Upbound (US:UPBD)2023-08-03 21:46Part I. Financial Information Condensed Consolidated Financial Statements The condensed consolidated financial statements detail Upbound Group's financial performance and position for the three and six months ended June 30, 2023, reflecting revenue and earnings changes Condensed Consolidated Statements of Operations This section details Upbound Group's revenues, gross profit, operating profit, and net earnings for the three and six months ended June 30, 2023 Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $979,163 | $1,071,255 | $1,995,224 | $2,230,976 | | Gross profit | $506,226 | $532,544 | $1,012,490 | $1,078,638 | | Operating profit | $84,031 | $58,081 | $48,918 | $69,123 | | Net (loss) earnings | $(45,618) | $19,725 | $1,712 | $15,488 | | Diluted (loss) earnings per share | $(0.83) | $0.33 | $0.03 | $0.26 | Condensed Consolidated Balance Sheets This section presents Upbound Group's financial position, including assets, liabilities, and stockholders' equity, as of June 30, 2023, compared to December 31, 2022 Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $86,801 | $144,141 | | Rental merchandise, net | $1,069,736 | $1,124,828 | | Total assets | $2,585,924 | $2,763,619 | | Senior debt, net | $798,874 | $930,902 | | Senior notes, net | $438,930 | $437,956 | | Total liabilities | $1,960,331 | $2,238,473 | | Total stockholders' equity | $625,593 | $525,146 | Condensed Consolidated Statements of Cash Flows This section outlines Upbound Group's cash flows from operating, investing, and financing activities for the six months ended June 30, 2023 Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $141,960 | $287,121 | | Net cash used in investing activities | $(21,428) | $(31,304) | | Net cash used in financing activities | $(180,034) | $(252,043) | | Net (decrease) increase in cash | $(57,340) | $3,842 | Notes to Condensed Consolidated Financial Statements This section provides details on the company's operating segments, significant accounting policies, debt obligations, and ongoing legal and regulatory matters - The company reports four operating segments: Rent-A-Center, Acima, Mexico, and Franchising. The Rent-A-Center and Acima segments are the largest, operating in the United States and Puerto Rico303132 - The company is involved in multiple regulatory investigations. Acima received a notice from the CFPB staff on May 16, 2023, indicating potential allegations of violating several consumer financial laws. The company has a $45 million indemnity holdback from Acima's former owners for losses related to this matter105106108 - As of June 30, 2023, the company had $815.5 million outstanding under its Term Loan Facility and no outstanding borrowings under its $550 million ABL Credit Facility. It also has $450 million in senior unsecured notes due 20296984 - Stock compensation expense related to the Acima Holdings acquisition was $118.7 million for the six months ended June 30, 2023, which included $78.4 million from accelerated vesting provisions, primarily for a former executive92101 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, liquidity, and capital resources, highlighting the impact of macroeconomic trends and segment-specific results - The company's performance is being impacted by negative macroeconomic trends, including the expiration of government stimulus programs and high inflation, which pressures consumer discretionary income. This has led to tighter underwriting policies126127 Financial Highlights - Six Months Ended June 30 | Metric (in millions) | 2023 | 2022 | Change % | | :--- | :--- | :--- | :--- | | Total Revenues | $1,995.2 | $2,231.0 | (10.6)% | | Gross Profit | $1,012.5 | $1,078.6 | (6.1)% | | Operating Profit | $48.9 | $69.1 | (29.2)% | - The company's strategy focuses on leveraging centers of excellence, accelerating Rent-A-Center's e-commerce shift, growing Acima's merchant penetration, integrating technology platforms, and using data analytics to manage risk and attract customers121124 - As of June 30, 2023, the company had $86.8 million in cash and cash equivalents and $1.3 billion in outstanding indebtedness. Management believes cash flow from operations and availability under its ABL Credit Facility are sufficient to fund operations for the next twelve months178183 Results of Operations This section provides a detailed comparison of the company's consolidated revenues, gross profit, and operating profit for Q2 and H1 2023 versus prior periods Comparison of Q2 2023 vs Q2 2022 (in thousands) | Metric | Q2 2023 | Q2 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $979,163 | $1,071,255 | $(92,092) | (8.6)% | | Gross Profit | $506,226 | $532,544 | $(26,318) | (4.9)% | | Operating Profit | $84,031 | $58,081 | $25,950 | 44.7% | Comparison of H1 2023 vs H1 2022 (in thousands) | Metric | H1 2023 | H1 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,995,224 | $2,230,976 | $(235,752) | (10.6)% | | Gross Profit | $1,012,490 | $1,078,638 | $(66,148) | (6.1)% | | Operating Profit | $48,918 | $69,123 | $(20,205) | (29.2)% | - Other charges for H1 2023 increased by $31.6 million to $155.4 million, primarily due to $118.7 million in stock compensation expense related to the Acima acquisition, compared to $69.4 million in the prior year period163 Segment Performance This section analyzes the revenue and operating profit performance of the Rent-A-Center, Acima, Mexico, and Franchising segments for the first half of 2023 Rent-A-Center Segment Performance - H1 2023 vs H1 2022 (in thousands) | Metric | H1 2023 | H1 2022 | Change % | | :--- | :--- | :--- | :--- | | Revenues | $951,199 | $1,008,690 | (5.7)% | | Operating Profit | $147,875 | $199,284 | (25.8)% | | Same Store Revenue | | | (5.8)% | Acima Segment Performance - H1 2023 vs H1 2022 (in thousands) | Metric | H1 2023 | H1 2022 | Change % | | :--- | :--- | :--- | :--- | | Revenues | $948,206 | $1,129,546 | (16.1)% | | Operating Profit | $116,979 | $45,433 | 157.5% | | Gross Merchandise Volume | $720,295 | $793,375 | (9.2)% | - Acima's operating profit margin increased significantly due to lower customer stolen merchandise losses, which were 8.9% of revenues in H1 2023 compared to 12.1% in H1 2022171 Liquidity and Capital Resources This section details the company's liquidity sources, cash flow activities, debt levels, and merchandise losses, as well as its capital resource management - Cash provided by operating activities decreased by $145.1 million to $142.0 million for H1 2023, primarily due to an increase in inventory purchases and a decrease in net earnings179 - As of July 27, 2023, the company had approximately $88.7 million in cash on hand and $487.1 million available under its ABL Credit Facility183 Merchandise Losses (in thousands) | Period | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Customer stolen merchandise | $139,450 | $185,231 | | Other merchandise losses | $14,529 | $18,431 | | Total merchandise losses | $153,979 | $203,662 | - The company anticipates that approximately 80% of its remaining $380 million tax deferral from bonus depreciation, or $303 million, will reverse in 2023184 Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate fluctuations on its variable-rate debt and foreign currency translation risk - The company's main market risk exposure is from interest rate fluctuations on its $815.5 million Term Loan Facility201202 - A hypothetical 1.0% increase or decrease in market interest rates would cause an $8.3 million change in annualized pre-tax earnings202 - The company is exposed to foreign currency translation risk from the Mexican peso due to its operations in Mexico203 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective204 - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls205 Part II. Other Information Legal Proceedings The company is involved in various legal proceedings and governmental inquiries, with potential but currently unquantified impacts on its financial results - The company is involved in various legal proceedings and governmental inquiries. For detailed information, refer to Note 12 of the condensed consolidated financial statements206 Risk Factors No material changes to the company's previously disclosed risk factors were reported during the period - No material changes to risk factors were reported since the last Annual Report on Form 10-K207 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None208 Defaults Upon Senior Securities The company reported no defaults upon senior securities - None209 Mine Safety Disclosures This item is not applicable to the company - Not applicable210 Other Information This section notes that officers and directors may participate in stock investment and dividend reinvestment programs, potentially under Rule 10b5-1 plans - Company officers and directors may participate in stock investment and dividend reinvestment programs, potentially under Rule 10b5-1 plans211 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, and Sarbanes-Oxley certifications - Key exhibits filed include the Second Amendment to the Term Loan Credit Agreement and Sarbanes-Oxley certifications from the CEO and CFO212