Business Context and Reporting Period
The supplied filing identifies the registrant as Rent-A-Center, Inc., not Upbound Group, Inc. It is an unaudited Form 10-Q for the quarter and six months ended June 30, 2011, filed July 29, 2011. The business primarily leases household durable goods on a rent-to-own basis, with installment sales, franchise operations and RAC Acceptance kiosk locations.
- At June 30, 2011: 3,022 company-owned stores, 611 RAC Acceptance locations and 210 ColorTyme franchised stores.
- The company discontinued its financial services business previously operated under RAC Financial Services and Cash AdvantEdge.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total revenue | $698.3 million | $1,440.4 million |
| Operating profit | $73.2 million | $153.6 million |
| Operating margin | 10.5% | 10.7% |
| Net earnings | $39.9 million | $84.1 million |
| Diluted EPS | $0.63 | $1.32 |
| Cash dividends per share | $0.06 | $0.12 |
- Revenue increased 4.0% for the quarter and 3.6% for the six-month period versus the comparable 2010 periods.
- Same-store revenue declined 0.3% in the quarter and 0.1% for the six months.
- Six-month revenue growth was driven primarily by RAC Acceptance, partially offset by the discontinued financial services operations.
- Six-month operating cash flow was $171.3 million, compared with $88.3 million in 2010. The increase included approximately $110.0 million of tax refunds and higher deferred taxes.
- Capital expenditures were $59.2 million for the six months, compared with $29.8 million in 2010. Management expected approximately $41.0 million of additional 2011 capital expenditures.
- Cash and cash equivalents were $74.0 million at June 30, 2011, versus $70.7 million at December 31, 2010.
- Balance-sheet debt included $361.5 million of senior debt and $300.0 million of 6.625% senior notes due 2020.
- Rental merchandise, net, was $872.8 million, compared with $842.3 million at December 31, 2010.
Material Changes Versus the Prior Comparable Period
- Six-month net earnings declined 15.3%, from $99.3 million to $84.1 million; quarterly net earnings declined 16.6%, from $47.8 million to $39.9 million.
- Six-month operating margin decreased from 12.3% to 10.7%; quarterly operating margin decreased from 12.3% to 10.5%.
- Interest expense increased 59.7% for the six months and 58.9% for the quarter, reflecting the 2010 senior notes issuance and higher variable interest rates.
- Merchandise sales margins weakened, with the six-month gross margin declining to 28.1% from 28.7% and the quarterly margin declining to 22.5% from 24.2%, primarily because of lower RAC Acceptance margins.
- The company recorded a $7.3 million impairment charge in the first quarter related to the discontinued financial services business, a $4.9 million second-quarter restructuring charge related to post-acquisition lease terminations, and a $2.8 million litigation settlement accrual for the six-month period.
- The company repurchased 2.94 million shares for approximately $92.8 million during the first six months, including 2.07 million shares for $64.2 million in the second quarter. Total repurchases under the program reached $643.9 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating cash flow and available credit facilities were expected to be sufficient for the next twelve months, but noted that liquidity could be adversely affected if profitability declined.
- On July 14, 2011, after quarter-end, the company refinanced its senior secured debt with a $250.0 million five-year term loan and a $500.0 million five-year revolving facility. It drew $250.0 million under the term loan and $100.0 million under the revolver to repay existing senior term debt.
- As of July 25, 2011, the company reported $89.7 million of cash and $283.2 million available under revolving credit facilities, including the Intrust line. The filing also reports $136.8 million of letters of credit usage under the new revolving facility.
- Debt covenants included a maximum consolidated leverage ratio of 3.25:1 and a minimum fixed-charge coverage ratio of 1.35:1; reported actual ratios were 1.58:1 and 1.50:1, respectively, based on June 30 calculations.
- Variable-rate debt exposed the company to interest-rate risk. A hypothetical 1% rate change was estimated to affect pre-tax earnings by approximately $3.6 million annually; no interest-rate swaps were in place.
- Key risks included mature-store same-store sales pressure, consumer spending and unemployment, regulation of rent-to-own transactions, litigation, debt covenant restrictions, change-of-control acceleration provisions, international expansion, foreign currency exposure and information-system implementation.
- The company had accrued $2.8 million for prospective California wage-and-hour class-action settlements. A disputed tax issue for 2003 through 2007 was scheduled for U.S. Tax Court trial in November 2011; management did not expect a material impact.
- Management expected third-quarter revenue to remain relatively flat with the prior quarter because of seasonal slowing in new rental purchase agreements.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Registrant identity: Confirm whether the intended filing is Rent-A-Center, Inc. rather than Upbound Group, Inc.
- Non-GAAP covenant metrics: Reconcile the reported covenant EBITDA, funded debt and fixed-charge calculations to the amended credit agreement.
- Debt refinancing: Verify the post-quarter-end refinancing terms, available revolver capacity, interest-rate margins and covenant headroom.
- Cash-flow quality: Distinguish recurring operating cash generation from the approximately $110.0 million tax refund and deferred-tax effects.
- Recurring profitability: Assess the effects of lower same-store revenue, RAC Acceptance margin pressure, higher labor costs and elevated interest expense.
- Contingencies: Monitor the California litigation settlement, tax-court proceedings, self-insurance liabilities of $123.0 million and franchisee guarantees with $20.5 million outstanding.
- Capital allocation: Review the sustainability of share repurchases and dividends in light of debt covenants, capital expenditures and seasonal liquidity needs.