Filing Context
The provided text is a Form 10-Q filed by Rent-A-Center, Inc., not Upbound Group, Inc. The report covers the quarter and nine months ended September 30, 2010; financial statements are unaudited. The company operated 3,001 company-owned stores, 151 RAC Acceptance kiosks, 326 stores offering financial services, and 206 franchised ColorTyme stores at quarter-end.
Financial Performance
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $664.6 million | $671.3 million | $2,054.5 million | $2,079.0 million |
| Operating profit | $69.4 million | $64.4 million | $240.9 million | $221.7 million |
| Operating margin | 10.4% | 9.6% | 11.7% | 10.7% |
| Net earnings | $40.5 million | $36.8 million | $139.8 million | $124.2 million |
| Diluted EPS | $0.62 | $0.55 | $2.11 | $1.86 |
- Q3 revenue declined 1.0%, while nine-month revenue declined 1.2%. The declines primarily reflected the November 2009 divestiture of the prepaid telecommunications and energy subsidiary.
- Q3 same-store revenue increased 0.3% to $579.9 million; nine-month same-store revenue decreased 0.1% to $1,748.2 million.
- Q3 operating profit increased 7.8%; nine-month operating profit increased 8.7%, primarily from lower operating expenses and cost of rentals.
- Q3 net earnings increased 9.9%; nine-month net earnings increased 12.6%.
- Interest expense rose 25.1% in Q3 because the weighted-average interest rate increased to 3.96% from 2.70%, despite lower debt. For nine months, interest expense declined 17.7% to $18.2 million.
- Cash dividends were $0.06 per share in both the quarter and nine-month period in 2010; no dividend was reported for the comparable 2009 periods.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $192.7 million for the nine months ended September 30, 2010, down from $297.8 million in 2009, primarily because of increased rental merchandise purchases and a lower deferred-tax benefit.
- Cash used in investing activities was $60.4 million, including $57.4 million of capital expenditures and $3.1 million for acquisitions.
- Cash used in financing activities was $153.6 million, including $170.9 million of debt repayments, $45.9 million of share repurchases, and $3.9 million of dividends, partially offset by $55.9 million of new borrowings.
- Cash and cash equivalents were $80.8 million at September 30, 2010, compared with $101.8 million at December 31, 2009.
- Senior debt was $596.1 million, down from $711.2 million at year-end 2009. The debt was variable-rate and indexed to prime or Eurodollar rates.
- At October 25, 2010, the company reported $101.7 million of cash and $232.6 million available under revolving credit facilities, including a $20.0 million Intrust Bank line.
- The company reported compliance with its debt covenants: actual consolidated leverage was 1.42:1 versus a maximum of 3.25:1, and fixed-charge coverage was 2.03:1 versus a minimum of 1.35:1.
- Contractual cash obligations totaled $1.131 billion, including $596.1 million of senior debt, $533.8 million of operating leases, and $1.2 million of capital leases.
Material Changes and Unusual Items
- The 2009 divestiture reduced reported revenue comparisons but also reduced associated costs and corporate expenses.
- The company repurchased 2.18 million shares for approximately $45.9 million during the first nine months, including 1.91 million shares for $39.5 million in Q3. The board later increased the repurchase authorization from $600 million to $800 million.
- Goodwill write-down charges related to stores sold or closed were $0.4 million in Q3 and $2.6 million for the nine-month period.
- The company opened 20 stores, acquired two stores, acquired accounts from 13 locations, consolidated 18 stores, and sold ten stores during the first nine months. It also closed 75 financial-services locations, including 39 closures attributed to legislative changes.
- Management was exploring strategic alternatives for the financial-services business, potentially including a sale or divestiture, but stated that no material adverse effect was anticipated.
- The company estimated that the 2010 Jobs Act would increase 2010 operating cash flow by approximately $2.0 million. It estimated approximately $93.0 million of related tax deferral remaining at December 31, 2010, with approximately $66.0 million expected to reverse in 2011.
Outlook, Risks and Contingencies
Management stated that operating cash flow and available credit were expected to fund liquidity requirements for the next twelve months. No specific earnings or revenue guidance was provided.
- Key risks include weak consumer spending, unemployment, declining or slow-growing same-store sales, regulatory changes affecting rent-to-own and financial-services products, and challenges executing new growth strategies.
- Variable-rate debt creates interest-rate exposure; management estimated that a hypothetical 1.0% rate change would affect annualized pretax earnings by approximately $6.0 million. No interest-rate swaps were outstanding.
- The company had ordinary-course litigation and historically had paid material settlements, but reported no accrual for probable litigation losses at September 30, 2010.
- An IRS dispute involving the 2003 through 2007 tax years was scheduled for trial in early 2011. Management did not expect the matter or state examinations to materially affect the financial statements.
- Self-insurance liabilities were $135.0 million, compared with $128.8 million at December 31, 2009. Actual claims costs could exceed recorded amounts.
- Debt agreements restrict additional debt, acquisitions, capital expenditures, dividends and share repurchases, and permit acceleration upon specified defaults or a change of control.
- Guarantees supporting franchisee financing had a maximum exposure of $45.0 million, with $17.1 million outstanding at September 30, 2010.
Investor Verification Items
- Issuer identity: Verify whether this filing was intended for Rent-A-Center, Inc. rather than Upbound Group, Inc.
- Reconcile reported revenue trends after the prepaid telecommunications and energy divestiture.
- Review debt maturities, variable-rate exposure, covenant calculations and revolving-credit availability.
- Assess the sustainability of improved margins despite lower revenue and reduced operating cash flow.
- Monitor the strategic alternatives process for the financial-services business.
- Review litigation, IRS and state tax matters, self-insurance reserves, and franchisee-guarantee exposure.
- Confirm the effect of ongoing share repurchases, dividends and the increased $800 million repurchase authorization on liquidity and per-share results.