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[March 03, 2014]
RENT A CENTER INC DE - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Business We are the largest rent-to-own operator in North America, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers, furniture and accessories, under flexible rental purchase agreements with no long-term obligation.
We were incorporated in Delaware in 1986. From 1993 to 2006, we pursued an aggressive growth strategy in which we opened new stores and sought to acquire underperforming rent-to-own stores to which we could apply our operating model.
As a result of this strategy, the number of our locations grew from 27 to over 3,400 in 2006, primarily through acquisitions. We acquired over 3,300 stores during this period, including approximately 390 of our franchised stores. These acquisitions occurred in approximately 200 separate transactions, including ten transactions in each of which we acquired in excess of 50 locations. In addition, we strategically opened or acquired stores near market areas served by our existing stores to enhance service levels, gain incremental sales and increase market penetration.
Historically, we achieved growth in our Core U.S. segment by opening new stores and acquiring underperforming rent-to-own stores to which we could apply our operating model. As a result, the acquired stores have generally experienced more significant revenue growth during the initial periods following their acquisition than in subsequent periods. Although we continue to believe there are attractive opportunities to expand our presence in the U.S. rent-to-own industry and we intend to continue our acquisition strategy of targeting under-performing and under-capitalized rent-to-own stores, the consolidation opportunities in the U.S. rent-to-own industry are more limited than in previous periods during which we experienced significant growth through acquisitions.
Therefore, our historical results of operations and period-to-period comparisons of such results and other financial data, including the rate of earnings growth, may not be meaningful or indicative of future results.
As our U.S. store base matured, we began to focus on acquiring new customers through sources other than our existing U.S. rent-to-own store locations and to seek additional distribution channels for our products and services. One of our current growth strategies is our "Acceptance Now" (previously "RAC Acceptance") model. With this model, we operate kiosks within various traditional retailers' locations where we generally offer the rent-to-own transaction to consumers who do not qualify for financing from such retailers. We operated 1,325 Acceptance Now locations at December 31, 2013, and we intend to continue growing the Acceptance Now segment by expanding the number of our retail partners and the number of locations with our existing retail partners. In addition, our strategy includes enhancing our Acceptance Now offering by launching a virtual capability. Capital expenditures related to opening an Acceptance Now kiosk in a retailer's store are very low, since the only fixed assets required are the kiosk and computer equipment. There is no long-term lease associated with these stores and the retailer does not charge us rent. Our operating model is highly agile and dynamic because we can open locations quickly and efficiently, and we can also close locations quickly and efficiently when their performance does not meet our expectations. In addition, we are expanding our operations in Mexico, and we are seeking to identify other international markets in which we believe our products and services would be in demand.
We recently launched a multi-year program designed to transform and modernize our operations company-wide in order to improve the profitability of the Core U.S. segment while continuing to support our Acceptance Now and International segments. This program is focused on building new competencies and capabilities through a variety of operational and infrastructure initiatives such as developing a new supply chain, formulating a customer-focused value-based pricing strategy, optimizing our store footprint, and innovating our digital e-commerce capabilities.
Total financing requirements of a typical new Acceptance Now kiosk location approximate $350,000, with roughly 80% of that amount relating to the purchase of rental merchandise. A newly opened Acceptance Now location is typically profitable on a monthly basis within seven months after its initial opening, and achieves cumulative break-even profitability in the second year after its initial opening.
Total financing requirements of a typical new Mexico store approximate $610,000, with roughly 50% of that amount relating to the purchase of rental merchandise.
A newly opened Mexico store is typically profitable on a monthly basis within 12 months after its initial opening. Historically, a typical Mexico store has achieved cumulative break-even profitability in the third year after its initial opening.
As a result of the investment in new stores and kiosk locations and their growth curves described above, our quarterly earnings are impacted by how many new locations we opened during a particular quarter and the quarters preceding it.
20 -------------------------------------------------------------------------------- Rental payments are generally made in advance on a weekly basis in our Core U.S.
and International segments and monthly in our Acceptance Now segment and, together with applicable fees, constitute our primary revenue source.
Our expenses primarily relate to merchandise costs and the operations of 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 corporate and other expenses.
Forward-Looking Statements The statements, other than statements of historical facts, included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "would," "expect," "intend," "could," "estimate," "should," "anticipate" or "believe." We believe the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that these expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to these differences include, but are not limited to: • the general strength of the economy and other economic conditions affecting consumer preferences and spending; • economic pressures, such as high fuel costs, affecting the disposable income available to our current and potential customers; • changes in the unemployment rate; • difficulties encountered in improving the financial performance of our Core U.S. segment or in executing our growth initiatives; • rapid inflation or deflation in prices of our products; • consumer preferences and perceptions of our brand; • our ability to identify and successfully market products and services that appeal to our customer demographic; • adverse changes in the economic conditions of the industries, countries or markets that we serve; • our ability to develop and successfully implement virtual or electronic commerce capabilities; • our available cash flow; • our ability to control costs and increase profitability; • our ability to enter into new and collect on our rental or lease purchase agreements; • uncertainties regarding the ability to open new locations; • our ability to acquire additional stores or customer accounts on favorable terms; • our ability to enhance the performance of acquired stores; • our ability to retain the revenue associated with acquired customer accounts; • the passage of legislation adversely affecting the rent-to-own industry; • our compliance with applicable statutes or regulations governing our transactions; • our ability to protect the integrity and security of individually identifiable data of our customers and employee; • the impact of any breaches in data security or other disturbances to our information technology and other networks; • information technology and data security costs; • changes in estimates relating to self-insurance liabilities and income tax and litigation reserves; • changes in our effective tax rate; • changes in interest rates; • changes in our stock price, the number of shares of common stock that we may or may not repurchase, and future dividends, if any; 21 --------------------------------------------------------------------------------• fluctuations in foreign currency exchange rates; • our ability to maintain an effective system of internal controls; • the resolution of our litigation; and • the other risks detailed from time to time in our SEC reports.
Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section "Risk Factors" and elsewhere in this report. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
Critical Accounting Policies Involving Critical 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 above, 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 $0.9 million in our estimates would result in a corresponding $0.01 change in our diluted earnings per common share.
Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers' compensation, general liability and vehicle liability insurance policies. 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, 2013, the amount reserved for losses within our self-insured retentions with respect to workers' compensation, general liability and vehicle liability insurance was $116.6 million, as compared to $116.1 million at December 31, 2012. 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.
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 22 -------------------------------------------------------------------------------- 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.
Valuation of Goodwill. We perform an assessment of goodwill for impairment at the reporting unit level annually as of December 31 of each year, or when events or circumstances indicate that impairment may have occurred. 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 historical or projected future operating results.
Our reporting units are generally our reportable operating segments identified in Note Q to the consolidated financial statements. The fair value of a reporting unit is estimated 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 based upon our cost of capital. 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, revenue growth rates, operating margins and future economic and market conditions. 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 exceeds fair value, goodwill is considered impaired.
The amount of the impairment is the difference between the carrying value of goodwill and the estimated fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination. At December 31, 2013, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was $1,310.1 million and $54.4 million, respectively.
The fair values of the Core U.S. and Acceptance Now segments exceeded their carrying values by over 10%. During 2013 and 2012, we recorded goodwill impairment charges of $1.1 million and $1.0 million in our International segment as a result of the sustained underperformance of certain stores located in Canada. Based on the results of the annual assessment, we concluded that no further impairment of goodwill existed at December 31, 2013.
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.
Significant Accounting Policies Our significant accounting policies are summarized below and in Note A to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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 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.
Franchise Revenue. 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.
Depreciation of Rental Merchandise. Depreciation of rental merchandise is included in the cost of rentals and fees on our statement of earnings.
Generally, we depreciate our rental merchandise using the income forecasting method. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents 23 -------------------------------------------------------------------------------- received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. Effective January 1, 2013, 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. Prior to January 1, 2013, merchandise held for rent (except for computers and tablets) that was at least 270 days old and held for rent for at least 180 consecutive days was depreciated using the straight-line method for a period generally not to exceed 20 months. Prior to January 1, 2013, the straight-line method was used for computers and tablets that were 24 months old or older and which have become idle over a period of at least six months, generally not to exceed an aggregate depreciation period of 30 months. This change has not had a significant impact on cost of revenues, gross profit, net earnings or earnings per share.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale.
Salaries and Other Expenses. Salaries and other expenses include all salaries and wages paid to store level employees, together with district managers' salaries, payroll taxes and benefits, and travel, as well as all store-level general and administrative expenses and selling, advertising, insurance, occupancy, delivery, charge offs due to customer stolen merchandise, fixed asset depreciation and other operating expenses.
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.
Stock-Based Compensation Expense. 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 could include, but are not limited to, expected stock volatility over the term of the award, expected dividend yields and the predicted employee exercise behavior. We base expected life 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 as actual forfeitures occur. Stock options granted during the year ended December 31, 2013, were valued using a Black-Scholes pricing model with the following assumptions for employee options: an expected volatility of 28.64% to 44.35%, a risk-free interest rate of 0.27% to 1.81%, an expected dividend yield of 2.20% to 2.44%, and an expected life of 2.33 to 6.25 years. Restricted stock units are valued using the last trade before the day of the grant.
We revised the 2011 consolidated statement of earnings to classify stock-based compensation received by employees above the district manager level that was previously reported within salaries and other expenses to general and administrative expenses to conform to the 2013 and 2012 presentation. This reclassification resulted in a decrease in salaries and other expenses of $4.5 million for the year ended December 31, 2011, with a corresponding increase to general and administrative expenses. This reclassification had no impact on net earnings or earnings per share for 2011.
Income taxes. We have not provided for deferred income taxes on undistributed earnings of non-U.S. subsidiaries because of our intention to indefinitely reinvest these earnings outside the U.S. The determination of the amount of the unrecognized deferred income tax liability related to the undistributed earnings is not practicable: however, unrecognized foreign income tax credits would be available to reduce a portion of this liability.
Results of Operations The following discussion focuses on our results of operations and issues related to our liquidity and capital resources. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Comparison of the Years Ended December 31, 2013 and 2012 Overview The following table reflects the revisions to reserves discussed in Note B to the consolidated financial statements.
24 -------------------------------------------------------------------------------- Year Ended December 31, 2013-2012 Change 2012-2011 Change (Dollar amounts in thousands) 2013 2012 2011 $ % $ % Rentals and fees $ 2,698,395 $ 2,654,081 $ 2,496,863 $ 44,314 1.7 % $ 157,218 6.3 % Merchandise sales 278,753 300,077 259,796 (21,324 ) (7.1 )% 40,281 15.5 % Installment sales 72,705 68,356 68,617 4,349 6.4 % (261 ) (0.4 )% Other 18,133 16,391 17,925 1,742 10.6 % (1,534 ) (8.6 )% Franchise merchandise sales 30,991 38,427 33,972 (7,436 ) (19.4 )% 4,455 13.1 % Franchise royalty income and fees 5,206 5,314 5,011 (108 ) (2.0 )% 303 6.0 % Total revenues 3,104,183 3,082,646 2,882,184 21,537 0.7 % 200,462 7.0 % Cost of rentals and fees 683,221 646,090 570,493 37,131 5.7 % 75,597 13.3 % Cost of merchandise sold 216,206 241,219 201,854 (25,013 ) (10.4 )% 39,365 19.5 % Cost of installment sales 25,771 24,572 24,834 1,199 4.9 % (262 ) (1.1 )% Franchise cost of merchandise sold 29,539 36,848 32,487 (7,309 ) (19.8 )% 4,361 13.4 % Total cost of revenues 954,737 948,729 829,668 6,008 0.6 % 119,061 14.4 % Gross profit 2,149,446 2,133,917 2,052,516 15,529 0.7 % 81,401 4.0 % Salaries and other 1,733,324 1,663,857 1,591,837 69,467 4.2 % 72,020 4.5 % General and administrative 158,424 148,500 140,612 9,924 6.7 % 7,888 5.6 % Amortization and write-down of intangibles 11,529 5,889 4,675 5,640 95.8 % 1,214 26.0 % Restructuring charge - - 13,943 - - (13,943 ) (100.0 )% Impairment charge - - 7,320 - - (7,320 ) (100.0 )% Litigation expense - - 2,800 - - (2,800 ) (100.0 )% 1,903,277 1,818,246 1,761,187 85,031 4.7 % 57,059 3.2 % Operating profit 246,169 315,671 291,329 (69,502 ) (22.0 )% 24,342 8.4 % Interest, net 38,813 31,223 36,607 7,590 24.3 % (5,384 ) (14.7 )% Earnings before income taxes 207,356 284,448 254,722 (77,092 ) (27.1 )% 29,726 11.7 % Income tax expense 79,118 102,745 91,258 (23,627 ) (23.0 )% 11,487 12.6 % Net earnings $ 128,238 $ 181,703 $ 163,464 $ (53,465 ) (29.4 )% $ 18,239 11.2 % During 2013, we continued the expansion of our Acceptance Now and International segments by adding 359 locations and 61 new rent-to-own stores, respectively.
Our Acceptance Now segment revenue increased by 46% over the prior year and provided over 16% of our consolidated revenue in 2013, while International segment revenue increased by 45% over the prior year driven primarily by the growth in Mexico. Expansion in these segments drove an increase in salaries and other expenses, primarily payroll-related. The significant decline in revenue in the Core U.S. segment eroded the revenue, gross profit and operating profit gains in the Acceptance Now and International segments. Our customers remain under severe economic pressure and we face an intensified 25 -------------------------------------------------------------------------------- promotional environment. As a result of the rebranding initiative in our Franchising segment, we sold certain Core U.S. stores to existing franchisees and purchased certain former ColorTyme stores, decreasing overall store count in the Franchising segment from 224 to 179. The sale of the company-owned stores resulted in a gain of approximately $1.6 million, net of a $7.4 million write-off of goodwill related to those stores.
Segment Performance Core U.S. segment.
Year Ended December 31, 2013-2012 Change 2012-2011 Change (Dollar amounts in thousands) 2013 2012 2011 $ % $ % Revenues $ 2,507,498 $ 2,655,411 $ 2,631,416 $ (147,913 ) (5.6 )% $ 23,995 0.9 % Gross profit 1,810,160 1,904,586 1,918,781 (94,426 ) (5.0 )% (14,195 ) (0.7 )% Operating profit 205,928 318,784 318,271 (112,856 ) (35.4 )% 513 0.2 % Change in same store revenue (6.4 )% 0.1 % Stores in same store revenue calculation 2,844 2,545 Revenues. Rentals and fees revenue and merchandise sales decreased in 2013 compared to 2012. We experienced a high volume of early purchase options in 2012 contributing to our recurring revenue portfolio being down year-over-year going into 2013, decreasing both rentals and fees and merchandise sales revenue in the current year. Our portfolio of agreements surpassed prior year levels in the third quarter of 2013, however, electronic product deflation coupled with promotional activity caused our average revenue per agreement (ticket) to lag behind the prior year, driving negative same store revenue. Additionally, we believe our business has been negatively impacted throughout the year by pressure on our customers in the form of higher payroll taxes and overall macroeconomic conditions. We believe these conditions impacted our performance in the critical growth month of December 2013, which was significantly below our forecast, leaving our recurring revenue portfolio going into 2014 behind the prior year.
Gross Profit. Gross profit decreased in 2013 from 2012 primarily due to decreased store revenue as discussed above. Gross profit as a percentage of total segment revenue increased to 72.2% in 2013 from 71.7% in 2012, primarily due to increases in early purchase option pricing.
Operating Profit. Operating profit as a percentage of total segment revenue decreased to 8.2% in 2013 from 12.0% for 2012. Operating profit in 2013 was impacted by decreased gross profit as discussed above, increased claims paid under our self-funded health insurance program, adjustments to certain rental merchandise reserves and severance payable to former executives of the Company.
Charge offs in our Core U.S. rent-to-own stores due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 2.7% in 2013 as compared to 2.4% in 2012. Operating expenses expressed as a percentage of total segment revenue increased to 64.0% in 2013 from 59.7% in 2012 primarily due to a decrease in revenue.
Acceptance Now segment.
Year Ended December 31, 2013-2012 Change 2012-2011 Change (Dollar amounts in thousands) 2013 2012 2011 $ % $ % Revenues $ 502,043 $ 343,283 $ 193,295 $ 158,760 46.2 % $ 149,988 77.6 % Gross profit 290,741 194,607 114,228 96,134 49.4 % 80,379 70.4 % Operating profit (loss) 66,625 25,261 (16,483 ) 41,364 163.7 % 41,744 253.3 % Change in same store revenue 30.1 % 25.3 % Stores in same store revenue calculation 868 256 Revenues. The increase in revenues in 2013 was driven by the 30.1% growth in same store revenue and the addition of 359 locations during the period. This segment contributed approximately 16% of consolidated revenues in 2013.
26 -------------------------------------------------------------------------------- Gross profit. Gross profit as a percentage of revenues was 57.9% in 2013 as compared to 56.7% in 2012 as a result of a maturing store base.
Operating profit. Operating profit as a percentage of total segment revenue increased to 13.3% in 2013 from 7.4% for 2012. Operating profit was positively impacted by the revenue growth in this segment, partially offset by an increase in payroll and payroll-related expenses due to the expansion and an increase in rental merchandise reserves. Charge-offs in our Acceptance Now locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 5.5% in 2013 as compared to 5.4% in 2012. The ratio of agreement charge-offs to total agreements in this segment is comparable to the Core U.S.
segment but the percentage is higher, primarily due to the higher cost of rental merchandise in this segment. While the higher cost of merchandise results in lower gross margins in this segment, this segment's kiosk model has lower operating costs than our other operating segments, resulting in a positive contribution to operating profit while maintaining an aggressive growth plan.
Year Ended December 31, 2013-2012 Change 2012-2011 Change (Dollar amounts in thousands) 2013 2012 2011 $ % $ % Revenues $ 58,445 $ 40,211 $ 18,490 $ 18,234 45.3 % $ 21,721 117.5 % Gross profit 41,887 27,831 13,011 14,056 50.5 % 14,820 113.9 % Operating loss (28,237 ) (30,700 ) (13,679 ) 2,463 8.0 % (17,021 ) (124.4 )% Change in same store revenue 40.6 % 8.0 % Stores in same store revenue calculation 103 13 Revenues. The increase in total revenues in 2013 was driven by the 40.6% growth in same store revenue, primarily due to the growth in Mexico, where we added 61 stores during 2013. Revenues in Canada decreased $6.3 million, or 36.0%, to $11.3 million in 2013 compared to $17.6 million in 2012 due to the sale of 15 stores on December 31, 2012.
Gross Profit. Gross profit increased in 2013 primarily due to increased revenue as discussed above. Gross profit as a percentage of total revenues increased to 71.7% in 2013 from 69.2% in 2012 as a result of a maturing store base.
Operating Loss. Operating loss as a percentage of total segment revenue decreased to 48.3% in 2013 from 76.3% for 2012. As the older stores in Mexico become profitable, those profits have been more than offset by the losses experienced in the new stores, but operating loss is improving as more stores mature.
Year Ended December 31, 2013-2012 Change 2012-2011 Change (Dollar amounts in thousands) 2013 2012 2011 $ % $ % Revenues $ 36,197 $ 43,741 $ 38,983 $ (7,544 ) (17.2 )% $ 4,758 12.2 % Gross profit 6,658 6,893 6,496 (235 ) (3.4 )% 397 6.1 % Operating profit 1,853 2,326 3,220 (473 ) (20.3 )% (894 ) (27.8 )% Revenues. Revenues decreased due to the rebranding initiative, which decreased overall store count in this segment.
Gross Profit. Gross profit as a percentage of revenues increased to 18.4% in 2013 from 15.8% in 2012.
Operating Profit. Operating profit as a percentage of total segment revenue decreased to 5.1% in 2013 from 5.3% for 2012 as we incurred approximately $0.3 million of expenses under the rebranding initiative, including replacing graphics on windows and trucks and minor store remodeling costs.
Other Consolidated Expenses Interest Expense. Interest expense increased $7.6 million, or 23.6%, to $39.6 million in 2013 as compared to $32.1 million in 2012 due to the issuance of $250 million of senior notes in May of 2013.
27 -------------------------------------------------------------------------------- Income Tax Expense. Our effective income tax rate was 38.2% and 36.1% for 2013 and 2012, respectively. The 2013 rate for income taxes is greater than that of 2012 due primarily to the non-deductible write-down of goodwill related to stores sold to franchisees.
Net Earnings and Earnings per Share. Net earnings decreased by $53.5 million, or 29.4%, to $128.2 million in 2013 as compared to $181.7 million in 2012. This decrease was primarily attributable to a decline in the Core U.S. segment, an increase in interest expense and an increase in the effective income tax rate in 2013 as compared to 2012, partially offset by growth in the Acceptance Now and International segments. Diluted earnings per share in 2013 were $2.32 compared to $3.06 in 2012. The decrease was due to the decrease in net income and was favorably impacted by a decrease in average diluted shares outstanding.
Comparison of the Years Ended December 31, 2012 and 2011 Store Revenue. Total store revenue increased by $195.7 million, or 6.9%, to $3,038.9 million in 2012 from $2,843.2 million in 2011. Store revenue increased primarily due to growth in the Acceptance Now segment, as well as growth in the Core U.S. and International segments.
Same store revenue represents revenue earned in 2,814 locations that were operated by us for each of the entire twelve-month periods ended December 31, 2012 and 2011. Same store revenues increased by $33.6 million, or 1.4%, to $2,405.1 million in 2012 as compared to $2,371.5 million in 2011. The increase in same store revenues was primarily attributable to the impact of the growth in the Acceptance Now segment.
Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees in 2012 increased by $75.6 million, or 13.3%, to $646.1 million as compared to $570.5 million in 2011. This increase in cost of rentals and fees was primarily attributable to an increase in rentals and fees revenue in 2012 as compared to 2011. Cost of rentals and fees expressed as a percentage of store rentals and fees revenue increased to 24.3% in 2012 as compared to 22.8% in 2011, driven by higher merchandise costs in the Acceptance Now segment and changes in promotional sales strategies in the Core U.S. segment.
Cost of Merchandise Sold. Cost of merchandise sold increased by $39.3 million, or 19.5%, to $241.2 million in 2012 from $201.9 million in 2011, driven by an increase in early purchase options. The gross margin percent of merchandise sales decreased to 19.6% in 2012 from 22.3% in 2011, primarily as a result of increased sales in the Acceptance Now segment, which has higher merchandise costs, and changes in promotional sales strategies in the Core U.S. segment.
Gross Profit. Gross profit increased by $81.4 million, or 4.0%, to $2,133.9 million in 2012 from $2,052.5 million in 2011, primarily due to increased store revenue as discussed above. Gross profit as a percentage of total revenues decreased to 69.2% in 2012 from 71.2% in 2011 due to decreased margins related to changes in promotional sales strategies in the Core U.S. segment and the lower margins as a percentage of revenue in the Acceptance Now segment, whose revenue has grown to 11.1% of consolidated revenue in 2012 from 6.7% in 2011.
Salaries and Other Expenses. The amounts and percentages that follow have been adjusted for the reclassification of stock-based compensation expense discussed in Note A to the financial statements. Salaries and other expenses increased by $72.0 million, or 4.5%, to $1,663.9 million in 2012 as compared to $1,591.8 million in 2011. This increase was primarily attributable to increased expenses associated with the expansion of our Acceptance Now and International segments.
Charge offs in our Core U.S. rent-to-own stores due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 2.4% in 2012 as compared to 2.5% in 2011. Salaries and other expenses expressed as a percentage of total store revenue decreased to 54.8% in 2012 from 56.0% in 2011 due to an increase in store revenue while continuing to manage store-related expenses.
General and Administrative Expenses. The amounts and percentages that follow have been adjusted for the reclassification of stock-based compensation expense discussed in Note A to the financial statements. General and administrative expenses increased by $7.9 million, or 5.6%, to $148.5 million in 2012 as compared to $140.6 million in 2011. General and administrative expenses expressed as a percentage of total revenue decreased to 4.8% in 2012 from 4.9% in 2011.
Operating Profit. Operating profit increased by $24.3 million, or 8.4%, to $315.7 million in 2012 as compared to $291.3 million in 2011. Operating profit as a percentage of total revenues increased to 10.2% in 2012 from 10.1% for 2011. Operating profit in 2012 was impacted by increased gross profit as discussed above. Operating profit in 2012 also increased compared to 2011 due to the $7.6 million restructuring charge related to the closure of eight Home Choice stores in Illinois, 24 RAC Limited locations within third-party grocery stores and 26 core rent-to-own stores following the sale of all customer accounts at those locations in 2011, the $7.3 million impairment charge related to the discontinuation of our financial services business and the $2.8 million litigation charge in 2011, all of which were reported in the Core U.S. segment, and the $4.9 million restructuring charge in 2011 for post-acquisition lease terminations related to the acquisition of The Rental Store, which was reported in the Acceptance 28 -------------------------------------------------------------------------------- Now segment. These increases were partially offset by an increase in salaries and other expenses associated with our continued expansion of the Acceptance Now and International segments.
Income Tax Expense. Our effective income tax rate was 36.1% and 35.8% for 2012 and 2011, respectively. The 2011 effective income tax rate was less than that of 2012 due primarily to the federal tax credits taken in 2011 that were not available in 2012.
Net Earnings and Earnings per Share. Net earnings increased by $18.2 million, or 11.2%, to $181.7 million in 2012 as compared to $163.5 million in 2011. This increase was primarily attributable to an increase in operating profit, slightly offset by an increase in the effective income tax rate in 2012 as compared to 2011. Diluted earnings per share in 2012 were $3.06 compared to $2.64 in 2011.
The increase was due primarily to the increase in net income and was also favorably impacted by a decrease in average diluted shares outstanding.
Quarterly Results The following table contains certain unaudited historical financial information for the quarters indicated, adjusted to reflect the revisions to reserves discussed in Note B to the consolidated financial statements: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands, except per share data) Year Ended December 31, 2013 Revenues $ 819,281 $ 760,511 $ 754,780 $ 769,611 Gross profit 550,678 530,620 529,332 538,816 Operating profit 78,784 77,230 55,773 34,382 Net earnings 46,133 41,876 27,165 13,064Basic earnings per common share $ 0.80 $ 0.76 $ 0.51 $ 0.25 Diluted earnings per common share $ 0.79 $ 0.76 $ 0.50 $ 0.25 Cash dividends paid per common share $ 0.21 $ 0.21 $ 0.21 $ 0.21 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands, except per share data) Year Ended December 31, 2012 Revenues $ 835,254 $ 749,698 $ 739,314 $ 758,380 Gross profit 560,417 526,973 519,341 527,186 Operating profit 90,476 78,454 67,798 78,943 Net earnings 50,968 43,825 39,701 47,209Basic earnings per common share $ 0.86 $ 0.74 $ 0.67 $ 0.81 Diluted earnings per common share $ 0.85 $ 0.74 $ 0.67 $ 0.80 Cash dividends paid per common share $ 0.16 $ 0.16 $ 0.16 $ 0.16 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands, except per share data) Year Ended December 31, 2011 Revenues $ 742,178 $ 698,253 $ 704,271 $ 737,482 Gross profit 523,148 506,355 505,724 517,289 Operating profit 80,486 72,872 57,363 80,608 Net earnings 44,272 39,713 30,948 48,531Basic earnings per common share $ 0.70 $ 0.64 $ 0.52 $ 0.82 Diluted earnings per common share $ 0.69 $ 0.63 $ 0.51 $ 0.81 Cash dividends paid per common share $ 0.06 $ 0.06 $ 0.16 $ 0.16 29 -------------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (As a percentage of revenues) Year Ended December 31, 2013 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 67.2 69.8 70.1 70.0 Operating profit 9.6 10.2 7.4 4.5 Net earnings 5.6 5.5 3.6 1.7 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (As a percentage of revenues) Year Ended December 31, 2012 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 67.1 70.3 70.2 69.5 Operating profit 10.8 10.5 9.2 10.4 Net earnings 6.1 5.8 5.4 6.2 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (As a percentage of revenues) Year Ended December 31, 2011 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 70.5 72.5 71.8 70.1 Operating profit 10.8 10.4 8.1 10.9 Net earnings 6.0 5.7 4.4 6.6 Liquidity and Capital Resources Overview. For the year ended December 31, 2013, we generated $134.3 million in operating cash flow and issued $250 million in senior notes. In addition to funding operating expenses, we used $217.4 million for common stock repurchases, $108.4 million in cash for capital expenditures, $46.8 million to pay cash dividends and $41.2 million to acquire stores. We ended the year with $42.3 million in cash and cash equivalents.
Analysis of Cash Flow. Net cash provided by operating activities decreased by $83.6 million to $134.3 million in 2013 from $217.9 million in 2012. This decrease was attributable to the net changes in operating assets and liabilities, primarily from increased purchases of inventory related to expansion in our Acceptance Now and International segments.
Net cash used in investing activities increased by $18.9 million to $129.6 million in 2013 from $110.7 million in 2012. This increase was primarily attributable to an increase in both capital expenditures and acquisitions of businesses.
Net cash used in financing activities decreased by $111.3 million to $23.1 million in 2013 from $134.5 million in 2012. Net borrowings increased $282.0 million, including the issuance of $250 million in senior notes, and we purchased $155.6 million more of our common stock in 2013 than in 2012, primarily through the $200 million accelerated share repurchase that we initiated in May 2013 and closed in October 2013. We also increased our quarterly dividends in 2013 compared to 2012.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases, implementation of our growth strategies, income tax payments, capital expenditures and debt service. Our primary sources of liquidity have been cash provided by operations and borrowings. 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. The global financial markets continue to experience volatility and adverse conditions and such conditions in the capital markets may affect our ability to access additional sources of financing. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable.
30 -------------------------------------------------------------------------------- Our revolving credit facilities, including our $20.0 million line of credit at Intrust Bank, provide us with revolving loans in an aggregate principal amount not exceeding $520.0 million, of which $223.3 million was available at February 21, 2014. At February 21, 2014, we had $78.8 million in cash. To the extent we have available cash that is not necessary to fund the items listed above, we may declare and pay dividends on our common stock, repurchase additional shares of our common stock, or make additional payments to service our existing debt.
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.
As announced on February 6, 2014, we intend, subject to market and other conditions, to refinance our existing senior credit facilities. We currently expect to enter into a new $850 million senior credit facility, consisting of a $350 million term loan and a $500 million revolving credit facility, during the first quarter of 2014. We intend to repay amounts outstanding under our existing senior credit facility with the proceeds of the new term loan. We cannot provide any assurance that we will be able to complete this refinancing transaction on terms and conditions acceptable to us or at all.
Based on the long-term nature of our relationships with the lenders under our current senior credit facilities and our history of strong cash flow generation, we believe strongly we will be successful in refinancing our existing senior credit facilities on terms and conditions reasonably satisfactory to us.
However, if we are unable to complete the refinancing transaction, or obtain other relief from the lenders under our current senior credit facilities, our current projections indicate that an event of default under our existing senior credit facilities may occur in 2014. If an event of default does occur, the lenders under our current senior credit facilities could accelerate all amounts outstanding thereunder. The acceleration of all amounts outstanding under our current senior credit facilities would also be an event of default under the indentures governing our senior notes. See "-Senior Credit Facilities" and "-Senior Notes." 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 restrict 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 facility 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 2013 permitted bonus first-year depreciation deductions ranging from 50-100% of the adjusted basis of qualified property placed in service during such years.
The depreciation benefits associated with these tax acts are now reversing and had a negative effect on our 2013 cash flow. We estimate the negative effect of these acts in 2013 to be $14 million. We estimate that the remaining tax deferral associated with these acts approximates $167 million at December 31, 2013, of which approximately 75%, or $126 million will reverse in 2014, and the remainder will reverse between 2015 and 2016.
On January 2, 2013, President Obama signed into law the 2012 Act. The Work Opportunity Tax Credit and Empowerment Zone Employment Credits, as well as the Research and Development Credit were extended retroactive to January 1, 2012.
The benefit associated with these credits was $1.8 million; due to the 2012 Act's enactment in 2013, the benefit was recognized in the first quarter of 2013.
Merchandise Inventory. A reconciliation of merchandise inventory, which includes purchases, follows: Year Ended December 31, 2013 2012 2011 (In thousands) Beginning merchandise value $ 1,011,260 $ 946,623 $ 834,091 Inventory additions through acquisitions 11,843 4,380 6,023 Purchases 1,152,619 1,070,308 993,598 Depreciation of rental merchandise (655,591 ) (622,261 ) (556,945 ) Cost of goods sold (241,977 ) (265,791 ) (226,688 ) Skips and stolens (105,225 ) (84,532 ) (74,061 ) Other inventory deletions(1) (43,823 ) (37,467 ) (29,395 ) Ending merchandise value $ 1,129,106 $ 1,011,260 $ 946,623 ________(1) Other inventory deletions include loss/damage waiver claims and unrepairable and missing merchandise, as well as acquisition write-offs.
31 -------------------------------------------------------------------------------- Capital Expenditures. We make capital expenditures in order to maintain our existing operations as well as for new capital assets in new and acquired stores, and investment in information technology. We spent $108.4 million, $102.5 million and $132.7 million on capital expenditures in the years 2013, 2012 and 2011, respectively, and expect to spend an aggregate of approximately $100.0 million in 2014.
Acquisitions and New Location Openings. During 2013, we used approximately $41.2 million in cash acquiring locations and accounts in 47 separate transactions, including the acquisition of 66 ColorTyme franchises in 25 separate transactions as part of our franchise rebranding initiative.
The table below summarizes the location activity for the years ended December 31, 2013, 2012 and 2011.
Year Ended December 31, 2013 Core U.S. Acceptance Now International Franchising Total Locations at beginning of period 2,990 966 108 224 4,288 New location openings 37 411 63 40 551 Acquired locations remaining open 47 - - - 47 Closed locations Merged with existing locations 46 44 2 - 92 Sold or closed with no surviving location 36 8 - 85 129 Locations at end of period 2,992 1,325 169 179 4,665 Acquired locations closed and accounts merged with existing locations 38 - - - 38 Total approximate purchase price (in millions) $ 41.2 $ - $ - $ - $ 41.2 Year Ended December 31, 2012 Core U.S. Acceptance Now International Franchising Total Locations at beginning of period 2,994 750 80 216 4,040 New location openings 35 325 45 18 423 Acquired locations remaining open 6 - - - 6 Closed locations Merged with existing locations 40 95 1 - 136 Sold or closed with no surviving location 5 14 16 10 45 Locations at end of period 2,990 966 108 224 4,288 Acquired locations closed and accounts merged with existing locations 31 - - - 31 Total approximate purchase price (in millions) $ 13.3 $ - $ - $ - $ 13.3 32 -------------------------------------------------------------------------------- Year Ended December 31, 2011 Core U.S. Acceptance Now International Franchising Total Locations at beginning of period 2,985 384 23 209 3,601 New location openings 52 445 57 10 564 Acquired locations remaining open 26 5 - 3 34 Closed locations Merged with existing locations 28 63 - - 91 Sold or closed with no surviving location 41 21 - 6 68 Locations at end of period 2,994 750 80 216 4,040 Acquired locations closed and accounts merged with existing locations 71 - - - 71 Total approximate purchase price (in millions) $ 26.4 $ 0.3 $ - $ - $ 26.7 Senior Credit Facilities. Our $750.0 million senior credit facilities consist of a $250.0 million, five-year term loan and a $500.0 million, five-year revolving credit facility.
The table below shows the scheduled maturity dates of our senior term loan outstanding at December 31, 2013.
Year Ending December 31, (In thousands) 2014 $ 25,000 2015 25,000 2016 137,500 $ 187,500 The full amount of the revolving credit facility may be used for the issuance of letters of credit, of which $104.7 million had been so utilized as of February 21, 2014, at which date $172.0 million was outstanding and $223.3 million was available. The revolving credit facility and the term loan expire on July 14, 2016.
Borrowings under our senior credit facility accrue interest at varying rates equal to, at our election, either (y) the prime rate plus 0.50% to 1.50%; or (z) the Eurodollar rate plus 1.50% to 2.50%. Interest periods range from seven days (for borrowings under the revolving credit facility only) to one, two, three or six months, at our election. The weighted average Eurodollar rate on our outstanding debt was 0.17% at February 21, 2014. The margins on the Eurodollar rate and on the prime rate, which were 2.25% and 1.25%, respectively, at December 31, 2013, may fluctuate dependent upon an increase or decrease in our consolidated leverage ratio as defined by a pricing grid included in the amended credit agreement, and the weighted average margins for the year ended December 31, 2013, were 2.08% and 1.08%, respectively. We have not entered into any interest rate protection agreements with respect to term loans under our senior credit facilities. A commitment fee equal to 0.30% to 0.50% of the average daily amount of the available revolving commitment is payable quarterly.
Our senior credit facilities are secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property. Our senior credit facilities are also secured by a pledge of the capital stock of our wholly-owned U.S. subsidiaries (other than certain specified subsidiaries).
33 --------------------------------------------------------------------------------Our senior credit facilities contain, without limitation, covenants that generally limit our ability to: • incur additional debt in excess of $250.0 million at any one time outstanding (other than subordinated debt, which is generally permitted if the maturity date is later than July 14, 2017); • repurchase our capital stock and 6.625% notes and 4.75% notes and pay cash dividends in the event the pro forma senior leverage ratio is greater than 2.50x (on February 20, 2014, we obtained a waiver from the lenders under our senior credit facilities to permit the declaration and payment of a cash dividend with respect to the second quarter of 2014); • incur liens or other encumbrances; • merge, consolidate or sell substantially all our property or business; • sell assets, other than inventory, in the ordinary course of business; • make investments or acquisitions unless we meet financial tests and other requirements; • make capital expenditures in the event the pro forma consolidated leverage ratio is greater than 2.75x; or • enter into an unrelated line of business.
Our senior credit facilities require us to comply with several financial covenants. The table below shows the required and actual ratios under our credit facilities calculated as of December 31, 2013: Required Ratio Actual Ratio Maximum consolidated leverage ratio No greater than 3.25:1 2.64:1 Minimum fixed charge coverage ratio No less than 1.35:1 1.38:1 These financial covenants, as well as the related components of their computation, are defined in the amended and restated credit agreement governing our senior credit facility, which is included as an exhibit to our Current Report on Form 8-K dated as of July 14, 2011. In accordance with the credit agreement, the maximum consolidated leverage ratio was calculated by dividing the consolidated funded debt outstanding at December 31, 2013 ($880.7 million) by consolidated EBITDA for the 12-month period ending December 31, 2013 ($334.1 million). For purposes of the covenant calculation, (i) "consolidated funded debt" is defined as outstanding indebtedness less cash in excess of $25.0 million, and (ii) "consolidated EBITDA" is generally defined as consolidated net income (a) plus the sum of income taxes, interest expense, depreciation and amortization expense, extraordinary non-cash expenses or losses, and other non-cash charges, and (b) minus the sum of interest income, extraordinary income or gains, other non-cash income, and cash payments with respect to extraordinary non-cash expenses or losses recorded in prior fiscal quarters. Consolidated EBITDA is a non-GAAP financial measure that is presented not as a measure of operating results, but rather as a measure used to determine covenant compliance under our senior credit facilities.
The minimum fixed charge coverage ratio was calculated pursuant to the credit agreement by dividing consolidated EBITDA for the 12-month period ending December 31, 2013 as adjusted for certain capital expenditures ($485.1 million), by consolidated fixed charges for the 12-month period ending December 31, 2013 ($351.5 million). For purposes of the covenant calculation, "consolidated fixed charges" is defined as the sum of interest expense, lease expense, cash dividends, and mandatory debt repayments.
Events of default under our senior credit facilities include customary events, such as a cross-acceleration provision in the event that we default on other debt. In addition, an event of default under the senior credit facility would occur if a change of control occurs. This is defined to include the case where a third party becomes the beneficial owner of 35% or more of our voting stock or certain changes in Rent-A-Center's Board of Directors occurs. 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.
We utilize our revolving 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 revolving credit facility for general corporate purposes. The funds drawn on individual occasions have varied in amounts of up to $100.0 million, which occurred at the date we refinanced our senior secured debt, with total amounts outstanding ranging up to $221.0 million. 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.
On February 6, 2014, we announced that we intend, subject to market and other conditions, to refinance our existing senior credit facilities. We currently expect to enter into a new $850 million senior credit facility, consisting of a $350 million term loan and a $500 million revolving credit facility, during the first quarter of 2014. We intend to repay amounts outstanding under our 34 -------------------------------------------------------------------------------- existing senior credit facility with the proceeds of the new term loan. We cannot provide any assurance that we will be able to complete this refinancing transaction on terms and conditions acceptable to us or at all.
Senior Notes. On November 2, 2010, we issued $300.0 million in senior unsecured notes due November 2020, bearing interest at 6.625%, pursuant to an indenture dated November 2, 2010, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repay approximately $200.0 million of outstanding term debt under our senior credit facility. The remaining net proceeds were used to repurchase shares of our common stock.
On May 2, 2013, we issued $250.0 million in senior unsecured notes due May 2021, bearing interest at 4.750%, pursuant to an indenture dated May 2, 2013, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repurchase shares of our common stock under a $200.0 million accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under our senior credit facility.
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 (subject to a restricted payments basket under which approximately $75 million is available); 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 in the 2010 indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, 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 holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase.
Any mandatory repurchase of the 6.625% notes an/or the 4.75% notes would trigger an event of default under our senior credit facilities. We are not required to maintain any financial ratios under either of the indentures.
In addition to the senior credit facilities discussed above, we maintain a $20.0 million unsecured, revolving line of credit with INTRUST Bank, N.A. to facilitate cash management. The outstanding balance of this line of credit was $18.3 million and $0 at December 31, 2013, and December 31, 2012, respectively.
Store Leases. We lease space for substantially all of our Core U.S. and International stores and certain support facilities under operating leases expiring at various times through 2023. 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.
Franchising Guarantees. Our subsidiary, ColorTyme Finance, Inc., is a party to an agreement with Citibank, N.A., pursuant to which Citibank provides up to $40.0 million in aggregate financing to qualifying franchisees of Franchising.
Under the Citibank agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Citibank can assign the loans and the collateral securing such loans to ColorTyme Finance, with ColorTyme Finance paying or causing to be paid the outstanding debt to Citibank and then succeeding to the rights of Citibank under the debt agreements, including the right to foreclose on the collateral.
Rent-A-Center and ColorTyme Finance guarantee the obligations of the franchise borrowers under the Citibank facility. An additional $20.0 million of financing is provided by Texas Capital Bank, 35 -------------------------------------------------------------------------------- National Association under an agreement similar to the Citibank financing, which is guaranteed by Rent-A-Center East, Inc., a subsidiary of Rent-A-Center. The maximum guarantee obligations under these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, is $60.0 million, of which $17.2 million was outstanding as of December 31, 2013.
Contractual Cash Commitments. The table below summarizes debt, lease and other minimum cash obligations outstanding as of December 31, 2013: Payments Due by Period Contractual Cash Obligations Total 2014 2015-2016 2017-2018 Thereafter (In thousands) Senior Debt (including current portion) $ 366,275 (1) $ 43,275 $ 323,000 $ - $ - 6.625% Senior Notes(2) 439,122 19,876 39,750 39,750 339,746 4.75% Senior Notes(3) 339,066 11,875 23,750 23,750 279,691 Operating Leases 567,035 189,353 271,887 101,927 3,868 Total(4) $ 1,711,498 $ 264,379 $ 658,387 $ 165,427 $ 623,305 __________ (1) Amount referenced does not include interest payments. Our senior credit facilities bear interest at varying rates equal to the Eurodollar rate plus 1.5% to 2.5% or the prime rate plus 0.5% to 1.5% at our election. The weighted average Eurodollar rate on our outstanding debt at December 31, 2013 was 0.20%.
(2) Includes interest payments of $9.9 million on each of May 15 and November 15 of each year.
(3) Includes interest payments of $5.9 million on each May 1 and November 1 of each year.
(4) As of December 31, 2013, we have $13.2 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.
Repurchases of Outstanding Securities. Under our current common stock repurchase program, our Board of Directors has authorized the purchase, from time to time, in the open market and privately negotiated transactions, up to an aggregate of $1.25 billion of Rent-A-Center common stock. On May 2, 2013, we entered into an agreement with Goldman, Sachs & Co. ("Goldman Sachs") to repurchase $200.0 million of Rent-A-Center common stock under an accelerated stock buyback program ("the ASB transaction"). Under the agreement, we paid $200.0 million to Goldman Sachs on May 7, 2013, and we received an initial share delivery of 4,592,423 shares, which was estimated to represent 80% of shares expected to be purchased in the ASB transaction. The weighted value of these shares immediately reduced weighted-average shares outstanding in our calculation of earnings per share.
The remainder of the ASB transaction was subject to a forward contract that settled in October 2013, at which time we received an additional 816,916 shares, ending the ASB transaction.
We have repurchased a total of 36,994,653 shares and 31,120,279 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million and $777.3 million as of December 31, 2013 and 2012, respectively, under this common stock repurchase program. In addition to the 5,409,339 shares repurchased pursuant to the accelerated stock buyback, we repurchased a total of 465,035 shares for $17.4 million in cash during the year ended December 31, 2013.
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 federal income tax refunds.
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 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.
36 -------------------------------------------------------------------------------- Effect of New Accounting Pronouncements In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB Accounting Standards Codification Topic 740, Income Taxes. This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Both early adoption and retrospective application are permitted, and we will adopt this standard prospectively on January 1, 2014. This standard will not have a material impact on our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("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.
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