Rent-A-Center
Annual Report 2018

Plain-text annual report

2019 Proxy Statement 2018 Annual Report Notice of 2019 Annual Meeting of Stockholders Tuesday, June 4, 2019 8:00 a.m. local time, 5501 Headquarters Drive, Plano, Texas 75024 The 2019 annual meeting of stockholders of Rent-A-Center, Inc. will be held on Tuesday, June 4, 2019, at 8:00 a.m. local time, at the Rent-A-Center, Inc. Field Support Center, which is located, along with our principal executive offices, at 5501 Headquarters Drive, Plano, Texas 75024, for the following purposes: 1. 2. 3. To elect the two Class I directors nominated by the Board of Directors; To ratify the Audit & Risk Committee’s current selection of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2019; To conduct an advisory vote approving the compensation of the named executive officers for the year ended December 31, 2018, as set forth in the proxy statement; and 4. To transact other business that properly comes before the meeting. This notice is being sent to stockholders of record at the close of business on April 9, 2019. Each such holder is entitled to receive notice of and to vote at the 2019 annual meeting of stockholders and at any and all adjournments or postponements thereof. Under rules approved by the Securities and Exchange Commission, we are furnishing proxy materials on the Internet in addition to mailing paper copies of the materials to each registered stockholder. Instructions on how to access and review the proxy materials on the Internet can be found on the proxy card sent to registered stockholders and on the Notice of Internet Availability of Proxy Materials (the “Notice”) sent to stockholders who hold their shares in “street name” (i.e. in the name of a broker, bank or other record holder). The Notice will also include instructions for stockholders who hold their shares in street name on how to access the proxy card to vote over the Internet. Your vote is important, and whether or not you plan to attend the 2019 annual meeting of stockholders, please vote as promptly as possible. We encourage you to vote via the Internet, as it is the most convenient and cost-effective method of voting. You may also vote by telephone or by mail (if you received paper copies of the proxy materials). Instructions regarding all three methods of voting are included in the Notice, the proxy card and the proxy statement. Thank you in advance for voting and for your support of Rent-A-Center. By order of the Board of Directors, Dawn M. Wolverton Vice President – Assistant General Counsel and Secretary April 26, 2019 Plano, Texas Table of Contents QUESTIONS AND ANSWERS ABOUT THE 2019 ANNUAL MEETING AND VOTING PROCEDURES PROPOSAL ONE: ELECTION OF DIRECTORS BOARD INFORMATION DIRECTOR COMPENSATION CORPORATE GOVERNANCE PROPOSAL TWO: RATIFICATION OF THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AUDIT COMMITTEE REPORT EXECUTIVE OFFICERS COMPENSATION COMMITTEE REPORT COMPENSATION DISCUSSION AND ANALYSIS PROPOSAL THREE: ADVISORY VOTE ON EXECUTIVE COMPENSATION COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION RELATED PERSON TRANSACTIONS SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SUBMISSION OF STOCKHOLDER PROPOSALS OTHER BUSINESS 3 5 8 11 13 16 17 18 19 19 38 38 39 39 40 41 41 Proxy Statement This proxy statement is furnished in connection with the solicitation of proxies by Rent-A-Center, Inc. (the “Company”), on behalf of its Board of Directors (the “Board”), for the 2019 Annual Meeting of Stockholders of the Company (the “2019 Annual Meeting”). This proxy statement and related proxy materials are being mailed to our stockholders on or about April 26, 2019. Proxy Summary This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. For information regarding our 2018 performance, please review our Annual Report on Form 10-K for the year ended December 31, 2018. Page references are supplied to help you find further information in this proxy statement. Meeting Information Date & Time: 8:00 a.m. Central time on Tuesday, June 4, 2019 Location: Rent-A-Center, Inc. Field Support Center, 5501 Headquarters Drive, Plano, Texas 75024 Eligibility to Vote: You can vote if you were a stockholder of record at the close of business on April 9, 2019 (see page 3 for information on how to vote) Voting matters Proposal Election of Directors Ratification of Auditors Advisory Vote on Executive Compensation Board Vote Recommendation FOR each Director Nominee FOR FOR Page Reference (for more detail) 5 16 38 At the 2018 annual meeting, we submitted a proposal to our stockholders to declassify the Board of Directors. Stockholders owning approximately 75% of our outstanding shares of common stock voted in favor of the declassification proposal, which was less than the 80% affirmative vote required to amend our Certificate of Incorporation to declassify the Board. We intend to resubmit the declassification proposal at a future annual meeting of stockholders. Board Nominees (page 5) The Board has identified two new independent director nominees to be elected as Class I directors, Carol A. McFate and Harold Lewis. The following table provides summary information about each director nominee who is nominated for election at the 2019 Annual Meeting. Each director nominee will serve a three-year term expiring at the 2022 annual meeting of stockholders and until their successors are elected and qualified. Information regarding our directors whose terms continue past this year’s stockholder meeting begins on page 6. Age 66 58 Experience/Qualification (cid:129) Corporate finance and treasury (cid:129) Governance; leadership (cid:129) Financial technology (cid:129) Consumer finance Proposed Committee Memberships Audit; Nominating Audit; Compensation Other Public Company Boards N/A N/A Name Carol A. McFate Harold Lewis Executive Compensation Principles (page 19) We generally target total direct compensation (base salary, annual incentive and long-term incentive compensation) at the 50th-75th percentile of that paid at similarly-situated public companies in the retail and consumer finance sector, with cash compensation (base salary and annual incentives) targeted at the 50th percentile, and long-term incentive compensation targeted at the 75th percentile. The objectives of our executive compensation program are to: (cid:129) attract, retain and motivate senior executives with competitive compensation opportunities; RENT-A-CENTER - 2019 Proxy Statement 1 (cid:129) balance short-term and long-term strategic goals; (cid:129) align our executive compensation program with the core values identified in our mission statement, which focuses on improving the quality of life for our co-workers and our customers; and (cid:129) reward achievement of our financial and non-financial goals. The following forms of compensation are currently utilized by the Compensation Committee in compensating our named executive officers: (cid:129) base salary, which is paid in cash; (cid:129) annual incentive compensation, which is paid in cash and is focused on three metrics – profitability, cash flow and revenue; (cid:129) long-term incentive compensation, which consists of stock options which generally vest ratably over four years beginning on the first anniversary of the date of grant, restricted stock units which cliff vest after three years, and performance stock units which vest based solely on a relative total shareholder return metric over a three-year measurement period; (cid:129) double trigger severance arrangements; and (cid:129) fringe benefits, including perquisites, with no tax gross-ups. Relative Total Shareholder Return (page 23) Our Compensation Committee has adopted a relative total shareholder return metric over a three-year measurement period as the vesting condition for grants of performance stock units pursuant to our long-term incentive compensation program. Stock Ownership Guidelines (pages 12 and 25) We believe that our Board and our management should have a significant financial stake in the Company to ensure that their interests are aligned with those of our stockholders. To that end, our directors, as well as our Chief Executive Officer, are subject to equity interest guidelines as described on pages 12 and 25, respectively. In addition, our insider trading policy prohibits our directors and executive officers from engaging in hedging or other derivative transactions involving our common stock. We also do not allow shares of our common stock owned by any of our directors or named executive officers to be pledged. Clawback Policy (page 25) Our Board has adopted a clawback policy applicable to our executive officers as described on page 25. Pay for Performance (page 19) Our executive compensation program directly links a substantial portion of executive compensation to our financial performance through annual and long-term incentives. For the 2018 annual cash incentive program, (i) the EBITDA goal was achieved at 141.9% of target (resulting in a 200% payout of the 40% of the target bonus amounts attributable to the EBITDA target), (ii) the cash flow target was achieved at 157.2% of target (resulting in a 200% payout of the target bonus amounts attributable to the cash flow target, and (iii) the revenue goal was achieved at 102.8% of target (resulting in a 129% payout of the 20% of the target bonus amounts attributable to the revenue target). As a result, each participant in the 2018 annual cash incentive program received an amount equal to 186% of such person’s target bonus amount. the 40% of In 2016, our Compensation Committee granted to our named executive officers performance-based restricted stock units based on our relative Total Shareholder Return (“TSR”) as compared to the S&P 1500 Specialty Retail Index over a three-year measurement period. Our relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the three-year period ending December 31, 2018, ranked us 32 out of 56 companies in the S&P 1500 Specialty Retail Index, or the 44th percentile, which resulted in the vesting of 75% of the performance-based restricted stock units that were granted. 2 RENT-A-CENTER - 2019 Proxy Statement QUESTIONS AND ANSWERS ABOUT THE 2019 ANNUAL MEETING AND VOTING PROCEDURES Who may vote? Stockholders of record as of the close of business on April 9, 2019, the record date for the 2019 Annual Meeting, may vote at the meeting. Each share of common stock entitles the holder to one vote per share. As of April 9, 2019, there were 54,049,974 shares of our common stock outstanding. What constitutes a quorum? The holders of at least a majority of our outstanding shares of common stock entitled to vote at the 2019 Annual Meeting must be represented at the 2019 Annual Meeting in person or by proxy to have a quorum. Any stockholder present at the 2019 Annual Meeting, either in person or by proxy, but who abstains from voting, will be counted for purposes of determining whether a quorum exists. How do I vote? You cannot vote your shares of common stock unless you are present at the meeting or you have previously given your proxy. You can vote by proxy in one of the following three convenient ways: (cid:129) by mail – if you received your proxy materials by mail, you can vote by mail by completing, signing, dating and returning the proxy card in the enclosed envelope; (cid:129) on the Internet, by visiting the website shown on the Notice or the proxy card and following the instructions; or (cid:129) by telephone, by calling the toll-free telephone number shown on the Notice or the proxy card and following the instructions. How will the proxies be voted? All properly executed proxies, unless revoked as described below, will be voted at the meeting in accordance with your directions on the proxy. If a properly executed proxy does not provide instructions, the shares of common stock represented by your proxy will be voted: (cid:129) “FOR” each of the Board’s nominees for Class I director; (cid:129) “FOR” the ratification of the Audit & Risk Committee’s current selection of KPMG LLP as our independent registered public accounting firm for 2019; and (cid:129) “FOR” the resolution approving the compensation of the named executive officers for the year ended December 31, 2018, as set forth in the proxy statement. The proxy holders will use their discretion on any other matters that properly come before the meeting. Unless otherwise stated, all shares represented by your completed, returned, and signed proxy will be voted as described above. If you are voting on the Internet or by telephone, the proxies will be voted in accordance with your voting instructions. If you are voting on the Internet or by telephone, your voting instructions must be received by 11:59 p.m., Eastern time on June 3, 2019, unless you are a participant in our 401(k) plan, in which case your voting instructions must be received by 6:00 a.m., Central time, on June 3, 2019. You may revoke your proxy at any time before or at the 2019 Annual Meeting (in each case, before the vote at the 2019 Annual Meeting) by: (cid:129) Delivering a signed, written revocation letter, dated later than the proxy, to Dawn M. Wolverton, Vice President – Assistant General Counsel and Secretary, at 5501 Headquarters Drive, Plano, TX 75024; (cid:129) Delivering a signed proxy, dated later than the first one, to Saratoga Proxy Consulting, LLC, 528 8th Avenue, 14th Floor, New York, NY 10018; (cid:129) Voting at a later time on the Internet or by telephone, if you previously voted on the Internet or by telephone; or (cid:129) Attending the meeting and voting in person or by proxy. Attending the meeting alone will not revoke your proxy. RENT-A-CENTER - 2019 Proxy Statement 3 QUESTIONS AND ANSWERS ABOUT THE 2019 ANNUAL MEETING AND VOTING PROCEDURES How many votes must each proposal receive to be adopted? Proposal 1: Election of Directors. Under our Bylaws, directors are elected by a majority of the votes cast in uncontested elections. Accordingly, the numbers of votes cast “for” a director nominee must exceed the number of votes cast “against” that nominee. In contested elections, the vote standard would be a plurality of votes cast. Each share may be voted for each of the nominees, but no share may be voted more than once for any particular nominee. Broker non-votes and abstentions will not affect the outcome of the vote. Proposal 2: Ratification of the Audit & Risk Committee’s current selection of KPMG LLP as our independent registered public accounting firm for 2019. A majority of the votes cast is required to ratify KPMG as our independent registered public accounting the firm. Broker non-votes and abstentions will not affect outcome of the vote to ratify KPMG. Proposal 3: Advisory vote on executive compensation. The affirmative vote of a majority of the shares of common stock present in person or represented by proxy and entitled to vote at the meeting is required to approve the advisory resolution on executive compensation. Broker non-votes will not affect the outcome of the vote. Because abstentions are counted as shares present and entitled to vote on the proposal, each abstention will have the same effect as a vote “against” the advisory resolution on executive compensation. What are broker non-votes? Broker non-votes occur when nominees, such as banks and brokers, holding shares on behalf of beneficial owners, or customers, do not receive voting instructions from the customers. Brokers holding shares of record for customers generally are not entitled to vote on certain matters unless they receive voting instructions from their customers. In the event that a broker does not receive voting instructions for these matters, a broker may notify us that it lacks voting authority to vote those shares. These broker non-votes refer to votes that could have been cast on the matter in question by brokers with respect to uninstructed shares if the brokers had received their customers’ instructions. These broker non-votes will be included in determining whether a quorum exists. Your bank or broker is not permitted to vote your uninstructed shares in the election of directors on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote, no votes will be cast on your behalf for Proposal 1 (in the election of directors), Proposal 2 (ratification of auditors) and Proposal 3 (advisory vote on executive compensation). To be sure your shares are voted in the manner you desire, you should instruct your broker how to vote your shares. Who is soliciting this proxy? The Board is soliciting this proxy. In addition to the solicitation of proxies by mail, proxies may also be solicited by telephone, interview. We will reimburse banks, electronic mail or personal brokers, custodians, nominees and fiduciaries for reasonable expenses they incur in sending these proxy materials to you if you are a beneficial holder of our shares. We have engaged Saratoga Proxy Consulting LLC, a proxy solicitation firm, to assist in the solicitation of proxies for which we will pay a fee in the amount of $10,000. 4 RENT-A-CENTER - 2019 Proxy Statement PROPOSAL ONE: ELECTION OF DIRECTORS What is the organizational structure of the Board? Our Board is divided into three classes with directors in each class generally serving for a term of three years. J.V. Lentell, currently serving as a Class III director, will retire from the Board following the 2019 Annual Meeting. Assuming the board nominees described below are elected at the 2019 Annual Meeting, the Board will consist of six members. How many directors are to be elected? Two Class I directors are to be elected by our stockholders. There are no incumbent directors serving in Class I due to term expiration and prior resignations from the Board. Accordingly, our Board has nominated two new independent director candidates to serve as Class I directors. Who are the board nominees? Our Board, upon recommendation of the Nominating and Corporate Governance Committee, has nominated each of Carol A. McFate and Harold Lewis to be elected as Class I directors by our stockholders. The qualifications necessary for a board nominee and the Nominating and Corporate Governance Committee’s process for evaluating prospective board members is discussed below under “Director Nominations – Qualifications” on page 15. Specific experience and relevant considerations with respect to each nominee are set forth in each candidate’s respective biography below. Each of Ms. McFate and Mr. Lewis has agreed to stand for election. However, should either of them become unable or unwilling to accept nomination or election, the shares of common stock voted for that nominee by proxy will be voted for the election of a substitute nominee whom the proxy holders believe will carry out our present policies. Our Board has no reason to believe that either of Ms. McFate or Mr. Lewis will be unable or unwilling to serve if elected, and, to the knowledge of the Board, each intends to serve the entire term for which election is sought. RENT-A-CENTER - 2019 Proxy Statement 5 PROPOSAL ONE: ELECTION OF DIRECTORS Our Board recommends that you vote “FOR” each of Ms. McFate and Mr. Lewis. Carol A. McFate Independent Director Nominee Age: 66 Harold Lewis Independent Director Nominee Age: 58 Ms. McFate served from 2006 until October 2017 as the Chief Investment Officer of Xerox Corporation, a multinational document provider of multifunction document management systems and services, managing retirement assets for North American and UK plans. Previously, Ms. McFate served in various finance and treasury roles for a number of prominent insurance and financial services companies, including XL Global Services, Inc., a US-based subsidiary of XL Capital Ltd., a leading Bermuda- insurance and reinsurance company, American based global International Group, Inc., an American multinational property & casualty insurance, life insurance, and financial services provider, Prudential Insurance Company of America, an American Fortune Global 500 and Fortune 500 company whose subsidiaries provide life insurance, financial products and services to both retail and institutional customers through the US and in over 30 other countries. Ms. McFate is a Chartered Financial Analyst. investment management and other Ms. McFate brings over 40 years of global corporate finance experience and a varied viewpoint to the Board which we believe will support our strategic initiatives and enhance long-term vision, sustainable growth and shareholder value. Mr. Lewis brings over 30 years of experience in financial services and mortgage lending. Since August 2018, he has served as the CEO of Renovate America, Inc., a national home improvement fintech company focused on energy efficient home improvement lending. From 2016 to 2018, Mr. Lewis was a senior advisor for McKinsey & Company, a worldwide management consulting firm. From 2012 to 2015 he served as President and COO of Nationstar Mortgage, one of the largest mortgage servicers in the country. In that position, he grew Nationstar’s servicing platform from $30 billion to $400 billion and mortgage origination portfolio from $1.8 billion to $25 billion while also building and managing Nationstar’s relationship with the newly created industry regulator, the Consumer Financial Protection Bureau. Prior to Nationstar Mortgage, he held C-Suite and senior executive positions at Citi Mortgage, Fannie Mae, Resource Bancshares Mortgage Group and Nations Credit, among others. technology We believe that Mr. Lewis’ significant knowledge and broad experience with a similar customer demographic provides our Board with an important resource with respect to our e-commerce and Acceptance Now businesses. financial Who are the continuing members of the Board? The terms of the following four members of our Board will continue past the 2019 Annual Meeting. Term to Expire at the 2020 Annual Meeting: Jeffrey J. Brown Independent Director; Chairman of the Board Age: 58 Director Since: 2017 Committees Served: Audit (chair); Compensation; Nominating & Corporate Governance Mr. Brown is the Chief Executive Officer and founding member of to Brown Equity management teams and companies needing equity. Mr. Brown’s venture capital and private equity career spans 30 years, including LLC, which provides Partners, capital positions with Hughes Aircraft Company, Morgan Stanley & Company, Security Pacific Capital Corporation and Bank of America Corporation. Since June 2015, Mr. Brown has served as the Lead Director of Medifast, Inc., where he also serves as chairman of the Audit Committee and is a member of the Executive Committee. Mr. Brown also serves as a director and member of the Audit Committee of Cadiz, Inc. Mr. Brown previously served as a director of Outerwall Inc., Midatech Pharma PLC, and Nordion, Inc. Mr. Brown brings to the Board extensive public and private company board experience and significant transactional expertise. 6 RENT-A-CENTER - 2019 Proxy Statement Mitchell E. Fadel Director; Chief Executive Officer Age: 61 Director Since: 2017 Committees Served: N/A Mr. Fadel has served as one of our directors since June 2017 and was named Chief Executive Officer on January 2, 2018. Mr. Fadel was self-employed prior to joining the Company after most recently serving as President – U.S. Pawn for EZCORP, Inc., a leading provider of pawn loans in the United States and Mexico, from September 2015 to December 2016. Prior to that, Mr. Fadel served as President of the Company (beginning in July 2000) and Chief Operating Officer (beginning in December 2002) each until August 2015, and also as a director of the Company from December 2000 to November 2013. From 1992 until 2000, Mr. Fadel served as President and Chief Executive Officer of the Company’s subsidiary Rent-A-Center Franchising International, Inc. f/k/a ColorTyme, Inc. Mr. Fadel’s professional experience with the Company also includes previously serving as a Regional Director and a District Manager. As our Chief Executive Officer, Mr. Fadel’s day-to-day leadership provides him with intimate knowledge of our operations that are a vital component of our Board discussions. In addition, Mr. Fadel brings 30 years of experience in and knowledge of the tenure as our rent-to-own industry, President and Chief Operating Officer, to the Board. We believe Mr. Fadel’s service as our Chief Executive Officer creates a critical link between management and our Board, enabling our Board to perform its oversight function with the benefit of management’s perspectives on our business. including his previous Term to Expire at the 2021 Annual Meeting: Michael J. Gade Independent Director Age: 67 Director Since: 2005 Committees Served: Audit; Compensation; Nominating & Corporate Governance (chair) Since 2004, Mr. Gade has been an Executive in Residence at the University of North Texas as a professor of marketing and retailing. Mr. Gade also serves as a strategic advisor to The Boston Consulting Group. A founding partner of Challance Group, LLP, Mr. Gade has over 30 years of marketing and management experience, most recently serving as senior executive for the southwest region of Home Depot, Inc. from 2003 to 2004. From 2000 to 2003, Mr. Gade served as Senior Vice President, PROPOSAL ONE: ELECTION OF DIRECTORS Christopher B. Hetrick Independent Director Age: 40 Director Since: 2017 Committees Served: Audit; Compensation (chair); Nominating & Corporate Governance Committee Mr. Hetrick has been the Director of Research at Engaged Capital, a California based investment firm and registered advisor with the U.S. Securities and Exchange Commission focused on investing in small and mid-cap North American equities, since September 2012. Prior to joining Engaged Capital, Mr. Hetrick worked at Relational Investors LLC (“Relational”), a $6 billion activist equity fund, from January 2002 to August 2012. Mr. Hetrick began his career with Relational as an associate analyst. He eventually became the firm’s senior consumer analyst overseeing over $1 billion in consumer sector investments. Prior to his work heading up the consumer research team, Mr. Hetrick was a generalist covering major investments in the technology, financial, automotive and food sectors. We believe that Mr. Hetrick’s extensive investment experience in a broad range of industries as well as his expertise in corporate strategy, capital allocation, executive compensation, and investor communications well qualifies him to serve on our Board. for Merchandising, Marketing and Business Development 7-Eleven, Inc. From 1995 to 2000, Mr. Gade was employed by Associates First Capital Corporation as Executive Vice President, Strategic Marketing and Development. Prior to 2000, Mr. Gade was a Senior Partner and Chairman of the Retail Consumer Product at Coopers & Lybrand (now part of PricewaterhouseCoopers). Mr. Gade also serves on the Board of Directors of The Crane Group. Practice We believe that Mr. Gade’s significant retail marketing experience provides our Board with an important resource with respect to our marketing and advertising efforts. In addition, Mr. Gade provides leadership and governance experience through his other directorships, including service on the audit and compensation committees of such companies. RENT-A-CENTER - 2019 Proxy Statement 7 BOARD INFORMATION Skills and Qualifications of Board of Directors and Nominees n w o r B l e d a F e d a G k c i r t e H i s w e L e t a F c M Industry experience or related perspective Franchise Financial Literacy International Finance and Capital Markets Transactions Technology M&A Risk Management Independent Directors the members of As part of the Company’s corporate governance practices, and in accordance with Nasdaq rules, the Board has established a policy requiring a majority of the Board to be In January 2019, each of our non-employee independent. directors completed a questionnaire which inquired as to their (and those of their immediate family members) relationship with us and other potential conflicts of interest. Our legal department reviewed the responses of our directors to such questionnaires, as well as material provided by management related to transactions, relationships and arrangements between us and our directors or parties related to our directors. In March 2019, our Board met to discuss the independence of our directors who are not employed by us. Following such discussions, our Board determined that the following continuing directors are “independent” as defined under Nasdaq rules: Jeffrey J. Brown, Michael J. Gade, and Christopher B. Hetrick. The table below includes a description of categories or types of transactions, relationships or arrangements considered by our Board in reaching its determination that the directors are independent. Name Jeffrey J. Brown Michael J. Gade Christopher B. Hetrick Independent Transactions/Relationships/Arrangements Yes Yes Yes None None Employee of Engaged Capital, a 9.9% stockholder in the Company In April 2019, each of Ms. McFate and Mr. Lewis completed a questionnaire which inquired as to their (and those of their immediate family members) relationship with us and other potential conflicts of interest in connection with the nomination process. Following a review of such questionnaires, our Board determined that each of Ms. McFate and Mr. Lewis will be “independent” as defined under Nasdaq rules. 8 RENT-A-CENTER - 2019 Proxy Statement Board Leadership Structure Our Board separates the roles of Chairman and Chief Executive Officer. Mr. Lentell served as Chairman from December 2017 to April 24, 2019. Mr. Brown was appointed as Chairman effective as of April 24, 2019. Mr. Fadel serves as our Chief Executive Officer. The Board believes that the separation of the roles of Chairman and Chief Executive Officer at this time is appropriate in light of Mr. Fadel’s tenure as Chief Executive Officer and is in the best interests of the Company’s stockholders. Separating these positions aligns the Chairman role with our independent directors, enhances the independence of our Board from management and focus Executive allows Officer Chief our to BOARD INFORMATION on developing and implementing our strategic initiatives and supervising our day-to-day business operations. Our Board believes that Mr. Brown is well situated to serve as Chairman because of his experience serving on the boards of other public companies, including as a lead director. Mr. Brown will work closely with Mr. Fadel to set the agenda for Board meetings and to coordinate information flow between the Board and management. Our Board will review its determination to separate the roles of Chairman and Chief Executive Officer periodically or as circumstances and events may require. Board Meetings; Executive Session During 2018, our Board met 31 times, including regularly scheduled and special meetings. All of our directors attended more than 75% of the aggregate of the total number of meetings of the Board and the total number of meetings of the Board committees on which they serve. Our independent directors meet in executive session at each in-person meeting of the Board. Executive sessions are generally chaired by our Chairman of the Board. Role of the Board in Risk Oversight Our Board takes an active role, as a whole and also at the committee level, in overseeing management of the Company’s risks. The Board and the relevant committees receive regular reports from members of senior management on areas of material risk to the Company, including operational, financial, strategic, competitive, reputational, legal and regulatory risks. The Board also meets with senior management annually for a strategic planning session and discussion of the key risks inherent in our short- and long-term strategies at the development stage, and also receives periodic updates on our strategic initiatives throughout the year. In addition, our Board has delegated the responsibility for oversight of certain risks standing committees, as discussed below. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, our entire Board is regularly informed through committee reports concerning such risks. to its Board Committees The standing committees of the Board during 2018 included the Audit & Risk Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. Each of the standing committees has the authority to retain independent advisors and consultants, with all fees and expenses to be paid by the Company. risks. enterprise-wide The Audit & Risk Committee assists the Board in fulfilling its oversight responsibilities by reviewing risks relating to accounting matters, financial reporting, legal and regulatory compliance, and oversight other responsibilities, our Audit & Risk Committee reviews, among other things, (1) the financial reports and other financial information provided by us to the Securities and Exchange Commission (2) our systems of controls regarding (“SEC”) or the public, that legal finance, management and the Board have established, (3) our independent accounting, compliance satisfy ethics these and To independent auditors, and reviews our auditor’s qualifications and independence, (4) the performance of our internal audit function and our independent auditors, (5) the efficacy and efficiency of our auditing, accounting and financial reporting processes generally, and (6) our risk management practices. The Audit & Risk Committee has the direct responsibility for the appointment, compensation, retention and oversight of our internal audit department’s reports, responsibilities, budget and staffing. The Audit & Risk Committee also pre-approves all audit and non-audit services provided by our independent auditors and oversees compliance with our code of ethics. In addition, the Audit & Risk Committee meets regularly with our Chief Financial Officer, the head of our internal audit department, our independent auditors, scheduled executive and management (including regularly internal audit and our sessions with the vice president of independent auditors). RENT-A-CENTER - 2019 Proxy Statement 9 BOARD INFORMATION “Investor The Board has adopted a charter for the Audit & Risk Committee, which can be found in the “Corporate Governance” section of the at www.rentacenter.com. The Audit & Risk Committee reviews, updates and assesses the adequacy of its charter on an annual basis, and may recommend any proposed modifications to its charter to the Board for its approval, if and when appropriate. our website Relations” section of In addition, During 2018, the Audit & Risk Committee held nine meetings. All members of the Audit & Risk Committee are “independent” under SEC and Nasdaq rules. the Board has determined that Mr. Brown is an “audit committee financial expert” as defined by SEC rules and each of Mr. Gade and Mr. Hetrick meets the financial sophistication requirements of Nasdaq. Members: Mr. Brown (Chair), Mr. Gade and Mr. Hetrick. Following the 2019 Annual Meeting, the Audit Committee will be reconstituted to comprise Mr. Brown (Chair), Mr. Lewis and Ms. McFate. reviews and discusses with our management The Compensation Committee (1) discharges the Board’s responsibilities with respect to all forms of compensation of our Chief Executive Officer, Chief Financial Officer, and each of our Executive Vice Presidents, including assessing the risks associated with our executive compensation policies and practices and employee benefits, (2) administers our equity incentive plans and (3) the Compensation Discussion and Analysis to be included in our report on Form 10-K or annual proxy statement, annual information a recommendation to the Board as to whether the Compensation Discussion and Analysis should be included in our annual proxy statement, annual report on Form 10-K or any information statement, as applicable. The Compensation Committee is also responsible for recommending to the Board the form and amount of director compensation and conducting a review of such compensation as appropriate. and makes statement, applicable, as for the Compensation The Board has adopted a charter Committee, which can be found in the “Corporate Governance” section of the “Investor Relations” section of our website at www.rentacenter.com. In addition, the Compensation Committee reviews, updates and assesses the adequacy of its charter on an annual basis, and may recommend any proposed modifications to its charter to the Board for its approval, if and when appropriate. The Compensation Committee’s processes fulfilling its responsibilities and duties with respect to executive compensation and the role of our executive officers in the compensation process are described under “Compensation Discussion and Analysis – Compensation Process” beginning on page 21 of this proxy statement. for 10 RENT-A-CENTER - 2019 Proxy Statement Pursuant to its charter, the Compensation Committee has the authority, to the extent it deems necessary or appropriate, to retain compensation consultants, independent legal counsel or other advisors and has the sole authority to approve the fees and other retention terms with respect to such advisors. From time to time, the Compensation Committee has engaged compensation consultants to advise it on certain matters. See “Compensation Discussion and Analysis – Compensation Process” beginning on page 21 of this proxy statement. In addition, the Compensation Committee also has the authority, it deems necessary or appropriate, to delegate matters to a sub-committee composed of members of the Compensation Committee. to the extent The Compensation Committee held four meetings in 2018. All members of the Compensation Committee are non-employee directors and are “independent” under Nasdaq rules. Members: Mr. Hetrick (Chair), Mr. Brown and Mr. Gade. Following the 2019 Annual Meeting, the Compensation Committee will be reconstituted to comprise Mr. Hetrick (Chair), Mr. Gade and Mr. Lewis. The Nominating and Corporate Governance Committee manages risks associated with corporate governance and potential conflicts of interest and assists the Board in fulfilling its responsibilities by (1) identifying individuals believed to be qualified to become members of the Board, consistent with criteria approved by the Board, (2) recommending to the Board candidates for election or reelection as directors, including director candidates submitted by the Company’s stockholders and (3) overseeing, reviewing and making periodic recommendations to the Board concerning our corporate governance policies. In addition, the Nominating and Corporate Governance Committee directs the succession planning efforts for the Chief Executive Officer and reviews management’s succession planning process with respect to our other senior executive officers. The Board has adopted a written charter for the Nominating and Corporate Governance Committee, which is available in the “Corporate Governance” section of the “Investor Relations” section of our website at www.rentacenter.com. In addition, the Nominating and Corporate Governance Committee reviews, updates and assesses the adequacy of its charter on an annual basis, and may recommend any proposed modifications to its charter to the Board for its approval, if and when appropriate. During 2018, the Nominating and Corporate Governance Committee held three meetings. The Board has determined that each member of the Nominating and Corporate Governance Committee is “independent” as defined under Nasdaq rules. Members: Mr. Gade (Chair), Mr. Brown and Mr. Hetrick. Following the 2019 Annual Meeting, the Nominating and Corporate Governance Committee will be reconstituted to comprise Mr. Gade (Chair) , Mr. Hetrick and Ms. McFate. DIRECTOR COMPENSATION Cash Compensation During 2018, each non-employee director received an annual retainer of $50,000. Additionally, each non-employee director receives $2,500 for each Board meeting attended in person and is reimbursed for his or her expenses in attending such meetings. In addition to such compensation, additional annual retainers are paid as follows: Position Chairman of the Board Chair of the Audit & Risk Committee Other members of the Audit & Risk Committee Chair of the Compensation Committee Other members of the Compensation Committee Chair of the Nominating and Corporate Governance Committee Other members of the Nominating and Corporate Governance Committee Annual Retainer $ $ $ $ $ $ $ 80,000 16,000 9,000 12,000 6,000 8,000 6,000 All retainers were paid in cash, in four equal installments on the first day of each quarter. Mr. Fadel did not receive any cash compensation for his service as a director during 2018. The Compensation Committee engaged Korn Ferry Hay Group, Inc. (“Hay Group”) to advise it with respect to the compensation paid to our non-employee directors as compared to similarly situated public companies. Based on such input from Hay Group, in March 2019, the Compensation Committee recommended, and the Board adopted, that the annual retainer paid to non-employee directors be increased from $50,000 to $77,500, beginning with the quarterly installment due on July 1, 2019. In addition, the Compensation Committee recommended, and the Board adopted, the following revised additional annual retainers, beginning with the quarterly installment due on July 1, 2019: Position Chairman of the Board Chair of the Audit & Risk Committee Other members of the Audit & Risk Committee Chair of the Compensation Committee Other members of the Compensation Committee Chair of the Nominating and Corporate Governance Committee Other members of the Nominating and Corporate Governance Committee Annual Retainer $ $ $ $ $ $ $ 150,000 27,500 15,000 25,000 10,500 20,000 10,000 Beginning July 1, 2019, retainers may be paid in a combination of cash or deferred stock units (“DSUs”) at each non-employee director’s election. To encourage our directors to take a greater portion of their cash compensation in the form of Company stock to further enhance their alignment with the interests of our stockholders, deferred fees will be matched 25% by the Company and the total deferred fees and matching contributions will be converted into an equivalent value of DSUs. Deferred fees plus matching contributions are converted to DSUs based on the closing price of Rent-A-Center common stock on the trading day immediately preceding the date on which the fees are payable. Each DSU represents the right to receive one share of common stock of the Company. The DSUs are fully vested and non-forfeitable. The common stock will be issued on the date the person ceases to be a member of the Board. The DSUs do not have voting rights. Equity Compensation Our non-employee directors receive a deferred stock award pursuant to the Rent-A-Center, Inc. 2016 Long-Term Incentive Plan (the “2016 Plan”) on the first business day of each year. Each deferred stock award consists of the right to receive shares of our common stock and is fully vested upon issuance. The shares covered by the award will be issued upon the termination of the director’s service as a member of the Board. All of our non-employee directors serving on January 2, 2018, the first business day of 2018, were granted deferred stock units valued at $100,000 on that date. the equity The annual deferred stock award to our non-employee directors for 2019 was valued at $120,000. The Board adopted this change to the value of compensation paid to our non-employee directors based on input from Hay Group in March 2019. In addition, the deferred stock award for 2019 was granted on April 1, 2019, following the ruling by the Court of Chancery of the State of Delaware that we validly terminated the Agreement and Plan of Merger entered into on June 17, 2018 with certain affiliates of Vintage Capital Management, LLC. RENT-A-CENTER - 2019 Proxy Statement 11 DIRECTOR COMPENSATION Director Equity Interest Guideline Our Board has adopted a guideline encouraging each non-employee member of the Board to hold at least $200,000 in our common stock and/or the deferred stock units issued as compensation for Board service (based on the price per share on the date or dates of such acquisition) within 5 years of the later of (i) December 23, 2008, or (ii) the date of their original election or appointment to the Board, and to hold such equity interest for so long as such member continues as a director. Mr. Gade has met the foregoing guideline. Messrs Brown, Fadel and Hetrick were elected to the Board in June 2017. The following table sets forth certain information regarding the compensation of our non-employee directors during 2018: Director Compensation for 2018 Name Jeffrey J. Brown Michael J. Gade Rishi Garg(3) Christopher B. Hetrick J.V. Lentell Fees Earned or Paid in Cash(1) Deferred Stock Award(2) $ $ $ $ $ 84,500 78,500 35,000 79,000 155,500 $ $ $ $ $ 158,333 100,000 100,000 158,333 100,000 $ $ $ $ $ Total 242,833 178,500 135,000 237,333 255,500 Includes annual retainer, committee fees and meeting attendance fees paid to each non-employee director with respect to services rendered in 2018. (1) (2) The amounts in this column reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note M to our consolidated financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on March 1, 2019. On January 2, 2018, each then current non-employee director was granted 9,010 deferred stock units. Also on January 2, 2018, each of Messrs. Brown and Hetrick were granted an additional 5,255 deferred stock units valued at $58,333, representing the pro-rata portion of the 2017 award value (Messrs. Brown and Hetrick were elected to the Board at the Company’s 2017 annual meeting of stockholders). Each deferred stock unit represents the right to receive one share of our common stock. The deferred stock units are fully vested and non-forfeitable. The common stock will be issued to the director upon the termination of his service as a member of our Board. (3) Mr. Garg’s term ended at the Company’s 2018 annual meeting of stockholders. 12 RENT-A-CENTER - 2019 Proxy Statement CORPORATE GOVERNANCE General Our Board has established corporate governance practices designed to serve the best interests of our company and our stockholders. In this regard, our Board has, among other things, adopted: (cid:129) a code of business conduct and ethics applicable to all of our Board members, as well as all of our employees, including our Chief Executive Officer, Chief Financial Officer, our principal accounting officer and controller; (cid:129) procedures regarding stockholder communications with our Board and its committees; (cid:129) separation of the Chairman and Chief Executive Officer roles; (cid:129) a majority voting standard in non-contested elections for directors; (cid:129) a policy for the submission of complaints or concerns relating to accounting, internal accounting controls or auditing matters; (cid:129) provisions in our Bylaws regarding director candidate nominations and other proposals by stockholders; and (cid:129) written charters for its Audit & Risk Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Our Board intends to monitor developing standards in the corporate governance area and, if appropriate, modify our policies and procedures with respect to such standards. In addition, our Board will continue to review and modify our policies and procedures as appropriate to comply with any new requirements of the SEC or Nasdaq. Code of Business Conduct and Ethics Our Board has adopted a Code of Business Conduct and Ethics applicable to all of the members of the Board, as well as all of our employees, including our Chief Executive Officer, Chief Financial Officer, our principal accounting officer and controller. A copy of this Code of Business Conduct and Ethics is published in the “Corporate Governance” section of the “Investor Relations” section of our website at www.rentacenter.com. We intend to make all required disclosures concerning any amendments to, or waivers from, this Code of Business Conduct and Ethics on our website. Stockholder Communications with the Board Our Board has established a process by which stockholders may communicate with our Board. Stockholders may contact the Board or any committee of the Board by any one of the following methods: By telephone: 972-624-6210 By mail: Rent-A-Center, Inc. Attn: Compliance Officer 5501 Headquarters Drive Plano, TX 75024 By e-mail: RAC.Board@rentacenter.com Procedures for Reporting Accounting Concerns The Audit & Risk Committee has established procedures for (1) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters, and (2) the submission by our employees, on a confidential and anonymous basis, of concerns regarding questionable accounting or auditing matters. These procedures are posted in the “Corporate Governance” section of the “Investor Relations” section of our website at www.rentacenter.com. RENT-A-CENTER - 2019 Proxy Statement 13 CORPORATE GOVERNANCE Director Nominations Director Nominees Under our Bylaws, only persons who are nominated in accordance with the procedures set forth in our Bylaws are eligible for election as, and to serve as, members of our Board. Under our Bylaws, nominations of persons for election to our Board may be made at a meeting of our stockholders (1) by or at the direction of our Board or (2) by any stockholder, provided they comply with the provisions of Article I, Sections 3 and 4 of our Bylaws. The Board has delegated the screening and recruitment process for Board to the Nominating and Corporate Governance members Committee. The Nominating and Corporate Governance Committee selects individuals it believes are qualified to be members of the Board, and recommends those individuals to the Board for nomination for election or re-election as directors. From time to time, the Nominating and Corporate Governance Committee may engage a consultant to conduct a search to identify qualified candidates. The Nominating and Corporate Governance Committee then undertakes the evaluation process described below for any candidates so identified. Qualifications The Nominating and Corporate Governance Committee believes that the minimum requirements for a person to be qualified to be a member of the Board are that a person must be committed to equal opportunity employment, and must not be a director, consultant, or employee of or to any competitor of ours (i.e., a company in the rent-to-own business). The Nominating and Corporate Governance Committee also believes that members of the Board should possess character, judgment, skills (such as an understanding of the retail and rent-to-own industries, business management, finance, accounting, marketing, operations and strategic planning), diversity, and experience with businesses and other organizations of a comparable size and industry. In addition, the Nominating and Corporate Governance Committee considers the composition of the current Board and the Board’s needs when evaluating the experience and qualification of director candidates. The Nominating and Corporate Governance Committee evaluates whether certain individuals possess the foregoing qualities and recommends to the Board candidates for nomination to serve as our directors. This process is the same regardless of whether the nominee is recommended by one of our stockholders. in selecting directors As noted above, our Nominating and Corporate Governance Committee believes that diversity is one of many attributes to be considered when selecting candidates for nomination to serve as one of our directors. In general, our Nominating and Corporate Governance Committee’s goal for nomination to our Board is to create a well-balanced team that (1) combines diverse business and industry experience, skill sets and other leadership qualities, (2) represents diverse viewpoints and (3) enables us to pursue our strategic objectives. While the Nominating and Corporate Governance Committee carefully considers diversity when evaluating nominees for director, the Nominating and Corporate Governance Committee has not established a formal policy regarding diversity in identifying director nominees. Advance Resignation Policy As a condition to nomination by the Nominating and Corporate Governance Committee of an incumbent director, a nominee shall submit an irrevocable offer of resignation to the Board, which resignation shall become effective in the event that (a) such nominee is proposed for reelection and is not reelected at a meeting of the stockholders in which majority voting applies and (b) the resignation is accepted by the Board by the vote of a majority of the directors, not including any director who has not been reelected. Stockholder Nominations In addition to nominees by or at the direction of our Board, the Nominating and Corporate Governance Committee will consider candidates for nomination proposed by a stockholder, so long as the stockholder provides notice and information on the proposed nominee to the Nominating and Corporate Governance Committee through the Secretary in accordance with the provisions of Article I, Sections 3 and 4 of our Bylaws relating to direct stockholder nominations. 14 RENT-A-CENTER - 2019 Proxy Statement For the Nominating and Corporate Governance Committee to consider candidates recommended by a stockholder, Article I, Section 3 of our Bylaws requires that the stockholder provide notice to our Secretary (1) not less than 90 nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders, or (2) with respect to an election to be held at a special meeting of stockholders for the election of directors, no earlier than 120 days prior to the date of such special meeting, nor later than the close of business on the later to occur of the 90th day prior to the date of such special meeting or the CORPORATE GOVERNANCE 10th day following the day on which public disclosure of the date of the special meeting was made (if the first public announcement of the date of the special meeting is less than 100 days prior to the date of the special meeting). The notice to our Secretary must set forth, among other things: (cid:129) the name & address of the stockholder and/or beneficial owner making such nomination; (cid:129) class & number of shares of capital stock owned, directly or indirectly, beneficially or of record by such stockholder and/or beneficial owner; (cid:129) any derivative interests held by such stockholder and/or beneficial owner; (cid:129) proxy or voting agreements to which such stockholder and/or beneficial owner may vote any shares of any of our securities; (cid:129) short interest position of such stockholder and/or beneficial owner, if any; (cid:129) dividend rights to which such stockholder and/or beneficial owner are entitled, if separable; (cid:129) with respect to each proposed stockholder nominee, a description of any compensatory and other material agreements among the nominating stockholder/beneficial owner, its affiliates and associates, and the proposed nominee. In addition, to be timely, a stockholder’s notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be correct as of the record date for the meeting and as of the date that is 10 business days prior to the meeting, and such update and supplement must be delivered to our Secretary not later than 5 business days after the record date for the meeting in the case of the update and supplement required to be made as of the record date, and not later than 8 business days prior to the date for the meeting in the case of the update and supplement required to be made as of 10 business days prior to the meeting. In addition, as to each person whom the stockholder proposes to nominate for election or re-election as a director, the following information must be provided to our Secretary in accordance with the time period prescribed for the notice to our Secretary described above: (cid:129) a questionnaire furnished by our Secretary and completed by (cid:129) proportionate interests of such stockholder and/or beneficial the proposed nominee; and owner arising out of partnership arrangements; (cid:129) performance related fees to which such stockholder and/or beneficial owner is entitled based on the increase or decrease in the value of such shares or derivative instrument; (cid:129) with respect to each proposed stockholder nominee, information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, as amended (the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected); and (cid:129) the representation and agreement of the proposed nominee regarding no voting agreements, non-disclosed compensation arrangements, and compliance upon election with our governance policies and guidelines. The above description of the requirements that stockholders must comply with when recommending candidates for our Board is a summary only, and stockholders interested in nominating candidates to our Board are encouraged to closely review our Bylaws. Director Attendance at Annual Meeting of Stockholders Our Board has adopted a policy stating that each member of the Board should attend our annual meeting of stockholders. All of our directors then serving as directors attended the Company’s 2018 annual meeting of stockholders. RENT-A-CENTER - 2019 Proxy Statement 15 PROPOSAL TWO: RATIFICATION OF THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit & Risk Committee has currently selected KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2019. Our Board has further directed that we submit the selection of our independent registered public accounting firm for ratification by our stockholders at the 2019 Annual Meeting. not to continue the retention of KPMG. Even if the selection is ratified, the Audit & Risk Committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if they determine that such a change would be in our best interests and those of our stockholders. The Audit & Risk Committee reviews and pre-approves both audit and all permissible non-audit services provided by our independent registered public accounting firm, and accordingly, all services and fees in 2018 and 2017 provided by KPMG were pre-approved by the Audit & Risk Committee. The Audit & Risk Committee has considered whether the provision of services, other than services rendered in connection with the audit of our annual is compatible with maintaining independence. The Audit & Risk Committee has KPMG’s determined that the rendering of non-audit services by KPMG during the years ended December 31, 2018 and 2017, was compatible with maintaining such firm’s independence. financial statements, Stockholder ratification of the selection of KPMG as our current independent registered public accounting firm is not required by our Bylaws or otherwise. However, the Board is submitting the selection of KPMG to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit & Risk Committee will reconsider whether or The Audit & Risk Committee annually reviews the performance of our independent registered public accounting firm and the fees charged for their services. In addition, earlier this year, the Company initiated a request for proposal process to evaluate independent registered public accounting firms that may be able to serve as the Company’s audit firm in the future. Based upon the Audit & Risk Committee’s analysis of this information, the Audit & Risk Committee will determine which registered independent public accounting firm to engage to perform our annual audit for the fiscal year ended December 31, 2019. Representatives of KPMG will attend the 2019 Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions from stockholders. Our Board recommends that you vote “FOR” the proposal to ratify the current selection of KPMG LLP as our independent registered public accounting firm. Principal Accountant Fees and Services The aggregate fees billed by KPMG LLP for the years ended December 31, 2018 and December 31, 2017, for the professional services described below are as follows: Audit Fees1 Audit-Related Fees2 Tax Fees3 All Other Fees4 2018 2017 $ 1,978,085 $ 0 66,387 $ 4,500 $ $ 1,890,000 82,200 $ 81,795 $ 0 $ (1) Represents the aggregate fees billed by KPMG for (a) professional services rendered for the audit of our annual financial statements for the years ended December 31, 2018 and December 31, 2017, (b) the audit of management’s assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2018 and December 31, 2017, and (c) reviews of the financial statements included in our Forms 10-Q filed with the SEC. (2) Represents the aggregate fees billed by KPMG for 2017 for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under the caption “Audit Fees.” (3) Represents the aggregate fees billed by KPMG for professional services rendered for tax compliance, tax advice and tax planning. These services comprise engagements related to federal research tax credits and international tax advice and planning. (4) Represents the aggregate fees billed by KPMG for executive leadership training program. 16 RENT-A-CENTER - 2019 Proxy Statement AUDIT COMMITTEE REPORT In accordance with its written charter adopted by the Board, the Audit & Risk Committee assists the Board in fulfilling its oversight responsibilities by, among other things, reviewing the financial reports and other financial information provided by the Company to any governmental body or the public. In discharging its oversight responsibilities, the Audit & Risk Committee obtained from the independent registered public accounting firm a formal written statement describing all relationships between the firm and the Company that might bear on the auditors’ independence consistent with the applicable requirements of the Public Company Accounting Standards Board, discussed with the independent auditors any relationships that may impact their objectivity and independence, and satisfied itself as to the auditors’ independence. The Audit & Risk Committee also discussed with management, the internal auditors and the independent auditors the integrity of the Company’s financial reporting processes, including the Company’s internal accounting systems and controls, and reviewed with management and the significant accounting independent auditors the Company’s principles and financial reporting issues, including judgments made in connection with the preparation of the Company’s financial statements. The Audit & Risk Committee also reviewed with the independent auditors their audit plans, audit scope and identification of audit risks. The Audit & Risk Committee discussed with the independent auditors the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, as adopted by the Public Company Accounting Oversight Board, and, with and without management present, discussed and reviewed the results of the independent auditors’ examination of the consolidated financial statements of the Company. The Audit & Risk Committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2018 with management and the the independent auditors. Management responsible for is financial Company’s financial reporting process, including its system of internal control over reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act), and for the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles. The independent auditor is responsible for auditing those financial statements, and expressing an opinion on the effectiveness of reporting. The Audit & Risk internal control over Committee’s to monitor and review these processes. The members of the Audit & Risk Committee are “independent” as defined by SEC and Nasdaq rules, and our Board has determined that Mr. Jeffrey J. Brown is an “audit committee financial expert” as defined by SEC rules. responsibility is financial The Audit & Risk Committee discussed with the Company’s internal and independent auditors the overall scope and plans for their respective audits, including internal control testing under Section 404 of the Sarbanes-Oxley Act. The Audit & Risk Committee periodically meets with the Company’s internal and independent auditors, with and without management present, and in private sessions with members of senior management to discuss the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Audit & Risk Committee also periodically meets in executive session. In reliance on the reviews and discussions referred to above, the Audit & Risk Committee recommended to the Board (and the Board subsequently approved the recommendation) that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, for filing with the SEC. AUDIT & RISK COMMITTEE Jeffrey J. Brown, Chairman Michael J. Gade Christopher B. Hetrick RENT-A-CENTER - 2019 Proxy Statement 17 EXECUTIVE OFFICERS The Board appoints our executive officers at the first Board meeting following our annual stockholders meeting and updates the executive officer positions as needed throughout the year. Each executive officer serves at the behest of the Board and until their successors are appointed, or until the earlier of their death, resignation or removal. The following table sets forth certain information with respect to our executive officers as of the date of this proxy statement: Name Mitchell E. Fadel Maureen B. Short Ann L. Davids Christopher A. Korst Catherine M. Skula Age 61 44 50 59 47 Position Chief Executive Officer Executive Vice President — Chief Financial Officer Executive Vice President — Chief Marketing Officer Executive Vice President — General Counsel Executive Vice President — Franchising Mitchell E. Fadel. Mr. Fadel has served as one of our directors since June 2017 and was named Chief Executive Officer on January 2, 2018. Mr. Fadel was self-employed prior to joining the Company after most recently serving as President — U.S. Pawn for EZCORP, Inc., a leading provider of pawn loans in the United States and Mexico, from September 2015 to December 2016. Prior to that, Mr. Fadel served as President of the Company (beginning in July 2000) and Chief Operating Officer (beginning in December 2002) each until August 2015, and also as a director of the Company from December 2000 to November 2013. From 1992 until 2000, Mr. Fadel served as President and Chief Executive Officer of the Company’s subsidiary Rent-A-Center Franchising International, Inc. f/k/a ColorTyme, Inc. Mr. Fadel’s professional experience with the Company also includes previously serving as a Regional Director and a District Manager. Maureen B. Short. Ms. Short was named Executive Vice President — Chief Financial Officer on December 19, 2018. Ms. Short previously served as Interim Chief Financial Officer effective from December 2016 until December 2018, Senior Vice President — Finance, Investor Relations and Treasury from November 2014 until December 2016, as Senior Vice President — Finance, Analytics and Reporting from March 2013 until November 2014, and as Vice President — Finance, Analytics and Reporting from August 2010 until March 2013. Ann L. Davids. Ms. Davids was named Executive Vice President — Chief Marketing Officer effective as of February 21, 2018. Ms. Davids served as Senior Vice President — Chief Marketing Officer for Direct General/National General Insurance from 2013 to 2018 with responsibility for the web channel development as well as marketing strategy and execution. Prior to 2013, Ms. Davids served as our chief marketing officer for 15 years. Christopher A. Korst. Mr. Korst has served as Executive Vice President — General Counsel since March 2019, after previously serving as Executive Vice President — Chief Administrative Officer and General Counsel from July 2014 to March 2019, and Executive Vice President — Chief Administrative Officer from January 1, 2014 to July 2014. Previously, Mr. Korst served as Executive Vice President — Domestic Operations from May 2012 to December 2013, as our Executive Vice President — Operations from January 2008 until April 2012, and as our Senior Vice President — General Counsel from May 2001 to January 2008. Mr. Korst also served as our Secretary from September 2004 until January 2008. From January 2000 until May 2001, Mr. Korst owned and operated AdvantEdge Quality Cars, which he acquired in a management buyout. Catherine M. Skula. Ms. Skula was appointed Executive Vice President — Franchising effective as of January 1, 2018, after previously serving as Senior Vice President — Franchising since January 2012. From August 2009 to January 2012, Ms. Skula served as Division Vice President — RTO Domestic. Ms. Skula began her employment with us in 1994 as a customer account representative. 18 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION COMMITTEE REPORT The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with our management and, based upon such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the proxy statement on Schedule 14A related to the 2019 Annual Meeting of Stockholders, for filing with the SEC. COMPENSATION COMMITTEE Christopher B. Hetrick, Chairman Jeffery J. Brown Michael J. Gade COMPENSATION DISCUSSION AND ANALYSIS Executive Compensation Program Objectives Decisions with respect to compensation of our executive officers, including our Chief Executive Officer and other named executive officers, are made by our Compensation Committee, which is comprised solely of independent directors. Our Compensation Committee has identified four primary objectives for our executive compensation program, which guide the decisions it makes with respect to the amount and type of compensation paid to our named executive officers. The objectives of our executive compensation program are to: (cid:129) attract, retain and motivate senior executives with competitive compensation opportunities; (cid:129) balance short-term and long-term strategic goals; (cid:129) align our executive compensation program with the core values identified in our mission statement, which focuses on improving the quality of life for our co-workers and our customers; and (cid:129) reward achievement of our financial and non-financial goals. The compensation philosophy is generally to target total direct compensation (base salary, annual incentive and long-term incentive compensation) at the 50th-75th percentile of that paid at similarly-situated public companies in the retail and consumer finance sector, with cash compensation (base salary and annual incentives) targeted at the 50th percentile, and long-term incentive compensation targeted at the 75th percentile. Executive Summary We are committed to a pay-for-performance culture. The compensation program is reviewed annually in order to assure that its objectives and components are aligned with the Company’s strategic goals and culture, and also that it incentivizes short- and long-term profitability. Pay for Performance Our executive compensation program directly links a substantial portion of executive compensation to our financial performance through annual and long-term incentives. For the 2018 annual cash incentive program, (i) the EBITDA goal was achieved at 141.9% of target (resulting in a 200% payout of the 40% of the target bonus amounts attributable to the EBITDA target), (ii) the cash flow target was achieved at 157.2% of target (resulting in a 200% payout of the target bonus amounts attributable to the cash flow target, and (iii) the revenue goal was achieved at 102.8% of target (resulting in a 129% payout of the 20% of the target bonus amounts attributable to the revenue target). As a result, each participant in the 2018 annual cash the 40% of incentive program received an amount equal to 186% of such person’s target bonus amount. In 2016, our Compensation Committee granted to our named executive officers performance-based restricted stock units based on our relative TSR as compared to the S&P 1500 Specialty Retail Index over a three-year measurement period. Our relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the three-year period ending December 31, 2018, ranked us 32 out of 56 companies in the S&P 1500 Specialty Retail Index, or the 44th percentile, which resulted in the vesting of 75% of the performance-based restricted stock units that were granted. RENT-A-CENTER - 2019 Proxy Statement 19 COMPENSATION DISCUSSION AND ANALYSIS Stockholder Advisory Vote In June 2018, we held a stockholder advisory vote on the compensation of our named executive officers, referred to as a say-on-pay vote. Our stockholders approved the compensation of our named executive officers, with 78% of the shares of common stock present and entitled to vote at the meeting cast in favor of our proposal. This level of support was significantly less than in previous years (94.4% in 2017; 98.5% in 2016, and 98.6% in 2015) and was affected by recommendation from Institutional Shareholder Services (ISS). ISS based its negative recommendation solely on a provision of the employment agreement we entered into with our new Chief Executive Officer in March 2018 (a single-trigger cash change in control payment which the Board deemed necessary given the Company’s then on-going strategic alternatives review process). a negative Compensation Process In April 2019, the employment agreement with Mr. Fadel was revised to eliminate the single-trigger cash change in control payment and adopting, instead, a double-trigger cash change in control payment structure. Compensation decisions and changes implemented during the 2018 fiscal year were made keeping in mind the support stockholders expressed for our compensation philosophy and pay-for-performance culture. As a result, our Compensation Committee kept most facets of the executive compensation program consistent, with an emphasis on short and long-term incentive compensation that rewards our executives upon value creation for our stockholders. The Compensation Committee typically begins the process of determining the amount and mix of total compensation to be paid to our senior executives, including our named executive officers, in December of each year and finalizes the amounts the following January. This enables the Compensation Committee to examine and consider our performance during the previous year in establishing the current year’s compensation. The Compensation Committee retains a compensation consultant to assist it with compensation decisions for the upcoming fiscal year. For the 2018 fiscal year, the Compensation Committee engaged Hay Group to conduct a formal evaluation of, and advise it with respect to, the compensation arrangements for our Chief Executive Officer, as well as provide guidance with respect to the compensation of our senior executives, including our other named such services, executive officers. In determining whether to engage Hay Group to provide the Compensation Committee considered whether such engagement would create any conflicts of interest and determined that the engagement of Hay Group by the Company to advise it with respect to compensation to be paid to our senior executive management for 2018 did not create any such conflicts. Hay Group was engaged directly by the Compensation Committee and has performed no other services to us or any of our executive officers or directors. Based on the work performed by Hay Group, the Compensation Committee determined that the following similarly-situated public companies (the “Peer Group”) provided an appropriate comparison for the purpose of evaluating our compensation arrangements for our senior executives: Aaron’s, Inc. Fred’s, Inc. Pier 1 Imports, Inc. United Rental Big Lots Inc. H&R Block, Inc. Sally Beauty, Inc. Western Union The following criteria were used to establish this Peer Group: (cid:129) U.S.-based public companies with a similar business focus as ours, including both consumer finance and retail (particularly home furnishings, appliances and other retail organizations with which we compete for customers in a similar demographic); (cid:129) Companies with revenue similar to us (generally 0.5 to 2.0 times our revenue) and annuitized revenue streams; (cid:129) Geographic proximity; and (cid:129) Competitors for executive talent. After considering several companies for possible inclusion in the Peer Group, the Compensation Committee determined to make Forms of Compensation Brinker International Inc. Michaels Stores, Inc. Sears Hometown & Outlet Conn’s OneMain Holdings Tractor Supply, Inc. no additions to the Peer Group. the Compensation Committee approved the use of this Peer Group for use in connection with compensation decisions to be made for the 2018 fiscal year. In the fall of 2017, Finally, various members of the Compensation Committee have significant professional experience in the retail industry, as well as with respect to the executive compensation practices of large publicly- traded companies. This experience provides a frame of reference within which to evaluate our executive compensation program relative to general economic conditions and our progress in achieving our short-term and long-term goals. The following forms of compensation are currently utilized by the Compensation Committee in compensating our named executive officers: (cid:129) base salary, which is paid in cash; (cid:129) annual incentive compensation, which is paid in cash; 20 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS (cid:129) long-term incentive compensation, which consists of stock options, restricted stock units, and performance stock units; (cid:129) severance arrangements; and (cid:129) fringe benefits, including perquisites, with no tax gross-ups. Base Salary The base salary for each of our named executive officers represents the guaranteed portion of their total compensation and is determined annually by the Compensation Committee. Base salary is intended to reward the performance of each named executive officer during the fiscal year relative to his position with us. In establishing the base salary for each of our named executive officers, the Compensation Committee reviews: salaries, the Compensation Committee primarily considers market data, input provided by our Human Resources department, input of the Chief Executive Officer (other than with respect to his own base salary), individual performance, our financial performance, the experience of the named executive officer, and each named executive officer’s compensation in relation to our other executive officers. (cid:129) the named executive officer’s historical performance in his position with us, including the financial performance within his or her area of responsibility and other factors; (cid:129) recommendations of the Chief Executive Officer as to the proposed base salary (other than his own); (cid:129) our financial performance; and (cid:129) market pay practices. At the beginning of each year, the Compensation Committee considers whether adjustments should be made to the annual base salaries for our named executive officers. During the the then-current base Compensation Committee’s review of financial performance in 2017, After considering our the Compensation Committee made no changes to the base salaries for each of our named executive officers for 2018, except with respect to Mr. Herman whose base salary was increased in connection with his assumption of additional duties as Interim Chief Information Officer in December 2017, and his subsequent appointment as Chief Information Officer. Mr. Fadel’s base salary for 2018 was determined by the Board in connection with Mr. Fadel’s appointment as Chief Executive Officer effective as of January 2, 2018. The Compensation Committee approved the following base salaries of the named executive officers for 2017 and 2018 as set forth in the table below. The base salary adjustments for 2018 were effective March 31, 2018. ANNUAL BASE SALARIES Name Mitchell E. Fadel(1) Maureen B. Short(2) Fred E. Herman(3) Christopher A. Korst Catherine M. Skula(4) 2016 Base Salary 2017 Base Salary 2018 Base Salary $ $ $ $ $ — 259,584 302,357 438,677 — $ $ $ $ $ — 362,000 302,357 438,677 — $ $ $ $ $ 800,000 362,000 355,000 438,677 325,338 (1) Mr. Fadel was named Chief Executive Officer effective as of January 2, 2018. (2) Ms. Short was named Interim Chief Financial Officer effective as of December 2, 2016, with a base salary of $362,000. Ms. Short was named Chief Financial Officer effective as of December 19, 2018. (3) Mr. Herman resigned as Executive Vice President – Chief Information Officer effective as of February 7, 2019. (4) Ms. Skula was named Executive Vice President – Franchising effective as of January 2, 2018. Annual Cash Incentive Compensation The Compensation Committee maintains an annual incentive compensation program for our executive officers that provides for awards in the form of a cash bonus. The Compensation Committee believes that cash bonuses are appropriate to promote our interests as well as those of our stockholders by providing our named executive officers with short-term financial rewards based upon achievement of specified short-term objectives, which the Compensation Committee believes will ultimately increase the value of our stock, as well as help us attract and retain our named executive officers by providing attractive compensation opportunities. Our named executive officers participate in our annual cash incentive program. Under our annual cash incentive program, is established at a pre-determined cash bonus eligibility percentage of the named executive officer’s base salary, with such percentage amount set in accordance with the eligible named executive officer’s position and responsibilities with us. The percentage allocated as well as the potential ultimate payouts pursuant to our annual cash incentive program for each year are typically approved by the Compensation Committee in February at the same time that all compensation for our named executive officers is reviewed and, if applicable, approved. This enables the Compensation Committee to examine the named executive officer’s performance during the previous year, as well as determine financial performance targets for the new fiscal year based in part upon the previous year’s performance. No changes to the eligible bonus percentages for our named executive officers were made for the 2018 annual cash incentive program. RENT-A-CENTER - 2019 Proxy Statement 21 COMPENSATION DISCUSSION AND ANALYSIS The annual cash incentive program for 2018 included three financial performance metrics: EBITDA, cash flow and corporate revenue. The Compensation Committee included an EBITDA target in the annual cash incentive program because it believes EBITDA generally represents an accurate indicator of our financial performance over a one-year period of time, while excluding the impact of interest and depreciation which can vary significantly. The Compensation Committee determined to include a cash flow target as one of the financial performance metrics comprising the 2018 annual cash incentive program to align with our strategy for 2018. The inclusion of the corporate revenue target in the annual cash incentive program reflects the Compensation Committee’s determination that although a substantial portion of the cash bonus opportunity should be dependent on our profitability, a portion of such cash bonus opportunity should be based on our revenue growth. Accordingly, the potential annual incentive award for each of our named executive officers for the 2018 annual cash incentive program was divided as follows: 40% EBITDA; 40% cash flow and 20% revenue. The financial performance targets for the 2018 annual cash incentive program were established in February 2018 following a the cash 2018 annual review of our financial projections developed pursuant to our strategic plan and objectives for 2018. Based upon that review, the Compensation Committee established the following targets for the 2018 annual cash incentive program: (1) a consolidated revenue target in the amount of $2,589.05 million, (2) a cash flow target in the amount of $150.57 million, and (3) an EBITDA target in the amount of $139.83 million. In setting the financial targets under the Compensation Committee considered (i) the level of achievement of the targets for the 2017 annual cash incentive program and (ii) the level of the Company’s anticipated investment in its strategic initiatives for 2018. The Compensation Committee further determined that, consistent with its views as to the financial performance measures for our annual cash incentive program, each eligible executive officer may receive (1) an additional bonus amount in the event that we exceed the financial performance targets for the fiscal year, and (2) a portion of the bonus in the event that we approach, yet fail to achieve, the target levels of financial performance, as set forth below: program, incentive Revenue Target ($M) - 20% Weighting EBITDA Target ($M) - 40% Weighting CASH FLOW Target ($M) - 40% Weighting % of Target Achieved Revenue Range % of Incentive Awarded % of Target Achieved EBITDA Range % of Incentive Awarded % Flow Through Range % of Target Achieved Cash Flow Range % of Incentive Awarded Less than 92.0000% < - $2,381.93 0% Less than 69.9990% < $97.88 0% 4.1% Less than 79.9990% < $120.45 92.0000% - 92.4998% $2,381.93 - $2,394.87 20% 70.0000% - 71.8700% $97.89 - $100.49 20% 4.1% 4.2% 80.0000% - 81.2490% $120.46 - $122.33 92.4999% - 92.9997% $2,394.87 - $2,407.81 25% 71.8710% - 73.7410% $100.50 - $103.11 25% 4.2% 4.3% 81.2500% - 82.4990% $122.35 - $124.22 92.9998% - 93.4996% $2,407.81 - $2,420.75 30% 73.7420% - 75.6120% $103.12 - $105.73 30% 4.3% 4.4% 82.5000% - 83.7490% $124.23 - $126.10 93.4997% - 93.9995% $2,420.76 - $2,433.69 35% 75.6130% - 77.4830% $105.74 - $108.35 35% 4.4% 4.5% 83.7500% - 84.9990% $126.11 - $127.99 93.9996% - 94.4994% $2,433.70 - $2,446.64 40% 77.4840% - 79.3540% $108.35 - $110.96 40% 4.5% 4.5% 85.0000% - 86.2490% $127.99 - $129.87 94.4995% - 94.9993% $2,446.64 - $2,459.58 45% 79.3550% - 81.2250% $110.97 - $113.58 45% 4.5% 4.6% 86.2500% - 87.4990% $129.87 - $131.75 94.9994% - 95.4992% $2,459.59 - $2,472.52 50% 81.2260% - 83.0960% $113.58 - $116.19 50% 4.6% 4.7% 87.5000% - 88.7490% $131.76 - $133.63 95.4993% - 95.9991% $2,472.53 - $2,485.46 55% 83.0970% - 84.9670% $116.20 - $118.81 55% 4.7% 4.8% 88.7500% - 89.9990% $133.64 - $135.51 95.9992% - 96.4990% $2,485.47 - $2,498.41 60% 84.9680% - 86.8380% $118.82 - $121.43 60% 4.8% 4.9% 90.0000% - 91.2490% $135.52 - $137.40 96.4991% - 96.9989% $2,498.41 - $2,511.34 65% 86.8390% - 88.7090% $121.43 - $124.04 65% 4.9% 4.9% 91.2500% - 92.4990% $137.40 - $139.28 96.9990% - 97.4988% $2,511.36 - $2,524.29 70% 88.7100% - 90.5800% $124.05 - $126.66 70% 4.9% 5.0% 92.5000% - 93.7490% $139.29 - $141.16 97.4989% - 97.9987% $2,524.30 - $2,537.23 75% 90.5810% - 92.4510% $126.67 - $129.27 75% 5.0% 5.1% 93.7500% - 94.9990% $141.17 - $143.04 97.9988% - 98.4986% $2,537.24 - $2,550.18 80% 92.4520% - 94.3220% $129.28 - $131.89 80% 5.1% 5.2% 95.0000% - 96.2490% $143.05 - $144.92 98.4987% - 98.9985% $2,550.19 - $2,563.12 85% 94.3230% - 96.1930% $131.90 - $134.50 85% 5.2% 5.2% 96.2500% - 97.4990% $144.93 - $146.80 98.9986% - 99.4984% $2,563.13 - $2,576.06 90% 96.1940% - 98.0640% $134.51 - $137.12 90% 5.2% 5.3% 97.5000% - 98.7490% $146.81 - $148.68 99.4985% - 99.9999% $2,576.07 - $2,589.04 95% 98.0650% - 99.9990% $137.13 - $139.83 95% 5.3% 5.4% 98.7500% - 99.9990% $148.70 - $150.57 0% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100.0000% - 100.5711% $2,589.05 - $2,603.84 100% 100.0000% - 102.1420% $139.84 - $142.82 100% 5.4% 5.5% 100.0000% - 101.4280% $150.58 - $152.72 100% 100.5712% - 101.1424% $2,603.84 - $2,618.62 107% 102.1430% - 104.2850% $142.83 - $145.82 107% 5.5% 5.6% 101.4290% - 102.8570% $152.73 - $154.87 107% 101.1425% - 101.7139% $2,618.64 - $2,633.42 114% 104.2860% - 106.4280% $145.83 - $148.82 114% 5.6% 5.7% 102.8580% - 104.2860% $154.88 - $157.02 114% 101.7140% - 102.2855% $2,633.43 - $2,648.22 121% 106.4290% - 108.5710% $148.83 - $151.81 121% 5.7% 5.7% 104.2870% - 105.7150% $157.03 - $159.17 121% 102.2856% - 102.8570% $2,648.22 - $2,663.01 129% 108.5720% - 110.7140% $151.82 - $154.81 129% 5.7% 5.8% 105.7160% - 107.1440% $159.19 - $161.33 129% 102.8571% - 103.4285% $2,663.02 - $2,677.81 136% 110.7150% - 112.8570% $154.82 - $157.80 136% 5.8% 5.9% 107.1450% - 108.5730% $161.34 - $163.48 136% 103.4286% - 104.0000% $2,677.82 - $2,692.61 143% 112.8580% - 115.0000% $157.82 - $160.80 143% 5.9% 6.0% 108.5740% - 110.0020% $163.49 - $165.63 143% 104.0001% - 104.5715% $2,692.61 - $2,707.40 150% 115.0010% - 117.1430% $160.81 - $163.80 150% 6.0% 6.1% 110.0030% - 111.4310% $165.64 - $167.78 150% 104.5716% - 105.1430% $2,707.42 - $2,722.20 157% 117.1440% - 119.2860% $163.81 - $166.79 157% 6.1% 6.1% 111.4320% - 112.8600% $167.79 - $169.93 157% 105.1431% - 105.7145% $2,722.21 - $2,737.00 164% 119.2870% - 121.4290% $166.81 - $169.79 164% 6.1% 6.2% 112.8610% - 114.2890% $169.94 - $172.08 164% 105.7146% - 106.2860% $2,737.01 - $2,751.79 171% 121.4300% - 123.5720% $169.80 - $172.79 171% 6.2% 6.3% 114.2900% - 115.7180% $172.10 - $174.24 171% 106.2861% - 106.8575% $2,751.81 - $2,766.59 179% 123.5730% - 125.7150% $172.80 - $175.78 179% 6.3% 6.4% 115.7190% - 117.1470% $174.25 - $176.39 179% 106.8576% - 107.4290% $2,766.60 - $2,781.39 186% 125.7160% - 127.8580% $175.80 - $178.78 186% 6.4% 6.4% 117.1480% - 118.5760% $176.40 - $178.54 186% 107.4291% - 107.9985% $2,781.40 - $2,796.14 193% 127.8590% - 130.0010% $178.79 - $181.78 193% 6.4% 6.5% 118.5770% - 120.0050% $178.55 - $180.69 193% 108.0000% or greater $2,796.18 - $ - 200% 130.0020% or greater $181.79 - $ - 200% 6.5% 120.0060% - 00.0000% $180.70 - $ - 200% Revenue Target $2,589.05 EBITDA Target $139.83 Cash Flow Target $150.57 * EBITDA is adjusted for the accrued bonus (FSC, DVPs) totaling $8.1M 22 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS In February 2019, the Compensation Committee determined the level of achievement of the revenue, cash flow and EBITDA targets as previously set by it with respect to the 2018 annual cash incentive program. The Compensation Committee reviewed the Company’s adjusted financial results for the fiscal year ended December 31, 2018, and determined that the Company’s (i) revenue for purposes of the 2018 annual cash incentive program was equal to $2,660 million, (ii) EBITDA for purposes of to the 2018 annual $198 million and (iii) cash flow for purposes of the 2018 annual cash incentive program was equal to $237 million. Accordingly, for the 2018 annual cash incentive program, (i) the EBITDA goal was achieved at 141.9% of target (resulting in a 200% payout of the 40% of the target bonus amounts attributable to the EBITDA cash incentive program was equal target), (ii) the cash flow target was achieved at 157.2% of target (resulting in a 200% payout of the 40% of the target bonus amounts attributable to the cash flow target, and (iii) the revenue goal was achieved at 102.8% of target (resulting in a 129% payout of the 20% of the target bonus amounts attributable to the revenue target). As a result, each participant in the 2018 annual cash incentive program received an amount equal to 186% of such person’s target bonus amount. The actual amounts awarded to our named executive officers for their annual cash incentive bonus for 2018 performance are included in the Summary Compensation Table under the column “Non-Equity Incentive Plan Compensation” on page 26 of this proxy statement. Long-Term Incentive Compensation Our equity incentive plans are administered by the Compensation Committee and are designed to enable the Compensation Committee to provide incentive compensation to our employees in the form of stock options, stock awards, other equity awards, and performance-based equity awards. The Compensation Committee believes that awarding our named executive officers non-cash, long-term equity incentive compensation, primarily in the form of long-term incentive awards which may increase in value in conjunction with the satisfaction by us of pre-determined performance measures and/or an increase in the value of our common stock, more effectively aligns their interests with ours. The Compensation Committee also believes that such awards will provide our named executive officers with an incentive to remain in their positions with us, since the determination as to whether a particular measure for our performance and/or an increase in the value of our common stock has been satisfied is typically made over an extended period of time. In general, the Compensation Committee considers equity awards to our named executive officers on an annual basis, normally in February of each year. Generally, long-term incentive awards are made to our named executive officers pursuant to the Rent-A-Center, Inc. 2016 Long- Term Incentive Plan (the “2016 Plan”). Previous long-term incentive awards were made to our named executive officers pursuant to (i) the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”) and (ii) the Rent-A-Center, Inc. 2006 Equity Incentive Plan (the “Equity Plan”). Under the terms of each of the 2016 Plan, the 2006 Plan and the Equity Plan, awards may be granted at times and upon vesting and other conditions as determined by the Compensation Committee, and may be made in the form of stock options, stock awards, other equity awards, and performance-based equity awards. Stock option awards under our equity incentive plans are granted at the fair market value per share of our common stock on the date the option is granted as determined by reference to the closing price for shares of our common stock on the Nasdaq Global Select Market on the last market trading day prior to the date the option is granted. The options granted to our named executive officers typically vest ratably over a four-year period, commencing one year from the date of grant, and expire after 10 years. The restricted stock units granted by our Compensation Committee cliff vest either after a set period of time or upon the achievement of specified goals for our performance over a period of time. Awards of restricted stock with time-based vesting provide our named executive officers with a minimum level of incentive for such value while also providing an additional individuals to remain in their positions with us. Awards of restricted stock with performance-based vesting provide an additional incentive for our named executive officers to remain in their positions with us in order to realize the benefit of such award and also focus them on a performance parameter which the Compensation Committee considers beneficial to increasing the value of our stock, and consequently, stockholder value. The Compensation Committee determines the timing of the annual grants of stock options and restricted stock units to our named executive officers as well as the terms and restrictions applicable to such grants. The Compensation Committee approves generally in February of each year the annual grant to review and our executive officers determination of each executive officer’s compensation for the current year. Grants may also be made in connection with commencement of employment, promotions, or tenure. in conjunction with its 2018 Long-term Incentive Compensation Awards. No changes to the aggregate amount of the long-term incentive compensation award as a percentage of base salary were made for our named executive officers for 2018. Consistent with prior years, the long- term incentive compensation awards for 2018 were comprised of three vehicles, with greater emphasis on the portion of the long- term incentive contingent on financial performance. Accordingly, the award tranches are weighted as follows: (i) 20% of the value of the award issued in stock options, (ii) 20% of the value of the award issued in time-based restricted stock units and (iii) 60% of the value of the award issued in performance-based restricted stock units. award which is Adoption of Relative Total Shareholder Return as Performance Measure. In prior years, long-term incentive awards of restricted stock with performance-based vesting were contingent upon our achievement of a three-year EBITDA target. Beginning in 2015, the Compensation Committee total shareholder return metric over a three-year measurement period as the vesting condition for grants of performance stock units long-term incentive compensation program. The under our Compensation Committee made this decision in order to tie the adopted a relative RENT-A-CENTER - 2019 Proxy Statement 23 COMPENSATION DISCUSSION AND ANALYSIS external performance of our common stock to executive compensation and because the Compensation Committee believes that a relative measure is a more appropriate basis for measuring long-term performance than an absolute measure. The Compensation Committee also took into consideration the fact that our annual cash incentive program includes an EBITDA metric. The Compensation Committee selected a three-year period over which to measure relative total shareholder return based upon the time-period utilized with respect to awards made by similarly-situated public companies in the retail industry, as well as upon its belief that a three-year measurement period was appropriate to place an emphasis on our relative total shareholder return over an extended period of time, as opposed to the single year measure which is utilized in our annual cash incentive program. The Compensation Committee selected the S&P 1500 Specialty Retail Index as the comparator group for measuring our relative shareholder return over the applicable measurement period. In making this selection, the Compensation Committee considered the median annual revenue of the companies in the index in the amount of $3.8 billion, four companies included in our Peer Group, and the representation of the overall retail environment by the index to determine that this index is comprised of the companies most similar to the Company and is an appropriate comparator group. The Compensation Committee adopted the following payout ranges applicable to the awards of performance-based restricted stock units: the inclusion in the index of RCII’s TSR Percentile Rank in the S&P 1500 Specialty Retail Index Payout Chart > 90% 80% 70% 60% 50% 40% 30% 25% 0% <= 100% 89% 79% 69% 59% 49% 39% 29% 24% RCII’s TSR Actual Rank in the S&P 1500 Specialty Retail Index1 Low High 1 8 14 20 26 32 39 45 48 7 13 19 25 31 38 44 47 63 Payout% 200% 175% 150% 125% 100% 75% 50% 25% 0% See the Grants of Plan-Based Awards table under the column “Estimated Possible Payouts Under Equity Incentive Plan Awards” on page 28 of this proxy statement for threshold, target, and maximum amounts payable to our named executive officers under the 2018 long-term incentive performance-based awards. Determination of Long-term Incentive Compensation Awards. In January 2019, the Compensation Committee determined the level of achievement of the minimum TSR condition with respect to the long-term incentive performance-based awards made in January 2016, with a three-year measurement period. The Compensation Severance Arrangements termination of We have executive transition agreements with our named executive officers to provide certain payments and benefits upon an the named executive officer’s involuntary employment or the occurrence of certain other circumstances that may affect the named executive officer. The Compensation Committee believes that such severance arrangements assist us in recruiting and retaining top-level talent. In addition, formalizing our severance practices benefits us (1) by providing us with certainty in terms of our obligations to an eligible executive in the event that our 24 RENT-A-CENTER - 2019 Proxy Statement Committee reviewed the Company’s relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the period January 1, 2016 through December 31, 2018, and determined that our relative TSR performance as compared to the S&P 1500 Specialty Retail three-year period ending the December 31, 2018, ranked us 32 out of 56 companies in the Index, or the 44th percentile, which S&P 1500 Specialty Retail resulted in the vesting of 75% of the performance-based restricted stock units that were granted. Index for relationship with him or her is severed and (2) by virtue of the non-competition, non-solicitation and release provisions in our loyalty agreements, which inure to our benefit in the event that an eligible executive severs employment with us. For a more detailed description of the severance arrangements which apply to our named executive officers, please see Change-in-Control “Termination Arrangements” beginning on page 32 of this proxy statement. Employment and of Fringe Benefits and Perquisites the Compensation Committee Our named executive officers are eligible to participate in the benefit plans generally available to all of our employees, which include health, dental, life insurance, vision and disability plans, all of which are commensurate with plans of other similarly situated public companies in the retail industry. In addition, we will pay for the cost of an executive physical examination for each named executive officer each year. Our named executive officers were eligible in 2018 to participate in our 401(k) Retirement Savings Plan and in the Rent-A-Center, Inc. Deferred Compensation Plan. The Deferred Compensation Plan allows our executive officers to defer tax liability on a portion of their compensation. believes The Compensation Committee has determined it is beneficial to offer the above-described fringe benefits and perquisites in order to attract and retain our named executive officers by offering compensation opportunities that are competitive with those Clawback Policy COMPENSATION DISCUSSION AND ANALYSIS offered by similarly-situated public companies in the retail industry. In determining the total compensation payable to our named executive officers for a given fiscal year, the Compensation Committee will examine such fringe benefits and perquisites in the context of the total compensation which our named executive officers are eligible to receive. However, given the fact that such fringe benefits and perquisites which are available to our named executive officers represent a relatively insignificant portion of their total compensation, the availability of such items does not materially influence the decisions made by the Compensation the total Committee with respect compensation to which our named executive officers are entitled or awarded. to other elements of For a description of the fringe benefits and perquisites received by our named executive officers in 2018, please see “– All Other Compensation” on page 27 of this proxy statement. Our Board has adopted a compensation recovery (“clawback”) policy which provides that, in the event of a restatement of our financial results due to our material noncompliance with any financial reporting requirement under the U.S. federal securities laws, we may seek reimbursement of any portion of incentive compensation paid, vested, or awarded during the three-year period preceding the date on which we are required to prepare such a re-statement, which is in excess of the amount that would have been paid or awarded if calculated based on the restated financial results. Restatements of financial results that are the direct result of changes in accounting standards will not result in recovery of performance-based or incentive compensation under this policy. This policy is intended to be administered in a manner listing consistent with any applicable rules, standards adopted by the SEC or The Nasdaq Global Select Market, Inc., as contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. We intend to revise our clawback policy to the extent we deem necessary to comply with such rules, regulations or listing standards. regulations or Executive Stock Ownership Guidelines We believe that our Chief Executive Officer should have a meaningful financial stake in the Company to ensure that his interests are aligned with those of our stockholders. To that end, the Board adopted equity ownership guidelines to define our these expectations for our Chief Executive Officer. Under guidelines, our Chief Executive Officer is expected to own shares of our common stock equal in value to 5 times his annual base salary within five years of the date on which he became Chief Executive Officer. Mr. Fadel was named our Chief Executive Officer effective as of January 2, 2018. Section 162(m) Section 162(m) of the Internal Revenue Code (the “Code”) generally prohibits a federal income tax deduction to public companies for compensation over $1,000,000 paid to a “covered the Chief employee.” A “covered employee” includes Executive Officer, (b) the Chief Financial Officer, (c) the three other most highly compensated executive officers, and (d) any individual who was a covered employee for any taxable year beginning after December 31, 2016. Prior to 2018, we were permitted to receive income tax deduction for qualifying “performance- a federal (a) legislation became based” compensation as defined under Code Section 162(m) without regard to this $1,000,000 limitation. Recent U.S. tax legislation eliminated the performance-based exception. The new The effective tax Compensation Committee may determine it is appropriate to provide compensation that may exceed deductibility limits in order to recognize performance, meet market demands, retain key appropriate executives, considerations. starting in 2018. account other take into and RENT-A-CENTER - 2019 Proxy Statement 25 COMPENSATION DISCUSSION AND ANALYSIS Summary of Compensation The following table summarizes the compensation earned by our “named executive officers” in fiscal year 2018, as well as the compensation earned by such individuals in each of fiscal year 2017 and fiscal year 2016, if serving as an executive officer during that time. For 2018, our “named executive officers” consisted of the persons serving as Chief Executive Officer during any part of 2018, our Chief Financial Officer, and our three other most highly compensated executive officers. The table specifically identifies the dollar value of compensation related to 2018, 2017 and 2016 paid to such named executive officers in the form of: (cid:129) base salary, paid in cash; (cid:129) stock awards, comprised of awards of restricted stock relating to the 2018, 2017 and 2016 fiscal years; Summary Compensation Table (cid:129) option awards, comprised of awards of options during the 2018, 2017 and 2016 fiscal years and identified based upon the aggregate fair value in dollars of such award; (cid:129) non-equity plan incentive plan compensation, listing the aggregate dollar value of the awards paid to our named executive officers; and (cid:129) all other compensation, which includes amounts paid by us to the named executive officers as matching contributions under our Deferred Compensation Plan and insurance premiums. Our named executive officers were not entitled to receive payments which would be characterized as “Bonus” payments for purposes of the Summary Compensation Table for 2018, 2017 and 2016. Name and Principal Position Year Salary Stock Awards(1) Option Awards(1) Non-Equity Incentive Plan Compensation(2) All Other Compensation(3) Total Mitchell E. Fadel(4) Chief Executive Officer Maureen B. Short Executive Vice President - Chief Financial Officer Fred E. Herman Executive Vice President - Chief Information Officer Christopher A. Korst Executive Vice President - General Counsel Catherine M. Skula Executive Vice President - Chief Operating Officer 2018 $ 800,000 $ 2,156,237 $ 388,141 $ 1,488,000 $ 29,632 $ 4,862,010 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 $ $ 362,000 $ $ 362,000 $ 267,4625 $ $ $ 355,000 $ $ 324,981 $ $ 302,357 $ 438,677 $ 438,677 $ 438,677 $ 325,338 $ $ $ $ 292,711 300,662 235,675 325,327 279,740 311,115 425,650 429,743 477,933 298,139 $ $ $ $ $ $ $ $ $ $ 52,690 54,299 38,938 58,561 51,401 51,400 76,622 78,963 78,963 91,669 $ $ $ $ $ $ $ $ $ $ 302,994 16,290 0 330,150 17,750 0 448,767 24,127 0 302,564 $ 30,444 $ 1,040,839 760,082 $ 26,831 $ $ 20,857 $ 562,932 $ 35,301 $ 1,104,339 737,683 $ 63,811 $ 687,963 $ 23,091 $ $ 38,476 $ 1,428,192 $ 32,405 $ 1,003,915 $ 31,980 $ 1,027,553 $ 40,547 $ 1,058,257 (1) The amounts reflected in this column are the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for each award of stock options or restricted stock in 2018, 2017 and 2016 to the applicable named executive officer. Assumptions used in the calculation of these amounts are included in Note N to our audited financial statements for our fiscal year ended December 31, 2018, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2019, and our Annual Reports on Form 10-K for prior years. For 2018, represents the compensation as described in the “All Other Compensation” table below. (2) Represents the cash bonuses which were payable under our annual cash incentive program with respect to services for the year indicated. (3) (4) Mr. Fadel was named Chief Executive Officer effective as of January 2, 2018. (5) In connection with being named Interim Chief Financial Officer, Ms. Short’s base salary was increased to $362,000 annually as of December 5, 2016. Ms. Short was named Chief Financial Officer effective as of December 19, 2018. 26 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS All Other Compensation The following table provides information regarding each component of compensation for 2018 included in the All Other Compensation column in the Summary Compensation Table above. Name Mitchell E. Fadel (4) Maureen B. Short Fred E. Herman Christopher A. Korst Catherine M. Skula Company Matching Contributions(1) Value of Insurance Premiums(2) $ $ $ $ $ 8,077 8,874 7,650 7,534 9,362 $ $ $ $ $ 16,982 14,830 25,011 26,377 21,445 $ $ $ $ $ Other(3) 4,573 6,740 2,640 4,565 9,740 $ $ $ $ $ Total 29,632 30,444 35,301 38,476 40,547 (1) Represents contributions or other allocations made by us to our 401(k) Retirement Savings Plan and/or Deferred Compensation Plan. (2) Represents premiums paid by the company for medical, dental, vision, dental, long-term disability and life insurance. (3) Represents deemed compensation related to incentive travel awards and fees paid by us for an annual executive physical examination. (4) Mr. Fadel was named Chief Executive Officer effective as of January 2, 2018. RENT-A-CENTER - 2019 Proxy Statement 27 COMPENSATION DISCUSSION AND ANALYSIS Grants of Plan-Based Awards The table below sets forth information about plan-based awards granted to the named executive officers during 2018 under the 2018 annual cash incentive program and the 2016 Plan. Date of Compen- sation Committee Grant Date Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) Estimated Future Payouts Under Equity Incentive Plan Awards(2) Threshold Target Maximum Threshold Target Maximum All Other Stock Awards: Number of Shares of Stock or Units(3) All Other Option Awards: Number of Securities Underlying Options(4) Exercise or Base Price of Option Award(5) Closing Price on Grant Date Grant Date Fair Value of Stock and Option Award Name Mitchell E. Fadel(6) Short-Term Incentive N/A 2/16/18 $160,000 $800,000 $1,600,000 Restricted Stock Units 2/23/18 Performance Stock Units 2/23/18 Stock Options 2/23/18 2/16/18 2/16/18 2/16/18 – – – – – – – – – Maureen B. Short Short-Term Incentive N/A 2/16/18 $ 32,580 $162,900 $ 325,800 Restricted Stock Units 2/23/18 Performance Stock Units 2/23/18 Stock Options Fred E. Herman 2/23/18 2/16/18 2/16/18 2/16/18 – – – – – – – – – Short-Term Incentive N/A 2/16/18 $ 35,500 $177,500 $ 355,000 Restricted Stock Units 2/23/18 Performance Stock Units 2/23/18 Stock Options 2/23/18 2/16/18 2/16/18 2/16/18 – – – – – – – – – Christopher A. Korst Short-Term Incentive N/A 2/16/18 $ 48,255 $241,273 $ 482,546 Restricted Stock Units 2/23/18 Performance Stock Units 2/23/18 Stock Options 2/23/18 2/16/18 2/16/18 2/16/18 – – – – – – – – – Catherine M. Skula Short-Term Incentive N/A 2/16/18 $ 32,534 $162,669 $ 325,338 Restricted Stock Units 2/23/18 Performance Stock Units 2/23/18 Stock Options Stock Options 2/28/18 4/2/18 2/16/18 2/16/18 2/16/18 3/27/18 – – – – – – – – – – – – – – – – – – – 48,662 0 194,489 388,978 – – – – – – – – – 0 26,402 52,804 – – – – – – – – – 0 29,344 58,688 – – – – – – – – – 0 38,393 76,786 – – – – – – – – – 0 26,892 53,784 – – – – – – – – – 6,606 – – – 7,342 – – – 9,606 – – – 6,728 – – – – – – – – – – $8.09 $ 400,001 – $8.09 $1,756,236 107,817 $8.22 $8.09 $ 388,141 – – – – – – – $8.09 $ 54,301 – $8.09 $ 238,410 14,636 $8.22 $8.09 $ 52,690 – – – – – – – $8.09 $ 60,351 – $8.09 $ 264,976 16,267 $8.22 $8.09 $ 58,561 – – – – – – – $8.09 $ 78,961 – $8.09 $ 346,689 21,284 $8.22 $8.09 $ 76,622 – – – – – – – $8.09 $ 55,304 – $8.09 $ 242,835 14,908 $8.22 $8.09 $ 53,669 10,000 $8.63 $8.72 $ 38,000 (1) These columns show the potential value of the payout of the annual cash incentive bonuses for 2018 performance for each named executive officer if the threshold, target and maximum performance levels are achieved. The potential payout is performance-based and driven by company performance. The actual amount of the annual cash incentive bonuses paid for 2018 performance is shown in the Summary Compensation Table under the “Non-Equity Incentive Plan Compensation” column. (2) Represents restricted stock units which vest depending on our relative TSR performance over a three-year measurement period as compared to the S&P 1500 Specialty Retail Index and the named executive officer remains an employee through the end of such measurement period. The issuance of the stock underlying the performance-based restricted stock units granted to our named executive officers will range from a minimum of zero shares if our relative TSR performance is below the 25th percentile, to the maximum number of shares if our relative TSR performance ranks at least the 90th percentile. (3) Represents restricted stock units which vest upon completion of three-years of continuous employment with us from February 23, 2018. (4) Represents options to purchase shares of our common stock which vest ratably over a four-year period. (5) Calculated by reference to the closing price for shares of our common stock on the Nasdaq Global Select Market on the last trading day before the date of grant as reported on the Nasdaq Global Select Market, in accordance with the applicable plan. (6) Mr. Fadel was named Chief Executive Officer effective as of January 2, 2018. 28 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS Outstanding Equity Awards at Fiscal Year End The following table provides information regarding stock options and restricted stock units held by the named executive officers that were outstanding at December 31, 2018. OPTION AWARDS STOCK AWARDS Mitchell E. Fadel Maureen B. Short Fred E. Herman Christopher A. Korst Catherine M. Skula Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested(1) 48,662(9) 194,489(12) 3,766(7) 6,526(8) 6,606(9) 14,638(10) 26,108(11) 26,402(12) 4,971(7) 6,178(8) 7,342(9) 19,324(10) 24,712(11) 29,344(12) 7,637(7) 9,491(8) 9,606(9) 29,685(10) 37,963(11) 38,393(12) 4,086(7) 5,332(8) 6,728(9) 15,884(10) 21,329(11) 26,892(12) $ 787,838 $3,148,777 $ 60,972 $ 105,656 $ 106,951 $ 236,989 $ 422,689 $ 427,448 $ 80,480 $ 100,022 $ 118,867 $ 312,856 $ 400,087 $ 475,079 $ 123,643 $ 153,659 $ 155,521 $ 480,600 $ 614,621 $ 621,583 $ 66,152 86,325 $ $ 108,926 $ 257,162 $ 345,317 $ 435,381 Number of Securities Underlying Unexercised Options - Exercisable Number of Securities Underlying Unexercised Options - Unexercisable Option Exercise Price Option Expiration Date 107,817(5) $ 8.22 2/23/2028 1,875 594 1,642 2,126 5,066 4,566 7,292 5,452 2,227 1,529 1,244 1,912 3,486 10,000 10,026 4,069 9,626 5,161 9,600 6,656 6,734 7,411 9,305 14,270 5,791 14,787 7,928 5,000 1,380 2,066 2,849 3,585 5,498 4,908 3,956 $22.38 $29.91 $37.19 $34.77 $25.03 $29.31 $10.34 $ 8.32 $ 8.22 $15.37 $19.70 $29.91 $37.19 $34.77 $33.34 $25.03 $29.31 $10.34 $ 8.32 $ 8.22 $15.37 $19.70 $29.91 $37.19 $34.77 $25.03 $29.31 $10.34 $ 8.32 $ 8.22 $18.88 $19.70 $29.91 $37.19 $34.77 $25.03 $29.31 $10.34 $ 8.32 $ 8.22 $ 8.63 10/1/2020 1/31/2021 1/31/2022 1/31/2023 1/31/2024 2/6/2025 2/5/2026 2/16/2027 2/23/2028 1/30/2019 1/29/2020 1/31/2021 1/31/2022 1/31/2023 1/2/2024 1/31/2024 2/6/2025 2/5/2026 2/16/2027 2/23/2028 1/30/2019 1/29/2020 1/31/2021 1/31/2022 1/31/2023 1/31/2024 2/6/2025 2/5/2026 2/16/2027 2/23/2028 10/1/2019 1/29/2020 1/31/2021 1/31/2022 1/31/2023 1/31/2024 2/6/2025 2/5/2026 2/16/2027 2/23/2028 4/2/2028 1,522(2) 7,291(3) 16,355(4) 14,636(5) 1,356(2) 9,625(3) 15,482(4) 16,267(5) 1,930(2) 14,787(3) 23,784(4) 21,284(5) 1,636(2) 3,956(3) 13,363(4) 21,284(5) 10,000(6) RENT-A-CENTER - 2019 Proxy Statement 29 COMPENSATION DISCUSSION AND ANALYSIS (1) Calculated by reference to the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018, which was $16.19. (2) These options to purchase shares of our common stock vested on February 6, 2019. (3) These options to purchase shares of our common stock vest in equal parts on each of February 5, 2019 and February 5, 2020. (4) These options to purchase shares of our common stock vest in equal parts on each of February 16, 2019, February 16, 2020 and February 16, 2021. (5) These options to purchase shares of our common stock vest in equal parts on each of February 23, 2019, February 23, 2020, February 23, 2021 and February 23, 2022. (6) These options to purchase shares of our common stock vest in equal parts on each of April 2, 2019, April 2, 2020, April 2, 2021 and April 2, 2022. (7) Represents the number of shares of our common stock that will vest and become issuable pursuant to the time-based restricted stock unit awards upon the named executive officer’s completion of three years of continuous employment with us from February 5, 2016. These shares vested on February 5, 2019. (8) Represents the number of shares of our common stock that will vest and become issuable pursuant to the time-based restricted stock unit awards upon the named executive officer’s completion of three years of continuous employment with us from February 16, 2017. (9) Represents the number of shares of our common stock that will vest and become issuable pursuant to the time-based restricted stock unit awards upon the named executive officer’s completion of three years of continuous employment with us from February 23, 2018. (10) Represents the number of shares of our common stock that will vest and become issuable pursuant to the performance-based restricted stock unit awards based on our relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the three-year period ending December 31, 2018, and the named executive officer remains an employee through December 31, 2018. Our relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the three-year period ending December 31, 2018, ranked at the 44th percentile, which resulted in 75% of the shares vesting. (11) Represents the number of shares of our common stock that will vest and become issuable pursuant to the performance-based restricted stock unit awards based on our relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the three-year period ending December 31, 2019, and the named executive officer remains an employee through December 31, 2019. (12) Represents the number of shares of our common stock that will vest and become issuable pursuant to the performance-based restricted stock unit awards based on our relative TSR performance as compared to the S&P 1500 Specialty Retail Index for the three-year period ending December 31, 2020, and the named executive officer remains an employee through December 31, 2020. Option Exercises and Stock Vested The following table reflects certain information with respect to options exercised by our named executive officers during the 2018 fiscal year, as well as applicable stock awards that vested, during the 2018 fiscal year: Mitchell E. Fadel Maureen B. Short Fred E. Herman Christopher A. Korst Catherine M. Skula Option Awards Stock Awards Number of Shares Acquired on Exercise Value Realized on Exercise Number of Shares Acquired on Vesting Value Realized on Vesting – – – – 12,367 – – – – $67,740 – 1,278 1,703 2,424 1,373 – $12,039 $16,042 $22,834 $12,934 Nonqualified Deferred Compensation The Rent-A-Center, Inc. Deferred Compensation Plan is an unfunded, nonqualified deferred compensation plan for a select group of our key management personnel and highly compensated employees. The Deferred Compensation Plan first became available to eligible employees in July 2007, with deferral elections taking effect as of August 3, 2007. The Deferred Compensation Plan allows participants to defer up to 50% of their base compensation and up to 100% of any bonus compensation. Participants may invest the amounts deferred in measurement funds that are the same funds offered as the investment options in our 401(k) Retirement Savings Plan. We may make discretionary contributions to the Deferred Compensation Plan, which are subject to a three-year graded vesting schedule based on the participant’s years of service with us. For 2018, we made matching contributions in the Deferred Compensation Plan of 50% of the employee’s contribution to the plan up to an amount not to exceed 6% of such employee’s compensation, which is the same matching policy as under our 401(k) Retirement Savings Plan. We are obligated to pay the deferred compensation amounts in the future in accordance with the terms of the Deferred Compensation Plan. 30 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS The following table provides information for the named executive officers regarding contributions, earnings and balances for our Deferred Compensation Plan. Name Mitchell E. Fadel Maureen B. Short Fred E. Herman Christopher A. Korst Catherine M. Skula Executive Contributions in FY 2018 Registrant Contributions in FY 2018(1) Aggregate Earnings in FY 2018 Aggregate Withdrawals/ Distributions Aggregate Balance at 12-31-18(2) $ $ $ $ $ 0 7,518 7,168 37,507 20,631 $ $ $ $ $ 0 3,551 0 0 4,069 $ $ $ $ $ 0 (13,005) (9,144) (47,676) 2,454 $ $ $ $ $ 0 0 0 0 0 $ $ $ $ $ 0 169,185 185,549 545,134 409,935 (1) Represents matching contributions or other allocations made by us under our 401(k) Retirement Plan and/or Deferred Compensation Plan which amount was also reported as compensation in the “Summary Compensation Table” on page 26 of this proxy. (2) Of these amounts, the following aggregate amounts are included in the Summary Compensation Table above (as fiscal 2016, 2017 or 2018 compensation, as applicable) for each Named Executive Officer: Ms. Short – $41,154; Mr. Herman – $46,820; Mr. Korst – $115,240; and Ms. Skula – $20,631. Termination of Employment and Change-in-Control Arrangements Severance Arrangements termination of We have entered into executive transition agreements with each of our named executive officers other than Mr. Fadel. Each executive transition agreement has substantially identical terms and is intended to provide certain payments and benefits upon an involuntary the named executive officer’s employment or the occurrence of certain other circumstances that and may Confidentiality Agreements executed in connection with our executive non-competition, non-solicitation and release provisions for the benefit of the Company. agreements transition executive provide officer. named Loyalty affect the Termination Not in Conjunction with a Change in Control. If the named executive officer’s employment is terminated without “cause,” the named executive officer will be entitled to receive: (cid:129) unpaid but earned base salary through the date of termination; (cid:129) a pro rata bonus calculated based upon the named executive officer’s bonus amount from the previous year; (cid:129) one and one half times the sum of the named executive officer’s highest annual rate of salary during the previous 24 months, and the named executive officer’s average annual bonus for the two preceding calendar years; and (cid:129) continued health insurance coverage for the named executive officer and the named executive officer’s spouse and covered dependents for up to 18 months. If the named executive officer’s employment is terminated due to disability or death, the named executive officer will be entitled to receive: (cid:129) unpaid but earned base salary through the date of termination; (cid:129) a pro rata bonus calculated based upon the named executive officer’s bonus amount from the previous year; and (cid:129) continued health insurance coverage for the named executive officer and the named executive officer’s spouse and covered dependents for 12 months. if for any reason other If the named executive officer’s employment is terminated for terminates his the named executive officer “cause” or employment the named executive officer will be entitled to receive his unpaid but earned base salary through the date of termination (reduced by amounts owed by the named executive officer to us or our affiliates). than death, is employment Termination in Conjunction With a Change In Control. If the named executive officer’s terminated in conjunction with a change in control of us without “cause” or by the named executive officer for “good reason,” the named executive officer will be entitled to receive the same severance payments and benefits as described above (not in connection with a change in control) with respect to a termination without “cause,” except that the named executive officer will be entitled to receive two times the sum of the named executive officer’s highest annual rate of salary during the previous 24 months, and the named executive officer’s average annual bonus for the two preceding calendar years, rather than one and one half times such amount, and the named executive officer will be entitled to continued health insurance coverage for up to two years, rather than 18 months. If the named executive officer’s employment is terminated in connection with a change in control due to disability or death, or for “cause” or without “good reason,” the named executive officer will be entitled to receive the same severance payments and benefits as described above (not in connection with a change in control) with respect to a termination due to disability or death or for “cause,” respectively. Under each of the executive transition agreements, the term “change in control” generally means the occurrence of any of the following after September 14, 2006: (cid:129) any person becomes the beneficial owner of 40% or more of the combined voting power of our then outstanding voting securities; RENT-A-CENTER - 2019 Proxy Statement 31 COMPENSATION DISCUSSION AND ANALYSIS (cid:129) a consolidation, merger or reorganization of us, unless (i) our stockholders immediately prior to such transaction own at least a majority of the voting power of the outstanding voting securities of the resulting entity, (ii) the members of our Board immediately prior to the execution of the agreement providing for such a transaction constitute a majority of the board of directors of its majority the surviving corporation or of stockholder, and (iii) no person beneficially owns more than 40% of the combined voting power of the then outstanding voting securities of the surviving corporation (other than a person who is (a) us or a subsidiary of us, (b) an employee benefit plan maintained by us, the surviving corporation or any subsidiary, or (c) the beneficial owner of 40% or more of the Fadel Employment Agreement Pursuant to Mr. Fadel’s employment agreement, if we terminate Mr. Fadel’s employment due to his disability or death, Mr. Fadel will be entitled to receive: (cid:129) unpaid but earned base salary through the date of termination; (cid:129) a pro rata bonus calculated based upon Mr. Fadel’s bonus amount from the previous year; and (cid:129) continued health insurance coverage for Mr. Fadel and Mr. Fadel’s spouse and covered dependents for 24 months. If we terminate Mr. Fadel’s employment for “cause,” or if Mr. Fadel terminates his employment with us for any reason other than death, disability or for “good reason,” Mr. Fadel will be entitled to receive his unpaid but earned base salary through the date of termination (reduced by amounts owed by Mr. Fadel to us or our affiliates). If Mr. Fadel’s employment is terminated by us without “cause” (as defined in the employment agreement) or by Mr. Fadel for “good reason,” Mr. Fadel will be entitled to receive: (cid:129) unpaid but earned base salary through the date of termination; (cid:129) a pro rata bonus calculated based upon Mr. Fadel’s bonus amount from the previous year; Long-Term Incentive Plans combined voting power of our outstanding voting securities immediately prior to such transaction; (cid:129) individuals who, as of September 14, 2006, constitute our entire Board cease to constitute a majority of our Board, provided that anyone who later becomes a director and whose appointment or nomination for election was approved by at least two-thirds of our directors at the time shall be considered as though such individual were a member of our Board; or (cid:129) a complete liquidation or dissolution of us, or a sale or other disposition of all or substantially all of our assets (other than to an entity described in the second bullet point above). (cid:129) two times the sum of Mr. Fadel’s (x) highest annual rate of salary during the previous 24 months, and (y) his target cash bonus amount for the calendar year in which the termination occurs; and (cid:129) continued health insurance coverage for Mr. Fadel and Mr. Fadel’s spouse and covered dependents for 24 months. If we terminate Mr. Fadel’s employment in conjunction with a change in control of us without “cause” or if Mr. Fadel terminates his employment with us for “good reason,” Mr. Fadel will be entitled to receive in a lump sum the same aggregate severance payments and benefits as described above for a termination not in connection with a change in control. The Compensation Committee or the Board may condition the payment of severance or benefits on the execution and delivery by Mr. Fadel of a general release in favor of us, our affiliates and our officers, directors, and employees, provided that no such release will be required for the payment to Mr. Fadel of accrued compensation. is also subject to a Loyalty and Confidentiality Mr. Fadel Agreement which provides non-competition, non-solicitation and release provisions for the benefit of the Company. Awards Pursuant to the 2016 Plan, the 2006 Plan and the Equity Plan. Pursuant to stock option agreements under the 2016 Plan, the 2006 Plan and the Equity Plan, if the individual’s employment with us is terminated because of death or disability, any options that are vested and exercisable on the date of termination will remain exercisable for 12 months thereafter, but not beyond the term of is terminated by us for “cause,” then the options (whether or not then vested and exercisable) will immediately terminate and cease If the individual’s employment with us is to be exercisable. terminated for any other reason, any options that are vested and exercisable as of the date of termination will remain exercisable for three months thereafter, but not beyond the term of the agreement. the individual’s employment the agreement. If Pursuant to the 2016 Plan, the 2006 Plan and the Equity Plan, each holder of an option to purchase shares of our common stock 32 RENT-A-CENTER - 2019 Proxy Statement the exercised before may exercise such option immediately prior to an “exchange transaction,” regardless of whether currently vested, and any outstanding options not exchange transaction shall terminate. However, if, as part of an exchange transaction, our stockholders receive capital stock of another corporation in exchange for our common stock, and if our Board so directs, then all outstanding options shall be converted into options to purchase shares of such stock, with the amount and price to be determined by adjusting the amount and price of the options granted under the 2016 Plan, the 2006 Plan or the Equity Plan, as applicable, on the same basis as the determination of the number of shares of exchange stock the holders of our outstanding common stock are entitled to receive in the exchange transaction. In addition, unless our Board determines otherwise, the vesting conditions with respect to the converted options shall be substantially the same as those set forth in the original option COMPENSATION DISCUSSION AND ANALYSIS agreement. The Board may accelerate the vesting of stock awards and other awards, provide for cash settlement of and/or make such other adjustments to any outstanding award as it deems appropriate in the context of an exchange transaction. Under the 2016 Plan, the 2006 Plan and the Equity Plan, the term “exchange transaction” means a merger (other than in which the holders of our common stock immediately prior thereto have the same proportionate ownership of common stock in the surviving corporation immediately thereafter), consolidation, acquisition or disposition of property or stock, separation, reorganization (other than a reincorporation or the creation of a holding company), liquidation of us or any other similar transaction or event so designated by our Board, as a result of which our stockholders receive cash, stock or other property in exchange for or in connection with their shares of our common stock. Pursuant to stock compensation agreements under the 2016 Plan, the 2006 Plan and the Equity Plan, if the individual’s employment with us is terminated because of death or disability, or there is a change in ownership of us, then any unvested restricted stock units will vest on the date of such termination of employment or to the consummation of immediately prior the change in ownership of us, as the case may be. However, any unvested restricted stock units do not vest by reason of a change in ownership unless the individual remains continuously employed by us until such change in ownership is complete or the individual’s employment is sooner terminated by us in connection with such change in ownership. In addition, upon the termination of the individual’s employment or other service with us for any reason other than disability or death, any unvested restricted stock units will thereupon terminate and be canceled. Under each of the stock compensation agreements, the term “change in ownership” is defined as any transaction or series of transactions as a result of which any one person or group of persons acquires (i) ownership of our common stock that, together with the common stock previously held by such person, constitutes more than 50% of the total fair market value or total voting power of such stock, or (ii) ownership of our assets having a total gross fair market value at least equal to 80% of the total gross fair market value of all of the assets immediately prior to such transaction or series of transactions. RENT-A-CENTER - 2019 Proxy Statement 33 COMPENSATION DISCUSSION AND ANALYSIS Potential Payments and Benefits Upon Termination Without a Change in Control currently employed by us under The following table provides quantitative disclosure of the estimated payments that would be made to our named executive officers severance agreements, as well as the amounts our named executive officers would receive upon the exercise of the equity and cash awards held by them on December 31, 2018, the last business day of our fiscal 2018, assuming that: their (cid:129) each named executive officer’s employment with us was terminated on December 31, 2018, and was not in connection with an event which constituted a “change in control” or an “exchange transaction” under any agreement or plan described above; (cid:129) the base salary earned by each named executive officer for his services to us through December 31, 2018 has been fully paid to such named executive officer; Name Mitchell E. Fadel (cid:129) to the extent not otherwise terminated in connection with the named executive officer’s termination, each of our named executive officers exercised any previously unexercised, vested options and sold the underlying shares at the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018, which was $16.19; and (cid:129) to the extent not otherwise terminated in connection with the named executive officer’s termination, each of our named executive officers sold the shares of our common stock underlying their previously unvested restricted stock units at the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018. Cash Severance Payout Continuation of Medical Benefits Acceleration and Continuation of Outstanding Awards Total Termination Benefits Termination by Us without “Cause” or by Mr. Fadel for “Good Reason” $3,200,000 Termination by Us for “Cause” Termination by Us due to Mr. Fadel’s Disability or death Termination by Mr. Fadel for Reason other than death or disability Maureen B. Short Termination by Us without “Cause” Termination by Us for “Cause” Termination by Us due to Ms. Short’s Disability or death Termination by Ms. Short for Reason other than death or disability Christopher A. Korst Termination by Us without “Cause” Termination by Us for “Cause” Termination by Us due to Mr. Korst’s Disability or death Termination by Mr. Korst for Reason other than death or disability Catherine M. Skula Termination by Us without “Cause” Termination by Us for “Cause” Termination by Us due to Ms. Skula’s Disability or death Termination by Ms. Skula for Reason other than death or disability $ 0 $1,488,000 $ 0 $ 782,463 $ 0 $ 302,994 $ 0 $1,012,686 $ 0 $ 448,767 $ 0 $ 724,912 $ 0 $ 302,564 $ 0 $25,824 $ 0 $12,912 $ 0 $16,416 $ 0 $10,944 $ 0 $26,946 $ 0 $17,964 $ 0 $26,946 $ 0 $17,964 $ 0 $ $ 0 0 $3,225,824 $ 0 $3,936,615 $5,437,527 $3,936,615 $3,936,615 $ $ 85,565 $ 884,444 0 $ 0 $1,446,270 $1,760,208 $ 85,565 $ 85,565 $ 179,912 $1,219,544 $ 0 $ 0 $2,306,397 $2,773,128 $ 179,912 $ 179,912 $ $ 23,143 $ 775,001 0 $ 0 $1,322,406 $1,642,934 $ 23,143 $ 23,143 34 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS Potential Payments and Benefits Upon Termination With a Change in Control their employment agreement or The following table provides quantitative disclosure of the estimated payments that would be made to our named executive officers under severance agreements, as well as the amounts our named executive officers would receive upon the exercise of the equity and cash awards held by them on December 31, 2018, the last business day of our fiscal 2018, assuming that: (cid:129) each named executive officer’s employment with us was terminated on December 31, 2018, and was in connection with an event which constituted a “change in control” or an “exchange transaction” under any agreement or plan described above; (cid:129) the base salary earned by each named executive officer for his services to us through December 31, 2018 has been fully paid to such named executive officer; (cid:129) with respect to options awarded pursuant to the 2016 Plan, the 2006 Plan or the Equity Plan, the Board does not direct such Name Mitchell E. Fadel outstanding options to be converted into options to purchase shares of the exchange stock; (cid:129) to the extent not otherwise terminated in connection with the named executive officer’s termination, each of our named executive officers exercised any previously unexercised options and sold the underlying shares at the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018; and (cid:129) to the extent not otherwise terminated in connection with the named executive officer’s termination, each of our named executive officers sold the shares of our common stock underlying their previously unvested restricted stock units at the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018. Cash Severance Payout Continuation of Medical Benefits Acceleration and Continuation of Outstanding Awards Total Termination Benefits Termination by Us without “Cause” or by Mr. Fadel for “Good Reason” Termination by Us due to Mr. Fadel’s Disability or Death Termination by Us for “Cause” or by Mr. Fadel without “Good Reason” Maureen B. Short Termination by Us without “Cause” or by Ms. Short for “Good Reason” Termination by Us due to Ms. Short’s Disability or death Termination by Us for “Cause” or by Ms. Short without “Good Reason” Christopher A. Korst Termination by Us without “Cause” or by Mr. Korst for “Good Reason” Termination by Us due to Mr. Korst’s Disability or death Termination by Us for “Cause” or by Mr. Korst without “Good Reason” Catherine M. Skula Termination by Us without “Cause” or by Ms. Skula for “Good Reason” Termination by Us due to Ms. Skula’s Disability or death Termination by Us for “Cause” or by Ms. Skula without “Good Reason” $3,200,000 $1,488,000 $ 0 $1,043,284 $ 302,994 $ 0 $1,350,248 $ 448,767 $ 0 $ 966,549 $ 302,564 $ 0 $25,824 $12,912 $ 0 $21,888 $10,944 $ 0 $35,928 $17,964 $ 0 $35,928 $17,964 $ 0 $4,881,011 $8,106,835 $4,881,011 $6,381,923 $4,881,011 $4,881,011 $1,734,285 $2,799,457 $1,734,285 $2,048,223 $1,734,285 $1,734,285 $2,749,714 $4,135,890 $2,749,714 $3,216,445 $2,749,714 $2,749,714 $1,695,949 $2,698,426 $1,695,949 $2,016,477 $1,695,949 $1,695,949 RENT-A-CENTER - 2019 Proxy Statement 35 COMPENSATION DISCUSSION AND ANALYSIS Potential Realizable Value of Outstanding Awards Upon a Change in Control Without Termination Under our long-term incentive plans, in the event of a “change in control” of us or an “exchange transaction” involving us, the vesting of outstanding awards may be accelerated regardless of whether terminated in connection therewith. The following table provides quantitative disclosure of the potential realizable value of outstanding awards granted to the named executive officers currently employed by us pursuant to our long-term incentive plans assuming that: the employment of the holder is (cid:129) an event which constituted a “change in control” and an “exchange transaction” under each of the agreements and plans described above was consummated on December 31, 2018; (cid:129) with respect to options awarded pursuant to the 2016 Plan, the 2006 Plan and the Equity Plan, the Board does not direct such outstanding options to be converted into options to purchase shares of the exchange stock; Name Mitchell E. Fadel Maureen B. Short Christopher A. Korst Catherine M. Skula (cid:129) each named executive officer exercised any previously unexercised options and sold the underlying shares at the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018; and (cid:129) each named executive officer sold the shares of our common stock underlying their previously unvested restricted stock units at the closing price for shares of our common stock on the Nasdaq Global Select Market on December 31, 2018. Potential Realizable Value(1) $ $ $ $ 4,881,011 1,734,285 2,749,714 1,695,949 (1) Calculated by reference to the closing price for shares of our common stock on The Nasdaq Global Select Market on December 31, 2018, the last business day of fiscal 2018, which was $16.19. Compensation Related Risk The Compensation Committee believes that the design of our compensation programs, including our executive compensation program, does not encourage our executives or employees to take unnecessary and excessive risks and that the risks arising from these programs are not reasonably likely to have a material adverse effect on us. The Compensation Committee considered the following factors in making that determination: (cid:129) The allocation among the components of direct annual compensation provides an appropriate balance between annual and long-term incentives and between fixed and performance- based compensation. (cid:129) The performance measures and the multi-year vesting features of the long-term equity incentive compensation component encourage participants to seek sustainable growth and value creation. CEO Pay Ratio (cid:129) Inclusion of share-based compensation through the long-term encourages equity appropriate decision-making that is aligned with the long-term interests of our stockholders. compensation component incentive (cid:129) Our annual cash incentive program and the awards of restricted stock with performance-based vesting contain provisions with respect to our achievement of the applicable financial target such that each participant may receive (1) an additional payout pursuant to such award in the event that we exceed the applicable financial target, and (2) a portion of the target payout pursuant to such award in the event that we approach, yet fail to achieve, the target level of financial performance. (cid:129) We maintain a values-driven, ethics-based culture supported by a strong tone at the top. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are presenting the ratio of the annual total compensation for fiscal year 2018 of our current Chief Executive Officer to that of the median of the annual total compensation for all of our other employees. We believe this ratio represents a reasonable estimate calculated in a manner consistent with the SEC’s disclosure requirements under Item 402(u) of Regulation S-K, which permit the use of estimates, assumptions and adjustments in connection with the identification of our median employee. Please note that due to the flexibility permitted by ratio may not be these rules in calculating this ratio, our comparable to CEO pay ratios presented by other companies. 36 RENT-A-CENTER - 2019 Proxy Statement COMPENSATION DISCUSSION AND ANALYSIS We determined our median employee using taxable wages from our payroll records for fiscal 2018 for all full- and part-time employees as of December 31, 2018. After identifying the median employee, we calculated annual total compensation for that person using the same methodology we use for our named executive officers in the Summary Compensation Table in this Proxy Statement. The annual total compensation of our median employee for 2018 was $36,828, and the 2018 annual total compensation for Mr. Fadel as set forth in the Summary Compensation Table above was $4,862,010. Accordingly, our estimate of the ratio of the annual total compensation of our Chief Executive Officer to the median of the annual total compensation of our other employees is approximately 132 to 1. Equity Compensation Plan Information The following table sets forth certain information concerning all equity compensation plans previously approved by our stockholders and all equity compensation plans not previously approved by our stockholders as of December 31, 2018. Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Number of Securities to be issued upon exercise of outstanding options, warrants and rights(1) Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plan(2) 4,324,762 –0– 4,324,762 $19.37 –0– $19.37 2,065,111 –0– 2,065,111 (1) Includes (a) 2,468,900 shares to be issued upon exercise of outstanding stock options with a weighted-average exercise price per share of $19.37, and a weighted-average remaining term of 6.06 years, and (b) 1,855,862 shares to be issued upon vesting of outstanding restricted stock units with a weighted-average grant date fair value of $8.82. (2) Pursuant to the terms of the Plans, when an optionee leaves our employ, unvested options granted to that employee terminate and become available for re-issuance. Vested options not exercised within 90 days from the date the optionee leaves our employ terminate and become available for re-issuance. RENT-A-CENTER - 2019 Proxy Statement 37 PROPOSAL THREE: ADVISORY VOTE ON EXECUTIVE COMPENSATION In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are seeking stockholder approval of our executive compensation program and practices as disclosed in this proxy statement. As described above in the “Compensation Discussion and Analysis” section of this proxy statement, the Compensation Committee executive has compensation program to achieve the following key objectives: structured our (cid:129) attract, retain and motivate senior executives with competitive compensation opportunities; (cid:129) balance short-term and long-term strategic goals; (cid:129) align our executive compensation program with the core values identified in our mission statement which focuses on improving the quality of life for our co-workers and our customers; and (cid:129) reward achievement of our financial and non-financial goals. We urge stockholders to read the “Compensation Discussion and Analysis” beginning on page 20 of this proxy statement, which describes in more detail how our executive compensation policies and procedures operate and are designed to achieve our compensation objectives, as well as the Summary Compensation Table and other related compensation tables and narrative disclosures, appearing on pages 26 through 36, which provide detailed information on the compensation of our named executive officers. The Compensation Committee and the Board believe that the policies and procedures articulated in the “Compensation Discussion and Analysis” are effective in achieving our goals and that the compensation of our named executive officers reported in this proxy statement has contributed to our recent and long-term success. In accordance with Section 14A of the Exchange Act, and as a matter of good corporate governance, we are asking stockholders to approve the following advisory resolution at the 2019 Annual Meeting: “RESOLVED, that the stockholders of Rent-A-Center, Inc. (the “Company”) approve, on an advisory basis, the compensation of the Company’s named executive officers for the year ended December 31, 2018, as disclosed in the 2019 Proxy Statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission (including Item 402 of Regulation S-K), including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and narrative disclosure.” This advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on the Board. Although non-binding, the Board and the Compensation Committee will carefully take into account the outcome of the vote when considering future compensation arrangements for our named executive officers. We intend to conduct votes on executive compensation at each subsequent annual meeting. advisory future The affirmative vote of a majority of the shares of common stock present in person or represented by proxy and entitled to be voted on the proposal at the meeting is required for approval of this advisory resolution. Our Board recommends that you vote “FOR” approval of the advisory resolution on executive compensation. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Brown, Mr. Lentell, Mr. Gade, and Mr. Hetrick each served as members of the Compensation Committee for all or a portion of 2018. Each member is independent and no member of the Compensation Committee (1) has ever been employed by us, as an officer or otherwise, or to Mr. Lentell, as described under the heading “Related Person Transactions” below, has or had any relationship with us in 2018 than with respect (2) other requiring disclosure pursuant to SEC rules. In addition, during 2018, none of our executive officers served as a member of the compensation or similar committee or as a member of the board of directors of any other entity having an executive officer that also served on the Compensation Committee or Board of Rent-A-Center. 38 RENT-A-CENTER - 2019 Proxy Statement RELATED PERSON TRANSACTIONS Policy on Review and Approval of Transactions with Related Persons the identification and review of The Board has adopted a written statement of policy and procedures for transactions involving us and “related persons” (our directors and executive officers, stockholders owning five percent or greater of our outstanding stock, immediate family members of any of the foregoing, or any entity in which any of the foregoing persons is employed or is a partner or principal or in a similar position or in which such person has a five percent or greater beneficial ownership interest). Our directors and executive officers are required to provide notice to our legal department of the facts and circumstances of any proposed transaction involving amounts greater than $50,000 involving them or their immediate family members that may be deemed to be a related person transaction. Our legal department will then assess whether the proposed related person transaction requires approval pursuant to the policy and procedures. If our legal department determines that any proposed, ongoing or completed transaction involves an amount in excess of $100,000 and is a related person transaction, our Chief Executive Officer and the Chairman of the Nominating and Corporate Governance Committee must be notified (unless it involves our Chief Executive in which case the Chairman of the Nominating and Officer, Corporate Governance Committee must be notified), for consideration at the next regularly scheduled meeting of the Nominating and Corporate Governance Committee. In certain instances, the Nominating and Corporate Governance Committee may pre-approve or ratify, as applicable, any related person transaction in which the aggregate amount less than $500,000. The involved is, or is expected to be, Nominating and Corporate Governance Committee or its Chairman, as applicable, will approve or ratify, as applicable, only those related person transactions that are in, or are not inconsistent with, our best interests and those of our stockholders. the Chairman of Intrust Bank Relationship J.V. Lentell, one of our directors, served during 2018 as Vice Chairman of the Board of Directors of Intrust Bank, N.A., one of our lenders. Intrust Bank, N.A. is a $7.77 million participant (total in our senior credit facility. We also maintain commitment) operational a checking $12.5 million revolving line of credit, with Intrust Bank, N.A. In addition, Intrust Bank, N.A. serves as trustee of our 401(k) and accounts, including other and deferred compensation plans. During 2018, we paid Intrust a total of $1.1 million in fees in connection with banking services provided by them, of which $0.6 million was for administration fees and trustee fees for our 401(k) and deferred compensation plans. The total fees paid to Intrust during 2018 constituted less than 1/2% of the year ended December 31, 2018. Intrust’s annual revenue for SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based on a review of reports filed by our directors, executive officers and beneficial owners of more than 10% of our shares of common stock, and upon representations from those persons, we believe that all SEC stock ownership reports required to be filed by those reporting persons during and with respect to 2018 were timely made. RENT-A-CENTER - 2019 Proxy Statement 39 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the common stock ownership for each of our directors, each of the named executive officers who are currently employed by us, all of our directors and executive officers as a group, and each of our known 5% stockholders. Beneficial ownership is determined in accordance with SEC rules and regulations. Unless otherwise indicated and subject to community property laws where applicable, we believe that each of the stockholders named in the table below has sole voting and investment power with respect to the shares indicated as beneficially owned. Information in the table is as of April 9, 2019, unless otherwise indicated. Name of Beneficial Owner Jeffrey J. Brown Mitchell E. Fadel Michael J. Gade Christopher B. Hetrick J.V. Lentell Christopher A. Korst Harold Lewis Carol A. McFate Maureen B. Short Catherine M. Skula BlackRock, Inc. Engaged Capital, LLC LMR Partners LLP The Vanguard Group All executive officers and directors as a group (11 total) Amount and Nature of Beneficial Ownership Percent 20,255(1) 32,210(2) 50,700(3) 20,255(4) 63,300(5) 138,178(6) 0 0 55,553(7) 55,555(8) 6,643,986(9) 5,333,609(10 3,790,000(11) 6,085,774(12) 436,966 * * * * * * – – * * 12.4 9.9 7.0 11.4 * Less than 1%. * (1) Represents 20,255 deferred stock units. (2) Represents (a) 5,256 deferred stock units, and (b) 26,954 shares issuable pursuant to currently exercisable options. (3) Represents (a) 2,400 shares held directly, and (b) 48,300 deferred stock units. (4) Represents 20,255 deferred stock units. In addition, as an affiliate of Engaged Capital, LLC, Mr. Hetrick may be deemed to be a member of a Section 13(d) group that may be deemed to collectively beneficially own the shares held by Engaged Capital as disclosed herein. (5) Represents (a) 15,000 shared held directly; and (b) 48,300 deferred stock units. (6) Represents (a) 36,196 shares held directly, (b) 94,955 shares issuable pursuant to currently exercisable options, (c) 2,027 shares held pursuant to our 401(k) Plan (as of December 31, 2018), and (d) 5,000 shares held in an IRA. (7) Represents (a) 12,663 shares held directly, and (b) 42,890 shares issuable pursuant to currently exercisable options. (8) Represents (a) 12,300 shares held directly, (b) 43,153 shares issuable pursuant to currently exercisable options, and (c) 102 shares held in deferred compensation plan. (9) The address of BlackRock, Inc. is 55 East 52nd Street, New York, New York, 10022. BlackRock, Inc. exercises sole voting control over 6,495,126 of these shares and sole investment control over all 6,643,986 shares. This information is based on a Schedule 13G/A filed by BlackRock, Inc. with the Securities and Exchange Commission on January 31, 2019. (10) The address of Engaged Capital, LLC is 610 Newport Center Drive, Suite 250, Newport Beach, CA 92660. Engaged Capital, LLC exercises sole voting and investment control over all 5,333,609 shares. This information is based on a Schedule 13D/A filed by Engaged Capital, LLC with the Securities and Exchange Commission on March 1, 2019. (11) The address of LMR Partners LLP is 9th Floor, Devonshire House, 1 Mayfair Place, London, W1J 8AJ, United Kingdom. LMR Partners LLP shares voting and investment control over all 3,790,000 shares, including 3,400,000 shares of common stock issuable upon exercise of call options. This information is based on a Schedule 13G filed by LMR Master Fund Ltd. with the Securities and Exchange Commission on March 13, 2019. (12) The address of The Vanguard Group is 100 Vanguard Blvd., Malvern, Pennsylvania 19355. The Vanguard Group exercises sole voting control over 54,505 of these shares, shared voting control over 3,308 of these shares, sole investment control over 6,044,001 of these shares, and shared investment control over 41,773 of these shares. This information is based on a Schedule 13G/A filed by The Vanguard Group with the Securities and Exchange Commission on February 11, 2019. 40 RENT-A-CENTER - 2019 Proxy Statement SUBMISSION OF STOCKHOLDER PROPOSALS From time to time, stockholders may seek to nominate directors or present proposals for inclusion in the proxy statement and form of proxy for consideration at an annual stockholders meeting. To be included in the proxy statement or considered at an annual or any special meeting, you must timely submit nominations of directors or proposals, in addition to meeting other legal requirements. We must receive proposals for possible inclusion in the proxy statement related to the 2020 annual stockholders meeting no OTHER BUSINESS Proposals than December 28, 2019. later for possible consideration at the 2020 annual stockholders meeting must be received by us no earlier than February 5, 2020, and no later than March 6, 2020. The 2020 annual stockholders meeting is expected to take place on June 2, 2020. Direct any proposals, as well as related questions, to Corporate Secretary, Rent-A-Center, Inc., 5501 Headquarters Drive, Plano, Texas 75024. The Board does not intend to bring any business before the annual stockholders meeting other than the matters referred to in this notice and at this date has not been informed of any matters that may be presented to the annual stockholders meeting by others. If, however, any other matters properly come before the annual stockholders meeting, it is intended that the persons named in the accompanying proxy will vote pursuant to the proxy in accordance with their best judgment on such matters. PLEASE VOTE – YOUR VOTE IS IMPORTANT RENT-A-CENTER - 2019 Proxy Statement 41 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 001-38047 Rent-A-Center, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 45-0491516 (I.R.S. Employer Identification No.) 5501 Headquarters Drive Plano, Texas 75024 (Address, including zip code of registrant’s principal executive offices) 972-801-1100 Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, par value $0.01 per share Name of Exchange on Which Registered The Nasdaq Global Select Market, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark • If the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO • If the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. • Whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. • Whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). • If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. • 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 Accelerated filer • 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. Non-accelerated filer Smaller reporting company Emerging growth company • Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Aggregate market value of the 41,270,651 shares of Common Stock held by non-affiliates of the registrant at the closing sales price as reported on The Nasdaq Global Select Market, Inc. on June 30, 2018 Number of shares of Common Stock outstanding as of the close of business on February 19, 2019: $607,503,983 53,978,616 Documents incorporated by reference: Portions of the definitive proxy statement relating to the 2019 Annual Meeting of Stockholders of Rent-A-Center, Inc. are incorporated by reference into Part III of this report. TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules SIGNATURES Page 3 3 9 14 14 14 15 16 16 18 20 31 32 61 61 61 62 62 62 62 62 62 63 63 66 RENT-A-CENTER - Annual Report on Form 10-K i CAUTIONARY NOTE REGARDING FORWARD- LOOKING STATEMENTS This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Factors that could cause or contribute to these differences include, but are not limited to: • the general strength of the economy and other economic conditions affecting consumer preferences and spending; • factors affecting the disposable income available to our current and potential customers; • changes in the unemployment rate; • the outcome of the litigation initiated by Vintage Capital Management, LLC (“Vintage Capital”) and B. Riley Financial, Inc. (“B. Riley”) challenging the validity of the termination of the Agreement and Plan of Merger (the “Merger Agreement”) and our right, or the ability, to collect on the $126.5 million reverse breakup fee; • risks relating to operations of the business and our financial results arising out of the termination of the Merger Agreement; • the effect of the termination of the Merger Agreement on our relationships with third parties, including our employees, franchisees, customers, suppliers, business partners and vendors, which may make it more difficult to maintain business and operations relationships, and negatively impact the operating results of our business segments and our business generally; • the risk of material price volatility with respect to trading in our common stock during litigation related to the termination of the Merger Agreement; • our ability to continue to effectively operate and execute our strategic initiatives as a stand-alone enterprise following the termination of the Merger Agreement; • capital market conditions, including availability of funding sources for us; • changes in our credit ratings; • difficulties encountered in improving the financial and operational performance of our business segments, including our ability to execute our franchise strategy; • our ability to recapitalize our debt, including our revolving credit facility expiring December 31, 2019, and senior notes maturing in November 2020 and May 2021 on favorable terms, if at all; • risks associated with pricing changes and strategies being deployed in our businesses; • our ability to continue to realize benefits from our initiatives regarding cost-savings and other EBITDA enhancements, efficiencies and working capital improvements; • our ability to continue to effectively operate and execute our strategic initiatives; • failure to manage our store labor and other store expenses; • disruptions caused by the operation of our store information management system; • our transition to more-readily scalable “cloud-based” solutions; RENT-A-CENTER - Annual Report on Form 10-K 1 • our ability to develop and successfully implement digital or E-commerce capabilities, including mobile applications; • disruptions in our supply chain; • limitations of, or disruptions in, our distribution network, and the impact, effects and results of the changes we have made and are making to our distribution methods; • rapid inflation or deflation in the prices of our products; • our ability to execute and the effectiveness of a store consolidation, including our ability to retain the revenue from customer accounts merged into another store location as a result of a store consolidation; • our available cash flow; • our ability to identify and successfully market products and services that appeal to our customer demographic; • consumer preferences and perceptions of our brand; • our ability to retain the revenue associated with acquired customer accounts and enhance the performance of acquired stores; • our ability to enter into new and collect on our rental or lease purchase agreements; • the passage of legislation adversely affecting the Rent-to-Own industry; • our compliance with applicable statutes or regulations governing our transactions; • changes in interest rates; • changes in tariff policies; • adverse changes in the economic conditions of the industries, countries or markets that we serve; • information technology and data security costs; • the impact of any breaches in data security or other disturbances to our information technology and other networks and our ability to protect the integrity and security of individually identifiable data of our customers and employees; • changes in estimates relating to self-insurance liabilities and income tax and litigation reserves; • changes in our effective tax rate; • fluctuations in foreign currency exchange rates; • our ability to maintain an effective system of internal controls; • the resolution of our litigation; and • the other risks detailed from time to time in our reports furnished or filed with the Securities and Exchange Commission. 2 RENT-A-CENTER - Annual Report on Form 10-K PART I Item 1. Business. History of Rent-A-Center Unless the context indicates otherwise, references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center, Inc., the parent, and any or all of its direct and indirect subsidiaries. For any references in this document to Note A through Note T, refer to the Notes to Consolidated Financial Statements in Item 8. We are one of the largest rent-to-own operators in North America, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories), under flexible rental purchase agreements with no long-term obligation. We were incorporated in the State of Delaware in 1986, and our common stock is traded on the Nasdaq Global Select Market under the symbol “RCII.” The Rental Purchase Transaction The rental purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long- term obligation. Key features of the rental purchase transaction include: Brand name merchandise. We offer well-known brands such as LG, Samsung, and Sony home electronics; Frigidaire, Whirlpool, Amana, and Maytag appliances; HP, Dell, Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; Samsung and Apple smartphones; and Ashley home furnishings. Convenient payment options. Our customers make payments on a weekly, semi-monthly or monthly basis in our stores, kiosks, online or by telephone. We accept cash, credit or debit cards. Rental payments are generally made in advance and, together with applicable fees, constitute our primary revenue source. Approximately 78% and 92% of our rental purchase agreements are on a weekly term in our Core U.S. rent-to-own stores and our Mexico segment, respectively. Generally, payments are made on a monthly basis in our Acceptance Now segment. No negative consequences. A customer may terminate a rental purchase agreement at any time without penalty. No credit needed. Generally, we do not conduct a formal credit investigation of our customers. We verify a customer’s residence and sources of income. References provided by the customer are also contacted to verify certain information contained in the rental purchase order form. Our principal executive offices are located at 5501 Headquarters Drive, Plano, Texas 75024. Our telephone number is (972) 801-1100 and our company website is www.rentacenter.com. We do not intend for information contained on our website to be part of this Annual Report on Form 10-K. We make available free of charge on or through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). Additionally, we provide electronic or paper copies of our filings free of charge upon request. Delivery & set-up included. We generally offer same-day or next-day delivery and installation of our merchandise at no additional cost to the customer in our rent-to-own stores. Our Acceptance Now locations rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer. Product maintenance & replacement. We provide any required service or repair without additional charge, except for damage in excess of normal wear and tear. The cost to repair the merchandise may be reimbursed by the vendor if the item is still under factory warranty. If the product cannot be repaired at the customer’s residence, we provide a temporary replacement while the product the product cannot be repaired, we will replace it with a product of comparable quality, age and condition. is being repaired. If Lifetime reinstatement. If a customer is temporarily unable to make payments on a piece of rental merchandise and must return the merchandise, that customer generally may later re-rent the same piece of merchandise (or if unavailable, a substitute of comparable quality, age and condition) on the terms that existed at the time the merchandise was returned, and pick up payments where they left off without losing what they previously paid. Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has continuously renewed the rental purchase agreement for a period of seven to 30 months, depending upon the product type, or exercises a specified early purchase option. RENT-A-CENTER - Annual Report on Form 10-K 3 PART I Item 1. Business. Our Strategy Our strategy focuses on multiple work streams including optimizing our cost structure, enhancing our value proposition, and executing our refranchising program. • Optimizing our cost structure by continuing to capitalize on recent initiatives targeting overhead, supply chain, and other store expenses; in addition to identifying future opportunities to efficiently manage cost within the business. Our Operating Segments We report four operating segments: Core U.S., Acceptance Now, Mexico, and Franchising. Additional information regarding our operating segments is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this Annual Report on Form 10-K, and financial information regarding these segments and revenues by geographic area are provided in Note R to the consolidated financial statements contained in this Annual Report on Form 10-K. Substantially all of our revenues for the past three years originated in the United States. Core U.S. Our Core U.S. segment is our largest operating segment, comprising approximately 70% of our consolidated net revenues for the year ended December 31, 2018. Approximately 80% of our business in this segment is from repeat customers. At December 31, 2018, we operated 2,158 company-owned stores in the United States and Puerto Rico, including 44 retail installment sales stores under the names “Get It Now” and “Home Choice.” We routinely evaluate the markets in which we operate and will close, sell or merge underperforming stores. Acceptance Now the approval of Through our Acceptance Now segment, we generally provide an on-site rent-to-own option at a third-party retailer’s location. In the event a retail purchase credit application is declined, the customer can be introduced to an in-store Acceptance Now representative who explains an the alternative transaction for acquiring the use and ownership of merchandise. Because we neither require nor perform a formal credit investigation for the rental purchase transaction, applicants who meet certain basic criteria are generally approved. We believe our Acceptance Now program is beneficial for both the retailer and the consumer. The retailer captures more sales because we buy the merchandise directly from them and future rental payments are generally made at the retailer’s location. We believe consumers also benefit from our Acceptance Now program because they are able to obtain the products they want and need without the necessity of credit. The gross margins in this segment are lower than the gross margins in our Core U.S. segment because we pay retail for the product by the retailer’s customer. Through certain retail partners, we offer our customers the option to obtain ownership of the product at or slightly above the full retail price if they pay within 90 days. In some cases, the retailer provides us a rebate on the cost of the merchandise if the customer exercises this 90-day option. 4 RENT-A-CENTER - Annual Report on Form 10-K • Enhance our value proposition through targeted pricing strategies across product categories aimed at improving traffic trends. • Executing our refranchising program allowing us to optimize our physical footprint and improve our capital position. Generally, our Acceptance Now kiosk locations consist of an area with a computer, desk and chairs. We occupy the space without charge by agreement with each retailer. Accordingly, capital expenditures with respect to a new Acceptance Now location are minimal, and any exit costs associated with the closure of an Acceptance Now location would also be immaterial on an individual basis. Our operating model is highly agile and dynamic because we can open and close kiosk locations quickly and efficiently. We rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer. the customer returns rented merchandise, we pick it up at no additional charge. Merchandise returned from an Acceptance Now kiosk location is subsequently offered for rent at one of our Core U.S. rent-to-own stores. In the event As of December 31, 2018, we operated 1,106 staffed kiosk locations inside furniture and electronics retailers located in 41 states and Puerto Rico, and 96 virtual (direct) locations. Mexico Our Mexico segment currently consists of our company-owned rent-to-own stores in Mexico. At December 31, 2018, we operated 122 stores in this segment. We are subject described under “Risk Factors.” to the risks of doing business internationally as Franchising The stores in our Franchising segment use Rent-A-Center’s, ColorTyme’s or RimTyme’s trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising’s primary source of revenue is the sale of rental merchandise to its franchisees who, in turn, offer the merchandise to the general public for rent or purchase under a rent-to-own transaction. At December 31, 2018, this segment franchised 281 stores in 32 states operating under the Rent-A-Center (213 stores), ColorTyme (32 stores) and RimTyme (36 stores) names. These rent-to-own stores primarily offer high quality durable products such as consumer electronics, appliances, computers, furniture and accessories, wheels and tires. As franchisor, Franchising receives royalties of 2.0% to 6.0% of the franchisees’ monthly gross revenue and, generally, an initial fee up to $35,000 per new location. PART I Item 1. Business. The following table summarizes our locations allocated among these operating segments as of December 31: Core U.S. Acceptance Now Staffed Acceptance Now Direct Mexico Franchising Total locations The following discussion applies generally to all of our operating segments, unless otherwise noted. 2018 2,158 1,106 96 122 281 3,763 2017 2,381 1,106 125 131 225 3,968 2016 2,463 1,431 478 130 229 4,731 Rent-A-Center Operations Store Expenses Our expenses primarily relate to merchandise costs and the operations of our stores, including salaries and benefits for our employees, occupancy expense for our leased real estate, advertising expenses, lost, damaged, or stolen merchandise, fixed asset depreciation, and other expenses. Product Selection Our Core U.S., Mexico, and franchise stores generally offer merchandise from five basic product categories: consumer electronics, appliances, computers (including tablets), smartphones, and furniture (including accessories). Although we seek to maintain sufficient inventory in our stores to offer customers a wide variety of models, styles and brands, we generally limit merchandise to prescribed levels to maintain strict inventory controls. We seek to provide a wide variety of high quality merchandise to our customers, and we emphasize products from name-brand manufacturers. Customers may request either new merchandise or previously rented merchandise. Previously rented merchandise is generally offered at a similar weekly, semi-monthly, or monthly rental rate as is offered for new merchandise, but with an opportunity to obtain ownership of the merchandise after fewer rental payments. Consumer electronic products offered by our stores include high definition televisions, home theater systems, video game consoles and stereos. Appliances include refrigerators, freezers, washing machines, dryers, and ranges. We offer desktop, laptop, tablet computers and smartphones. Our furniture products include dining room, living room and bedroom furniture featuring a number of styles, materials and colors. Accessories include lamps and tables and are typically rented as part of a package of items, such as a complete room of furniture. Showroom displays enable customers to visualize how the product will look in their homes and provide a showcase for accessories. The merchandise assortment may vary in our non-U.S. stores according to market characteristics and consumer demand unique to the particular country in which we are operating. For example, the appliances we offer are sourced locally, providing our customers in Mexico the look and feel to which they are accustomed in that product category. in Mexico, Acceptance Now locations offer the merchandise available for sale at the applicable third-party retailer, primarily furniture and accessories, consumer electronics and appliances. For the year ended December 31, 2018, furniture and accessories accounted for approximately 43% of our consolidated rentals and fees revenue, consumer electronic products for 18%, appliances for 15%, computers for 6%, smartphones for 3% and other products and services for 15%. Product Turnover On average, in the Core U.S. segment, a rental term of 14 months or exercising an early purchase option is generally required to obtain ownership of new merchandise. Product turnover is the number of times a product is rented to a different customer. On average, a product is rented (turned over) to three customers before a customer acquires ownership. Merchandise returned in the Acceptance Now segment is moved to a Core U.S. store where it is offered for rent. Ownership is attained in approximately 35% of first-time rental purchase agreements in the Core U.S. segment. The average total life for each product in our Core U.S. segment is approximately 17 months, which includes the initial rental period, all re-rental periods and idle time in our system. To cover the higher operating expenses generated by product turnover and the key features of rental purchase transactions, rental purchase agreements require higher aggregate payments than are generally charged under other types of purchase plans, such as installment purchase or credit plans. Collections information system to track Store managers use our management collections on a daily basis. If a customer fails to make a rental payment when due, store personnel will attempt to contact the customer to obtain payment and reinstate the agreement, or will terminate the account and arrange to regain possession of the merchandise. We attempt to recover the rental items as soon as possible following termination or default of a rental purchase agreement, generally by the seventh day. Collection efforts are enhanced by the personal and job-related references required of customers, the personal nature of the relationships between our employees and customers, and the availability of lifetime reinstatement. Currently, we track past due amounts using a guideline of seven days in our Core U.S. segment and 30 days in the Acceptance Now segment. These metrics align with the majority of the rental purchase agreements in each segment, since payments are generally made weekly in the Core U.S. segment and monthly in the Acceptance Now segment. If a customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Core U.S. and Mexico segments, and on or before the 150th day in the Acceptance Now segment. RENT-A-CENTER - Annual Report on Form 10-K 5 PART I Item 1. Business. Purchasing In our Core U.S. and Mexico segments, we purchase our rental merchandise from a variety of suppliers. In 2018, approximately 21% of our merchandise purchases were attributable to Ashley Furniture Industries. No other brand accounted for more than 10% of merchandise purchased during these periods. We do not generally enter into written contracts with our suppliers that obligate us to meet certain minimum purchasing levels. Although we expect to continue relationships with our existing suppliers, we believe there are numerous sources of products available, and we do not believe the success of our operations is dependent on any one or more of our present suppliers. In our Acceptance Now segment, we purchase the merchandise selected by the customer from the applicable third-party retailer at the time such customer enters into a rental purchase agreement with us. to our Franchising segment, With respect the franchise agreement requires the franchised stores to exclusively offer for rent or sale only those brands, types and models of products that Franchising has approved. The franchised stores are required to maintain an adequate mix of inventory that consists of approved products for rent as dictated by Franchising policy manuals. Franchising negotiates purchase arrangements with various suppliers it has approved. Franchisees can purchase product through us or directly from those suppliers. Management Our executive management team has extensive rent-to-own or similar retail experience and has demonstrated the ability to grow and manage our business through their operational leadership and strategic vision. In addition, our regional and district managers generally have long tenures with us, and we have a history of promoting management personnel from within. We believe this extensive industry and company experience will allow us to effectively execute our strategies. Marketing We promote our products and services through television and radio commercials, print advertisements, store telemarketing, digital display advertisements, direct email campaigns, social networks, paid and organic search, website and store signage. Our advertisements emphasize such features as product and name-brand selection, the opportunity to pay as you go without credit, long-term contracts or obligations, delivery and set-up at no additional cost, product repair and loaner services at no extra cost, lifetime reinstatement and multiple options to acquire ownership, including 180-day option pricing, an early purchase option or through a fixed number of payments. In addition, we promote the “RAC Worry-Free Guarantee®” to further highlight these the rental purchase transaction. We believe that by aspects of leveraging our advertising efforts to highlight the benefits of the rental purchase transaction, we will continue to educate our customers and potential customers about the rent-to-own alternative to credit as well as solidify our reputation as a leading provider of high-quality, branded merchandise and services. Franchising has established national advertising funds for the franchised stores, whereby Franchising has the right to collect up to 3% of the monthly gross revenue from each franchisee as contributions to the fund. Franchising directs the advertising programs of the fund, generally consisting of television and radio commercials and print advertisements. Franchising also has the right to require franchisees to expend up to 3% of their monthly gross revenue on local advertising. Industry & Competition According to a report published by the Association of Progressive Rental Organizations in 2016, the $8.5 billion rent-to-own industry in the United States, Mexico and Canada consists of approximately 9,200 stores, serves approximately 4.8 million customers and approximately 83% of rent-to-own customers have household incomes between $15,000 and $50,000 per year. The rent-to-own industry provides customers the opportunity to obtain merchandise they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to credit. We believe the number of consumers lacking access to credit is increasing. According to data released by the Fair Isaac Corporation on September 24, 2018, consumers in the “subprime” category (those with credit scores below 650) made up approximately 29% of the United States population. The rent-to-own industry is experiencing rapid change with the emergence of virtual and kiosk-based operations, such as our Acceptance Now business. These new industry participants are disrupting traditional rent-to-own stores by attracting customers and making the rent-to-own transaction more acceptable to potential customers. In addition, banks and consumer finance companies are developing products and services designed to compete for the traditional rent-to-own customer. These factors are increasingly contributing to an already highly competitive environment. Our stores and kiosks compete with other national, regional and local rent-to-own businesses, including on-line only competitors, as well as with rental stores that do not offer their customers a purchase option. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores, online competitors, and non-traditional lenders. Competition is based primarily on convenience, store location, product selection and availability, customer service, rental rates and terms. 6 RENT-A-CENTER - Annual Report on Form 10-K PART I Item 1. Business. Seasonality Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year. Generally, our customers will more frequently exercise the early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year, primarily due to the receipt of federal income tax refunds. Trademarks and own various trademarks service marks, We including Rent-A-Center® and RAC Worry-Free Guarantee® that are used in connection with our operations and have been registered with the United States Patent and Trademark Office. The duration of our trademarks is unlimited, subject to periodic renewal and continued use. In addition, we have obtained trademark registrations in Mexico, Canada and certain other foreign jurisdictions. We believe we hold the necessary rights for protection of to our business. The products held for rent in our stores also bear trademarks and service marks held by their respective manufacturers. the trademarks and service marks essential Employees As of February 19, 2019, we had approximately 14,000 employees. Government Regulation Core U.S. & Acceptance Now State Regulation. Currently, 46 states, the District of Columbia and Puerto Rico have rental purchase statutes that recognize and regulate rental purchase transactions as separate and distinct from credit sales. We believe this existing legislation is generally favorable to us, as it defines and clarifies the various disclosures, procedures and transaction structures related to the rent-to-own business with which we must comply. With some variations in individual states, most related state to make prescribed disclosures to legislation requires the lessor customers about the rental purchase agreement and transaction, and provides time periods during which customers may reinstate agreements despite having failed to make a timely payment. Some state rental purchase laws prescribe grace periods for non-payment, prohibit or limit certain types of collection or other practices, and limit certain fees that may be charged. Eleven states limit the total rental payments that can be charged to amounts ranging from 2.0 times to 2.4 times the disclosed cash price or the retail value of the rental product. Six states limit the cash price of merchandise to amounts ranging from 1.56 to 2.5 times our cost for each item. Although Minnesota has a rental purchase statute, the rental purchase transaction is also treated as a credit sale subject to consumer lending restrictions pursuant to judicial decision. Therefore, we offer our customers in Minnesota an opportunity to purchase our merchandise through an installment sale transaction in our Home Choice stores. We operate 17 Home Choice stores in Minnesota. North Carolina has no rental purchase legislation. However, the retail installment sales statute in North Carolina expressly provides that lease transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under the statute. We operate 96 rent-to-own stores, and 44 and 4 Acceptance Now Staffed and Acceptance Now Direct locations, respectively, in North Carolina. Franchising licenses the use of the Rent-A-Center and ColorTyme trademarks and service marks to its franchisees under the franchise agreement. Franchising owns various trademarks and service marks, including ColorTyme® and RimTyme®, that are used in connection with its operations and have been registered with the United States Patent and Trademark office. The duration of these marks is unlimited, subject to periodic renewal and continued use. Courts in Wisconsin and New Jersey, which do not have rental purchase statutes, have rendered decisions which classify rental to consumer lending purchase transactions as credit sales subject restrictions. Accordingly, in Wisconsin, we offer our customers an opportunity to purchase our merchandise through an installment sale transaction in our Get It Now stores. In New Jersey, we have modified our typical rental purchase agreements to provide disclosures, grace periods, and pricing that we believe comply with the retail installment sales act. We operate 27 Get It Now stores in Wisconsin and 43 Rent-A-Center stores in New Jersey. There can be no assurance as to whether new or revised rental purchase laws will be enacted or whether, if enacted, the laws would not have a material and adverse effect on us. Federal Regulation. To date, no comprehensive federal legislation has been enacted regulating or otherwise impacting the rental purchase transaction. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) does not regulate leases with terms of 90 days or less. Because the rent-to-own transaction is for a term of week to week, or at most, month to month, and established federal law deems the term of a lease to be its minimum term regardless of extensions or renewals, if any, we believe the rent-to-own transaction is not covered by the Dodd-Frank Act. From time to time, we have supported legislation introduced in Congress that would regulate the rental purchase transaction. While both beneficial and adverse legislation may be introduced in Congress in the future, any adverse federal legislation, if enacted, could have a material and adverse effect on us. RENT-A-CENTER - Annual Report on Form 10-K 7 PART I Item 1. Business. Mexico No comprehensive legislation regulating the rent-to-own transaction has been enacted in Mexico. We use substantially the same rental purchase transaction in Mexico as in the U.S. stores, but with such additional provisions as we believe may be necessary to comply with Mexico’s specific laws and customs. 8 RENT-A-CENTER - Annual Report on Form 10-K PART I Item 1A. Risk Factors. Item 1A. Risk Factors. You should carefully consider the risks described below before making an investment decision. We believe these are all the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. You should also refer to the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. Our success depends on the effective implementation and continued execution of our strategies. We are focused on our mission to provide cash- and credit-constrained consumers with affordable and flexible access to durable goods that promote a higher quality of In 2018, we executed multiple initiatives targeting cost savings opportunities, a more competitive value proposition within our Core U.S. and Acceptance Now operating segments, and refranchising select brick and mortar locations, to improve profitability and enhance long-term value for our stockholders. living. There is no assurance that we will be able to continue to implement and execute our strategic initiatives in accordance with our expectations. Our inability to lower costs or failure to achieve targeted results associated with our initiatives could adversely affect our results of operations, or negatively impact our ability to successfully execute future strategies, which may result in an adverse impact on our business and financial results. The successful execution of our franchise strategy is important to our future growth and profitability. We intend to pursue opportunities for growth through new and existing franchise partners, acquisitions and divestitures. These strategic transactions involve various inherent risks, including, without limitation: • inaccurate assessment of the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of such strategic transactions; • our ability to preserve, enhance and leverage the value of our brand; • diversion of management’s attention and focus away from existing operations towards execution of strategic transactions; • inability to achieve projected economic and operating benefits from our strategic transactions; • challenges in successfully completing franchise transactions and integrating new franchisees into our franchise system; and • unanticipated changes in business and economic conditions affecting our strategic transactions. We are highly dependent on the financial performance of our Core U.S. operating segment. Our financial performance is highly dependent on our Core U.S. segment, which comprised approximately 70% of our consolidated net revenues for the year ended December 31, 2018. Any significant decrease in the financial performance of the Core U.S. segment may also have a material adverse impact on our ability to implement our growth strategies. The uncertainty regarding the Company’s future arising out of a series of executive departures and the resulting management transitions, and the volatility in our historical financial results may adversely impact our ability to attract and retain key employees. team has Executive leadership transitions can be inherently difficult to manage and may cause disruption to our business. As a result of the changes in team over the past several years, our our executive management existing management taken on substantially more responsibility, which has resulted in greater workload demands and could divert attention away from other key areas of our business. In transition inherently causes some loss of addition, management institutional knowledge, may be disruptive to our daily operations or affect public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on our business, financial condition, results of operations or cash flows. Our future success depends in large part upon our ability to attract and retain key management executives and other key employees. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash and equity compensation. Any prolonged inability to provide salary increases or cash incentive compensation opportunities, or if the anticipated value of such equity awards does not materialize or our equity compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate executives and key employees could be weakened. the uncertainty and operational disruptions caused by the management changes and related transitions could result in additional key employees deciding to leave the Company. If we are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operations could be adversely impacted. In addition, We may not be able to recapitalize our debt, including our senior credit facility expiring on December 31, 2019, and senior notes maturing in November 2020 and May 2021 on favorable terms, if at all. Our inability to recapitalize our debt would materially and adversely affect our liquidity and our ongoing results of operations in the future. Our senior credit facility matures in December 2019, and our senior notes mature in November 2020 and May 2021. We intend to recapitalize our debt structure in 2019. Our ability to effect a recapitalization will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors the time of refinancing could increase our interest expense. A at recapitalization of our debt could also require us to comply with more RENT-A-CENTER - Annual Report on Form 10-K 9 PART I Item 1A. Risk Factors. onerous covenants and further restrict our business operations. Failure to refinance or recapitalize our debt, or satisfy the conditions and requirements of that debt, would likely result in an event of default and potentially the loss of some or all of the assets securing our obligations under the senior credit facility. In addition, our inability to refinance or recapitalize our debt or to obtain alternative financing from other sources, or our inability to do so upon attractive terms could materially and adversely affect our business, prospects, results of operations, financial condition and cash flows, and make us more vulnerable to adverse industry and general economic conditions. A future lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital. Our indebtedness currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes in our business, warrant. Our indebtedness was upgraded by Standard & Poor’s in January 2019 and Moody’s improved our outlook. Any downgrade by any ratings agency may increase the interest rate on our future indebtedness, limit our access to vendor financing on favorable terms or otherwise result in higher borrowing costs, and likely would make it more difficult or more expensive for us to obtain additional debt financing or recapitalize our existing debt structure. Our arrangements with our suppliers and vendors may be impacted by our financial results or financial position. Substantially all of our merchandise suppliers and vendors sell to us on open account purchase terms. There is a risk that our key suppliers and vendors could respond to any actual or apparent decrease in, or any concern with, our financial results or liquidity by requiring or conditioning their sale of merchandise to us on more stringent or more costly payment terms, such as by requiring standby letters of credit, earlier or advance payment of invoices, payment upon delivery or other assurances or credit support or by choosing not to sell merchandise to us on a timely basis or at all. Our arrangements with our suppliers and vendors may also be impacted by media reports regarding our financial position or other factors relating to our business. Our need for additional liquidity could significantly increase and our supply of inventory could be materially disrupted if a significant portion of our key suppliers and vendors took one or more of the actions described above, which could have a material adverse effect on our sales, customer satisfaction, cash flows, liquidity and financial position. Failure to effectively manage our costs could have a material adverse effect on our profitability. Certain elements of our cost structure are largely fixed in nature. Consumer spending remains uncertain, which makes it more challenging for us to maintain or increase our operating income in the Core U.S. segment. The competitive environment in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our overall cost of operations, labor and benefit rates, advertising and marketing expenses, operating leases, charge-offs due to customer 10 RENT-A-CENTER - Annual Report on Form 10-K stolen merchandise, other store expenses or indirect spending could materially adversely affect our profitability. Our Acceptance Now segment depends on the success of our third-party retail partners and our continued relationship with them. Our Acceptance Now segment revenues depend in part on the ability of unaffiliated third-party retailers to attract customers. The failure of our third-party retail partners to maintain quality and consistency in their operations and their ability to continue to provide products and services, or the loss of the relationship with any of these third-party retailers and an inability to replace them, could cause our Acceptance Now segment to lose customers, substantially decreasing the revenues and earnings of our Acceptance Now segment. This could adversely affect our financial results. In 2018, approximately 67% of the total revenue of the Acceptance Now segment originated at our Acceptance Now kiosks located in stores operated by four retail partners. We may be unable to continue growing the Acceptance Now segment if we are unable to find additional third-party retailers willing to partner with us or if we are unable to enter into agreements with third-party retailers acceptable to us. The success of our business is dependent on factors affecting consumer spending that are not under our control. Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debt and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war, pandemics, inclement weather, tariff policies, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for our products and services resulting in lower revenue and negatively impacting the business and its financial results. If we are unable to compete effectively with the growing e-commerce sector, our business and results of operations may be materially adversely affected. With the continued expansion of Internet use, as well as mobile computing devices and smartphones, competition from the e-commerce sector continues to grow. We have launched virtual capabilities within our Acceptance Now and Core U.S. segments. There can be no assurance we will be able to grow our e-commerce business in a profitable manner. Certain of our competitors, and a number of e-commerce retailers, have established e-commerce operations against which we compete for customers. It is possible that the increasing competition from the e-commerce sector may reduce our market share, gross and operating margins, and may materially adversely affect our business and results of operations in other ways. Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business. Any disruption in our supply chain could result in our inability to meet our customers’ expectations, higher costs, an inability to stock our stores, or longer lead time associated with distributing merchandise. Any such disruption within our supply chain network could also result in decreased net sales, increased costs and reduced profits. Our senior secured asset-based revolving credit facility limits our borrowing capacity to the value of certain of our assets. In addition, our senior secured asset-based revolving credit facility is secured by substantially all of our assets, and lenders may exercise remedies against the collateral in the event of our default. We are party to a $200 million senior secured asset-based revolving credit facility. Our borrowing capacity under our revolving credit facility varies according to our eligible rental contracts, eligible installment sales accounts, and inventory net of certain reserves. In the event of any material decrease in the amount of or appraised value of these assets, our borrowing capacity would similarly decrease, which could adversely impact our business and liquidity. Our revolving credit facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our available credit falls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. Our obligations under the revolving credit facility are secured by liens with respect to inventory, accounts receivable, deposit accounts and certain related collateral. In the event of a default that is not cured or waived within any applicable cure periods, the lenders’ commitment to extend further credit under our revolving credit facility could be terminated, our outstanding obligations could become immediately due and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral, which generally consists of substantially all of our tangible and intangible assets, including intellectual property and the capital stock of our U.S. subsidiaries. If we are unable to borrow under our revolving credit facility, we may not have the necessary cash resources for our operations and, if any event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and liquidity. Our current insurance program may expose us to unexpected costs and negatively affect our financial performance. insurance coverage is subject Our to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our operations. Because we self-insure a significant portion of expected losses under our workers’ compensation, general liability, vehicle and group health insurance programs, unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, including potential in materially different amounts of expense than expected under these programs. This could have a material adverse effect on our financial condition and results of operations. increases in medical and indemnity costs, could result PART I Item 1A. Risk Factors. Our transactions are regulated by and subject to the requirements of various federal and state laws and regulations, which may require significant compliance costs and expose us to litigation. Any negative change in these laws or the passage of unfavorable new laws could require us to alter our business practices in a manner that may be materially adverse to us. Currently, 46 states, the District of Columbia and Puerto Rico have passed laws that regulate rental purchase transactions as separate and distinct from credit sales. One additional state has a retail installment sales statute that excludes leases, including rent-to-own transactions, from its coverage if the lease provides for more than a nominal purchase price at the end of the rental period. The specific rental purchase laws generally require certain contractual and advertising disclosures. They also provide varying levels of substantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event is terminated. The rental purchase laws of eleven states limit the total amount that may be charged over the life of a rental purchase agreement and the laws of six states limit the cash prices for which we may offer merchandise. the rental purchase agreement Similar to other consumer transactions, our rental purchase transaction is also governed by various federal and state consumer protection statutes. These consumer protection statutes, as well as the rental purchase statutes under which we operate, provide various consumer remedies, including monetary penalties, for violations. In our history, we have been the subject of litigation alleging that we have violated some of these statutory provisions. legislation Although there is currently no comprehensive federal regulating rental purchase transactions, adverse federal legislation may be enacted in the future. From time to time, both favorable and adverse legislation seeking to regulate our business has been introduced in Congress. In addition, various legislatures in the states where we currently do business may adopt new legislation or amend existing legislation that could require us to alter our business practices in a manner that could have a material adverse effect on our business, financial condition and results of operations. Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners. Our operations in the U.S. and abroad are subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Our employees, contractors or agents may violate the policies and procedures we have implemented to ensure compliance with these laws. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees, and could damage our reputation. RENT-A-CENTER - Annual Report on Form 10-K 11 PART I Item 1A. Risk Factors. We may be subject to legal proceedings from time to time which seek material damages. The costs we incur in defending ourselves or associated with settling any of these proceedings, as well as a material final judgment or decree against us, could materially adversely affect our financial condition by requiring the payment of the settlement amount, a judgment or the posting of a bond. In our history, we have defended class action lawsuits alleging various regulatory violations and have paid material amounts to settle such judgments could claims. Significant settlement amounts or materially and adversely affect our liquidity and capital resources. The failure to pay any material judgment would be a default under our senior credit facilities and the indenture governing our outstanding senior unsecured notes. final Vintage Capital and B. Riley’s lawsuit against us in connection with our termination of the Merger Agreement, has caused, and may continue to cause, us to incur significant costs, may present material distractions and, if decided adversely to us, could negatively impact our financial position. filed a lawsuit As described in Item 3—Legal Proceedings of this Annual Report on Form 10-K, on December 18, 2018, we terminated the Merger Agreement with Vintage Capital. On December 21, 2018, Vintage in the Delaware Court of Chancery against Capital Rent-A-Center, asserting that the Merger Agreement remained in effect, and that Vintage Capital did not owe Rent-A-Center the $126.5 million reverse breakup fee associated with our termination of the Merger Agreement. On February 11th and 12th of this year, a trial was held in the Delaware Court of Chancery in connection with the lawsuit brought by Vintage Capital (and joined by B. Riley) against Rent-A-Center. An adverse decision by the Delaware Court of Chancery could result in the possible reinstatement of the Merger Agreement, monetary exposure for litigation costs of opposing parties, denial of the right to recovery of the reverse breakup fee and other possible monetary or equitable exposure to the opposing parties. These risks, coupled with the ongoing costs of litigation and potential management distractions associated therewith, could adversely affect our business, business relationships, financial condition, results of operations, cash flows and market price. Our operations are dependent on effective information management systems. Failure of these systems could negatively impact our business, financial condition and results of operations. We utilize integrated information management systems. The efficient operation of our business is dependent on these systems to effectively manage our financial and operational data. The failure of our information management systems to perform as designed, loss of data or any interruption of our information management systems for a significant period of time could disrupt our business. If the information management systems sustain repeated failures, we may not be able to manage our store operations, which could have a material adverse effect on our business, financial condition and results of operations. 12 RENT-A-CENTER - Annual Report on Form 10-K ensure designed procedures these investments, We invest in new information management technology and systems and implement modifications and upgrades to existing systems. These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware with updated functionality. We take actions and to implement successful the implementation of including the testing of new systems and the transfer of existing data, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing systems and our business, and may not provide the anticipated benefits. A disruption in our information management systems, or our inability to improve, upgrade, integrate or expand our systems to meet our evolving business requirements, could impair our ability to achieve critical strategic initiatives and could materially adversely impact our business, financial condition and results of operations. If we fail to protect the integrity and security of customer and employee information, we could be exposed to litigation or regulatory enforcement and our business could be adversely impacted. We collect and store certain personal information provided to us by our customers and employees in the ordinary course of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Loss of customer or employee information could disrupt our operations, damage our reputation, and expose us to claims from customers, employees, regulators and other persons, any of which could have an adverse effect on our business, In the costs associated with information security, such as addition, increased investment the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could adversely impact our business. financial condition and results of operations. in technology, A change in control could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts. Under our senior credit facilities, an event of default would result if a third party became the beneficial owner of 35.0% or more of our voting stock or a majority of Rent-A-Center’s Board of Directors are not continuing directors (all of the current members of our Board of Directors are continuing directors under the senior credit facility). As of December 31, 2018, we had no outstanding balance under our senior credit facilities. Under the indenture governing our outstanding senior unsecured notes, in the event of a change in control, we may be required to offer to purchase all of our outstanding senior unsecured notes at 101% of their original aggregate principal amount, plus accrued interest to the date of repurchase. A change in control also would result in an event of default under our senior credit facilities, which would allow our lenders to accelerate indebtedness owed to them. If a specified change in control occurs and the lenders under our debt instruments accelerate these obligations, we may not have sufficient liquid assets to repay amounts outstanding under these agreements. Rent-A-Center’s organizational documents and our debt instruments contain provisions that may prevent or deter another group from paying a premium over the market price to Rent-A-Center’s stockholders to acquire its stock. to Section 203 of Rent-A-Center’s organizational documents contain provisions that classify its Board of Directors, authorize its Board of Directors to issue blank check preferred stock and establish advance notice requirements on its stockholders for director nominations and actions to be taken at meetings of the stockholders. In addition, as a Delaware corporation, Rent-A-Center is subject the Delaware General Corporation Law relating to business combinations. Our senior credit facilities and the indentures governing our senior unsecured notes each contain various change in control provisions which, in the event of a change in control, would cause a default under those provisions. These provisions and arrangements could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change in control involving us that could include a premium over the market price of Rent-A-Center’s common stock that some or a majority of Rent-A-Center’s stockholders might consider to be in their best interests. Rent-A-Center is a holding company and is dependent on the operations and funds of its subsidiaries. Rent-A-Center is a holding company, with no revenue generating operations and no assets other than its ownership interests in its direct and indirect subsidiaries. Accordingly, Rent-A-Center is dependent on the cash flow generated by its direct and indirect operating subsidiaries and must rely on dividends or other intercompany transfers from its operating subsidiaries to generate the funds necessary to meet its obligations, including the obligations under the senior credit facilities. The ability of Rent-A-Center’s subsidiaries to pay dividends or make other payments to it is subject to applicable state laws. Should one or more of Rent-A-Center’s subsidiaries be unable to pay dividends or make distributions, Rent-A-Center’s ability to meet its ongoing obligations could be materially and adversely impacted. PART I Item 1A. Risk Factors. Our stock price is volatile, and you may not be able to recover your investment if our stock price declines. The price of our common stock has been volatile and can be expected to be significantly affected by factors such as: • our ability to meet market expectations with respect to the growth and profitability of each of our operating segments; • quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store sales or when and how many locations we acquire or open; • quarterly variations in our competitors’ results of operations; • changes in earnings estimates or buy/sell recommendations by financial analysts; • uncertainties associated with the termination of the Merger Agreement and the litigation relating to its termination; and • the stock price performance of comparable companies. In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies’ operating performance. Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price. Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our internal control brand and operating results could be harmed. All systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. financial RENT-A-CENTER - Annual Report on Form 10-K 13 PART I Item 1B. Unresolved Staff Comments. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. We lease space for all of our Core U.S. and Mexico stores and certain support facilities under operating leases expiring at various times through 2024. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas. Store sizes average approximately 4,800 square feet. Approximately 75% of each store’s space is generally used for showroom space and 25% for offices and storage space. Our Acceptance Now kiosks occupy space without charge in the retailer’s location with no lease commitment. We believe suitable store space generally is available for lease and we would be able to relocate any of our stores or support facilities without significant difficulty should we be unable to renew a particular lease. We also expect additional space is readily available at competitive rates to open new stores or support facilities, as necessary. We own the land and building in Plano, Texas, in which our corporate headquarters is located. The land and improvements are pledged as collateral under our senior credit facilities. Item 3. Legal Proceedings. From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We impact on our these losses to have a material do not expect consolidated financial statements if and when such losses are incurred. We are subject to unclaimed property audits by states in the ordinary course of business. The property subject to review in this audit process included unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. We routinely remit escheat payments to states in compliance with applicable escheat laws. The negotiated settlements did not have a material adverse impact to our financial statements. Alan Hall, et. al. v. Rent-A-Center, Inc., et. al.; James DePalma, et. al. v. Rent-A-Center, Inc., et. al. On December 23, 2016, a putative class action was filed against us and certain of our former officers by Alan Hall in the Federal District Court for the Eastern District of Texas in Sherman, Texas. The complaint alleges that the defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing false and misleading statements and omitting material facts regarding our business, including implementation of our point-of-sale system, operations and prospects during the period covered by the complaint. A complaint filed by James DePalma also in Sherman, Texas alleging similar claims was consolidated by the court into the Hall matter. On October 8, 2018, the parties agreed to settle this matter for $11 million. The court granted preliminary approval of the settlement on December 13, 2018. Under the terms of the settlement our insurance carrier paid an aggregate of $11 million in cash, subsequent to December 31, 2018, which will be distributed to an agreed upon class of claimants who purchased our common stock from July 27, 2015 through October 10, 2016, as well as used to pay costs of notice and settlement administration, and plaintiffs’ attorneys’ fees and expenses. A hearing to finally approve the settlement is scheduled for May 3, 2019. 14 RENT-A-CENTER - Annual Report on Form 10-K the plaintiffs allege that we fail the Karnette Rental-Purchase Act. Blair v. Rent-A-Center, Inc. This matter is a state-wide class action complaint originally filed on March 13, 2017 in the Federal District Court for the Northern District of California. The complaint alleges various claims, including that our cash sales and total rent to own prices exceed the pricing permitted under In to give customers a fully addition, executed rental agreement and that all such rental agreements that were issued to customers unsigned are void under the law. The plaintiffs are seeking statutory damages under the Karnette Rental-Purchase Act which range from $100—$1,000 per violation, injunctive relief, and attorney’s fees. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter. terminated stated End Date, we Inc. and Vintage Rodeo Parent, LLC, Vintage Rodeo Acquisition, Inc. v. Vintage Capital Management, LLC, and B. Riley Financial, Rent-A-Center, Inc. On December 18, 2018, after the Company did not receive an extension notice from Vintage Rodeo Parent, LLC (“Vintage”) that was required by December 17, 2018 to extend the Merger Agreement’s the Merger Agreement. Our Board of Directors determined that terminating the Merger Agreement was in the best interests of our stockholders, and instructed Rent-A-Center’s management to exercise the Company’s right to terminate the Merger Agreement and make a demand on Vintage for the $126.5 million reverse breakup fee owed to us following the termination of the Merger Agreement. On December 21, 2018, Vintage and its affiliates filed a lawsuit in Delaware Court of Chancery against Rent-A-Center, asserting that the Merger Agreement remained in effect, and that Vintage did not owe Rent-A-Center the $126.5 million reverse breakup fee associated with our termination of the Merger Agreement. B. Riley, a guarantor of the payment of the reverse breakup fee, later joined the lawsuit brought by Vintage in Delaware Court of Chancery. In addition, we brought a counterclaim against Vintage and B. Riley asserting our right to payment of the reverse breakup fee. On February 11th and 12th of this year, a trial was held in Delaware Court of Chancery in the lawsuit arising from Rent-A-Center’s termination of the Merger Agreement. While it is difficult to predict the outcome of litigation, we believe Rent-A-Center had a clear right to terminate the Merger Agreement under the express and unambiguous language of that agreement and that it is entitled to the $126.5 million reverse breakup fee. Oral argument on the parties’ post-trial briefs is scheduled for Monday, March 11th. Item 4. Mine Safety Disclosures. Not applicable. PART I Item 4. Mine Safety Disclosures RENT-A-CENTER - Annual Report on Form 10-K 15 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock has been listed on the Nasdaq Global Select Market® and its predecessors under the symbol “RCII” since January 25, 1995, the date we commenced our initial public offering. As of February 19, 2019, there were approximately 26 record holders of our common stock. Future decisions to pay cash dividends on our common stock continue to be at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and any other factors our Board of Directors may deem relevant. Cash dividend payments are subject to certain restrictions in our debt agreements. Please see Note I and Note J to the consolidated financial statements for further discussion of such restrictions. Under our current common stock repurchase program, our Board of Directors has authorized the purchase, from time to time, in the open market and privately negotiated transactions, up to an aggregate of $1.25 billion of Rent-A-Center common stock. As of December 31, 2018, we had purchased a total of 36,994,653 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million under this common stock repurchase program. Common stock repurchases are subject to certain restrictions in our debt agreements. Please see Note I and Note J to the consolidated financial statements for further discussion of such restrictions. No shares were repurchased during 2018 and 2017. 16 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Stock Performance Graph The following chart represents a comparison of the five year total return of our common stock to the NASDAQ Composite Index and the S&P 1500 Specialty Retail Index. We selected the S&P 1500 Specialty Retail Index for comparison because we use this published industry index as the comparator group to measure our relative total shareholder return for purposes of determining vesting of performance stock units granted under our long-term incentive compensation program. The graph assumes $100 was invested on December 31, 2013, and dividends, if any, were reinvested for all years ending December 31. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among Rent-A-Center, Inc., the NASDAQ Composite Index, and S&P 1500 Specialty Retail Index 200 150 100 50 0 12/13 12/14 12/15 12/16 12/17 12/18 Rent-A-Center, Inc. NASDAQ Composite S&P 1500 Specialty Retail Index RENT-A-CENTER - Annual Report on Form 10-K 17 PART II Item 6. Selected Financial Data. Item 6. Selected Financial Data. The selected financial data presented below for the five years ended December 31, 2018, have been derived from our audited consolidated financial statements. The historical financial data are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included in this report. (In thousands, except per share data) 2018 2017 2016 2015(8) 2014 Year Ended December 31, Consolidated Statements of Operations Revenues Store Rentals and fees Merchandise sales Installment sales Other Franchise Merchandise sales Royalty income and fees Total revenues Cost of revenues Store Cost of rentals and fees Cost of merchandise sold Cost of installment sales Other charges and (credits) Franchise cost of merchandise sold Total cost of revenues Gross profit Operating expenses Store expenses Labor Other store expenses General and administrative expenses Depreciation, amortization and write-down of intangibles Goodwill impairment charge Other charges $ 2,244,860 $ 2,267,741 $ 2,500,053 $ 2,781,315 $ 2,745,828(13) 304,455 69,572 9,000 19,087 13,491 331,402 71,651 9,620 13,157 8,969 351,198 74,509 12,706 16,358 8,428 377,240 76,238 19,158 15,577 8,892 290,048 75,889 19,949 19,236 6,846 2,660,465 2,702,540 2,963,252 3,278,420 3,157,796 621,860 308,912 23,326 — 18,199 972,297 625,358 322,628 23,622 — 12,390 983,998 1,688,168 1,718,542 664,845 323,727 24,285 — 15,346 1,028,203 1,935,049 683,422 656,894 163,445 68,946 — 732,466 744,187 171,090 74,639 — 59,324(1) 59,219(3) 789,049 791,614 168,907 80,456 151,320(6) 20,299(7) 728,706 356,696 25,677 34,698(9) 14,534 1,160,311 2,118,109 854,610 833,914 166,102 80,720 1,170,000(10) 704,595 231,520 26,084 (6,836)(14) 18,070 973,433 2,184,363 888,929 842,254 162,316 83,168 — 20,651(11) 14,234(15) Total operating expenses 1,632,031 1,781,601 2,001,645 3,125,997 Operating profit (loss) Write-off of debt issuance costs Interest expense, net Earnings (loss) before income taxes Income tax expense (benefit) Net earnings (loss) Basic earnings (loss) per common share Diluted earnings (loss) per common share Cash dividends declared per common share 56,137 475(2) 41,821 13,841 5,349 8,492 0.16 0.16 $ $ $ — $ (63,059) 1,936(4) 45,205 (66,596) (1,007,888) — 46,678 — 48,692 (110,200) (113,274) (1,056,580) (116,853)(5) (8,079) (103,060)(12) 6,653 0.12 0.12 0.16 $ $ $ $ (105,195) (1.98) (1.98) 0.32 $ $ $ $ (953,520) (17.97) (17.97) 0.96 $ $ $ $ $ $ $ $ 1,990,901 193,462 4,213(16) 46,896 142,353 45,931 96,422 1.82 1.81 0.93 18 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 6. Selected Financial Data — Continued. Item 6. Selected Financial Data — Continued. (Dollar amounts in thousands) 2018 2017 2016 2015(8) 2014 December 31, Consolidated Balance Sheet Data Rental merchandise, net Intangible assets, net Total assets Total debt Total liabilities Total stockholders’ equity Operating Data (Unaudited) $ 807,470 $ 868,991 $1,001,954 $1,136,472 $1,237,856 57,344 1,396,917 540,042 1,110,400 286,517 57,496 60,560 213,899 1,420,781 1,602,741 1,974,468 672,887 724,230 955,833 1,148,338 1,337,808 1,590,878 272,443 264,933 383,590 1,377,992 3,271,197 1,042,813 1,881,802 1,389,395 Core U.S. and Mexico stores open at end of period Acceptance Now Staffed locations open at end of period Acceptance Now Direct locations open at end of period Same store revenue growth (decrease)(12) Franchise stores open at end of period 2,280 1,106 96 4.7% 281 2,512 1,106 125 (5.4)% 225 2,593 1,431 478 (6.2)% 229 2,815 1,444 532 5.7% 227 3,001 1,406 — 1.2% 187 (1) (2) (3) (4) (5) (6) (7) Includes $30.4 million related to cost savings initiatives, $16.4 million in incremental legal and advisory fees, $11.6 million related to store closure costs, $1.2 million in capitalized software write-downs, and $(0.3) million related to the 2018 and 2017 hurricane impacts. Includes the effects of a $0.5 million financing expense related to the write-off of unamortized financing costs. Includes $24.0 million related to the closure of Acceptance Now locations, $18.2 million for capitalized software write-downs, $6.5 million for incremental legal and advisory fees, $5.4 million for 2017 hurricane impacts, $3.4 million for reductions at the field support center, $1.1 million for previous store closure plans, and $0.6 million in legal settlements. Includes the effects of a $1.9 million financing expense related to the write-off of unamortized financing costs. Includes a $77.5 million gain resulting from the Tax Cuts and Jobs Act. Includes a $151.3 million goodwill impairment charge in the Core U.S. segment. Includes $22.5 million primarily related to the closure of Core U.S. stores, Acceptance Now locations, and Mexico stores, partially offset by a $2.2 million legal settlement. Includes revisions for immaterial correction of deferred tax error associated with our goodwill impairment reported in the fourth quarter of 2015. Includes a $34.7 million write-down of smartphones. (8) (9) (10) Includes a $1,170.0 million goodwill impairment charge in the Core U.S. segment. (11) Includes a $7.5 million loss on the sale of Core U.S. and Canada stores, a $7.2 million charge related to the closure of Core U.S. and Mexico stores, $2.8 million of charges for start-up and warehouse closure expenses related to our sourcing and distribution initiative, a $2.0 million corporate reduction charge and $1.1 million of losses for other store sales and closures. (12) Includes $6.0 million of discrete adjustments to income tax reserves. (13) Includes a $0.6 million reduction of revenue due to consumer refunds as a result of an operating system programming error. (14) Includes a $6.8 million credit due to the settlement of a lawsuit against the manufacturers of LCD screen displays. (15) Includes store closure charges of $5.1 million, asset impairment charges of $4.6 million, corporate reduction charges of $2.8 million, and a $1.8 million loss on the sale of stores in the Core U.S. segment. (16) Includes the effects of a $4.2 million financing expense related to the payment of debt origination costs and the write-off of unamortized financing costs. RENT-A-CENTER - Annual Report on Form 10-K 19 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Recent Developments Merger Termination. On December 18, 2018, we terminated the Merger Agreement with Vintage Capital. On December 21, 2018, Vintage Capital and its affiliates filed a lawsuit in the Delaware Court of Chancery against Rent-A-Center, asserting that the Merger Agreement remained in effect, and that Vintage Capital did not owe Rent-A-Center the $126.5 million reverse breakup fee associated with our termination of the Merger Agreement. On February 11th and 12th of this year, a trial was held in the Delaware Court of Chancery in connection with the lawsuit brought by Vintage Capital (and joined by B Riley) against Rent-A-Center. The Delaware Court of Chancery has not yet rendered its verdict in this case. Oral argument on the parties’ post-trial briefs is schedule for Monday, March 11th. Results of Operations The following discussion focuses on our results of operations and issues related to our liquidity and capital resources. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Overview During the twelve months ended December 31, 2018, we experienced a decline in revenues and gross profit driven primarily by reductions in our store base for the Core U.S. and Acceptance Now segments, partially offset by increases in same store sales. Operating profit, however, increased during the twelve months ended December 31, 2018, primarily due to cost savings initiatives, including reductions in overhead and supply chain, and lower rental merchandise losses. increased approximately Revenues in our Core U.S. segment $20.3 million for the twelve months ended December 31, 2018, primarily due to increases in same store sales, partially offset by a reduction in our Core U.S. store base. Gross profit as a percentage of revenue increased 0.5% primarily due to the intercompany book value adjustment of Acceptance Now returned product transferred to Core U.S. stores. Operating profit increased $61.6 million for the twelve months ended December 31, 2018, primarily due to decreases of $19.8 million and $37.5 million in labor and other store expenses, respectively. The Acceptance Now segment revenues decreased by approximately $75.4 million for the twelve months ended December 31, 2018, primarily due to kiosk closures at our former retailer partners Conn’s and hhgregg, partially offset by increases in same store sales. Gross profit as a percent of revenue decreased 3.1% primarily due to the intercompany book value adjustment of Acceptance Now returned product transferred to Core U.S. stores, and the new value proposition enhancements initiated in 2018 for Acceptance Now customers. Operating profit as a percent of revenue increased 6.9% primarily due to lower rental merchandise losses. Operating profit for the Mexico segment as a percentage of revenue increased by 5.9% for the twelve months ended December 31, 2018, driven primarily by lower rental merchandise losses. Cash flow from operations was $227.5 million for the twelve months ended December 31, 2018. We paid down debt by $139.3 million during the year, ending the period with $155.4 million of cash and cash equivalents. 20 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following table is a reference for the discussion that follows. (Dollar amounts in thousands) 2018 2017 2016 $ % $ % Year Ended December 31, 2018-2017 Change 2017-2016 Change Revenues Store Rentals and fees Merchandise sales Installment sales Other $ 2,244,860 $ 2,267,741 $ 2,500,053 $ (22,881) (1.0)% $ (232,312) 304,455 69,572 9,000 331,402 351,198 (26,947) 71,651 9,620 74,509 12,706 (2,079) (620) (8.1)% (2.9)% (6.4)% (2.0)% (19,796) (2,858) (3,086) (258,052) Total store revenues 2,627,887 2,680,414 2,938,466 (52,527) Franchise Merchandise sales Royalty income and fees 19,087 13,491 13,157 8,969 16,358 8,428 5,930 4,522 45.1% 50.4% (3,201) (19.6)% 541 Total revenues 2,660,465 2,702,540 2,963,252 (42,075) (1.6)% (260,712) Cost of revenues Store Cost of rentals and fees Cost of merchandise sold Cost of installment sales Total cost of store revenues Franchise cost of merchandise sold Total cost of revenues 621,860 308,912 23,326 954,098 18,199 972,297 625,358 322,628 23,622 664,845 323,727 24,285 (3,498) (13,716) (296) 971,608 1,012,857 (17,510) (0.6)% (4.3)% (1.3)% (1.8)% 12,390 15,346 5,809 46.9% 983,998 1,028,203 (11,701) (1.2)% (1.8)% (39,487) (1,099) (663) (41,249) (2,956) (44,205) 1,688,168 1,718,542 1,935,049 (30,374) (216,507) (11.2)% (9.3)% (5.6)% (3.8)% (24.3)% (8.8)% 6.4% (8.8)% (5.9)% (0.3)% (2.7)% (4.1)% (19.3)% (4.3)% Gross profit Operating expenses Store expenses Labor Other store expenses General and administrative Depreciation, amortization and write- down of intangibles Goodwill impairment charge Other charges 683,422 656,894 163,445 68,946 — 59,324 732,466 744,187 171,090 74,639 — 59,219 789,049 791,614 168,907 80,456 151,320 20,299 (49,044) (6.7)% (87,293) (11.7)% (7,645) (4.5)% (56,583) (47,427) 2,183 (7.2)% (6.0)% 1.3% (5,693) (7.6)% (5,817) (7.2)% — 105 —% 0.2% (151,320) (100.0) 38,920 191.7% Total operating expenses 1,632,031 1,781,601 2,001,645 (149,570) (8.4)% (220,044) (11.0)% Operating profit (loss) Write-off of debt issuance costs Interest, net Income (loss) before income taxes Income tax expense (benefit) 56,137 475 41,821 13,841 5,349 (63,059) (66,596) 119,196 189.0% 1,936 45,205 (110,200) (116,853) — 46,678 (1,461) (3,384) (113,274) 124,041 (8,079) 122,202 (75.5)% (7.5)% 112.6% 104.6% 3,537 1,936 (1,473) 3,074 5.3% 100.0% (3.2)% 2.7% (108,774) (1,346.4)% Net earnings (loss) $ 8,492 $ 6,653 $ (105,195)$ 1,839 27.6% $ 111,848 106.3% Comparison of the Years Ended December 31, 2018 and 2017 Store Revenue. Total store revenue decreased by $52.5 million, or 2.0%, to $2,627.9 million for the year ended December 31, 2018, from $2,680.4 million for 2017. This was primarily due to a decrease of approximately $75.4 million in the Acceptance Now segment, partially offset by an increase of $20.3 million in the Core U.S. segment, as discussed further in the segment performance section below. Same store revenue is reported on a constant currency basis and generally represents revenue earned in 2,575 locations that were operated by us for 13 months or more, excluding any store that receives a certain level of customer accounts from another store (acquisition or merger). Receiving stores will be eligible for inclusion in the same store sales base in the twenty-fourth full month following the account transfer. In addition, due to the severity of the hurricane impacts, we instituted a change to the same store sales store selection criteria to exclude stores in geographically impacted regions for 18 months. Same store revenues increased by $74.8 million, or 4.7%, to $1,653.4 million for the year ended December 31, 2018, as compared to $1,578.6 million in 2017. The increase in same store revenues was primarily attributable to an improvement in the Core U.S. segment, as discussed further in the segment performance section below. RENT-A-CENTER - Annual Report on Form 10-K 21 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2018 decreased by $3.5 million, or 0.6%, to $621.9 million, as compared to $625.4 million in 2017. This decrease in cost of rentals and fees was primarily attributable to a decrease of $8.1 million in the Core U.S. segment as a result of lower rentals and fees revenue, partially offset by an increase of $3.8 million in the Acceptance Now segment. Cost of rentals and fees expressed as a percentage of rentals and fees revenue increased to 27.7% for the year ended December 31, 2018 as compared to 27.6% in 2017. Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $13.7 million, or 4.3%, to $308.9 million for the year ended December 31, 2018, from $322.6 million in 2017, primarily attributable to a decrease of $18.8 million in the Acceptance Now segment, partially offset by an increase of $5.1 million in the Core U.S. segment. The gross margin percent of merchandise sales decreased to (1.5)% for the year ended December 31, 2018, from 2.6% in 2017. the year ended December 31, 2018, to Gross Profit. Gross profit decreased by $30.3 million, or 1.8%, $1,688.2 million for from $1,718.5 million in 2017, due primarily to a decrease of $60.4 million in the Acceptance Now segment, partially offset by an increase of $23.6 million and $4.6 million in the Core U.S. and Franchising in the segment respectively, as discussed further segments, performance section below. Gross profit as a percentage of total revenue decreased to 63.5% in 2018 compared to 63.6% in 2017. Store Labor. Store labor includes all salaries and wages paid to store- level employees and district managers’ salaries, together with payroll taxes and benefits. Store labor decreased by $49.1 million, or 6.7%, to $683.4 million for the year ended December 31, 2018, as compared to $732.5 million in 2017, primarily attributable to a decrease of $29.4 million and $19.8 million in the Acceptance Now and Core U.S. segments, respectively, driven by our cost savings initiatives and lower Core U.S. store base. Store labor expressed as a percentage of total store revenue was 26.0% for the year ended December 31, 2018, as compared to 27.3% in 2017. insurance, Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise, delivery, advertising, travel and other store-level operating expenses. selling, Other store expenses decreased by $87.3 million, or 11.7%, to $656.9 million for the year ended December 31, 2018, as compared to $744.2 million in 2017, primarily attributable to decreases of $51.6 million and $37.5 million in the Acceptance Now and Core U.S. segments, lower customer stolen merchandise losses for Acceptance Now and lower Core U.S. store respectively, as a result of base. Other store expenses expressed as a percentage of total store revenue decreased to 25.0% for the year ended December 31, 2018, from 27.8% in 2017. occupancy, administrative General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and to administrative expenses decreased by $7.7 million, or 4.5%, $163.4 million for the year ended December 31, 2018, as compared to $171.1 million in 2017. General and administrative expenses expressed as a percentage of total revenue decreased to 6.1% for the year ended December 31, 2018, compared to 6.3% in 2017. other and Other Charges. Other charges increased by $0.1 million, or 0.2%, to $59.3 million in 2018, as compared to $59.2 million in 2017. Other charges for the year ended December 31, 2018 primarily related to cost savings initiatives, including reductions in overhead and supply chain, incremental legal and advisory fees, Core U.S. store closures, and write- down of capitalized software assets. See Note L to the consolidated financial statements for additional detail regarding these other charges. Operating Profit (Loss). Operating profit increased $119.2 million, or 189.0%, to $56.1 million for the year ended December 31, 2018, as compared to operating loss of $63.1 million in 2017, primarily due to increases of $61.6 million and $45.3 million in the Core U.S. and Acceptance Now segments, respectively, as discussed further in the segment performance sections below. Operating profit (loss) expressed total revenue was 2.1% for the year ended as a percentage of December 31, 2018, as compared to (2.3)% for 2017. Excluding other charges, profit was $115.5 million or 4.3% of revenue or the year ended December 31, 2018, compared to $(3.8) million or (0.1)% of revenue for the comparable period of 2017. Income Tax Expense (Benefit). Income tax expense for the twelve months ended December 31, 2018 was $5.3 million, as compared to an income tax benefit of $116.9 million in 2017, primarily due to the impact of the Tax Cuts and Jobs Act of 2017 (“Tax Act”) on our deferred tax balances in the prior year. The effective tax rate was 38.6% for the twelve months ended December 31, 2018, compared to 106.0% in 2017. Excluding impacts from the Tax Act, the effective tax rate was 41.5% for the twelve months ended December 31, 2017. Net Earnings. Net earnings were $8.5 million for the year ended December 31, 2018 as compared to $6.7 million in 2017. Excluding impacts from other charges and the Tax Act, net earnings were $57.8 million for the year ended December 31, 2018 as compared to net loss of $28.7 million in 2017. Comparison of the Years Ended December 31, 2017 and 2016 Store Revenue. Total store revenue decreased by $258.1 million, or 8.8%, to $2,680.4 million for the year ended December 31, 2017, from $2,938.5 million for 2016. This was primarily due to a decrease of approximately $234.3 million in the Core U.S. segment, as discussed further in the segment performance section below. Same store revenue is reported on a constant currency basis and generally represents revenue earned in 3,376 locations that were operated by us for 13 months or more, excluding any store that receives a certain level of customer accounts from another store (acquisition or merger). Receiving stores will be eligible for inclusion in the same store sales base in the twenty-fourth full month following the account transfer. In addition, due to the severity of the hurricane impacts, we instituted a change to the same store sales store selection criteria to exclude stores in geographically impacted regions for 18 months. Same store revenues decreased by $99.2 million, or 5.4%, to $1,753.9 million for the year ended December 31, 2017, as compared to $1,853.1 million in 2016. The decrease in same store revenues was primarily attributable to a decline in the Core U.S. segment, as discussed further in the segment performance section below. Cost of Rentals and Fees. Cost of rentals and fees consists primarily of depreciation of rental merchandise. Cost of rentals and fees for the year ended December 31, 2017, decreased by $39.5 million, or 5.9%, to $625.4 million, as compared to $664.8 million in 2016. This decrease in cost of rentals and fees was primarily attributable to a decrease of $35.7 million in the Core U.S. segment as a result of lower rentals and fees revenue. Cost of rentals and fees expressed as a percentage of 22 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. rentals and fees revenue increased to 27.6% for the year ended December 31, 2017 as compared to 26.6% in 2016. Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at time of sale. Cost of merchandise sold decreased by $1.1 million, or 0.3%, to $322.6 million for the year ended December 31, 2017, from $323.7 million in 2016. The gross margin percent of merchandise sales decreased to 2.6% for the year ended December 31, 2017, from 7.8% in 2016. These decreases were primarily attributable to a decrease of $6.4 million in the Core U.S. segment, partially offset by an increase of $5.3 million in the Acceptance Now segment driven by a focused effort to encourage ownership and reduce returned product. the year ended December 31, 2017, Gross Profit. Gross profit decreased by $216.5 million, or 11.2%, to from $1,718.5 million for $1,935.0 million in 2016, due primarily to a decrease of $191.5 million in in the segment the Core U.S. segment, as discussed further performance section below. Gross profit as a percentage of total revenue decreased to 63.6% in 2017 compared to 65.3% in 2016. Store Labor. Store labor includes all salaries and wages paid to store- level employees and district managers’ salaries, together with payroll taxes and benefits. Store labor decreased by $56.6 million, or 7.2%, to $732.5 million for the year ended December 31, 2017, as compared to $789.0 million in 2016, primarily attributable to a decrease of $44.4 million and $10.7 million in the Core U.S. and Acceptance Now segments, respectively, primarily as a result of a lower Core U.S. store base and closure of Acceptance Now locations in the first half of 2017. Store labor expressed as a percentage of total store revenue increased to 27.3% for the year ended December 31, 2017, from 26.9% in 2016. insurance, Other Store Expenses. Other store expenses include occupancy, charge-offs due to customer stolen merchandise, delivery, advertising, travel and other store-level operating expenses. selling, Other store expenses decreased by $47.4 million, or 6.0%, to $744.2 million for the year ended December 31, 2017, as compared to $791.6 million in 2016, primarily attributable to a decrease of $64.0 million in the Core U.S. segment as a result of our rationalization of the Core U.S. store base, partially offset by an increase of $17.6 million in the Acceptance Now segment primarily, partially due to a one-time, non-cash, charge to write-off unreconciled invoices with certain retail partners, in addition to increased customer stolen merchandise. Other store expenses expressed as a percentage of total store revenue increased to 27.8% for the year ended December 31, 2017, from 26.9% in 2016. General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, payroll taxes and benefits, stock-based compensation, operating expenses, as well as salaries and labor costs for our regional directors, divisional vice presidents and executive vice presidents. General and administrative occupancy, other and administrative expenses increased by $2.2 million, or 1.3%, to $171.1 million for the year ended December 31, 2017, as compared to $168.9 million in 2016, primarily due to project related expenses, insurance expenses, legal and other professional fees. General and administrative expenses expressed as a percentage of total revenue increased to 6.3% for the year ended December 31, 2017, compared to 5.7% in 2016. Goodwill Impairment Charge. During 2016, we recognized a goodwill impairment charge of $151.3 million due to an impairment of the impairment charge is goodwill discussed further in Note F to the consolidated financial statements. in the Core U.S. segment. Goodwill Other Charges. Other charges increased by $38.9 million, or 191.7%, to $59.2 million in 2017, as compared to $20.3 million in 2016. Other charges for the year ended December 31, 2017 primarily included charges related to the closure of Acceptance Now locations, write- downs of capitalized software, incremental legal and advisory fees, damage caused by hurricanes, and reductions in our field support center, partially offset by legal settlements. Other charges for the year ended December 31, 2016 primarily included charges related to the closure of Core U.S. and Mexico stores, and Acceptance Now locations, partially offset by litigation settlements. See Note M to the consolidated financial statements for additional detail regarding these other charges. Operating Loss. Operating loss decreased $3.5 million, or 5.3%, to $63.1 million for the year ended December 31, 2017, as compared to $66.6 million in 2016, due to a decrease of $87.2 million in the Core U.S. segment, primarily related to the goodwill impairment charge recorded in 2016, partially offset by increases of $57.3 million in the Acceptance Now segment as discussed in the segment performance sections below. Operating loss expressed as a percentage of total revenue was 2.3% for the year ended December 31, 2017, as compared to 2.2% for 2016. Excluding the goodwill impairment and other charges operating results as a percentage of revenue would have been (0.1)% and 3.5% in 2017 and 2016, respectively, discussed further in the segment performance sections below. Income Tax Benefit. Income tax benefit for the twelve months ended December 31, 2017 was $116.9 million, as compared to $8.1 million in 2016. The effective tax rate was 106.0% for the twelve months ended December 31, 2017, compared to 7.1% in 2016. The increase in income tax benefit is primarily due to the impact of the Tax Act on our deferred tax balances. Excluding impacts from other charges, the Tax Act, and the goodwill impairment charge, the effective tax rate was 41.5% for the twelve months ended December 31, 2017, as compared to 29.8% in 2016. Net Earnings (Loss). Net earnings were $6.7 million for the year ended December 31, 2017 as compared to net loss of $105.2 million in 2016. Excluding impacts from other charges, the Tax Act, and the goodwill loss was $28.7 million for the year ended impairment charge, net December 31, 2017 as compared to net earnings of $40.9 million in 2016. RENT-A-CENTER - Annual Report on Form 10-K 23 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Segment Performance Core U.S. segment. (Dollar amounts in thousands) 2018 2017 2016 $ % $ % Year Ended December 31, 2018-2017 Change 2017-2016 Change Revenues Gross profit Operating profit (loss) Change in same store revenue Stores in same store revenue calculation $1,855,712 $1,835,422 $2,069,725 $20,290 1,299,809 1,276,212 1,467,679 147,787 86,196 (1,020) 23,597 61,591 1.1% 1.8% 71.5% 4.4% 1,904 $(234,303) (11.3)% (191,467) (13.0)% 87,216 8,550.6% (8.0)% 2,118 Revenues. The increase in revenue for the year ended December 31, 2018 was driven primarily by an increase in rentals and fees revenue of $26.1 million, as compared to 2017. This increase is primarily due to increases in same store sales, partially offset by decreases of $3.3 million and $2.1 million in merchandise sales and installment sales, respectively, primarily due to rationalization of our Core U.S. store base. Gross Profit. Gross profit increased in 2018 primarily due to the increase in rentals and fees revenue described above, and a decrease in cost of rentals and fees of $8.1 million, partially offset by an increase in cost of merchandise sold of $5.1 million as compared to 2017. Gross profit as a percentage of segment revenues increased to 70.0% in 2018 from 69.5% in 2017, primarily due to the intercompany book value adjustment for Acceptance Now returned product transferred to Core U.S. stores. Operating Profit. Operating profit as a percentage of segment revenues was 8.0% for 2018 compared to 4.7% for 2017, primarily due to decreases in other store expenses of $37.5 million and store labor of $19.8 million, partially offset by other charges and higher merchandise losses. Declines in store labor and other store expenses were driven primarily by lower store count, offset by the increase in other charges primarily related to one-time charges associated with store closures. Charge-offs in our Core U.S. rent-to-own stores due to customer stolen merchandise, expressed as a percentage of Core U.S. rent-to-own revenues, were approximately 3.3% for the year ended December 31, 2018, compared to 2.7% in 2017. Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Charge-offs in our Core U.S. rent-to-own stores due to other merchandise losses, expressed as a percentage of revenues, were approximately 1.6% for the year ended December 31, 2018, compared to 2.1% in 2017. Acceptance Now segment. (Dollar amounts in thousands) 2018 2017 2016 $ % $ % Year Ended December 31, 2018-2017 Change 2017-2016 Change Revenues Gross profit Operating profit Change in same store revenue Stores in same store revenue calculation $ 722,562 $ 797,987 $ 817,814 $ (75,425) (9.5)% $(19,827) 339,616 93,951 400,002 48,618 422,381 105,925 (60,386) (15.1)% 45,333 93.2% 5.9% 563 (22,379) (57,307) (2.4)% (5.3)% (54.1)% 5.2% 1,140 Revenues. The decrease in revenue for the year ended December 31, 2018 was driven primarily by store closures for hhgregg and Conn’s locations, partially offset by increases in same store sales. Gross Profit. Gross profit decreased for the year ended December 31, 2018 compared to 2017, primarily due to the decrease in revenue described above. Gross profit as a percentage of segment revenue decreased to 47.0% in 2018 as compared to 50.1% in 2017, primarily due to the intercompany book value adjustment of Acceptance Now returned product transferred to Core U.S. stores, and the new value proposition enhancements. Operating Profit. Operating profit increased by 93.2% compared to 2017, primarily due to decreases in labor and other store expenses driven by the closure of our collection centers, decreased rental merchandise losses, and a decrease in charges incurred for store closures in 2017. Charge-offs in our Acceptance Now locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 9.0% in 2018 as compared to 12.7% in 2017. Other merchandise losses include unrepairable merchandise and loss/ damage waiver claims. Charge-offs in our Acceptance Now locations due to other merchandise losses, expressed as a percentage of revenues, were approximately 0.6% and 1.3% in 2018 and 2017, respectively. Mexico segment. Year Ended December 31, 2018-2017 Change 2017-2016 Change (Dollar amounts in thousands) 2018 2017 2016 Revenues Gross profit Operating profit (loss) Change in same store revenue Stores in same store revenue calculation 24 RENT-A-CENTER - Annual Report on Form 10-K $ 49,613 $ 47,005 $ 50,927 $ 34,364 2,605 32,592 (260) 35,549 (2,449) $ 2,608 1,772 % 5.5% 5.4% 2,865 1,101.9% 8.5% 108 $ % $ (3,922) (2,957) 2,189 (7.7)% (8.3)% 89.4% (5.1)% 118 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Revenues. Revenues for 2018 were negatively impacted by exchange rate fluctuations of approximately $0.9 million, as compared to 2017. On a constant currency basis, revenues for the year ended December 31, 2018 increased approximately $3.5 million. Gross Profit. Gross profit for the year ended December 31, 2018 was negatively impacted by approximately $0.6 million due to exchange rate fluctuations as compared to 2017. On a constant currency basis, gross profit increased by approximately $2.4 million for the year ended December 31, 2018, compared to 2017. Gross profit as a percentage of segment revenues remained flat at 69.3% in 2018 and 2017. (Loss). Operating profit Operating Profit the year ended December 31, 2018 was minimally impacted by exchange rate fluctuations compared to 2017. Operating profit as a percentage of segment revenues increased to 5.3% in 2018, compared to a loss of 0.6% in 2017. for Franchising segment. (Dollar amounts in thousands) 2018 2017 2016 $ % $ % Year Ended December 31, 2018-2017 Change 2017-2016 Change Revenues Gross profit Operating profit $ 32,578 $ 22,126 $24,786 $ 10,452 47.2% $ (2,660) (10.7)% 14,379 4,385 9,736 5,081 9,440 5,650 4,643 47.7% (696) (13.7)% 296 3.1% (569) (10.1)% Revenues. Revenues increased for the year ended December 31, 2018, compared to 2017, primarily due to an increase in merchandise sales driven by higher store count and a change in accounting for franchise advertising fees as a result of the adoption of ASC 606. During the year ended December 31, 2018 franchise advertising fees are presented on a gross basis, as revenue, in the consolidated statement of operations, rather than net of operating expenses in the consolidated statement of operations, as they are presented in 2017. Gross Profit. Gross profit as a percentage of segment revenues increased to 44.1% in 2018 from 44.0% in 2017, primarily due to the change in accounting for franchise advertising fees described above. Operating Profit. Operating profit as a percentage of segment revenues decreased to13.5% in 2018 from 23.0% for 2017. Quarterly Results The following table contains certain unaudited historical financial information for the quarters indicated: (In thousands, except per share data) Year Ended December 31, 2018 Revenues Gross profit Operating (loss) profit Net (loss) earnings Basic (loss) earnings per common share Diluted (loss) earnings per common share (In thousands, except per share data) Year Ended December 31, 2017 Revenues Gross profit Operating profit (loss) Net (loss) earnings Basic (loss) earnings per common share Diluted (loss) earnings per common share Cash dividends declared per common share (As a percentage of revenues) Year Ended December 31, 2018 Revenues Gross profit Operating (loss) profit Net (loss) earnings $ $ $ $ $ $ $ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 698,043 $ 655,730 $ 644,942 $ 436,978 (10,270) (19,843) (0.37) $ (0.37) $ 423,886 27,151 13,753 407,740 25,632 12,918 0.26 $ 0.25 $ 0.24 $ 0.24 $ 661,750 419,564 13,624 1,664 0.03 0.03 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 741,986 $ 677,635 $ 643,965 $ 462,663 1,152 (6,679) (0.13) $ (0.13) $ 0.08 $ 432,533 (873) (8,893) (0.17) $ (0.17) $ 0.08 $ 412,465 (8,445) (12,599) (0.24) $ (0.24) $ — $ 638,954 410,881 (54,893) 34,824 0.65 0.65 — 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 100.0% 62.6% (1.5)% (2.8)% 100.0% 64.6% 4.1% 2.1% 100.0% 63.2% 4.0% 2.0% 100.0% 63.4% 2.1% 0.3% RENT-A-CENTER - Annual Report on Form 10-K 25 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (As a percentage of revenues) Year Ended December 31, 2017 Revenues Gross profit Operating profit (loss) Net (loss) earnings 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 100.0% 62.4% 0.2% (0.9)% 100.0% 63.8% (0.1)% (1.3)% 100.0% 64.1% (1.3)% (2.0)% 100.0% 64.3% (8.6)% 5.5% Liquidity and Capital Resources Overview. For the year ended December 31, 2018, we generated $227.5 million in operating cash flow. We paid down debt by $139.3 million from cash generated from operations, used cash in the amount of $28.0 million for capital expenditures, and received proceeds from the sale of property assets of $25.3 million, ending the year with $155.4 million of cash and cash equivalents. Analysis of Cash Flow. Cash provided by operating activities increased by $117.0 million to $227.5 million in 2018 from $110.5 million in 2017. This was primarily attributable to the improvement in net earnings during the twelve months ended December 31, 2018 compared to 2017, income tax refund of approximately receipt of our 2017 federal $35.2 million, and other net changes in operating assets and liabilities. Cash used in investing activities decreased approximately $58.6 million to $4.7 million in 2018 from $63.3 million in 2017, due primarily to a decrease in capital expenditures of approximately $37.5 million and an increase in proceeds from the sale of property assets of approximately $20.7 million. Cash used in financing activities increased by $69.8 million to $140.3 million in 2018 from $70.5 million in 2017, primarily driven by our net reduction in debt of $139.3 million in 2018, as compared to a net decrease in debt of $52.5 million in 2017, offset by dividend payments of $12.8 million and higher debt issuance payments of $3.2 million during the twelve months ended December 31, 2017. capital requirements purchases. Other Liquidity Requirements. Our primary liquidity requirements are for rental include merchandise expenditures for property assets and debt service. Our primary sources of liquidity have been cash provided by operations. Should we require additional facilities, funding sources, we maintain revolving credit including a $12.5 million line of credit at INTRUST Bank, N.A. We utilize our Revolving Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw Merchandise Losses. Merchandise losses consist of the following: (In thousands) Customer stolen merchandise Other merchandise losses(1) Total merchandise losses funds under the Revolving Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities. We believe the cash flow generated from operations, together with amounts available under our Credit Agreement for the remainder of its term, will be sufficient to fund our liquidity requirements during the next 12 months. While our operating cash flow has been strong and we expect this strength to continue, our liquidity could be negatively impacted if we do not remain as profitable as we expect. At February 19, 2019, we had $181.1 million in cash on hand, and $95.9 million available under our Revolving Facility at December 31, 2018. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable. Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2017 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing. The Protecting Americans from Tax Hikes Act of 2015 (“PATH”) extended the 50% bonus depreciation to 2015 and through September 26, 2017, when it was updated by the Tax Act. The Tax Act allows 100% bonus depreciation for certain property placed in service between September 27, 2017 and December 31, 2022, at which point it will begin to phase out. The bonus depreciation provided by the Tax Act resulted in an estimated benefit of $174 million for us in 2018. We estimate the remaining tax deferral associated with is approximately $207 million at bonus depreciation from this act December 31, 2018, of which approximately 78%, or $161 million, will reverse in 2019, and the majority of the remainder will reverse between 2020 and 2021. Year Ended December 31, 2018 2017 $ $ 136,705 $ 161,912 $ 33,219 47,596 169,924 $ 209,508 $ 2016 169,021 49,731 218,752 (1) Other merchandise losses include unrepairable and missing merchandise, and loss/damage waiver claims. Capital Expenditures. We make capital expenditures in order to maintain our existing operations as well as for new capital assets in new and acquired stores, and investment in information technology. We spent $28.0 million, $65.5 million and $61.1 million on capital expenditures in the years 2018, 2017 and 2016, respectively. 26 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Acquisitions and New Location Openings. See Note F to the consolidated financial statements for information about cash used to acquire locations and accounts. The table below summarizes the location activity for the years ended December 31, 2018, 2017 and 2016. Locations at beginning of period New location openings Acquired locations remaining open Conversions Closed locations Merged with existing locations Sold or closed with no surviving location Locations at end of period Acquired locations closed and accounts merged with existing locations Total approximate purchase price (in millions) $ Locations at beginning of period New location openings Acquired locations remaining open Conversions Closed locations Merged with existing locations Sold or closed with no surviving location Locations at end of period Acquired locations closed and accounts merged with existing locations Total approximate purchase price (in millions) $ Locations at beginning of period New location openings Acquired locations remaining open Conversions Closed locations Merged with existing locations Sold or closed with no surviving location Locations at end of period Acquired locations closed and accounts merged with existing locations Total approximate purchase price (in millions) $ Core U.S. 2,381 Year Ended December 31, 2018 Acceptance Now Staffed Acceptance Now Direct Mexico Franchising 1,106 122 — (3) (119) — 1,106 — — $ 125 7 — 3 (39) — 96 — $ — $ 131 — — — (8) (1) 122 — — 225 3 71 — — (18) 281 — $ — $ Year Ended December 31, 2017 Acceptance Now Staffed Acceptance Now Direct Mexico Franchising 1,431 222 — (63) (483) (1) 1,106 — — $ 478 24 — 63 (439) (1) 125 — $ — $ 130 1 — — — — 131 — — 229 1 4 — — (9) 225 — $ — $ Year Ended December 31, 2016 Acceptance Now Staffed Acceptance Now Direct Mexico Franchising 1,444 171 — 1 (185) — 1,431 — — $ 532 67 — (2) — (119) 478 — $ — $ 143 1 — — (4) (10) 130 — — 227 2 5 — (1) (4) 229 — $ — $ Total 3,968 132 72 — (303) (106) 3,763 6 2.0 Total 4,731 248 4 — (973) (42) 3,968 8 2.5 Total 5,018 241 5 (1) (375) (157) 4,731 3 2.3 — 1 — (137) (87) 2,158 6 2.0 — — — (51) (31) 2,381 8 2.5 — — — (185) (24) 2,463 3 2.3 Core U.S. 2,463 Core U.S. 2,672 Senior Debt. As discussed in Note I to the consolidated financial statements, the Credit Agreement consists of a $200.0 million Revolving Facility. We may use the full amount of the Revolving Facility for the issuance of letters of credit, of which $92.0 million had been so utilized as of February 19, 2019. The Revolving Facility has a scheduled maturity of December 31, 2019. Senior Notes. See descriptions of the senior notes in Note J to the consolidated financial statements. Store Leases. We lease space for all of our Core U.S. and Mexico stores and certain support facilities under operating leases expiring at various times through 2024. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas. RENT-A-CENTER - Annual Report on Form 10-K 27 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Contractual Cash Commitments. The table below summarizes debt, lease and other minimum cash obligations outstanding as of December 31, 2018: (In thousands) 6.625% Senior Notes(1) 4.75% Senior Notes(2) Operating Leases Payments Due by Period Total 331,528 279,688 408,649 2019 2020-2021 2022-2023 Thereafter 19,394 11,875 145,345 312,134 267,813 197,147 — — — — 63,877 2,280 Total contractual cash obligations(3) $ 1,019,865 $ 176,614 $ 777,094 $ 63,877 $ 2,280 (1) (2) Includes interest payments of $9.7 million on each May 15 and November 15 of each year. Includes interest payments of $5.9 million on each May 1 and November 1 of each year. (3) As of December 31, 2018, we have recorded $38.2 million in uncertain tax positions. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table. Seasonality. Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year, primarily related to the receipt of federal income tax refunds by our customers. Generally, our customers will more frequently exercise the early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future. Critical Accounting Estimates, Uncertainties or Assessments in Our Financial Statements The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical. If we make changes to our reserves in accordance with the policies described below, our earnings would be impacted. Increases to our reductions to our reserves would reduce earnings and, similarly, reserves would increase our earnings. A pre-tax change of approximately $0.7 million in our estimates would result in a corresponding $0.01 change in our diluted earnings per common share. Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers’ compensation, general liability, vehicle liability and health insurance programs. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions. We continually institute procedures to manage our loss exposure and increases in health care costs associated with our insurance claims through our risk management function, including a transitional duty program for injured workers, ongoing safety and accident prevention training, and various other programs designed to minimize losses and improve our loss experience in our store locations. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, company-specific development factors, general industry loss development factors, and third-party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we evaluate the adequacy of our reserves by comparing amounts reserved on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third-party claim administrator loss estimates, and make adjustments to our reserves as needed. As of December 31, 2018, the amount reserved for losses within our self-insured retentions with respect to workers’ compensation, general liability and vehicle liability insurance was $101.6 million, as compared to $118.0 million at December 31, 2017. However, if any of the factors that contribute to the overall cost of insurance claims were to change, the actual amount incurred for our self-insurance liabilities could be more or less than the amounts currently reserved. judgment Income Taxes. Our annual tax rate is affected by many factors, including the mix of our earnings, legislation and acquisitions, and is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax laws are complex and subject to differing interpretations between the taxpayer and the taxing authorities. Significant is required in determining our tax expense, evaluating our tax positions and evaluating uncertainties. Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. A number of years may elapse before a particular 28 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Valuation of Goodwill. We perform an assessment of goodwill for impairment at the reporting unit level annually on October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our market capitalization, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results. We use a two-step approach to assess goodwill impairment. If the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, we perform a second analysis to measure the fair value of all assets and liabilities within the reporting unit, and if the carrying value of goodwill exceeds its implied fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of goodwill and the implied fair value, which is calculated as if the reporting unit had been acquired and accounted for as a business combination. As an alternative to this annual impairment testing, the Company may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying value of a reporting unit’s net assets exceeds the reporting unit’s fair value. Our reporting units are our reportable operating segments identified in Note R to the consolidated financial statements. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable inherently uncertain, and actual results may differ from those but estimates. These estimates and assumptions include, but are not limited to, future cash flows based on revenue growth rates and operating margins, and future economic and market conditions approximated by a discount rate derived from our weighted average cost of capital. Factors that could affect our ability to achieve the expected growth rates or operating margins include, but are not limited to, the general strength of the economy and other economic conditions that affect consumer preferences and spending and factors that affect the disposable income of our current and potential customers. Factors that could affect our weighted average cost of capital include changes in interest rates and changes in our effective tax rate. During the period from our 2017 goodwill impairment assessment through the third quarter 2018, we periodically analyzed whether any indicators of these periodic impairment had occurred. As part of analyses, we compared estimated fair value of the company, as determined based on the consolidated stock price, to its net book value. As the estimated fair value of the company was higher than its net book value during each of these periods, no additional testing was deemed necessary. We completed a qualitative assessment for impairment of goodwill as of October 1, 2018, concluding it was not more likely than not that the carrying value of our reporting unit’s net assets exceeded the reporting unit’s fair value. At December 31, 2018, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was $1.5 million and $55.3 million, respectively. At December 31, 2017 the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was $1.3 million and $55.3 million, respectively. Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe our consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of our company as of, and for, the periods presented in this Annual Report on Form 10-K. However, we do not suggest that other general risk factors, such as those discussed elsewhere in this report as well as changes in our growth objectives or performance of new or acquired locations, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods. Effect of New Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which replaces existing accounting literature relating to the classification of, and accounting for, leases. Under ASU 2016-02, a company must recognize for all leases (with the exception of leases with terms less than 12 months) a liability representing a lessee’s obligation to make lease payments arising from a lease, and a right-of-use asset representing the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged, with certain improvements to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Adoption under ASU 2016-02 requires the use of a modified retrospective transition method to measure leases at the beginning of the earliest period presented in the consolidated financial statements. In July 2018, the FASB issued ASU 2018-11, allowing companies to apply a transition method for adoption of the new standard as of the adoption date, with recognition of any cumulative-effects as adjustments to the opening balance of retained earnings in the period of adoption. The adoption of the new lease standard and all related ASU’s is required for us beginning January 1, 2019. We will elect the transition method under ASU 2018-11 upon adoption of the new standard. The company’s rent-to-own agreements which comprise the majority of our annual revenue will fall within the scope of ASU 2016-02 under lessor accounting, however, we have determined that adoption of the new standard will not significantly affect the timing of recognition or presentation of revenue for our rental contracts. As a lessee, the new standard will also affect a substantial portion of our real estate, vehicle, and other equipment lease contracts. Upon adoption we will recognize a right-to-use asset and lease liability for the majority of these operating lease contracts within the consolidated balance sheet. We also expect to be affected by the requirement under the new standard to determine whether impairment indicators exist for the right-of-use asset at the asset or asset group level. If impairment indicators exist, a recoverability test is performed to determine whether an impairment loss exists. In accordance with the transition guidance for the new standard we are required to determine if an impairment loss exists immediately prior to the date of adoption. We are in the process of finalizing our impairment assessment for our Product Service Center facilities and Core U.S. stores previously identified for closure in 2019. The determination of any impairment losses as part of this assessment will be recorded as a cumulative adjustment to retained earnings as of the date of adoption. Otherwise we do not expect the impact of adoption to significantly affect our consolidated statements of operations or cash flows. We plan to elect a package of optional practical expedients in our adoption of the new standard, including the option to retain the current classification for leases entered into prior to the date of adoption; the RENT-A-CENTER - Annual Report on Form 10-K 29 PART II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. option not to reassess initial direct costs for capitalization for leases entered into prior to the date of adoption; and the option not to separate lease and non-lease components for our rent-to-own agreements as a lessor, and our real estate, fleet, and certain equipment leases as a lessee. In conjunction with the adoption of the new lease accounting standard, we are in the process of implementing a new back-office lease administration and accounting system to support the new accounting and disclosure requirements as a lessee. In addition, we are also in the finalizing changes to our existing accounting policies, process of processes, and internal controls to ensure compliance with the new standard following adoption; as well as finalizing the impacts to our consolidated balance sheet upon the date of adoption for our operating leases, including development of the incremental borrowing rate that will be used to calculate the present value of our lease liability. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the hypothetical purchase price allocation and instead using the difference between the carrying amount and the fair value of the reporting unit. The adoption of ASU 2017-04 will be required for us on a prospective basis beginning January 1, 2020, with early adoption permitted. We are currently in the process of determining our adoption date and what impact the adoption of this ASU will have on our financial statements. In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a company to reclassify to retained earnings the disproportionate income tax effects of the Tax Act on items with accumulated other comprehensive income that the FASB refers to as having been stranded in accumulated other comprehensive income. The adoption of ASU 2018-02 will be required for us beginning January 1, 2019, with early adoption permitted. We do not intend to exercise the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”) (SEC Update), which amends paragraphs in ASC 740, Income Taxes, to reflect SAB 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Act in the period of enactment. The Tax Act, enacted on December 22, 2017 significantly changed existing U.S. tax law and includes numerous provisions that affect our business, such as reducing the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018 and bonus depreciation that allows for full expensing of qualified property. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we made reasonable estimates of the effects and recorded provisional amounts. We recognized an income tax benefit of $76.5 million in the year ended December 31, 2017 associated with the revaluation of our net deferred tax liability. Our provisional estimate of the one-time transition tax resulted in $0.7 million additional tax expense. We also recorded a federal provisional benefit of $9.7 million based on our intent to fully expense all qualifying expenditures incurred during 2017. In 2018, we finalized our analysis over the one-year measurement period that ended on December 22, 2018, resulting in an immaterial income tax benefit recorded in our consolidated statement of operations. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements in ASC 820, to improve the effectiveness of the fair value measurement disclosures. The adoption of ASU 2018-13 will be required for us beginning January 1, 2020, with early adoption permitted. We are currently in the process of determining our adoption date and what impact the adoption of this ASU will have on our financial statements. - In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill Internal-Use Software (Subtopic 350-40); Customer’s and Other Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement, which requires implementation costs incurred by customers in cloud computing arrangements (CCAs) to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing agreement under the internal-use software guidance in ASC 350-40. The adoption of ASU 2018-15 will be required for us beginning January 1, 2020, with early adoption permitted. We are currently in the process of determining our adoption date and what impact the adoption of this ASU will have on our financial statements. From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption. 30 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Interest Rate Sensitivity As of December 31, 2018, we had $292.7 million in senior notes outstanding at a fixed interest rate of 6.625% and $250.0 million in senior notes outstanding at a fixed interest rate of 4.75%. The fair value of the 6.625% senior notes, based on the closing price at December 31, 2018, was $285.5 million. The fair value of the 4.75% senior notes, based on the closing price at December 31, 2018, was $239.1 million. Market Risk Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by our senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. As a result of such assessment, we may enter into swap contracts or other interest rate protection agreements from time to time to mitigate this risk. Interest Rate Risk Interest rates on borrowings under our Credit Agreement are variable, indexed to prime or Eurodollar rates that expose us to the risk of increased interest costs if interest rates rise. As of December 31, 2018, we did not have any outstanding borrowings under our Revolving Facility. Foreign Currency Translation We are exposed to market risk from foreign exchange rate fluctuations of the Mexican peso to the U.S. dollar as the financial position and operating results of our stores in Mexico are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity. RENT-A-CENTER - Annual Report on Form 10-K 31 PART II Item 8. Financial Statements and Supplementary Data. Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Rent-A-Center, Inc. and Subsidiaries Page Reports of Independent Registered Public Accounting Firm ............................................................... 33 Management’s Annual Report on Internal Control over Financial Reporting Consolidated Financial Statements ....................................................................................................................................... 35 Consolidated Statements of Operations........................................................................................... 36 Consolidated Statements of Comprehensive Income (Loss) ........................................................... 37 Consolidated Balance Sheets .......................................................................................................... 37 Consolidated Statements of Stockholders’ Equity............................................................................ 38 Consolidated Statements of Cash Flows.......................................................................................... 39 Notes to Consolidated Financial Statements ....................................................................................... 40 32 RENT-A-CENTER - Annual Report on Form 10-K PART II Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Rent-A-Center, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Rent-A-Center, Inc. and subsidiaries (the Company) as of December 31, the related consolidated statements of operations, 2018 and 2017, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, the consolidated financial and the related notes (collectively, the consolidated financial statements statements). the present Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. in all material respects, the financial position of In our opinion, fairly, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. issued by (2013) Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those /s/ KPMG LLP We have served as the Company’s auditor since 2013. Dallas, Texas March 1, 2019 RENT-A-CENTER - Annual Report on Form 10-K 33 PART II Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Rent-A-Center, Inc.: Opinion on Internal Control over Financial Reporting We have audited Rent-A-Center, Inc.’s and subsidiaries (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2019, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance federal securities laws and the applicable rules and with the U.S. regulations of the Securities and Exchange Commission and the PCAOB. in accordance with the standards of We conducted our audit the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. limitations, its inherent internal control over Because of financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Dallas, Texas March 1, 2019 reporting and the preparation of A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial statements for financial external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable in reasonable detail, accurately and fairly reflect 34 RENT-A-CENTER - Annual Report on Form 10-K PART II Management’s Annual Report on Internal Control over Financial Reporting MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to management and the Company’s Board of reporting and the Directors regarding the reliability of preparation of financial statements for external purposes in accordance with generally accepted accounting principles. financial financial All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this assessment, management has concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria. reporting and the preparation of financial KPMG LLP, the Company’s independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. RENT-A-CENTER - Annual Report on Form 10-K 35 PART II Consolidated Financial Statements RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2018 2017 2016 $ 2,244,860 $ 2,267,741 $ 2,500,053 304,455 69,572 9,000 331,402 71,651 9,620 351,198 74,509 12,706 2,627,887 2,680,414 2,938,466 19,087 13,491 13,157 8,969 16,358 8,428 2,660,465 2,702,540 2,963,252 621,860 308,912 23,326 954,098 18,199 972,297 625,358 322,628 23,622 971,608 12,390 983,998 1,688,168 1,718,542 683,422 656,894 163,445 68,946 — 59,324 732,466 744,187 171,090 74,639 — 59,219 664,845 323,727 24,285 1,012,857 15,346 1,028,203 1,935,049 789,049 791,614 168,907 80,456 151,320 20,299 1,632,031 1,781,601 2,001,645 56,137 475 42,968 (1,147) 13,841 5,349 (63,059) 1,936 45,996 (791) (110,200) (116,853) (66,596) — 47,181 (503) (113,274) (8,079) $ $ $ $ 8,492 $ 6,653 $ (105,195) 0.16 $ 0.16 $ — $ 0.12 $ 0.12 $ 0.16 $ (1.98) (1.98) 0.32 (In thousands, except per share data) Revenues Store Rentals and fees Merchandise sales Installment sales Other Total store revenues Franchise Merchandise sales Royalty income and fees Total revenues Cost of revenues Store Cost of rentals and fees Cost of merchandise sold Cost of installment sales Total cost of store revenues Franchise cost of merchandise sold Total cost of revenues Gross profit Operating expenses Store expenses Labor Other store expenses General and administrative expenses Depreciation, amortization and write-down of intangibles Goodwill impairment charge Other charges Total operating expenses Operating profit (loss) Write-off of debt issuance costs Interest expense Interest income Earnings (loss) before income taxes Income tax expense (benefit) Net earnings (loss) Basic earnings (loss) per common share Diluted earnings (loss) per common share Cash dividends declared per common share See accompanying notes to consolidated financial statements. 36 RENT-A-CENTER - Annual Report on Form 10-K PART II Consolidated Financial Statements RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Net earnings (loss) Other comprehensive income (loss): Foreign currency translation adjustments, net of tax of ($73), $2,822, and ($2,794) for 2018, 2017 and 2016, respectively Total other comprehensive income (loss) Comprehensive income (loss) See accompanying notes to consolidated financial statements. Year Ended December 31, 2018 2017 2016 $ 8,492 $ 6,653 $ (105,195) (274) (274) 5,241 5,241 (5,188) (5,188) $ 8,218 $ 11,894 $ (110,383) RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and par value data) ASSETS Cash and cash equivalents Receivables, net of allowance for doubtful accounts of $4,883 and $4,167 in 2018 and 2017, respectively Prepaid expenses and other assets Rental merchandise, net On rent Held for rent Merchandise held for installment sale Property assets, net of accumulated depreciation of $551,750 and $525,673 in 2018 and 2017, respectively Deferred tax asset Goodwill Other intangible assets, net Total assets LIABILITIES Accounts payable — trade Accrued liabilities Deferred tax liability Senior debt, net Senior notes, net Total liabilities STOCKHOLDERS’ EQUITY Common stock, $.01 par value; 250,000,000 shares authorized; 109,909,504 and 109,681,559 shares issued in 2018 and 2017, respectively Additional paid-in capital Retained earnings Treasury stock at cost, 56,369,752 shares in 2018 and 2017 Accumulated other comprehensive loss Total stockholders’ equity December 31, 2018 2017 $ 155,391 $ 72,968 69,645 51,352 683,808 123,662 3,834 226,323 25,558 56,845 499 69,823 64,577 701,803 167,188 4,025 282,901 — 56,614 882 $ $ 1,396,917 $ 1,420,781 113,838 $ 337,459 119,061 — 540,042 1,110,400 1,099 838,436 805,924 90,352 298,018 87,081 134,125 538,762 1,148,338 1,097 831,271 798,743 (1,347,677) (1,347,677) (11,265) 286,517 (10,991) 272,443 Total liabilities and stockholders’ equity $ 1,396,917 $ 1,420,781 See accompanying notes to consolidated financial statements. RENT-A-CENTER - Annual Report on Form 10-K 37 PART II Consolidated Financial Statements RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balance at January 1, 2016 109,442 $ 1,094 $ 818,339 $ 922,878 $ (1,347,677) $ (11,044) $ 383,590 Net loss Other comprehensive loss Vesting of restricted share units Shares withheld for employee taxes on awards vested & exercised Stock-based compensation Dividends declared — — 77 — — — — — 1 — — — — (105,195) — (1) (440) 9,209 — — — — — (17,043) — — — — — — — (105,195) (5,188) (5,188) — — — — — (440) 9,209 (17,043) Balance at December 31, 2016 109,519 1,095 827,107 800,640 (1,347,677) (16,232) 264,933 Net earnings Other comprehensive income Exercise of stock options Vesting of restricted share units Stock-based compensation Dividends declared — — 27 136 — — — — — 2 — — — — 270 (2) 3,896 — 6,653 — — — — (8,550) — — — — — — — 5,241 — — — — 6,653 5,241 270 — 3,896 (8,550) Balance at December 31, 2017 109,682 1,097 831,271 798,743 (1,347,677) (10,991) 272,443 Net earnings Other comprehensive income Exercise of stock options Vesting of restricted share units Shares withheld for employee taxes on awards vested & exercised Stock-based compensation ASC 606 adoption — — 138 90 — — — — — 1 1 — — — — — 1,399 (1) (194) 5,961 8,492 — — — — — — (1,311) — — — — — — — — (274) — — — — — 8,492 (274) 1,400 — (194) 5,961 (1,311) Balance at December 31, 2018 109,910 1,099 838,436 805,924 (1,347,677) (11,265) 286,517 See accompanying notes to consolidated financial statements. 38 RENT-A-CENTER - Annual Report on Form 10-K PART II Consolidated Financial Statements RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities Year Ended December 31, 2018 2017 2016 Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by operating $ 8,492 $ 6,653 $ (105,195) activities Depreciation of rental merchandise Bad debt expense Stock-based compensation expense Depreciation of property assets Loss on sale or disposal of property assets Goodwill impairment charge Amortization of impairment of intangibles Amortization of financing fees Write-off of debt financing fees Deferred income taxes Changes in operating assets and liabilities, net of effects of acquisitions Rental merchandise Receivables Prepaid expenses and other assets Accounts payable — trade Accrued liabilities Net cash provided by operating activities Cash flows from investing activities Purchase of property assets Proceeds from sale of stores Acquisitions of businesses Net cash used in investing activities Cash flows from financing activities Exercise of stock options Shares withheld for payment of employee tax withholdings Debt issuance costs Proceeds from debt Repayments of debt Dividends paid Net cash used in financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information: Cash paid during the year for: 616,640 14,610 5,961 68,275 7,388 — 671 5,486 475 6,816 (569,717) (14,431) 13,105 23,486 40,248 227,505 (27,962) 25,317 (2,048) (4,693) 1,401 (317) (2,098) 27,060 (166,358) — (140,312) (77) 82,423 72,968 618,390 15,702 3,896 73,685 15,795 — 4,908 4,667 1,936 (86,063) (487,130) (15,741) (9,622) (17,886) (18,657) 110,533 (65,460) 4,638 (2,525) (63,347) 270 (225) (5,258) 347,635 (400,151) (12,811) (70,540) 926 (22,428) 95,396 $ 155,391 $ 72,968 $ 657,090 15,449 9,209 77,361 3,718 151,320 2,176 2,217 — (32,994) (523,697) (15,914) 104,379 11,883 (2,929) 354,073 (61,143) 5,262 (3,098) (58,979) — (338) — 52,245 (286,065) (25,554) (259,712) (349) 35,033 60,363 95,396 Interest Income taxes (excludes $47,837, $7,321, and $84,884 of income taxes refunded in 2018, 2017 and 2016, respectively) $ $ 37,530 $ 41,339 $ 44,469 2,227 $ 1,983 $ 18,536 See accompanying notes to consolidated financial statements. RENT-A-CENTER - Annual Report on Form 10-K 39 PART II Notes to Consolidated Financial Statements RENT-A-CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A — Nature of Operations and Summary of Accounting Policies A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: Principles of Consolidation and Nature of Operations These financial statements include the accounts of Rent-A-Center, Inc. and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context indicates otherwise, references to “Rent-A-Center” refer only to Rent-A-Center, Inc., the parent, and references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center and any or all of its direct and indirect subsidiaries. We report four operating segments: Core U.S., Acceptance Now, Mexico and Franchising. Our Core U.S. segment consists of company-owned rent-to-own stores in the United States and Puerto Rico that lease household durable goods to customers on a rent-to-own basis. We also offer merchandise on an installment sales basis in certain of our stores under the names “Get It Now” and “Home Choice.” At December 31, 2018, we operated 2,158 company-owned stores nationwide and in Puerto Rico, including 44 retail installment sales stores. Our Acceptance Now segment generally offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks located within such retailers’ locations. At December 31, 2018, we operated 1,106 Acceptance Now Staffed locations and 96 Acceptance Now Direct locations. Our Mexico segment consists of our company-owned rent-to-own stores in Mexico that lease household durable goods to customers on a rent-to-own basis. At December 31, 2018, we operated 122 stores in Mexico. Rent-A-Center Franchising International, Inc., an indirect wholly-owned subsidiary of Rent-A-Center, is a franchisor of rent-to-own stores. At December 31, 2018, Franchising had 281 franchised stores operating in 32 states. Our Franchising segment’s primary source of revenue is the sale of rental merchandise to its franchisees, who in turn offer the merchandise to the general public for rent or purchase under a rent-to-own transaction. The balance of our Franchising segment’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues and upfront fees charged to new franchisees. Rental Merchandise Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation for merchandise is generally provided using the income forecasting method, which is intended to match as closely as practicable the recognition of depreciation expense with the consumption of the rental merchandise, and assumes no salvage value. The consumption of rental merchandise occurs during periods of rental and directly coincides with the receipt of rental revenue over the rental purchase agreement period. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. We depreciate merchandise (including computers and tablets) that is held for rent for at least 180 consecutive days using to exceed 18 the straight-line method over a period generally not months. Beginning in 2016, smartphones are depreciated over an 18-month straight-line basis beginning with the earlier of on rent or 90 consecutive days on held for rent. Rental merchandise which is damaged and inoperable is expensed If a customer does not return the when such impairment occurs. merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90th day following the time the account became past due in the Core U.S. and Mexico segments, and on or before the 150th day in the Acceptance Now segment. We maintain a reserve for these expected expenses. In addition, any minor repairs made to rental merchandise are expensed at the time of the repair. Cash Equivalents three months or Cash equivalents include all highly liquid investments with an original maturity of less. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts. Revenues Merchandise is rented to customers pursuant to rental purchase agreements which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term and merchandise sales revenue is recognized when the customer exercises the purchase option and pays the cash price due. Cash received prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue is accrued for uncollected amounts due based on historical collection experience. However, the rental purchase the total amount of agreement is not accrued because the customer can terminate the rental agreement at any time and we cannot enforce collection for non-payment of future rents. Revenues from the sale of merchandise in our retail installment stores are recognized when the installment note is signed, the customer has taken possession of the merchandise and collectability is reasonably assured. Revenues from the sale of rental merchandise are recognized upon the merchandise to the franchisee. Franchise royalty shipment of 40 RENT-A-CENTER - Annual Report on Form 10-K income and fee revenue is recognized upon completion of substantially all services and satisfaction of all material conditions required under the terms of franchise fees charged to franchisees for new or converted franchise stores are recognized on a straight-line basis over the term of the franchise agreement. the franchise agreement. Initial Receivables and Allowance for Doubtful Accounts The installment notes receivable associated with the sale of merchandise at our Get It Now and Home Choice stores generally consists of the sales price of the merchandise purchased and any additional less the fees for services the customer has chosen, customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis. We have established an allowance for doubtful accounts for our installment notes receivable. Our policy for determining the allowance is loss experience, as well as the results of based on historical management’s review and analysis of the payment and collection of the installment notes receivable within the previous year. We believe our allowance is adequate to absorb any known or probable losses. Our policy is to charge off installment notes receivable that are 120 days or more past due. Charge-offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts. The majority of Franchising’s trade and notes receivable relate to is extended based on an amounts due from franchisees. Credit evaluation of a franchisee’s financial condition and collateral is generally not required. Trade receivables are due within 30 days and are stated at amounts due from franchisees net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. Franchising determines its allowance by considering a number of factors, including the length of time receivables are past due, Franchising’s previous loss history, the franchisee’s current ability to pay its obligation to Franchising, and the condition of the general economy and the industry as a whole. Franchising writes off trade receivables that are 90 days or more past due and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Property Assets and Related Depreciation Furniture, equipment and vehicles are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets (generally 5 years) by the straight-line method. Our corporate office building is depreciated over 40 years. Leasehold improvements are amortized over the useful life of the asset or the initial term of the applicable leases by the straight-line method, whichever is shorter. We have incurred costs to develop computer software for internal use. We capitalize the costs incurred during the application development stage, which includes designing the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary stages along with post-implementation stages of internally developed software are expensed as incurred. Internally developed software costs, once placed in service, are amortized over various periods up to 10 years. We incur repair and maintenance expenses on our vehicles and equipment. These amounts are recognized when incurred, unless such repairs significantly extend the life of the asset, in which case we amortize the cost of the repairs for the remaining useful life of the asset utilizing the straight-line method. PART II Notes to Consolidated Financial Statements Goodwill and Other Intangible Assets We record goodwill when the consideration paid for an acquisition exceeds the fair value of the identifiable net tangible and identifiable intangible assets acquired. Goodwill is not subject to amortization but must be periodically evaluated for impairment. Impairment occurs when the carrying value of goodwill is not recoverable from future cash flows. We perform an assessment of goodwill for impairment at the reporting unit level annually as of October 1, or when events or circumstances indicate that impairment may have occurred. Our reporting units are our reportable operating segments. Factors which could necessitate an interim impairment assessment include a sustained decline in our stock price, prolonged negative industry or economic trends and significant underperformance relative to expected historical or projected future operating results. We determine the fair value of each reporting unit using methodologies which include the present value of estimated future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization. The analysis is based upon available information regarding expected future cash flows and discount rates. Discount rates are based upon our cost of capital. We use a two-step approach to assess goodwill impairment. If the fair value of the reporting unit exceeds its carrying value, then the goodwill is not deemed impaired. If the carrying value of the reporting unit exceeds fair value, we perform a second analysis to measure the fair value of all assets and liabilities within the reporting unit, and if the carrying value of goodwill exceeds its implied fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of goodwill and the implied fair value, which is calculated as if the reporting unit had been acquired and accounted for as a business combination. As an alternative to this annual impairment testing, we may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying value of a reporting unit’s net assets exceeds the reporting unit’s fair value. Acquired customer relationships are amortized utilizing the straight-line method over a 21-month period, non-compete agreements are amortized using the straight-line method over the contractual life of the agreements, vendor relationships are amortized using the straight-line method over a 7 or 15 year period, and other intangible assets are amortized using the straight-line method over the life of the asset. Accounting for Impairment of Long-Lived Assets We evaluate all long-lived assets, including intangible assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate. Self-Insurance Liabilities to losses under our We have self-insured retentions with respect workers’ compensation, general liability, vehicle liability and health insurance programs. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions. We make assumptions on our liabilities within our self- loss forecasts, company-specific insured retentions using actuarial development factors, general industry loss development factors, and third-party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we RENT-A-CENTER - Annual Report on Form 10-K 41 PART II Notes to Consolidated Financial Statements evaluate the adequacy of our reserves by comparing amounts reserved on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third-party claim administrator loss estimates, and make adjustments to our reserves as needed. Foreign Currency Translation The functional currency of our foreign operations is the applicable local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period. Revenues and expenses are generally translated at a daily exchange rate and equity transactions are translated using the actual rate on the day of the transaction. Other Comprehensive Income (Loss) Other comprehensive income (loss) is comprised exclusively of our foreign currency translation adjustment. Income Taxes judgment We record deferred taxes for temporary differences between the tax and financial reporting bases of assets and liabilities at the enacted tax rate expected to be in effect when those temporary differences are expected to be recovered or settled. Income tax accounting requires management to make estimates and apply judgments to events that will be recognized in one period under rules that apply to financial reporting in a different period in our tax returns. is required when In particular, estimating the value of future tax deductions, tax credits and net operating loss carryforwards (NOLs), as represented by deferred tax assets. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings income rely and available tax planning strategies. These sources of heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. When it is determined the recovery of all or a portion of a deferred tax asset is not likely, a valuation allowance is established. We include NOLs in the calculation of deferred tax assets. NOLs are utilized to the extent allowable due to the provisions of the Internal Revenue Code of 1986, as amended, and relevant state statutes. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. We classify accrued interest and penalties related to unrecognized tax benefits as interest expense and general & administrative expense, respectively. Sales Taxes We apply the net basis for sales taxes imposed on our goods and services in our consolidated statements of operations. We are required by the applicable governmental authorities to collect and remit sales taxes. Accordingly, such amounts are charged to the customer, collected and remitted directly to the appropriate jurisdictional entity. 42 RENT-A-CENTER - Annual Report on Form 10-K Earnings (Loss) Per Common Share Basic earnings (loss) per common share are based upon the weighted average number of common shares outstanding during each period presented. Diluted earnings (loss) per common share are based upon the weighted average number of common shares outstanding during the period, plus, if dilutive, the assumed exercise of stock options and vesting of stock awards at the beginning of the year, or for the period outstanding during the year for current year issuances. Advertising Costs Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $74.6 million, $86.1 million and $90.6 million, for the years ended December 31, 2018, 2017 and 2016, respectively. Stock-Based Compensation the benefit of certain We maintain long-term incentive plans for employees and directors, which are described more fully in Note M. We recognize share-based payment awards to our employees and directors at the estimated fair value on the grant date. Determining the fair value of any share-based award requires information about several variables that include, but are not limited to, expected stock volatility over the term of the award, expected dividend yields, and the risk free interest rate. We base the expected term on historical exercise and post-vesting employment- termination experience, and expected volatility on historical realized volatility trends. In addition, all stock-based compensation expense is recorded net of an estimated forfeiture rate. The forfeiture rate is based upon historical activity and is analyzed at least annually as actual forfeitures occur. Compensation costs are recognized net of estimated forfeitures over the requisite service period on a straight-line basis. We issue new shares to settle stock awards. Stock options are valued using a Black-Scholes pricing model. Time-vesting restricted stock units are valued using the closing price on the Nasdaq Global Select Market on the day before the grant date, adjusted for any provisions affecting fair value, such as the lack of dividends or dividend equivalents during the vesting period. Performance-based restricted stock units will vest in accordance with a total shareholder return formula, and are valued by a third-party valuation firm using Monte Carlo simulations. Stock-based compensation expense is reported within general and administrative expenses in the consolidated statements of operations. Reclassifications Certain reclassifications may be made to the reported amounts for prior periods to conform to the current period presentation. These reclassifications have no impact on net earnings or earnings per share in any period. Use of Estimates In preparing financial statements in conformity with U.S. generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent losses and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. in the financial reporting Because of process, actual results could differ from those estimates. the use of estimates inherent Newly Adopted Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies existing accounting literature relating to how and when a company recognizes revenue. We adopted ASU 2014-09 and all related amendments beginning January 1, 2018, using the modified retrospective adoption method. We recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. PART II Notes to Consolidated Financial Statements Under Topic 606, initial franchise fees charged to franchisees for new stores are recognized over the term of the franchise agreement, rather than when they are paid by the franchisee, upon the opening of a new location. Furthermore, franchise advertising fees are presented on a gross basis, as revenue, in the consolidated statement of operations, rather than net of operating expenses in the consolidated statement of operations. Impacts resulting from adoption were not material to the consolidated statement of operations. See descriptions of the revenues in Note B. The cumulative effect of the changes made to our condensed consolidated balance sheet for the adoption of Topic 606 were as follows: (In thousands) LIABILITIES Accrued liabilities Deferred tax liability Total liabilities STOCKHOLDERS’ EQUITY Retained earnings Total stockholders’ equity January 1, 2018 Adjustments due to Topic 606 December 31, 2017 $ 299,683 86,727 1,149,649 $ 797,432 271,132 $(1,665) 354 (1,311) $ 298,018 87,081 1,148,338 $ 1,311 1,311 $ 798,743 272,443 In accordance with Topic 606, the disclosure of the impact of adoption on our condensed consolidated statements of operations and condensed consolidated balance sheets for the periods ended December 31, 2018 is as follows: Condensed Consolidated Statements of Operations Twelve Months Ended December 31, 2018 Condensed Consolidated Balance Sheets December 31, 2018 (In thousands) Royalty income and fees Total revenues Gross profit Other store expenses Total operating expenses Operating profit Earnings before income taxes Income tax expense Net earnings (In thousands) LIABILITIES Accrued liabilities Deferred tax liability Total liabilities STOCKHOLDERS’ EQUITY Retained earnings Total stockholders’ equity Adjustments due to Topic 606 Balances without Adoption of Topic 606 As Reported 13,491 2,660,465 1,688,168 656,894 1,632,031 56,137 13,841 5,349 8,492 (1,844) (1,844) (1,844) (3,965) (3,965) 2,121 2,121 657 1,464 As Reported Adjustments due to Topic 606 11,647 2,658,621 1,686,324 652,929 1,628,066 58,258 15,962 6,006 9,956 Balances without Adoption of Topic 606 $ 337,459 119,061 1,110,400 $ 805,924 286,517 $(3,786) $ 333,673 120,072 1,107,625 1,011 (2,775) $ 2,775 2,775 $ 808,699 289,292 RENT-A-CENTER - Annual Report on Form 10-K 43 PART II 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, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. Rent-A-Center adopted ASU 2016-15 beginning January 1, 2018, on a retrospective basis. The adoption of ASU 2016-15 had no impact to the financial statements as of December 31, 2018. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which introduces amendments that are intended to make the guidance in ASC 805 on the definition of a business more consistent and cost-efficient. The amendments narrow the definition of a business and provide a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. Rent-A-Center adopted ASU 2017-01 beginning January 1, 2018, using the prospective approach. The adoption of ASU 2017-01 had an immaterial impact to the financial statements as of December 31, 2018. In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. Rent-A-Center adopted ASU 2017-09 beginning January 1, 2018, on a prospective basis. The adoption of ASU 2017-09 had no impact to the financial statements as of December 31, 2018. Note B — Revenues The following table disaggregates our revenue: (In thousands) Store Rentals and fees Merchandise sales Installment sales Other Total store revenues Franchise Merchandise sales Royalty income and fees Total revenues Twelve Months Ended December 31, 2018 Core U.S. Acceptance Now Mexico Franchising Consolidated Unaudited $ 1,640,839 $ 557,592 $ 46,429 $ — $ 2,244,860 136,878 69,572 8,423 164,432 3,145 — 538 — 39 1,855,712 722,562 49,613 — — — — — — — — — — 19,087 13,491 304,455 69,572 9,000 2,627,887 19,087 13,491 $ 1,855,712 $ 722,562 $ 49,613 $ 32,578 $ 2,660,465 Rental-Purchase Agreements Core U.S., Acceptance Now, and Mexico terms with non-refundable rental payments. At Rentals and Fees. Merchandise is leased to customers pursuant to rental purchase agreements which provide for weekly, semi-monthly or monthly rental the expiration of each rental term customers renew the rental agreement by pre-paying for the next rental term. Generally, the customer has the right to acquire title of the merchandise either through a purchase option or through payment of all required rental terms. Customers can terminate the agreement at the end of any rental term without penalty. Therefore, rental transactions are accounted for as operating leases and rental revenue is recognized over the rental term. Cash received for rental payments, including processing fees, prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue related to various payment, reinstatement or late fees are recognized when paid by the customer at the point service is provided. Rental merchandise is depreciated using the income forecasting method and is recognized in cost of sales over the rental term. We offer additional product plans along with our rental agreements which provide customers with liability protection against significant damage or loss of a product, and club membership benefits, including various discount programs and product service and replacement benefits in the event merchandise is damaged or lost. Customers renew product plans in conjunction with their rental term renewals, and can cancel the plans at any time. Revenue for product plans is recognized over the term of the plan. Costs incurred related to product plans are primarily recognized in cost of sales. At December 31, 2018 and December 31, 2017, we had $42.1 million and $41.1 million, respectively, in deferred revenue included in accrued liabilities related to our rental purchase agreements. Revenue from contracts with customers Core U.S., Acceptance Now, and Mexico Merchandise Sales. Merchandise sales include payments received for the exercise of the early purchase option offered through our rental purchase agreements or merchandise sold through point of sale transactions. Revenue for merchandise sales is recognized when payment is received and ownership of the merchandise passes to the customer. The remaining net value of merchandise sold is recorded to cost of sales at the time of the transaction. Installment Sales. Revenue from the sale of merchandise in our retail installment stores is recognized when the installment note is signed and control of the merchandise has passed to the customer. The cost of merchandise sold through installment agreements is recognized in cost of sales at the time of the transaction. We offer extended service plans with our installment agreements which are administered by third parties and provide customers with product service maintenance beyond the term of the installment agreement. Payments received for extended service plans are deferred and recognized, net of related costs, when 44 RENT-A-CENTER - Annual Report on Form 10-K PART II Notes to Consolidated Financial Statements the installment payment plan is complete and the service plan goes into effect. Customers can cancel extended service plans at any time during the installment agreement and receive a refund for payments previously made towards the plan. At both December 31, 2018 and December 31, 2017, we had $3.0 million in deferred revenue included in accrued liabilities related to other product plans. Other. Other revenue primarily consists of external maintenance and repair services provided by the Company’s service department, in addition to other miscellaneous product plans offered to our rental and installment customers. The Company’s service department is a licensed warranty service provider and performs service maintenance and merchandise repair for qualified warranty guarantees, on behalf of merchandise vendors. In addition, we provide external maintenance and repair services for our franchisees, and other external businesses and individual customers. Revenue for warranty services is recognized when service is complete and a claim has been submitted to the original vendor issuing the warranty guarantee. Revenue for external repair and maintenance services are recognized when services provided are complete and the customer has been billed. Costs incurred for repair services are recognized as incurred in labor and other store expenses. Revenue for other product plans is recognized in accordance with the terms of the applicable plan agreement. Franchising Merchandise Sales. Revenue from the sale of rental merchandise is recognized upon shipment of the merchandise to the franchisee. including franchisee Royalty Income and Fees. Franchise royalties, contributions to corporate advertising funds, represent sales-based royalties calculated as a percentage of gross rental payments and sales. Royalty revenue is recognized as rental payments and sales occur. Franchise fees are initial fees charged to franchisees for new or converted franchise stores. Franchise fee revenue is recognized on a straight-line basis over the franchise agreement. At December 31, 2018 and December 31, 2017, we had $4.1 million and $1.7 million, respectively, in deferred revenue included in accrued liabilities related to franchise fees. the term of Note C — Receivables and Allowance for Doubtful Accounts Receivables consist of the following: (In thousands) Installment sales receivable Trade and notes receivables Total receivables Less allowance for doubtful accounts December 31, 2018 $ 54,746 $ 19,782 74,528 (4,883) Total receivables, net of allowance for doubtful accounts $ 69,645 $ 2017 55,516 18,474 73,990 (4,167) 69,823 The allowance for doubtful accounts related to installment sales receivable was $3.6 million and $3.6 million, and the allowance for doubtful accounts related to trade and notes receivable was $1.3 million and $0.6 million at December 31, 2018 and 2017, respectively. Changes in our allowance for doubtful accounts are as follows: (In thousands) Beginning allowance for doubtful accounts Bad debt expense Accounts written off Recoveries Ending allowance for doubtful accounts Note D — Rental Merchandise (In thousands) On rent Cost Less accumulated depreciation Net book value, on rent Held for rent Cost Less accumulated depreciation Net book value, held for rent Year Ended December 31, 2018 2017 4,167 $ 3,593 $ 14,610 (14,475) 581 15,702 (15,791) 663 4,883 $ 4,167 $ 2016 3,614 15,449 (16,095) 625 3,593 $ $ December 31, 2018 2017 $ $ $ $ 1,110,968 $ (427,160) 1,176,240 (474,437) 683,808 $ 701,803 147,300 $ (23,638) 123,662 $ 198,471 (31,283) 167,188 RENT-A-CENTER - Annual Report on Form 10-K 45 PART II Notes to Consolidated Financial Statements Note E — Property Assets (In thousands) Furniture and equipment Building and leasehold improvements Land and land improvements Transportation equipment Construction in progress Total property assets Less accumulated depreciation December 31, 2018 $ 512,056 $ 251,975 6,737 3,765 3,540 778,073 (551,750) 2017 511,527 269,522 6,747 10,585 10,193 808,574 (525,673) Total property assets, net of accumulated depreciation $ 226,323 $ 282,901 We had $1.9 million and $7.3 million of capitalized software costs included in construction in progress at December 31, 2018 and 2017, respectively. For the years ended December 31, 2018, 2017 and 2016, we placed in service internally developed software of approximately $9.7 million, $32.1 million and $84.5 million, respectively. Note F — Intangible Assets and Acquisitions Goodwill Impairment Charge In the fourth quarter of 2018, we completed a qualitative assessment for impairment of goodwill as of October 1, 2018, concluding it was not more likely than not that the carrying value of our reporting unit’s net assets exceeded the reporting unit’s fair value and therefore no impairment of goodwill existed as of December 31. 2018. During 2016, we recorded a goodwill impairment charge of $151.3 million in our Core U.S. segment. Intangible Assets Amortizable intangible assets consist of the following: (Dollar amounts in thousands) Customer relationships Vendor relationships Non-compete agreements Total other intangible assets Aggregate amortization expense (in thousands): Year Ended December 31, 2018 Year Ended December 31, 2017(1) Year Ended December 31, 2016 December 31, 2018 December 31, 2017 Avg. Life (years) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization 2 11 3 $ $ 79,942 $ 860 6,745 87,547 $ 79,695 860 6,493 87,048 $ $ 79,670 $ 860 6,748 87,278 $ $ $ $ 79,274 860 6,262 86,396 671 4,908 2,176 (1) Includes impairment charge of $3.9 million to our intangible assets, related to a vendor relationship, in the ANOW segment during the first quarter of 2017. Estimated amortization expense, assuming current intangible balances and no new acquisitions, for each of the years ending December 31, is as follows: (In thousands) 2019 2020 Thereafter Total amortization expense Estimated Amortization Expense $ $ 451 48 — 499 At December 31, 2018, the amount of goodwill attributable to the Core U.S. and Acceptance Now segments was approximately $1.5 million and $55.3 million, respectively. At December 31, 2017, the amount of goodwill allocated to the Core U.S. and Acceptance Now segment was approximately $1.3 million and $55.3 million, respectively. 46 RENT-A-CENTER - Annual Report on Form 10-K A summary of the changes in recorded goodwill follows: (In thousands) Beginning goodwill balance Additions from acquisitions Post purchase price allocation adjustments Ending goodwill balance Acquisitions PART II Notes to Consolidated Financial Statements Year Ended December 31, 2018 56,614 $ 169 62 2017 55,308 1,217 89 56,845 $ 56,614 $ $ The following table provides information concerning the acquisitions made during the years ended December 31, 2018, 2017 and 2016. (Dollar amounts in thousands) Number of stores acquired remaining open Number of stores acquired that were merged with existing stores Number of transactions Total purchase price Amounts allocated to: Goodwill Non-compete agreements Customer relationships Rental merchandise Year Ended December 31, 2018 2017 2016 1 6 7 2,048 169 — 289 1,590 $ $ — 8 4 2,547 1,217 — 550 780 $ $ — 3 3 2,302 1,442 — 181 679 $ $ Purchase prices are determined by evaluating the average monthly rental income of the acquired stores and applying a multiple to the total for rent-to-own store acquisitions. Operating results of the acquired stores and accounts have been included in the financial statements since their date of acquisition. The weighted average amortization period was approximately 21 months for intangible assets added during the year ended December 31, 2018. Additions to goodwill due to acquisitions in 2018 were tax deductible. Note G — Accrued Liabilities (In thousands) Accrued insurance costs Accrued compensation Deferred revenue Taxes other than income Income taxes payable Accrued legal settlement Deferred compensation Accrued interest payable Deferred rent Accrued other Total Accrued liabilities December 31, 2018 2017 $ 109,505 $ 124,760 55,789 53,348 27,711 26,797 11,000 8,687 5,643 3,503 35,476 $ 337,459 $ 37,783 51,742 27,415 — — 11,323 5,707 3,937 35,351 298,018 Note H — Income Taxes On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted which, among other things, reduced the U.S. federal income tax rate from 35% to 21% in 2018, instituted a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings in 2017, and created a new U.S. minimum tax on earnings of foreign subsidiaries. The Tax Act also allowed for 100% bonus depreciation for assets purchased after September 27, 2017, until December 31, 2023. We recognized an income tax benefit of $76.5 million in the year ended December 31, 2017, associated with the revaluation of the net deferred tax liability at the date of enactment. Our provisional estimate of the one-time transition tax resulted in $0.7 million of additional tax expense. We also recorded a federal provisional benefit of $9.7 million based on our intent to fully expense all qualifying expenditures. In 2018, we finalized our analysis over the one-year measurement period that ended on December 22, 2018, in accordance with SAB 118, resulting in an immaterial income tax benefit recorded in our consolidated statement of operations. RENT-A-CENTER - Annual Report on Form 10-K 47 PART II Notes to Consolidated Financial Statements For financial statement purposes, income (loss) before income taxes by source was comprised of the following: (In thousands) Domestic Foreign Income (loss) before income taxes Year Ended December 31, 2018 2017 2016 $ $ 11,290 $ (109,615) $ (110,347) 2,551 (585) (2,927) 13,841 $ (110,200) $ (113,274) A reconciliation of the federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to actual follows: Year Ended December 31, Tax at statutory rate Tax Cuts and Jobs Act of 2017 Goodwill impairment State income taxes Effect of foreign operations, net of foreign tax credits Effect of current and prior year credits Change in unrecognized tax benefits Other permanent differences Prior year return to provision adjustments Adjustments to deferred taxes Valuation allowance Other, net Effective income tax rate The components of income tax expense (benefit) are as follows: (In thousands) Current expense (benefit) Federal State Foreign Total current Deferred expense (benefit) Federal State Foreign Total deferred 2018 21.0% —% —% 17.6% (1.2)% (31.4)% 10.9% 14.9% 7.3% —% (0.5)% —% 38.6% 2017 35.0% 70.3% —% (1.8)% 3.5% 1.7% —% —% —% 1.6% (1.6)% (2.7)% 106.0% 2016 35.0% —% (29.3)% 3.3% (0.2)% 2.9% —% —% —% 0.6% (6.6)% 1.4% 7.1% Year Ended December 31, 2018 2017 2016 $ (2,573) $ 816 724 (34,445) $ 1,216 (1,417) (1,033) (34,646) 4,691 3,325 (1,634) 6,382 (89,820) 9,266 (1,653) (82,207) 23,752 779 (582) 23,949 (27,307) (6,586) 1,865 (32,028) Total income tax expense (benefit) $ 5,349 $ (116,853) $ (8,079) 48 RENT-A-CENTER - Annual Report on Form 10-K Deferred tax assets (liabilities) consist of the following: (In thousands) Deferred tax assets Net operating loss carryforwards Accrued liabilities Intangible assets Other assets including credits Foreign tax credit carryforwards Total deferred tax assets Valuation allowance Deferred tax assets, net Deferred tax liabilities Rental merchandise Property assets Other liabilities Total deferred tax liabilities Net deferred taxes PART II Notes to Consolidated Financial Statements December 31, 2018 2017 $ $ 56,701 50,558 20,346 23,070 6,601 157,276 (39,961) 117,315 (177,794) (32,571) (453) (210,818) $ (93,503) $ 38,914 49,619 26,029 11,967 6,601 133,130 (40,074) 93,056 (139,425) (40,712) — (180,137) (87,081) At December 31, 2018, we have net operating loss carryforwards of approximately $65.6 million for federal, $453.2 million for state, and $61.2 million for foreign jurisdictions, partially offset by valuation allowance. We also had federal, state and foreign tax credit carryforwards of approximately $16.9 million of which a portion has been offset by a valuation allowance. The net operating losses and credits will expire in various years from 2019 and 2038. The federal net operating loss will be carried forward indefinitely. We are subject to federal, state, local and foreign income taxes. Along with our U.S. subsidiaries, we file a U.S. federal consolidated income tax return. With few exceptions, we are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2012. We are currently under examination in the U.S. and various states. We do not anticipate that adjustments as a result of impact to our consolidated these audits, if any, will have a material statement of operations, financial condition, statement of cash flows or earnings per share. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. In 2018, we increased the valuation allowance against net operating losses and credits in multiple state jurisdictions. The valuation allowance related to foreign deferred tax assets was decreased due to utilization of losses in the current year. However, management believes certain foreign losses and deferred tax assets will not be realized and has recorded a valuation allowance related to these assets. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows: (In thousands) Year Ended December 31, 2018 2017 Beginning unrecognized tax benefit balance $ 37,319 $ 33,723 $ (Reductions) additions based on tax positions related to current year Additions for tax positions of prior years Reductions for tax positions of prior years Settlements Ending unrecognized tax benefit balance (206) 735 (488) (996) (2,280) 6,688 (368) (444) 2016 27,164 773 8,396 (2,246) (364) $ 36,364 $ 37,319 $ 33,723 RENT-A-CENTER - Annual Report on Form 10-K 49 PART II Notes to Consolidated Financial Statements Included in the balance of unrecognized tax benefits at December 31, 2018, if ultimately recognized, will affect our annual effective tax rate. is $6.2 million, net of federal benefit, which, During the next is reasonably twelve months, we anticipate that possible that the amount of unrecognized tax benefits could be reduced by approximately $19.7 million either because our tax position will be sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions. it As of December 31, 2018, we have accrued approximately $3.4 million for the payment of interest for uncertain tax positions and recorded interest expense of approximately $80 thousand for the year then ended, which are excluded from the reconciliation of unrecognized tax Note I — Senior Debt We are party to a Credit Agreement with BBVA Compass Bank, HSBC, and SunTrust Bank, as syndication agents, JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), and the several lenders from time to time parties thereto, dated March 19, 2014, as amended on February 1, 2016, September 30, 2016, March 31, 2017, June 6, 2017, and December 12, 2018 (the “Fifth Amendment”) and as so amended, (the “Credit Agreement”). The Credit Agreement currently provides a senior credit facility consisting of a $200.0 million revolving credit facility (the “Revolving Facility”). The debt facilities as of December 31, 2018 and 2017 are as follows: benefits presented above. These amounts are net of the reversal of interest expense due to settlement of certain tax positions. other comprehensive The effect of the tax rate change for items originally recognized in other comprehensive income was properly recorded in tax expense from continuing operations. This results in stranded tax effects in accumulated 31, 2018. Companies can make a policy election to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects directly arising from the change in the federal corporate tax rate. We did not exercise the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. at December income There were no outstanding borrowings under the Term Loans or Revolving Facility at December 31, 2018 and $48.6 million and $85.0 million at December 31, 2017, respectively. Total unamortized debt issuance costs reported in the consolidated balance sheet at December 31, 2018 and 2017 were $2.6 million and $5.2 million, respectively. The Revolving Facility has a scheduled maturity of December 31, 2019. December 31, 2018 December 31, 2017 Facility Maturity Maximum Facility Amount Outstanding Amount Available Maximum Facility Amount Outstanding Amount Available Revolving Facility December 31, 2019 $ — $ — $ — $ 225,000 $ 48,563 $ 200,000 200,000 95,900 95,900 350,000 575,000 85,000 133,563 — 109,700 109,700 — — — August 20, 2019 12,500 12,500 12,500 5,735 6,765 $ 212,500 — $ 108,400 $ 587,500 139,298 $ 116,465 —(2) — $ (5,173) $ 134,125 (1) During the third quarter of 2018 the outstanding Term Loans were repaid in full. (2) At December 31, 2018 there was $2.6 million in unamortized debt issuance costs included in other assets on the consolidated balance sheet. The full amount of the revolving credit facility may be used for the issuance of letters of credit. At December 31, 2018 and 2017, the amounts available under the revolving credit facility were reduced by approximately $92.0 million and $94.0 million, respectively, for our outstanding letters of credit, resulting in availability of $95.9 million in our revolving credit facility, net of Reserves, as defined in the Credit Agreement. Borrowings under the Revolving Facility bear interest at varying rates equal to either the Eurodollar rate plus 1.50% to 3.00%, or the prime rate plus 0.50% to 2.00% (ABR), at our election. The margins on the Eurodollar loans and on the ABR loans for borrowings under the Revolving Facility, which were 2.00% and 1.00%, respectively, at December 31, 2018, may fluctuate based upon an increase or decrease in our Consolidated Total Leverage Ratio as defined by a pricing grid included in the Credit Agreement. A commitment fee equal to 0.30% to 0.50% of the Revolving Facility is payable quarterly, and fluctuates dependent upon an increase or decrease in our the unused portion of Consolidated Total Leverage Ratio. The commitment fee for the fourth quarter of 2018 was $1.0 million and was equal to 0.50% of the unused portion of the Revolving Facility. The aggregate outstanding amounts (including after any draw request) under the Revolving Facility may not exceed the Borrowing Base. The Borrowing Base is tied to the Eligible Installment Sales Accounts, Inventory and Eligible Rental Contracts, reduced by Reserves, as defined in the Credit Agreement. We provide to the Agent information necessary to calculate the Borrowing Base within 30 days of the end of each calendar month, unless liquidity is less than 20% of the maximum borrowing capacity of the Revolving Facility or $60 million, in which case we must provide weekly information. Our borrowings under the Credit Agreement are, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property, and are also secured by a pledge of the capital stock of our U.S. subsidiaries. 50 RENT-A-CENTER - Annual Report on Form 10-K (In thousands) Senior Debt: Term Loan(1) Total Other indebtedness: Line of credit Total Unamortized debt issuance costs Total senior debt, net Subject to a number of exceptions, the Credit Agreement contains, without limitation, covenants that generally limit our ability and the ability of our subsidiaries to: • incur additional debt; • pay cash dividends in excess of $15 million annually when the Consolidated Total Leverage Ratio is greater than 3.75:1; • incur liens or other encumbrances; • merge, consolidate or sell substantially all property or business; • sell, lease or otherwise transfer assets (if not in the ordinary course of business, limited in any fiscal year to an amount equal to 5% of Consolidated Total Assets as of the last day of the immediately preceding fiscal year); • make investments or acquisitions (unless they meet financial tests and other requirements); or • enter into an unrelated line of business; • guarantee obligations of Foreign Subsidiaries in excess of $10 million at any time; and • exceed an aggregate outstanding amount of $10 million in indebtedness, including Capital Lease Obligations, mortgage financings and purchase money obligations that are secured by Liens permitted under the Credit Agreement. In addition, we are prohibited from repurchasing our common stock or 6.625% and 4.75% Senior Notes for the remaining term of the Credit Agreement. PART II Notes to Consolidated Financial Statements The Credit Agreement permits us to increase the amount of the Revolving Facility from time to time on up to three occasions, in an aggregate amount of no more than $100 million. We may request an Incremental Revolving Loan, provided that at the time of such request, we are not in default, have obtained the consent of the administrative agent and the lenders providing such increase, and after giving effect thereto, (i) the Consolidated Fixed Charge Coverage Ratio on a pro forma basis is no less than 1.10:1, (ii) the Total Revolving Extensions of Credit do not exceed the Borrowing Base, and (iii) if the request occurs during a Minimum Availability Period, the Availability must be more than the Availability Threshold Amount. The Credit Agreement permits the Agent, in its sole discretion, to make loans to us that it deems necessary or desirable (i) to preserve or protect the Collateral, (ii) to enhance the likelihood of, or maximize the amount of, repayment of the Loans and other Obligations, or (iii) to pay any other amount chargeable to or required to be paid by us pursuant to the terms of the Credit Agreement. The aggregate amount of such Protective Advances outstanding at any time may not exceed $35 million. In connection with entering into the Fifth Amendment to the Credit Agreement, we recorded a write-down of previously unamortized debt issuance costs of approximately $0.5 million in the fourth quarter of 2018. In addition, we paid arrangement and amendment fees to the Agent and the lenders that provided their consent to the Amendment of approximately $2.1 million, which were capitalized in the fourth quarter of 2018, and will be amortized to interest expense over the remaining term of the agreement. The Credit Agreement requires us to comply with a Consolidated Fixed Charge Coverage ratio of no less than 1.10:1. Breach of this covenant shall result in a Minimum Availability Period, which requires us to maintain $50.0 million of excess availability on the Revolving Facility. The table below shows the required and actual ratios under the Credit Agreement calculated as of December 31, 2018: Consolidated Fixed Charge Coverage Ratio The actual Consolidated Fixed Charge Coverage ratio was calculated pursuant to the Credit Agreement by dividing the sum of consolidated EBITDA minus Unfinanced Capital Expenditures minus the excess (to the extent positive) of (i) expenses for income taxes paid in cash minus (ii) cash income tax refunds received for the 12-month period ending December 31, 2018 ($156.4 million), by consolidated fixed charges for the 12-month period ending December 31, 2018 ($42.9 million). For purposes of the calculation, “consolidated fixed charges” is defined as the sum of consolidated interest expense and scheduled principal payments on indebtedness actually made during such period. The actual Consolidated Fixed Charge Coverage Ratio of 3.64:1 as of December 31, 2018 was above the minimum requirement of 1.10:1 under the Credit Agreement. Availability under our Revolving Facility was $95.9 million at December 31, 2018. Events of default under the Credit Agreement include customary events, such as a cross-acceleration provision in the event that we default on other debt. In addition, an event of default under the Credit Agreement Liquidity purchases. Other As described above, our Revolving Facility is scheduled to mature in December 2019. Our primary liquidity requirements are for rental merchandise include expenditures for property assets and debt service. Our primary sources of liquidity have been cash provided by operations. We utilize our Revolving Facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the requirements capital Required Ratio Actual Ratio No less than 1.10:1 3.64:1 would occur if a change of control occurs. This is defined to include the case where a third party becomes the beneficial owner of 35% or more of our voting stock or a majority of Rent-A-Center’s Board of Directors are not Continuing Directors (all of the current members of our Board of Directors are Continuing Directors under the Credit Agreement). An event of default would also occur if one or more judgments were entered against us of $50.0 million or more and such judgments were not satisfied or bonded pending appeal within 30 days after entry. the terms of In addition to the Revolving Facility discussed above, we maintain a $12.5 million unsecured, revolving line of credit with INTRUST Bank, N.A. to facilitate cash management. As of December 31, 2018, we had no outstanding borrowings against this line of credit and $5.7 million outstanding borrowings at December 31, 2017. timing of cash receipts. In that regard, we may from time to time draw funds under the Revolving Facility for general corporate purposes. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities. We believe cash flow generated from operations, together with availability its term, will be under our Credit Agreement sufficient to fund our operations during the next 12 months. for the remainder of RENT-A-CENTER - Annual Report on Form 10-K 51 PART II Notes to Consolidated Financial Statements Note J — Senior Notes On November 2, 2010, we issued $300.0 million in senior unsecured notes due November 2020, bearing interest at 6.625%, pursuant to an indenture dated November 2, 2010, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repay approximately $200.0 million of outstanding term debt under our Prior Credit Agreement. The remaining net proceeds were used to repurchase shares of our common stock. The principal amount of the 6.625% notes outstanding as of December 31, 2018 and 2017, was $292.7 million, reduced by $1.2 million and $1.8 million of unamortized issuance costs, respectively. Inc., the proceeds of On May 2, 2013, we issued $250.0 million in senior unsecured notes due May 2021, bearing interest at 4.75%, pursuant to an indenture dated May 2, 2013, among Rent-A-Center, its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of this offering were used to repurchase shares of our common stock under a $200.0 million accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under our Prior Credit Agreement. The principal amount of the 4.75% notes outstanding as of December 31, 2018 and 2017, was $250.0 million, reduced by $1.5 million and $2.1 million of unamortized issuance costs, respectively. The indentures governing the 6.625% notes and the 4.75% notes are substantially similar. Each indenture contains covenants that limit our ability to: • incur additional debt; • sell assets or our subsidiaries; • grant liens to third parties; • pay cash dividends or repurchase stock when total leverage is greater than 2.50:1 (subject to an exception for cash dividends in an amount not to exceed $20 million annually); and • engage in a merger or sell substantially all of our assets. Events of default under each indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $50.0 million, as well as in the event a judgment is entered against us in excess of $50.0 million that is not discharged, bonded or insured. The 6.625% notes may be redeemed on or after November 15, 2015, at our option, in whole or in part, at a premium declining from 103.313% (the current premium is 100%). The 6.625% notes may be redeemed on or after November 15, 2018, at our option, in whole or in part, at par. The 6.625% notes also require that upon the occurrence of a change of control (as defined in the 2010 indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. The 4.75% notes may be redeemed on or after May 1, 2016, at our option, in whole or in part, at a premium declining from 103.563% (the current premium is 101.188%). The 4.75% notes may be redeemed on or after May 1, 2019, at our option, in whole or in part, at par. The 4.75% notes also require that upon the occurrence of a change of control (as defined in the 2013 indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. Any mandatory repurchase of the 6.625% notes and/or the 4.75% notes would trigger an event of default under our Credit Agreement. We are not the indentures. required to maintain any financial ratios under either of the and obligations guaranteed unconditionally jointly and Rent-A-Center and its subsidiary guarantors have fully, of severally, Rent-A-Center with respect to the 6.625% notes and the 4.75% notes. Rent-A-Center has no independent assets or operations, and each subsidiary guarantor indirectly by Rent-A-Center. The only direct or indirect subsidiaries of Rent-A-Center that are not guarantors are minor subsidiaries. There are no restrictions on the ability of any of the subsidiary guarantors to transfer funds to Rent-A-Center in the form of loans, advances or dividends, except as provided by applicable law. is 100% owned directly or Note K — Commitments and Contingencies Leases We lease space for all of our Core U.S. and Mexico stores, certain support facilities and the majority of our delivery vehicles under operating leases expiring at various times through 2024. Certain of the store leases contain escalation clauses for increased taxes and operating expenses. Rental expense was $206.3 million, $209.7 million and $231.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Future minimum rental payments under operating leases with remaining lease terms in excess of one year at December 31, 2018 are as follows: (In thousands) 2019 2020 2021 2022 2023 Thereafter Total future minimum rental payments 52 RENT-A-CENTER - Annual Report on Form 10-K Operating Leases $ 145,345 116,785 80,362 47,417 16,460 2,280 $ 408,649 Contingencies From time to time, the Company, along with our subsidiaries, is party to various legal proceedings arising in the ordinary course of business. We reserve for loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred. We are subject to unclaimed property audits by states in the ordinary course of business. The property subject to review in this audit process included unclaimed wages, vendor payments and customer refunds. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. We routinely remit escheat payments to states in compliance with applicable escheat laws. The negotiated settlements did not have a material impact to our financial statements. Alan Hall, et. al. v. Rent-A-Center, Inc., et. al.; James DePalma, et. al. v. Rent-A-Center, Inc., et. al. On December 23, 2016, a putative class action was filed against us and certain of our former officers by Alan Hall in the Federal District Court for the Eastern District of Texas in Sherman, Texas. The complaint alleges that the defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing false and misleading statements and omitting material facts regarding our business, including implementation of our point-of-sale system, operations and prospects during the period covered by the complaint. A complaint filed by James DePalma also in Sherman, Texas alleging similar claims was consolidated by the court into the Hall matter. On October 8, 2018, the parties agreed to settle this matter for $11 million. The court granted preliminary approval of the settlement on December 13, 2018. Under the terms of the settlement our insurance carrier paid an aggregate of $11 million in cash, subsequent to December 31, 2018, which will be distributed to an agreed upon class of claimants who purchased our common stock from July 27, 2015 through October 10, 2016, as well as used to pay costs of notice and settlement administration, and plaintiffs’ attorneys’ fees and expenses. A hearing to finally approve the settlement is scheduled for May 3, 2019. Blair v. Rent-A-Center, Inc. This matter is a state-wide class action complaint originally filed on March 13, 2017 in the Federal District Court Note L — Other Charges 2018 Cost Savings Initiatives. During the year ended December 31, 2018, we began execution of multiple cost savings initiatives, including reductions in overhead and supply chain, resulting in pre-tax charges of $13.1 million in severance and other payroll-related costs, $6.8 million in contract termination fees, $2.3 million in other miscellaneous shutdown costs, $3.4 million in lease obligation costs, $1.9 million in legal and advisory fees, $1.9 million related to the write-down of capitalized software, and $1.0 million in disposal of fixed assets. Store Consolidation Plan. During the year ended December 31, 2018, we closed 138 Core U.S. stores and 9 locations in Mexico, resulting in pre-tax charges of $11.2 million, consisting of $8.1 million in lease obligation costs, $1.6 million in disposal of fixed assets, $1.3 million in other miscellaneous shutdown costs, and $0.2 million in severance and other payroll-related cost. Write-down of Capitalized Software. During 2018 and 2017, we discontinued certain IT software projects and as a result incurred pre-tax PART II Notes to Consolidated Financial Statements the plaintiffs allege that we fail the Karnette Rental-Purchase Act. for the Northern District of California. The complaint alleges various claims, including that our cash sales and total rent to own prices exceed In the pricing permitted under addition, to give customers a fully executed rental agreement and that all such rental agreements that were issued to customers unsigned are void under the law. The plaintiffs are seeking statutory damages under the Karnette Rental-Purchase Act injunctive relief, and which range from $100—$1,000 per violation, attorney’s fees. We believe that these claims are without merit and intend to vigorously defend ourselves. However, we cannot assure you that we will be found to have no liability in this matter. terminated stated End Date, we Vintage Rodeo Parent, LLC, Vintage Rodeo Acquisition, Inc. and Inc. v. Vintage Capital Management, LLC, and B. Riley Financial, Rent-A-Center, Inc. On December 18, 2018, after the Company did not receive an extension notice from Vintage Rodeo Parent, LLC (“Vintage”) that was required by December 17, 2018 to extend the Merger Agreement’s the Merger Agreement. Our Board of Directors determined that terminating the Merger Agreement was in the best interests of our stockholders, and instructed Rent-A-Center’s management to exercise the Company’s right to terminate the Merger Agreement and make a demand on Vintage for the $126.5 million reverse breakup fee owed to us following the termination of the Merger Agreement. On December 21, 2018, Vintage and its affiliates filed a lawsuit in Delaware Court of Chancery against Rent-A-Center, asserting that the Merger Agreement remained in effect, and that Vintage did not owe Rent-A-Center the $126.5 million reverse breakup fee associated with out termination of the Merger Agreement. B. Riley, a guarantor of the payment of the reverse breakup fee, later joined the lawsuit brought by Vintage in Delaware Court of Chancery. In addition, we brought a counterclaim against Vintage and B. Riley asserting our right to payment of the reverse breakup fee. On February 11th and 12th of 2019, a trial was held in Delaware Court of Chancery in the lawsuit arising from Rent-A-Center’s termination of the Merger Agreement. While it is difficult to predict the outcome of litigation, we believe Rent-A-Center, under the express and unambiguous language of that agreement, had a clear right to terminate the Merger Agreement and that it is entitled to the $126.5 million reverse breakup fee. Oral argument on the parties’ post-trial briefs is scheduled for Monday, March 11th. In the event that the Merger Agreement is reinstated by the court and the transaction is completed, we expect to pay estimated financial advisory fees of approximately $15 million. charges of $1.2 million and $18.2 million, respectively, related to the write-down of capitalized assets and termination of associated license agreements. in and Florida pre-tax resulting expenses Effects of Hurricanes. During the second half of 2018, Hurricane Florence and Michael caused damage in North Carolina, South Carolina, of approximately $0.6 million for inventory losses, store repair costs, fixed asset write-offs, and employee assistance. During the third quarter of 2017, Hurricanes Harvey, Irma and Maria caused significant damage in the continental United States and surrounding areas, including Texas, Florida, and Puerto Rico, resulting in pre-tax expenses of approximately $4.5 million for inventory losses, store repair costs, fixed asset write-offs, and employee assistance. Approximately $2.1 million of these pre-tax expenses related to Hurricanes Harvey and Irma, while the remaining $2.4 million related to Hurricane Maria. RENT-A-CENTER - Annual Report on Form 10-K 53 PART II Notes to Consolidated Financial Statements Acceptance Now Store Closures. During the first six months of 2017, we closed 319 Acceptance Now manned locations and 9 Acceptance Now direct locations, related to the hhgregg bankruptcy and liquidation plan and the Conn’s referral contract termination. These closures resulted in pre-tax charges of $19.2 million for the year ended December 31, 2017, consisting primarily of rental merchandise losses, disposal of fixed assets, and other miscellaneous labor and shutdown costs. In addition, we recorded a pre-tax impairment charge of $3.9 million to our intangible assets for our discontinued vendor relationship. Corporate Cost Rationalization. During the first nine months of 2017, we executed a head count reduction that impacted approximately 10% of our field support center workforce. This resulted in pre-tax charges for severance and other payroll-related costs of approximately $3.4 million for the year ended December 31, 2017. Core U.S. Store and Acceptance Now Consolidation Plan. During the second quarter of 2016, we closed 167 Core U.S. stores and 96 Acceptance Now locations, resulting in pre-tax charges of $20.1 million consisting of lease obligation costs, disposal of fixed assets, and other miscellaneous shutdown costs. Mexico Store Consolidation Plan. During the first quarter of 2016, we closed 14 stores in Mexico, resulting in pre-tax charges of $2.3 million in the Mexico segment for disposal of rental merchandise, disposal of fixed assets and leasehold improvements, and other miscellaneous shutdown costs. Claims Settlement. In the fourth quarter of 2016, we recognized a gain of $2.2 million related to a legal claims settlement. Activity with respect to other charges for the years ended December 31, 2017 and 2018 is summarized in the below table: (In thousands) Cash charges: Labor reduction costs Lease obligation costs Contract termination costs Other miscellaneous Total cash charges Non-cash charges: Rental merchandise losses Asset impairments, including capitalized software Impairment of intangible asset Other(1) Total other charges Accrued Charges at December 31, 2016 Charges & Adjustments Payments Accrued Charges at December 31, 2017 Charges & Adjustments Payments Accrued Charges at December 31, 2018 $ $ 1,393 $ 3,765 $ (3,484) $ 6,628 — — 457 — 723 (4,980) — (723) 1,674 2,105 — — $13,321 $ (7,372) $ 11,952 6,750 2,696 (9,175) (6,750) (2,696) 7,623 4,882 — — 8,021 4,945 $ (9,187) $ 3,779 34,719 $ (25,993) $ 12,505 18,417 19,237 3,896 12,724 59,219 $ 620 6,825 — 17,160 $59,324 (1) Other primarily includes incremental legal and advisory fees associated with our strategic review and merger related activities, partially offset by insurance claims recoveries related to 2017 hurricanes for the year ended December 31, 2018 and primarily includes incremental legal and advisory fees, effects of hurricanes, and legal settlements for the year ended December 31, 2017. Note M — Stock-Based Compensation the benefit of certain We maintain long-term incentive plans for employees and directors. Our plans consist of the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”), the Rent-A-Center, Inc. 2006 Equity Incentive Plan (the “Equity Incentive Plan”), and the Rent-A-Center 2016 Long-Term Incentive Plan (the “2016 Plan”) which are collectively known as the “Plans.” On March 9, 2016, upon the recommendation of the Compensation Committee, the Board adopted, subject to stockholder approval, the 2016 Plan and directed that it be submitted for the approval of the stockholders. On June 2, 2016, the stockholders approved the 2016 Plan. The 2016 Plan authorizes the issuance of a total of 6,500,000 shares of common stock. Any shares of common stock granted in connection with an award of stock options or stock appreciation rights will be counted against this limit as one share and any shares of common stock granted in connection with awards of restricted stock, restricted stock units, deferred stock or similar forms of stock awards other than stock options and stock appreciation rights will be counted against this limit as two shares of common stock for every one share of common stock granted in connection with such awards. No shares of common stock will be deemed to have been issued if (1) such shares covered by the unexercised portion of an option that terminates, expires, or is cancelled or settled in cash or (2) such shares are forfeited 54 RENT-A-CENTER - Annual Report on Form 10-K or subject to awards that are forfeited, canceled, terminated or settled in cash. In any calendar year, (1) no employee will be granted options and/ or stock appreciation rights for more than 800,000 shares of common stock; (2) no employee will be granted performance-based equity awards under the 2016 Plan (other than options and stock appreciation rights), covering more than 800,000 shares of common stock; and (3) no employee will be granted performance-based cash awards for more than $5,000,000. At December 31, 2018 and 2017, there were 2,625,206 and 1,705,660 shares, respectively, allocated to equity awards outstanding in the 2016 Plan. The 2006 Plan authorizes the issuance of 7,000,000 shares of Rent-A-Center’s common stock that may be issued pursuant to awards granted under the 2006 Plan, of which no more than 3,500,000 shares may be issued in the form of restricted stock, deferred stock or similar forms of stock awards which have value without regard to future appreciation in value of or dividends declared on the underlying shares of common stock. In applying these limitations, the following shares will be deemed not to have been issued: (1) shares covered by the unexercised portion of an option that terminates, expires, or is canceled or settled in cash, and (2) shares that are forfeited or subject to awards terminated or settled in cash. At that are forfeited, canceled, there were 1,022,482 and December 31, 2018 and 2017, PART II Notes to Consolidated Financial Statements 1,554,931 shares, respectively, allocated to equity awards outstanding in the 2006 Plan. The 2006 Plan expired in accordance with its terms on March 24, 2016, and all shares remaining available for grant under the 2006 Plan were canceled. Options granted to our employees generally become exercisable over a period of 1 to 4 years from the date of grant and may be exercised up to a maximum of 10 years from the date of grant. Options granted to directors were immediately exercisable. We acquired the Equity Incentive Plan (formerly known as the Rent-Way, Inc. 2006 Equity Incentive Plan) in conjunction with our acquisition of Rent-Way in 2006. There were 2,468,461 shares of our common stock reserved for issuance under the Equity Incentive Plan. There were 677,074 and 1,037,514 shares allocated to equity awards outstanding in the Equity Incentive Plan at December 31, 2018 and 2017, respectively. The Equity Incentive Plan expired in accordance with its terms on January 13, 2016, and all shares remaining available for grant under the Equity Incentive Plan were canceled. We grant restricted stock units to certain employees that vest after a three-year service requirement has been met. We recognize expense for these awards using the straight-line method over the requisite service period based on the number of awards expected to vest. We also grant performance-based restricted stock units that vest between 0% and 200% depending on our stock performance against an index using a total shareholder return formula established at the date of grant for the subsequent three-year period. We record expense for these awards over the requisite service period, net of the expected forfeiture rate, since the employee must maintain employment to vest in the award. Stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016 is as follows: (In thousands) Stock options Restricted share units Total stock-based compensation expense Tax benefit recognized in the statements of earnings Stock-based compensation expense, net of tax Year Ended December 31, 2018 2017 2016 $ 1,388 $ 2,023 $ 2,954 4,573 5,961 1,739 1,873 3,896 1,442 6,255 9,209 658 $ 4,222 $ 2,454 $ 8,551 We issue new shares of stock to satisfy option exercises and the vesting of restricted stock units. The fair value of unvested options that we expect to result in compensation expense was approximately $2.4 million with a weighted average number of years to vesting of 2.52 at December 31, 2018. Information with respect to stock option activity related to the Plans for the year ended December 31, 2018 follows: Equity Awards Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (In thousands) Balance outstanding at January 1, 2018 Granted Exercised Forfeited Expired Balance outstanding at December 31, 2018 Exercisable at December 31, 2018 2,953,694 $ 522,731 (137,509) (373,690) (496,326) 2,468,900 $ 1,424,800 $ 21.34 8.73 10.19 12.79 27.40 19.37 25.81 6.06 $ 4.38 $ 2,090 2,090 The intrinsic value of options exercised during the years ended December 31, 2018 and 2017 was $418.9 thousand and $53.3 thousand, respectively, resulting in tax benefits of $146.6 thousand and $18.7 thousand, respectively, which are reflected as an outflow from operating activities and an inflow from financing activities in the consolidated statements of cash flows. There were no options exercised during the year ended December 31, 2016. The weighted average fair values of the options granted under the Plans were calculated using the Black-Scholes method. The weighted average grant date fair value and weighted average assumptions used in the option pricing models are as follows: Weighted average grant date fair value Weighted average risk free interest rate Weighted average expected dividend yield Weighted average expected volatility Weighted average expected life (in years) Year Ended December 31, 2018 2017 $ 3.80 $ 2.92 $ 2016 3.06 1.31% 3.16% 1.78% 3.03% 45.44% 39.64% 4.50 4.63 2.51% —% 49.58% 4.63 RENT-A-CENTER - Annual Report on Form 10-K 55 PART II Notes to Consolidated Financial Statements Information with respect to non-vested restricted stock unit activity follows: Balance outstanding at January 1, 2018 Granted Vested Forfeited Balance outstanding at December 31, 2018 Restricted Awards Outstanding Weighted Average Grant Date Fair Value 1,344,411 1,188,565 (188,029) (489,085) 1,855,862 $ $ 10.87 8.73 23.34 8.66 8.82 Restricted stock units are valued using the closing price reported by the Nasdaq Global Select Market on the trading day immediately preceding the day of the grant. Unrecognized compensation expense for unvested restricted stock units at December 31, 2018, was approximately $7.3 million expected to be recognized over a weighted average period of 1.84 years. Note N — Deferred Compensation Plan is The Rent-A-Center, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) deferred compensation plan for a select group of our key management personnel and highly compensated employees. The Deferred Compensation Plan first became available to eligible employees in July 2007, with deferral elections taking effect as of August 3, 2007. nonqualified unfunded, an The Deferred Compensation Plan allows participants to defer up to 50% their base compensation and up to 100% of any bonus of compensation. Participants may invest the amounts deferred in measurement funds that are the same funds offered as the investment options in the Rent-A-Center, Inc. 401(k) Retirement Savings Plan. We may make discretionary contributions to the Deferred Compensation Plan, which are subject to a three-year graded vesting schedule based Note O — 401(k) Plan on the participant’s years of service with us. We are obligated to pay the deferred compensation amounts in the future in accordance with the terms of the Deferred Compensation Plan. Assets and associated liabilities of the Deferred Compensation Plan are included in prepaid and other assets and accrued liabilities in our consolidated balance sheets. For the years ended December 31, 2018, 2017 and 2016, we made matching cash contributions of approximately $50 thousand, $100 thousand and $300 thousand, respectively, which represents 50% of the employees’ contributions to the Deferred Compensation Plan up to an amount not to exceed 6% of each employee’s respective compensation. No other discretionary contributions were made for the years ended December 31, 2018, 2017 and 2016. The deferred compensation plan assets and liabilities were approximately $8.7 million and $11.3 million as of December 31, 2018 and 2017, respectively. We sponsor a defined contribution plan under Section 401(k) of the Internal Revenue Code for certain employees who have completed at least three months of service. Employees may elect to contribute up to 50% of to limitations. We may make discretionary contributions to the 401(k) plan. Employer matching contributions are subject to a three-year graded vesting schedule based on the participant’s years of service with us. For the years ended December 31, 2018, 2017 and 2016, we made their eligible compensation on a pre-tax basis, subject matching cash contributions of $6.3 million, $7.0 million and $7.6 million, respectively, which represents 50% of the employees’ contributions to the 401(k) plan up to an amount not to exceed 6% of each employee’s respective compensation. Employees are permitted to elect to purchase our common stock as part of their 401(k) plan. As of December 31, 2018 and 2017, 6.2% and 6.0%, respectively, of the total plan assets consisted of our common stock. Note P — Fair Value We follow a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of our non-financial assets and non-financial liabilities, which consist primarily of goodwill. These tiers include: Level 1, defined as observable inputs instruments in active markets; such as quoted prices for identical Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no changes in the methods and assumptions used in measuring fair value during the period. At December 31, 2018, our financial instruments include cash and cash equivalents, receivables, payables, senior debt and senior notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at December 31, 2018 and 2017, because of the short maturities of these instruments. Our senior debt is variable rate debt that re-prices frequently and entails no significant change in credit risk and, as a result, fair value approximates carrying value. 56 RENT-A-CENTER - Annual Report on Form 10-K PART II Notes to Consolidated Financial Statements The fair value of our senior notes is based on Level 1 inputs and was as follows at December 31, 2018 and 2017: (In thousands) 6.625% senior notes 4.75% senior notes Total senior notes December 31, 2018 December 31, 2017 Carrying Value Fair Value Difference Carrying Value Fair Value Difference $ $ 292,740 250,000 542,740 $ $ 285,509 239,050 524,559 $ $ (7,231) (10,950) (18,181) $ $ 292,740 250,000 542,740 $ $ 278,835 237,500 516,335 $ $ (13,905) (12,500) (26,405) Note Q — Stock Repurchase Plan Under our current common stock repurchase program, our Board of Directors has authorized the purchase, from time to time, in the open market and privately negotiated transactions, of up to an aggregate of $1.25 billion of Rent-A-Center common stock. We have repurchased a total of 36,994,653 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million as of December 31, 2018. No shares were repurchased during 2018 and 2017. Common stock repurchases are currently prohibited under the Fifth Amendment to our Credit Agreement. Please see Note I for further discussion of this restriction. Note R — Segment Information The operating segments reported below are the segments for which separate financial information is available and for which segment results are evaluated by the chief operating decision makers. Our operating segments are organized based on factors including, but not limited to, type of business transactions, geographic location and store ownership. All operating segments offer merchandise from four basic product categories: consumer electronics, appliances, computers (including tablets), and furniture (including accessories), and our Core U.S., Mexico and franchising segments also offer smartphones. Reportable segments and their respective operations are defined as follows. Our Core U.S. segment primarily operates rent-to-own stores in the United States and Puerto Rico whose customers enter into weekly, semi-monthly or monthly rental purchase agreements, which renew automatically upon receipt of each payment. We retain the title to the merchandise during the term of the rental purchase agreement and ownership passes to the customer if the customer has continuously renewed the rental purchase agreement through the end of the term or exercises a specified early purchase option. This segment also includes the 44 stores operating in two states that utilize a retail model which generates installment credit sales through a retail sale transaction. Segment assets include cash, receivables, rental merchandise, property assets and other intangible assets. Our Acceptance Now segment operates kiosks within various traditional retailers’ locations where we generally offer the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer. The transaction offered is generally similar to that of the Core U.S. segment; however, the majority of the customers in this segment enter into monthly rather than weekly agreements. Segment assets include cash, rental merchandise, property assets, goodwill and other intangible assets. Our Mexico segment currently consists of our company-owned rent-to-own stores in Mexico. The nature of this segment’s operations and assets are the same as our Core U.S. segment. The stores in our Franchising segment use Rent-A-Center’s, ColorTyme’s or RimTyme’s trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising’s primary source of revenue is the sale of rental merchandise to its franchisees who, in turn, offer the merchandise to the general public for rent or purchase under a rent-to-own program. As the franchisor, Franchising receives royalties of 2.0% to 6.0% of franchisees’ monthly gross revenue and initial fees for new locations. Segment assets include cash, franchise fee receivables, property assets and intangible assets. Segment information as of and for the years ended December 31, 2018, 2017 and 2016 is as follows: (In thousands) Revenues Core U.S. Acceptance Now Mexico Franchising Total revenues (In thousands) Gross profit Core U.S. Acceptance Now Mexico Franchising Total gross profit Year Ended December 31, 2018 2017 2016 1,855,712 $ 1,835,422 $ 2,069,725 722,562 49,613 32,578 797,987 47,005 22,126 817,814 50,927 24,786 2,660,465 $ 2,702,540 $ 2,963,252 Year Ended December 31, 2018 2017 2016 1,299,809 $ 1,276,212 $ 1,467,679 339,616 34,364 14,379 400,002 32,592 9,736 422,381 35,549 9,440 1,688,168 $ 1,718,542 $ 1,935,049 $ $ $ $ RENT-A-CENTER - Annual Report on Form 10-K 57 PART II Notes to Consolidated Financial Statements Beginning in 2018, we implemented an intercompany book value adjustment charge for all rental merchandise transfers from Acceptance Now locations to Core U.S. stores. For the twelve months ended December 31, 2018, book value adjustments on intercompany rental merchandise transfers were $12.0 million, resulting in a corresponding increase in gross profit for the Core U.S. and decrease in gross profit for Acceptance Now. (In thousands) Operating profit (loss) Core U.S. Acceptance Now Mexico Franchising Total segments Corporate Year Ended December 31, 2018 2017 2016 $ 147,787 $ 86,196 $ 93,951 2,605 4,385 248,728 (192,591) 48,618 (260) 5,081 139,635 (202,694) (1,020) 105,925 (2,449) 5,650 108,106 (174,702) Total operating profit (loss) $ 56,137 $ (63,059) $ (66,596) Beginning in 2018, we implemented an intercompany book value adjustment charge for all rental merchandise transfers from Acceptance Now locations to Core U.S. stores. For the twelve months ended December 31, 2018, book value adjustments for inventory charge-offs related to intercompany rental merchandise transfers were $2.2 million, resulting in a corresponding increase in operating profit for the Core U.S. and decrease in operating profit for Acceptance Now. Total depreciation, amortization and write-down of intangibles $ (1) We recorded a goodwill impairment charge of $151.3 million in the Core U.S. segment during the fourth quarter of 2016, not included in the table above. (2) We recorded an impairment of intangibles of $3.9 million in the Acceptance Now segment during the first quarter of 2017 that is not included in the table above. The impairment charge was recorded to Other Charges in the Consolidated Statement of Operations. (In thousands) Depreciation, amortization and write-down of intangibles Core U.S.(1) Acceptance Now(2) Mexico Franchising Total segments Corporate (In thousands) Capital expenditures Core U.S. Acceptance Now Mexico Total segments Corporate Year Ended December 31, 2018 2017 2016 $ 25,566 $ 31,070 $39,734 1,677 1,006 172 28,421 40,525 68,946 $ 2,498 1,973 177 35,718 38,921 74,639 3,309 3,179 177 46,399 34,057 $80,456 Year Ended December 31, 2018 2017 2016 $ 17,173 $ 26,506 $ 203 295 17,671 10,291 2,723 124 29,353 36,107 65,460 $ 20,802 2,330 283 23,415 37,728 61,143 Total capital expenditures $ 27,962 $ (In thousands) On rent rental merchandise, net Core U.S. Acceptance Now Mexico Total on rent rental merchandise, net December 31, 2018 2017 2016 $ $ 424,829 242,978 16,001 683,808 $ $ 408,993 278,443 14,367 701,803 $ $ 426,845 354,486 13,787 795,118 58 RENT-A-CENTER - Annual Report on Form 10-K (In thousands) Held for rent rental merchandise, net Core U.S. Acceptance Now Mexico Total held for rent rental merchandise, net (In thousands) Assets by segment Core U.S. Acceptance Now Mexico Franchising Total segments Corporate Total assets (In thousands) Assets by country United States Mexico Canada Total assets (In thousands) Rentals and fees by inventory category Furniture and accessories Consumer electronics Appliances Computers Smartphones Other products and services Total rentals and fees (In thousands) Revenue by country United States Mexico Canada Total revenues PART II Notes to Consolidated Financial Statements December 31, 2018 2017 2016 $ $ 117,294 $ 156,039 1,207 5,161 4,940 6,209 123,662 $ 167,188 $ $ 192,718 7,489 6,629 206,836 December 31, 2018 2017 2016 $ 714,914 $ 776,296 $ 312,151 29,321 4,287 1,060,673 336,244 350,970 33,529 3,802 1,164,597 256,184 860,717 432,383 31,415 2,197 1,326,712 276,029 $ 1,396,917 $ 1,420,781 $ 1,602,741 $ $ $ December 31, 2018 2017 2016 1,366,405 $ 1,383,004 $ 1,567,933 29,321 1,191 33,529 4,248 31,415 3,393 1,396,917 $ 1,420,781 $ 1,602,741 Year Ended December 31, 2018 2017 2016 962,241 $ 921,159 $ 410,184 344,548 120,756 62,592 344,539 459,942 351,893 124,158 57,927 352,662 927,537 553,976 391,539 148,889 93,449 384,663 $ 2,244,860 $ 2,267,741 $ 2,500,053 Year Ended December 31, 2018 2017 2016 $ $ 2,610,432 $ 2,654,819 $ 2,911,613 49,612 421 47,005 716 50,927 712 2,660,465 $ 2,702,540 $ 2,963,252 RENT-A-CENTER - Annual Report on Form 10-K 59 PART II Notes to Consolidated Financial Statements Note S — Earnings Per Common Share Summarized basic and diluted earnings per common share were calculated as follows: (In thousands, except per share data) Numerator: Net earnings (loss) Denominator: Weighted-average shares outstanding Effect of dilutive stock awards(1) Weighted-average dilutive shares Basic earnings (loss) per share Diluted earnings (loss) per share Anti-dilutive securities excluded from diluted earnings (loss) per common share: Anti-dilutive restricted share units Anti-dilutive performance share units Anti-dilutive stock options Year Ended December 31, 2018 2017 2016 $ 8,492 $ 6,653 $ (105,195) 53,471 1,071 54,542 53,282 562 53,844 $ $ 0.16 0.16 $ $ 0.12 0.12 $ $ — 200 1,498 — 329 2,554 53,121 — 53,121 (1.98) (1.98) 482 880 3,072 (1) There was no dilutive effect to the loss per common share for the year ended December 31, 2016 due to the net loss incurred for the period. Note T — Unaudited Quarterly Data Summarized quarterly financial data for the years ended December 31, 2018, and 2017 is as follows: (In thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Ended December 31, 2018 Revenues Gross profit Operating profit (loss) Net (loss) earnings Basic (loss) earnings per common share Diluted (loss) earnings per common share (In thousands, except per share data) Year Ended December 31, 2017 Revenues Gross profit Operating profit (loss) Net earnings (loss) Basic earnings (loss) per common share Diluted earnings (loss) per common share Cash dividends declared per common share $ $ $ $ $ $ $ 698,043 $ 655,730 $ 644,942 $ 436,978 (10,270) (19,843) 423,886 27,151 13,753 407,740 25,632 12,918 (0.37) $ (0.37) $ 0.26 0.25 $ $ 0.24 0.24 $ $ 661,750 419,564 13,624 1,664 0.03 0.03 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 741,986 $ 677,635 $ 643,965 $ 462,663 432,533 1,152 (6,679) (0.13) (0.13) 0.08 $ $ $ (873) (8,893) (0.17) (0.17) 0.08 $ $ $ 412,465 (8,445) (12,599) (0.24) (0.24) $ $ — $ 638,954 410,881 (54,893) 34,824 0.65 0.65 — 60 RENT-A-CENTER - Annual Report on Form 10-K PART II Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Disclosure Controls and Procedures In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of December 31, 2018, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective. Management’s Annual Report on Internal Control over Financial Reporting Please refer to Management’s Annual Report on Internal Control over Financial Reporting in Part II, Item 8, of this Annual Report on Form 10-K. Auditor’s Report Relating to Effectiveness of Internal Control over Financial Reporting Please refer to the Report of Independent Registered Public Accounting Firm in Part II, Item 8, of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting For the year ended December 31, 2018, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that, in the aggregate, have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. RENT-A-CENTER - Annual Report on Form 10-K 61 PART III Item 10. Directors, Executive Officers and Corporate Governance.(*) Item 11. Executive Compensation.(*) Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.(*) Item 13. Certain Relationships and Related Transactions, and Director Independence.(*) Item 14. Principal Accountant Fees and Services.(*) * The information required by Items 10, 11, 12, 13 and 14 is or will be set forth in the definitive proxy statement relating to the 2019 Annual Meeting of Stockholders of Rent-A-Center, Inc., which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. This definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K. 62 RENT-A-CENTER - Annual Report on Form 10-K PART IV Item 15. Exhibits and Financial Statement Schedules. 1. Financial Statements 2. Financial Statement Schedules The financial statements included in this report are listed in the Index to Financial Statements in Part II, Item 8, of this Annual Report on Form 10-K. Schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions or inapplicable. 3. Exhibits Exhibit No. Description 2.1 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 10.1† 10.2 10.3† 10.4† 10.5† Agreement and Plan of Merger, dated as of June 17, 2018, by and among Rent-A-Center, Inc., Vintage Rodeo Parent, LLC and Vintage Rodeo Acquisition, Inc. (Incorporated herein by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated as of June 17, 2018.) Certificate of Incorporation of Rent-A-Center, Inc., as amended (Incorporated herein by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated as of December 31, 2002.) Certificate of Amendment to the Certificate of Incorporation of Rent-A-Center, Inc., dated May 19, 2004 (Incorporated herein by reference to Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.) Amended and Restated Bylaws of Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated as of September 28, 2011.) Certificate of Designations of Series D Preferred Stock of Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated as of March 29, 2017.) Form of Certificate evidencing Common Stock (Incorporated herein by reference to Exhibit 4.1 to the registrant’s Current Report on Form 10-Q dated as of March 31, 2017.) Indenture, dated as of November 2, 2010, by and among Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York Mellon Trust Company, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated as of November 2, 2010.) Indenture, dated as of May 2, 2013, by and among Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York Mellon Trust Company, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated as of May 2, 2013.) Rights Agreement, dated as of March 28, 2017, between Rent-A-Center, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (Incorporated herein by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated as of March 25, 2017.) Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.) Guarantee and Collateral Agreement, dated March 19, 2014, by and among Rent-A-Center, Inc., its subsidiaries named as guarantors therein and JPMorgan Chase Bank, N.A. as Administrative Agent (Incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K dated March 19, 2014.) Form of Stock Option Agreement issuable to Directors pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.) Form of Stock Option Agreement issuable to management pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.21 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.) Summary of Director Compensation (Incorporated herein by reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2017.) RENT-A-CENTER - Annual Report on Form 10-K 63 PART IV Item 15. Exhibits and Financial Statement Schedules. Exhibit No. Description 10.6† 10.7† 10.8† 10.9† 10.10† 10.11† 10.12† 10.13† 10.14† 10.15† 10.16† 10.17† 10.18† 10.19† 10.20† 10.21† 10.22 10.23† 10.24 10.25 10.26 10.27 Form of Stock Compensation Agreement issuable to management pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.) Form of Long-Term Incentive Cash Award issuable to management pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.16 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.) Form of Loyalty and Confidentiality Agreement entered into with management (Incorporated herein by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2016.) Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.17 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.) Form of Stock Option Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.) Form of Stock Compensation Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Equity Incentive Plan (Incorporated herein by reference to Exhibit 10.19 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006.) Form of Long-Term Incentive Cash Award issuable to management pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006.) Rent-A-Center, Inc. 2006 Equity Incentive Plan and Amendment (Incorporated herein by reference to Exhibit 4.5 to the registrant’s Registration Statement on Form S-8 filed with the SEC on January 4, 2007.) Form of Stock Option Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Equity Incentive Plan (Incorporated herein by reference to Exhibit 10.22 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006.) Form of Stock Compensation Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006.) Form of Stock Option Agreement issuable to Directors pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006.) Form of Deferred Stock Unit Award Agreement issuable to Directors pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2010.) Form of Executive Transition Agreement entered into with management (Incorporated herein by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended August 31, 2016.) Rent-A-Center, Inc. 2016 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.36 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.) Rent-A-Center, Inc. Non-Qualified Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.28 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.) Rent-A-Center, Inc. 401-K Plan (Incorporated herein by reference to Exhibit 10.30 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008.) Credit Agreement, dated as of March 19, 2014, among Rent-A-Center, Inc., the several lenders from time to time parties thereto, Bank of America, N.A., BBVA Compass Bank, Wells Fargo Bank, N.A. and Suntrust Bank, as syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated as of March 19, 2014.) Rent-A-Center East, Inc. Retirement Savings Plan for Puerto Rico Employees (Incorporated herein by reference to Exhibit 99.1 to the registrant’s Registration Statement on Form S-8 filed January 28, 2011.) First Amendment to Franchisee Financing Agreement between ColorTyme Finance, Inc. and Citibank, N.A., dated as of July 25, 2012 (Incorporated herein by reference to Exhibit 10.32 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) Master Confirmation Agreement, dated as of May 2, 2013, between Rent-A-Center, Inc. and Goldman Sachs & Co. (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of May 2, 2013.) Second Amendment to Franchisee Financing Agreement between ColorTyme Finance, Inc. and Citibank, N.A., dated as of August 30, 2013 (Incorporated herein by reference to Exhibit 10.34 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.) Third Amendment to Franchisee Financing Agreement between ColorTyme Finance, Inc. and Citibank, N.A., dated as of May 1, 2014 (Incorporated herein by reference to Exhibit 10.33 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.) 64 RENT-A-CENTER - Annual Report on Form 10-K PART IV Item 15. Exhibits and Financial Statement Schedules. Exhibit No. Description 10.28 10.29 10.30† 10.31† 10.32† 10.33 10.34† 10.35 10.36 10.37 10.38† 10.39 10.4 18.1 21.1 23.1* 31.1* 31.2* 32.1* 32.2* Waiver and Fourth Amendment to Franchisee Financing Agreement between ColorTyme Finance, Inc. and Citibank, N.A., dated as of September 1, 2014 (Incorporated herein by reference to Exhibit 10.34 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014.) First Amendment to the Credit Agreement, dated February 1, 2016, between the Company, JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of February 1, 2016.) Form of Stock Option Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2016 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.37 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.) Form of Stock Compensation Agreement (RSU) issuable to management pursuant to the Rent-A-Center, Inc. 2016 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.38 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.) Form of Stock Compensation Agreement (PSU) issuable to management pursuant to the Rent-A-Center, Inc. 2016 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.39 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.) Second Amendment to the Credit Agreement, dated effective as of September 30, 2016, between the Company, JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of October 4, 2016.) Separation Agreement and Release of Claims, dated as of January 9, 2017, between Robert D. Davis and Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K dated as of January 9, 2017.) Third Amendment and Waiver to the Credit Agreement, dated effective as of May 1, 2017, between the Company, JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of May 1, 2017.) Fourth Amendment to the Credit Agreement (including Amended and Restated Guarantee and Collateral Agreement), dated as of June 6, 2017, between the Company, JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of June 6, 2017.) Cooperation Agreement, dated February 5, 2018, by and among Rent-A-Center, Inc., Engaged Capital Flagship Master Fund, LP, Engaged Capital Co-Invest V, LP, Engaged Capital Co-Invest V-A, LP, Engaged Capital Holdings, LLC and Glenn W. Welling (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of February 5, 2018.) CEO Employment Agreement, dated December 30, 2017, between Mitchell E. Fadel and Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of April 3, 2018.) Letter Agreement, dated May 25, 2018, by and among Rent-A-Center, Inc., Engaged Capital Flagship Master Fund, LP, Engaged Capital Co-Invest V, LP, Engaged Capital Co-Invest V-A, LP, Engaged Capital Flagship Fund, LP, Engaged Capital Flagship Fund, Ltd., Engaged Capital, LLC, Engaged Capital Holdings, LLC and Glenn W. Welling (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of May 25, 2018.) Fifth Amendment to the Credit Agreement, dated as of December 12, 2018, between the Company, JPMorgan Chase Bank, N.A., as administrative agent, the other agents party thereto and the lenders party thereto (Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated as of December 12, 2018.) Preferability letter regarding change in accounting principle (Incorporated herein by reference to Exhibit 18.1 to the registrant’s Quarterly Report on the Form 10-Q for the quarter ended September 30, 2014). Subsidiaries of Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 21.1 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2016.) Consent of KPMG LLP Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Mitchell E. Fadel Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Maureen B. Short Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Mitchell E. Fadel Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Maureen B. Short 101.INS* 101.SCH* 101.CAL* 101.DEF* 101.LAB* 101.PRE* XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document † Management contract or compensatory plan or arrangement. * ** Filed herewith. The XBRL-related information in Exhibit No. 101 to this Annual Report on Form 10-K is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. RENT-A-CENTER - Annual Report on Form 10-K 65 PART IV Signatures SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: RENT-A-CENTER, INC. /s/ MITCHELL E. FADEL Mitchell E. Fadel Chief Executive Officer Date: March 1, 2019 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature /s/ MITCHELL E. FADEL Mitchell E. Fadel /s/ MAUREEN B. SHORT Maureen B. Short /s/ JEFFREY J. BROWN Jeffrey J. Brown /s/ MICHAEL J. GADE Michael J. Gade /s/ CHRISTOPHER B. HETRICK Christopher B. Hetrick /s/ J. V. LENTELL J. V. Lentell Title Chief Executive Officer and Director (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Director Director Director Director Date March 1, 2019 March 1, 2019 March 1, 2019 March 1, 2019 March 1, 2019 March 1, 2019 66 RENT-A-CENTER - Annual Report on Form 10-K Board of Directors J.V. Lentell Vice Chairman (retired) Intrust Bank, N.A. Jeffrey J. Brown Chief Executive Officer and Founder Brown Equity Partners Mitchell E. Fadel Chief Executive Officer Rent-A-Center, Inc. Michael J. Gade Founding Partner Challance Group, L.L.P. Christopher B. Hetrick Director of Research Engaged Capital Corporate Officers Division Vice President – RTO Domestic Division Vice President – RTO Domestic Division Vice President – RTO Domestic Vice President – Home Choice General Director – RAC Mexico Anthony J. Blasquez David G. Ewbank James E. York Mark F. Schmitz Armando Avalos Michael J. Santimaw Senior Vice President – Chief Information Officer Andrew M. Trusevich Eric A. Erlewein Daniel G. Glasky Mathew W. Grynwald Vice President – Legal Ajit Jagtap G. Michael Landry Daniel B. O’Rourke Mohammed Saleh Ronald L. Schoolcraft Tiffany J. Watson Senior Vice President and Assistant General Counsel Vice President – Market Planning Vice President – Merchandising Vice President – Information & Business Systems Vice President – Franchise Development Vice President – Finance, Investor Relations and Treasury Vice President – Digital Products & Services Vice President – Acceptance Now Business Development Vice President – Performance Improvement, Training and Development Vice President – Assistant General Counsel and Secretary Plano, TX 75024 Dawn M. Wolverton Stockholders may also contact: Investor Relations Rent-A-Center, Inc. 5501 Headquarters Drive Executive Officers Mitchell E. Fadel Chief Executive Officer Maureen B. Short Executive Vice President – Chief Financial Officer Ann L. Davids Executive Vice President – Chief Customer Officer/Chief Marketing Officer Christopher A. Korst Executive Vice President – General Counsel Catherine M. Skula Executive Vice President – Franchising Corporate and Stockholder Information Corporate Offices 5501 Headquarters Drive Plano, TX 75024 www.rentacenter.com Stockholders may obtain copies of news releases, U.S. Securities and Exchange Commission filings, including Forms 10-K, 10-Q, and 8-K, and other company information by accessing our Web site at www.rentacenter.com Phone: Fax: Email: (972) 801-1100 (866) 260-1424 investor.relations@rentacenter.com Annual Meeting June 4, 2019 at 8:00 a.m. Rent-A-Center, Inc. Field Support Center Transfer Agent and Registrar Computershare P.O. Box 505000 Louisville, KY 40233 For overnight deliveries: 462 South 4th Street, Suite 1600 Louisville, KY 40202 www.computershare.com Stock Listing NASDAQ Global Select Market Ticker Symbol: RCII Independent Auditors KPMG LLP 2323 Ross Avenue Suite 1400 Dallas, TX 75201 

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