UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2021
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For the fiscal year ended December 31, 2017
or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-38047 |
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For the transition period from to
Commission File Number: 001-38047
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)
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| 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
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol | Name of Exchange on Which Registered |
| Common Stock, par value $0.01 per share | RCII | The Nasdaq Global SelectStock Market Inc. |
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Securities registered pursuant to Section 12(g) of the Act: None |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ☒ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨☐ No þ☒
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 þ☒ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ
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Aggregate market value of the 42,856,015 shares of Common Stock held by non-affiliates of the registrant at the closing sales price as reported on The Nasdaq Global Select Market, Inc. on June 30, 2017 | $ | 502,272,496 |
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| Number of shares of Common Stock outstanding as of the close of business on February 21, 2018: | 53,413,636 |
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Aggregate market value of the 60,651,808 sharesof Common Stock held by non-affiliatesof the registrant at the closing salesprice as reported on The Nasdaq Global Select Market, on June 30, 2021 | $ | 3,218,791,451 | |
| Number of shares of Common Stock outstanding as of the close of business on February 21, 2022: | 59,028,739 | |
Documents incorporated by reference:
Portions of the definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders of Rent-A-Center, Inc. are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
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| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
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Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6. | Selected Financial DataReserved | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | |
| Item 9B. | Other Information | |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. | |
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| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accountant Fees and Services | |
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| Item 15. | Exhibits and Financial Statement Schedules | |
| Item 16. | Form 10-K Summary | |
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| SIGNATURES | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995.1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.” These forward-looking statements, include, without limitation, those relating to the potential effects of the pandemic of the respiratory disease caused by a novel coronavirus (“COVID-19”) on our business, operations, financial performance and prospects, the future business prospects and financial performance of our Company following our merger with Acima Holdings, LLC (“Acima Holdings”), cost and revenue synergies and other benefits expected to result from the Acima Holdings acquisition, our planned technologies and other enhancements to our lease-to-own solutions for consumers and retailers, potential additional product or service offerings, our expectations, plans and strategy relating to our capital structure and capital allocation, including any share repurchases under the Company's share repurchase program, and other statements that are not historical facts.
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 Annual Report on Form 10-K. 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 and adversely 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 Annual Report on Form 10-K 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. WeExcept as required by law, 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 possibility that the anticipated benefits from the Acima Holdings acquisition may not be fully realized or may take longer to realize than expected;
• the possibility that costs, difficulties or disruptions related to the integration of Acima Holdings operations into our other operations will be greater than expected;
• our ability to (i) effectively adjust to changes in the composition of our offerings and product mix as a result of acquiring Acima Holdings and continue to maintain the quality of existing offerings and (ii) successfully introduce other new product or service offerings on a timely and cost-effective basis;
• changes in our future cash requirements as a result of the Acima Holdings acquisition, whether caused by unanticipated increases in capital expenditures or working capital needs, unanticipated liabilities or otherwise;
• our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;
•the impact of the COVID-19 pandemic and related government and regulatory restrictions issued to combat the pandemic, including adverse changes in such restrictions, and the expiration of governmental stimulus programs, and impacts on (i) demand for our lease-to-own products offered in our operating segments, (ii) our Acima retail partners, (iii) our customers and their willingness and ability to satisfy their lease obligations, (iv) our suppliers' ability to satisfy our merchandise needs and related supply chain disruptions, (v) our employees, including our ability to adequately staff our operating locations, (vi) our financial and operational performance, and (vii) our liquidity;
•the general strength of the economy and other economic conditions affecting consumer preferences and spending;spending, including the availability of credit to our target consumers and impacts from inflation;
•factors affecting the disposable income available to our current and potential customers;
•changes in the unemployment rate;
uncertainties concerning the outcome, impact, effects and results•capital market conditions, including availability of the exploration offunding sources for us;
•changes in our strategic and financial alternatives;credit ratings;
•difficulties encountered in improving the financial and operational performance of our business segments;
•risks associated with pricing changes and strategies being deployed in our businesses;
•our ability to continue to realize any benefits from our initiatives regarding cost-savings and other EBITDA enhancements, efficiencies and working capital improvements;
our chief executive officer transitions, including •our ability to continue to effectively operate and execute our strategies during the transition period;strategic initiatives, including mitigating risks associated with any potential mergers and acquisitions, or refranchising opportunities;
our ability to execute our franchise strategy;
•failure to manage our store labor and other store expenses;expenses, including merchandise losses;
our ability to develop and successfully execute strategic initiatives;
•disruptions caused by the operation of our store information management system;systems or disruptions in the systems of our host retailers;
•risks related to our virtual lease-to-own business, including our ability to continue to develop and successfully implement the necessary technologies;
•our ability to achieve the benefits expected from our integrated virtual and staffed retail partner offering and to successfully grow this business segment;
•exposure to potential operating margin degradation due to the higher cost of merchandise in our Acima offering and higher merchandise losses than compared to our Rent-A-Center Business segment;
•our transition to more-readily scalable "cloud-based"“cloud-based” solutions;
•our ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications;
•our ability to protect our proprietary intellectual property;
•our ability or that of our host retailers to protect the integrity and security of customer, employee and host retailer information, which may be adversely affected by hacking, computer viruses, or similar disruptions;
•disruptions in our supply chain;
•limitations of, or disruptions in, our distribution network;
•rapid inflation or deflation in the prices of our products;
•our ability to execute and the effectiveness of a store consolidation,consolidations, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
•our available cash flow;
flow and our ability to refinance our senior credit facility on favorable terms, if at all;generate sufficient cash flow to continue paying dividends;
•increased competition from traditional competitors, virtual lease-to-own competitors, online retailers, Buy-Now-Pay-Later and other Fintech companies and other competitors, including subprime lenders;
•our ability to identify and successfully market products and services that appeal to our current and future targeted customer demographic;segments and to accurately estimate the size of the total addressable market;
•consumer preferences and perceptions of our brands;
our ability to control costs and increase profitability;
•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;
•changes in the passageenforcement of legislationexisting laws and regulations and the enactment of new laws and regulations adversely affecting the Rent-to-Own industry;our business, including any legislative or regulatory enforcement efforts that seek to re-characterize store-based or virtual lease-to-own transactions as credit sales and to apply consumer credit laws and regulations to our business;
•our compliance with applicable statutes or regulations governing our transactions;businesses;
•the impact of any additional social unrest such as that experienced in 2020 or otherwise, and resulting damage to our inventory or other assets and potential lost revenues;
•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 networks;
•our ability to protect the integrity and security of individually identifiable data of our customers, employees and employees;retail partners;
changes in our stock price, the number of shares of common stock that we may or may not repurchase, and our dividend policy and any changes thereto, if any;
•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;controls, including in connection with the integration of Acima;
the resolution of our litigation;•litigation or administrative proceedings to which we are or may be a party to from time to time; and
•the other risks detailed from time to time in our reports furnished or filed with the United States Securities and Exchange Commission.
Commission (the “SEC”).
PART I
Item 1. Business.
History of Rent-A-Center
Unless the context indicates otherwise, references to “we,” “us”, “our”, and “our”the “Company” refer to the consolidated business operations of Rent-A-Center, Inc., the parent, and any or all of its direct and indirect subsidiaries. For any references in this document to Note A through Note U, refer to the Notes to Consolidated Financial Statements in Item 8.
We are onea leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. We provide a critical service for a large portion of the largest rent-to-own operators in North America, focused on improving the quality of life for our customersunderserved consumers by providing them with access to, and the opportunity to obtain ownership of, high-quality, durable products such as consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories),via small payments over time under a flexible rental purchase agreementslease-purchase agreement with no long-term debt obligation. Through our Rent-A-Center Business, we provide a fully integrated customer experience through our e-commerce platform and brick and mortar presence. Our Acima business offers lease-to-own solutions through retailers in stores and online enabling such retailers to grow sales by expanding their customer base utilizing our differentiated offering. We were incorporated in the State of Delaware in 1986, and our common stock is traded on the Nasdaq Global Select Market under the ticker symbol "RCII."“RCII.”
Our principal executive offices are located at 5501 Headquarters Drive, Plano, Texas 75024. Our telephone number is (972) 801-1100 and our company website is www.rentacenter.com. We do not intend for information contained on our website to be part of this Annual Report on Form 10-K. We make available free of charge on or through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). Additionally, we provide electronic or paper copies of our filings free of charge upon request.
The RentalLease Purchase Transaction
The rentallease purchase transaction is a flexible alternative that provides freedom for consumers who wish to obtain use and enjoyment of brand name merchandise with no long-term obligation. obligation and without having to pay the full price up front. Generally, our customer has the right, but is not obligated, to acquire title to the merchandise either through an early purchase option or through payment of all lease renewals that would be required to obtain ownership.
The unit economics of the lease purchase transaction vary depending on the length of time customers take to obtain ownership of the product or whether the customer chooses to return the product without obtaining ownership. If a customer elects an early purchase option within a designated period of time following the initial lease, such as 90 or 120 days, a customer generally pays the retail price of the product plus a premium to the cost. Full term lease-to-own transactions involve the customer leasing our merchandise through a lease structured with multiple lease renewal terms and ultimately obtaining ownership of the merchandise at the conclusion of the final lease renewal term. A customer may also elect to obtain ownership anytime after the initial lease period, but prior to the full term of all lease renewals. Due to the longer lease period of full term lease contracts, along with the other benefits that are part of the lease-to-own transaction, obtaining ownership through payment of all lease renewals involve a higher total cost compared to the cost of the general retail price of the product if it was purchased upfront. Customers primarily take ownership of the merchandise through early purchase options, where the customer elects to make a lump-sum payment at a discounted purchase price prior to the final lease renewal. In the Rent-A-Center Business, the product is often rented more than one time before a customer ultimately obtains ownership.
There are differences in the unit economics between our Rent-A-Center Business and Acima segments, as we purchase our merchandise at wholesale prices for our Rent-A-Center Business segment and at retail prices for our Acima segment. Historically, operating margin for our Acima segment has benefited from the lower overhead cost associated with the virtual options employed at many third party locations.
Key features of the rentallease purchase transaction include:
Brand name merchandise. We offer well-known brands such as LG, Samsung, Sony and Vizio home electronics; Frigidaire, General Electric, LG, Samsung and Whirlpool appliances; HP, Dell, Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; LG and Samsung smartphones; and Ashley home furnishings.No long term obligation. A customer may terminate a lease purchase agreement at any time without penalty. Once the product is returned to us, the customer has no obligation for remaining payments other than any outstanding balances to the date of return.
Convenient payment options. Our customers make payments on a weekly, semi-monthly or monthly basis in our stores, kiosks,at our retail partner locations, online or by telephone. We accept cash, credit or debit cards. Rental payments are generally made in advancecards and together with applicable fees, constitute our primary revenue source.payment via certain electronic platforms (such as PayPal and Venmo). Approximately 82%78% and 92%94% of our rental purchase agreements are on a weekly termterms in our Core U.S. rent-to-own storesRent-A-Center Business and our Mexico segment,segments, respectively. Payments are generally made in advance on a biweekly or monthly basis in our Acceptance NowAcima segment.
No negative consequences. AFlexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer may terminate a rentalif the customer continuously renews the lease purchase agreement for a required period of between seven and 30 months, depending upon the product type, or exercises a specified early purchase option.
Reinstatement. If a customer is temporarily unable to make payments on a piece of rental merchandise and returns the merchandise, that customer generally may later re-rent the same piece of merchandise (or, if unavailable, a substitute of comparable quality, age and condition) on the terms that existed at anythe time the merchandise was returned, and pick up payments where they left off without penalty.losing credit for what they previously paid.
No formal credit needed. Generally, no established credit score or credit history is required. In the Rent-A-Center Business segment, we do not conductuse a formal credit investigationproprietary decision engine to verify customer information as part of our customers. We verifyapproval process for entering into a customer’s residencelease purchase agreement. In our Acima segment, which provides on-site or virtual lease-to-own options through third-party retailers and sourcesthrough the Acima ecosystem, customers complete the application process through a variety of income. References provided byresources, including online digital waterfall technology, retail partner electronic portals, online e-commerce websites, and the Acima mobile application. A robust proprietary automated decision engine process is used to confirm certain customer are also contacted to verify certain information contained infor approval of the rentallease purchase order form.agreement.
Brand name merchandise. In our store locations and through our retail partnerships, we offer merchandise from a large number of well-known brands such as Ashley and Lane home furnishings; LG, Samsung, and Sony home electronics; Frigidaire, Whirlpool, Amana, and Maytag appliances; HP, Acer, Asus, and Samsung computers and/or tablets; and Samsung smartphones.
Delivery & set-up included.and set-up. We generally offer same-day or next-day delivery and installation of our merchandise at no additional cost to the customer in our rent-to-ownRent-A-Center lease-to-own stores. Our Acceptance NowAcima locations rely on our third-party retail partners to deliver merchandise rentedleased by the customer. Suchcustomer, or for the customer to carry-out leased merchandise. Our third-party retail partners typically charge us a fee for delivery, which we pass on to the customer.
Product maintenance &and replacement. We In our Rent-A-Center Business, and in the Acima business where required by law, we provide any required service or repair without additional charge, except forin the event of damage in excess of normal wear and tear. Repair services are provided through our network of service centers,tear and certain other limited circumstances. The cost to repair the cost of whichmerchandise may be reimbursed by the vendor if the item is still under factory warranty. If the product cannot be repaired at the customer’s residence, we provide a temporary replacement while the product is being repaired. If the product cannot be repaired, we will replace it with a product of comparable quality, age and condition.
Lifetime reinstatement. If a customer is temporarily unable to make payments on a piece of rental merchandise and must return the merchandise, that customer generally may later re-rent the same piece of merchandise (or if unavailable, a substitute of comparable quality, age and condition) on the terms that existed at the time the merchandise was returned, and pick up payments where they left off without losing what they previously paid.
Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has continuously renewed the rental purchase agreement for a period of seven to 30 months, depending upon the product type, or exercises a specified early purchase option.
Our Strategy
Our strategy focusesis focused on several improvement areasgrowing our business model through emphasis on the following key initiatives:
•executing on market opportunities and enhancing our competitive position across both traditional and virtual lease-to-own solutions;
•accelerating the shift to e-commerce, expanding product categories, including a significant cost savings plan, a more targeted value proposition,into emerging product categories, and a refranchising program.improving the fully integrated customer experience;
The Company is targeting significant cost savings•using technology to support frictionless retailer onboarding with seamless integration to retailers' platforms;
•continuing to generate repeat business while expanding our potential customer base;
•leveraging the integration of the Acima Holdings decision engine and expanding digital payments and communication channels; and
•generating favorable adjusted EBITDA margin and strong free cash flow to fund strategic priorities and deliver and return capital to shareholders.
As we pursue our strategy, we may take advantage of merger and acquisition opportunities acrossfrom time to time that advance our key initiatives, and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or dispositions or other transactions, although there can be no assurance that any such activities will be consummated.
For additional information regarding the business in the areasacquisition of overhead, supply chainAcima Holdings, see “Item 7. Management's Discussion and other store expenses.Analysis of Financial Condition and Results of Operation—Recent Developments”.
The updated value proposition in the Core is intended to improve traffic trends with a balanced approach of competitively pricing elastic categories while capturing more margin in inelastic categories.
Within Acceptance NOW, the value proposition will center around improved return on investment through a shorter payback period and higher ownership levels.
Refranchising brick and mortar locations will enable the Company to maintain and grow its presence while using proceeds to pay down debt.
Our Operating Segments
We report financial operating performance under four operating segments: Core U.S.segments. To better reflect the Company's current strategic focus, our retail partner business operations are reported as the Acima segment (formerly Preferred Lease), Acceptance Now,which includes our virtual and staffed business models; and our company-owned stores and e-commerce platform through rentacenter.com are reported as the Rent-A-Center Business segment. In addition, we report operating results for our Mexico and Franchising.Franchising segments. Additional information regarding our operating segments is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this Annual Report on Form 10-K, and financial
information regarding these segments and revenues by geographic area are provided in Note ST to the consolidated financial statements contained in this Annual Report on Form 10-K. Substantially all of our revenues for the past three years originated in the United States.
Core U.S.Acima
Our Core U.S.Acima segment, is our largest operating segment, comprising approximately 70% of our consolidated net revenues for the year ended December 31, 2017. Approximately 80% of our business in this segment is from repeat customers.
At December 31, 2017, we operated 2,381 company-owned storeswhich operates in the United States Canada and Puerto Rico, including 45 retail installment sales stores underincludes the names “Get It Now”operations of Acima Holdings acquired in February 2021 and “Home Choice.” We routinely evaluateour virtual and staffed locations (previously branded as our Preferred Lease locations), and generally offers the markets in whichlease-to-own transaction to consumers who do not qualify for financing from the retailer. The Acima segment offers the lease-to-own transaction through our virtual offering solutions and Acima ecosystem, and through staffed and unstaffed kiosks located within third party retailer locations.
During 2021, we operateintegrated the virtual offering solutions within our then existing Preferred Lease platform with the Acima Holdings virtual platform to provide retailers and will close, sell or merge underperforming stores.
Acceptance Now
Through our Acceptance Now segment, we generally provideconsumers an on-site rent-to-own option at a third-party retailer’s location. Inexpanded set of innovative solutions to enter into lease-to-own transactions. Our virtual offering solutions allow consumers to enjoy the event a retail purchase credit application is declined, the customer can be introduced to an in-store Acceptance Now representative who explains an alternative transaction for acquiring the use and ownershipbenefits of the merchandise. Because weCompany’s flexible lease-to-own solutions across e-commerce, digital, and mobile channels. Beginning in the first quarter of 2021, the Preferred Lease segment was renamed the Acima segment and includes the results of Acima Holdings from the date of acquisition.
We neither require nor perform a formal credit investigation for the approval of the rentallease-to-own transaction through our Acima virtual offerings and on-site locations, although we do rely on certain information from consumer reporting agencies as part of our decisioning process that may constitute a "consumer report" under applicable law. We use a proprietary automated process to confirm certain customer information for approval of the lease purchase transaction, applicants who meet certain basic criteria are generally approved.agreement. We believe our Acceptance Now program islease-to-own solutions within the Acima segment are beneficial for both the retailer and the consumer. The retailer captures more sales and reduces their payment risk because we buy the merchandise directly from them and future rental payments are generally made at the retailer’s location.them. We believe consumers also benefit from our Acceptance Now programAcima model because they are able to obtain the products they want and need without the necessity of credit. The gross margins in this segment are lower thanrelying on credit to finance a purchase. We generally pay the gross margins inretail price for merchandise purchased from our Core U.S. segment because we pay retail forpartners and subsequently leased to the product.customer. Through certain retail partners, we offer our customers the option to obtain ownership of the product at or slightly above the full retail price if they pay within 90 days. In some cases, the retailer provides us a rebate on the cost of the merchandise if the customer exercises this 90 day90-day option.
Each Acceptance Now kiosk location typically consistsOur Acima operating model is highly agile and dynamic given our virtual offerings and our ability to open and close staffed and unstaffed locations quickly and efficiently. Generally, our Acima staffed locations consist of an area with a computer, desk and chairs. We occupy the space without charge by agreement with each retailer. In our virtual locations, transactions are initiated through an electronic portal accessible by retail partners on their store computers, on our retail partners' e-commerce sites or through our Acima ecosystem including the Acima mobile application. Accordingly, capital expenditures with respect to a new Acceptance Now locationAcima locations are minimal, and any exit costs associated with the closure of an Acceptance Now location would also be immaterial on an individual basis. Our operating model is highly agile and dynamic because we can open and close locations quickly and efficiently.minimal.
We relyAcima relies on our third-party retail partners to deliver merchandise rentedleased by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer. In the event the customer returns rented merchandise, we pick it up at no additional charge. MerchandiseMost merchandise returned from an Acceptance Now kiosk locationAcima lease-to-own transaction is subsequently donated or offered for rentrental at one of our Core U.S. rent-to-ownRent-A-Center Business stores.
Rent-A-Center Business
Our Rent-A-Center Business includes our company-owned stores in the United States and Puerto Rico and our e-commerce platform rentacenter.com. As of December 31, 2017,2021, we operated 1,106 staffed kiosk locations inside furniture and electronics retailers located1,846 company-owned stores in 42 statesthe United States and Puerto Rico, including 45 retail installment sales stores under the names “Get It Now” and 125 virtual (direct) locations.
“Home Choice.” We routinely evaluate the locations in which we operate to optimize our store network. Our Rent-A-Center Business segment comprised approximately 44% of our consolidated net revenues for the year ended December 31, 2021.
Mexico
Our Mexico segment currently consists primarily of our company-owned rent-to-ownlease-to-own stores in Mexico. AtAs of December 31, 2017,2021, we operated 131123 stores in this segment.
We are subject to the risks of doing business internationally as described under "Risk Factors."Mexico.
Franchising
The stores in our Franchising segment use Rent-A-Center's, ColorTyme'sour Rent-A-Center, ColorTyme or RimTyme'sRimTyme trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising's primary sourcesources of revenue isinclude 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.lease-to-own transaction, and royalties collected from franchisees based on a percentage of revenue.
As of December 31, 2017, this segment2021, we franchised 225466 stores in 3132 states operating under the Rent-A-Center (148(401 stores), ColorTyme (39(28 stores) and RimTyme (38(37 stores) trade names. These rent-to-ownlease-to-own stores primarily offer high quality durable products such as furniture and accessories, consumer electronics, appliances, computers, furniture and accessories, wheels and tires.
As franchisor, Franchising receives royalties of 2.0% to 6.0% of the franchisees’ monthly gross revenue and, generally, an initial fee up to $35,000$10,000 per new location.
The following table summarizes our locations allocated among these operating segments as of December 31:31 of each of the years indicated below: | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Rent-A-Center Business | 1,846 | | | 1,845 | | | 1,973 | |
| Mexico | 123 | | | 121 | | | 123 | |
| Franchising | 466 | | | 462 | | | 372 | |
Total locations(1) | 2,435 | | | 2,428 | | | 2,468 | |
(1) Does not include locations in our Acima segment. |
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Core U.S. | 2,381 |
| | 2,463 |
| | 2,672 |
|
| Acceptance Now Staffed | 1,106 |
| | 1,431 |
| | 1,444 |
|
| Acceptance Now Direct | 125 |
| | 478 |
| | 532 |
|
| Mexico | 131 |
| | 130 |
| | 143 |
|
| Franchising | 225 |
| | 229 |
| | 227 |
|
| Total locations | 3,968 |
| | 4,731 |
| | 5,018 |
|
The following discussion applies generally to all of our operating segments, unless otherwise noted.
Rent-A-Center Operations
Store Expenses
Our expenses primarily relate to merchandise costs and the operationscost of operating our stores, including salaries and benefits for our employees, occupancy expense for our leased real estate, advertising expenses, lost, damaged, or stolen merchandise, fixed asset depreciation, and other expenses.
Product Selection
Our Core U.S.The stores in our Rent-A-Center Business, Mexico, and Mexico storesFranchising segments generally offer merchandise from fivecertain basic product categories: furniture and accessories, appliances, consumer electronics, appliances, computers, (including tablets),tablets and smartphones, tools, tires, handbags and furniture (including accessories).other accessories. Although we seek to maintain sufficient inventory in our stores to offer customers a wide variety of models, styles and brands, we generally limit merchandise to prescribed levels to maintain strict inventory controls. We seek to provide a wide variety of high quality merchandise to our customers, and we emphasize products from name-brand manufacturers. Customers may request either new merchandise or previously rentedleased merchandise. Previously rentedleased merchandise is generally offered at a similar weekly, semi-monthly, or monthly rentallease rate as is offered for new merchandise, but with an opportunity to obtain ownership of the merchandise after fewer rentallease payments.
Consumer electronic products offered by our stores include high definition televisions, home theater systems, video game consoles and stereos. Appliances include refrigerators, freezers, washing machines, dryers, and ranges. We offer desktop, laptop, tablet computers and smartphones. Our furniture products include dining room, living room and bedroom furniture featuring a number of styles, materials and colors. Accessories include lamps and tables and are typically rented as part of a package of items, such as a complete room of furniture. Showroom displays enable customers to visualize how the product will look in their homes and provide a showcase for accessories. Appliances include refrigerators, freezers, washing machines, dryers, and ranges. Consumer electronic products offered by our stores include high definition televisions, home theater systems, video game consoles and stereos. We offer desktop, laptop, tablet computers and smartphones.
The merchandise assortment may vary in our non-U.S. stores according to market characteristics and consumer demand unique to the particular country in which we are operating. For example, in Mexico, the appliances we offer are sourced locally, providing our customers in Mexico the look and feel to which they are accustomed in that product category.
Acceptance NowAcima locations offer the merchandise available for sale at the applicablethrough third-party retailer,retailers, primarily including furniture and accessories, consumer electronics and appliances.appliances, wheels and tires, and jewelry.
For the year ended December 31, 2017, furniture and accessories accounted for approximately 41% of our consolidated rentals and fees revenue, consumer electronic products for 20%, appliances for 15%, computers for 5%, smartphones for 3% and other products and services for 16%.
Product Turnover
On average, in the Core U.S.Rent-A-Center Business segment, a rental term of 1416 months or exercising an early purchase option is generally required to obtain ownership of new merchandise. Product turnover is the number of times a product is rented to a different customer. On average, a product is rented (turned over) to threemultiple customers before a customer acquires ownership. Merchandise returned in the Acceptance NowAcima segment is moved to a Core U.S.Rent-A-Center Business store where it is offered for rent. Ownership is attained in approximately 25%42% of first-time rental purchase agreements in the Core U.S.Rent-A-Center Business segment. The average total life for each product in our Core U.S.Rent-A-Center Business segment is approximately 1815 months, which includes the initial rental period, all re-rental periods and idle time in our system. To cover the higher operating expenses generated by product turnover and the key featuresbenefits of rental purchase transactions and product turnover, rental purchase agreements require higher aggregate payments to obtain ownership over time (if elected by the customer) than are generally charged under other types of purchase plans, such as installment purchase or credit plans.
Collections
StoreIn our Rent-A-Center Business store, managers use our management information system to track collections on a daily basis. Similarly, collections are monitored on a daily basis by on-site employees in our Acima staffed locations and by our back-office collections team in respect of our Acima virtual locations. If a customer fails to make a rental payment when due, store personnelwe will attempt to contact the customer to obtain payment and reinstate the agreement, or will terminate the account and arrange to regain possession of our merchandise or, if elected by the merchandise. customer, to obtain payment and reinstate the agreement.
We attempt to recover the rental items as soon as possible following terminationnon-renewal or defaulttermination of a rental purchase agreement, generally by the seventh day.agreement. Collection efforts are enhanced by the personal and job-related references required of customers, the personal nature of the relationships in our Rent-A-Center Business segment between our employees and customers, and the availability of lifetime reinstatement.
Currently, we track past due amounts using a guideline of seven days in our Core U.S.Rent-A-Center Business segment and 30 days in the Acceptance NowAcima segment. These metrics align with the majority of the rental purchase agreements in each segment, since payments are generally made weekly in the Core U.S.Rent-A-Center Business segment and monthly in the Acceptance NowAcima segment.
If a customer does not return the merchandise or make a payment sufficient to reinstate an agreement, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Core U.S.Rent-A-Center Business and Mexico segments, and on or beforeduring the 150month following the 120th day in the Acceptance Now segment.
Management
Our executive management team has extensive rent-to-ownour virtual business or similar retail experience and has demonstrated the ability to grow and manage our business through their operational leadership and strategic vision. In addition, our regional and district managers have long tenures with us, and we have a history of promoting management personnel from within. We believe this extensive industry and company experience will allow us to effectively execute our strategies.
Purchasing
Our centralized inventory management organization utilizes a combination of automated and manual merchandise planning, forecasting and replenishment processes to determine appropriate inventory levels to maintain150th day in our third-party distribution centers and company-owned stores. Inventory levels are monitored on a daily basis, and purchase orders are processed and sent to manufacturers and distributors on a weekly basis to replenish inventory housedstaffed locations in our third-party distribution centers. We use a customized software solution that builds recommended store replenishment orders based on current store inventory levels, current store rental and return trends, seasonality, product needs, desired weeks of supply targets, and other key factors. Approved orders are then passed through an automated solution to our third party distribution center and furniture manufacturers and product ships to the stores. The replenishment system and associated processes allow us to retain tight control over our inventory, ensure assortment diversity in our stores and assists us in having the right products available at the right time.Acima segment.
Purchasing
In our Core U.S.Acima segment, we purchase the merchandise selected by the customer from the applicable third-party retailer at the time such customer enters into a lease purchase agreement with us. As in the Rent-A-Center Business segment, Acima retains ownership of the leased property unless and until the customer elects to purchase the property pursuant to the lease terms.
In our Rent-A-Center Business and Mexico segments, we purchase our rental merchandise from a variety of suppliers. In 2017,2021, approximately 13%21% and 11% of our merchandise purchases were attributable to Ashley Furniture Industries.Industries and Whirlpool, respectively. No other brand accounted for more than 10% of merchandise purchased during these periods. We do not generally enter into written contracts with our suppliers that obligate us to meet certain minimum purchasing levels. Although we expect to continue relationships with our existing suppliers, we believe there are numerous sources of products available, and we do not believe the success of our operations is dependent on any one or more of our present suppliers.
In our Acceptance Now segment, we purchase the merchandise selected by the customer from the applicable third-party retailer at the time such customer enters into a rental purchase agreement with us.
With respect to our Franchising segment, theour franchise agreement requiresagreements with franchisees require the franchised stores to exclusively offer for rent or sale only those brands, types and models of products that Franchising has approved. The franchised stores are required to maintain an adequate mix of inventory that consists of approved products for rent as dictated by Franchising policy manuals. Franchising negotiatesFranchisees can purchase arrangements with various suppliers it has approved, and franchisees purchaseproduct through us or directly from those suppliersvarious approved suppliers.
Management
Our executive management team has extensive experience in the lease-to-own industry, as well as financial services and technology, and has demonstrated the ability to grow and manage our business through their operational leadership and strategic vision. Our regional and district managers generally have long tenures with us, and we have a history of promoting management personnel from inventory housedwithin. To support our strategic efforts in our third-party distribution centers.virtual and e-commerce business solutions, we have hired additional key management members in recent years, including our Executive Vice President of Acima, who brings extensive experience and a proven track record of innovation in financial services and financial technology.
We believe our executive management team's extensive industry and company experience will allow us to effectively execute our strategies. Marketing
We promote our products and services through television and digital radio commercials, print advertisements, store telemarketing, digital display advertisements, direct email campaigns, social networks, paid and organic search, website and store signage. Our advertisements emphasize such features as product and name-brand selection, the opportunity to pay as you go without relying on credit to finance a purchase and without requiring long-term contracts or obligations, convenient delivery and set-up at no additional cost,, product repair and loaner services, at no extra cost, lifetime reinstatement and multiple options to acquire ownership if desired by the customer, including 90 day option pricing, an early purchase optionpricing options or through a fixed number of payments. In addition, in the Rent-A-Center Business segment, we promote the “RAC Worry-Free Guarantee®” to further highlight these aspects of the rentallease purchase transaction. We believe that by leveraging our advertising efforts to highlight the benefits of the rentallease purchase transaction, we will continue to educate our customers and potential customers about the rent-to-ownlease-to-own alternative to credit as well as solidify our reputation as a leading provider of high-quality, branded merchandise and services.
Franchising has established national advertising funds for the franchised stores, whereby Franchising has the right to collect up to 3%4.5% of the monthly gross revenue from each franchisee as contributions to the fund. Franchising directs the advertising programs of the fund, generally consisting of television and radio commercials and print advertisements. Franchising also has the right to require franchisees to expend up to 3% of their monthly gross revenue on local advertising.
Industry & Competition
According to a report publisheddata released by the AssociationFair Isaac Corporation on August 17, 2021, consumers in the “subprime” category (those with credit scores below 650) made up approximately 25% of Progressive Rental Organizations in 2016, the $8.5 billion rent-to-own industry in the United States Mexicopopulation. Approximately 40% of U.S. consumers have incomes below $50,000 and Canada consists of approximately 9,200 stores, serves approximately 4.8 million customers and approximately 83% of rent-to-own customers have household incomes between $15,000 and $50,000 per year.may lack access to traditional credit. The rent-to-ownlease-to-own industry provides customers the opportunity to obtain merchandise they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to credit. We believe the number of consumers lacking access to credit is increasing. According to data released by the Fair Isaac Corporation on July 10, 2017, consumers in the “subprime” category (those with credit scores below 650) made up 30% of the United States population.
The rent-to-own industry is experiencing rapid change with the emergence of virtual and kiosk-based operations, such as our Acceptance Now business. These new industry participants are disrupting traditional rent-to-own stores by attracting customers and making the rent-to-own transaction more acceptable to potential customers. In addition, banks and consumer finance companies are developing products and services designed to compete for the traditional rent-to-own customer.
These factors are increasingly contributing to an already highly competitive environment. Our stores, kiosks and kiosksother lease-to-own operations compete with other national, regional and local rent-to-ownlease-to-own businesses, including on-line only competitors, as well as with rental stores that do not offer their customers a purchase option. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores, online competitors, and non-traditional lenders. Competition is based primarily on convenience, store location, product selection and availability, customer service, rentaland lease rates and terms.
Seasonality
Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year. Generally, our customers will more frequently exercise the early purchase option on their existing rentallease purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year, primarily due to the receipt of federal income tax refunds. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.
Trademarks
We own various trademarks and service marks including Rent-A-Center® and RAC Worry-Free Guarantee® that are used in connection with our operations and have been registered with the United States Patent and Trademark Office. The duration of our trademarks is unlimited, subject to periodic renewal and continued use. In addition, we have obtained trademarks and filed for trademark registrations in
Mexico Canada and certain other foreign jurisdictions. We believe we hold the necessary rights for protection of the trademarks and service marks essential to our business. The products held for rent in our stores or through our host retailer partners also bear trademarks and service marks held by their respective manufacturers.
The Franchising segment licenses the use of the Rent-A-Center® and ColorTyme® trademarks and service marks to its franchisees under theits franchise agreement.agreements with such franchisees. The Franchising segment owns various trademarks and service marks, including ColorTyme® and RimTyme®, that are used in connection with its operations and have been registered with the United States Patent and Trademark office. The duration of these marks is unlimited, subject to periodic renewal and continued use.
EmployeesHuman Capital Resources
As of February 21, 2018,December 31, 2021, we had approximately 18,300employed a total of 14,290 coworkers, the vast majority of which are full time employees. Our employee base is made up of 12,480 coworkers in our U.S. Operations, including Puerto Rico, 1,330 coworkers in our Mexico operations and 480 coworkers at our corporate facilities.
We continually monitor our demand for labor and provide training and competitive compensation packages in an effort to attract and retain skilled coworkers. We believe our coworkers are one of the primary keys to successfully operating our business and achieving our strategic initiatives. Our human capital measures and objectives focus on the successful training and development of our coworkers, in addition to their safety. All of our coworkers are employed at will and are free to end their employment with us at any time. We also focus on supporting a diverse and inclusive workforce. Our Chief Diversity Officer regularly reports to our Board of Directors. We have also implemented a program to deliver unconscious bias training to our employees and have launched and are expanding our Employee Resource Groups to promote a dialogue with our employees regarding our diversity initiatives.
Government Regulation of Lease-to-Own Transactions
Core U.S. & Acceptance Now
State Regulation. Currently, 46 states, the District of Columbia and Puerto Rico have rental purchase statutes that recognize and regulate rental purchase transactions as separate and distinct from credit sales. We believe this existing legislation is generally favorable to us, as it defines and clarifies the various disclosures, procedures and transaction structures related to the rent-to-ownlease-to-own business with which we must comply. With some variations in individual states, most related state legislation requires the lessor to make prescribed disclosures to customers about the rental purchase agreement and transaction, and provides time periods during which customers may reinstate agreements despite having failed to make a timely payment. Some state rental purchase laws prescribe grace periods for non-payment, prohibit or limit certain types of collection or other practices, and limit certain fees that may be charged. Eleven states limit the total rental payments that can be charged to amounts ranging from 2.0 times to 2.4 times the disclosed cash price or the retail value of the rental product. Six of those eleven states also limit the cash price of merchandise to amounts ranging from 1.56 to 2.5 times our cost for each item.
Although Minnesota has a rental purchase statute, the rental purchase transaction is also treated as a credit sale subject to consumer lending restrictions pursuant to judicial decision. Therefore, we offer our customers in Minnesota an opportunity to purchase our merchandise through an installment sale transaction in our Home Choice stores. We operate 17As of December 31, 2021, we operated 18 Home Choice stores in Minnesota.
North Carolina has no rental purchase legislation. However, the retail installment sales statute in North Carolina expressly provides that lease transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under the statute. We operate 98 rent-to-ownAs of December 31, 2021, we operated 86 lease-to-own stores and 45 and 6 Acceptance Now Staffed and Acceptance Now Direct35 Acima staffed locations respectively, in North Carolina.
Courts in Wisconsin and New Jersey, which do not have rental purchase statutes, have rendered decisions which classify rental purchase transactions as credit sales subject to consumer lending restrictions. Accordingly, in Wisconsin, we offer our customers an opportunity to purchase our merchandise through an installment sale transaction in our Get It Now stores. In New Jersey, we have modified our typical rental purchase agreements to provide disclosures, grace periods, and pricing that we believe comply with the retail installment sales act. We operate 28As of December 31, 2021, we operated 27 Get It Now stores in Wisconsin and 4540 Rent-A-Center stores in New Jersey.
In addition to state lease-to-own laws as described above, general consumer protection laws and regulations adopted by states may also impact our business. There can be no assurance as to whether changes in the enforcement of existing state laws or regulations or the enactment of new laws or revised rental purchase laws will be enacted or whether, if enacted,regulations that may unfavorably impact the lawslease-to-own industry would not have a material and adverse effect on us.
Federal Regulation.To date, no comprehensive federal legislation has been enacted regulating or otherwise impacting the rental purchase transaction. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) does not regulate leases with terms of 90 days or less. Because the rent-to-ownlease-to-own transaction is for a term of week to week, or at most, month to month, and established federal law deems the term of a lease to be its minimum term regardless of extensions or renewals, if any, we believe the rent-to-ownlease-
to-own transaction is not covered by the Dodd-Frank Act. General consumer protection laws and regulations adopted at the federal level, however, may impact our business.
From time to time, we have supported legislation introduced in Congress that would regulate the rental purchase transaction. While both beneficial and adverse legislation regulating the rental purchase transaction may be introduced in Congress in the future, any adverse federal legislation, if enacted, could have a material and adverse effect on us. In addition, there can be no assurance as to whether changes in the enforcement of existing federal consumer protection laws or regulations or the enactment of new laws or regulations that may unfavorably impact the lease-to-own industry would have a material and adverse effect on us.
Mexico and Canada
No comprehensive legislation regulating the rent-to-ownlease-to-own transaction has been enacted in Mexico or Canada.Mexico. We use substantially the same rental purchase transaction in those countriesMexico as in the U.S. stores, but with such additional provisions as we believe may be necessary to comply with such country’sMexico’s specific laws and customs.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K, proxy statements and other information with the SEC. The public may obtain copies of these reports and any amendments at the SEC's Internet site, www.sec.gov. Additionally, we make available free of charge on or through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also provide electronic or paper copies of our filings free of charge upon request. In addition, our Board of Directors has adopted a Code of Business Conduct and Ethics applicable to all members of our Board of Directors, as well as all of our employees, including our Chief Executive Officer, Chief Financial Officer, principal accounting officer and controller. The Code of Business Conduct and Ethics forms the foundation of a compliance program we established as part of our commitment to responsible business practices that includes policies, training, monitoring and other components covering a wide variety of specific areas applicable to our business activities and employee conduct. A copy of the Code of Business Conduct and Ethics is published on our website at https://investor.rentacenter.com/governance-documents. We intend to make all required disclosures concerning any amendments to, or waivers from, this Code of Business Conduct and Ethics on our website.
Item 1A. Risk Factors.
YouInvesting in Rent‑A‑Center involves a high degree of risk, and you should carefully consider the risks described below before making an investment decision. We believe these are all the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks,in this section and you may lose all or part of your investment. You should also refer to the other information included in this Annual Report on Form 10-K, including our consolidated financial statementsConsolidated Financial Statements and related notes.notes, before making an investment decision. Please note that the headings reflected below are provided solely for convenience of the reader and do not indicate that a given risk applies only to the heading under which it is located. The risks described in this section include, but are not limited to, those highlighted in the following list:
Our success depends on the effective implementation and continued execution of our strategies.Risks Relating to Economic Conditions
•We are focusedsubject to the risk of pandemics and other threats to public health, such as the novel coronavirus (COVID-19) global pandemic, which could have an adverse effect on our mission to provide cash-business, financial condition and credit-constrained consumers with affordable and flexible access to durable goods that promote a higher quality of living. We are in the process of implementing initiatives targeting cost savings opportunities, a more competitive value proposition within our Core U.S. and ANOW operating segments, and refranchising select brick and mortar locations, to improve profitability and enhance long-term value for our stockholders.
There is no assurance that we will be able to implement and execute our strategic initiatives in accordance with our expectations. Our inability to lower costs or failure to achieve targeted results associated with our initiatives could adversely affect our results of operations and lead to lasting changes in consumer behavior.
Risks Relating to Our Vendors, Suppliers and Products
•We rely on the receipt of information from third party data vendors, and inaccuracies in or negatively impactdelay in receiving such information, or the termination of our abilityrelationships with such vendors, could have a material adverse effect on our business, operating results and financial condition.
•We must successfully manage our inventory to reflect customer demand and anticipate changing consumer preferences and leasing trends or our revenue and profitability will be materially and adversely affected.
•Allegations of or actual product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.
Risks Relating to Our Strategy and Operations
•If we are unable to successfully execute future strategies, which may result in an adverse impact onappeal to and engage with our target consumers, our business and financial results.performance may be materially and adversely affected.
•We must maintain brands that are highly dependent on the financial performancerecognized and trusted by consumers.
•Our proprietary algorithms and customer lease decisioning tools used to approve customers are subject to unexpected changes in behavior caused by macroeconomic conditions which could cause these tools to no longer be indicative of our Core U.S. operating segment.customers’ ability to perform under their lease agreements with us.
Our financial performance is highly dependent on•Failure to effectively manage our Core U.S. segment, which comprised approximately 70% of our consolidated net revenues for the year ended December 31, 2017. Any significant decrease in the financial performance of the Core U.S. segment may alsocosts could have a material adverse impacteffect on our ability to implementprofitability.
•We face risks in our growth strategies.
We areAcima retail partner business and virtual locations that differ in a management transition period in which three individuals have served as our chief executive officer insome potentially significant respects from the past two years and the individual currently serving as our chief executive officer was recently named.
On January 9, 2017, Robert D. Davis resigned as Chief Executive Officer and a directorrisks of the Company. On that date, our founder, former Chief Executive Officer, and Chairman of the Board, Mark E. Speese, was named as Interim Chief Executive Officer. Effective as of April 10, 2017, Mr. Speese was named Chief Executive Officertraditional lease-to-own business conducted in lieu of his interim role. On December 30, 2017, Mr. Speese resigned as Chief Executive Office and Mitchell E. Fadel,Rent-A-Center Business store locations. These risks could have a director of the Company, was appointed as Chief Executive Officer. Mr. Fadel is a former President and Chief Operating Officer of the Company.
Any significant leadership change or executive management transition creates uncertainty, involves inherent risk, and may involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any ofmaterial adverse effect on Acima, which could negatively impact our ability to operate effectively or execute our strategiesgrow the Acima segment and result in a material adverse effect on our results of operations.
•Our strategy to grow the retail partner business depends on our ability to develop and offer robust virtual lease-to-own technology, including algorithmic decisioning programs and waterfall integrations.
•Our operations are dependent on effective information management systems. Failure of our systems or those of our host retailers could negatively impact our business, financial condition and results of operations.
•If we fail to protect the integrity and security of customer, employee and host retailer information or if our host retailers fail to protect the integrity and security of customer information, we could incur significant liability and damage our reputation and our business could be materially and adversely affected.
•The industries in which we operate are highly competitive, which could impede our ability to maintain sales volumes and pricing and have a material adverse effect on our operating results.
•If we are unable to attract, train and retain managerial personnel and hourly associates in our stores and staffed Acima locations, our reputation, sales and operating results may be materially and adversely affected.
•The risks associated with climate change and other environmental impacts and increased focus by stakeholders on environmental issues, including those associated with climate change, could adversely affect our business, financial condition, and operating results.
Risks Relating to Legal and Compliance Matters
•We may be subject to legal or regulatory proceedings from time to time that result in damages, penalties or other material monetary obligations or material restrictions on our business operations, and our use of arbitration agreements may not allow us to avoid costly litigation.
•The outcome of the Consumer Financial Protection Bureau’s (“CFPB”) investigation into certain of Acima’s business practices is uncertain and may materially and adversely affect our business.
•Federal and state regulatory authorities are increasingly focused on the lease‑to‑own industry and any negative change in these laws or regulations or the passage of unfavorable new laws or regulations or the manner in which any of these are enforced or interpreted could require us to alter our business practices in a manner that may be materially adverse to us.
•Our lease‑to‑own transactions are regulated by and subject to the requirements of federal and state laws and regulations that vary by jurisdiction, which requires significant compliance costs and exposes us to regulatory action or other litigation.
•Laws and regulations regarding information security and data collection, use and privacy are increasingly rigorous and subject to change, which may cause us to incur significant compliance costs.
•Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners, including retail partners.
•Our products and services may be negatively characterized by consumer advocacy groups, the media and certain Federal, state and local government officials, and if those negative characterizations become increasingly accepted by consumers and/or our retail partners, demand for our goods and the transactions we offer could decrease and our business could be materially and adversely affected.
•We may be unable to protect our intellectual property, or may be alleged to have infringed upon the intellectual property rights of others, which could result in a loss of our competitive advantage and a diversion of resources and a material adverse effect on our business and results of operations.
Risks Relating to Our Indebtedness and Other Financial Matters
•We have significant indebtedness and the level of our indebtedness could materially and adversely affect us.
•The amount of borrowings permitted under the ABL Credit Facility is limited to the value of certain of our assets, and Rent-A-Center relies in part on available borrowings under the ABL Credit Facility for cash to operate its business, which subjects it to market and counterparty risk, some of which is beyond Rent-A-Center’s control.
•Our organizational documents and our current or future debt instruments contain or may contain provisions that may prevent or deter another group from paying a premium over the market price to Rent-A-Center’s stockholders to acquire its stock.
Risks Relating to the Merger
•We may be unable to realize the anticipated benefits of the Merger, including synergies, and expect to incur substantial expenses related to the Merger, which could have a material adverse effect on our business, financial condition and results of operations or cash flows.
Our ability to attract and retain key employees may be adversely impacted by the recent executive departures and resulting management transition, and our recent financial results.
Executive leadership transitions can be inherently difficult to manage and may cause disruption to our business. As a result of the recent changes in our executive management team, our existing management team has taken on substantially more responsibility, which has resulted in greater workload demands and could divert their attention away from other key areas of our business. In addition, management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution, and our results of operations and financial condition could suffer as a result.
Our future success depends in large part upon our ability to attract and retain key management executives and other key employees. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash and equity compensation. Any prolonged inability to provide salary increases or cash incentive compensation opportunities, or if the anticipated value of such equity awards does not materialize or our equity compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate executives and key employees could be weakened. In addition, the uncertainty and operational disruptions caused by the management changes and related transitions could result in additional key employees deciding to leave the Company. If we are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operations could be adversely impacted.
operations.
The review of potential strategic alternatives by our Board of Directors may resultrisks described in significant transaction expenses and uncertainty regardingthis section are not the outcome of our exploration of strategic alternatives may adversely impact our business.
On October 30, 2017, we announcedonly risks that our Board of Directors had initiated a process to explore and evaluate a wide range of strategic and financial alternatives focused on maximizing stockholder value. The pursuit of potential strategic alternatives could result in the diversion of management’s attention from our existing business; failure to achieve financial or operating objectives; incurrence of significant transaction expenses; and failure to retain key personnel, customers, or contracts. There can be no assurances that the strategic alternatives review process will result in the announcement or consummation of any strategic transaction, that any resulting plans or initiatives will yield additional value for stockholders, or that the process will not have an adverse impact on our business. Any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on reasonable terms.
We do not intend to discuss or disclose developments with respect to the process unless we determine further disclosure is appropriate or required. As a consequence, perceived uncertainties related to the future of the company may result in the loss of potential business opportunities, may make it more difficult for us to attract and retain qualified personnel and business partners, and could cause our stock price to fluctuate significantly.
We may not be able to refinance our senior credit facility on favorable terms, if at all.Our inability to refinance our senior credit facility or obtain alternative financing from other sources would materially and adversely affect our liquidity and our ongoing results of operations in the future.
Our senior credit facility matures in March 2019, and we intend to refinance it in 2018, subject to the conclusion of our ongoing review of strategic and financial alternatives. Our ability to refinance our senior credit facility will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our senior credit facility could also require us to comply with more onerous covenants and further restrict our business operations. Failure to refinance or extend our senior credit facility, or satisfy the conditions and requirements of that debt, would likely result in an event of default and potentially the loss of some or all of the assets securing our obligations under the senior credit facility. In addition, our inability to refinance our senior credit facility or to obtain alternative financing from other sources, or our inability to do so upon attractive terms could materially and adversely affect our business; other risks currently believed to be immaterial or additional risks not currently known to us could also materially and adversely affect our business, financial condition or results of operations. Furthermore, the COVID-19 pandemic (including federal, state and local governmental responses, broad economic impacts and market disruptions) has heightened certain risks discussed below. If any of the events or circumstances described in this section actually occur, our business, operating results, financial condition, cash flows, and prospects could be materially and adversely affected. In that event, the market price of our securities could decline, and you could lose part or all of your investment.
Risks Relating to Economic Conditions
We are subject to the risk of pandemics and other threats to public health, such as the novel coronavirus (COVID-19) global pandemic, which could have an adverse effect on our business, financial condition and results of operations and lead to lasting changes in consumer behavior.
As demonstrated by the COVID-19 global pandemic, we are subject to the risk of pandemics and other threats to public health, and the reactions of governmental authorities to those emergencies. The governmental measures in response to COVID-19 materially and adversely affected workforces, customers, consumer sentiment, economies and financial conditionmarkets and, cash flows, and make us more vulnerablealong with decreased consumer spending, have led to adversean economic downturn in many markets. The lease-to-own industry and generalcan benefit during recessionary economic conditions.cycles or credit constrained environments because it provides credit constrained customers with a viable option to obtain merchandise they may not otherwise be able to obtain through other retailers offering traditional
financing options. However, there are no assurances that the continuing or future lowering or withdrawalpandemics will not lead to future government actions negatively impacting our business. In addition, pandemics could lead to lasting changes in consumer behavior detrimental to our business. In the latter part of 2021, we have experienced negative trends in customer behavior following the expiration of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costsgovernment’s fiscal and reduce our access to capital.
Our indebtedness currently has a non-investment grade rating,monetary stimulus and any rating assigned could be lowered or withdrawn entirely by a rating agency if,relief programs, and significant rise in that rating agency’s judgment, future circumstances relating to the basis of the rating, suchUS consumer price index, resulting in lower payment and higher loss activity; as adverse changeswell as certain other negative trends in our business warrant.that we believe to be associated with macro-economic conditions resulting from COVID-19, including a condensed labor market, wage inflation, and global supply chain issues resulting in reduced product availability and rising product costs. At this time, we are unable to predict the full extent to which consumer spending behavior, or other macro-economic trends associated with the pandemic, may adversely impact our business in future periods.
The success of our business is dependent on factors affecting consumer spending that are not under our control.
Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debt and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war, pandemics, inclement weather, tariff policies, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for our products and services resulting in lower revenue or negatively impact consumer payment behavior resulting in higher than expected losses and negatively impacting the business and its financial results.
Risks Relating to Our indebtedness was downgraded twice by Standard & Poor’sVendors, Suppliers and once by Moody’s during fiscal year 2017. Any additional downgrade by any ratings agency may increaseProducts
Disruptions in our supply chain and other factors affecting the interest ratedistribution of our merchandise could materially and adversely affect our business.
Disruptions in our supply chain can and have resulted in our inability to meet our customers’ expectations, higher costs, an inability to stock our stores, or longer lead time associated with distributing merchandise. Disruptions within our supply chain network also result in decreased net sales, increased costs and reduced profits. For example, as a result of the impacts of COVID-19 on U.S. and global supply chains and manufacturing operations, we have experienced some delays on our future indebtedness, limit our access to vendor financing on favorable termstiming or otherwise result in higher borrowing costs, and likely would make it more difficult or more expensive for usability to obtain additional debt financing.desired merchandise for our business. The impacts of COVID-19 have also affected supply chains of some of Acima’s host retailers, which has led to certain products desired by customers not being available at all or in a timely manner and thereby adversely impacted Acima’s results.
Our arrangements with our suppliers and vendors may be impactedmaterially and adversely affected by changes in our financial results or financial position.position or changes in consumer demand, which could materially and adversely affect our business.
Substantially all of our merchandise suppliers and vendors sell to us on open account purchase terms. There is a risk that our key suppliers and vendors could respond to any actual or apparent decrease in, or any concern with, our financial results or liquidity by requiring or conditioning their sale of merchandise to us on more stringent or more costly payment terms, such as by requiring standby letters of credit, earlier or advance payment of invoices, payment upon delivery or other assurances or credit support or by choosing not to sell merchandise to us on a timely basis or at all. In addition, if demand for our products and services declines, the volume of merchandise we purchase from third party suppliers may decrease, which could result in smaller discounts from our vendors or the elimination of such discounts by our vendors. Our arrangements with our suppliers and vendors may also be impacted by media reports regarding our financial position.position or other factors relating to our business. Our need for additional liquidity could significantlymaterially increase and our supply of inventory could be materially disrupted if any of our key suppliers or vendors, or a significant portion of our keyother suppliers andor vendors, tooktakes one or more of the actions described above, which could result in increased costs of operation and decreased net sales, customer satisfaction and profits.
We rely on the receipt of information from third party data vendors, and inaccuracies in or delay in receiving such information, or the termination of our relationships with such vendors, could have a material adverse effect on our sales, customer satisfaction, cash flows, liquiditybusiness, operating results and financial position.condition.
We are heavily dependent on data provided by third-party providers. Our lease-to-own business employs a proprietary decisioning algorithm that determines whether or not an application for a lease submitted by a customer will be approved for a lease and the potential amount of the lease. This algorithm depends extensively upon continued access to and timely receipt of reliable data from external sources, such as third-party data vendors. Our data providers could stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach, regulatory concerns or for competitive reasons. We could also become subject to increased legislative, regulatory or judicial restrictions or mandates on the collection, disclosure or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data. If we were to lose access to this external data or if our access or use were restricted or were to become less economical or desirable, our business would be negatively impacted, which would materially and adversely affect our operating results and financial condition. We cannot provide assurance that we will be successful in maintaining our relationships with these external data
source providers or that we will be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative sources if our current sources become unavailable.
We must successfully manage our inventory to reflect customer demand and anticipate changing consumer preferences and leasing trends or our revenue and profitability will be materially and adversely affected.
The success of our Rent-A-Center Business depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. We cannot always accurately predict consumer preferences and they may change over time. We must order certain types of merchandise, such as consumer electronics, well in advance of seasonal increases in customer demand for those products. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing consumer trends and price shifting, and to maintain an optimal selection of merchandise available for lease at all times. If we misjudge either the market for our merchandise, our customers’ product preferences or our customers’ leasing habits, our revenue may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins. In addition, our level of profitability and success in our Rent-A-Center Business depends on our ability to successfully re-lease our inventory of merchandise that are returned by customers of our Rent-A-Center Business or Acima, due to their lease agreements expiring, or otherwise.
Allegations of or actual product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.
The products we sell and lease in our Rent-A-Center Business and Acima business are subject to regulation by the U.S. Consumer Product Safety Commission and similar state regulatory authorities and expose us to potential product liability claims, recalls or other regulatory or enforcement actions initiated by regulatory authorities or through private causes of action. Such claims, recalls or actions could be based on allegations that, among other things, the products sold by us are contain contaminants or impermissible materials, provide inadequate instructions regarding their use or misuse or include inadequate warnings, such as those concerning the materials or their flammability. We do not control the production process of the products we sell and lease, and may be unable to identify a defect or deficiency in a product purchased from a manufacturer before offering it for sale or lease to our customers. Product safety or quality concerns may require us to voluntarily remove selected products from our physical locations or from our customers’ homes or cease offering those products online. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our financial condition. In addition, in the event of such a product quality or safety issue, our customers who have leased the defective merchandise from us could terminate their lease agreements for that merchandise and/or not renew those lease arrangements, which could have a material adverse effect on our financial condition if we are unable to recover those losses from the vendor who supplied us with the relevant merchandise.
Risks Relating to Our Strategy and Operations
Our success depends on the effective implementation and continued execution of our strategies.
We are focused on our mission to provide cash- and credit-constrained consumers with affordable and flexible access to durable goods that promote a higher quality of living. In recent years, we accelerated our virtual growth strategy through the acquisition of Merchants Preferred and launch of our Preferred Lease offering, followed by the completed acquisition of Acima Holdings in the first quarter of 2021, with a focus towards executing on large market opportunities through national and regional retail partners. We intend to capitalize on key differentiators in our virtual offerings, as well as grow our business through expansion in our product verticals, e‑commerce platform and other digital enhancements, improving the customer and retail partner experience and providing consumers with greater opportunities to shop how, when and where they want with the flexibility of our lease-to-own solutions. Our Rent-A-Center Business employs its own growth strategies and seeks to adapt to changing consumer preferences and shopping behaviors while managing its cost structure.
Growth of our business, including through the launch of new product offerings and our intended significant expansion into virtual lease-to-own offerings, requires us to invest in or expand our information and technology capabilities, engage and retain experienced management, invest in our stores and otherwise incur additional costs. Our inability to address these concerns or otherwise to achieve targeted results associated with our initiatives could materially and adversely affect our results of operations, or negatively impact our ability to successfully execute future strategies, which may result in a material adverse effect on our business and financial results.
If we are unable to successfully appeal to and engage with our target consumers, our business and financial performance may be materially and adversely affected.
We operate in the consumer retail industry through brick and mortar stores and digitally. As such, our success depends, among other things, on our ability to identify and successfully market products and services through various channels that appeal to our
current and future target customer segments, to align our offerings with consumer preferences and to maintain favorable perceptions of our brands by our target consumers. If we are unable to successfully appeal to and engage with our target consumers, our business and financial performance may be materially and adversely affected.
We must maintain brands that are recognized and trusted by consumers.
Our brands could be adversely affected by situations that reflect negatively on us, whether due to our business practices, adverse financial developments, perceptions of our corporate governance or how we address environmental or social responsibility initiatives, the conduct of our officers, directors, or employees, the actions of a significant partner or other businesses with which we do business, or other causes. The negative impacts of these or other events may be aggravated as consumers and other stakeholders increase or change their expectations regarding the conduct of public companies, sustainability efforts, and corporate responsibility. These impacts may be further complicated such that perceptions are formed through rapid and broad interactions using modern communication and social media tools over which we have no control. Any such event could decrease demand for our products, reduce our ability to recruit and retain employees, and lead to greater regulatory scrutiny of our businesses.
Our proprietary algorithms and customer lease decisioning tools used to approve customers are subject to unexpected changes in behavior caused by macroeconomic conditions which could cause these tools to no longer be indicative of our customers’ ability to perform under their lease agreements with us.
We believe our proprietary customer lease decisioning process to be a key to the success of our business for both Acima and our Rent-A-Center Business. As a result of the shift in operations driven by the COVID-19 pandemic, we accelerated the rollout of centralized lease decisioning processes in our Company-operated Rent-A-Center Business stores. We assume behavior and attributes observed for prior customers, among other factors, are indicative of performance by future customers. Unexpected changes in behavior caused by macroeconomic conditions, including, for example, impacts to the U.S. economy related to the COVID-19 pandemic and changes in consumer behavior relating thereto, could lead to increased incidence and costs related to lease merchandise write-offs. For example, we experienced higher losses in the fourth quarter of 2021 due to the impacts of changing consumer payment behaviors following the expiration of governmental stimulus programs. Due to the nature and novelty of the crisis and the governmental and other reactions to the crisis, our decisioning process will likely require frequent adjustments and the application of greater management judgment in the interpretation and adjustment of the results produced by our decisioning tools and we may be unable to accurately predict and respond to the impact of a prolonged economic downturn or changes to consumer behaviors, which in turn may limit our ability to manage risk, avoid lease merchandise write-offs and could result in our accounts receivable allowance being insufficient.
We may take advantage of merger and acquisition opportunities from time to time with the intent of advancing our key initiatives, but such activities may not prove successful and may subject us to additional risks.
From time to time, we may take advantage of merger and acquisition opportunities intended to advance our key strategic initiatives. Such merger and acquisition opportunities may involve numerous risks, including the following:
•difficulties in integrating the operations, systems, technologies, products and personnel of the acquired businesses;
•difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets may have stronger market positions;
•application of regulatory regimes that have not previously applied to, and may significantly impact, our business;
•diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations;
•the potential loss of key employees, vendors and other business partners of the businesses we acquire;
•the incurrence of debt, contingent liabilities and amortization expenses and write‑offs of goodwill in connection with such activities that could harm our financial condition; and
•dilutive issuances of common stock or other equity securities.
Mergers and acquisitions are inherently risky and subject to many factors outside of our control. We cannot assure you that our previous or future acquisitions will be successful and will not materially and adversely affect our business, operating results or financial condition. Failure to manage and successfully integrate acquisitions, including our acquisition of Acima Holdings in 2021, could materially harm our business and operating results.
Although we believe our Acima segment will be a higher growth business over the long term, we remain highly dependent on the financial performance of our Rent-A-Center Business segment.
Our financial performance has historically been highly dependent on our Rent-A-Center Business segment. Although the Rent-A-Center Business revenues decreased to approximately 44% of our consolidated net revenues for the year ended December 31, 2021 following the acquisition of Acima Holdings, the Rent-A-Center Business segment will remain important to our
consolidated results. Any significant decrease in the financial performance of the Rent-A-Center Business segment may have a material adverse effect on our ability to implement our growth strategies.
Failure to effectively manage our costs could have a material adverse effect on our profitability.
Certain elements of our cost structure are largely fixed in nature. Consumer spending remains uncertain which makes it more challenging for usand our continued profitability is largely dependent on our ability to maintain or increaseeffectively manage our operating incomecost structure. We have experienced and may experience in the Core U.S. segment. The competitivenessfuture increases in the costs of purchasing certain merchandise from suppliers or retail partners as a result of various factors, including supply/demand trends, tariffs, increases in the prices of certain commodities and increases in shipping costs. We have experienced and may experience in the future increases in labor costs as a result of wage inflation for hourly employees in many regions or increased competition for employees as unemployment rates decline. We have limited or no control over many of these inflationary forces. In addition, due to the competitive environment in our industry and increasing price transparency, means that the focus on achieving efficient operations is greater than ever.we may not be able to recover all or even a portion of such cost increases by increasing our merchandise prices, fees, or otherwise. Even if we are able to increase merchandise prices or fees, those cost increases to our customers could result in reduced demand for our products and services. As a result, we must continuously focus on managing our cost structure. Failurethe failure to manage our overall cost of operations, labor and benefit rates,
advertising and marketing expenses, operating leases, charge-offs due to customer stolen merchandise, other store expenses or indirect spending could materially and adversely affect our profitability.
Our Acceptance NowWe face risks in our Acima retail partner business and virtual locations that differ in some potentially significant respects from the risks of the traditional lease-to-own business conducted in Rent-A-Center Business store locations. These risks could have a material adverse effect on Acima, which could negatively impact our ability to grow the Acima segment dependsand result in a material adverse effect on the successour results of our third-party retail partners and our continued relationship with them.operations.
Our Acceptance NowAcima segment revenues dependoffers the lease-to-own transaction through the stores or websites of third-party retailers and, therefore, faces risks different from those that have historically been associated with our traditional lease-to-own business conducted in partour Rent-A-Center Business store locations. These potential risks include, among others:
•reliance on the ability of unaffiliated third-party retailers to attract customers. The failure of our third-party retail partnerscustomers and to maintain quality and consistency in their operations and their ability to continue to provide eligible durable goods desired by customers;
•establishing and maintaining relationships with unaffiliated third-party retailers;
•reliance on unaffiliated third-party retailers for many important business functions, from advertising through assistance with lease transaction applications, including, for example, adhering to Acima’s merchant policies and procedures, properly explaining the nature of the lease-to-own transaction to potential customers, properly handling customer inquiries made directly to the retail partner and properly explaining that the transaction is with Acima and not with the third-party retailer;
•increased regulatory focus on the virtual lease-to-own transaction and/or the potential that regulators adopt new regulations or legislation (or existing laws and regulations may be interpreted in a manner) that negatively impact Acima’s ability to offer virtual lease-to-own programs or certain products or services through third-party retail partners, and/or that regulators may attempt to force the application of laws and regulations on Acima’s virtual lease-to-own business or certain products or services in inconsistent and unpredictable ways that could increase the compliance-related costs incurred by us, restrict certain business activities and negatively impact our financial and operational performance;
•reliance on automatic bank account drafts for lease payments, which may become disfavored as a payment method for these transactions by regulators and/or providers, or may otherwise become unavailable;
•more product diversity within Acima’s merchandise inventory relative to our traditional store-based lease-to-own business, which can complicate matters such as merchandise repair and disposition of merchandise that is returned and which exposes us to risks associated with products with which we have limited experience;
•lower barriers to entry and start-up capital costs to launch a competitor due to the reliance of Acima and its competitors on the store locations and inventories of third-party retailers, and online connections with retailers, rather than incurring the cost to obtain and maintain brick and mortar locations and in-store or in-warehouse inventories;
•indemnification obligations to Acima’s retail partners and their service providers for losses stemming from Acima’s failure to perform with respect to its products and services, to comply with applicable laws or regulations or to take steps to protect its retail partner’s and their customers’ data and information from being accessed or stolen by unauthorized third parties, including through cyber-attacks;
•increased risk of consumer fraud with respect to Acima’s virtual lease-to-own business and e-commerce business as compared to the losstraditional store-based Rent‑A‑Center Business;
•increased risk of merchant fraud due to the planned growth in retail partners and other merchants from which customers can select products to lease from Acima;
•reduced gross margins compared to the Rent-A-Center Business because Acima purchases merchandise it leases to customers at retail, rather than wholesale, prices;
•operational, financial, regulatory or other risks associated with the development and implementation of new digital technologies that are intended to enhance the customer and retail partner experience and to differentiate Acima from competing consumer offerings, including the Acima direct to consumer ecosystem; and
•the ability of Acima to adequately protect its proprietary technologies or to address any claims of infringement by third parties.
These risks could have a material adverse effect on Acima, which could negatively impact our ability to grow the Acima segment and result in a material adverse effect on our results of operations. In addition, these risks have become more significant as a result of the relationship with anyMerger due to the increased size of these third-party retailers and an inability to replace them, could cause our Acceptance Nowthe Acima segment to lose customers, substantially decreasing the revenues and earningsas a percentage of our Acceptance Now segment. This could adversely affectoverall company.
Our strategy to grow the retail partner business depends on our financial results.ability to develop and offer robust virtual lease-to-own technology, including algorithmic decisioning programs and waterfall integrations.
Although our retail partner business began as a staffed model, our strategy to grow the retail partner business depends on significantly expanding our unstaffed or virtual lease-to-own solution. The acquisitions of Merchants Preferred and Acima Holdings in recent years, including scalable technology offering, robust decision engine, enhanced infrastructure and experienced management team members accelerated the development of our virtual lease-to-own offering. In 2017, approximately 61% of the total revenue of the Acceptance Now segment originated at2021, we have further executed on our Acceptance Now kiosks locatedvirtual growth strategy through, among other things, continued investments in stores operated by four retail partners.Acima’s proprietary offerings, technologies and organizational enhancements. We may be unable to continue growingnot realize the Acceptance Now segment ifintended benefits from these investments and initiatives. If we are unable to find additional third-party retailers willing to partner with us or if we are unable to enter into agreements with third-party retailers acceptable to us.
The success ofmaintain and continuously improve our technologies and decisioning methodologies, our business is dependent on factors affecting consumer spending that are not under our control.
Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debtfinancial results may be materially and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war, pandemics, inclement weather, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for our products and services resulting in lower revenue and negatively impacting the business and its financial results.adversely affected.
If we are unable to compete effectively with the growing e-commerce sector, our business and results of operations may be materially and adversely affected.
With the continued expansion of Internet use, as well as mobile computing devices and smartphones, competitionCompetition from the e-commerce sector continues to grow.grow and has been accelerated by trends that developed as a result of social restrictions implemented due to COVID-19. To compete in this e-commerce sector, we must be able to innovate and develop technologies and digital solutions that appeal to our customer. We have launched virtual capabilities within our Acceptance NowAcima and Core U.S.Rent-A-Center Business segments. There can be no assurance we will be ablesuccessful in developing the technologies and digital solutions necessary to grow our e-commerce business in a profitable manner. Certain of our competitors, and a number of e-commerce retailers, have established e-commerce operations against which we compete for customers. It is possible that the increasing competition from the e-commerce sector may reduce or prevent us from growing our market share, gross margin, and operating margin,margins, and may materially and adversely affect our business and results of operations in other ways.
Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.
Any disruption in the operation of our distribution centers could result in our inability to meet our customers’ expectations, higher costs, an inability to stock our stores, or longer lead time associated with distributing merchandise. Any such disruption within our supply chain network, including damage or destruction to one of our five regional distribution centers, could result in decreased net sales, increased costs and reduced profits.
Our senior secured asset-based revolving credit facility limits our borrowing capacity to the value of certain of our assets. In addition, our senior secured asset-based revolving credit facility is secured by substantially all of our assets, and lenders may exercise remedies against the collateral in the event of our default.
We are party to a $350 million senior secured asset-based revolving credit facility. Our borrowing capacity under our revolving credit facility varies according to our eligible rental contracts, eligible installment sales accounts, and inventory net of certain reserves. In the event of any material decrease in the amount of or appraised value of these assets, our borrowing capacity would similarly decrease, which could adversely impact our business and liquidity. Our revolving credit facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our available credit falls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. Our obligations under the revolving credit facility are secured by liens with respect to inventory, accounts receivable, deposit accounts and certain related collateral. In the event of a default that is not cured or waived within any applicable cure periods, the lenders’ commitment to extend further credit under our revolving credit facility could be terminated, our outstanding obligations could become immediately due and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral, which generally consists of substantially all of our tangible and intangible assets, including intellectual property and the capital stock of our U.S. subsidiaries. If we are unable to borrow under our revolving credit facility, we may not have the necessary cash resources for our operations and, if any event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such
indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our operations. Because we self-insure a significant portion of expected losses under our workers' compensation, general liability, vehicle and group health insurance programs, unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including potential increases in medical and indemnity costs, could result in materially different amounts of expense than expected under these programs. This could have a material adverse effect on our financial condition and results of operations.
Our transactions are regulated by and subject to the requirements of various federal and state laws and regulations, which may require significant compliance costs and expose us to litigation. Any negative change in these laws or the passage of unfavorable new laws could require us to alter our business practices in a manner that may be materially adverse to us.
Currently, 46 states, the District of Columbia and Puerto Rico have passed laws that regulate rental purchase transactions as separate and distinct from credit sales. One additional state has a retail installment sales statute that excludes leases, including rent-to-own transactions, from its coverage if the lease provides for more than a nominal purchase price at the end of the rental period. The specific rental purchase laws generally require certain contractual and advertising disclosures. They also provide varying levels of substantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event the rental purchase agreement is terminated. The rental purchase laws of eleven states limit the total amount that may be charged over the life of a rental purchase agreement and the laws of six states limit the cash prices for which we may offer merchandise.
Similar to other consumer transactions, our rental purchase transaction is also governed by various federal and state consumer protection statutes. These consumer protection statutes, as well as the rental purchase statutes under which we operate, provide various consumer remedies, including monetary penalties, for violations. In our history, we have been the subject of litigation alleging that we have violated some of these statutory provisions.
Although there is currently no comprehensive federal legislation regulating rental purchase transactions, adverse federal legislation may be enacted in the future. From time to time, both favorable and adverse legislation seeking to regulate our business has been introduced in Congress. In addition, various legislatures in the states where we currently do business may adopt new legislation or amend existing legislation that could require us to alter our business practices in a manner that could have a material adverse effect on our business, financial condition and results of operations.
Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners.
Our operations in the U.S. and abroad are subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Our employees, contractors or agents may violate the policies and procedures we have implemented to ensure compliance with these laws. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees, and could damage our reputation.
We may be subject to legal proceedings from time to time which seek material damages. The costs we incur in defending ourselves or associated with settling any of these proceedings, as well as a material final judgment or decree against us, could materially adversely affect our financial condition by requiring the payment of the settlement amount, a judgment or the posting of a bond.
In our history, we have defended class action lawsuits alleging various regulatory violations and have paid material amounts to settle such claims. Significant settlement amounts or final judgments could materially and adversely affect our liquidity and capital resources. The failure to pay any material judgment would be a default under our senior credit facilities and the indenture governing our outstanding senior unsecured notes.
Our operations are dependent on effective information management systems. Failure of theseour systems or those of our host retailers could negatively impact our business, financial condition and results of operations.
We utilize integrated information management systems. The efficient operation of our business is dependent on these systems to effectively manage our financial and operational data. The failure of our information management systems to perform as designed due to “bugs,” crashes, computer viruses, security breaches, cyberattacks, phishing attacks, internet failures and outages, operator error, or catastrophic events, and any associated loss of data or any interruption of oursuch information management systems for a significant period of time could disrupt our business.
If the information management systems sustain repeated failures, we may not be able to manage our store operations, which could have a material adverse effect on our business, financial condition and results of operations.
We continuously need to improve and upgrade our systems and technology while maintaining their reliability and integrity. We invest in new information management technology and systems and implement modifications and upgrades to existing systems. These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware with updated functionality. We take appropriate actions and implement procedures designed to ensure the successful implementation of these investments, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business.data. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing systems and our business, and may not provide the anticipated benefits. TheA disruption in our information management systems, or our inability to improve, upgrade, integrate or expand our systems to meet our evolving business requirements, could impair our ability to achieve critical strategic initiatives and could materially and adversely impactaffect our business, financial condition and results of operations. Similar risks associated with Acima host retailer information management systems, which we do not control, may also materially and adversely affect our business, financial condition and results of operations.
If we fail to protect the integrity and security of customer, employee and employeehost retailer information or if our host retailers fail to protect the integrity and security of customer information, we could be exposed to litigation or regulatory enforcementincur significant liability and damage our reputation and our business could be materially and adversely impacted.affected.
WeIn the ordinary course of business, we collect, store and storeprocess certain personal information provided to us by our customers, including social security numbers, dates of birth, banking information, credit and debit card information and data we receive from consumer reporting companies, including credit report information, as well as certain confidential information about our retail partners and employees, in the ordinary courseamong others. Much of our business. this data constitutes confidential personally identifiable information which, if unlawfully accessed, either through a “hacking” attack or otherwise, could subject us to significant liability as further discussed below.
Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely freesubject to significant risk of compromise from vulnerabilityincreasingly aggressive and sophisticated cyberattacks, including hacking, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to attack. Computer hackers may attemptinformation technology systems. Our IT systems are subject to penetrateconstant attempts to gain unauthorized access in order to disrupt our network securitybusiness operations and if successful,capture, misappropriate, destroy or manipulate various types of information that we rely on, including confidential customerpersonally identifiable information (“PII”) or employeeother confidential information. In addition, one of our employees, contractors or other third partyparties with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently causeif a third party we are engaged with suffers a breach involvingwe could potentially also suffer the from the loss such information. Loss or misuse of customer, employee or employeeretail partner information could disrupt our operations, damage our reputation, and expose us to claims from customers, employees, retail partners, regulators and other persons, any of which could have ana material adverse effect on our business, financial condition and results of operations. Successful data breaches or other cybersecurity incidents at other companies, whether or not we are involved, could lead to a general loss of customer confidence that could similarly negatively affect us, including harming the market perception of the effectiveness of our security measures or financial technology in general. Further, if any such compromise, breach or misuse is not detected quickly, the effect could be compounded. In addition, the costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws and industry standards, fines, penalties, or liability, and costs incurred to prevent or remediate information security breaches, could adversely impact our business.
A change of control could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts.
Under our senior credit facilities, an event of default would result if a third party became the beneficial owner of 35.0% 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 senior credit facility). As of December 31, 2017, $133.6 million was outstanding under our senior credit facilities.
Under the indenture governing our outstanding senior unsecured notes, in the event of a change in control, we may be required to offer to purchase all of our outstanding senior unsecured notes at 101% of their original aggregate principal amount, plus accrued interest to the date of repurchase. A change in control also would result in an event of default under our senior credit facilities, which would allow our lenders to accelerate indebtedness owed to them.
If a specified change in control occurs and the lenders under our debt instruments accelerate these obligations, we may not have sufficient liquid assets to repay amounts outstanding under these agreements.
Rent-A-Center's organizational documents and our debt instruments contain provisions that may prevent or deter another group from paying a premium over the market price to Rent-A-Center's stockholders to acquire its stock.
Rent-A-Center’s organizational documents contain provisions that classify its Board of Directors, authorize its Board of Directors to issue blank check preferred stock and establish advance notice requirements on its stockholders for director nominations and actions to be taken at meetings of the stockholders. In addition, as a Delaware corporation, Rent-A-Center is subject to Section 203 of the Delaware General Corporation Law relating to business combinations. Our senior credit facilities and the indentures governing our senior unsecured notes each contain various change of control provisions which, in the event of a change of control, would cause a default under those provisions. These provisions and arrangements could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving us that could include a premium over the market price of Rent-A-Center’s common stock that some or a majority of Rent-A-Center’s stockholders might consider to be in their best interests.
Rent-A-Center is a holding company and is dependent on the operations and funds of its subsidiaries.
Rent-A-Center is a holding company, with no revenue generating operations and no assets other than its ownership interests in its direct and indirect subsidiaries. Accordingly, Rent-A-Center is dependent on the cash flow generated by its direct and indirect operating subsidiaries and must rely on dividends or other intercompany transfers from its operating subsidiaries to generate the funds necessary to meet its obligations, including the obligations under the senior credit facilities. The ability of Rent-A-Center’s subsidiaries to pay dividends or make other payments to it is subject to applicable state laws. Should one or more of Rent-A-
Center’s subsidiaries be unable to pay dividends or make distributions, Rent-A-Center's ability to meet its ongoing obligations could be materially and adversely impacted.
Our stock price is volatile,affect our business. Similar risks associated with Acima host retailers’ failure to protect the integrity and yousecurity of customer information, which we do not control, may not be able to recover your investment ifalso materially and adversely affect our stock price declines.
The price of our common stock has been volatilebusiness, financial condition and can be expected to be significantly affected by factors such as:
our ability to meet market expectations with respect to the growth and profitability of each of our operating segments;
quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store sales or when and how many locations we acquire or open;
quarterly variations in our competitors’ results of operations;
changes in earnings estimates or buy/sell recommendations by financial analysts; and
the stock price performance of comparable companies.
In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies' operating performance.operations.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price.business.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. Additionally, as a public company, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify, on an annual basis, that our internal control over financial reporting is effective. We are also required to, among other things, establish and periodically evaluate procedures with respect to our disclosure controls and procedures.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financialinformation, which could have a material adverse effect on our ability to raise capital, and may also expose us to potential claims and losses. Additionally, any such failure could subject us to increased regulatory scrutiny, which could also have a material adverse effect on our business and our stock price.
The industries in which we operate are highly competitive, which could impede our ability to maintain sales volumes and pricing and have a material adverse effect on our operating results. Certain categories of products we sell and lease from time to time, including furniture, appliances and electronics such as televisions, computers and smartphones, are the subject of intense competition from a number of types of competitors, including national, regional and local operators of lease-to-own stores, virtual lease-to-own companies, traditional and online providers of used goods and merchandise, traditional, “big-box” and e-commerce retailers, Fintech firms and others. These competitors may offer a larger selection of products at more competitive prices than our Rent-A-Center Business and Acima segment. Our competitors may employ aggressive marketing strategies involving frequent sales and discounts, including the use
of certain products as “loss leaders” to increase customer traffic. Engaging in these pricing strategies could cause a material reduction in sales revenue and gross margins. Alternatively, we may be unable to or elect not to engage in these pricing strategies, which could decrease our sales volumes. The expansion of digital retail has increased the number and variety of retailers with which we compete, and certain online retailers may have greater brand recognition, social media following and engagement and sophisticated websites than does Rent‑A‑Center. The increasing competition from all of these sources may also reduce the market share held by our Rent-A-Center Business and Acima segments.
The lease-to-own industry faces competition from the retailers and lease-to-own companies mentioned above, including many retailers who offer layaway programs, various types of consumer finance companies, including Buy Now Pay Later, installment, payday and title loan companies, that may enable our customers to shop at traditional or on-line retailers, as well as rental stores that do not offer their customers a purchase option. Some of these competitors may be willing to offer products and services on an unprofitable basis in an effort to gain market share or be willing to lease certain types of products that we are not willing to or are unable to lease. Additionally, these competitors may be willing to enter into customer leases where services, rather than goods, comprise the significant portion of the lease value, or be willing to engage in other practices related to pricing, compliance, and other areas in which we are not willing to or cannot engage.
Our Acima business relies heavily on relationships with retail partners. An increase in competition could cause our retail partners to no longer offer the Acima product in favor of those of our competitors, or to offer the Acima product and the products of our competitors simultaneously at the same store locations, which could slow growth in the Acima business and limit or reduce profitability. Furthermore, Acima’s virtual lease to own competitors may deploy different business models, such as direct-to-consumer strategies, that forego reliance on retail partner relationships that may prove to be more successful.
We may be unable to retain key employees.
The success of Rent-A-Center depends in part upon its ability to retain its executive leadership, management team and other key employees. Key personnel may depart because of a variety of reasons. The loss of these individuals without adequate replacement could materially and adversely affect our ability to sustain and grow our business. The inability to attract and retain qualified individuals, or a significant increase in the costs to do so, would materially and adversely affect our operations.
If we are unable to attract, train and retain managerial personnel and hourly associates in our stores and staffed Acima locations, our reputation, sales and operating results may be materially and adversely affected.
Our workforce is comprised primarily of employees who work on an hourly basis. We rely on our sales associates in our store locations and staffed Acima locations to provide customers with an enjoyable and informative shopping experience and to help ensure the efficient processing and delivery of products. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same time controlling labor costs. We compete with other retail businesses as well as restaurants for many candidates for employment at our store locations and staffed Acima locations. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. Our ability to control labor costs is also subject to numerous external factors and compliance with regulatory structures, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, governmental regulatory bodies such as the Equal Employment Opportunity Commission and the National Labor Relations Board, prevailing wage rates and wage and hour laws, minimum wage laws, the impact of legislation governing labor and employee relations or benefits, such as the Affordable Care Act, health insurance costs and our ability to maintain good relations with our employees. If we are unable to attract and retain quality employees at reasonable cost, or fail to comply with the regulations and laws impacting personnel, it could have a material adverse effect on our business, financial condition and results of operations.
Acts of nature, whether due to climate change or otherwise, can disrupt our operations and those of our retail partners.
Our store operations, as well as those of our retail partners at Acima, are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornadoes, which have in the past caused damage such as flooding and other damage to our stores and those of our retail partners in specific geographic locations, including in Mexico, Florida, Louisiana and Texas, and may, depending upon the location and severity of such events, materially and unfavorably impact our business continuity. We cannot guarantee that the amount of any hurricane, windstorm, earthquake, flood, business interruption or other casualty insurance we may maintain from time to time would cover any or all damages caused by any such event.
The risks associated with climate change and other environmental impacts and increased focus by stakeholders on environmental issues, including those associated with climate change, could adversely affect our business, financial condition, and operating results.
Climatologists predict the long-term effects of climate change and global warming will result in the increased frequency, intensity, and duration of weather events, which could significantly disrupt supply chains, potentially impacting our vendors’
costs and the production of products leased at our stores. These weather events could also lead to an increased rate of temporary store closures and reduced customer traffic at our stores.
In addition, concern over climate change may result in new or increased regional, federal or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases. These requirements may lead to an increase in tax, transportation, and utility expenses.
Lastly, there is increased focus, including by governmental and non-governmental organizations, investors, customers and consumers on these and other environmental sustainability matters, including deforestation, land use, climate impact and recyclability or recoverability of packaging, including plastic. Our reputation could be damaged if we or others in our industry do not act, or are perceived not to act, responsibly with respect to our impact on the environment. In addition, our host retailers in our Acima segment may face similar risks, which could adversely impact the performance of our Acima results.
The success of our Franchising segment is dependent on the ability and success of our third party franchisees, over which we have limited control.
The franchisees of our Franchising segment are independent third party businesses that are contractually obligated to operate in accordance with the operational and other standards set forth in their respective franchise agreements. Although we evaluate potential franchisee candidates before entering into a franchisor‑franchisee relationship with them, we cannot be certain that management of a given candidate will have the business acumen or financial resources necessary to operate successful franchises in their approved territories. Because franchisees are independent businesses and not employees, we are not able to control them to the same extent as our Rent‑A‑Center Business stores, and the ultimate success and quality of a franchise ultimately rests with the franchisee. Certain state franchise laws may also limit our ability to terminate, not renew or modify our franchise agreements. Our franchisees may fail in key areas, or experience significant business or financial difficulties, which could slow our growth, reduce our franchise fees, royalties and revenue, damage our reputation, expose us to regulatory enforcement actions or private litigation and/or cause us to incur additional costs. If we fail to adequately mitigate any such future losses, our business and financial condition could be materially and adversely affected.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our operations. Because we self-insure a significant portion of expected losses under our workers’ compensation, general liability, vehicle and group health insurance programs, unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including potential increases in medical and indemnity costs, could result in materially different amounts of expense than expected under these programs. This could have a material adverse effect on our financial condition and results of operations.
If we were not able to send or accept electronic payments, our business and financial results could be adversely affected.
We rely on access to various financial networks to process payments received from our customers. These include credit card and debit card networks and the Automated Clearing House (ACH) network. Our ability to participate in these networks depends on our compliance with applicable laws and regulations and with the complex rules of each network and any related industry supervisory groups. If we fail to comply with legal requirements or rules and best practices established by a network or industry group, including those related to data security, we could be assessed significant monetary fines and other penalties, including, in certain cases, the termination of our right to use the applicable network or system. Such fines and penalties, and any disruption in or termination of our ability to process customer payments electronically, could materially adversely affect our business and our brand.
Risks Relating to Legal and Compliance Matters
We may be subject to legal or regulatory proceedings from time to time that result in damages, penalties or other material monetary obligations or material restrictions on our business operations, and our use of arbitration agreements may not allow us to avoid costly litigation.
In addition to laws and regulations regarding our lease‑to‑own transactions, we are subject to consumer protection and data privacy laws and other laws and regulations. As we execute on our strategic plans, we may continue to expand into complementary businesses that engage in financial, banking or lending services, or lease-to-own or rent-to-rent transactions involving products that we do not currently offer our customers, all of which may be subject to a variety of additional statutes and regulatory requirements not presently applicable to our operations. We have defended against, continue to defend against, and may in the future defend against, legal and regulatory proceedings from time to time, including class action lawsuits and regulatory enforcement proceedings alleging various regulatory violations. We have incurred and may in the future incur significant damages, fines, penalties, obligations to post bonds pending appeal or legal fees or expenses in connection with such legal and regulatory proceedings or may pay significant amounts to settle legal or regulatory proceedings, which could materially and adversely affect our liquidity and capital resources. The failure to pay any material judgment would constitute a
default under the ABL Credit Facility, the Term Loan Facility (as defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation”) and the Notes (as defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation”). In addition, we may become subject to significant restrictions on or changes to our business practices, operations or methods, including pricing or similar terms, as a result of existing or future governmental or other proceedings or settlements, any of which could significantly harm our reputation, both with consumers as well as with retail partners and materially and adversely affect our business, prospects and financial condition.
In an attempt to limit costly and lengthy consumer, employee and other litigation, including class actions, we require our customers and employees to sign arbitration agreements, including class action waivers. However, in addition to opt-out provisions contained in such agreements, judicial, regulatory or legislative actions may restrict or eliminate the enforceability of such agreements and waivers. If we are not permitted to use arbitration agreements and/or class action waivers, or if the enforceability of such agreements and waivers is restricted or eliminated, we could incur increased costs to resolve legal actions brought by customers, employees and others, as we would be forced to participate in more expensive and lengthy dispute resolution processes. See Note M in this Form 10-K for additional information regarding certain legal and regulatory proceedings impacting our company.
The outcome of the Consumer Financial Protection Bureau’s (“CFPB”) investigation into certain of Acima’s business practices is uncertain and may materially and adversely affect our business.
Prior to the execution of the Merger Agreement, Acima received a Civil Investigative Demand dated October 1, 2020 (the “CID”) from the CFPB requesting certain information, documents and data relating to Acima’s products, services and practices for the period from January 1, 2015 to the date on which responses to the CID are provided in full. The purpose of the CID is to determine whether Acima extends credit, offers leases, or otherwise offers or provides a consumer financial product or service and whether Acima complies with certain consumer financial protection laws. We are fully cooperating with the CFPB investigation and are continuing to produce records in response to requests of the CFPB. The CFPB has not made any allegations in the investigation, and we are currently unable to predict the eventual scope, ultimate timing or outcome of the CFPB investigation.
On the terms and subject to the conditions set forth in the Merger Agreement, the former owners of Acima have agreed to indemnify Rent-A-Center for certain losses arising after the consummation of the Merger with respect to the CID and certain pre-closing taxes. The indemnification obligations of the former owners of Acima are limited to an indemnity holdback in the aggregate amount of $50 million, which amount was escrowed at the closing of the Merger, and will be Rent-A-Center’s sole recourse against the former owners of Acima with respect to all of the indemnifiable claims under the Merger Agreement. Other than with respect to any pending or unresolved claims for indemnification submitted by Rent-A-Center prior to such time, and subject to other limited exceptions, the escrowed amount in respect of the CID will be released to the former owners of Acima as follows: (i) in respect of the CID, on the earlier of the third anniversary of the closing date of the Merger and the date on which a final determination is entered providing for a resolution of the matters regarding the CID and (ii) in respect of certain pre-closing taxes, on August 18, 2022, the first business day following the date that is 18 months after the closing of the Merger.
There can be no assurance that the CID will be finally resolved prior to the release to the former owners of Acima of the escrowed funds reserved therefor, or that such escrowed amount will be sufficient to address all covered losses or that the CFPB’s ongoing investigation or future exercise of its enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of consumer financial protection laws that could lead to enforcement actions, proceedings or litigation, whether by the CFPB, other state or federal agencies, or other parties, and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, or changes to Acima’s business practices or operations that could materially and adversely affect our business, financial condition, results of operations or reputation.
Federal and state regulatory authorities are increasingly focused on the lease‑to‑own industry and any negative change in these laws or regulations or the passage of unfavorable new laws or regulations or the manner in which any of these are enforced or interpreted could require us to alter our business practices in a manner that may be materially adverse to us.
Although there is currently no comprehensive federal legislation regulating rental purchase transactions, federal regulatory authorities such as the United States Federal Trade Commission and the CFPB are increasingly focused on the subprime financial marketplace in which the lease-to-own industry operates and adverse federal legislation may be enacted in the future. Any federal agency, or any state regulatory authority, may propose and adopt new regulations or interpret existing regulations in a manner that could materially increase both our costs of complying with laws and the risk that we could be sued or be subject to government sanctions if we are not in compliance or to alter our business practices in a manner that reduces the economic potential of our operations. Any such new laws, regulations or interpretations could include, by way of example only, those that seek to re-characterize store-based or virtual lease-to-own transactions as credit sales and to apply consumer credit laws and regulations to our business. In addition, federal and state regulators are increasingly holding businesses operating in the lease-to-own industry to higher standards of monitoring, disclosure and reporting, notwithstanding the adoption of any new
laws or regulations applicable to our industry. Furthermore, regulators and courts may apply laws or regulations to our businesses in incorrect, inconsistent or unpredictable ways that may make our compliance more difficult, expensive and uncertain. This increased attention at the federal and state levels, as well as the potential for scrutiny by certain municipal governments, could increase our compliance costs significantly and materially and adversely affect the manner in which we operate. In addition, legislative or regulatory proposals regarding our industry, or interpretations of them, may subject Rent‑A‑Center to “headline risks” whereby media attention to these matters could negatively impact our business in a particular region or in general or investor sentiment and may materially and adversely affect our share price. Moreover, an adverse outcome from a lawsuit, even one against one of our competitors, could result in changes in the way we and others in the industry do business, possibly leading to significant costs or decreased revenues or profitability. See Note M in this Form 10-K for additional information regarding certain legal and regulatory proceedings impacting our company.
Our lease‑to‑own transactions are regulated by and subject to the requirements of federal and state laws and regulations that vary by jurisdiction, which requires significant compliance costs and exposes us to regulatory action or other litigation.
Currently, 46 states, the District of Columbia and Puerto Rico have passed laws that regulate rental purchase transactions as separate and distinct from credit sales. One additional state has a retail installment sales statute that excludes leases, including lease-to-own transactions, from its coverage if the lease provides for more than a nominal purchase price at the end of the rental period. The specific rental purchase laws generally require certain contractual and advertising disclosures. They also provide varying levels of substantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event the rental purchase agreement is terminated. The rental purchase laws of 11 states limit the total amount that may be charged over the life of a rental purchase agreement and the laws of six states limit the cash prices for which we may offer merchandise. Furthermore, there is currently no comprehensive federal legislation regulating lease-to-own transactions. We have incurred and will continue to incur substantial costs to comply with federal and state laws and regulations, many of which are evolving, unclear and inconsistent across various jurisdictions as described above. In addition to compliance costs, we may incur substantial expenses to respond to federal and state government investigations and enforcement actions, proposed fines and penalties, criminal or civil sanctions, and private litigation, including those arising out of our or our franchisees’ alleged violations of existing laws and/or regulations.
Similar to other consumer transactions, our rental purchase transaction is also governed by various federal and state consumer protection statutes, in addition to the rental purchase statutes under which we operate, that provide various consumer remedies, including monetary penalties, for violations. In our history, we have been the subject of litigation alleging that we have violated some of these statutory provisions and the consumer practices of Acima are currently the subject of an investigation by the CFPB (see “—The outcome of the Consumer Financial Protection Bureau’s investigation into certain of Acima’s business practices is uncertain and may materially and adversely affect our business” below) and a multi-state attorneys general inquiry. See Note M in this Form 10-K for additional information regarding certain legal and regulatory proceedings impacting our company.
Laws and regulations regarding information security and data collection, use and privacy are increasingly rigorous and subject to change, which may cause us to incur significant compliance costs.
The regulatory environment related to information security and data collection, use and privacy is increasingly rigorous, with new and constantly changing requirements applicable to certain aspects of our business, including our collection practices (as well as those of third parties), the manner in which we contact our customers, our decisioning process regarding whether to lease merchandise to customers, our credit reporting practices, and the manner in which we process and store certain customer, employee and other information. All states have adopted laws requiring the timely notification to individuals and, at times, regulators, the media or credit reporting agencies, if a company experiences the unauthorized access or acquisition of PII. Many states have enacted additional data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of PII and other information. For instance, the California Consumer Privacy Act of 2018 (the “CCPA”), which became effective on January 1, 2020, contains, among other things, new disclosure obligations for businesses that collect PII from California residents and affords those individuals numerous rights relating to their PII. The CCPA has changed the manner in which we collect, store and use consumer data and has resulted in increased regulatory oversight, litigation risks and costs of compliance. Furthermore, a California ballot initiative from privacy rights advocates intended to augment and expand the CCPA called the California Privacy Rights Act (the “CPRA”) was passed in November 2020 and will take effect in January 2023 (with respect to information collected from and after January 2022). The CPRA will significantly modify the CCPA, including by creating a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. Moreover, other states have adopted and may continue to adopt privacy-related laws whose restrictions and requirements differ from those of California, which could require us to design, implement and maintain different types of state-based, privacy-related compliance controls and programs simultaneously in multiple states, thereby further increasing the complexity and cost of compliance. These costs, including others relating to increased regulatory oversight and compliance, could materially and adversely affect our business. In addition, given that privacy and customer data protection laws may be interpreted and applied inconsistently and are in a state of flux that varies by jurisdiction, our data protection policies and
practices may not be consistent with the most recent interpretations and applications of such laws at all times. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. Any failure, or perceived failure, by us to comply with our own privacy policies or with any regulatory requirements or orders or other privacy or consumer protection related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and materially and adversely affect our operating results.
Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners, including retail partners.
While our policies and compliance programs are intended to promote legal and ethical business practices, there is a risk that our employees, agents or business partners, including retail partners, could engage in misconduct that materially and adversely affects our reputation, ability to do business or our operating results or financial condition. For instance, our operations in the U.S. and abroad are subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Violations by our employees, contractors or agents of policies and procedures we have implemented to ensure compliance with these laws could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees and could damage our reputation. Other misconduct, including discrimination or harassment in the workplace, illegal or suspicious activity and breaches in the protection of consumer information, could similarly subject us to regulatory sanctions and negatively impact our business, operating results or financial condition. In addition, misconduct by our employees or agents could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect violations of such rules. Furthermore, alleged or perceived misconduct by our employees, agents or business partners, including retail partners, even if not substantiated, may attract negative publicity that could damage our reputation and impair our ability to maintain and develop relationships with our vendors, customers and other third parties with whom we do business and to attract and retain employees.
Our products and services may be negatively characterized by consumer advocacy groups, the media and certain Federal, state and local government officials, and if those negative characterizations become increasingly accepted by consumers and/or our retail partners, demand for our goods and the transactions we offer could decrease and our business could be materially and adversely affected.
Certain consumer advocacy groups, media reports and federal and state regulators and legislators have asserted that laws and regulations regarding lease-to-own transactions should be broader and more restrictive. The consumer advocacy groups and media reports generally focus on the total cost to a consumer to acquire an item, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories seeking to borrow money to finance purchases. This “cost-of-rental” amount, which is generally defined as total lease fees paid in excess of the “retail” price of the goods, is from time to time characterized by consumer advocacy groups and media reports as predatory or abusive without discussing the fundamental difference between a credit transaction and a lease transaction, the fact that consumers can return their leased merchandise at any time without penalty or further payment obligations or the numerous other benefits to consumers of lease-to-own programs compared to traditional financing, or the lack of viable alternatives available to many of these consumers to obtain critical household items. If the negative characterization of lease-to-own transactions becomes increasingly accepted by consumers or our retail and merchant partners, demand for our products and services could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, if the negative characterization of lease‑to‑own transactions is accepted by regulators and legislators, our business may become subject to more restrictive laws and regulations and more stringent enforcement of existing laws and regulations, any of which could have a material adverse effect on our business, results of operations and financial condition. The vast expansion and reach of technology, including social media platforms, has increased the risk that our reputation could be significantly impacted by these negative characterizations in a relatively short amount of time. If we are unable to quickly and effectively respond to such characterizations, we may experience declines in customer loyalty and traffic and our relationships with our retail partners may suffer, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, any failure by our competitors, including smaller, regional competitors, to comply with the laws and regulations applicable to the traditional and/or virtual lease-to-own models, or any actions by our competitors that are challenged by consumers, advocacy groups, the media or governmental agencies or entities as being abusive or predatory, could result in Rent-A-Center being perceived as engaging in similar unlawful or inappropriate activities or business practices, merely because we operate in the same general industries as such competitors.
Disputes with or involving our franchisees may lead to litigation with our franchisees, which may materially and adversely affect our relationships with franchisees or our reputation, or cause us to incur significant expenses that materially and adversely affect our results of operations.
As a franchisor, we are subject to regulation by various federal and state laws that govern the relationship between us and our franchisees and the offer and sale of franchises. If we fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties, as well as the loss of franchise fees and ongoing royalty revenues. Although we believe we generally enjoy a positive working relationship with our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees in the ordinary course of business for a variety of reasons, including disputes related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also have disputes with franchisees in connection with transactions whereby we have re-franchised previously company-owned locations and sold them to the franchisee, including disputes regarding our indemnification obligations pursuant to those transaction agreements. Further, we may engage in litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our products and the customer experience, or to enforce any applicable contractual indemnification rights if we are brought into a matter involving a third party due to an alleged act or omission by the franchisee. In addition, we may be subject to claims by our franchisees relating to our franchise disclosure documents, including claims based on financial information contained in those documents. Engaging in such litigation may be costly, time-consuming and may distract management and materially and adversely affect our relationships with or ability to attract new franchisees. Any negative outcome of these or any other claims could materially and adversely affect our results of operations as well as our ability to expand our franchise system and may damage our reputation and brand. Moreover, federal and state laws that regulate substantive aspects of our relationships with franchisees may limit our ability to terminate our franchise arrangements or otherwise resolve conflicts with our franchisees or enforce contractual duties or rights we believe we have with respect to our franchisees, which could materially and adversely affect our operations.
We may face liability for the actions, omissions and liabilities of our franchisees, which could materially and adversely affect our results of operation.
One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not responsible for the acts, omissions or liabilities of its franchisees. However, under the franchise business model, we may face claims and liabilities based on vicarious liability, joint‑employer liability, or other theories or liabilities. Expansion of these bases for liability not only could result in expensive litigation with our franchisees or government agencies, but also could make it more difficult to appropriately support our franchisees while managing our risk of liability, all of which could impact our results of operations. For instance, in 2015, the National Labor Relations Board adopted a broad standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under the National Labor Relations Act. Although the U.S. Department of Labor announced the rescission of these guidelines in June 2017, there can be no assurance that no future changes in law, regulation or policy will cause us or our franchisees to be liable or held responsible for unfair labor practices, violations of wage and hour laws, or other violations or require our franchises to conduct collective bargaining negotiations regarding employees of our franchisees. If such changes occur, our operating expenses may increase as a result of required modifications to our business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability, which could materially and adversely affect our results of operations.
We may be unable to protect our intellectual property, or may be alleged to have infringed upon the intellectual property rights of others, which could result in a loss of our competitive advantage and a diversion of resources and a material adverse effect on our business and results of operations.
The success of our lease-to-own model depends in large part on our proprietary decisioning algorithm, our e‑commerce platform and other proprietary technologies that we currently have or may develop in the future, including the Acima ecosystem. To protect our intellectual property rights, we rely, or may from time to time rely, on a combination of trademark, trade dress, domain name, copyright, trade secret and patent laws, as well as confidentiality and license agreements with our employees, contractors and other third parties with whom we have relationships. However, our efforts to protect our intellectual property rights may not be sufficient or effective to prevent misappropriation or infringement of our intellectual property or proprietary information, which could result in a loss of our competitive advantage. In addition, any of our intellectual property rights may be challenged, which could result in their being narrowed in scope or declared invalid or unenforceable. We may litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which could be expensive and cause a diversion of resources and ultimately may not be successful.
Moreover, competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim (even if we ultimately prevail). We may also be required to pay significant money damages. In the event of a settlement or adverse
judgment, our results of operation may materially decline if we are prohibited from using the relevant systems, processes, technologies or other intellectual property, especially if we are forced to cease offering certain products or services, or are required to pay to the alleged owner of the relevant intellectual property licensing fees, royalties or technology development expenses. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims may be time consuming and expensive and may result in the diversion of time and attention of our management and employees.
The taxes applicable to our operations can be difficult to determine and are subject to change, and our failure to correctly calculate and pay such taxes could result in substantial tax liabilities and a material adverse effect on our results of operations.
The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the lease-to-own industry generally and our virtual lease-to-own Acima and e-commerce businesses more specifically. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the lease-to-own industry and e-commerce and, therefore, in many cases it is not clear how existing statutes apply to our various business activities. Failure to comply with such statutes, or a successful assertion by a jurisdiction requiring us to collect taxes in a location or for transactions where we presently do not, could result in substantial tax liabilities, including for past sales and leases, as well as penalties and interest. In addition, if the tax authorities in jurisdictions where we are already subject to sales tax or other indirect tax obligations were to successfully challenge our positions, our tax liability could increase substantially. For instance, following a United States Supreme Court decision in June 2018, states may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state. Our Acima business may become subject to additional taxes if state or municipal legislatures adopt tax reform that subjects our lease-to-own transactions originated at the locations of Acima’s retail partners to taxation in that jurisdiction, despite Rent‑A‑Center having no physical presence in that jurisdiction. As governments increasingly search for ways to increase revenues, states may adopt tax reform or take other legislative action designed to raise tax revenues, including by expanding the scope of transactions subject to taxation or by increasing applicable tax rates, or may adversely interpret existing sales, income and other tax regulations. Such changes could subject our business to new or increased tax obligations, which could have a material adverse effect on our results of operations.
Risks Relating to Our Indebtedness and Other Financial Matters
We have significant indebtedness and the level of our indebtedness could materially and adversely affect us.
As of December 31, 2021, our total indebtedness was approximately $1.61 billion. We also had undrawn commitments available for borrowings of an additional $174 million under the ABL Credit Facility (after giving effect to approximately $86 million of outstanding letters of credit).
Notwithstanding the increase in our total indebtedness following our acquisition of Acima Holdings, we expect to continue to evaluate the possibility of acquiring additional businesses and making strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness. Moreover, to respond to competitive challenges, we may be required to raise substantial additional capital to finance new product or service offerings. As a result, our indebtedness could further increase, and the related risks that we face could intensify.
Our level of indebtedness, together with any additional indebtedness we may incur in the future, could materially and adversely affect us in a number of ways. For example, the anticipated level of indebtedness or any additional financing could:
•make it more difficult for us to pay or refinance our debts as they become due during adverse economic, financial market and industry conditions;
•require us to use a larger portion of our cash flow for debt service, reducing funds available for other purposes;
•impair our ability to take advantage of business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
•increase our vulnerability to adverse economic, industry or competitive developments and decrease our ability to respond to such changes as compared to our competitors with less leverage;
•materially and adversely affect our ability to obtain additional financing, particularly as substantially all of our assets will be subject to liens securing certain of our indebtedness;
•decrease our profitability and/or cash flow or require us to dispose of significant assets in order to satisfy our debt service and other obligations if cash from operations or other sources is insufficient to satisfy such obligations;
•increase the risk of a downgrade in the credit rating of us or any indebtedness of us or our subsidiaries which could increase the cost of further borrowings;
•limit our ability to borrow additional funds in the future to fund working capital, capital expenditures and other general corporate purposes; and
•limit our financial resources available to continue paying dividends on our common stock, as determined in the discretion of our Board of Directors and subject to the restrictive covenants in our debt agreements.
Although the terms of the indenture that governs the Notes and the terms of the ABL Credit Facility and the Term Loan Facility contain restrictions on the incurrence of additional debt, including secured debt, these restrictions are subject to a number of important exceptions and debt incurred in compliance with these restrictions could be substantial. If we incur significant additional debt, the related risks could intensify.
The amount of borrowings permitted under the ABL Credit Facility is limited to the value of certain of our assets, and Rent-A-Center relies in part on available borrowings under the ABL Credit Facility for cash to operate its business, which subjects it to market and counterparty risk, some of which is beyond Rent-A-Center’s control.
In addition to cash we generate from our business, our principal existing sources of cash are borrowings available under the ABL Credit Facility. Our borrowing capacity under the ABL Credit Facility varies according to our eligible rental contracts, eligible installment sales accounts and inventory, net of certain reserves. In the event of any material decrease in the amount of or appraised value of these assets, our borrowing capacity would similarly decrease, which could materially and adversely affect our business and liquidity. The documentation governing the ABL Credit Facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our available credit falls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. Subject to certain exceptions, our obligations under the ABL Credit Facility are secured by liens on substantially all of our assets. In the event of a default that is not cured or waived within any applicable cure periods, the lenders’ commitment to extend further credit under the ABL Credit Facility could be terminated, our outstanding obligations could become immediately due and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral. Our access to such financing may be unavailable or reduced, or such financing may become significantly more expensive for any reason, including, but not limited to, adverse economic conditions. In addition, if certain of our lenders experience difficulties that render them unable to fund future draws on the facility, we may not be able to access all or a portion of these funds. If our access to borrowings under the ABL Credit Facility is unavailable or reduced, we may not have the necessary cash resources for our operations and, if any event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and liquidity.
We may not be able to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our failure to meet our debt service obligations could have a material adverse effect on our business, financial condition and results of operations.
As of December, 2021, the annual cash interest payments on our indebtedness are approximately $51 million, which could fluctuate depending on changes in interest rates. We depend on cash on hand and cash flows from operations to make scheduled debt payments. We expect to be able to meet the estimated cash interest payments on our indebtedness through our cash flows from operations. However, our ability to generate sufficient cash flow from operations and to utilize other methods to make scheduled payments will depend on a range of economic, competitive and business factors, many of which are outside of our control, and there can be no assurance that these sources will be adequate. If we are unable to service our indebtedness and fund our operations, we will be forced to adopt an alternative strategy that may include:
•reducing or delaying capital expenditures;
•limiting our growth;
•seeking additional capital;
•selling assets;
•reducing or eliminating the dividend on our common stock; or
•restructuring or refinancing our indebtedness.
Even if we adopt an alternative strategy, the strategy may not be successful and we may be unable to service our indebtedness and fund our operations, which could have a material adverse effect on our business, financial condition or results of operations. In addition, the ABL Credit Facility and the Term Loan Facility are secured by liens on substantially all of our and our restricted subsidiaries’ assets, and any successor credit facilities are likely to be secured on a similar basis. As such, our ability to refinance our indebtedness or seek additional financing, or our restricted subsidiaries’ ability to make cash available to us, by dividend, debt repayment or otherwise, to enable us to repay the amounts due under our indebtedness, could be impaired as a result of such security interests and the agreements governing such security interests.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations. In addition, if
we cannot make scheduled payments on our debt, we will be in default and lenders under the ABL Credit Facility could terminate their commitments to loan money, holders of the Notes and lenders under the ABL Credit Facility and the Term Loan Facility could declare all outstanding principal and interest to be due and payable, and lenders under the ABL Credit Facility and the Term Loan Facility could foreclose against the assets securing such indebtedness and Rent-A-Center could be forced into bankruptcy or liquidation.
Restrictive covenants in certain of the agreements and instruments governing our indebtedness may materially and adversely affect our financial and operational flexibility.
The terms of our indebtedness include restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to, among other things, (i) create liens; (ii) transfer or sell assets; (iii) incur indebtedness or issue certain preferred stock; (iv) pay dividends, redeem stock or make other distributions; (v) make other restricted payments or investments; (vi) create restrictions on payment of dividends or other amounts by us to our restricted subsidiaries; (vii) merge or consolidate with other entities; (viii) engage in certain transactions with affiliates; and (ix) designate our subsidiaries as unrestricted subsidiaries. In addition, our ability to access the full amount available under the ABL Credit Facility is subject to compliance with a financial maintenance covenant requiring that we maintain at least a specified fixed charge coverage ratio (as such ratio is defined in the ABL Credit Facility). Our failure to comply with any of these covenants could result in reduced borrowing capacity and/or an event of default that, if not cured or waived, could result in the acceleration of certain of our debt, which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to comply with these covenants may be affected by events beyond our control, and any material deviations from our forecasts could require us to seek waivers or amendments of covenants or alternative sources of financing, or to reduce expenditures. We cannot assure you that such waivers, amendments or alternative financing could be obtained or, if obtained, would be on terms acceptable to us.
A breach of any of the covenants or restrictions could result in an event of default. Such a default, if not cured or waived, could allow our debt holders to accelerate the related debt, as well as any other debt to which a cross-acceleration or cross-default provision applies, or to declare all borrowings outstanding thereunder to be due and payable. In the event our debt is accelerated, our assets may not be sufficient to repay such debt in full.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market interest rates will increase our interest expense and our debt service obligations on the variable rate indebtedness, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. As of December 31, 2021, approximately $1,158 million of our indebtedness was variable rate indebtedness and, assuming all loans were fully drawn, each quarter‑point (0.25%) change in interest rates would result in an additional $2.9 million annualized pretax charge or credit to our Consolidated Statement of Operations. As of the date of this Annual Report on Form 10-K, we have not entered into any interest rate swap agreements. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate interest rate risk.
A change in control could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts.
Under the agreements governing our ABL Credit Facility and our Term Loan Facility, an event of default will result if a third party becomes the beneficial owner of 40% or more of our voting stock, in which case our obligations under such facilities may become immediately due and payable. In addition, under the indenture governing the Notes, we are obligated to offer to purchase the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to the date of the purchase, upon the occurrence of certain changes in control, including, subject to certain exceptions, the consummation of any transaction that results in any person becoming the beneficial owner of at least 50% of our voting stock or a sale of substantially all of our assets. Rent‑A‑Center may enter into additional financing arrangements in the future that require the repayment of outstanding amounts in similar circumstances. If a specified change in control occurs and the lenders or debt holders under our debt instruments accelerate our obligations, we may not have sufficient liquid assets to repay amounts outstanding under such agreements or be able to arrange for additional financing to fund such obligations, which could result in an event of default under the relevant instrument and could cause any other debt that we may have at that time to become automatically due, further exacerbating the adverse impacts on our financial condition.
Our organizational documents and our current or future debt instruments contain or may contain provisions that may prevent or deter another group from paying a premium over the market price to Rent-A-Center’s stockholders to acquire its stock.
Rent-A-Center’s organizational documents contain provisions that authorize its Board of Directors to issue blank check preferred stock and establish advance notice requirements on its stockholders for director nominations and actions to be taken at meetings of the stockholders. In addition, as a Delaware corporation, Rent-A-Center is subject to Section 203 of the Delaware General Corporation Law, which prohibits persons that acquire, or are affiliated with any person that acquires, more than 15% of our outstanding common stock from engaging in any business combination with Rent‑A‑Center for a three-year period following the date of such acquisition, subject to limited exceptions. Furthermore, the terms of our indebtedness include various change in control provisions which, in the event of a change in control, would cause a default under those provisions. These provisions and arrangements could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change in control involving us, whether favored or opposed by our management or our stockholders. For instance, the consummation of any such transaction in certain circumstances may require the redemption or repurchase of the Notes, and there can be no assurance that we or the potential acquiror will have sufficient financial resources to affect such a redemption or repurchase.
Risks Relating to the Merger
We may be unable to realize the anticipated benefits of the Merger, including synergies, and expect to incur substantial expenses related to the Merger, which could have a material adverse effect on our business, financial condition and results of operations.
We expect to realize potential revenue and cost synergies as a result of the Merger. In addition to the purchase price we paid in connection with the Merger, we incurred certain one-time costs to achieve these synergies. In addition, while we believe these synergies are achievable, our ability to achieve such estimated synergies and the timing of achieving any such synergies is subject to various assumptions by our management, which may or may not be realized, as well as the incurrence of other costs in our operations that offset all or a portion of such synergies. As a consequence, we may not be able to realize all of these synergies within the timeframe expected or at all. In addition, we may incur additional and/or unexpected costs in order to realize these synergies. Failure to achieve the expected synergies could significantly reduce the expected benefits associated with the Merger and materially and adversely affect our business, financial condition and results of operations.
We may be unable to successfully integrate Acima’s business and realize the anticipated benefits of the Merger.
Rent-A-Center and Acima operated as independent companies prior to the consummation of the Merger in February 2021. We have devoted, and expect to continue to devote, significant management attention and resources to integrating the business practices and operations of Acima with the other business of Rent-A-Center. Potential difficulties we may encounter in the integration process include the following:
•the inability to successfully combine the businesses of Rent-A-Center and Acima in a manner that permits Rent-A-Center to achieve the cost savings or revenue enhancements anticipated to result from the Merger, which would result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all;
•lost sales and customers as a result of certain customers, retail partners or other third parties of either of the two companies deciding not to do business with us after the Merger;
•the complexities associated with managing Rent-A-Center out of several different locations and integrating personnel from Acima, resulting in a significantly larger combined company, while at the same time attempting to provide consistent, high quality products and services;
•the complexities of consolidating retail partner locations;
•the additional complexities of integrating a company with different products, services, markets and customers;
•coordinating corporate and administrative infrastructures and harmonizing insurance coverage;
•coordinating accounting, information technology, communications, administration and other systems;
•complexities associated with implementing necessary controls for Acima’s business activities to address Rent-A-Center’s requirements as a public company;
•identifying and eliminating redundant and underperforming functions and assets;
•difficulty addressing possible differences in corporate culture and management philosophies;
•the failure to retain key employees of either Acima or Rent-A-Center;
•potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger, including litigation relating to the Merger or the ultimate outcome of the CFPB investigation of Acima;
•performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention to efforts to integrate Acima’s operations; and
•a deterioration of credit ratings.
For all these reasons, the integration process could result in the distraction of Rent-A-Center’s management, the disruption of Rent-A-Center’s ongoing business or inconsistencies in its products, services, standards, controls, procedures and policies, any of which could materially and adversely affect our ability to maintain relationships with our customers, retail partners, vendors and employees or to achieve the anticipated benefits of the Merger, or could otherwise materially and adversely affect our business and financial results.
An inability to realize the full extent of the anticipated benefits and cost synergies of the Merger, as well as any delays encountered in the integration process, could have a material adverse effect on the revenues, level of expenses and operating results of the combined company, which may materially and adversely affect the value of Rent-A-Center’s securities.
In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefit of our plan for integration may not be realized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Merger may be offset by costs incurred or delays in integrating the companies. If we are not able to adequately address these challenges, we may be unable to successfully integrate Acima’s operations into our other businesses or, even if we are able to combine such business operations successfully, to realize the anticipated benefits of the integration of the two companies.
Risks Relating to Our Structure or an Investment in Our Common Stock
We are a holding company and are dependent on the operations and funds of our subsidiaries.
We are a holding company, with no revenue generating operations and no assets other than our ownership interests in our direct and indirect subsidiaries. Accordingly, we are dependent on the cash flow generated by our direct and indirect operating subsidiaries and must rely on dividends or other intercompany transfers from our operating subsidiaries to generate the funds necessary to meet our obligations, including the obligations under the ABL Credit Facility, Term Loan Facility and the Notes. The ability of our subsidiaries to pay dividends or make other payments to us is subject to applicable state laws. Should one or more of our subsidiaries be unable to pay dividends or make distributions, our ability to meet our ongoing obligations could be materially and adversely affected. If we are unable to satisfy the financial and other covenants in our debt agreements, our lenders could elect to terminate the agreements and require us to repay the outstanding borrowings, or we could face other substantial costs.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
•our perceived ability to meet market expectations with respect to the growth and profitability of each of our operating segments and to timely achieve the expected benefits of the Merger;
•quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store sales, invoice volume or when and how many locations we acquire, open, sell or close;
•quarterly variations in our competitors’ results of operations;
•changes in earnings estimates or buy/sell recommendations by financial analysts;
•how our actual financial performance compares to the financial performance guidance we provide;
•state or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our business;
•the stock price performance of comparable companies;
•the unpredictability of global and regional economic and political conditions; and
•the impact of any of the other risk factors discussed or incorporated by reference herein.
In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to such companies’ operating performance.
There can be no assurance as to the dividends that we may pay on our common stock or as to future stock repurchases.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have paid quarterly cash dividends on our common stock since 2019, we are not required to declare or pay any dividends and there may be circumstances under which we may be unable to declare and pay dividends or repurchase our shares under applicable Delaware law or due to the impact of restrictive covenants in our debt agreements. In addition, we may elect to eliminate or reduce our common stock dividend or cease to engage in stock
repurchases in the future for any reason. Any elimination of or reduction in the amount of our common stock dividend or the failure to implement future stock repurchases could materially and adversely affect the market price of our common stock.
A lowering or withdrawal of the ratings assigned to Rent-A-Center’s debt by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our indebtedness currently has a non-investment grade rating, and any rating assigned to our debt could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Credit ratings are not recommendations to purchase, hold or sell any securities of our company. Additionally, credit ratings may not reflect the potential effect of risks relating to any securities of our company. Any downgrade by either S&P or Moody’s may result in higher borrowing costs. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease space for substantially all of our Core U.S.Rent-A-Center Business and Mexico stores andunder operating leases expiring at various times through 2029. In addition, we lease space for certain support facilities under operating leases expiring at various times through 2023.2032. Most of our store leases are five yearfive-year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-uponagreed formulas. Store sizes average approximately 4,4004,800 square feet. Approximately 75% of each store’s space is generally used for showroom space and 25% for offices and storage space. Our Acceptance NowAcima kiosks occupy space without charge in the retailer's location with no lease commitment.
We believe suitable store space generally is available for lease and we would be able to relocate any of our stores or support facilities without significant difficulty should we be unable to renew a particular lease. We also expect additional space is readily available at competitive rates to open new stores or support facilities, as necessary.
We own the land and building in Plano, Texas, in which our corporate headquarters is located. The land and improvements are pledged as collateral under our senior credit facilities.
Item 3. Legal Proceedings.
From time to time, we, along with our subsidiaries, are party to various legal proceedings and governmental inquiries 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 currently expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred.
We are subject Nevertheless, we cannot predict the impact of future developments affecting our claims and lawsuits, and any resolution of a claim or lawsuit or reserve within a particular fiscal period may materially and adversely impact our results of operations for that period. In addition, claims and lawsuits against us may seek injunctive or other relief that requires changes to unclaimed property audits by statesour business practices or operations and it is possible that any required changes may materially and adversely impact our business, financial condition, results of operations or reputation. Please reference Note M in the ordinary course of business. We recently reached settlement agreements for the comprehensive multi-state unclaimed property audit. 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. The negotiated settlements did not have a material adverse impactNotes to our financial statements.
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 andFinancial Statements for additional discussion of 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. Discovery in this matter has now commenced. A hearing on class certification is scheduled for September 19, 2018. We continue to believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.legal proceedings.
Kevin Paul, derivatively and on behalf of Rent-A-Center, Inc. v. Robert D. Davis et. al.; Sheila Coleman, derivatively and on behalf of Rent-A-Center, Inc. v. Robert D. Davis et. al.; Michael Downing, derivatively and on behalf of Rent-A-Center, Inc. v. Mark E. Speese et. al. On March 15 and 16, 2017, substantially similar shareholder derivative suits were filed against certain current and former officers and directors and, nominally, against us, in state court in Dallas County, Texas. Another substantially similar shareholder derivative suit was filed against certain current and former officers and directors and, nominally, against us, in state court in Collin County, Texas on May 8, 2017. All three of the cases have been consolidated in state court in Dallas County, Texas. The lawsuits allege that the defendants breached their fiduciary duties owed to Rent-A-Center and otherwise mismanaged the affairs of the company as it concerns public statements made related to our point-of-sale system, operational results of our Acceptance Now segment, and our revenues and profitability. The petitions in these suits claim damages in unspecified amounts; seek an order directing the Company to make various changes to corporate governance and internal procedures, including putting forth a shareholder vote on various governance matters; restitution from the individual defendants; and cost, fees and expenses. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that the individual defendants will be found to have no liability in this matter.
Arnaud van der Gracht de Rommerswael, derivatively and on behalf of Rent-A-Center, Inc. v. Mark Speese et. al. On April 3, 2017, another shareholder derivative suit was filed against certain current and former officers and directors, JPMorgan Chase Bank, N.A., The Bank of New York Mellon Trust Company, N.A., and, nominally, against us, in federal court in Sherman, Texas. The complaint alleges that the defendants breached their fiduciary duties owed to Rent-A-Center and otherwise mismanaged the affairs of the company as it concerns (i) public statements made related to the rollout of our point-of-sale system; (ii) compensation paid to Guy Constant and Robert Davis surrounding their resignations; and (iii) change-of-control language in certain debt agreements, which the suit alleges impacts shareholders’ willingness to vote for a slate of directors nominated by Engaged Capital Flagship Master Fund, LP. (“Engaged Capital”). The complaint claims damages in unspecified amounts, disgorgement of benefits from alleged breaches of duty by the individual defendants; an order declaring that certain language in the debt agreements is unenforceable; an order enjoining the lender defendants from enforcing certain provisions in the debt agreements; an order directing the Company’s board to approve Engaged Capital’s slate of directors; an order directing the Company to make unspecified changes to corporate governance and internal procedures; and costs, fees, and expenses.
In response to the motion to dismiss filed by the defendants on April 25, 2017, the plaintiff amended his complaint on May 9, 2017 and on May 19, 2017. The amended complaint alleges breach of fiduciary duty, unjust enrichment and waste of corporate assets related to alleged acts for the purposes of entrenching board members, including the approval of change-of-control language in certain debt agreements, the implementation of the point-of-sale system, and the severance compensation paid to Guy Constant and Robert Davis.
On July 10, 2017, the plaintiff’s claims against JPMorgan Chase Bank, N.A. and The Bank of New York Mellon Trust Company, N.A. were dismissed.
On October 12, 2017, the court issued an order requiring plaintiffs to re-plead the claims related to our point-of-sale system, and denying the motion to dismiss with respect to the waste and entrenchment claims. The plaintiffs failed to re-plead the claims related to our point-of-sale system. Discovery with respect to the remaining waste and entrenchment clams has now commenced.
We continue to believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that the defendants will be found to have no liability in this matter.
Blair v. Rent-A-Center, Inc. This matter is a state-wide class action complaint originally filed on March 13, 2017 in the Federal District Court for the Northern District of California. The complaint alleges various claims, including that our cash sales and total rent to own prices exceed the pricing permitted under the Karnette Rental-Purchase Act. In addition, the plaintiffs allege that we fail to give customers a fully executed rental agreement and that all such rental agreements that were issued to customers unsigned are void under the law. The plaintiffs are seeking statutory damages under the Karnette Rental-Purchase Act which range from $100 - $1,000 per violation, injunctive relief, and attorney’s fees. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been listed on the Nasdaq Global Select Market® and its predecessors under the symbol “RCII” since January 25, 1995, the date we commenced our initial public offering. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported, and the quarterly cash dividend declared per share on our common stock.
|
| | | | | |
| 2017 | High | | Low | | Cash Dividends Declared |
| Fourth Quarter | $12.20 | | $9.05 | | $— |
| Third Quarter | $13.89 | | $10.66 | | $— |
| Second Quarter | $13.33 | | $8.52 | | $0.08 |
| First Quarter | $11.98 | | $7.76 | | $0.08 |
|
| | | | | |
| 2016 | High | | Low | | Cash Dividends Declared |
| Fourth Quarter | $13.16 | | $8.00 | | $0.08 |
| Third Quarter | $13.73 | | $10.20 | | $0.08 |
| Second Quarter | $15.94 | | $11.21 | | $0.08 |
| First Quarter | $16.37 | | $9.76 | | $0.08 |
As of February 21, 2018,2022, there were approximately 3546 record holders of our common stock.
Future decisions to pay cash dividends on our common stock continue to be at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and any other factors our Board of Directors may deem relevant. Cash dividend payments are subject to certain restrictions in our debt agreements. Please see Note I and Note JK to the consolidated financial statements for further discussion of such restrictions.
Under our current common stock repurchase program,Repurchases of Equity Securities
In early December 2021, our Board of Directors has authorized a new stock repurchase program for up to $500.0 million (the “December 2021 Program”), which superseded our previous stock repurchase program. Under the December 2021 program, we may purchase shares of our common stock from time to time in the open market andor privately negotiated transactions, uptransactions. We are not obligated to an aggregate of $1.25 billion of Rent-A-Center common stock. As ofacquire any shares under the program, and the program may be suspended or discontinued at any time. Under the December 31, 2017, we had purchased a total of 36,994,6532021 Program, 2,829,700 shares of Rent-A-Centerour common stock were repurchased for an aggregate purchase price of $994.8approximately $140.0 million under thisand $360.0 million remains available for repurchases. Under previous repurchase programs, 5,069,108 shares of our common stock repurchase program. Commonwere repurchased for an aggregate purchase price of $250.0 million during 2021. During 2020, 1,463,377 shares of our common stock repurchases are subjectwere repurchased for an aggregate purchase prices of $26.6 million.
The following table presents information with respect to certain restrictions inpurchases of our debt agreements. Please see Note Icommon stock the Company made during the six months ended December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum dollar value of shares that may yet be purchased under publicly announced plans or programs (in millions) |
| August 1, 2021 - August 31, 2021 | | 160,408 | | $ | 59.14 | | | 160,408 | | $ | 240.5 |
| September 1, 2021 - September 30, 2021 | | 175,100 | | $ | 60.26 | | | 175,100 | | $ | 230.0 |
| October 1, 2021 - October 31, 2021 | | 979,700 | | $ | 55.08 | | | 979,700 | | $ | 176.0 |
| November 1, 2021 - November 30, 2021 | | 3,426,600 | | $ | 46.90 | | | 3,426,600 | | $ | 15.3 |
| December 1, 2021 - December 31, 2021 | | 3,157,000 | | $ | 49.22 | | | 3,157,000 | | $ | 360.0 |
Recent Sales of Unregistered Securities
On February 17, 2021, we completed the acquisition of Acima Holdings and Note Jissued to the consolidated financial statements for further discussionformer owners of such restrictions. NoAcima an aggregate of 10,779,923 shares were repurchased during 2017of our common stock, with a value of $51.14 per share based on the closing price of our common stock on the date of closing. The offer, sale, and 2016.
issuance of these securities was deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) and Regulation D of the Securities Act of 1933, as amended.
Stock Performance Graph
The following chart represents a comparison of the five year total return of our common stock to the NASDAQ Composite Index and the S&P 1500 Specialty Retail Index. We selected the S&P 1500 Specialty Retail Index for comparison because we use this published industry index as the comparator group to measure our relative total shareholder return for purposes of determining vesting of performance stock units granted under our long-term incentive compensation program. The graph assumes $100 was invested on December 31, 2012,2016, and dividends, if any, were reinvested for all years ending December 31.
Item 6. Reserved.
Item 6. Selected Financial Data.
The selected financial data presented below for the five years ended December 31, 2017, have been derived from our audited consolidated financial statements. The historical financial data are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included in this report.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share data) | 2017 | | 2016 | | 2015(6) | | 2014 | | 2013 |
| Consolidated Statements of Operations | | | | | | | | | |
| Revenues | | | | | | | | | |
| Store | | | | | | | | | |
| Rentals and fees | $ | 2,267,741 |
| | $ | 2,500,053 |
| | $ | 2,781,315 |
| | $ | 2,745,828 |
| (11) | $ | 2,695,895 |
|
| Merchandise sales | 331,402 |
| | 351,198 |
| | 377,240 |
| | 290,048 |
| | 278,753 |
|
| Installment sales | 71,651 |
| | 74,509 |
| | 76,238 |
| | 75,889 |
| | 71,475 |
|
| Other | 9,620 |
| | 12,706 |
| | 19,158 |
| | 19,949 |
| | 18,133 |
|
| Franchise | | | | | | | | | |
| Merchandise sales | 13,157 |
| | 16,358 |
| | 15,577 |
| | 19,236 |
| | 24,556 |
|
| Royalty income and fees | 8,969 |
| | 8,428 |
| | 8,892 |
| | 6,846 |
| | 5,206 |
|
| Total revenues | 2,702,540 |
| | 2,963,252 |
| | 3,278,420 |
| | 3,157,796 |
| | 3,094,018 |
|
| Cost of revenues | | | | | | | | | |
| Store | | | | | | | | | |
| Cost of rentals and fees | 625,358 |
| | 664,845 |
| | 728,706 |
| | 704,595 |
| | 676,674 |
|
| Cost of merchandise sold | 322,628 |
|
| 323,727 |
| | 356,696 |
| | 231,520 |
| | 216,206 |
|
| Cost of installment sales | 23,622 |
| | 24,285 |
| | 25,677 |
| | 26,084 |
| | 24,541 |
|
| Other charges and (credits) | — |
| | — |
| | 34,698 |
| (7) | (6,836 | ) | (12) | — |
|
| Franchise cost of merchandise sold | 12,390 |
| | 15,346 |
| | 14,534 |
| | 18,070 |
| | 23,104 |
|
| Total cost of revenues | 983,998 |
| | 1,028,203 |
| | 1,160,311 |
| | 973,433 |
| | 940,525 |
|
| Gross profit | 1,718,542 |
| | 1,935,049 |
| | 2,118,109 |
| | 2,184,363 |
| | 2,153,493 |
|
| Operating expenses | | | | | | | | | |
| Store expenses | | | | | | | | | |
| Labor | 732,466 |
| | 789,049 |
| | 854,610 |
| | 888,929 |
| | 881,671 |
|
| Other store expenses | 744,187 |
| | 791,614 |
| | 833,914 |
| | 842,254 |
| | 789,212 |
|
| General and administrative expenses | 171,090 |
| | 168,907 |
| | 166,102 |
| | 162,316 |
| | 147,621 |
|
| Depreciation, amortization and write-down of intangibles | 74,639 |
| | 80,456 |
| | 80,720 |
| | 83,168 |
| | 86,912 |
|
| Goodwill impairment charge | — |
| | 151,320 |
| (4) | 1,170,000 |
| (8) | — |
| | 1,068 |
|
| Other charges | 59,219 |
| (1) | 20,299 |
| (5) | 20,651 |
| (9) | 14,234 |
| (13) | — |
|
| Total operating expenses | 1,781,601 |
| | 2,001,645 |
| | 3,125,997 |
| | 1,990,901 |
| | 1,906,484 |
|
| Operating (loss) profit | (63,059 | ) | | (66,596 | ) | | (1,007,888 | ) | | 193,462 |
| | 247,009 |
|
| Write-off of debt issuance costs | 1,936 |
| (2) | — |
| | — |
| | 4,213 |
| (14) | — |
|
| Interest expense, net | 45,205 |
| | 46,678 |
| | 48,692 |
| | 46,896 |
| | 38,813 |
|
| (Loss) earnings before income taxes | (110,200 | ) | | (113,274 | ) | | (1,056,580 | ) | | 142,353 |
| | 208,196 |
|
| Income tax (benefit) expense | (116,853 | ) | (3) | (8,079 | ) | | (103,060 | ) | (10) | 45,931 |
| | 79,439 |
|
| Net earnings (loss) | $ | 6,653 |
| | $ | (105,195 | ) | | $ | (953,520 | ) | | $ | 96,422 |
| | $ | 128,757 |
|
| Basic earnings (loss) per common share | $ | 0.12 |
| | $ | (1.98 | ) | | $ | (17.97 | ) | | $ | 1.82 |
| | $ | 2.35 |
|
| Diluted earnings (loss) per common share | $ | 0.12 |
| | $ | (1.98 | ) | | $ | (17.97 | ) | | $ | 1.81 |
| | $ | 2.33 |
|
| Cash dividends declared per common share | $ | 0.16 |
| | $ | 0.32 |
| | $ | 0.96 |
| | $ | 0.93 |
| | $ | 0.86 |
|
Item 6. Selected Financial Data— Continued.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015(6) | | 2014 | | 2013 |
| Consolidated Balance Sheet Data | | | | | | | | | |
| Rental merchandise, net | $ | 868,991 |
| | $ | 1,001,954 |
| | $ | 1,136,472 |
| | $ | 1,237,856 |
| | $ | 1,124,198 |
|
| Intangible assets, net | 57,496 |
| | 60,560 |
| | 213,899 |
| | 1,377,992 |
| | 1,373,518 |
|
| Total assets | 1,420,781 |
| | 1,602,741 |
| | 1,974,468 |
| | 3,271,197 |
| | 3,018,175 |
|
| Total debt | 672,887 |
| | 724,230 |
| | 955,833 |
| | 1,042,813 |
| | 916,275 |
|
| Total liabilities | 1,148,338 |
| | 1,337,808 |
| | 1,590,878 |
| | 1,881,802 |
| | 1,682,306 |
|
| Total stockholders' equity | 272,443 |
| | 264,933 |
| | 383,590 |
| | 1,389,395 |
| | 1,335,869 |
|
| | | | | | | | | | |
| Operating Data (Unaudited) | | | | | | | | | |
| Core U.S. and Mexico stores open at end of period | 2,512 |
| | 2,593 |
| | 2,815 |
| | 3,001 |
| | 3,161 |
|
| Acceptance Now Staffed locations open at end of period | 1,106 |
| | 1,431 |
| | 1,444 |
| | 1,406 |
| | 1,325 |
|
| Acceptance Now Direct locations open at end of period | 125 |
| | 478 |
| | 532 |
| | — |
| | — |
|
Same store revenue (decrease) growth (12) | (5.4 | )% | | (6.2 | )% | | 5.7 | % | | 1.2 | % | | (2.0 | )% |
| Franchise stores open at end of period | 225 |
| | 229 |
| | 227 |
| | 187 |
| | 179 |
|
| |
(1)
| Includes$24.0 million related to the closure of Acceptance Now locations, $18.2 million for capitalized software write-downs, $6.5 million for incremental legal and advisory fees, $5.4 million for hurricane damages, $3.4 million for reductions at the field support center, $1.1 million for previous store closure plans, and $0.6 million in legal settlements.
|
| |
(2)
| Includes the effects of a $1.9 million financing expense related to the write-off of unamortized financing costs. |
| |
(3)
| Includes a $77.5 million gain resulting from the Tax Cuts and Jobs Act. |
| |
(4)
| Includes a $151.3 million goodwill impairment charge in the Core U.S. segment. |
| |
(5)
| Includes $22.5 million primarily related to the closure of Core U.S. stores, Acceptance Now locations, and Mexico stores, partially offset by a $2.2 million legal settlement. |
| |
(6)
| Includes revisions for immaterial correction of deferred tax error associated with our goodwill impairment reported in the fourth quarter of 2015 as discussed in Note B to the consolidated financial statements.
|
| |
(7)
| Includes a $34.7 million write-down of smartphones. |
| |
(8)
| Includes a $1,170.0 million goodwill impairment charge in the Core U.S. segment. |
| |
(9)
| Includes a $7.5 million loss on the sale of Core U.S. and Canada stores, a $7.2 million charge related to the closure of Core U.S. and Mexico stores, $2.8 million of charges for start-up and warehouse closure expenses related to our sourcing and distribution initiative, a $2.0 million corporate reduction charge and $1.1 million of losses for other store sales and closures. . |
| |
(10)
| Includes $6.0 million of discrete adjustments to income tax reserves. |
| |
(11)
| Includes a $0.6 million reduction of revenue due to consumer refunds as a result of an operating system programming error. |
| |
(12)
| Includes a $6.8 million credit due to the settlement of a lawsuit against the manufacturers of LCD screen displays. |
| |
(13)
| Includes store closure charges of $5.1 million, asset impairment charges of $4.6 million, corporate reduction charges of $2.8 million, and a $1.8 million loss on the sale of stores in the Core U.S. segment. |
| |
(14)
| Includes the effects of a $4.2 million financing expense related to the payment of debt origination costs and the write-off of unamortized financing costs. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent DevelopmentsObjective
Strategic Review. On October 30, 2017, the Board initiated a process to explore strategicWe report financial operating performance under four operating segments, including our Rent-A-Center Business segment, which represents our company-owned stores and financial alternatives. The Board, in consultation with its financiale-commerce platform through rentacenter.com; our Acima segment (formerly Preferred Lease), which includes our virtual and legal advisors, is carefully reviewingstaffed business models; and considering a full range of options focused on maximizing stockholder value. There can be no assurance that the Board's exploration of strategicour Mexico and financial alternatives will result in any particular action or any transaction being pursued, entered into or consummated, or the timing of any action or transaction.
Executive Management Changes. On December 30, 2017, Mark E. Speese resigned from his position as Chief Executive Officer and the Board named Mitchell E. Fadel as Chief Executive Officer. Mr. Fadel served as one of the Company's directors since June 2017 and prior to that served as President of the Company (beginning in July 2000) and Chief Operating Officer (beginning in December 2002) each until August 2015, and also as a director of the Company from December 2000 to November 2013. From 1992 until 2000, Mr. Fadel served as President and Chief Executive Officer of the Company’s subsidiary Rent-A-Center Franchising International, Inc. f/k/a ColorTyme, Inc.
Cooperation Agreement. On February 5, 2018, we entered into a cooperation agreement with the Engaged Group. The Cooperation Agreement provides, among other things, that we will nominate for election at the 2018 Annual Meeting of Stockholders one new independent director to be proposed by the Engaged Group. That individual will replace the nomination of Rishi Garg, a current member of the Board, who has informed us that he does not intend to stand for re-election at the 2018 Annual Meeting. In addition, the Engaged Group has agreed to support the election of J.V. Lentell and Michael J. Gade, members of the Board whose terms will expire at the 2018 Annual Meeting and who have recently informed the Company of their intent to stand for re-election. The Cooperation Agreement also provides that, prior to the 2018 Annual Meeting, the Board will be composed of six directors, but may, following the 2018 Annual Meeting, be expanded to seven directors during the remaining term of the Cooperation Agreement (in which case nominees for the seventh director seat would be proposed by the Engaged Group). The Engaged Group has also agreed to vote all of the shares of Common Stock it beneficially owns in favor of our previously announced proposal to declassify the Board which, if approved, will result in all directors standing for election on an annual basis. We have also agreed to terminate our stockholder rights plan no later than February 28, 2018.
Results of Operationssegments.
The following discussion focuses on recent developments expected to have current and future impacts on the results of our business, trends and uncertainties within our industry and business model that may impact our financial results, our recent results of operations, and issues related todiscussion of our liquidity and capital resources. You should read thisthe following discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
For similar historical operating and financial data and discussion of our twelve months ended December 31, 2020 results compared to our twelve months ended December 31, 2019 results, refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form10 K incorporated herein by reference, which was filed with the SEC on March 1, 2021. Recent Developments
Acima Acquisition. On February 17, 2021, we completed the acquisition of Acima Holdings and issued to the former owners of Acima an aggregate of 10,779,923 shares of our common stock (the “Aggregate Stock Consideration”), with a value of $51.14 per share based on the closing price of our common stock on the date of closing, and paid to them aggregate cash consideration of $1,273.3 million (the “Aggregate Cash Consideration”). Under the terms of the definitive agreement, $50 million of the Aggregate Cash Consideration was placed into escrow at closing to cover certain potential tax and regulatory indemnification obligations of the former owners of Acima Holdings under the agreement. Although we currently believe the escrow holdback amount, which serves as our sole recourse with respect to any indemnifiable claims, will be sufficient to cover any such potential tax and regulatory matters, there is no assurance that any actual payments by us with respect to such matters will not exceed the escrow holdback amount.
The portion of the Aggregate Stock Consideration issued to former owners of Acima Holdings who are also employees of Acima is subject to restricted stock agreements providing vesting conditions over a 36-month period beginning upon closing of the acquisition. The portion of the Aggregate Stock Consideration issued to non-employee former owners of Acima Holdings is subject to the terms of an 18-month lockup agreement, pursuant to which one-third of the aggregate shares of our common stock received by a non-employee former owner of Acima Holdings becomes transferable after each six month period following the closing of the acquisition.
In connection with the acquisition, we entered into employment agreements with certain executives of Acima Holdings, including Aaron Allred, Chairman and Founder of Acima Holdings, which became effective upon closing.
Dividends. On December 2, 2021, we announced that our board of directors approved an increase of approximately 10% in the quarterly cash dividend to $0.34 per share for the first quarter of 2022. The dividend was paid on January 13, 2022 to our common stockholders of record as of the close of business on December 16, 2021.
Trends and Uncertainties
COVID-19 Pandemic. Beginning in the latter half of March 2020, the worldwide spread of COVID-19 caused significant disruptions to the U.S. and world economies, resulting in U.S. state and local jurisdictions implementing various containment or mitigation measures, including temporary shelter-in-place orders and the temporary closure of non-essential businesses.
As a result of COVID-19 and related jurisdictional ordinances implemented in the United States to contain the spread of COVID-19 or mitigate its effects, beginning in the latter half of March 2020 a significant number of Acima retail partner locations were temporarily closed, resulting in the initial closure of approximately 65% of our staffed Acima locations, which operated within those stores. In addition, in our Rent-A-Center Business segment we temporarily shut down operations at a small number of stores and approximately 24% of our stores were partially closed, operating with closed showrooms and conducting business only through e-commerce web orders, and contactless curbside service or ship-from-store models. Some franchise locations and stores in our Mexico operating segment were also temporarily closed or had restricted operations due to COVID-19. All locations in our Rent-A-Center Business, Franchising and Mexico operating segments and staffed Acima locations, temporarily or partially closed at the onset of the pandemic, were reopened in the second quarter of 2020.
Despite the recent availability of COVID-19 vaccines in 2021, the number of COVID-19 cases has increased at various times throughout 2021 including as the result of the appearance of new variants resulting in certain governmental authorities imposing or re-imposing certain restrictions on businesses. As of February 21, 2022, all locations in our Rent-A-Center Business, Franchising and Mexico operating segments and staffed Acima locations are providing full in-store services subject to local requirements for sanitization, social distancing, face masks and capacity limitations and, in Mexico, certain restrictions regarding hours of operation.
In response to the negative impacts to our business resulting from COVID-19, in 2020, we proactively implemented certain measures to reduce operating expenses and cash flow uses, including implementing temporary executive pay reductions, temporarily furloughing certain employees at our store locations and corporate headquarters, reducing store hours in certain locations, renegotiating real estate leases, reducing inventory purchases and capital expenditures, and, for a brief period of time, suspending further share repurchases. In addition, we implemented additional electronic payment methods for our Rent-A-Center Business and Acima customers to facilitate contactless transactions. Separately, on March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), providing U.S. citizens and business with various stimulus and income tax relief benefits throughout 2020 and early 2021 to help offset immediate negative financial impacts sustained as a result of COVID-19.
The lease-to-own industry can benefit during recessionary economic cycles or credit constrained environments because it provides credit constrained customers with a viable option to obtain merchandise they may not otherwise be able to obtain through other retailers offering more traditional financing options. However, there are no assurances we will not be subject to future government actions negatively impacting our business as the pandemic progresses. In addition, in the latter part of 2021, we have experienced negative trends in customer behavior following the expiration of government stimulus and relief programs, and significant rise in the US consumer price index, resulting in lower payment and higher loss activity; as well as certain other negative trends in our business that we believe to be associated with macro-economic conditions resulting from COVID-19, including a condensed labor market, wage inflation, and global supply chain issues resulting in reduced product availability and rising product costs. At this time, we are unable to predict the full extent to which consumer spending behavior, or other macro-economic trends associated with the pandemic, may impact our business in future periods.
See “Risk Factors” in Part I, Item 1A for additional discussion of operational impacts to our business and additional risks associated with COVID-19.
Results of Operations
Overview
The following briefly summarizes certain of our financial information for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020.
During the twelve months ended December 31, 2017, we experienced a decline2021, consolidated revenues increased approximately $1.769.3 million, primarily due to the acquisition of Acima Holdings, in revenues, gross profit and operating profit driven primarily by declinesaddition to an increase in same store revenue, reductionssales in our store base, and impacts related to the recent hurricanes in the Core U.S. segment.
Revenues in our Core U.S. segment decreasedRent-A-Center Business. Operating profit increased approximately $234.3$43.2 million for the twelve months ended December 31, 2017,2021, primarily due to a decrease in same store revenuethe acquisition of 8.0%, rationalizationAcima Holdings and increased operating profit of our Core U.S. store base in the prior year,Acima and impacts from the recent hurricanes. Gross profit as a percentageRent-A-Center Business segments, partially offset by one-time transaction and integration costs, stock compensation expense related to equity consideration subject to vesting conditions, and depreciation and amortization of revenue decreased 1.4% dueacquired software and intangible assets related to the decreaseacquisition of Acima Holdings.
Revenues in store revenue and pricing actions taken to right size the segment's inventory mix and changes from the new value proposition. Labor and other store expenses decreasedour Rent-A-Center Business segment increased approximately $44.4 million and $64.0 million, respectively, but were negatively affected by sales deleverage.
The Acceptance Now segment revenues decreased by approximately $19.8 million or 2.4% primarily due to store closures for Conn's and hhgregg, and impacts from the recent hurricanes. Gross profit decreased by 5.3% primarily due to lower gross margins on merchandise sales driven by our continued focus to encourage ownership and reduce returned product. Operating profit declined 54.1% primarily due to other charges related to store closures and sales deleverage. Excluding these other charges, operating profit decreased by 28.6%.
Gross profit for the Mexico segment as a percentage of revenue decreased by 0.5%, while operating profit as a percentage of revenue increased by 4.2% for the twelve months ended December 31, 2017.
Cash flow from operations was $110.5$185.2 million for the twelve months ended December 31, 2017. We used our free cash flow2021, primarily due to pay down debtan increase in same store sales revenue driven by $52.5growth in e-commerce sales and strong lease portfolio performance, partially offset by the impact of refranchising approximately 100 stores in California in the fourth quarter of 2020 which are no longer reflected in the Rent-A-Center Business segment revenues. Operating profit increased $115.5 million for the twelve months ended December 31, 2021, driven primarily by increased operating leverage as a result of higher revenues, partially offset by higher operating expenses.
The Acima segment revenues increased approximately $1,517.9 million for the twelve months ended December 31, 2021, driven primarily by the acquisition of Acima Holdings. Operating profit increased approximately $118.6 million for the twelve months ended December 31, 2021, driven by higher revenue due to the acquisition of Acima Holdings and stronger lease performance, partially offset by depreciation and amortization of acquired software and intangible assets related to the acquisition of Acima Holdings.
The Mexico segment revenues increased by 21.4% for the twelve months ended December 31, 2021, contributing to an increase in gross profit of 20.9%, or $7.5 million. Operating profit increased $2.1 million for the twelve months ended December 31, 2021.
Revenues for the Franchising segment increased $55.3 million for the twelve months ended December 31, 2021, primarily due to a higher store count, resulting from the refranchising of approximately 100 California stores during the year, endingfourth quarter of 2020 and higher inventory purchases by franchisees. Operating profit increased $7.8 million for the period with $73.0twelve months ended December 31, 2021.
Cash flow from operations was $392.3 million for the twelve months ended December 31, 2021. As of December 31, 2021, we held $108.3 million of cash and cash equivalents.equivalents and outstanding indebtedness of $1.61 billion.
The following table is a reference for the discussion that follows. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | 2021-2020 Change | | |
| (Dollar amounts in thousands) | 2021 | | 2020 | | | | $ | | % | | | | |
| Revenues | | | | | | | | | | | | | |
| Store | | | | | | | | | | | | | |
| Rentals and fees | $ | 3,522,453 | | | $ | 2,263,091 | | | | | $ | 1,259,362 | | | 55.6 | % | | | | |
| Merchandise sales | 829,222 | | | 378,717 | | | | | 450,505 | | | 119.0 | % | | | | |
| Installment sales | 73,585 | | | 68,500 | | | | | 5,085 | | | 7.4 | % | | | | |
| Other | 4,148 | | | 3,845 | | | | | 303 | | | 7.9 | % | | | | |
| Total store revenues | 4,429,408 | | | 2,714,153 | | | | | 1,715,255 | | | 63.2 | % | | | | |
| Franchise | | | | | | | | | | | | | |
| Merchandise sales | 126,856 | | | 80,023 | | | | | 46,833 | | | 58.5 | % | | | | |
| Royalty income and fees | 27,187 | | | 20,015 | | | | | 7,172 | | | 35.8 | % | | | | |
| Total revenues | 4,583,451 | | | 2,814,191 | | | | | 1,769,260 | | | 62.9 | % | | | | |
| Cost of revenues | | | | | | | | | | | | | |
| Store | | | | | | | | | | | | | |
| Cost of rentals and fees | 1,260,434 | | | 655,612 | | | | | 604,822 | | | 92.3 | % | | | | |
| Cost of merchandise sold | 935,765 | | | 382,182 | | | | | 553,583 | | | 144.8 | % | | | | |
| Cost of installment sales | 25,637 | | | 24,111 | | | | | 1,526 | | | 6.3 | % | | | | |
| Total cost of store revenues | 2,221,836 | | | 1,061,905 | | | | | 1,159,931 | | | 109.2 | % | | | | |
| | | | | | | | | | | | | |
| Franchise cost of merchandise sold | 126,603 | | | 80,134 | | | | | 46,469 | | | 58.0 | % | | | | |
| Total cost of revenues | 2,348,439 | | | 1,142,039 | | | | | 1,206,400 | | | 105.6 | % | | | | |
| Gross profit | 2,235,012 | | | 1,672,152 | | | | | 562,860 | | | 33.7 | % | | | | |
| Operating expenses | | | | | | | | | | | | | |
| Store expenses | | | | | | | | | | | | | |
| Labor | 644,763 | | | 579,125 | | | | | 65,638 | | | 11.3 | % | | | | |
| Other store expenses | 770,073 | | | 609,370 | | | | | 160,703 | | | 26.4 | % | | | | |
| General and administrative expenses | 194,894 | | | 153,108 | | | | | 41,786 | | | 27.3 | % | | | | |
| Depreciation, amortization and write-down of intangibles | 54,830 | | | 56,658 | | | | | (1,828) | | | (3.2) | % | | | | |
| | | | | | | | | | | | | |
| Other charges | 289,913 | | | 36,555 | | | | | 253,358 | | | 693.1 | % | | | | |
| Total operating expenses | 1,954,473 | | | 1,434,816 | | | | | 519,657 | | | 36.2 | % | | | | |
| Operating profit | 280,539 | | | 237,336 | | | | | 43,203 | | | 18.2 | % | | | | |
| Debt refinancing charges | 15,582 | | | — | | | | | 15,582 | | | 100.0 | % | | | | |
| Interest, net | 70,653 | | | 14,557 | | | | | 56,096 | | | 385.4 | % | | | | |
| Earnings before income taxes | 194,304 | | | 222,779 | | | | | (28,475) | | | (12.8) | % | | | | |
| Income tax expense | 59,364 | | | 14,664 | | | | | 44,700 | | | 304.8 | % | | | | |
| Net earnings | $ | 134,940 | | | $ | 208,115 | | | | | $ | (73,175) | | | (35.2) | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2017-2016 Change | | 2016-2015 Change |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015 | | $ | | % | | $ | | % |
| Revenues | | | | | | | | | | | | | |
| Store | | | | | | | | | | | | | |
| Rentals and fees | $ | 2,267,741 |
| | $ | 2,500,053 |
| | $ | 2,781,315 |
| | $ | (232,312 | ) | | (9.3 | )% | | $ | (281,262 | ) | | (10.1 | )% |
| Merchandise sales | 331,402 |
| | 351,198 |
| | 377,240 |
| | (19,796 | ) | | (5.6 | )% | | (26,042 | ) | | (6.9 | )% |
| Installment sales | 71,651 |
| | 74,509 |
| | 76,238 |
| | (2,858 | ) | | (3.8 | )% | | (1,729 | ) | | (2.3 | )% |
| Other | 9,620 |
| | 12,706 |
| | 19,158 |
| | (3,086 | ) | | (24.3 | )% | | (6,452 | ) | | (33.7 | )% |
| Total store revenues | 2,680,414 |
| | 2,938,466 |
| | 3,253,951 |
| | (258,052 | ) | | (8.8 | )% | | (315,485 | ) | | (9.7 | )% |
| Franchise | | | | | | | | | | | | | |
| Merchandise sales | 13,157 |
| | 16,358 |
| | 15,577 |
| | (3,201 | ) | | (19.6 | )% | | 781 |
| | 5.0 | % |
| Royalty income and fees | 8,969 |
| | 8,428 |
| | 8,892 |
| | 541 |
| | 6.4 | % | | (464 | ) | | (5.2 | )% |
| Total revenues | 2,702,540 |
| | 2,963,252 |
| | 3,278,420 |
| | (260,712 | ) | | (8.8 | )% | | (315,168 | ) | | (9.6 | )% |
| Cost of revenues | | | | | | | | | | | | | |
| Store | | | | | | | | | | | | | |
| Cost of rentals and fees | 625,358 |
| | 664,845 |
| | 728,706 |
| | (39,487 | ) | | (5.9 | )% | | (63,861 | ) | | (8.8 | )% |
| Cost of merchandise sold | 322,628 |
| | 323,727 |
| | 356,696 |
| | (1,099 | ) | | (0.3 | )% | | (32,969 | ) | | (9.2 | )% |
| Cost of installment sales | 23,622 |
| | 24,285 |
| | 25,677 |
| | (663 | ) | | (2.7 | )% | | (1,392 | ) | | (5.4 | )% |
| Total cost of store revenues | 971,608 |
| | 1,012,857 |
| | 1,111,079 |
| | (41,249 | ) | | (4.1 | )% | | (98,222 | ) | | (8.8 | )% |
| Other charges | — |
| | — |
| | 34,698 |
| | — |
| | — | % | | (34,698 | ) | | (100.0 | )% |
| Franchise cost of merchandise sold | 12,390 |
| | 15,346 |
| | 14,534 |
| | (2,956 | ) | | (19.3 | )% | | 812 |
| | 5.6 | % |
| Total cost of revenues | 983,998 |
| | 1,028,203 |
| | 1,160,311 |
| | (44,205 | ) | | (4.3 | )% | | (132,108 | ) | | (11.4 | )% |
| Gross profit | 1,718,542 |
| | 1,935,049 |
| | 2,118,109 |
| | (216,507 | ) | | (11.2 | )% | | (183,060 | ) | | (8.6 | )% |
| Operating expenses | | | | | | | | | | | | | |
| Store expenses | | | | | | | | | | | | | |
| Labor | 732,466 |
| | 789,049 |
| | 854,610 |
| | (56,583 | ) | | (7.2 | )% | | (65,561 | ) | | (7.7 | )% |
| Other store expenses | 744,187 |
| | 791,614 |
| | 833,914 |
| | (47,427 | ) | | (6.0 | )% | | (42,300 | ) | | (5.1 | )% |
| General and administrative | 171,090 |
| | 168,907 |
| | 166,102 |
| | 2,183 |
| | 1.3 | % | | 2,805 |
| | 1.7 | % |
| Depreciation, amortization and write-down of intangibles | 74,639 |
| | 80,456 |
| | 80,720 |
| | (5,817 | ) | | (7.2 | )% | | (264 | ) | | (0.3 | )% |
| Goodwill impairment charge | — |
| | 151,320 |
| | 1,170,000 |
| | (151,320 | ) | | (100.0 | )% | | (1,018,680 | ) | | (87.1 | ) |
| Other charges | 59,219 |
| | 20,299 |
| | 20,651 |
| | 38,920 |
| | 191.7 | % | | (352 | ) | | (1.7 | )% |
| Total operating expenses | 1,781,601 |
| | 2,001,645 |
| | 3,125,997 |
| | (220,044 | ) | | (11.0 | )% | | (1,124,352 | ) | | (36.0 | )% |
| Operating loss | (63,059 | ) | | (66,596 | ) | | (1,007,888 | ) | | 3,537 |
| | 5.3 | % | | 941,292 |
| | 93.4 | % |
| Write-off of debt issuance costs | 1,936 |
| | — |
| | — |
| | 1,936 |
| | — | % | | — |
| | — | % |
| Interest, net | 45,205 |
| | 46,678 |
| | 48,692 |
| | (1,473 | ) | | (3.2 | )% | | (2,014 | ) | | (4.1 | )% |
| Loss before income taxes | (110,200 | ) | | (113,274 | ) | | (1,056,580 | ) | | 3,074 |
| | 2.7 | % | | 943,306 |
| | 89.3 | % |
| Income tax benefit | (116,853 | ) | | (8,079 | ) | | (103,060 | ) | | (108,774 | ) | | (1,346.4 | )% | | 94,981 |
| | 92.2 | % |
| Net earnings (loss) | $ | 6,653 |
| | $ | (105,195 | ) | | $ | (953,520 | ) | | $ | 111,848 |
| | 106.3 | % | | $ | 848,325 |
| | 89.0 | % |
Comparison of the Years Ended December 31, 20172021 and 20162020
Store Revenue. Total store revenue decreasedincreased by $258.1$1,715.2 million, or 8.8%63.2%, to $2,680.4$4,429.4 million for the year ended December 31, 2017,2021, from $2,938.5$2,714.2 million for 2016.2020. This increase was primarily due to a decreaseincreases of approximately $234.3$1,517.9 million and $185.2 million in the Core U.S. segment,Acima and Rent-A-Center Business segments, respectively, as discussed further in the segment performance“Segment Performance” section below.
Same store revenue is reported on a constant currency basis and generally represents revenue earned in 3,376 locations that were operated by us for 13 months or more, excluding any store that receives a certain level of customer accounts from another store (acquisition or merger). Receiving stores will be eligible for inclusion in the same store sales base in the twenty-fourth full month
following the account transfer. In addition, due to the severity of the hurricane impacts, we instituted a change to the same store sales store selection criteria to exclude stores in geographically impacted regions for 18 months. Same store revenues decreased by $99.2 million, or 5.4%, to $1,753.9 million for the year ended December 31, 2017, as compared to $1,853.1 million in 2016. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment, as discussed further in the segment performance section below.
Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2017, decreased2021 increased by $39.5$604.8 million, or 5.9%92.3%, to $625.4$1,260.4 million, as compared to $664.8$655.6 million in 2016.2020. This decreaseincrease in cost of rentals and fees was primarily attributable to a decreasean increase of $35.7$558.8 million and $43.2 million in the Core U.S. segmentAcima and Rent-A-Center Business segments, respectively, as a result of lower rentals and fees revenue.discussed further in the “Segment
Performance” section below. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 27.6%35.8% for the year ended December 31, 20172021 as compared to 26.6%29.0% in 2016.2020.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreasedincreased by $1.1$553.6 million, or 0.3%144.8%, to $322.6$935.8 million for the year ended December 31, 2017,2021, from $323.7$382.2 million in 2016.2020, attributable to increases of $551.4 million and $1.6 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the “Segment Performance” section below. The gross margin percent of merchandise sales decreased to 2.6%(12.8)% for the year ended December 31, 2017,2021, from 7.8%(0.9)% in 2016. These decreases were primarily attributable to a decrease of $6.4 million in the Core U.S. segment, partially offset by an increase of $5.3 million in the Acceptance Now segment driven by a focused effort to encourage ownership and reduce returned product.2020.
Gross Profit. Gross profit decreasedincreased by $216.5$562.8 million, or 11.2%33.7%, to $1,718.5$2,235.0 million for the year ended December 31, 2017,2021, from $1,935.0$1,672.2 million in 2016,2020, due primarily to a decreasean increase of $191.5$407.7 million and $138.8 million in the Core U.S. segment,Acima and Rent-A-Center Business segments, respectively, as discussed further in the segment performance“Segment Performance” section below. Gross profit as a percentage of total revenue decreased to 63.6%48.8% in 20172021, as compared to 65.3%59.4% in 2016.2020, primarily due to the acquisition of Acima Holdings which maintains a different lease merchandise depreciation policy resulting in lower gross margins.
Store Labor. Store labor includes all salaries and wages paid to store-level employees and district managers' salaries, together with payroll taxes and benefits. Store labor decreasedincreased by $56.6$65.7 million, or 7.2%11.3%, to $732.5$644.8 million for the year ended December 31, 2017,2021, as compared to $789.0$579.1 million in 2016,2020, primarily attributable to a decreaseincreases of $44.4$33.8 million and $10.7$29.3 million in the Core U.S.Acima and Acceptance NowRent-A-Center Business segments, respectively, primarily as a result of a lower Core U.S. store base and closure of Acceptance Now locationsdiscussed further in the first half of 2017.“Segment Performance” section below. Store labor expressed as a percentage of total store revenue increased to 27.3%was 14.6% for the year ended December 31, 2017, from 26.9%2021, as compared to 21.3% in 2016.2020.
Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise and occupancy, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses decreasedincreased by $47.4$160.7 million, or 6.0%26.4%, to $744.2$770.1 million for the year ended December 31, 2017,2021, as compared to $791.6$609.4 million in 2016,2020, primarily attributable to a decreaseincreases of $64.0$144.2 million and $13.1 million in the Core U.S. segmentAcima and Rent-A-Center Business segments, as a result of our rationalization of the Core U.S. store base, partially offset by an increase of $17.6 milliondiscussed further in the Acceptance Now segment primarily, partially due to a one-time, non-cash, charge to write-off unreconciled invoices with certain retail partners, in addition to increased customer stolen merchandise.“Segment Performance” section below. Other store expenses expressed as a percentage of total store revenue increased to 27.8%were 17.4% for the year ended December 31, 2017, from 26.9%2021, compared to 22.5% in 2016.2020.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses increased by $2.2$41.8 million, or 1.3%27.3%, to $171.1$194.9 million for the year ended December 31, 2017,2021, as compared to $168.9$153.1 million in 2016,2020, primarily due to project related expenses, insurance expenses, legalhigher labor overhead as a result of the acquisition of Acima Holdings and other professional fees.higher incentive compensation in 2021, combined with the impact of cost savings initiatives implemented in response to COVID-19 in 2020. General and administrative expenses expressed as a percentage of total revenue increased to 6.3%were 4.3% for the year ended December 31, 2017,2021, compared to 5.7%5.4% in 2016.2020.
Goodwill Impairment Charge. During 2016, we recognized a goodwill impairment charge of $151.3 million due to an impairment of the goodwill in the Core U.S. segment. Goodwill impairment charge is discussed further in Note F to the consolidated financial statements.
Other Charges - Operating Expenses. charges. Other charges increased by $38.9$253.3 million or 191.7%, to $59.2$289.9 million in 2017,2021, as compared to $20.3$36.6 million in 2016.2020. Other charges for the year ended December 31, 20172021 primarily included chargesstock compensation expense related to the closurevesting of Acceptance Now locations, write-downsa portion of capitalizedthe equity consideration issued in the acquisition of Acima Holdings, depreciation and amortization of acquired software incrementaland intangible assets, legal settlement reserves, and advisory fees, damage caused by hurricanes,other one-time transaction and reductions in our field support center, partially offset by legal settlements.integration costs related to the acquisition of Acima Holdings. Other charges for the year ended December 31, 20162020 primarily included chargesrelated to a loss on the sale of our stores in California, expenses related to the Merger and the related financing transactions, legal settlement and state sales tax assessment reserves, cost savings initiatives, inventory losses resulting from damage related to looting, employee payroll and sanitation costs in connection with COVID-19, store closure of Core U.S.impacts, and Mexico stores, and Acceptance Now locations,asset disposals, partially offset by litigation settlements. See Note Mproceeds from the sale of a legal antitrust claim, rent abatements, and insurance proceeds related to the consolidated financial statements for additional detail regarding these other charges.hurricane Maria in 2017.
Operating Loss.Profit. Operating loss decreased $3.5profit increased $43.2 million, or 5.3%18.2%, to $63.1$280.5 million for the year ended December 31, 2017,2021, as compared to $66.6$237.3 million in 2016,2020, primarily due to a decrease of $87.2 millionincreases in the Core U.S. segment, primarily related to the goodwill impairment charge recorded in 2016, partiallyrevenue and gross profit, offset by increases of $57.3 million in the Acceptance Now segmentoperating expenses as discussed in the segment performance sections below.described above. Operating lossprofit expressed as a percentage of total revenue was 2.3%6.1% for the year ended December 31, 2017, as2021, compared to 2.2% for 2016.8.4% in 2020. Excluding the goodwill impairment and otherOther charges, operating results as a percentageprofit was $570.5 million, or 12.4% of revenue would have been (0.1)% and 3.5% in 2017 and 2016, respectively, discussed further infor the segment performance sections below.year ended December 31, 2021, compared to $273.9 million or 9.7% of revenue for the comparable period of 2020.
Income Tax Benefit. Expense. Income tax benefitexpense for the twelve months ended December 31, 20172021 was $116.9$59.4 million, as compared to $8.1$14.7 million in 2016.2020. The effective tax rate was 106.0%30.6% for the twelve months ended December 31, 2017,2021, compared to 7.1%6.6% in 2016.2020. The increase in income tax benefit is primarily due to the impact of the Tax Cuts and Jobs Act on our deferred tax balances. Excluding impacts from other charges, the Tax Cuts and Jobs Act, and the goodwill impairment charge, the effective tax rate was 41.5%expense for the twelve months ended December 31, 2017, as2021 compared to 29.8% in 2016.2020 was primarily related to the 2020 tax benefit of net operating loss carrybacks at a 35% tax rate as a result of changes from the Coronavirus Aid
Net Earnings (Loss). Net earnings were $6.7 million for the year ended December 31, 2017 as compared to net loss of $105.2 million in 2016. Excluding impacts from other charges, the Tax Cuts
Relief and JobsEconomic Security Act, enacted on March 27, 2020 (the “CARES Act”) and the goodwill impairment charge, net loss was $28.7 million for the year ended December 31, 2017 as compared to net earningsrelease of $40.9 million in 2016.domestic and foreign tax valuation allowances.
Comparison of the Years Ended December 31, 20162020 and 20152019
Store Revenue. Total store revenue decreased by $315.5 million, or 9.7%, to $2,938.5 million for theFor similar operating and financial data and discussion of our year ended December 31, 2016, from $3,254.0 million for 2015. This was primarily due2020 results compared to a decrease of approximately $302.1 million in the Core U.S. segment, as discussed further in the segment performance section below.
Same store revenue generally represents revenue earned in 3,469 locations that were operated by us for 13 months or more. Same store revenues decreased by $134.7 million, or 6.2%, to $2,043.0 million for theour year ended December 31,
2016, as compared2019 results, refer to
$2,177.7 millionPart II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 10-K.Segment Performance
Rent-A-Center Business segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021-2020 Change | | |
| (Dollar amounts in thousands) | 2021 | | 2020 | | | | $ | | % | | | | |
| Revenues | $ | 2,037,849 | | | $ | 1,852,641 | | | | | $ | 185,208 | | | 10.0 | % | | | | |
| Gross profit | 1,433,536 | | | 1,294,695 | | | | | 138,841 | | | 10.7 | % | | | | |
| Operating profit | 448,905 | | | 333,379 | | | | | 115,526 | | | 34.7 | % | | | | |
| Change in same store revenue | | | | | | | | | 15.4 | % | | | | |
| Stores in same store revenue calculation | | | | | | | | | 1,730 | | | | | |
Revenues. The increase in 2015. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment, as discussed further in the segment performance section below. Same store revenues are reported on a constant currency basis.
Cost of Rentals and Fees. Cost of rentals and fees consists of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2016, decreased by $63.9 million, or 8.8%, to $664.8 million, as compared to $728.7 million in 2015. This decrease in cost of rentals and fees was primarily attributable to a $64.0 million decrease in the Core U.S. segment primarily as a result of lower rentals and fees revenue. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 26.6% for the year ended December 31, 2016 as compared to 26.2% in 2015.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $33.0 million, or 9.2%, to $323.7 million for the year ended December 31, 2016, from $356.7 million in 2015, primarily attributable to a decrease of $24.8 million in the Core U.S. segment. The gross margin percent of merchandise sales increased to 7.8% for the year ended December 31, 2016, from 5.4% in 2015.
Other Charges - Cost of Revenues. During 2015, a charge of $34.7 million was recognized for the write-down of smartphones in the Core U.S. segment.
Gross Profit. Gross profit decreased by $183.1 million, or 8.6%, to $1,935.0 million for the year ended December 31, 2016, from $2,118.1 million in 2015, due primarily to a decrease of $177.2 million in the Core U.S. segment. Gross profit as a percentage of total revenue increased to 65.3% in 2016 compared to 64.6% in 2015 primarily due to improvements in the Acceptance Now segment, as discussed further in the segment performance section below. Excluding other charges, gross profit was $1,935.0 million, or 65.3% of revenue for the year ended December 31, 2016, compared2021 was primarily due to $2,152.8 million, or 65.7%an increase in same store sales revenue driven by growth in e-commerce sales and higher portfolio balance, partially offset by the impact of revenue for 2015. These changes arerefranchising approximately 100 stores in California in the fourth quarter of 2020.
Gross Profit. Gross profit increased in 2021 primarily due to the decreaseincreases in the Core U.S. store revenue.
Store Labor. Store labor includes all salaries and wages paid to store-level employees and district managers' salaries, together with payroll taxes and benefits. Store labor decreased by $65.6 million, or 7.7%, to $789.0 million for the year ended December 31, 2016, as compared to $854.6 million in 2015. Labor in the Core U.S. segment decreased $59.5 million due to our flexible labor initiative and the continued rationalization of the Core U.S. store base. Store labor expressed as a percentage of total store revenue increased to 26.9% for the year ended December 31, 2016, from 26.3% in 2015.
Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses decreased by $42.3 million, or 5.1%, to $791.6 million for the year ended December 31, 2016, as compared to $833.9 million in 2015. Other store expenses in the Core U.S. segment decreased $47.9 million due primarily to the continued rationalization of the Core U.S. store base. Other
store expenses expressed as a percentage of total store revenue increased to 26.9% for the year ended December 31, 2016, from 25.6% in 2015.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses increased by $2.8 million, or 1.7%, to $168.9 million for the year ended December 31, 2016, as compared to $166.1 million in 2015, primarily due to severance costs. General and administrative expenses expressed as a percentage of total revenue increased to 5.7% for the year ended December 31, 2016, compared to 5.1% in 2015.
Goodwill Impairment Charge. During 2016 and 2015, we recognized goodwill impairment charges of $151.3 million and $1,170.0, respectively, due to an impairment in the goodwill in the Core U.S. segment. Goodwill impairment charge is discussed further in Note F to the consolidated financial statements.
Other Charges - Operating Expenses. Other charges relating to store sales and consolidations, startup costs related to our new sourcing and distribution network and corporate restructuring decreased by $0.4 million, or 1.7%, to $20.3 million in 2016, as compared to $20.7 million in 2015. Other charges for the year ended December 31, 2016 included charges for the closure of Core U.S., Acceptance Now, and Mexico locations, partially offset by a litigation claims settlement. See Note M to the consolidated financial statements for additional detail regarding these other charges.
Operating Loss. Operating loss decreased $941.3 million, or 93.4%, to $66.6 million for the year ended December 31, 2016, as compared to $1,007.9 million in 2015. Operating loss as a percentage of total revenue was 2.2% for the year ended December 31, 2016, as compared to 30.7% for 2015, primarily due to the goodwill impairment charges and other charges discussed above. Excluding the $171.6 million and $1,190.7 million of goodwill impairment and other charges in 2016 and 2015, respectively, discussed above, operating profit as a percentage of revenue would have been 3.5% and 5.6% in 2016 and 2015, respectively, discussed further in the Core U.S. segment performance section below.
Income Tax Benefit. Our effective income tax rate was 7.1% for 2016 as compared to a rate of 9.8% for 2015. The decrease in income tax benefit is primarily due to the lower goodwill impairment charge in 2016 compared to 2015.
Net Loss. Net loss was $105.2 million for the year ended December 31, 2016 as compared to $953.5 million in 2015, a decrease of $848.3 million.
Segment Performance
Core U.S. segment.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2017-2016 Change | | 2016-2015 Change |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015 | | $ | | % | | $ | | % |
| Revenues | $ | 1,835,422 |
| | $ | 2,069,725 |
| | $ | 2,371,823 |
| | $ | (234,303 | ) | | (11.3 | )% | | $ | (302,098 | ) | | (12.7 | )% |
| Gross profit | 1,276,212 |
| | 1,467,679 |
| | 1,644,840 |
| | (191,467 | ) | | (13.0 | )% | | (177,161 | ) | | (10.8 | )% |
| Operating profit (loss) | 86,196 |
| | (1,020 | ) | | (959,447 | ) | | 87,216 |
| | (8,550.6 | )% | | 958,427 |
| | (99.9 | )% |
| Change in same store revenue | | | | | | |
|
| | (8.0 | )% | |
|
| | (9.0 | )% |
| Stores in same store revenue calculation | | | | | | | | | 2,118 |
| | | | 2,053 |
|
Revenues. Revenue decreased in 2017 compared to 2016, primarily driven by a decrease of $213.5 million in rentals and fees revenue. This decrease is primarily due to the decrease in same store revenue, rationalization of our Core U.S. store base in the prior year, and impacts from the recent hurricanes. The decrease in same store revenue was driven primarily by a lower portfolio balance in 2017.
Gross Profit. Gross profit decreased in 2017 from 2016, primarily due to the decrease in store revenue described above and targeted pricing actions implemented to right size the inventory mix and changes from the new value proposition.above. Gross profit as a percentage of segment revenues decreased to 69.5% in 2017 from 70.9% in 2016.
Operating Profit (Loss). Operating profit as a percentage of segment revenues increased to 4.7%70.3% in 2017 compared to operating loss of (0.1)% for 2016, primarily due to the goodwill impairment charge recorded2021 from 69.9% in 2016. Excluding other charges and the goodwill impairment charge, operating2020.
Operating Profit. Operating profit as a percentage of revenue decreasedsegment revenues was 22.0% for 2021 compared to 5.1%,18.0% for 2020. The increase in operating profit for the year ended December 31, 2017, compared to 8.1% in 2016, primarily due to sales deleverage, offset by a decrease in store labor of $44.4 million and other store expenses of $64.0 million. Declines in store labor and other store expenses were2021 was driven primarily by lower store count, lower customer stolen merchandise losses,higher revenues, partially offset by higher loss rates and lower advertising expenses.higher labor expense. Charge-offs in our Core U.S. rent-to-ownRent-A-Center Business lease-to-own stores due to
customer stolen merchandise, expressed as a percentage of Core U.S. rent-to-ownRent-A-Center Business lease-to-own revenues, were approximately 2.7%3.4% for the year ended December 31, 2017,2021, compared to 3.7%3.0% in 2016.2020. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Charge-offs in our Core U.S. rent-to-ownRent-A-Center Business lease-to-own stores due to other merchandise losses, expressed as a percentage of revenues, were approximately 2.1%1.6% for the year ended December 31, 2017,2021, compared to 2.0%1.5% in 2016.2020.
Acceptance NowAcima segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021-2020 Change | | |
| (Dollar amounts in thousands) | 2021 | | 2020 | | | | $ | | % | | | | |
| Revenues | $ | 2,328,089 | | | $ | 810,151 | | | | | $ | 1,517,938 | | | 187.4 | % | | | | |
| Gross profit | 728,852 | | | 321,110 | | | | | 407,742 | | | 127.0 | % | | | | |
| Operating profit | 176,496 | | | 57,847 | | | | | 118,649 | | | 205.1 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2017-2016 Change | | 2016-2015 Change |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015 | | $ | | % | | $ | | % |
| Revenues | $ | 797,987 |
| | $ | 817,814 |
| | $ | 818,325 |
| | $ | (19,827 | ) | | (2.4 | )% | | $ | (511 | ) | | (0.1 | )% |
| Gross profit | 400,002 |
| | 422,381 |
| | 420,980 |
| | (22,379 | ) | | (5.3 | )% | | 1,401 |
| | 0.3 | % |
| Operating profit | 48,618 |
| | 105,925 |
| | 123,971 |
| | (57,307 | ) | | (54.1 | )% | | (18,046 | ) | | (14.6 | )% |
| Change in same store revenue | | | | | | |
|
| | 5.2 | % | | | | (0.4 | )% |
| Stores in same store revenue calculation | | | | | | | | | 1,140 |
| | | | 1,297 |
|
Revenues.The decreaseincrease in revenue for the year ended December 31, 20172021 compared to 2020 was driven primarily by store closures for hhgregg and Conn's locations, as well as impacts from the recent hurricanes, partially offset by higher same store revenue.acquisition of Acima Holdings in February 2021.
Gross Profit. Gross profit decreased for the year ended December 31, 2017 compared to 2016, primarily due the decrease in revenues described above, in addition to an increase in cost of merchandise sold driven by a focused effort to encourage ownership and reduce product returns. Gross profit as a percentage of segment revenues was 50.1%revenue decreased to 31.3% in 20172021 as compared to 51.6%39.6% in 2016.
Operating Profit. Operating profit decreased by 54.1% compared to 2016,2020, primarily due to increased rentalthe acquisition of Acima Holdings which maintains a different lease merchandise losses, charges incurred for store closures, and sales deleverage. depreciation policy resulting in lower gross margins.
Operating profit as a percentage of total segment revenue decreased to 6.1% in 2017 from 13.0% for 2016. Excluding other charges, operatingProfit. Operating profit as a percentage of segment revenues decreasedincreased to 9.5%,7.6% for the year ended December 31, 2017,2021, compared to 13.0%7.1% in 2016,2020. Operating profit margin increased for the year ended December 31, 2021, as compared to 2020, primarily driven by higher revenues, partially offset by increases in operating expenses due to a one-time, non-cash, charge to write-off unreconciled invoices with certain retail partners, in addition to increased customer stolen merchandise.the acquisition of Acima Holdings, including amortization of acquired intangible assets. Charge-offs in our Acceptance NowAcima locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 12.7%9.6% in 20172021 as compared to 10.0%13.3% in 2016. Excluding other charges, charge-offs due to customer stolen merchandise were 10.7% for the year ended December 31, 2017.2020. Other merchandise losses include unrepairable merchandise and loss/damage waiver claims. Charge-offs in our Acceptance NowAcima locations due
to other merchandise losses, expressed as a percentage of revenues, were approximately 1.3%0.0% and 0.9%0.4% in 20172021 and 2016,2020, respectively.
Mexico segment.Segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021-2020 Change | | |
| (Dollar amounts in thousands) | 2021 | | 2020 | | | | $ | | % | | | | |
| Revenues | $ | 61,403 | | | $ | 50,583 | | | | | $ | 10,820 | | | 21.4 | % | | | | |
| Gross profit | 43,117 | | | 35,665 | | | | | 7,452 | | | 20.9 | % | | | | |
| Operating profit | 7,858 | | | 5,798 | | | | | 2,060 | | | 35.5 | % | | | | |
| Change in same store revenue | | | | | | | | | 13.6 | % | | | | |
| Stores in same store revenue calculation | | | | | | | | | 114 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2017-2016 Change | | 2016-2015 Change |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015 | | $ | | % | | $ | | % |
| Revenues | $ | 47,005 |
| | $ | 50,927 |
| | $ | 63,803 |
| | $ | (3,922 | ) | | (7.7 | )% | | $ | (12,876 | ) | | (20.2 | )% |
| Gross profit | 32,592 |
| | 35,549 |
| | 42,354 |
| | (2,957 | ) | | (8.3 | )% | | (6,805 | ) | | (16.1 | )% |
| Operating loss | (260 | ) | | (2,449 | ) | | (14,149 | ) | | 2,189 |
| | (89.4 | )% | | 11,700 |
| | (82.7 | )% |
| Change in same store revenue | | | | | | |
|
| | (5.1 | )% | | | | 6.6 | % |
| Stores in same store revenue calculation | | | | | | | | | 118 |
| | | | 119 |
|
Revenues. Revenues for 20172021 were negativelypositively impacted by approximately $0.8 million due to exchange rate fluctuations of approximately $3.1 million, as compared to 2016.2020. On a constant currency basis, revenues for the decrease in revenue for 2017 was primarily driven by a decrease in same store revenue, compared to 2016.year ended December 31, 2021 increased approximately $7.7 million.
Gross Profit. Gross profit for the year ended December 31, 20172021 was negativelypositively impacted by approximately $0.5 million due to exchange rate fluctuations of approximately $2.2 million, as compared to 2016.2020. On a constant currency basis, gross profit decreased primarily as a result of decreased rental revenue, partially offset byfor the year ended December 31, 2021 increased merchandise sales.approximately $5.2 million. Gross profit as a percentage of segment revenues decreased to 69.3%70.2% in 2017 from 69.8%2021, compared to 70.5% in 2016.2020.
Operating Loss.Profit. Operating losses were negatively impacted by approximately $0.6 millionprofit for the year ended December 31, 2017 due to2021 was positively impacted by exchange rate fluctuations of approximately $0.4 million, compared to 2016.2020. On a constant currency basis, operating loss as a percentage of segment revenues decreased to 0.6%profit for the year ended December 31, 2017 from 4.8% in 2016. Operating losses for the years ended December 31, 2017 and 2016 included other charges of $0.3 million and $2.3 million, respectively, primarily related to store
closures during the first quarter of 2016. Excluding other charges, operating profit as a percentage of segment revenues2021 increased to 0.2% in 2017, compared to a loss of 0.3% in 2016.
Franchising segment.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2017-2016 Change | | 2016-2015 Change |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015 | | $ | | % | | $ | | % |
| Revenues | $ | 22,126 |
| | $ | 24,786 |
| | $ | 24,469 |
| | $ | (2,660 | ) | | (10.7 | )% | | $ | 317 |
| | 1.3 | % |
| Gross profit | 9,736 |
| | 9,440 |
| | 9,935 |
| | 296 |
| | 3.1 | % | | (495 | ) | | (5.0 | )% |
| Operating profit | 5,081 |
| | 5,650 |
| | 5,793 |
| | (569 | ) | | (10.1 | )% | | (143 | ) | | (2.5 | )% |
Revenues. Revenues decreased for the year ended December 31, 2017, compared to 2016, primarily due to lower merchandise sales to the Company's franchise partners.
Gross Profit. Gross profit as a percentage of segment revenues increased to 44.0% in 2017 from 38.1% in 2016.
Operating Profit.approximately $1.7 million. Operating profit as a percentage of segment revenues increased to 23.0%12.8% in 2017 from 22.8%2021, compared to 11.5% in 2020.
Franchising segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021-2020 Change | | |
| (Dollar amounts in thousands) | 2021 | | 2020 | | | | $ | | % | | | | |
| Revenues | $ | 156,110 | | | $ | 100,816 | | | | | $ | 55,294 | | | 54.8 | % | | | | |
| Gross profit | 29,507 | | | 20,682 | | | | | 8,825 | | | 42.7 | % | | | | |
| Operating profit | 20,321 | | | 12,570 | | | | | 7,751 | | | 61.7 | % | | | | |
Revenues. Revenues increased for 2016the year ended December 31, 2021, compared to 2020, primarily due to a higher store count, resulting from the refranchising of approximately 100 California stores during 2020 and higher inventory purchases by franchisees.
Gross Profit. Gross profit as a percentage of segment revenues decreased to 18.9% in 2021 from 20.5% in 2020, primarily due to a lower percentage of royalty income and fees included in franchise revenues.
Operating Profit. Operating profit as a percentage of segment revenues increased to 13.0% in 2021 from 12.5% for 2020, primarily due to an increase in gross profit.
Quarterly Results
The following table contains certain unaudited historical financial information for the quarters indicated:
|
| | | | | | | | | | | | | | | |
| (In thousands, except per share data) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| Year Ended December 31, 2017 | | | | | | | |
| Revenues | $ | 741,986 |
| | $ | 677,635 |
| | $ | 643,965 |
| | $ | 638,954 |
|
| Gross profit | 462,663 |
| | 432,533 |
| | 412,465 |
| | 410,881 |
|
| Operating profit (loss) | 1,152 |
| | (873 | ) | | (8,445 | ) | | (54,893 | ) |
| Net (loss) earnings | (6,679 | ) | | (8,893 | ) | | (12,599 | ) | | 34,824 |
|
| Basic (loss) earnings per common share | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.24 | ) | | $ | 0.65 |
|
| Diluted (loss) earnings per common share | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.24 | ) | | $ | 0.65 |
|
| Cash dividends declared per common share | $ | 0.08 |
| | $ | 0.08 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| (In thousands, except per share data) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| Year Ended December 31, 2016 | | | | | | | |
| Revenues | $ | 835,652 |
| | $ | 749,619 |
| | $ | 693,877 |
| | $ | 684,104 |
|
| Gross profit | 534,944 |
| | 500,158 |
| | 457,226 |
| | 442,721 |
|
| Operating profit (loss) | 48,430 |
| | 27,550 |
| | 16,700 |
| | (159,276 | ) |
| Net earnings (loss) | 25,061 |
| | 9,946 |
| | 6,181 |
| | (146,383 | ) |
| Basic earnings (loss) per common share | $ | 0.47 |
| | $ | 0.19 |
| | $ | 0.12 |
| | $ | (2.76 | ) |
| Diluted earnings (loss) per common share | $ | 0.47 |
| | $ | 0.19 |
| | $ | 0.12 |
| | $ | (2.76 | ) |
| Cash dividends declared per common share | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
|
|
| | | | | | | | | | | |
| (As a percentage of revenues) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| Year Ended December 31, 2017 | | | | | | | |
| Revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Gross profit | 62.4 | % | | 63.8 | % | | 64.1 | % | | 64.3 | % |
| Operating profit (loss) | 0.2 | % | | (0.1 | )% | | (1.3 | )% | | (8.6 | )% |
| Net (loss) earnings | (0.9 | )% | | (1.3 | )% | | (2.0 | )% | | 5.5 | % |
|
| | | | | | | | | | | |
| (As a percentage of revenues) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| Year Ended December 31, 2016 | | | | | | | |
| Revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Gross profit | 64.0 | % | | 66.7 | % | | 65.9 | % | | 64.7 | % |
| Operating profit (loss) | 5.8 | % | | 3.7 | % | | 2.4 | % | | (23.3 | )% |
| Net earnings (loss) | 3.0 | % | | 1.3 | % | | 0.9 | % | | (21.4 | )% |
Liquidity and Capital Resources
Overview. For the year ended December 31, 2017,2021, we generated $110.5$392.3 million in operating cash flow. We paid down debt by $52.5 million from cash generated from operations and also used cash in the amount of $65.5$1,273.5 million for acquisitions, $390.1 million for share repurchases, $369.1 million for debt repayments, $71.5 million for dividends, $62.5 million for capital expenditures, and $12.8$47.6 million for paymentin debt issuance costs, offset by cash proceeds from indebtedness of dividends, ending$1,780.0 million. We ended the year with $73.0$108.3 million of cash and cash equivalents.equivalents and outstanding indebtedness of $1.61 billion.
Analysis of Cash Flow. Cash provided by operating activities decreasedincreased by $243.5$155.8 million to $110.5$392.3 million in 20172021 from $354.1$236.5 million in 2016. This was2020, primarily attributabledue to the receiptacquisition of Acima Holdings, partially offset by cost savings initiatives implemented by the Company in 2016response to COVID-19 and benefits stemming from the CARES Act in 2020.
Cash used in investing activities was $1,336.0 million in 2021, compared to $20.6 million in 2020, primarily due to the acquisition of income tax refundsAcima Holdings in February 2021, and increase in capital expenditures of approximately $80.0$27.9 million.
Cash provided by (used in) financing activities was $892.8 million in 2021, compared to $(126.7) million in 2020, representing a change of $1.0 billion, due to an increase in debt proceeds of $1.6 billion primarily used to fund the declineacquisition of Acima Holdings in net earnings forFebruary 2021, partially offset by increases in share repurchases of $363.5 million, and debt repayments of $129.1 million during the twelve months ended December 31, 2017 compared to 2016, and other net changes in operating assets and liabilities.2021.
Cash used in investing activities increased approximately $4.3 million to $63.3 million in 2017 from $59.0 million in 2016, due primarily to an increase in capital expenditures.
Cash used in financing activities decreased by $189.2 million to $70.5 million in 2017 from $259.7 million in 2016, primarily driven by our net reduction in debt of $52.5 million in 2017, as compared to a net decrease in debt of $233.8 million in 2016, payment of debt issuance costs of $5.3 million related to the Fourth Amendment discussed below, offset by an $12.7 million decrease in dividend payments year over year.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases. As we implement our strategic initiatives, the need for additional rental merchandise is expected to remain our primary capital requirement. Other capital requirements include expenditures for property assets, debt service, dividends and debt service.share repurchases. Our primary sources of liquidity have been cash provided by operations. In the future, to provide any additional funds necessary for the continued operations and expansion of our business, we may incur from time to time additional short-term or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable.
Should we require additional funding sources, we maintain revolving credit facilities, including a $12.5 million line of credit at INTRUST Bank, N.A. We utilize our RevolvingABL Credit 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 RevolvingABL Credit 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. We believe the cash flow generated from operations together with amounts availableand availability under our ABL Credit Agreement,Facility, will be sufficient to fund our liquidity requirementsoperations during the next 12 months. While our operating cash flow has been strong and we expect this strength to continue, our liquidity could be negatively impacted if we do not remain as profitable as we expect. At February 21, 2018,2022, we had $60.3approximately $123.1 million in cash on hand, and $109.7$290.0 million available under our Revolving Facility at December 31, 2017, net of the $50 million of excess availability we must maintain on the Revolving Facility as a result of being out of compliance with our Fixed Charge Coverage Ratio covenant.ABL Credit Facility.
On June 6, 2017, we amended our Credit Agreement (the “Fourth Amendment”), effective as of June 6, 2017, with JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto. Under the Fourth Amendment, we agreed to provide additional collateral protections to secure the obligations under the Credit Agreement. The Fourth Amendment also modified the borrowing terms of the revolving loans under the Credit Agreement, which, as amended, establishes that the aggregate outstanding amounts (including after any draw request) not exceed the Borrowing Base. The Borrowing Base is tied to the Company’s Eligible Installment Sales Accounts, Inventory and Eligible Rental Contracts, in addition to Reserves and the Term Loan Reserve. We will 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 the Company must provide weekly information.
The Fourth Amendment reduced the capacity of the Revolving Facility from $675 million to $350 million and the aggregate amount of Incremental Term Loans and Incremental Revolving Commitments from $250 million to $100 million. We may request an Incremental Revolving Loan, provided that at the time of such draw, 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 draw occurs during a Minimum Availability Period, the Availability must be more than the Availability Threshold Amount.
A change in control would result in an event of default under our senior credit facilities which would allow our lenders to accelerate the indebtedness owed to them. In addition, if a change in control occurs, we may be required to offer to repurchase all of our outstanding senior unsecured notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Our senior credit facilities limit our ability to repurchase the senior unsecured notes, including in the event of a change in control. In the event a change in control occurs, we cannot be sure we would have enough funds to immediately pay our accelerated senior credit facilities and senior note obligations or that we would be able to obtain financing to do so on favorable terms, if at all.
Deferred Taxes.Certain federal tax legislation enacted during the period 2009 to 20142017 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing. The Protecting Americans from Tax Hikes Act of 2015 ("PATH"(“PATH”) extended the 50% bonus depreciation to 2015 and through SeptembersSeptember 26, 2017, when it was updated by Thethe Tax CutCuts and Jobs Act of 2017 (the “Tax(“Tax Act”). The Tax Act allows 100% bonus depreciation for certain property placed in service between September 27, 2017 and December 31, 2022, at which point it will begin to phase out. The PATH act andbonus depreciation provided by the Tax Act resulted in an estimated benefit of $184$349 million for us in 2017.2021. We estimate the remaining tax deferral associated with bonus depreciation from these actsActs is approximately $140$402 million at December 31, 2017,2021, of which approximately 77%80%, or $108$320 million, will reverse in 2018,2022, and the majority of the remainder will reverse between 20192023 and 2020.2024.
Tax Act. We expect that the Tax Act will generate cash tax savings to the Company of approximately $200 million over the next 3 years, mainly due to the decrease in the tax rate and the initial acceleration of depreciation. This deferral of tax due to acceleration of depreciation will cause additional cash taxes in the future as the deferral reverses.
Merchandise Losses. Merchandise losses consist of the following: | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 | | |
Customer stolen merchandise(1)(2) | $ | 298,533 | | | $ | 174,527 | | | $ | 158,324 | | | |
Other merchandise losses(3) | 33,380 | | | 30,660 | | | 25,830 | | | |
| Total merchandise losses | $ | 331,913 | | | $ | 205,187 | | | $ | 184,154 | | | |
(1)Increase in customer stolen merchandise in 2021 is primarily related to the acquisition of Acima Holdings in the first quarter of 2021. |
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Customer stolen merchandise | $ | 161,912 |
| | $ | 169,021 |
| | $ | 154,781 |
|
Other merchandise losses(1) | 47,596 |
| | 49,731 |
| | 52,003 |
|
| Total merchandise losses | $ | 209,508 |
| | $ | 218,752 |
| | $ | 206,784 |
|
| |
(1)
| Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. |
(3)Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
Capital Expenditures. We make capital expenditures in order to maintain our existing operations, as well as foracquire new capital assets in new and acquired stores and investmentinvest in information technology. We spent $65.5$62.5 million, $61.1$34.5 million and $80.9$21.2 million on capital expenditures in the years 2017, 20162021, 2020 and 2015,2019, respectively.
Acquisitions and New Location Openings. See Note F to the consolidated financial statements During 2021, we acquired one rent-to-own store location and customer accounts from a franchisee for information about cash used to acquire locations and accounts.an aggregate purchase price of approximately $0.3 million. The tablestore location remained open upon acquisition as part of our Rent-A-Center Business segment.
The tables below summarizessummarize the location activity for the years ended December 31, 2017, 20162021, 2020 and 2015.2019. | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Rent-A-Center Business | | | | Mexico | | Franchising | | Total |
Locations at beginning of period(1) | 1,845 | | | | | 121 | | | 462 | | | 2,428 | |
| New location openings | 6 | | | | | 2 | | | 8 | | | 16 | |
| | | | | | | | | |
| Conversions | 1 | | | | | — | | | (1) | | | — | |
| Closed locations | | | | | | | | | |
| Merged with existing locations | (6) | | | | | — | | | — | | | (6) | |
| Sold or closed with no surviving location | — | | | | | — | | | (3) | | | (3) | |
Locations at end of period(1) | 1,846 | | | | | 123 | | | 466 | | | 2,435 | |
| Acquired and remains open | 1 | | | | | — | | | — | | | 1 | |
Total approximate purchase price (in millions) | $ | 0.3 | | | | | $ | — | | | $ | — | | | $ | 0.3 | |
(1) Does not include locations in our Acima segment.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Rent-A-Center Business | | | | Mexico | | Franchising | | Total |
Locations at beginning of period(1) | 1,973 | | | | | 123 | | | 372 | | | 2,468 | |
| | | | | | | | | |
| | | | | | | | | |
| Conversions | (99) | | | | | — | | | 99 | | | — | |
| Closed locations | | | | | | | | | |
| Merged with existing locations | (28) | | | | | (2) | | | — | | | (30) | |
| Sold or closed with no surviving location | (1) | | | | | — | | | (9) | | | (10) | |
Locations at end of period(1) | 1,845 | | | | | 121 | | | 462 | | | 2,428 | |
| Acquired locations closed and accounts merged with existing locations | 2 | | | | | — | | | — | | | 2 | |
Total approximate purchase price (in millions) | $ | 0.7 | | | | | $ | — | | | $ | — | | | $ | 0.7 | |
(1) Does not include locations in our Acima segment.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Rent-A-Center Business | | | | Mexico | | Franchising | | Total |
Locations at beginning of period(1) | 2,158 | | | | | 122 | | | 281 | | | 2,561 | |
| New location openings | — | | | | | 1 | | | 2 | | | 3 | |
| | | | | | | | | |
| Conversions | (97) | | | | | — | | | 97 | | | — | |
| Closed locations | | | | | | | | | |
| Merged with existing locations | (84) | | | | | — | | | — | | | (84) | |
| Sold or closed with no surviving location | (4) | | | | | — | | | (8) | | | (12) | |
Locations at end of period(1) | 1,973 | | | | | 123 | | | 372 | | | 2,468 | |
| Acquired locations closed and accounts merged with existing locations | 4 | | | | | — | | | — | | | 4 | |
Total approximate purchase price (in millions) | $ | 0.5 | | | | | $ | — | | | $ | — | | | $ | 0.5 | |
(1) Does not include locations in our Acima segment.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Core U.S. | | Acceptance Now Staffed | | Acceptance Now Direct | | Mexico | | Franchising | | Total |
| Locations at beginning of period | 2,463 |
| | 1,431 |
| | 478 |
| | 130 |
| | 229 |
| | 4,731 |
|
| New location openings | — |
| | 222 |
| | 24 |
| | 1 |
| | 1 |
| | 248 |
|
| Acquired locations remaining open | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
| Conversions | — |
| | (63 | ) | | 63 |
| | — |
| | — |
| | — |
|
| Closed locations | | | | | | | | | | | |
| Merged with existing locations | (51 | ) | | (483 | ) | | (439 | ) | | — |
| | — |
| | (973 | ) |
| Sold or closed with no surviving location | (31 | ) | | (1 | ) | | (1 | ) | | — |
| | (9 | ) | | (42 | ) |
| Locations at end of period | 2,381 |
| | 1,106 |
| | 125 |
| | 131 |
| | 225 |
| | 3,968 |
|
| Acquired locations closed and accounts merged with existing locations | 8 |
| | — |
| | — |
| | — |
| | — |
| | 8 |
|
Total approximate purchase price (in millions) | $ | 2.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Core U.S. | | Acceptance Now Staffed | | Acceptance Now Direct | | Mexico | | Franchising | | Total |
| Locations at beginning of period | 2,672 |
| | 1,444 |
| | 532 |
| | 143 |
| | 227 |
| | 5,018 |
|
| New location openings | — |
| | 171 |
| | 67 |
| | 1 |
| | 2 |
| | 241 |
|
| Acquired locations remaining open | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
| Conversions | — |
| | 1 |
| | (2 | ) | | — |
| | — |
| | (1 | ) |
| Closed locations | | | | | | | | | | | |
| Merged with existing locations | (185 | ) | | (185 | ) | | — |
| | (4 | ) | | (1 | ) | | (375 | ) |
| Sold or closed with no surviving location | (24 | ) | | — |
| | (119 | ) | | (10 | ) | | (4 | ) | | (157 | ) |
| Locations at end of period | 2,463 |
| | 1,431 |
| | 478 |
| | 130 |
| | 229 |
| | 4,731 |
|
| Acquired locations closed and accounts merged with existing locations | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Total approximate purchase price (in millions) | $ | 2.3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Core U.S. | | Acceptance Now Staffed | Acceptance Now Direct | | Mexico | | Franchising | | Total |
| Locations at beginning of period | 2,824 |
| | 1,406 |
| | — |
| | 177 |
| | 187 |
| | 4,594 |
|
| New location openings | — |
| | 161 |
| | 505 |
| | — |
| | 11 |
| | 677 |
|
| Acquired locations remaining open | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Conversions | (40 | ) | | (29 | ) | | 29 |
| | — |
| | 40 |
| | |
| Closed locations | | | | | | | | | | |
|
|
| Merged with existing locations | (83 | ) | | (94 | ) | | — |
| | (34 | ) | | — |
| | (211 | ) |
| Sold or closed with no surviving location | (34 | ) | | — |
| | (2 | ) | | — |
| | (11 | ) | | (47 | ) |
| Locations at end of period | 2,672 |
| | 1,444 |
| | 532 |
| | 143 |
| | 227 |
| | 5,018 |
|
| Acquired locations closed and accounts merged with existing locations | 34 |
| | — |
| | — |
| | — |
| | — |
| | 34 |
|
Total approximate purchase price (in millions) | $ | 25.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25.5 |
|
Senior Debt. As discussed On February 17, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a five-year asset-based revolving credit facility with commitments of $550 million and a letter of credit sublimit of $150 million, which commitments may be increased, at our option and under certain conditions, by up to an additional $125 million in Note Ithe aggregate (the “ABL Credit Facility”). Under the ABL Credit Facility, we may borrow only up to the consolidated financial statements,lesser of the Credit Agreement consistslevel of $225.0 million, seven-year Term Loans,the then-current borrowing base and a $350.0 million, five-year Revolving Facility.
the aggregate amount of
We may use $150 millioncommitments under the ABL Credit Facility. The borrowing base is tied to the amount of eligible installment sales accounts, inventory and eligible rental contracts, reduced by reserves. The ABL Credit Facility bears interest at a fluctuating rate determined by reference to the Revolving Facility for the issuanceeurodollar rate plus an applicable margin of letters of credit, of1.50% to 2.00%, which $94.0 million had been so utilizedmargin, as of February 21, 2018.2022, was 1.875%. A commitment fee equal to 0.250% to 0.375% of the unused portion of the ABL Credit Facility fluctuates dependent upon average utilization for the prior month as defined by a pricing grid included in the documentation governing the ABL Credit Facility. Loans under the ABL Credit Facility may be borrowed, repaid and re-borrowed until February 17, 2026, at which time all amounts borrowed must be repaid.
The obligations under the ABL Credit Facility are guaranteed by us and certain of our wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations under the ABL Credit Facility and such guarantees are secured on a first-priority basis by all of our and our subsidiary guarantors’ accounts, inventory, deposit accounts, securities accounts, cash and cash equivalents, rental agreements, general intangibles (other than equity interests in our subsidiaries), chattel paper, instruments, documents, letter of credit rights, commercial tort claims related to the foregoing and other related assets and all proceeds thereof related to the foregoing, subject to permitted liens and certain exceptions (such assets, collectively, the “ABL Priority Collateral”) and a second-priority basis in substantially all other present and future tangible and intangible personal property of ours and the subsidiary guarantors, subject to certain exceptions.
On February 17, 2021, we also entered into a term loan credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and lenders party thereto, that provides for a seven-year $875 million senior secured term loan facility (as amended on September 21, 2021, the “Term Loan Facility”). Subject in each case to certain restrictions and conditions, we may add up to $500 million of incremental term loan facilities to the Term Loan Facility or utilize incremental capacity under the Term Loan Facility at any time by issuing or incurring incremental equivalent term debt. Interest on borrowings under the Term Loan Facility is payable at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin of 3.25%, subject to a 0.50% LIBOR floor. Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.000% per annum of the original aggregate principal amount thereof, with the remaining balance due at final maturity. The Term Loans are scheduled to mature on March 19, 2021Loan Facility is secured by a first-priority security interest in substantially all of present and future tangible and intangible personal property of the Company and the Revolvingsubsidiary guarantors, other than the ABL Priority Collateral, and by a second-priority security interest in the ABL Priority Collateral, subject to certain exceptions. The obligations under the Term Loan Facility hasare guaranteed by the Company and the Company’s material wholly-owned domestic restricted subsidiaries that also guarantee the ABL Credit Facility.
The Term Loan Facility was fully drawn at the closing of the Acima Holdings acquisition to fund a scheduled maturityportion of March 19, 2019. The weighted average Eurodollar rate onthe Aggregate Cash Consideration, repay certain of our and our subsidiaries' outstanding debtindebtedness, repay all outstanding indebtedness of Acima and its subsidiaries and pay certain fees and expenses incurred in connection with the Acima Holdings acquisition. A portion of such proceeds were used to repay $197.5 million outstanding under our prior term loan facility, dated as of August 5, 2019, among us, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the “Prior Term Loan Facility”), which Prior Term Loan Facility was 1.51% atterminated in connection with such repayment. At February 21, 2018.2022, we had outstanding borrowings of $868.4 million under the Term Loan Facility.
Senior Notes. See descriptionsOn February 17, 2021, we issued $450.0 million in senior unsecured notes due February 15, 2029, at par value, bearing interest at 6.375% (the “Notes”), the proceeds of which were used to fund a portion of the senior notesAggregate Cash Consideration upon closing of the Acima Holdings acquisition. Interest on the Notes is payable in Note Jarrears on February 15 and August 15 of each year, beginning on August 15, 2021. We may redeem some or all of the Notes at any time on or after February 15, 2024 for cash at the redemption prices set forth in the indenture governing the Notes, plus accrued and unpaid interest to, but not including, the consolidated financial statements.redemption date. Prior to February 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at a redemption price of 106.375% plus accrued and unpaid interest to, but not including, the redemption date. In addition, we may redeem some or all of the Notes prior to February 15, 2024, at a redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” premium. If we experience specific kinds of change of control, we will be required to offer to purchase the Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
Store
Operating Leases. We lease space for substantially all of our Core U.S.Rent-A-Center Business and Mexico stores andunder operating leases expiring at various times through 2029. In addition we lease space for certain support facilities under operating leases expiring at various times through 2023.2032. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas.
Contractual Cash Commitments. The table below summarizes debt, lease and other minimum cash obligations outstanding as As of December 31, 2017:2021, our total remaining obligation for existing store lease contracts was approximately $340.7 million.
We lease vehicles for all of our Rent-A-Center Business stores under operating leases with lease terms expiring twelve months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our Consolidated Balance Sheets. As of December 31, 2021, our total remaining minimum obligation for existing Rent-A-Center Business vehicle lease contracts was approximately $0.8 million.
We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2025 with rental rates adjusted periodically for inflation. As of December 31, 2021, our total remaining obligation for existing Mexico vehicle lease contracts was approximately $1.3 million.
Reference Note G of our consolidated financial statements for additional discussion of our store operating leases.
Uncertain Tax Position. As of December 31, 2021, we have recorded $6.5 million in uncertain tax positions. Although these positions represent a potential future cash liability to the Company, the amounts and timing of such payments are uncertain. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In thousands) | Total | | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter |
Senior Term Debt(1) | $ | 48,563 |
| | $ | 2,250 |
| | $ | 4,500 |
| | $ | 41,813 |
| | $ | — |
|
Revolving Credit Facility(2) | 85,000 |
| | — |
| | 85,000 |
| | — |
| | — |
|
| INTRUST Line of Credit | 5,735 |
| | 5,735 |
| | — |
| | — |
| | — |
|
6.625% Senior Notes(3) | 350,922 |
| | 19,394 |
| | 331,528 |
| | — |
| | — |
|
4.75% Senior Notes(4) | 291,563 |
| | 11,875 |
| | 23,750 |
| | 255,938 |
| | — |
|
| Operating Leases | 466,239 |
| | 158,347 |
| | 220,205 |
| | 83,958 |
| | 3,729 |
|
Total contractual cash obligations(5) | $ | 1,248,022 |
| | $ | 197,601 |
| | $ | 664,983 |
| | $ | 381,709 |
| | $ | 3,729 |
|
| |
(1)
| Does not include interest payments. Our senior term debt bears interest at varying rates equal to the Eurodollar rate (not less than 0.75%) plus 3.00% or the prime rate plus 2.00% at our election. The Eurodollar rate on our senior term debt at December 31, 2017 was 1.57%. |
| |
(2)
| Does not include interest payments. Our Revolving Facility bears interest at varying rates equal to the Eurodollar rate plus 1.50% to 3.00% or the prime rate plus 0.50% to 2.00% at our election. The weighted average Eurodollar rate on our Revolving Facility at December 31, 2017 was 1.48%. |
| |
(3)
| Includes interest payments of $9.7 million on each May 15 and November 15 of each year. |
| |
(4)
| Includes interest payments of $5.9 million on each May 1 and November 1 of each year. |
| |
(5)
| As of December 31, 2017, we have recorded $37.3 million in uncertain tax positions. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table. |
Seasonality. Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year, primarily related to the receipt of federal income tax refunds by our customers.year. Generally, our customers will more frequently exercise the early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year. Furthermore, we tendyear, primarily due to experience slower growth in the numberreceipt of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.federal income tax refunds.
Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical.
If we make changes to our reserves in accordance with the policies described below, our earnings would be impacted. Increases to our reserves would reduce earnings and, similarly, reductions to our reserves would increase our earnings. A pre-tax change of approximately $0.8 million in our estimates would result in a corresponding $0.01 change in our diluted earnings per common share.share as of December 31, 2021.
Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers' compensation, general liability, vehicle liability and health insurance programs. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions.
We continually institute procedures to manage our loss exposure and increases in health care costs associated with our insurance claims through our risk management function, including a transitional duty program for injured workers, ongoing safety and accident prevention training, and various other programs designed to minimize losses and improve our loss experience in our store locations. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, company-specific development factors, general industry loss development factors, and third-party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we evaluate the adequacy of our reserves by comparing amounts reserved on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third-party claim administrator loss estimates, and make adjustments to our reserves as needed.
As of December 31, 2017,2021, the amount reserved for losses within our self-insured retentions with respect to workers’ compensation, general liability and vehicle liability insurance was $118.0$82.6 million, as compared to $120.8$88.3 million at December 31, 2016.2020. However, if any of the factors that contribute to the overall cost of insurance claims were to change, the actual amount incurred for our self-insurance liabilities could be more or less than the amounts currently reserved.
Rental Merchandise. Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation for merchandise in Rent-A-Center Business and staffed Acima locations is generally provided using the income forecasting method, which is intended to match as closely as practicable the recognition of depreciation expense with the consumption of the rental merchandise, and assumes no salvage value. The consumption of rental merchandise occurs during periods of rental and directly coincides with the receipt of rental revenue over the rental purchase agreement period. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. In addition, we depreciate merchandise (including computers and tablets) that is held for rent for at least 180 consecutive days using the straight-line method over a period generally not to exceed 18 months. Beginning in 2016, smartphones are depreciated over an 18-month straight-line basis beginning with the earlier of on rent or 90 consecutive days on held for rent. Depreciation of merchandise in our virtual business is recognized using a straight-line method over the term of the lease contract.
Rental merchandise which is damaged and inoperable is expensed when such impairment occurs. In addition, any minor repairs made to rental merchandise are expensed at the time of the repair. If a customer does not return merchandise on-rent or make a payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Rent-A-Center Business and Mexico segments, and during the month following the 120th day in our Acima virtual business and 150th day in our Acima staffed locations. We maintain a reserve for these expected losses, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on a combination of historical write-offs and expected future losses. As of December 31, 2021 and 2020, the reserve for merchandise losses was $98.2 million and $58.1 million, respectively.
Income Taxes. Our annual tax rate is affected by many factors, including the mix of our earnings, legislation and acquisitions, and is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax laws are complex and subject to differing interpretations between the taxpayer and the taxing authorities. Significant judgment is required in determining our tax expense, evaluating our tax positions and evaluating uncertainties.
Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available.
The Tax Cuts and Jobs Act (the "Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. As of December 31, 2017, we have completed an initial assessment of the tax effects of the Tax Act, and have made a reasonable estimate of the effects on our existing deferred tax balances. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to impact future tax returns. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts resulting in adjustments in future periods in 2018. The impact of the Tax Act may differ from our estimate due to changes in the regulations, rulings, guidance, and interpretations issued by the IRS and the Financial Accounting Standards Board ("FASB") as well as interpretations and assumptions made by the Company. For the items for which we were able to determine a reasonable estimate, we recognized a provisional net benefit of $75.9 million for the year ended December 31, 2017, which is included as a component of income tax expense. See Note H to the consolidated financial statements for additional information.
Valuation of Goodwill. We perform an assessment of goodwill for impairment at the reporting unit level annually on October 1, or between annual tests, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our market capitalization, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
We use a two-step approach to assess goodwill impairment. IfBased on our assessment, if the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, we performgoodwill is deemed impaired and the impairment is measured as the difference between the carrying value and the fair value of the respective reporting unit. As an alternative to performing a second analysisquantitative assessment to measure the fair value of all assets and liabilities within the reportingrelevant unit, and if the carrying value of goodwill exceeds its implied fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of goodwill and the implied fair value, which is calculated as if the reporting unit had been acquired and accounted for as a business combination. As an alternative to this annual impairment testing, the Company may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying value of a reporting unit'sthe net assets exceedsof the reporting unit'sunit exceeds its fair value.
Our reporting units are our reportable operating segments identified in Note ST to the consolidated financial statements. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. These estimates and assumptions include, but are not limited to, future cash flows based on revenue growth rates and operating margins, and future economic and market conditions approximated by a discount rate derived from our weighted average cost of capital. Factors that could affect our ability to achieve the expected growth rates or operating margins include, but are not limited to, the general strength of the economy and other economic conditions that affect consumer preferences and spending and factors that affect the disposable income of our current and potential customers. Factors that could affect our weighted average cost of capital include changes in interest rates and changes in our effective tax rate.
During the period from our 20162020 goodwill impairment assessment through the third quarter 2017,2021, we periodically analyzed whether any indicators of impairment had occurred. As part of these periodic analyses, we comparedoccurred, including by comparing the estimated fair value of the company,Company, as determined based on theour consolidated stock price, to its net book value. As the estimated fair value of the company was higher than its net book value during each of these periods, no additional testing was deemed necessary.
We completed a qualitative assessment for impairment of goodwill as of October 1, 2017,2021, concluding it was not more likely than not that the carrying value of net assets of our reporting unit's net assetsunits exceeded the reporting unit'stheir fair value.
At December 31, 2017,2021 and 2020, the amount of goodwill allocated to the Core U.S. and Acceptance Now segmentsRent-A-Center Business segment was $1.3 million and $55.3 million, respectively.$1.5 million. At December 31, 20162021 and 2020, the amount of goodwill was $55.3 million, solely attributableallocated to the Acceptance Now segment.Acima segment was $288.3 million and $68.7 million, respectively.
Acquisitions. On February 17, 2021, we completed the acquisition of Acima Holdings. In accordance with the acquisition agreement, we issued to the former owners of Acima Holdings an aggregate of 10,779,923 shares of our common stock (“Aggregate Stock Consideration”) and paid to them aggregate cash consideration of $1.3 billion (the “Aggregate Cash Consideration”). The aggregate purchase price was approximately $1.4 billion, including net cash consideration of approximately $1.3 billion, and 2,683,328 shares of the Aggregate Stock Consideration subject to 18-month lockup agreements valued at $51.14 per share, as of the date of closing, and adjusted by a discount for lack of marketability to account for the transfer restrictions that lapse in three tranches, each in 6-month intervals after the closing date.
In accordance with ASC 805, assets acquired and liabilities assumed in connection with the acquisition were recorded at their fair values. Carrying value for assets and liabilities assumed as part of the acquisition, including receivables, prepaid expenses and other assets, accounts payable and accrued liabilities were recorded as fair value, as of the date of acquisition, due to the short term nature of these balances. Operating lease right-of-use assets and liabilities were recorded as the discounted value of future obligations in accordance with ASC Topic 842, “Leases”. The fair value measurements for certain acquired assets, including $520 million of identifiable intangible assets, $341 million of rental merchandise, and $170.0 million related to developed technology, were determined based on an independent valuation using common industry valuation methods for similar asset types and significant unobservable inputs (Level 3) developed using company-specific information. Finally, we recorded goodwill of $219.5 million in our Acima operating segment, which consists of the excess of the net purchase price over the fair value of the net assets acquired.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe our consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of our company as of, and for, the periods presented in this Annual Report on Form 10-K. However, we do not suggest that other general risk factors, such as those discussed elsewhere in this report as well as changes in our growth objectives or performance of new or acquired locations, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.
Effect of New
Recently Issued Accounting Pronouncements
In May 2014,December 2019, the FASB issued ASU 2014-09, Revenue from Contracts with Customers2019-12, Income Taxes (Topic 606), 740): Simplifying the Accounting for Income Taxes, which clarifies existingis intended to simplify various aspects related to accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved a one-year deferral of the effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends ASU 2014-09 relating to how and when a company recognizes revenue when another party is involved in providing a good or service to a customer. Under Topic 606, a company will recognize revenue on a gross basis when it provides a good or service to a customer (acts as the principal in a transaction), and on a net basis when it arranges for the good or service to be providedincome taxes. The standard removes certain exceptions to the customer by another party (acts as an agentgeneral principles in a transaction).Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2016-08 provides additional guidance for determining whether a company acts as a principal or agent, depending primarily on whether a company controls goods or services before delivery to the customer. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides additional guidance related to the identification of performance obligations within the contract, and licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides additional guidance related to certain technical areas within ASU 2014-09. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which provides additional guidance related to certain technical areas within ASU 2014-09. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which adds, amends, and supersedes SEC paragraphs related to the adoption and transition provisions of ASU 2014-09 and ASU 2016-02. The adoption of these additional ASU's must be concurrent with the adoption of ASU 2014-09.
The majority of our revenue generating activities fall outside of the scope of ASU 2014-09. We have completed our evaluation of the above standard and related ASU's, for revenue generating activities that fall within scope, and believe impacts stemming from adoption include the timing of revenue recognition for initial franchise fees charged to franchisees for new stores, and the presentation of advertising fees charged to franchisees in accordance with our franchise agreement. We currently recognize initial franchise fees when paid by the franchisee, upon the opening of a new location. Under the new standard, the benefits provided by the Company to the franchisee for payment of the initial franchise fee are not considered distinct from the franchise license, but are considered to provide benefit to the franchisee throughout the term of the license. Therefore, upon adoption of the standard, we will recognize initial franchise fees over the term of the franchise agreement. Regarding advertising fees, the Company currently
records advertising fees paid by franchisees net of operating expenses in the consolidated statement of operations. Under the new standard, advertising fees will be presented on a gross basis, as revenue, in the consolidated statement of operations. We do not believe either of these changes will result in material impacts to the consolidated statement of operations or require significant changes to existing internal processes for recognizing revenue. The Company will adopt the new standard in the first quarter of 2018, in accordance with the standard’s required adoption date, using the modified retrospective adoption method.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which replaces existing accounting literature relating to the classification of, and accounting for, leases. Under ASU 2016-02, a company must recognize for all leases (with the exception of leases with terms less than 12 months) a liability representing a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset representing the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged, with certain improvements to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. In January 2018, the FASB issued ASU 2018-01, Lease (Topic 841): Land Easement Practical Expedient for Transition to Topic 842, which amends ASU 2016-02 to add two practical expedients. The changes allow companies to elect a simplified transition approach, and provides lessors with an option related to how lease and other related revenues are presented and disclosed. The adoption of these ASU's will be required for us2019-12 beginning January 1, 2019, with early adoption permitted. ASU 2016-02 must be adopted2021 using a modified retrospective transition, applying the new criteriaprospective approach. Impacts to all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. We do not expect to early adopt these standards and are currently in the process of determining what impact the adoption of these ASU's will have on our financial position, results of operations and cash flows.
In August 2016,statements for 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. The adoption of ASU 2016-15 will be required for us on a retrospective basis beginning January 1, 2018, with early adoption permitted. We will not early adopt this standard nor do we believe thattwelve months ended December 31, 2021 resulting from the adoption of this ASU will materially affect our presentation of cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the hypothetical purchase price allocation and instead using the difference between the carrying amount and the fair value of the reporting unit. The adoption of ASU 2017-04 will be required for us on a prospective basis beginning January 1, 2020, with early adoption permitted. We are currently in the process of determining our adoption date and what impact the adoption of this ASU will have on our financial statements.
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. The adoption of ASU 2017-09 will be required for us on a prospective basis beginning January 1, 2018, with early adoption permitted. We will not early adopt this standard nor do we believe that the adoption of this ASU will materially affect our financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which addresses certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act. The adoption of ASU 2018-02 will be required for us beginning January 1, 2019, with early adoption permitted. We do not intend to exercise the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded.were immaterial.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Sensitivity
As of December 31, 2017,2021, we had $292.7$450.0 million in senior notesNotes outstanding at a fixed interest rate of 6.625% and $250.0 million in senior notes outstanding at a fixed interest rate of 4.75%6.375%. We also had $48.6$868.4 million outstanding inunder the Term Loans, $85.0Loan Facility and $290.0 million outstanding under our RevolvingABL Credit Facility, and $5.7 million outstanding on our INTRUST line of credit, each at interest rates indexed to the Eurodollar rate or the prime rate. The fair value of the 6.625% senior notes, based on the closing price at December 31, 2017, was $278.8 million. The fair value of the 4.75% senior notes, based on the closing price at December 31, 2017, was $237.5 million. Carrying value approximates fair value for all othersuch indebtedness.
Market Risk
Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by our senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. As a result of such assessment, we may enter into swap contracts or other interest rate protection agreements from time to time to mitigate this risk.
Interest Rate Risk
We have outstanding debt with variable interest rates indexed to prime or Eurodollar rates that exposes us to the risk of increased interest costs if interest rates rise. As of December 31, 2017,2021, we have not entered into any interest rate swap agreements. Based on our overall interest rate exposure at December 31, 2017,2021, a hypothetical 1.0% increase or decrease in market interest rates would have the effect of causing a $1.4an additional $11.6 million additional annualized pre-tax charge or credit to our Consolidated Statementconsolidated statement of Operations.operations.
Foreign Currency Translation
We are exposed to market risk from foreign exchange rate fluctuations of the Mexican peso to the U.S. dollar as the financial position and operating results of our stores in Mexico are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders'stockholders’ equity.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and the Board of Directors
Rent‑A‑Center, of Rent-A-Center, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Rent-A-Center, Inc. and subsidiaries (the Company) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ stockholders' equity and cash flows for each of the years in the three year periodthen ended December 31, 2017, and the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the three years in the three year periodthen ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control - IntegratedControl-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)and our report dated February 28, 201825, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Self-Insurance Liabilities | | | | | |
| Description of the Matter | As described in Note A to the consolidated financial statements, the Company recorded liabilities totaling $82.6 million associated with its self-insured retentions for workers’ compensation, general liability and vehicle liability insurance (collectively, the self-insurance liabilities). The self-insurance liabilities are established by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within the self-insured retentions. Auditing the Company's self-insurance liabilities is complex and required us to use our actuarial specialists due to the significant measurement uncertainty associated with the estimates, management’s application of judgment, and the use of various actuarial methods. The Company’s analyses of the self-insurance liabilities consider a variety of factors, including the actuarial loss forecasts, company-specific development factors, general industry loss development factors and third-party claim administrator loss estimates of individual claims. The self-insurance liabilities are sensitive to changes in these factors. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the self-insurance liabilities processes. For example, we tested controls over the factors mentioned above that management used in the calculations and the completeness and accuracy of the data underlying the ultimate expected losses. To evaluate the reserve for self-insurance liabilities, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims data provided to management's actuarial specialist. Additionally, we involved our actuarial specialists to assist in our evaluation of the key factors mentioned above and the methodologies applied by management's specialist to establish the actuarially determined ultimate expected losses and develop a range for ultimate expected loss estimates based on independently developed assumptions, which we compared to the Company's recorded reserves for self-insurance liabilities.
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Merchandise Loss Reserve | | | | | |
| Description of the Matter | As described in Note A to the consolidated financial statements, the Company maintains a $98.2 million reserve for expected merchandise losses from unreturned merchandise related to delinquent rental agreements. The Company estimates this reserve based on a combination of historical write-offs and expected future losses. Auditing the Company’s merchandise loss reserve was complex due to the level of uncertainty associated with management’s assumptions used to estimate the reserve. In particular, management was required to estimate the amount of merchandise not expected to be returned related to delinquent accounts. The Company estimates expected losses from delinquent accounts based on historical write-off experience, including the number of days past due before a write-off occurred and expectations about future losses from delinquent accounts at the end of the year. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to determine the valuation of the merchandise loss reserve. This included testing controls over the Company’s review of the significant inputs underlying the reserve estimate, which include those mentioned above. |
| To test the adequacy of the Company’s merchandise loss reserve, we performed substantive audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the reserve calculations and evaluating the Company’s methodology for estimating future losses. We evaluated significant assumptions, including those mentioned above, that were used in management’s calculation of the merchandise loss reserve. We also tested a sample of actual charge-offs to supporting documents to validate the number of days an account is delinquent before a write-off occurs for merchandise on rent. Among our other procedures, we performed sensitivity analyses over significant assumptions to evaluate the changes in the estimated merchandise loss reserve resulting from changes in the Company's significant assumptions. |
Business Combination
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| Description of the Matter | As described in Note B, the Company completed the acquisition of Acima Holdings for consideration of $1.3 billion. This transaction was accounted for as a business combination. Auditing the Company’s accounting for its acquisition of Acima Holdings was complex due to the significant estimation uncertainty in determining the fair value of the identifiable intangible assets acquired. In particular, the fair value of estimates for identifiable intangible assets were sensitive to changes in assumptions, including discount rates, revenue growth rates, royalty rates and the projected cash flows. These assumptions relate to the future performance of the acquired business and are affected by such factors as expected future market or economic conditions. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for business combinations. This included testing controls over the Company’s process to identify and measure acquired intangible assets as well as controls over management's review of the significant assumptions described above. To test the estimated fair value of the identifiable intangible assets acquired, our audit procedures included, among others, assessing the completeness of the identifiable intangible assets acquired, assessing the valuation methodologies and testing the significant assumptions described above and underlying data used by the Company. For example, we compared the significant assumptions used by management to the historical results of the acquired business as well as to current industry, market and economic trends, and other guideline companies within the same industry. We performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the identifiable intangible assets resulting from changes in the assumptions. In addition, we involved an internal valuation specialist to assist in evaluating the methodologies used and the significant assumptions applied in developing the fair value estimates. We have also evaluated the company's disclosures in relation to this matter. |
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/s/ KPMG LLP |
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We have served as the Company's auditor since 2013.2019. |
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February 28, 201825, 2022 |
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and the Board of Directors
Rent‑A‑Center, of Rent-A-Center, Inc.:
Opinion on Internal Control overOver Financial Reporting
We have audited Rent-A-Center, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control - Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (2013 framework) (the COSO criteria). In our opinion, the CompanyRent-A-Center, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria establishedthe COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control - Integrated Framework (2013) issued byOver Financial Reporting, management’s assessment of and conclusion on the Committeeeffectiveness of Sponsoring Organizationsinternal control over financial reporting did not include the internal controls of Acima Holdings, which is included in the 2021 consolidated financial statements of the Treadway Commission.Company and constituted 33% of the Company’s total revenues for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Acima Holdings.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income, (loss), stockholders’ equity and cash flows for each of the three years in the three-year periodthen ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 201825, 2022 expressed an unqualified opinion on those consolidated financial statements.thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 25, 2022
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Dallas, Texas |
February 28, 2018 |
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of the Company, including the Chief Executive Officer and Interim Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to management and the Company’s Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based
In February 2021, we acquired Acima Holdings. Management's assessment and conclusions on thisthe effectiveness of internal control over financial reporting as of December 31, 2021 excludes an assessment management hasof the internal control over financial reporting of Acima Holdings. Acima Holdings represents approximately 33% of the Company's total revenues for the 12 months ending December 31, 2021.
Excluding the above, Management's assessment concluded that, as of December 31, 2017,2021, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria.
KPMGErnst & Young LLP, the Company’s independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share data) | 2017 |
| 2016 |
| 2015 |
| Revenues | | | |
| Store | | | | | |
| Rentals and fees | $ | 2,267,741 |
| | $ | 2,500,053 |
| | $ | 2,781,315 |
|
| Merchandise sales | 331,402 |
| | 351,198 |
| | 377,240 |
|
| Installment sales | 71,651 |
| | 74,509 |
| | 76,238 |
|
| Other | 9,620 |
| | 12,706 |
| | 19,158 |
|
| Total store revenues | 2,680,414 |
| | 2,938,466 |
| | 3,253,951 |
|
| Franchise | | | | | |
| Merchandise sales | 13,157 |
| | 16,358 |
| | 15,577 |
|
| Royalty income and fees | 8,969 |
| | 8,428 |
| | 8,892 |
|
| Total revenues | 2,702,540 |
| | 2,963,252 |
| | 3,278,420 |
|
| Cost of revenues | | | | | |
| Store | | | | | |
| Cost of rentals and fees | 625,358 |
| | 664,845 |
| | 728,706 |
|
| Cost of merchandise sold | 322,628 |
| | 323,727 |
| | 356,696 |
|
| Cost of installment sales | 23,622 |
| | 24,285 |
| | 25,677 |
|
| Total cost of store revenues | 971,608 |
| | 1,012,857 |
| | 1,111,079 |
|
| Other charges | — |
| | — |
| | 34,698 |
|
| Franchise cost of merchandise sold | 12,390 |
| | 15,346 |
| | 14,534 |
|
| Total cost of revenues | 983,998 |
| | 1,028,203 |
| | 1,160,311 |
|
| Gross profit | 1,718,542 |
| | 1,935,049 |
| | 2,118,109 |
|
| Operating expenses | | | | | |
| Store expenses | | | | | |
| Labor | 732,466 |
| | 789,049 |
| | 854,610 |
|
| Other store expenses | 744,187 |
| | 791,614 |
| | 833,914 |
|
| General and administrative expenses | 171,090 |
| | 168,907 |
| | 166,102 |
|
| Depreciation, amortization and write-down of intangibles | 74,639 |
| | 80,456 |
| | 80,720 |
|
| Goodwill impairment charge | — |
| | 151,320 |
| | 1,170,000 |
|
| Other charges | 59,219 |
| | 20,299 |
| | 20,651 |
|
| Total operating expenses | 1,781,601 |
| | 2,001,645 |
| | 3,125,997 |
|
| Operating loss | (63,059 | ) | | (66,596 | ) | | (1,007,888 | ) |
| Write-off of debt issuance costs | 1,936 |
| | — |
| | — |
|
| Interest expense | 45,996 |
| | 47,181 |
| | 49,326 |
|
| Interest income | (791 | ) | | (503 | ) | | (634 | ) |
| Loss before income taxes | (110,200 | ) | | (113,274 | ) | | (1,056,580 | ) |
| Income tax benefit | (116,853 | ) | | (8,079 | ) | | (103,060 | ) |
| Net earnings (loss) | $ | 6,653 |
| | $ | (105,195 | ) | | $ | (953,520 | ) |
| Basic earnings (loss) per common share | $ | 0.12 |
| | $ | (1.98 | ) | | $ | (17.97 | ) |
| Diluted earnings (loss) per common share | $ | 0.12 |
| | $ | (1.98 | ) | | $ | (17.97 | ) |
| Cash dividends declared per common share | $ | 0.16 |
| | $ | 0.32 |
| | $ | 0.96 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share data) | 2021 | | 2020 | | 2019 |
| Revenues | | | |
| Store | | | | | |
| Rentals and fees | $ | 3,522,453 | | | $ | 2,263,091 | | | $ | 2,224,402 | |
| Merchandise sales | 829,222 | | | 378,717 | | | 304,630 | |
| Installment sales | 73,585 | | | 68,500 | | | 70,434 | |
| Other | 4,148 | | | 3,845 | | | 4,795 | |
| Total store revenues | 4,429,408 | | | 2,714,153 | | | 2,604,261 | |
| Franchise | | | | | |
| Merchandise sales | 126,856 | | | 80,023 | | | 49,135 | |
| Royalty income and fees | 27,187 | | | 20,015 | | | 16,456 | |
| Total revenues | 4,583,451 | | | 2,814,191 | | | 2,669,852 | |
| Cost of revenues | | | | | |
| Store | | | | | |
| Cost of rentals and fees | 1,260,434 | | | 655,612 | | | 634,878 | |
| Cost of merchandise sold | 935,765 | | | 382,182 | | | 319,006 | |
| Cost of installment sales | 25,637 | | | 24,111 | | | 23,383 | |
| Total cost of store revenues | 2,221,836 | | | 1,061,905 | | | 977,267 | |
| | | | | |
| Franchise cost of merchandise sold | 126,603 | | | 80,134 | | | 48,514 | |
| Total cost of revenues | 2,348,439 | | | 1,142,039 | | | 1,025,781 | |
| Gross profit | 2,235,012 | | | 1,672,152 | | | 1,644,071 | |
| Operating expenses | | | | | |
| Store expenses | | | | | |
| Labor | 644,763 | | | 579,125 | | | 630,096 | |
| Other store expenses | 770,073 | | | 609,370 | | | 617,106 | |
| General and administrative expenses | 194,894 | | | 153,108 | | | 142,634 | |
| Depreciation, amortization and write-down of intangibles | 54,830 | | | 56,658 | | | 61,104 | |
| | | | | |
| Other charges and (gains) | 289,913 | | | 36,555 | | | (60,728) | |
| Total operating expenses | 1,954,473 | | | 1,434,816 | | | 1,390,212 | |
| Operating profit | 280,539 | | | 237,336 | | | 253,859 | |
| Debt refinancing charges | 15,582 | | | — | | | 2,168 | |
| Interest expense | 70,874 | | | 15,325 | | | 31,031 | |
| Interest income | (221) | | | (768) | | | (3,123) | |
| Earnings before income taxes | 194,304 | | | 222,779 | | | 223,783 | |
| Income tax expense | 59,364 | | | 14,664 | | | 50,237 | |
| Net earnings | $ | 134,940 | | | $ | 208,115 | | | $ | 173,546 | |
| Basic earnings per common share | $ | 2.37 | | | $ | 3.84 | | | $ | 3.19 | |
| Diluted earnings per common share | $ | 2.02 | | | $ | 3.73 | | | $ | 3.10 | |
| Cash dividends declared per common share | $ | 1.27 | | | $ | 1.18 | | | $ | 0.54 | |
See accompanying notes to consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Net earnings (loss) | $ | 6,653 |
| | $ | (105,195 | ) | | $ | (953,520 | ) |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustments, net of tax of $2,822, ($2,794), and ($3,445) for 2017, 2016 and 2015, respectively | 5,241 |
| | (5,188 | ) | | (6,399 | ) |
| Total other comprehensive income (loss) | 5,241 |
| | (5,188 | ) | | (6,399 | ) |
| Comprehensive income (loss) | $ | 11,894 |
| | $ | (110,383 | ) | | $ | (959,919 | ) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Net earnings | $ | 134,940 | | | $ | 208,115 | | | $ | 173,546 | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation adjustments, net of tax of $(259), $(193), and $158 for 2021, 2020, and 2019, respectively | (975) | | | (726) | | | 595 | |
| Total other comprehensive (loss) income | (975) | | | (726) | | | 595 | |
| Comprehensive income | $ | 133,965 | | | $ | 207,389 | | | $ | 174,141 | |
See accompanying notes to consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| | December 31, |
| (In thousands, except share and par value data) | 2017 | | 2016 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 72,968 |
| | $ | 95,396 |
|
| Receivables, net of allowance for doubtful accounts of $4,167 and $3,593 in 2017 and 2016, respectively | 69,823 |
| | 69,785 |
|
| Prepaid expenses and other assets | 64,577 |
| | 54,989 |
|
| Rental merchandise, net | | | |
| On rent | 701,803 |
| | 795,118 |
|
| Held for rent | 167,188 |
| | 206,836 |
|
| Merchandise held for installment sale | 4,025 |
| | 3,629 |
|
| Property assets, net of accumulated depreciation of $525,673 and $522,101 in 2017 and 2016, respectively | 282,901 |
| | 316,428 |
|
| Goodwill | 56,614 |
| | 55,308 |
|
| Other intangible assets, net | 882 |
| | 5,252 |
|
| Total assets | $ | 1,420,781 |
| | $ | 1,602,741 |
|
| LIABILITIES | | | |
| Accounts payable — trade | $ | 90,352 |
| | $ | 108,238 |
|
| Accrued liabilities | 298,018 |
| | 332,196 |
|
| Deferred income taxes | 87,081 |
| | 173,144 |
|
| Senior debt, net | 134,125 |
| | 186,747 |
|
| Senior notes, net | 538,762 |
| | 537,483 |
|
| Total liabilities | 1,148,338 |
| | 1,337,808 |
|
| STOCKHOLDERS’ EQUITY | | | |
| Common stock, $.01 par value; 250,000,000 shares authorized; 109,681,559 and 109,519,369 shares issued in 2017 and 2016, respectively | 1,097 |
| | 1,095 |
|
| Additional paid-in capital | 831,271 |
| | 827,107 |
|
| Retained earnings | 798,743 |
| | 800,640 |
|
| Treasury stock at cost, 56,369,752 shares in 2017 and 2016 | (1,347,677 | ) | | (1,347,677 | ) |
| Accumulated other comprehensive loss | (10,991 | ) | | (16,232 | ) |
| Total stockholders' equity | 272,443 |
| | 264,933 |
|
| Total liabilities and stockholders' equity | $ | 1,420,781 |
| | $ | 1,602,741 |
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands, except share and par value data) | 2021 | | 2020 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 108,333 | | | $ | 159,449 | |
| Receivables, net of allowance for doubtful accounts of $8,479 and $8,047 in 2021 and 2020, respectively | 126,378 | | | 90,003 | |
| Prepaid expenses and other assets | 63,468 | | | 50,006 | |
| Rental merchandise, net | | | |
| On rent | 1,173,024 | | | 762,886 | |
| Held for rent | 132,984 | | | 146,266 | |
| Merchandise held for installment sale | 6,405 | | | 5,439 | |
| Property assets, net of accumulated depreciation of $557,453 and $505,074 in 2021 and 2020, respectively | 308,098 | | | 141,641 | |
| Operating lease right-of-use assets | 291,338 | | | 283,422 | |
| Deferred tax asset | 68,391 | | | 33,782 | |
| Goodwill | 289,750 | | | 70,217 | |
| Other intangible assets, net | 425,158 | | | 7,869 | |
| Total assets | $ | 2,993,327 | | | $ | 1,750,980 | |
| LIABILITIES | | | |
| Accounts payable — trade | $ | 135,666 | | | $ | 186,063 | |
| Accrued liabilities | 362,708 | | | 320,583 | |
| Operating lease liabilities | 296,535 | | | 285,354 | |
| Deferred tax liability | 113,943 | | | 176,410 | |
| Senior debt, net | 1,135,207 | | | 190,490 | |
| Senior notes, net | 435,992 | | | — | |
| Total liabilities | 2,480,051 | | | 1,158,900 | |
| | | |
| STOCKHOLDERS’ EQUITY | | | |
| Common stock, $0.01 par value; 250,000,000 shares authorized; 124,398,373 and 112,180,517 shares issued in 2021 and 2020, respectively | 1,065 | | | 1,105 | |
| Additional paid-in capital | 1,146,509 | | | 886,902 | |
| Retained earnings | 1,143,647 | | | 1,091,010 | |
| Treasury stock at cost, 58,227,367 and 57,891,859 shares in 2021 and 2020, respectively | (1,765,574) | | | (1,375,541) | |
| Accumulated other comprehensive loss | (12,371) | | | (11,396) | |
| Total stockholders' equity | 513,276 | | | 592,080 | |
| Total liabilities and stockholders' equity | $ | 2,993,327 | | | $ | 1,750,980 | |
See accompanying notes to consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
| (In thousands) | Shares | | Amount | |
| Balance at January 1, 2015 | 109,353 |
| | $ | 1,094 |
| | $ | 813,178 |
| | $ | 1,927,445 |
| | $ | (1,347,677 | ) | | $ | (4,645 | ) | | $ | 1,389,395 |
|
| Net loss | — |
| | — |
| | — |
| | (953,520 | ) | | — |
| | — |
| | (953,520 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (6,399 | ) | | (6,399 | ) |
| Exercise of stock options | 66 |
| | — |
| | 1,485 |
| | — |
| | — |
| | — |
| | 1,485 |
|
| Vesting of restricted share units | 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tax effect of stock awards vested and options exercised | — |
| | — |
| | (5,865 | ) | | — |
| | — |
| | — |
| | (5,865 | ) |
| Stock-based compensation | — |
| | — |
| | 9,541 |
| | — |
| | — |
| | — |
| | 9,541 |
|
| Dividends declared | — |
| | — |
| | — |
| | (51,047 | ) | | — |
| | — |
| | (51,047 | ) |
| Balance at December 31, 2015 | 109,442 |
| | 1,094 |
| | 818,339 |
| | 922,878 |
| | (1,347,677 | ) | | (11,044 | ) | | 383,590 |
|
| Net loss | — |
| | — |
| | — |
| | (105,195 | ) | | — |
| | — |
| | (105,195 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (5,188 | ) | | (5,188 | ) |
| Vesting of restricted share units | 77 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Tax effect of stock awards vested and options exercised | — |
| | — |
| | (440 | ) | | — |
| | — |
| | — |
| | (440 | ) |
| Stock-based compensation | — |
| | — |
| | 9,209 |
| | — |
| | — |
| | — |
| | 9,209 |
|
| Dividends declared | — |
| | — |
| | — |
| | (17,043 | ) | | — |
| | — |
| | (17,043 | ) |
| Balance at December 31, 2016 | 109,519 |
| | 1,095 |
| | 827,107 |
| | 800,640 |
| | (1,347,677 | ) | | (16,232 | ) | | 264,933 |
|
| Net earnings | — |
| | — |
| | — |
| | 6,653 |
| | — |
| | — |
| | 6,653 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 5,241 |
| | 5,241 |
|
| Exercise of stock options | 27 |
| | — |
| | 270 |
| | — |
| | — |
| | — |
| | 270 |
|
| Vesting of restricted share units | 136 |
| | 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 3,896 |
| | — |
| | — |
| | — |
| | 3,896 |
|
| Dividends declared | — |
| | — |
| | — |
| | (8,550 | ) | | — |
| | — |
| | (8,550 | ) |
| Balance at December 31, 2017 | 109,682 |
| | $ | 1,097 |
| | $ | 831,271 |
| | $ | 798,743 |
| | $ | (1,347,677 | ) | | $ | (10,991 | ) | | $ | 272,443 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Treasury
Stock | | Accumulated Other Comprehensive (Loss) Income | | Total |
| (In thousands) | Shares | | Amount | |
| Balance at January 1, 2019 | 109,910 | | | $ | 1,099 | | | $ | 838,436 | | | $ | 805,924 | | | $ | (1,347,677) | | | $ | (11,265) | | | $ | 286,517 | |
| ASC 842 adoption | — | | | — | | | — | | | (1,976) | | | — | | | — | | | (1,976) | |
| Net earnings | — | | | — | | | — | | | 173,546 | | | — | | | — | | | 173,546 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 595 | | | 595 | |
| Purchase of treasury stock | — | | | — | | | — | | | — | | | (1,292) | | | — | | | (1,292) | |
| Exercise of stock options | 550 | | | 5 | | | 6,794 | | | — | | | — | | | — | | | 6,799 | |
| Vesting of restricted share units | 267 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
| Tax effect of stock awards vested and options exercised | — | | | — | | | (1,734) | | | — | | | — | | | — | | | (1,734) | |
| Stock-based compensation | — | | | — | | | 6,958 | | | — | | | — | | | — | | | 6,958 | |
| Dividends declared | — | | | — | | | — | | | (29,619) | | | — | | | — | | | (29,619) | |
| Merchants Preferred acquisition | 439 | | | 4 | | | 19,165 | | | — | | | — | | | — | | | 19,169 | |
| Balance at December 31, 2019 | 111,166 | | | $ | 1,110 | | | $ | 869,617 | | | $ | 947,875 | | | $ | (1,348,969) | | | $ | (10,670) | | | $ | 458,963 | |
| ASC 326 adoption | — | | | — | | | — | | | (769) | | | — | | | — | | | (769) | |
| Net earnings | — | | | — | | | — | | | 208,115 | | | — | | | — | | | 208,115 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (726) | | | (726) | |
| Purchase of treasury stock | — | | | (14) | | | — | | | — | | | (26,572) | | | — | | | (26,586) | |
| Exercise of stock options | 494 | | | 5 | | | 10,275 | | | — | | | — | | | — | | | 10,280 | |
| Vesting of restricted share units | 521 | | | 4 | | | (4) | | | — | | | — | | | — | | | — | |
| Tax effect of stock awards vested and options exercised | — | | | — | | | (5,270) | | | — | | | — | | | — | | | (5,270) | |
| Stock-based compensation | — | | | — | | | 12,284 | | | — | | | — | | | — | | | 12,284 | |
| Dividends Declared | — | | | — | | | — | | | (64,211) | | | — | | | — | | | (64,211) | |
| Balance at December 31, 2020 | 112,181 | | | $ | 1,105 | | | $ | 886,902 | | | $ | 1,091,010 | | | $ | (1,375,541) | | | $ | (11,396) | | | $ | 592,080 | |
| Net earnings | — | | | — | | | — | | | 134,940 | | | — | | | — | | | 134,940 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (975) | | | (975) | |
| Purchase of treasury stock | — | | | (79) | | | — | | | — | | | (390,033) | | | — | | | (390,112) | |
| Exercise of stock options | 477 | | | 4 | | | 12,050 | | | — | | | — | | | — | | | 12,054 | |
| Vesting of restricted share units | 960 | | | 8 | | | (8) | | | — | | | — | | | — | | | — | |
| Tax effect of stock awards vested and options exercised | — | | | — | | | (20,903) | | | — | | | — | | | — | | | (20,903) | |
| Stock-based compensation | — | | | — | | | 147,554 | | | — | | | — | | | — | | | 147,554 | |
| Dividends Declared | — | | | — | | | — | | | (82,303) | | | — | | | — | | | (82,303) | |
| Acima acquisition | 10,780 | | | 27 | | | 120,914 | | | — | | | — | | | — | | | 120,941 | |
| Balance at December 31, 2021 | 124,398 | | | $ | 1,065 | | | $ | 1,146,509 | | | $ | 1,143,647 | | | $ | (1,765,574) | | | $ | (12,371) | | | $ | 513,276 | |
See accompanying notes to consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities | | | | | |
| Net earnings | $ | 134,940 | | | $ | 208,115 | | | $ | 173,546 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities | | | | | |
| Depreciation of rental merchandise | 1,216,735 | | | 633,695 | | | 619,353 | |
| Bad debt expense | 14,397 | | | 14,635 | | | 15,077 | |
| Stock-based compensation expense | 147,554 | | | 12,284 | | | 6,958 | |
| Depreciation of property assets | 67,091 | | | 55,597 | | | 60,592 | |
| Loss (gain) on sale or disposal of property assets | 353 | | | 18,215 | | | (23,537) | |
| | | | | |
| Amortization of intangibles | 102,742 | | | 1,070 | | | 723 | |
| Amortization of financing fees | 6,008 | | | 1,577 | | | 2,987 | |
| Write-off of debt financing fees | 9,926 | | | — | | | 2,168 | |
| Deferred income taxes | 48,315 | | | (6,605) | | | 55,257 | |
| Changes in operating assets and liabilities, net of effects of acquisitions | | | | | |
| Rental merchandise | (1,273,734) | | | (736,444) | | | (651,487) | |
| Receivables | (25,516) | | | (20,674) | | | (28,855) | |
| Prepaid expenses and other assets | (12,766) | | | (3,963) | | | 3,185 | |
| Operating lease right-of-use assets and lease liabilities | 2,712 | | | (1,543) | | | 4,366 | |
| Accounts payable — trade | (66,419) | | | 17,943 | | | 54,282 | |
| Accrued liabilities | 19,960 | | | 42,600 | | | (79,199) | |
| Net cash provided by operating activities | 392,298 | | | 236,502 | | | 215,416 | |
| Cash flows from investing activities | | | | | |
| Purchase of property assets | (62,450) | | | (34,545) | | | (21,157) | |
| Proceeds from sale of assets | 4 | | | 14,477 | | | 69,717 | |
| Hurricane insurance recovery proceeds | — | | | 158 | | | 1,113 | |
| Acquisitions of businesses | (1,273,528) | | | (700) | | | (28,915) | |
| Net cash (used in) provided by investing activities | (1,335,974) | | | (20,610) | | | 20,758 | |
| Cash flows from financing activities | | | | | |
| Share repurchases | (390,112) | | | (26,572) | | | (1,292) | |
| Exercise of stock options | 12,054 | | | 10,280 | | | 6,799 | |
| Shares withheld for payment of employee tax withholdings | (20,903) | | | (5,270) | | | (1,733) | |
| | | | | |
| Debt issuance costs | (47,622) | | | — | | | (8,454) | |
| Proceeds from debt | 1,780,000 | | | 198,000 | | | 305,400 | |
| Repayments of debt | (369,063) | | | (240,000) | | | (608,640) | |
| Dividends paid | (71,505) | | | (63,119) | | | (13,707) | |
| Net cash provided by (used in) financing activities | 892,849 | | | (126,681) | | | (321,627) | |
| Effect of exchange rate changes on cash | (289) | | | (256) | | | 556 | |
| Net (decrease) increase in cash and cash equivalents | (51,116) | | | 88,955 | | | (84,897) | |
| Cash and cash equivalents at beginning of year | 159,449 | | | 70,494 | | | 155,391 | |
| Cash and cash equivalents at end of year | $ | 108,333 | | | $ | 159,449 | | | $ | 70,494 | |
| Supplemental cash flow information: | | | | | |
| Cash paid during the year for: | | | | | |
| Interest | $ | 51,071 | | | $ | 14,222 | | | $ | 32,114 | |
| Income taxes (excludes $1,571, $32,318, and $2,074 of income taxes refunded in 2021, 2020, and 2019, respectively) | $ | 19,340 | | | $ | 51,569 | | | $ | 24,332 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities | | | | | |
| Net earnings (loss) | $ | 6,653 |
| | $ | (105,195 | ) | | $ | (953,520 | ) |
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities | | | | | |
| Depreciation of rental merchandise | 618,390 |
| | 657,090 |
| | 718,100 |
|
| Bad debt expense | 15,702 |
| | 15,449 |
| | 15,260 |
|
| Stock-based compensation expense | 3,896 |
| | 9,209 |
| | 9,541 |
|
| Depreciation of property assets | 73,685 |
| | 77,361 |
| | 76,429 |
|
| Loss on sale or disposal of property assets | 15,795 |
| | 3,718 |
| | 11,897 |
|
| Goodwill impairment charge | — |
| | 151,320 |
| | 1,170,000 |
|
| Amortization of impairment of intangibles | 4,908 |
| | 2,176 |
| | 3,333 |
|
| Amortization of financing fees | 4,667 |
| | 2,217 |
| | 3,126 |
|
| Write-off of debt financing fees | 1,936 |
| | — |
| | — |
|
| Deferred income taxes | (86,063 | ) | | (32,994 | ) | | (144,818 | ) |
| Excess tax benefit related to stock awards | — |
| | — |
| | (86 | ) |
| Changes in operating assets and liabilities, net of effects of acquisitions | | | | | |
| Rental merchandise | (487,130 | ) | | (523,697 | ) | | (622,149 | ) |
| Receivables | (15,741 | ) | | (15,914 | ) | | (19,088 | ) |
| Prepaid expenses and other assets | (9,622 | ) | | 104,379 |
| | 31,636 |
|
| Accounts payable — trade | (17,886 | ) | | 11,883 |
| | (45,523 | ) |
| Accrued liabilities | (18,657 | ) | | (2,929 | ) | | (23,144 | ) |
| Net cash provided by operating activities | 110,533 |
| | 354,073 |
| | 230,994 |
|
| Cash flows from investing activities | | | | | |
| Purchase of property assets | (65,460 | ) | | (61,143 | ) | | (80,870 | ) |
| Proceeds from sale of stores | 4,638 |
| | 5,262 |
| | 15,964 |
|
| Acquisitions of businesses | (2,525 | ) | | (3,098 | ) | | (25,170 | ) |
| Net cash used in investing activities | (63,347 | ) | | (58,979 | ) | | (90,076 | ) |
| Cash flows from financing activities | | | | | |
| Exercise of stock options | 270 |
| | — |
| | 1,485 |
|
| Shares withheld for payment of employee tax withholdings | (225 | ) | | (338 | ) | | (506 | ) |
| Excess tax benefit related to stock awards | — |
| | — |
| | 86 |
|
| Debt issuance costs | (5,258 | ) | | — |
| | — |
|
| Proceeds from debt | 347,635 |
| | 52,245 |
| | 531,180 |
|
| Repayments of debt | (400,151 | ) | | (286,065 | ) | | (605,620 | ) |
| Dividends paid | (12,811 | ) | | (25,554 | ) | | (51,011 | ) |
| Net cash used in financing activities | (70,540 | ) | | (259,712 | ) | | (124,386 | ) |
| Effect of exchange rate changes on cash | 926 |
| | (349 | ) | | (2,295 | ) |
| Net (decrease) increase in cash and cash equivalents | (22,428 | ) | | 35,033 |
| | 14,237 |
|
| Cash and cash equivalents at beginning of year | 95,396 |
| | 60,363 |
| | 46,126 |
|
| Cash and cash equivalents at end of year | $ | 72,968 |
| | $ | 95,396 |
| | $ | 60,363 |
|
| Supplemental cash flow information: | | | | | |
| Cash paid during the year for: | | | | | |
| Interest | $ | 41,339 |
| | $ | 44,469 |
| | $ | 49,386 |
|
| Income taxes (excludes $7,321, $84,884 and $116,337 of income taxes refunded in 2017, 2016 and 2015, respectively) | $ | 1,983 |
| | $ | 18,536 |
| | $ | 128,083 |
|
See accompanying notes to consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Nature of Operations and Summary of Accounting Policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation and Nature of Operations
TheseThe financial statements included herein 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 the “Company,” “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,Rent-A-Center Business, Acima, Mexico and Franchising.
Our Core U.S.Rent-A-Center Business segment consists of company-owned rent-to-ownlease-to-own stores in the United States Canada and Puerto Rico that lease household durable goods to customers on a rent-to-ownlease-to-own basis. Our store in Canada operates under the name "Rent-A-Centre." We also offer merchandise on an installment sales basis in certain of our stores under the names “Get It Now” and “Home Choice.” Our Rent-A-Center Business segment operates through our company-owned stores and e-commerce platform through rentacenter.com. At December 31, 2017,2021, we operated 2,3811,846 company-owned stores nationwide and in Canada and Puerto Rico, including 45 retail installment sales stores.
Our Acceptance NowAcima segment, which operates in the United States and Puerto Rico, and includes the operations of Merchants Preferred (as defined in Note B below) acquired in August 2019, generally offers the rent-to-ownlease-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks located within such retailers' locations. At December 31, 2017, we operated 1,106 Acceptance Now Staffedretailer’s locations, including staffed options and 125 Acceptance Now Direct locations.unstaffed or virtual options. Virtual locations employ a virtual solution where customers, either directly or with the assistance of a representative of the third-party retailer, initiate the lease-to-own transaction online in the retailers’ locations using our virtual solutions.
Our Mexico segment consists of our company-owned rent-to-ownlease-to-own stores in Mexico that lease household durable goods to customers on a rent-to-ownlease-to-own basis. At December 31, 2017,2021, we operated 131123 stores in Mexico.
Rent-A-Center Franchising International, Inc., an indirect wholly-owned subsidiary of Rent-A-Center, is a franchisor of rent-to-ownlease-to-own stores. At December 31, 2017,2021, Franchising had 225466 franchised stores operating in 3132 states. Our Franchising segment'ssegment’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-ownlease-to-own transaction. The balance of our Franchising segment'ssegment’s revenue is generated primarily from royalties based on franchisees'franchisees’ monthly gross revenues.
Rental Merchandise
Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation for merchandise in Rent-A-Center Business and staffed Acima locations is generally provided using the income forecasting method, which is intended to match as closely as practicable the recognition of depreciation expense with the consumption of the rental merchandise, and assumes no salvage value. The consumption of rental merchandise occurs during periods of rental and directly coincides with the receipt of rental revenue over the rental purchase agreement period. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. WeIn addition, we depreciate merchandise (including computers and tablets) that is held for rent for at least 180 consecutive days using the straight-line method over a period generally not to exceed 18 months. Beginning in 2016, smartphonesSmartphones are depreciated over an 18 month18-month straight-line basis beginning with the earlier of on rent or 90 consecutive days on held for rent. Depreciation of merchandise in our virtual business is recognized using a straight-line method over the term of the lease contract.
Rental merchandise whichthat is damaged and inoperable is expensed when such impairment occurs. If a customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Core U.S.Rent-A-Center Business and Mexico segments, and on or beforeduring the 150month following the 120th day in the Acceptance Now segment. We maintain a reserve for these expected expenses. In addition, any minorour Acima virtual business and 150th day in our Acima staffed locations. Minor repairs made to rental merchandise are expensed at the time of the repair. In addition, we maintain a reserve for these expected losses, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on a combination of historical write-offs and expected future losses. As of December 31, 2021 and 2020, the reserve for merchandise losses was $98.2 million and $58.1 million, respectively. Expenses related to merchandise losses, damaged merchandise, or merchandise repairs are recorded to other store expenses in our Consolidated Statement of Operations.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Equivalents
Cash equivalents include all highly liquid investments with an original maturity of three months or less. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.
Revenues
Merchandise is rented to customers pursuant to rental purchase agreements which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term and merchandise
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sales revenue is recognized when the customer exercises the purchase option and pays the cash price due. Cash received prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue is accrued for uncollected amounts due based on historical collection experience. However, the total amount of the rental purchase agreement is not accrued because the customer can terminate the rental agreement at any time and we cannot enforce collection for non-payment of future rents.
Revenues from the sale of merchandise in our retail installment stores are recognized when the installment note is signed, the customer has taken possession of the merchandise and collectability is reasonably assured.
RevenuesFranchise revenues from the sale of rental merchandise are recognized upon shipment of the merchandise to the franchisee. Franchise royalty income and fee revenue is recognized upon completion of substantially all services and satisfaction of all material conditions required under the terms of the franchise agreement. SomeInitial franchise fees charged to franchisees purchase directly fromfor new or converted franchise stores are recognized on a supplier but request reimbursement through ColorTyme Finance, Inc. and we recognize revenue forstraight-line basis over the commission we earn on these transactions.term of the franchise agreement.
Receivables and Allowance for Doubtful Accounts
The installment notes receivable associated with the sale of merchandise at our Get It Now and Home Choice stores generally consists of the sales price of the merchandise purchased and any additional fees for services the customer has chosen, less the customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis.
We have established an allowance for doubtful accounts for our installment notes receivable. Our policy for determining the allowance is based on historical loss experience, as well as the results of management’s review and analysis of the payment and collection of the installment notes receivable within the previous year. We believe our allowance is adequate to absorb any known or probable losses. Our policy is to charge off installment notes receivable that are 120 days or more past due. Charge-offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts.
Our trade and notes receivables consist primarily of amounts due from our rental customers for renewal and uncollected rental payments, Franchising receivables, and other corporate related receivables. The majority of Franchising’sour Franchising trade and notes receivablereceivables relate to amounts due from franchisees.franchisees for inventory purchases, earned royalties and other obligations. Credit is extended based on an evaluation of a franchisee’s financial condition and collateral is generally not required. Trade receivables are generally due within 30 days and are stated atreported as amounts due from franchisees, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. Franchising determines its allowance by considering a number of factors, including the length of time receivables are past due, Franchising’s previous loss history, the franchisee’s current ability to pay its obligation, to Franchising, and the condition of the general economy and the industry as a whole. Franchising writes off trade receivables that are 120 days90 or more days past due and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Property Assets and Related Depreciation
Furniture, equipment and vehicles are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets (generally 5 years) byon the straight-line method. Our building is depreciated over 40 years. Leasehold improvements are amortized over the useful life of the asset or the initial term of the applicable leases byon the straight-line method, whichever is shorter.
We have incurred costs to develop computer software for internal use. We capitalize the costs incurred during the application development stage, which includes designing the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary stages along with post-implementation stages of internally developed software are expensed as incurred. Internally developed software costs, once placed in service, are amortized over various periods up to 10 years.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We incur repair and maintenance expenses on our vehicles and equipment. These amounts are recognized when incurred, unless such repairs significantly extend the life of the asset, in which case we amortize the cost of the repairs for the remaining useful life of the asset utilizing the straight-line method.
Goodwill and Other Intangible Assets
We record goodwill when the consideration paid for an acquisition exceeds the fair value of the identifiable net tangible and identifiable intangible assets acquired. Goodwill is not subject to amortization but must be periodically evaluated for impairment.impairment for each reporting unit. Impairment occurs when the carrying value of goodwill is not recoverable from future cash flows. We perform an assessment of goodwill for impairment at the reporting unit level annually as of October 1, or when events or circumstances indicate that impairment may have occurred.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our reporting units are our reportable operating segments. Factors which could necessitate an interim impairment assessment include a sustained decline in our stock price, prolonged negative industry or economic trends and significant underperformance relative to expected historical or projected future operating results.
Based on our assessment, if the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, goodwill is deemed impaired and the impairment is measured as the difference between the carrying value and the fair value of the respective reporting unit. We determine the fair value of each reporting unit using methodologies which include the present value of estimated future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization. The analysis is based upon available information regarding expected future cash flows and discount rates. Discount rates are generally based upon our weighted average cost of capital. We use
As an alternative to performing a two-step approachquantitative assessment to assess goodwill impairment. Ifmeasure the fair value of the reporting unit, exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, we perform a second analysis to measure the fair value of all assets and liabilities within the reporting unit, and if the carrying value of goodwill exceeds its implied fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of goodwill and the implied fair value, which is calculated as if the reporting unit had been acquired and accounted for as a business combination. As an alternative to this annual impairment testing, weCompany may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying value of a reporting unit'sthe net assets exceedsof the reporting unit'sunit exceeds its fair value.
At December 31, 2021, the amount of goodwill attributable to the Rent-A-Center Business and Acima segments was approximately $1.5 million and $288.3 million, respectively. We currently do not have goodwill balances attributable to our Mexico or Franchising segments.
Acquired intangible assets are recorded at their estimated fair value as of the date of acquisition and generally include customer relationships, merchant relationships, non-compete agreements and trade names. Customer relationships are generally amortized utilizing the straight-line method over a 21 month21-month period, non-compete agreementsexcluding Relationships with Existing Lessees recently acquired from Acima Holdings which are being amortized using the straight-line methodover 12 months. Non-compete Agreements are amortized over the contractual life of the agreements, vendor relationshipsMerchant Relationships are amortized using the straight-line method over a 7 or 15to 10 year period, and Trade Names and other intangible assets are amortized usingover the straight-line method over theestimated life of the asset. Intangible assets are amortized using methods that we believe reflect the pattern in which the economic benefits of the related asset are consumed unless such pattern cannot be reliably determined, in which case we amortize using a straight-line amortization method.
Accounting for Impairment of Long-Lived Assets
We evaluate all long-lived assets, including intangible assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the related assets may not be recoverable.recoverable by the undiscounted net cash flows they will generate. Impairment is recognized when the carrying amounts of such assets cannot be recovered byexceed their fair value. We determine the undiscounted netfair value of our long-lived assets using methodologies which include the present value of estimated future cash flows they will generate.of the asset, or related fair market values for similar assets.
Self-Insurance Liabilities
We have self-insured retentions with respect to losses under our workers'workers’ compensation, general liability, vehicle liability and health insurance programs. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, company-specific development factors, general industry loss development factors, and third-party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we evaluate the adequacy of our reserves by comparing amounts reserved on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third-party claim administrator loss estimates, and make adjustments to our reserves as needed.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Currency Translation
The functional currency of our foreign operations is the applicable local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period. Revenues and expenses are generally translated at a daily exchange rate and equity transactions are translated using the actual rate on the day of the transaction.
Other Comprehensive (Loss) Income (Loss)
Other comprehensive (loss) income (loss) is comprised exclusively of our foreign currency translation adjustment.
Income Taxes
We record deferred taxes for temporary differences between the tax and financial reporting bases of assets and liabilities at the enacted tax rate expected to be in effect when taxes become payable.those temporary differences are expected to be recovered or settled. Income tax accounting requires management to make estimates and apply judgments to events that will be recognized in one period under rules that apply to financial reporting in a different period in our tax returns. In particular, judgment is required when estimating the value of future tax deductions, tax credits and net operating loss carryforwards (NOLs), as represented by deferred tax assets. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. When it is determined the recovery of all or a portion of a deferred tax asset is not likely, a valuation allowance is
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
established. We include NOLs in the calculation of deferred tax assets. NOLs are utilized to the extent allowable due to the provisions of the Internal Revenue Code of 1986, as amended, and relevant state statutes.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. We classify accrued interest and penalties related to unrecognized tax benefits as interest expense and general & administrative expense, respectively.
Sales Taxes
We apply the net basis for sales taxes imposed on our goods and services in our consolidated statementsConsolidated Statements of earnings.Operations. We are required by the applicable governmental authorities to collect and remit sales taxes. Accordingly, such amounts are charged to the customer, collected and remitted directly to the appropriate jurisdictional entity.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are based upon the weighted average number of common shares outstanding during each period presented. Diluted earnings (loss) per common share are based upon the weighted average number of common shares outstanding during the period, plus, if dilutive, the assumed exercise of stock options and vesting of stock awards at the beginning of the year, or for the period outstanding during the year for current year issuances.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $86.1$73.9 million, $90.6$50.9 million, and $96.2$58.8 million, for the years ended December 31, 2017, 20162021, 2020, and 2015,2019, respectively. Advertising expense is net of vendor allowances of $21.6 million, $24.8 million, and $21.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Stock-Based Compensation
We maintain long-term incentive plans for the benefit of certain employees and directors, which are described more fully in Note N.O. We recognize share-based payment awards to our employees and directors at the estimated fair value on the grant date. Determining the fair value of any share-based award requires information about several variables that include, but are not
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
limited to, expected stock volatility over the termsterm of the award, expected dividend yields, and the risk free interest rate. We base the expected lifeterm on historical exercise and post-vesting employment-termination experience, and expected volatility on historical realized volatility trends. In addition, all stock-based compensation expense is recorded net of an estimated forfeiture rate. The forfeiture rate is based upon historical activity and is analyzed at least annually as actual forfeitures occur. Compensation costs are recognized net of estimated forfeitures over the requisite service period on a straight-line basis. We issue new shares to settle stock awards. Stock options are valued using a Black-Scholes pricing model. Time-vesting restricted stock units are valued using the closing price on the Nasdaq Global Select Market on the day before the grant date, adjusted for any provisions affecting fair value, such as the lack of dividends or dividend equivalents during the vesting period. Performance-based restricted stock units will vest in accordance with a total shareholder return formula, and are valued by a third-party valuation firm using Monte Carlo simulations.
Stock-based compensation expense is reported within general and administrative expenses in the consolidated statements of earnings.
Reclassifications
Certain reclassifications have beenmay be made to the reported amounts for the prior periods to conform to the current period presentation. These reclassifications hadhave no impact on net earnings or earnings per share in any period.
Use of Estimates
In preparing financial statements in conformity with accounting principlesU.S. generally accepted in the United States of America,accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent losses and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. However, uncertainties, including future unknown impacts of the COVID-19 pandemic, may affect certain estimates and assumptions inherent in the financial reporting process, which may impact reported amounts of assets and liabilities in future periods and cause actual results to differ from those estimates.
Newly Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The standard removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 beginning January 1, 2021 using a prospective approach. Impacts to our financial statements for the twelve months ended December 31, 2021 resulting from the adoption of this ASU were immaterial.
Note B — Acquisitions and Divestitures
Acima Acquisition
On February 17, 2021, we completed the acquisition of Acima Holdings for total estimated consideration of $1.4 billion. Acima Holdings is a platform offering customers virtual lease-to-own solutions at the point-of-sale via web and mobile technology.
In accordance with the Merger Agreement, we issued to the former owners of Acima Holdings an aggregate of 10,779,923 shares of our common stock (the “Aggregate Stock Consideration”) and paid to them aggregate cash consideration of $1.3 billion (the “Aggregate Cash Consideration”). In accordance with the terms of the Merger Agreement, the portion of the Aggregate Stock Consideration issued to former owners of Acima Holdings who are also employees of Acima Holdings is subject to restricted stock agreements providing vesting conditions over a 36-month period beginning upon closing of the Merger. The portion of the Aggregate Stock Consideration issued to nonemployee former owners of Acima Holdings is subject to the terms of an 18-month lockup agreement, pursuant to which one-third of the aggregate shares of our common stock received by a non-employee former owner in the Merger becomes transferable after each six-month period following the closing of the Merger. We entered into a Registration Rights Agreement, dated as of February 17, 2021, pursuant to which certain former owners of Acima are entitled to registration rights in respect of the portion of the Aggregate Stock Consideration received by them in the Merger.
The aggregate purchase price was approximately $1.4 billion, including net cash consideration of approximately $1.3 billion, and 2,683,328 shares of the Aggregate Stock Consideration subject to 18-month lockup agreements valued at $51.14 per share, as of the date of closing, adjusted by a discount for lack of marketability to account for the transfer restrictions in three tranches, each in 6-month intervals after the closing date. The Aggregate Cash Consideration for the acquisition was financed with a combination of cash on hand, borrowings under our ABL Credit Facility and proceeds from issuances under our Term Loan
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Facility, as defined in Note K, in addition to proceeds from the issuance of new unsecured senior notes. See Note K and Note L for additional information.
experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Newly Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. Rent-A-Center adopted ASU 2016-09 beginning January 1, 2017. We adopted the recognition of excess tax benefits in the provision for income taxes rather than paid-in-capital, and the classification of excess tax benefits on the statement of cash flows on a prospective basis. We elected to continue to estimate forfeitures expected to occur in our determination of compensation cost recognized each period. Furthermore, we adopted the minimum statutory withholding requirements and classification of employee taxes paid on the statement of cash flows on a modified retrospective and full retrospective basis, respectively. Additional amendmentsThe remaining 8,096,595 common shares included in the accounting standard updateAggregate Stock Consideration subject to 36-month vesting conditions were not applicablevalued at $414.1 million, as of the date of closing. These shares have been excluded from the aggregate purchase price and instead are being recognized as stock-based compensation expense subject to us. Impacts resulting from adoptionASC Topic 718, “Stock-based Compensation”, over the required vesting period, and recorded to Other charges in our Consolidated Statements of Operations.
Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. The following table provides the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| (in thousands) | February 17, 2021 |
| Aggregate cash consideration | $ | 1,273,263 | |
| Aggregate stock consideration, subject to lockup agreements | 120,929 | |
| Total Purchase price | $ | 1,394,192 | |
| ASSETS ACQUIRED | |
Receivables, net(1) | $ | 25,255 | |
| Prepaid expenses and other assets | 700 | |
| Rental merchandise | |
| On rent | 340,575 | |
| Property assets | 171,455 | |
| Operating lease right-of-use assets | 9,136 | |
| Deferred income taxes | 28,559 | |
| Goodwill | 219,530 | |
| Other intangible assets | 520,000 | |
| Total assets acquired | $ | 1,315,210 | |
| LIABILITIES ASSUMED | |
| Accounts payable - trade | 16,023 | |
| Accrued liabilities | 11,716 | |
| Operating lease liabilities | 9,689 | |
| Deferred income taxes | (116,410) | |
| Total liabilities assumed | (78,982) | |
| Total equity value | $ | 1,394,192 | |
(1) Includes gross contractual receivables of $61.6 million related to merchandise lease contracts, of which $34.7 million were immaterialestimated to be uncollectible.
Carrying value for assets and liabilities assumed as part of the acquisition, including receivables, prepaid expenses and other assets, accounts payable and accrued liabilities were recorded as fair value, as of the date of acquisition, due to the consolidated financial statements.
Note B — Correctionshort term nature of Immaterial Errors
Duringthese balances. Operating lease right-of-use assets and liabilities were recorded as the fourth quarterdiscounted value of 2016, we identified errorsfuture obligations in accounting for our estimates for deferred taxes associated with our goodwill impairment reported in the fourth quarter 2015, resulting in an immaterial understatement of deferred income tax liabilities and overstatement of retained earnings, which affected periods beginning December 31, 2015 through September 30, 2016. In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality,ASC Topic 842, “Leases”. The fair value measurements for acquired intangible assets and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materialitydeveloped technology were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. Certain fair value estimates were determined based on an independent valuation of the errors from qualitative and quantitative perspectives, and concluded the errors were immaterial to the prior periods. The errors resulted in an overstatement of income tax benefit and an understatement of net loss of $86.9 million, respectively, for the year ended December 31, 2015; a corresponding understatement of deferred income tax liabilities and overstatement of retained earnings in our consolidated balance sheet at December 31, 2015; and non-cash impacts to net loss and deferred income taxes in our consolidated cash flow statement at December 31, 2015.
Due to the immaterial nature of the error correction, we revised our historical financial statements based on the amounts discussed above for 2015 herein, and revised the quarters within 2016 when they were published in 2017.
Note C — Receivables and Allowance for Doubtful Accounts
Receivables consist of the following:assets acquired,
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 |
| Installment sales receivable | $ | 55,516 |
| | $ | 55,834 |
|
| Trade and notes receivables | 18,474 |
| | 14,067 |
|
| Other receivables | — |
| | 3,477 |
|
| Total receivables | 73,990 |
| | 73,378 |
|
| Less allowance for doubtful accounts | (4,167 | ) | | (3,593 | ) |
| Total receivables, net of allowance for doubtful accounts | $ | 69,823 |
| | $ | 69,785 |
|
The allowance for doubtful accounts related to installment sales receivable was $3.6 million and $3.3 million, and the allowance for doubtful accounts related to trade and notes receivable was $0.6 million and $0.3 million at December 31, 2017 and 2016, respectively.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
including $340.6 million of rental merchandise and $520 million of identifiable intangible assets with an estimated weighted average useful life of 8 years, as follows:
Changes | | | | | | | | |
| Asset Class | Estimated Fair Value
(in thousands) | Estimated Remaining Useful Life (in years) |
| Merchant relationships | $ | 380,000 | | 10 |
| Relationship with existing lessees | 60,000 | | 1 |
| Trade name | 40,000 | | 7 |
| Non-compete agreements | 40,000 | | 3 |
| | |
Developed technology, included in Property assets, net, in line with our accounting policies, was also acquired with a value of $170.0 million and an estimated remaining useful life of 10 years. The fair value for these intangible and property assets were estimated using common industry valuation methods for similar asset types, based primarily on cost inputs and projected cash flows.
In addition, we recorded goodwill of $219.5 million in our allowance for doubtful accounts are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Beginning allowance for doubtful accounts | $ | 3,593 |
| | $ | 3,614 |
| | $ | 4,023 |
|
| Bad debt expense | 15,702 |
| | 15,449 |
| | 15,260 |
|
| Accounts written off | (15,791 | ) | | (16,095 | ) | | (16,317 | ) |
| Recoveries | 663 |
| | 625 |
| | 648 |
|
| Ending allowance for doubtful accounts | $ | 4,167 |
| | $ | 3,593 |
| | $ | 3,614 |
|
Note D — Rental Merchandise |
| | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 |
| On rent | | | |
| Cost | $ | 1,176,240 |
| | $ | 1,338,670 |
|
| Less accumulated depreciation | (474,437 | ) | | (543,552 | ) |
| Net book value, on rent | $ | 701,803 |
| | $ | 795,118 |
|
| Held for rent | | | |
| Cost | $ | 198,471 |
| | $ | 255,857 |
|
| Less accumulated depreciation | (31,283 | ) | | (49,021 | ) |
| Net book value, held for rent | $ | 167,188 |
| | $ | 206,836 |
|
Note E — Property Assets
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 |
| Furniture and equipment | $ | 511,527 |
| | $ | 522,036 |
|
| Transportation equipment | 10,585 |
| | 11,854 |
|
| Building and leasehold improvements | 269,522 |
| | 274,118 |
|
| Land and land improvements | 6,747 |
| | 6,747 |
|
| Construction in progress | 10,193 |
| | 23,774 |
|
| Total property assets | 808,574 |
| | 838,529 |
|
| Less accumulated depreciation | (525,673 | ) | | (522,101 | ) |
| Total property assets, net of accumulated depreciation | $ | 282,901 |
| | $ | 316,428 |
|
We had $7.3 millionAcima operating segment, which consists of the excess of the net purchase price over the fair value of the net assets acquired. Goodwill represents expected cost and $22.9 millionrevenue synergies and other benefits expected to result within our retail partner business from the acquisition of capitalized software costs included in construction in progress at December 31, 2017 and 2016 respectively. For the years ended December 31, 2017, 2016 and 2015, we placed in service internally developed software of approximately $32.1 million, $84.5 million and $22.9 million, respectively.
Note F — Intangible Assets and Acquisitions
Goodwill Impairment Charge
In the fourth quarter of 2017, we completed a qualitative assessment for impairmentAcima Holdings. The total value of goodwill for tax purposes differs from recorded goodwill as a result of October 1, 2017, concluding itthe Aggregate Stock Consideration subject to restricted stock agreements, differences in value assigned to other purchased assets, and acquisition-related expenses. Tax goodwill will be amortized over 15 years.
Acima Holdings results of operations are reflected in our Consolidated Statements of Operations from the date of acquisition.
Subsequent to the date of acquisition, we recorded certain adjustments to the purchase price allocation within the measurement period, including an adjustment to the fair value of rental merchandise decreasing the value of the acquired assets by approximately $17.1 million. The adjustment to the fair value of rental merchandise was not more likely than not thatbased on further assessment of the carrying value of the assets and corresponding evaluation of related (Level 2) market inputs. In connection with the adjustment to decrease the value of acquired rental merchandise we recorded corresponding adjustments to decrease rental merchandise depreciation by approximately $14.3 million, representing the period from the date of acquisition through December 31, 2021. The adjustment to rental merchandise depreciation is reflected in cost of rentals and fees in our reporting unit's net assets exceededConsolidated Statement of Operations. Total cumulative measurement period adjustments resulted in a decrease to goodwill of approximately $(22.2) million. The purchase price allocation for the reporting unit's fair value and therefore no impairment of goodwill existedAcima Holdings acquisition was complete as of December 31. 2017.31, 2021.
During 2016In connection with this acquisition, we incurred approximately $23.7 million in acquisition-related expenses including expenses related to legal, professional, and 2015, we recordedbanking transaction fees, which are treated as an addition to goodwill impairmentfor tax purposes. These costs were included in Other charges (gains) in our Consolidated Statements of $151.3Operations.
The following unaudited pro forma combined results of operations present our financial results as if the acquisition of Acima had been completed on January 1, 2020. These unaudited pro forma results may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma information reflects the step-up depreciation and amortization adjustments for the fair value of the assets acquired, adjustments to stock compensation expense as a result of Aggregate Stock Consideration subject to restricted stock awards, the adjustments in interest expense due to the elimination of historical debt and placement of the new debt, and the related adjustments to the income tax provision. In addition, the pro forma net income has been adjusted to include transaction expenses and other non-recurring costs as of January 1, 2020. The unaudited pro forma financial information is as follows:
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | | | | 2021 | | 2020 |
| | | | | (unaudited) | | (unaudited) |
| Pro Forma total revenues | | | | | $ | 4,778,055 | | | $ | 4,071,990 | |
Pro Forma net earnings(1) | | | | | 178,103 | | | 66,352 | |
(1)Total pro forma adjustments to net earnings represented an increase of $16.0 million and $1,170.0a decrease of $356.8 million respectively, in our Core U.S. segment.
for the twelve months ended December 31, 2021 and 2020, respectively.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amounts of revenue and earnings of Acima Holdings included in our Consolidated Statements of Operations as of December 31, 2021 and 2020 from the acquisition date of February 17th for each year presented are as follows: | | | | | | | | |
| (in thousands) | February 17, 2021 - December 31, 2021 | February 17, 2020 - December 31, 2020 |
| audited | (unaudited) |
| Total revenues | $ | 1,495,746 | | $ | 1,116,430 | |
Net earnings(1) | 119,183 | | 196,088 | |
(1)Net Earnings for the period February 17, 2021 - December 31, 2021 includes amortization of intangible assets acquired upon closing of the Acima Holdings acquisition.
Merchants Preferred Acquisition
On August 13, 2019, we completed the acquisition of substantially all of the assets of Merchants Preferred, a nationwide provider of virtual lease-to-own services (“Merchant's Preferred”). The aggregate purchase price was approximately $46.4 million, including net cash consideration of approximately $28.0 million, and 701,918 shares of our common stock valued at $27.31 per share, as of the date of closing, less working capital adjustments of approximately $0.9 million. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. The following table provides the final estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| (in thousands) | August 13, 2019 |
| Receivables | $ | 1,813 | |
| Prepaid expenses and other assets | 154 | |
| Rental merchandise | 17,904 | |
| Software | 4,300 | |
| Right of use operating leases | 404 | |
| Other intangible assets | 8,900 | |
| Goodwill | 13,403 | |
| Lease liabilities | (487) | |
| Net identifiable assets acquired | $ | 46,391 | |
The fair value measurements were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. Certain fair value estimates were determined based on an independent valuation of the net assets acquired, including identifiable intangible assets, relating to dealer relationships, of $8.9 million, and software of $4.3 million. The fair value for dealer relationships and software were estimated using common industry valuation methods for similar asset types, based primarily on cost inputs and projected cash flows. The dealer relationships and software assets were both assigned remaining lives of 10 years.
In addition, we recorded goodwill of $13.4 million, which consists of the excess of the net purchase price over the fair value of the net assets acquired. The goodwill was not deductible for tax purposes.
Merchants Preferred's results of operations are reflected in our Consolidated Statements of Operations from the date of acquisition.
In connection with this acquisition, we recorded approximately $1.4 million in acquisition-related expenses during the twelve months ended December 31, 2019 including expenses related to legal, professional, and banking transaction fees. These costs were included in other charges and (gains) in our consolidated statement of operations.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Acquisitions
The following table provides information concerning other store acquisitions completed during the years ended December 31, 2021, 2020 and 2019. | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| (Dollar amounts in thousands) | 2021 | | 2020 | | 2019 | |
| Number of stores acquired remaining open | 1 | | | — | | | — | | |
| Number of stores acquired that were merged with existing stores | — | | | 2 | | | 4 | | |
| Number of transactions | 1 | | | 2 | | | 4 | | |
| Total purchase price | $ | 278 | | | $ | 700 | | | $ | 504 | | |
| Amounts allocated to: | | | | | | |
| Goodwill | $ | — | | | $ | — | | | $ | 66 | | |
| | | | | | |
| Customer relationships | 30 | | | 177 | | | 85 | | |
| Rental merchandise | 248 | | | 523 | | | 353 | | |
| | | | | | |
Operating results of the acquired stores and accounts have been included in the financial statements since their date of acquisition.
California Refranchise Sale
On October 5, 2020, we sold all 99 Rent-A-Center Business corporate stores in the state of California to an experienced franchisee. We received cash consideration of approximately $16.0 million, including approximately $1.0 million in respect of related franchise fees. The sale included idle and on-rent inventory of approximately $30.0 million and property assets of approximately $0.8 million, resulting in a total loss on sale of approximately $16.6 million. The loss on sale was recorded to Other charges in our Consolidated Statement of Operations.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note C — Revenues
The following tables disaggregates our revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2021 |
| | Rent-A-Center Business | | Acima | | Mexico | | Franchising | | Consolidated |
| (In thousands) | |
| Store | | | | | | | | | |
| Rentals and fees | $ | 1,762,847 | | | $ | 1,701,532 | | | $ | 58,074 | | | $ | — | | | $ | 3,522,453 | |
| Merchandise sales | 199,781 | | | 626,166 | | | 3,275 | | | — | | | 829,222 | |
| Installment sales | 73,585 | | | — | | | — | | | — | | | 73,585 | |
| Other | 1,636 | | | 391 | | | 54 | | | 2,067 | | | 4,148 | |
| Total store revenues | 2,037,849 | | | 2,328,089 | | | 61,403 | | | 2,067 | | | 4,429,408 | |
| Franchise | | | | | | | | | |
| Merchandise sales | — | | | — | | | — | | | 126,856 | | | 126,856 | |
| Royalty income and fees | — | | | — | | | — | | | 27,187 | | | 27,187 | |
| Total revenues | $ | 2,037,849 | | | $ | 2,328,089 | | | $ | 61,403 | | | $ | 156,110 | | | $ | 4,583,451 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2020 |
| | Rent-A-Center Business | | Acima | | Mexico | | Franchising | | Consolidated |
| (In thousands) | |
| Store | | | | | | | | | |
| Rentals and fees | $ | 1,604,615 | | | $ | 610,908 | | | $ | 47,568 | | | $ | — | | | $ | 2,263,091 | |
| Merchandise sales | 177,223 | | | 198,517 | | | 2,977 | | | — | | | 378,717 | |
| Installment sales | 68,500 | | | — | | | — | | | — | | | 68,500 | |
| Other | 2,303 | | | 726 | | | 38 | | | 778 | | | 3,845 | |
| Total store revenues | 1,852,641 | | | 810,151 | | | 50,583 | | | 778 | | | 2,714,153 | |
| Franchise | | | | | | | | | |
| Merchandise sales | — | | | — | | | — | | | 80,023 | | | 80,023 | |
| Royalty income and fees | — | | | — | | | — | | | 20,015 | | | 20,015 | |
| Total revenues | $ | 1,852,641 | | | $ | 810,151 | | | $ | 50,583 | | | $ | 100,816 | | | $ | 2,814,191 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2019 |
| | Rent-A-Center Business | | Acima | | Mexico | | Franchising | | Consolidated |
| (In thousands) | |
| Store | | | | | | | | | |
| Rentals and fees | $ | 1,585,997 | | | $ | 587,502 | | | $ | 50,903 | | | $ | — | | | $ | 2,224,402 | |
| Merchandise sales | 140,372 | | | 161,235 | | | 3,023 | | | — | | | 304,630 | |
| Installment sales | 70,434 | | | — | | | — | | | — | | | 70,434 | |
| Other | 3,683 | | | 523 | | | 34 | | | 555 | | | 4,795 | |
| Total store revenues | 1,800,486 | | | 749,260 | | | 53,960 | | | 555 | | | 2,604,261 | |
| Franchise | | | | | | | | | |
| Merchandise sales | — | | | — | | | — | | | 49,135 | | | 49,135 | |
| Royalty income and fees | — | | | — | | | — | | | 16,456 | | | 16,456 | |
| Total revenues | $ | 1,800,486 | | | $ | 749,260 | | | $ | 53,960 | | | $ | 66,146 | | | $ | 2,669,852 | |
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Lease Purchase Agreements
Rent-A-Center Business, Acima, and Mexico
Rentals and Fees. Rental 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 may renew the rental agreement 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 rental agreement at the end of any rental term without penalty. Therefore, rental transactions are accounted for as operating leases.
Rental payments received at our Rent-A-Center Business, Acima (excluding virtual) and Mexico locations must be prepaid in advance of the next rental term. Under the virtual business model, revenues may be earned prior to the rental payment due date, in which case revenue is accrued prior to receipt of the rental payment, net of estimated returns and uncollectible renewal payments. Under both models, rental revenue is recognized over the rental term. See Note D for additional information regarding accrued rental revenue.
Cash received for rental payments, including fees, prior to the period in which it should be recognized, is deferred and recognized according to the rental term. At December 31, 2021 and 2020, we had $51.7 million and $45.8 million, respectively, in deferred revenue included in accrued liabilities related to our rental purchase agreements. Revenue related to various payment, reinstatement or late fees is recognized when paid by the customer at the point service is provided. Rental merchandise in our Rent-A-Center Business, former Preferred Lease, and Mexico locations is depreciated using the income forecasting method and recognized in cost of sales over the rental term. Rental merchandise in Acima Holdings is depreciated over the rental term using a straight-line depreciation method.
We also 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, and payment insurance in the event eligible customers become unemployed. 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.
Revenue from contracts with customers
Rent-A-Center Business, Acima, 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 period and receive a refund for payments previously made towards the plan. At December 31, 2021 and 2020, we had $2.6 million and $3.1 million, respectively, in deferred revenue included in accrued liabilities related to extended service plans.
Other. Other revenue consists of revenue generated by other miscellaneous product plans offered to our rental and installment customers. 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 accrued and recognized as rental payments and merchandise sales occur. Franchise fees are initial fees charged to franchisees for new or converted
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
franchise stores. Franchise fee revenue is recognized on a straight-line basis over the term of the franchise agreement. At December 31, 2021 and 2020, we had $4.1 million and $4.7 million, respectively, in deferred revenue included in accrued liabilities related to franchise fees.
Note D — Receivables and Allowance for Doubtful Accounts
Installment sales receivables consist primarily of receivables due from customers for the sale of merchandise in our retail installment stores. Installment sales receivable associated with the sale of merchandise at our Get It Now and Home Choice stores generally consist of the sales price of the merchandise purchased and any additional fees for services the customer has chosen, less the customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis. Interest paid on installment agreements for the twelve months ended December 31, 2021, 2020 and 2019 was $12.2 million, $11.5 million, and $10.8 million, respectively.
Trade and notes receivables consist of amounts due from our rental customers for renewal and uncollected rental payments; amounts owed from our franchisees for inventory purchases, earned royalties and other obligations; and other corporate related receivables. Credit is extended to franchisees based on an evaluation of each franchisee’s financial condition and collateral is generally not required. Trade receivables are generally due within 30 days.
Receivables consist of the following: | | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2021 | | 2020 |
| Installment sales receivable | $ | 66,276 | | | $ | 61,794 | |
| Trade and notes receivables | 68,581 | | | 36,256 | |
| | | |
| Total receivables | 134,857 | | | 98,050 | |
| Less allowance for doubtful accounts | (8,479) | | | (8,047) | |
| Total receivables, net of allowance for doubtful accounts | $ | 126,378 | | | $ | 90,003 | |
We have established an allowance for doubtful accounts for our installment notes receivable. Our policy for determining the allowance is primarily based on historical loss experience, as well as the results of management’s review and analysis of the payment and collection of the installment notes receivable within the previous year. We believe our allowance is adequate to absorb all expected losses. Our policy is to charge off installment notes receivable that are 120 days or more past due. Charge-offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts.
The allowance for our Franchising trade and notes receivables is determined by considering a number of factors, including the length of time receivables are past due, previous loss history, the franchisee’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Trade receivables that are more than 90 days past due are either written-off or fully reserved in our allowance for doubtful accounts. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
The allowance for doubtful accounts related to trade and notes receivable was $0.9 million and $1.0 million, and the allowance for doubtful accounts related to installment sales receivable was $7.6 million and $7.0 million at December 31, 2021 and 2020, respectively.
Changes in our allowance for doubtful accounts are as follows: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Beginning allowance for doubtful accounts | $ | 8,047 | | | $ | 5,601 | | | $ | 4,883 | |
Estimated uncollectible payments and returns(1) | 14,397 | | | 14,636 | | | 15,077 | |
| Accounts written off, net of recoveries | (13,965) | | | (12,190) | | | (14,359) | |
| Ending allowance for doubtful accounts | $ | 8,479 | | | $ | 8,047 | | | $ | 5,601 | |
(1) Uncollectible installment payments, franchisee obligations, and other corporate receivables are recognized in other store operating expenses in our consolidated financial statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note E — Rental Merchandise | | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2021 | | 2020 |
| On rent | | | |
| Cost | $ | 1,894,247 | | | $ | 1,169,333 | |
| Less accumulated depreciation | (721,223) | | | (406,447) | |
| Net book value, on rent | $ | 1,173,024 | | | $ | 762,886 | |
| Held for rent | | | |
| Cost | $ | 155,832 | | | $ | 165,879 | |
| Less accumulated depreciation | (22,848) | | | (19,613) | |
| Net book value, held for rent | $ | 132,984 | | | $ | 146,266 | |
Note F — Property Assets | | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2021 | | 2020 |
| Software | $ | 468,011 | | | $ | 279,141 | |
| Building and leasehold improvements | 199,280 | | | 196,179 | |
| Furniture and equipment | 172,418 | | | 163,623 | |
| Transportation equipment | 549 | | | 503 | |
| Construction in progress | 25,293 | | | 7,269 | |
| Total property assets | 865,551 | | | 646,715 | |
| Less accumulated depreciation | (557,453) | | | (505,074) | |
| Total property assets, net of accumulated depreciation | $ | 308,098 | | | $ | 141,641 | |
We had $21.6 million and $4.8 million of capitalized software costs included in construction in progress at December 31, 2021 and 2020, respectively. For the years ended December 31, 2021, 2020, and 2019, we placed in service internally developed software of approximately $12.3 million, $9.5 million, and $6.0 million, respectively, and acquired software assets with an estimated fair value of $170.0 million for the year ended December 31, 2021.
Note G — Leases
We lease space for all of our Rent-A-Center Business and Mexico stores under operating leases expiring at various times through 2029. In addition, we lease space for certain support facilities under operating leases expiring at various times through 2032. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed upon formulas. We evaluate all leases to determine if it is likely that we will exercise future renewal options and in most cases we are not reasonably certain of exercise due to competing market rental rates and lack of significant penalty or business disruption incurred by not exercising the renewal options. In certain situations involving the sale of a Rent-A-Center Business corporate store to a franchisee, we enter into a lease assignment agreement with the buyer, but we remain the primary obligor under the original lease for the remaining active term. These assignments are therefore classified as subleases and the original lease is included in our operating lease right-of-use assets and operating lease liabilities in our Consolidated Balance Sheets.
We lease vehicles for all of our Rent-A-Center Business stores under operating leases with lease terms expiring twelve months after the start date of the lease. We classify these leases as short-term and have elected the short-term lease exemption for our vehicle leases, and have therefore excluded them from our operating lease right-of-use assets within our Consolidated Balance Sheets. We also lease vehicles for all of our Mexico stores which have terms expiring at various times through 2025 with rental rates adjusted periodically for inflation. Finally, we have a minimal number of equipment leases, primarily related to temporary storage containers and certain back office technology hardware assets.
For all of the leases described above, we have elected not to separate the lease and non-lease components and instead account for these as a single component. In addition, we have elected to use available practical expedients that eliminate the requirement
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to reassess whether expired or existing contracts contained leases, and the requirement to reassess the lease classification for any existing leases prior to our adoption of ASU 2016-02 on January 1, 2019.
Operating lease right-of-use assets and operating lease liabilities are discounted using our incremental borrowing rate, since the implicit rate is not readily determinable. We do not currently have any financing leases.
Operating lease costs are recorded on a straight-line basis within other store expenses in our Consolidated Statements of Operations.
Total operating lease costs by expense type: | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended |
| (in thousands) | | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
Operating lease cost included in other store expenses(1)(2) | | | $ | 129,217 | | | $ | 140,186 | | | $ | 148,314 | |
Operating lease cost included in other charges(2) | | | 302 | | | 1,236 | | | 9,222 | |
| Sublease receipts | | | (11,806) | | | (9,727) | | | (7,683) | |
| Total operating lease charges | | | $ | 117,713 | | | $ | 131,695 | | | $ | 149,853 | |
(1) Includes short-term lease costs, which are not significant.
(2) Excludes variable lease costs of $33.7 million and $34.6 million for the twelve months ended December 31, 2021 and 2020, respectively.
Supplemental cash flow information related to leases: | | | | | | | | | | | | | | | | | |
| Twelve Months Ended |
| (in thousands) | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Cash paid for amounts included in measurement of operating lease liabilities | $ | 107,588 | | | $ | 113,243 | | | $ | 120,826 | |
| Cash paid for short-term operating leases not included in operating lease liabilities | 17,266 | | | 22,339 | | | 27,402 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 100,779 | | | 104,771 | | | 78,250 | |
Weighted-average discount rate and weighted-average remaining lease term: | | | | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
Weighted-average discount rate(1) | 6.0 | % | | 6.8 | % | | 7.7 | % |
| Weighted-average remaining lease term (in years) | 4 | | 4 | | 4 |
(1) January 1, 2019 incremental borrowing rate was used for leases in existence at the time of adoption of ASU 2016-02.
Reconciliation of undiscounted operating lease liabilities to the present value operating lease liabilities at December 31, 2021: | | | | | |
| (In thousands) | Operating Leases |
| 2022 | $ | 106,505 | |
| 2023 | 83,248 | |
| 2024 | 64,693 | |
| 2025 | 47,248 | |
| 2026 | 23,077 | |
| Thereafter | 17,266 | |
| Total undiscounted operating lease liabilities | 342,037 | |
| Less: Interest | (45,502) | |
| Total present value of operating lease liabilities | $ | 296,535 | |
In response to the COVID-19 pandemic and related government restrictions negatively impacting our operations, we renegotiated certain store lease agreements in the second quarter of 2020 to obtain rent relief in the near term, in order to help offset the negative financial impacts of COVID-19. Renegotiations included approximately 500 lease agreements, receiving near term rent abatements of approximately $2.3 million and rent deferrals of approximately $2.1 million. As of December 31, 2021, the vast majority of COVID rent deferrals have been repaid.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note H — Goodwill and Other Intangible Assets
Goodwill
In the fourth quarter of 2021, we completed a qualitative assessment for impairment of goodwill as of October 1, 2021, concluding it was not more likely than not that the carrying value of the net assets of our reporting units exceeded their respective fair values and therefore no impairment of goodwill existed as of December 31, 2021.
At December 31, 2021 and 2020, the amount of goodwill attributable to the Rent-A-Center Business segment was approximately $1.5 million. At December 31, 2021 and 2020, the amount of goodwill attributable to the Acima segment was $288.3 million and $68.7 million, respectively.
A summary of the changes in recorded goodwill follows: | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 |
| Beginning goodwill balance | $ | 70,217 | | | $ | 70,217 | |
| Additions from acquisitions | 241,774 | | | — | |
| | | |
| Post purchase price allocation adjustments | (22,241) | | | — | |
| Ending goodwill balance | $ | 289,750 | | | $ | 70,217 | |
Other Intangible Assets
Amortizable intangible assets consist of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 |
(Dollar amounts in thousands) | Avg. Life (years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization |
Customer relationships(1) | 2 | | $ | 140,039 | | | $ | 132,127 | | | $ | 80,008 | | | $ | 79,853 | |
| Merchant relationships | 10 | | 389,760 | | | 35,960 | | | 9,760 | | | 2,046 | |
| Trade Name | 7 | | 40,000 | | | 4,966 | | | — | | | — | |
| Non-compete agreements | 3 | | 46,719 | | | 18,307 | | | 6,719 | | | 6,719 | |
| Total other intangible assets | | | $ | 616,518 | | | $ | 191,360 | | | $ | 96,487 | | | $ | 88,618 | |
(1)Includes acquired Relationships with Existing Lessees from Acima Holdings with a remaining useful life of 1 year from the date of acquisition, February 17, 2021. |
| | | | | | | | | | | | | | | | | |
| | | | December 31, 2017 | | December 31, 2016 |
(Dollar amounts in thousands) | Avg. Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Customer relationships | 2 | | $ | 79,670 |
| | $ | 79,274 |
| | $ | 79,106 |
| | $ | 78,707 |
|
| Vendor relationships | 11 | | 860 |
| | 860 |
| | 7,538 |
| | 3,408 |
|
| Non-compete agreements | 3 | | 6,748 |
| | 6,262 |
| | 6,746 |
| | 6,023 |
|
| Total other intangible assets | | | $ | 87,278 |
| | $ | 86,396 |
| | $ | 93,390 |
| | $ | 88,138 |
|
Aggregate amortization expense (in thousands): | | | | | |
| Year Ended December 31, 2021 | $ | 102,742 | |
| Year Ended December 31, 2020 | $ | 1,070 | |
| Year Ended December 31, 2019 | $ | 723 | |
|
| | | |
Year Ended December 31, 2017 (1) | $ | 4,908 |
|
| Year Ended December 31, 2016 | $ | 2,176 |
|
| Year Ended December 31, 2015 | $ | 3,333 |
|
(1) Includes impairment charge of $3.9 million to our intangible assets, related to a vendor relationship, in the ANOW segment during the first quarter of 2017.
Estimated amortization expense, assuming current intangible balances and no new acquisitions, for each of the years ending December 31, is as follows: | | | | | |
| (In thousands) | Estimated
Amortization Expense |
| 2022 | $ | 65,850 | |
| 2023 | 57,938 | |
| 2024 | 46,350 | |
| 2025 | 44,604 | |
| 2026 | 44,604 | |
| Thereafter | 165,812 | |
| Total amortization expense | $ | 425,158 | |
|
| | | |
| (In thousands) | Estimated Amortization Expense |
| 2018 | $ | 552 |
|
| 2019 | 310 |
|
| 2020 | 20 |
|
| Thereafter | — |
|
| Total amortization expense | $ | 882 |
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
At December 31, 2017,NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note I — Accrued Liabilities | | | | | | | | | | | |
| December 31, |
| (In thousands) | 2021 | | 2020 |
| Accrued insurance costs | $ | 89,621 | | | $ | 94,744 | |
| Deferred revenue | 71,376 | | | 61,066 | |
| Taxes other than income | 49,708 | | | 48,038 | |
| Accrued compensation | 46,750 | | | 48,027 | |
| | | |
| Accrued dividends | 27,801 | | | 17,003 | |
| Accrued legal settlement | 22,500 | | | 5,440 | |
| Accrued interest payable | 11,993 | | | 1,041 | |
| Deferred compensation | 10,349 | | | 9,437 | |
| | | |
| Accrued other | 32,610 | | | 35,787 | |
| Total Accrued liabilities | $ | 362,708 | | | $ | 320,583 | |
Note J — Income Taxes
For financial statement purposes, earnings before income taxes by source was comprised of the amountfollowing: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Domestic | $ | 176,042 | | | $ | 212,859 | | | $ | 212,406 | |
| Foreign | 18,262 | | | 9,920 | | | 11,377 | |
| Earnings before income taxes | $ | 194,304 | | | $ | 222,779 | | | $ | 223,783 | |
A reconciliation of goodwill attributablethe federal statutory rate of 21% to the Core U.S. and Acceptance Now segments was approximately $1.3 million and $55.3 million, respectively. At December 31, 2016, the amount of goodwill allocated to the Acceptance Now segment was approximately $55.3 million and there was no goodwill allocated to the Core U.S. segment.
A summary of the changes in recorded goodwilleffective rate follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Tax at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| | | | | |
| Stock compensation | 11.6 | % | | — | % | | — | % |
| State income taxes | 7.4 | % | | 2.8 | % | | 4.3 | % |
| Effect of foreign operations | 2.0 | % | | (0.3) | % | | 0.3 | % |
| Effect of current and prior year credits | (2.4) | % | | (0.8) | % | | (2.7) | % |
| Change in unrecognized tax benefits | (2.8) | % | | 0.3 | % | | — | % |
| Other permanent differences | 0.3 | % | | (0.7) | % | | 0.2 | % |
| Prior year return to provision adjustments | (0.2) | % | | 1.1 | % | | (2.7) | % |
| | | | | |
| Benefit of CARES Act | — | % | | (7.5) | % | | — | % |
| Valuation allowance | (7.1) | % | | (9.3) | % | | 1.2 | % |
| Other, net | 0.8 | % | | — | % | | 0.8 | % |
| Effective income tax rate | 30.6 | % | | 6.6 | % | | 22.4 | % |
|
| | | | | | | |
| | Year Ended December 31, |
(In thousands) | 2017 | | 2016 |
| Beginning goodwill balance | $ | 55,308 |
| | $ | 206,122 |
|
| Additions from acquisitions | 1,217 |
| | 1,442 |
|
| Goodwill impairments and write-offs related to stores sold or closed | — |
| | (152,239 | ) |
| Post purchase price allocation adjustments | 89 |
| | (17 | ) |
| Ending goodwill balance | $ | 56,614 |
| | $ | 55,308 |
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Acquisitions
The following table provides information concerning the acquisitions made during the years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollar amounts in thousands) | 2017 | | 2016 | | 2015 |
| Number of stores acquired remaining open | — |
| | — |
| | 5 |
|
| Number of stores acquired that were merged with existing stores | 8 |
| | 3 |
| | 34 |
|
| Number of transactions | 4 |
| | 3 |
| | 24 |
|
| Total purchase price | $ | 2,547 |
| | $ | 2,302 |
| | $ | 25,488 |
|
| Amounts allocated to: | | | | | |
| Goodwill | $ | 1,217 |
| | $ | 1,442 |
| | $ | 12,942 |
|
| Non-compete agreements | — |
| | — |
| | 1,166 |
|
| Customer relationships | 550 |
| | 181 |
| | 2,625 |
|
| Rental merchandise | 780 |
| | 679 |
| | 8,755 |
|
Purchase prices are determined by evaluating the average monthly rental incomecomponents of the acquired stores and applying a multiple to the total for rent-to-own store acquisitions. All acquisitions have been accounted for as asset purchases, and the operating results of the acquired stores and accounts have been included in the financial statements since their date of acquisition.
The weighted average amortization period was approximately 21 months for intangible assets added during the year ended December 31, 2017. Additions to goodwill due to acquisitions in 2017 were tax deductible.
Note G — Accrued Liabilities
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 |
| Accrued insurance costs | $ | 124,760 |
| | $ | 125,172 |
|
| Deferred revenue | 51,742 |
| | 58,255 |
|
| Accrued compensation | 37,783 |
| | 40,551 |
|
| Taxes other than income | 27,415 |
| | 22,556 |
|
| Deferred compensation | 11,323 |
| | 11,394 |
|
| Accrued interest payable | 5,707 |
| | 5,808 |
|
| Deferred rent | 3,937 |
| | 5,199 |
|
| Accrued dividends | — |
| | 4,262 |
|
| Accrued other | 35,351 |
| | 58,999 |
|
| Total Accrued liabilities | $ | 298,018 |
| | $ | 332,196 |
|
Note H — Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax
law by lowering the U.S. federal corporate incomeexpense (benefit) are as follows: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Current expense (benefit) | | | | | |
| Federal | $ | (7,398) | | | $ | 14,354 | | | $ | (6,996) | |
| State | 15,106 | | | 4,735 | | | 528 | |
| Foreign | 3,690 | | | 1,608 | | | 796 | |
| Total current | 11,398 | | | 20,697 | | | (5,672) | |
| Deferred expense (benefit) | | | | | |
| Federal | 56,716 | | | 12,576 | | | 37,309 | |
| State | (1,205) | | | (2,956) | | | 16,439 | |
| Foreign | (7,545) | | | (15,653) | | | 2,161 | |
| Total deferred | 47,966 | | | (6,033) | | | 55,909 | |
| Total income tax expense (benefit) | $ | 59,364 | | | $ | 14,664 | | | $ | 50,237 | |
Deferred tax rate from 35.0% to 21.0%, implementing a territorial tax system, imposing one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other things.
Loss before income taxes was comprisedassets (liabilities) consist of the following:
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2021 | | 2020 |
| Deferred tax assets | | | |
| | | |
| Net operating loss carryforwards | $ | 35,834 | | | $ | 32,834 | |
| | | |
| Accrued liabilities | 48,659 | | | 45,776 | |
| Intangible assets | 165,135 | | | 9,676 | |
| | | |
| Lease obligations | 73,819 | | | 67,999 | |
| Other assets including credits | 12,157 | | | 10,079 | |
| Foreign tax credit carryforwards | 7,696 | | | 5,643 | |
| Total deferred tax assets | 343,300 | | | 172,007 | |
| Valuation allowance | (7,688) | | | (21,645) | |
| Deferred tax assets, net | 335,612 | | | 150,362 | |
| Deferred tax liabilities | | | |
| Rental merchandise | (288,504) | | | (206,833) | |
| Property assets | (20,094) | | | (18,935) | |
| Lease assets | (72,458) | | | (66,661) | |
| Other liabilities | (108) | | | (561) | |
| Total deferred tax liabilities | (381,164) | | | (292,990) | |
| Net deferred taxes | $ | (45,552) | | | $ | (142,628) | |
At December 31, 2021, we had net operating loss carryforwards of approximately $239 million for state, $37 million for federal and $52 million for foreign jurisdictions. State net operating losses were partially offset by a valuation allowance. We also had federal, state and foreign tax credit carryforwards of approximately $15.6 million of which a portion has been offset by a valuation allowance. The net operating losses and credits will expire in various years between 2022 and 2041.
We file income tax returns in the U.S. and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, we are subject to examination by various taxing authorities. We are currently under examination by certain Federal and state revenue authorities for the fiscal years 2012 through 2019. The following is a summary of all tax years that are open to examination.
��U.S. Federal - 2013 and forward
•U.S. States - 2011 and forward
•Foreign - 2013 and forward
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Domestic | $ | (109,615 | ) | | $ | (110,347 | ) | | $ | (1,041,243 | ) |
| Foreign | (585 | ) | | (2,927 | ) | | (15,337 | ) |
| Loss before income taxes | $ | (110,200 | ) | | $ | (113,274 | ) | | $ | (1,056,580 | ) |
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the federal statutory rate of 35% to actual follows:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Tax at statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Tax Cuts and Jobs Act of 2017 | 70.3 | % | | — | % | | — | % |
| Goodwill impairment | — | % | | (29.3 | )% | | (27.0 | )% |
| State income taxes | (1.8 | )% | | 3.3 | % | | 2.8 | % |
| Effect of foreign operations, net of foreign tax credits | 3.5 | % | | (0.2 | )% | | — | % |
| Effect of current and prior year credits | 1.7 | % | | 2.9 | % | | 0.5 | % |
| Adjustments to deferred taxes | 1.6 | % | | 0.6 | % | | — | % |
| Valuation allowance | (1.6 | )% | | (6.6 | )% | | (1.0 | )% |
| Other, net | (2.7 | )% | | 1.4 | % | | (0.5 | )% |
| Effective income tax rate | 106.0 | % | | 7.1 | % | | 9.8 | % |
The components of income tax (benefit) expense are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Current (benefit) expense | | | | | |
| Federal | $ | (34,445 | ) | | $ | 23,752 |
| | $ | 29,668 |
|
| State | 1,216 |
| | 779 |
| | (6,432 | ) |
| Foreign | (1,417 | ) | | (582 | ) | | 2,575 |
|
| Total current | (34,646 | ) | | 23,949 |
| | 25,811 |
|
| Deferred (benefit) expense | | | | | |
| Federal | (89,820 | ) | | (27,307 | ) | | (100,139 | ) |
| State | 9,266 |
| | (6,586 | ) | | (28,143 | ) |
| Foreign | (1,653 | ) | | 1,865 |
| | (589 | ) |
| Total deferred | (82,207 | ) | | (32,028 | ) | | (128,871 | ) |
| Total income tax benefit | $ | (116,853 | ) | | $ | (8,079 | ) | | $ | (103,060 | ) |
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets (liabilities) consist of the following:
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 |
| Deferred tax assets | | | |
| State net operating loss carryforwards | $ | 22,154 |
| | $ | 17,538 |
|
| Foreign net operating loss carryforwards | 16,760 |
| | 17,234 |
|
| Accrued liabilities | 49,619 |
| | 70,733 |
|
| Intangible assets | 26,029 |
| | 43,662 |
|
| Other assets including credits | 11,967 |
| | 7,497 |
|
| Foreign tax credit carryforwards | 6,601 |
| | 13,576 |
|
| Total deferred tax assets | 133,130 |
| | 170,240 |
|
| Valuation allowance | (40,074 | ) | | (35,410 | ) |
| Deferred tax assets, net | 93,056 |
| | 134,830 |
|
| Deferred tax liabilities | | | |
| Rental merchandise | (139,425 | ) | | (234,211 | ) |
| Property assets | (40,712 | ) | | (73,763 | ) |
| Total deferred tax liabilities | (180,137 | ) | | (307,974 | ) |
| Net deferred taxes | $ | (87,081 | ) | | $ | (173,144 | ) |
At December 31, 2017, there are approximately $402.7 million of state Net Operating Loss (“NOL”) carryforwards expiring between 2018 and 2037, offset by a valuation allowance of $60.2 million. Of the total remaining state NOL carryforwards, approximately 12.0% represent acquired NOLs. Utilization of these NOLs is subject to applicable annual limitations for U.S. state tax purposes. At December 31, 2017, the Mexico NOL carryforwards were approximately $54.3 million, which expire between 2021 and 2027, and are offset with a full valuation allowance. The Puerto Rico NOL is $1.8 million and it will expire in 2024. In addition, at December 31, 2017, we also had approximately $6.6 million in foreign tax credit (“FTC”) carryforwards expiring between 2020 and 2025 and are offset with a full valuation allowance. We establish a valuation allowance to the extent we consider it more likely than not that the deferred tax assets attributable to our NOLs, FTCs or other deferred tax assets will not be recovered.
We are subject to federal, state, local and foreign income taxes. Along with our U.S. subsidiaries, we file a U.S. federal consolidated income tax return. With few exceptions, we are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2012. We are currently under examination in the U.S., Puerto Rico, and various states. We do not anticipate that adjustments as a result of these audits, if any, will result inhave a material changeimpact to our consolidated statementConsolidated Statement of earnings, financial condition,Operations, Consolidated Balance Sheets, and statement of cash flows or earnings per share.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. In 2017,After review of the positive evidence generated during the year, we increased thehave determined no valuation allowance is required against Net Operating Losses and Credits in multiple state jurisdictions as well as foreign deferred tax assets that management believes will not be realized. In addition, theMexico net operating losses. A valuation allowance is still required related to foreigncertain tax credits was decreased due to the realization of foreign tax credits through deduction.and certain state net operating losses.
A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Beginning unrecognized tax benefit balance | $ | 33,723 |
| | $ | 27,164 |
| | $ | 13,376 |
|
| (Reductions) additions based on tax positions related to current year | (2,280 | ) | | 773 |
| | 1,508 |
|
| Additions for tax positions of prior years | 6,688 |
| | 8,396 |
| | 20,684 |
|
| Reductions for tax positions of prior years | (368 | ) | | (2,246 | ) | | (8,354 | ) |
| Settlements | (444 | ) | | (364 | ) | | (50 | ) |
| Ending unrecognized tax benefit balance | $ | 37,319 |
| | $ | 33,723 |
| | $ | 27,164 |
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Beginning unrecognized tax benefit balance | $ | 22,184 | | | $ | 24,208 | | | $ | 36,364 | |
| Additions (Reductions) based on tax positions related to current year | 461 | | | 1,204 | | | (654) | |
| Additions for tax positions of prior years | 4,119 | | | 45 | | | 415 | |
| Reductions for tax positions of prior years | (3,006) | | | (2,086) | | | (11,917) | |
| Settlements | (17,222) | | | (1,187) | | | — | |
| Ending unrecognized tax benefit balance | $ | 6,536 | | | $ | 22,184 | | | $ | 24,208 | |
Included in the balance of unrecognized tax benefits at December 31, 2017,2021, is $6.2$2.2 million, net of federal benefit, which, if ultimately recognized, will affect our annual effective tax rate.
During the next twelve months,year ended December 31, 2021, we anticipate that it is reasonably possible thatrecorded $2.6 million of interest income primarily related to the amount of unrecognized tax benefits could be reduced by approximately $2.4 million either because our tax position will be sustained upon audit or as a resultreversal of the expiration of the statute of limitations for specific jurisdictions.
As of December 31, 2017, we have accrued approximately $3.3 million for the paymentaccrual of interest for matters settled during the year in our favor, partially offset by interest expense of $1.2 million for remaining uncertain tax positions, and recorded interest expenseboth of approximately $1.0 million for the year then ended, which are excluded from the reconciliation of unrecognized tax benefits presented above.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. For our net federal deferred tax liabilities ("DTL"), we have recorded a provisional decrease of $76.5 million, with a corresponding net adjustment to deferred income tax benefit of $76.5 million for the year ended December 31, 2017. This adjustment is based on a reasonable estimate of the impact of the reduction in the corporate tax rate on our DTL's as of December 22, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, our DTL's may be affected by other analyses related to the Tax Act, including our calculation of deemed repatriation of deferred foreign income, our calculation of the 100% bonus depreciation for assets placed in service in 2017 impacted by the Tax Act, and the state tax effect of adjustments made to federal temporary differences.
A provision in the Tax Act allows for 100% bonus depreciation on certain assets acquired and placed in service after September 27, 2017. This immediate expensing will continue for assets acquired before December 31, 2022, at which point it will begin phasing out. While we have not yet completed all of the computations necessary or completed an inventory of our 2017 expenditures that qualify for immediate expensing, we have recorded a federal provisional benefit of $9.7 million based on our current intent to fully expense all qualifying expenditures. This resulted in a decrease of approximately $24.2 million to our current income tax payable and a corresponding increase in our DTLs of approximately $14.5 million (after considering the effects of the reduction in income tax rates). This provisional estimate is including the rate change provision above.
The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To assess the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and currently estimate an obligation of $0.7 million. However, we are continuing to review additional information regarding our accumulated E&P and non-U.S. income taxes paid to more precisely compute the amount of the Transition Tax, if any. In addition, based on current state tax law, we estimate the state impact of the Transition Tax to be insignificant. This estimate will be revised based on a calculation of our final Transition Tax as well as any updated guidance on state treatment of the deemed repatriation.
The effect of the tax rate change for items originally recognized in other comprehensive income was properly recorded in tax expense from continuing operations. This results in stranded tax effects in accumulated other comprehensive income at December 31, 2017.2021. Companies can make a policy election to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects directly arising from the change in the federal corporate tax rate. We dodid not intend to exercise the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate inresulting from the Tax Cuts and Jobs Act (or portion thereof) isof 2017 was recorded.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note I—K— Senior Debt
On March 19, 2014,February 17, 2021, we entered into a Credit Agreement (the "Credit Agreement") among the Company, the several lenders from time to time parties to the Credit Agreement, Bank of America, N.A., BBVA Compass Bank, Wells Fargo Bank, N.A., and SunTrust Bank, as syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement initially provided $900.0 million senior credit facility consisting of $225.0 million in term loans (the "Term Loans") and a $350.0 million revolving credit facility (the "Revolving Facility"). The Credit Agreement was previously amended on February 1, 2016 (the “First Amendment”), on September 30, 2016 (the “Second Amendment”), and on March 31, 2017 (the "Third Amendment and Waiver"). On June 6, 2017, we entered into a Fourth Amendment (the “Fourth Amendment”), effective as of June 6, 2017,agreement with JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto, providing for a seven-year $875 million senior secured term loan facility (the “Term Loan Facility”) and an Asset Based Loan Credit Facility (the “ABL Credit Facility”) providing for a five-year asset-based revolving credit facility with commitments of $550 million and a letter of credit sublimit of $150 million. Commitments under the ABL Credit Facility may be increased, at our option and under certain conditions, by up to an additional $125 million in the aggregate.
Proceeds from the Term Loan Facility were net of original issue discount of $4.4 million upon issuance from the lenders. In addition, in connection with the closing of the Term Loan Facility and the ABL Credit Facility, we incurred approximately $30.2 million in debt issuance costs, including bank financing fees and third party legal and other professional fees, of which $25.3 million was capitalized in accordance with ASC Topic 470, “Debt” and recorded as a reduction of our outstanding senior debt, net in our Consolidated Balance Sheets. Remaining debt issuance costs incurred of $4.9 million were expensed and recorded to Other charges (gains) in our Consolidated Statement of Operations.
On September 21, 2021 we entered into a First Amendment (the “First Amendment”) to the Credit Agreement.
Term Loan Facility, effective as of September 21, 2021. The amounts outstandingamendment effected a repricing of the applicable margin under the Term Loans were $48.6 million and $191.8 million at December 31, 2017 and December 31, 2016, respectively. The amount outstanding underLoan Facility by reducing the Revolving Facility was $85.0 million at December 31, 2017 and there were no outstanding borrowings under the Revolving Facility at December 31, 2016. Outstanding borrowings for senior debt at December 31, 2017 and December 31, 2016 were reducedLIBOR floor by total unamortized issuance costs of $5.2 million and $5.1 million, respectively. The Term Loans are scheduled25 basis points from 0.75% to mature on March 19, 2021,0.50%, and the Revolving Facility has a scheduled maturity of March 19, 2019.
The Term Loans are payable in consecutive quarterly installments each in an aggregate principal amount of $562,500, with a final installment equal to the remaining principal balance of the Term Loans due on March 19, 2021. In the event our Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement) exceeds 2.5:1, we are also required to pay down the Term Loans by a percentage of annual excess cash flow, as defined in the Credit Agreement. Additional payments will be equal to 25% of annual excess cash flows if the Consolidated Total Leverage Ratio is between 2.5:1 and 3.0:1, increasing to 50% of annual excess cash flows if the Consolidated Total Leverage Ratio is greater than 3.0:1. We made a mandatory excess cash flow prepayment in March 2017applicable margin, with respect to our results forany initial term loans, by 75 basis points from 4.00% to 3.25%.
In connection with the year ended December 31, 2016, of approximately $141 million and in March 2016 with respect to our results for the year ended December 31, 2015, of approximately $27 million. We anticipate making a mandatory excess cash flow prepayment in the first quarter of 2018 with respect to our results for the year ended December 31, 2017, of approximately $6 million. We are further required to pay down the Term Loans with proceeds from certain asset sales or borrowings as defined in the Credit Agreement.
The debt facilities as of December 31, 2017 and 2016 are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2017 | | December 31, 2016 |
| (In thousands) | Facility Maturity | | Maximum Facility | | Amount Outstanding | | Amount Available | | Maximum Facility | | Amount Outstanding | | Amount Available |
| Senior Debt: | | | | | | | | | | | | | |
| Term Loan | March 19, 2021 | | $ | 225,000 |
| | $ | 48,563 |
| | $ | — |
| | $ | 225,000 |
| | $ | 191,813 |
| | $ | — |
|
| Revolving Facility | March 19, 2019 | | 350,000 |
| | 85,000 |
| | 109,700 |
| | 675,000 |
| | — |
| | 584,304 |
|
| Total | | | 575,000 |
| | 133,563 |
| | 109,700 |
| | 900,000 |
| | 191,813 |
| | 584,304 |
|
| Other indebtedness: | | | | | | | | | | | | | |
| Line of credit | August 20, 2018 | | 12,500 |
| | 5,735 |
| | 6,765 |
| | 20,000 |
| | — |
| | 20,000 |
|
| Total | | | $ | 587,500 |
| | 139,298 |
| | $ | 116,465 |
| | $ | 920,000 |
| | 191,813 |
| | $ | 604,304 |
|
| Unamortized debt issuance costs | | |
|
| | (5,173 | ) | | | | | | (5,066 | ) | | |
| Total senior debt, net | | | | | $ | 134,125 |
| | | | | | $ | 186,747 |
| | |
The full amountexecution of the revolving credit facility may be used for the issuance of letters of credit. At December 31, 2017 and 2016, the amounts available under the revolving credit facility were reduced byFirst Amendment, we incurred approximately $94.0 million and $90.7 million, respectively, for our outstanding letters of credit, resulting in availability of $109.7$1.5 million in our revolving credit facility, netdebt issuance costs, including third party arrangement and other professional fees, of the $50which approximately $1.4 million of excess availability we must maintain on the 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 (pursuant to the Fourth Amendment discussed below). The margins on the Eurodollar loans and on the ABR loans for borrowings under the Revolving Facility, which were 3.00% and 2.00%, respectively, at December 31, 2017, may fluctuate based upon an increase or decreaseexpensed as debt refinance charges in our Consolidated Total Leverage RatioStatement of Operations, and approximately $0.1 million were capitalized and recorded as defined by a pricing grid includedreduction to our outstanding senior debt in the Credit Agreement. The margins on the Eurodollar loansour Consolidated Balance Sheets. In addition, in accordance with ASC Topic 470, “Debt”, we recorded approximately $5.4 million in write-offs of unamortized debt issuance costs and on the ABR loans for Term Loans are 3.00% and 2.00%, respectively, but may also fluctuate in the event the all-in pricing for any subsequent incremental Term Loan exceeds the all-in pricing for prior Term Loans by more than 0.50% per annum. A commitment fee equal to 0.30% to 0.50% of
original issue
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
discount previously capitalized upon the unused portionissuance of the RevolvingTerm Loan Facility on February 17, 2021. The write-offs were recorded as debt refinance charges in our Consolidated Statement of Operations.
As of December 31, 2021, the total remaining balance of unamortized debt issuance costs and original issue discount related to our senior debt reported in the Consolidated Balance Sheets were approximately $20.3 million and $2.9 million, respectively. Remaining unamortized debt issuance costs and original issue discount will be amortized to interest expense over the remaining term of the Term Loan Facility.
The amount outstanding under the Term Loan Facility was $868.4 million at December 31, 2021. We had $290.0 million outstanding borrowings under our ABL Credit Facility at December 31, 2021 and borrowing capacity of $173.6 million.
We also utilize the ABL Credit Facility for the issuance of letters of credit. As of December 31, 2021, we have issued letters of credit in the aggregate outstanding amount of $86.4 million primarily relating to workers compensation insurance claims.
The senior debt facilities as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| (In thousands) | Facility
Maturity | | Maximum
Facility | | Amount
Outstanding | | Amount
Available | | Maximum
Facility | | Amount
Outstanding | | Amount
Available |
| Senior Debt: | | | | | | | | | | | | | |
| Term Loan Facility | February 17, 2028 | | $ | 875,000 | | | $ | 868,438 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
ABL Credit Facility(1) | February 17, 2026 | | 550,000 | | | 290,000 | | | 173,616 | | | 300,000 | | | — | | | 209,268 | |
| Prior Term Loan Facility | 0 | | — | | | — | | | — | | | 200,000 | | | 197,500 | | | — | |
| Total | | | $ | 1,425,000 | | | 1,158,438 | | | $ | 173,616 | | | $ | 500,000 | | | 197,500 | | | $ | 209,268 | |
| Unamortized debt issuance costs | | | | | (23,231) | | | | | | | (7,010) | | | |
| Total senior debt, net | | | | | $ | 1,135,207 | | | | | | | $ | 190,490 | | | |
(1)Borrowing availability is net of issued letters of credit of approximately $86.4 million and $90.7 million for the years ended December 31, 2021 and 2020, respectively
Term Loan Credit Agreement
The Term Loan Facility, which matures on February 17, 2028, amortizes in equal quarterly installments at a rate of 1.00% per annum of the original principal amount thereof, with the remaining balance due at final maturity. Subject in each case to certain restrictions and conditions, we may add up to $500 million of incremental term loan facilities to the Term Loan Facility or utilize incremental capacity under the Term Loan Facility at any time by issuing or incurring incremental equivalent term debt.
Interest on borrowings under the Term Loan Facility is payable at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin of 3.25%, subject to a 0.50% LIBOR floor. Borrowings under the Term Loan Facility amortize in equal quarterly and fluctuates dependent uponinstallments in an increase or decrease in our Consolidated Total Leverage Ratio. The commitment fee at December 31, 2017, isamount equal to 0.50%1.000% per annum of the unused portion oforiginal aggregate principal amount thereof, with the Revolving Facility.remaining balance due at final maturity.
Our borrowings under the Credit Agreement are, subject to certain exceptions,The Term Loan Facility is secured by a first-priority security interest in substantially all of our present and future tangible and intangible assets,personal property, including intellectual property,our subsidiary guarantors, other than the ABL Priority Collateral (as defined below), and are also secured by a pledgesecond-priority security interest in the ABL Priority Collateral, subject to certain exceptions. The obligations under the Term Loan Facility are guaranteed by us and our material wholly-owned domestic restricted subsidiaries that also guarantee the ABL Credit Facility.
The Term Loan Facility contains covenants that are usual and customary for similar facilities and transactions and that, among other things, restrict our ability and our restricted subsidiaries to create certain liens and enter into certain sale and lease-back transactions; create, assume, incur or guarantee certain indebtedness; consolidate or merge with, or convey, transfer or lease all or substantially all of theour and our restricted subsidiaries’ assets, to another person; pay dividends or make other distributions on, or repurchase or redeem, our capital stock of our U.S. subsidiaries.
Subjector certain other debt; and make other restricted payments. The Term Loan Facility also includes mandatory prepayment requirements related to asset sales (subject to reinvestment), debt incurrence (other than permitted debt) and excess cash flow, subject to certain limitations described therein. These covenants are subject to a number of limitations and exceptions the Credit Agreement contains, without limitation, covenants that generally limit our ability and the ability of our subsidiaries to:
incur additional debt;
repurchase capital stock, repurchase 6.625% notes and 4.75% notes and/or pay cash dividends when the Consolidated Total Leverage Ratio is greater than 3.75:1 (subject to an exception for cash dividends in an amount not to exceed $15 million annually);
incur liens or other encumbrances;
merge, consolidate or sell substantially all property or business;
sell, lease or otherwise transfer assets (other thanset forth in the ordinary coursedocumentation governing the Term Loan.
The Term Loan provides for customary events of business);
make investments or acquisitions (unless they meet financial tests and other requirements); or
enter into an unrelated line of business.
Since the Consolidated Total Leverage Ratio at December 31, 2017 is greater than 3.75:1, we aredefault, including, but not limited to, a maximumfailure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of $15.0 million in dividend payments for the fiscal year. As of December 31, 2017, we have paid dividends of $12.8 million.
The Fourth Amendment removedbankruptcy or modified certain covenants under the Credit Agreement, including:
the maximum Consolidated Total Leverage Ratio was removed;
the maximum Consolidated Senior Secured Leverage Ratio was removed;
the minimum Consolidated Fixed Charge Coverage Ratio was reduced from 1.50:1 to 1.10:1insolvency involving us and the definitions of Consolidated Fixed Charges and Consolidated Fixed Charge Coverage Ratio were modified. In addition, the sole consequence of a breach of this covenant shall be that a Minimum Availability Period shall result, which impacts the borrowing capacity under the Loans;
any guarantee obligations of Foreign Subsidiaries may not exceed an aggregate of $10 million outstanding at any time;
indebtedness, including Capital Lease Obligations, mortgage financings and purchase money obligations that are secured by Liens permitted under the Credit Agreement, may not exceed an aggregate outstanding amount of $10 million, unless such Indebtedness was outstanding on the effective date of the Fourth Amendment; and
removed certain Permitted Investments, and modified Permitted Acquisitions, which is now tied to certain performance criteria, including the Borrowing Base.
As a result of the Fourth Amendment, we are no longer required to maintain a certain Consolidated Total Leverage Ratio or Consolidated Senior Secured Leverage Ratio, and we are prohibited from repurchasing our common stock and senior notes for the remaining term of the Credit Agreement. In addition, under the Fourth Amendment, we agreed to provide additional collateral protections to secure the obligations under the Credit Agreement.
The Fourth Amendment reduced the total capacity of the Revolving Facility from $675 million to $350 million. The Fourth Amendment also modified the borrowing terms of the revolving loans under the Credit Agreement, which, as amended, establishes that the aggregate outstanding amounts (including after any draw request) not exceed the Borrowing Base. The Borrowing Base is tied to the Company’s Eligible Installment Sales Accounts, Inventory and Eligible Rental Contracts, in addition to Reserves and the Term Loan Reserve. We will 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 the Company must provide weekly information.
The Credit Agreement as modified by the Fourth Amendment 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
significant subsidiaries.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit do not exceedThe Term Loan Facility was fully drawn at 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 Fourth Amendment permits the Agent, in its sole discretion, to make loans to us that it deems necessary or desires (i) to preserve or protect the Collateral, (ii) to enhance the likelihood of, or maximize the amount of, repaymentclosing of the Loans and other Obligations, or (iii)Acima Holdings acquisition to pay any other amount chargeable to or requirement to be paid by the Company pursuant to the termsfund a portion of the Credit Agreement. The aggregate amountAggregate Cash Consideration payable in the transaction, repay certain of such Protective Advancesour outstanding at any time may not exceed $35 million.
Inindebtedness and that of our subsidiaries, repay all outstanding indebtedness of Acima Holdings and its subsidiaries and pay certain fees and expenses incurred in connection with the Fourth Amendment, we recorded a write-downtransaction. A portion of previously unamortized debt issuance costssuch proceeds were used to repay $197.5 million outstanding under the prior term loan facility, dated as of approximately $1.9 million in the second quarter of 2017. In addition, we paid arrangement and amendment fees to the AgentAugust 5, 2019, among us, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders that provided their consentparty thereto (the “Prior Term Loan Facility”).
ABL Credit Agreement
The ABL Credit Facility will mature on February 17, 2026. We may borrow only up to the Amendment of approximately $5.3 million, which were capitalized in the second quarter of 2017 and will be amortized to interest expense over the remaining termlesser of the agreement.
We also utilize our Revolving Facility forlevel of 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 flowsthen-current borrowing base and are generally paid down as cash is generated by our operating activities. We believe the cash flow generated from operations, together with amounts available under our Credit Agreement, will be sufficient to fund our operations during the next 12 months. As of December 31, 2017, we have issued letters of credit in the aggregate amount of $94 million.commitments under the ABL Credit Facility. The borrowing base is tied to the amount of eligible installment sales accounts, inventory and eligible rental contracts, reduced by certain reserves.
The table below showsABL Credit Facility bears interest at a fluctuating rate determined by reference to the required and actual ratioseurodollar rate plus an applicable margin of 1.50% to 2.00%. The total interest rate on the ABL Credit Facility at December 31, 2021 was 1.875%. A commitment fee equal to 0.250% to 0.375% of the unused portion of the ABL Credit Facility fluctuates dependent upon average utilization for the prior month as defined by a pricing grid included in the documentation governing the ABL Credit Facility. The commitment fee at December 31, 2021 was 0.375%. We paid $0.8 million of commitment fees during the fourth quarter of 2021.
Loans under the ABL Credit Agreement calculatedFacility may be borrowed, repaid and re-borrowed until February 17, 2026, at which time all amounts borrowed must be repaid. The obligations under the ABL Credit Facility are guaranteed by us and certain of our wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations under the ABL Credit Facility and such guarantees are secured on a first-priority basis by all of our and our subsidiary guarantors’ accounts, inventory, deposit accounts, securities accounts, cash and cash equivalents, rental agreements, general intangibles (other than equity interests in our subsidiaries), chattel paper, instruments, documents, letter of credit rights, commercial tort claims related to the foregoing and other related assets and all proceeds thereof related to the foregoing, subject to permitted liens and certain exceptions (such assets, collectively, the “ABL Priority Collateral”) and a second-priority basis in substantially all other present and future tangible and intangible personal property of ours and the subsidiary guarantors, subject to certain exceptions.
The ABL Credit Facility contains covenants that are usual and customary for similar facilities and transactions and that, among other things, restrict our ability and our restricted subsidiaries to create certain liens and enter into certain sale and lease-back transactions; create, assume, incur or guarantee certain indebtedness; consolidate or merge with, or convey, transfer or lease all or substantially all of our and our restricted subsidiaries’ assets, to another person; pay dividends or make other distributions on, or repurchase or redeem, our capital stock or certain other debt; and make other restricted payments.
The ABL Credit Facility also requires the maintenance of a consolidated fixed charge coverage ratio of 1.10 to 1.00 at the end of each fiscal quarter when either (i) certain specified events of default have occurred and are continuing or (ii) availability is less than or equal to the greater of $56.25 million and 15% of the line cap then in effect. These covenants are subject to a number of limitations and exceptions set forth in the documentation governing the ABL Credit Facility. The fixed charge coverage ratio as of December 31, 2017:
|
| | | | | |
| Required Ratio | | Actual Ratio |
Consolidated Fixed Charge Coverage Ratio | No less than | | 1.10:1 | | 0.11:1 |
The actual Consolidated Fixed Charge Coverage ratio2021 was calculated pursuant1.07 to 1.00, however, there were no events of default and our borrowing availability remains above 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 paidline cap in cash minus (ii) cash income tax refunds received) for the 12-month period ending December 31, 2017 ($5.3 million), by consolidated fixed charges for the 12-month period ending December 31, 2017 ($47.5 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 0.11:1effect. Therefore, as of December 31, 2017 was below2021 we are not subject to any restrictions as described above.
The documentation governing the minimum requirement of 1.10:1 as defined in the Fourth Amendment modifications above. As a result of being out of compliance with this covenant, we must maintain $50.0 million of excess availability on the Revolving Facility. Availability under our RevolvingABL Credit Facility was $109.7 million at December 31, 2017, net of the $50 million of excess availability we must maintain on the Revolving Facility.
Eventsprovides for customary events of default, under the Credit Agreement include customaryincluding, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain 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%bankruptcy or more ofinsolvency involving us and 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 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 December 31, 2017, we had $5.7 million outstanding borrowings against this line of credit and no outstanding borrowings at December 31, 2016. The line of credit renews annually. Borrowings under the line of credit bear interest at the greater of a variable rate or 2.00%.
significant subsidiaries.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below shows the scheduled maturity dates of our outstanding debt at December 31, 20172021 for each of the years ending December 31:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Term Loan Facility | | ABL Credit Facility | | Total |
| 2022 | $ | 8,750 | | | $ | — | | | $ | 8,750 | |
| 2023 | 8,750 | | | — | | | 8,750 | |
| 2024 | 8,750 | | | — | | | 8,750 | |
| 2025 | 8,750 | | | — | | | 8,750 | |
| 2026 | 8,750 | | | 290,000 | | | 298,750 | |
| Thereafter | 824,688 | | | — | | | 824,688 | |
| Total senior debt | $ | 868,438 | | | $ | 290,000 | | | $ | 1,158,438 | |
|
| | | | | | | | | | | | | | | |
| (in thousands) | Term Loan | | Revolving Facility | | INTRUST Line of Credit | | Total |
| 2018 | $ | 2,250 |
| | $ | — |
| | $ | 5,735 |
| | $ | 7,985 |
|
| 2019 | 2,250 |
| �� | 85,000 |
| | — |
| | 87,250 |
|
| 2020 | 2,250 |
| | — |
| | — |
| | 2,250 |
|
| 2021 | 41,813 |
| | — |
| | — |
| | 41,813 |
|
| 2022 | — |
| | — |
| | — |
| | — |
|
| Thereafter | — |
| | — |
| | — |
| | — |
|
| Total senior debt | $ | 48,563 |
| | $ | 85,000 |
| | $ | 5,735 |
| | $ | 139,298 |
|
Note JL — Subsidiary Guarantors - Senior Notes
On November 2, 2010,February 17, 2021, we issued $300.0$450 million in senior unsecured notes due November 2020,February 15, 2029, at par value, bearing interest at 6.625%6.375% (the “Notes”), pursuantthe proceeds of which were used 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. Afund a portion of the proceedsAggregate Cash Consideration upon closing of this offeringthe Acima Holdings acquisition. Interest on the Notes is payable in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. In connection with the issuance of the Notes, we incurred approximately $15.7 million in debt issuance costs, including bank financing fees and third party legal and other professional fees, which 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 sharescapitalized in accordance with ASC Topic 470, “Debt” and recorded as a reduction of our common stock. Theoutstanding Notes in our Consolidated Balance Sheets. Debt issuance costs will be amortized as interest expense over the term of the Notes.
We may redeem some or all of the Notes at any time on or after February 15, 2024 for cash at the redemption prices set forth in the indenture governing the Notes, plus accrued and unpaid interest to, but not including, the redemption date. Prior to February 15, 2024, we may redeem up to 40% of the aggregate principal amount of the 6.625% notes outstanding as of December 31, 2017 and 2016, was $292.7 million, reduced by $1.8 million and $2.5 million of unamortized issuance costs, respectively.
On May 2, 2013, we issued $250.0 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 ofNotes with the proceeds of this offering were usedcertain equity offerings at a redemption price of 106.375% plus accrued and unpaid interest to, repurchase sharesbut not including, the redemption date. In addition, we may redeem some or all of our common stock underthe Notes prior to February 15, 2024, at a $200.0 million accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under our Prior Credit Agreement. Theredemption price of 100% of the principal amount of the 4.75% notes outstanding asNotes plus accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” premium. If we experience specific kinds of December 31, 2017 and 2016, was $250.0 million, reduced by $2.1 million and $2.8 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 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 inwe will be required to offer to purchase the 2010 indenture), the holders of the notes have the right to require us to repurchase the notesNotes at a price equal to 101% of the original aggregate principal amount together withthereof plus accrued and unpaid interest, if any,interest.
The Notes are our general unsecured senior obligations, and are effectively subordinated to all of our existing and future secured indebtedness to the date of repurchase.
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 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 holdersextent of the notes have the right to require us to repurchase the notes at a price equal to 101%value of the original aggregate principal amount, together with accruedcollateral securing such indebtedness, structurally subordinated to all existing and unpaid interest,future indebtedness and other liabilities of our non-guarantor subsidiaries, equal in right of payment to all of our and our guarantor subsidiaries’ existing and future senior indebtedness and senior in right of payment to all of our future subordinated indebtedness, if any, to the date of repurchase.
Any mandatory repurchase of the 6.625% notes and/or the 4.75% notes would trigger an event of default under our Credit Agreement. Weany. The Notes are not required to maintain any financial ratios under either of the indentures.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rent-A-Center and its subsidiary guarantors have fully, jointly and severally and unconditionally guaranteed on a senior unsecured basis by certain of our domestic subsidiaries that have outstanding indebtedness or guarantee other specified indebtedness, including the obligations of Rent-A-Center with respect to the 6.625% notesABL Credit Facility and the 4.75% notes. Rent-A-Center has no independent assets or operations,Term Loan Facility.
The indenture governing the Notes contains covenants that limit, among other things, our ability 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 some of our restricted subsidiaries to create liens, transfer or sell assets, incur indebtedness or issue certain preferred stock, pay dividends, redeem stock or make other distributions, make other restricted payments or investments, create restrictions on payment of dividends or other amounts to us by our restricted subsidiaries, merge or consolidate with other entities, engage in certain transactions with affiliates and designate our subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions and qualifications. The covenants limiting restricted payments, restrictions on payment of dividends or other amounts to us by our restricted subsidiaries, the ability to incur indebtedness, asset dispositions and transactions with affiliates will be suspended if and while the Notes have investment grade ratings from any two of Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. and Fitch, Inc.
The indenture governing the Notes also provides for events of default, which, if any of them occurs, would permit or require the subsidiary guarantorsprincipal, premium, if any, and interest on all the then outstanding Notes to transfer funds to Rent-A-Center in the form of loans, advances or dividends, except as provided by applicable law.be due and payable.
Note KM — Commitments and Contingencies
Leases
We lease space for substantially all of our Core U.S. and Mexico stores, certain support facilities and the majority of our delivery vehicles under operating leases expiring at various times through 2023. Certain of the store leases contain escalation clauses for increased taxes and operating expenses. Rental expense was $209.7 million, $231.3 million and $239.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Future minimum rental payments under operating leases with remaining lease terms in excess of one year at December 31, 2017 are as follows:
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| | | |
| (In thousands) | Operating Leases |
| 2018 | $ | 158,347 |
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| 2019 | 125,843 |
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| 2020 | 94,362 |
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| 2021 | 57,630 |
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| 2022 | 26,328 |
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| Thereafter | 3,729 |
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| Total future minimum rental payments | $ | 466,239 |
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Contingencies
From time to time, the Company,we, along with our subsidiaries, isare party to various legal proceedings and governmental inquiries 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
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
basis. We do not currently expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred. Nevertheless, we cannot predict the impact of future developments affecting our claims and lawsuits, and any resolution of a claim or lawsuit or reserve within a particular fiscal period may materially and adversely impact our results of operations for that period. In addition, claims and lawsuits against us may seek injunctive or other relief that requires changes to our business practices or operations and it is possible that any required changes may materially and adversely impact our business, financial condition, results of operations or reputation.
Unclaimed Property.We are subject to unclaimed property audits by states in the ordinary course of business. We recently reached settlement agreements for the comprehensive multi-state unclaimed property audit. The property subject to review in thisthe audit process includedincludes 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 and believe we are in compliance with applicable escheat laws.
Acima Consumer Financial Protection Bureau investigation. Prior to the execution of the definitive agreement to acquire Acima Holdings, Acima Holdings received a Civil Investigative Demand dated October 1, 2020 (the “CID”) from the Consumer Financial Protection Bureau (the “CFPB”) requesting certain information, documents and data relating to Acima Holding’s products, services and practices for the period from January 1, 2015 to the date on which responses to the CID are provided in full. The negotiatedpurpose of the CID is to determine whether Acima Holdings extends credit, offers leases, or otherwise offers or provides a consumer financial product or service and whether Acima Holdings complies with certain consumer financial protection laws. We are fully cooperating with the CFPB investigation and are continuing to produce records in response to requests of the CFPB. The CFPB has not made any allegations in the investigation, and we are currently unable to predict the eventual scope, ultimate timing or outcome of the CFPB investigation.
On the terms and subject to the conditions set forth in the definitive agreement to acquire Acima Holdings, the former owners of Acima Holdings have agreed to indemnify Rent-A-Center for certain losses arising after the consummation of the transaction with respect to the CID and certain pre-closing taxes. The indemnification obligations of the former owners of Acima Holdings are limited to an indemnity holdback in the aggregate amount of $50 million, which was escrowed at the closing of the transaction, and will be Rent-A-Center’s sole recourse against the former owners of Acima Holdings with respect to all of the indemnifiable claims under the definitive transaction agreement. Other than with respect to any pending or unresolved claims for indemnification submitted by Rent-A-Center prior to such time, and subject to other limited exceptions, the escrowed amount will be released to the former owners of Acima Holdings as follows: (i) in respect of the CID, on the earlier of February 17, 2024 and the date on which a final determination is entered providing for a resolution of the matters regarding the CID and (ii) in respect of certain pre-closing taxes, on August 18, 2022, the first business day following the date that is 18 months after the closing date of the transaction.
There can be no assurance that the CID will be finally resolved prior to the release to the former owners of Acima Holdings of the escrowed funds reserved therefor, or that such escrowed amount will be sufficient to address all covered losses or that the CFPB’s ongoing investigation or future exercise of its enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of consumer financial protection laws that could lead to enforcement actions, proceedings or litigation, whether by the CFPB, other state or federal agencies, or other parties, and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements did not have a material adverse impactor changes to Acima Holdings’ business practices or operations that could materially and adversely affect our business, financial statements.condition, results of operations or reputation.
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 andCalifornia Attorney General. The California Attorney General (the “CAG”) issued an investigative subpoena in 2018 seeking information with respect to certain of our former officers by Alan HallAcceptance Now business practices (now part of the Acima segment). Since receiving such demand, we have cooperated with the CAG in federal courtconnection with its investigation and made several productions of requested documents. In March 2020, the CAG put forth proposed settlement terms to address alleged violations of California law. The CAG’s allegations include those with respect to certain consumer fees, charges and communications in Sherman, Texas.connection with our lease-to-own transactions. The complaint allegesCAG’s proposed settlement terms include civil penalties, disgorgement of certain revenues, additional training requirements, and changes to certain business practices. In November 2021, the parties reached an agreement in principle regarding the potential resolution of this matter. Final settlement remains subject to the negotiation and execution of applicable documentation. We are currently unable to predict the ultimate timing of entering binding settlement documentation, and it remains possible that the defendants violated Section 10(b) and/or Section 20(a)parties will be unable to agree on the settlement documentation.
Massachusetts Attorney General. The Massachusetts Attorney General (the “MAG”) issued a civil investigative demand in 2018 seeking information with respect to certain of our business practices, including regarding account management and certain other business practices in connection with our lease-to-own transactions. Since receiving such demand, we have cooperated with the MAG in connection with its investigation. In June 2021, the MAG provided us with proposed settlement terms including a monetary payment, injunctive provisions regarding certain business practices and compliance requirements. We are continuing to cooperate with the MAG and to discuss resolution of the Securities Exchange Actinquiry with the MAG. We are currently unable to predict the ultimate timing or outcome 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. Discovery in this matter has now commenced. A hearing on class certification is scheduled for September 19, 2018. We continue to believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.
Kevin Paul, derivatively and on behalf of Rent-A-Center, Inc. v. Robert D. Davis et. al.; Sheila Coleman, derivatively and on behalf of Rent-A-Center, Inc. v. Robert D. Davis et. al.; Michael Downing, derivatively and on behalf of Rent-A-Center, Inc. v. Mark E. Speese et. al. On March 15 and 16, 2017, substantially similar shareholder derivative suits were filed against certain current and
MAG investigation.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
former officersState Attorneys General Investigation. On November 1, 2021, Acima received a letter from the Nebraska Attorney General’s office stating that the Attorney General of Nebraska, along with a coalition of thirty-eight state Attorneys General, initiated a multistate investigation into the business acts and directorspractices of Acima and nominally, against us, inthat a civil investigative demand(s) and/or subpoena(s) pursuant to respective state court in Dallas County, Texas. Another substantially similar shareholder derivative suit was filed against certain currentconsumer protection laws will be forthcoming. Since receiving the letter, we have held multiple discussions with officials at the lead attorneys general offices and, former officersbased on those discussions, it is our understanding that the investigation is looking at business practices within the virtual lease-to-own industry and directors and, nominally, against us, in state court in Collin County, Texas on May 8, 2017. All threeincludes or will include multiple companies. Acima is cooperating with the investigation process. As of the casesdate of filing this Form 10-K, we have not yet received a civil investigative demand or subpoena and no specific allegations have been consolidatedmade against Acima pursuant to the investigation. We are currently unable to predict the eventual scope, timing or outcome of this matter.
Note N — Other Charges (Gains)
Acima Holdings Acquisition. As described in state courtNote B, on February 17, 2021, we completed the acquisition of Acima Holdings, a leading provider of virtual lease-to-own solutions. Included in Dallas County, Texas. the aggregate consideration issued to the former owners of Acima Holdings were 8,096,595 common shares, valued at $414.1 million, subject to 36-month vesting conditions under restricted stock agreements, which will be recognized over the vesting term as stock compensation expense. During 2021, we recognized approximately $127.1 million in stock compensation expense related to these restricted stock agreements.
The lawsuits allege that the defendants breached their fiduciary duties owed to Rent-A-Center and otherwise mismanaged the affairsfair value of assets acquired as part of the company as it concerns public statements madetransaction included $520 million in intangible assets and $170 million in developed technology. During 2021, we recognized approximately $101.7 million in amortization expense and $13.2 million in incremental depreciation expense related to our point-of-sale system, operational results of our Acceptance Now segment, and our revenues and profitability. The petitionsthese assets.
Furthermore, during 2021 we recognized approximately $17.7 million in these suits claim damages in unspecified amounts; seek an order directingtransaction costs associated with the Company to make various changes to corporate governance and internal procedures, including putting forth a shareholder vote on various governance matters; restitution from the individual defendants; and cost, fees and expenses. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that the individual defendants will be found to have no liability in this matter.
Arnaud van der Gracht de Rommerswael, derivatively and on behalf of Rent-A-Center, Inc. v. Mark Speese et. al. On April 3, 2017, another shareholder derivative suit was filed against certain current and former officers and directors, JPMorgan Chase Bank, N.A., The Bank of New York Mellon Trust Company, N.A., and, nominally, against us, in federal court in Sherman, Texas. The complaint alleges that the defendants breached their fiduciary duties owed to Rent-A-Center and otherwise mismanaged the affairsclosing of the company as it concerns (i) public statements madetransaction, and approximately $10.3 million in post-acquisition integration costs, including $5.1 million in inventory losses, $3.7 million in employee severance, and $1.5 million in other integration costs, including reorganization advisory fees.
During 2020, we recorded approximately $6.4 million in expenses related to the rolloutacquisition, primarily consisting of our point-of-sale system; (ii) compensation paid to Guy Constantlegal and Robert Davis surrounding their resignations; and (iii) change-of-control language in certain debt agreements, which the suit alleges impacts shareholders’ willingness to vote for a slate of directors nominated by Engaged Capital Flagship Master Fund, LP. (“Engaged Capital”). The complaint claims damages in unspecified amounts, disgorgement of benefits from alleged breaches of duty by the individual defendants; an order declaring that certain language in the debt agreements is unenforceable; an order enjoining the lender defendants from enforcing certain provisions in the debt agreements; an order directing the Company’s board to approve Engaged Capital’s slate of directors; an order directing the Company to make unspecified changes to corporate governance and internal procedures; and costs, fees, and expenses.other professional fees.
In response to the motion to dismiss filed by the defendants on April 25, 2017, the plaintiff amended his complaint on May 9, 2017 and on May 19, 2017. The amended complaint alleges breach of fiduciary duty, unjust enrichment and waste of corporate assets related to alleged acts for the purposes of entrenching board members, including the approval of change-of-control language in certain debt agreements, the implementation of the point-of-sale system, and the severance compensation paid to Guy Constant and Robert Davis.
On July 10, 2017, the plaintiff’s claims against JPMorgan Chase Bank, N.A. and The Bank of New York Mellon Trust Company, N.A. were dismissed.
On October 12, 2017, the court issued an order requiring plaintiffs to re-plead the claims related to our point-of-sale system, and denying the motion to dismiss with respect to the waste and entrenchment claims. The plaintiffs failed to re-plead the claims related to our point-of-sale system. Discovery with respect to the remaining waste and entrenchment clams has now commenced.
We continue to believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that the defendants will be found to have no liability in this matter.
Blair v. Rent-A-Center, Inc. This matter is a state-wide class action complaint originally filed on March 13, 2017 in the Federal District Court for the Northern District of California. The complaint alleges various claims, including that our cash sales and total rent to own prices exceed the pricing permitted under the Karnette Rental-Purchase Act. In addition, the plaintiffs allege that we fail to give customers a fully executed rental agreement and that all such rental agreements that were issued to customers unsigned are void under the law. The plaintiffs are seeking statutory damages under the Karnette Rental-Purchase Act which range from $100 - $1,000 per violation, injunctive relief, and attorney’s fees. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.
Note L — Other Charges and Credits - Cost of Revenues
Write-down of Rental Merchandise.Store Consolidations. During 2015, we projected that we would not recover the carrying value of certain smartphones. We recorded a $34.7 million impairment charge, included in cost of revenues in the accompanying statement of operations.
Note M — Other Charges - Operating Expenses
Acceptance Now Store Closures. During the first six months of 2017,2020, 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. These closures resulted28 Rent-A-Center Business stores, resulting in pre-tax charges of $19.2$1.5 million for the year ended December 31, 2017, consisting primarily of rental merchandise losses,in other miscellaneous shutdown and holding costs, $0.4 million in lease impairment charges, $0.1 million in disposal of fixed assets, and $0.1 million in severance and other payroll-related costs.
Cost Savings Initiatives. During 2018, we began the execution of multiple cost savings initiatives, including reductions in overhead and supply chain operations. In connection with these initiatives, we recorded pre-tax charges during 2020 consisting of $0.8 million in severance and other payroll-related costs, $0.4 million in lease impairment charges, and $0.4 million in other miscellaneous laborshutdown and shutdownholding costs.
COVID-19 Pandemic. In addition,March 2020, national efforts to contain the COVID-19 virus began to be implemented. In connection with COVID-19, during 2020, we recorded a pre-tax impairment chargeincurred approximately $1.4 million in sanitization cleaning and personal protective equipment expenses, $0.4 million in payroll-related costs, and $0.2 million in lease expense related to closed stores and idled vehicles, partially offset by real estate lease abatement credits of $3.9$0.8 million to our intangible assets for our discontinued vendor relationship.Rent-A-Center Business stores.
Social Unrest. During the second quarter of 2020, we incurred expenses resulting from certain civil unrest that occurred in connection with efforts to institute law enforcement and other social and political reforms. In connection with this unrest, approximately 30 Rent-A-Center Business stores were looted and/or damaged, resulting in $0.9 million of inventory write-offs and less than $0.1 million in disposal of fixed assets during 2020.
California Refranchise Sale. On October 5, 2020, we sold all 99 Rent-A-Center Business corporate stores in the state of California to an experienced franchisee. We received cash consideration of approximately $16 million, including approximately $1 million paid for related franchise fees. The sale included idle and on-rent inventory of approximately $30.0 million and property assets of approximately $0.8 million, resulting in a total loss on sale of approximately $16.6 million.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Activity with respect to Other charges for the years ended December 31, 2020 and 2021 is summarized in the below table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Accrued Charges at December 31, 2019 | | Charges & Adjustments | | Payments & Adjustments | | Accrued Charges at December 31, 2020 | | Charges & Adjustments | | Payments & Adjustments | | Accrued Charges at December 31, 2021 |
| Cash: | | | | | | | | | | | | | |
| Acima Holdings transaction costs | $ | — | | | $ | 6,400 | | | $ | (1,395) | | | $ | 5,005 | | | $ | 17,680 | | | $ | (22,685) | | | $ | — | |
| Acima Holdings integration costs | — | | | — | | | — | | | — | | | 6,572 | | | (6,572) | | | — | |
| Labor reduction costs | 738 | | | 1,334 | | | (1,728) | | | 344 | | | 3,751 | | | (2,502) | | | 1,593 | |
Lease obligation costs(1) | — | | | (645) | | | 645 | | | — | | | — | | | — | | | — | |
| Contract termination costs | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other cash charges(2) | — | | | 1,889 | | | (1,889) | | | — | | | 658 | | | (658) | | | — | |
| Total cash charges | $ | 738 | | | 8,978 | | | $ | (4,367) | | | $ | 5,349 | | | 28,661 | | | $ | (32,417) | | | $ | 1,593 | |
| Non-cash: | | | | | | | | | | | | | |
Acima Holdings restricted stock agreements(3) | | | — | | | | | | | 127,060 | | | | | |
Depreciation and amortization of acquired assets(4) | | | — | | | | | | | 114,959 | | | | | |
Asset impairments(5) | | | 2,749 | | | | | | | 1,572 | | | | | |
Rental merchandise losses(6) | | | 860 | | | | | | | — | | | | | |
| | | | | | | | | | | | | |
Other(7) | | | 23,968 | | | | | | | 17,661 | | | | | |
| Total other charges | | | $ | 36,555 | | | | | | | $ | 289,913 | | | | | |
Corporate Cost Rationalization. During(1) Includes lease abatement credits in 2020 related to renegotiated lease agreements in response to COVID-19.
(2) Represents shutdown and holding expenses related to store closures.
(3) Represents stock compensation expense recognized in 2021, related to common stock issued to Acima Holdings employees under restricted stock agreements as part of the first nine monthsacquisition consideration subject to vesting restrictions, as described in Note B and Note O.
(4) Represents amortization of 2017, we executedthe total fair value of acquired intangible assets and incremental depreciation related to the fair value increase over net book value of acquired software assets in connection with the acquisition of Acima Holdings as described in Note B.
(5) Asset impairments primarily includes store damage related to Hurricane Ida in 2021. Asset impairments in 2020 primarily include impairments of operating lease right-of-use assets and other property assets related to the closure of Rent-A-Center Business stores and previously closed product service centers, store damage related to looting, as well as a head count reduction that impacted approximately 10%write-down of capitalized software.
(6) Reflects merchandise losses due to looting.
(7) Includes $17.5 million in legal settlement reserves and $0.2 million in state sales tax assessment reserves for 2021. Amounts accrued for potential settlements do not represent our maximum loss exposure. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be significantly different than the amounts accrued for such matters due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings. For 2020, primarily includes a $16.6 million loss on the sale of our field support center workforce. This resultedstores in pre-tax chargesCalifornia, $7.9 million for severancelegal settlement reserves, $1.2 million for state tax audit assessment reserves, $1.4 million in expenses related to COVID-19, partially offset by $2.8 million in proceeds received from the sale of a class action claim and other payroll-related costs of approximately $3.4$0.3 million in insurance proceeds related to Hurricane Maria in 2017 for the year ended December 31, 2017.2020.
Effects of 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 $5.4 million for inventory losses, store repair costs, fixed asset write-offs, and employee assistance. Approximately $2.1 million of these pre-tax expenses related to Hurricanes Harvey and Irma, while the remaining $3.3 million related to Hurricane Maria.
Write-down of Capitalized Software. During the fourth quarter of 2017 we discontinued certain IT software projects and as a result incurred pre-tax charges of $18.2 million, related to the write-down of capitalized assets and termination of associated license agreements.
Core U.S. Store and Acceptance Now Consolidation Plan. During the second quarter of 2016, we closed 167 Core U.S. stores and 96 Acceptance Now locations, resulting in pre-tax charges of $20.1 million consisting of lease obligation costs, disposal of fixed assets, and other miscellaneous shutdown costs. During 2015, we closed 65 Core U.S. stores resulting in pre-tax restructuring charges of $4.3 million consisting of lease obligations costs, accelerated depreciation and disposal of fixed assets and inventory and other miscellaneous shutdown costs.
Mexico Store Consolidation Plan. During the first quarter of 2016, we closed 14 stores in Mexico, resulting in pre-tax charges of $2.3 million in the Mexico segment for disposal of rental merchandise, disposal of fixed assets and leasehold improvements, and other miscellaneous shutdown costs. During 2015, we closed 34 stores in Mexico. These store closures resulted in pre-tax charges of $3.0 million in the Mexico segment for disposal of fixed assets and leasehold improvements, and other miscellaneous shutdown costs.
Claims Settlement. In the fourth quarter of 2016, we recognized a gain of $2.2 million related to a legal claims settlement.
Sourcing and Distribution Network Startup Costs. As part of our transformational sourcing and distribution initiative, we entered into an agreement with a third-party logistics partner. As a result, we incurred one-time costs to set up new warehousing facilities and distribution routes and we incurred other charges to close existing warehouse space and terminate employees. The pre-tax charges for these items were approximately $2.8 million for the year ended December 31, 2015, reflected in the Core U.S. segment.
Sale of Stores. During 2015, we incurred pre-tax losses of $7.2 million on the sale of 40 Core U.S. stores to a franchisee and $0.3 million on the sale of 14 Core U.S. stores in Canada. We also incurred losses on the sale and closure of other Core U.S. stores of $1.1 million in 2015.
Corporate Cost Rationalization. During 2015, we eliminated certain departments and functions in our field support center as a part of our efforts to transform and modernize our operations company-wide. This resulted in pre-tax charges for severance and other payroll-related costs of approximately $2.0 million for the year ended December 31, 2015.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Activity with respect to other charges for the year ended December 31, 2017 is summarized in the below table:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Accrued Charges at December 31, 2015 | | Charges & Adjustments | | Payments | | Accrued Charges at December 31, 2016 | | Charges & Adjustments | | Payments | | Accrued Charges at December 31, 2017 |
| Cash charges: | | | | | | | | | | | | | |
| Labor reduction costs | $ | 3,340 |
| | $ | 1,380 |
| | $ | (3,327 | ) | | $ | 1,393 |
| | $ | 3,765 |
| | $ | (3,484 | ) | | $ | 1,674 |
|
| Lease obligation costs | 1,229 |
| | 15,198 |
| | (9,799 | ) | | 6,628 |
| | 457 |
| | (4,980 | ) | | 2,105 |
|
| Other miscellaneous | — |
| | 1,455 |
| | (1,455 | ) | | — |
| | 723 |
| | (723 | ) | | — |
|
| Total cash charges | $ | 4,569 |
| | 18,033 |
| | $ | (14,581 | ) | | $ | 8,021 |
| | 4,945 |
| | $ | (9,187 | ) | | $ | 3,779 |
|
| Non-cash charges: | | | | | | | | | | | | | |
| Rental merchandise losses | | | 287 |
| | | | | | 18,417 |
| | | | |
| Loss on sale of fixed assets | | | 3,491 |
| | | | | | 1,032 |
| | | | |
| Other, net | | | 673 |
| | | | | | — |
| | | | |
| Impairment of intangible asset | | | — |
| | | | | | 3,896 |
| | | | |
| Impairment of capitalized software costs | | | — |
| | | | | | 18,205 |
| | | | |
Other(1) | | | (2,185 | ) | | | | | | 12,724 |
| | | | |
| Total other charges | | | $ | 20,299 |
| | | | | | $ | 59,219 |
| | | | |
(1) Other primarily includes incremental legal and advisory fees related to shareholder proposals, effects of hurricanes, and legal settlements for the year ended December 31, 2017 and primarily includes gain related to a legal claims settlement for the year ended December 31, 2016.
Note NO — Stock-Based Compensation
We maintain long-term incentive plans for the benefit of certain employees and directors. Our plans consist of the Rent-A-Center, Inc. 2021 Long-Term Incentive Plan (the “2021 Plan”), the Rent-A-Center 2016 Long-Term Incentive Plan (the “2016 Plan”), the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”), and the Rent-A-Center, Inc. 2006 Equity Incentive Plan (the “Equity Incentive Plan”), and the Rent-A-Center 2016 Long-Term Incentive Plan (the "2016 Plan") which are collectively known as the “Plans.”
On March 9, 2016, All Plans prior to the 2021 Plan were previously expired upon the recommendation of the Compensation Committee, the Board adopted, subject to stockholder approval, the 2016 Plan and directed that it be submitted for the approval of the stockholders. superseding Plan, and any shares available for grant under the respective plans were canceled at the time of expiration.
On June 2, 2016,8, 2021, at the 2021 Annual Meeting of Stockholders, the stockholders approved the 20162021 Plan. The 20162021 Plan authorizes the issuance of a total of 6,500,0005,000,000 shares of common stock. Any shares of common stock granted in connection with an award of stock options or stock appreciation rights will be counted against this limit as one share and any shares of common stock granted in connection with awards of restricted stock, restricted stock units, deferred stock or similar forms of stock awards other than stock options and stock appreciation rights will be counted against this limit as two shares of common stock for every one share of common stock granted in connection with such awards. No shares of common stock will be deemed to have been issued if (1) such shares covered by the unexercised portion of an option that terminates, expires, or is cancelled or settled in cash or (2) such shares are forfeited or subject to awards that are forfeited, canceled, terminated or settled in cash. In any calendar year, (1) no employee will be granted options and/or stock appreciation rights for more than 800,000 shares of common stock; (2) no employee will be granted performance-based equity awards under the 20162021 Plan (other than options and stock appreciation rights), covering more than 800,000 shares of common stock; and (3) no employee will be granted performance-based cash awards for more than $5,000,000. At December 31, 2017 and 2016, there were 1,705,660 and 302,935 shares, respectively, allocated to equity awards outstanding in the 2016 Plan.
The 2006 Plan authorizes the issuance of 7,000,000 shares of Rent-A-Center’s common stock that may be issued pursuant to awards granted under the 2006 Plan, of which no more than 3,500,000 shares may be issued in the form of restricted stock, deferred stock or similar forms of stock awards which have value without regard to future appreciation in value of or dividends declared on the underlying shares of common stock. In applying these limitations, the following shares will be deemed not to have been issued: (1) shares covered by the unexercised portion of an option that terminates, expires, or is canceled or settled in cash, and (2) shares that are forfeited or subject to awards that are forfeited, canceled, terminated or settled in cash. At December 31, 2017 and 2016, there were 1,554,931 and 2,108,068 shares, respectively, allocated to equity awards outstanding in the 2006 Plan. The 2006 Plan expired in accordance with its terms on March 24, 2016, and all shares remaining available for grant under the 2006 Plan were canceled.
We acquired the Equity Incentive Plan (formerly known as the Rent-Way, Inc. 2006 Equity Incentive Plan) in conjunction with our acquisition of Rent-Way in 2006. There were 2,468,461 shares of our common stock reserved for issuance under the Equity
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Incentive Plan. Therethan options and stock appreciation rights), covering more than 800,000 shares of common stock. At December 31, 2021, there were 1,037,514 and 1,526,203100,822 shares allocated to equity awards outstanding in the 2021 Plan.
Under the previously expired 2016 Plan, there were 2,184,396 and 2,767,703 shares, respectively, allocated to equity awards outstanding as of December 31, 2021 and 2020, respectively, in the 2016 Plan. The 2016 Plan expired on June 8, 2021 upon approval of the 2021 Plan.
Under the previously expired 2006 Plan and Equity Incentive Plan at(formerly known as the Rent-Way, Inc. 2006 Equity Incentive Plan) there were 83,757 and 263,657 shares as of December 31, 20172021 and 2016, respectively. The Equity Incentive2020, respectively, allocated to outstanding equity awards under the 2006 Plan, expired in accordance with its terms on January 13, 2016, and all63,065 and 231,454 shares remaining available for grantas of December 31, 2021 and 2020, respectively, allocated to outstanding equity awards under the Equity Incentive Plan. The 2006 Plan were canceled.and Equity Incentive Plan previously expired in 2016. Outstanding equity awards under these plans represent vested options that will expire at various times through 2026, unless exercised or canceled prior to the expiration date.
Options granted to our employees generally become exercisable over a period of 1 to 4 years from the date of grant and may be exercised up to a maximum of 10 years from the date of grant. Options granted to directors wereare immediately exercisable.
We grant restricted stock units to certain employees that vest afterratably over a three-year service requirement has been met.period. We recognize expense for these awards using the straight-line method over the requisite service period based on the number of awards expected to vest. We also grant performance-based restricted stock units that vest between 0% and 200% depending on our stock performance against an index using a total shareholder return formula established at the date of grant for the subsequent three-year period. We record expense for these awards over the requisite service period, net of the expected forfeiture rate, since the employee must maintain employment to vest in the award.
Stock-based compensation expense for the years ended December 31, 2017, 20162021, 2020 and 20152019 is as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Stock options | $ | 2,001 | | | $ | 1,878 | | | $ | 1,273 | |
Restricted share units(1) | 145,553 | | | 10,406 | | | 5,685 | |
| Total stock-based compensation expense | 147,554 | | | 12,284 | | | 6,958 | |
| Tax benefit recognized in the statements of earnings | 58,963 | | | 3,062 | | | 1,562 | |
| Stock-based compensation expense, net of tax | $ | 88,591 | | | 9,222 | | | $ | 5,396 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Stock options | $ | 2,023 |
| | $ | 2,954 |
| | $ | 4,030 |
|
| Restricted share units | 1,873 |
| | 6,255 |
| | 5,511 |
|
| Total stock-based compensation expense | 3,896 |
| | 9,209 |
| | 9,541 |
|
| Tax benefit recognized in the statements of earnings | 1,442 |
| | 658 |
| | 1,715 |
|
| Stock-based compensation expense, net of tax | $ | 2,454 |
| | $ | 8,551 |
| | $ | 7,826 |
|
We issue new shares of stock to satisfy option exercises and the vesting of restricted stock units.
The fair value of unvested options that we expect to result in compensation expense was approximately $3.1$3.3 million with a weighted average number of years to vesting of 2.562.27 at December 31, 2017.2021.
Information with respect to stock option activity related to the Plans for the year ended December 31, 20172021 follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Awards
Outstanding | | Weighted Average
Exercise Price | | Weighted Average
Remaining Contractual Life | | Aggregate Intrinsic
Value
(In thousands) |
| Balance outstanding at January 1, 2021 | 1,658,165 | | | $ | 22.91 | | | | | |
| Granted | 97,250 | | | 45.37 | | | | | |
| Exercised | (476,398) | | | 25.30 | | | | | |
| Forfeited | (138,237) | | | 31.45 | | | | | |
| Expired | (19,291) | | | 29.19 | | | | | |
| Balance outstanding at December 31, 2021 | 1,121,489 | | | $ | 22.68 | | | 6.70 | | $ | 29,691 | |
| | | | | | | |
| Exercisable at December 31, 2021 | 525,801 | | | $ | 19.65 | | | 5.34 | | $ | 15,384 | |
|
| | | | | | | | | | | | |
| | Equity Awards Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (In thousands) |
| Balance outstanding at January 1, 2017 | 3,072,181 |
| | $ | 25.07 |
| | | | |
| Granted | 935,532 |
| | 9.46 |
| | | | |
| Exercised | (38,830 | ) | | 17.01 |
| | | | |
| Forfeited | (695,697 | ) | | 17.93 |
| | | | |
| Expired | (319,492 | ) | | 30.37 |
| | | | |
| Balance outstanding at December 31, 2017 | 2,953,694 |
| | $ | 21.34 |
| | 6.15 | | $ | 344 |
|
| | | | | | | | |
| Exercisable at December 31, 2017 | 1,645,305 |
| | $ | 27.23 |
| | 4.26 | | $ | 344 |
|
The intrinsic value of options exercised during the years ended December 31, 20172021, 2020, and 20152019 was $53.3 thousand$14.3 million, $5.8 million, and $521.5 thousand,$5.1 million, respectively, resulting in tax benefits of $18.7 thousand$5.0 million, $2.0 million, and $182.5 thousand,$1.8 million, respectively, which are reflected as an outflow from operating activities and an inflow from financing activities in the consolidated statementsConsolidated Statements of cash flows.There were no options exercised during the year ended December 31, 2016.
Cash Flows.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average fair values of the options granted under the Plans were calculated using the Black-Scholes method. The weighted average grant date fair value and weighted average assumptions used in the option pricing models are as follows: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Weighted average grant date fair value | $ | 14.94 | | | $ | 7.28 | | | $ | 8.92 | |
| Weighted average risk free interest rate | 0.49 | % | | 0.93 | % | | 2.07 | % |
| Weighted average expected dividend yield | 2.87 | % | | 4.75 | % | | 1.28 | % |
| Weighted average expected volatility | 50.29 | % | | 49.44 | % | | 50.93 | % |
| Weighted average expected life (in years) | 4.62 | | 4.62 | | 4.63 |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Weighted average grant date fair value | $ | 2.92 |
| | $ | 3.06 |
| | $ | 6.34 |
|
| Weighted average risk free interest rate | 1.78 | % | | 1.31 | % | | 1.42 | % |
| Weighted average expected dividend yield | 3.03 | % | | 3.16 | % | | 3.32 | % |
| Weighted average expected volatility | 45.44 | % | | 39.64 | % | | 33.28 | % |
| Weighted average expected life (in years) | 4.50 |
| | 4.63 |
| | 5.05 |
|
Information with respect to non-vested restricted stock unit activity follows:
|
| | | | | | |
| | Restricted Awards Outstanding | | Weighted Average Grant Date Fair Value |
| Balance outstanding at January 1, 2017 | 1,362,131 |
| | $ | 15.31 |
|
| Granted | 955,683 |
| | 9.00 |
|
| Vested | (176,707 | ) | | 19.39 |
|
| Forfeited | (796,696 | ) | | 14.34 |
|
| Balance outstanding at December 31, 2017 | 1,344,411 |
| | $ | 10.87 |
|
| | | | | | | | | | | |
| Restricted Awards
Outstanding | | Weighted Average
Grant Date Fair Value |
| Balance outstanding at January 1, 2021 | 1,383,951 | | | $ | 20.09 | |
Granted(1) | 8,599,682 | | | 53.03 | |
| Vested | (690,957) | | | 24.12 | |
| Forfeited | (83,419) | | | 45.11 | |
| Balance outstanding at December 31, 2021 | 9,209,257 | | | $ | 50.33 | |
(1) Includes 8,096,595 issued under restricted stock agreements to the former owners of Acima Holdings and valued at $51.14 per share.Restricted stock units are valued using the closing price reported by the Nasdaq Global Select Market on the trading day immediately preceding the day of the grant. Unrecognized compensation expense for unvested restricted stock units at December 31, 2017,2021, was approximately $6.0$317.5 million expected to be recognized over a weighted average period of 1.792.11 years.
Note OP — Deferred Compensation Plan
The Rent-A-Center, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) is an unfunded, nonqualified deferred compensation plan for a select group of our key management personnel and highly compensated employees. The Deferred Compensation Plan first became available to eligible employees in July 2007, with deferral elections taking effect as of August 3, 2007.
The Deferred Compensation Plan allows participants to defer up to 50% of their base compensation and up to 100% of any bonus compensation. Participants may invest the amounts deferred in measurement funds that are the same funds offered as the investment options in the Rent-A-Center, Inc. 401(k) Retirement Savings Plan. We may make discretionary contributions to the Deferred Compensation Plan, which are subject to a three-year graded vesting schedule based on the participant’s years of service with us. We are obligated to pay the deferred compensation amounts in the future in accordance with the terms of the Deferred Compensation Plan. Assets and associated liabilities of the Deferred Compensation Plan are included in prepaid and other assets and accrued liabilities in our consolidated balance sheets.Consolidated Balance Sheets. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, we made matching cash contributions of $0.1 million, $0.3 millionapproximately $170 thousand, $160 thousand, and $0.4 million,$150 thousand, respectively, which represents 50% of the employees’ contributions to the Deferred Compensation Plan up to an amount not to exceed 6% of each employee's respective compensation. No other discretionary contributions were made for the years ended December 31, 2017, 20162021, 2020 and 2015.2019. The deferred compensation plan assets and liabilities were approximately $11.3$10.4 million and $11.4$9.5 million as of December 31, 20172021 and 2016,2020, respectively.
Note PQ — 401(k) Plan
We sponsor a defined contribution plan under Section 401(k) of the Internal Revenue Code for certain employees who have completed at least three months of service. Employees may elect to contribute up to 50% of their eligible compensation on a pre-tax basis, subject to limitations. We may make discretionary contributions to the 401(k) plan. Employer matching contributions are subject to a three-year graded vesting schedule based on the participant's years of service with us. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, we made matching cash contributions of $7.0$6.4 million, $7.6$5.5 million, and $7.2$6.6 million, respectively, which represents 50% of the employees’ contributions to the 401(k) plan up to an amount not to exceed 6% of each employee's respective compensation. Employees are permitted to elect to purchase our common stock as part of their 401(k) plan. As of December 31, 2017 and 2016, 6.0% and 3.6%, respectively, of the total plan assets consisted of our common stock.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
part of their 401(k) plan, up to specified limitations. As of December 31, 2021 and 2020, 6.9% and 8.2%, respectively, of the total plan assets consisted of our common stock.
Note QR — 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 December 31, 2017, ourOur financial instruments include cash and cash equivalents, receivables, payables, senior debtborrowings against our ABL Credit Facility and senior notes.Term Loan Facility, and outstanding Notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at December 31, 20172021 and 2016,December 31, 2020, because of the short maturities of these instruments. Our senior debt isIn addition, the interest rates on our Term Loan Facility and ABL Credit Facility are variable rate debt that re-prices frequently and, entails no significant change in credit risk and, as a result,therefore, we believe the carrying value of outstanding borrowings approximates their fair value approximates carrying value.
The fair value of our senior notesNotes is based on Level 1 inputs and was as follows at December 31, 2017 and 2016:2021: | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| (in thousands) | Carrying Value | | Fair Value | | Difference |
| Senior notes | $ | 450,000 | | | $ | 469,125 | | | $ | 19,125 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| (In thousands) | Carrying Value | | Fair Value | | Difference | | Carrying Value | | Fair Value | | Difference |
| 6.625% senior notes | $ | 292,740 |
| | $ | 278,835 |
| | $ | (13,905 | ) | | $ | 292,740 |
| | $ | 266,393 |
| | $ | (26,347 | ) |
| 4.75% senior notes | 250,000 |
| | 237,500 |
| | (12,500 | ) | | 250,000 |
| | 206,250 |
| | (43,750 | ) |
| Total senior notes | $ | 542,740 |
| | $ | 516,335 |
| | $ | (26,405 | ) | | $ | 542,740 |
| | $ | 472,643 |
| | $ | (70,097 | ) |
Note RS — Stock Repurchase Plan
Under our current common stock repurchase program,In early December 2021, our Board of Directors has authorized a new stock repurchase program for up to $500.0 million (the “December 2021 Program”), which superseded our previous stock repurchase program. Under the December 2021 program, we may purchase shares of our common stock from time to time in the open market andor privately negotiated transactions, of uptransactions. We are not obligated to an aggregate of $1.25 billion of Rent-A-Center common stock. We have repurchased a total of 36,994,653acquire any shares under the program, and the program may be suspended or discontinued at any time. Under the December 2021 Program, 2,829,700 shares of Rent-A-Centerour common stock were repurchased for an aggregate purchase price of $994.8approximately $140.0 million asand $360.0 million remains available for repurchases. Under previous repurchase programs, 5,069,108 shares of December 31, 2017. No sharesour common stock were repurchased for an aggregate purchase price of $250.0 million during 2017 and 2016.2021. During 2020, 1,463,377 shares of our common stock were repurchased for an aggregate purchase prices of $26.6 million.
Common stock repurchases are currently prohibited under the Fourth Amendment to our Credit Agreement. Please see
Note I for further discussion of this restriction.
Note ST — 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. AllWithin our operating segments, we offer merchandise for lease from fourcertain basic product categories: furniture, including mattresses, tires, consumer electronics, appliances, tools, handbags, computers, furnituresmartphones, and accessories,accessories.
We report financial operating performance under four operating segments. To better reflect the Company's current strategic focus, our retail partner business operations are now reported as the Acima segment (formerly Preferred Lease), which includes our virtual and staffed business models; and our Rent-A-Center Business segment (formerly Core U.S.), which operates our company-owned stores and franchising segments also offer smartphones.e-commerce platform through rentacenter.com. In addition, we report operating results for our Mexico and Franchising segments. Reportable segments and their respective operations are defined as follows:follows.
Our Core U.S.Rent-A-Center Business segment primarily operates rent-to-ownlease-to-own stores in the United States Canada and Puerto Rico whose customers enter into weekly, semi-monthly or monthly rental purchase agreements, which renew automatically upon receipt of each payment. We retain the title to the merchandise during the term of the rental purchase agreement and ownership passes to the customer if the customer has continuously renewed the rental purchase agreement through the end of the term or exercises a specified early purchase option. This segment also includes the 45 stores operating in two states that utilize a retail model which generates installment credit sales through a retail sale transaction. Segment assets include cash, receivables, rental merchandise, property assets and other intangible assets.
Our Acceptance NowAcima segment, which primarily operates kiosks within various traditional retailers’in the United States and Puerto Rico, and which includes the operations of Acima Holdings acquired in February 2021 and our former Preferred Lease virtual and staffed locations, where we generally offeroffers the rent-to-ownlease-to-own transaction to consumers who do not qualify for financing from the traditional retailer. The Acima segment offers the lease-to-own transaction offered is generally similar to that of the Core U.S. segment; however, the majority of the customers in this segment enter into monthly rather than weekly agreements. Segment assets include cash, rental merchandise, property assets, goodwillthrough our virtual offering solutions across e-commerce, digital, and other intangible assets.mobile channels, and through staffed and unstaffed kiosks located within such retailer’s locations.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our Mexico segment currently consists of our company-owned rent-to-ownlease-to-own stores in Mexico. The nature of this segment's operations and assets are the same as our Core U.S.Rent-A-Center Business segment.
The stores in our Franchising segment use Rent-A-Center’s, ColorTyme’s or RimTyme’s trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising’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-
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to-ownlease-to-own program. As franchisor, Franchising receives royalties of 2.0% to 6.0% of the franchisees' monthly gross revenue and initial fees for new locations. Segment assets include cash, franchise feetrade receivables, property assets and intangible assets.
Segment information as of and for the years ended December 31, 2017, 20162021, 2020, and 20152019 is as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| Rent-A-Center Business | $ | 2,037,849 | | | $ | 1,852,641 | | | $ | 1,800,486 | |
| Acima | 2,328,089 | | | 810,151 | | | 749,260 | |
| Mexico | 61,403 | | | 50,583 | | | 53,960 | |
| Franchising | 156,110 | | | 100,816 | | | 66,146 | |
| Total revenues | $ | 4,583,451 | | | $ | 2,814,191 | | | $ | 2,669,852 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Gross profit | | | | | |
| Rent-A-Center Business | $ | 1,433,536 | | | $ | 1,294,695 | | | $ | 1,255,153 | |
| Acima | 728,852 | | | 321,110 | | | 333,798 | |
| Mexico | 43,117 | | | 35,665 | | | 37,488 | |
| Franchising | 29,507 | | | 20,682 | | | 17,632 | |
| Total gross profit | $ | 2,235,012 | | | $ | 1,672,152 | | | $ | 1,644,071 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Revenues |
|
|
|
|
|
| Core U.S. | $ | 1,835,422 |
| | $ | 2,069,725 |
|
| $ | 2,371,823 |
|
| Acceptance Now | 797,987 |
| | 817,814 |
|
| 818,325 |
|
| Mexico | 47,005 |
| | 50,927 |
|
| 63,803 |
|
| Franchising | 22,126 |
| | 24,786 |
|
| 24,469 |
|
| Total revenues | $ | 2,702,540 |
|
| $ | 2,963,252 |
|
| $ | 3,278,420 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Gross profit | | | | | |
| Core U.S. | $ | 1,276,212 |
| | $ | 1,467,679 |
| | $ | 1,644,840 |
|
| Acceptance Now | 400,002 |
| | 422,381 |
| | 420,980 |
|
| Mexico | 32,592 |
| | 35,549 |
| | 42,354 |
|
| Franchising | 9,736 |
| | 9,440 |
| | 9,935 |
|
| Total gross profit | $ | 1,718,542 |
| | $ | 1,935,049 |
| | $ | 2,118,109 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Operating profit (loss) | | | | | |
| Core U.S. | $ | 86,196 |
| | $ | (1,020 | ) | | $ | (959,447 | ) |
| Acceptance Now | 48,618 |
| | 105,925 |
| | 123,971 |
|
| Mexico | (260 | ) | | (2,449 | ) | | (14,149 | ) |
| Franchising | 5,081 |
| | 5,650 |
| | 5,793 |
|
| Total segments | 139,635 |
| | 108,106 |
| | (843,832 | ) |
| Corporate | (202,694 | ) | | (174,702 | ) | | (164,056 | ) |
| Total operating loss | $ | (63,059 | ) | | $ | (66,596 | ) | | $ | (1,007,888 | ) |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Depreciation, amortization and write-down of intangibles | | | | | |
Core U.S.(1) | $ | 31,070 |
| | $ | 39,734 |
| | $ | 49,137 |
|
Acceptance Now(2) | 2,498 |
| | 3,309 |
| | 3,334 |
|
| Mexico | 1,973 |
| | 3,179 |
| | 5,160 |
|
| Franchising | 177 |
| | 177 |
| | 185 |
|
| Total segments | 35,718 |
| | 46,399 |
| | 57,816 |
|
| Corporate | 38,921 |
| | 34,057 |
| | 22,904 |
|
| Total depreciation, amortization and write-down of intangibles | $ | 74,639 |
| | $ | 80,456 |
| | $ | 80,720 |
|
(1) We recorded goodwill impairment charges of $151.3 million and $1,170 million in the Core U.S. segment during the fourth quarters of 2016 and 2015, respectively, not included in the table above.
(2) 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 Consolidated Statement of Operations.
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Operating profit | | | | | |
| Rent-A-Center Business | $ | 448,905 | | | $ | 333,379 | | | $ | 235,964 | |
| Acima | 176,496 | | | 57,847 | | | 83,066 | |
| Mexico | 7,858 | | | 5,798 | | | 5,357 | |
| Franchising | 20,321 | | | 12,570 | | | 7,205 | |
| Total segments | 653,580 | | | 409,594 | | | 331,592 | |
Corporate(1) | (373,041) | | | (172,258) | | | (77,733) | |
| Total operating profit | $ | 280,539 | | | $ | 237,336 | | | $ | 253,859 | |
(1) Includes stock compensation expense of $127.1 million recognized in 2021, related to common stock issued to Acima Holdings employees under restricted stock agreements as part of the acquisition consideration subject to vesting restrictions as described in Note N.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Depreciation, amortization and write-down of intangibles | | | | | |
| Rent-A-Center Business | $ | 18,588 | | | $ | 19,912 | | | $ | 20,822 | |
Acima(1)(2) | 2,122 | | | 2,066 | | | 1,533 | |
| Mexico | 511 | | | 413 | | | 401 | |
| Franchising | 93 | | | 40 | | | 45 | |
| Total segments | 21,314 | | | 22,431 | | | 22,801 | |
| Corporate | 33,516 | | | 34,227 | | | 38,303 | |
| Total depreciation, amortization and write-down of intangibles | $ | 54,830 | | | $ | 56,658 | | | $ | 61,104 | |
(1)Excludes amortization expense of approximately $101.7 million for the twelve months ended December 31, 2021, recorded to Other charges (gains) in the Consolidated Statement of Operations, related to intangible assets acquired upon closing of the Acima Holdings acquisition, see Note N for additional information.
(2)Excludes depreciation expense of approximately $13.2 million for the twelve months ended December 31, 2021, recorded to Other charges (gains) in the Consolidated Statement of Operations, related to software acquired upon closing of the Acima Holdings acquisition, see Note N for additional information.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Capital expenditures | | | | | |
| Rent-A-Center Business | $ | 23,139 | | | $ | 14,869 | | | $ | 10,255 | |
| Acima | 1,045 | | | 161 | | | 141 | |
| Mexico | 1,032 | | | 392 | | | 172 | |
| | | | | |
| Total segments | 25,216 | | | 15,422 | | | 10,568 | |
| Corporate | 37,234 | | | 19,123 | | | 10,589 | |
| Total capital expenditures | $ | 62,450 | | | $ | 34,545 | | | $ | 21,157 | |
| | | | | | | | | | | | | | | | | |
| December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| On rent rental merchandise, net | | | | | |
| Rent-A-Center Business | $ | 477,901 | | | $ | 444,945 | | | $ | 411,482 | |
| Acima | 676,279 | | | 299,660 | | | 268,845 | |
| Mexico | 18,844 | | | 18,281 | | | 16,943 | |
| Total on rent rental merchandise, net | $ | 1,173,024 | | | $ | 762,886 | | | $ | 697,270 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Capital expenditures | | | | | |
| Core U.S. | $ | 26,506 |
| | $ | 20,802 |
| | $ | 21,739 |
|
| Acceptance Now | 2,723 |
| | 2,330 |
| | 2,473 |
|
| Mexico | 124 |
| | 283 |
| | 204 |
|
| Total segments | 29,353 |
| | 23,415 |
| | 24,416 |
|
| Corporate | 36,107 |
| | 37,728 |
| | 56,454 |
|
| Total capital expenditures | $ | 65,460 |
| | $ | 61,143 |
| | $ | 80,870 |
|
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| On rent rental merchandise, net | | | | | |
| Core U.S. | $ | 408,993 |
| | $ | 426,845 |
| | $ | 540,004 |
|
| Acceptance Now | 278,443 |
| | 354,486 |
| | 350,046 |
|
| Mexico | 14,367 |
| | 13,787 |
| | 17,575 |
|
| Total on rent rental merchandise, net | $ | 701,803 |
| | $ | 795,118 |
| | $ | 907,625 |
|
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Held for rent rental merchandise, net | | | | | |
| Core U.S. | $ | 156,039 |
| | $ | 192,718 |
| | $ | 215,327 |
|
| Acceptance Now | 4,940 |
| | 7,489 |
| | 5,000 |
|
| Mexico | 6,209 |
| | 6,629 |
| | 8,520 |
|
| Total held for rent rental merchandise, net | $ | 167,188 |
| | $ | 206,836 |
| | $ | 228,847 |
|
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Assets by segment | | | | | Revised |
| Core U.S. | $ | 776,296 |
| | $ | 860,717 |
| | $ | 1,240,593 |
|
| Acceptance Now | 350,970 |
| | 432,383 |
| | 426,827 |
|
| Mexico | 33,529 |
| | 31,415 |
| | 38,898 |
|
| Franchising | 3,802 |
| | 2,197 |
| | 2,723 |
|
| Total segments | 1,164,597 |
| | 1,326,712 |
| | 1,709,041 |
|
| Corporate | 256,184 |
| | 276,029 |
| | 265,427 |
|
| Total assets | $ | 1,420,781 |
| | $ | 1,602,741 |
| | $ | 1,974,468 |
|
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Assets by country | | | | | Revised |
| United States | $ | 1,383,004 |
| | $ | 1,567,933 |
| | $ | 1,930,676 |
|
| Mexico | 33,529 |
| | 31,415 |
| | 38,898 |
|
| Canada | 4,248 |
| | 3,393 |
| | 4,894 |
|
| Total assets | $ | 1,420,781 |
| | $ | 1,602,741 |
| | $ | 1,974,468 |
|
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Held for rent rental merchandise, net | | | | | |
| Rent-A-Center Business | $ | 123,111 | | | $ | 136,219 | | | $ | 131,086 | |
| Acima | 626 | | | 2,228 | | | 1,254 | |
| Mexico | 9,247 | | | 7,819 | | | 6,078 | |
| Total held for rent rental merchandise, net | $ | 132,984 | | | $ | 146,266 | | | $ | 138,418 | |
| | | | | | | | | | | | | | | | | |
| December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Assets by segment | | | | | |
| Rent-A-Center Business | $ | 1,026,886 | | | $ | 999,252 | | | $ | 953,151 | |
| Acima | 1,476,752 | | | 389,650 | | | 357,859 | |
| Mexico | 41,669 | | | 42,278 | | | 33,707 | |
| Franchising | 15,412 | | | 14,729 | | | 11,095 | |
| Total segments | 2,560,719 | | | 1,445,909 | | | 1,355,812 | |
| Corporate | 432,608 | | | 305,071 | | | 226,986 | |
| Total assets | $ | 2,993,327 | | | $ | 1,750,980 | | | $ | 1,582,798 | |
| | | | | | | | | | | | | | | | | |
| December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Assets by country | | | | | |
| United States | $ | 2,951,658 | | | $ | 1,708,702 | | | $ | 1,547,895 | |
| Mexico | 41,669 | | | 42,278 | | | 33,707 | |
| Canada | — | | | — | | | 1,196 | |
| Total assets | $ | 2,993,327 | | | $ | 1,750,980 | | | $ | 1,582,798 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Rentals and fees by inventory category | | | | | |
| Furniture and accessories | $ | 1,542,003 | | | $ | 1,028,876 | | | $ | 982,644 | |
| Consumer electronics | 435,004 | | | 358,931 | | | 346,668 | |
| Appliances | 426,316 | | | 322,261 | | | 358,619 | |
| Wheels and tires | 280,132 | | | — | | | — | |
| Computers | 155,313 | | | 119,015 | | | 103,171 | |
| Jewelry | 146,477 | | | — | | | — | |
| Smartphones | 61,058 | | | 59,205 | | | 62,948 | |
| Other products and services | 476,150 | | | 374,803 | | | 370,352 | |
| Total rentals and fees | $ | 3,522,453 | | | $ | 2,263,091 | | | $ | 2,224,402 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Revenue by country | | | | | |
| United States | $ | 4,522,048 | | | $ | 2,763,608 | | | $ | 2,615,892 | |
| Mexico | 61,403 | | | 50,583 | | | 53,960 | |
| | | | | |
| Total revenues | $ | 4,583,451 | | | $ | 2,814,191 | | | $ | 2,669,852 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Rentals and fees by inventory category | | | | | |
| Furniture and accessories | $ | 921,159 |
| | $ | 927,537 |
| | $ | 955,576 |
|
| Consumer electronics | 459,942 |
| | 553,976 |
| | 626,668 |
|
| Appliances | 351,893 |
| | 391,539 |
| | 415,278 |
|
| Computers | 124,158 |
| | 148,889 |
| | 207,906 |
|
| Smartphones | 57,927 |
| | 93,449 |
| | 163,667 |
|
| Other products and services | 352,662 |
| | 384,663 |
| | 412,220 |
|
| Total rentals and fees | $ | 2,267,741 |
| | $ | 2,500,053 |
| | $ | 2,781,315 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Revenue by country | | | | | |
| United States | $ | 2,654,819 |
| | $ | 2,911,613 |
| | $ | 3,209,736 |
|
| Mexico | 47,005 |
| | 50,927 |
| | 63,803 |
|
| Canada | 716 |
| | 712 |
| | 4,881 |
|
| Total revenues | $ | 2,702,540 |
| | $ | 2,963,252 |
| | $ | 3,278,420 |
|
Note T — Earnings Per Common Share
Summarized basic and diluted earnings per common share were calculated as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share data) | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | |
| Net earnings (loss) | $ | 6,653 |
| | $ | (105,195 | ) | | $ | (953,520 | ) |
| Denominator: | | | | | |
| Weighted-average shares outstanding | 53,282 |
| | 53,121 |
| | 53,050 |
|
Effect of dilutive stock awards(1) | 562 |
| | — |
| | — |
|
| Weighted-average dilutive shares | 53,844 |
| | 53,121 |
| | 53,050 |
|
| | | | | | |
| Basic earnings (loss) per share | $ | 0.12 |
| | $ | (1.98 | ) | | $ | (17.97 | ) |
| Diluted earnings (loss) per share | $ | 0.12 |
| | $ | (1.98 | ) | | $ | (17.97 | ) |
| Anti-dilutive securities excluded from diluted earnings (loss) per common share: | | | | | |
| Anti-dilutive restricted share units | — |
| | 482 |
| | 257 |
|
| Anti-dilutive performance share units | 329 |
| | 880 |
| | 611 |
|
Anti-dilutive stock options
| 2,554 |
| | 3,072 |
| | 2,586 |
|
| |
(1)
| There was no dilutive effect to the loss per common share for the years ended December 31, 2016 and 2015 due to the net loss incurred for both periods. |
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note U — Unaudited Quarterly DataEarnings Per Common Share
Summarized quarterly financial data for the years ended December 31, 2017,basic and 2016 isdiluted earnings per common share were calculated as follows: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share data) | 2021 | | 2020 | | 2019 |
| Numerator: | | | | | |
| Net earnings | $ | 134,940 | | | $ | 208,115 | | | $ | 173,546 | |
| Denominator: | | | | | |
| Weighted-average shares outstanding | 57,053 | | | 54,187 | | | 54,325 | |
| Effect of dilutive stock awards | 9,786 | | | 1,567 | | | 1,630 | |
| Weighted-average dilutive shares | 66,839 | | | 55,754 | | | 55,955 | |
| | | | | |
| Basic earnings per share | $ | 2.37 | | | $ | 3.84 | | | $ | 3.19 | |
| Diluted earnings per share | $ | 2.02 | | | $ | 3.73 | | | $ | 3.10 | |
| Anti-dilutive securities excluded from diluted earnings per common share: | | | | | |
| Anti-dilutive restricted share units | 32 | | | 1 | | | — | |
| Anti-dilutive performance share units | 107 | | | 3 | | | 290 | |
| Anti-dilutive stock options | 295 | | | 949 | | | 1,109 | |
|
| | | | | | | | | | | | | | | |
| (In thousands, except per share data) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| Year Ended December 31, 2017 | | | | | | | |
| Revenues | $ | 741,986 |
| | $ | 677,635 |
| | $ | 643,965 |
| | $ | 638,954 |
|
| Gross profit | 462,663 |
| | 432,533 |
| | 412,465 |
| | 410,881 |
|
| Operating profit (loss) | 1,152 |
| | (873 | ) | | (8,445 | ) | | (54,893 | ) |
| Net (loss) earnings | (6,679 | ) | | (8,893 | ) | | (12,599 | ) | | 34,824 |
|
| Basic (loss) earnings per common share | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.24 | ) | | $ | 0.65 |
|
| Diluted (loss) earnings per common share | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.24 | ) | | $ | 0.65 |
|
| Cash dividends declared per common share | $ | 0.08 |
| | $ | 0.08 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| (In thousands, except per share data) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| Year Ended December 31, 2016 | | | | | | | |
| Revenues | $ | 835,652 |
| | $ | 749,619 |
| | $ | 693,877 |
| | $ | 684,104 |
|
| Gross profit | 534,944 |
| | 500,158 |
| | 457,226 |
| | 442,721 |
|
| Operating profit (loss) | 48,430 |
| | 27,550 |
| | 16,700 |
| | (159,276 | ) |
| Net earnings (loss) | 25,061 |
| | 9,946 |
| | 6,181 |
| | (146,383 | ) |
| Basic earnings (loss) per common share | $ | 0.47 |
| | $ | 0.19 |
| | $ | 0.12 |
| | $ | (2.76 | ) |
| Diluted earnings (loss) per common share | $ | 0.47 |
| | $ | 0.19 |
| | $ | 0.12 |
| | $ | (2.76 | ) |
| Cash dividends declared per common share | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our management, including our Chief Executive Officer and our interim Chief Financial Officer, concluded that, as of December 31, 2017,2021, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.
In February 2021, we acquired Acima Holdings. We are currently in the process of integrating Acima Holdings into our assessment of our internal control over financial reporting. Management's assessment and conclusions on the effectiveness of our disclosure controls and procedures as of December 31, 2021 excludes an assessment of the internal control over financial reporting of Acima Holdings. Acima Holdings represents approximately 33% of the Company's total revenues for the 12 months ending December 31, 2021.
In October 2021, we completed the implementation of a back-office enterprise resource planning system to be utilized within our corporate accounting and reporting functions. In connection with the implementation of this system, Management completed an assessment of the design and effectiveness of related control process changes, concluding internal control over financial reporting was effective as of December 31, 2021.
Management’s Annual Report on Internal Control over Financial Reporting
Please refer to Management’s Annual Report on Internal Control over Financial Reporting in Part II, Item 8, of this Annual Report on Form 10-K.
Auditor's Report Relating to Effectiveness of Internal Control over Financial Reporting
Please refer to the Report of Independent Registered Public Accounting Firm in Part II, Item 8, of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
For the yearquarter ended December 31, 2017,2021, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that, in the aggregate, have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
PART III
Item 10.Directors, Executive Officers and Corporate Governance.Governance.(*)
Item 11. Executive Compensation.Compensation.(*)
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Matters.(*)
Item 13. Certain Relationships and Related Transactions, and Director Independence.Independence.(*)
Item 14. Principal Accountant Fees and Services.Services.(*)
The Company's independent registered public accounting firm is Ernst & Young, LLP, Dallas, TX, Auditor Firm ID: 42. |
| | | | |
| * | The information required by Items 10, 11, 12, 13 and 14 is or will be set forth in the definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders of Rent-A-Center, Inc., which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. This definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K. |
PART IV
Item 15.Exhibits and Financial Statement Schedules.
1. Financial Statements
The financial statements included in this report are listed in the Index to Financial Statements in Part II, Item 8, of this Annual Report on Form 10-K.
2. Financial Statement Schedules
Schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions or inapplicable.
3. Exhibits
| | | | | |
| Exhibit No. | Description |
| |
| 2.1 | | Description2.1 to the registrant's Current Report on Form 8-K dated as of December 20, 2020.) |
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| 3.1 | |
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| 3.2 | |
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| 3.3 | |
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| 3.4 | |
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3.43.5 | |
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| 4.1 | |
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| 4.2 | Indenture, dated as of November 2, 2010,February 17, 2021, by and among Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors,between Radiant Funding SPV, LLC and TheTruist Bank of New York Mellon Trust Company, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated as of November 2, 2010.February 17, 2021.) |
| |
| 4.3 | Indenture, dated asDescription of May 2, 2013, by and among Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York Mellon Trust Company, N.A., as Trustee’s Common Stock (Incorporated herein by reference to Exhibit 4.14.3 to the registrant's Currentregistrant’s Annual Report on Form 8-K dated as of May 2, 2013.10-K for the year ended December 31, 2020.) |
| |
4.410.1† | |
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10.1† | |
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10.210.2† | |
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10.3† | |
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10.4†10.3† | |
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10.5†* | |
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| 10.5† | |
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10.7†10.6† | |
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10.8†10.7† | |
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10.9†10.8† | |
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10.10†10.9† | |
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10.11†10.10† | |
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10.12†10.11† | |
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10.13†10.12† | |
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10.14†10.13† | |
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10.15†10.14† | |
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10.16†10.15† | |
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10.17†10.16† | |
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10.18†10.17† | |
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10.19†10.18† | |
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10.20†10.19† | |
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10.21†10.20† | |
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10.2210.21† | Credit Agreement, dated as of March 19, 2014, among Rent-A-Center, Inc., the several lenders from time to time parties thereto, Bank of America, N.A., BBVA Compass Bank, Wells Fargo Bank, N.A. and Suntrust Bank, as syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated as of March 19, 2014.) |
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10.23† | |
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10.2610.23† | |
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10.27 | |
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10.28 | |
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10.29 | |
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10.30† | |
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10.31†10.24† | |
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10.32†10.25† | |
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10.33 | |
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10.3410.26†
| |
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10.35†
| |
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10.36†
| |
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10.3710.27 | |
| |
10.38 | |
10.39 | Cooperation Agreement, dated February 5,25, 2018, by and among Rent-A-Center, Inc., Engaged Capital Flagship Master Fund, LP, Engaged Capital Co-Invest V, LP, Engaged Capital Co-Invest V-A, LP, Engaged Capital Flagship Fund, LP, Engaged Capital Flagship Fund, Ltd., Engaged Capital, LLC, Engaged Capital Holdings, LLC and Glenn W. Welling (Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated as of February 5,May 25, 2018.) |
|
| |
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18.110.28 | |
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| 10.29 | |
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21.110.30 | |
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23.1*10.31 | |
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| 10.32 | |
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| 10.33 | |
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| 10.34 | |
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| 10.35 | |
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| 10.36 | |
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| 10.37 | |
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| 10.38 | |
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| 10.39 | |
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| 10.40 | |
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| 10.41 | |
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| 10.42 | |
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| 10.43 | |
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| 10.44 | |
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| 10.45 | |
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| 10.46 | |
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| 10.47 | |
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| 10.48 | |
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| 21.1* | |
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| 23.1* | |
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| 31.1* | |
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| 31.2* | |
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| 32.1* | |
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| 32.2* | |
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| 101.INS* | XBRL Instance Document - The instance document does not appear in the interactive data files because its XBRL tags are embedded within the inline XBRL document |
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| 101.SCH* | XBRL Taxonomy Extension Schema Document |
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| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
|
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†104* | Cover page Interactive Data File (embedded within the inline XBRL document contained in Exhibit 101) |
| | | | | |
| † | Management contract or compensatory plan or arrangement. |
| * | Filed herewith. |
** | The XBRL-related information in Exhibit No. 101 to this Annual Report on Form 10-K is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | |
| | RENT-A-CENTER, INC. |
| RENT-A-CENTER, INC. |
| |
| By: | /s/ MITCHELL E. FADEL |
| | Mitchell E. Fadel |
| | Chief Executive Officer |
Date: February 28, 201825, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | |
/s/ MITCHELL E. FADEL | | Chief Executive Officer and Director
(Principal Executive Officer) | | February 25, 2022 |
| Mitchell E. Fadel | | |
| | | |
| | | | |
Signature | | Title | | Date |
| | |
/s/ MITCHELL E. FADELAUREEN B. SHORT | | Chief Executive Officer and Director
(Principal Executive Officer)
| | February 28, 2018 |
Mitchell E. Fadel | | |
| | | |
| | | | |
/s/ MAUREEN B. SHORT
| | InterimEVP, Chief Financial Officer (Principal Financial and Accounting Officer) | | February 28, 201825, 2022 |
| Maureen B. Short | | | |
| | | |
| | | | |
/s/ JEFFREY J. BROWN | | Director | | February 28, 201825, 2022 |
| Jeffrey J. Brown | | |
| | | | |
/s/ MICHAEL J. GADECHRISTOPHER B. HETRICK | | Director | | February 28, 201825, 2022 |
Michael J. GadeChristopher B. Hetrick | | | |
| | | | |
/s/ RISHI GARG HAROLD LEWIS | | Director | | February 28, 201825, 2022 |
Rishi GargHarold Lewis | | | | |
| | | | |
/s/ CHRISTOPHER B. HETRICK GLENN P. MARINO | | Director | | February 28, 201825, 2022 |
Christopher B. HetrickGlenn P. Marino | | | | |
| | | | |
/s/ J. V. LENTELL CAROL A. MCFATE | | Director | | February 28, 201825, 2022 |
J. V. LentellCarol A. McFate | | | | |
| | | | |
/s/ BRINSON CALEB SILVER | | Director | | February 25, 2022 |
| Brinson Caleb Silver | | | | |
| | | | |
/s/ JEN YOU | | Director | | February 25, 2022 |
| Jen You | | | |
