Company Quick10K Filing
Quick10K
Rent A Center De
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.94 54 $960
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-07 Officers
8-K 2018-12-19 Officers
8-K 2018-12-18 Leave Agreement, Other Events, Exhibits
8-K 2018-12-18 Enter Agreement, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-09-18 Shareholder Vote
8-K 2018-09-11 Other Events
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-06-17 Enter Agreement, Other Events, Exhibits
8-K 2018-06-08 Code of Ethics
8-K 2018-06-05 Shareholder Vote
8-K 2018-05-25 Enter Agreement, Exhibits
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-03-28 Enter Agreement, Officers, Exhibits
8-K 2018-02-27 Enter Agreement, Leave Agreement, Shareholder Rights, Amend Bylaw, Exhibits
8-K 2018-02-20 Earnings, Exhibits
8-K 2018-02-05 Enter Agreement, Officers, Exhibits
8-K 2017-12-28 Officers, Other Events, Exhibits
KFY Korn Ferry
ABM ABM Industries
AYR Aircastle
MGRC McGrath Rentcorp
FORR Forrester Research
HSII Heidrick & Struggles
CAI CAI International
SSLJ sslj. Com
ACY Aerocentury
JOB GEE Group
RCII 2018-09-30
Item 1. Condensed Consolidated Financial Statements.
Note 1 - Basis of Presentation
Note 2 - Revenues
Note 3 - Receivables and Allowance for Doubtful Accounts
Note 4 - Senior Debt
Note 5 - Senior Notes
Note 6 - Fair Value
Note 7 - Other Charges
Note 8 - Segment Information
Note 9 - Stock-Based Compensation
Note 10 - Contingencies
Note 11 - Loss per Common Share
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits.
EX-31.1 ex-311_q32018.htm
EX-31.2 ex-312_q32018.htm
EX-32.1 ex-321_q32018.htm
EX-32.2 ex-322_q32018.htm

Rent A Center De Earnings 2018-09-30

RCII 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 rac10-q_q32018.htm 10-Q Wdesk | Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 001-38047
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
45-0491516
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
5501 Headquarters Drive
Plano, Texas 75024
(Address, including zip code of registrant’s
principal executive offices)
Registrant’s telephone number, including area code: 972-801-1100
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   ý    NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
YES   ý    NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
 
Accelerated filer
¨
 
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
Emerging Growth Company
¨
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES   ¨    NO   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 30, 2018:
Class
 
Outstanding
Common stock, $.01 par value per share
 
53,514,721



TABLE OF CONTENTS
 
 
 
 
 
 
Page No.
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Condensed Consolidated Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month and nine-month periods ended September 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2018 and 2017
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
SIGNATURES
 
 



i


Item 1. Condensed Consolidated Financial Statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
(In thousands, except per share data)
 
 
 
Revenues
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
Rentals and fees
$
552,580

 
$
552,194

 
$
1,679,697

 
$
1,723,019

Merchandise sales
67,141

 
67,566

 
239,487

 
266,061

Installment sales
15,681

 
17,276

 
49,459

 
51,690

Other
2,140

 
2,257

 
6,995

 
7,428

Total store revenues
637,542

 
639,293

 
1,975,638

 
2,048,198

Franchise
 
 
 
 
 
 
 
Merchandise sales
4,135

 
2,676

 
12,649

 
9,211

Royalty income and fees
3,265

 
1,996

 
10,428

 
6,177

Total revenues
644,942


643,965

 
1,998,715

 
2,063,586

Cost of revenues
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
Cost of rentals and fees
153,716

 
153,202

 
465,852

 
474,511

Cost of merchandise sold
74,340

 
70,551

 
236,255

 
256,730

Cost of installment sales
5,244

 
5,207

 
16,103

 
16,099

Total cost of store revenues
233,300

 
228,960

 
718,210

 
747,340

Franchise cost of merchandise sold
3,902

 
2,540

 
11,901

 
8,585

Total cost of revenues
237,202

 
231,500

 
730,111

 
755,925

Gross profit
407,740

 
412,465

 
1,268,604

 
1,307,661

Operating expenses
 
 
 
 
 
 
 
Store expenses
 
 
 
 
 
 
 
Labor
168,297

 
179,643

 
513,543

 
551,197

Other store expenses
149,326

 
171,995

 
492,129

 
546,485

General and administrative expenses
40,818

 
43,768

 
127,480

 
130,637

Depreciation, amortization and impairment of intangibles
16,946

 
18,679

 
52,274

 
55,928

Other charges
6,721

 
6,825

 
40,665

 
31,580

Total operating expenses
382,108

 
420,910

 
1,226,091

 
1,315,827

Operating profit (loss)
25,632

 
(8,445
)
 
42,513

 
(8,166
)
Debt refinancing charges

 

 

 
1,936

Interest expense
10,496

 
11,453

 
32,662

 
34,346

Interest income
(345
)
 
(177
)
 
(756
)
 
(492
)
Earnings (loss) before income taxes
15,481

 
(19,721
)
 
10,607

 
(43,956
)
Income tax expense (benefit)
2,563

 
(7,122
)
 
3,779

 
(15,785
)
Net earnings (loss)
$
12,918

 
$
(12,599
)
 
$
6,828

 
$
(28,171
)
Basic earnings (loss) per common share
$
0.24

 
$
(0.24
)
 
$
0.13

 
$
(0.53
)
Diluted earnings (loss) per common share
$
0.24

 
$
(0.24
)
 
$
0.13

 
$
(0.53
)
Cash dividends declared per common share
$

 
$

 
$

 
$
0.16

See accompanying notes to condensed consolidated financial statements.


1


RENT-A-CENTER, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
(In thousands)

 
 
Net earnings (loss)
$
12,918

 
$
(12,599
)
 
$
6,828

 
$
(28,171
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $239 and $(97), and $112 and $3,530 for the three and nine months ended 2018 and 2017, respectively
900

 
(181
)
 
423

 
6,555

Total other comprehensive income (loss)
900

 
(181
)
 
423

 
6,555

Comprehensive income (loss)
$
13,818

 
$
(12,780
)
 
$
7,251

 
$
(21,616
)
See accompanying notes to condensed consolidated financial statements.


2


RENT-A-CENTER, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
September 30, 2018
 
December 31, 2017
(In thousands, except share and par value data)
Unaudited
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
111,008

 
$
72,968

Receivables, net of allowance for doubtful accounts of $4,247 and $4,167 in 2018 and 2017, respectively
65,197

 
69,823

Prepaid expenses and other assets
67,148

 
64,577

Rental merchandise, net
 
 
 
On rent
634,918

 
701,803

Held for rent
141,379

 
167,188

Merchandise held for installment sale
3,362

 
4,025

Property assets, net of accumulated depreciation of $545,619 and $525,673 in 2018 and 2017, respectively
243,121

 
282,901

Deferred tax asset
28,440

 

Goodwill
56,845

 
56,614

Other intangible assets, net
675

 
882

Total assets
$
1,352,093

 
$
1,420,781

LIABILITIES
 
 
 
Accounts payable – trade
$
98,063

 
$
90,352

Accrued liabilities
311,277

 
298,018

Deferred tax liability
119,288

 
87,081

Senior debt, net

 
134,125

Senior notes, net
539,719

 
538,762

Total liabilities
1,068,347

 
1,148,338

STOCKHOLDERS’ EQUITY
 
 
 
Common stock, $.01 par value; 250,000,000 shares authorized; 109,879,035 and 109,681,559 shares issued in 2018 and 2017, respectively
1,099

 
1,097

Additional paid-in capital
836,632

 
831,271

Retained earnings
804,260

 
798,743

Treasury stock at cost, 56,369,752 shares in 2018 and 2017
(1,347,677
)
 
(1,347,677
)
Accumulated other comprehensive loss
(10,568
)
 
(10,991
)
Total stockholders' equity
283,746

 
272,443

Total liabilities and stockholders' equity
$
1,352,093

 
$
1,420,781

See accompanying notes to condensed consolidated financial statements.


3


RENT-A-CENTER, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
 
2018
 
2017
(In thousands)

Cash flows from operating activities
 
 
 
Net earnings (loss)
$
6,828

 
$
(28,171
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
 
 
 
Depreciation of rental merchandise
461,484

 
469,483

Bad debt expense
10,372

 
11,051

Stock-based compensation expense
4,493

 
2,198

Depreciation of property assets
51,778

 
55,156

Loss on sale or disposal of property assets
2,529

 
18

Amortization and impairment of intangibles
496

 
4,667

Amortization of financing fees
4,074

 
3,276

Write-off of debt financing fees

 
1,936

Deferred income taxes
4,379

 
(33,940
)
Changes in operating assets and liabilities, net of effects of acquisitions
 
 
 
Rental merchandise
(375,013
)
 
(339,278
)
Receivables
(5,746
)
 
(3,560
)
Prepaid expenses and other assets
(2,663
)
 
600

Accounts payable – trade
7,711

 
(20,032
)
Accrued liabilities
13,133

 
12,040

Net cash provided by operating activities
183,855

 
135,444

Cash flows from investing activities
 
 
 
Purchase of property assets
(22,491
)
 
(53,528
)
Proceeds from sale of property assets
16,474

 
3,951

Acquisitions of businesses
(2,049
)
 
(2,241
)
Net cash used in investing activities
(8,066
)
 
(51,818
)
Cash flows from financing activities
 
 
 
Exercise of stock options
1,064

 
270

Shares withheld for payment of employee tax withholdings
(283
)
 
(225
)
Debt issuance costs

 
(5,258
)
Proceeds from debt
27,060

 
216,880

Repayments of debt
(166,357
)
 
(303,498
)
Dividends paid

 
(12,811
)
Net cash used in financing activities
(138,516
)
 
(104,642
)
Effect of exchange rate changes on cash
767

 
1,828

Net increase (decrease) in cash and cash equivalents
38,040

 
(19,188
)
Cash and cash equivalents at beginning of period
72,968

 
95,396

Cash and cash equivalents at end of period
$
111,008

 
$
76,208

See accompanying notes to condensed consolidated financial statements.


4

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 - Basis of Presentation
The interim condensed consolidated financial statements of Rent-A-Center, Inc. included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the SEC’s rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. We suggest these financial statements be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2017. In our opinion, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly our results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
These financial statements include the accounts of Rent-A-Center, Inc. and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context indicates otherwise, references to “Rent-A-Center” refer only to Rent-A-Center, Inc., the parent, and references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center and any or all of its direct and indirect subsidiaries. We report four operating segments: Core U.S., Acceptance Now, Mexico and Franchising.
Our Core U.S. segment consists of company-owned rent-to-own stores in the United States and Puerto Rico that lease household durable goods to customers on a rent-to-own basis. We also offer merchandise on an installment sales basis in certain of our stores under the names “Get It Now” and “Home Choice.”
Our Acceptance Now segment, which operates in the United States and Puerto Rico, generally offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks located within such retailers’ locations. Those kiosks can be staffed by an Acceptance Now employee (staffed locations) or employ a virtual solution where customers initiate the rent-to-own transaction online in the retailers' locations using our tablet computer and our virtual solution (direct locations).
Our Mexico segment consists of our company-owned rent-to-own stores in Mexico that lease household durable goods to customers on a rent-to-own basis.
Rent-A-Center Franchising International, Inc., an indirect, wholly owned subsidiary of Rent-A-Center, is a franchisor of rent-to-own stores. Our Franchising segment’s primary source of revenue is the sale of rental merchandise to its franchisees, who in turn offer the merchandise to the general public for rent or purchase under a rent-to-own transaction. The balance of our Franchising segment’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues.
Proposed Merger
On June 17, 2018, Rent-A-Center entered into a merger agreement (the “Vintage Merger Agreement”) with Vintage Rodeo Parent, LLC (“Vintage”), an affiliate of Vintage Capital Management, LLC (“Vintage Capital”), pursuant to which Vintage will, when the proposed merger is completed, acquire all of the outstanding shares of Rent-A-Center common stock for $15.00 per share in cash (collectively, the “Vintage Merger”). The Vintage Merger was approved by the Company's stockholders on September 18, 2018. As previously announced, the parties received a Second Request from the Federal Trade Commission (“FTC”) in connection with the Vintage Merger. Rent-A-Center and Vintage Capital continue to cooperate fully with the FTC. The parties intend to complete the Vintage Merger as soon as practicable following receipt of regulatory clearance from the FTC and the satisfaction or waiver of other customary closing conditions. The Company currently expects the Vintage Merger, which is not subject to a financing condition, to close during the first quarter of 2019. Upon completion of the Vintage Merger, Rent-A-Center will become a wholly owned subsidiary of Vintage and Rent-A-Center’s shares of common stock will be delisted from NASDAQ and deregistered.
Newly Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies existing accounting literature relating to how and when a company recognizes revenue. We adopted ASU 2014-09 and all related amendments beginning January 1, 2018, using the modified retrospective adoption method. We recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Under Topic 606, initial franchise fees charged to franchisees for new stores are recognized over the term of the franchise agreement, rather than when they are paid by the franchisee, upon the opening of a new location. Furthermore, franchise advertising fees are presented on a gross basis, as revenue, in the consolidated statement of operations, rather than net of operating expenses in the


5

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

consolidated statement of operations. Impacts resulting from adoption were not material to the consolidated statement of operations. See descriptions of the revenues in Note 2.
The cumulative effect of the changes made to our condensed consolidated balance sheets for the adoption of Topic 606 were as follows:
 
January 1, 2018
 
Adjustments due to Topic 606
 
December 31, 2017
(In thousands)
Unaudited
LIABILITIES
 
 
 
 
 
Accrued liabilities
$
299,683

 
$
(1,665
)
 
$
298,018

Deferred tax liability
86,727

 
354

 
87,081

Total liabilities
1,149,649

 
(1,311
)
 
1,148,338

STOCKHOLDERS’ EQUITY
 
 
 
 
 
Retained earnings
$
797,432

 
$
1,311

 
$
798,743

Total stockholders' equity
271,132

 
1,311

 
272,443

In accordance with Topic 606, the disclosure of the impact of adoption on our condensed consolidated statements of operations and condensed consolidated balance sheets for the periods ended September 30, 2018 is as follows:
 Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As Reported
 
Adjustments due to Topic 606
 
Balances without Adoption of Topic 606
 
As Reported
 
Adjustments due to Topic 606
 
Balances without Adoption of Topic 606
(In thousands)
Unaudited
 
Unaudited
Royalty income and fees
3,265

 
(1,129
)
 
2,136

 
10,428

 
(2,171
)
 
8,257

Total revenues
644,942

 
(1,129
)
 
643,813

 
1,998,715

 
(2,171
)
 
1,996,544

Gross profit
407,740

 
(1,129
)
 
406,611

 
1,268,604

 
(2,171
)
 
1,266,433

Other store expenses
149,326

 
(1,068
)
 
148,258

 
492,129

 
(3,047
)
 
489,082

Total operating expenses
382,108

 
(1,068
)
 
381,040

 
1,226,091

 
(3,047
)
 
1,223,044

Operating profit
25,632

 
(61
)
 
25,571

 
42,513

 
876

 
43,389

Earnings before income taxes
15,481

 
(61
)
 
15,420

 
10,607

 
876

 
11,483

Income tax expense
2,563

 
(10
)
 
2,553

 
3,779

 
53

 
3,832

Net earnings
12,918

 
(51
)
 
12,867

 
6,828

 
823

 
7,651

 Condensed Consolidated Balance Sheets
September 30, 2018
 
As Reported
 
Adjustments due to Topic 606
 
Balances without Adoption of Topic 606
(In thousands)
Unaudited
LIABILITIES
 
 
 
 
 
Accrued liabilities
$
311,277

 
$
(2,541
)
 
$
308,736

Deferred tax liability
119,288

 
407

 
119,695

Total liabilities
1,068,347

 
(2,134
)
 
1,066,213

STOCKHOLDERS’ EQUITY
 
 
 
 
 
Retained earnings
$
804,260

 
$
2,134

 
$
806,394

Total stockholders' equity
283,746

 
2,134

 
285,880

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. Rent-A-Center adopted ASU 2016-15 beginning January 1, 2018, on a retrospective basis. The adoption of ASU 2016-15 had no impact to the financial statements as of September 30, 2018.


6

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which introduces amendments that are intended to make the guidance in ASC 805 on the definition of a business more consistent and cost-efficient. The amendments narrow the definition of a business and provide a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. Rent-A-Center adopted ASU 2017-01 beginning January 1, 2018, using the prospective approach. The adoption of ASU 2017-01 had an immaterial impact to the financial statements as of September 30, 2018.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. Rent-A-Center adopted ASU 2017-09 beginning January 1, 2018, on a prospective basis. The adoption of ASU 2017-09 had no impact to the financial statements as of September 30, 2018.
Note 2 - Revenues
The following table disaggregates our revenue for the periods ended September 30, 2018:
 
Three Months Ended September 30, 2018
 
Core U.S.
 
Acceptance Now
 
Mexico
 
Franchising
 
Consolidated
(In thousands)
Unaudited
Store
 
 
 
 
 
 
 
 
 
Rentals and fees
$
403,483

 
$
137,061

 
$
12,036

 
$

 
$
552,580

Merchandise sales
30,135

 
36,264

 
742

 

 
67,141

Installment sales
15,681

 

 

 

 
15,681

Other
2,021

 
113

 
6

 

 
2,140

Total store revenues
451,320

 
173,438

 
12,784

 

 
637,542

Franchise
 
 
 
 
 
 
 
 
 
Merchandise sales

 

 

 
4,135

 
4,135

Royalty income and fees

 

 

 
3,265

 
3,265

Total revenues
$
451,320

 
$
173,438

 
$
12,784

 
$
7,400

 
$
644,942

 
Nine Months Ended September 30, 2018
 
Core U.S.
 
Acceptance Now
 
Mexico
 
Franchising
 
Consolidated
(In thousands)
Unaudited
Store
 
 
 
 
 
 
 
 
 
Rentals and fees
$
1,226,233

 
$
418,684

 
$
34,780

 
$

 
$
1,679,697

Merchandise sales
106,828

 
130,347

 
2,312

 

 
239,487

Installment sales
49,459

 

 

 

 
49,459

Other
6,561

 
404

 
30

 

 
6,995

Total store revenues
1,389,081

 
549,435

 
37,122

 

 
1,975,638

Franchise
 
 
 
 
 
 
 
 
 
Merchandise sales

 

 

 
12,649

 
12,649

Royalty income and fees

 

 

 
10,428

 
10,428

Total revenues
$
1,389,081

 
$
549,435

 
$
37,122

 
$
23,077

 
$
1,998,715

Rental-Purchase Agreements
Core U.S., Acceptance Now, and Mexico
Rentals and Fees. Merchandise is leased to customers pursuant to rental purchase agreements which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. At the expiration of each rental term customers renew the rental agreement by pre-paying for the next rental term. Generally, the customer has the right to acquire title of the merchandise either through a purchase option or through payment of all required rental terms. Customers can terminate the agreement at the


7

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

end of any rental term without penalty. Therefore rental transactions are accounted for as operating leases and rental revenue is recognized over the rental term. Cash received for rental payments, including processing fees, prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue related to various payment, reinstatement or late fees are recognized when paid by the customer at the point service is provided. Rental merchandise is depreciated using the income forecasting method and is recognized in cost of sales over the rental term. We offer additional product plans along with our rental agreements which provide customers with liability protection against significant damage or loss of a product, and club membership benefits, including various discount programs and product service and replacement benefits in the event merchandise is damaged or lost. Customers renew product plans in conjunction with their rental term renewals, and can cancel the plans at any time. Revenue for product plans is recognized over the term of the plan. Costs incurred related to product plans are primarily recognized in cost of sales. At September 30, 2018 and December 31, 2017, we had $39.4 million and $41.1 million, respectively, in deferred revenue included in accrued liabilities related to our rental purchase agreements.
Revenue from contracts with customers
Core U.S., Acceptance Now, and Mexico
Merchandise Sales. Merchandise sales include payments received for the exercise of the early purchase option offered through our rental purchase agreements or merchandise sold through point of sale transactions. Revenue for merchandise sales is recognized when payment is received and ownership of the merchandise passes to the customer. The remaining net value of merchandise sold is recorded to cost of sales at the time of the transaction.
Installment Sales. Revenue from the sale of merchandise in our retail installment stores is recognized when the installment note is signed and control of the merchandise has passed to the customer. The cost of merchandise sold through installment agreements is recognized in cost of sales at the time of the transaction. We offer extended service plans with our installment agreements which are administered by third parties and provide customers with product service maintenance beyond the term of the installment agreement. Payments received for extended service plans are deferred and recognized, net of related costs, when the installment payment plan is complete and the service plan goes into effect. Customers can cancel extended service plans at any time during the installment agreement and receive a refund for payments previously made towards the plan. At September 30, 2018 and December 31, 2017, we had $2.8 million and $3.0 million, respectively, in deferred revenue included in accrued liabilities related to other product plans.
Other. Other revenue primarily consists of external maintenance and repair services provided by the Company’s service department, in addition to other miscellaneous product plans offered to our rental and installment customers. The Company’s service department is a licensed warranty service provider and performs service maintenance and merchandise repair for qualified warranty guarantees, on behalf of merchandise vendors. In addition, we provide external maintenance and repair services for our franchisees, and other external businesses and individual customers. Revenue for warranty services is recognized when service is complete and a claim has been submitted to the original vendor issuing the warranty guarantee. Revenue for external repair and maintenance services are recognized when services provided are complete and the customer has been billed. Costs incurred for repair services are recognized as incurred in labor and other store expenses. Revenue for other product plans is recognized in accordance with the terms of the applicable plan agreement.
Franchising
Merchandise Sales. Revenue from the sale of rental merchandise is recognized upon shipment of the merchandise to the franchisee.
Royalty Income and Fees. Franchise royalties, including franchisee contributions to corporate advertising funds, represent sales-based royalties calculated as a percentage of gross rental payments and sales. Royalty revenue is recognized as rental payments and sales occur. Franchise fees are initial fees charged to franchisees for new or converted franchise stores. Franchise fee revenue is recognized on a straight-line basis over the term of the franchise agreement. At September 30, 2018 and December 31, 2017, we had $2.7 million and $1.7 million, respectively, in deferred revenue included in accrued liabilities related to franchise fees.


8

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Note 3 - Receivables and Allowance for Doubtful Accounts
Receivables consist of the following:
(In thousands)
September 30, 2018
 
December 31, 2017
Installment sales receivable
$
51,477

 
$
55,516

Trade and notes receivables
17,967

 
18,474

Total receivables
69,444

 
73,990

Less allowance for doubtful accounts
(4,247
)
 
(4,167
)
Total receivables, net of allowance for doubtful accounts
$
65,197

 
$
69,823

The allowance for doubtful accounts related to installment sales receivable was $3.0 million and $3.6 million at September 30, 2018 and December 31, 2017, respectively. The allowance for doubtful accounts related to trade and notes receivable was $1.2 million and $0.6 million at September 30, 2018 and December 31, 2017, respectively.
Changes in our allowance for doubtful accounts are as follows: 
(In thousands)
September 30, 2018
 
December 31, 2017
Beginning allowance for doubtful accounts
$
4,167

 
$
3,593

Bad debt expense
10,372

 
15,702

Accounts written off
(10,740
)
 
(15,791
)
Recoveries
448

 
663

 Ending allowance for doubtful accounts
$
4,247

 
$
4,167

Note 4 - Senior Debt
We are party to a Credit Agreement with Bank of America, N.A., BBVA Compass Bank, Wells Fargo Bank, N.A., and SunTrust Bank, as syndication agents, JPMorgan Chase Bank, N.A., as administrative agent (the "Agent"), and the several lenders from time to time parties thereto, dated March 19, 2014, as amended on February 1, 2016, September 30, 2016, March 31, 2017, and June 6, 2017 (the “Fourth Amendment”) and as so amended, (the "Credit Agreement"). The Credit Agreement currently provides a senior credit facility consisting of $225 million in term loans (the "Term Loans") and a $350 million revolving credit facility (the "Revolving Facility").
During the third quarter of 2018 the outstanding Terms Loans were repaid in full. Therefore there were no outstanding borrowings under the Term Loans or Revolving Facility at September 30, 2018 and $48.6 million and $85.0 million outstanding at December 31, 2017, respectively. Total unamortized debt issuance costs reported in the Condensed Consolidated Balance Sheet at September 30, 2018 and December 31, 2017 were $2.1 million and $5.2 million, respectively. The Revolving Facility has a scheduled maturity of March 19, 2019. We also utilize the Revolving Facility for the issuance of letters of credit. As of September 30, 2018, we have issued letters of credit in the aggregate amount of $92.2 million. In the event the Vintage Merger is not completed prior to the maturation of the Revolving Facility, we will need to refinance our Revolving Facility.
Borrowings under the Revolving Facility bear interest at varying rates equal to either the Eurodollar rate plus 1.50% to 3.00%, or the prime rate plus 0.50% to 2.00% (ABR), at our election. The margins on the Eurodollar loans and on the ABR loans for borrowings under the Revolving Facility, which were 2.75% and 1.75%, respectively, at September 30, 2018, fluctuate based upon an increase or decrease in our Consolidated Total Leverage Ratio as defined by a pricing grid included in the Credit Agreement. A commitment fee equal to 0.30% to 0.50% of the unused portion of the Revolving Facility is payable quarterly, and fluctuates dependent upon an increase or decrease in our Consolidated Total Leverage Ratio. The commitment fee for the third quarter of 2018 was $1.1 million and was equal to 0.50% of the unused portion of the Revolving Facility.
The aggregate outstanding amounts (including after any draw request) under the Revolving Facility may not exceed the Borrowing Base. The Borrowing Base is tied to the Eligible Installment Sales Accounts, Inventory and Eligible Rental Contracts, reduced by Reserves and the Term Loan Reserve, as defined in the Credit Agreement. We provide to the Agent information necessary to calculate the Borrowing Base within 30 days of the end of each calendar month, unless the remaining availability of the Revolving Facility is less than 20% of the maximum borrowing capacity of the Revolving Facility or $60 million, in which case we must provide weekly information.


9

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Our borrowings under the Credit Agreement are, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property, and are also secured by a pledge of the capital stock of our U.S. subsidiaries.
Subject to a number of exceptions, the Credit Agreement contains, without limitation, covenants that generally limit our ability and the ability of our subsidiaries to:
incur additional debt;
pay cash dividends in excess of $15 million annually when the Consolidated Total Leverage Ratio is greater than 3:75:1;
incur liens or other encumbrances;
merge, consolidate or sell substantially all property or business;
sell, lease or otherwise transfer assets (if not in the ordinary course of business, limited in any fiscal year to an amount equal to 5% of Consolidated Total Assets as of the last day of the immediately preceding fiscal year);
make investments or acquisitions (unless they meet financial tests and other requirements); or
enter into an unrelated line of business;
guarantee obligations of Foreign Subsidiaries in excess of $10 million at any time; and
exceed an aggregate outstanding amount of $10 million in indebtedness, including Capital Lease Obligations, mortgage financings and purchase money obligations that are secured by Liens permitted under the Credit Agreement.
In addition, we are prohibited from repurchasing our common stock or 6.625% and 4.75% Senior Notes for the remaining term of the Credit Agreement.
The Credit Agreement permits us to increase the amount of the Term Loans and/or the Revolving Facility from time to time on up to three occasions, in an aggregate amount of no more than $100 million. We may request an Incremental Revolving Loan or Incremental Term Loan, provided that at the time of such request, we are not in default, have obtained the consent of the administrative agent and the lenders providing such increase, and after giving effect thereto, (i) the Consolidated Fixed Charge Coverage Ratio on a pro forma basis is no less than 1.10:1, (ii) the Total Revolving Extensions of Credit do not exceed the Borrowing Base, and (iii) if the request occurs during a Minimum Availability Period, the Availability must be more than the Availability Threshold Amount.
The Credit Agreement permits the Agent, in its sole discretion, to make loans to us that it deems necessary or desirable (i) to preserve or protect the Collateral, (ii) to enhance the likelihood of, or maximize the amount of, repayment of the Loans and other Obligations, or (iii) to pay any other amount chargeable to or required to be paid by us pursuant to the terms of the Credit Agreement. The aggregate amount of such Protective Advances outstanding at any time may not exceed $35 million.
In connection with entering into the Fourth Amendment to the Credit Agreement, we recorded a write-down of previously unamortized debt issuance costs of approximately $1.9 million in the second quarter of 2017. In addition, we paid arrangement and amendment fees to the Agent and the lenders that provided their consent to the Amendment of approximately $5.3 million, which were capitalized in the second quarter of 2017 and are amortized to interest expense over the remaining term of the agreement.
The Credit Agreement requires us to comply with a Consolidated Fixed Charge Coverage ratio of no less than 1.10:1. Breach of this covenant shall result in a Minimum Availability Period, which requires us to maintain $50.0 million of excess availability on the Revolving Facility.
The table below shows the required and actual ratios under the Credit Agreement calculated as of September 30, 2018:
 
Required Ratio
 
Actual Ratio
Consolidated Fixed Charge Coverage Ratio
No less than
 
1.10:1
 
2.03:1
The actual Consolidated Fixed Charge Coverage ratio was calculated pursuant to the Credit Agreement by dividing the sum of consolidated EBITDA minus Unfinanced Capital Expenditures minus the excess (to the extent positive) of (i) expenses for income taxes paid in cash minus (ii) cash income tax refunds received for the 12-month period ending September 30, 2018 ($92.5 million), by consolidated fixed charges for the 12-month period ending September 30, 2018 ($45.5 million). For purposes of the calculation, “consolidated fixed charges” is defined as the sum of consolidated interest expense and scheduled principal payments on indebtedness actually made during such period. The actual Consolidated Fixed Charge Coverage Ratio of 2.03:1 as of September 30, 2018 was above the minimum requirement of 1.10:1 under the Credit Agreement. Availability under our Revolving Facility was $247.3 million at September 30, 2018.


10

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Events of default under the Credit Agreement include customary events, such as a cross-acceleration provision in the event that we default on other debt. In addition, an event of default under the Credit Agreement would occur if a change of control occurs. This is defined to include the case where a third party becomes the beneficial owner of 35% or more of our voting stock or a majority of Rent-A-Center’s Board of Directors are not Continuing Directors (all of the current members of our Board of Directors are Continuing Directors under the terms of the Credit Agreement). An event of default would also occur if one or more judgments were entered against us of $50.0 million or more and such judgments were not satisfied or bonded pending appeal within 30 days after entry.
In addition to the Revolving Facility discussed above, we maintain a $12.5 million unsecured, revolving line of credit with INTRUST Bank, N.A. to facilitate cash management. As of September 30, 2018, we had no outstanding borrowings against this line of credit and $5.7 million outstanding at December 31, 2017.
Liquidity
As described above, our Revolving Facility is scheduled to mature in March 2019. Our primary liquidity requirements are for rental merchandise purchases. Other capital requirements include expenditures for property assets and debt service. Our primary sources of liquidity have been cash provided by operations. We utilize our Revolving Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw funds under the Revolving Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities.
In the event the Vintage Merger is not completed prior to the maturation of the Revolving Facility, we will need to refinance our Revolving Facility. We are evaluating refinancing options for our Credit Agreement, including amending and extending our current Revolving Facility with our existing lenders, or obtaining other sources of financing. We expect to obtain refinancing of our Revolving Facility, if required. We believe cash flow generated from operations, together with availability under our Credit Agreement for the remainder of its term, will be sufficient to fund our operations during the next 12 months.
Note 5 - Senior Notes
On November 2, 2010, we issued $300 million in senior unsecured notes due November 2020, bearing interest at 6.625%, pursuant to an indenture dated November 2, 2010, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repay approximately $200.0 million of outstanding term debt under our Prior Credit Agreement. The remaining net proceeds were used to repurchase shares of our common stock. The principal amount of the 6.625% notes outstanding as of September 30, 2018 and December 31, 2017, was $292.7 million, reduced by $1.3 million and $1.8 million of unamortized issuance costs, respectively.
On May 2, 2013, we issued $250 million in senior unsecured notes due May 2021, bearing interest at 4.75%, pursuant to an indenture dated May 2, 2013, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repurchase shares of our common stock under a $200.0 million accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under our Prior Credit Agreement. The principal amount of the 4.75% notes outstanding as of September 30, 2018 and December 31, 2017, was $250.0 million, reduced by $1.7 million and $2.1 million of unamortized issuance costs, respectively.
The indentures governing the 6.625% notes and the 4.75% notes are substantially similar. Each indenture contains covenants that limit our ability to:
incur additional debt; 
sell assets or our subsidiaries;
grant liens to third parties;
pay cash dividends or repurchase stock when total leverage is greater than 2.50:1 (subject to an exception for cash dividends in an amount not to exceed $20 million annually); and
engage in a merger or sell substantially all of our assets.
Events of default under each indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $50.0 million, as well as in the event a judgment is entered against us in excess of $50.0 million that is not discharged, bonded or insured.
The 6.625% notes may be redeemed on or after November 15, 2015, at our option, in whole or in part, at a premium declining from 103.313% (the current premium is 101.104%). The 6.625% notes may be redeemed on or after November 15, 2018, at our option, in whole or in part, at par. The 6.625% notes also require that upon the occurrence of a change of control (as defined in the 2010 indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the


11

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. We expect to exercise our option to redeem the 6.625% notes in connection with the closing of the Vintage Merger.
The 4.75% notes may be redeemed on or after May 1, 2016, at our option, in whole or in part, at a premium declining from 103.563% (the current premium is 101.188%). The 4.75% notes may be redeemed on or after May 1, 2019, at our option, in whole or in part, at par. The 4.75% notes also require that upon the occurrence of a change of control (as defined in the 2013 indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. We expect to exercise our option to redeem the 4.75% notes in connection with the closing of the Vintage Merger.
Any mandatory repurchase of the 6.625% notes and/or the 4.75% notes would trigger an event of default under our Credit Agreement. We are not required to maintain any financial ratios under either of the indentures.
Rent-A-Center and its subsidiary guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center with respect to the 6.625% notes and the 4.75% notes. Rent-A-Center has no independent assets or operations, and each subsidiary guarantor is 100% owned directly or indirectly by Rent-A-Center. The only direct or indirect subsidiaries of Rent-A-Center that are not guarantors are minor subsidiaries. There are no restrictions on the ability of any of the subsidiary guarantors to transfer funds to Rent-A-Center in the form of loans, advances or dividends, except as provided by applicable law.
Note 6 - Fair Value
We follow a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of our non-financial assets and non-financial liabilities, which consist primarily of goodwill. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no changes in the methods and assumptions used in measuring fair value during the period.
At September 30, 2018, our financial instruments include cash and cash equivalents, receivables, payables and senior notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at September 30, 2018 and December 31, 2017, because of the short maturities of these instruments.
The fair value of our senior notes is based on Level 1 inputs and was as follows at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
(in thousands)
Carrying Value
 
Fair Value
 
Difference
 
Carrying Value
 
Fair Value
 
Difference
6.625% senior notes
$
292,740

 
$
291,276

 
$
(1,464
)
 
$
292,740

 
$
278,835

 
$
(13,905
)
4.75% senior notes
250,000

 
252,950

 
2,950

 
250,000

 
237,500

 
(12,500
)
Total senior notes
$
542,740

 
$
544,226

 
$
1,486

 
$
542,740

 
$
516,335

 
$
(26,405
)
Note 7 - Other Charges
2018 Cost Savings Initiatives. During the first nine months of 2018, we began execution of multiple cost savings initiatives, including reductions in overhead and supply chain, resulting in pre-tax charges of $6.8 million in contract termination fees, $7.0 million in severance and other payroll-related costs, $1.9 million in legal and advisory fees, $1.1 million in other miscellaneous shutdown costs, $0.9 million in lease obligation costs, $0.4 million related to the write-down of capitalized software, and $0.1 million in disposal of fixed assets.
Store Consolidation Plan. During the first nine months of 2018, we closed 129 Core U.S. stores and 9 locations in Mexico, resulting in pre-tax charges of $10.5 million, consisting of $7.9 million in lease obligation costs, $1.5 million in disposal of fixed assets, $0.9 million in other miscellaneous shutdown costs, and $0.2 million in severance and other payroll-related cost.
Discontinuation of IT Software Projects. During the first half of 2018, we discontinued certain IT software projects and as a result incurred pre-tax charges of $1.9 million, related to the write-down of capitalized assets.
Effects of 2018 Hurricane. During the third quarter of 2018, Hurricane Florence caused damage in North Carolina and South Carolina, resulting in pre-tax expenses of approximately $0.2 million for inventory losses, store repair costs, fixed asset write-offs, and employee assistance. At this time, we are unable to estimate the full extent of losses incurred due to the damage caused by Hurricane Florence, however, we do not ultimately expect the losses to be material to our financial statements.
Acceptance Now Store Closures. During the first six months of 2017, we closed 319 Acceptance Now manned locations and 9 Acceptance Now direct locations, related to the hhgregg bankruptcy and liquidation plan and the Conn's referral contract termination.


12

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

These closures resulted in pre-tax charges of $16.4 million for the nine months ended September 30, 2017, consisting primarily of rental merchandise losses, disposal of fixed assets, and other miscellaneous labor and shutdown costs. In addition, we recorded a pre-tax impairment charge of $3.9 million to our intangible assets, for our discontinued vendor relationship.
Corporate Cost Rationalization. During the first nine months of 2017, we executed a head count reduction that impacted approximately 10% of our field support center workforce. This resulted in pre-tax charges for severance and other payroll-related costs of approximately $3.4 million for the nine months ended September 30, 2017.
Effects of 2017 Hurricanes. During the third quarter of 2017, Hurricanes Harvey, Irma and Maria caused significant damage in the continental United States and surrounding areas, including Texas, Florida, and Puerto Rico, resulting in pre-tax expenses of approximately $1.9 million in the third quarter of 2017 for inventory losses, store repair costs, fixed asset write-offs, and employee assistance. Approximately $1.7 million of these pre-tax expenses related to Hurricanes Harvey and Irma, while the remaining $0.2 million related to employee assistance payments for Hurricane Maria.
Activity with respect to other charges for the nine months ended September 30, 2018 is summarized in the below table:
(in thousands)
 Accrued Charges at December 31, 2017
 
Charges & Adjustments
 
Payments
 
 Accrued Charges at September 30, 2018
Cash charges:
 
 
 
 
 
 
 
Labor reduction costs
$
1,674

 
$
7,168

 
$
(6,411
)
 
$
2,431

Lease obligation costs
2,105

 
9,303

 
(5,564
)
 
5,844

Contract termination costs

 
6,750

 
(6,750
)
 

Other miscellaneous

 
2,165

 
(2,165
)
 

Total cash charges
$
3,779

 
25,386

 
$
(20,890
)
 
$
8,275

Non-cash charges:
 
 
 
 
 
 
 
Rental merchandise recoveries
 
 
(484
)
 
 
 
 
Asset impairments
 
 
3,771

 
 
 
 
Other(1)
 
 
11,992

 
 
 
 
Total other charges
 
 
$
40,665

 
 
 
 
(1) Other primarily includes incremental legal and advisory fees related to our strategic review process and the Vintage Merger Agreement, partially offset by insurance claims recoveries related to 2017 hurricanes.
Note 8 - Segment Information
The operating segments reported below are the segments for which separate financial information is available and for which segment results are evaluated by the chief operating decision makers. Our operating segments are organized based on factors including, but not limited to, type of business transactions, geographic location and store ownership. All operating segments offer merchandise from four basic product categories: consumer electronics, appliances, computers, furniture and accessories. Our Core U.S. and Franchising segments also offer smartphones.
Segment information for the three and nine months ended September 30, 2018 and 2017 is as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Core U.S.
$
451,320

 
$
442,763

 
$
1,389,081

 
$
1,390,687

Acceptance Now
173,438

 
184,293

 
549,435

 
622,160

Mexico
12,784

 
12,237

 
37,122

 
35,351

Franchising
7,400

 
4,672

 
23,077

 
15,388

Total revenues
$
644,942

 
$
643,965

 
$
1,998,715

 
$
2,063,586



13

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Gross profit
 
 
 
 
 
 
 
Core U.S.
$
313,771

 
$
309,779

 
$
975,231

 
$
965,739

Acceptance Now
81,586

 
92,088

 
256,441

 
310,451

Mexico
8,885

 
8,466

 
25,756

 
24,668

Franchising
3,498

 
2,132

 
11,176

 
6,803

Total gross profit
$
407,740

 
$
412,465

 
$
1,268,604

 
$
1,307,661

Beginning in 2018, we implemented an intercompany book value adjustment charge for all rental merchandise transfers from Acceptance Now locations to Core U.S. stores. For the three and nine months ended September 30, 2018, book value adjustments on intercompany rental merchandise transfers were $2.9 million and $9.3 million, respectively, resulting in a corresponding increase in gross profit for the Core U.S. and decrease in gross profit for Acceptance Now.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Operating profit (loss)
 
 
 
 
 
 
 
Core U.S.
$
43,221

 
$
23,859

 
$
115,135

 
$
79,241

Acceptance Now
26,278

 
10,379

 
70,865

 
49,595

Mexico
922

 
(242
)
 
2,306

 
(122
)
Franchising
522

 
1,032

 
3,687

 
3,565

Total segments
70,943

 
35,028

 
191,993

 
132,279

Corporate
(45,311
)
 
(43,473
)
 
(149,480
)
 
(140,445
)
Total operating profit (loss)
$
25,632

 
$
(8,445
)
 
$
42,513

 
$
(8,166
)
Beginning in 2018, we implemented an intercompany book value adjustment charge for all rental merchandise transfers from Acceptance Now locations to Core U.S. stores. For the three and nine months ended September 30, 2018, book value adjustments for inventory charge-offs related to intercompany rental merchandise transfers were $0.5 million and $1.7 million, respectively, resulting in a corresponding increase in operating profit for the Core U.S. and decrease in operating profit for Acceptance Now.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Depreciation, amortization and impairment of intangibles
 
 
 
 
 
 
 
Core U.S.
$
6,216

 
$
7,725

 
$
19,482

 
$
23,715

Acceptance Now
421

 
568

 
1,288

 
1,983

Mexico
222

 
496

 
839

 
1,549

Franchising
45

 
45

 
133

 
133

Total segments
6,904

 
8,834

 
21,742

 
27,380

Corporate
10,042

 
9,845

 
30,532

 
28,548

Total depreciation, amortization and impairment of intangibles
$
16,946

 
$
18,679

 
$
52,274

 
$
55,928

We recorded an impairment of intangibles of $3.9 million in the Acceptance Now segment during the first quarter of 2017 that is not included in the table above. The impairment charge was recorded to Other Charges in the Condensed Consolidated Statement of Operations.


14

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Capital expenditures
 
 
 
 
 
 
 
Core U.S.
$
3,586

 
$
6,625

 
$
12,801

 
$
21,333

Acceptance Now
76

 
430

 
156

 
1,525

Mexico
113

 
56

 
151

 
103

Total segments
3,775

 
7,111

 
13,108

 
22,961

Corporate
3,021

 
6,258

 
9,383

 
30,567

Total capital expenditures
$
6,796

 
$
13,369

 
$
22,491

 
$
53,528

(in thousands)
September 30, 2018
 
December 31, 2017
On rent rental merchandise, net
 
 
 
Core U.S.
$
378,221

 
$
408,993

Acceptance Now
241,044

 
278,443

Mexico
15,653

 
14,367

Total on rent rental merchandise, net
$
634,918

 
$
701,803

(in thousands)
September 30, 2018
 
December 31, 2017
Held for rent rental merchandise, net
 
 
 
Core U.S.
$
134,759

 
$
156,039

Acceptance Now
1,290

 
4,940

Mexico
5,330

 
6,209

Total held for rent rental merchandise, net
$
141,379

 
$
167,188

(in thousands)
September 30, 2018
 
December 31, 2017
Assets by segment
 
 
 
Core U.S.
$
709,074

 
$
776,296

Acceptance Now
306,553

 
350,970

Mexico
30,747

 
33,529

Franchising
3,899

 
3,802

Total segments
1,050,273

 
1,164,597

Corporate
301,820

 
256,184

Total assets
$
1,352,093

 
$
1,420,781

Note 9 - Stock-Based Compensation
We recognized $1.5 million and $1.1 million in pre-tax compensation expense related to stock options and restricted stock units during the three months ended September 30, 2018 and 2017, respectively, and $4.5 million and $2.2 million during the nine months ended September 30, 2018 and 2017, respectively. Stock compensation expense recognized during the nine months ended September 30, 2017 was impacted by the reversal of unvested stock compensation in the first quarter of 2017 for stock awards previously granted to former executives. During the nine months ended September 30, 2018, we granted approximately 554,000 stock options, 673,000 market-based performance restricted stock units and 490,000 time-vesting restricted stock units. The stock options granted were valued using a Black-Scholes pricing model with the following assumptions: an expected volatility of 44.97% to 56.01%, a risk-free interest rate of 2.07% to 2.78%, no expected dividend yield, and an expected term of 3.50 to 5.75 years. The weighted-average exercise price of the options granted during the nine months ended September 30, 2018 was $9.06 and the weighted-average grant-date fair value was $3.97. Performance-based restricted stock units are valued using a Monte Carlo simulation. Time-vesting restricted stock units are valued using the closing price on the trading day immediately preceding the day of the grant. The weighted-average grant date fair value of the market-based performance and time-vesting restricted stock units granted during the nine months ended September 30, 2018 was $9.03 and $8.58, respectively.


15

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Note 10 - Contingencies
From time to time, the Company, along with our subsidiaries, is party to various legal proceedings arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not expect these losses to have a material impact on our condensed consolidated financial statements if and when such losses are incurred.
We are subject to unclaimed property audits by states in the ordinary course of business. The property subject to review in this audit process included unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. We routinely remit escheat payments to states in compliance with applicable escheat laws.
Assuming completion of the Vintage Merger, we expect to pay estimated financial advisory fees of approximately $15 million.
Alan Hall, et. al. v. Rent-A-Center, Inc., et. al.; James DePalma, et. al. v. Rent-A-Center, Inc., et. al. On December 23, 2016, a putative class action was filed against us and certain of our former officers by Alan Hall in Federal court in Sherman, Texas. The complaint alleges that the defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing false and misleading statements and omitting material facts regarding our business, including implementation of our point-of-sale system, operations and prospects during the period covered by the complaint. The complaint purports to be brought on behalf of all purchasers of our common stock from July 27, 2015 through October 10, 2016, and seeks damages in unspecified amounts and costs, fees, and expenses. A complaint filed by James DePalma also in Sherman, Texas alleging similar claims was consolidated by the court into the Hall matter. On October 19, 2017, the magistrate judge entered a recommendation to deny our motion to dismiss the complaint to the district judge who will decide the issue. We filed our objections to the magistrate's recommendation on November 2, 2017. On December 14, 2017, the district judge issued an order adopting the magistrate's report and denying our motion to dismiss the complaint. The parties have subsequently agreed to settle this matter for $11 million pursuant to a Settlement Term Sheet dated October 8, 2018. The settlement is in the documentation process and is subject to approval by the court. The settlement will be fully funded by insurance.
Note 11 - Loss Per Common Share
Summarized basic and diluted earnings per common share were calculated as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net earnings (loss)
$
12,918

 
$
(12,599
)
 
$
6,828

 
$
(28,171
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding
53,508

 
53,306

 
53,455

 
53,272

Effect of dilutive stock awards(1)
1,404

 

 
946

 

Weighted-average dilutive shares
54,912

 
53,306

 
54,401

 
53,272

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.24

 
$
(0.24
)
 
$
0.13

 
$
(0.53
)
Diluted earnings (loss) per common share
$
0.24

 
$
(0.24
)
 
$
0.13

 
$
(0.53
)
Anti-dilutive securities excluded from diluted loss per common share:
 
 
 
 
 
 
 
Anti-dilutive restricted share units

 
635

 

 
635

Anti-dilutive performance share units
211

 
784

 
211

 
784

Anti-dilutive stock options
1,417

 
3,103

 
1,672

 
3,103

(1) 
There was no dilutive effect to the loss per common share for the three and nine months ended September 30, 2017 due to the net loss incurred for respective periods.
 


16


RENT-A-CENTER, INC. AND SUBSIDIARIES


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with respect to the pending Vintage Merger, the benefits of the pending transaction, and the anticipated timing and consummation of the pending Vintage Merger. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Quarterly Report on Form 10-Q and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Factors that could cause or contribute to these differences include, but are not limited to:
the general strength of the economy and other economic conditions affecting consumer preferences and spending;
factors affecting the disposable income available to our current and potential customers;
changes in the unemployment rate;
the occurrence of any event, change or other circumstances that could give rise to the termination of the Vintage Merger Agreement;
the inability to complete the Vintage Merger due to failure to satisfy conditions necessary for completion of the merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction;
risks regarding the failure of Vintage to obtain the necessary debt and/or equity financing to complete the Vintage Merger;
risks relating to operations of the business and our financial results if the Vintage Merger Agreement is terminated;
risks related to disruption of management’s attention from our ongoing business operations due to the pending Vintage Merger;
the effect of the pendency or consummation of the Vintage Merger on our relationships with third parties, including our employees, franchisees, customers, suppliers, business partners and vendors, which make it more difficult to maintain business and operations relationships, and negatively impact the operating results of the four core business segments and business generally;
the risk that certain approvals or consents will not be received in a timely manner or that the Vintage Merger will not be consummated in a timely manner;
capital market conditions, including availability of funding sources for us and Vintage;
changes in our credit ratings;
the risk of stockholder litigation in connection with the Vintage Merger, and the impact of any adverse legal judgments, fines, penalties, injunctions or settlements thereof;
difficulties encountered in improving the financial and operational performance of our business segments;
our ability to refinance our Revolving Facility expiring in early 2019 on favorable terms, if at all;
risks associated with pricing changes and strategies being deployed in our businesses;
our ability to continue to realize benefits from our initiatives regarding cost-savings and other EBITDA enhancements, efficiencies and working capital improvements;
our ability to continue to effectively operate and execute our strategic initiatives;
our ability to execute our franchise strategy;
failure to manage our store labor and other store expenses;
disruptions caused by the operation of our store information management system;


17


RENT-A-CENTER, INC. AND SUBSIDIARIES


our transition to more-readily scalable, "cloud-based" solutions;
our ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications;
disruptions in our supply chain;
limitations of, or disruptions in, our distribution network, and the impact, effects and results of the changes we have made and are making to our distribution methods;
rapid inflation or deflation in the prices of our products;
our available cash flow;
our ability to identify and successfully market products and services that appeal to our customer demographic;
consumer preferences and perceptions of our brands;
our ability to execute and the effectiveness of a store consolidation, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores;
our ability to enter into new and collect on our rental or lease purchase agreements;
the passage of legislation adversely affecting the Rent-to-Own industry;
our compliance with applicable statutes or regulations governing our transactions;
changes in interest rates;
changes in tariff policies;
adverse changes in the economic conditions of the industries, countries or markets that we serve;
information technology and data security costs;
the impact of any breaches in data security or other disturbances to our information technology and other networks and our ability to protect the integrity and security of individually identifiable data of our customers and employees;
changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;
changes in our effective tax rate;
fluctuations in foreign currency exchange rates;
our ability to maintain an effective system of internal controls;
the resolution of our litigation; and
the other risks detailed from time to time in our reports furnished or filed with the Securities and Exchange Commission.
Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, and elsewhere in this Quarterly Report on Form 10-Q. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Our Business
We are one of the largest rent-to-own operators in North America, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories), under flexible rental purchase agreements with no long-term obligation. We were incorporated in the State of Delaware in 1986.
Our Strategy
Our strategy focuses on several improvement areas including a significant cost savings plan, a more targeted value proposition, and a refranchising program.
We have implemented significant cost savings opportunities across the business in the areas of overhead, supply chain and other store expenses.
The updated value proposition in the Core U.S. is intended to improve traffic trends with a balanced approach of competitively pricing elastic categories while capturing more margin in inelastic categories.


18


RENT-A-CENTER, INC. AND SUBSIDIARIES


Within Acceptance NOW, the value proposition centers around improved return on investment through a shorter payback period and higher ownership levels.
Refranchising certain brick and mortar locations will enable us to maintain and grow our presence while using proceeds to pay down debt.
Recent Developments
Effects of Hurricanes. In September and October 2018, Hurricanes Florence and Michael caused significant damage in the continental United States, primarily including North Carolina, South Carolina, Florida, Georgia, and Alabama. We incurred charges during the third quarter of 2018 as a result of the damage and displacement caused by Hurricane Florence, including inventory losses, store repairs, employee assistance, and fixed asset write-offs. Storm related costs are included in other charges for the respective segment as discussed in Note 7 to the unaudited condensed consolidated financial statements. We continue to assess the full impact of damage caused by these storms and expect additional charges to be recorded in the fourth quarter of 2018, however, we do not ultimately expect the losses to be material to our financial statements.
Proposed Merger. On June 17, 2018, Rent-A-Center entered into a merger agreement (the “Vintage Merger Agreement”) with Vintage Rodeo Parent, LLC (“Vintage”), an affiliate of Vintage Capital Management, LLC (“Vintage Capital”), pursuant to which Vintage Capital will, when the proposed merger is completed, acquire all of the outstanding shares of Rent-A-Center common stock for $15.00 per share in cash (collectively, the “Vintage Merger”). The Vintage Merger was approved by the Company's stockholders on September 18, 2018. As previously announced, the parties received a Second Request from the Federal Trade Commission ("FTC") in connection with the Vintage Merger. Rent-A-Center and Vintage Capital continue to cooperate fully with the FTC. The parties intend to complete the Vintage Merger as soon as practicable following receipt of regulatory clearance from the FTC and the satisfaction or waiver of other customary closing conditions. Rent-A-Center currently expects the Vintage Merger, which is not subject to a financing condition, to close during the first quarter of 2019. Upon completion of the Vintage Merger, Rent-A-Center will become a wholly owned subsidiary of Vintage and Rent-A-Center’s shares of common stock will be delisted from NASDAQ and deregistered.
Results of Operations
The following discussion focuses on our results of operations and issues related to our liquidity and capital resources. You should read this discussion in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
During the first nine months of 2018, we experienced a decline in revenues and gross profit driven primarily by reductions in our store base for the Core U.S. and Acceptance Now segments, and impacts related to the aftermath of the 2017 hurricanes, partially offset by increases in same store sales. Operating profit, however, increased during the first nine months of 2018, primarily due to cost savings initiatives, including reductions in overhead and supply chain, and lower rental merchandise losses.
Revenues in our Core U.S. segment decreased approximately $1.6 million for the nine months ended September 30, 2018, primarily due to rationalization of our Core U.S. store base and impacts from the aftermath of the 2017 hurricanes, partially offset by increases in same store sales. Gross profit as a percentage of revenue increased 0.8% primarily due to the intercompany book value adjustment of Acceptance Now returned product transferred to Core U.S. stores. Operating profit increased $35.9 million for the nine months ended September 30, 2018 primarily due to decreases of $13.1 million and $23.8 million in labor and other store expenses, respectively.
The Acceptance Now segment revenues decreased by approximately $72.7 million or 11.7%, primarily due to closures for Conn's and hhgregg, and impacts related to the aftermath of the 2017 hurricanes, partially offset by increases in same store sales. Gross profit as a percent of revenue decreased 3.2% primarily due to the intercompany book value adjustment of Acceptance Now returned product transferred to Core U.S. stores, and the new value proposition enhancements. Operating profit as a percent of revenue increased 4.9% primarily due to lower rental merchandise losses.
Operating profit for the Mexico segment as a percentage of revenue increased by 6.5% for the nine months ended September 30, 2018, driven primarily by lower rental merchandise losses.
Cash flow from operations was $183.9 million for the nine months ended September 30, 2018. We paid down debt by $139.3 million during the first nine months of the year, ending the period with $111.0 million of cash and cash equivalents and no outstanding borrowings under our Term Loans or Revolving Facility.



19


RENT-A-CENTER, INC. AND SUBSIDIARIES


The following table is a reference for the discussion that follows.
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
(dollar amounts in thousands)
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rentals and fees
$
552,580

 
$
552,194

 
$
386

 
0.1
 %
 
$
1,679,697

 
$
1,723,019

 
$
(43,322
)
 
(2.5
)%
Merchandise sales
67,141

 
67,566

 
(425
)
 
(0.6
)%
 
239,487

 
266,061

 
(26,574
)
 
(10.0
)%
Installment sales
15,681

 
17,276

 
(1,595
)
 
(9.2
)%
 
49,459

 
51,690

 
(2,231
)
 
(4.3
)%
Other
2,140

 
2,257

 
(117
)
 
(5.2
)%
 
6,995

 
7,428

 
(433
)
 
(5.8
)%
Total store revenue
637,542

 
639,293

 
(1,751
)
 
(0.3
)%
 
1,975,638

 
2,048,198

 
(72,560
)
 
(3.5
)%
Franchise
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
4,135

 
2,676

 
1,459

 
54.5
 %
 
12,649

 
9,211

 
3,438

 
37.3
 %
Royalty income and fees
3,265

 
1,996

 
1,269

 
63.6
 %
 
10,428

 
6,177

 
4,251

 
68.8
 %
Total revenues
644,942

 
643,965

 
977

 
0.2
 %
 
1,998,715

 
2,063,586

 
(64,871
)
 
(3.1
)%
Cost of revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of rentals and fees
153,716

 
153,202

 
514

 
0.3
 %
 
465,852

 
474,511

 
(8,659
)
 
(1.8
)%
Cost of merchandise sold
74,340

 
70,551

 
3,789

 
5.4
 %
 
236,255

 
256,730

 
(20,475
)
 
(8.0
)%
Cost of installment sales
5,244

 
5,207

 
37

 
0.7
 %
 
16,103

 
16,099

 
4

 
 %
Total cost of store revenues
233,300

 
228,960

 
4,340

 
1.9
 %
 
718,210

 
747,340

 
(29,130
)
 
(3.9
)%
Franchise cost of merchandise sold
3,902

 
2,540

 
1,362

 
53.6
 %
 
11,901

 
8,585

 
3,316

 
38.6
 %
Total cost of revenues
237,202

 
231,500

 
5,702

 
2.5
 %
 
730,111

 
755,925

 
(25,814
)
 
(3.4
)%
Gross profit
407,740

 
412,465

 
(4,725
)
 
(1.1
)%
 
1,268,604

 
1,307,661

 
(39,057
)
 
(3.0
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Store expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
168,297

 
179,643

 
(11,346
)
 
(6.3
)%
 
513,543

 
551,197

 
(37,654
)
 
(6.8
)%
Other store expenses
149,326

 
171,995

 
(22,669
)
 
(13.2
)%
 
492,129

 
546,485

 
(54,356
)
 
(9.9
)%
General and administrative expenses
40,818

 
43,768

 
(2,950
)
 
(6.7
)%
 
127,480

 
130,637

 
(3,157
)
 
(2.4
)%
Depreciation, amortization and impairment of intangibles
16,946

 
18,679

 
(1,733
)
 
(9.3
)%
 
52,274

 
55,928

 
(3,654
)
 
(6.5
)%
Other charges
6,721

 
6,825

 
(104
)
 
(1.5
)%
 
40,665

 
31,580

 
9,085

 
28.8
 %
Total operating expenses
382,108

 
420,910

 
(38,802
)
 
(9.2
)%
 
1,226,091

 
1,315,827

 
(89,736
)
 
(6.8
)%
Operating profit (loss)
25,632

 
(8,445
)
 
34,077

 
403.5
 %
 
42,513

 
(8,166
)
 
50,679

 
620.6
 %
Debt refinancing charges

 

 

 
 %
 

 
1,936

 
(1,936
)
 
(100.0
)%
Interest, net
10,151

 
11,276

 
(1,125
)
 
(10.0
)%
 
31,906

 
33,854

 
(1,948
)
 
(5.8
)%
Earnings (loss) before income taxes
15,481

 
(19,721
)
 
35,202

 
178.5
 %
 
10,607

 
(43,956
)
 
54,563

 
124.1
 %
Income tax expense (benefit)
2,563

 
(7,122
)
 
9,685