Ready for the Future.
Reflecting on the Past.
Annual Report 2010 | Our 55th Year
Aaron’s, Inc. serves
consumers through the
sale and lease ownership and
specialty retailing of residential
furniture, consumer electronics,
home appliances and accessories
in over 1,825 Company-operated
and franchised stores in the United
States and Canada. Aaron’s is the
industry leader in serving the moderate-
income consumer, and offering affordable
payment plans, quality merchandise
and superior service. The Company’s
strategic focus is on growing the sales
and lease ownership business through
the addition of new Company-
operated stores by both internal
expansion and acquisitions,
as well as through its
successful and expanding
franchise program.
Financial Highlights
to Our Shareholders
Reflections
The Present
1
2–3
4–5
6–9
Ready for the Future
10–12
Financial Information
14–43
Common Stock Market
Prices and Dividends
44
Board of Directors and Officers 45
Corporate and Shareholder
Information
46
Financial Highlights
(Dollar Amounts in Thousands,
Except Per Share)
Operating Results
Revenues
Earnings Before Taxes From Continuing Operations
Net Earnings From Continuing Operations
Loss From Discontinued Operations, Net of Tax
From Continuing Operations:
Earnings Per Share
Earnings Per Share Assuming Dilution
From Discontinued Operations:
Loss Per Share Assuming Dilution
190,786
118,376
—
1.46
1.44
—
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Percentage
Change
$1,876,847
$1,752,787
176,439
112,878
7.1%
8.1
4.9
(277)
(100.0)
1.39
1.38
5.0
4.3
(.01)
(100.0)
Financial Position
Total Assets
Lease Merchandise, Net
Credit Facilities
Shareholders’ Equity
Book Value Per Share
Debt to Capitalization
Pretax Profit Margin From Continuing Operations
Net Profit Margin From Continuing Operations
Return on Average Equity
Stores Open at Year-end
Aaron’s Sales & Lease Ownership
Aaron’s Sales & Lease Ownership Franchised*
Aaron’s Office Furniture
Total Stores
$1,502,072
$1,321,456
13.7%
814,484
41,790
979,417
12.23
4.1%
10.2
6.3
12.7
1,149
664
1
1,814
19.4
(24.1)
10.4
12.1
682,402
55,044
887,260
10.91
5.8%
10.1
6.4
13.7
1,082
597
15
1,694
6.2%
11.2
(93.3)
7.1%
* Aaron’s Sales & Lease Ownership franchised stores are not owned or operated by Aaron’s, Inc.
Revenues By Year
Net Earnings By Year
$2,000,000
120000
2000000
$120,000
)
s
d
n
a
s
u
o
h
t
n
i
$
(
1,500,000
100000
80000
1,000,000
60000
500,000
40000
20000
1500000
1000000
)
s
d
n
a
s
u
o
h
t
n
i
$
(
500000
100,000
80,000
60,000
40,000
20,000
0
2006
0
2007
2008
2009
2010
0
0
2006
2007
2008
2009
2010
1
To OUr Shareholders
Our 55th year of operations was exciting,
challenging and rewarding. We are proud of the
Company’s operating results which we believe refl ect
the strength of our business model and the talent
of our associates.
We celebrated several milestones during 2010 in
addition to our 55th anniversary. Highlights include
the following.
In June, we made the decision to cease all the
operations of the Aaron’s Offi ce Furniture division.
The offi ce furniture business is highly cyclical and
the division has not been profi table for a number
of years. At the end of the year, there was one
store open to liquidate remaining merchandise.
The closure of this division resulted in charges to
operating expenses during the year of approximately
$.07 per diluted share.
Aaron’s had more than 1.4 million customers of
Company-operated and franchised stores at the
end of 2010, a gain of 10% for the year. Customer
count on a same store basis for Company-operated
stores and franchised stores was up 7.2% and 7.3%,
respectively, from last year.
Revenues for the year were a record $1.877 billion,
an increase of 7% from 2009. In addition, our
franchisees reported an 11% increase in revenues
to $841.3 million, although those revenues are not
revenues of Aaron’s, Inc.
Net earnings for the year were also a record —
$118.4 million, a 5% increase over the $112.6
million earned in 2009. Fully diluted earnings per
share were $1.44 compared to $1.37 in the prior
year.
We are particularly proud of the consistent same
store revenue growth in our system, driven by
our increasing number of stores and customers.
For the year, same store revenues increased 4% in
Company-operated stores and 3% in franchised
stores. Many of our stores in states and market areas
with unemployment rates exceeding 10% reported
strong same store revenue gains in 2010, and
our stores over fi ve years old collectively achieved
positive same store revenue growth. We believe
this organic growth is impressive evidence of the
fl exibility, appeal, and economic resiliency of our
sales and lease ownership model.
Our Woodhaven Furniture Industries division
manufactured approximately $79 million, at cost, of
furniture and bedding in 2010 to meet the growing
demand by Aaron’s stores for furniture products.
Woodhaven’s 12 plants were also able to improve
production and operating effi ciencies during
the year, furthering Aaron’s distinct quality and
cost advantage.
During 2010, Aaron’s opened 91 new Company-
operated stores and 72 new franchised stores.
The Aaron’s Sales & Lease Ownership total net
store count increased 8% for the year. We expect
a comparable percentage increase in new stores
in 2011. We also awarded area development
agreements to open 120 new franchised stores. At
the end of 2010 there were 282 franchised stores
awarded that are expected to be opened over the
next several years.
For most of our corporate history, the Company
has required external capital to meet growth targets.
Over the past few years, Aaron’s has been generating
cash fl ow and we expect to internally fund our
growth in 2011 and into the foreseeable future. At
year end, the Company had $72 million of cash
on hand and no bank debt. During the year, we
declared a three-for-two stock split, increased our
dividend for the seventh year in a row and used
some of our cash fl ow for stock repurchases. The
Company reacquired 1,478,805 shares of Common
Stock in 2010 and is currently authorized to
purchase an additional 4,401,815 shares.
At December 31, 2010, the Aaron’s Sales & Lease
Ownership division consisted of 1,138 Company-
operated stores, 658 franchised stores, 11 Company-
operated RIMCO stores and six franchised RIMCO
stores. The Company also had one Aaron’s Offi ce
Furniture store. The total number of stores open at
the end of 2010 was 1,814.
A major event in 2010 was the conversion of the
Company’s non-voting Common Stock into voting
Class A Common Stock on a one-for-one basis.
All shares of the Company’s Common Stock were
converted into shares of Class A Common Stock,
and the Class A Common Stock was renamed as the
2
Company’s Common Stock, trading on the New York Stock Exchange under
the symbol “AAN.” We expect this conversion to improve the trading liquidity
and attractiveness of our stock to the investment community.
Another signifi cant event was Aaron’s inclusion in the Fortune 1000 for the
fi rst time. We are proud of achieving this landmark status and believe it will
enhance awareness and interest in the Company.
Last September, Earl Dolive retired from the Board of Directors after serving
for 33 years. Earl’s dedication, service, and thoughtful counsel over the years
have been instrumental to the success of Aaron’s. Earl was appointed Director
Emeritus upon his retirement.
Several management promotions have been recently made in the Company.
John T. Trainor was promoted to Vice President, Chief Information Offi cer.
Within the Aaron’s Sales & Lease Ownership division, Brock M. Roberts was
promoted to Vice President, Northeastern Operations, and Marco Scalise to
Vice President, Customer Account Management.
The theme of this year’s report is refl ecting on the past and preparing for
The theme of this year’s report is refl ecting on the past and preparing for
the future. There are few companies with a story like that of Aaron’s.
We have operated successfully for fi ve and a half decades and feel
we have never been stronger or better positioned. We have dozens
and dozens of associates who have been part of the Aaron’s team
for 10, 20 and 30 years or more. We also have families who have
been customers of Aaron’s for many generations. With that kind
of loyalty, you know we are doing something right. The Company
did more than weather the recent recession — Aaron’s increased
earnings and market share and added customers. Aaron’s provides
desired and needed basic home furnishings, and our customers’
demand for these products remains strong. In refl ecting on our past,
we believe that our corporate culture, values and willingness to adapt
have all been critical to our success. As we look forward, those same
attributes give us confi dence. Aaron’s is well-positioned to serve our market
attributes give us confi dence. Aaron’s is well-positioned to serve our market
and our fi nancial strength, business model and competitive advantages should
lead to continued profi table growth.
As always, we are grateful for the support of our associates, our customers,
our business partners and our shareholders.
R. Charles Loudermilk, Sr.
Chairman
Chairman
Robert C. Loudermilk, Jr.
President and Chief Executive Offi cer
3
Reflections
Charlie Loudermilk: Aaron’s success has been built
on responding to opportunity and attending to
details and I believe those same characteristics will
serve us well in the future. In 55 years of operation,
we never squeezed our customers to enhance the
bottom line. Fairness is the bottom line. I was in
the restaurant business, the ultimate customer
service business, with my mother and we were
business partners for 15 years. She set the example
for me — success is built on hard work, attention
to detail and customer service.
The Company’s fi rst transaction was the rental
of 300 folding chairs for an estate sale in Atlanta.
We made $90 on that deal. In the early years, we
nearly drowned in an ocean of opportunity. At fi rst,
the notion of inventory that could go out into the
marketplace and continue to generate revenue long
after its initial cost had been recouped seemed too
good to be true. And it was. Our business required
constant infusions of fresh capital. The most
important thing in the rental business is pleasing
people though. Over the years, Aaron’s managed to
do both — raise capital and please people.
4
People often ask me how
I came up with the name “Aaron’s.”
The answer is quite simple — I wanted
to be fi rst in the phone book.
— R. Charles Loudermilk, Sr., Chairman of the Board
After about 10 years of operation, more
and more people began to ask about
renting furniture and our business shifted.
Our furniture rental business grew rapidly
and soon we found that the traditional
furniture manufacturing industry could
not meet our needs for large shipments on
short notice. So, we began to manufacture
our own furniture. For us to serve our
customers well, we had to have greater
control over our sourcing. Aaron’s now
produces nearly $80 million of furniture
a year at cost. Of course, with our current
buying power, manufacturers of all types
of products from big-screen televisions to
recliners to computers now work closely
with us on product styling, availability
and price.
The initial public offering in 1982
provided the access to capital to
signifi cantly grow the business and, by
1984, Aaron’s was the largest furniture
rental company in America with annual
revenues of more than $80 million. We
grew through acquisitions as well as
developing our own store locations.
As the rental industry changed, the
Company developed the sales and lease
ownership model, which is the foundation
of our business today. As a boy in
working-class Atlanta, what I wanted most
was a chance, a level playing fi eld and an
honest shot. Give me that and you give
me dignity. I’ll take it the rest of the way.
Many of Aaron’s 1.4 million customers are
not so different from my own childhood
family. The easy phrase is that they are
“credit-challenged,” but the truth is they
want a scrap of dignity, whether it is a
computer, a living room suite or maybe a
set of well-made beds for their kids. Many
of Aaron’s customers have been buffeted by
life, by a variety of circumstances, and are
trying to move forward. We don’t check
their credit or string out their payments.
We give them their shot at ownership. I
see Aaron’s as “making dreams come true”
for families all across this country.
I am most proud of the corporate culture
at Aaron’s — the basis for our success and
the reason for my optimism for the future.
We work hard to remind everyone that
they are more than employees at Aaron’s.
They are truly family. Our associates
are Aaron’s greatest asset; they carry our
culture into their communities. It is a
testimony to our culture that so many
of our key executives have been with the
Company 10, 20 and even 30-plus years.
The depth of our management and the
strength of our corporate culture give me
great confi dence in the future as I step
back from day-to-day management.
5
The Present
“Respect the Consumer”
Ken Butler: Early in our corporate history, our
typical customer was a renter looking for temporary
furnishings. At the time, there were dozens of home
furnishings retailers across the country catering to
the middle class. Most of those home furnishings
chains have gone out of business while Aaron’s
has grown, has refi ned its business model and has
stamped a national presence. That, I believe, is
testimony to the strength of the Aaron’s business
model.
One of the building blocks of our business is
“Respect the Consumer.” Over 1.4 million
consumers are Aaron’s customers. Many of Aaron’s
customers are homeowners, all carefully managing
household budgets. Our typical customer has a
household income of approximately $40,000 and
has credit constraints such as a poor credit score or
limited access. Our customers can visit their local
Aaron’s store, pick out their merchandise and sit
down with the manager to discuss payment terms,
6
the length of the agreement and the
monthly payment. We want our customers
to own their product, and over 45% of
our agreements go to term. We don’t do a
credit check on our customers — we just
need to know that they have income and
can meet their monthly obligations. Many
of our customers have credit cards, but
leasing through Aaron’s leaves that credit
availability untouched. It is increasingly
important to our customer to know that if
their fi nancial circumstances change, they
can terminate a lease with no lingering
fi nancial obligation. That fl exibility is very
important in today’s economy.
We have adapted over time as the
consumer’s needs have changed, but
fairness is always our guiding principle.
Our product line has expanded to
meet customer desires; you only have
to look at our line-up of electronics
to see that. We offer a broad range of
televisions — plasma, DLP, LCD and
LED. We offer computers and gaming
systems as well. We have also adapted
our payment terms to meet changing
consumer needs. We have lease terms of
12, 18 and 24 months, which makes it
possible for our customers to select terms
which best fi t monthly budgets.
We take pride in our stores. We operate
9,000-square-foot stores with attractive
signage and product displays. Think about
walking into a supermarket and seeing
gaps on shelves. The fi rst thing you will
think is “I have missed the good stuff ”
and only the second-rate products are left.
So, we pay a great deal of attention to our
stores; our sales fl oors must look attractive
with “no holes on the fl oor.” We operate
stores in a variety of locations: urban,
suburban and rural. Years ago, our stores
drew from roughly a 10-mile radius but we
now fi nd many of our suburban and rural
stores draw from a much larger market.
Our stores have become destinations. Most
of the product line is standard, but our
managers can tailor their sales fl oors to the
local market. When a customer comes into
our store, they will fi nd fi rst-rate name-
brand merchandise and friendly associates.
We are really a specialty retailer — with
a large base of loyal customers. Seventy
percent of our customers are repeat
customers, testimony to our belief that a
vibrant, respectful, day-to-day connection
between a service business and the
consumer is the basis for success.
Over the years, Aaron’s has become a
national brand, which we consider a
competitive advantage. Our NASCAR
affi liation has become a critical part of
our marketing. Our well-known “Lucky
Dog” mascot is featured in our advertising
and participates in store openings and
special events. We have an Aaron’s car and
even sponsor the Aaron’s 499 and 312
races during Aaron’s Dream Weekend at
Talladega. With sponsorships of sports
teams such as the University of Alabama,
University of Texas and Georgia Tech
athletic programs, the Atlanta Thrashers
One of our marketing
themes — “Aaron’s Drives Dreams
Home”— says it all. We are in the
business of furnishing homes.
— William K. Butler, Jr., Chief Operating Officer
7
Company-Operated Sales and Lease
Ownership Store Revenues
Other
3%
Computers
13%
Furniture
31%
Electronics
37%
Appliances
16%
8
Company Revenues
From Franchising
Company Pretax Profit
From Franchising
STore Growth
)
s
d
n
a
s
u
o
h
t
n
i
$
(
$60,000
50,000
40,000
30,000
20,000
10,000
0
2006
2007
2008
2009
2010
60000
$50,000
50000
40,000
40000
)
s
d
n
a
s
u
30000
o
h
t
n
i
$
20000
(
10000
30,000
20,000
10,000
0
0
50000
2,000
40000
1,500
)
s
e
r
o
t
s
30000
1,000
f
o
r
e
b
m
u
N
(
20000
2006
2007
2008
2009
2010
500
10000
0
0
2006
2007
2008
2009
2010
2000
1500
1000
500
0
and Falcons, and arena football, as well as
our NASCAR program, our advertising
and sponsorships bring the Aaron’s name
to over 50 million people each year. We
are launching our fi rst national television
advertising program in 2011, a signifi cant
milestone for our Company.
Even though we have over 1,800 stores,
we keep our fi nger on the pulse of the
business. Our store managers know that
“you are what your numbers say you are.”
We track agreements and lease payments
daily, weekly and monthly. Each store’s
manager is responsible for the leases
originating in his store. That manager is
responsible for those customers — their
satisfaction and their service. At corporate,
we try to source the best products at
the best price, make sure that every
fulfi llment center has adequate inventory
to meet our 24-hour delivery goal, and
develop outstanding marketing programs
and advertising. At the store level, the
manager and associates are the front line
of customer relations. They are the key to
“driving dreams home.”
9
Ready for
the Future
“We are the industry leader in serving the
moderate-income customer, offering
affordable payment plans, quality
merchandise and superior service.”
— Robert C. Loudermilk, Jr., President, Chief Executive Officer
Robin Loudermilk: Aaron’s has been part of my
life since childhood, but I have never been more
optimistic. I learned the business from the ground
up — I worked in stores, drove trucks, managed
divisions. I have learned fi rsthand how strong
our Company culture is and what a competitive
asset that can be. The strength of this culture has
allowed us to shift and adapt our business model
as conditions warrant. An important part of our
culture is the tenure of our management team.
A number of our top executives have been with
Aaron’s for many, many years. That says a great deal
about the character of our culture and the talent and
loyalty of our management.
For many years, we were a rental company and
Aaron Rents was our trade name. Our customer
today wants to own home furnishings and we offer
a fl exible, cost-effective way to achieve that goal.
This was the reason for our name change from
Aaron Rents to Aaron’s in 2009. With the tightened
consumer credit markets of the past few years and
the weaker credit scores of so many American
households, Aaron’s is well positioned to be the
10
“We are the industry leader in serving the
moderate-income customer, offering
affordable payment plans, quality
merchandise and superior service.”
— Robert C. Loudermilk, Jr., President, Chief Executive Officer
provider of choice for high-quality, brand-
name products now and for many years
to come.
I often am asked about the limits of
growth. We have over 1,800 stores and
the opportunities for expansion are still
promising. We expect to have greater than
3,000 stores one day. Our development
is not one-dimensional. Aaron’s grows
through opening both new Company-
operated and franchised stores. We also
grow through servicing an increasing
number of American households. Aaron’s
market share also increases as the number
of home furnishings retailers in the
country shrinks. We prosper relative to
competitors because we offer a unique
path to ownership that is not dependent
on credit scores and credit limits. Our
corporate strategy encompasses both store
and market share growth. At the same
time, we are exploring other avenues of
profi table expansion. We entered the
Canadian market through franchise
arrangements a number of years ago
and are studying other markets. The
management team also continuously
reviews potential opportunities in
the United States and opened three
HomeSmart stores as a pilot project several
months ago. These stores, all opened in
strong and vibrant Aaron’s markets, are
positioned to serve those consumers who
desire a weekly pay option and leverage
the Company’s distribution system and
corporate functions.
We believe Aaron’s clearly gained market
share during the recent recession. The
natural question is whether we give back
some of these gains when the economy
bounces back. I believe that our market
share gains will continue for several
reasons. First, jobs creation leads to
household formation and the need for
home furnishings. And, as we do not
check credit scores (a consumer needs
11
only a visible source of income to be an
Aaron’s customer), an improving economy
increases the number of people who meet
our criteria. Third, a fi rst-time Aaron’s
customer is likely to become a repeat
customer. Our commitment to customer
satisfaction and the fl exibility of our
lease ownership program undergird our
customer loyalty.
It is also important to note that our
corporate balance sheet is strong. As the
economy emerges from a recession, Aaron’s
is fi nancially stronger than ever. We
anticipate that the Company can internally
fund planned growth for the next few
years. We have steadily increased the cash
dividend and repurchased stock. We have
a substantial amount of cash on hand with
no signifi cant debt. The fi nancial strength
of Aaron’s is defi nitely a competitive
advantage.
Aaron’s has been taking care of customers
for more than 55 years. Our business
model has evolved, adjusted and is now
tested and solid. A greater portion than
ever of American households makes for
potential customers. We have a highly
respected brand name and image, a
commitment to customer service and the
fi nancial and human resources to pursue
market opportunities. We look forward
to continued success and growth in the
future.
Locations Within the
United STates and Canada
4
26
4
7
1
27
33 1
25
7
4
8
7
23
2
25
9
12
34 1
4
4
5
10
13
13
1
10
34
1
2
170
1
38
15
18
27
15
24
1
51
3
3
Store Count as of December 31, 2010
Company Stores — 1,146
Franchised Stores — 664
Aaron’s Office Furniture Stores — 1
HomeSmart Stores — 3
Fulfillment Centers — 17
Woodhaven Furniture Industries — 12
12
2
1
8
5
1
1
1313
1
2
20
5
1
23
39
28
19
9
4
13
5
1 3
30
1
21
69
1
23
16
5
7
31
32
18
38
18
1
1
1
92
10
2
32
4
54
1
2
36 1
16
1
2
38
1
47 1
5
1
93
2
7
1
16
102
1
1
13
3
3
4
26
4
7
1
27
33 1
25
7
4
8
7
23
2
25
9
12
34 1
4
2
1
8
5
1
1
13
1
2
20
5
16
5
4
5
10
13
13
1
10
34
1
2
170
1
38
1
23
39
28
19
4
9
5
13
1 3
30
21
1
69
1
23
7
31
32
18
38
18
1
1
1
92
10
2
32
4
54
1
2
36 1
16
1
2
38
1
47 1
5
1
93
2
7
1
16
15
18
27
15
24
1
51
102
1
1
13
Selected Financial Information 14
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
Consolidated Balance Sheets
Consolidated Statements
of Earnings
Consolidated Statements of
Shareholders’ Equity
Consolidated Statements
of Cash Flows
Notes to Consolidated
Financial Statements
Management Report
on Internal Control Over
Financial Reporting
Report of Independent
Registered Public Accounting
Firm on Financial Statements
Report of Independent
Registered Public Accounting
Firm on Internal Control Over
Financial Reporting
Common Stock Market
Prices and Dividends
15
24
25
26
27
28
42
42
43
44
13
Selected Financial Information
(Dollar Amounts in Thousands,
Except Per Share)
Operating Results
Revenues:
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Year Ended
December 31,
2008
Year Ended
December 31,
2007
Year Ended
December 31,
2006
Lease Revenues and Fees
$1,402,053
$1,310,709
$1,178,719
$1,045,804
$ 915,872
Net Earnings
$ 118,376
Earnings Per Share From Continuing Operations
$ 1.46
$ 112,601
$ 1.39
—
(277)
4,420
$ 90,189
$ 1.07
6,850
$ 80,275
$ .90
7,732
$ 78,635
$ .90
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other
Costs and Expenses:
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Depreciation of Lease Merchandise
Interest
Earnings From Continuing Operations
Before Income Taxes
Income Taxes
Net Earnings From Continuing Operations
(Loss) Earnings From Discontinued Operations,
Net of Tax
Earnings Per Share From Continuing
Operations Assuming Dilution
Earnings Per Share From Discontinued Operations
(Loss) Earnings Per Share From Discontinued Operations
Assuming Dilution
Dividends Per Share:
Common Stock
Class A Common Stock
Financial Position
Lease Merchandise, Net
Property, Plant and Equipment, Net
Total Assets
Debt
Shareholders’ Equity
At Year End
Stores Open:
Company-Operated
Franchised
Lease Agreements in Effect
Number of Employees
14
40,556
362,273
59,112
12,853
43,394
327,999
52,941
17,744
43,187
309,326
45,025
16,351
34,591
261,584
38,803
14,157
40,102
224,489
33,626
14,358
1,876,847
1,752,787
1,592,608
1,394,939
1,228,447
23,013
330,918
824,929
504,105
3,096
25,730
299,727
771,634
474,958
4,299
26,379
283,358
705,566
429,907
7,818
21,201
239,755
617,106
391,538
7,587
25,207
207,217
525,980
349,218
8,567
1,686,061
1,576,348
1,453,028
1,277,187
1,116,189
190,786
72,410
118,376
176,439
63,561
112,878
139,580
53,811
85,769
117,752
44,327
73,425
112,258
41,355
70,903
1.44
.00
.00
.049
.049
1.38
.00
(.01)
1.06
.06
.05
.89
.08
.08
.89
.10
.10
.046
.043
.041
.038
.046
.043
.041
.038
$ 814,484
$ 682,402
$ 681,086
$ 558,322
$ 550,205
204,912
1,502,072
41,790
979,417
1,150
664
1,325,000
10,400
215,183
1,321,456
55,044
887,260
1,097
597
1,171,000
10,000
209,452
1,233,270
114,817
761,544
1,053
504
1,017,000
9,600
228,275
1,113,176
185,832
673,380
1,030
484
820,000
9,100
152,032
979,606
129,974
607,015
857
441
734,000
7,900
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Aaron’s, Inc. is a leading specialty retailer of consumer electronics,
computers, residential furniture, household appliances and acces-
sories. Our major operating divisions are the Aaron’s Sales & Lease
Ownership Division and the Woodhaven Furniture Industries
Division, which manufactures and supplies the majority of the
upholstered furniture and bedding leased and sold in our stores.
Aaron’s has demonstrated strong revenue growth over the last
three years. Total revenues have increased from $1.593 billion in
2008 to $1.877 billion in 2010, representing a compound annual
growth rate of 8.5%. Total revenues for the year ended December
31, 2010 increased $124.1 million, or 7.1%, over the prior year.
The majority of our growth comes from the opening of new
sales and lease ownership stores and increases in same store revenues
from previously opened stores. We added a net of 67 company-
operated sales and lease ownership stores in 2010. We spend on
average approximately $600,000 to $700,000 in the first year of
operation of a new store, which includes purchases of lease merchan-
dise, investments in leasehold improvements and financing first-year
start-up costs. Our new sales and lease ownership stores typically
achieve revenues of approximately $1.1 million in their third year
of operation. Our comparable stores, open more than three years,
normally achieve approximately $1.4 million in unit revenues, which
we believe represents a higher unit revenue volume than the typical
rent-to-own store. Most of our stores are cash flow positive in the
second year of operations following their openings.
We also use our franchise program to help us expand our sales
and lease ownership concept more quickly and into more areas than
we otherwise would by opening only company-operated stores. Our
franchisees added a net of 67 stores in 2010. We purchased 12 fran-
chised stores during 2010. Franchise royalties and other related fees
represent a growing source of high-margin revenue for us, account-
ing for $59.1 million of revenues in 2010, up from $45.0 million in
2008, representing a compounded annual growth rate of 14.6%.
AARON’S OFFICE FURNITURE CLOSURE. In November 2008,
the Company completed the sale of substantially all of the assets and
the transfer of certain liabilities of its legacy residential rent-to-rent
business, Aaron’s Corporate Furnishings division, to CORT Business
Services Corporation. When the Company sold its rent-to-rent
business, it decided to keep the then 13 Aaron’s Office Furniture
stores, a rent-to-rent concept aimed at the office market. However,
after disappointing results in a difficult environment, in June
2010, the Company announced its plans to close all of the then 12
remaining Aaron’s Office Furniture stores and focus solely on the
Company’s Sales & Lease Ownership business. Since June 2010, the
Company has closed 11 of its Aaron’s Office Furniture stores and
has one remaining store open to liquidate merchandise. As a result,
the Company recorded $9.0 million in 2010 related to the write-
down and cost to dispose of office furniture, estimated future lease
liabilities for closed stores, write-off of leaseholds, severance pay, and
other costs associated with closing the stores and winding down the
division. We do not anticipate incurring significant charges in the
future related to winding down of the division.
STOCK SPLIT. On March 23, 2010, we announced a 3-for-2
stock split effected in the form of a 50% stock dividend on both
Nonvoting Common Stock and Class A Common Stock. New
shares were distributed on April 15, 2010 to shareholders of record
as of the close of business on April 1, 2010. All share and per share
information has been restated for all periods presented to reflect this
stock split.
SAME STORE REVENUES. We believe the changes in same store
revenues are a key performance indicator. The change in same store
revenues is calculated by comparing revenues for the year to revenues
for the prior year for all stores open for the entire 24-month period,
excluding stores that received lease agreements from other acquired,
closed or merged stores.
Key Components of Income
In this management’s discussion and analysis section, we review the
Company’s consolidated results, including the five components of
our revenues, costs of sales and expenses, of which depreciation of
lease merchandise is a significant part.
REVENUES. We separate our total revenues into five components:
lease revenues and fees, retail sales, non-retail sales, franchise royal-
ties and fees, and other revenues. Lease revenues and fees include all
revenues derived from lease agreements from our stores, including
agreements that result in our customers acquiring ownership at the
end of the term. Retail sales represent sales of both new and lease
return merchandise from our stores. Non-retail sales mainly represent
new merchandise sales to our sales and lease ownership division
franchisees. Franchise royalties and fees represent fees from the sale
of franchise rights and royalty payments from franchisees, as well
as other related income from our franchised stores. Other revenues
include, at times, income from gains on asset dispositions and other
miscellaneous revenues.
COST OF SALES. We separate our cost of sales into two compo-
nents: retail and non-retail. Retail cost of sales represents the original
or depreciated cost of merchandise sold through our company-
operated stores. Non-retail cost of sales primarily represents the cost
of merchandise sold to our franchisees.
OPERATING EXPENSES. Operating expenses include personnel
costs, selling costs, occupancy costs, and delivery, among other
expenses.
DEPRECIATION OF LEASE MERCHANDISE. Depreciation of
lease merchandise reflects the expense associated with depreciating
merchandise held for lease and leased to customers by our stores.
15
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies
REVENUE RECOGNITION. Lease revenues are recognized in the
month they are due on the accrual basis of accounting. For internal
management reporting purposes, lease revenues from the sales and
lease ownership division are recognized as revenue in the month the
cash is collected. On a monthly basis, we record an accrual for lease
revenues due but not yet received, net of allowances, and a deferral
of revenue for lease payments received prior to the month due. Our
revenue recognition accounting policy matches the lease revenue
with the corresponding costs, mainly depreciation, associated with
the lease merchandise. At December 31, 2010 and 2009, we had a
revenue deferral representing cash collected in advance of being due
or otherwise earned totaling $39.5 million and $37.4 million, respec-
tively, and accrued revenue receivable, net of allowance for doubtful
accounts, based on historical collection rates of $4.9 million and
$5.3 million, respectively. Revenues from the sale of merchandise to
franchisees are recognized at the time of receipt of the merchandise
by the franchisee and revenues from such sales to other customers are
recognized at the time of shipment.
LEASE MERCHANDISE. Our sales and lease ownership division
depreciates merchandise over the applicable agreement period, gener-
ally 12 to 24 months when leased, and 36 months when not leased,
to 0% salvage value. Our office furniture stores depreciate merchan-
dise over its estimated useful life, which ranges from 24 months to
48 months, net of salvage value, which ranges from 0% to 30%.
Sales and lease ownership merchandise is generally depreciated at a
faster rate than our office furniture merchandise. Our policies require
weekly lease merchandise counts by store managers and write-offs for
unsalable, damaged, or missing merchandise inventories. Full physi-
cal inventories are generally taken at our fulfillment and manufactur-
ing facilities two to four times a year with appropriate provisions
made for missing, damaged and unsalable merchandise. In addition,
we monitor lease merchandise levels and mix by division, store and
fulfillment center, as well as the average age of merchandise on hand.
If unsalable lease merchandise cannot be returned to vendors, its car-
rying value is adjusted to net realizable value or written off. All lease
merchandise is available for lease and sale, excluding merchandise
determined to be missing, damaged or unsalable.
We record lease merchandise carrying value adjustments on
the allowance method, which estimates the merchandise losses
incurred but not yet identified by management as of the end of
the accounting period. Lease merchandise adjustments totaled
$46.5 million, $38.3 million, and $34.5 million for the years ended
December 31, 2010, 2009, and 2008, respectively. The current year
includes a write-down of $4.7 million related to the closure of the
Aaron’s Office Furniture division.
LEASES AND CLOSED STORE RESERVES. The majority of
our Company-operated stores are operated from leased facilities
under operating lease agreements. The majority of these leases are
for periods that do not exceed five years. Leasehold improvements
related to these leases are generally amortized over periods that do
not exceed the lesser of the lease term or five years. While a majority
of our leases do not require escalating payments, for the leases which
do contain such provisions we record the related lease expense on a
straight-line basis over the lease term. We do not generally obtain
significant amounts of lease incentives or allowances from landlords.
From time to time, we close or consolidate stores. Our primary
cost associated with closing or consolidating stores is the future
lease payments and related commitments. We record an estimate
of the future obligation related to closed or consolidated stores
based upon the present value of the future lease payments and
related commitments, net of estimated sublease income which we
base upon historical experience. For the years ended December 31,
2010 and 2009, our reserve for closed or consolidated stores was
$6.4 million and $2.3 million, respectively, and the increase was
primarily the result of the closure of the Aaron’s Office Furniture
stores. If our estimates related to sublease income are not correct,
our actual liability may be more or less than the liability recorded
at December 31, 2010.
INSURANCE PROGRAMS. Aaron’s maintains insurance contracts
to fund workers compensation, vehicle liability, general liability and
group health insurance claims. Using actuarial analysis and projec-
tions, we estimate the liabilities associated with open and incurred,
but not reported workers compensation, vehicle liability and general
liability claims. This analysis is based upon an assessment of the
likely outcome or historical experience, net of any stop loss or other
supplementary coverage. We also calculate the projected outstanding
plan liability for our group health insurance program using historical
claims runoff data. Our gross liability for workers compensation
insurance claims, vehicle liability, general liability and group health
insurance was $27.6 million and $22.5 million at December 31,
2010 and 2009, respectively. In addition, we have prefunding bal-
ances on deposit with the insurance carriers of $23.8 million and
$19.8 million at December 31, 2010 and 2009, respectively.
If we resolve insurance claims for amounts that are in excess of
our current estimates and within policy stop loss limits, we will
be required to pay additional amounts beyond those accrued at
December 31, 2010. The assumptions and conditions described
above reflect management’s best assumptions and estimates, but
these items involve inherent uncertainties as described above,
which may or may not be controllable by management. As a result,
the accounting for such items could result in different amounts if
management used different assumptions or if different conditions
occur in future periods.
INCOME TAXES. The calculation of our income tax expense
requires significant judgment and the use of estimates. We periodi-
cally assess tax positions based on current tax developments, includ-
ing enacted statutory, judicial and regulatory guidance. In analyzing
our overall tax position, consideration is given to the amount and
timing of recognizing income tax liabilities and benefits. In applying
16
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
the tax and accounting guidance to the facts and circumstances,
income tax balances are adjusted appropriately through the income
tax provision. Reserves for income tax uncertainties are maintained
at levels we believe are adequate to absorb probable payments. Actual
amounts paid, if any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets when we
expect the amount of tax benefit to be realized is less than the car-
rying value of the deferred tax asset.
Results of Operations
Year Ended December 31, 2010 Versus Year Ended
December 31, 2009
The Aaron’s Corporate Furnishings division is reflected as a discon-
tinued operation for all periods presented. The following table shows
key selected financial data for the years ended December 31, 2010
and 2009, and the changes in dollars and as a percentage to 2010
from 2009.
(In Thousands)
Revenues:
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other
Costs and Expenses:
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Depreciation of Lease Merchandise
Interest
Earnings From Continuing
Operations Before Income Taxes
Income Taxes
Net Earnings From Continuing
Operations
Loss From Discontinued
Operations, Net of Tax
Net Earnings
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Increase/(Decrease)
in Dollars to 2010
from 2009
% Increase/
(Decrease) to
2010 from 2009
$1,402,053
40,556
362,273
59,112
12,853
1,876,847
23,013
330,918
824,929
504,105
3,096
1,686,061
190,786
72,410
$1,310,709
43,394
327,999
52,941
17,744
1,752,787
25,730
299,727
771,634
474,958
4,299
1,576,348
176,439
63,561
118,376
112,878
—
(277)
$ 91,344
(2,838)
34,274
6,171
(4,891)
124,060
(2,717)
31,191
53,295
29,147
(1,203)
109,713
14,347
8,849
5,498
277
$ 118,376
$ 112,601
$ 5,775
7.0%
(6.5)
10.4
11.7
(27.6)
7.1
(10.6)
10.4
6.9
6.1
(28.0)
7.0
8.1
13.9
4.9
(100.0)
5.1%
17
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Revenues
Expenses
The 7.1% increase in total revenues, to $1.877 billion in 2010
from $1.753 billion in 2009, was due mainly to a $91.3 million,
or 7.0%, increase in lease revenues and fees revenues, plus a
$34.3 million, or 10.4%, increase in non-retail sales. The
$91.3 million increase in lease revenues and fees revenues was
attributable to our sales and lease ownership division, which had a
4.4% increase in same store revenues during the 24-month period
ended December 31, 2010 and added a net 112 company-operated
stores since the beginning of 2009.
The 6.5% decrease in revenues from retail sales, to $40.6 million
in 2010 from $43.4 million in the comparable period in 2009, was
due to decreased demand and closure of the majority of the Aaron’s
Office Furniture stores in 2010.
The 10.4% increase in non-retail sales (which mainly represents
merchandise sold to our franchisees), to $362.3 million in 2010
from $328.0 million in 2009, was due to the growth of our fran-
chise operations and our distribution network. The total number of
franchised sales and lease ownership stores at December 31, 2010
was 664, reflecting a net addition of 160 stores since the beginning
of 2009.
The 11.7% increase in franchise royalties and fees, to $59.1
million in 2010 from $52.9 million in 2009, primarily reflects an
increase in royalty income from franchisees, increasing 13.2% to
$47.9 million in 2010 compared to $42.3 million in 2009. The
increase is due primarily to the growth in the number of franchised
stores and same store growth in the revenues of existing franchised
stores.
Other revenues decreased 27.6% to $12.9 million in 2010 from
$17.7 million in 2009. Included in other revenues in 2010 is a
$1.9 million gain from the sales of the assets of 11 stores. Included
in other revenues in 2009 is a $7.8 million gain on the sales of the
assets of 39 stores.
Cost of Sales
Retail cost of sales decreased 10.6% to $23.0 million in 2010
compared to $25.7 million in 2009, and as a percentage of retail
sales, decreased to 56.7% in 2010 from 59.3% in 2009 primarily
as a result of decline in the volume of lower margin office furni-
ture retail sales associated with the closure of 14 Aaron’s Office
Furniture stores.
Non-retail cost of sales increased 10.4%, to $330.9 million in
2010, from $299.7 million for the comparable period in 2009,
and as a percentage of non-retail sales, decreased slightly to 91.3%
in 2010 from 91.4% in 2009.
Operating expenses in 2010 increased $53.3 million to $824.9 mil-
lion from $771.6 million in 2009, a 6.9% increase. As a percentage
of total revenues, operating expenses were 44.0% for both the year
ended December 31, 2010, and 2009.
We began ceasing the operations of the Aaron’s Office Furniture
division in June 2010. We closed 14 Aaron’s Office Furniture
stores during 2010 and had one remaining store open to liquidate
merchandise. As a result, we recorded $3.3 million in closed store
reserves, $4.7 million in lease merchandise write-downs and other
miscellaneous expenses in 2010, totaling $9.0 million in operating
expenses, related to the closures. In 2009 we recorded a $2.2 million
pre-tax charge to operating expenses relating to the write-down of
certain lease merchandise and the impairment of long-lived assets
associated with Aaron’s Office Furniture stores.
Depreciation of lease merchandise increased $29.1 million to
$504.1 million in 2010 from $475.0 million during the comparable
period in 2009, a 6.1% increase. As a percentage of total lease
revenues and fees, depreciation of lease merchandise decreased
slightly to 36.0% from 36.2% a year ago.
Interest expense decreased to $3.1 million in 2010 compared
with $4.3 million in 2009, a 28.0% decrease. The decrease in inter-
est expense was due to lower debt levels during 2010.
Income tax expense increased $8.8 million to $72.4 million in
2010, compared with $63.6 million in 2009, representing a 13.9%
increase. Our effective tax rate increased to 38.0% in 2010 from
36.0% in 2009 primarily related to the favorable impact of a $2.3
million reversal of previously recorded liabilities for uncertain tax
positions due to expiration of statute of limitations in 2009.
Net Earnings from Continuing Operations
Net earnings from continuing operations increased $5.5 million to
$118.4 million in 2010 compared with $112.9 million in 2009,
representing a 4.9% increase. As a percentage of total revenues, net
earnings from continuing operations were 6.3% and 6.4% in 2010
and 2009, respectively. The increase in net earnings from continuing
operations was primarily the result of the maturing of new company-
operated sales and lease ownership stores added over the past several
years, contributing to a 4.4% increase in same store revenues, and an
11.7% increase in franchise royalties and fees.
Year Ended December 31, 2009 Versus Year Ended
December 31, 2008
The Aaron’s Corporate Furnishings division is reflected as a discon-
tinued operation for all periods presented. The following table shows
key selected financial data for the years ended December 31, 2009
and 2008, and the changes in dollars and as a percentage to 2009
from 2008.
18
(In Thousands)
Revenues:
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other
Costs and Expenses:
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Depreciation of Lease Merchandise
Interest
Earnings From Continuing
Operations Before Income Taxes
Income Taxes
Net Earnings From Continuing
Operations
(Loss) Earnings From Discontinued
Operations, Net of Tax
Net Earnings
Year Ended
December 31,
2009
Year Ended
December 31,
2008
Increase/(Decrease)
in Dollars to 2009
from 2008
% Increase/
(Decrease) to
2009 from 2008
$1,310,709
43,394
327,999
52,941
17,744
1,752,787
25,730
299,727
771,634
474,958
4,299
1,576,348
176,439
63,561
$1,178,719
43,187
309,326
45,025
16,351
1,592,608
26,379
283,358
705,566
429,907
7,818
1,453,028
139,580
53,811
$ 131,990
207
18,673
7,916
1,393
160,179
(649)
16,369
66,068
45,051
(3,519)
123,320
36,859
9,750
112,878
85,769
27,109
11.2%
0.5
6.0
17.6
8.5
10.1
(2.5)
5.8
9.4
10.5
(45.0)
8.5
26.4
18.1
31.6
(277)
4,420
(4,697)
$ 112,601
$ 90,189
$ 22,412
(106.3)
24.9%
Revenues
The 10.1% increase in total revenues, to $1.753 billion in 2009
from $1.593 billion in 2008, was due mainly to a $132.0 million,
or 11.2%, increase in lease revenues and fees, plus an $18.7 million,
or 6.0%, increase in non-retail sales. The $132.0 million increase
in lease revenues and fees revenues was attributable to our sales and
lease ownership division, which had an 8.1% increase in same store
revenues during the 24-month period ended December 31, 2009
and added a net 68 company-operated stores since the beginning
of 2008.
The 6.0% increase in non-retail sales (which mainly represents
merchandise sold to our franchisees), to $328.0 million in 2009
from $309.3 million in 2008, was due to the growth of our franchise
operations and our distribution network. The total number of
franchised sales and lease ownership stores at December 31, 2009
was 597, reflecting a net addition of 113 stores since the beginning
of 2008.
The 17.6% increase in franchise royalties and fees, to $52.9
million in 2009 from $45.0 million in 2008, primarily reflects an
increase in royalty income from franchisees, increasing 15.9% to
$42.3 million in 2009 compared to $36.5 million in 2008. The
increase is due primarily to the growth in the number of franchised
stores and same store growth in the revenues of existing stores.
Other revenues increased 8.5% to $17.7 million in 2009 from
$16.4 million in 2008. Included in other revenues in 2009 is a
$7.8 million gain from the sales of the assets of 39 stores. Included
in other revenues in 2008 is an $8.5 million gain on the sales of the
assets of 41 stores.
Cost of Sales
Cost of sales from retail sales decreased 2.5% to $25.7 million in
2009 compared to $26.4 million in 2008, with retail cost of sales as
a percentage of retail sales decreasing to 59.3% from 61.1% in 2008
as a result of improved pricing and lower product cost.
Cost of sales from non-retail sales increased 5.8%, to $299.7
million in 2009 from $283.4 million in 2008, and as a percentage
of non-retail sales, was consistent at 91.4% in 2009 and 91.6% in
2008.
Expenses
Operating expenses in 2009 increased $66.1 million to $771.6 mil-
lion from $705.6 million in 2008, a 9.4% increase. As a percentage
of total revenues, operating expenses were 44.0% for the year ended
December 31, 2009, and 44.3% for the comparable period in 2008.
Depreciation of lease merchandise increased $45.1 million to
$475.0 million in 2009 from $429.9 million during the comparable
period in 2008, a 10.5% increase. As a percentage of total lease
revenues and fees, depreciation of lease merchandise decreased to
36.2% from 36.5% a year ago, primarily due to product mix and
lower product cost from favorable purchasing trends.
19
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Interest expense decreased to $4.3 million in 2009 compared
with $7.8 million in 2008, a 45.0% decrease. The decrease in
interest expense was due to lower debt levels during 2009.
Income tax expense increased $9.8 million to $63.6 million
in 2009, compared with $53.8 million in 2008, representing an
18.1% increase. Our effective tax rate decreased to 36.0% in 2009
from 38.6% in 2008 primarily related to the favorable impact of a
$2.3 million reversal of previously recorded liabilities for uncertain
tax positions due to expiration of statute of limitations.
Net Earnings from Continuing Operations
Net earnings from continuing operations increased $27.1 million
to $112.9 million in 2009 compared with $85.8 million in 2008,
representing a 31.6% increase. As a percentage of total revenues, net
earnings from continuing operations were 6.4% and 5.4% in 2009
and 2008, respectively. The increase in net earnings from continuing
operations was primarily the result of the maturing of new company-
operated sales and lease ownership stores added over the past several
years, contributing to an 8.1% increase in same store revenues, and a
17.6% increase in franchise royalties and fees.
Discontinued Operations
Loss from discontinued operations (which represents the loss from
the former Aaron’s Corporate Furnishings division), net of tax, was
$277,000 in 2009, compared to net earnings of $4.4 million in
2008. Included in the 2008 results is a $1.2 million pre-tax gain
on the sale of substantially all of the assets of the Aaron’s Corporate
Furnishings division to CORT Business Services Corporation in the
fourth quarter of 2008.
Balance Sheet
CASH AND CASH EQUIVALENTS. The Company’s cash balance
decreased to $72.0 million at December 31, 2010 from $109.7 mil-
lion at December 31, 2009. The decrease in our cash balance is due
to cash flow generated from operations, less cash used by investing
and financing activities of $37.7 million. For additional information,
refer to the “Liquidity and Capital Resources” section below.
LEASE MERCHANDISE, NET. The increase of $132.1 million
in lease merchandise, net of accumulated depreciation, to
$814.5 million at December 31, 2010 from $682.4 million at
December 31, 2009, is primarily the result of continued revenue
growth of new and existing company-operated stores, partially
offset by lower product costs.
PROPERTY, PLANT AND EQUIPMENT, NET. The decrease of
$10.3 million in property, plant and equipment, net of accumulated
depreciation, to $204.9 million at December 31, 2010 from $215.2
million at December 31, 2009, is primarily the result of sale-lease-
back transactions completed since December 31, 2009.
In addition, the Company recorded an impairment charge of
$3.0 million in 2009 related to various properties and land parcels
which have been reclassified as held for sale in all periods presented.
GOODWILL, NET. The $8.0 million increase in goodwill, to
$202.4 million on December 31, 2010 from $194.4 million on
December 31, 2009, is the result of a series of acquisitions of sales
and lease ownership businesses. During 2010, the Company acquired
a total of 30 stores. The aggregate purchase price for these asset
acquisitions totaled $17.9 million, with the principal tangible assets
acquired consisting of lease merchandise and certain fixtures and
equipment.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses
and other assets increased $86.9 million to $122.9 million at
December 31, 2010 from $36.1 million at December 31, 2009,
primarily as a result of an increase in prepaid income taxes.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. The
increase of $35.9 million in accounts payable and accrued expenses,
to $213.1 million at December 31, 2010 from $177.3 million at
December 31, 2009, is primarily the result of fluctuations in the
timing of payments and greater purchases of lease merchandise.
DEFERRED INCOME TAXES PAYABLE. The increase of
$63.8 million in deferred income taxes payable to $227.5 million
at December 31, 2010 from $163.7 million at December 31, 2009
is primarily the result of bonus lease merchandise depreciation
deductions for tax purposes included in the Small Business
Jobs Act of 2010 and the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010.
CREDIT FACILITIES. The $13.3 million decrease in the amounts
we owe under our credit facilities to $41.8 million on December 31,
2010 from $55.0 million on December 31, 2009, primarily reflects
net payments in 2010 on our senior unsecured notes.
Liquidity and Capital Resources
General
Cash flows from continuing operations for the year ended
December 31, 2010 and 2009 were $49.3 million and $193.7
million, respectively. The decrease in cash flows from operating
activities is primarily related to higher 2010 tax payments and
greater purchases of lease merchandise.
Purchases of sales and lease ownership stores had a positive
impact on operating cash flows in each period presented. The posi-
tive impact on operating cash flows from purchasing stores occurs as
the result of lease merchandise, other assets and intangibles acquired
in these purchases being treated as an investing cash outflow. As
such, the operating cash flows attributable to the newly purchased
stores usually have an initial positive effect on operating cash flows
that may not be indicative of the extent of their contributions in
future periods. The amount of lease merchandise purchased in
acquisitions and shown under investing activities was $6.5 million in
2010, $9.5 million in 2009 and $28.5 million in 2008. Sales of sales
and lease ownership stores are an additional source of investing cash
20
flows in each period presented. Proceeds from such sales were
$8.0 million in 2010, $32.0 million in 2009 and $22.7 million
in 2008. The amount of lease merchandise sold in these sales and
shown under investing activities was $4.5 million in 2010, $16.3
million in 2009 and $11.7 million in 2008. In addition, in 2008 the
proceeds from the sale of the Aaron’s Corporate Furnishings division
shown under investing activities were $76.4 million.
Our cash flows include profits on the sale of lease return mer-
chandise. Our primary capital requirements consist of buying lease
merchandise for sales and lease ownership stores. As we continue
to grow, the need for additional lease merchandise will remain
our major capital requirement. Other capital requirements include
purchases of property, plant and equipment and expenditures for
acquisitions. These capital requirements historically have been
financed through:
• cash flow from operations;
• bank credit;
• trade credit with vendors;
• proceeds from the sale of lease return merchandise;
• private debt offerings; and
• stock offerings.
At December 31, 2010, there was no outstanding balance under
our revolving credit agreement. The credit facilities balance decreased
by $13.3 million in 2010 primarily as a result of net payments made
on our senior unsecured notes during the period. Our revolving
credit facility expires May 23, 2013 and the total available credit on
the facility is $140.0 million.
We have $24.0 million currently outstanding in aggregate
principal amount of 5.03% senior unsecured notes due July 2012,
principal repayments of which were made in 2008, 2009 and
2010, and are due in equal $12.0 million annual installments
until maturity.
Our revolving credit agreement and senior unsecured notes,
and our franchisee loan program discussed below, contain certain
financial covenants. These covenants include requirements that we
maintain ratios of: (1) EBITDA plus lease expense to fixed charges
of no less than 2:1; (2) total debt to EBITDA of no greater than 3:1;
and (3) total debt to total capitalization of no greater than 0.6:1.
“EBITDA” in each case means consolidated net income before
interest and tax expense, depreciation (other than lease merchandise
depreciation) and amortization expense, and other non-cash charges.
The Company is also required to maintain a minimum amount of
shareholders’ equity. See the full text of the covenants in our credit
and guarantee agreements, which we have filed as exhibits to our
Securities and Exchange Commission reports, for the details of these
covenants and other terms. If
we fail to comply with these covenants, we will be in default
under these agreements, and all amounts would become due
immediately. We were in compliance with all of these covenants at
December 31, 2010 and believe that we will continue to be in com-
pliance in the future.
We purchase our stock in the market from time to time as
authorized by our board of directors. We repurchased 1,478,805
shares of Nonvoting Common Stock and no shares of Class A
Common Stock during 2010 and have authority to purchase
4,401,815 additional shares. We repurchased $28.0 million of
our stock in 2010.
We have a consistent history of paying dividends, having paid
dividends for 23 consecutive years. A $.0113 per share dividend
on Nonvoting Common Stock and Class A Common Stock was
paid in January 2009, April 2009, July 2009, and October 2009.
Our board of directors increased the dividend 6.2% for the fourth
quarter of 2009 on November 4, 2009 to $.012 per share and was
paid in December 2009. A $.012 per-share dividend on Nonvoting
Common Stock and Class A Common Stock was paid in April 2010,
July 2010 and November 2010. Our board of directors increased
the dividend 8.3% for the fourth quarter of 2010 to $.013 per share
and the fourth quarter dividend was paid in January 2011. Subject
to sufficient operating profits, any future capital needs and other
contingencies, we currently expect to
continue our policy of paying dividends.
If we achieve our expected level of growth in our operations,
we anticipate we will supplement our expected cash flows from
operations, existing credit facilities, vendor credit and proceeds
from the sale of lease return merchandise by expanding our existing
credit facilities, by securing additional debt financing, or by seeking
other sources of capital to ensure we will be able to fund our capital
and liquidity needs for at least the next 24 months. We believe we
can secure these additional sources of capital in the ordinary course
of business. However, if the credit and capital markets experience
disruptions like those that began in the second half of 2008, we
may not be able to obtain access to capital at as favorable costs as
we have historically been able to, and some forms of capital may
not be available at all.
Commitments
INCOME TAXES. During the 12 months ended December 31,
2010, we made $94.8 million in income tax payments. Within the
next 12 months, we anticipate that we will make cash payments for
state income taxes of approximately $9.0 million. The Small Business
Jobs Act of 2010 was enacted after we paid our third quarter esti-
mated federal tax. In December, the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010 was enact-
ed. As a result of the bonus depreciation provisions in these acts, we
have paid more than our anticipated 2010 federal tax liability. We
filed for a refund of overpaid federal tax of approximately $81.0 mil-
lion in January 2011 and received that refund in February 2011.
The Economic Stimulus Act of 2008, the American Recovery
and Reinvestment Act of 2009, and the Small Business Jobs Act
of 2010 provided for accelerated depreciation by allowing a bonus
21
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
first-year depreciation deduction of 50% of the adjusted basis of
qualified property, such as our lease merchandise, placed in service
during those years. The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 allowed for
deduction of 100% of the adjusted basis of qualified property
for assets placed in service after September 8, 2010 and before
December 31, 2011. Accordingly, our cash flow benefited from hav-
ing a lower cash tax obligation which, in turn, provided additional
cash flow from operations. Because of our sales and lease ownership
model where Aaron’s remains the owner of merchandise on lease,
we benefit more from bonus depreciation, relatively, than traditional
furniture, electronics and appliance retailers. In future years, we
anticipate having to make increased tax payments on our earnings as
a result of expected profitability and the reversal of the accelerated
depreciation deductions that were taken in 2010 and prior periods.
We estimate that at December 31, 2010, the remaining tax deferral
associated with the acts described above is approximately $150.0 mil-
lion, of which approximately 76% will reverse in 2011 and most of
the remainder will reverse between 2012 and 2013.
LEASES. We lease warehouse and retail store space for most of our
operations under operating leases expiring at various times through
2028. Most of the leases contain renewal options for additional peri-
ods ranging from one to 15 years or provide for options to purchase
the related property at predetermined purchase prices that do not
represent bargain purchase options. We also lease transportation and
computer equipment under operating leases expiring during the next
five years. We expect that most leases will be renewed or replaced
by other leases in the normal course of business. Approximate
future minimum rental payments required under operating leases
that have initial or remaining non-cancelable terms in excess of one
year as of December 31, 2010 are shown in the below table under
“Contractual Obligations and Commitments.”
We have 20 capital leases, 19 of which are with a limited liability
company (“LLC”) whose managers and owners are 11 officers of
the company of which there are eight executive officers, with no
individual, owning more than 13.33% of the LLC. Nine of these
related party leases relate to properties purchased from us in October
and November of 2004 by the LLC for a total purchase price of
$6.8 million. The LLC is leasing back these properties to us for a
15-year term, with a five-year renewal at our option, at an aggregate
annual lease amount of $716,000. Another 10 of these related party
leases relate to properties purchased from us in December 2002 by
the LLC for a total purchase price of approximately $5.0 million.
The LLC is leasing back these properties to us for a 15-year term at
an aggregate annual lease of $556,000. We do not currently plan to
enter into any similar related party lease transactions in the future.
We finance a portion of our store expansion through sale-
leaseback transactions. The properties are generally sold at net book
value and the resulting leases qualify and are accounted for as operat-
ing leases. We do not have any retained or contingent interests in the
stores nor do we provide any guarantees, other than a corporate level
guarantee of lease payments, in connection with the sale-leasebacks.
The operating leases that resulted from these transactions are
included in the table below.
FRANCHISE LOAN GUARANTY. We have guaranteed the bor-
rowings of certain independent franchisees under a franchise loan
program with several banks and we also guarantee franchisee borrow-
ings under certain other debt facilities. The guaranty was amended
on June 18, 2010 to increase the maximum commitment amount
under the facility from $175.0 million to $200.0 million, provide
for the ability to extend loans to franchisees that operate stores
located in Canada (other than in the Province of Quebec), increase
the maximum available amount of swing loans from $20.0 million
to $25.0 million, reduce our interest obligations with respect to
franchisees that operate stores located in the United States and
establish our interest obligations with respect to franchisees that
operate stores located in Canada. At December 31, 2010, the portion
that we might be obligated to repay in the event franchisees defaulted
was $121.0 million. Of this amount, approximately $108.3 million
represents franchise borrowings outstanding under the franchisee
loan program and approximately $12.7 million represents franchisee
borrowings that we guarantee under other debt facilities. However,
due to franchisee borrowing limits, we believe any losses associated
with any defaults would be mitigated through recovery of lease
merchandise and other assets. Since its inception in 1994, we have
had no significant losses associated with the franchise loan and
guaranty program. We believe the likelihood of any significant
amounts being funded in connection with these commitments to
be remote. We receive guarantee fees based on such franchisees’
outstanding debt obligations, which it recognizes as the guarantee
obligation is satisfied.
We have no long-term commitments to purchase merchandise.
See Note F to the Consolidated Financial Statements for further
information. The following table shows our approximate contractual
obligations, including interest, and commitments to make future
payments as of December 31, 2010:
22
(In Thousands)
Total
Amounts
Committed
Period Less
Than 1 Year
Credit Facilities, Excluding Capital Leases
$ 27,303
$ 12,002
Capital Leases
Operating Leases
Purchase Obligations
14,487
537,918
47,542
1,337
96,305
31,619
Period 1–3
Years
$ 12,000
2,708
151,784
15,728
Period 3–5
Years
Period Over
5 Years
$ 3,301
$ —
3,287
98,324
195
7,155
191,505
—
Total Contractual Cash Obligations
$627,250
$141,263
$182,220
$105,107
$198,660
The following table shows the Company’s approximate commercial commitments as of December 31, 2010:
(In Thousands)
Guaranteed Borrowings of Franchisees
Total
Amounts
Committed
$121,014
Period Less
Than 1 Year
Period 1–3
Years
Period 3–5
Years
Period Over
5 Years
$119,937
$ 1,077
$ —
$ —
Purchase obligations are primarily related to certain advertis-
ing and marketing programs. Purchase orders or contracts for the
purchase of lease merchandise and other goods and services are
not included in the tables above. We are not able to determine the
aggregate amount of such purchase orders that represent contrac-
tual obligations, as purchase orders may represent authorizations
to purchase rather than binding agreements. Our purchase orders
are based on our current distribution needs and are fulfilled by our
vendors within short time horizons. We do not have significant
agreements for the purchase of lease merchandise or other goods
specifying minimum quantities or set prices that exceed our
expected requirements for three months.
Deferred income tax liabilities as of December 31, 2010 were
approximately $227.5 million. This amount is not included in the
total contractual obligations table because we believe this presenta-
tion would not be meaningful. Deferred income tax liabilities are
calculated based on temporary differences between the tax basis
of assets and liabilities and their respective book basis, which will
result in taxable amounts in future years when the liabilities are
settled at their reported financial statement amounts. The results of
these calculations do not have a direct connection with the amount
of cash taxes to be paid in any future periods. As a result, schedul-
ing deferred income tax liabilities as payments due by period could
be misleading, because this scheduling would not relate to liquidity
needs.
Recent Accounting Pronouncements
We are not aware of any recent accounting pronouncements that will
materially impact the Company’s consolidated financial statements
in future periods.
Quantitative And Qualitative Disclosures
About Market Risk
As of December 31, 2010, we had $24.0 million of senior unsecured
notes outstanding at a fixed rate of 5.03%. We had no balance
outstanding under our revolving credit agreement indexed to the
LIBOR (“London Interbank Offer Rate”) or the prime rate, which
exposes us to the risk of increased interest costs if interest rates rise.
Based on our overall interest rate exposure at December 31, 2010, a
hypothetical 1.0% increase or decrease in interest rates would not be
material.
We do not use any significant market risk sensitive instruments
to hedge commodity, foreign currency, or other risks, and hold
no market risk sensitive instruments for trading or speculative
purposes.
23
Consolidated Balance Sheets
(In Thousands, Except Share Data)
Assets:
Cash and Cash Equivalents
Accounts Receivable (net of allowances of $4,544
in 2010 and $4,157 in 2009)
Lease Merchandise
Less: Accumulated Depreciation
Property, Plant and Equipment, Net
Goodwill, Net
Other Intangibles, Net
Prepaid Expenses and Other Assets
Assets Held for Sale
Total Assets
Liabilities & Shareholders’ Equity:
Accounts Payable and Accrued Expenses
Deferred Income Taxes Payable
Customer Deposits and Advance Payments
Credit Facilities
Total Liabilities
Shareholders’ Equity:
Common Stock, Par Value $.50 Per Share;
Authorized: 225,000,000 and 125,000,000
Shares at December 31, 2010 and 2009,
respectively; Shares Issued: 90,752,123 at
December 31, 2010 and 2009, respectively
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Less: Treasury Shares at Cost,
Common Stock, 10,664,728 and 9,397,997 Shares
at December 31, 2010 and 2009, respectively
Total Shareholders’ Equity
Total Liabilities & Shareholders’ Equity
December 31,
2010
December 31,
2009
$ 72,022
$ 109,685
69,662
1,280,457
(465,973)
814,484
204,912
202,379
3,832
122,932
11,849
66,095
1,122,954
(440,552)
682,402
215,183
194,376
5,200
36,082
12,433
$1,502,072
$1,321,456
$ 213,139
$ 177,284
227,513
40,213
41,790
522,655
45,376
201,752
809,084
846
1,057,058
163,670
38,198
55,044
434,196
45,378
196,669
694,689
(101)
936,635
(77,641)
979,417
(49,375)
887,260
$1,502,072
$1,321,456
The accompanying notes are an integral part of the Consolidated Financial Statements.
24
Consolidated Statements of Earnings
(In Thousands, Except Per Share)
Revenues:
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other
Costs and Expenses:
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Depreciation of Lease Merchandise
Interest
Earnings From Continuing
Operations Before Income Taxes
Income Taxes
Net Earnings From
Continuing Operations
(Loss) Earnings From Discontinued
Operations, Net of Tax
Net Earnings
Earnings Per Share From
Continuing Operations
Earnings Per Share From Continuing
Operations Assuming Dilution
Earnings Per Share From
Discontinued Operations
(Loss) Earnings Per Share From Discontinued
Operations Assuming Dilution
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Year Ended
December 31,
2008
$1,402,053
$1,310,709
$1,178,719
40,556
362,273
59,112
12,853
43,394
327,999
52,941
17,744
43,187
309,326
45,025
16,351
1,876,847
1,752,787
1,592,608
23,013
330,918
824,929
504,105
3,096
25,730
299,727
771,634
474,958
4,299
26,379
283,358
705,566
429,907
7,818
1,686,061
1,576,348
1,453,028
190,786
72,410
176,439
63,561
139,580
53,811
118,376
112,878
85,769
—
(277)
4,420
$ 118,376
$ 112,601
$ 90,189
$ 1.46
$ 1.39
$ 1.07
1.44
.00
.00
1.38
.00
(.01)
1.06
.06
.05
The accompanying notes are an integral part of the Consolidated Financial Statements.
25
Consolidated Statements of Shareholders’ Equity
(In Thousands, Except Per Share)
Balance, January 1, 2008
Dividends, $.043 Per share
Stock-Based Compensation
Reissued Shares
Repurchased Shares
Treasury Stock
Shares
Amount
Common
Stock
Additional
Paid-In
Capital
Accumulated Other
Comprehensive
(Loss) Income
Foreign
Retained Comprehensive Currency Marketable
Translation Securities
Earnings
Income
(10,344) $(44,474)
$45,378
$173,449
$499,109
$ 6
$(88)
646
(582)
4,598
(7,529)
(3,471)
2,523
3,219
Net Earnings From Continuing Operations
Net Earnings From Discontinued Operations
Foreign Currency Translation Adjustment
Comprehensive Income
Balance, December 31, 2008
Dividends, $.046 Per share
Stock-Based Compensation
Exchange of Common Stock for Class A
Common Stock
Reissued Shares
Net Earnings From Continuing Operations
Loss From Discontinued Operations
Foreign Currency Translation Adjustment
Comprehensive Income
Balance, December 31, 2009
Dividends, $.049 per share
Stock-Based Compensation
Reissued Shares
Repurchased Shares
Stock Recombination
Net Earnings
Foreign Currency Translation Adjustment,
net of Income Taxes of $356
Comprehensive Income
Balance, December 31, 2010
85,769 $85,769
4,420
4,420
(1,365)
(1,365)
—
88,824
(10,280)
(47,405)
45,378
179,191
585,827
(1,359)
(88)
(144)
(9,073)
1,026
7,103
(3,739)
3,565
9,073
4,840
112,878 112,878
(277)
(277)
1,346
1,346
—
113,947
(9,398)
(49,375)
45,378
196,669
694,689
(13)
(88)
212
743
(1,479)
(29,009)
(3,981)
4,759
324
(2)
118,376 118,376
(10,665) $(77,641)
$45,376
$201,752
$809,084
$ 578
$(88)
947
591
—
$119,323
The accompanying notes are an integral part of the Consolidated Financial Statements.
26
Consolidated Statements of Cash Flows
(In Thousands)
Continuing Operations
Operating Activities:
Net Earnings from Continuing Operations
Depreciation of Lease Merchandise
Other Depreciation and Amortization
Additions to Lease Merchandise
Book Value of Lease Merchandise Sold or Disposed
Change in Deferred Income Taxes
Loss on Sale of Property, Plant, and Equipment
Gain on Asset Dispositions
Change in Income Tax Receivable
Change in Accounts Payable and Accrued Expenses
Change in Accounts Receivable
Excess Tax Benefits from Stock-Based Compensation
Change in Other Assets
Change in Customer Deposits
Stock-Based Compensation
Other Changes, Net
Cash Provided by Operating Activities
Investing Activities:
Additions to Property, Plant and Equipment
Acquisitions of Businesses and Contracts
Proceeds from Dispositions of Businesses and Contracts
Proceeds from Sale of Property, Plant, and Equipment
Cash Used by Investing Activities
Financing Activities:
Proceeds from Credit Facilities
Repayments on Credit Facilities
Dividends Paid
Excess Tax Benefits from Stock-Based Compensation
Acquisition of Treasury Stock
Issuance of Stock Under Stock Option Plans
Cash Used by Financing Activities
Discontinued Operations:
Operating Activities
Investing Activities
Cash Used by Discontinued Operations
(Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Cash Paid During the Year:
Interest
Income Taxes
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Year Ended
December 31,
2008
$ 118,376
504,105
45,427
(1,034,474)
400,304
63,843
2,441
(1,917)
(82,378)
35,321
(3,567)
(321)
(4,943)
2,015
4,759
270
49,261
(87,636)
(17,891)
8,025
53,399
(44,103)
2,429
(15,683)
(2,929)
321
(28,046)
1,087
(42,821)
—
—
—
(37,663)
109,685
$ 72,022
$ 112,878
474,958
44,413
(847,094)
363,975
15,032
1,136
(7,826)
28,443
2,014
(6,582)
(3,909)
3,356
4,763
3,696
4,441
193,694
(83,140)
(25,202)
32,042
37,533
(38,767)
57,383
(117,156)
(4,649)
3,909
—
8,172
(52,341)
(277)
—
(277)
102,309
7,376
$ 109,685
$ 85,769
429,907
41,486
(865,881)
330,032
66,345
1,725
(8,490)
(28,443)
35,384
(13,219)
(1,767)
(941)
4,845
1,421
1,078
79,251
(74,924)
(80,935)
99,152
54,546
(2,161)
536,469
(607,484)
(3,430)
1,767
(7,529)
6,476
(73,731)
(3,512)
2,739
(773)
2,586
4,790
$ 7,376
$ 3,203
94,793
$ 4,591
15,286
$ 8,869
29,186
The accompanying notes are an integral part of the Consolidated Financial Statements.
27
Notes to Consolidated Financial Statements
e
t
o
AN
Summary of Significant
Accounting Policies
As of December 31, 2010 and 2009, and for the Years Ended
December 31, 2010, 2009 and 2008.
BASIS OF PRESENTATION — The consolidated financial state-
ments include the accounts of Aaron’s, Inc. and its wholly owned
subsidiaries (the “Company”). All significant intercompany accounts
and transactions have been eliminated. The preparation of the
Company’s consolidated financial statements in conformity with
United States generally accepted accounting principles requires man-
agement to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes.
Actual results could differ from those estimates. Generally, actual
experience has been consistent with management’s prior estimates
and assumptions. Management does not believe these estimates or
assumptions will change significantly in the future absent unsurfaced
or unforeseen events.
On December 7, 2010, at a special meeting of the Company’s
shareholders, shareholders approved a proposal to amend and restate
the Company’s Amended and Restated Articles of Incorporation
to: (i) convert each outstanding share of Common Stock, par value
$0.50 per share (the “Nonvoting Common Stock”) into one share
of Class A Common Stock (the “Class A Common Stock”) and
to rename the Class A Common Stock as Common Stock (the
“Common Stock”), (ii) eliminate certain obsolete provisions relating
to the Company’s prior dual-class common stock structure, and (iii)
amend the number of authorized shares to be 225,000,000 total
shares of Common Stock (the aggregate of the number of autho-
rized shares of Nonvoting Common Stock and Class A Common
Stock prior to the approval of the Amended and Restated Articles
of Incorporation). Following receipt of shareholder approval at the
special meeting, the Amended and Restated Articles of Incorporation
were filed with the Secretary of State of the State of Georgia and are
now effective.
As a result of the reclassification of shares of Nonvoting Common
Stock into shares of Class A Common Stock and the other changes
described above and effected by the Amended and Restated Articles
of Incorporation, shares of the combined class now titled Common
Stock have one vote per share on all matters submitted to the
Company’s shareholders, including the election of directors. The
former Nonvoting Common Stock did not entitle the holders
thereof to any vote except as otherwise provided in the Company’s
Articles of Incorporation or required by law. In addition, holders of
the combined class now titled Common Stock will all vote as a single
class of stock on any matters subject to a shareholder vote. Holders
of the former Class A Common Stock and the Nonvoting Common
Stock were previously entitled to separate class voting rights in
certain circumstances as required by law, and those class voting
rights were eliminated with the share reclassification.
The holders of Common Stock are entitled to receive dividends
and other distributions in cash, stock or property of the Company as
and when declared by the Board of Directors of the Company out
of legally available funds. Prior to the conversion, the Company’s
Articles of Incorporation permitted the payment of a cash dividend
on the Nonvoting Common Stock without paying any dividend on
the Class A Common Stock or the payment of a cash dividend on
the Nonvoting Common Stock that was up to 50% higher than any
dividend paid on the Class A Common Stock. Cash dividends could
not be paid on the Class A Common Stock unless equal or higher
dividends were paid on the Nonvoting Common Stock.
The conversion had no other impact on the economic equity
interests of holders of Common Stock, including with regards to
liquidation rights or redemption, regardless of whether holders
previously held shares of Nonvoting Common Stock or Class A
Common Stock.
On March 23, 2010, the Company announced a 3-for-2
stock split effected in the form of a 50% stock dividend on both
Nonvoting Common Stock and Class A Common Stock. New
shares were distributed on April 15, 2010 to shareholders of record
as of the close of business on April 1, 2010. All share and per-share
information has been restated for all periods presented to reflect this
stock split.
During the fourth quarter of 2008, the Company sold substan-
tially all of the assets of its Aaron’s Corporate Furnishings division.
As a result of the sale, the Company’s financial statements have been
prepared reflecting the Aaron’s Corporate Furnishings division as
discontinued operations. See Note N for a discussion of the sale of
the Aaron’s Corporate Furnishings division.
Certain reclassifications have been made to the prior periods to
conform to the current period presentation. In all periods presented,
Aaron’s Office Furniture was reclassified from the Sales and Lease
Ownership Segment to the Other Segment. Refer to Note K for the
segment disclosure. Certain assets have been reclassified as held for
sale in all periods presented.
LINE OF BUSINESS — The Company is engaged in the business
of leasing and selling residential furniture, consumer electronics,
appliances, computers, and other merchandise throughout the
United States and Canada. The Company’s entire production of
furniture and bedding is shipped to Aaron’s stores.
LEASE MERCHANDISE — The Company’s lease merchandise
consists primarily of residential furniture, consumer electronics,
appliances, computers, and other merchandise, and is recorded at
cost, which includes overhead from production facilities, shipping
costs and warehousing costs. The sales and lease ownership division
depreciates merchandise over the lease agreement period, generally
12 to 24 months when on lease and 36 months when not on lease,
to a 0% salvage value. Our office furniture stores depreciate mer-
chandise over its estimated useful life, which ranges from 24 months
to 48 months, net of salvage value, which ranges from 0% to 30%.
The Company’s policies require weekly lease merchandise counts by
28
store managers, which include write-offs for unsalable, damaged, or
missing merchandise inventories. Full physical inventories are gener-
ally taken at the fulfillment and manufacturing facilities two to four
times a year, and appropriate provisions are made for missing, dam-
aged and unsalable merchandise. In addition, the Company monitors
lease merchandise levels and mix by division, store, and fulfillment
center, as well as the average age of merchandise on hand. If unsal-
able lease merchandise cannot be returned to vendors, it is adjusted
to its net realizable value or written off.
All lease merchandise is available for lease or sale. On a monthly
basis, all damaged, lost or unsalable merchandise identified is written
off. The Company records lease merchandise adjustments on the
allowance method. Lease merchandise write-offs totaled $46.5
million, $38.3 million and $34.5 million during the years ended
December 31, 2010, 2009 and 2008, respectively, and are included
in operating expenses in the accompanying consolidated statements
of earnings. The current year includes a write-down of $4.7 million
related to the closure of the Aaron’s Office Furniture division.
DISPOSAL ACTIVITIES — The Company began ceasing the opera-
tions of the Aaron’s Office Furniture division in June 2010. The
Company closed 14 of its Aaron’s Office Furniture stores during
2010 and had one remaining store open to liquidate merchandise. As
a result, the Company recorded $3.3 million in closed-store reserves,
$4.7 million in lease merchandise write-downs and other miscella-
neous expenses in 2010, totaling $9.0 million in operating expenses,
related to the closures. The charges were recorded within operating
expenses on the consolidated statement of earnings and are included
in the Other segment category.
CASH AND CASH EQUIVALENTS — The Company classifies as
cash highly liquid investments with maturity dates of less than three
months when purchased.
ACCOUNTS RECEIVABLE — The Company maintains an allow-
ance for doubtful accounts. The reserve for returns is calculated
based on the historical collection experience associated with lease
receivables. The Company’s policy is to write off lease receivables
that are 60 days or more past due.
The following is a summary of the Company’s allowance for
doubtful accounts as of December 31:
and repairs are also expensed as incurred; renewals and betterments
are capitalized. Depreciation expense, included in operating expenses
in the accompanying consolidated statements of earnings, for prop-
erty, plant and equipment, was $41.4 million, $40.7 million and
$38.4 million during the years ended December 31, 2010, 2009 and
2008, respectively.
ASSETS HELD FOR SALE — Certain properties, primarily consist-
ing of parcels of land, met the held-for-sale classification criteria
at December 31, 2010. After adjustment to fair value, the $11.8
million and $12.4 million carrying value of these properties has been
classified as assets held for sale in the consolidated balance sheets as
of December 31, 2010 and 2009, respectively. The Company esti-
mated the fair values of these properties using the market values for
similar properties and these are considered Level 2 assets as defined
in FASB ASC Topic 820, “Fair Value Measurements.”
GOODWILL AND OTHER INTANGIBLES — Goodwill represents
the excess of the purchase price paid over the fair value of the net
tangible and identifiable intangible assets acquired in connection
with business acquisitions. The Company has elected to perform
its annual impairment evaluation as of September 30. Based on the
evaluation, there was no impairment as of September 30, 2010.
More frequent evaluations are completed if indicators of impairment
become evident. Other intangibles represent the value of customer
relationships acquired in connection with business acquisitions,
acquired franchise development rights and non-compete agree-
ments, recorded at fair value as determined by the Company. As of
December 31, 2010 and 2009, the net intangibles other than good-
will were $3.8 million and $5.2 million, respectively. The customer
relationship intangible is amortized on a straight-line basis over a
two-year useful life. Acquired franchise development rights are amor-
tized over the unexpired life of the franchisee’s 10-year area develop-
ment agreement. The non-compete intangible is amortized on a
straight-line basis over a three-year useful life. Amortization expense
of intangibles, included in operating expenses in the accompanying
consolidated statements of earnings, was $3.1 million, $3.8 million
and $3.0 million during the years ended December 31, 2010, 2009
and 2008, respectively.
The following is a summary of the Company’s goodwill in its
sales and lease ownership segment at December 31:
(In Thousands)
2010
2009
2008
Beginning Balance
Accounts written off
Provision
Ending Balance
$ 4,157
(23,601)
23,988
$ 4,544
$ 4,040
(20,352)
20,469
$ 4,157
$ 4,014
(18,876)
18,902
$ 4,040
(In Thousands)
Beginning Balance
Additions
Disposals
Ending Balance
2010
2009
$194,376
9,239
(1,236)
$202,379
$185,965
12,947
(4,536)
$194,376
PROPERTY, PLANT AND EQUIPMENT — The Company records
property, plant and equipment at cost. Depreciation and amortiza-
tion are computed on a straight-line basis over the estimated useful
lives of the respective assets, which are from eight to 40 years for
buildings and improvements and from one to five years for other
depreciable property and equipment. Gains and losses related to
dispositions and retirements are recognized as incurred. Maintenance
IMPAIRMENT — The Company assesses its long-lived assets other
than goodwill for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable.
When it is determined that the carrying value of the assets are not
recoverable, the Company compares the carrying value of the assets
to their fair value as estimated using discounted expected future cash
flows, market values or replacement values for similar assets. The
29
Notes to Consolidated Financial Statements
amount by which the carrying value exceeds the fair value of the
asset is recognized as an impairment loss.
The Company also recorded an impairment charge of $879,000
and $3.0 million within operating expenses in 2010 and 2009,
respectively, both of which related primarily to the impairment
of various land outparcels and buildings included in our sales and
lease ownership segment that the Company decided not to utilize
for future expansion. The assets held for sale are Level 2 assets and
the charges were recorded within operating expenses on the consoli-
dated statement of earnings and are included in the Other segment
category. In 2008, the Company recorded an impairment charge of
$838,000 within operating expenses which related primarily to the
impairment of leasehold improvements in several RIMCO stores
included in our sales and lease ownership segment. The RIMCO
leasehold improvements are Level 2 assets.
The Company performed an impairment analysis on the
Aaron’s Office Furniture long-lived assets in the third quarter of
2009 due to continuing negative performance. As a result, the
Company recorded an impairment charge of $1.3 million in 2009
within operating expenses related primarily to the impairment of
leasehold improvements in the Aaron’s Office Furniture stores.
The Aaron’s Office Furniture long-lived assets are Level 2 assets. In
addition, the Company recorded an $865,000 write-down to certain
office furniture lease merchandise in 2009 within operating expenses.
The impairment charge and inventory write-down are included in
the other segment and are Level 2 assets.
DERIVATIVE FINANCIAL INSTRUMENTS — The Company
utilizes derivative financial instruments to mitigate its exposure to
certain market risks associated with its ongoing operations. The pri-
mary risk it seeks to manage through the use of derivative financial
instruments is commodity price risk, including the risk of increases
in the market price of diesel fuel used in the Company’s delivery
vehicles. All derivative financial instruments are recorded at fair
value on the consolidated balance sheets. The Company does not use
derivative financial instruments for trading or speculative purposes.
The Company is exposed to counterparty credit risk on all its deriva-
tive financial instruments. The counterparties to these contracts are
high-credit quality commercial banks, which the Company believes
largely minimize the risk of counterparty default. The fair values of
the Company’s fuel hedges as of December 31, 2010 and 2009 and
the changes in their fair values in 2010 and 2009 were immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS — The fair values
of the Company’s cash and cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to their
short-term nature.
DEFERRED INCOME TAXES — Deferred income taxes represent
primarily temporary differences between the amounts of assets and
liabilities for financial and tax reporting purposes. Such temporary
differences arise principally from the use of accelerated depreciation
methods on lease merchandise for tax purposes.
REVENUE RECOGNITION — Lease revenues are recognized as
revenue in the month they are due. Lease payments received prior to
30
the month due are recorded as deferred lease revenue. Until all pay-
ments are received under sales and lease ownership agreements, the
Company maintains ownership of the lease merchandise. Revenues
from the sale of merchandise to franchisees are recognized at the
time of receipt of the merchandise by the franchisee, and revenues
from such sales to other customers are recognized at the time of
shipment, at which time title and risk of ownership are transferred to
the customer. Refer to Note I for discussion of recognition of other
franchise-related revenues. The Company presents sales net of sales
taxes.
COST OF SALES — Included in cost of sales is the net book value
of merchandise sold, primarily using specific identification. It is not
practicable to allocate operating expenses between selling and lease
operations.
SHIPPING AND HANDLING COSTS — The Company classifies
shipping and handling costs as operating expenses in the accompany-
ing consolidated statements of earnings, and these costs totaled $60.6
million in 2010, $55.0 million in 2009 and $55.1 million in 2008.
ADVERTISING — The Company expenses advertising costs as
incurred. Advertising costs are recorded as expenses the first time
an advertisement appears. Such costs aggregated to $31.7 million
in 2010, $31.0 million in 2009 and $28.5 million in 2008. These
advertising expenses are shown net of cooperative advertising
considerations received from vendors, substantially all of which rep-
resents reimbursement of specific, identifiable and incremental costs
incurred in selling those vendors’ products. The amount of coopera-
tive advertising consideration netted against advertising expense was
$27.2 million in 2010, $23.4 million in 2009 and $24.7 million in
2008. The prepaid advertising asset was $3.2 million and $2.6 mil-
lion at December 31, 2010 and 2009, respectively.
STOCK-BASED COMPENSATION — The Company has stock-
based employee compensation plans, which are more fully described
in Note H below. The Company estimates the fair value for the
options granted on the grant date using a Black-Scholes option-
pricing model and accounts for stock-based compensation under the
fair value recognition provisions codified in FASB ASC Topic 718,
“Compensation — Stock Compensation” (“ASC 718”).
INSURANCE RESERVES — Estimated insurance reserves are
accrued primarily for group health and workers compensation
benefits provided to the Company’s employees. Estimates for these
insurance reserves are made based on actual reported but unpaid
claims and actuarial analyses of the projected claims run off for both
reported and incurred but not reported claims.
COMPREHENSIVE INCOME — For the years ended December 31,
2010, 2009 and 2008, comprehensive income totaled $119.3 mil-
lion, $113.9 million and $88.8 million, respectively.
FOREIGN CURRENCY TRANSLATION — 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.
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BN
Earnings Per Share
Earnings per share is computed by dividing net earnings by the
weighted average number of shares of Common Stock outstand-
ing during the year for the year ended December 31, 2010 and
Nonvoting Common Stock and Class A Common Stock outstanding
during the year for the years ended December 31, 2009 and 2008,
which were approximately 81,194,000 shares in 2010, 81,138,000
shares in 2009, and 80,114,000 shares in 2008. The computation
of earnings per share assuming dilution includes the dilutive effect
of stock options and awards. Such stock options and awards had the
effect of increasing the weighted average shares outstanding assuming
dilution by approximately 745,000 in 2010, 663,000 in 2009, and
1,025,000 in 2008.
Anti-dilutive stock options excluded from the computation of
earnings per share assuming dilution were 314,000, 470,000 and
2.0 million in 2010, 2009 and 2008, respectively.
The Company has issued restricted stock awards under its stock
incentive plan whereby shares vest upon satisfaction of certain
performance and vesting conditions and all performance conditions
were met at December 31, 2010. The effect of restricted stock
increased weighted average shares outstanding by 163,000 in 2010,
150,000 in 2009 and 146,000 in 2008.
Anti-dilutive shares excluded from the computation of earnings
per share assuming dilution were 275,000, 45,000 and 61,000 in
2010, 2009 and 2008, respectively.
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CN
Property, Plant
and Equipment
Following is a summary of the Company’s property, plant, and
equipment at December 31:
(In Thousands)
Land
Buildings and Improvements
Leasehold Improvements and Signs
Fixtures and Equipment
Assets Under Capital Leases:
with Related Parties
with Unrelated Parties
Construction in Progress
Less: Accumulated Depreciation
and Amortization
2010
2009
$ 25,067 $ 34,739
96,571
84,097
90,625
74,216
100,031
109,458
8,501
10,564
9,485
337,322
8,501
10,564
11,900
336,997
(132,410)
(121,814)
$ 204,912 $ 215,183
Amortization expense on assets recorded under capital leases is
included in operating expenses and was $1.9 million, $1.2 million
and $1.2 million in 2010, 2009 and 2008, respectively. Capital
leases consist of buildings and improvements.
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DN
Credit Facilities
Following is a summary of the Company’s credit facilities at
December 31:
(In Thousands)
Senior Unsecured Notes
Capital Lease Obligation:
with Related Parties
with Unrelated Parties
Other Debt
2010
2009
$24,000
$36,000
7,279
7,208
3,303
$41,790
7,775
7,959
3,310
$55,044
BANK DEBT — The Company has a revolving credit agreement
with several banks providing for unsecured borrowings up to $140.0
million. Amounts borrowed bear interest at the lower of the lender’s
prime rate or LIBOR plus 87.5 basis points. The pricing under a
working capital line is based upon overnight bank borrowing rates.
At December 31, 2010 and 2009, there was a zero balance under the
Company’s revolving credit agreement. The Company pays a .20%
commitment fee on unused balances. The weighted average interest
rate on borrowings under the revolving credit agreement was 0.97%
in 2010, 1.23% in 2009 and 3.66% in 2008. The revolving credit
agreement expires May 23, 2013.
The revolving credit agreement contains financial covenants
which, among other things, prohibit the Company from exceeding
certain debt to equity levels and require the maintenance of mini-
mum fixed charge coverage ratios. If the Company fails to comply
with these covenants, the Company will be in default under these
agreements, and all amounts could become due immediately. At
December 31, 2010, $199.8 million of retained earnings was
available for dividend payments and stock repurchases under the
debt restrictions, and the Company was in compliance with all
covenants.
SENIOR UNSECURED NOTES — On July 27, 2005, the Company
sold $60.0 million in aggregate principal amount of senior unsecured
notes in a private placement to a consortium of insurance companies.
The notes bear interest at a rate of 5.03% per year and mature on
July 27, 2012. Interest-only payments were due quarterly for the first
two years, followed by annual $12.0 million principal repayments
plus interest for the five years thereafter. The related note purchase
agreement contains financial maintenance covenants, negative cov-
enants regarding the Company’s other indebtedness, its guarantees
and investments and other customary covenants substantially similar
to the covenants in the Company’s, revolving credit facility. At
31
Notes to Consolidated Financial Statements
December 31, 2010 there was $24.0 million outstanding under the
July 2005 senior unsecured notes.
At December 31, 2010, the fair value of fixed-rate long-term debt
approximated its carrying value. The fair value of debt is estimated
using valuation techniques that consider risk-free borrowing rates
and credit risk.
CAPITAL LEASES WITH RELATED PARTIES — In October
and November 2004, the Company sold 11 properties, including
leasehold improvements, to a limited liability company (“LLC”)
controlled by a group of Company executives, including the
Company’s Chairman. The LLC obtained borrowings collateralized
by the land and buildings totaling $6.8 million. The Company
occupies the land and buildings collateralizing the borrowings under
a 15-year term lease, with a five-year renewal at the Company’s
option, at an aggregate annual rental of $716,000. The transaction
has been accounted for as a financing in the accompanying consoli-
dated financial statements. The rate of interest implicit in the leases
is approximately 9.7%. Accordingly, the land and buildings, associ-
ated depreciation expense and lease obligations are recorded in the
Company’s consolidated financial statements. No gain or loss was
recognized in this transaction.
In December 2002, the Company sold 10 properties, including
leasehold improvements, to the LLC. The LLC obtained borrowings
collateralized by the land and buildings totaling $5.0 million. The
Company occupies the land and buildings collateralizing the bor-
rowings under a 15-year term lease at an aggregate annual rental of
approximately $556,000. The transaction has been accounted for as
a financing in the accompanying consolidated financial statements.
The rate of interest implicit in the leases is approximately 11.1%.
Accordingly, the land and buildings, associated depreciation expense
and lease obligations are recorded in the Company’s consolidated
financial statements. No gain or loss was recognized in this
transaction.
SALE-LEASEBACKS — The Company finances a portion of store
expansion through sale-leaseback transactions. The properties are
generally sold at net book value and the resulting leases qualify
and are accounted for as operating leases. The Company does not
have any retained or contingent interests in the stores nor does the
Company provide any guarantees, other than a corporate level guar-
antee of lease payments, in connection with the sale-leasebacks.
OTHER DEBT — Other debt at December 31, 2010 and 2009
includes $3.3 million of industrial development corporation revenue
bonds. The weighted-average borrowing rate on these bonds in
2010 was 0.48%. No principal payments are due on the bonds until
maturity in 2015.
Future maturities under the Company’s long-term debt and
capital lease obligations are as follows:
(In Thousands)
2011
2012
2013
2014
2015
Thereafter
$13,339
13,285
1,423
1,549
5,039
7,155
$41,790
Income Taxes
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EN
Following is a summary of the Company’s income tax expense for
the years ended December 31:
(In Thousands)
2010
2009
2008
Current Income Tax Expense (Benefit):
$ —
Federal
8,932
State
8,932
Deferred Income Tax Expense (Benefit):
64,679
Federal
(1,201)
State
63,478
$72,410
$40,697
7,832
48,529
$(26,324)
5,062
(21,262)
15,169
(137)
15,032
$63,561
73,375
1,698
75,073
$ 53,811
At December 31, 2010, the Company had a federal net operating
loss (“NOL”) carryforward of approximately $18.0 million available
to offset future taxable income. The NOL expires in 2030 and its
utilization is subject to applicable annual limitations for U.S. federal
and U.S. state tax purposes, including Section 382 of the Internal
Revenue Code of 1986, as amended. The Company intends to
carryforward the NOL to offset future taxable income and does
not anticipate that its utilization will be impacted by the applicable
limitations.
As a result of the bonus depreciation provisions in the 2010
tax acts, the Company has paid more than our anticipated 2010
federal tax liability. The 2010 acts provided an estimated tax deferral
of approximately $127.0 million. The Company filed for a refund of
overpaid federal tax of approximately $81.0 million in January 2011
and received that refund in February 2011.
Significant components of the Company’s deferred income tax
liabilities and assets at December 31 are as follows:
32
(In Thousands)
2010
2009
Deferred Tax Liabilities:
Lease Merchandise and
Property, Plant and Equipment
Other, Net
Total Deferred Tax Liabilities
Deferred Tax Assets:
Accrued Liabilities
Advance Payments
Federal Net Operating Loss
Other, Net
Total Deferred Tax Assets
Less Valuation Allowance
Net Deferred Tax Liabilities
$248,775
24,777
273,552
$175,293
19,449
194,742
15,859
15,231
6,423
9,386
46,899
(860)
$227,513
10,848
14,242
—
6,436
31,526
(454)
$163,670
The Company’s effective tax rate differs from the statutory
U.S. Federal income tax rate for the years ended December 31
as follows:
Statutory Rate
Increases in U.S. Federal Taxes
Resulting From:
State Income Taxes, Net of
Federal Income Tax Benefit
Other, Net
Effective Tax Rate
2010
2009
2008
35.0%
35.0%
35.0%
2.7
0.3
38.0%
2.8
(1.8)
36.0%
3.1
.4
38.5%
The Company files a federal consolidated income tax return in
the United States and the separate legal entities file in various states
and foreign jurisdictions. With few exceptions, the Company is no
longer subject to federal, state and local tax examinations by tax
authorities for years before 2007. The decrease in the effective rate
in 2009 was due to the favorable impact of a $2.3 million reversal
of previously recorded liabilities for uncertain tax positions.
The following table summarizes the activity related to the
Company’s uncertain tax positions:
(In Thousands)
2010
2009
2008
Balance at January 1,
Additions based on tax
positions related to the
current year
Additions for tax positions
of prior years
Prior year reductions
Statute expirations
Settlements
Balance at December 31,
$1,342
$3,110
$3,482
149
172
119
18
(26)
(63)
(105)
$1,315
523
(46)
(2,231)
(186)
$1,342
559
(349)
(176)
(525)
$3,110
As of December 31, 2010 and 2009, the amount of uncertain
tax benefits that, if recognized, would affect the effective tax rate
is $1.3 million, for both years, including interest and penalties.
During the years ended December 31, 2010, 2009 and 2008, the
Company recognized interest and penalties of $35,000, $276,000,
and $435,000, respectively. The Company had $332,000 and
$349,000 of accrued interest and penalties at December 31, 2010
and 2009, respectively. The Company recognizes potential interest
and penalties related to uncertain tax benefits as a component of
income tax expense.
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FN
Commitments and
Contingencies
The Company leases warehouse and retail store space for most of its
operations under operating leases expiring at various times through
2028. The Company also leases certain properties under capital
leases that are more fully described in Note D. Most of the leases
contain renewal options for additional periods ranging from one to
15 years or provide for options to purchase the related property at
predetermined purchase prices that do not represent bargain pur-
chase options. In addition, certain properties occupied under operat-
ing leases contain normal purchase options. Leasehold improvements
related to these leases are generally amortized over periods that do
not exceed the lesser of the lease term or five years. While a majority
of leases do not require escalating payments, for the leases which
do contain such provisions the Company records the related lease
expense on a straight-line basis over the lease term. The Company
also leases transportation and computer equipment under operating
leases expiring during the next five years. Management expects that
most leases will be renewed or replaced by other leases in the normal
course of business.
Future minimum lease payments required under operating leases
that have initial or remaining non-cancelable terms in excess of one
year as of December 31, 2010, are as follows:
(In Thousands)
2011
2012
2013
2014
2015
Thereafter
$ 96,305
83,334
68,450
55,833
42,490
191,506
$537,918
The Company has guaranteed certain debt obligations of some
of the franchisees amounting to $121.0 million and $128.8 million
at December 31, 2010 and 2009, respectively. Of this amount,
approximately $108.3 million represents franchise borrowings
outstanding under the franchise loan program and approximately
33
Notes to Consolidated Financial Statements
$12.7 million represents franchise borrowings under other debt
facilities at December 31, 2010. The Company receives guarantee
fees based on such franchisees’ outstanding debt obligations, which
it recognizes as the guarantee obligation is satisfied. The Company
has recourse rights to the assets securing the debt obligations, which
consist primarily of lease merchandise inventory and fixed assets. As
a result, the Company has never incurred any, nor does management
expect to incur any, significant losses under these guarantees. The
guaranty was amended on June 18, 2010, to increase the maximum
commitment amount under the facility from $175.0 million to
$200.0 million; provide for the ability to extend loans to franchisees
that operate stores located in Canada (other than in the Province of
Quebec); increase the maximum available amount of swing loans
from $20.0 million to $25.0 million; reduce the Company’s interest
obligations with respect to franchisees that operate stores located in
the United States and establish the Company’s interest obligations
with respect to franchisees that operate stores located in Canada.
Rental expense was $96.1 million in 2010, $88.1 million in
2009, and $81.8 million in 2008. As of December 31, 2010,
the total amount of sublease income expected to be received was
$22.1 million.
At December 31, 2010, the Company had non-cancelable
commitments primarily related to certain advertising and marketing
programs of $47.5 million. Payments under these commitments
are scheduled to be $31.5 million in 2011, $13.6 million in 2012,
$2.2 million in 2013 and $195,000 in 2014.
The Company maintains a 401(k) savings plan for all its full-time
employees with at least one year of service and who meet certain
eligibility requirements. The plan allows employees to contribute up
to 10% of their annual compensation with 50% matching by the
Company on the first 4% of compensation. The Company’s expense
related to the plan was $841,000 in 2010, $844,000 in 2009, and
$775,000 in 2008.
The Company is a party to various claims and legal proceedings
arising in the ordinary course of business. Management regularly
assesses the Company’s insurance deductibles, analyzes litigation
information with the Company’s attorneys and evaluates its loss
experience. The Company also enters into various contracts in the
normal course of business that may subject it to risk of financial loss
if counterparties fail to perform their contractual obligations.
The Company does not currently believe its exposure to loss
under any claims is probable, nor can the Company estimate a range
of amounts of loss that are reasonably possible. Notwithstanding
the foregoing, the Company is currently a party to the following
proceeding:
In Kunstmann et al v. Aaron Rents, Inc. originally filed with the
United States District Court, Northern District of Alabama (the
“court”) on October 28, 2008, plaintiffs alleged that the Company
improperly classified store general managers as exempt from the
overtime provisions of the Fair Labor Standards Act. Plaintiffs seek
to recover unpaid overtime compensation and other damages for
all similarly situated general managers nationwide for the period
January 25, 2007 to present. After initially denying plaintiffs’ class
34
certification motion in April 2009, the court ruled to conditionally
certify a plaintiff class in early 2010. The current class includes
237 individuals, which may decrease as discovery continues. Those
individuals who affirmatively opt to join the class may be required to
travel at their own expense to Alabama for discovery purposes and/or
trial. The court’s class certification ruling is procedural only and does
not address the merits of the plaintiffs’ claims.
The Company believes it has meritorious defenses to the claim
described above, and intends to vigorously defend itself against the
litigation. However, this proceeding is still developing, and due to
inherent uncertainty in litigation and similar adversarial proceed-
ings, there can be no guarantee that the Company will ultimately be
successful in this proceeding, or in others to which it is currently a
party. Substantial losses from this proceeding could have a material
adverse impact upon the Company’s business, financial position or
results of operations. In addition, the Company’s requirement to
record or disclose potential losses under generally accepted account-
ing principles could change in the near term depending upon chang-
es in facts and circumstances. The Company believes it has recorded
an adequate reserve for contingencies at December 31, 2010.
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Shareholders’
Equity
The Company held 10,664,728 shares in its treasury and was
authorized to purchase an additional 4,401,815 shares at
December 31, 2010. The Company repurchased 1,478,805 shares
of its Nonvoting Common Stock on the open market in 2010.
The Company did not repurchase any shares of its capital stock in
2009. The Company repurchased 387,545 shares of its Nonvoting
Common Stock in 2008.
The Company has 1,000,000 shares of preferred stock authorized.
The shares are issuable in series with terms for each series fixed by
the Board and such issuance is subject to approval by the Board of
Directors. As of December 31, 2010, no preferred shares have
been issued.
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Stock Options and
Restricted Stock
The Company’s outstanding stock options are exercisable for its
Common Stock. The Company estimates the fair value for the
options on the grant date using a Black-Scholes option-pricing
model. The expected volatility is based on the historical volatility of
the Company’s Common Stock over the most recent period gener-
ally commensurate with the expected estimated life of each respective
grant. The expected lives of options are based on the Company’s his-
torical option exercise experience. Forfeiture assumptions are based
on the Company’s historical forfeiture experience. The Company
believes that the historical experience method is the best estimate of
future exercise and forfeiture patterns currently available. The risk-
free interest rates are determined using the implied yield currently
available for zero-coupon U.S. government issues with a remaining
term equal to the expected life of the options. The expected dividend
yields are based on the approved annual dividend rate in effect and
current market price of the underlying Common Stock at the time
of grant. No assumption for a future dividend rate increase has been
included unless there is an approved plan to increase the dividend in
the near term. Shares are issued from the Company’s treasury shares
upon share option exercises.
The results of operations for the year ended December 31, 2010,
2009 and 2008 include $3.2 million, $2.4 million and $1.4 million,
respectively, in compensation expense related to unvested grants. At
December 31, 2010, there was $5.0 million of total unrecognized
compensation expense related to non-vested stock options which
is expected to be recognized over a period of 4.2 years. Excess
tax benefits of $321,000, $3.9 million and $1.8 million are
included in cash provided by financing activities for the year
ended December 31, 2010 and 2009, respectively. The Company
recognizes compensation cost for awards with graded vesting on
a straight-line basis over the requisite service period for each
separately vesting portion of the award.
Under the Company’s stock option plans, options granted to date
become exercisable after a period of two to five years and unexercised
options lapse 10 years after the date of the grant. Options are subject
to forfeiture upon termination of service.
The aggregate number of shares of common stock that may be issued
or transferred under the incentive stock awards plan is 14,966,112 at
December 31, 2010.
The Company granted 347,000 and 1,524,000 stock options
during 2010 and 2008, respectively. The Company did not grant
any stock options in 2009. The weighted average fair value of
options granted was $10.31 in 2010 and $5.75 in 2008. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted
average assumptions for 2010 and 2008, respectively: risk-free
interest rate 3.59% and 3.47%; a dividend yield of .25% and .25%;
a volatility factor of the expected market price of the Company’s
Common Stock of .41 and .38; weighted average assumptions
of forfeiture rate of 3.89% and 11.77%; and weighted average
expected life of the option of nine and five years. The aggregate
intrinsic value of options exercised was $848,000 million, $13.1
million and $6.4 million in 2010, 2009 and 2008, respectively. The
total fair value of options vested was $3.2 million and $1.0 million
in 2010 and 2008, respectively.
Income tax benefits resulting from stock option exercises credited
to additional paid-in capital totaled $1.4 million, $4.8 million, and
$3.2 million, in 2010, 2009 and 2008, respectively.
The following table summarizes information about stock options
outstanding at December 31, 2010:
Range of
Exercise
Prices
$ 3.81–10.00
10.01–15.00
15.01–19.92
$ 3.81–19.92
Number
Outstanding
December 31, 2010
Options Outstanding
Weighted Average
Remaining
Contractual
Life (in years)
Options Exercisable
Weighted
Average
Exercise price
Number
Exercisable
December 31, 2010
Weighted
Average
Exercise Price
477,382
2,551,458
345,458
3,374,298
2.60
6.29
8.71
6.01
$ 8.75
13.95
19.61
$13.80
477,382
1,228,458
31,958
1,737,798
$ 8.75
13.79
16.61
$12.46
The table below summarizes option activity for the periods indicated in the Company’s stock option plans:
Options
(In Thousands)
Weighted
Average
Weighted Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
(In Thousands)
Weighted
Average
Fair Value
Outstanding at January 1, 2010
Granted
Exercised
Forfeited
Outstanding at December 31, 2010
Exercisable at December 31, 2010
3,246
347
(110)
(109)
3,374
1,738
$13.09
19.92
11.24
14.92
13.80
$12.46
$23,689
163
(848)
(598)
22,245
$13,785
6.01 years
4.09 years
$5.77
10.31
4.30
6.56
6.26
$5.87
35
Notes to Consolidated Financial Statements
The weighted average fair value of unvested options was
Franchise agreement fee revenue was $3.0 million, $3.8 million
and $3.2 million and royalty revenue was $47.9 million, $42.3
million and $36.5 million for the years ended December 31, 2010,
2009 and 2008, respectively. Deferred franchise and area develop-
ment agreement fees, included in customer deposits and advance
payments in the accompanying consolidated balance sheets, were
$5.5 and $5.3 million at December 31, 2010 and 2009, respec-
tively.
Franchised Aaron’s Sales & Lease Ownership store activity is
summarized as follows:
(Unaudited)
2010
2009
2008
Franchised stores open
at January 1,
Opened
Added through acquisition
Purchased from the Company
Purchased by the Company
Closed, sold or merged
Franchised stores open
at December 31,
597
62
10
10
(12)
(3)
664
504
84
—
37
(19)
(9)
597
484
56
12
27
(66)
(9)
504
Company-operated Aaron’s Sales & Lease Ownership store
activity is summarized as follows:
(Unaudited)
2010
2009
2008
Company-operated stores
open at January 1,
Opened
Added through acquisition
Closed, sold or merged
Company-operated stores
open at December 31,
1,082
89
14
(36)
1,037
85
19
(59)
1,014
54
66
(97)
1,149
1,082
1,037
In 2010, the Company acquired the lease contracts, merchan-
dise and other related assets of 30 stores, including 12 franchised
stores, and merged certain acquired stores into existing stores,
resulting in a net gain of 14 stores. In 2009, the Company
acquired the lease contracts, merchandise and other related assets
of 44 stores, including 19 franchised stores, and merged certain
acquired stores into existing stores, resulting in a net gain of
29 stores. In 2008, the Company acquired the lease contracts,
merchandise and other related assets of 95 stores, including 66
franchised stores, and merged certain acquired stores into existing
stores, resulting in a net gain of 68 stores.
$6.66, $6.08 and $6.08 as of December 31, 2010, 2009 and 2008,
respectively. The weighted average fair value of options that vested
during 2010, 2009 and 2008 was $5.87, $5.35 and $4.36, respec-
tively.
The Company granted 300,000 restricted stock unit awards in
2010. The Company did not grant any restricted stock awards in
2009 or 2008. Shares of restricted stock or restricted stock units
may be granted to employees and directors and typically vest over
approximately three-to four-year periods. Restricted stock grants
may be subject to one or more objective employment, performance
or other forfeiture conditions as established at the time of grant.
Any shares of restricted stock that are forfeited may again become
available for issuance. Compensation cost for restricted stock is
equal to the fair market value of the shares at the date of the award
and is amortized to compensation expense over the vesting period.
Total compensation expense related to restricted stock was $1.5
million, $1.3 million and $1.5 million in 2010, 2009 and 2008,
respectively.
The following table summarizes information about restricted
stock activity:
(In Thousands)
Restricted
Stock
Weighted
Average
Grant Price
Outstanding at January 1, 2010
Granted
Vested
Forfeited
Outstanding at December 31, 2010
293
300
(147)
(8)
438
18.84
16.20
18.84
18.84
17.01
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Franchising of Aaron’s Sales and
Lease Ownership Stores
The Company franchises Aaron’s Sales & Lease Ownership stores.
As of December 31, 2010 and 2009, 946 and 866 franchises had
been granted, respectively. Franchisees typically pay a non-refundable
initial franchise fee from $15,000 to $50,000, depending upon
market size and an ongoing royalty of either 5% or 6% of gross
revenues. Franchise fees and area development fees are generated
from the sale of rights to develop, own and operate Aaron’s Sales &
Lease Ownership stores. These fees are recognized as income when
substantially all of the Company’s obligations per location are satis-
fied, generally at the date of the store opening. Franchise fees and
area development fees are received before the substantial completion
of the Company’s obligations and deferred. Substantially all of the
amounts reported as non-retail sales and non-retail cost of sales in
the accompanying consolidated statements of earnings relate to the
sale of lease merchandise to franchisees.
36
Acquisitions and Dispositions
The following is a summary of the Company’s intangible assets
by category:
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During 2010, the Company acquired the lease contracts, mer-
chandise and other related assets of a net of 14 sales and lease
ownership stores for an aggregate purchase price of $17.9 million.
Consideration transferred consisted primarily of cash. Fair value of
acquired tangible assets included $6.5 million for lease merchandise,
$333,000 for fixed assets and $34,000 for other assets. The excess
cost over the fair value of the assets and liabilities acquired in 2010,
representing goodwill, was $9.2 million. The fair value of acquired
separately identifiable intangible assets included $748,000 for cus-
tomer lists, $541,000 for non-compete intangibles and $496,000 for
acquired franchise development rights.
During 2009, the Company acquired the lease contracts,
merchandise and other related assets of a net of 29 sales and lease
ownership stores for an aggregate purchase price of $25.2 million.
Consideration transferred consisted primarily of cash. Fair value of
acquired tangible assets included $9.5 million for lease merchan-
dise, $712,000 for fixed assets and $28,000 for other assets. The
excess cost over the fair value of the assets and liabilities acquired in
2010, representing goodwill, was $12.0 million. The fair value of
acquired separately identifiable intangible assets included $1.1 mil-
lion for customer lists, $695,000 for non-compete intangibles and
$477,000 for acquired franchise development rights.
During 2008, the Company acquired the lease contracts,
merchandise and related assets of a net of 68 sales and lease
ownership stores for an aggregate purchase price of $79.8 mil-
lion. Consideration transferred consisted primarily of cash. Fair
value of acquired tangible assets included $28.5 million for lease
merchandise, $2.1 million for fixed assets, and $66,000 for other
assets. The excess cost over the fair value of the assets and liabili-
ties acquired in 2008, representing goodwill, was $44.1 million.
The fair value of acquired separately identifiable intangible assets
included $4.3 million for customer lists and $1.9 million for
acquired franchise development rights.
Acquisitions have been accounted for as purchases, and the
results of operations of the acquired businesses are included in the
Company’s results of operations from their dates of acquisition.
The effect of these acquisitions on the 2010, 2009 and 2008 con-
solidated financial statements was not significant. The estimated
amortization of customer lists, reacquired franchise development
rights and non-compete intangibles in future years approximates
$636,000, $432,000, $148,000, $64,000 and $63,000 for 2011,
2012, 2013, 2014 and 2015, respectively.
(In Thousands)
2010
2009
2008
Customer Relationship
Intangible, Gross
Accumulated Amortization on
Customer Relationship Intangible
Non-Compete Intangible, Gross
Accumulated Amortization
on Non-Compete Intangible
Reacquired Franchise
Intangible, Gross
Accumulated Amortization on
Reacquired Franchise Rights
$748
$1,677
$4,250
(205)
496
(469)
477
(699)
1,931
(52)
(109)
(139)
541
861
(109)
(191)
—
—
The Company sells sales and lease ownership stores to fran-
chisees and third party operators during the course of the year.
The Company sold 11, 37 and 27 of its sales and lease ownership
locations in 2010, 2009 and 2008, respectively. The effect of these
sales on the consolidated financial statements was not significant.
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Segments
Description of Products and Services of
Reportable Segments
Aaron’s, Inc. has three reportable segments: sales and lease owner-
ship, franchise and manufacturing. During 2008, the Company sold
its corporate furnishings division. The sales and lease ownership
division offers electronics, residential furniture, appliances and
computers to consumers primarily on a monthly payment basis with
no credit requirements. The Company’s franchise operation sells
and supports franchisees of its sales and lease ownership concept.
The manufacturing division manufactures upholstered furniture and
bedding predominantly for use by Company-operated and franchised
stores. The Company has elected to aggregate certain operating
segments.
Earnings before income taxes for each reportable segment are
generally determined in accordance with accounting principles gen-
erally accepted in the United States with the following adjustments:
• Sales and lease ownership revenues are reported on the cash basis
for management reporting purposes.
• A predetermined amount of each reportable segment’s revenues
is charged to the reportable segment as an allocation of corporate
overhead. This allocation was approximately 2% in 2010, 2009
and 2008.
37
Notes to Consolidated Financial Statements
• Accruals related to store closures are not recorded on the report-
able segments’ financial statements, but are rather maintained and
controlled by corporate headquarters.
• The capitalization and amortization of manufacturing variances are
recorded on the consolidated financial statements as part of Cash
to Accrual and Other Adjustments and are not allocated to the seg-
ment that holds the related lease merchandise.
• Advertising expense in the sales and lease ownership division is
estimated at the beginning of each year and then allocated to the
division ratably over time for management reporting purposes.
For financial reporting purposes, advertising expense is recognized
when the related advertising activities occur. The difference
between these two methods is reflected as part of the Cash to
Accrual and Other Adjustments line below.
• Sales and lease ownership lease merchandise write-offs are recorded
using the direct write-off method for management reporting
purposes and using the allowance method for financial reporting
purposes. The difference between these two methods is reflected as
part of the Cash to Accrual and Other Adjustments line below.
• Interest on borrowings is estimated at the beginning of each year.
Interest is then allocated to operating segments based on relative
total assets.
Revenues in the “Other” category are primarily revenues of the
Aaron’s Office Furniture division, from leasing space to unrelated
third parties in the corporate headquarters building and revenues
from several minor unrelated activities. The pre-tax losses in the
“Other” category are the net result of the activity mentioned
above, net of the portion of corporate overhead not allocated to the
reportable segments for management purposes.
Measurement of Segment Profi t or Loss and
Segment Assets
The Company evaluates performance and allocates resources based
on revenue growth and pre-tax profit or loss from operations. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies except
that the sales and lease ownership division revenues and certain other
items are presented on a cash basis. Intersegment sales are completed
at internally negotiated amounts. Since the intersegment profit and
loss affect inventory valuation, depreciation and cost of goods sold
are adjusted when intersegment profit is eliminated in consolidation.
Factors Used by Management to Identify the
Reportable Segments
The Company’s reportable segments are based on the operations
of the Company that the chief operating decision maker regularly
reviews to analyze performance and allocate resources among busi-
ness units of the Company.
As discussed in Note N, the Company sold substantially all of
the assets of the Aaron’s Corporate Furnishings division during
the fourth quarter of 2008. For financial reporting purposes, this
division has been classified as a discontinued operation and is not
included in our segment information as shown below.
38
(In Thousands)
Revenues From External Customers:
Sales and Lease Ownership
Franchise
Other
Manufacturing
Revenues of Reportable Segments
Elimination of Intersegment Revenues
Cash to Accrual Adjustments
Total Revenues from External Customers from Continuing Operations
Earnings Before Income Taxes:
Sales and Lease Ownership
Franchise
Other
Manufacturing
Earnings Before Income Taxes for Reportable Segments
Elimination of Intersegment Profit
Cash to Accrual and Other Adjustments
Total Earnings from Continuing Operations Before Income Taxes
Assets:
Sales and Lease Ownership
Franchise
Other
Manufacturing
Total Assets from Continuing Operations
Depreciation and Amortization:
Sales and Lease Ownership
Franchise
Other
Manufacturing
Total Depreciation and Amortization from Continuing Operations
Interest Expense:
Sales and Lease Ownership
Franchise
Other
Manufacturing
Total Interest Expense from Continuing Operations
Capital Expentitures:
Sales and Lease Ownership
Franchise
Other
Manufacturing
Total Capital Expenditures from Continuing Operations
Revenues From Canadian Operations (included in totals above):
Sales and Lease Ownership
Assets From Canadian Operations (included in totals above):
Sales and Lease Ownership
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Year Ended
December 31,
2008
$1,803,778
59,112
16,514
79,115
1,958,519
(80,109)
(1,563)
$1,876,847
$ 159,417
45,953
(8,165)
3,216
200,403
(3,218)
(6,399)
$ 190,786
$1,248,785
55,789
189,198
14,723
$1,508,495
$ 539,669
41
6,864
2,958
$ 549,532
$ 2,937
—
144
15
$ 3,096
$ 275
—
679
904
$ 1,858
$1,685,841
52,941
19,320
72,473
1,830,575
(73,184)
(4,604)
$1,752,787
$ 147,261
39,335
(5,676)
3,329
184,249
(3,341)
(4,469)
$ 176,439
$1,110,675
51,245
144,024
15,512
$1,321,456
$ 508,218
192
9,073
1,888
$ 519,371
$ 4,030
—
254
15
$ 4,299
$ 275
706
239
$ 1,220
$1,526,405
45,025
25,781
68,720
1,665,931
(69,314)
(4,009)
$1,592,608
$ 113,513
32,933
(60)
1,350
147,736
(1,332)
(6,824)
$ 139,580
$1,019,338
39,831
152,934
21,167
$1,233,270
$ 461,182
350
8,016
1,845
$ 471,393
$ 7,621
—
182
15
$ 7,818
$ 275
—
734
239
$ 1,247
$ 4,470
$ 3,781
$ 8,716
$ 15,093
$ 6,469
$ 7,985
39
Notes to Consolidated Financial Statements
Information on segments and a reconciliation to earnings before
income taxes from continuing operations are as follows:
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Related Party Transactions
The Company leases certain properties under capital leases with cer-
tain related parties that are more fully described in Note D above.
In 2009, the Company sponsored the son of its Chief
Operating Officer as a driver for the Robert Richardson Racing
team in the NASCAR Nationwide Series at a cost of $1.6 million.
The Company also paid $22,000 for team decals, apparel and
driver travel to corporate promotional events. The sponsorship
agreement expired at the end of the year and was not renewed.
Motor sports promotions and sponsorships are an integral part of
the Company’s marketing programs.
In the second quarter of 2009, the Company entered into an
agreement with R. Charles Loudermilk, Sr., Chairman of the
Board of Directors of the Company, to exchange 750,000 of
Mr. Loudermilk, Sr.’s shares of the Company’s Class A Common
Stock for 624,503 shares of its Nonvoting Common Stock having
approximately the same fair market value, based on a 30 trading
day average.
Quarterly Financial Information (Unaudited)
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(In Thousands, Except Per Share)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2010
Revenues
Gross Profit*
Earnings Before Taxes From Continuing Operations
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
Year Ended December 31, 2009
Revenues
Gross Profit*
Earnings Before Taxes From Continuing Operations
Net Earnings From Continuing Operations
(Loss) Earnings From Discontinued Operations, Net of Tax
Earnings Per Share
Earnings Per Share Assuming Dilution
$495,269
239,827
59,562
36,975
.45
.45
$473,950
226,571
57,236
35,360
(209)
.44
.43
$444,999
215,725
39,329
24,435
.30
.30
$417,310
206,191
44,350
27,826
(76)
.34
.34
$452,150
217,994
42,085
26,179
.32
.32
$415,259
203,254
34,999
24,655
(19)
.30
.30
$484,429
226,822
49,810
30,787
.38
.38
$446,268
207,323
39,854
25,037
27
.31
.31
* Gross profit is the sum of lease revenues and fees, retail sales, and non-retail sales less retail cost of sales, non-retail cost of sales, depreciation of lease merchandise and
write-offs of lease merchandise.
40
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Discontinued Operations
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ON
Deferred Compensation Plan
On September 12, 2008, the Company entered into an agreement
with CORT Business Services Corporation to sell substantially all of
the assets of its Aaron’s Corporate Furnishings division and to trans-
fer certain of the Aaron’s Corporate Furnishings division’s liabilities
to CORT. The Aaron’s Corporate Furnishings division, which
operated at 47 stores, primarily engaged in the business of leasing
and selling residential furniture, electronics, appliances, housewares
and accessories. The Company consummated the sale of the Aaron’s
Corporate Furnishings division in the fourth quarter of 2008.
The consideration for the assets consisted of $72 million in
cash plus payments for certain accounts receivable of the Aaron’s
Corporate Furnishings division, subject to certain adjustments,
including for differences in the amount of the Aaron’s Corporate
Furnishings division’s inventory at closing and in the monthly rent
potential of the division’s merchandise on lease at closing as com-
pared to certain benchmark ranges set forth in the purchase agree-
ment. The assets transferred include all of the Aaron’s Corporate
Furnishings division’s lease contracts with customers and certain
other contracts, certain inventory and accounts receivable and store
leases or subleases for 27 locations. CORT assumed performance
obligations under transferred lease and certain other contracts and
customer deposits. The Company retained other liabilities of the
Aaron’s Corporate Furnishings division, including its accounts
payable and accrued expenses. Included in the 2008 results is a
$1.2 million pre-tax gain on the sale of the Aaron’s Corporate
Furnishings division in the fourth quarter of 2008.
Summarized operating results for the Aaron’s Corporate
Furnishings division for the years ended December 31 are
as follows:
(In Thousands)
2010
2009
2008
Revenues
(Loss) Earnings Before Income Taxes
(Loss) Earnings From Discontinued
Operations, Net of Tax
$ —
—
$ —
(447)
$83,359
7,162
—
(277)
4,420
Effective July 1, 2009, the Company implemented the Aaron’s, Inc.
Deferred Compensation Plan (the “Plan”) an unfunded, nonquali-
fied deferred compensation plan for a select group of management,
highly compensated employees and non-employee directors. On a
pre-tax basis, eligible employees can defer receipt of up to 75% of
their base compensation and up to 100% of their incentive pay com-
pensation, and eligible non-employee directors can defer receipt of
up to 100% of both their cash and stock director fees. In addition,
the Company may elect to make restoration matching contributions
on behalf of eligible employees to compensate for certain limitations
on the amount of matching contributions an employee can receive
under the Company’s tax-qualified 401(k) plan.
Compensation deferred under the Plan is credited to each
participant’s deferral account and a deferred compensation liability
is recorded in accounts payable and accrued expenses in the con-
solidated balance sheets. The deferred compensation plan liability
was approximately $3.5 million and $713,000 as of December 31,
2010 and 2009, respectively. Liabilities under the Plan are recorded
at amounts due to participants, based on the fair value of partici-
pants’ selected investments. The Company has established a Rabbi
Trust to fund obligations under the Plan with Company-owned
life insurance. The obligations are unsecured general obligations of
the Company and the participants have no right, interest or claim
in the assets of the Company, except as unsecured general creditors.
The cash surrender value of these policies totaled $3.5 million and
$772,000 as of December 31, 2010 and 2009, respectively, and is
included in prepaid expenses and other assets in the consolidated
balance sheets.
Deferred compensation expense charged to operations for
the Company’s matching contributions totaled $231,000 and
$130,000 in 2010 and 2009, respectively. No benefits have been
paid as of December 31, 2010.
41
Management Report on Internal Control
Over Financial Reporting
Management of Aaron’s, Inc. and subsidiaries (the “Company”)
is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
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. Internal control
over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting also can be circumvented
by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not
be prevented or detected on a timely basis by internal control
over financial reporting. However, these inherent limitations are
known features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though not
eliminate, the risk.
The Company’s management assessed the effectiveness of
the Company’s internal control over financial reporting as of
December 31, 2010. In making this assessment, the Company’s
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework.
Based on its assessment, management believes that, as of
December 31, 2010, the Company’s internal control over financial
reporting was effective based on those criteria.
The Company’s internal control over financial reporting as of
December 31, 2010 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their
report dated February 25, 2011, which expresses an unqualified
opinion on the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2010.
Report of Independent Registered Public Accounting Firm
on Financial Statements
The Board of Directors of Aaron’s, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of
Aaron’s, Inc. and subsidiaries as of December 31, 2010 and 2009,
and the related consolidated statements of earnings, shareholders’
equity, and cash flows for each of the three years in the period ended
December 31, 2010. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Aaron’s, Inc. and subsidiaries at December 31, 2010
and 2009, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Aaron’s, Inc. and subsidiaries’ internal control over financial
reporting as of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and
our report dated February 25, 2011 expressed an unqualified
opinion thereon.
Atlanta, Georgia
February 25, 2011
42
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
The Board of Directors of Aaron’s, Inc. and subsidiaries
We have audited Aaron’s, Inc. and subsidiaries’ internal control
over financial reporting as of December 31, 2010, based on criteria
established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Aaron’s, Inc. and subsidiaries’
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 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 conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
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 included obtaining an understanding of
internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for 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, in reasonable
detail, accurately and fairly reflect 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 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.
Because of its inherent limitations, internal control over
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.
In our opinion, Aaron’s, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting
as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Aaron’s, Inc. and subsidiaries
as of December 31, 2010 and 2009 and the related consolidated
statements of earnings, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2010 of
Aaron’s, Inc. and subsidiaries and our report dated February 25,
2011 expressed an unqualified opinion thereon.
Atlanta, Georgia
February 25, 2011
43
Common Stock Market Prices and Dividends
The Company’s Common Stock is listed on the New York
Stock Exchange under the symbol “AAN.”
The number of shareholders of record of the Company’s
Common Stock at February 24, 2011 was 282. The closing price
for the Common Stock at February 23, 2011 was $23.18.
The following table shows the range of high and low closing
prices per share for the Nonvoting Common Stock and Class A
Common Stock (now known as the Common Stock) and the quar-
terly cash dividends declared per share for the periods indicated.
Subject to our ongoing ability to generate sufficient income, any
future capital needs and other contingencies, we expect to continue
our policy of paying dividends. Under our revolving credit agree-
ment, we may pay cash dividends in any year only if the dividends
do not exceed 50% of our consolidated net earnings for the prior
fiscal year plus the excess, if any, of the cash dividend limitation
applicable to the prior year over the dividend actually paid in the
prior year.
Common Stock
High
Low
Cash
Dividends
Per Share
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Aaron's, Inc., the S&P Smallcap 600 Index,
the S&P Midcap 400 index and a Peer Group
December 31, 2010
Fourth Quarter (December 13,
2010 – December 31, 2010)(1)
$20.67
$19.73
$.013
Former Nonvoting Common Stock High
Low
Cash
Dividends
Per Share
December 31, 2010
First Quarter(2)
Second Quarter(2)
Third Quarter
Fourth Quarter (October 1,
2010 – December 10, 2010)(1)
December 31, 2009
First Quarter(2)
Second Quarter(2)
Third Quarter(2)
Fourth Quarter(2)
$22.47
24.32
18.62
$18.25
17.05
16.16
$.012
.012
.012
22.53
16.92
NA
$18.67
23.47
21.35
19.68
$13.91
17.17
16.55
16.40
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/05
12/06
12/07
12/08
12/09
12/10
Aaron's, Inc.
S&P Smallcap 600
S&P Midcap 400
Peer Group
$.011
.011
.011
.012
Cash
Dividends
Per Share
The line graph above and the table below compare, for the
last five fiscal years of the Company, the yearly percentage change
in the cumulative total shareholder returns (assuming reinvestment
of dividends) on the Company’s Common Stock with that of the
S&P SmallCap 600 Index and a Peer Group. For 2010, the Peer
Group consisted of Rent-A-Center, Inc. The stock price perfor-
mance shown is not necessarily indicative of future performance.
Former Class A Common Stock
High
Low
12/05 12/06 12/07 12/08 12/09 12/10
100.00 136.38 89.47 114.14 117.37 160.03
Aaron’s, Inc.
S&P Smallcap 600 100.00 115.12 114.78 79.11 99.34 125.47
S&P Midcap 400 100.00 110.32 119.12 75.96 104.36 132.16
100.00 156.47 76.99 93.58 93.96 172.03
Peer Group
Copyright© 2011 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights
reserved. (www.researchdatagroup.com/S&P.htm)
December 31, 2010
First Quarter(2)
Second Quarter(2)
Third Quarter
Fourth Quarter (October 1,
2010 – December 10, 2010)(1)
December 31, 2009
First Quarter(2)
Second Quarter(2)
Third Quarter(2)
Fourth Quarter(2)
$18.10
19.85
18.40
$14.60
13.55
13.00
$.012
.012
.012
21.03
16.81
NA
$ 15.60
20.30
16.73
15.77
$ 10.50
14.83
13.38
9.56
$ .011
.011
.011
.012
(1) Effective December 13, 2010 shares of the former Nonvoting Common Stock
were converted into shares of Class A Common Stock and the Class A Common
Stock was renamed Common Stock.
(2) Shares have been adjusted for the effect of the 3-for-2 partial stock split dis-
tributed on April 15, 2010 and effective April 16, 2010.
44
Board of Directors
R. Charles Loudermilk, Sr.
Chairman of the Board, Aaron’s, Inc.
Ronald W. Allen (2)
Retired Chairman of the Board,
President and Chief Executive Officer, Delta
Air Lines, Inc.
Leo Benatar (1, 3, 4)
Principal, Benatar & Associates
William K. Butler, Jr.
Chief Operating Officer, Aaron’s, Inc.
Gilbert L. Danielson
Executive Vice President, Chief
Financial Officer, Aaron’s, Inc.
David L. Kolb (2, 4)
Retired Chairman and Chief Executive
Officer, Mohawk Industries, Inc.
Robert C. Loudermilk, Jr.
President, Chief Executive Officer,
Aaron’s, Inc.
John C. Portman, Jr.(4)
Chairman of the Board, Portman Holdings,
LLC; Chairman, AMC, Inc.; and Chairman,
John Portman & Associates
Ray M. Robinson(3)
President Emeritus, East Lake Golf
Club and Vice Chairman, East Lake
Community Foundation
John Schuerholz (2, 3)
President, The Atlanta Braves
Director Emeritus
Earl Dolive
Vice Chairman of the Board, Emeritus,
Genuine Parts Company
Officers
Corporate
R. Charles Loudermilk, Sr.*
Chairman of the Board
Robert C. Loudermilk, Jr.*
President, Chief Executive Officer
William K. Butler, Jr.*
Chief Operating Officer
Gilbert L. Danielson*
Executive Vice President,
Chief Financial Officer
James L. Cates*
Senior Group Vice President,
Corporate Secretary
Elizabeth L. Gibbs*
Vice President, General Counsel
John T. Trainor*
Vice President,
Chief Information Officer
Michael W. Jarnagin
Vice President, Manufacturing
James C. Johnson
Vice President, Internal Audit
Robert P. Sinclair, Jr.*
Vice President, Corporate Controller
D. Chad Strickland
Vice President, Employee Relations
Danny Walker, Sr.
Vice President, Internal Security
Aaron’s Sales & Lease
Ownership Division
K. Todd Evans*
Vice President, Franchising
Mitchell S. Paull*
Senior Vice President,
Merchandising and Logistics
Gregory G. Bellof
Vice President, Mid-Atlantic Operations
(1) Lead Director
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
* Executive Officer
Michael C. Bennett
Vice President, Great Lakes Operations
David A. Boggan
Vice President, Mississippi
Valley Operations
David L. Buck
Vice President, Southwestern Operations
Todd G. Coppedge
Vice President, Midwest Operations
Paul A. Doize
Vice President, Real Estate
Joseph N. Fedorchak
Vice President, Eastern Operations
Scott L. Harvey
Vice President, Management Development
Kevin J. Hrvatin
Vice President, Western Operations
Jason M. McFarland
Vice President, Mid-American Operations
Steven A. Michaels
Vice President, Finance
Tristan J. Montanero
Vice President, Central Operations
Brock M. Roberts
Vice President, Northeastern Operations
Mark A. Rudnick
Vice President, Marketing
Michael P. Ryan
Vice President, Northern Operations
Marco A. Scalise
Vice President, Customer Account
Management
Aaron’s Office Furniture Division
Ronald M. Benedit
Vice President, Operations
45
Corporate and Shareholder Information
Corporate Headquarters
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011
www.aarons.com
www.aaronsinc.com
Subsidiaries
Aaron Investment Company
4005 Kennett Pike
Greenville, Delaware 19807
(302) 888-2351
Aaron’s Canada, ULC
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011
Annual Shareholders Meeting
The annual meeting of the share holders of
Aaron’s, Inc. will be held on Tuesday, May 3,
2011, at 10:00 a.m. EDT on the 4th Floor,
SunTrust Plaza, 303 Peachtree Street, N.E.,
Atlanta, Georgia 30303
Transfer Agent and Registrar
Computershare Investor Services
Canton, Massachusetts
General Counsel
Kilpatrick Townsend & Stockton LLP
Atlanta, Georgia
Form 10-K
Shareholders may obtain a copy of the
Company’s annual report on Form 10-K
filed with the Securities and Exchange
Commission upon written request, without
charge. Such requests should be sent to the
attention of Gilbert L. Danielson, Execu-
tive Vice President, Chief Financial Officer,
Aaron’s, Inc., 309 E. Paces Ferry Rd., N.E.,
Atlanta, Georgia 30305-2377.
Stock Listing
Aaron’s, Inc.’s Common Stock is traded on
the New York Stock Exchange under the
symbol “AAN.”
Forward-Looking Statements
Certain written and oral statements made
by our Company may constitute “forward-
looking statements” as defined under the
Private Securities Litigation Reform Act of
1995, including statements made in this
report and in the Company’s filings with
the Securities and Exchange Commission.
All statements which address operating
performance, events, or developments that
we expect or anticipate will occur in the
future — including growth in store openings,
franchises awarded, and market share, and
statements expressing general optimism about
future operating results — are forward-looking
statements. Forward-looking statements are
subject to certain risks and uncertainties that
could cause actual results to differ materially.
The Company undertakes no obligation to
publicly update or revise any forward-looking
statements. For a discussion of such risks and
uncertainties, see “Risk Factors” in Item 1A
of the Company’s Annual Report on Form
10-K filed with the Securities and Exchange
Commission.
46
46
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011
www.aarons.com
www.aaronsinc.com