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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C.  20549
 

 
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 30, 2013
 
Commission File Number 1-34956
 
CONN'S, INC.
(Exact name of registrant as specified in its charter)

A Delaware Corporation
06-1672840
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

4055 Technology Forest Blvd, Suite 210
The Woodlands, Texas 77381
(936) 230-5899
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)

None
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x 
Non-accelerated filer o 
smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 31, 2013:
 
Class
 
Outstanding
Common stock, $.01 par value per share
 
35,732,875
 



TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
Page No.
 
 
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
6
 
 
 
 
 
Item 2.
 
 
12
 
 
 
 
 
Item 3.
 
 
24
 
 
 
 
 
Item 4.
 
 
24
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
 
 
24
 
 
 
 
 
Item 1A.
 
 
24
 
 
 
 
 
Item 2.
 
 
24
 
 
 
 
 
Item 3.
 
 
24
 
 
 
 
 
Item 4.
 
 
24
 
 
 
 
 
Item 5
 
 
25
 
 
 
 
 
Item 6.
 
 
25
 
 
 
 
 
Item 7.
 
 
25

CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)

 
 
April 30,
   
January 31,
 
Assets
 
2013
   
2013
 
Current assets
 
   
 
Cash and cash equivalents
 
$
4,310
   
$
3,849
 
Customer accounts receivable, net of allowance of $29,736 and $27,617, respectively (includes balance of VIE of $28,553 at January 31, 2013)
   
395,085
     
378,050
 
Other accounts receivable, net of allowance of $55 and $55, respectively
   
51,565
     
45,759
 
Inventories
   
88,862
     
73,685
 
Deferred income taxes
   
15,327
     
15,302
 
Prepaid expenses and other assets (includes balance of VIE of $4,717 at January 31, 2013)
   
6,121
     
11,599
 
Total current assets
   
561,270
     
528,244
 
Long-term portion of customer accounts receivable, net of allowance of $24,402 and $22,866, respectively (includes balance of VIE of $23,641 at January 31, 2013)
   
324,213
     
313,011
 
Property and equipment
   
148,649
     
141,449
 
Less accumulated depreciation
   
(96,918
)
   
(94,455
)
Property and equipment, net
   
51,731
     
46,994
 
Deferred income taxes
   
10,938
     
11,579
 
Other assets
   
9,122
     
10,029
 
Total assets
 
$
957,274
   
$
909,857
 
 
               
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Current portion of long-term debt (includes balance of VIE of $32,307 at January 31, 2013)
 
$
222
   
$
32,526
 
Accounts payable
   
74,748
     
69,608
 
Accrued compensation and related expenses
   
9,684
     
8,780
 
Accrued expenses
   
23,394
     
20,716
 
Income taxes payable
   
8,612
     
4,618
 
Deferred revenues and allowances
   
15,839
     
14,915
 
Total current liabilities
   
132,499
     
151,163
 
Long-term debt
   
293,773
     
262,531
 
Other long-term liabilities
   
22,572
     
21,713
 
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity
               
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)
   
-
     
-
 
Common stock ($0.01 par value, 50,000,000 shares authorized; 35,708,628 and 35,192,070 shares issued at April 30, 2013  and January 31, 2013, respectively)
   
357
     
352
 
Additional paid-in capital
   
216,152
     
204,372
 
Accumulated other comprehensive loss
   
(204
)
   
(223
)
Retained earnings
   
292,125
     
269,949
 
Total stockholders’ equity
   
508,430
     
474,450
 
Total liabilities and stockholders' equity
 
$
957,274
   
$
909,857
 

See notes to consolidated financial statements.
 

CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

 
  Three Months Ended  
 
  April 30,  
 
 
2013
   
2012
 
Revenues
 
   
 
Product sales
 
$
190,860
   
$
152,115
 
Repair service agreement commissions
   
15,989
     
11,392
 
Service revenues
   
2,599
     
3,430
 
Total net sales
   
209,448
     
166,937
 
Finance charges and other
   
41,615
     
33,914
 
Total revenues
   
251,063
     
200,851
 
Cost and expenses
               
Cost of goods sold, including warehousing and occupancy costs
   
123,457
     
108,443
 
Cost of service parts sold, including warehousing and occupancy costs
   
1,406
     
1,550
 
Selling, general and administrative expense
   
73,255
     
59,656
 
Provision for bad debts
   
13,937
     
9,185
 
Charges and credits
   
-
     
163
 
Total cost and expenses
   
212,055
     
178,997
 
Operating income
   
39,008
     
21,854
 
Interest expense
   
3,871
     
3,759
 
Other income, net
   
(6
)
   
(96
)
Income before income taxes
   
35,143
     
18,191
 
Provision for income taxes
   
12,967
     
6,635
 
Net income
 
$
22,176
   
$
11,556
 
 
               
Earnings per share:
               
Basic
 
$
0.63
   
$
0.36
 
Diluted
 
$
0.61
   
$
0.35
 
Average common shares outstanding:
               
Basic
   
35,313
     
32,195
 
Diluted
   
36,452
     
32,904
 

See notes to consolidated financial statements.
 
 
CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)

 
  Three Months Ended  
 
 
April 30,
 
 
 
2013
   
2012
 
 
 
   
 
Net income
 
$
22,176
   
$
11,556
 
 
               
Change in fair value of hedges
   
29
     
43
 
Impact of provision for income taxes on comprehensive income
   
(10
)
   
(15
)
Comprehensive income
 
$
22,195
   
$
11,584
 

See notes to consolidated financial statements.
 

CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended April 30, 2013 and 2012
(unaudited)
(in thousands)

 
 
   
   
   
Accumulated
   
   
 
 
 
   
   
Additional
   
Other
   
   
 
 
 
Common Stock
   
Paid-in
   
Comprehensive
   
Retained
   
 
 
 
Shares
   
Amount
   
Capital
   
Loss
   
Earnings
   
Total
 
Balance at January 31, 2013
   
35,191
   
$
352
   
$
204,372
   
$
(223
)
 
$
269,949
   
$
474,450
 
Exercise of stock options, net of tax
   
506
     
5
     
10,761
     
-
     
-
     
10,766
 
Issuance of common stock under Employee Stock Purchase Plan
   
7
     
-
     
178
     
-
     
-
     
178
 
Vesting of restricted stock units
   
4
     
-
     
-
     
-
     
-
     
-
 
Stock-based compensation
                   
841
                     
841
 
Net income
   
-
     
-
     
-
     
-
     
22,176
     
22,176
 
Change in fair value of hedges, net of tax of $10
   
-
     
-
     
-
     
19
     
-
     
19
 
Balance at April 30, 2013
   
35,708
   
$
357
   
$
216,152
   
$
(204
)
 
$
292,125
   
$
508,430
 

 
 
   
   
   
Accumulated
   
   
 
 
 
   
   
Additional
   
Other
   
   
 
 
 
Common Stock
   
Paid-in
   
Comprehensive
   
Retained
   
 
 
 
Shares
   
Amount
   
Capital
   
Loss
   
Earnings
   
Total
 
Balance at January 31, 2012
   
32,140
   
$
321
   
$
136,006
   
$
(293
)
 
$
217,337
   
$
353,371
 
Exercise of stock options, net of tax
   
223
     
3
     
2,866
     
-
     
-
     
2,869
 
Issuance of common stock under Employee Stock Purchase Plan
   
6
     
-
     
63
     
-
     
-
     
63
 
Vesting of restricted stock units
   
21
     
-
     
-
     
-
     
-
     
-
 
Stock-based compensation
                   
598
                     
598
 
Net income
   
-
     
-
     
-
     
-
     
11,556
     
11,556
 
Change in fair value of hedges, net of tax of $15
   
-
     
-
     
-
     
28
     
-
     
28
 
Balance at April 30, 2012
   
32,390
   
$
324
   
$
139,533
   
$
(265
)
 
$
228,893
   
$
368,485
 

See notes to consolidated financial statements.
 

CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

 
 
Three Months Ended
 
 
 
April 30,
 
 
 
2013
   
2012
 
Cash flows from operating activities
 
   
 
Net income
 
$
22,176
   
$
11,556
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
2,490
     
2,402
 
Amortization
   
1,474
     
739
 
Provision for bad debts and uncollectible interest
   
15,787
     
11,282
 
Stock-based compensation
   
841
     
598
 
Excess tax benefits from stock-based compensation
   
(2,592
)
   
(116
)
Store closing costs
   
-
     
163
 
Provision for deferred income taxes
   
617
     
1,272
 
Gain on sale of property and equipment
   
(6
)
   
(66
)
Discounts and accretion on promotional credit
   
-
     
(103
)
Change in operating assets and liabilities:
               
Customer accounts receivable
   
(44,024
)
   
(6,768
)
Other accounts receivable
   
(5,799
)
   
3,095
 
Inventories
   
(15,177
)
   
(6,350
)
Prepaid expenses and other assets
   
703
     
500
 
Accounts payable
   
5,141
     
16,100
 
Accrued expenses
   
4,542
     
(2,953
)
Income taxes payable
    6,606      
5,651
 
Deferred revenues and allowances
   
708
     
65
 
Net cash (used in) provided by operating activities
    (6,513
)
   
37,067
 
Cash flows from investing activities
               
Purchase of property and equipment
   
(7,228
)
   
(4,404
)
Proceeds from sale of property and equipment
   
6
     
296
 
Net cash used in investing activities
   
(7,222
)
   
(4,108
)
Cash flows from financing activities
               
Borrowings under lines of credit
   
87,335
     
33,729
 
Payments on lines of credit
   
(56,036
)
   
(160,182
)
Proceeds from issuance of asset-backed notes, net of original issue discount
   
-
     
103,025
 
Payments on asset-backed notes
   
(32,513
)
   
-
 
Change in restricted cash
   
4,717
     
(10,042
)
Net proceeds from stock issued under employee benefit plans
    8,352      
2,932
 
Excess tax benefits from stock-based compensation
   
2,592
     
116
 
Other
   
(251
)
   
(2,072
)
Net cash provided by (used in) financing activities
    14,196      
(32,494
)
Net change in cash
   
461
     
465
 
Cash and cash equivalents
               
Beginning of period
   
3,849
     
6,265
 
End of period
 
$
4,310
   
$
6,730
 

See notes to consolidated financial statements.
 

CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Summary of Significant Accounting Policies
 
Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements of Conn’s, Inc. and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise described herein. The Company’s business is somewhat seasonal, with a higher portion of sales and operating profit realized during the quarter that ends January 31, due primarily to the holiday selling season. Operating results for the three-month period ended April 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending  January 31, 2014. The financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2013, filed with the Securities and Exchange Commission on April 4, 2013.

The Company’s balance sheet at January 31, 2013, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete financial presentation. Please see the Company’s Annual Report on Form 10-K for a complete presentation of the audited financial statements for the fiscal year ended January 31, 2013, together with all required footnotes, and for a complete presentation and explanation of the components and presentations of the financial statements.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries. Conn’s, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
 
In April of 2012, the Company transferred certain customer receivables to a bankruptcy-remote, variable-interest entity (“VIE”) in connection with a securitization. The VIE, which is consolidated within the accompanying financial statements, issued debt secured by the customer receivables that were transferred to it, which were included in customer accounts receivable and long-term portion of customer accounts receivable on the consolidated balance sheet as of January 31, 2013. On April 15, 2013, the VIE redeemed the then outstanding asset-backed notes and the remaining customer receivables were transferred back to the Company.
 
The Company determined that the VIE should be consolidated within its financial statements due to the fact that it qualified as the primary beneficiary of the VIE based on the following considerations:
 
· The Company directed the activities that generated the customer receivables that were transferred to the VIE;
· The Company directed the servicing activities related to the collection of the customer receivables transferred to the VIE;
· The Company absorbed losses incurred by the VIE to the extent of its interest in the VIE before any other investors incurred losses; and
· The Company had the right to receive benefits generated by the VIE after paying the contractual amounts due to the other investors.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
 
Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of any stock options and restricted stock units granted, to the extent not anti-dilutive, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:

 
 
Three Months Ended
 
 
 
April 30,
 
(in thousands)
 
2013
   
2012
 
 
 
   
 
Weighted average common shares outstanding - Basic
   
35,313
     
32,195
 
Assumed exercise of stock options
   
937
     
576
 
Unvested restricted stock units
   
202
     
133
 
Weighted average common shares outstanding - Diluted
   
36,452
     
32,904
 

The weighted average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 1.1 million for the three months ended April 30, 2012.
 
Fair Value of Financial Instruments. The fair value of cash and cash equivalents and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a discounted cash flow analysis, approximates their carrying amount. The fair value of the Company’s debt approximates carrying value due to the recent date at which the facility has been renewed. The Company’s interest rate cap options are presented on the balance sheet at fair value. Fair value of these instruments were determined using Level 2 inputs of the GAAP hierarchy, which are defined as inputs not quoted in active markets, but are either directly or indirectly observable.
 
2. Charges and Credits
 
During the three months ended April 30, 2012, the Company accrued the lease buyout costs related to one of its store closures and revised its estimate of future obligations related to its other closed stores. This resulted in a pre-tax charge of $163 thousand ($106 thousand after-tax). This amount is reported within the retail segment and classified in charges and credits in the consolidated statement of operations.
 
3. Supplemental Disclosure of Customer Receivables
 
Customer accounts receivable are originated at the time of sale and delivery of the various products and services. The Company records the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months, based on contractual terms, in current assets on its consolidated balance sheet. Those amounts expected to be collected after twelve months, based on contractual terms, are included in long-term assets. Typically, customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment is reversed and charged against the allowance for uncollectible interest.
 
As part of its efforts in mitigating losses on its accounts receivable, the Company may make loan modifications to a borrower experiencing financial difficulty that are intended to maximize the net cash flow after expenses, and avoid the need for repossession of collateral. The Company may extend the loan term, refinance or otherwise re-age an account. Accounts that have been re-aged in excess of three months or refinanced are considered Troubled Debt Restructurings (“TDR”).
 
The Company uses risk-rating criteria to differentiate underwriting requirements, potentially requiring differing down payment and initial application and documentation criteria. The following tables present quantitative information about the receivables portfolio managed by the Company, segregated by class:

 
 
Total Outstanding Balance
 
 
 
Customer Accounts Receivable
   
60 Days Past Due (1)
   
Re-aged (1)
 
 
 
April 30,
   
January 31,
   
April 30,
   
January 31,
   
April 30,
   
January 31,
 
(in thousands)
 
2013
   
2013
   
2013
   
2013
   
2013
   
2013
 
Customer accounts receivable
 
$
733,626
   
$
702,737
   
$
40,106
   
$
41,704
   
$
47,024
   
$
47,757
 
Restructured accounts (2)
   
39,810
     
38,807
     
11,437
     
11,135
     
39,669
     
38,671
 
Total receivables managed
 
$
773,436
   
$
741,544
   
$
51,543
   
$
52,839
   
$
86,693
   
$
86,428
 

Allowance for uncollectible accounts related to the credit portfolio
   
(46,162
)
   
(43,911
)
Allowance for promotional credit programs
   
(7,976
)
   
(6,572
)
Short-term portion of customer accounts receivable, net
   
(395,085
)
   
(378,050
)
Long-term customer accounts receivable, net
 
$
324,213
   
$
313,011
 

(1) Amounts are based on end of period balances. As an account can become past due after having been re-aged, accounts may be presented in both the past due and re-aged columns shown above. The amounts included within both the past due and re-aged columns shown above as of April 30, 2013 and January 31, 2013 were $20.8 million and $20.7 million, respectively. The total amount of customer receivables past due one day or greater was $173.4 million and $172.4 million as of April 30, 2013 and January 31, 2013, respectively. These amounts include the 60 days past due totals shown above.
(2) In addition to the amounts included in restructured accounts, there are $1.7 million and $1.9 million as of April 30, 2013 and January 31, 2013, respectively, of accounts re-aged four or more months included in the re-aged balance above that did not qualify as TDRs because they were not re-aged subsequent to January 31, 2011.

 
 
   
   
Net Credit
 
 
 
Average Balances
   
Charge-offs (1)
 
 
 
Three Months Ended
   
Three Months Ended
 
 
 
April 30,
   
April 30,
 
(in thousands)
 
2013
   
2012
   
2013
   
2012
 
Customer accounts receivable
 
$
713,700
   
$
589,969
   
$
8,843
   
$
7,576
 
Restructured accounts
   
39,521
     
44,774
     
2,712
     
5,953
 
Total receivables managed
 
$
753,221
   
$
634,743
   
$
11,555
   
$
13,529
 

(1) Charge-offs include the principal amount of losses (excluding accrued and unpaid interest) net of recoveries which include principal collections during the period shown of previously charged-off balances.
 
 
Following is the activity in the Company’s balance in the allowance for doubtful accounts and uncollectible interest for customer receivables for the three months ended April 30, 2013 and 2012:

 
 
Three Months Ended April 30, 2013
   
Three Months Ended April 30, 2012
 
(in thousands)
 
Customer
Accounts
Receivable
   
 
Restructured
Accounts
   
 
 
Total
   
Customer
Accounts
Receivable
   
 
Restructured
Accounts
   
 
 
Total
 
Allowance at beginning of period
 
$
27,702
   
$
16,209
   
$
43,911
   
$
24,518
   
$
25,386
   
$
49,904
 
Provision(1)
   
12,505
     
3,282
     
15,787
     
9,448
     
1,834
     
11,282
 
Principal charge-offs(2)
   
(9,634
)
   
(2,955
)
   
(12,589
)
   
(8,597
)
   
(6,755
)
   
(15,352
)
Interest charge-offs
   
(1,516
)
   
(465
)
   
(1,981
)
   
(1,282
)
   
(1,007
)
   
(2,289
)
Recoveries(2)
   
791
     
243
     
1,034
     
1,021
     
802
     
1,823
 
Allowance at end of period
 
$
29,848
   
$
16,314
   
$
46,162
   
$
25,108
   
$
20,260
   
$
45,368
 

(1) Includes provision for uncollectible interest, which is included in finance charges and other.
(2) Charge-offs include the principal amount of losses (excluding accrued and unpaid interest), and recoveries include principal collections during the period shown of previously charged-off balances. These amounts represent net charge-offs.
 
The Company records an allowance for doubtful accounts, including estimated uncollectible interest, for its customer accounts receivable, based on its historical cash collections and net loss experience using a projection of monthly delinquency performance, cash collections and losses. In addition to pre-charge-off cash collections and charge-off information, estimates of post-charge-off recoveries, including cash payments, amounts realized from the repossession of the products financed and, at times, payments received under credit insurance policies are also considered.
 
The Company determines reserves for those accounts that are TDRs based on the present value of cash flows expected to be collected over the life of those accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as a reserve for loss on those accounts.
 
The Company typically only places accounts in non-accrual status when legally required. Interest accrual is resumed on those accounts once a legally-mandated settlement arrangement is reached or other payment arrangements are made with the customer. Customer receivables in non-accrual status were $9.4 million and $9.0 million at April 30, 2013 and January 31, 2013, respectively. Customer receivables that were past due 90 days or more and still accruing interest totaled $36.2 million and $36.6 million at April 30, 2013 and January 31, 2013, respectively.

4.    Supplemental Disclosure of Finance Charges and Other Revenue
 
The following is a summary of the classification of the amounts included as finance charges and other for the three months ended April 30, 2013 and 2012:

 
 
Three Months Ended
 
 
 
April 30,
 
(in thousands)
 
2013
   
2012
 
Interest income and fees on customer receivables
 
$
33,010
   
$
28,640
 
Insurance commissions
   
8,267
     
5,033
 
Other
   
338
     
241
 
Finance charges and other
 
$
41,615
   
$
33,914
 

Interest income and fees on customer receivables is reduced by provisions for uncollectible interest of $2.1 million and $1.8 million, respectively, for the three months ended April 30, 2013 and 2012. The amount included in interest income and fees on customer receivables related to TDR accounts was $1.2 million for each of the three months ended April 30, 2013 and 2012. The Company recognizes interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount of TDR accounts such that it always equals the present value of expected future cash flows.
 
 
5. Accrual for Store Closures
 
During the fiscal years ended January 31, 2013 and 2012, the Company closed two and 11 retail locations, respectively, that did not perform at a level the Company expects for mature store locations. As a result of the closure of 10 of the stores which had unexpired leases, the Company recorded an accrual for the present value of remaining lease obligations and anticipated ancillary occupancy costs, net of estimated sublease income. Revisions to these projections for changes in estimated marketing times and sublease rates are made to the obligation as further information related to the actual terms and costs become available. The estimates were calculated using Level 2 fair value inputs. The following table presents detail of the activity in the accrual for store closures during the three months ended April 30, 2013 and 2012:

 
 
Three Months Ended April 30,
 
(in thousands)
 
2013
   
2012
 
Balance at beginning of period
 
$
5,071
   
$
8,106
 
Accrual for closures
   
-
     
450
 
Change in estimate
   
-
     
(287
)
Cash payments
   
(522
)
   
(961
)
Balance at end of period
 
$
4,549
   
$
7,308
 

 
 
April 30,
 
Balance sheet presentation:
 
2013
 
Accrued expenses
 
$
2,691
 
Other long-term liabilities
   
1,858
 
 
 
$
4,549
 

The cash payments include payments made for facility rent and related costs.

6. Debt and Letters of Credit
 
The Company’s long-term debt consisted of the following at the period ended:

 
 
April 30,
   
January 31,
 
(in thousands)
 
2013
   
2013
 
Asset-based revolving credit facility
 
$
293,700
   
$
262,401
 
Asset-backed notes, net of discount of $205
   
-
     
32,307
 
Other long-term debt
   
295
     
349
 
Total debt
   
293,995
     
295,057
 
Less current portion of debt
   
222
     
32,526
 
Long-term debt
 
$
293,773
   
$
262,531
 

The Company’s asset-based revolving credit facility with a syndicate of banks was expanded in March 2013 with capacity increasing from $545 million to $585 million. The Company’s revolving credit facility, which matures in September 2016, provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory. The amended and restated credit facility bears interest at LIBOR plus a spread ranging from 275 basis points to 350 basis points, based on a leverage ratio (defined as total liabilities to tangible net worth). In addition to the leverage ratio, the revolving credit facility includes a fixed charge coverage requirement, a minimum customer receivables cash recovery percentage requirement and a net capital expenditures limit. The asset-based revolving credit facility restricts the amount of dividends the Company can pay and is secured by the assets of the Company not otherwise encumbered.
 
On April 30, 2012, the Company’s VIE issued $103.7 million of asset-backed notes which bore interest at 4.0% and were sold at a discount to deliver a 5.21% yield, before considering transaction costs. The principal balance of the notes, which was secured by certain customer receivables, was reduced on a monthly basis by collections on the underlying customer receivables after the payment of interest and other expenses of the VIE. While the final maturity for the notes was April 2016, the Company repaid the outstanding note balance in April 2013. In connection with the early repayment of the asset-backed notes, the Company accelerated the amortization of deferred financing cost resulting in an additional $0.4 million of interest expense.
 
 
The Company was in compliance with its debt covenants at April 30, 2013.
 
As of April 30, 2013, the Company had immediately available borrowing capacity of approximately $244.6 million under its asset-based revolving credit facility, net of standby letters of credit issued, for general corporate purposes. The Company also had $45.3 million that may become available under its asset-based revolving credit facility if it grows the balance of eligible customer receivables and its total eligible inventory balances. The Company pays additional fees in the amount of 25 basis points for the additional commitment amount.

The Company’s asset-based revolving credit facility provides it the ability to utilize letters of credit to secure its deductibles under the Company’s property and casualty insurance programs, among other acceptable uses. At April 30, 2013, the Company had outstanding letters of credit of $1.3 million under this facility. The maximum potential amount of future payments under these letter of credit facilities is considered to be the aggregate face amount of each letter of credit commitment, which totals $1.3 million as of April 30, 2013.

7. Contingencies
 
Litigation.  The Company is involved in routine litigation and claims incidental to its business from time to time, and, as required, has accrued its estimate of the probable costs for the resolution of these matters, which are not expected to be material. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact the Company’s estimate of reserves for litigation.
 
8. Segment Reporting
 
Financial information by segment is presented in the following tables for the three months ended April 30, 2013 and 2012:
 
 
 
Three Months Ended April 30, 2013
   
Three Months Ended April 30, 2012
 
(in thousands)
 
Retail
   
Credit
   
Total
   
Retail
   
Credit
   
Total
 
Revenues
 
   
   
   
   
   
 
Product sales
 
$
190,860
   
$
-
   
$
190,860
   
$
152,115
   
$
-
   
$
152,115
 
Repair service agreement commissions
   
15,989
     
-
     
15,989
     
11,392
     
-
     
11,392
 
Service revenues
   
2,599
     
-
     
2,599
     
3,430
     
-
     
3,430
 
Total net sales
   
209,448
     
-
     
209,448
     
166,937
     
-
     
166,937
 
Finance charges and other
   
339
     
41,276
     
41,615
     
241
     
33,673
     
33,914
 
Total revenues
   
209,787
     
41,276
     
251,063
     
167,178
     
33,673
     
200,851
 
Cost and expenses
                                               
Cost of goods sold, including warehousing and occupancy costs
   
123,457
     
-
     
123,457
     
108,443
     
-
     
108,443
 
Cost of service parts sold, including warehousing and occupancy cost
   
1,406
     
-
     
1,406
     
1,550
     
-
     
1,550
 
Selling, general and administrative expense (a)
   
57,510
     
15,745
     
73,255
     
46,049
     
13,607
     
59,656
 
Provision for bad debts
   
114
     
13,823
     
13,937
     
212
     
8,973
     
9,185
 
Charges and credits
   
-
     
-
     
-
     
163
     
-
     
163
 
Total cost and expense
   
182,487
     
29,568
     
212,055
     
156,417
     
22,580
     
178,997
 
Operating income
   
27,300
     
11,708
     
39,008
     
10,761
     
11,093
     
21,854
 
Interest expense
   
-
     
3,871
     
3,871
     
-
     
3,759
     
3,759
 
Other income, net
   
(6
)
   
-
     
(6
)
   
(96
)
   
-
     
(96
)
Income before income taxes
 
$
27,306
   
$
7,837
   
$
35,143
   
$
10,857
   
$
7,334
   
$
18,191
 

(a)
Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated overhead expenses and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was approximately $2.6 million and $2.2 million for the three months ended April 30, 2013 and 2012, respectively. The amount of reimbursement made to the retail segment by the credit segment was approximately $4.7 million and $4.0 million for the three months ended April 30, 2013 and 2012, respectively.
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Unless the context otherwise indicates, references to “Conn’s,” the “Company,” “we,” “us,” and “our” refer to the consolidated business operations of Conn’s, Inc. and all of its direct and indirect subsidiaries, limited liability companies and limited partnerships.
 
Forward-Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties.  Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives.  Statements containing the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to continue existing or offer new customer financing programs; changes in the delinquency status of our credit portfolio; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores and the updating of existing stores; technological and market developments and sales trends for our major product offerings; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets; and the other risks detailed from time-to-time in our United States Securities and Exchange Commission (“SEC”) reports, including but not limited to, our Annual Report on Form 10-K for our fiscal year ended January 31, 2013.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
 
General
 
Conn’s is a leading specialty retailer that offers a broad selection of high-quality, branded durable consumer goods and related services in addition to a proprietary credit solution for its core credit constrained consumers. We operate a highly integrated and scalable business through our 70 retail stores and website. Our complementary product offerings include home appliances, furniture and mattresses, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, underserved population of credit constrained consumers who typically are unbanked and have credit scores between 550 and 650. We provide customers the opportunity to comparison shop across brands with confidence in our low prices as well as affordable monthly payment options, next day delivery and installation, and product repair service. We believe our large, attractively merchandised stores and credit solutions offer a distinctive shopping experience compared to other retailers that target our core customer demographic.
 
We currently operate 70 retail locations with 58 stores in Texas, six in Louisiana, three in Oklahoma, two in New Mexico and one in Arizona. The Company’s primary product categories include:
 
· Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
· Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses;
· Consumer electronic, including LCD, LED, 3-D and plasma televisions, Blu-ray players, home theater and video game products, camcorders, digital cameras, and portable audio equipment; and
· Home office, including computers, tablets, printers and accessories.
 
Additionally, the Company offers a variety of products on a seasonal basis, including lawn and garden equipment, room air conditioners and outdoor furniture.
 
Our stores typically range in size from 18,000 to 50,000 square feet and are predominately located in areas densely populated by our core customer and are typically anchor stores in strip malls. We utilize a “good-better-best” merchandising strategy that offers approximately 2,300 branded products from approximately 200 manufacturers and distributors in a wide range of price points. Our commissioned sales, consumer credit and service personnel are well-trained and knowledgeable to assist our customers with product selection and the credit application process. We also provide additional services including next day delivery and installation capabilities, and product repair or replacement services for most items sold in our stores.
 
Unlike many of our competitors, we provide multiple financing options to address various customer needs including a proprietary in-house credit program, a third-party financing program and a third-party rent-to-own payment program. The majority of our credit customers use our in-house credit program and typically have a credit score of between 550 and 650, with the average score of new applicants for the three months ended April 30, 2013 of 602. For customers who do not qualify for our in-house program, we offer rent-to-own payment plans through RAC Acceptance. For customers with high credit scores, we have partnered with GE Capital to offer long-term, no interest and revolving credit plans. RAC Acceptance and GE Capital manage their respective underwriting decisions, management and collection of their credit programs. For the three months ended April 30, 2013, we financed approximately 74.0% of our retail sales, including down payments, under our in-house financing program.
 
We believe our extensive brand and product selection, competitive pricing, financing alternatives and supporting services combined with our customer service-focused store associates make us an attractive alternative to appliance and electronics superstores, department stores and other national, regional, local and internet retailers.
 
Our business is moderately seasonal, with a greater share of our revenues, operating and net income historically realized during the quarter ending January 31, due to the holiday selling season.

Operational Changes and Operating Environment

We have implemented, continued to focus on, or modified operating initiatives that we believe should positively impact future results, including:
 
· Opening expanded Conn’s HomePlus stores in new markets. In April of 2013, we opened new stores in Las Cruces, New Mexico and Tulsa, Oklahoma and plan to open 8 to 10 additional new stores by the end of fiscal year 2014;
 
· Remodeling existing stores utilizing the new Conn’s HomePlus format to increase retail square footage and improve our customers shopping experience;
 
· Expanding and enhancing our product offering of higher-margin furniture and mattresses;
 
· Focusing on higher-price, higher-margin products to improve operating performance;
 
· Reviewing our existing store locations to ensure the customer demographics and retail sales opportunity are sufficient to achieve our store performance expectations, and selectively closing or relocating stores to achieve those goals. In this regard, we closed a total of 13 retail locations in fiscal 2012 and 2013 that did not perform at the level we expect for mature store locations;
 
· Augmenting our credit offerings through the use of third-party consumer credit providers to provide flexible financing options to meet the varying needs of our customers, while focusing the use of our credit program to offer credit to customers where third-party programs are not available;
 
· Assessing the ability to approve customers being declined today, as retail margin and portfolio yield may provide the ability to finance these customers profitably; and
 
· Limiting the number of months an account can be re-aged and reducing the period of time a delinquent account can remain outstanding before it is charged off. Additionally, we have shortened contract terms for higher-risk products and smaller-balances originated. We have increased credit lines to higher credit scored customers to allow them to purchase additional products given our furniture and mattress offerings expansion. In total, these changes are expected to continue to improve the performance of our portfolio and increase the cost-effectiveness of our collections operation.

While we have benefited from our operations being concentrated in the Texas, Louisiana and Oklahoma region in the past, continued weakness in the national and state economies, including instability in the financial markets and the volatility of oil and natural gas prices, have and will present significant challenges to our operations in the coming quarters.
 

Customer Receivable Portfolio Data

The following tables present, for comparison purposes, information about our credit portfolios (dollars in thousands, except average outstanding customer balance).

 
 
As of April 30,
 
 
 
2013
   
2012
 
Total outstanding balance
 
$
773,436
   
$
635,233
 
Weighted average credit score of outstanding balances
   
596
     
601
 
Percent of total outstanding balances represented by balances over 36 months from origination(1)
   
0.8
%
   
1.8
%
Average outstanding customer balance
 
$
1,588
   
$
1,385
 
Number of active accounts
   
486,988
     
458,493
 
Account balances 60+ days past due(2)
 
$
51,543
   
$
46,438
 
Percent of balances 60+ days past due to total outstanding balance
   
6.7
%
   
7.3
%
Total account balances reaged(2)
 
$
86,693
   
$
73,737
 
Percent of re-aged balances to total outstanding balance
   
11.2
%
   
11.6
%
Account balances re-aged more than six months
 
$
19,172
   
$
27,052
 
Percent of total bad debt allowance to total outstanding customer receivable balance
   
6.0
%
   
7.1
%
Percent of total outstanding balance represented by promotional receivables
   
30.6
%
   
17.7
%

 
 
Three Months Ended
 
 
 
April 30,
 
 
 
2013
   
2012
 
Total applications processed
   
199,045
     
179,907
 
Weighted average origination credit score of sales financed
   
602
     
615
 
Total applications approved(3)
   
50.2
%
   
46.1
%
Average down payment
   
3.9
%
   
4.5
%
Average total outstanding balance
 
$
753,221
   
$
634,743
 
Bad debt charge-offs (net of recoveries)
 
$
11,555
   
$
13,529
 
Percent of bad debt charge-offs (net of recoveries) to average outstanding balance, annualized
   
6.1
%
   
8.5
%
Payment rate (4)
   
6.2
%
   
6.1
%
Percent of retail sales paid for by:
               
Third party financing
    11.8
%
   
12.5
%
In-house financing, including down payment received
    74.0
%
   
66.9
%
Third party rent-to-own options
    3.8
%
   
3.7
%
Total
    89.6
%
   
83.1
%
 
(1) Includes installment accounts only.
(2) Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.
(3) Total applications approved data for three months ended April 30, 2012 revised to conform calculation of approval status.
(4) Three month average of gross cash payments as a percentage of gross principal balances outstanding at the beginning of each month in the period.

Historical Static Loss Table

The following static loss analysis calculates the cumulative percentage of balances charged off, based on the year the credit account was originated and the period the balance was charged off. The percentage computed below is calculated by dividing the cumulative net amount charged off since origination by the total balance of accounts originated during the applicable fiscal year. The net charge-off was determined by estimating, on a pro rata basis, the amount of the recoveries received during a period that was allocable to the applicable origination period.

 
 
Cumulative loss rate as a % of balance originated (a)
 
Fiscal Year
 
Years from origination
 
of Origination
   
0
     
1
     
2
     
3
   
Terminal (b)
 
2005
   
0.3%
 
   
1.7%
 
   
3.4%
 
   
4.3%
 
   
4.9%
 
2006
   
0.3%
 
   
1.9%
 
   
3.6%
 
   
4.8%
 
   
5.7%
 
2007
   
0.2%
 
   
1.7%
 
   
3.5%
 
   
4.6%
 
   
5.6%
 
2008
   
0.2%
 
   
1.8%
 
   
3.6%
 
   
5.0%
 
   
5.9%
 
2009
   
0.2%
 
   
2.0%
 
   
4.6%
 
   
6.0%
 
   
6.6%
 
2010
   
0.2%
 
   
2.4%
 
   
4.5%
 
   
5.9%
 
   
6.0%
 
2011
   
0.4%
 
   
2.6%
 
   
5.2%
 
   
5.5%
 
       
2012
   
0.2%
 
   
3.1%
 
   
3.8%
 
               
2013
   
0.4%
 
   
0.6%
 
                       
 
(a)
The most recent percentages in years from origination 1 through 3 include loss data through April 30, 2013, and are not comparable to prior fiscal year accumulated net charge-off percentages in the same column.
(b) The terminal loss percentage presented represents the point at which that pool of loans has reached its maximum loss rate.
 
 
Results of Operations
 
The presentation of our results of operations may not be comparable to some other retailers since we include the cost of our in-home delivery and installation service as part of selling, general and administrative expense.  Similarly, we include the cost related to operating our purchasing function in selling, general and administrative expense.  It is our understanding that other retailers may include such costs as part of their cost of goods sold.
 
The following tables present certain operations information, on a consolidated and segment basis:
 
Consolidated:
 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Revenues
 
   
   
 
Product sales
 
$
190,860
   
$
152,115
   
$
38,745
 
Repair service agreement commissions
   
15,989
     
11,392
     
4,597
 
Service revenues
   
2,599
     
3,430
     
(831
)
Total net sales
   
209,448
     
166,937
     
42,511
 
Finance charges and other
   
41,615
     
33,914
     
7,701
 
Total revenues
   
251,063
     
200,851
     
50,212
 
Cost and expenses
                       
Cost of goods sold, including warehousing and occupancy costs
   
123,457
     
108,443
     
15,014
 
Cost of service parts sold, including warehousing and occupancy cost
   
1,406
     
1,550
     
(144
)
Selling, general and administrative expense (a)
   
73,255
     
59,656
     
13,599
 
Provision for bad debts
   
13,937
     
9,185
     
4,752
 
Charges and credits
   
-
     
163
     
(163
)
Total cost and expenses
   
212,055
     
178,997
     
33,058
 
Operating income
   
39,008
     
21,854
     
17,154
 
Interest expense
   
3,871
     
3,759
     
112
 
Other income, net
   
(6
)
   
(96
)
   
90
 
Income before income taxes
   
35,143
     
18,191
     
16,952
 
Provision for income taxes
   
12,967
     
6,635
     
6,332
 
Net income
 
$
22,176
   
$
11,556
   
$
10,620
 
 
 
Retail Segment:
 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Revenues
 
   
   
 
Product sales
 
$
190,860
   
$
152,115
   
$
38,745
 
Repair service agreement commissions
   
15,989
     
11,392
     
4,597
 
Service revenues
   
2,599
     
3,430
     
(831
)
Total net sales
   
209,448
     
166,937
     
42,511
 
Finance charges and other
   
339
     
241
     
98
 
Total revenues
   
209,787
     
167,178
     
42,609
 
Cost and expenses
                       
Cost of goods sold, including warehousing and occupancy costs
   
123,457
     
108,443
     
15,014
 
Cost of service parts sold, including warehousing and occupancy cost
   
1,406
     
1,550
     
(144
)
Selling, general and administrative expense (a)
   
57,510
     
46,049
     
11,461
 
Provision for bad debts
   
114
     
212
     
(98
)
Charges and credits
   
-
     
163
     
(163
)
Total cost and expenses
   
182,487
     
156,417
     
26,070
 
Operating income
   
27,300
     
10,761
     
16,539
 
Other income, net
   
(6
)
   
(96
)
   
90
 
Segment income before income taxes
 
$
27,306
   
$
10,857
   
$
16,449
 

Credit Segment:
 
 
Three Months Ended.
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Revenues
 
   
   
 
Finance charges and other
 
$
41,276
   
$
33,673
   
$
7,603
 
Cost and expenses
                       
Selling, general and administrative expense (a)
   
15,745
     
13,607
     
2,138
 
Provision for bad debts
   
13,823
     
8,973
     
4,850
 
Total cost and expenses
   
29,568
     
22,580
     
6,988
 
Operating income
   
11,708
     
11,093
     
615
 
Interest expense
   
3,871
     
3,759
     
112
 
Segment income before income taxes
 
$
7,837
   
$
7,334
   
$
503
 

(a)
Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated overhead expenses and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was approximately $2.6 million and $2.2 million for the three months ended April 30, 2013 and 2012, respectively. The amount of reimbursement made to the retail segment by the credit segment was approximately $4.7 million and $4.0 million for the three months ended April 30, 2013 and 2012, respectively.
 

 
Three months ended April 30, 2013 compared to three months ended April 30, 2012

Segment Overview
 
The following provides an overview of our retail and credit segment operations for the three months ended April 30, 2013.  A detailed explanation of the changes in our operations for the comparative periods is included below.
 
Retail Segment
 
· Revenues were $209.8 million for the quarter ended April 30, 2013, an increase of $42.5 million, or 25.5%, from the prior-year period. The increase in revenues during the quarter was primarily driven by significantly improved same store sales and the opening of five new Conn’s HomePlusTM stores during fiscal 2013. On a same store basis, revenues for the current quarter rose 16.5% over the prior-year period.
 
· Retail gross margin was 40.3% for the quarter ended April 30, 2013, an increase of 660 percentage points over the 33.7% reported in the comparable quarter last year. This increase was driven by continued margin improvement across all major product categories due primarily to the continued focus on higher price-point, higher margin products and sourcing opportunities. Additionally, higher-margin furniture and mattress sales increased 72.7% over the prior-year period.
 
· Selling, general and administrative (“SG&A”) expense was $57.5 million for the quarter ended April 30, 2013, an increase of $11.5 million, or 24.9%, over the quarter ended April 30, 2012. The SG&A expense increase was primarily due to higher sales-driven compensation and delivery costs, facility-related costs and advertising expenses. As a percent of segment revenues, SG&A expense declined 10 basis points to 27.4% in the current period from 27.5% in the prior-year quarter.
 
Credit Segment
 
· Revenues were $41.3 million for the three months ended April 30, 2013, an increase of $7.6 million, or 22.6%, from the prior-year quarter.  The increase was primarily driven by year-over-year growth in the average balance of the customer receivable portfolio.
 
· SG&A expense for the credit segment was $15.7 million for the quarter ended April 30, 2013, an increase of $2.1 million, or 15.7%, from the same quarter last year. SG&A expense as a percent of revenues was 38.1% in the current year period, which compares to 40.4% in the prior-year period.
 
· Provision for bad debts was $13.8 million for the three months ended April 30, 2013, an increase of $4.9 million from the prior-year quarter. This additional provision was driven primarily by the substantial year-over-year growth in the average receivable portfolio outstanding, which included an increase of $31.9 million during the current quarter.
 
· Net interest expense for the quarter ended April 30, 2013 was $3.9 million, relatively unchanged from the prior-year period. The Company recorded approximately $0.4 million of accelerated amortization of deferred financing costs related to the early repayment of asset-backed notes during the current quarter.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Total net sales
 
$
209,448
   
$
166,937
   
$
42,511
 
Finance charges and other
   
41,615
     
33,914
     
7,701
 
Total Revenues
 
$
251,063
   
$
200,851
   
$
50,212
 

The following table provides an analysis of net sales by product category in each period, including repair service agreement commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales.

 
 
Three Months ended April 30,
   
   
%
   
Same store
 
 
 
2013
   
% of Total
   
2012
   
% of Total
   
Change
   
Change
   
% change
 
(dollars in thousands)
 
   
   
   
   
   
   
 
Home appliance
 
$
57,679
     
27.5
%
 
$
48,293
     
29.0
%
 
$
9,386
     
19.4
     
11.5
 
Furniture and mattress
   
49,123
     
23.5
     
28,446
     
17.0
     
20,677
     
72.7
     
50.9
 
Consumer electronic
   
56,810
     
27.1
     
52,446
     
31.4
     
4,364
     
8.3
     
(0.8
)
Home office
   
17,506
     
8.4
     
12,150
     
7.3
     
5,356
     
44.1
     
34.2
 
Other
   
9,742
     
4.7
     
10,780
     
6.5
     
(1,038
)
   
(9.6
)
   
(15.3
)
Product sales
   
190,860
     
91.2
     
152,115
     
91.2
     
38,745
     
25.5
     
15.2
 
 
                                                       
Repair service agreement commissions
   
15,989
     
7.6
     
11,392
     
6.8
     
4,597
     
40.4
     
28.0
 
Service revenues
   
2,599
     
1.2
     
3,430
     
2.0
     
(831
)
   
(24.2
)
       
Total net sales
 
$
209,448
     
100.0
%
 
$
166,937
     
100.0
%
 
$
42,511
     
25.5
     
16.5
 

The following provides a summary of items influencing the Company’s major product category performance during the quarter, compared to the prior-year period:

· Home appliance average selling price rose 14.6% and unit volume increased 3.8%. Laundry sales increased 25.8%, refrigeration sales were up 16.2% and cooking sales rose 19.4%;
 
· Furniture unit sales increased 81.6% and the average selling price was down slightly;
 
· Mattress unit volume increased 33.6% and average selling price was up 19.7%;
 
· Same store sales of consumer electronics improved through the quarter.  In April, same store sales were up 5.9%; and
 
· Tablet sales increased 218.0% and computer sales were up 16.2%.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Interest income and fees
 
$
33,010
   
$
28,640
   
$
4,370
 
Insurance commissions
   
8,267
     
5,033
     
3,234
 
Other income
   
338
     
241
     
97
 
Finance charges and other
 
$
41,615
   
$
33,914
   
$
7,701
 

Interest income and fees and insurance commissions are included in the finance charges and other for the credit segment, while other income is included in finance charges and other for the retail segment.

Interest income and fees of the credit segment increased over the prior year level primarily driven by an 18.7% increase in the average balance of the portfolio. Portfolio interest and fee yield remained constant at 18.0% year-over-year, but declined 70 basis points sequentially as a result of increased short-term, no-interest financing.
 
 
The following table provides key portfolio performance information for the three months ended April 30, 2013 and 2012:
 
 
 
Three Months Ended
 
 
 
April 30,
 
 
 
2013
   
2012
 
(in thousands, except percentages)
 
   
 
Interest income and fees (a)
 
$
33,010
   
$
28,640
 
Net charge-offs
   
(11,555
)
   
(13,529
)
Borrowing costs (b)
   
(3,871
)
   
(3,759
)
Net portfolio yield
 
$
17,584
   
$
11,352
 
 
               
Average portfolio balance
 
$
753,221
   
$
634,743
 
Interest income and fee yield % (annualized)
   
18.0
%
   
18.0
%
Net charge-off % (annualized)
   
6.1
%
   
8.5
%

(a) Included in finance charges and other.
(b) Total interest expense.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands, except percentages)
 
2013
   
2012
   
Change
 
Cost of goods sold
 
$
123,457
   
$
108,443
   
$
15,014
 
Product gross margin percentage
   
35.3
%
   
28.7
%
       


Product gross margin expanded 660 basis points as a percent of product sales from the quarter ended April 30, 2012. Margin improvement was reported in each of the product categories – reflecting the benefit of the sale of higher-price point, higher margin goods and the realization of sourcing opportunities. Product gross margin was also influenced by a favorable shift in product mix.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands, except percentages)
 
2013
   
2012
   
Change
 
Cost of service parts sold
 
$
1,406
   
$
1,550
   
$
(144
)
As a percent of service revenues
   
54.1
%
   
45.2
%
       

Cost of service parts sold declined due to a $0.8 million decrease in service revenues.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands, except percentages)
 
2013
   
2012
   
Change
 
Selling, general and administrative expense - Retail
 
$
57,510
   
$
46,049
   
$
11,461
 
Selling, general and administrative expense - Credit
   
15,745
     
13,607
     
2,138
 
Selling, general and administrative expense - Total
 
$
73,255
   
$
59,656
   
$
13,599
 
As a percent of total revenues
   
29.2
%
   
29.7
%
       

For the three months ended April 30, 2013, the increase in SG&A expense was driven by higher sales-related compensation. The improvement in our SG&A expense as a percentage of total revenues was largely attributable to the leveraging effect of higher total revenues.

The SG&A expense increase in the retail segment was primarily due to higher sales-related compensation and delivery costs, facility-related costs and advertising expenses. As a percent of segment revenues, SG&A expense remained relatively unchanged as compared to the prior-year quarter.
 
 
The increase in SG&A expense for the credit segment was driven by higher compensation costs related to collections personnel. SG&A expense as a percent of revenues was 38.1% in the current-year period, which compares to 40.4% in the prior-year period.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands, except percentages)
 
2013
   
2012
   
Change
 
Provision for bad debts
 
$
13,937
   
$
9,185
   
$
4,752
 
As a percent of average portfolio balance (annualized)
   
7.4
%
   
5.8
%
       

The provision for bad debts is primarily related to the operations of our credit segment, with approximately $0.1 million and $0.2 million for the periods ended April 30, 2013 and 2012, respectively, included in the results of operations for the retail segment.
 
The provision for bad debts increased by $4.8 million from the prior-year period. This additional provision was driven primarily by the substantial year-over-year growth in the average receivable portfolio balance outstanding, which includes an increase of $31.9 million during the current quarter.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Costs related to store closings
 
$
-
   
$
163
   
$
(163
)
Charges and credits
 
$
-
   
$
163
   
$
(163
)

During the first quarter of fiscal 2013, the Company recorded a $0.2 million charge related to the adjustment of future lease obligations for closed stores.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands)
 
2013
   
2012
   
Change
 
Interest expense
 
$
3,871
   
$
3,759
   
$
112
 
 
Net interest expense for the three months ended April 30, 2013 remained relatively unchanged from the prior-year period. We recorded approximately $0.4 million of accelerated amortization of deferred financing costs related to the early repayment of asset-backed notes during the current quarter. The entirety of our interest expense is included in the results of operations of the credit segment.

 
 
Three Months Ended
   
 
 
 
April 30,
   
 
(in thousands, except percentages)
 
2013
   
2012
   
Change
 
Provision for income taxes
 
$
12,967
   
$
6,635
     
6,332
 
As a percent of income before income taxes
   
36.9
%
   
36.5
%
       

The provision for income taxes increased due primarily to the year-over-year improvement in profitability.
 

 
Liquidity and Capital Resources
 
Cash flow
 
Operating activities
 
During the three months ended April 30, 2013, net cash used in operating activities was $6.5 million, which compares to net cash provided by operating activities of $37.1 million during the prior-year period. The year-over-year improvement in operating performance was more than offset by the impact of the use of cash to fund a $31.9 million increase in customer accounts receivable during the three months ended April 30, 2013.
 
Investing activities
 
Net cash used in investing activities increased to $7.2 million in the current period, as compared to $4.1 million in the prior period, primarily due to the construction of new stores and remodeling of existing store locations. We expect during the next twelve months to invest between $25 million and $35 million, net of tenant allowances, in capital expenditures for new stores, remodels and other projects.
 
Financing activities
 
Net cash provided by financing activities was $14.2 million during the three months ended April 30, 2013, as compared to net cash used in financing activities of $32.5 million used during the three months ended April 30, 2012. During the three months ended April 30, 2013, we received $8.4 million in cash proceeds and $2.6 million in tax benefit related to the exercise of stock options. Additionally, the balance in restricted cash declined $4.7 million with the retirement of the ABS facility.
 
Liquidity
 
We require capital to finance our growth as we add new stores and markets to our operations, which in turn requires additional working capital for increased customer receivables and inventory. We have historically financed our operations through a combination of cash flow generated from earnings and external borrowings, including primarily bank debt, extended terms provided by our vendors for inventory purchases, acquisition of inventory under consignment arrangements and transfers of customer receivables to asset-backed securitization facilities.
 
Our asset-based revolving credit facility with a syndicate of banks was expanded in March 2013 with capacity increasing from $545 million to $585 million.  The facility, which matures in September 2016, provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory. The credit facility bears interest at LIBOR plus a spread ranging from 275 basis points to 350 basis points, based on a leverage ratio (defined as total liabilities to tangible net worth). In addition to the leverage ratio, the revolving credit facility includes a fixed charge coverage requirement, a minimum customer receivables cash recovery percentage requirement and a net capital expenditures limit. The leverage ratio covenant requirement is a required maximum of 2.00 to 1.00. The fixed charge coverage ratio requirement is a minimum of 1.10 to 1.00. We expect, based on current facts and circumstances, that we will be in compliance with the above covenants for the next 12 months. The weighted average interest rate on borrowings outstanding under the asset-based revolving credit facility was 3.1% at April 30, 2013.
 
On April 30, 2012, our VIE issued $103.7 million of notes which bore interest at 4.0% and were sold at a discount to deliver a 5.21% yield, before considering transaction costs. The principal balance of the notes, which was secured by certain customer receivables, was reduced on a monthly basis by collections on the underlying customer receivables after the payment of interest and other expenses of the VIE. On April 15, 2013, the VIE redeemed the then outstanding notes and the remaining receivables were transferred back to the Company.
 
We have interest rate cap options with a notional amount of $100 million. These cap options are held for the purpose of hedging against variable interest rate risk related to the variability of cash flows in the interest payments on a portion of its variable-rate debt, based on the benchmark one-month LIBOR interest rate exceeding 1.0%. These cap options have monthly caplets extending through August, 2014.
 
The weighted average effective interest rate on borrowings outstanding under all our credit facilities for the three months ended April 30, 2013 was 5.3%, including the interest expense associated with our interest rate caps and amortization of deferred financing costs.
 
 
A summary of the significant financial covenants that govern our credit facility compared to our actual compliance status at April 30, 2013, is presented below:

 
 
 
 
Actual
   
Required
Minimum/
Maximum
 
Fixed charge coverage ratio must exceed required minimum
 
2.04 to 1.00
   
1.10 to 1.00
 
Total liabilities to tangible net worth ratio must be lower than required maximum
 
0.88 to 1.00
   
2.00 to 1.00
 
Cash recovery percentage must exceed stated amount
 
6.19%
 
 
4.74%
 
Capital expenditures, net must be lower than stated amount
 
$6.1 million
   
$40.0 million
 

Note: All terms in the above table are defined by the revolving credit facility and may or may not agree directly to the financial statement captions in this document. The covenants are required to be calculated quarterly on a trailing twelve month basis, except for the Cash recovery percentage, which is calculated monthly on a trailing three month basis.
 
As of April 30, 2013, we had immediately available borrowing capacity of $244.6 million under our asset-based revolving credit facility, net of standby letters of credit issued, available to us for general corporate purposes. In addition to the $244.6 million currently available under the revolving credit facility, an additional $45.3 million may become available if we grow the balance of eligible customer receivables and total eligible inventory balances. Payments received on customer receivables which averaged approximately $55.1 million per month during the three months ended April 30, 2013, are available each month to fund new customer receivables generated.
 
We will continue to finance our operations and future growth through a combination of cash flow generated from operations and external borrowings, including primarily bank debt, extended vendor terms for purchases of inventory, acquisition of inventory under consignment arrangements and transfers of customer receivables to asset-backed securitization facilities. Based on our current operating plans, we believe that cash generated from operations, available borrowings under our revolving credit facility, extended vendor terms for purchases of inventory, acquisition of inventory under consignment arrangements, and transfers of customer receivable to asset-based securitization facilities will be sufficient to fund our operations, store expansion and updating activities and capital programs for at least the next 12 months, subject to continued compliance with the covenants in our debt and other credit arrangements. Additionally, if there is a default under any of the facilities that is not waived by the various lenders, it could result in the requirement to immediately begin repayment of all amounts owed under our credit facilities, as all of the facilities have cross-default provisions that would result in default under all of the facilities if there is a default under any one of the facilities. If the repayment of amounts owed under our debit and other credit arrangements is accelerated for any reason, we may not have sufficient cash and liquid assets at such time to be able to immediately repay all the amounts owed under the facilities.
 
The revolving credit facility is a significant factor relative to our ongoing liquidity and our ability to meet the cash needs associated with the growth of our business. Our inability to use this program because of a failure to comply with its covenants would adversely affect our business operations. Funding of current and future customer receivables under the borrowing facility can be adversely affected if we exceed certain predetermined levels of re-aged customer receivables, write-offs, bankruptcies or other ineligible customer receivable amounts.
 
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
On April 15, 2013, we retired the fixed-rate notes that were issued by our VIE on April 30, 2012. There have been no other significant changes to our market risk since January 31, 2013.
 
For additional quantitative and qualitative disclosures about market risk, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” of Conn’s, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2013.
 
Item 4.  Controls and Procedures
 
Based on management's evaluation (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
For the three months ended April 30, 2013, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
PART II – OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
The Company is involved in routine litigation and claims incidental to its business from time to time, and, as required, has accrued its estimate of the probable costs for the resolution of these matters, which are not expected to be material. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact the Company’s estimate of reserves for litigation.
 
Item 1A. Risk Factors
 
As of the date of the filing, there have been no material changes to the risk factors previously disclosed in Part 1, Item A, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2013.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosure
 
None.
 
 
Item 5. Submission of Matters to a Vote of Security Holders
 
At the Annual Meeting of Stockholders held on June 4, 2013, the following proposals were submitted to stockholders with the following results:

1. Election of seven directors:
 
 
Number of Shares
 
 
 
For
   
Withheld
 
Jon E.M. Jacoby
   
28,650,855
     
2,510,736
 
Kelly M. Malson
   
30,995,785
     
165,806
 
Bob L. Martin
   
30,922,598
     
238,993
 
Douglas H. Martin
   
30,933,225
     
228,366
 
David Schofman
   
30,995,617
     
165,974
 
Scott L. Thompson
   
30,941,528
     
220,063
 
Theodore M. Wright
   
30,813,235
     
348,356
 

2. Ratification of the Audit Committee’s appointment of Ernst & Young, LLP as our independent registered public accounting firm for the fiscal year ending January 31, 2014.
 
Number of Shares
 
For
   
33,537,228
 
Against
   
67,842
 
Abstain
   
66,749
 

3. Advisory vote for the approval of the compensation of our Named Executive Officers:
 
Number of Shares
 
For
   
30,972,762
 
Against
   
117,495
 
Abstain
   
71,334
 

4. Approval of such other business as may properly come before the Meeting:
 
Number of Shares
 
For
   
17,617,137
 
Against
   
15,897,199
 
Abstain
   
157,483
 

Item 6.  Other Information
 
There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors since we last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A.
 
Item 7.  Exhibits
 
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.
 
 
SIGNATURE
 
Pursuant to the requirements 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.
 
 
CONN’S, INC.
 
 
 
 
 
 
By:
 /s/ Brian E. Taylor
 
 
 
Brian E. Taylor
 
 
 
Vice President, Chief Financial Officer and Treasurer
 
 
 
(Principal Financial Officer and duly authorized to sign this report on behalf of the registrant)
 

Date: June 6, 2013
 

 
EXHIBIT INDEX
 
Exhibit
Number
Description
2
Agreement and Plan of Merger dated January 15, 2003, by and among Conn's, Inc., Conn Appliances, Inc. and Conn's Merger Sub, Inc. (incorporated herein by reference to Exhibit 2 to Conn's, Inc. registration statement on Form S-1 (file no. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003).
 
3.1
Certificate of Incorporation of Conn's, Inc. (incorporated herein by reference to Exhibit 3.1 to Conn's, Inc. registration statement on Form S-1 (file no. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003).
 
3.1.1
Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. dated June 3, 2004 (incorporated herein by reference to Exhibit 3.1.1 to Conn’s, Inc. Form 10-Q for the quarterly period ended April 30, 2004 (File No. 000-50421) as filed with the Securities and Exchange Commission on June 7, 2004).
 
3.1.2
Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. dated May 30, 2012 (incorporated herein by reference to Exhibit 3.1.2 to Conn’s, Inc. Form 10-Q for the quarterly period ended April 30, 2012 (File No. 000-50421) as filed with the Securities and Exchange Commission on June 5, 2012).
 
3.2
Amended and Restated Bylaws of Conn’s, Inc. effective as of June 3, 2008 (incorporated herein by reference to Exhibit 3.2.3 to Conn’s, Inc. Form 10-Q for the quarterly period ended April 30, 2008 (File No. 000-50421) as filed with the Securities and Exchange Commission on June 4, 2008).
 
4.1
Specimen of certificate for shares of Conn's, Inc.'s common stock (incorporated herein by reference to Exhibit 4.1 to Conn's, Inc. registration statement on Form S-1 (file no. 333-109046) as filed with the Securities and Exchange Commission on October 29, 2003).
 
10.1
Amended and Restated 2003 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to Conn's, Inc. registration statement on Form S-1 (file no. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003).t
 
10.1.1
Amendment to the Conn’s, Inc. Amended and Restated 2003 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.1.1 to Conn’s, Inc. Form 10-Q for the quarterly period ended April 30, 2004 (File No. 000-50421) as filed with the Securities and Exchange Commission on June 7, 2004).t
 
10.1.2
Form of Stock Option Agreement (incorporated herein by reference to Exhibit 10.1.2 to Conn’s, Inc.  Form 10-K for the annual period ended January 31, 2005 (File No. 000-50421) as filed with the Securities and Exchange Commission on April 5, 2005).t
 
10.1.3
2011 Omnibus Incentive Plan as filed with the Securities and Exchange Commission on April 1, 2011.
 
10.1.4
Form of Restricted Stock Award Agreement from Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1.4 to Conn’s, Inc. Form 10-Q for the quarterly period ended July 31, 2011 (File No. 000-50421) as filed with the Securities and Exchange Commission on September 8, 2011).
 
10.2
2003 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to Conn's, Inc. registration statement on Form S-1 (file no. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003).t

 
 
10.2.1
Form of Stock Option Agreement (incorporated herein by reference to Exhibit 10.2.1 to Conn’s, Inc. Form 10-K for the annual period ended January 31, 2005 (File No. 000-50421) as filed with the Securities and Exchange Commission on April 5, 2005).t