Filing Overview
The supplied Form 10-Q is for Rent-A-Center, Inc., not Upbound Group, Inc. It covers the quarter and six months ended June 30, 2010, with comparative periods ended June 30, 2009. The financial statements are unaudited.
Business Context and Reporting Period
Rent-A-Center operated 2,998 company-owned stores and 204 franchised ColorTyme stores at June 30, 2010. Its primary business was leasing household durable goods under rent-to-own agreements. It also operated installment-sales stores and offered financial services in 296 locations across 14 states.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $671.5 million, down 1.2% | $1,390.0 million, down 1.3% |
| Operating profit | $82.8 million, up 10.0% | $171.5 million, up 9.0% |
| Operating margin | 12.3%, versus 11.1% | 12.3%, versus 11.2% |
| Net earnings | $47.8 million, up 14.0% | $99.3 million, up 13.7% |
| Diluted earnings per share | $0.72, versus $0.63 | $1.49, versus $1.31 |
| Interest expense | $6.1 million, down 24.8% | $12.1 million, down 29.8% |
| Net cash from operating activities | Not separately provided | $88.3 million, versus $210.4 million |
Cash and cash equivalents were $74.1 million at June 30, 2010, compared with $101.8 million at December 31, 2009. Senior debt was $622.4 million, down from $711.2 million at year-end 2009. Total assets were $2.41 billion and stockholders’ equity was $1.35 billion.
Capital expenditures were $29.8 million in the first six months, and management expected approximately $53.2 million of additional capital expenditures during the remainder of 2010. Rental merchandise purchases were $401.8 million in the first six months, compared with $341.4 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Total revenue declined primarily because the company divested its prepaid telecommunications and energy subsidiary in November 2009. That business contributed approximately $28.0 million of first-half 2009 merchandise sales and $14.0 million in the second quarter of 2009.
- Same-store revenue was broadly stable: down 0.1% for the first six months and up 0.1% for the second quarter.
- Operating profit and margins improved as store-level expenses, general and administrative expenses, and rental costs declined. Management cited labor, delivery-cost, and inventory-loss controls.
- Net earnings benefited from improved operating profit and lower interest expense. The weighted-average interest rate declined to 3.38% for the first six months from 3.88% in 2009.
- Operating cash flow declined by $122.1 million, primarily because of increased rental merchandise purchases and lower deferred-tax benefits.
- The company repaid $141.3 million of debt and borrowed $52.5 million during the first six months. It also repurchased $6.5 million of common stock.
- During the first six months, the company opened 10 stores, acquired one store, acquired accounts from seven locations, consolidated 16 stores, sold four stores, added financial services to 18 locations, and closed 75 stores. Thirty-nine closures were attributed to legislative changes.
Liquidity, Debt, and Capital Resources
- At July 27, 2010, cash was $121.7 million and $252.5 million was available under revolving credit facilities with aggregate principal capacity of $370.0 million.
- The amended senior credit facility had total commitments of $999 million, including term loans and a $350 million revolving facility. The company reported $622.4 million of senior debt at June 30, 2010.
- Debt maturities included $43.8 million in 2010, $106.3 million in 2011, and $142.7 million in 2012.
- Credit covenants were satisfied at June 30, 2010: consolidated leverage was 1.52x versus a maximum of 3.25x, and fixed-charge coverage was 2.17x versus a minimum of 1.35x.
- Management believed operating cash flow and available credit facilities would fund liquidity needs for the following twelve months, although access to additional financing could be affected by market conditions.
- The company had variable-rate debt indexed primarily to Eurodollar or prime rates and had no interest-rate swaps. A hypothetical 1.0% rate increase was estimated to increase annualized pretax expense by approximately $6.3 million.
Guidance, Outlook, Commentary, and Unusual Items
- Management expected approximately 350 stores to offer financial services by year-end 2010, compared with 296 at June 30. It cautioned that these operations might not become profitable as expected.
- Management stated that third-quarter revenue would generally remain relatively flat with the prior quarter because of seasonal patterns and slower growth in rental agreements.
- On July 26, 2010, the company declared a quarterly dividend of $0.06 per share, payable August 26, 2010, and increased its stock-repurchase authorization by $100 million to $600 million.
- Goodwill charges related to stores sold or closed were $1.4 million in the quarter and $2.2 million for the first six months. No material litigation reserve was recorded, although litigation outcomes remained uncertain.
- The company was contesting an IRS issue related to the 2003–2007 tax years; trial was expected in late 2010. Management did not expect a material financial impact.
- ColorTyme franchisee financing included an $18.1 million outstanding amount covered by guarantees subject to a maximum guarantee of $55.0 million. The Wells Fargo facility was scheduled to expire September 30, 2010, and refinancing was being negotiated.
- Management identified risks from mature-store performance, regulatory changes affecting rent-to-own and financial-services products, consumer unemployment and disposable income, litigation, variable interest rates, debt covenants, and the execution of financial-services expansion.
Important Facts to Verify
- Confirm the issuer identity: the supplied filing is Rent-A-Center, Inc., whereas the request identifies Upbound Group, Inc.
- Review the debt maturity schedule, revolving-credit availability, covenant compliance, and any refinancing completed after June 30, 2010.
- Assess whether the sharp decline in operating cash flow was temporary or reflected continuing increases in rental merchandise investment and tax payments.
- Monitor same-store revenue trends and the profitability of the expanding financial-services business.
- Verify the resolution of the IRS dispute, state tax examinations, pending litigation, and the ColorTyme franchise-financing refinancing.
- Evaluate the effect of variable-rate debt, regulatory changes, store closures, and the company’s dividend and share-repurchase program on future liquidity.