in thousands)
|
June 30, 2019
|
|
June 30, 2019
|
Operating lease cost included in other store expenses
(1)
|
$
|
38,232
|
|
|
$
|
74,785
|
|
Operating lease cost included in other (gains) and charges
|
5,111
|
|
|
7,252
|
|
Sublease receipts
|
(1,818
|
)
|
|
(3,494
|
)
|
Total operating lease charges
|
$
|
41,525
|
|
|
$
|
78,543
|
|
(1)
Includes short-term lease costs, which are not significant.
Supplemental cash flow information related to leases:
|
|
|
|
|
|
Six Months Ended
|
(in thousands)
|
June 30, 2019
|
Cash paid for amounts included in measurement of operating lease liabilities
|
$
|
61,333
|
|
Cash paid for short-term operating leases not included in operating lease liabilities
|
14,451
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
10,540
|
|
Weighted-average discount rate and weighted-average remaining lease term:
|
|
|
|
(in thousands)
|
June 30, 2019
|
Weighted-average discount rate
(1)
|
8.0
|
%
|
Weighted-average remaining lease term (in years)
|
3
|
|
(1)
January 1, 2019 incremental borrowing rate was used for leases in existence at the time of adoption of ASU 2016-02.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Reconciliation of undiscounted operating lease liabilities to the present value operating lease liabilities at
June 30, 2019
:
|
|
|
|
|
(In thousands)
|
Operating Leases
|
2019
|
$
|
61,288
|
|
2020
|
104,264
|
|
2021
|
72,264
|
|
2022
|
43,637
|
|
2023
|
19,536
|
|
Thereafter
|
5,893
|
|
Total undiscounted operating lease liabilities
|
306,882
|
|
Less: Interest
|
(35,247
|
)
|
Total present value of operating lease liabilities
|
$
|
271,635
|
|
In accordance with ASC 840, future minimum rental payments for operating leases with remaining lease terms in excess of one year, at
December 31, 2018
:
|
|
|
|
|
(In thousands)
|
Operating Leases
|
2019
|
$
|
145,345
|
|
2020
|
116,785
|
|
2021
|
80,362
|
|
2022
|
47,417
|
|
2023
|
16,460
|
|
Thereafter
|
2,280
|
|
Total future minimum rental payments
|
408,649
|
|
Note 5 -
Senior Debt
Until August 5, 2019, we were party to a Credit Agreement with BBVA Compass Bank, HSBC, and SunTrust Bank, as syndication agents, JPMorgan Chase Bank, N.A., as administrative agent (the "Agent"), and the several lenders from time to time parties thereto, dated March 19, 2014, as amended on February 1, 2016, September 30, 2016, March 31, 2017, June 6, 2017, and December 12, 2018 (the “Fifth Amendment”) and as so amended, (the "Prior Credit Agreement"), which provided prior to its termination a senior credit facility consisting of a
$200 million
revolving credit facility (the "Prior Revolving Facility").
There were
no
outstanding borrowings under the Prior Revolving Facility at
June 30, 2019
or
December 31, 2018
. Total unamortized debt issuance costs reported in the Condensed Consolidated Balance Sheet at
June 30, 2019
and
December 31, 2018
were
$1.4 million
and
$2.6 million
, respectively. The Prior Revolving Facility was scheduled to mature on
December 31, 2019
. We also utilized the Prior Revolving Facility for the issuance of letters of credit. As of
June 30, 2019
, issued letters of credit under the Prior Revolving Facility amounted to
$92 million
in the aggregate.
Borrowings under the Prior Revolving Facility bore interest at varying rates equal to either the
Eurodollar rate
plus
1.50%
to
3.00%
, or the
prime
rate plus
0.50%
to
2.00%
(ABR), at our election. The margins on the Eurodollar loans and on the ABR loans for borrowings under the Prior Revolving Facility were
1.75%
and
0.75%
, respectively, at
June 30, 2019
. A commitment fee equal to
0.30%
to
0.50%
of the unused portion of the Prior Revolving Facility was payable quarterly and fluctuated dependent upon increases or decreases in our Consolidated Total Leverage Ratio as of the end of the previous quarter as defined by a pricing grid included in the Prior Credit Agreement. The commitment fee for the second quarter of 2019 was
$0.6 million
, equal to
0.40%
of the unused portion of the Prior Revolving Facility based on our Total Leverage Ratio as of December 31, 2018.
In connection with entering into the Fifth Amendment to the Prior Credit Agreement, we recorded a write-down of previously unamortized debt issuance costs of approximately
$0.5 million
in the fourth quarter of 2018. In addition, we paid arrangement and amendment fees to the Agent and the lenders that provided their consent to the Fifth Amendment of approximately
$2.1 million
, which were capitalized in the fourth quarter of 2018 and will be amortized to interest expense over the remaining term of the Prior Credit Agreement.
On August 5, 2019, (the "Closing Date") we entered into a new a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) providing for a seven-year
$200 million
senior secured term loan facility and an Asset Based Loan Credit Agreement (the “ABL Credit Agreement”) providing a five-year asset-based revolving credit facility (the “ABL Credit Facility”) with commitments of
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
$300 million
, the proceeds of which were used, in part, to prepay in full and terminate commitments under the Prior Credit Agreement (the "Refinancing"). In connection with the Refinancing, we irrevocably deposited
$551,019,061.81
, the redemption price for all of our outstanding senior notes, and the indentures under which the senior notes were issued were satisfied and discharged. The senior notes will be redeemed on August 15, 2019, at a price equal to
100%
of their principal amount plus accrued but unpaid interest.
Term Loan Credit Agreement
The Term Loan Credit Agreement, which matures on August 5, 2026, 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. Interest on the Term Loan Credit Agreement will accrue at the Eurodollar rate plus an applicable margin equal to
4.50%
.
The Term Loan Credit Agreement permits the Company to prepay the term loans, in whole or in part, without penalty on or after the six-month anniversary of the Closing Date. It also permits the Company to incur incremental term loans in an aggregate amount equal to $150 million plus the amount of voluntary prepayments of the term loans and an unlimited amount subject to a pro forma consolidated senior secured leverage ratio of not greater than
2.00
to 1.00, subject to certain other conditions.
The obligations under the Term Loan Credit Agreement are guaranteed by certain of our subsidiaries. The Term Loan Credit Agreement and the guarantees are secured on a first-priority basis by substantially all of the tangible and intangible assets of the company and the guarantors, other than collateral subject to a first-priority lien under the ABL Credit Agreement, consisting of, among other things, accounts receivable, inventory and bank accounts (and funds on deposit therein), in which the Term Loan Credit Agreement and the guarantees have a second-priority security interest, in each case, subject to certain exceptions.
The Term Loan Credit Agreement contains covenants that are usual and customary for facilities and transactions of this type and that, among other things, restrict the ability of the company and its restricted subsidiaries to:
|
|
•
|
create certain liens and enter into certain sale and lease-back transactions;
|
|
|
•
|
create, assume, incur or guarantee certain indebtedness;
|
|
|
•
|
pay dividends or make other distributions on, or repurchase or redeem, the company’s capital stock or certain other debt;
|
|
|
•
|
make other restricted payments; and
|
|
|
•
|
consolidate or merge with, or convey, transfer or lease all or substantially all of the company’s and its restricted subsidiaries’ assets, to another person.
|
These covenants are subject to a number of other limitations and exceptions set forth in the Term Loan Credit Agreement.
The Term Loan Credit Agreement 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 the Company and its significant subsidiaries.
ABL Credit Agreement
The ABL Credit Facility will mature on August 5, 2024. The Borrowers (as defined in the ABL Credit Agreement) may borrow only up to the lesser of the level of the then-current borrowing base and the committed maximum borrowing capacity of $300 million. Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of
1.50%
to
2.00%
. 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 ABL Credit Agreement.
Letters of credit are limited to the lesser of (x) $150 million, subject to certain limitations, and (y) the aggregate unused availability then in effect.
Subject to certain conditions, the ABL Credit Facility may be expanded by up to $100 million in additional commitments, subject to a pro forma fixed charge coverage ratio being greater than
1.10
to 1.00.
The obligations under the ABL Credit Agreement are guaranteed by the company and certain of the company’s subsidiaries. The ABL Credit Agreement and the guarantees are secured on a first-priority basis on all our and the guarantors’ accounts receivable, inventory and bank accounts (and funds on deposit therein) and a second-priority basis on all of the tangible and intangible assets (second in priority to the liens securing the Term Loan Credit Agreement) of such persons, in each case, subject to certain exceptions.
The ABL Credit Agreement contains covenants that are usual and customary for facilities and transactions of this type and are substantially the same as covenants in the Term Loan Credit Agreement. The ABL Credit Facility also requires the maintenance of a Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of
1.10
to 1.00 at the end of each fiscal
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
quarter when either (i) certain specified events of default have occurred and are continuing or (ii) availability is less than or equal to the greater of $33.75 million and 15% of the line cap then in effect.
The ABL Credit Agreement provides for customary events of default that are substantially the same as events of default in the Term Loan Credit Agreement.
Liquidity
Our primary liquidity requirements are for rental merchandise purchases. Other capital requirements include expenditures for property assets and debt service. Our primary sources of liquidity have been cash provided by operations. We also 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 our 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.
Note 6 -
Senior Notes
On November 2, 2010, we issued
$300 million
in senior unsecured notes due November 2020, bearing interest at 6.625%, pursuant to an indenture dated November 2, 2010, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repay approximately
$200.0 million
of outstanding term debt under a prior credit agreement. The remaining net proceeds were used to repurchase shares of our common stock. The principal amount of the 6.625% notes outstanding as of
June 30, 2019
and
December 31, 2018
, was
$292.7 million
, reduced by
$0.8 million
and
$1.2 million
of unamortized issuance costs, respectively.
On May 2, 2013, we issued
$250 million
in senior unsecured notes due May 2021, bearing interest at 4.75%, pursuant to an indenture dated May 2, 2013, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repurchase shares of our common stock under a
$200.0 million
accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under a prior credit agreement. The principal amount of the 4.75% notes outstanding as of
June 30, 2019
and
December 31, 2018
, was
$250.0 million
, reduced by
$1.2 million
and
$1.5 million
of unamortized issuance costs, respectively.
Certain of Rent-A-Center's subsidiaries fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center with respect to the 6.625% notes and the 4.75% notes. The only direct or indirect subsidiaries of Rent-A-Center that were not guarantors were minor subsidiaries. There were no restrictions on the ability of any of the subsidiary guarantors to transfer funds to Rent-A-Center in the form of loans, advances or dividends, except as provided by applicable law.
On July 15, 2019, Rent-A-Center instructed the trustee under the indentures governing the 6.625% and 4.75% senior notes to issue a conditional notice of full redemption to the holders of the outstanding 6.625% and 4.75% senior notes. On August 5, 2019, in connection with the Refinancing, Rent-A-Center irrevocably deposited the redemption price for the 6.625% and 4.75% senior notes with the trustee, and the indentures were satisfied and discharged. The 6.625% and 4.75% senior notes will be redeemed on August 15, 2019, at a price equal to
100%
of their principal amount plus accrued and unpaid interest to, but excluding, the redemption date. As a result, Rent-A-Center and its subsidiary guarantors have been released from their respective obligations under the 6.625% and 4.75% senior notes as of August 5, 2019.
Note 7 -
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. There were no changes in the methods and assumptions used in measuring fair value during the period.
At
June 30, 2019
, our financial instruments include cash and cash equivalents, receivables, payables and senior notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at
June 30, 2019
and
December 31, 2018
, because of the short maturities of these instruments.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The fair value of our senior notes was based on Level 1 inputs and was as follows at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Difference
|
|
Carrying Value
|
|
Fair Value
|
|
Difference
|
6.625% senior notes
|
$
|
292,740
|
|
|
$
|
292,740
|
|
|
$
|
—
|
|
|
$
|
292,740
|
|
|
$
|
285,509
|
|
|
$
|
(7,231
|
)
|
4.75% senior notes
|
250,000
|
|
|
248,750
|
|
|
(1,250
|
)
|
|
250,000
|
|
|
239,050
|
|
|
(10,950
|
)
|
Total senior notes
|
$
|
542,740
|
|
|
$
|
541,490
|
|
|
$
|
(1,250
|
)
|
|
$
|
542,740
|
|
|
$
|
524,559
|
|
|
$
|
(18,181
|
)
|
Note 8 -
Other (Gains) and Charges
Cost Savings Initiatives.
During 2018, we began execution of multiple cost savings initiatives, including reductions in overhead and supply chain, resulting in pre-tax charges during the first half of 2019 consisting of
$5.0 million
in lease impairment charges,
$2.8 million
in severance and other payroll-related costs,
$1.6 million
in other miscellaneous shutdown costs, and
$0.4 million
in disposal of fixed assets. Costs incurred during the first six months of 2018 related to these initiatives included pre-tax charges of
$6.8 million
in contract termination fees,
$6.2 million
in severance and other payroll-related costs,
$1.9 million
in legal and advisory fees,
$1.0 million
in other miscellaneous shutdown costs,
$0.9 million
in lease obligation costs,
$0.4 million
related to the write-down of capitalized software, and
$0.1 million
in disposal of fixed assets.
Store Consolidation Plan.
During the first half of 2019, we closed
66
Core U.S. stores, resulting in pre-tax charges of
$2.3 million
in lease impairment charges,
$0.9 million
in other miscellaneous shutdown costs,
$0.7 million
in disposal of fixed assets, and
$0.3 million
in severance and other payroll-related costs. During the first six months of 2018, we closed
109
Core U.S. stores and
8
locations in Mexico, resulting in pre-tax charges of
$8.7 million
, consisting of
$7.0 million
in lease obligation costs,
$1.0 million
in disposal of fixed assets,
$0.5 million
in other miscellaneous shutdown costs, and
$0.2 million
in severance and other payroll-related costs.
Vintage Settlement.
On April 22, 2019, we agreed to settle (the "Vintage Settlement") all litigation with Vintage Rodeo Parent, LLC, Vintage Rodeo Acquisition, Inc., Vintage Capital Management, LLC (collectively, "Vintage Capital") and B. Riley Financial, Inc. ("B. Riley") relating to our termination of the Agreement and Plan of Merger (the "Merger Agreement") among Vintage Rodeo Parent, LLC, Vintage Rodeo Acquisition, Inc. and Rent-A-Center, Inc. In the Vintage Settlement, we received a payment of
$92.5 million
in cash in May 2019, of which we retained net pre-tax proceeds of approximately
$80 million
following payment of all remaining costs, fees and expenses relating to the termination (the "Vintage Settlement Proceeds"). The Vintage Settlement was recorded as a pre-tax gain upon receipt.
Write-down of Capitalized Software.
During the first six months of 2018 we discontinued certain IT software projects and as a result incurred pre-tax charges of
$1.9 million
, related to the write-down of capitalized assets.
Activity with respect to other charges for the
six months ended June 30, 2019
is summarized in the below table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Accrued Charges at December 31, 2018
|
|
Charges & Adjustments
|
|
Payments & Adjustments
|
|
Accrued Charges at June 30, 2019
|
Cash charges:
|
|
|
|
|
|
|
|
Labor reduction costs
|
$
|
7,623
|
|
|
$
|
3,145
|
|
|
$
|
(8,525
|
)
|
|
$
|
2,243
|
|
Lease obligation costs
(1)
|
4,882
|
|
|
—
|
|
|
(4,882
|
)
|
|
—
|
|
Other miscellaneous
|
—
|
|
|
2,565
|
|
|
(2,565
|
)
|
|
—
|
|
Total cash charges
|
$
|
12,505
|
|
|
5,710
|
|
|
$
|
(15,972
|
)
|
|
$
|
2,243
|
|
Non-cash charges:
|
|
|
|
|
|
|
|
Asset impairments
(2)
|
|
|
8,283
|
|
|
|
|
|
Other
(3)
|
|
|
(58,160
|
)
|
|
|
|
|
Total other (gains) and charges
|
|
|
$
|
(44,167
|
)
|
|
|
|
|
(1)
Upon adoption of ASU 2016-02, previously accrued lease obligation costs related to discontinued operations were eliminated and are now reflected as an adjustment to our operating lease right-of-use assets in our condensed consolidated balance sheet.
(2)
Includes impairments of operating lease right-of-use assets and other property assets related to the closure of RTO stores and our product service centers in the first half of 2019.
(3)
Other primarily includes the Vintage Settlement Proceeds, offset by the Blair class action settlement (refer to
Note 11
for additional details), incremental legal and professional fees related to the termination of the Merger Agreement, and state tax audit assessments.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 9 -
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. All operating segments offer merchandise from four basic product categories: consumer electronics, appliances, computers, furniture and accessories. Our Core U.S. and Franchising segments also offer smartphones.
Segment information for the three and six months ended
June 30, 2019
and
2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
Core U.S.
|
$
|
451,096
|
|
|
$
|
455,720
|
|
|
$
|
925,153
|
|
|
$
|
937,761
|
|
Acceptance Now
|
176,389
|
|
|
179,011
|
|
|
372,911
|
|
|
375,997
|
|
Mexico
|
13,551
|
|
|
12,307
|
|
|
26,896
|
|
|
24,338
|
|
Franchising
|
14,889
|
|
|
8,692
|
|
|
27,659
|
|
|
15,677
|
|
Total revenues
|
$
|
655,925
|
|
|
$
|
655,730
|
|
|
$
|
1,352,619
|
|
|
$
|
1,353,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gross profit
|
|
|
|
|
|
|
|
Core U.S.
|
$
|
313,871
|
|
|
$
|
325,219
|
|
|
$
|
638,511
|
|
|
$
|
661,460
|
|
Acceptance Now
|
80,380
|
|
|
86,050
|
|
|
166,708
|
|
|
174,855
|
|
Mexico
|
9,411
|
|
|
8,549
|
|
|
18,680
|
|
|
16,871
|
|
Franchising
|
4,409
|
|
|
4,068
|
|
|
9,038
|
|
|
7,678
|
|
Total gross profit
|
$
|
408,071
|
|
|
$
|
423,886
|
|
|
$
|
832,937
|
|
|
$
|
860,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating profit
|
|
|
|
|
|
|
|
Core U.S.
|
$
|
64,925
|
|
|
$
|
43,527
|
|
|
$
|
118,236
|
|
|
$
|
71,914
|
|
Acceptance Now
|
22,734
|
|
|
29,157
|
|
|
44,247
|
|
|
44,587
|
|
Mexico
|
1,474
|
|
|
887
|
|
|
2,693
|
|
|
1,384
|
|
Franchising
|
1,803
|
|
|
1,909
|
|
|
3,581
|
|
|
3,165
|
|
Total segments
|
90,936
|
|
|
75,480
|
|
|
168,757
|
|
|
121,050
|
|
Corporate
|
38,893
|
|
|
(48,329
|
)
|
|
(21,579
|
)
|
|
(104,169
|
)
|
Total operating profit
|
$
|
129,829
|
|
|
$
|
27,151
|
|
|
$
|
147,178
|
|
|
$
|
16,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Core U.S.
|
$
|
5,110
|
|
|
$
|
6,440
|
|
|
$
|
10,582
|
|
|
$
|
13,266
|
|
Acceptance Now
|
313
|
|
|
432
|
|
|
661
|
|
|
867
|
|
Mexico
|
95
|
|
|
273
|
|
|
235
|
|
|
617
|
|
Franchising
|
9
|
|
|
44
|
|
|
39
|
|
|
88
|
|
Total segments
|
5,527
|
|
|
7,189
|
|
|
11,517
|
|
|
14,838
|
|
Corporate
|
9,594
|
|
|
10,239
|
|
|
19,377
|
|
|
20,490
|
|
Total depreciation and amortization
|
$
|
15,121
|
|
|
$
|
17,428
|
|
|
$
|
30,894
|
|
|
$
|
35,328
|
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Capital expenditures
|
|
|
|
|
|
|
|
Core U.S.
|
$
|
907
|
|
|
$
|
4,325
|
|
|
$
|
1,465
|
|
|
$
|
9,215
|
|
Acceptance Now
|
54
|
|
|
35
|
|
|
101
|
|
|
80
|
|
Mexico
|
27
|
|
|
35
|
|
|
30
|
|
|
38
|
|
Total segments
|
988
|
|
|
4,395
|
|
|
1,596
|
|
|
9,333
|
|
Corporate
|
1,592
|
|
|
2,651
|
|
|
3,492
|
|
|
6,362
|
|
Total capital expenditures
|
$
|
2,580
|
|
|
$
|
7,046
|
|
|
$
|
5,088
|
|
|
$
|
15,695
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
On rent rental merchandise, net
|
|
|
|
Core U.S.
|
$
|
392,904
|
|
|
$
|
424,829
|
|
Acceptance Now
|
216,988
|
|
|
242,978
|
|
Mexico
|
15,973
|
|
|
16,001
|
|
Total on rent rental merchandise, net
|
$
|
625,865
|
|
|
$
|
683,808
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Held for rent rental merchandise, net
|
|
|
|
Core U.S.
|
$
|
107,778
|
|
|
$
|
117,294
|
|
Acceptance Now
|
982
|
|
|
1,207
|
|
Mexico
|
4,493
|
|
|
5,161
|
|
Total held for rent rental merchandise, net
|
$
|
113,253
|
|
|
$
|
123,662
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Assets by segment
|
|
|
|
Core U.S.
|
$
|
922,482
|
|
|
$
|
714,914
|
|
Acceptance Now
|
281,835
|
|
|
312,151
|
|
Mexico
|
36,605
|
|
|
29,321
|
|
Franchising
|
7,159
|
|
|
4,287
|
|
Total segments
|
1,248,081
|
|
|
1,060,673
|
|
Corporate
|
496,132
|
|
|
336,244
|
|
Total assets
|
$
|
1,744,213
|
|
|
$
|
1,396,917
|
|
Note 10 -
Stock-Based Compensation
We recognized
$2.0 million
and
$1.1 million
in pre-tax compensation expense related to stock options and restricted stock units during the
three months ended June 30, 2019
and
2018
, respectively, and
$2.7 million
and
$3.0 million
during the
six months ended June 30, 2019
and
2018
, respectively. During the
six months ended June 30, 2019
, we granted approximately
255,000
stock options,
278,000
market-based performance restricted stock units and
193,000
time-vesting restricted stock units. The stock options granted were valued using a Black-Scholes pricing model with the following assumptions: an expected volatility of
48.28%
to
55.17%
, a risk-free interest rate of
2.30%
to
2.34%
, and an expected term of
3.50
to
5.75 years
. The weighted-average exercise price of the options granted during the
six months ended June 30, 2019
was
$20.87
and the weighted-average grant-date fair value was
$9.33
. Performance-based restricted stock units are valued using a Monte Carlo simulation. Time-vesting restricted stock units are valued using the closing price on the trading day immediately preceding the day of the grant. The weighted-average grant date fair value of the market-based performance and time-vesting restricted stock units granted during the
six months ended June 30, 2019
was
$15.83
and
$11.42
, respectively.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 11 -
Contingencies
From time to time, the Company, along with our subsidiaries, is party to various legal proceedings 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 expect these losses to have a material impact on our condensed consolidated financial statements if and when such losses are incurred.
We are subject to unclaimed property audits by states in the ordinary course of business. The property subject to review in the audit process include 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 in compliance with applicable escheat laws.
Blair v. Rent-A-Center, Inc.
This matter is a state-wide class action complaint originally filed on March 13, 2017 in the Federal District Court for the Northern District of California. The complaint alleges various claims, including that our cash sales and total rent to own prices exceed the pricing permitted under the Karnette Rental-Purchase Act. Following a court-ordered mediation on March 28, 2019, we reached an agreement in principle to settle this matter for a total of
$13 million
, including attorneys’ fees. The settlement is in the documentation process and is subject to approval by the court. We have denied any liability in the settlement and agreed to the settlement in order to avoid additional expensive, time-consuming litigation. We recorded the pre-tax charge for this settlement in the first quarter of 2019.
Vintage Rodeo Parent, LLC, Vintage Rodeo Acquisition, Inc. and Vintage Capital Management, LLC, and B. Riley Financial, Inc. v. Rent-A-Center, Inc.
As announced on April 22, 2019, we agreed to settle all litigation with Vintage Capital and B. Riley relating to our termination of the Merger Agreement. In the settlement, we received a payment of
$92.5 million
in cash in May 2019. The Vintage Settlement was recorded as a pre-tax gain upon receipt.
Velma Russell v. Acceptance Now.
This purported class action arising out of calls made by Acceptance Now to customers’ reference (s) was filed on January 29, 2019 in Massachusetts state court. Specifically, plaintiffs seek to certify a class representing any references of customers (within the state of Massachusetts) during the 4 years prior to the filing date that were contacted by Acceptance Now more frequently during a 12 month period than is permitted by Massachusetts state law. The plaintiffs are seeking injunctive relief and statutory damages of
$25
per reference which may be tripled to
$75
per reference. References are not parties to our consumer arbitration agreement. We operate
12
Acceptance Now locations in Massachusetts. We intend to vigorously defend these claims; however, we cannot assure you that we will be found to have no liability in this matter.
Federal Trade Commission civil investigative demand.
In April 2019, along with other rent-to-own companies, we received a civil investigative demand from the Federal Trade Commission ("FTC") seeking information regarding certain transactions involving the purchase and sale of customer lease agreements, and whether such transactions violated the FTC Act. Although we believe such transactions were in compliance with the FTC Act, this inquiry could lead to an enforcement action and/or a consent order, and substantial costs. The Company is in the process of responding to this inquiry from the FTC.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 12 -
Earnings (Loss) Per Common Share
Summarized basic and diluted earnings per common share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands, except per share data)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net earnings (loss)
|
$
|
94,455
|
|
|
$
|
13,753
|
|
|
$
|
101,778
|
|
|
$
|
(6,090
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
54,153
|
|
|
53,450
|
|
|
54,042
|
|
|
53,428
|
|
Effect of dilutive stock awards
(1)
|
1,553
|
|
|
845
|
|
|
1,559
|
|
|
—
|
|
Weighted-average dilutive shares
|
55,706
|
|
|
54,295
|
|
|
55,601
|
|
|
53,428
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
$
|
1.74
|
|
|
$
|
0.26
|
|
|
$
|
1.88
|
|
|
$
|
(0.11
|
)
|
Diluted earnings (loss) per common share
|
$
|
1.70
|
|
|
$
|
0.25
|
|
|
$
|
1.83
|
|
|
$
|
(0.11
|
)
|
Anti-dilutive securities excluded from diluted loss per common share:
|
|
|
|
|
|
|
|
Anti-dilutive restricted share units
|
—
|
|
|
—
|
|
|
—
|
|
|
797
|
|
Anti-dilutive performance share units
|
263
|
|
|
222
|
|
|
263
|
|
|
1,172
|
|
Anti-dilutive stock options
|
1,107
|
|
|
2,411
|
|
|
1,123
|
|
|
2,801
|
|
|
|
(1)
|
There was no dilutive effect to the loss per common share for the six months ended June 30, 2018 due to the net loss incurred for respective period.
|
RENT-A-CENTER, INC. AND SUBSIDIARIES