Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - CONNS INC | conns10312017ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - CONNS INC | conns10312017ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - CONNS INC | conns10312017ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2017
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-34956
CONN'S, INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-1672840 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
4055 Technology Forest Blvd, Suite 210, The Woodlands, TX | 77381 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: (936) 230-5899
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) 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 ý No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
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 | o | Accelerated filer | ý | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
Emerging growth company | o | |||
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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 30, 2017:
Class | Outstanding | |
Common stock, $0.01 par value per share | 31,370,581 | |
CONN'S, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBER 31, 2017
TABLE OF CONTENTS
Page No. | ||||
PART I. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | |||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
PART II. | OTHER INFORMATION | |||
Item 1. | ||||
Item 1A. | ||||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
Item 5. | ||||
Item 6. | ||||
This Quarterly Report on Form 10-Q includes our trademarks such as "Conn's," "Conn's HomePlus," "YES Money," "YE$ Money," and our logos, which are protected under applicable intellectual property laws and are the property of Conn's, Inc. This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Quarterly Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.
References to "Conn's," the "Company," "we," "us," and "our" refer to Conn's, Inc. and, as apparent from the context, its consolidated bankruptcy-remote variable-interest entities (“VIEs”), and its wholly-owned subsidiaries.
PART I. | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and dollars in thousands)
October 31, 2017 | January 31, 2017 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 12,742 | $ | 23,566 | |||
Restricted cash (all held by VIEs) | 71,099 | 110,698 | |||||
Customer accounts receivable, net of allowances (includes VIE balance of $360,086 and $529,108, respectively) | 635,700 | 702,162 | |||||
Other accounts receivable | 63,203 | 69,286 | |||||
Inventories | 235,479 | 164,856 | |||||
Income taxes recoverable | 1,194 | 2,150 | |||||
Prepaid expenses and other current assets | 14,721 | 14,955 | |||||
Total current assets | 1,034,138 | 1,087,673 | |||||
Long-term portion of customer accounts receivable, net of allowances (includes VIE balance of $231,036 and $320,382, respectively) | 616,665 | 615,904 | |||||
Property and equipment, net | 144,747 | 159,202 | |||||
Deferred income taxes | 72,554 | 71,442 | |||||
Other assets | 6,285 | 6,913 | |||||
Total assets | $ | 1,874,389 | $ | 1,941,134 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Current maturities of long-term debt and capital lease obligations (includes VIE balance of $64,952 and $0 respectively) | $ | 65,651 | $ | 849 | |||
Accounts payable | 109,738 | 101,612 | |||||
Accrued compensation and related expenses | 16,912 | 13,325 | |||||
Accrued expenses | 45,491 | 26,456 | |||||
Income taxes payable | 2,513 | 3,318 | |||||
Deferred revenues and other credits | 22,018 | 21,821 | |||||
Total current liabilities | 262,323 | 167,381 | |||||
Deferred rent | 87,152 | 87,957 | |||||
Long-term debt and capital lease obligations (includes VIE balance of $396,010 and $745,581, respectively) | 973,278 | 1,144,393 | |||||
Other long-term liabilities | 22,245 | 23,613 | |||||
Total liabilities | 1,344,998 | 1,423,344 | |||||
Commitments and contingencies | |||||||
Stockholders' equity: | |||||||
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding) | — | — | |||||
Common stock ($0.01 par value, 100,000,000 shares authorized; 31,365,028 and 30,961,898 shares issued, respectively) | 314 | 310 | |||||
Additional paid-in capital | 98,611 | 90,276 | |||||
Retained earnings | 430,466 | 427,204 | |||||
Total stockholders' equity | 529,391 | 517,790 | |||||
Total liabilities and stockholders' equity | $ | 1,874,389 | $ | 1,941,134 | |||
See notes to condensed consolidated financial statements.
1
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and dollars in thousands, except per share amounts)
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | |||||||||||||||
Product sales | $ | 263,786 | $ | 278,056 | $ | 774,741 | $ | 864,269 | |||||||
Repair service agreement commissions | 24,488 | 26,354 | 72,703 | 82,849 | |||||||||||
Service revenues | 3,534 | 3,623 | 10,062 | 11,456 | |||||||||||
Total net sales | 291,808 | 308,033 | 857,506 | 958,574 | |||||||||||
Finance charges and other revenues | 81,364 | 68,740 | 238,139 | 205,469 | |||||||||||
Total revenues | 373,172 | 376,773 | 1,095,645 | 1,164,043 | |||||||||||
Costs and expenses: | |||||||||||||||
Cost of goods sold | 175,591 | 192,374 | 519,847 | 605,709 | |||||||||||
Selling, general and administrative expenses | 114,355 | 114,457 | 332,524 | 347,550 | |||||||||||
Provision for bad debts | 56,512 | 51,564 | 161,891 | 169,978 | |||||||||||
Charges and credits | 5,861 | 1,987 | 11,156 | 5,408 | |||||||||||
Total costs and expenses | 352,319 | 360,382 | 1,025,418 | 1,128,645 | |||||||||||
Operating income | 20,853 | 16,391 | 70,227 | 35,398 | |||||||||||
Interest expense | 18,095 | 23,470 | 62,142 | 73,504 | |||||||||||
Loss on extinguishment of debt | 461 | — | 2,907 | — | |||||||||||
Income (loss) before income taxes | 2,297 | (7,079 | ) | 5,178 | (38,106 | ) | |||||||||
Provision (benefit) for income taxes | 728 | (3,264 | ) | 1,916 | (12,618 | ) | |||||||||
Net income (loss) | $ | 1,569 | $ | (3,815 | ) | $ | 3,262 | $ | (25,488 | ) | |||||
Income (loss) per share: | |||||||||||||||
Basic | $ | 0.05 | $ | (0.12 | ) | $ | 0.10 | $ | (0.83 | ) | |||||
Diluted | $ | 0.05 | $ | (0.12 | ) | $ | 0.10 | $ | (0.83 | ) | |||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 31,292,913 | 30,816,319 | 31,121,177 | 30,736,636 | |||||||||||
Diluted | 31,764,594 | 30,816,319 | 31,457,420 | 30,736,636 | |||||||||||
See notes to condensed consolidated financial statements.
2
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and dollars in thousands)
Nine Months Ended October 31, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 3,262 | $ | (25,488 | ) | ||
Adjustments to reconcile net income (loss) to net cash from operating activities: | |||||||
Depreciation | 23,138 | 21,209 | |||||
Loss from retirement of leasehold improvement | — | 1,980 | |||||
Amortization of debt issuance costs | 11,088 | 19,164 | |||||
Provision for bad debts and uncollectible interest | 192,354 | 200,349 | |||||
Loss on extinguishment of debt | 2,907 | — | |||||
Stock-based compensation expense | 5,899 | 3,928 | |||||
Charges, net of credits, for store and facility closures | 428 | 954 | |||||
Deferred income taxes | (1,112 | ) | 3,309 | ||||
Loss (gain) on sale/write-off of fixed assets | 5,636 | (259 | ) | ||||
Tenant improvement allowances received from landlords | 5,072 | 23,674 | |||||
Change in operating assets and liabilities: | |||||||
Customer accounts receivable | (126,654 | ) | (131,943 | ) | |||
Other accounts receivable | 5,641 | 13,281 | |||||
Inventories | (70,623 | ) | (2,568 | ) | |||
Other assets | 964 | 1,483 | |||||
Accounts payable | 8,186 | 32,342 | |||||
Accrued expenses | 21,371 | 11,542 | |||||
Income taxes | 151 | (355 | ) | ||||
Deferred rent, revenues and other credits | (4,971 | ) | 10,409 | ||||
Net cash provided by operating activities | 82,737 | 183,011 | |||||
Cash flows from investing activities: | |||||||
Purchase of property and equipment | (11,995 | ) | (41,804 | ) | |||
Proceeds from sale of property | — | 686 | |||||
Net cash used in investing activities | (11,995 | ) | (41,118 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of asset-backed notes | 469,814 | 1,067,850 | |||||
Payments on asset-backed notes | (816,243 | ) | (736,266 | ) | |||
Changes in restricted cash balances | 39,599 | (87,900 | ) | ||||
Borrowings from revolving credit facility | 1,257,052 | 529,352 | |||||
Payments on revolving credit facility | (1,082,552 | ) | (858,559 | ) | |||
Borrowings on warehouse facility | 79,940 | — | |||||
Payments on warehouse facility | (23,066 | ) | — | ||||
Payment of debt issuance costs and amendment fees | (8,172 | ) | (9,775 | ) | |||
Proceeds from stock issued under employee benefit plans | 3,011 | 824 | |||||
Other | (949 | ) | (608 | ) | |||
Net cash used in financing activities | (81,566 | ) | (95,082 | ) | |||
Net change in cash and cash equivalents | (10,824 | ) | 46,811 | ||||
Cash and cash equivalents, beginning of period | 23,566 | 12,254 | |||||
Cash and cash equivalents, end of period | $ | 12,742 | $ | 59,065 | |||
Non-cash investing and financing activities: | |||||||
Capital lease asset additions and related obligations | $ | 3,196 | $ | — | |||
Property and equipment purchases not yet paid | $ | 1,021 | $ | 1,805 | |||
Supplemental cash flow data: | |||||||
Cash interest paid | $ | 44,561 | $ | 53,074 | |||
Cash income taxes paid (refunded), net | $ | 2,878 | $ | (15,624 | ) | ||
See notes to condensed consolidated financial statements.
3
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business. Conn's, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries. References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its subsidiaries. Conn's is a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to proprietary credit solutions for its core credit-constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives.
We operate two reportable segments: retail and credit. Our retail stores bear the "Conn's" or "Conn's HomePlus" name with all of our stores providing the same products and services to a common customer group. Our stores follow the same procedures and methods in managing their operations. Our retail business and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing to our retail customers. The retail segment is not involved in credit approval decisions. Our management evaluates performance and allocates resources based on the operating results of the retail and credit segments.
Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements of Conn's, Inc. and its wholly-owned subsidiaries, including the VIEs (as defined below), have been prepared by management in accordance with accounting principles generally accepted in the United States ("GAAP") and prevailing industry practice for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 31, 2017 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017, filed with the United States Securities and Exchange Commission (the “SEC”) on April 4, 2017.
Fiscal Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
Principles of Consolidation. The consolidated financial statements include the accounts of Conn's, Inc. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Variable Interest Entities. Variable interest entities ("VIEs") are consolidated if the Company is the primary beneficiary. The primary beneficiary of a VIE is the party that has (i) the power to direct the activities that most significantly impact the performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. We retain the servicing of the securitized portfolio and have a variable interest in each corresponding VIE by holding the residual equity. We have determined that we are the primary beneficiary of each respective VIE because (i) our servicing responsibilities for the securitized portfolio give us the power to direct the activities that most significantly impact the performance of the VIE and (ii) our variable interest in the VIE gives us the obligation to absorb losses and the right to receive residual returns that potentially could be significant. As a result, we consolidate the respective VIEs within our consolidated financial statements.
Refer to Note 6, Debt and Capital Lease Obligations, and Note 8, Variable Interest Entities, for additional information.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ, even significantly, from these estimates. Management evaluates its estimates and related assumptions regularly, including those related to the allowance for doubtful accounts, allowances for no-interest option credit programs and deferred interest, which are particularly sensitive given the size of our customer portfolio balance.
Cash and Cash Equivalents. Cash and cash equivalents include cash, credit card deposits in-transit, and highly liquid debt instruments purchased with a maturity of three months or less. Cash and cash equivalents include credit card deposits in-transit of $2.1 million and $2.4 million, as of October 31, 2017 and January 31, 2017, respectively.
4
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash. The restricted cash balance as of October 31, 2017 and January 31, 2017 includes $52.8 million and $75.2 million, respectively, of cash we collected as servicer on the securitized receivables that was subsequently remitted to the VIEs and $18.3 million and $35.5 million, respectively, of cash held by the VIEs as additional collateral for the asset-backed notes.
Customer accounts receivable. Customer accounts receivable reported in the consolidated balance sheet includes total receivables managed, including both those transferred to the VIEs and those not transferred to the VIEs. Customer accounts receivable are recognized at the time the customer takes possession of the product. Based on contractual terms, we record the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months in current assets with the remaining balance in long-term assets on the consolidated balance sheet. Customer accounts receivable include the net of unamortized deferred fees charged to customers and origination costs. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts along with interest accrued subsequent to the last payment.
In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. In our role as servicer, we may also make modifications to loans held by the VIEs. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to repossess collateral or exercise legal remedies available to us. We may extend or "re-age" a portion of our customer accounts, which involves modifying the payment terms to defer a portion of the cash payments due. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account, which does not change the interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extend the term. We consider accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings ("TDR" or "Restructured Accounts").
Interest income on customer accounts receivable. Interest income, which includes interest income and amortization of deferred fees and origination costs, is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. Any contractual interest income received from customers in excess of the interest income calculated using the interest method is recorded as deferred revenue on our balance sheets. Our calculation of interest income for customers with similar financing arrangements for which the timing and amount of prepayments can be reasonably estimated includes an estimate of the benefit from future prepayments based on our historical experience. At October 31, 2017 and January 31, 2017, there was $13.0 million and $13.7 million, respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off.
We offer 12-and 18-month no-interest option programs. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no-interest option finance programs with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience.
No-interest option finance programs with terms greater than 12 months are discounted to their present value at origination, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract.
We recognize interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it equals the present value of expected future cash flows.
We typically only place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the amount of the loan. At October 31, 2017 and January 31, 2017, customer receivables carried in non-accrual status were $21.4 million and $22.9 million, respectively. At October 31, 2017 and January 31, 2017, customer receivables that were past due 90 days or more and still accruing interest totaled $105.2 million and $124.0 million, respectively. At October 31, 2017 and January 31, 2017, customer receivables in a bankruptcy status that are less than 60 days past due of $11.7 million and $19.5 million, respectively, are included within the customer receivables carried in non-accrual status balance.
Allowance for doubtful accounts. The determination of the amount of the allowance for bad debts is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the allowance for bad debts. General economic conditions, changes to state or federal regulations and a variety of other factors that affect the ability of borrowers’ to service their debts or our ability to collect will impact the future performance of the portfolio.
We establish an allowance for doubtful accounts, including estimated uncollectible interest, to cover probable and estimable losses on our customer accounts receivable resulting from the failure of customers to make contractual payments. Our customer portfolio balance consists of a large number of relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment.
5
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We record an allowance for doubtful accounts on our non-TDR customer accounts receivable that we expect to charge-off over the next 12 months based on historical gross charge-off rates over the last 24 months. We incorporate an adjustment to historical gross charge-off rates for a scaled factor of the year-over-year change in six month average first payment default rates and the year-over-year change in the balance of customer accounts receivable that are 60 days or more past due. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from customers, amounts realized from the repossession of the products financed, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance policies are also considered.
Qualitative adjustments are made to the allowance for bad debts when, based on management’s judgment, there are internal or external factors impacting probable incurred losses not taken into account by the quantitative calculations. These qualitative considerations are based on the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value of underlying collateral, changes in concentrations of credit, and other internal or external factor changes. We utilize an economic qualitative adjustment based on changes in unemployment rates if current unemployment rates in our markets are worse than they were on average over the last 24 months. We also qualitatively limit the impact of changes in first payment default rates and changes in delinquency when those changes result in a decrease to the allowance for bad debts based on a measure of the dispersion of historical charge-off rates.
We determine allowances for those accounts that are TDR based on the discounted present value of cash flows expected to be collected over the life of those accounts based primarily on the performance of TDR loans over the last 24 months. The cash flows are discounted based on the weighted-average effective interest rate of the TDR accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as an allowance for loss on those accounts.
Debt Issuance Costs. Costs that are direct and incremental to debt issuance are deferred and amortized to interest expense using the effective interest method over the expected life of the debt. All other costs related to debt issuance are expensed as incurred. We present debt issuance costs associated with long-term debt as a reduction of the carrying amount of the debt. Unamortized costs related to the revolving credit facility were $5.9 million and $5.7 million as of October 31, 2017 and January 31, 2017, respectively, and were included in other assets on our consolidated balance sheet.
Income Taxes. For the nine months ended October 31, 2017 and 2016 we utilized the estimated annual effective tax rate based on our estimated fiscal year 2018 and 2017 pre-tax income, respectively, in determining income tax expense.
Stock-based compensation. Stock-based compensation expense is recorded, net of estimated forfeitures, for share-based compensation awards over the requisite service period using the straight-line method. An adjustment is made to compensation cost for any difference between the estimated forfeitures and the actual forfeitures related to the awards. For equity-classified share-based compensation awards, expense is recognized based on the grant-date fair value. For stock option grants, we use the Black-Scholes model to determine fair value. For grants of restricted stock units, the fair value of the grant is the market value of our stock at the date of issuance.
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Restricted stock awards ("RSUs") (1) | 2,740 | 14,502 | 646,033 | 343,369 | |||||||||||
Performance stock awards ("PSUs") (2) | — | — | 501,012 | 131,759 | |||||||||||
Total stock awards granted | 2,740 | 14,502 | 1,147,045 | 475,128 | |||||||||||
Aggregate grant date fair value (in thousands) | $ | 50 | $ | 96 | $ | 14,596 | $ | 5,046 | |||||||
(1) The majority of the RSUs issued during the nine months ended October 31, 2017 will vest, if at all, over periods of three to five years from the date of grant.
(2)The majority of the PSUs issued during the nine months ended October 31, 2017 will vest, if at all, upon the certification, after fiscal year 2020, by the compensation committee of the satisfaction of the annual and cumulative Earnings Before Interest, Taxes, Depreciation and Amortization performance conditions over the three fiscal years commencing with fiscal year 2018.
For the three months ended October 31, 2017 and 2016, stock-based compensation expense was $1.7 million and $1.0 million, respectively. For the nine months ended October 31, 2017 and 2016, stock-based compensation expense was $5.9 million and $3.9 million, respectively, inclusive of severance related stock-based compensation expense of $0.6 million and $0.2 million, respectively.
6
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Share. Basic earnings per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effects of any stock options and restricted stock units granted, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||
Weighted-average common shares outstanding - Basic | 31,292,913 | 30,816,319 | 31,121,177 | 30,736,636 | |||||||
Dilutive effect of stock options and restricted stock units | 471,681 | — | 336,243 | — | |||||||
Weighted-average common shares outstanding - Diluted | 31,764,594 | 30,816,319 | 31,457,420 | 30,736,636 | |||||||
For the three months ended October 31, 2017 and 2016 the weighted-average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 0.2 million and 1.2 million, respectively. For the nine months ended October 31, 2017 and 2016, the weighted-average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 0.4 million and 1.2 million, respectively.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to subjectivity associated with the inputs to fair value measurements as follows:
• | Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs). |
• | Level 3 – Inputs that are not observable from objective sources such as our internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in our internally developed present value of future cash flows model that underlies the fair-value measurement). |
In determining fair value, we use observable market data when available or models that incorporate observable market data. When we are required to measure fair value and there is not a market-observable price for the asset or liability or for a similar asset or liability, we use the cost or income approach depending on the quality of information available to support management’s assumptions. The cost approach is based on management’s best estimate of the current asset replacement cost. The income approach is based on management’s best assumptions regarding expectations of future net cash flows and discounts the expected cash flows using a commensurate risk-adjusted discount rate. Such evaluations involve significant judgment, and the results are based on expected future events or conditions such as sales prices, economic and regulatory climates, and other factors, most of which are often outside of management’s control. However, we believe assumptions used reflect a market participant’s view of long-term prices, costs, and other factors and are consistent with assumptions used in our business plans and investment decisions.
In arriving at fair-value estimates, we use relevant observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based on the lowest level of input that is significant to the fair-value measurement.
The fair value of cash and cash equivalents, restricted cash held by the consolidated VIEs and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a Level 3 discounted cash flow analysis, approximates their carrying amount, which includes the allowance for doubtful accounts. The fair value of our revolving credit facility approximates carrying value based on the current borrowing rate for similar types of borrowing arrangements. At October 31, 2017, the fair value of the Senior Notes outstanding, which was determined using Level 1 inputs, was $225.3 million as compared to the carrying value of $227.0 million, excluding the impact of the related discount. At October 31, 2017, the fair value of the asset-backed notes approximates their carrying value and was determined using Level 2 inputs based on inactive trading activity.
7
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements Adopted. In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for excess tax benefits and tax deficiencies associated with share-based payments, the accounting for forfeitures, and the classification of certain items on the statement of cash flows. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in additional paid-in capital ("APIC"), and the requirement to evaluate tax deficiencies for APIC or income tax expense classification, and provides for these benefits or deficiencies to be recorded as an income tax expense or benefit in the income statement. With these changes, tax-related cash flows resulting from share-based payments are classified as operating activities as opposed to financing. The standard became effective for us in the first quarter of fiscal year 2018. The amendment requiring the recognition of excess tax benefits and deficiencies as income tax benefit or expense in the income statement as opposed to being recognized as additional paid-in-capital was applied prospectively and the impact was not material. The Company retrospectively adopted the amendments requiring the classification of excess tax benefits and deficiencies with other income tax cash flows as operating activities and cash paid when directly withholding shares as financing activities in the accompanying consolidated statements of cash flows; the impact was not material. The Company has elected to continue its current practice of estimating the number of awards expected to vest in determining the amount of compensation cost to be recognized related to share based payment transactions.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory that has historically been measured using first-in, first-out or average cost method be measured at the lower of cost and net realizable value. The update requires prospective application and became effective for us in the first quarter of fiscal year 2018. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Yet To Be Adopted. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Upon adoption of ASU 2014-09, entities are required to recognize revenue using the following comprehensive model: (1) identify contracts with customers, (2) identify the performance obligations in such contracts, (3) determine transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of Effective Date, which defers the effective date of ASU 2014-09 by one year and allows early adoption on a limited basis. The FASB has also issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing; ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting; and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, all of which were issued to improve and clarify the guidance in ASU 2014-09. These ASUs will be effective for us beginning in the first quarter of fiscal year 2019 and will result in retrospective application, either in the form of recasting all prior periods presented or a cumulative adjustment to equity in the period of adoption. Based on our preliminary assessment, we do not expect the adoption of these ASUs to have a material impact on our consolidated financial statements other than the expected additional disclosure requirements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will change how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to how we currently account for capital leases. On transition, we will recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The final standard will become effective for us beginning in the first quarter of fiscal year 2020. Based on our preliminary assessment, we believe the adoption of this ASU will have a material impact on our financial statements as we will be required to report additional leases on our consolidated balance sheet. We are the lessee under various lease agreements for our retail stores and equipment that are currently accounted for as operating leases as discussed in Note 6, Leases, of our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that financial assets measured at amortized cost should be presented at the net amount expected to be collected through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The standard will become effective for us in the first quarter of fiscal year 2021 and earlier adoption is permitted beginning in the first quarter of fiscal year 2020. We are currently assessing the impact this ASU will have on our financial statements.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice. Among other things, debt prepayment or debt extinguishment costs will be presented as cash outflows for financing activities on the statement of cash flow. The standard will become effective for us in the first quarter of fiscal year 2019 and early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The standard will become effective for us in the first quarter of fiscal year 2019 and early adoption is permitted. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are evaluating the standard and the impact it will have on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires that the statement of cash flows provides the change in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. We hold restricted cash related to our asset-backed security transactions. The adoption of this standard will result in us no longer showing the changes in restricted cash balances as a component of cash flows from financing activities but instead include the balances of both current and long-term restricted cash with cash and cash equivalents in total cash, cash equivalents and restricted cash for the beginning and end of the periods presented. The ASU will become effective for us in the first quarter of fiscal year 2019, and early adoption is permitted.
2. Customer Accounts Receivable
Customer accounts receivable consisted of the following:
Total Outstanding Balance | |||||||||||||||||||||||
Customer Accounts Receivable | 60 Days Past Due (1) | Re-aged (1) | |||||||||||||||||||||
(in thousands) | October 31, 2017 | January 31, 2017 | October 31, 2017 (2) | January 31, 2017 | October 31, 2017 (3) | January 31, 2017 | |||||||||||||||||
Customer accounts receivable | $ | 1,341,939 | $ | 1,417,581 | $ | 110,382 | $ | 127,747 | $ | 208,047 | $ | 111,585 | |||||||||||
Restructured accounts | 146,967 | 138,858 | 37,484 | 38,010 | 146,967 | 138,858 | |||||||||||||||||
Total customer portfolio balance | 1,488,906 | 1,556,439 | $ | 147,866 | $ | 165,757 | $ | 355,014 | $ | 250,443 | |||||||||||||
Allowance for uncollectible accounts | (202,906 | ) | (210,175 | ) | |||||||||||||||||||
Allowances for no-interest option credit programs | (19,616 | ) | (21,207 | ) | |||||||||||||||||||
Deferred fees and origination costs, net | (14,019 | ) | (6,991 | ) | |||||||||||||||||||
Total customer accounts receivable, net | 1,252,365 | 1,318,066 | |||||||||||||||||||||
Short-term portion of customer accounts receivable, net | (635,700 | ) | (702,162 | ) | |||||||||||||||||||
Long-term portion of customer accounts receivable, net | $ | 616,665 | $ | 615,904 | |||||||||||||||||||
Securitized receivables held by the VIEs | $ | 712,727 | $ | 1,015,837 | $ | 99,763 | $ | 156,344 | $ | 246,333 | $ | 238,375 | |||||||||||
Receivables not held by the VIEs | 776,179 | 540,602 | 48,103 | 9,413 | 108,681 | 12,068 | |||||||||||||||||
Total customer portfolio balance | $ | 1,488,906 | $ | 1,556,439 | $ | 147,866 | $ | 165,757 | $ | 355,014 | $ | 250,443 | |||||||||||
(1) | Due to the fact that an account can become past due after having been re-aged, accounts could be represented as both past due and re-aged. As of October 31, 2017 and January 31, 2017, the amounts included within both 60 days past due and re-aged were $64.8 million and $66.7 million, respectively. As of October 31, 2017 and January 31, 2017, the total customer portfolio balance past due one day or greater was $394.5 million and $406.1 million, respectively. These amounts include the 60 days past due balances shown. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) | The balance of accounts 60 days past due as of October 31, 2017 reflects the impact of first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas. |
(3) | The re-aged receivable balance as of October 31, 2017 includes $71.8 million in first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas. |
The following presents the activity in the allowance for doubtful accounts and uncollectible interest for customer receivables:
Nine Months Ended October 31, 2017 | Nine Months Ended October 31, 2016 | ||||||||||||||||||||||
(in thousands) | Customer Accounts Receivable | Restructured Accounts | Total | Customer Accounts Receivable | Restructured Accounts | Total | |||||||||||||||||
Allowance at beginning of period | $ | 158,992 | $ | 51,183 | $ | 210,175 | $ | 149,226 | $ | 41,764 | $ | 190,990 | |||||||||||
Provision (1) | 139,406 | 52,948 | 192,354 | 156,063 | 44,286 | 200,349 | |||||||||||||||||
Principal charge-offs (2) | (133,033 | ) | (44,657 | ) | (177,690 | ) | (132,028 | ) | (31,802 | ) | (163,830 | ) | |||||||||||
Interest charge-offs | (21,884 | ) | (7,346 | ) | (29,230 | ) | (22,400 | ) | (5,405 | ) | (27,805 | ) | |||||||||||
Recoveries (2) | 5,463 | 1,834 | 7,297 | 3,727 | 899 | 4,626 | |||||||||||||||||
Allowance at end of period | $ | 148,944 | $ | 53,962 | $ | 202,906 | $ | 154,588 | $ | 49,742 | $ | 204,330 | |||||||||||
Average total customer portfolio balance | $ | 1,352,137 | $ | 141,155 | $ | 1,493,292 | $ | 1,422,473 | $ | 126,493 | $ | 1,548,966 | |||||||||||
(1) | Includes provision for uncollectible interest, which is included in finance charges and other revenues. |
(2) | Charge-offs include the principal amount of losses (excluding accrued and unpaid interest). Recoveries include principal collections of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries. |
3. Accrual for Store and Facility Closures
We have closed or relocated retail and facility locations that did not perform at a level expected for mature store locations or that did not align with our long-term retail objectives. Certain of the closed or relocated stores and facilities had non-cancelable lease agreements, resulting in the accrual of the present value of the remaining lease payments and estimated related occupancy obligations, net of estimated sublease income. Adjustments to these projections for changes in estimated marketing times and sublease rates, as well as other revisions, are made to the obligation as further information related to the actual terms and costs become available.
The following table presents detail of the activity in the accrual for store and facility closures:
Nine Months Ended October 31, | |||||||
(in thousands) | 2017 | 2016 | |||||
Balance at beginning of period | $ | 1,874 | $ | 1,866 | |||
Accrual for additional closures | 1,314 | 954 | |||||
Adjustments | 16 | (74 | ) | ||||
Cash payments, net of sublease income | (2,010 | ) | (767 | ) | |||
Balance at end of period | 1,194 | 1,979 | |||||
Current portion, included in accrued expenses | (170 | ) | (923 | ) | |||
Long-term portion, included in other long-term liabilities | $ | 1,024 | $ | 1,056 | |||
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Charges and Credits
Charges and credits consisted of the following:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Store and facility closure costs | $ | — | $ | 954 | $ | 1,349 | $ | 954 | |||||||
Impairments from disposals | — | 595 | — | 1,980 | |||||||||||
Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation | — | 158 | 34 | 747 | |||||||||||
Employee severance | — | 280 | 1,317 | 1,493 | |||||||||||
Indirect tax audit reserve | — | — | 2,595 | — | |||||||||||
Write-off of capitalized software costs | 5,861 | — | 5,861 | — | |||||||||||
Executive management transition costs | — | — | — | 234 | |||||||||||
$ | 5,861 | $ | 1,987 | $ | 11,156 | $ | 5,408 | ||||||||
During the three months ended October 31, 2017, we incurred a loss from the write-off of previously capitalized costs for a software project that was abandoned during the third quarter of fiscal year 2018 related to the implementation of a new point of sale system that began in fiscal year 2013. During the nine months ended October 31, 2017, we incurred exit costs associated with reducing the square footage of a distribution center, severance costs related to a change in the executive management team, a charge related to an increase in our indirect tax audit reserve, and a loss from the write-off of previously capitalized costs for a software project that was abandoned during the third quarter of fiscal year 2018 related to the implementation of a new point of sale system that began in fiscal year 2013. During the three and nine months ended October 31, 2016, we incurred costs associated with store and facility closures, impairments from disposals, legal and professional fees related to our securities-related litigation and severance and transition costs due to changes in the executive management team. The impairments from disposals included the write-off of leasehold improvements for one store we relocated prior to the end of the useful life of the leasehold improvements and incurred costs for a terminated store project prior to starting construction.
5. Finance Charges and Other Revenues
Finance charges and other revenues consisted of the following:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Interest income and fees | $ | 74,144 | $ | 58,404 | $ | 210,765 | $ | 173,527 | |||||||
Insurance income | 7,125 | 9,999 | 27,107 | 30,674 | |||||||||||
Other revenues | 95 | 337 | 267 | 1,268 | |||||||||||
$ | 81,364 | $ | 68,740 | $ | 238,139 | $ | 205,469 | ||||||||
Interest income and fees and insurance income are derived from the credit segment operations, whereas other revenues are derived from the retail segment operations. Insurance income is comprised of sales commissions from third-party insurance companies at the time we sell the coverage, and we may receive retrospective commissions, which are additional commissions paid by the insurance carrier if insurance claims are less than earned premiums.
During the three months ended October 31, 2017 and 2016, interest income and fees reflected provisions for uncollectible interest of $10.5 million and $11.0 million and interest income related to TDR accounts of $4.8 million and $4.4 million, respectively. During the nine months ended October 31, 2017 and 2016, interest income and fees reflected provisions for uncollectible interest of $31.0 million and $31.2 million and interest income related to TDR accounts of $14.0 million and $12.7 million, respectively.
11
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Debt and Capital Lease Obligations
Debt and capital lease obligations consisted of the following:
(in thousands) | October 31, 2017 | January 31, 2017 | |||||
Revolving credit facility | $ | 352,000 | $ | 177,500 | |||
Senior Notes | 227,000 | 227,000 | |||||
2015 VIE Asset-backed Class A notes | — | 12,166 | |||||
2015 VIE Asset-backed Class B notes | — | 165,900 | |||||
2016-A VIE Asset-backed Class A notes | — | 64,732 | |||||
2016-A VIE Asset-backed Class B notes | — | 70,510 | |||||
2016-A VIE Asset-backed Class C notes | — | 70,510 | |||||
2016-B VIE Asset-backed Class A notes | 8,563 | 256,513 | |||||
2016-B VIE Asset-backed Class B notes | 111,960 | 111,960 | |||||
2017-A VIE Asset-backed Class A notes | 129,583 | — | |||||
2017-A VIE Asset-backed Class B notes | 106,270 | — | |||||
2017-A VIE Asset-backed Class C notes | 50,340 | — | |||||
2017 Warehouse Class A Notes | 56,874 | — | |||||
Capital lease obligations | 5,213 | 2,393 | |||||
Total debt and capital lease obligations | 1,047,803 | 1,159,184 | |||||
Less: | |||||||
Discount on debt | (2,668 | ) | (3,089 | ) | |||
Deferred debt issuance costs | (6,206 | ) | (10,853 | ) | |||
Current maturities of long-term debt and capital lease obligations | (65,651 | ) | (849 | ) | |||
Long-term debt and capital lease obligations | $ | 973,278 | $ | 1,144,393 | |||
Senior Notes. On July 1, 2014, we issued $250.0 million of the unsecured Senior Notes due July 2022 bearing interest at 7.25% (the "Senior Notes"), pursuant to an indenture dated July 1, 2014 (the "Indenture"), among Conn's, Inc., its subsidiary guarantors (the "Guarantors") and U.S. Bank National Association, as trustee. The effective interest rate of the Senior Notes after giving effect to the discount and issuance costs is 7.8%.
The Indenture restricts the Company's and certain of its subsidiaries' ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock ("restricted payments"); (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. Specifically, limitations on restricted payments are only effective if one or more of the following occurred: (1) a default were to exist under the Indenture, (2) we could not satisfy a debt incurrence test, and (3) the aggregate amount of restricted payments were to exceed an amount tied to consolidated net income. These limitations, however, are subject to two exceptions: (1) an exception that permits the payment of up to $375.0 million in restricted payments, and (2) an exception that permits restricted payments regardless of dollar amount so long as, after giving pro forma effect to the dividends and other restricted payments, we would have had a leverage ratio, as defined under the Indenture, of less than or equal to 2.50 to 1.0. As a result of these exceptions, as of October 31, 2017, $179.2 million would have been free from the distribution restriction. However, as a result of the revolving credit facility distribution restrictions, which are further described below, we were restricted from making a distribution as of October 31, 2017. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and we will cease to be subject to such covenants during such period.
Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we fail to make payment of other indebtedness prior to the expiration of any applicable grace period or upon acceleration of indebtedness prior to its stated maturity date in an amount exceeding $25.0 million, as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.
12
CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset-backed Notes. During fiscal years 2018, 2017 and 2016, we securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.
Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933, as amended. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.
The asset-backed notes at origination consisted of the following:
Asset-Backed Notes | Original Principal Amount | Net Proceeds(1) | Issuance Date | Maturity Date | Contractual Interest Rate | Effective Interest Rate(2) | ||||||||||
2016-B Class A Notes | 391,840 | 380,033 | 10/6/2016 | 10/15/2018 | 3.73% | 5.47% | ||||||||||
2016-B Class B Notes | 111,960 | 108,586 | 10/6/2016 | 3/15/2019 | 7.34% | 8.03% | ||||||||||
2017-A Class A Notes | 313,220 | 304,451 | 4/19/2017 | 7/15/2019 | 2.73% | 4.96% | ||||||||||
2017-A Class B Notes | 106,270 | 103,300 | 4/19/2017 | 2/15/2020 | 5.11% | 5.83% | ||||||||||
2017-A Class C Notes | 50,340 | 48,919 | 4/19/2017 | 10/15/2021 | 7.40% | 7.91% | ||||||||||
2017 Warehouse Class A Notes | 79,940 | 78,777 | 8/15/2017 | 8/15/2018 | 1M CP + 4% (3) | 7.02% | ||||||||||
Total | $ | 1,053,570 | $ | 1,024,066 | ||||||||||||
(1) | After giving effect to debt issuance costs and restricted cash held by the VIEs. |
(2) | For the nine months ended October 31, 2017, and inclusive of changes in timing of actual and expected cash flows. |
(3) | The rate on the 2017 Warehouse Class A Notes is defined as the one-month commercial paper rate, representing the purchaser's commercial paper cost, plus a 4% fixed margin. |
On May 15, 2017, the Company completed the redemption of its Series 2015-A Class B Notes (collectively, the "2015-A Redeemed Notes") at an aggregate redemption price of $114.1 million (which was equal to the entire outstanding principal of, plus accrued interest on, the 2015-A Redeemed Notes). The net funds used to call the notes was $78.8 million, which is equal to the redemption price less adjustments of $35.3 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2015-A Redeemed Notes. The net funds used to call the 2015-A Redeemed Notes of $78.8 million was transferred from the Guarantors to the Non-Guarantor Subsidiary in exchange for the underlying securities held as collateral on the 2015-A Redeemed Notes with carrying value of $126.3 million as of April 30, 2017. In connection with the early redemption of the 2015-A Redeemed Notes, we wrote-off $2.1 million of debt issuance costs.
On August 15, 2017, affiliates of the Company closed on a $79.9 million financing under a receivables warehouse financing transaction entered into on August 8, 2017 (the "Warehouse Financing"). The net proceeds of the Warehouse Financing were used to prepay in full the Series 2016-A Class B Notes and Class C Notes (collectively, the "2016-A Redeemed Notes"), which had been issued by Conn’s Receivables Funding 2016-A, LLC under a securitization transaction entered into on March 17, 2016, that were still outstanding as of August 15, 2017.
On August 15, 2017, the Company completed the redemption of the 2016-A Redeemed Notes at an aggregate redemption price of $102.9 million (which was equal to the entire outstanding principal of, plus accrued interest and the call premiums on, the 2016-A Redeemed Notes). The net funds used to call the notes was $78.6 million, which is equal to the redemption price less adjustments of $24.3 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2016-A Redeemed Notes. The difference between the net proceeds of the Warehouse Financing and the carrying value of the
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016-A Redeemed Notes at redemption was used to fund fees, expenses and a reserve account related to the Warehouse facility. In connection with the early redemption of the 2016-A Redeemed Notes, we wrote-off $0.5 million of debt issuance costs.
Revolving Credit Facility. On March 31, 2017, Conn's, Inc. and certain of its subsidiaries (the "Borrowers") entered into a Third Amendment (the "Third Amendment") to the Third Amended and Restated Loan and Security Agreement, dated as of October 30, 2015, with certain lenders, which provides for a $750.0 million asset-based revolving credit facility (the "revolving credit facility") under which credit availability is subject to a borrowing base. The revolving credit facility matures on October 30, 2019.
The Third Amendment, among other things, (a) extends the maturity date of the credit facility one year to October 30, 2019; (b) provides for a reduction in the aggregate commitments from $810 million to $750 million; (c) amends the minimum interest coverage ratio covenant to reduce the minimum interest coverage ratio to 1.10x as of the last day of the fiscal quarter ending October 31, 2017 and to 1.25x as of the last day of each fiscal quarter thereafter, beginning with the fiscal quarter ending January 31, 2018; (d) sets the applicable margin at 3.50% for LIBOR loans and 2.50% for Base Rate loans until the Company demonstrates an interest coverage ratio of equal to or greater than 1.10x for the fiscal quarter ending October 31, 2017, at which point the applicable margin will revert to being determined according to the existing pricing grid based on facility availability; (e) reduces the minimum cash recovery percentage on the contracts it owns and manages from 4.50% to 4.45% for the first nine months of each fiscal year, and from 4.25% to 4.20% for the last three months of each fiscal year; (f) amends the definition of “EBITDA” to, among other things, exclude the impact of non-cash asset write-offs relating to construction in process; (g) amends the definition of “Interest Expense” to exclude certain non-interest expenses; (h) amends various definitions and other related provisions to clarify the Company’s ability to undertake permitted securitization transactions; (i) increases the number of equity cures that may be exercised during the term of the agreement from one time to two times, and increases the maximum amount of each such cure from $10 million to $20 million; and (j) modifies the calculations of “Tangible Net Worth” and “Interest Coverage Ratio” to deduct certain amounts attributable to the difference between a calculated loss reserve and the Company’s recorded loss reserve on its customer receivables.
Loans under the revolving credit facility bear interest, at our option, at a rate equal to LIBOR plus the applicable margin at 3.50% for LIBOR loans and 2.50% for base rate loans until the Company demonstrates an interest coverage ratio of equal to or greater than 1.10x for the fiscal quarter ending October 31, 2017, at which point the applicable margin will revert to being determined according to the existing pricing grid based on facility availability which specifies a margin ranging from 2.75% to 3.25% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.75% to 2.25% per annum (depending on quarterly average net availability under the borrowing base). The alternate base rate is the greatest of the prime rate announced by Bank of America, N.A., the federal funds rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that is available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.75% per annum, depending on the average outstanding balance and letters of credit of the revolving credit facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the revolving credit facility was 6.6% for the nine months ended October 31, 2017.
The revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory, and provides for a $40.0 million sub-facility for letters of credit to support obligations incurred in the ordinary course of business. The obligations under the revolving credit facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of October 31, 2017, we had immediately available borrowing capacity of $110.5 million under our revolving credit facility, net of standby letters of credit issued of $2.8 million. We also had $284.8 million that may become available under our revolving credit facility if we grow the balance of eligible customer receivables and our eligible inventory balances.
The revolving credit facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The revolving credit facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may make dividends and distributions to the Company and other obligors under the revolving credit facility without restriction. As of October 31, 2017, we were unable to repay the Senior Notes or make other distributions as a result of the revolving credit facility restrictions. The revolving credit facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the revolving credit facility.
In connection with entering into the Third Amendment, we wrote-off $0.3 million of debt issuance costs for lenders that did not continue to participate. We also paid $2.8 million of debt issuance costs, recorded as other assets, which will be amortized ratably over the remaining term of the revolving credit facility along with the unamortized debt issuance costs remaining on the revolving credit facility.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Covenants. We were in compliance with our debt covenants, as amended, at October 31, 2017. A summary of the significant financial covenants that govern our revolving credit facility, as amended, compared to our actual compliance status at October 31, 2017 is presented below:
Actual | Required Minimum/ Maximum | ||
Interest Coverage Ratio must equal or exceed minimum | 1.75:1.00 | 1.10:1.00 | |
Leverage Ratio must not exceed maximum | 2.49:1.00 | 4.00:1.00 | |
ABS Excluded Leverage Ratio must not exceed maximum | 1.71:1.00 | 2.00:1.00 | |
Cash Recovery Percent must exceed stated amount | 4.80% | 4.45% | |
Capital Expenditures, net, must not exceed maximum | $1.0 million | $75.0 million | |
All capitalized terms in the above table are defined by the revolving credit facility, as amended, and may or may not agree directly to the financial statement captions in this document. The covenants are calculated quarterly, except for the Cash Recovery Percent, which is calculated monthly on a trailing three-month basis, and Capital Expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.
7. Contingencies
Securities Class Action Litigation. We and two of our former executive officers are defendants in a consolidated securities class action lawsuit pending in the United States District Court for the Southern District of Texas (the “Court”), captioned In re Conn's Inc. Securities Litigation, Cause No. 14-CV-00548 (the “Consolidated Securities Action”). The Consolidated Securities Action started as three separate purported securities class action lawsuits filed between March 5, 2014 and May 5, 2014 in the Court that were consolidated into the Consolidated Securities Action on June 3, 2014. The plaintiffs in the Consolidated Securities Action allege that the defendants made false and misleading statements or failed to disclose material adverse facts about our business, operations, and prospects. They allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seek to certify a class of all persons and entities that purchased or otherwise acquired Conn's common stock or call options, or sold or wrote Conn's put options between April 3, 2013 and December 9, 2014. The complaint does not specify the amount of damages sought.
On June 30, 2015, the Court held a hearing on the defendants' motion to dismiss plaintiffs' complaint. At the hearing, the Court dismissed Brian Taylor, a former executive officer, and certain other aspects of the complaint. The Court ordered the plaintiffs to further amend their complaint in accordance with its ruling, and the plaintiffs filed their Fourth Consolidated Amended Complaint on July 21, 2015. The remaining defendants filed a motion to dismiss on August 28, 2015. The defendant's motion to dismiss was fully briefed and the Court held a hearing on defendants' motion on March 25, 2016 and on May 5, 2016, the Court issued a ruling that dismissed 78 of 91 alleged misstatements. The parties have submitted their respective briefs in support of, and in opposition to, class certification, and also engaged in discovery pursuant to the Court’s scheduling order. In late June 2017, the Court granted the plaintiffs’ motion for class certification, and shortly thereafter, Defendants filed a petition for permission to appeal to the U.S. 5th Circuit Court of Appeals. The Fifth Circuit granted leave to appeal on August 21, 2017. We anticipate that the appellate court may issue its ruling in the first half of calendar year 2018. Trial is scheduled for October 2018.
We intend to vigorously defend against all of the claims in the Consolidated Securities Action against us. It is not possible at this time to predict the timing or outcome of any of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
Derivative Litigation. On December 1, 2014, an alleged shareholder, purportedly on behalf of the Company, filed a derivative shareholder lawsuit against us and certain of our current and former directors and former executive officers in the Court, captioned as Robert Hack, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director), Brian Taylor (former executive officer) and Michael J. Poppe (former executive officer) and Conn's, Inc., Case No. 4:14-cv-03442 (the "Original Derivative Action"). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified damages against these persons and does not request any damages from us. Setting forth substantially similar claims against the same defendants, on February 25, 2015, an additional federal derivative action, captioned 95250 Canada LTEE, derivatively on behalf of Conn's, Inc. v. Wright et al., Cause No. 4:15-cv-00521, was filed in the Court, which has been consolidated with the Original Derivative Action.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Court previously approved a stipulation among the parties to stay the action pending resolution of the motion to dismiss in the Consolidated Securities Action. The Consolidated Securities Action is scheduled for trial in October 2018. The parties have agreed to continue the stay.
Another derivative action was filed on January 27, 2015, captioned as Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, filed in the 281st Judicial District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. On September 14, 2017, the court entered an order extending the stay until March 16, 2018. On May 19, 2016, an alleged shareholder, purportedly on behalf of the Company, filed a lawsuit against us and certain of our current and former directors and former executive officers in the 55th Judicial District Court, Harris County, Texas, captioned as Robert J. Casey II, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Michael J. Poppe (former executive officer), Brian Taylor (former executive officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director) and William E. Saunders Jr., and Conn's, Inc., Cause No. 2016-33135. The complaint asserts claims for breach of fiduciary duties and unjust enrichment based on substantially similar factual allegations as those asserted in the Original Derivative Action. The complaint does not specify the amount of damages sought. Pursuant to the parties’ agreement, this action is currently stayed.
None of the plaintiffs in any of the derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits. The defendants in the derivative actions intend to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of any of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
Regulatory Matters. We are continuing to cooperate with the SEC's investigation of our underwriting policies and bad debt provisions, which began in November 2014. The investigation is a non-public, fact-finding inquiry, and the SEC has stated that the investigation does not mean that any violations of law have occurred. At this time, it is not possible to predict the timing or outcome of this investigation, or whether there will be a material loss, if any, resulting from this investigation.
In addition, we are involved in other routine litigation and claims incidental to our business from time to time which, individually or in the aggregate, are not expected to have a material adverse effect on us. As required, we accrue estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation.
8. Variable Interest Entities
In fiscal years 2018, 2017 and 2016, we securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. Under the terms of the respective securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. We retain the servicing of the securitized portfolio and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables, and we currently hold all of the residual equity. In addition, we, rather than the VIEs, will retain certain credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as we consolidate the VIEs.
We consolidate VIEs when we determine that we are the primary beneficiary of these VIEs, we have the power to direct the activities that most significantly impact the performance of the VIEs and our obligation to absorb losses and the right to receive residual returns are significant.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the assets and liabilities held by the VIEs (for legal purposes, the assets and liabilities of the VIEs will remain distinct from Conn's, Inc.):
(in thousands) | October 31, 2017 | January 31, 2017 | |||||
Assets: | |||||||
Restricted cash | $ | 71,099 | $ | 110,698 | |||
Due from Conn's, Inc., net | 2,387 | 7,368 | |||||
Customer accounts receivable: | |||||||
Customer accounts receivable | 603,584 | 884,367 | |||||
Restructured accounts | 109,143 | 131,470 | |||||
Allowance for uncollectible accounts | (109,759 | ) | (150,435 | ) | |||
Allowances for no-interest option credit programs | (8,661 | ) | (15,912 | ) | |||
Deferred fees and origination costs | (3,185 | ) | — | ||||
Total customer accounts receivable, net | 591,122 | 849,490 | |||||
Total assets | $ | 664,608 | $ | 967,556 | |||
Liabilities: | |||||||
Accrued expenses | $ | 3,602 | $ | 6,525 | |||
Other liabilities | 6,362 | 6,691 | |||||
Current maturities of long-term debt: | |||||||
2016-B Class A Notes | 8,563 | ||||||
2017-A Warehouse Class A Notes | 56,874 | ||||||
Deferred debt issuance costs | (485 | ) | |||||
64,952 | — | ||||||
Long-term debt: | |||||||
2015 Class A Notes | — | 12,166 | |||||
2015 Class B Notes | — | 165,900 | |||||
2016-A Class A Notes | — | 64,732 | |||||
2016-A Class B Notes | — | 70,510 | |||||
2016-A Class C Notes | — | 70,510 | |||||
2016-B Class A Notes | — | 256,513 | |||||
2016-B Class B Notes | 111,960 | 111,960 | |||||
2017-A Class A Notes | 129,583 | — | |||||
2017-A Class B Notes | 106,270 | — | |||||
2017-A Class C Notes | 50,340 | — | |||||
398,153 | 752,291 | ||||||
Less: deferred debt issuance costs | (2,143 | ) | (6,710 | ) | |||
Total long-term debt | 396,010 | 745,581 | |||||
Total liabilities | $ | 470,926 | $ | 758,797 | |||
The assets of the VIEs serve as collateral for the obligations of the VIEs. The holders of the asset-backed notes have no recourse to assets outside of the respective VIEs.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Segment Reporting
Operating segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit-constrained consumers. We have two operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail segment operates primarily through our stores and website in the retail furniture and mattresses, home appliances, consumer electronics and home office products business. Our retail segment product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit segment offers affordable financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives. Our operating segments provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next day delivery and installation in the majority of our markets, and product repair service. We believe our large, attractively merchandised retail stores and credit solutions offer a distinctive value proposition compared to other retailers that target our core customer demographic. The operating segments follow the same accounting policies used in our consolidated financial statements.
We evaluate a segment’s performance based upon operating income before taxes. Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated corporate overhead expenses, and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period.
As of October 31, 2017, we operated retail stores in 14 states with no operations outside of the United States. No single customer accounts for more than 10% of our total revenues.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial information by segment is presented in the following tables:
Three Months Ended October 31, 2017 | Three Months Ended October 31, 2016 | ||||||||||||||||||||||
(in thousands) | Retail | Credit | Total | Retail | Credit | Total | |||||||||||||||||
Revenues: | |||||||||||||||||||||||
Furniture and mattress | $ | 97,146 | $ | — | $ | 97,146 | $ | 98,898 | $ | — | $ | 98,898 | |||||||||||
Home appliance | 83,837 | — | 83,837 | 85,785 | — | 85,785 | |||||||||||||||||
Consumer electronic | 58,062 | — | 58,062 | 65,670 | — | 65,670 | |||||||||||||||||
Home office | 20,295 | — | 20,295 | 22,747 | — | 22,747 | |||||||||||||||||
Other | 4,446 | — | 4,446 | 4,956 | — | 4,956 | |||||||||||||||||
Product sales | 263,786 | — | 263,786 | 278,056 | — | 278,056 | |||||||||||||||||
Repair service agreement commissions | 24,488 | — | 24,488 | 26,354 | — | 26,354 | |||||||||||||||||
Service revenues | 3,534 | — | 3,534 | 3,623 | — | 3,623 | |||||||||||||||||
Total net sales | 291,808 | — | 291,808 | 308,033 | — | 308,033 | |||||||||||||||||
Finance charges and other revenues | 95 | 81,269 | 81,364 | 337 | 68,403 | 68,740 | |||||||||||||||||
Total revenues | 291,903 | 81,269 | 373,172 | 308,370 | 68,403 | 376,773 | |||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||
Cost of goods sold | 175,591 | — | 175,591 | 192,374 | — | 192,374 | |||||||||||||||||
Selling, general and administrative expenses (1) | 80,676 | 33,679 | 114,355 | 79,777 | 34,680 | 114,457 | |||||||||||||||||
Provision for bad debts | 189 | 56,323 | 56,512 | 286 | 51,278 | 51,564 | |||||||||||||||||
Charges and credits | 5,861 | — | 5,861 | 1,987 | — | 1,987 | |||||||||||||||||
Total costs and expense | 262,317 | 90,002 | 352,319 | 274,424 | 85,958 | 360,382 | |||||||||||||||||
Operating income (loss) | 29,586 | (8,733 | ) | 20,853 | 33,946 | (17,555 | ) | 16,391 | |||||||||||||||
Interest expense | — | 18,095 | 18,095 | — | 23,470 | 23,470 | |||||||||||||||||
Loss on extinguishment of debt | — | 461 | 461 | — | — | — | |||||||||||||||||
Income (loss) before income taxes | $ | 29,586 | $ | (27,289 | ) | $ | 2,297 | $ | 33,946 | $ | (41,025 | ) | $ | (7,079 | ) | ||||||||
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended October 31, 2017 | Nine Months Ended October 31, 2016 | ||||||||||||||||||||||
(in thousands) | Retail | Credit | Total | Retail | Credit | Total | |||||||||||||||||
Revenues: | |||||||||||||||||||||||
Furniture and mattress | $ | 286,886 | $ | — | $ | 286,886 | $ | 309,766 | $ | — | $ | 309,766 | |||||||||||
Home appliance | 253,044 | — | 253,044 | 275,048 | — | 275,048 | |||||||||||||||||
Consumer electronic | 166,761 | — | 166,761 | 197,270 | — | 197,270 | |||||||||||||||||
Home office | 54,945 | — | 54,945 | 66,921 | — | 66,921 | |||||||||||||||||
Other | 13,105 | — | 13,105 | 15,264 | — | 15,264 | |||||||||||||||||
Product sales | 774,741 | — | 774,741 | 864,269 | — | 864,269 | |||||||||||||||||
Repair service agreement commissions | 72,703 | — | 72,703 | 82,849 | — | 82,849 | |||||||||||||||||
Service revenues | 10,062 | — | 10,062 | 11,456 | — | 11,456 | |||||||||||||||||
Total net sales | 857,506 | — | 857,506 | 958,574 | — | 958,574 | |||||||||||||||||
Finance charges and other revenues | 267 | 237,872 | 238,139 | 1,268 | 204,201 | 205,469 | |||||||||||||||||
Total revenues | 857,773 | 237,872 | 1,095,645 | 959,842 | 204,201 | 1,164,043 | |||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||
Cost of goods sold | 519,847 | — | 519,847 | 605,709 | — | 605,709 | |||||||||||||||||
Selling, general and administrative expenses (1) | 233,290 | 99,234 | 332,524 | 244,598 | 102,952 | 347,550 | |||||||||||||||||
Provision for bad debts | 584 | 161,307 | 161,891 | 811 | 169,167 | 169,978 | |||||||||||||||||
Charges and credits | 11,156 | — | 11,156 | 5,408 | — | 5,408 | |||||||||||||||||
Total costs and expense | 764,877 | 260,541 | 1,025,418 | 856,526 | 272,119 | 1,128,645 | |||||||||||||||||
Operating income (loss) | 92,896 | (22,669 | ) | 70,227 | 103,316 | (67,918 | ) | 35,398 | |||||||||||||||
Interest expense | — | 62,142 | 62,142 | — | 73,504 | 73,504 | |||||||||||||||||
Loss on extinguishment of debt | — | 2,907 | 2,907 | — | — | — | |||||||||||||||||
Income (loss) before income taxes | $ | 92,896 | $ | (87,718 | ) | $ | 5,178 | $ | 103,316 | $ | (141,422 | ) | $ | (38,106 | ) | ||||||||
(1) | For the three months ended October 31, 2017 and 2016, the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $7.3 million and $6.7 million, respectively. For the three months ended October 31, 2017 and 2016, the amount of reimbursement made to the retail segment by the credit segment was $9.3 million and $9.6 million, respectively. For the nine months ended October 31, 2017 and 2016, the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $21.5 million and $18.9 million, respectively. For the nine months ended October 31, 2017 and 2016, the amount of reimbursement made to the retail segment by the credit segment was $27.9 million and $29.0 million, respectively. |
10. | Guarantor Financial Information |
Conn's, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. The Senior Notes, which were issued by Conn's, Inc., are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain guarantor subsidiaries (the "Guarantors"). As of October 31, 2017 and January 31, 2017, the direct or indirect subsidiaries of Conn's, Inc. that were not Guarantors (the "Non-Guarantor Subsidiaries") were the VIEs and minor subsidiaries. There are no restrictions under the Indenture on the ability of any of the Guarantors to transfer funds to Conn's, Inc. in the form of dividends or distributions.
The following financial information presents the condensed consolidated balance sheet, statement of operations, and statement of cash flows for Conn's, Inc. (the issuer of the Senior Notes), the Guarantors, and the Non-Guarantor Subsidiaries, together with certain eliminations. Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Results of operations of subsidiaries are therefore reflected in the parent company's investment accounts and operations. The consolidated financial information includes financial data for:
(i) Conn’s, Inc. (on a parent-only basis),
(ii) Guarantors,
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(iii) Non-Guarantor Subsidiaries, and
(iv) the parent company and the subsidiaries on a consolidated basis at October 31, 2017 and January 31, 2017 (after the elimination of intercompany balances and transactions). Condensed consolidated net income (loss) is the same as condensed consolidated comprehensive income (loss) for the periods presented.
Condensed Consolidated Balance Sheet as of October 31, 2017:
(in thousands) | Conn's, Inc. | Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 12,742 | $ | — | $ | — | $ | 12,742 | |||||||||
Restricted cash | — | — | 71,099 | — | 71,099 | ||||||||||||||
Customer accounts receivable, net of allowance | — | 275,614 | 360,086 | — | 635,700 | ||||||||||||||
Other accounts receivable | — | 63,203 | — | — | 63,203 | ||||||||||||||
Inventories | — | 235,479 | — | — | 235,479 | ||||||||||||||
Other current assets | — | 18,865 | 2,387 | (5,337 | ) | 15,915 | |||||||||||||
Total current assets | — | 605,903 | 433,572 | (5,337 | ) | 1,034,138 | |||||||||||||
Investment in and advances to subsidiaries | 682,391 | 193,682 | — | (876,073 | ) | — | |||||||||||||
Long-term portion of customer accounts receivable, net of allowance | — | 385,629 | 231,036 | — | 616,665 | ||||||||||||||
Property and equipment, net | — | 144,747 | — | — | 144,747 | ||||||||||||||
Deferred income taxes | 72,554 | — | — | — | 72,554 | ||||||||||||||
Other assets | — | 6,285 | — | — | 6,285 | ||||||||||||||
Total assets | $ | 754,945 | $ | 1,336,246 | $ | 664,608 | $ | (881,410 | ) | $ | 1,874,389 | ||||||||
Liabilities and Stockholders' Equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Current maturities of capital lease obligations | $ | — | $ | 699 | $ | 64,952 | $ | — | $ | 65,651 | |||||||||
Accounts payable | — | 109,738 | — | — | 109,738 | ||||||||||||||
Accrued expenses | 4,800 | 59,463 | 3,602 | (2,949 | ) | 64,916 | |||||||||||||
Other current liabilities | — | 21,342 | 3,063 | (2,387 | ) | 22,018 | |||||||||||||
Total current liabilities | 4,800 | 191,242 | 71,617 | (5,336 | ) | 262,323 | |||||||||||||
Deferred rent | — | 87,152 | — | — | 87,152 | ||||||||||||||
Long-term debt and capital lease obligations | 220,754 | 356,514 | 396,010 | — | 973,278 | ||||||||||||||
Other long-term liabilities | — | 18,946 | 3,299 | — | 22,245 | ||||||||||||||
Total liabilities | 225,554 | 653,854 | 470,926 | (5,336 | ) | 1,344,998 | |||||||||||||
Total stockholders' equity | 529,391 | 682,391 | 193,682 | (876,073 | ) | 529,391 | |||||||||||||
Total liabilities and stockholders' equity | $ | 754,945 | $ | 1,336,245 | $ | 664,608 | $ | (881,409 | ) | $ | 1,874,389 | ||||||||
Deferred income taxes related to tax attributes of the Guarantors and Non-Guarantor Subsidiaries are reflected under Conn's, Inc.
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CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of January 31, 2017:
(in thousands) | Conn's, Inc. | Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 23,566 | $ | — | $ | — | $ | 23,566 | |||||||||
Restricted cash | — | — | 110,698 | — | 110,698 | ||||||||||||||
Customer accounts receivable, net of allowance | — | 173,054 | 529,108 | — | 702,162 | ||||||||||||||
Other accounts receivable | — | 69,286 | — | — | 69,286 | ||||||||||||||
Inventories | — | 164,856 | — | — | 164,856 | ||||||||||||||
Other current assets | — | 21,505 | 7,368 | (11,768 | ) | 17,105 | |||||||||||||
Total current assets | — | 452,267 | 647,174 | (11,768 | ) | 1,087,673 | |||||||||||||
Investment in and advances to subsidiaries | 678,149 | 220,107 | — | (898,256 | ) | — | |||||||||||||
Long-term portion of customer accounts receivable, net of allowance | — | 295,522 | 320,382 | — | 615,904 | ||||||||||||||
Property and equipment, net | — | ||||||||||||||||||