AARON’S®
brings it home.
Annual Report 2011
ABOUT US
a
aron’s, Inc. serves consumers through the sale and lease
ownership and specialty retailing of residential furniture,
consumer electronics, home appliances and accessories in
over 1,950 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.
CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . 1
To Our Shareholders . . . . . . . . . . . . . . . . . . . . 2
Aaron’s is Still Bringing it Home . . . . . . . . . . 4
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . 27
Management’s Report on Internal
Control Over Financial Reporting . . . . . . . 43
Selected Financial Information . . . . . . . . . . . 12
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . .13
Consolidated Balance Sheets . . . . . . . . . . . 23
Report of Independent Registered
Public Accounting Firm on
Financial Statements . . . . . . . . . . . . . . . . . . . 43
Report of Independent Registered
Public Accounting Firm on Internal
Control Over Financial Reporting . . . . . . . 44
Consolidated Statements
of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Market Information, Holders
and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 45
Consolidated Statements of
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements
of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 26
Board of Directors and Officers . . . . . . . . . 47
Corporate and Shareholder
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
FINANCIAL HIGHLIGHTS
(Dollar Amounts in Thousands,
Except Per Share)
OpERATING RESULTS
Revenues
Earnings Before Taxes
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
FINANCIAL pOSITION
Total Assets
Lease Merchandise, Net
Credit Facilities
Shareholders’ Equity
Book Value Per Share
Debt to Capitalization
Pretax Profit Margin
Net Profit Margin
Return on Average Equity
STORES OpEN AT YEAR-ENd
Aaron’s Sales & Lease Ownership
Aaron’s Sales & Lease Ownership Franchised*
HomeSmart
Aaron’s Office Furniture
Total Stores
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Percentage
Change
$2,024,049
$1,876,847
7.8%
183,377
113,767
1.46
1.43
190,786
118,376
1.46
1.44
(3.9)
(3.9)
(0.0)
(0.7)
$1,735,149
$1,502,072
15.5%
862,276
153,789
976,554
12.91
13.6%
9.1
5.6
11.6
1,160
713
71
1
1,945
5.9
268.0
(0.3)
5.6
814,484
41,790
979,417
12.23
4.1%
10.2
6.3
12.7
1,146
664
3
1
1,814
1.2%
7.4
2,266.7
0.0
7.2%
* Aaron’s Sales & Lease Ownership franchised stores are not owned or operated by Aaron’s, Inc.
Revenues By Year
)
s
d
n
a
s
u
o
h
t
n
i
$
(
$2,250,000
120000
2,000,000
100000
1,750,000
1,500,000
80000
1,250,000
1,000,000
60000
750,000
40000
500,000
225,000
20000
0
0
2007
2008
2009
2010
2011
)
s
d
n
a
s
u
o
h
t
n
i
$
(
2500000
2250000
$120,000
2000000
100,000
1750000
1500000
80,000
1250000
60,000
1000000
750000
40,000
500000
20,000
250000
0
0
Net Earnings By Year
2007
2008
2009
2010
2011
1
TO OUR SHAREHOLdERS
t
The strength of the Aaron’s business model
was evident in our operating results for 2011
and remains the foundation for continued
growth. We achieved record revenues during
the year and our earnings, excluding certain
unusual items, were also at a record level.
The economic environment in which we operate
continues to be challenging with high rates of
unemployment in most of our markets, and our
typical customer remains credit-constrained.
We believe Aaron’s is well-positioned for this
environment. We offer consumers flexible lease
terms, affordable pricing, a broad range of products
and the ability to terminate a lease and return a
product at any time. We are proud of our business
model, our associates, our corporate values and the
2011 operating results.
For the second year in a row, the Company achieved
more than 10 percent growth in the number of our
customers. Customer count on a same store basis for
Company-operated stores and franchised stores was
up 6.4% and 4.6%, respectively, over a year ago. At
the end of 2011, we had over one million corporate
and over 550,000 franchise customers. Store traffic
has been strong, and our “Credit is Hard, Aaron’s
is Easy!” tag line has been an effective, distinctive
message to consumers in all parts of the country.
Revenues for 2011 crossed the $2 billion mark, an
8% increase compared to 2010. In addition, our
franchisees also reported an 8% increase in revenues
to over $900 million, although those revenues are
not revenues of Aaron’s, Inc.
Net earnings for the year were $113.8 million
compared to the $118.4 million earned in 2010.
Results for 2011, however, reflected certain unusual
items, including a $36.5 million charge related to a
lawsuit verdict. Fully diluted earnings per share for
the year were $1.43 compared to $1.44 in 2010.
In 2011, the Company opened 57 new Aaron’s
Sales & Lease Ownership stores and our franchisees
opened 55 new stores. We also added 68
HomeSmart stores during the year. At the end of
2011, we had 1,945 stores open — a combination
of Company-operated and franchised stores. Our
2,000th store will open in 2012 and there are many
exciting promotions planned for this significant
milestone.
In 2011, we expanded our new HomeSmart
concept which is based on a weekly payment model.
As a result of several opportunistic acquisitions,
HomeSmart has grown rapidly and by the end of
the year we had 71 stores in operation. These stores
are in a pilot phase but early results are encouraging
and we have experienced minimal cannibalization
from neighboring Aaron’s Sales & Lease Ownership
stores. Our focus in 2012 is refining HomeSmart
and evaluating the stores’ financial performance
and returns. We are optimistic and hopeful that
HomeSmart will prove to be a successful growth
opportunity.
Our Woodhaven Furniture Industries division
provides the majority of our upholstered and
bedding products. Woodhaven had a record year in
2011, manufacturing close to $90 million, at cost,
of furniture and bedding for our stores.
Aaron’s launched its first national advertising
campaign in 2011 and branding initiatives are a key
focus for 2012. In addition to brand development,
we are working to better educate the consumer on
the Aaron’s advantage and our distinctive placement
within the home furnishings industry.
In October, the Company purchased an 11.5%
interest in Perfect Home Holdings Ltd., a privately-
held rent-to-own company which provides basic
home furnishings through 45 stores in the United
Kingdom. Perfect Home is expected to double
its store base over the next several years and this
investment provides another avenue of possible
growth and international expansion.
The Company remains financially strong with
$274.4 million in cash and short-term investment
securities at the end of the year. During 2011, we
repurchased 5.1 million shares of Common Stock
for $127.2 million and have authority to purchase
5.3 million additional shares. Aaron’s is well
2
positioned to fund organic growth, take advantage of acquisition opportunities,
finance strategic investments, and repurchase stock as deemed appropriate.
Regrettably, Robert C. Loudermilk, Jr., the Company’s President and Chief
Executive Officer since 2008, resigned in November to pursue personal goals.
Robin had ably served the Company in nearly every capacity over the past 29
years, and, as CEO, he oversaw Aaron’s tremendous growth and outstanding
performance, as well as a significant increase in shareholder value. All of the
Aaron’s associates join us in thanking Robin for his service to the Company.
We were fortunate that Ronald W. Allen, a distinguished long-time Aaron’s
Director and former Chairman and CEO of Delta Air Lines, quickly stepped
in as interim President and Chief Executive Officer. In February 2012, those
two roles became permanent and Ron now serves as only the Company’s third
Chief Executive Officer in its history. Aaron’s has a deep, experienced, talented
management team and the Company is in good hands.
In addition, in 2011 our valued Director, John C. Portman, Jr., Chairman of
Portman Holdings, LLC, stepped down from the Board of Directors after five
years of wise counsel and guidance. In October, Cynthia N. Day, President
and Chief Executive Officer of Citizen’s Trust Bank, joined our Board to fill an
open vacancy.
Several other management changes and promotions were made in 2011.
Within the Aaron’s Sales & Lease Ownership division, Thomas A. Peterson
joined Aaron’s as Vice President, Marketing, and Brock M. Roberts was elected
Vice President of Operations, Northeastern Operations. For the HomeSmart
division, Marco A. Scalise was elected Vice President, HomeSmart Operations
and Mark A. Rudnick was named Vice President, Marketing, HomeSmart/
RIMCO. In January 2012, Jeannie M. Cave joined the Company as Vice
President, Real Estate and Construction.
After 57 years, Aaron’s is still bringing it home — delivering high-quality
household products to our customers, bringing jobs to our communities and
bringing investment returns to our shareholders. We are poised to bring home
another solid year in 2012. We thank all of you for your support.
R. Charles Loudermilk, Sr.
Chairman
Ronald W. Allen
President and Chief Executive Officer
3
AFTER 57 YEARS,
AARON’S ® IS STILL
BRINGING IT HOME.
> Bringing the best business
model to the consumer
> Bringing price, variety and
quality to the showroom floor
> Bringing the message to
millions of consumers each year
> Bringing jobs and service
to communities
> Bringing outstanding
returns to investors
4
t his has been the story of Aaron’s in times of good
employment and easy credit and in times of high
unemployment and tight credit.
Aaron’s unique sales and lease ownership business
model competes with home furnishings retailers
serving the middle- and lower-income market,
including rent-to-own stores and traditional credit retailers.
Over the past 30 years, there has been a significant change in
the home furnishings industry. In the 1970s and 1980s, and
into the 1990s, home furnishings retailing was dominated by
chains offering in-house financing as well as a fragmented rent-
to-own market. Well-known brands were among the leaders
in the industry and individual stores struggled to compete
against the chains. Aaron’s was a small regional chain. When the
Company completed an initial public offering in 1982, annual
revenues were only $48 million. Since then, many of those
national and regional chains are out of business and Aaron’s
is thriving. Today, Aaron’s is one of the nation’s largest home
furnishings retailers. The Aaron’s story has many more chapters
to come.
Aaron’s® brings the best business model to the consumer.
Aaron’s has a distinctive business model which is flexible and
can accommodate a wide range of consumer profiles. For the
credit-constrained consumer, Aaron’s has a no credit check
policy, varying lease terms and the ability to terminate a
lease with no additional obligation. With a traditional credit
card purchase, there is uncertainty on the ultimate cost of
the product as interest on unpaid balances accrues monthly.
With Aaron’s, the total price of ownership of a product can be
determined on day one. Aaron’s is available when the big box
and smaller traditional retailers are reluctant to extend credit
and the Aaron’s model is better than layaway. No matter how
you look at the issue, Aaron’s offers a better path to product
ownership for the average consumer.
Our best customer is an existing customer and the high level
of repeat business is a testimony to the appeal of our business
model. Our average customer has a current monthly payment
of approximately $130, which is lower than in previous years.
The average lease term has lengthened over the past few
years, resulting in reduced monthly payments for our typical
customer. The ability to adjust lease terms allows Aaron’s
to make products more affordable in difficult economic
continued on page 9 5
BRINGING IT HOME
6
KITCHEN: Refrigerators are the mainstay of the
Aaron’s kitchen appliance product line and we
offer Samsung, Maytag and Frigidaire models
from 15 cubic feet to 23 cubic feet capacity.
Over 70,000 refrigerators moved through our
fulfillment centers last year.
Home Office: Aaron’s offers computers for every need and
budget. Some customers still prefer desktop computers but
laptops are the focus of our product offerings. We leased over
250,000 HP and Toshiba computers in 2011 and introduced
the Toshiba tablet in time for the holiday season.
Laundry room:
Aaron’s is proud to
offer top-quality
brand-name laundry
appliances. Our
top-selling brands are
Amana, Frigidaire,
Maytag and LG. Over
150,000 washer/dryer
sets were delivered
to Aaron’s customers
in 2011.
Family room: Aaron’s continually updates its product lines, offering
customers the latest products. Over 100,000 Aaron’s customers are now
enjoying XBOX 360, Sony Playstation and Nintendo Wii gaming systems.
We also offer digital cameras, camcorders and blu-ray disc players.
Aaron’s purchases more Mitsubishi big-screen televisions than any other
retailer in America. We offer a full line of high-definition televisions
from a 19" model to an 82" 3-D ready DLP television.
Our customers selected over 400,000 televisions last year.
LIVING ROOM: Aaron’s delivers over
200,000 pieces of upholstered
furniture a year and works closely with
manufacturers to offer the latest styling,
fabrics and color schemes for all tastes
and price points. Because of our buying
power, we are able to specify high
standards for durability and quality.
The Company has been very successful in
offering room packages,
accessorizing living
room sets with rugs and
lamps and decorative
items. Aaron’s
customers brought
home over 170,000
lamps in 2011. We are
proud to offer a line of
high-quality area rugs
from Mohawk.
Bedroom: Aaron’s
delivered over 180,000
mattress sets in 2011.
Our Woodhaven
division manufactures
high-quality bedding
with up-to-date styling.
Aaron’s even offers
top-of-the-line Dyson
vacuum cleaners.
DINING ROOM:
Aaron’s is present
in every room in
the home. We
delivered over
50,000 sets
of dining room
furniture in 2011.
7
Company-Operated Sales and Lease Ownership Store Revenues
Other
3%
Computers
12%
Electronics
39%
Furniture
32%
Appliances
18%
Company Revenues
From Franchising
$70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
88
2007
2008
2009
2010
2011
80000
70000
60000
50000
40000
30000
20000
10000
0
$50,000
40,000
30,000
20,000
10,000
0
Company pretax profit
From Franchising
2007
2008
2009
2010
2011
50000
40000
30000
20000
10000
0
continued from page 5
environments. We encourage product ownership and work
hard with every customer to craft an affordable and sustainable
monthly payment. Over 90% of Aaron’s customers are on
a monthly payment plan with the remainder paying semi-
monthly or weekly.
Aaron’s® brings price, variety and quality to the showroom floor.
Aaron’s has the purchasing power in the market place to secure
the best pricing on the best products for our customers. We are
constantly working with vendors to bring the latest products to
our showrooms at prices our customers can afford.
High-definition televisions have become a signature feature of
family rooms and we have models up to over 80 inches in size
with the most up-to-date features. We offer gaming systems,
computers and now tablet computers. Furniture, bedding,
and appliances also remain a significant component of our
product offerings.
Our Woodhaven manufacturing division, which supplies the
majority of our upholstered furniture and bedding, keeps up
with color and style trends and builds durability into all our
products. Sixteen fulfillment centers make possible next-day
delivery in nearly all of our markets, at no cost to our customer.
Aaron’s® brings the message to millions of consumers each year.
As Aaron’s stores have come to more and more communities,
local marketing has been paired with a national branding
campaign. Direct mail circulars to selected neighborhoods are
the bread and butter of our marketing program and we now
deliver 27 million circulars each month.
Aaron’s marketing reaches out into the communities we serve.
We have sponsorship agreements with over 30 collegiate
athletic programs and numerous professional sports teams.
Our signature marketing affiliation for 10 years has been with
NASCAR. We sponsor the Michael Waltrip Racing Team
with future Hall of Famer Mark Martin driving the No. 55
Aaron’s Dream Machine Toyota honoring Charlie Loudermilk’s
founding of Aaron’s in 1955. He’ll share the Aaron’s Dream
Machine with two-time Daytona winner Michael Waltrip who
will drive in selected races. The Company sponsors the Aaron’s
499 Sprint Cup and the 312 Nationwide Series races at the
Aaron’s Dream Weekend at the Talladega Superspeedway each
year. There are several contests and sweepstakes tied to this
event as well as advertising and promotional tie-ins. The Lucky
Dog mascot, an integral part of our NASCAR sponsorship, is a
popular addition to store openings and promotions.
In 2011, the Company launched its first national advertising
program, a key part of our branding program. The goal in
2012 is to have our marketing and branding efforts fully
continued on page 11 9
2000
1500
1000
500
0
Store Growth
2,000
1,500
1,000
500
0
2007
2008
2009
2010
2011
3
3
3
3
LOCATIONS WITHIN THE
UNITEd STATES ANd CANAdA
STORE COUNT AS OF dECEMBER 31, 2011
Company Stores — 1,160
Franchised Stores — 713
HomeSmart Stores — 71
Aaron’s Office Furniture Stores — 1
Fulfillment Centers — 16
Woodhaven Furniture Industries — 13
4
29
1
29
38 1
28
1
29
10
5
6
12
38 1
28
35 1
4
1
4
8
29
5
6
8
5
9
10
8
12
25
35 1
4
2
1
29
3
9
4
5
5
8
11
25
11
9
2
29
3
37
1
9
1
2
191
39
14
17
5
17
5
2
2
4
5
11
16
1
9
20
36
1
17
11
29
1
37
9
15
24
1
5
39
57
1
2
1
42
1
191
2
14
2
9
5
9
2
2
31
19
1
13
19
5
5
2
1
19
13
5
35
1
27
4
9
5
16
1 3
7
33
31
19
35
37
1
1
17
1
1
27
5
9
89
16
4
14
5
2
1 3
14
2
22
63
75
1
33
35
5
5
3
1
5
7
1
59 1
42 1
13
5
15
3
1
24
12
104
1
16
2
8
35
5
22
75
1
7
1
24
59 1
13
5
106
3
1
1
13
106
3
1
1
13
7
33
16
1
37
20
17
1
1
29
33
5
36
5
17
89
5
3
1
15
63
24
42 1
5
15
1
3
57
12
1
104
2
2
42
16
8
1
3
3
8
5
4
29
5
6
17
5
2
2
1
29
10
38 1
28
12
35 1
4
1
4
5
11
9
8
25
2
29
3
9
5
2
19
5
1
13
31
19
1
27
35
9
4
16
5
1 3
22
75
35
1
7
1
5
24
7
33
16
36
17
37
17
1
1
5
1
89
14
2
33
5
5
3
63
1
59 1
5
13
12
104
2
8
1
16
42 1
15
3
106
3
1
1
13
1
20
11
9
1
37
9
1
2
191
39
14
29
15
24
1
5
57
1
2
42
1
continued from page 9
integrated — to be more understandable as a brand, and to be
top of mind when consumers think about home furnishings.
Aaron’s® brings jobs and service to communities.
Aaron’s expects to open its 2,000th store in 2012, a
remarkable milestone which will be marked by a number of
promotions and events. In addition, the Company is investing
in HomeSmart, a weekly rental concept. HomeSmart is
designed to reach those customers who need the flexibility of
a weekly payment plan or who cannot successfully afford the
typical Aaron’s Sales & Lease Ownership monthly payment.
HomeSmart may prove an additional avenue of growth,
broadening the market of customers served by the Company
and bringing more jobs to more communities.
Aaron’s has consistently brought employment opportunities to
our communities, creating new jobs each year. The Company
now has over 11,200 associates, and a combination of
Company-operated and franchised stores in 48 states.
Aaron’s is committed to serving our communities. In 2011, for
the third year in a row, our national store managers devoted one
afternoon to community outreach projects benefiting military
service members, children and the community. In conjunction
with this day of service, more than 2,000 Aaron’s associates
invested 4,500 hours and $200,000 in product and service
donations. As part of the donation, the Company presented St.
Jude Children’s Research Hospital, the nation’s top children’s
cancer hospital, with a check for $81,200 from funds raised
during an associate campaign. Over the past three years of
community outreach projects, Aaron’s managers have invested
15,700 hours and over $1 million dollars in product and service
donations to surrounding communities.
Aaron’s® brings outstanding returns to investors.
At the end of 2011, the Company had $274.4 million in cash
and short-term investment securities and an unused line of
credit of $140 million. The Company repurchased 5.1 million
shares of stock in 2011 and has an authorization to acquire an
additional 5.3 million shares.
We are proud that Aaron’s has provided solid
investment returns to investors over the years.
We have paid cash dividends consistently for 24
years and raised the cash dividend rate by 15%
in 2011, the seventh consecutive year of dividend
increases. Our operating success is reflected in the
market value of the Company which increased
24% in 2011 and our stock price recently reached
an all-time high. These results wouldn’t be possible
without the loyalty of our customers, the hard work
of our associates, our many business partners, and
the support of our shareholders.
Aaron’s® brings it home … for 57 years and counting.
11
SELECTEd FINANCIAL INFORMATION
(Dollar Amounts in Thousands,
Except Per Share)
OpERATING RESULTS
Revenues:
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Year Ended
December 31,
2008
Year Ended
December 31,
2007
Lease Revenues and Fees
$1,516,508
$1,402,053
$1,310,709
$1,178,719
$1,045,804
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other
Costs and Expenses:
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Lawsuit Expense
Depreciation of Lease Merchandise
Interest
38,557
388,960
63,255
16,769
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
2,024,049
1,876,847
1,752,787
1,592,608
1,394,939
22,738
353,745
872,248
36,500
550,732
4,709
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
1,840,672
1,686,061
1,576,348
1,453,028
1,277,187
Earnings From Continuing Operations
Before Income Taxes
Income Taxes
Net Earnings From Continuing Operations
(Loss) Earnings From Discontinued Operations,
Net of Tax
Net Earnings
183,377
69,610
113,767
—
$ 113,767
Earnings Per Share From Continuing Operations
$ 1.46
190,786
72,410
118,376
176,439
63,561
112,878
139,580
53,811
85,769
117,752
44,327
73,425
—
(277)
$ 118,376
$ 1.46
$ 112,601
$ 1.39
4,420
$ 90,189
$ 1.07
6,850
$ 80,275
$ .90
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
Former Class A Common Stock
FINANCIAL pOSITION
Lease Merchandise, Net
Property, Plant and Equipment, Net
Total Assets
Credit Facilities
Shareholders’ Equity
AT YEAR ENd
Stores Open:
Company-Operated
Franchised
Lease Agreements in Effect
Number of Associates
12
1.43
.00
.00
.054
—
1.44
.00
.00
.049
.049
1.38
.00
(.01)
1.06
.06
.05
.89
.08
.08
.046
.043
.041
.046
.043
.041
$ 862,276
$ 814,484
$ 682,402
$ 681,086
$ 558,322
226,619
1,735,149
153,789
976,554
1,232
713
1,508,000
11,200
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
Earnings per share data has been adjusted for the effect of the 3-for-2 partial stock split distributed on April 15, 2010 and effective April 16, 2010.
MANAGEMENT’S dISCUSSION ANd ANALYSIS OF
FINANCIAL CONdITION ANd RESULTS OF OpERATIONS
OvERvIEW
Aaron’s, Inc. (“we”, “our”, “us”, “Aaron’s” or the “Company”)
is a leading specialty retailer of consumer electronics, computers,
residential furniture, household appliances and accessories. Our
major operating divisions are the Aaron’s Sales & Lease Ownership
division, the HomeSmart 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 $1.753 billion in
2009 to $2.024 billion in 2011, representing a compound annual
growth rate of 7.5%. Total revenues for the year ended December
31, 2011 increased $147.2 million, or 7.8%, 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 82
Company-operated sales and lease ownership stores in 2011. 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
merchandise, investments in leasehold improvements and financ-
ing 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
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 49 stores in 2011. We pur-
chased seven franchised stores during 2011. Franchise royalties and
other related fees represent a growing source of high margin rev-
enue for us, accounting for $63.3 million of revenues in 2011, up
from $52.9 million in 2009, representing a compounded annual
growth rate of 9.4%.
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 busi-
ness, 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 and 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 liabili-
ties for closed stores, write-off of leaseholds, severance pay, and other
costs associated with closing the stores. The Company did not incur
charges in 2011 related to closing down 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 our Common
Stock. New shares were distributed on April 15, 2010 to sharehold-
ers 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.
Dual Class Unification. In December 2010, the Company’s share-
holders approved the unification of our prior nonvoting Common
Stock and voting Class A Common Stock into a single class.
Effective December 10, 2010, the two classes were combined into a
single voting class now known simply as our Common Stock.
Same Store Revenues. We believe the changes in same store rev-
enues 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 NET 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 royalties and
fees, and other. Lease revenues and fees include all revenues derived
from lease agreements at Company-operated stores, including agree-
ments that result in our customers acquiring ownership at the end of
the term. Retail sales represent sales of both new and returned lease
merchandise from our stores. Non-retail sales mainly represent new
merchandise sales to our Aaron’s Sales & 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.
Retail Cost of Sales. Retail cost of sales represents the original
or depreciated cost of merchandise sold through our Company-
operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily repre-
sents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs,
selling costs, occupancy costs, and delivery, among other expenses.
Lawsuit Expense. Lawsuit expense consists of the cost of paying
legal judgments and settlement amounts; defense costs are included
in operating expenses.
13
MANAGEMENT’S dISCUSSION ANd ANALYSIS OF
FINANCIAL CONdITION ANd RESULTS OF OpERATIONS
Depreciation of Lease Merchandise. Depreciation of lease
merchandise reflects the expense associated with depreciating
merchandise held for lease and leased to customers by our
Company-operated stores.
CRITICAL ACCOUNTING pOLICIES
Revenue Recognition. Lease revenues are recognized in the month
they are due on the accrual basis of accounting. For internal manage-
ment reporting purposes, lease revenues from sales and lease owner-
ship agreements are recognized by the reportable segments 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 allow-
ances, 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 deprecia-
tion, associated with the lease merchandise. At December 31, 2011
and 2010, we had a revenue deferral representing cash collected in
advance of being due or otherwise earned totaling $43.9 million
and $39.5 million, respectively, and accrued revenue receivable, net
of allowance for doubtful accounts, based on historical collection
rates of $5.2 million and $4.9 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 Aaron’s Sales & Lease Ownership and
HomeSmart divisions depreciate merchandise over the applicable
agreement period, generally 12 to 24 months when leased, and 36
months when not leased, to 0% salvage value. Our Office Furniture
store depreciates merchandise 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 physical inventories are generally taken
at our fulfillment and manufacturing 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 carrying 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 account-
ing period. Lease merchandise adjustments totaled $46.2 million,
$46.5 million, and $38.3 million for the years ended December
31, 2011, 2010, and 2009, respectively. The fiscal year ended
December 31, 2010 includes a write-down of $4.7 million related
to the closure of the Aaron’s Office Furniture stores.
Leases and Closed Store Reserves. The majority of our Company-
operated stores are operated from leased facilities under operating
lease agreements. The majority of the leases are for periods that do
not exceed five years, although lease terms range in length up to
approximately 15 years. Leasehold improvements related to these
leases are generally amortized over periods that do not exceed the
lesser of the lease term or useful life. While some 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. Any incentive or
allowance amounts we receive are recognized ratably over the lease
term.
From time to time, we close or consolidate stores. Our primary
costs associated with closing stores are the future lease payments
and related commitments. We record an estimate of the future
obligation related to closed stores based upon the present value
of the future lease payments and related commitments, net of
estimated sublease income based upon historical experience. As of
December 31, 2011 and 2010, our reserve for closed stores was
$3.8 million and $6.4 million, respectively. Due to changes in the
market conditions, our estimates related to sublease income may
change and as a result, our actual liability may be more or less than
the liability recorded at December 31, 2011.
Insurance Programs. We maintain insurance contracts to fund
workers compensation, vehicle liability, general liability and group
health insurance claims. Using actuarial analysis and projections,
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 estimated liability for workers compen-
sation insurance claims, vehicle liability, general liability and group
health insurance was $28.5 million and $27.6 million at December
31, 2011 and 2010, respectively. In addition, we have prefunding
balances on deposit with the insurance carriers of $26.4 million and
$23.8 million at December 31, 2011 and 2010, 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, 2011.
The assumptions and conditions described above reflect manage-
ment’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 differ-
ent assumptions or if different conditions occur in future periods.
14
Legal Reserves. We are subject to various legal claims 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. We accrue
for litigation loss contingencies that are both probable and reasonably
estimable. Legal fees and expenses associated with the defense of all of
our litigation are expensed as such fees and expenses are incurred.
Income Taxes. The calculation of our income tax expense requires
significant judgment and the use of estimates. We periodically assess
tax positions based on current tax developments, including enacted
statutory, judicial and regulatory guidance. In analyzing our overall
tax position, consideration is given to the amount and timing of rec-
ognizing income tax liabilities and benefits. In applying the tax and
accounting guidance to the facts and circumstances, income tax bal-
ances 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 basis. 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.
Fair Value. For the valuation techniques used to determine the
fair value of our call option on our PerfectHome investment and
assets held for sale, refer to Note A and Note P in the Consolidated
Financial Statements.
RESULTS OF OpERATIONS
Year Ended December 31, 2011 Versus Year Ended
December 31, 2010
For the years ended December 31, 2011 and 2010, the Company’s
Sales and Lease Ownership, Franchise and HomeSmart segments
accounted for substantially all of the operations of the Company
and, therefore, unless otherwise noted only the material changes are
discussed within these three segments. The entire production of our
Manufacturing segment, consisting of our Woodhaven Furniture
Industries operation, is leased or sold through our stores, and con-
sequently that segment’s revenues and earnings before income taxes
are eliminated through the elimination of intersegment revenues and
intersegment profit.
(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
Lawsuit Expense
Depreciation of Lease Merchandise
Interest
Earnings Before Income Taxes
Income Taxes
Net Earnings
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Increase/(Decrease)
in Dollars to 2011
from 2010
% Increase/
(Decrease) to
2011 from 2010
$1,516,508
38,557
389,960
63,255
16,769
2,024,049
22,738
353,745
872,248
36,500
550,732
4,709
1,840,672
183,377
69,610
$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
$114,455
(1,999)
26,687
4,143
3,916
147,202
(275)
22,827
47,319
36,500
46,627
1,613
154,611
(7,409)
(2,800)
8.2%
(4.9)
7.4
7.0
30.5
7.8
(1.2)
6.9
5.7
—
9.2
52.1
9.2
(3.9)
(3.9)
$ 113,767
$ 118,376
$ (4,609)
(3.9)%
15
MANAGEMENT’S dISCUSSION ANd ANALYSIS OF
FINANCIAL CONdITION ANd RESULTS OF OpERATIONS
Revenues
The 7.8% increase in total revenues, to $2.024 billion in 2011
from $1.877 billion in 2010, was due mainly to a $135.2 million,
or 7.5%, increase in revenues from the Sales and Lease Ownership
segment, a $15.6 million increase in revenues from the HomeSmart
segment and a $4.1 million, or 7.0%, increase in revenues from the
Franchise segment.
Sales and Lease Ownership segment revenues increased due
to a 7.2% increase in lease revenues and fees and 7.4% increase
in non-retail sales (which mainly represents merchandise sold to
our franchisees). Lease revenues and fees within the Sales and
Lease Ownership segment increased due to a net addition of 78
Company-operated stores since the beginning of 2010 and a 4.4%
increase in same store revenues. Non-retail sales increased primarily
due to net additions of 116 franchised stores since the beginning
of 2010.
Franchise segment revenues increased due to a $4.0 million, or
8.4%, increase in royalty income from franchisees. Franchise roy-
alty income increased primarily due to the growth in the number
of franchised stores and a 1.3% increase in same store revenues of
existing franchised stores. The total number of franchised sales and
lease ownership stores at December 31, 2011 was 713, reflecting a
net addition of 116 stores since the beginning of 2010.
HomeSmart segment revenues increased to $15.6 million pri-
marily due to the growth in the number of HomeSmart stores to
71, all of which have been added since the beginning of 2010.
The $114.5 million increase in lease revenues and fees and
$26.7 million in non-retail sales was primarily attributable to our
Sales and Lease Ownership segment discussed above. The $4.1 mil-
lion increase in franchise royalties and fees was attributable to our
Franchise segment also discussed above.
The 4.9% decrease in retail sales, to $38.6 million in 2011 from
$40.6 million in the comparable period in 2010, was due primarily
to the closure of the majority of the Aaron’s Office Furniture stores
in 2010.
Other revenues increased 30.5% to $16.8 million in 2011 from
$12.9 million in 2010 due to a $1.1 million increase in gains from
the sales of stores and a $1.2 million increase in interest income
primarily from investment securities. Included in other revenues
in 2011 is a $3.0 million gain from the sales of 25 Sales and Lease
Ownership stores. Included in other revenues in 2010 is a $1.9
million gain on the sales of 11 Sales and Lease Ownership stores.
Costs and Expenses
Non-retail cost of sales increased 6.9%, to $353.7 million in 2011,
from $330.9 million for the comparable period in 2010, and as a
percentage of non-retail sales, decreased to 90.9% in 2011 from
91.3% in 2010.
Operating expenses in 2011 increased $47.3 million to $872.2
million from $824.9 million in 2010, a 5.7% increase. As a per-
centage of total revenues, operating expenses decreased to 43.1% in
2011 from 44.0% in 2010.
We began ceasing the operations of the Aaron’s Office
Furniture division in June of 2010. We closed 14 Aaron’s Office
16
Furniture stores during 2010 and have one remaining store open
to liquidate merchandise. As a result, in 2010 we recorded $3.3
million in closed store reserves and $4.7 million in lease merchan-
dise write-downs and other miscellaneous expenses, totaling $9.0
million in operating expenses, related to the closures. No operating
expenses related to the closure were recorded in 2011.
The Company recorded $36.5 million in lawsuit expense in
2011. There was no similar charge during 2010.
Depreciation of lease merchandise increased $46.6 million
to $550.7 million in 2011 from $504.1 million during the
comparable period in 2010, a 9.2% increase as a result of higher
on-rent lease merchandise due to the growth of our Sales and Lease
Ownership and HomeSmart segments. As a percentage of total
lease revenues and fees, depreciation of lease merchandise increased
slightly to 36.3% from 36.0% in the prior year.
Interest expense increased to $4.7 million in 2011 compared
with $3.1 million in 2010, a 52.1% decrease. The increase is
directly related to the issuance of our senior unsecured notes on
July 5, 2011.
Income tax expense decreased $2.8 million to $69.6 million in
2011, compared with $72.4 million in 2010, representing a 3.9%
decrease. Our effective tax rate was 38.0% in both 2011 and 2010.
Net Earnings from Continuing Operations
Net earnings decreased $4.6 million to $113.8 million in 2011 com-
pared with $118.4 million in 2010, representing a 3.9% decrease.
Earnings before income taxes decreased $7.4 million, or 3.9%,
primarily due to a $15.7 million, 9.9%, or, decrease in the Sales
and Lease Ownership segment and a $7.0 million decrease in the
HomeSmart segment, offset by a $3.6 million, or 7.9%, increase in
the Franchise segment. As a percentage of total revenues, net earn-
ings from continuing operations were 5.6% and 6.3% in 2011 and
2010, respectively. The decrease in net earnings was primarily the
result of the increase litigation expense, offset by an increase in prof-
itability 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 a 7.0% increase in franchise royalties and
fees.
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. For the years ended December 31, 2010 and 2009, the
Company’s Sales and Lease Ownership segment and the Franchise
segment accounted for substantially all of the operations of the
Company and, therefore, unless otherwise noted only the material
changes are discussed within these two segments. The entire produc-
tion of our Manufacturing segment, consisting of our Woodhaven
Furniture Industries operation, is leased or sold through our stores,
and consequently that segment’s revenues and earnings before
income taxes are eliminated through the elimination of intersegment
revenues and intersegment profit.
(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%
Revenues
The 7.1% increase in total revenues, to $1.877 billion in 2010 from
$1.753 billion in 2009, was due mainly to a $117.9 million or 7.0%,
increase in revenues from the Sales and Lease Ownership segment
and $6.2 million, or 11.7%, increase in revenues from the Franchise
segment.
Sales and Lease Ownership segment revenues increased due
to a 7.3% increase in lease revenues and fees and 10.4% increase
in non-retail sales (which mainly represents merchandise sold to
our franchisees). Lease revenues and fees within the Sales and
Lease Ownership segment increased due to a net addition of 112
Company-operated stores since the beginning of 2009 and a 3.5%
increase in same store revenues. Non-retail sales increased primarily
due to net additions of 160 franchised stores since the beginning
of 2009.
Franchise segment revenues increased due to a $5.6 million, or
13.2%, increase in royalty income from franchisees. Franchise roy-
alty income increased primarily due to the growth in the number
of franchised stores and the maturation of franchised stores opened
over the last few years.
The $91.3 million increase in lease revenues and fees revenues
and $34.3 million in non-retail sales was primarily attributable to
our Sales and Lease Ownership segment discussed above. The $6.2
million increase in franchise royalties and fees was attributable to
our Franchise segment also discussed above.
The 6.5% decrease in revenues from retail sales, to $40.6 mil-
lion in 2010 from $43.4 million in the comparable period in 2009,
was due primarily to the closure of the majority of the Aaron’s
Office Furniture stores in 2010.
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 11 stores. Included in other
revenues in 2009 is a $7.8 million gain on the sales of 39 stores.
Costs and Expenses
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
furniture 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
million from $771.6 million in 2009, a 6.9% increase. As a per-
centage of total revenues, operating expenses were 44.0% for both
the year ended December 31, 2010 and 2009.
17
MANAGEMENT’S dISCUSSION ANd ANALYSIS OF
FINANCIAL CONdITION ANd RESULTS OF OpERATIONS
We began ceasing the operations of the Aaron’s Office
Furniture segment in June of 2010. We closed 14 Aaron’s Office
Furniture stores during 2010 and had one remaining store open to
liquidate merchandise. As a result, in 2010 we recorded $3.3 mil-
lion in closed store reserves and $4.7 million in lease merchandise
write-downs and other miscellaneous expenses, totaling $9.0 mil-
lion 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 result of higher
on-rent lease merchandise due to the growth of our Sales and Lease
Ownership segment. Depreciation and amortization in the Other
segment decreased $2.2 million or 24.6% due to the closure of
Aaron’s Office Furniture stores in 2010. As a percentage of total
lease revenues and fees, depreciation of lease merchandise decreased
slightly to 36.0% in 2010 from 36.2% in the prior year.
Interest expense decreased to $3.1 million in 2010 compared
with $4.3 million in 2009, a 28.0% decrease. The decrease in
interest 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 the expiration of the 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. Earnings before income taxes from
continuing operations increased $14.3 million, or 8.1%, primarily
due to a $12.2 million, or 8.3%, increase in the Sales and Lease
Ownership segment and a $6.6 million, or 16.8%, increase in the
Franchise segment. 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 opera-
tions was primarily the result of the increase in profitability of new
Company-operated stores in our Sales and Lease Ownership segment
added over the past several years, contributing to a 3.5% increase in
same store revenues, and an 11.7% increase in franchise royalties
and fees.
Balance Sheet
18
Cash and Cash Equivalents. The Company’s cash balance increased
to $176.3 million at December 31, 2011 from $72.0 million at
December 31, 2010. The $104.2 million increase in our cash bal-
ance is due to cash flow generated from operations, less cash used by
investing and financing activities. For additional information, refer
to the “Liquidity and Capital Resources” section below.
Investment Securities. Our investment securities balance was $98.1
million at December 31, 2011 primarily as a result of purchases of
corporate bonds in 2011 and an investment in bonds issued by a
privately-held rent-to-own company based in the United Kingdom.
The securities are recorded at amortized cost in the consolidated
balance sheets and mature at various dates in the period April 2012
to December 2013. We did not hold any investment securities at
December 31, 2010.
Lease Merchandise, Net. The increase of $47.8 million in lease
merchandise, net of accumulated depreciation, to $862.3 million at
December 31, 2011 from $814.5 million at December 31, 2010, is
primarily the result of a net increase in lease merchandise of $24.9
million in the Sales and Lease Ownership segment and $25.9 million
in the HomeSmart segment.
Property, Plant and Equipment, Net. The increase of $21.7 mil-
lion in property, plant and equipment, net of accumulated deprecia-
tion, to $226.6 million at December 31, 2011 from $204.9 million
at December 31, 2010, is primarily due to $10.1 million in net
additions resulting from the growth of the HomeSmart segment and
$6.3 million in net additions from the growth of the Sales and Lease
Ownership segment.
Goodwill, Net. The $17.0 million increase in goodwill, to $219.3
million on December 31, 2011 from $202.4 million on December
31, 2010, is the result of a series of acquisitions of sales and lease
ownership businesses. During 2011, the Company acquired 38 Sales
and Lease Ownership stores with an aggregate purchase price of
$17.5 million. The Company acquired 47 stores that were converted
to HomeSmart with an aggregate purchase price of $23.9 million.
The principal tangible assets acquired consisted of lease merchandise,
vehicles and certain fixtures and equipment.
Prepaid Expenses and Other Assets. Prepaid expenses and other
assets decreased $73.8 million to $49.1 million at December 31,
2011 from $122.9 million at December 31, 2010, primarily as a
result of a decrease in prepaid income taxes primarily as a result of
the receipt of an $80.9 million income tax refund in February 2011.
Accounts Payable and Accrued Expenses. The increase of $20.1
million in accounts payable and accrued expenses, to $231.6 million
at December 31, 2011 from $211.5 million at December 31, 2010,
is primarily the result of fluctuations in the timing of payments.
Accrued Litigation Expense. Accrued litigation expense increased
$40.0 million to $41.7 million at December 31, 2011 from $1.7
million at December 31, 2010. In 2011 the Company accrued $41.5
million, which represents the judgment, as reduced, and associated
legal fees and expenses related to the Alford v. Aarons Rents, Inc. et al
case discussed in Item 3, “Legal Proceedings” of our Annual Report
on Form 10-K for the year ended December 31, 2011 filed with
the SEC and in Note F to our Consolidated Financial Statements.
Additional positive or negative developments in the lawsuit could
affect the assumptions, and therefore, the accrual. The Company has
also recorded insurance coverage receivable of $5 million in prepaid
expenses and other assets on the consolidated balance sheet as of
December 31, 2011
Deferred Income Taxes Payable. The increase of $59.5 million
in deferred income taxes payable to $287.0 million at December
31, 2011 from $227.5 million at December 31, 2010 is primarily
the result of bonus lease merchandise depreciation deductions for
tax purposes included in the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010.
Credit Facilities. The $112.0 million increase in the amounts we
owe under our credit facilities, to $153.8 million on December 31,
2011 from $41.8 million on December 31, 2010, reflects net bor-
rowings under our note purchase agreement during 2011 primarily
to fund purchases of lease merchandise, acquisitions, real estate,
investments, working capital and repurchases of our Common Stock,
offset by regularly schedule payments.
LIqUIdITY ANd CApITAL RESOURCES
General
Cash flows from continuing operations for the year ended December
31, 2011, 2010 and 2009 were $307.2 million, $49.3 million and
$193.7 million, respectively, due to increases in cash flows from
operating activities. The $257.9 million increase in cash flows from
operating activities is primarily related to lower 2011 tax payments,
tax refunds and income from operations.
Purchases of sales and lease ownership stores had a positive
impact on operating cash flows in each period presented. The
positive impact on operating cash flows from purchasing stores
occurs as the result of lease merchandise, other assets and intan-
gibles 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 of Aaron’s Sales & Lease
Ownership stores and shown under investing activities was $6.1
million in 2011, $6.5 million in 2010 and $9.5 million in 2009.
Sales of Sales and Lease Ownership stores are an additional source
of investing cash flows in each period presented. Proceeds from
such sales were $16.5 million in 2011, $8.0 million in 2010 and
$32.0 million in 2009. The amount of lease merchandise sold in
these sales and shown under investing activities was $8.9 million
in 2011, $4.5 million in 2010 and $16.3 million in 2009. The
amount of HomeSmart merchandise purchased in acquisitions
of sales and lease ownership stores and shown under investing
activities was $7.3 million in 2011. There were no purchases of
HomeSmart stores in 2010 and 2009 and no sales activity in 2011,
2010 or 2009.
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, expenditures for
acquisitions and income tax payments. 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, 2011, there was no outstanding balance under our
revolving credit agreement. The credit facilities balance increased
by $112.0 million in 2011 primarily as a result of the addition of
senior unsecured notes in July 2011 and was offset by $12.0 million
in payments during the period for previously outstanding debt. Our
revolving credit facility expires May 23, 2013 and the total available
credit under the facility is $140.0 million.
We have $12.0 million currently outstanding in aggregate prin-
cipal amount of 5.03%, senior unsecured notes due July 2012.
On July 5, 2011, the Company entered into a note purchase
agreement with several insurance companies. Pursuant to this
agreement, the Company and its subsidiary, Aaron Investment
Company, as co-obligors issued $125.0 million in senior unsecured
notes to the purchasers in a private placement. The notes bear
interest at the rate of 3.75% per year and mature on April 27,
2018. Payments of interest are due quarterly, commencing July 27,
2011, with principal payments of $25.0 million each due annually
commencing April 27, 2014.
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,
2011 and believe that we will continue to be in compliance in
the future.
We purchase our stock in the market from time to time as
authorized by our board of directors. In May 2011, the Board of
Directors approved and authorized the repurchase of an additional
5,955,204 shares of Common Stock over the previously authorized
repurchase amount of 4,044,796 shares, increasing the total num-
ber of our shares of Common Stock authorized for repurchase to
10,000,000. We repurchased 5,075,675 shares of Common Stock 19
MANAGEMENT’S dISCUSSION ANd ANALYSIS OF
FINANCIAL CONdITION ANd RESULTS OF OpERATIONS
during 2011 at a total purchase price of $127.2 million and have
authority to purchase 5,281,344 additional shares. The repurchases
in 2011 increased the diluted earnings per share by $.04.
We have a consistent history of paying dividends, having paid
dividends for 24 consecutive years. A $.0113 per share dividend
on our common shares 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 our common shares was paid in January
2010, April 2010, July 2010, and October 2010 for a total cash
outlay of $3.9 million. Our board of directors increased the divi-
dend 8.3% for the fourth quarter of 2010 on November 3, 2010 to
$.013 per share and the dividend was paid to holders of Common
Stock in January 2011. A $.013 per share dividend on Common
Stock was paid in April 2011, July 2011 and October 2011 for a
total cash outlay of $3.1 million. Our board of directors increased
the dividend 15.4% for the fourth quarter of 2011 on November
1, 2011 to $.015 per share and the dividend was paid to holders
of Common Stock in January 2012. Subject to sufficient operating
profits, any future capital needs and other contingencies, we cur-
rently 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 opera-
tions, 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 12 and 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 expe-
rience disruptions, 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 twelve months ended December 31,
2011, we made $11.0 million in income tax payments. Within the
next twelve months, we anticipate that we will make cash payments
for federal and state income taxes of approximately $141.0 million.
In September 2010 the Small Business Jobs Act of 2010 was enacted
and in December 2010, the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 was enacted. As a
result of the bonus depreciation provisions in these acts, in 2010 we
made estimated payments greater than our anticipated 2010 federal
tax liability. We filed for a refund of overpaid federal tax of approxi-
mately $80.9 million 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
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 deduc-
tion 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 having a
lower cash tax obligation which, in turn, provided additional cash
flow from operations. Because of our sales and lease ownership
model where the Company 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 2011
and prior periods. We estimate that at December 31, 2011 the
remaining tax deferral associated with the acts described above is
approximately $240.0 million, of which approximately 70% will
reverse in 2012 and most of the remainder will reverse between
2013 and 2014.
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, 2011 are shown in the below table under
“Contractual Obligations and Commitments.”
We have 20 capital leases, 19 of which are with a limited liabil-
ity company (“LLC”) whose managers and owners are 10 officers
and one former officer of the Company of which there are seven
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 ten of these related party leases relate to properties pur-
chased 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 operating 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.
20
Franchise Loan Guaranty. We have guaranteed the borrowings
of certain independent franchisees under a franchise loan program
with several banks and we also guarantee franchisee borrowings
under certain other debt facilities. On May 18, 2011, we entered
into a second amendment to our second amended and restated loan
facility and guaranty, dated June 18, 2010, as amended, and on July
1, 2011, we entered into a third amendment. The amendments to
the franchisee loan facility extended the maturity date until May 16,
2012, increased the maximum Canadian subfacility commitment
amount for loans to franchisees that operate stores in Canada (other
than in the Province of Quebec) from Cdn $25.0 million to Cdn
$35.0 million, and added the defined terms “Institutional Investor”
and “Private Placement Debt” to further clarify the circumstances
under which we may incur indebtedness and still remain in compli-
ance with applicable negative covenants, modified the negative
covenant restricting debt applicable to us by, among other things,
increasing the amount of indebtedness we may incur with respect to
certain privately placed debt from an aggregate principal amount of
up to $60.0 million to an aggregate principal amount of up to $150
million, replaced the pricing grid schedule to the franchisee loan
facility to reduce the applicable margins and participant unused com-
mitment fee percentages with respect to the funded participations,
and permitted the issuance of our 3.75% unsecured senior notes
issued to several insurance companies as described above under the
heading “Liquidity and Capital Resources—General.” We remain
subject to the financial covenants under the franchisee loan facility.
At December 31, 2011, the portion that we might be obligated
to repay in the event franchisees defaulted was $128.8 million. Of
this amount, approximately $108.5 million represents franchise
borrowings outstanding under the franchisee loan program and
approximately $20.3 million represents franchisee borrowings that
we guarantee under other debt facilities. However, due to fran-
chisee 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 were recognized as the guarantee obligation
is satisfied.
Legal Reserves. We are frequently a party to various legal proceed-
ings 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. We accrue for litigation loss contingencies that are both
probable and reasonably estimable. Legal fees and expenses associated
with the defense of all of our litigation are expensed as such fees and
expenses are incurred. Some of the proceedings we are currently a
party to are described in Item 3, “Legal Proceedings” of our Annual
Report on Form 10-K for the year ended December 31, 2011
filed with the SEC and in Note F to our Consolidated Financial
Statements.
Accrued litigation expense increased $40.0 million to $41.7
million at December 31, 2011 from $1.7 million at December 31,
2010, substantially due to the Alford v. Aarons Rents, Inc. et al.
case discussed in Item 3 of our Annual Report on Form 10-K for
the year ended December 31, 2011 filed with the SEC and in
Note F to our Consolidated Financial Statements.
While we do not presently believe that any of the legal proceed-
ings to which we are currently a party will ultimately have a mate-
rial adverse impact upon our business, financial position or results
of operations, there can be no assurance that we will prevail in all
the proceedings we are party to, or that we will not incur material
losses from them.
Contractual Obligations and Commitments. 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, 2011:
Contractual Obligations
and Commitments
(In Thousands)
Credit Facilities, Excluding Capital Leases
Capital Leases
Operating Leases
Purchase Obligations
Total
Amounts
Committed
$173,703
16,359
532,810
38,998
Period Less
Than 1 Year
$ 17,228
2,030
100,906
19,761
Period 1–3
Years
Period 3–5
Years
Period Over
5 Years
$ 34,475
$ 62,625
$ 59,375
4,244
160,296
19,237
4,276
96,983
—
5,809
174,625
—
Total Contractual Cash Obligations
$761,870
$139,925
$218,252
$163,884
$239,809
The following table shows the Company’s approximate commercial commitments as of December 31, 2011:
(In Thousands)
Guaranteed Borrowings of Franchisees
Total
Amounts
Committed
$128,761
Period Less
Than 1 Year
$128,222
Period 1–3
Years
Period 3–5
Years
Period Over
5 Years
$ 539
$ —
$ — 21
MANAGEMENT’S dISCUSSION ANd ANALYSIS OF
FINANCIAL CONdITION ANd RESULTS OF OpERATIONS
Purchase obligations are primarily related to certain advertising and
marketing programs. 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, 2011 were
approximately $287.0 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
In May 2011, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2011-4,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-4”).
ASU 2011-4 is intended to improve the comparability of fair value
measurements presented and disclosed in financial statements
prepared in accordance with U.S. Generally Accepted Accounting
Principles and International Financial Reporting Standards. The
amendments are of two types: (i) those that clarify the FASB’s intent
about the application of existing fair value measurement and disclo-
sure requirements and (ii) those that change a particular principle or
requirement for measuring fair value or for disclosing information
about fair value measurements. ASU 2011-4 is effective for annual
periods beginning after December 15, 2011.
qUANTITATIvE ANd qUALITATIvE dISCLOSURES
ABOUT MARKET RISK
As of December 31, 2011, we had $12.0 million and $125.0
million of senior unsecured notes outstanding at a fixed rate of
5.03% and 3.75%, respectively. We had no balance outstand-
ing 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, 2011, a hypotheti-
cal 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.
22
CONSOLIdATEd BALANCE SHEETS
(In Thousands, Except Share Data)
ASSETS:
Cash and Cash Equivalents
Investment Securities
Accounts Receivable (net of allowances of
$4,768 in 2011 and $4,544 in 2010)
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
Accrued Litigation Expense
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 Shares at
December 31, 2011 and 2010
Shares Issued: 90,752,123 at
December 31, 2011 and 2010
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Less: Treasury Shares at Cost,
Common Stock, 15,111,635 and 10,664,728 Shares
at December 31, 2011 and 2010, respectively
Total Shareholders’ Equity
Total Liabilities & Shareholders’ Equity
December 31,
2011
December 31,
2010
$ 176,257
$ 72,022
98,132
—
87,471
1,363,903
(501,627)
862,276
226,619
219,342
6,066
49,101
9,885
69,662
1,280,457
(465,973)
814,484
204,912
202,379
3,832
122,932
11,849
$1,735,149
$1,502,072
$ 231,553
$ 211,462
41,720
286,962
44,571
153,789
758,595
45,376
212,311
918,699
274
1,677
227,513
40,213
41,790
522,655
45,376
201,752
809,084
846
1,176,660
1,057,058
(200,106)
976,554
(77,641)
979,417
$1,735,149
$1,502,072
The accompanying notes are an integral part of the Consolidated Financial Statements.
23
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
Lawsuit Expense
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
Earnings Per Share From
Continuing Operations
Earnings Per Share From Continuing
Operations Assuming Dilution
Earnings Per Share From
Discontinued Operations
Loss Per Share From Discontinued
Operations Assuming Dilution
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Year Ended
December 31,
2009
$1,516,508
$1,402,053
$1,310,709
38,557
388,960
63,255
16,769
40,556
362,273
59,112
12,853
43,394
327,999
52,941
17,744
2,024,049
1,876,847
1,752,787
22,738
353,745
872,248
36,500
550,732
4,709
23,013
330,918
824,929
—
504,105
3,096
25,730
299,727
771,634
—
474,958
4,299
1,840,672
1,686,061
1,576,348
183,377
69,610
190,786
72,410
176,439
63,561
113,767
118,376
112,878
—
—
(277)
$ 113,767
$ 118,376
$ 112,601
$ 1.46
$ 1.46
$ 1.39
1.43
.00
.00
1.44
.00
.00
1.38
.00
(.01)
The accompanying notes are an integral part of the Consolidated Financial Statements.
24
CONSOLIdATEd STATEMENTS OF SHAREHOLdERS’ EqUITY
(In Thousands, Except Per Share)
BALANCE, JANUARY 1, 2009
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
Dividends, $.054 per share
Stock-Based Compensation
Reissued Shares
Repurchased Shares
Stock Recombination
Net Earnings
Reclassification Into Earnings of
Available for Sale Securities, net
of Taxes of $54
Foreign Currency Translation Adjustment,
net of Income Taxes of $187
Comprehensive Income
BALANCE, dECEMBER 31, 2011
Treasury Stock
Shares
Amount
Common
Stock
Additional
Paid-In
Capital
Accumulated Other
Comprehensive
(Loss) Income
Foreign
Retained Comprehensive Currency Marketable
Translation Securities
Earnings
Income
(10,280) $ (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
737
7,493
(5,184)
(129,958)
(4,152)
8,385
2,174
113,767 113,767
(15,112) $(200,106)
$45,376
$212,311
$918,699
$ 274
$ —
88
(304)
(304)
$113,463
The accompanying notes are an integral part of the Consolidated Financial Statements.
25
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
Bad Debt Expense
Loss on Sale of Property, Plant, and Equipment
Gain on Dispositions of Business and Contracts
Change in Income Tax Receivable
Change in Accounts Payable and Accrued Expenses
Change in Accrued Litigation Expense
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
Purchase of Investment Securities
Proceeds from Calls of Investment Securities
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
Cash Used by Discontinued Operations
Increase (Decrease) 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:
26
Interest
Income Taxes
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Year Ended
December 31,
2009
$ 113,767
550,732
52,832
(1,024,602)
430,540
59,449
25,402
1,172
(3,045)
79,762
20,916
40,043
(43,211)
(1,264)
(6,348)
4,358
8,385
(1,693)
307,195
(78,211)
(32,176)
(100,513)
1,063
7,282
11,481
(191,074)
129,150
(17,151)
(4,073)
1,264
(127,193)
6,117
(11,886)
$ 118,376
504,105
45,427
(1,034,474)
400,304
63,843
23,988
2,441
(1,917)
(82,378)
33,969
1,352
(27,555)
(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)
$ 112,878
474,958
44,413
(847,094)
363,975
15,032
20,469
1,136
(7,826)
28,443
2,410
(396)
(27,051)
(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)
—
—
104,235
72,022
$ 176,257
—
—
(37,663)
109,685
$ 72,022
(277)
(277)
102,309
7,376
$ 109,685
$ 3,983
10,991
$ 3,203
94,793
$ 4,591
15,286
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
a
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING pOLICIES
As of December 31, 2011 and 2010, and for the Years Ended
December 31, 2011, 2010 and 2009.
Basis of Presentation — The consolidated financial statements
include the accounts of Aaron’s, Inc. and its wholly owned subsidiar-
ies (the “Company” or “Aaron’s”). 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, such 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 autho-
rized shares to be 225,000,000 total shares of Common Stock
(the aggregate of the number of authorized 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 divi-
dends 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.
Certain reclassifications have been made to the prior periods
to conform to the current period presentation. In all periods
presented, the HomeSmart division was reclassified from the Other
segment to the HomeSmart segment. Refer to Note K for the
segment disclosure. In all periods presented, bad debt expense was
reclassified from change in accounts receivable to a separate bad
debt expense line on the consolidated statements of cash flows.
Line of Business — The Company is a specialty retailer engaged in
the business of leasing and selling residential furniture, consumer
electronics, appliances, computers, and other merchandise through-
out the U.S. and Canada. The Company’s entire production of
furniture and bedding is shipped to Aaron’s Company-operated and
franchise 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 stores depreciate
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. Aaron’s Office Furniture store depreciates merchandise
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 store
managers, which include write-offs for unsalable, damaged, or miss-
ing merchandise inventories. Full physical inventories are generally
taken at the fulfillment and manufacturing facilities two to four
27
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
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 writ-
ten off. The Company records lease merchandise adjustments on
the allowance method. Lease merchandise write-offs totaled $46.2
million, $46.5 million, and $38.3 million during the years ended
December 31, 2011, 2010 and 2009, respectively, and are included
in operating expenses in the accompanying consolidated statements
of earnings. Included in 2010 is a write-down of $4.7 million
related to the closure of stores of the Aaron’s Office Furniture divi-
sion.
Disposal Activities — The Company began ceasing the opera-
tions of the Aaron’s Office Furniture division in June of 2010. The
Company closed 14 of its Aaron’s Office Furniture stores during
2010 and has one remaining store open to liquidate merchandise.
As a result, in 2010 the Company recorded $3.3 million in closed
store reserves, $4.7 million in lease merchandise write-downs and
other miscellaneous expenses, respectively, totaling $9.0 million. The
charges were recorded within operating expenses on the consolidated
statement of earnings and are included in the Other segment cat-
egory. There were no charges related to the closure of this division
in 2011.
Cash and Cash Equivalents — The Company classifies as cash
highly liquid investments with maturity dates of less than three
months when purchased.
Information pertaining to held to maturity securities with gross unre-
alized losses at December 31, 2011 are as follows. All of the securities
have been in a continuous loss position for less than 12 months.
(In Thousands)
Corporate Bonds
Gross
Fair Value
Unrealized
Losses
$72,315
$(664)
The Company evaluates securities for other-than-temporary
impairment on a quarterly basis, and more frequently when eco-
nomic or market concerns warrant such evaluation. Consideration
is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer and (3) the intent and ability of
the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value.
The Company does not intend to sell the securities and it is not
more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost bases.
The unrealized losses at December 31, 2011 relate principally to
the increases in short-term market interest rates that occurred since
the securities were purchased and 38 of the 44 securities are in an
unrealized loss position as of December 31, 2011. The fair value is
expected to recover as the securities approach their maturity or if
market yields for such investments decline. In analyzing an issuer’s
financial condition, management considers whether downgrades by
bond rating agencies have occurred. The Company has the intent
and ability to hold the investment securities until their amortized
cost basis is recovered on the maturity date. As a result of manage-
ment’s analysis and review, no declines are deemed to be other
than temporary.
Investment Securities — The amortized cost, gross unrealized gains
and losses, and fair value of investment securities held to maturity
at December 31, 2011 are as follows. The securities are recorded at
amortized cost in the consolidated balance sheets and mature at vari-
ous dates during 2012 and 2013. There were no investment securi-
ties held by the Company at December 31, 2010.
Accounts Receivable — The Company maintains an allowance 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
(In Thousands)
Corporate Bonds
Perfect Home Bonds
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
$82,243
15,889
$98,132
$15
—
$15
$(664) $81,594
15,889
$(664) $97,483
—
doubtful accounts as of December 31:
(In Thousands)
2011
2010
2009
Beginning Balance
Accounts written off
Bad debt expense
Ending Balance
$ 4,544
(25,178)
25,402
$ 4,768
$ 4,157
(23,601)
23,988
$ 4,544
$ 4,040
(20,352)
20,469
$ 4,157
The amortized cost and fair value of held to maturity securities at
December 31, 2011, by contractual maturity are as follows:
(In Thousands)
Amortized Cost
Fair Value
Due in one year or less
Due in years one through two
Ending Balance
28
$60,403
37,729
$98,132
$60,093
37,390
$97,483
Property, Plant and Equipment — The Company records prop-
erty, plant and equipment at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful
lives of the respective assets, which are from five to 40 years for
buildings and improvements and from one to fifteen years for
other depreciable property and equipment. Gains and losses
related to dispositions and retirements are recognized as incurred.
Maintenance 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 property, plant and equipment was $45.2 million,
$41.4 million and $40.7 million during the years ended December
31, 2011, 2010 and 2009, respectively.
Assets Held for Sale — Certain properties, primarily consisting
of parcels of land, met the held for sale classification criteria at
December 31, 2011 and 2010. After adjustment to fair value, the
$9.9 million and $11.8 million carrying value of these properties
has been classified as assets held for sale in the consolidated bal-
ance sheets as of December 31, 2011 and 2010, respectively. The
Company estimated the fair values of these properties using 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 with Indefinite
Lives — Goodwill and intangibles with indefinite lives represent the
excess of the purchase price paid over the fair value of the identifi-
able net tangible and intangible assets acquired in connection with
business acquisitions. Impairment occurs when the carrying value
of goodwill and intangibles with indefinite lives is not recoverable
from future cash flows. The Company performs an assessment of
goodwill and intangibles with indefinite lives for impairment at the
reporting unit level annually as of September 30, or when events or
circumstances indicate that impairment may have occurred. Factors
which could necessitate an interim impairment assessment include
a sustained decline in the Company’s stock price, prolonged nega-
tive industry or economic trends and significant underperformance
relative to expected historical or projected future operating results.
The Company tests goodwill and intangibles with indefinite lives at
the operating segment level as operations (stores) included in each
operating segment have similar economic characteristics.
Fair value of reporting units used in the goodwill and intan-
gibles with indefinite lives impairment test is determined based on
either a multiple of gross revenue or other appropriate fair value
methods. If the carrying value of the reporting unit exceeds the
fair value, a second analysis is performed to measure the fair value
of all assets and liabilities. If, based on the second analysis, it is
determined that the fair value of the assets and liabilities is less than
the carrying value, an impairment charge in an amount equal to
the excess of the carrying value over fair value would be recognized.
During the performance of the annual assessment of goodwill
and intangibles with indefinite useful lives for impairment in the
2011, 2010 and 2009 fiscal years, the Company did not identify
any reporting units which had estimated fair values that were
not substantially in excess of their carrying values other than the
HomeSmart division for which locations were recently acquired.
Other Intangibles — Other intangibles represent the value of
customer relationships acquired in connection with business acquisi-
tions, acquired franchise development rights and non-compete agree-
ments, recorded at fair value as determined by the Company. As of
December 31, 2011 and 2010, the net intangibles other than good-
will were $4.0 million and $3.8 million, respectively for the Sales
and Lease Ownership segment, and $2.0 million for the HomeSmart
segment at December 31, 2011. The customer relationship intan-
gible is amortized on a straight-line basis over a two-year useful life.
Acquired franchise development rights are amortized over the unex-
pired life of the franchisee’s ten year area development agreement.
The non-compete intangible is amortized on a straight-line basis over
a three-year useful life. Amortization expense of intangibles for the
Sales and Lease Ownership segment, included in operating expenses
in the accompanying consolidated statements of earnings, was $2.0
million, $3.1 million and $3.8 million during the years ended
December 31, 2011, 2010 and 2009, respectively. Amortization
expense of intangibles for the HomeSmart segment, included in
operating expenses in the accompanying consolidated statements of
earnings, was $312,000 during the year ended December 31, 2011.
The following is a summary of the Company’s goodwill in its
Sales and Lease Ownership segment at December 31:
(In Thousands)
Beginning Balance
Additions
Disposals
Ending Balance
2011
2010
$202,379
5,468
(2,338)
$205,509
$194,376
9,240
(1,237)
$202,379
The following is a summary of the Company’s goodwill in its
HomeSmart segment at December 31:
(In Thousands)
Beginning Balance
Additions
Disposals
Ending Balance
2011
$ —
13,833
—
$ 13,833
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 values of the assets are not recoverable,
the Company compares the carrying values of the assets to their fair
values as estimated using discounted expected future cash flows,
market values or replacement values for similar assets. The amount
by which the carrying value exceeds the fair value of the asset is
recognized as an impairment loss.
The Company also recorded impairment charges of $453,000
and $879,000 within operating expenses in 2011 and 2010,
respectively, both of which related primarily to the impairment
of various land outparcels and buildings included in its Sales and
Lease Ownership segment that the Company decided not to utilize
for future expansion. The assets held for sale are included in the
Other segment.
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
29
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
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.
Derivative Financial Instruments — The Company utilizes deriva-
tive financial instruments to mitigate its exposure to certain market
risks associated with its ongoing operations for a portion of the year.
The primary 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 derivative financial instruments. The counterparties to these con-
tracts 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
the changes in their fair values in 2011 and 2010 were immaterial.
The Company did not hold any derivative financial instruments as of
December 31, 2011.
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.
At December 31, 2011 and 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.
Deferred Income Taxes — Deferred income taxes represent primar-
ily temporary differences between the amounts of assets and liabilities
for financial and tax reporting purposes. The Company’s largest
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 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.
Retail and Non-Retail 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 accompanying
consolidated statements of earnings, and these costs totaled $68.1
million in 2011, $60.6 million in 2010 and $55.0 million in 2009.
Advertising — The Company expenses advertising costs as incurred.
Advertising costs are recorded as expenses the first time an adver-
tisement appears. Such costs aggregated to $38.9 million in 2011,
$31.7 million in 2010 and $31.0 million in 2009. These advertising
expenses are shown net of cooperative advertising considerations
received from vendors, substantially all of which represents reim-
bursement of specific, identifiable and incremental costs incurred in
selling those vendors’ products. The amount of cooperative adver-
tising consideration netted against advertising expense was $25.4
million in 2011, $27.2 million in 2010 and $23.4 million in 2009.
The prepaid advertising asset was $1.6 million and $3.2 million at
December 31, 2011 and 2010, 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,
Stock Compensation. The fair value of each share of restricted stock
awarded was equal to the market value of a share of the Company’s
Common Stock on the grant date.
Insurance Reserves — Estimated insurance reserves are accrued
primarily for group health, general liability, automobile liability and
workers compensation benefits provided to the Company’s employ-
ees. 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, 2011,
2010 and 2009, comprehensive income totaled $113.2 million,
$119.3 million and $113.9 million, respectively.
Foreign Currency Translation — Assets and liabilities denomi-
nated 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.
30
b
NOTE B: EARNINGS
pER SHARE
Earnings per share is computed by dividing net earnings by the
weighted average number of shares of Common Stock outstanding
during the period. The computation of earnings per share assuming
dilution includes the dilutive effect of stock options, restricted stock
units (“RSUs”) and restricted stock awards (“RSAs”). Stock options
had the effect of increasing the weighted average shares outstanding
assuming dilution by approximately 998,000 in 2011, 745,000 in
2010, and 663,000 in 2009. RSUs had the effect of increasing the
weighted average shares outstanding assuming dilution by approxi-
mately 236,000, and 25,000 for the years ending 2011, and 2010,
respectively. There were no RSUs that had the effect of increasing
the weighted average shares outstanding assuming dilution for the
year ended December 31, 2009. RSAs had the effect of increasing
the weighted average shares outstanding assuming dilution by 3,000
in 2011, 138,000 in 2010 and 150,000 in 2009.
There were no anti-dilutive stock options excluded from the
computation of earnings per share assuming dilution for the twelve
months ended December 31, 2011. Anti-dilutive stock options
excluded from the computation of earnings per share assuming
dilution were 314,000 and 470,000 for the twelve months ended
December 31, 2010 and 2009, respectively. Anti-dilutive RSUs
and RSAs excluded from the computation of earnings per share
assuming dilution were 298,000, 275,000 and 45,000 in 2011,
2010 and 2009, respectively.
c
NOTE C: 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
2011
2010
$ 25,882
81,566
116,632
133,615
$ 25,067
74,216
100,031
109,458
7,641
10,564
5,444
381,344
8,501
10,564
9,485
337,322
(154,725)
$226,619
(132,410)
$204,912
Amortization expense on assets recorded under capital leases is
included in operating expenses and was $1.2 million, $1.9 million
and $1.2 million in 2011, 2010 and 2009, respectively. Capital
leases consist of buildings and improvements. Assets under capital
leases with related parties included $4.2 million and $4.0 million
in accumulated depreciation and amortization as of December
31, 2011 and 2010, respectively. Assets under capital leases with
unrelated parties included $3.8 million and $3.2 million in accu-
mulated depreciation and amortization as of December 31, 2011
and 2010, respectively.
d
NOTE d: 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
2011
2010
$137,000
$24,000
6,730
6,809
3,250
$153,789
7,279
7,208
3,303
$41,790
Bank Debt — On May 18, 2011, the Company entered into the
second amendment to its revolving credit agreement, dated May
23, 2008, as amended, and on July 1, 2011, the Company entered
into a third amendment. The amendments to the revolving credit
agreement (i) add the defined terms “Institutional Investor” and
“Private Placement Debt” to further clarify the circumstances under
which the Company may incur indebtedness and still remain in
compliance with applicable negative covenants and (ii) modified
the negative covenant restricting debt applicable to the Company
by, among other things, increasing the amount of indebtedness the
Company may incur with respect to certain privately placed debt
from an aggregate principal amount of up to $60.0 million to an
aggregate principal amount of up to $150.0 million. The Company
entered into the amendments in order to permit the issuance of the
3.75% unsecured senior notes issued to a consortium of insurance
companies as described below.
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 work-
ing capital line is based upon overnight bank borrowing rates. At
December 31, 2011 and 2010, 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 inter-
est rate on borrowings under the revolving credit agreement was
0.97% in 2011, 0.97% in 2010 and 1.23% in 2009. The revolving
credit agreement expires May 23, 2013.
The revolving credit agreement contains financial covenants
which, among other things, prohibit the Company from exceeding
31
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
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, 2011, $140.1 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 5, 2011, the Company entered
into a note purchase agreement with several insurance companies.
Pursuant to this agreement, the Company and its subsidiary, Aaron
Investment Company, as co-obligors issued $125.0 million in senior
unsecured notes to the purchasers in a private placement. The notes
bear interest at the rate of 3.75% per year and mature on April 27,
2018. Payments of interest are due quarterly, commencing July 27,
2011, with principal payments of $25.0 million each due annually
commencing April 27, 2014. The new note purchase agreement con-
tains financial maintenance covenants, negative covenants regarding
the Company’s other indebtedness, its guarantees and investments,
and other customary covenants substantially similar to the covenants
in the Company’s existing note purchase agreement, revolving credit
facility and franchisee loan and guaranty facility, as modified.
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 inter-
est for the five years thereafter. The related note purchase agree-
ment contains financial maintenance covenants, negative covenants
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
December 31, 2011 and 2010, there was $12.0 million and $24.0
million outstanding under the July 2005 senior unsecured notes,
respectively.
Capital Leases with Related Parties — In October and November
2004, the Company sold 11 properties, including leasehold improve-
ments, 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 consolidated financial statements. The rate of
interest implicit in the leases is approximately 9.7%. 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.
In December 2002, the Company sold ten properties, including
leasehold improvements, to the LLC. The LLC obtained borrow-
ings collateralized by the land and buildings totaling $5.0 million.
32
The Company occupies the land and buildings collateralizing the
borrowings 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 state-
ments. The rate of interest implicit in the leases is approximately
11.1%. Accordingly, the land and buildings, associated deprecia-
tion 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, 2011 and 2010 includes
$3.3 million of industrial development corporation revenue bonds.
The weighted-average borrowing rate on these bonds in 2011 was
0.38%. 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)
2012
2013
2014
2015
2016
Thereafter
$ 19,258
6,886
31,833
35,145
31,756
65,184
$190,062
e
NOTE E:
INCOME TAxES
Following is a summary of the Company’s income tax expense for
the years ended December 31:
(In Thousands)
2011
2010
2009
Current Income Tax Expense:
Federal
State
$ —
9,797
9,797
Deferred Income Tax Expense (Benefit):
62,015
(2,202)
59,813
$69,610
Federal
State
$ —
8,932
8,932
$40,697
7,832
48,529
64,679
(1,201)
63,478
$72,410
15,169
(137)
15,032
$63,561
At December 31, 2011, the Company had a federal net operat-
ing loss (“NOL”) carryforward of approximately $31.2 million
available to offset future taxable income. The NOLs expire in 2030
and 2031 and 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 NOLs to offset future taxable income
and does not anticipate that the utilization will be impacted by the
applicable limitations.
As a result of the bonus depreciation provisions in the 2010
tax acts the Company paid more than it’s 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 $80.9 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:
(In Thousands)
2011
2010
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
$329,497
29,607
359,104
$248,775
24,777
273,552
33,826
16,432
10,936
11,760
72,954
(812)
$286,962
15,859
15,231
6,423
9,386
46,899
(860)
$227,513
The Company’s effective tax rate differs from the statutory
United States Federal income tax rate for the years ended
December 31 as follows:
Statutory Rate
Increases (Decreases) in
United States Federal Taxes
Resulting From:
State Income Taxes, Net of
Federal Income Tax Benefit
Other, Net
Effective Tax Rate
2011
2010
2009
35.0%
35.0%
35.0%
2.7
0.3
38.0%
2.7
0.3
38.0%
2.8
(1.8)
36.0%
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 2008. The lower effective tax 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)
2011
2010
2009
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,
22
(13)
(90)
—
$1,412
$1,315
$1,342
$3,110
178
149
172
18
(26)
(63)
(105)
$1,315
523
(46)
(2,231)
(186)
$1,342
As of December 31, 2011 and 2010, the amount of uncertain
tax benefits that, if recognized, would affect the effective tax rate is
$1.2 million and $1.3 million, respectively, including interest and
penalties. During the years ended December 31, 2011, 2010 and
2009, the Company recognized interest and penalties of $41,000,
$35,000, and $276,000, respectively. The Company had $374,000
and $332,000 of accrued interest and penalties at December 31,
2011 and 2010, respectively. The Company recognizes potential
interest and penalties related to uncertain tax benefits as a compo-
nent of income tax expense.
f
Leases
NOTE F: 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
20 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 15 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.
33
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
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, 2011, are as follows:
the pricing grid schedule to the franchisee loan facility to reduce the
applicable margins and participant unused commitment fee percent-
ages with respect to the funded participations.
(In Thousands)
2012
2013
2014
2015
2016
Thereafter
$100,906
87,393
72,205
56,252
40,217
174,322
$531,295
Rental expense was $93.6 million in 2011, $96.1 million in
2010, and $88.1 million in 2009. The amount of sublease income
is $3.1 million in 2011, $2.8 million in 2010, and $1.5 million in
2009. The Company has anticipated future sublease rental income
of $4.7 million in 2012, $3.7 million in 2013, $3.0 million in
2014, $2.6 million in 2015, $2.1 million in 2016 and $8.8 million
thereafter through 2024. Rental expense and sublease income are
included in operating expenses.
Guarantees
The Company has guaranteed certain debt obligations of some of
the franchisees amounting to $128.8 million and $121.0 million
at December 31, 2011 and 2010, respectively. Of this amount,
approximately $108.5 million represents franchise borrowings out-
standing under the franchise loan program and approximately $20.3
million represents franchise borrowings under other debt facilities at
December 31, 2011. 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. On May 18,
2011, the Company entered into a second amendment to its second
amended and restated loan facility and guaranty, dated June 18,
2010, as amended, and on July 1, 2011, the Company entered into
a third amendment. The amendments to the franchisee loan facil-
ity, among other things, (i) extend the maturity date until May 16,
2012, (ii) increase the maximum Canadian subfacility commitment
amount for loans to franchisees that operate stores in Canada (other
than in the Province of Quebec) from Cdn $25.0 million to Cdn
$35.0 million, (iii) add the defined terms “Institutional Investor”
and “Private Placement Debt” to further clarify the circumstances
under which the Company may incur indebtedness and still remain
in compliance with applicable negative covenants, (iv) modify the
negative covenant restricting debt applicable to the Company by,
among other things, increasing the amount of indebtedness the
Company may incur with respect to certain privately placed debt
from an aggregate principal amount of up to $60.0 million to an
aggregate principal amount of up to $150.0 million, and (v) replace
34
Legal Proceedings
The Company is frequently a party to various legal proceedings aris-
ing 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 to
determine whether or not any legal proceedings may have an adverse
impact upon the Company’s business. The Company accrues for
litigation loss contingencies that are both probable and reasonably
estimable. Legal fees and expenses associated with the defense of all
of the Company’s litigation are expensed as such fees and expenses
are incurred. While the Company does not presently believe that any
of the legal proceedings to which the Company are currently a party
will ultimately have a material adverse impact upon our business,
financial position or results of operations, there can be no assurance
that we will prevail in all the proceedings we are party to, or that
the Company will not incur material losses from them. Some of the
proceedings the Company is currently a party to are described below:
In Kunstmann et al v. Aaron Rents, Inc., originally filed with the
United States District Court, Northern District of Alabama, on
October 29, 2008, plaintiffs alleged that the Company improperly
classified store general managers as exempt from the overtime pro-
visions 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 certification
motion in April 2009, the court ruled to conditionally certify a
plaintiff class in early 2010. The current class includes 247 indi-
viduals. The Company has filed its motion to decertify the class
action as well as a motion for summary judgment on plaintiff’s
individual claims.
In Alford v. Aaron Rents, Inc. et al originally filed in the U.S.
District Court for the Southern District of Illinois on October 2,
2008, plaintiff alleged, among other claims, that she was sexually
harassed and subjected to retaliation, in violation of Title VII of
the Civil Rights Act of 1964, by a general manager of a Company
store. After trial, the jury returned a defense verdict solely on the
claim of retaliation. On June 14, 2011, the jury awarded plaintiff
compensatory damages in the amount of $13.5 million and puni-
tive damages in the amount of $80.0 million. Of the total damages
awarded, $53.7 million exceeded the maximum award permitted
by law. Consequently, the court reduced the judgment to $39.8
million. The Company filed motions to reduce the verdict and/
or for a new trial and was required to post a bond in the amount
of $5.0 million while judgment was stayed pending post-trial
motions. On January 13, 2012, the court ruled that the verdict
would not be sustained in its current form and the Company is
waiting for a detailed ruling from the court regarding whether it
will order a new trial on liability and/or damages or reduce the
jury’s damages award beyond the reduction previously described.
The Company has accrued $41.5 million, which represents
the judgment, as reduced, and associated legal fees and expenses
and has insurance coverage of $5.0 million for this litigation.
Additional positive or negative developments in the lawsuit could
affect the assumptions, and therefore, the accrual.
In Margaret Korrow, et al. v. Aaron’s Inc., originally filed in the
Superior Court of New Jersey, Middlesex County, Law Division
on October 26, 2010, plaintiff filed suit on behalf of herself and
others similarly situated alleging that Company is liable in dam-
ages to plaintiff and each class member because the Company’s
lease agreements issued after March 16, 2006 purportedly violated
certain New Jersey state consumer statutes. The Company removed
the lawsuit to the United States District Court for the District of
New Jersey on December 6, 2010. Discovery is proceeding and no
class has yet been certified.
In Crystal and Brian Byrd v. Aaron’s, Inc., Aspen Way Enterprises,
Inc., John Does (1-100) Aaron’s Franchisees and Designerware,
LLC., filed on May 16, 2011 in the United States District
Court, Western District of Pennsylvania, plaintiffs allege that
the Company and its franchisees knowingly violated plaintiffs’
and other similarly situated plaintiffs’ privacy in violation of the
Electronic Communications Privacy Act and the Computer Fraud
Abuse Act through its use of a software program called “PC Rental
Agent.” The Company expressly denies that any of its Company-
operated stores engaged in the alleged conduct and intends to
defend itself vigorously. On February 17, 2012, the Magistrate
Judge recommended in her report to the district court that the
Company be dismissed from the lawsuit. It is expected that the
district court will issue a final ruling based upon this recommenda-
tion in the second quarter of 2012. It is possible that the court
may permit plaintiffs to file an amended complaint. The Company
has received inquiries from government agencies requesting infor-
mation regarding this lawsuit and another incident involving the
compromise of customer information, and inquiring about, among
other things, the Company’s retail transactional, information
security and privacy policies and practices.
The Company believes it has meritorious defenses to the claims
described above, and intends to vigorously defend itself against
the claims. However, due to inherent uncertainty in litigation and
similar adversarial proceedings, there can be no guarantee that the
Company will ultimately be successful in these proceedings, or in
others to which it is currently a party. Substantial losses from legal
proceedings or the costs of defending them could have a material
adverse impact upon the Company’s business, financial position or
results of operations.
Accrued litigation expense was $41.7 million and $1.7 million
at December 31, 2011 and 2010, respectively. The Company
believes this reserve was adequate at December 31, 2011, and
is adequate currently, but future developments in pending legal
proceedings can affect the required reserve. We do not currently
believe that the reasonably possible aggregate range of loss for
our pending litigation will exceed the amount we have currently
accrued for litigation expense by any material amount, although
this belief is subject to the uncertainties and variables described
above. We continually monitor our litigation exposure, and review
the adequacy of our legal reserves on a quarterly basis in accordance
with applicable accounting rules.
Other Commitments
At December 31, 2011, the Company had non-cancelable com-
mitments primarily related to certain advertising and marketing
programs of $38.7 million. Payments under these commitments are
scheduled to be $19.5 million in 2012, $17.3 million in 2013, and
$1.9 million 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 100% of their annual compensation in accor-
dance with federal contribution limits with 50% matching by
the Company on the first 4% of compensation. The Company’s
expense related to the plan was $891,000 in 2011, $841,000 in
2010, and $844,000 in 2009.
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.
g
NOTE G: SHAREHOLdERS’
EqUITY
The Company held 15,111,635 shares in its treasury and was autho-
rized to purchase an additional 5,281,344 shares at December 31,
2011. The Company repurchased 5,075,675 shares of its Common
Stock on the open market in 2011 and 1,478,805 shares of its for-
mer Nonvoting Common Stock on the open market in 2010. The
Company did not repurchase any shares of its capital stock in 2009.
The Company has 1,000,000 shares of preferred stock autho-
rized. 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, 2011, no preferred shares
have been issued.
h
NOTE H: 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
35
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
believes that the historical experience method is the best estimate
of future exercise and forfeiture patterns. The risk-free interest rates
are determined using the implied yield available for zero-coupon
United States government issues with a remaining term equal to the
expected life of the grant. The expected dividend yields are based on
the approved annual dividend rate in effect and 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.
Under the Aaron’s Management Performance Plan (“AMP
Plan”) RSUs are granted quarterly upon achievement of certain
pre-tax profit levels during the prior quarter by the employees’
operating units or the overall Company. The RSUs granted under
the AMP Plan vest over four to five years from the date of grant.
The AMP Plan participants include certain vice presidents, director
level employees and other key personnel in the Company’s home
office, divisional vice presidents and regional managers.
The results of operations for the years ended December 31,
2011, 2010 and 2009 include $2.6 million, $3.2 million and $2.4
million, respectively, in compensation expense related to unvested
grants. At December 31, 2011, there was $2.7 million of total
unrecognized compensation expense related to non-vested stock
options which is expected to be recognized over a period of 2.2
years. Excess tax benefits of $1.3 million, $321,000 and $3.9 mil-
lion are included in cash provided by financing activities for the
years ended December 31, 2011 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 ten 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 14,700,556 at
December 31, 2011.
The Company granted 347,000 stock options during 2010.
The Company did not grant any stock options in 2011 and 2009.
The weighted average fair value of options granted was $10.31 in
2010. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the follow-
ing weighted average assumptions for 2010, respectively: risk-free
interest rate 3.59%; a dividend yield of .25%; a volatility factor
of the expected market price of the Company’s Common Stock
of .41; weighted average assumptions of forfeiture rate of 3.89%;
and weighted average expected life of the option of nine years. The
aggregate intrinsic value of options exercised was $5.5 million,
$848,000 and $13.1 million in 2011, 2010 and 2009, respectively.
The total fair value of options vested was $2.7 million and $3.2
million in 2011 and 2010, respectively.
Income tax benefits resulting from stock option exercises cred-
ited to additional paid-in capital totaled $2.1 million, $1.4 million,
and $4.8 million, in 2011, 2010 and 2009, respectively.
The following table summarizes information about stock
options outstanding at December 31, 2011:
Range of
Exercise
Prices
$ 5.92–10.00
10.01–15.00
15.01–19.92
$ 5.92–19.92
Number
Outstanding
December 31, 2011
Options Outstanding
Weighted Average
Remaining
Contractual
Life (in years)
Options Exercisable
Weighted
Average
Exercise price
Number
Exercisable
December 31, 2011
Weighted
Average
Exercise Price
460,661
2,068,006
320,453
2,849,120
1.62
5.19
7.84
4.91
$ 8.80
13.97
19.70
$13.78
460,661
1,281,506
21,203
1,763,370
$ 8.80
13.89
16.61
$12.59
The table below summarizes option activity for the periods indicated in the Company’s stock option plans:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Outstanding at December 31, 2011
Exercisable at December 31, 2011
36
Options
(In Thousands)
Weighted
Average
Weighted Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
(In Thousands)
Weighted
Average
Fair Value
3,374
—
(447)
(78)
2,849
1,763
$13.80
—
13.68
15.21
13.78
$12.59
$43,460
—
(5,469)
(886)
36,760
$24,848
$6.26
—
5.45
6.18
6.38
$5.93
4.91 years
3.52 years
The weighted average fair value of unvested options was $7.12,
$6.66 and $6.08 as of December 31, 2011, 2010 and 2009, respec-
tively. The weighted average fair value of options that vested during
2011, 2010 and 2009 was $5.93, $5.87 and $5.35, respectively.
The Company granted 246,000 and 300,000 RSUs in 2011
and 2010, respectively, and there were no RSUs granted in 2009.
The Company granted 20,000 RSAs in 2011. The Company did
not grant RSAs in 2010 and 2009. Of the 246,000 RSUs granted
in 2011, 225,000 were related to executive grants and 21,000 were
granted as part of the AMP Plan. The weighted average grant date
fair value for RSUs not part of the AMP plan was $23.08 in 2011
and $16.20 in 2010. The weighted average grant date fair value
for RSUs granted as part of the AMP plan was $26.19 in 2011.
The weighted average grant date fair value for RSAs was $26.34 in
2011.
Shares of restricted stock or restricted stock units may be grant-
ed to employees and directors and typically vest over approximately
two to five year periods. Restricted stock grants may be subject to
one or more objective employment, performance or other forfei-
ture 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 compensa-
tion expense related to restricted stock was $5.7 million, $1.5
million and $1.3 million in 2011, 2010 and 2009, respectively. At
December 31, 2011, there was $5.4 million of total unrecognized
compensation expense related to non-vested restricted stock which
is expected to be recognized over a period of 2.4 years.
During the year 287,000 restricted shares vested, 150,000 of
these shares were restricted stock units attributed to an immediate
vest modification related to the separation for a key executive,
137,000 of these shares were restricted stock awards granted in
2006. The total value of shares vesting during the year was $4.0
million for restricted stock units and $3.2 million for restricted
stock awards. There were no shares vested under the AMP Plan.
During 2011, the Company recorded a $3.5 million charge for
separation costs primarily related to the accelerated vesting of the
aforementioned 150,000 restricted stock units and 50,000 stock
option previously granted to a former key executive. The total
incremental compensation cost resulting from the modification was
$1.3 million.
The following table summarizes information about restricted
stock activity:
i
NOTE I: FRANCHISING OF AARON’S
SALES ANd LEASE OWNERSHIp STORES
The Company franchises Aaron’s Sales & Lease Ownership stores.
As of December 31, 2011 and 2010, 943 and 946 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.
Franchise agreement fee revenue was $2.6 million, $3.0 million
and $3.8 million and royalty revenue was $52.0 million, $47.9
million and $42.3 million for the years ended December 31, 2011,
2010 and 2009, respectively. Deferred franchise and area develop-
ment agreement fees, included in customer deposits and advance
payments in the accompanying consolidated balance sheets, were
$4.7 million and $5.5 million at December 31, 2011 and 2010,
respectively.
Franchised Aaron’s Sales & Lease Ownership store activity is
summarized as follows:
(Unaudited)
2011
2010
2009
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,
664
55
—
9
(7)
(8)
713
597
62
10
10
(12)
(3)
664
504
84
—
37
(19)
(9)
597
Company-operated Aaron’s Sales & Lease Ownership store activity is
summarized as follows:
(Unaudited)
2011
2010
2009
Outstanding at January 1, 2011
Granted
Vested
Forfeited
Outstanding at December 31, 2011
Restricted Weighted
Stock
Average
(In Thousands) Grant Price
438
266
(287)
(2)
415
$17.01
23.57
25.24
22.84
$19.64
Company-operated stores open
at January 1,
Opened
Added through acquisition
Closed, sold or merged
Company-operated stores open
at December 31,
1,146
57
8
(51)
1,082
86
14
(36)
1,037
85
19
(59)
1,160
1,146
1,082
37
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
Company-operated HomeSmart store activity is summarized
as follows:
(Unaudited)
2011
2010
Company-operated stores open at January 1,
Opened
Added through acquisition
Company-operated stores open at December 31,
3
24
44
71
—
3
—
3
In 2011, Sales and Lease Ownership segment acquired the
lease contracts, merchandise and other related assets of 38 stores,
including seven franchised stores, and merged certain acquired
stores into existing stores, resulting in a net gain of eight stores.
In 2010, the Company acquired the lease contracts, merchandise
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, includ-
ing 19 franchised stores, and merged certain acquired stores into
existing stores, resulting in a net gain of 29 stores.
In 2011, HomeSmart operations acquired the lease contracts,
merchandise and other related assets of 47 stores and merged
certain acquired stores into existing stores, resulting in a net gain of
44 stores.
j
NOTE J: ACqUISITIONS
ANd dISpOSITIONS
During 2011, the Company acquired the lease contracts, merchan-
dise and related assets of a net of 52 sales and lease ownership stores
for an aggregate purchase price of $41.4 million. Consideration
transferred consisted primarily of cash. Fair value of acquired tan-
gible assets included $13.4 million for lease merchandise, $500,000
for fixed assets, and $21,000 for other assets. The excess cost over the
fair value of the assets and liabilities acquired in 2011, representing
goodwill, was $22.9 million. The fair value of acquired separately
identifiable intangible assets included $2.7 million for customer
lists, $1.7 million for non-compete intangibles, and $255,000 for
acquired franchise development rights. The weighted average amorti-
zation period for these intangibles was 2.5 years.
During 2010, the Company acquired the lease contracts,
merchandise 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 merchan-
dise, $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
38
for customer lists, $541,000 for non-compete intangibles and
$496,000 for acquired franchise development rights. The weighted
average amortization period for these intangibles was 2.7 years.
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. The weighted
average amortization period for these intangibles was 2.4 years.
Acquisitions have been accounted for as business combina-
tions, 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 2011, 2010 and
2009 consolidated financial statements was not significant. The
estimated amortization of sales and lease ownership stores customer
lists, reacquired franchise development rights and non-compete
intangibles in future years approximates $916,000, $728,000,
$191,000, $34,000 and $32,000 for 2012, 2013, 2014, 2015 and
2016, respectively. The estimated amortization of HomeSmart
customer lists and non-compete intangibles in future years approxi-
mates $1.0 million, $826,000, and $202,000 for 2012, 2013, and
2014, respectively. All goodwill acquired in 2011, 2010 and 2009
is expected to be deductible for tax purposes.
The following is a summary of the Aaron’s Sales & Lease
Ownership Company-operated stores’ intangible assets by category
at December 31:
(In Thousands)
2011
2010
2009
$3,698
Customer Relationship
Intangible, Gross
Accumulated Amortization on
Customer Relationship Intangible (1,827)
Reacquired Franchise
Intangible, Gross
Accumulated Amortization on
Re-acquired Franchise Rights
Non-Compete Intangible, Gross
Accumulated Amortization on
Non-Compete Intangible
(307)
2,133
1,227
(906)
$6,675
$8,267
(5,719)
(6,406)
2,814
3,561
(862)
1,402
(938)
861
(478)
(145)
The Company periodically sells sales and lease ownership stores
to franchisees and third party operators. The Company sold 25, 11
and 37 of its Aaron’s Sales and Lease Ownership stores in 2011,
2010 and 2009, respectively. The effect of these sales on the con-
solidated financial statements was not significant.
The following is a summary of the HomeSmart stores’ intangible
assets by category at December 31:
(In Thousands)
Customer Relationship Intangible, Gross
Accumulated Amortization on Customer
Relationship Intangible
Reacquired Franchise Intangible, Gross
Accumulated Amortization on
Re-acquired Franchise Rights
Non-Compete Intangible, Gross
Accumulated Amortization on Non-Compete Intangible
2011
$1,402
(194)
—
—
957
(117)
The Company did not sell any of its HomeSmart stores in 2011.
k
NOTE K:
SEGMENTS
Description of Products and Services of
Reportable Segments
Aaron’s, Inc. has four reportable segments: Sales and Lease
Ownership, Franchise, HomeSmart and Manufacturing. In all peri-
ods presented, HomeSmart was reclassified from the Other Segment
to the HomeSmart segment. During 2008, the Company sold its
corporate furnishings division. The Aaron’s Sales & Lease Ownership
division offers electronics, residential furniture, appliances and
computers to consumers primarily on a monthly payment basis with
no credit requirements. The HomeSmart division offers electron-
ics, residential furniture, appliances and computers to consumers
primarily on a weekly payment basis with no credit requirements.
The Company’s franchise operation sells and supports franchisees of
its sales and lease ownership concept. The Manufacturing segment
manufactures upholstered furniture and bedding predominantly
for use by Company-operated and franchised stores. Therefore the
Manufacturing Segment revenues and earnings before income taxes
are solely the result of intercompany transactions and are eliminated
through the Elimination of Intersegment Revenues. 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 2011, 2010
and 2009.
• 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
segment that holds the related lease merchandise.
• Advertising expense in the Sales and Lease Ownership and
HomeSmart segments is estimated at the beginning of each year
and then allocated to the division ratably over time for manage-
ment reporting purposes. For financial reporting purposes, advertis-
ing 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 Profit 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.
Included in the Earnings Before Income Taxes results above for
the Sales and Lease Ownership segment is a $36.5 million charge
for the lawsuit expense described in Note F. 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.
39
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
Information on segments and a reconciliation to earnings before income taxes from continuing operations are as follows:
(In Thousands)
REvENUES FROM ExTERNAL CUSTOMERS:
Sales and Lease Ownership
Franchise
HomeSmart
Manufacturing
Other
Revenues of Reportable Segments
Elimination of Intersegment Revenues
Cash to Accrual Adjustments
Total Revenues from External Customers
EARNINGS BEFORE INCOME TAxES:
Sales and Lease Ownership
Franchise
HomeSmart
Manufacturing
Other
Earnings Before Income Taxes for Reportable Segments
Elimination of Intersegment Profit
Cash to Accrual and Other Adjustments
Total Earnings Before Income Taxes From Continuing Operations
ASSETS:
Sales and Lease Ownership
Franchise
HomeSmart
Manufacturing
Other
Total Assets
dEpRECIATION ANd AMORTIzATION:
Sales and Lease Ownership
Franchise
HomeSmart
Manufacturing
Other
Total Depreciation and Amortization
INTEREST ExpENSE:
Sales and Lease Ownership
Franchise
HomeSmart
Manufacturing
Other
Total Interest Expense
CApITAL ExpENdITURES:
Sales and Lease Ownership
HomeSmart
Manufacturing
Other
40
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, 2011
Year Ended
December 31, 2010
Year Ended
December 31, 2009
$1,938,991
63,255
15,624
89,430
9,960
2,117,260
(89,953)
(3,258)
$2,024,049
$143,686
49,577
(7,283)
2,960
(141)
188,799
(2,959)
(2,463)
$183,377
$1,293,151
56,131
50,600
11,142
324,125
$1,735,149
$588,036
41
5,933
1,294
8,260
$603,564
$4,473
—
201
142
(107)
$4,709
$53,502
11,349
6,521
11,752
$83,124
$3,258
$1,527
$1,803,778
59,112
56
79,115
16,458
1,958,519
(80,109)
(1,563)
$1,876,847
$159,417
45,935
(318)
3,216
(7,847)
200,403
(3,218)
(6,399)
$190,786
$1,248,785
55,789
955
14,723
181,820
$1,502,072
$539,669
41
21
2,958
6,843
$549,532
$2,937
—
2
15
142
$3,096
$73,166
202
6,584
9,118
$89,070
$4,470
$15,093
$1,685,841
52,941
—
72,473
19,320
1,830,575
(73,184)
(4,604)
$1,752,787
$147,261
39,335
—
3,329
(5,676)
184,249
(3,341)
(4,469)
$176,439
$1,110,675
51,245
—
15,512
144,024
$1,321,456
$508,218
192
—
1,888
9,073
$519,371
$4,030
—
—
15
254
$4,299
$76,151
—
1,474
6,338
$83,963
$3,781
$6,469
l
NOTE L:
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 the fourth quarter of 2011, the Company purchased an
airplane for $2.8 million and sold it to R. Charles Loudermilk,
Sr., Chairman of the Board of Directors of the Company, for
the same amount. The Company paid approximately $80,000 in
brokerage fees in connection with the transaction, for which Mr.
Loudermilk reimbursed the Company. In the fourth quarter of
2011, the Company transferred a Company-owned vehicle to Mr.
Loudermilk valued at $21,000.
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. to exchange 750,000
of Mr. Loudermilk, Sr.’s shares of the Company’s former Class
A Common Stock for 624,503 shares of its former Nonvoting
Common Stock having approximately the same fair market value,
based on a 30 trading day average.
m
NOTE M: qUARTERLY FINANCIAL
INFORMATION (UNAUdITEd)
(In Thousands, Except Per Share)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
YEAR ENdEd dECEMBER 31, 2011
Revenues
Gross Profit*
Earnings Before Taxes From Continuing Operations
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
YEAR ENdEd dECEMBER 31, 2010
Revenues
Gross Profit*
Earnings Before Taxes From Continuing Operations
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
$532,665
259,542
71,919
44,389
.55
.55
$495,269
239,827
59,562
36,975
.45
.45
$482,700
236,958
17,627
10,799
.14
.13
$444,999
215,725
39,329
24,435
.30
.30
$485,195
231,942
45,092
28,045
.36
.36
$452,150
217,994
42,085
26,179
.32
.32
$523,489
242,163
48,739
30,534
.40
.40
$484,429
226,822
49,810
30,787
.38
.38
* 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.
41
NOTES TO CONSOLIdATEd FINANCIAL STATEMENTS
n
NOTE N: dISCONTINUEd
OpERATIONS
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 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.
Summarized operating results for the Aaron’s Corporate
Furnishings division for the years ended December 31 are
as follows:
(In Thousands)
2011
2010
2009
Loss Before Income Taxes
Loss From Discontinued
Operations, Net of Tax
—
—
—
—
$(447)
(277)
o
NOTE O: dEFERREd
COMpENSATION pLAN
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 elected 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 par-
ticipant’s deferral account and a deferred compensation liability is
recorded in accounts payable and accrued expenses in the consoli-
dated balance sheets. The deferred compensation plan liability was
approximately $6.3 million and $3.5 million as of December 31,
2011 and 2010, 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 $5.8 million and
$3.5 million as of December 31, 2011 and 2010, 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 $306,000, $231,000
and $130,000 in 2011, 2010, and 2009 respectively. Benefits of
$77,000 have been paid as of December 31, 2011. No benefits
were paid in 2010.
p
NOTE p: vARIABLE
INTEREST ENTITIES
On October 14, 2011, the Company purchased 11.5% of the com-
mon stock of Perfect Home Holdings Limited (“Perfect Home”),
a privately-held rent-to-own company that is primarily financed by
subordinated debt. Perfect Home is based in the United Kingdom
and operates over 40 retail stores. As part of the transaction, the
Company also received notes and an option to acquire the remaining
interest in Perfect Home at any time through December 31, 2013.
If the Company does not exercise the option prior to December 31,
2013, it will be obligated to sell the common stock and notes back
to Perfect Home at the original purchase price plus interest. The
Company’s investment is denominated in British Pounds.
Perfect Home is a VIE as it does not have sufficient equity at
risk; however, the Company is not the primary beneficiary and
lacks the power through voting or similar rights to direct those
activities of Perfect Home that most significantly affect its eco-
nomic performance. As such, the VIE is not consolidated by
the Company.
Because the Company is not able to exercise significant influ-
ence over the operating and financial decisions of Perfect Home,
the equity portion of the investment in Perfect Home totaling less
than a thousand dollars at December 31, 2011 is accounted for
as a cost method investment and is included in prepaid expenses
and other assets. The notes purchased from Perfect Home totaling
$15.9 million at December 31, 2011 are accounted for as held to
maturity securities in accordance with ASC 320, Debt and Equity
Securities and are included in investment securities. Utilizing a
Black-Scholes model, the options to buy the remaining interest in
Perfect Home and to sell the Company’s interest in Perfect Home
were determined to have only nominal values. The Company
recorded aggregate transaction losses related to the investment of
$228,000 to expense during the year ended December 31, 2011.
The Company’s maximum exposure to any potential losses associ-
ated with this VIE is equal to its total recorded investment which
totals $15.9 million at December 31, 2011.
42
MANAGEMENT’S 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 finan-
cial 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 report-
ing. 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, 2011. 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, 2011, 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, 2011 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their
report dated February 29, 2012, which expresses an unqualified
opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2011.
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, 2011 and 2010,
and the related consolidated statements of earnings, shareholders’
equity, and cash flows for each of the three years in the period ended
December 31, 2011. 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, 2011
and 2010, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2011, 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, 2011, 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 29, 2012 expressed an unqualified opinion
thereon.
Atlanta, Georgia
February 29, 2012
43
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, 2011, 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 inter-
nal 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 reli-
ability of financial reporting and the preparation of financial state-
ments 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, 2011, 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, 2011 and 2010 and the related consolidated state-
ments of earnings, shareholders’ equity and cash flows for each of
the three years in the period ended December 31, 2011 of Aaron’s,
Inc. and subsidiaries and our report dated February 29, 2012
expressed an unqualified opinion thereon.
Atlanta, Georgia
February 29, 2012
44
MARKET INFORMATION, HOLdERS ANd dIvIdENdS
Effective December 13, 2010, all shares of the Common Stock began
trading as a single class on the New York Stock Exchange under the
ticker symbol “AAN.” The CUSIP number of the Common Stock is
002535300.
The number of shareholders of record of the Company’s
Common Stock at February 22, 2012 was 270. The closing price
for the Common Stock at February 22, 2012 was $27.97.
The following table shows the range of high and low closing
prices per share for the Company’s former Nonvoting Common
Stock and Company’s former Class A Common Stock (now known
as the Common Stock) and the quarterly cash dividends declared
per share for the periods indicated.
Common Stock
High
Low
Cash
Dividends
Per Share
dECEMBER 31, 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
dECEMBER 31, 2011
Fourth Quarter
(December 13, 2010 –
December 31, 2010)1
$25.52
29.29
29.34
29.10
$19.16
24.79
22.17
23.24
$.013
.013
.013
.015
$20.67
$19.73
$.013
Subject to our ongoing ability to generate sufficient income, any
future capital needs and other contingencies, we expect to continue
our policy of paying quarterly dividends. Under our revolving
credit agreement, 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.
Issuer Purchases of Equity Securities
The Company repurchased 5,075,675 shares of Common Stock
during 2011 at an average price of $25.06 under our publically-
announced share repurchase program for repurchase at the discretion
of the Chief Financial Officer. As of December 31, 2011, 5,281,344
Common Stock shares remained available for repurchase under the
purchase authority approved by the Company’s Board of Directors
and publicly announced from time-to-time.
The following table provides information regarding our
Common Stock repurchases. All repurchases were made on the
open market.
Issuer Purchases of Equity Securities
Shares
(d) Maximum
Number (or
Approximate
(c) Total
Number of Dollar Value)
of Shares that
Purchased as May Yet Be
Part of Publicly Purchased
Under the
Plans or
Programs
Plans
or Programs
(a) Total Number (b) Average Announced
Common Stock Price Paid
Per Share
Purchased
Former Nonvoting Common Stock High
Low
Cash
Dividends
Per Share
Period
dECEMBER 31, 2010
First Quarter2
Second Quarter2
Third Quarter
Fourth Quarter
(October 1, 2010 –
December 10, 2010)1
$ 22.47
24.32
18.62
$ 18.25
17.05
16.16
$.012
.012
.012
22.53
16.92
NA
Former Class A Common Stock
High
Low
Cash
Dividends
Per Share
October 1
through
October 31, 2011 —
November 1
through
November 30, 2011 —
December 1
through
December 31, 2011 —
—
QTD Total
—
—
—
—
—
—
—
—
5,281,344
5,281,344
5,281,344
Information concerning the Company’s equity compensation plans is
set forth in Item 12 of Part III of our Annual Report on Form 10-K
for the year ended December 31, 2011 filed with the SEC.
dECEMBER 31, 2010
First Quarter2
Second Quarter2
Third Quarter
Fourth Quarter
(October 1, 2010 –
December 10, 2010)1
$18.10
19.85
18.40
$14.60
13.55
13.00
$.012
.012
.012
21.03
16.81
NA
(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
distributed on April 15, 2010 and effective April 16, 2010.
45
MARKET INFORMATION, HOLdERS ANd dIvIdENdS
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
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 MidCap 400 Index and a Peer Group. For 2011, the Peer
Group consisted of Rent-A-Center, Inc. The stock price perfor-
mance shown is not necessarily indicative of future performance.
12/06 12/07 12/08 12/09 12/10 12/11
100.00 65.61 83.69 86.06 117.34 153.87
Aaron’s, Inc.
S&P MidCap 400 100.00 107.98 68.86 94.60 119.80 117.72
100.00 49.20 59.81 60.05 109.95 128.42
Peer Group
Copyright© 2012 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights
reserved. (www.researchdatagroup.com/S&P.htm)
46
BOARd OF dIRECTORS ANd OFFICERS
BOARd OF dIRECTORS
R. Charles Loudermilk, Sr.
Chairman of the Board, Aaron’s, Inc.
Ronald W. Allen
President and Chief Executive Officer,
Aaron’s, 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.
Ray M. Robinson(3, 4)
President Emeritus, East Lake Golf
Club and Vice Chairman, East Lake
Community Foundation
John Schuerholz (2, 3)
President, The Atlanta Braves
Cynthia N. Day(2)
President and Chief Executive Officer
Citizens Trust Bank
Director Emeritus
Earl Dolive
Vice Chairman of the Board, Emeritus,
Genuine Parts Company
OFFICERS
Corporate
R. Charles Loudermilk, Sr.*
Chairman of the Board
Ronald W. Allen*
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
Gregory G. Bellof
Vice President, Mid-Atlantic Operations
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
Joseph N. Fedorchak
Vice President, Eastern Operations
Jeannie M. Cave
Vice President, Real Estate and Construction
Scott L. Harvey
Vice President, Management Development
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, Associate Resources
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
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
Michael P. Ryan
Vice President, Northern Operations
Thomas A. Peterson
Vice President, Marketing
HomeSmart Division
Marco A. Scalise
Vice President, HomeSmart Operations
Mark A. Rudnick
Vice President, Marketing,
HomeSmart/RIMCO
Aaron’s Office Furniture Division
Ronald M. Benedit
Vice President, Operations
(1) Lead Director
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
* Executive Officer
47
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
Aaron’s Foundation, Inc.
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011
99LTO, LLC
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 1,
2012, 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
SEC 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. Forward-looking
statements are based on management’s current
beliefs, assumptions and expectations regarding
our future economic performance, taking into
account the information currently available
to management. Generally, the words “antici-
pate,” “believe,” “estimate,” “expect,” “intend,”
“project,” and similar expressions identify
forward-looking statements, which generally
are not historical in nature. 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 from
the Company’s historical experience and the
Company’s present expectations or projections.
The Company undertakes no obligation to
publicly update or revise any forward-looking
statements, whether as a result of new informa-
tion, future events, changes in assumptions or
otherwise. For a discussion of such risks and
uncertainties, see “Risk Factors” in Item 1A of
the Company’s Annual Report on Form 10-K
for the year ended December 31, 2011 filed
with the Securities and Exchange Commission.
48
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011
www.aarons.com
www.aaronsinc.com