Business Context and Reporting Period
The provided filing is Rent-A-Center, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, not a filing identified as Upbound Group, Inc. The filing includes fourth-quarter 2011 results and comparative annual information for 2010 and 2009. Rent-A-Center operated rent-to-own businesses through Core U.S., RAC Acceptance, International, and ColorTyme segments.
- Locations increased to 4,040 at year-end 2011 from 3,601 in 2010.
- Core U.S. represented approximately 91% of consolidated revenue and substantially all net earnings.
- RAC Acceptance locations increased to 750 from 384, and International locations increased to 80 from 23.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $2.882 billion | $2.732 billion | Up 5.5% |
| Gross profit | $2.053 billion | $1.996 billion | Up 2.8% |
| Gross margin | 71.2% | 73.1% | Down 190 basis points |
| Operating profit | $293.2 million | $303.8 million | Down 3.5% |
| Operating margin | 10.2% | 11.1% | Down 90 basis points |
| Net earnings | $164.6 million | $171.6 million | Down 4.1% |
| Diluted EPS | $2.66 | $2.60 | Up 2.3% |
| Operating cash flow | $286.6 million | $216.5 million | Up $70.1 million |
Fourth-quarter 2011 revenue was $737.5 million, compared with $677.1 million in the fourth quarter of 2010. Fourth-quarter operating profit was $81.8 million and net earnings were $49.3 million, compared with $62.8 million and $31.9 million, respectively, in the prior-year quarter.
- Same-store revenue increased 0.8% in 2011.
- Rental merchandise, net, was $953.2 million at year-end, compared with $836.9 million in 2010.
- Cash and cash equivalents were $88.1 million at year-end, compared with $70.7 million.
- Total debt was $740.7 million, including $440.7 million of senior debt and $300.0 million of 6.625% senior notes due 2020.
- Capital expenditures were $132.7 million; acquisitions used $26.7 million.
- Share repurchases were $164.3 million and cash dividends paid were $26.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by RAC Acceptance expansion and increased International operations. RAC Acceptance revenue increased to $193.3 million from $18.2 million, while International revenue increased to $18.5 million from $10.1 million.
- RAC Acceptance remained loss-making, with operating losses of $14.0 million in 2011 versus $5.4 million in 2010. International operating losses increased to $13.6 million from $5.2 million.
- Cost of rentals and fees increased 9.9%, and the merchandise sales margin declined to 22.3% from 25.5%, primarily because of the RAC Acceptance mix and higher merchandise costs.
- Operating profit and net earnings declined despite higher revenue because of lower gross margins, expansion costs, higher interest expense, and restructuring charges.
- Interest expense increased to $37.2 million from $26.8 million, reflecting the 2010 senior notes and higher average interest rates.
- Diluted EPS increased because the company repurchased approximately 5.9 million shares during 2011.
- The company recorded $13.9 million of restructuring charges, a $7.3 million impairment charge, and $2.8 million of litigation expense in 2011. The prior year included an $18.9 million impairment charge related to discontinued financial services activities and $3.1 million of refinancing costs.
- Operating cash flow benefited from approximately $113.0 million of tax refunds and tax-law-related timing benefits. Management estimated a 2011 cash-flow benefit of $54.0 million from bonus depreciation provisions.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected to add approximately 200 RAC Acceptance kiosks, approximately 10 Canadian stores, and approximately 60 Mexican stores during 2012.
- 2012 capital expenditures were expected to be approximately $105.0 million.
- Management stated that operating cash flow and available credit facilities should be sufficient for the next twelve months, subject to continued profitability and access to financing.
- Available revolving credit capacity was approximately $198.8 million at December 31, 2011, before considering the broader $520.0 million aggregate revolving capacity described in the filing and related letters of credit.
- Debt covenants were satisfied at year-end: actual consolidated leverage was 1.70x versus a maximum of 3.25x, and fixed-charge coverage was 1.58x versus a minimum of 1.35x.
- Material risks include dependence on the mature Core U.S. segment, execution risk in RAC Acceptance and international expansion, reliance on third-party retail partners, consumer income and unemployment trends, foreign-exchange exposure, regulatory changes affecting rent-to-own transactions, litigation, information-system implementation, and variable interest rates.
- A 1% change in interest rates was estimated to affect annual pre-tax earnings by approximately $4.3 million.
- The company had no reserves for probable litigation losses at year-end, but disclosed a history of material regulatory settlements. It also provided up to $45.0 million of guarantees for franchisee financing, of which $21.9 million was outstanding.
- An IRS tax dispute involving 2003 through 2007 periods was pending in U.S. Tax Court; management did not expect a material financial statement impact.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc., whereas the request metadata identifies Upbound Group, Inc.
- Reconcile annual revenue growth with declining operating profit and net earnings, particularly the effect of RAC Acceptance and International losses.
- Assess whether the unusually strong operating cash flow was substantially dependent on tax refunds and deferred tax timing benefits.
- Review debt maturities, variable-rate exposure, covenant headroom, letters of credit, and the change-of-control provisions.
- Evaluate the sustainability of share repurchases and dividends relative to capital expenditures, merchandise investment, acquisitions, and debt service.
- Monitor customer delinquency and merchandise losses: Core U.S. average past-due agreements were 7.07% in 2011 versus a stated goal of no more than 5.99%, and stolen-merchandise charge-offs were approximately 2.5% of rental store revenue.
- Verify the outcome of the pending IRS matter, litigation developments, franchisee guarantees, and restructuring obligations.