10-K 1 rac2017-form10xk.htm 10-K Wdesk | Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-38047
 
 
 
 
 
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
45-0491516
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
5501 Headquarters Drive
Plano, Texas 75024
(Address, including zip code of registrant's
principal executive offices)
Registrant's telephone number, including area code: 972-801-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, par value $0.01 per share
 
The Nasdaq Global Select Market, Inc.
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ   No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ¨   No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ     Accelerated filer ¨     Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨ Emerging growth company  ¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No þ
Aggregate market value of the 42,856,015 shares of Common Stock held by non-affiliates of the registrant at the closing sales price as reported on The Nasdaq Global Select Market, Inc. on June 30, 2017
$
502,272,496

Number of shares of Common Stock outstanding as of the close of business on February 21, 2018:
53,413,636

Documents incorporated by reference:
Portions of the definitive proxy statement relating to the 2018 Annual Meeting of Stockholders of Rent-A-Center, Inc. are incorporated by reference into Part III of this report.

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TABLE OF CONTENTS 
 
 
Page
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
SIGNATURES


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Factors that could cause or contribute to these differences include, but are not limited to:
the general strength of the economy and other economic conditions affecting consumer preferences and spending;
factors affecting the disposable income available to our current and potential customers;
changes in the unemployment rate;
uncertainties concerning the outcome, impact, effects and results of the exploration of our strategic and financial alternatives;
difficulties encountered in improving the financial and operational performance of our business segments;
our ability to realize any benefits from our initiatives regarding cost-savings and other EBITDA enhancements, efficiencies and working capital improvements;
our chief executive officer transitions, including our ability to effectively operate and execute our strategies during the transition period;
our ability to execute our franchise strategy;
failure to manage our store labor and other store expenses;
our ability to develop and successfully execute strategic initiatives;
disruptions caused by the operation of our store information management system;
our transition to more-readily scalable "cloud-based" solutions;
our ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications;
disruptions in our supply chain;
limitations of, or disruptions in, our distribution network;
rapid inflation or deflation in the prices of our products;
our ability to execute and the effectiveness of a store consolidation, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation;
our available cash flow;
our ability to refinance our senior credit facility on favorable terms, if at all;
our ability to identify and successfully market products and services that appeal to our customer demographic;
consumer preferences and perceptions of our brands;
our ability to control costs and increase profitability;
our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores;
our ability to enter into new and collect on our rental or lease purchase agreements;
the passage of legislation adversely affecting the Rent-to-Own industry;
our compliance with applicable statutes or regulations governing our transactions;

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changes in interest rates;
adverse changes in the economic conditions of the industries, countries or markets that we serve;
information technology and data security costs;
the impact of any breaches in data security or other disturbances to our information technology and other networks and our ability to protect the integrity and security of individually identifiable data of our customers and employees;
changes in our stock price, the number of shares of common stock that we may or may not repurchase, and our dividend policy and any changes thereto, if any;
changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;
changes in our effective tax rate;
fluctuations in foreign currency exchange rates;
our ability to maintain an effective system of internal controls;
the resolution of our litigation; and
the other risks detailed from time to time in our reports furnished or filed with the Securities and Exchange Commission.

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PART I
Item 1. Business.
History of Rent-A-Center
Unless the context indicates otherwise, references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center, Inc., the parent, and any or all of its direct and indirect subsidiaries. For any references in this document to Note A through Note U, refer to the Notes to Consolidated Financial Statements in Item 8.
We are one of the largest rent-to-own operators in North America, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories), under flexible rental purchase agreements with no long-term obligation. We were incorporated in the State of Delaware in 1986, and our common stock is traded on the Nasdaq Global Select Market under the symbol "RCII."
Our principal executive offices are located at 5501 Headquarters Drive, Plano, Texas 75024. Our telephone number is (972) 801-1100 and our company website is www.rentacenter.com. We do not intend for information contained on our website to be part of this Annual Report on Form 10-K. We make available free of charge on or through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). Additionally, we provide electronic or paper copies of our filings free of charge upon request.
The Rental Purchase Transaction
The rental purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long-term obligation. Key features of the rental purchase transaction include:
Brand name merchandise. We offer well-known brands such as LG, Samsung, Sony and Vizio home electronics; Frigidaire, General Electric, LG, Samsung and Whirlpool appliances; HP, Dell, Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; LG and Samsung smartphones; and Ashley home furnishings.
Convenient payment options. Our customers make payments on a weekly, semi-monthly or monthly basis in our stores, kiosks, online or by telephone. We accept cash, credit or debit cards. Rental payments are generally made in advance and, together with applicable fees, constitute our primary revenue source. Approximately 82% and 92% of our rental purchase agreements are on a weekly term in our Core U.S. rent-to-own stores and our Mexico segment, respectively. Payments are made in advance on a monthly basis in our Acceptance Now segment.
No negative consequences. A customer may terminate a rental purchase agreement at any time without penalty.
No credit needed. Generally, we do not conduct a formal credit investigation of our customers. We verify a customer’s residence and sources of income. References provided by the customer are also contacted to verify certain information contained in the rental purchase order form.
Delivery & set-up included. We generally offer same-day or next-day delivery and installation of our merchandise at no additional cost to the customer in our rent-to-own stores. Our Acceptance Now locations rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer.
Product maintenance & replacement. We provide any required service or repair without additional charge, except for damage in excess of normal wear and tear. Repair services are provided through our network of service centers, the cost of which may be reimbursed by the vendor if the item is still under factory warranty. If the product cannot be repaired at the customer’s residence, we provide a temporary replacement while the product is being repaired. If the product cannot be repaired, we will replace it with a product of comparable quality, age and condition.
Lifetime reinstatement. If a customer is temporarily unable to make payments on a piece of rental merchandise and must return the merchandise, that customer generally may later re-rent the same piece of merchandise (or if unavailable, a substitute of comparable quality, age and condition) on the terms that existed at the time the merchandise was returned, and pick up payments where they left off without losing what they previously paid.

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Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has continuously renewed the rental purchase agreement for a period of seven to 30 months, depending upon the product type, or exercises a specified early purchase option.
Our Strategy
Our strategy focuses on several improvement areas including a significant cost savings plan, a more targeted value proposition, and a refranchising program.
The Company is targeting significant cost savings opportunities across the business in the areas of overhead, supply chain and other store expenses.
The updated value proposition in the Core is intended to improve traffic trends with a balanced approach of competitively pricing elastic categories while capturing more margin in inelastic categories.
Within Acceptance NOW, the value proposition will center around improved return on investment through a shorter payback period and higher ownership levels.
Refranchising brick and mortar locations will enable the Company to maintain and grow its presence while using proceeds to pay down debt.
Our Operating Segments
We report four operating segments: Core U.S., Acceptance Now, Mexico, and Franchising. Additional information regarding our operating segments is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this Annual Report on Form 10-K, and financial information regarding these segments and revenues by geographic area are provided in Note S to the consolidated financial statements contained in this Annual Report on Form 10-K. Substantially all of our revenues for the past three years originated in the United States.
Core U.S.
Our Core U.S. segment is our largest operating segment, comprising approximately 70% of our consolidated net revenues for the year ended December 31, 2017. Approximately 80% of our business in this segment is from repeat customers.
At December 31, 2017, we operated 2,381 company-owned stores in the United States, Canada and Puerto Rico, including 45 retail installment sales stores under the names “Get It Now” and “Home Choice.” We routinely evaluate the markets in which we operate and will close, sell or merge underperforming stores.
Acceptance Now
Through our Acceptance Now segment, we generally provide an on-site rent-to-own option at a third-party retailer’s location. In the event a retail purchase credit application is declined, the customer can be introduced to an in-store Acceptance Now representative who explains an alternative transaction for acquiring the use and ownership of the merchandise. Because we neither require nor perform a formal credit investigation for the approval of the rental purchase transaction, applicants who meet certain basic criteria are generally approved. We believe our Acceptance Now program is beneficial for both the retailer and the consumer. The retailer captures more sales because we buy the merchandise directly from them and future rental payments are generally made at the retailer’s location. We believe consumers also benefit from our Acceptance Now program because they are able to obtain the products they want and need without the necessity of credit. The gross margins in this segment are lower than the gross margins in our Core U.S. segment because we pay retail for the product. Through certain retail partners, we offer our customers the option to obtain ownership of the product at or slightly above the full retail price if they pay within 90 days. In some cases, the retailer provides us a rebate on the cost of the merchandise if the customer exercises this 90 day option.
Each Acceptance Now kiosk location typically consists of an area with a computer, desk and chairs. We occupy the space without charge by agreement with each retailer. Accordingly, capital expenditures with respect to a new Acceptance Now location are minimal, and any exit costs associated with the closure of an Acceptance Now location would also be immaterial on an individual basis. Our operating model is highly agile and dynamic because we can open and close locations quickly and efficiently.
We rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer. In the event the customer returns rented merchandise, we pick it up at no additional charge. Merchandise returned from an Acceptance Now kiosk location is offered for rent at one of our Core U.S. rent-to-own stores.
As of December 31, 2017, we operated 1,106 staffed kiosk locations inside furniture and electronics retailers located in 42 states and Puerto Rico, and 125 virtual (direct) locations.

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Mexico
Our Mexico segment currently consists of our company-owned rent-to-own stores in Mexico. At December 31, 2017, we operated 131 stores in this segment.
We are subject to the risks of doing business internationally as described under "Risk Factors."
Franchising
The stores in our Franchising segment use Rent-A-Center's, ColorTyme's or RimTyme's trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising's primary source of revenue is the sale of rental merchandise to its franchisees who, in turn, offer the merchandise to the general public for rent or purchase under a rent-to-own transaction.
At December 31, 2017, this segment franchised 225 stores in 31 states operating under the Rent-A-Center (148 stores), ColorTyme (39 stores) and RimTyme (38 stores) names. These rent-to-own stores primarily offer high quality durable products such as consumer electronics, appliances, computers, furniture and accessories, wheels and tires.
As franchisor, Franchising receives royalties of 2.0% to 6.0% of the franchisees’ monthly gross revenue and, generally, an initial fee up to $35,000 per new location.
The following table summarizes our locations allocated among these operating segments as of December 31:
 
2017
 
2016
 
2015
Core U.S.
2,381

 
2,463

 
2,672

Acceptance Now Staffed
1,106

 
1,431

 
1,444

Acceptance Now Direct
125

 
478

 
532

Mexico
131

 
130

 
143

Franchising
225

 
229

 
227

Total locations
3,968

 
4,731

 
5,018

The following discussion applies generally to all of our operating segments, unless otherwise noted.
Rent-A-Center Operations
Store Expenses
Our expenses primarily relate to merchandise costs and the 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 other expenses.
Product Selection
Our Core U.S. and Mexico stores generally offer merchandise from five basic product categories: consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories). Although we seek to maintain sufficient inventory in our stores to offer customers a wide variety of models, styles and brands, we generally limit merchandise to prescribed levels to maintain strict inventory controls. We seek to provide a wide variety of high quality merchandise to our customers, and we emphasize products from name-brand manufacturers. Customers may request either new merchandise or previously rented merchandise. Previously rented merchandise is generally offered at a similar weekly or monthly rental rate as is offered for new merchandise, but with an opportunity to obtain ownership of the merchandise after fewer rental payments.
Consumer electronic products offered by our stores include high definition televisions, home theater systems, video game consoles and stereos. Appliances include refrigerators, freezers, washing machines, dryers, and ranges. We offer desktop, laptop, tablet computers and smartphones. Our furniture products include dining room, living room and bedroom furniture featuring a number of styles, materials and colors. Accessories include lamps and tables and are typically rented as part of a package of items, such as a complete room of furniture. Showroom displays enable customers to visualize how the product will look in their homes and provide a showcase for accessories.
The merchandise assortment may vary in our non-U.S. stores according to market characteristics and consumer demand unique to the particular country in which we are operating. For example, in Mexico, the appliances we offer are sourced locally, providing our customers in Mexico the look and feel to which they are accustomed in that product category.

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Acceptance Now locations offer the merchandise available for sale at the applicable third-party retailer, primarily furniture and accessories, consumer electronics and appliances.
For the year ended December 31, 2017, furniture and accessories accounted for approximately 41% of our consolidated rentals and fees revenue, consumer electronic products for 20%, appliances for 15%, computers for 5%, smartphones for 3% and other products and services for 16%.
Product Turnover
On average, in the Core U.S. segment, a rental term of 14 months or exercising an early purchase option is generally required to obtain ownership of new merchandise. Product turnover is the number of times a product is rented to a different customer. On average, a product is rented (turned over) to three customers before a customer acquires ownership. Merchandise returned in the Acceptance Now segment is moved to a Core U.S. store where it is offered for rent. Ownership is attained in approximately 25% of first-time rental purchase agreements in the Core U.S. segment. The average total life for each product in our Core U.S. segment is approximately 18 months, which includes the initial rental period, all re-rental periods and idle time in our system. To cover the higher operating expenses generated by product turnover and the key features of rental purchase transactions, rental purchase agreements require higher aggregate payments than are generally charged under other types of purchase plans, such as installment purchase or credit plans.
Collections
Store managers use our management information system to track collections on a daily basis. If a customer fails to make a rental payment when due, store personnel will attempt to contact the customer to obtain payment and reinstate the agreement, or will terminate the account and arrange to regain possession of the merchandise. We attempt to recover the rental items as soon as possible following termination or default of a rental purchase agreement, generally by the seventh day. Collection efforts are enhanced by the personal and job-related references required of customers, the personal nature of the relationships between our employees and customers, and the availability of lifetime reinstatement. Currently, we track past due amounts using a guideline of seven days in our Core U.S. segment and 30 days in the Acceptance Now segment. These metrics align with the majority of the rental purchase agreements in each segment, since payments are generally made weekly in the Core U.S. segment and monthly in the Acceptance Now segment.
If a customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Core U.S. and Mexico segments, and on or before the 150th day in the Acceptance Now segment.
Management
Our executive management team has extensive rent-to-own or similar retail experience and has demonstrated the ability to grow and manage our business through their operational leadership and strategic vision. In addition, our regional and district managers have long tenures with us, and we have a history of promoting management personnel from within. We believe this extensive industry and company experience will allow us to effectively execute our strategies.
Purchasing
Our centralized inventory management organization utilizes a combination of automated and manual merchandise planning, forecasting and replenishment processes to determine appropriate inventory levels to maintain in our third-party distribution centers and company-owned stores. Inventory levels are monitored on a daily basis, and purchase orders are processed and sent to manufacturers and distributors on a weekly basis to replenish inventory housed in our third-party distribution centers. We use a customized software solution that builds recommended store replenishment orders based on current store inventory levels, current store rental and return trends, seasonality, product needs, desired weeks of supply targets, and other key factors. Approved orders are then passed through an automated solution to our third party distribution center and furniture manufacturers and product ships to the stores. The replenishment system and associated processes allow us to retain tight control over our inventory, ensure assortment diversity in our stores and assists us in having the right products available at the right time.
In our Core U.S. and Mexico segments, we purchase our rental merchandise from a variety of suppliers. In 2017, approximately 13% of our merchandise purchases were attributable to Ashley Furniture Industries. No other brand accounted for more than 10% of merchandise purchased during these periods. We do not generally enter into written contracts with our suppliers that obligate us to meet certain minimum purchasing levels. Although we expect to continue relationships with our existing suppliers, we believe there are numerous sources of products available, and we do not believe the success of our operations is dependent on any one or more of our present suppliers.

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In our Acceptance Now segment, we purchase the merchandise selected by the customer from the applicable third-party retailer at the time such customer enters into a rental purchase agreement with us.
With respect to our Franchising segment, the franchise agreement requires the franchised stores to exclusively offer for rent or sale only those brands, types and models of products that Franchising has approved. The franchised stores are required to maintain an adequate mix of inventory that consists of approved products for rent as dictated by Franchising policy manuals. Franchising negotiates purchase arrangements with various suppliers it has approved, and franchisees purchase directly from those suppliers and from inventory housed in our third-party distribution centers.
Marketing
We promote our products and services through television and radio commercials, print advertisements, store telemarketing, digital display advertisements, direct email campaigns, social networks, paid and organic search, website and store signage. Our advertisements emphasize such features as product and name-brand selection, the opportunity to pay as you go without credit, long-term contracts or obligations, delivery and set-up at no additional cost, product repair and loaner services at no extra cost, lifetime reinstatement and multiple options to acquire ownership, including 90 day option pricing, an early purchase option or through a fixed number of payments. In addition, we promote the “RAC Worry-Free Guarantee®” to further highlight these aspects of the rental purchase transaction. We believe that by leveraging our advertising efforts to highlight the benefits of the rental purchase transaction, we will continue to educate our customers and potential customers about the rent-to-own alternative to credit as well as solidify our reputation as a leading provider of high-quality, branded merchandise and services.
Franchising has established national advertising funds for the franchised stores, whereby Franchising has the right to collect up to 3% of the monthly gross revenue from each franchisee as contributions to the fund. Franchising directs the advertising programs of the fund, generally consisting of television and radio commercials and print advertisements. Franchising also has the right to require franchisees to expend up to 3% of their monthly gross revenue on local advertising.
Industry & Competition
According to a report published by the Association of Progressive Rental Organizations in 2016, the $8.5 billion rent-to-own industry in the United States, Mexico and Canada consists of approximately 9,200 stores, serves approximately 4.8 million customers and approximately 83% of rent-to-own customers have household incomes between $15,000 and $50,000 per year. The rent-to-own industry provides customers the opportunity to obtain merchandise they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to credit. We believe the number of consumers lacking access to credit is increasing. According to data released by the Fair Isaac Corporation on July 10, 2017, consumers in the “subprime” category (those with credit scores below 650) made up 30% of the United States population.
The rent-to-own industry is experiencing rapid change with the emergence of virtual and kiosk-based operations, such as our Acceptance Now business. These new industry participants are disrupting traditional rent-to-own stores by attracting customers and making the rent-to-own transaction more acceptable to potential customers. In addition, banks and consumer finance companies are developing products and services designed to compete for the traditional rent-to-own customer.
These factors are increasingly contributing to an already highly competitive environment. Our stores and kiosks compete with other national, regional and local rent-to-own businesses, including on-line only competitors, as well as with rental stores that do not offer their customers a purchase option. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores, online competitors, and non-traditional lenders. Competition is based primarily on convenience, store location, product selection and availability, customer service, rental rates and terms.
Seasonality
Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year. Generally, our customers will more frequently exercise the early purchase option on their existing 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. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.
Trademarks
We own various trademarks and service marks, including Rent-A-Center® and RAC Worry-Free Guarantee® that are used in connection with our operations and have been registered with the United States Patent and Trademark Office. The duration of our trademarks is unlimited, subject to periodic renewal and continued use. In addition, we have obtained trademark registrations in

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Mexico, Canada and certain other foreign jurisdictions. We believe we hold the necessary rights for protection of the trademarks and service marks essential to our business. The products held for rent in our stores also bear trademarks and service marks held by their respective manufacturers.
Franchising licenses the use of the Rent-A-Center and ColorTyme trademarks and service marks to its franchisees under the franchise agreement. Franchising owns various trademarks and service marks, including ColorTyme® and RimTyme®, that are used in connection with its operations and have been registered with the United States Patent and Trademark office. The duration of these marks is unlimited, subject to periodic renewal and continued use.
Employees
As of February 21, 2018, we had approximately 18,300 employees.
Government Regulation
Core U.S. & Acceptance Now
State Regulation.    Currently, 46 states, the District of Columbia and Puerto Rico have rental purchase statutes that recognize and regulate rental purchase transactions as separate and distinct from credit sales. We believe this existing legislation is generally favorable to us, as it defines and clarifies the various disclosures, procedures and transaction structures related to the rent-to-own business with which we must comply. With some variations in individual states, most related state legislation requires the lessor to make prescribed disclosures to customers about the rental purchase agreement and transaction, and provides time periods during which customers may reinstate agreements despite having failed to make a timely payment. Some state rental purchase laws prescribe grace periods for non-payment, prohibit or limit certain types of collection or other practices, and limit certain fees that may be charged. Eleven states limit the total rental payments that can be charged to amounts ranging from 2.0 times to 2.4 times the disclosed cash price or the retail value of the rental product. Six states limit the cash price of merchandise to amounts ranging from 1.56 to 2.5 times our cost for each item.
Although Minnesota has a rental purchase statute, the rental purchase transaction is also treated as a credit sale subject to consumer lending restrictions pursuant to judicial decision. Therefore, we offer our customers in Minnesota an opportunity to purchase our merchandise through an installment sale transaction in our Home Choice stores. We operate 17 Home Choice stores in Minnesota.
North Carolina has no rental purchase legislation. However, the retail installment sales statute in North Carolina expressly provides that lease transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under the statute. We operate 98 rent-to-own stores, and 45 and 6 Acceptance Now Staffed and Acceptance Now Direct locations, respectively, in North Carolina.
Courts in Wisconsin and New Jersey, which do not have rental purchase statutes, have rendered decisions which classify rental purchase transactions as credit sales subject to consumer lending restrictions. Accordingly, in Wisconsin, we offer our customers an opportunity to purchase our merchandise through an installment sale transaction in our Get It Now stores. In New Jersey, we have modified our typical rental purchase agreements to provide disclosures, grace periods, and pricing that we believe comply with the retail installment sales act. We operate 28 Get It Now stores in Wisconsin and 45 Rent-A-Center stores in New Jersey.
There can be no assurance as to whether new or revised rental purchase laws will be enacted or whether, if enacted, the laws would not have a material and adverse effect on us.
Federal Regulation.    To date, no comprehensive federal legislation has been enacted regulating or otherwise impacting the rental purchase transaction. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) does not regulate leases with terms of 90 days or less. Because the rent-to-own transaction is for a term of week to week, or at most, month to month, and established federal law deems the term of a lease to be its minimum term regardless of extensions or renewals, if any, we believe the rent-to-own transaction is not covered by the Dodd-Frank Act.
From time to time, we have supported legislation introduced in Congress that would regulate the rental purchase transaction. While both beneficial and adverse legislation may be introduced in Congress in the future, any adverse federal legislation, if enacted, could have a material and adverse effect on us.
Mexico and Canada
No comprehensive legislation regulating the rent-to-own transaction has been enacted in Mexico or Canada. We use substantially the same rental purchase transaction in those countries as in the U.S. stores, but with such additional provisions as we believe may be necessary to comply with such country’s specific laws and customs.

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Item 1A. Risk Factors.
You should carefully consider the risks described below before making an investment decision. We believe these are all the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. You should also refer to the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
Our success depends on the effective implementation and continued execution of our strategies.
We are focused on our mission to provide cash- and credit-constrained consumers with affordable and flexible access to durable goods that promote a higher quality of living. We are in the process of implementing initiatives targeting cost savings opportunities, a more competitive value proposition within our Core U.S. and ANOW operating segments, and refranchising select brick and mortar locations, to improve profitability and enhance long-term value for our stockholders.
There is no assurance that we will be able to implement and execute our strategic initiatives in accordance with our expectations. Our inability to lower costs or failure to achieve targeted results associated with our initiatives could adversely affect our results of operations, or negatively impact our ability to successfully execute future strategies, which may result in an adverse impact on our business and financial results.
We are highly dependent on the financial performance of our Core U.S. operating segment.
Our financial performance is highly dependent on our Core U.S. segment, which comprised approximately 70% of our consolidated net revenues for the year ended December 31, 2017. Any significant decrease in the financial performance of the Core U.S. segment may also have a material adverse impact on our ability to implement our growth strategies.
We are in a management transition period in which three individuals have served as our chief executive officer in the past two years and the individual currently serving as our chief executive officer was recently named.
On January 9, 2017, Robert D. Davis resigned as Chief Executive Officer and a director of the Company. On that date, our founder, former Chief Executive Officer, and Chairman of the Board, Mark E. Speese, was named as Interim Chief Executive Officer. Effective as of April 10, 2017, Mr. Speese was named Chief Executive Officer in lieu of his interim role. On December 30, 2017, Mr. Speese resigned as Chief Executive Office and Mitchell E. Fadel, a director of the Company, was appointed as Chief Executive Officer. Mr. Fadel is a former President and Chief Operating Officer of the Company.
Any significant leadership change or executive management transition creates uncertainty, involves inherent risk, and may involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on our business, financial condition, results of operations or cash flows.
Our ability to attract and retain key employees may be adversely impacted by the recent executive departures and resulting management transition, and our recent financial results.
Executive leadership transitions can be inherently difficult to manage and may cause disruption to our business. As a result of the recent changes in our executive management team, our existing management team has taken on substantially more responsibility, which has resulted in greater workload demands and could divert their attention away from other key areas of our business. In addition, management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution, and our results of operations and financial condition could suffer as a result.
Our future success depends in large part upon our ability to attract and retain key management executives and other key employees. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash and equity compensation. Any prolonged inability to provide salary increases or cash incentive compensation opportunities, or if the anticipated value of such equity awards does not materialize or our equity compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate executives and key employees could be weakened. In addition, the uncertainty and operational disruptions caused by the management changes and related transitions could result in additional key employees deciding to leave the Company. If we are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operations could be adversely impacted.

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The review of potential strategic alternatives by our Board of Directors may result in significant transaction expenses and uncertainty regarding the outcome of our exploration of strategic alternatives may adversely impact our business.

On October 30, 2017, we announced that our Board of Directors had initiated a process to explore and evaluate a wide range of strategic and financial alternatives focused on maximizing stockholder value. The pursuit of potential strategic alternatives could result in the diversion of management’s attention from our existing business; failure to achieve financial or operating objectives; incurrence of significant transaction expenses; and failure to retain key personnel, customers, or contracts. There can be no assurances that the strategic alternatives review process will result in the announcement or consummation of any strategic transaction, that any resulting plans or initiatives will yield additional value for stockholders, or that the process will not have an adverse impact on our business. Any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on reasonable terms.

We do not intend to discuss or disclose developments with respect to the process unless we determine further disclosure is appropriate or required. As a consequence, perceived uncertainties related to the future of the company may result in the loss of potential business opportunities, may make it more difficult for us to attract and retain qualified personnel and business partners, and could cause our stock price to fluctuate significantly.
We may not be able to refinance our senior credit facility on favorable terms, if at all. Our inability to refinance our senior credit facility or obtain alternative financing from other sources would materially and adversely affect our liquidity and our ongoing results of operations in the future.
Our senior credit facility matures in March 2019, and we intend to refinance it in 2018, subject to the conclusion of our ongoing review of strategic and financial alternatives. Our ability to refinance our senior credit facility will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our senior credit facility could also require us to comply with more onerous covenants and further restrict our business operations. Failure to refinance or extend our senior credit facility, or satisfy the conditions and requirements of that debt, would likely result in an event of default and potentially the loss of some or all of the assets securing our obligations under the senior credit facility. In addition, our inability to refinance our senior credit facility or to obtain alternative financing from other sources, or our inability to do so upon attractive terms could materially and adversely affect our business, prospects, results of operations, financial condition and cash flows, and make us more vulnerable to adverse industry and general economic conditions.
A future lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
 Our indebtedness currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes in our business, warrant. Our indebtedness was downgraded twice by Standard & Poor’s and once by Moody’s during fiscal year 2017. Any additional downgrade by any ratings agency may increase the interest rate on our future indebtedness, limit our access to vendor financing on favorable terms or otherwise result in higher borrowing costs, and likely would make it more difficult or more expensive for us to obtain additional debt financing.
Our arrangements with our suppliers and vendors may be impacted by our financial results or financial position.
Substantially all of our merchandise suppliers and vendors sell to us on open account purchase terms. There is a risk that our key suppliers and vendors could respond to any actual or apparent decrease in or any concern with our financial results or liquidity by requiring or conditioning their sale of merchandise to us on more stringent or more costly payment terms, such as by requiring standby letters of credit, earlier or advance payment of invoices, payment upon delivery or other assurances or credit support or by choosing not to sell merchandise to us on a timely basis or at all. Our arrangements with our suppliers and vendors may also be impacted by media reports regarding our financial position. Our need for additional liquidity could significantly increase and our supply of inventory could be materially disrupted if a significant portion of our key suppliers and vendors took one or more of the actions described above, which could have a material adverse effect on our sales, customer satisfaction, cash flows, liquidity and financial position.
Failure to effectively manage our costs could have a material adverse effect on our profitability.
Certain elements of our cost structure are largely fixed in nature. Consumer spending remains uncertain, which makes it more challenging for us to maintain or increase our operating income in the Core U.S. segment. The competitiveness in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our overall cost of operations, labor and benefit rates,

10




advertising and marketing expenses, operating leases, charge-offs due to customer stolen merchandise, other store expenses or indirect spending could materially adversely affect our profitability.
Our Acceptance Now segment depends on the success of our third-party retail partners and our continued relationship with them.
Our Acceptance Now segment revenues depend in part on the ability of unaffiliated third-party retailers to attract customers. The failure of our third-party retail partners to maintain quality and consistency in their operations and their ability to continue to provide products and services, or the loss of the relationship with any of these third-party retailers and an inability to replace them, could cause our Acceptance Now segment to lose customers, substantially decreasing the revenues and earnings of our Acceptance Now segment. This could adversely affect our financial results. In 2017, approximately 61% of the total revenue of the Acceptance Now segment originated at our Acceptance Now kiosks located in stores operated by four retail partners. We may be unable to continue growing the Acceptance Now segment if we are unable to find additional third-party retailers willing to partner with us or if we are unable to enter into agreements with third-party retailers acceptable to us.
The success of our business is dependent on factors affecting consumer spending that are not under our control.
Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debt and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war, pandemics, inclement weather, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for our products and services resulting in lower revenue and negatively impacting the business and its financial results.
If we are unable to compete effectively with the growing e-commerce sector, our business and results of operations may be materially adversely affected.
With the continued expansion of Internet use, as well as mobile computing devices and smartphones, competition from the e-commerce sector continues to grow. We have launched virtual capabilities within our Acceptance Now and Core U.S. segments. There can be no assurance we will be able to grow our e-commerce business in a profitable manner. Certain of our competitors, and a number of e-commerce retailers, have established e-commerce operations against which we compete for customers. It is possible that the increasing competition from the e-commerce sector may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations in other ways.
Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.
Any disruption in the operation of our distribution centers could result in our inability to meet our customers’ expectations, higher costs, an inability to stock our stores, or longer lead time associated with distributing merchandise. Any such disruption within our supply chain network, including damage or destruction to one of our five regional distribution centers, could result in decreased net sales, increased costs and reduced profits.
Our senior secured asset-based revolving credit facility limits our borrowing capacity to the value of certain of our assets. In addition, our senior secured asset-based revolving credit facility is secured by substantially all of our assets, and lenders may exercise remedies against the collateral in the event of our default.
We are party to a $350 million senior secured asset-based revolving credit facility. Our borrowing capacity under our revolving credit facility varies according to our eligible rental contracts, eligible installment sales accounts, and inventory net of certain reserves. In the event of any material decrease in the amount of or appraised value of these assets, our borrowing capacity would similarly decrease, which could adversely impact our business and liquidity. Our revolving credit facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our available credit falls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. Our obligations under the revolving credit facility are secured by liens with respect to inventory, accounts receivable, deposit accounts and certain related collateral. In the event of a default that is not cured or waived within any applicable cure periods, the lenders’ commitment to extend further credit under our revolving credit facility could be terminated, our outstanding obligations could become immediately due and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral, which generally consists of substantially all of our tangible and intangible assets, including intellectual property and the capital stock of our U.S. subsidiaries. If we are unable to borrow under our revolving credit facility, we may not have the necessary cash resources for our operations and, if any event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such

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indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our operations. Because we self-insure a significant portion of expected losses under our workers' compensation, general liability, vehicle and group health insurance programs, unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including potential increases in medical and indemnity costs, could result in materially different amounts of expense than expected under these programs. This could have a material adverse effect on our financial condition and results of operations.
Our transactions are regulated by and subject to the requirements of various federal and state laws and regulations, which may require significant compliance costs and expose us to litigation. Any negative change in these laws or the passage of unfavorable new laws could require us to alter our business practices in a manner that may be materially adverse to us.
Currently, 46 states, the District of Columbia and Puerto Rico have passed laws that regulate rental purchase transactions as separate and distinct from credit sales. One additional state has a retail installment sales statute that excludes leases, including rent-to-own transactions, from its coverage if the lease provides for more than a nominal purchase price at the end of the rental period. The specific rental purchase laws generally require certain contractual and advertising disclosures. They also provide varying levels of substantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event the rental purchase agreement is terminated. The rental purchase laws of eleven states limit the total amount that may be charged over the life of a rental purchase agreement and the laws of six states limit the cash prices for which we may offer merchandise.
Similar to other consumer transactions, our rental purchase transaction is also governed by various federal and state consumer protection statutes. These consumer protection statutes, as well as the rental purchase statutes under which we operate, provide various consumer remedies, including monetary penalties, for violations. In our history, we have been the subject of litigation alleging that we have violated some of these statutory provisions.
Although there is currently no comprehensive federal legislation regulating rental purchase transactions, adverse federal legislation may be enacted in the future. From time to time, both favorable and adverse legislation seeking to regulate our business has been introduced in Congress. In addition, various legislatures in the states where we currently do business may adopt new legislation or amend existing legislation that could require us to alter our business practices in a manner that could have a material adverse effect on our business, financial condition and results of operations.
Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners.
Our operations in the U.S. and abroad are subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Our employees, contractors or agents may violate the policies and procedures we have implemented to ensure compliance with these laws. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees, and could damage our reputation.
We may be subject to legal proceedings from time to time which seek material damages. The costs we incur in defending ourselves or associated with settling any of these proceedings, as well as a material final judgment or decree against us, could materially adversely affect our financial condition by requiring the payment of the settlement amount, a judgment or the posting of a bond.
In our history, we have defended class action lawsuits alleging various regulatory violations and have paid material amounts to settle such claims. Significant settlement amounts or final judgments could materially and adversely affect our liquidity and capital resources. The failure to pay any material judgment would be a default under our senior credit facilities and the indenture governing our outstanding senior unsecured notes.
Our operations are dependent on effective information management systems. Failure of these systems could negatively impact our business, financial condition and results of operations.
We utilize integrated information management systems. The efficient operation of our business is dependent on these systems to effectively manage our financial and operational data. The failure of our information management systems to perform as designed, loss of data or any interruption of our information management systems for a significant period of time could disrupt our business.

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If the information management systems sustain repeated failures, we may not be able to manage our store operations, which could have a material adverse effect on our business, financial condition and results of operations.
We invest in new information management technology and systems and implement modifications and upgrades to existing systems. These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware with updated functionality. We take appropriate actions to ensure the successful implementation of these investments, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing systems and our business, and may not provide the anticipated benefits. The disruption in our information management systems, or our inability to improve, upgrade, integrate or expand our systems to meet our evolving business requirements, could impair our ability to achieve critical strategic initiatives and could materially adversely impact our business, financial condition and results of operations.
If we fail to protect the integrity and security of customer and employee information, we could be exposed to litigation or regulatory enforcement and our business could be adversely impacted.
We collect and store certain personal information provided to us by our customers and employees in the ordinary course of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Loss of customer or employee information could disrupt our operations, damage our reputation, and expose us to claims from customers, employees, regulators and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, the costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could adversely impact our business.
A change of control could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts.
Under our senior credit facilities, an event of default would result if a third party became the beneficial owner of 35.0% or more of our voting stock or a majority of Rent-A-Center’s Board of Directors are not Continuing Directors (all of the current members of our Board of Directors are Continuing Directors under the senior credit facility). As of December 31, 2017, $133.6 million was outstanding under our senior credit facilities.
Under the indenture governing our outstanding senior unsecured notes, in the event of a change in control, we may be required to offer to purchase all of our outstanding senior unsecured notes at 101% of their original aggregate principal amount, plus accrued interest to the date of repurchase. A change in control also would result in an event of default under our senior credit facilities, which would allow our lenders to accelerate indebtedness owed to them.
If a specified change in control occurs and the lenders under our debt instruments accelerate these obligations, we may not have sufficient liquid assets to repay amounts outstanding under these agreements.
Rent-A-Center's organizational documents and our debt instruments contain provisions that may prevent or deter another group from paying a premium over the market price to Rent-A-Center's stockholders to acquire its stock.
Rent-A-Center’s organizational documents contain provisions that classify its Board of Directors, authorize its Board of Directors to issue blank check preferred stock and establish advance notice requirements on its stockholders for director nominations and actions to be taken at meetings of the stockholders. In addition, as a Delaware corporation, Rent-A-Center is subject to Section 203 of the Delaware General Corporation Law relating to business combinations. Our senior credit facilities and the indentures governing our senior unsecured notes each contain various change of control provisions which, in the event of a change of control, would cause a default under those provisions. These provisions and arrangements could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving us that could include a premium over the market price of Rent-A-Center’s common stock that some or a majority of Rent-A-Center’s stockholders might consider to be in their best interests.
Rent-A-Center is a holding company and is dependent on the operations and funds of its subsidiaries.
Rent-A-Center is a holding company, with no revenue generating operations and no assets other than its ownership interests in its direct and indirect subsidiaries. Accordingly, Rent-A-Center is dependent on the cash flow generated by its direct and indirect operating subsidiaries and must rely on dividends or other intercompany transfers from its operating subsidiaries to generate the funds necessary to meet its obligations, including the obligations under the senior credit facilities. The ability of Rent-A-Center’s subsidiaries to pay dividends or make other payments to it is subject to applicable state laws. Should one or more of Rent-A-

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Center’s subsidiaries be unable to pay dividends or make distributions, Rent-A-Center's ability to meet its ongoing obligations could be materially and adversely impacted.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
our ability to meet market expectations with respect to the growth and profitability of each of our operating segments;
quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store sales or when and how many locations we acquire or open;
quarterly variations in our competitors’ results of operations;
changes in earnings estimates or buy/sell recommendations by financial analysts; and
the stock price performance of comparable companies.
In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies' operating performance.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease space for substantially all of our Core U.S. and Mexico 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. Store sizes average approximately 4,400 square feet. Approximately 75% of each store’s space is generally used for showroom space and 25% for offices and storage space. Our Acceptance Now kiosks occupy space without charge in the retailer's location with no lease commitment.
We believe suitable store space generally is available for lease and we would be able to relocate any of our stores or support facilities without significant difficulty should we be unable to renew a particular lease. We also expect additional space is readily available at competitive rates to open new stores or support facilities, as necessary.
We own the land and building in Plano, Texas, in which our corporate headquarters is located. The land and improvements are pledged as collateral under our senior credit facilities.
Item 3. Legal Proceedings.
From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred.
We are subject to unclaimed property audits by states in the ordinary course of business. We recently reached settlement agreements for the comprehensive multi-state unclaimed property audit. The property subject to review in this audit process included unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and remit abandoned and

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unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. We routinely remit escheat payments to states in compliance with applicable escheat laws. The negotiated settlements did not have a material adverse impact to our financial statements.
Alan Hall, et. al. v. Rent-A-Center, Inc., et. al.; James DePalma, et. al. v. Rent-A-Center, Inc., et. al. On December 23, 2016, a putative class action was filed against us and certain of our former officers by Alan Hall in federal court in Sherman, Texas. The complaint alleges that the defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing false and misleading statements and omitting material facts regarding our business, including implementation of our point-of-sale system, operations and prospects during the period covered by the complaint. The complaint purports to be brought on behalf of all purchasers of our common stock from July 27, 2015 through October 10, 2016, and seeks damages in unspecified amounts and costs, fees, and expenses. A complaint filed by James DePalma also in Sherman, Texas alleging similar claims was consolidated by the court into the Hall matter. On October 19, 2017, the magistrate judge entered a recommendation to deny our motion to dismiss the complaint to the district judge who will decide the issue. We filed our objections to the magistrate's recommendation on November 2, 2017. On December 14, 2017, the district judge issued an order adopting the magistrate's report and denying our motion to dismiss the complaint. Discovery in this matter has now commenced. A hearing on class certification is scheduled for September 19, 2018. We continue to believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.
Kevin Paul, derivatively and on behalf of Rent-A-Center, Inc. v. Robert D. Davis et. al.; Sheila Coleman, derivatively and on behalf of Rent-A-Center, Inc. v. Robert D. Davis et. al.; Michael Downing, derivatively and on behalf of Rent-A-Center, Inc. v. Mark E. Speese et. al. On March 15 and 16, 2017, substantially similar shareholder derivative suits were filed against certain current and former officers and directors and, nominally, against us, in state court in Dallas County, Texas. Another substantially similar shareholder derivative suit was filed against certain current and former officers and directors and, nominally, against us, in state court in Collin County, Texas on May 8, 2017. All three of the cases have been consolidated in state court in Dallas County, Texas. The lawsuits allege that the defendants breached their fiduciary duties owed to Rent-A-Center and otherwise mismanaged the affairs of the company as it concerns public statements made related to our point-of-sale system, operational results of our Acceptance Now segment, and our revenues and profitability. The petitions in these suits claim damages in unspecified amounts; seek an order directing the Company to make various changes to corporate governance and internal procedures, including putting forth a shareholder vote on various governance matters; restitution from the individual defendants; and cost, fees and expenses. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that the individual defendants will be found to have no liability in this matter.
Arnaud van der Gracht de Rommerswael, derivatively and on behalf of Rent-A-Center, Inc. v. Mark Speese et. al. On April 3, 2017, another shareholder derivative suit was filed against certain current and former officers and directors, JPMorgan Chase Bank, N.A., The Bank of New York Mellon Trust Company, N.A., and, nominally, against us, in federal court in Sherman, Texas. The complaint alleges that the defendants breached their fiduciary duties owed to Rent-A-Center and otherwise mismanaged the affairs of the company as it concerns (i) public statements made related to the rollout of our point-of-sale system; (ii) compensation paid to Guy Constant and Robert Davis surrounding their resignations; and (iii) change-of-control language in certain debt agreements, which the suit alleges impacts shareholders’ willingness to vote for a slate of directors nominated by Engaged Capital Flagship Master Fund, LP. (“Engaged Capital”). The complaint claims damages in unspecified amounts, disgorgement of benefits from alleged breaches of duty by the individual defendants; an order declaring that certain language in the debt agreements is unenforceable; an order enjoining the lender defendants from enforcing certain provisions in the debt agreements; an order directing the Company’s board to approve Engaged Capital’s slate of directors; an order directing the Company to make unspecified changes to corporate governance and internal procedures; and costs, fees, and expenses.
In response to the motion to dismiss filed by the defendants on April 25, 2017, the plaintiff amended his complaint on May 9, 2017 and on May 19, 2017. The amended complaint alleges breach of fiduciary duty, unjust enrichment and waste of corporate assets related to alleged acts for the purposes of entrenching board members, including the approval of change-of-control language in certain debt agreements, the implementation of the point-of-sale system, and the severance compensation paid to Guy Constant and Robert Davis.
On July 10, 2017, the plaintiff’s claims against JPMorgan Chase Bank, N.A. and The Bank of New York Mellon Trust Company, N.A. were dismissed.
On October 12, 2017, the court issued an order requiring plaintiffs to re-plead the claims related to our point-of-sale system, and denying the motion to dismiss with respect to the waste and entrenchment claims. The plaintiffs failed to re-plead the claims related to our point-of-sale system. Discovery with respect to the remaining waste and entrenchment clams has now commenced.

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We continue to believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that the defendants will be found to have no liability in this matter.
Blair v. Rent-A-Center, Inc. This matter is a state-wide class action complaint originally filed on March 13, 2017 in the Federal District Court for the Northern District of California. The complaint alleges various claims, including that our cash sales and total rent to own prices exceed the pricing permitted under the Karnette Rental-Purchase Act. In addition, the plaintiffs allege that we fail to give customers a fully executed rental agreement and that all such rental agreements that were issued to customers unsigned are void under the law. The plaintiffs are seeking statutory damages under the Karnette Rental-Purchase Act which range from $100 - $1,000 per violation, injunctive relief, and attorney’s fees. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter.
Item 4. Mine Safety Disclosures.
Not applicable. 

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been listed on the Nasdaq Global Select Market® and its predecessors under the symbol “RCII” since January 25, 1995, the date we commenced our initial public offering. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported, and the quarterly cash dividend declared per share on our common stock.
2017
High
 
Low
 
Cash Dividends
Declared
Fourth Quarter
$12.20
 
$9.05
 
$—
Third Quarter
$13.89
 
$10.66
 
$—
Second Quarter
$13.33
 
$8.52
 
$0.08
First Quarter
$11.98
 
$7.76
 
$0.08
2016
High
 
Low
 
Cash Dividends
Declared
Fourth Quarter
$13.16
 
$8.00
 
$0.08
Third Quarter
$13.73
 
$10.20
 
$0.08
Second Quarter
$15.94
 
$11.21
 
$0.08
First Quarter
$16.37
 
$9.76
 
$0.08
As of February 21, 2018, there were approximately 35 record holders of our common stock.
Future decisions to pay cash dividends on our common stock continue to be at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and any other factors our Board of Directors may deem relevant. Cash dividend payments are subject to certain restrictions in our debt agreements. Please see Note I and Note J to the consolidated financial statements for further discussion of such restrictions.
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. As of December 31, 2017, we had purchased a total of 36,994,653 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million under this common stock repurchase program. Common stock repurchases are subject to certain restrictions in our debt agreements. Please see Note I and Note J to the consolidated financial statements for further discussion of such restrictions. No shares were repurchased during 2017 and 2016.


17




Stock Performance Graph
The following chart represents a comparison of the five year total return of our common stock to the NASDAQ Composite Index and the S&P 1500 Specialty Retail Index. We selected the S&P 1500 Specialty Retail Index for comparison because we use this published industry index as the comparator group to measure our relative total shareholder return for purposes of determining vesting of performance stock units granted under our long-term incentive compensation program. The graph assumes $100 was invested on December 31, 2012, and dividends, if any, were reinvested for all years ending December 31.
chart-298e55b4d89e549b85e.jpg

18




Item 6. Selected Financial Data.
The selected financial data presented below for the five years ended December 31, 2017, have been derived from our audited consolidated financial statements. The historical financial data are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included in this report.
 
Year Ended December 31,
 (In thousands, except per share data)
2017
 
2016
 
2015(6)
 
2014
 
2013
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
Rentals and fees
$
2,267,741

 
$
2,500,053

 
$
2,781,315

 
$
2,745,828

(11) 
$
2,695,895

Merchandise sales
331,402

 
351,198

 
377,240

 
290,048

 
278,753

Installment sales
71,651

 
74,509

 
76,238

 
75,889

 
71,475

Other
9,620

 
12,706

 
19,158

 
19,949

 
18,133

Franchise
 
 
 
 
 
 
 
 
 
Merchandise sales
13,157

 
16,358

 
15,577

 
19,236

 
24,556

Royalty income and fees
8,969

 
8,428

 
8,892

 
6,846

 
5,206

Total revenues
2,702,540

 
2,963,252

 
3,278,420

 
3,157,796

 
3,094,018

Cost of revenues
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
Cost of rentals and fees
625,358

 
664,845

 
728,706

 
704,595

 
676,674

Cost of merchandise sold
322,628


323,727

 
356,696

 
231,520

 
216,206

Cost of installment sales
23,622

 
24,285

 
25,677

 
26,084

 
24,541

Other charges and (credits)

 

 
34,698

(7) 
(6,836
)
(12) 

Franchise cost of merchandise sold
12,390

 
15,346

 
14,534

 
18,070

 
23,104

Total cost of revenues
983,998

 
1,028,203

 
1,160,311

 
973,433

 
940,525

Gross profit
1,718,542

 
1,935,049

 
2,118,109

 
2,184,363

 
2,153,493

Operating expenses
 
 
 
 
 
 
 
 
 
Store expenses
 
 
 
 
 
 
 
 
 
Labor
732,466

 
789,049

 
854,610

 
888,929

 
881,671

Other store expenses
744,187

 
791,614

 
833,914

 
842,254

 
789,212

General and administrative expenses
171,090

 
168,907

 
166,102

 
162,316

 
147,621

Depreciation, amortization and write-down of intangibles
74,639

 
80,456

 
80,720

 
83,168

 
86,912

Goodwill impairment charge

 
151,320

(4) 
1,170,000

(8) 

 
1,068

Other charges
59,219

(1) 
20,299

(5) 
20,651

(9) 
14,234

(13) 

Total operating expenses
1,781,601

 
2,001,645

 
3,125,997

 
1,990,901

 
1,906,484

Operating (loss) profit
(63,059
)
 
(66,596
)
 
(1,007,888
)
 
193,462

 
247,009

Write-off of debt issuance costs
1,936

(2) 

 

 
4,213

(14) 

Interest expense, net
45,205

 
46,678

 
48,692

 
46,896

 
38,813

(Loss) earnings before income taxes
(110,200
)
 
(113,274
)
 
(1,056,580
)
 
142,353

 
208,196

Income tax (benefit) expense
(116,853
)
(3) 
(8,079
)
 
(103,060
)
(10) 
45,931

 
79,439

Net earnings (loss)
$
6,653

 
$
(105,195
)
 
$
(953,520
)
 
$
96,422

 
$
128,757

Basic earnings (loss) per common share
$
0.12

 
$
(1.98
)
 
$
(17.97
)
 
$
1.82

 
$
2.35

Diluted earnings (loss) per common share
$
0.12

 
$
(1.98
)
 
$
(17.97
)
 
$
1.81

 
$
2.33

Cash dividends declared per common share
$
0.16

 
$
0.32

 
$
0.96

 
$
0.93

 
$
0.86



19




Item 6. Selected Financial Data — Continued.
 
December 31,
 (Dollar amounts in thousands)
2017
 
2016
 
2015(6)
 
2014
 
2013
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
Rental merchandise, net
$
868,991

 
$
1,001,954

 
$
1,136,472

 
$
1,237,856

 
$
1,124,198

Intangible assets, net
57,496

 
60,560

 
213,899

 
1,377,992

 
1,373,518

Total assets
1,420,781

 
1,602,741

 
1,974,468

 
3,271,197

 
3,018,175

Total debt
672,887

 
724,230

 
955,833

 
1,042,813

 
916,275

Total liabilities
1,148,338

 
1,337,808

 
1,590,878

 
1,881,802

 
1,682,306

Total stockholders' equity
272,443

 
264,933

 
383,590

 
1,389,395

 
1,335,869

 
 
 
 
 
 
 
 
 
 
Operating Data (Unaudited)
 
 
 
 
 
 
 
 
 
Core U.S. and Mexico stores open at end of period
2,512

 
2,593

 
2,815

 
3,001

 
3,161

Acceptance Now Staffed locations open at end of period
1,106

 
1,431

 
1,444

 
1,406

 
1,325

Acceptance Now Direct locations open at end of period
125

 
478

 
532

 

 

Same store revenue (decrease) growth (12)
(5.4
)%
 
(6.2
)%
 
5.7
%
 
1.2
%
 
(2.0
)%
Franchise stores open at end of period
225

 
229

 
227

 
187

 
179

(1) 
Includes $24.0 million related to the closure of Acceptance Now locations, $18.2 million for capitalized software write-downs, $6.5 million for incremental legal and advisory fees, $5.4 million for hurricane damages, $3.4 million for reductions at the field support center, $1.1 million for previous store closure plans, and $0.6 million in legal settlements.
(2) 
Includes the effects of a $1.9 million financing expense related to the write-off of unamortized financing costs.
(3) 
Includes a $77.5 million gain resulting from the Tax Cuts and Jobs Act.
(4) 
Includes a $151.3 million goodwill impairment charge in the Core U.S. segment.
(5) 
Includes $22.5 million primarily related to the closure of Core U.S. stores, Acceptance Now locations, and Mexico stores, partially offset by a $2.2 million legal settlement.
(6) 
Includes revisions for immaterial correction of deferred tax error associated with our goodwill impairment reported in the fourth quarter of 2015 as discussed in Note B to the consolidated financial statements.
(7) 
Includes a $34.7 million write-down of smartphones.
(8) 
Includes a $1,170.0 million goodwill impairment charge in the Core U.S. segment.
(9) 
Includes a $7.5 million loss on the sale of Core U.S. and Canada stores, a $7.2 million charge related to the closure of Core U.S. and Mexico stores, $2.8 million of charges for start-up and warehouse closure expenses related to our sourcing and distribution initiative, a $2.0 million corporate reduction charge and $1.1 million of losses for other store sales and closures. .
(10) 
Includes $6.0 million of discrete adjustments to income tax reserves.
(11) 
Includes a $0.6 million reduction of revenue due to consumer refunds as a result of an operating system programming error.
(12) 
Includes a $6.8 million credit due to the settlement of a lawsuit against the manufacturers of LCD screen displays.
(13) 
Includes store closure charges of $5.1 million, asset impairment charges of $4.6 million, corporate reduction charges of $2.8 million, and a $1.8 million loss on the sale of stores in the Core U.S. segment.
(14) 
Includes the effects of a $4.2 million financing expense related to the payment of debt origination costs and the write-off of unamortized financing costs.




20




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent Developments
Strategic Review. On October 30, 2017, the Board initiated a process to explore strategic and financial alternatives. The Board, in consultation with its financial and legal advisors, is carefully reviewing and considering a full range of options focused on maximizing stockholder value. There can be no assurance that the Board's exploration of strategic and financial alternatives will result in any particular action or any transaction being pursued, entered into or consummated, or the timing of any action or transaction.
Executive Management Changes. On December 30, 2017, Mark E. Speese resigned from his position as Chief Executive Officer and the Board named Mitchell E. Fadel as Chief Executive Officer. Mr. Fadel served as one of the Company's directors since June 2017 and prior to that served as President of the Company (beginning in July 2000) and Chief Operating Officer (beginning in December 2002) each until August 2015, and also as a director of the Company from December 2000 to November 2013. From 1992 until 2000, Mr. Fadel served as President and Chief Executive Officer of the Company’s subsidiary Rent-A-Center Franchising International, Inc. f/k/a ColorTyme, Inc.
Cooperation Agreement. On February 5, 2018, we entered into a cooperation agreement with the Engaged Group. The Cooperation Agreement provides, among other things, that we will nominate for election at the 2018 Annual Meeting of Stockholders one new independent director to be proposed by the Engaged Group. That individual will replace the nomination of Rishi Garg, a current member of the Board, who has informed us that he does not intend to stand for re-election at the 2018 Annual Meeting. In addition, the Engaged Group has agreed to support the election of J.V. Lentell and Michael J. Gade, members of the Board whose terms will expire at the 2018 Annual Meeting and who have recently informed the Company of their intent to stand for re-election. The Cooperation Agreement also provides that, prior to the 2018 Annual Meeting, the Board will be composed of six directors, but may, following the 2018 Annual Meeting, be expanded to seven directors during the remaining term of the Cooperation Agreement (in which case nominees for the seventh director seat would be proposed by the Engaged Group). The Engaged Group has also agreed to vote all of the shares of Common Stock it beneficially owns in favor of our previously announced proposal to declassify the Board which, if approved, will result in all directors standing for election on an annual basis. We have also agreed to terminate our stockholder rights plan no later than February 28, 2018.
Results of 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.
Overview
During the twelve months ended December 31, 2017, we experienced a decline in revenues, gross profit and operating profit driven primarily by declines in same store revenue, reductions in our store base, and impacts related to the recent hurricanes in the Core U.S. segment.
Revenues in our Core U.S. segment decreased approximately $234.3 million for the twelve months ended December 31, 2017, primarily due to a decrease in same store revenue of 8.0%, rationalization of our Core U.S. store base in the prior year, and impacts from the recent hurricanes. Gross profit as a percentage of revenue decreased 1.4% due to the decrease in store revenue and pricing actions taken to right size the segment's inventory mix and changes from the new value proposition. Labor and other store expenses decreased approximately $44.4 million and $64.0 million, respectively, but were negatively affected by sales deleverage.
The Acceptance Now segment revenues decreased by approximately $19.8 million or 2.4% primarily due to store closures for Conn's and hhgregg, and impacts from the recent hurricanes. Gross profit decreased by 5.3% primarily due to lower gross margins on merchandise sales driven by our continued focus to encourage ownership and reduce returned product. Operating profit declined 54.1% primarily due to other charges related to store closures and sales deleverage. Excluding these other charges, operating profit decreased by 28.6%.
Gross profit for the Mexico segment as a percentage of revenue decreased by 0.5%, while operating profit as a percentage of revenue increased by 4.2% for the twelve months ended December 31, 2017.
Cash flow from operations was $110.5 million for the twelve months ended December 31, 2017. We used our free cash flow to pay down debt by $52.5 million during the year, ending the period with $73.0 million of cash and cash equivalents.


21




The following table is a reference for the discussion that follows.
 
Year Ended December 31,
 
2017-2016 Change
 
2016-2015 Change
(Dollar amounts in thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
 
 
 
 
Rentals and fees
$
2,267,741

 
$
2,500,053

 
$
2,781,315

 
$
(232,312
)
 
(9.3
)%
 
$
(281,262
)
 
(10.1
)%
Merchandise sales
331,402

 
351,198

 
377,240

 
(19,796
)
 
(5.6
)%
 
(26,042
)
 
(6.9
)%
Installment sales
71,651

 
74,509

 
76,238

 
(2,858
)
 
(3.8
)%
 
(1,729
)
 
(2.3
)%
Other
9,620

 
12,706

 
19,158

 
(3,086
)
 
(24.3
)%
 
(6,452
)
 
(33.7
)%
Total store revenues
2,680,414

 
2,938,466

 
3,253,951

 
(258,052
)
 
(8.8
)%
 
(315,485
)
 
(9.7
)%
Franchise
 
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
13,157

 
16,358

 
15,577

 
(3,201
)
 
(19.6
)%
 
781

 
5.0
 %
Royalty income and fees
8,969

 
8,428

 
8,892

 
541

 
6.4
 %
 
(464
)
 
(5.2
)%
Total revenues
2,702,540

 
2,963,252

 
3,278,420

 
(260,712
)
 
(8.8
)%
 
(315,168
)
 
(9.6
)%
Cost of revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of rentals and fees
625,358

 
664,845

 
728,706

 
(39,487
)
 
(5.9
)%
 
(63,861
)
 
(8.8
)%
Cost of merchandise sold
322,628

 
323,727

 
356,696

 
(1,099
)
 
(0.3
)%
 
(32,969
)
 
(9.2
)%
Cost of installment sales
23,622

 
24,285

 
25,677

 
(663
)
 
(2.7
)%
 
(1,392
)
 
(5.4
)%
Total cost of store revenues
971,608

 
1,012,857

 
1,111,079

 
(41,249
)
 
(4.1
)%
 
(98,222
)
 
(8.8
)%
Other charges

 

 
34,698

 

 
 %
 
(34,698
)
 
(100.0
)%
Franchise cost of merchandise sold
12,390

 
15,346

 
14,534

 
(2,956
)
 
(19.3
)%
 
812

 
5.6
 %
Total cost of revenues
983,998

 
1,028,203

 
1,160,311

 
(44,205
)
 
(4.3
)%
 
(132,108
)
 
(11.4
)%
Gross profit
1,718,542

 
1,935,049

 
2,118,109

 
(216,507
)
 
(11.2
)%
 
(183,060
)
 
(8.6
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Store expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
732,466

 
789,049

 
854,610

 
(56,583
)
 
(7.2
)%
 
(65,561
)
 
(7.7
)%
Other store expenses
744,187

 
791,614

 
833,914

 
(47,427
)
 
(6.0
)%
 
(42,300
)
 
(5.1
)%
General and administrative
171,090

 
168,907

 
166,102

 
2,183

 
1.3
 %
 
2,805

 
1.7
 %
Depreciation, amortization and write-down of intangibles
74,639

 
80,456

 
80,720

 
(5,817
)
 
(7.2
)%
 
(264
)
 
(0.3
)%
Goodwill impairment charge

 
151,320

 
1,170,000

 
(151,320
)
 
(100.0
)%
 
(1,018,680
)
 
(87.1
)
Other charges
59,219

 
20,299

 
20,651

 
38,920

 
191.7
 %
 
(352
)
 
(1.7
)%
Total operating expenses
1,781,601

 
2,001,645

 
3,125,997

 
(220,044
)
 
(11.0
)%
 
(1,124,352
)
 
(36.0
)%
Operating loss
(63,059
)
 
(66,596
)
 
(1,007,888
)
 
3,537

 
5.3
 %
 
941,292

 
93.4
 %
Write-off of debt issuance costs
1,936

 

 

 
1,936

 
 %
 

 
 %
Interest, net
45,205

 
46,678

 
48,692

 
(1,473
)
 
(3.2
)%
 
(2,014
)
 
(4.1
)%
Loss before income taxes
(110,200
)
 
(113,274
)
 
(1,056,580
)
 
3,074

 
2.7
 %
 
943,306

 
89.3
 %
Income tax benefit
(116,853
)
 
(8,079
)
 
(103,060
)
 
(108,774
)
 
(1,346.4
)%
 
94,981

 
92.2
 %
Net earnings (loss)
$
6,653

 
$
(105,195
)
 
$
(953,520
)
 
$
111,848

 
106.3
 %
 
$
848,325

 
89.0
 %
Comparison of the Years Ended December 31, 2017 and 2016
Store Revenue. Total store revenue decreased by $258.1 million, or 8.8%, to $2,680.4 million for the year ended December 31, 2017, from $2,938.5 million for 2016. This was primarily due to a decrease of approximately $234.3 million in the Core U.S. segment, as discussed further in the segment performance section below.
Same store revenue is reported on a constant currency basis and generally represents revenue earned in 3,376 locations that were operated by us for 13 months or more, excluding any store that receives a certain level of customer accounts from another store (acquisition or merger). Receiving stores will be eligible for inclusion in the same store sales base in the twenty-fourth full month

22




following the account transfer. In addition, due to the severity of the hurricane impacts, we instituted a change to the same store sales store selection criteria to exclude stores in geographically impacted regions for 18 months. Same store revenues decreased by $99.2 million, or 5.4%, to $1,753.9 million for the year ended December 31, 2017, as compared to $1,853.1 million in 2016. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment, as discussed further in the segment performance section below.
Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2017, decreased by $39.5 million, or 5.9%, to $625.4 million, as compared to $664.8 million in 2016. This decrease in cost of rentals and fees was primarily attributable to a decrease of $35.7 million in the Core U.S. segment as a result of lower rentals and fees revenue. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 27.6% for the year ended December 31, 2017 as compared to 26.6% in 2016.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $1.1 million, or 0.3%, to $322.6 million for the year ended December 31, 2017, from $323.7 million in 2016. The gross margin percent of merchandise sales decreased to 2.6% for the year ended December 31, 2017, from 7.8% in 2016. These decreases were primarily attributable to a decrease of $6.4 million in the Core U.S. segment, partially offset by an increase of $5.3 million in the Acceptance Now segment driven by a focused effort to encourage ownership and reduce returned product.
Gross Profit. Gross profit decreased by $216.5 million, or 11.2%, to $1,718.5 million for the year ended December 31, 2017, from $1,935.0 million in 2016, due primarily to a decrease of $191.5 million in the Core U.S. segment, as discussed further in the segment performance section below. Gross profit as a percentage of total revenue decreased to 63.6% in 2017 compared to 65.3% in 2016.
Store Labor. Store labor includes all salaries and wages paid to store-level employees and district managers' salaries, together with payroll taxes and benefits. Store labor decreased by $56.6 million, or 7.2%, to $732.5 million for the year ended December 31, 2017, as compared to $789.0 million in 2016, primarily attributable to a decrease of $44.4 million and $10.7 million in the Core U.S. and Acceptance Now segments, respectively, primarily as a result of a lower Core U.S. store base and closure of Acceptance Now locations in the first half of 2017. Store labor expressed as a percentage of total store revenue increased to 27.3% for the year ended December 31, 2017, from 26.9% in 2016.
Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses decreased by $47.4 million, or 6.0%, to $744.2 million for the year ended December 31, 2017, as compared to $791.6 million in 2016, primarily attributable to a decrease of $64.0 million in the Core U.S. segment as a result of our rationalization of the Core U.S. store base, partially offset by an increase of $17.6 million in the Acceptance Now segment primarily, partially due to a one-time, non-cash, charge to write-off unreconciled invoices with certain retail partners, in addition to increased customer stolen merchandise. Other store expenses expressed as a percentage of total store revenue increased to 27.8% for the year ended December 31, 2017, from 26.9% in 2016.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses increased by $2.2 million, or 1.3%, to $171.1 million for the year ended December 31, 2017, as compared to $168.9 million in 2016, primarily due to project related expenses, insurance expenses, legal and other professional fees. General and administrative expenses expressed as a percentage of total revenue increased to 6.3% for the year ended December 31, 2017, compared to 5.7% in 2016.
Goodwill Impairment Charge. During 2016, we recognized a goodwill impairment charge of $151.3 million due to an impairment of the goodwill in the Core U.S. segment. Goodwill impairment charge is discussed further in Note F to the consolidated financial statements.
Other Charges - Operating Expenses. Other charges increased by $38.9 million, or 191.7%, to $59.2 million in 2017, as compared to $20.3 million in 2016. Other charges for the year ended December 31, 2017 primarily included charges related to the closure of Acceptance Now locations, write-downs of capitalized software, incremental legal and advisory fees, damage caused by hurricanes, and reductions in our field support center, partially offset by legal settlements. Other charges for the year ended December 31, 2016 primarily included charges related to the closure of Core U.S. and Mexico stores, and Acceptance Now locations, partially offset by litigation settlements. See Note M to the consolidated financial statements for additional detail regarding these other charges.

23




Operating Loss. Operating loss decreased $3.5 million, or 5.3%, to $63.1 million for the year ended December 31, 2017, as compared to $66.6 million in 2016, due to a decrease of $87.2 million in the Core U.S. segment, primarily related to the goodwill impairment charge recorded in 2016, partially offset by increases of $57.3 million in the Acceptance Now segment as discussed in the segment performance sections below. Operating loss expressed as a percentage of total revenue was 2.3% for the year ended December 31, 2017, as compared to 2.2% for 2016. Excluding the goodwill impairment and other charges operating results as a percentage of revenue would have been (0.1)% and 3.5% in 2017 and 2016, respectively, discussed further in the segment performance sections below.
Income Tax Benefit. Income tax benefit for the twelve months ended December 31, 2017 was $116.9 million, as compared to $8.1 million in 2016. The effective tax rate was 106.0% for the twelve months ended December 31, 2017, compared to 7.1% in 2016. The increase in income tax benefit is primarily due to the impact of the Tax Cuts and Jobs Act on our deferred tax balances. Excluding impacts from other charges, the Tax Cuts and Jobs Act, and the goodwill impairment charge, the effective tax rate was 41.5% for the twelve months ended December 31, 2017, as compared to 29.8% in 2016.
Net Earnings (Loss). Net earnings were $6.7 million for the year ended December 31, 2017 as compared to net loss of $105.2 million in 2016. Excluding impacts from other charges, the Tax Cuts and Jobs Act, and the goodwill impairment charge, net loss was $28.7 million for the year ended December 31, 2017 as compared to net earnings of $40.9 million in 2016.
Comparison of the Years Ended December 31, 2016 and 2015
Store Revenue. Total store revenue decreased by $315.5 million, or 9.7%, to $2,938.5 million for the year ended December 31, 2016, from $3,254.0 million for 2015. This was primarily due to a decrease of approximately $302.1 million in the Core U.S. segment, as discussed further in the segment performance section below.
Same store revenue generally represents revenue earned in 3,469 locations that were operated by us for 13 months or more. Same store revenues decreased by $134.7 million, or 6.2%, to $2,043.0 million for the year ended December 31, 2016, as compared to $2,177.7 million in 2015. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment,     as discussed further in the segment performance section below. Same store revenues are reported on a constant currency basis.
Cost of Rentals and Fees. Cost of rentals and fees consists of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2016, decreased by $63.9 million, or 8.8%, to $664.8 million, as compared to $728.7 million in 2015. This decrease in cost of rentals and fees was primarily attributable to a $64.0 million decrease in the Core U.S. segment primarily as a result of lower rentals and fees revenue. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 26.6% for the year ended December 31, 2016 as compared to 26.2% in 2015.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $33.0 million, or 9.2%, to $323.7 million for the year ended December 31, 2016, from $356.7 million in 2015, primarily attributable to a decrease of $24.8 million in the Core U.S. segment. The gross margin percent of merchandise sales increased to 7.8% for the year ended December 31, 2016, from 5.4% in 2015.
Other Charges - Cost of Revenues. During 2015, a charge of $34.7 million was recognized for the write-down of smartphones in the Core U.S. segment.
Gross Profit. Gross profit decreased by $183.1 million, or 8.6%, to $1,935.0 million for the year ended December 31, 2016, from $2,118.1 million in 2015, due primarily to a decrease of $177.2 million in the Core U.S. segment. Gross profit as a percentage of total revenue increased to 65.3% in 2016 compared to 64.6% in 2015 primarily due to improvements in the Acceptance Now segment, as discussed further in the segment performance section below. Excluding other charges, gross profit was $1,935.0 million, or 65.3% of revenue for the year ended December 31, 2016, compared to $2,152.8 million, or 65.7% of revenue for 2015. These changes are primarily due to the decrease in the Core U.S. store revenue.
Store Labor. Store labor includes all salaries and wages paid to store-level employees and district managers' salaries, together with payroll taxes and benefits. Store labor decreased by $65.6 million, or 7.7%, to $789.0 million for the year ended December 31, 2016, as compared to $854.6 million in 2015. Labor in the Core U.S. segment decreased $59.5 million due to our flexible labor initiative and the continued rationalization of the Core U.S. store base. Store labor expressed as a percentage of total store revenue increased to 26.9% for the year ended December 31, 2016, from 26.3% in 2015.
Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise, delivery, advertising, selling, insurance, travel and other store-level operating expenses. Other store expenses decreased by $42.3 million, or 5.1%, to $791.6 million for the year ended December 31, 2016, as compared to $833.9 million in 2015. Other store expenses in the Core U.S. segment decreased $47.9 million due primarily to the continued rationalization of the Core U.S. store base. Other

24




store expenses expressed as a percentage of total store revenue increased to 26.9% for the year ended December 31, 2016, from 25.6% in 2015.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative expenses increased by $2.8 million, or 1.7%, to $168.9 million for the year ended December 31, 2016, as compared to $166.1 million in 2015, primarily due to severance costs. General and administrative expenses expressed as a percentage of total revenue increased to 5.7% for the year ended December 31, 2016, compared to 5.1% in 2015.
Goodwill Impairment Charge. During 2016 and 2015, we recognized goodwill impairment charges of $151.3 million and $1,170.0, respectively, due to an impairment in the goodwill in the Core U.S. segment. Goodwill impairment charge is discussed further in Note F to the consolidated financial statements.
Other Charges - Operating Expenses. Other charges relating to store sales and consolidations, startup costs related to our new sourcing and distribution network and corporate restructuring decreased by $0.4 million, or 1.7%, to $20.3 million in 2016, as compared to $20.7 million in 2015. Other charges for the year ended December 31, 2016 included charges for the closure of Core U.S., Acceptance Now, and Mexico locations, partially offset by a litigation claims settlement. See Note M to the consolidated financial statements for additional detail regarding these other charges.
Operating Loss. Operating loss decreased $941.3 million, or 93.4%, to $66.6 million for the year ended December 31, 2016, as compared to $1,007.9 million in 2015. Operating loss as a percentage of total revenue was 2.2% for the year ended December 31, 2016, as compared to 30.7% for 2015, primarily due to the goodwill impairment charges and other charges discussed above. Excluding the $171.6 million and $1,190.7 million of goodwill impairment and other charges in 2016 and 2015, respectively, discussed above, operating profit as a percentage of revenue would have been 3.5% and 5.6% in 2016 and 2015, respectively, discussed further in the Core U.S. segment performance section below.
Income Tax Benefit. Our effective income tax rate was 7.1% for 2016 as compared to a rate of 9.8% for 2015. The decrease in income tax benefit is primarily due to the lower goodwill impairment charge in 2016 compared to 2015.
Net Loss. Net loss was $105.2 million for the year ended December 31, 2016 as compared to $953.5 million in 2015, a decrease of $848.3 million.
Segment Performance
Core U.S. segment. 
 
Year Ended December 31,
 
2017-2016 Change
 
2016-2015 Change
(Dollar amounts in thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Revenues
$
1,835,422

 
$
2,069,725

 
$
2,371,823

 
$
(234,303
)
 
(11.3
)%
 
$
(302,098
)
 
(12.7
)%
Gross profit
1,276,212

 
1,467,679

 
1,644,840

 
(191,467
)
 
(13.0
)%
 
(177,161
)
 
(10.8
)%
Operating profit (loss)
86,196

 
(1,020
)
 
(959,447
)
 
87,216

 
(8,550.6
)%
 
958,427

 
(99.9
)%
Change in same store revenue
 
 
 
 
 
 


 
(8.0
)%
 


 
(9.0
)%
Stores in same store revenue calculation
 
 
 
 
 
 
 
 
2,118

 
 
 
2,053

Revenues. Revenue decreased in 2017 compared to 2016, primarily driven by a decrease of $213.5 million in rentals and fees revenue. This decrease is primarily due to the decrease in same store revenue, rationalization of our Core U.S. store base in the prior year, and impacts from the recent hurricanes. The decrease in same store revenue was driven primarily by a lower portfolio balance in 2017.
Gross Profit. Gross profit decreased in 2017 from 2016, primarily due to the decrease in store revenue described above and targeted pricing actions implemented to right size the inventory mix and changes from the new value proposition. Gross profit as a percentage of segment revenues decreased to 69.5% in 2017 from 70.9% in 2016.
Operating Profit (Loss). Operating profit as a percentage of segment revenues increased to 4.7% in 2017 compared to operating loss of (0.1)% for 2016, primarily due to the goodwill impairment charge recorded in 2016. Excluding other charges and the goodwill impairment charge, operating profit as a percentage of revenue decreased to 5.1%, for the year ended December 31, 2017, compared to 8.1% in 2016, primarily due to sales deleverage, offset by a decrease in store labor of $44.4 million and other store expenses of $64.0 million. Declines in store labor and other store expenses were driven primarily by lower store count, lower customer stolen merchandise losses, and lower advertising expenses. Charge-offs in our Core U.S. rent-to-own stores due to

25




customer stolen merchandise, expressed as a percentage of Core U.S. rent-to-own revenues, were approximately 2.7% for the year ended December 31, 2017, compared to 3.7% in 2016. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Charge-offs in our Core U.S. rent-to-own stores due to other merchandise losses, expressed as a percentage of revenues, were approximately 2.1% for the year ended December 31, 2017, compared to 2.0% in 2016.
Acceptance Now segment. 
 
Year Ended December 31,
 
2017-2016 Change
 
2016-2015 Change
(Dollar amounts in thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Revenues
$
797,987

 
$
817,814

 
$
818,325

 
$
(19,827
)
 
(2.4
)%
 
$
(511
)
 
(0.1
)%
Gross profit
400,002

 
422,381

 
420,980

 
(22,379
)
 
(5.3
)%
 
1,401

 
0.3
 %
Operating profit
48,618

 
105,925

 
123,971

 
(57,307
)
 
(54.1
)%
 
(18,046
)
 
(14.6
)%
Change in same store revenue
 
 
 
 
 
 


 
5.2
 %
 
 
 
(0.4
)%
Stores in same store revenue calculation
 
 
 
 
 
 
 
 
1,140

 
 
 
1,297

Revenues. The decrease in revenue for the year ended December 31, 2017 was driven primarily by store closures for hhgregg and Conn's locations, as well as impacts from the recent hurricanes, partially offset by higher same store revenue.
Gross Profit. Gross profit decreased for the year ended December 31, 2017 compared to 2016, primarily due the decrease in revenues described above, in addition to an increase in cost of merchandise sold driven by a focused effort to encourage ownership and reduce product returns. Gross profit as a percentage of segment revenues was 50.1% in 2017 as compared to 51.6% in 2016.
Operating Profit. Operating profit decreased by 54.1% compared to 2016, primarily due to increased rental merchandise losses, charges incurred for store closures, and sales deleverage. Operating profit as a percentage of total segment revenue decreased to 6.1% in 2017 from 13.0% for 2016. Excluding other charges, operating profit as a percentage of segment revenues decreased to 9.5%, for the year ended December 31, 2017, compared to 13.0% in 2016, partially due to a one-time, non-cash, charge to write-off unreconciled invoices with certain retail partners, in addition to increased customer stolen merchandise. Charge-offs in our Acceptance Now locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 12.7% in 2017 as compared to 10.0% in 2016. Excluding other charges, charge-offs due to customer stolen merchandise were 10.7% for the year ended December 31, 2017. Other merchandise losses include unrepairable merchandise and loss/damage waiver claims. Charge-offs in our Acceptance Now locations due to other merchandise losses, expressed as a percentage of revenues, were approximately 1.3% and 0.9% in 2017 and 2016, respectively.
Mexico segment. 
 
Year Ended December 31,
 
2017-2016 Change
 
2016-2015 Change
(Dollar amounts in thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Revenues
$
47,005

 
$
50,927

 
$
63,803

 
$
(3,922
)
 
(7.7
)%
 
$
(12,876
)
 
(20.2
)%
Gross profit
32,592

 
35,549

 
42,354

 
(2,957
)
 
(8.3
)%
 
(6,805
)
 
(16.1
)%
Operating loss
(260
)
 
(2,449
)
 
(14,149
)
 
2,189

 
(89.4
)%
 
11,700

 
(82.7
)%
Change in same store revenue
 
 
 
 
 
 


 
(5.1
)%
 
 
 
6.6
 %
Stores in same store revenue calculation
 
 
 
 
 
 
 
 
118

 
 
 
119

Revenues. Revenues for 2017 were negatively impacted by approximately $0.8 million due to exchange rate fluctuations as compared to 2016. On a constant currency basis, the decrease in revenue for 2017 was primarily driven by a decrease in same store revenue, compared to 2016.
Gross Profit. Gross profit for the year ended December 31, 2017 was negatively impacted by approximately $0.5 million due to exchange rate fluctuations as compared to 2016. On a constant currency basis, gross profit decreased primarily as a result of decreased rental revenue, partially offset by increased merchandise sales. Gross profit as a percentage of segment revenues decreased to 69.3% in 2017 from 69.8% in 2016.
Operating Loss. Operating losses were negatively impacted by approximately $0.6 million for the year ended December 31, 2017 due to exchange rate fluctuations compared to 2016. On a constant currency basis, operating loss as a percentage of segment revenues decreased to 0.6% for the year ended December 31, 2017 from 4.8% in 2016. Operating losses for the years ended December 31, 2017 and 2016 included other charges of $0.3 million and $2.3 million, respectively, primarily related to store

26




closures during the first quarter of 2016. Excluding other charges, operating profit as a percentage of segment revenues increased to 0.2% in 2017, compared to a loss of 0.3% in 2016.
Franchising segment. 
 
Year Ended December 31,
 
2017-2016 Change
 
2016-2015 Change
(Dollar amounts in thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Revenues
$
22,126

 
$
24,786

 
$
24,469

 
$
(2,660
)
 
(10.7
)%
 
$
317

 
1.3
 %
Gross profit
9,736

 
9,440

 
9,935

 
296

 
3.1
 %
 
(495
)
 
(5.0
)%
Operating profit
5,081

 
5,650

 
5,793

 
(569
)
 
(10.1
)%
 
(143
)
 
(2.5
)%
Revenues. Revenues decreased for the year ended December 31, 2017, compared to 2016, primarily due to lower merchandise sales to the Company's franchise partners.
Gross Profit. Gross profit as a percentage of segment revenues increased to 44.0% in 2017 from 38.1% in 2016.
Operating Profit. Operating profit as a percentage of segment revenues increased to 23.0% in 2017 from 22.8% for 2016 primarily due to increased gross profit.
Quarterly Results
The following table contains certain unaudited historical financial information for the quarters indicated:
(In thousands, except per share data)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2017
 
 
 
 
 
 
 
Revenues
$
741,986

 
$
677,635

 
$
643,965

 
$
638,954

Gross profit
462,663

 
432,533

 
412,465

 
410,881

Operating profit (loss)
1,152

 
(873
)
 
(8,445
)
 
(54,893
)
Net (loss) earnings
(6,679
)
 
(8,893
)
 
(12,599
)
 
34,824

Basic (loss) earnings per common share
$
(0.13
)
 
$
(0.17
)
 
$
(0.24
)
 
$
0.65

Diluted (loss) earnings per common share
$
(0.13
)
 
$
(0.17
)
 
$
(0.24
)
 
$
0.65

Cash dividends declared per common share
$
0.08

 
$
0.08

 
$

 
$

(In thousands, except per share data)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2016
 
 
 
 
 
 
 
Revenues
$
835,652

 
$
749,619

 
$
693,877

 
$
684,104

Gross profit
534,944

 
500,158

 
457,226

 
442,721

Operating profit (loss)
48,430

 
27,550

 
16,700

 
(159,276
)
Net earnings (loss)
25,061

 
9,946

 
6,181

 
(146,383
)
Basic earnings (loss) per common share
$
0.47

 
$
0.19

 
$
0.12

 
$
(2.76
)
Diluted earnings (loss) per common share
$
0.47

 
$
0.19

 
$
0.12

 
$
(2.76
)
Cash dividends declared per common share
$
0.08

 
$
0.08

 
$
0.08

 
$
0.08

(As a percentage of revenues)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2017
 
 
 
 
 
 
 
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Gross profit
62.4
 %
 
63.8
 %
 
64.1
 %
 
64.3
 %
Operating profit (loss)
0.2
 %
 
(0.1
)%
 
(1.3
)%
 
(8.6
)%
Net (loss) earnings
(0.9
)%
 
(1.3
)%
 
(2.0
)%
 
5.5
 %

27




(As a percentage of revenues)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Year Ended December 31, 2016
 
 
 
 
 
 
 
Revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
 %
Gross profit
64.0
%
 
66.7
%
 
65.9
%
 
64.7
 %
Operating profit (loss)
5.8
%
 
3.7
%
 
2.4
%
 
(23.3
)%
Net earnings (loss)
3.0
%
 
1.3
%
 
0.9
%
 
(21.4
)%
Liquidity and Capital Resources
Overview. For the year ended December 31, 2017, we generated $110.5 million in operating cash flow. We paid down debt by $52.5 million from cash generated from operations and also used cash in the amount of $65.5 million for capital expenditures and $12.8 million for payment of dividends, ending the year with $73.0 million of cash and cash equivalents.
Analysis of Cash Flow. Cash provided by operating activities decreased by $243.5 million to $110.5 million in 2017 from $354.1 million in 2016. This was primarily attributable to the receipt in 2016 of income tax refunds of approximately $80.0 million, the decline in net earnings for the twelve months ended December 31, 2017 compared to 2016, and other net changes in operating assets and liabilities.
Cash used in investing activities increased approximately $4.3 million to $63.3 million in 2017 from $59.0 million in 2016, due primarily to an increase in capital expenditures.
Cash used in financing activities decreased by $189.2 million to $70.5 million in 2017 from $259.7 million in 2016, primarily driven by our net reduction in debt of $52.5 million in 2017, as compared to a net decrease in debt of $233.8 million in 2016, payment of debt issuance costs of $5.3 million related to the Fourth Amendment discussed below, offset by an $12.7 million decrease in dividend payments year over year.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases. As we implement our strategic initiatives, the need for additional rental merchandise is expected to remain our primary capital requirement. Other capital requirements include expenditures for property assets and debt service. Our primary sources of liquidity have been cash provided by operations. In the future, to provide any additional funds necessary for the continued operations and expansion of our business, we may incur from time to time additional short-term or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable.
Should we require additional funding sources, we maintain revolving credit facilities, including a $12.5 million line of credit at INTRUST Bank, N.A. We utilize our Revolving Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw funds under the Revolving Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities. We believe the cash flow generated from operations, together with amounts available under our Credit Agreement, will be sufficient to fund our liquidity requirements during the next 12 months. While our operating cash flow has been strong and we expect this strength to continue, our liquidity could be negatively impacted if we do not remain as profitable as we expect. At February 21, 2018, we had $60.3 million in cash on hand, and $109.7 million available under our Revolving Facility at December 31, 2017, net of the $50 million of excess availability we must maintain on the Revolving Facility as a result of being out of compliance with our Fixed Charge Coverage Ratio covenant.
On June 6, 2017, we amended our Credit Agreement (the “Fourth Amendment”), effective as of June 6, 2017, with JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto. Under the Fourth Amendment, we agreed to provide additional collateral protections to secure the obligations under the Credit Agreement. The Fourth Amendment also modified the borrowing terms of the revolving loans under the Credit Agreement, which, as amended, establishes that the aggregate outstanding amounts (including after any draw request) not exceed the Borrowing Base. The Borrowing Base is tied to the Company’s Eligible Installment Sales Accounts, Inventory and Eligible Rental Contracts, in addition to Reserves and the Term Loan Reserve. We will provide to the Agent information necessary to calculate the Borrowing Base within 30 days of the end of each calendar month, unless the remaining availability of the Revolving Facility is less than 20% of the maximum borrowing capacity of the Revolving Facility or $60 million, in which case the Company must provide weekly information.

28




The Fourth Amendment reduced the capacity of the Revolving Facility from $675 million to $350 million and the aggregate amount of Incremental Term Loans and Incremental Revolving Commitments from $250 million to $100 million. We may request an Incremental Revolving Loan, provided that at the time of such draw, and after giving effect thereto, (i) the Consolidated Fixed Charge Coverage Ratio on a pro forma basis is no less than 1.10:1, (ii) the Total Revolving Extensions of Credit do not exceed the Borrowing Base, and (iii) if the draw occurs during a Minimum Availability Period, the Availability must be more than the Availability Threshold Amount.
A change in control would result in an event of default under our senior credit facilities which would allow our lenders to accelerate the indebtedness owed to them. In addition, if a change in control occurs, we may be required to offer to repurchase all of our outstanding senior unsecured notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Our senior credit facilities limit our ability to repurchase the senior unsecured notes, including in the event of a change in control. In the event a change in control occurs, we cannot be sure we would have enough funds to immediately pay our accelerated senior credit facilities and senior note obligations or that we would be able to obtain financing to do so on favorable terms, if at all.
Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2014 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 Septembers 26, 2017, when it was updated by The Tax Cut and Jobs Act of 2017, (the “Tax Act”). The Tax Act allows 100% bonus depreciation for certain property placed in service between September 27, 2017 and December 31, 2022, at which point it will begin to phase out. The PATH act and the Tax Act resulted in an estimated benefit of $184 million for us in 2017. We estimate the remaining tax deferral associated with these acts is approximately $140 million at December 31, 2017, of which approximately 77%, or $108 million will reverse in 2018, and the majority of the remainder will reverse between 2019 and 2020.
Tax Act. We expect that the Tax Act will generate cash tax savings to the Company of approximately $200 million over the next 3 years, mainly due to the decrease in the tax rate and the initial acceleration of depreciation.  This deferral of tax due to acceleration of depreciation will cause additional cash taxes in the future as the deferral reverses.
Merchandise Losses. Merchandise losses consist of the following: 
 
Year Ended December 31,
(In thousands)
2017
 
2016
 
2015
Customer stolen merchandise
$
161,912

 
$
169,021

 
$
154,781

Other merchandise losses(1)
47,596

 
49,731

 
52,003

Total merchandise losses
$
209,508

 
$
218,752

 
$
206,784

(1) 
Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims.
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 $65.5 million, $61.1 million and $80.9 million on capital expenditures in the years 2017, 2016 and 2015, respectively.

29




Acquisitions and New Location Openings. See Note F to the consolidated financial statements for information about cash used to acquire locations and accounts. The table below summarizes the location activity for the years ended December 31, 2017, 2016 and 2015.
 
Year Ended December 31, 2017
 
Core U.S.
 
Acceptance Now Staffed
 
Acceptance Now Direct
 
Mexico
 
Franchising
 
Total
Locations at beginning of period
2,463

 
1,431

 
478

 
130

 
229

 
4,731

New location openings

 
222

 
24

 
1

 
1

 
248

Acquired locations remaining open

 

 

 

 
4

 
4

Conversions

 
(63
)
 
63

 

 

 

Closed locations
 
 
 
 
 
 
 
 
 
 
 
Merged with existing locations
(51
)
 
(483
)
 
(439
)
 

 

 
(973
)
Sold or closed with no surviving location
(31
)
 
(1
)
 
(1
)
 

 
(9
)
 
(42
)
Locations at end of period
2,381

 
1,106

 
125

 
131

 
225

 
3,968

Acquired locations closed and accounts merged with existing locations
8

 

 

 

 

 
8

Total approximate purchase price (in millions)
$
2.5

 
$

 
$

 
$

 
$

 
$
2.5

 
Year Ended December 31, 2016
 
Core U.S.
 
Acceptance Now Staffed
 
Acceptance Now Direct
 
Mexico
 
Franchising
 
Total
Locations at beginning of period
2,672

 
1,444

 
532

 
143

 
227

 
5,018

New location openings

 
171

 
67

 
1

 
2

 
241

Acquired locations remaining open

 

 

 

 
5

 
5

Conversions

 
1

 
(2
)
 

 

 
(1
)
Closed locations
 
 
 
 
 
 
 
 
 
 
 
Merged with existing locations
(185
)
 
(185
)
 

 
(4
)
 
(1
)
 
(375
)
Sold or closed with no surviving location
(24
)
 

 
(119
)
 
(10
)
 
(4
)
 
(157
)
Locations at end of period
2,463

 
1,431

 
478

 
130

 
229

 
4,731

Acquired locations closed and accounts merged with existing locations
3

 

 

 

 

 
3

Total approximate purchase price (in millions)
$
2.3

 
$

 
$

 
$

 
$

 
$
2.3

 
Year Ended December 31, 2015
 
Core U.S.
 
Acceptance Now Staffed
Acceptance Now Direct
 
Mexico
 
Franchising
 
Total
Locations at beginning of period
2,824

 
1,406

 

 
177

 
187

 
4,594

New location openings

 
161

 
505

 

 
11

 
677

Acquired locations remaining open
5

 

 

 

 

 
5

Conversions
(40
)
 
(29
)
 
29

 

 
40

 
 
Closed locations
 
 
 
 
 
 
 
 
 
 


Merged with existing locations
(83
)
 
(94
)
 

 
(34
)
 

 
(211
)
Sold or closed with no surviving location
(34
)
 

 
(2
)
 

 
(11
)
 
(47
)
Locations at end of period
2,672

 
1,444

 
532

 
143

 
227

 
5,018

Acquired locations closed and accounts merged with existing locations
34

 

 

 

 

 
34

Total approximate purchase price (in millions)
$
25.5

 
$

 
$

 
$

 
$

 
$
25.5

Senior Debt. As discussed in Note I to the consolidated financial statements, the Credit Agreement consists of $225.0 million, seven-year Term Loans, and a $350.0 million, five-year Revolving Facility.

30




We may use $150 million of the Revolving Facility for the issuance of letters of credit, of which $94.0 million had been so utilized as of February 21, 2018. The Term Loans are scheduled to mature on March 19, 2021 and the Revolving Facility has a scheduled maturity of March 19, 2019. The weighted average Eurodollar rate on our outstanding debt was 1.51% at February 21, 2018.
Senior Notes. See descriptions of the senior notes in Note J to the consolidated financial statements.
Store Leases. We lease space for substantially all of our Core U.S. and Mexico 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.
Contractual Cash Commitments. The table below summarizes debt, lease and other minimum cash obligations outstanding as of December 31, 2017:
 
Payments Due by Period
(In thousands)
Total
 
2018
 
2019-2020
 
2021-2022
 
Thereafter
Senior Term Debt(1)
$
48,563

 
$
2,250

 
$
4,500

 
$
41,813

 
$

Revolving Credit Facility(2)
85,000

 

 
85,000

 

 

INTRUST Line of Credit
5,735

 
5,735

 

 

 

6.625% Senior Notes(3)
350,922

 
19,394

 
331,528

 

 

4.75% Senior Notes(4)
291,563

 
11,875

 
23,750

 
255,938

 

Operating Leases
466,239

 
158,347

 
220,205

 
83,958

 
3,729

Total contractual cash obligations(5)
$
1,248,022

 
$
197,601

 
$
664,983

 
$
381,709