Business Context and Reporting Period
The provided filing is Rent-A-Center, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013, not a filing identifying Upbound Group, Inc. The company operated rent-to-own stores and kiosks across Core U.S., RAC Acceptance, International, and Franchising segments. It operated 4,609 locations at September 30, 2013, including 2,974 Core U.S. stores, 1,254 RAC Acceptance kiosks, 168 International stores, and 213 franchised stores.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30, 2013 | Year-over-Year Change | Nine Months Ended September 30, 2013 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $754.8 million | 2.1% | $2.335 billion | 0.4% |
| Gross profit | $529.3 million | 1.9% | $1.611 billion | 0.2% |
| Gross margin | 70.1% | Down from 70.2% | 69.0% | Down from 69.1% |
| Operating profit | $56.5 million | Down 17.0% | $213.3 million | Down 10.8% |
| Operating margin | 7.5% | Down from 9.2% | 9.1% | Down from 10.3% |
| Net earnings | $27.6 million | Down 30.8% | $116.1 million | Down 14.7% |
| Diluted EPS | $0.51 | Down from $0.67 | $2.08 | Down from $2.28 |
Operating cash flow was $172.9 million for the first nine months, down from $258.7 million in the prior-year period. Investing cash outflow was $86.0 million, including $73.8 million of capital expenditures and $13.8 million for acquisitions. Financing cash outflow was $95.0 million, including $217.4 million of treasury-stock purchases and $35.6 million of dividends.
Cash and cash equivalents were $52.9 million at September 30, 2013, compared with $61.1 million at December 31, 2012. Senior debt was $284.6 million and senior notes were $550.0 million, for total reported debt of approximately $834.6 million. The company reported $295.9 million available under its senior revolving facility at September 30, 2013; including its separate INTRUST line, aggregate revolving availability was $332.9 million at October 21, 2013.
Actual September 30 covenant ratios remained within requirements: consolidated leverage was 2.17x versus a maximum of 3.25x, and fixed-charge coverage was 1.53x versus a minimum of 1.35x. A hypothetical 1% change in interest rates would have affected pretax earnings by approximately $2.9 million.
Material Changes Versus the Prior Comparable Period
- Core U.S. performance weakened: nine-month same-store revenue declined 6.7%, and segment operating profit fell $64.6 million.
- RAC Acceptance expanded rapidly, adding 288 locations during the first nine months. Nine-month revenue increased 48.2% and operating profit rose to $52.4 million from $17.0 million.
- International revenue increased 50.6% for the nine-month period, supported by the addition of 60 Mexico stores; the segment remained unprofitable, with a $20.4 million operating loss.
- Consolidated revenue was approximately flat despite segment growth because Core U.S. declines largely offset RAC Acceptance and International gains.
- Cost of rentals and fees increased faster than rental and fee revenue, with the ratio rising to 25.2% from 24.2% for the nine-month period. Salaries and other expenses increased to 55.5% of store revenue from 54.5%.
- The company issued $250.0 million of 4.75% senior notes due 2021. Proceeds helped fund a $200.0 million accelerated share repurchase and repay revolving debt.
- Weighted-average diluted shares declined to 55.8 million from 59.6 million for the nine-month period, partially offsetting the effect of lower net earnings on diluted EPS.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected approximately $110.0 million of total 2013 capital expenditures and approximately 325 additional RAC Acceptance kiosk locations during 2013.
- Management anticipated a pretax restructuring charge of $1 million to $3 million in the fourth quarter of 2013 related to rebranding ColorTyme stores as Rent-A-Center stores. No such charge was recorded in the third quarter.
- Management attributed Core U.S. weakness to a smaller recurring revenue portfolio following unusually high prior-year early purchase activity, electronic-product deflation, promotional activity, delayed federal tax refunds, higher payroll taxes, and broader macroeconomic conditions.
- Key risks include customer affordability and unemployment, regulatory changes affecting rent-to-own transactions, interest-rate increases, foreign currency movements, merchandise losses and charge-offs, execution of new-store and acquisition strategies, litigation, tax matters, and information-technology or data-security costs.
- The IRS commenced a limited-scope audit of the 2010 consolidated U.S. tax return. A disputed issue from 2003–2007 remained pending; management did not expect a material impact. Unrecognized tax benefits increased by approximately $2.8 million from year-end 2012.
- The company guaranteed certain franchisee financing arrangements with maximum obligations of $60.0 million, excluding recoveries from collateral; $20.1 million was outstanding at September 30, 2013.
- Self-insurance reserves for workers’ compensation, general liability, and vehicle liability were $116.3 million at September 30, 2013.
- Goodwill totaled $1.354 billion, and management reported no indication of goodwill impairment at September 30, 2013.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Rent-A-Center, Inc., while the request metadata names Upbound Group, Inc.
- Assess whether the RAC Acceptance and International expansion can offset continued Core U.S. same-store revenue and margin pressure.
- Review debt maturities, variable-rate exposure, covenant headroom, and the company’s ability to fund merchandise purchases, capital expenditures, dividends, and repurchases.
- Verify the final October 2013 settlement of the accelerated stock repurchase, including the additional 816,916 shares and the $40.0 million equity reclassification.
- Evaluate the amount and timing of the expected fourth-quarter rebranding restructuring charge.
- Review customer charge-offs, merchandise depreciation, inventory growth, and operating cash-flow conversion, which weakened materially year over year.