UPBOUND GROUP, INC. (UPBD) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Objective
We report financial operating performance under four operating segments, including our Rent-A-Center Business segment, which represents our company-owned stores and e-commerce platform through rentacenter.com; our Acima segment (formerly Preferred Lease), which includes our virtual and staffed business models; and our Mexico and Franchising segments.
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 discussion of our liquidity and capital resources. You should read the 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 Form 10 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.
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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, 2021, consolidated revenues increased approximately $1.769.3 million, primarily due to the acquisition of Acima Holdings, in addition to an increase in same store sales in our Rent-A-Center Business. Operating profit increased approximately $43.2 million for the twelve months ended December 31, 2021, primarily due to the acquisition of Acima Holdings and increased operating profit of the Acima and Rent-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 acquired software and intangible assets related to the acquisition of Acima Holdings.
Revenues in our Rent-A-Center Business segment increased approximately $185.2 million for the twelve months ended December 31, 2021, primarily due to an increase in same store sales revenue driven by growth 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.
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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 fourth quarter of 2020 and higher inventory purchases by franchisees. Operating profit increased $7.8 million for the twelve 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 and outstanding indebtedness of $1.61 billion.
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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) | % |
Comparison of the Years Ended December 31, 2021 and 2020
Store Revenue. Total store revenue increased by $1,715.2 million, or 63.2%, to $4,429.4 million for the year ended December 31, 2021, from $2,714.2 million for 2020. This increase was primarily due to increases of approximately $1,517.9 million and $185.2 million in the Acima and Rent-A-Center Business segments, respectively, 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, 2021 increased by $604.8 million, or 92.3%, to $1,260.4 million, as compared to $655.6 million in 2020. This increase in cost of rentals and fees was primarily attributable to an increase of $558.8 million and $43.2 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the “Segment
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Performance” section below. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 35.8% for the year ended December 31, 2021 as compared to 29.0% in 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 increased by $553.6 million, or 144.8%, to $935.8 million for the year ended December 31, 2021, from $382.2 million in 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 (12.8)% for the year ended December 31, 2021, from (0.9)% in 2020.
Gross Profit. Gross profit increased by $562.8 million, or 33.7%, to $2,235.0 million for the year ended December 31, 2021, from $1,672.2 million in 2020, due primarily to an increase of $407.7 million and $138.8 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the “Segment Performance” section below. Gross profit as a percentage of total revenue decreased to 48.8% in 2021, as compared to 59.4% in 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 increased by $65.7 million, or 11.3%, to $644.8 million for the year ended December 31, 2021, as compared to $579.1 million in 2020, primarily attributable to increases of $33.8 million and $29.3 million in the Acima and Rent-A-Center Business segments, respectively, as discussed further in the “Segment Performance” section below. Store labor expressed as a percentage of total store revenue was 14.6% for the year ended December 31, 2021, as compared to 21.3% in 2020.
Other Store Expenses. Other store expenses include charge-offs due to customer stolen merchandise and occupancy, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses increased by $160.7 million, or 26.4%, to $770.1 million for the year ended December 31, 2021, as compared to $609.4 million in 2020, primarily attributable to a increases of $144.2 million and $13.1 million in the Acima and Rent-A-Center Business segments, as discussed further in the “Segment Performance” section below. Other store expenses expressed as a percentage of total store revenue were 17.4% for the year ended December 31, 2021, compared to 22.5% in 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 $41.8 million, or 27.3%, to $194.9 million for the year ended December 31, 2021, as compared to $153.1 million in 2020, primarily due to higher labor overhead as a result of the acquisition of Acima Holdings and 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 were 4.3% for the year ended December 31, 2021, compared to 5.4% in 2020.
Other charges. Other charges increased by $253.3 million to $289.9 million in 2021, as compared to $36.6 million in 2020. Other charges for the year ended December 31, 2021 primarily included stock compensation expense related to the vesting of a portion of the equity consideration issued in the acquisition of Acima Holdings, depreciation and amortization of acquired software and intangible assets, legal settlement reserves, and other one-time transaction and integration costs related to the acquisition of Acima Holdings. Other charges for the year ended December 31, 2020 primarily related 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 impacts, and asset disposals, partially offset by proceeds from the sale of a legal antitrust claim, rent abatements, and insurance proceeds related to hurricane Maria in 2017.
Operating Profit. Operating profit increased $43.2 million, or 18.2%, to $280.5 million for the year ended December 31, 2021, as compared to $237.3 million in 2020, primarily due to increases in revenue and gross profit, offset by increases in operating expenses as described above. Operating profit expressed as a percentage of total revenue was 6.1% for the year ended December 31, 2021, compared to 8.4% in 2020. Excluding Other charges, operating profit was $570.5 million, or 12.4% of revenue for the year ended December 31, 2021, compared to $273.9 million or 9.7% of revenue for the comparable period of 2020.
Income Tax Expense. Income tax expense for the twelve months ended December 31, 2021 was $59.4 million, as compared to $14.7 million in 2020. The effective tax rate was 30.6% for the twelve months ended December 31, 2021, compared to 6.6% in 2020. The increase in income tax expense for the twelve months ended December 31, 2021 compared to 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
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Relief and Economic Security Act, enacted on March 27, 2020 (the “CARES Act”) and the release of domestic and foreign tax valuation allowances.
Comparison of the Years Ended December 31, 2020 and 2019
For similar operating and financial data and discussion of our year ended December 31, 2020 results compared to our year 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 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 revenue for the year ended December 31, 2021 was primarily due to an increase in same store sales revenue driven by growth in e-commerce sales and higher portfolio balance, partially offset by the impact of refranchising approximately 100 stores in California in the fourth quarter of 2020.
Gross Profit. Gross profit increased in 2021 primarily due to the increases in revenue described above. Gross profit as a percentage of segment revenues increased to 70.3% in 2021 from 69.9% in 2020.
Operating Profit. Operating profit as a percentage of segment revenues was 22.0% for 2021 compared to 18.0% for 2020. The increase in operating profit for the year ended December 31, 2021 was driven primarily by higher revenues, partially offset by higher loss rates and higher labor expense. Charge-offs in our Rent-A-Center Business lease-to-own stores due to customer stolen merchandise, expressed as a percentage of Rent-A-Center Business lease-to-own revenues, were approximately 3.4% for the year ended December 31, 2021, compared to 3.0% in 2020. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Charge-offs in our Rent-A-Center Business lease-to-own stores due to other merchandise losses, expressed as a percentage of revenues, were approximately 1.6% for the year ended December 31, 2021, compared to 1.5% in 2020.
Acima 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 | % |
Revenues. The increase in revenue for the year ended December 31, 2021 compared to 2020 was driven primarily by the acquisition of Acima Holdings in February 2021.
Gross Profit. Gross profit as a percentage of segment revenue decreased to 31.3% in 2021 as compared to 39.6% in 2020, primarily due to the acquisition of Acima Holdings which maintains a different lease merchandise depreciation policy resulting in lower gross margins.
Operating Profit. Operating profit as a percentage of segment revenues increased to 7.6% for the year ended December 31, 2021, compared to 7.1% in 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 the acquisition of Acima Holdings, including amortization of acquired intangible assets. Charge-offs in our Acima locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 9.6% in 2021 as compared to 13.3% in 2020. Other merchandise losses include unrepairable merchandise and loss/damage waiver claims. Charge-offs in our Acima locations due
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to other merchandise losses, expressed as a percentage of revenues, were approximately 0.0% and 0.4% in 2021 and 2020, respectively.
Mexico 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 |
Revenues. Revenues for 2021 were positively impacted by exchange rate fluctuations of approximately $3.1 million, as compared to 2020. On a constant currency basis, revenues for the year ended December 31, 2021 increased approximately $7.7 million.
Gross Profit. Gross profit for the year ended December 31, 2021 was positively impacted by exchange rate fluctuations of approximately $2.2 million, as compared to 2020. On a constant currency basis, gross profit for the year ended December 31, 2021 increased approximately $5.2 million. Gross profit as a percentage of segment revenues decreased to 70.2% in 2021, compared to 70.5% in 2020.
Operating Profit. Operating profit for the year ended December 31, 2021 was positively impacted by exchange rate fluctuations of approximately $0.4 million, compared to 2020. On a constant currency basis, operating profit for the year ended December 31, 2021 increased approximately $1.7 million. Operating profit as a percentage of segment revenues increased to 12.8% in 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 the 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.
Liquidity and Capital Resources
Overview. For the year ended December 31, 2021, we generated $392.3 million in operating cash flow. We used cash in the amount of $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 $47.6 million in debt issuance costs, offset by cash proceeds from indebtedness of $1,780.0 million. We ended the year with $108.3 million of cash and cash equivalents and outstanding indebtedness of $1.61 billion.
Analysis of Cash Flow. Cash provided by operating activities increased by $155.8 million to $392.3 million in 2021 from $236.5 million in 2020, primarily due to the acquisition of Acima Holdings, partially offset by cost savings initiatives implemented by the Company in response 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 Acima Holdings in February 2021, and increase in capital expenditures of $27.9 million.
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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 acquisition of Acima Holdings in February 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, 2021.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases. Other capital requirements include expenditures for property assets, debt service, dividends and share repurchases. Our primary sources of liquidity have been cash provided by operations.
We utilize our ABL 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 ABL 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 cash flow generated from operations and availability under our ABL Credit Facility, will be sufficient to fund our operations during the next 12 months. At February 21, 2022, we had approximately $123.1 million in cash on hand, and $290.0 million available under our ABL Credit Facility.
Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2017 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”) extended the 50% bonus depreciation to 2015 and through September 26, 2017, when it was updated by the Tax Cuts and Jobs Act of 2017 (“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 bonus depreciation provided by the Tax Act resulted in an estimated benefit of $349 million for us in 2021. We estimate the remaining tax deferral associated with bonus depreciation from these Acts is approximately $402 million at December 31, 2021, of which approximately 80%, or $320 million, will reverse in 2022, and the majority of the remainder will reverse between 2023 and 2024.
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.
(2)Includes incremental merchandise losses related to the conversion of Preferred Lease locations to Acima Holdings software in 2021, and impacts of COVID-19 in 2020.
(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, acquire new capital assets in new and acquired stores and invest in information technology. We spent $62.5 million, $34.5 million and $21.2 million on capital expenditures in the years 2021, 2020 and 2019, respectively.
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Acquisitions and New Location Openings. During 2021, we acquired one rent-to-own store location and customer accounts from a franchisee for an aggregate purchase price of approximately $0.3 million. The store location remained open upon acquisition as part of our Rent-A-Center Business segment.
The tables below summarize the location activity for the years ended December 31, 2021, 2020 and 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.
Senior Debt. 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 the aggregate (the “ABL Credit Facility”). Under the ABL Credit Facility, we may borrow only up to the lesser of the level of the then-current borrowing base and the aggregate amount of
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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 reserves. The ABL Credit Facility bears interest at a fluctuating rate determined by reference to the eurodollar rate plus an applicable margin of 1.50% to 2.00%, which margin, as of February 21, 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 Loan 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 subsidiary 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 are 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 portion of the Aggregate Cash Consideration, repay certain of our and our subsidiaries' outstanding indebtedness, 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 terminated in connection with such repayment. At February 21, 2022, we had outstanding borrowings of $868.4 million under the Term Loan Facility.
Senior Notes. On 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 Aggregate Cash Consideration upon closing of the 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. 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 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.
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Operating 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. As of December 31, 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.
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 rental 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.
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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 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, 2021, the amount reserved for losses within our self-insured retentions with respect to workers’ compensation, general liability and vehicle liability insurance was $82.6 million, as compared to $88.3 million at December 31, 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.
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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.
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.
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. As an alternative to performing a quantitative assessment to measure the fair value of the relevant unit, the Company may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying value of the net assets of the reporting unit exceeds its fair value.
Our reporting units are our reportable operating segments identified in Note T 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 2020 goodwill impairment assessment through the third quarter 2021, we periodically analyzed whether any indicators of impairment had occurred, including by comparing the estimated fair value of the Company, as determined based on our 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, 2021, concluding it was not more likely than not that the carrying value of net assets of our reporting units exceeded their fair value.
At December 31, 2021 and 2020, the amount of goodwill allocated to the Rent-A-Center Business segment was $1.5 million. At December 31, 2021 and 2020, the amount of goodwill allocated to the 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.
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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.
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Recently Issued 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.
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.
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