Annual Report 2018
Aaron’s, Inc.
400 Galleria Parkway, S.E., Suite 300
Atlanta, Georgia 30339-3182
(678) 402-3000
Aarons.com
Dear Fellow Shareholders:
Sixty-four years ago, Charlie Loudermilk brought to life a company that has since filled a void in the market for
underserved, credit-challenged customers. Today, through our Aaron’s-branded and Progressive Leasing retail partner
platforms, the Company fulfills its mission of providing access to high-quality products that improve our customers’ lives
and the lives of their families. We are proud of the Aaron’s mission and through the dedication of our 12,000 associates,
we remain a trusted source of furniture, appliances, electronics, jewelry and other products for millions of customers in
the U.S. and Canada. While we celebrate our Company’s long history, our future success requires us to continue to
execute at a high-level and innovate our businesses as our customers’ needs and preferences change. We understand
the commitment required to be successful and are excited about the opportunities for our great Company.
2018 Highlights for Aaron’s, Inc.
Our financial and other highlights for our 2018 fiscal year include:
• We increased consolidated revenues by 13% to $3.8 billion;
• Our Progressive Leasing segment achieved record revenues of nearly $2.0 billion, an increase of 28% over 2017;
• Our Aaron’s Business segment innovated key parts of its operations, including rapid customer onboarding, and
grew Aarons.com revenue written into the portfolio by 50%;
• We returned $175 million to shareholders by purchasing 3.7 million shares of stock and paying cash dividends,
which we increased for the 16th consecutive year; and
• We maintained our conservative capital structure, ending 2018 with a net debt-to-capitalization ratio of 18.7%,
debt-to-Adjusted EBITDA ratio of 1.1x, and total liquidity of $388 million.
Continuing Momentum at Progressive
Through its industry-leading virtual operating model, Progressive continues to offer underserved customers
unprecedented access to competitively priced products across a broad range of outstanding retail partners’ platforms.
Because of its compelling value proposition to customers and retail partners, Progressive generated excellent financial
results in 2018, while expanding its pipeline of new retail partners to drive future revenue and earnings growth.
While Progressive has grown rapidly over the past several years, we believe there remains a large unserved market
opportunity. We are excited about the potential growth resulting from Progressive’s competitive advantages, including
proven execution with national retail partners, financial scale and a robust focus on compliance and information
security. These advantages, along with an outstanding team, position Progressive well for continued success.
Investing for the Next Generation of the Aaron’s Business
Over the past several years, our Aaron’s Business segment has made substantial investments to improve its customer
experience and lower its overall cost to serve, while maintaining a high level of profitability.
In 2018, the Aaron’s Business innovated its business model by enhancing our offering to customers through an improved
in-store and e-commerce experience while undertaking initiatives to streamline its cost structure. New technologies,
such as rapid customer onboarding, have shown early success by reducing the sales onboarding time and freeing
associates to engage in more value-add activities. The Aarons.com e-commerce site continues to fulfill its mission of
bringing a younger demographic and first-time customers to Aaron’s, growing 50% year-over-year.
This is an exciting time for the Aaron’s Business. We are growing, investing in the future of our stores and associates,
and improving the experience of our customers to drive profitable revenue growth.
Strong Financial Position and Capital Allocation
We maintained a strong balance sheet during 2018 while generating substantial earnings and cash flow. Our strong
financial position has enabled us to scale and attract new retail partners, invest in our core virtual and store-based
businesses, acquire franchised locations, increase our dividend, and opportunistically repurchase the Company’s
common stock.
We are constantly evaluating the best use of our excess earnings and cash flow. As part of that process, we routinely
evaluate potential acquisitions for opportunities that would leverage our strengths, improve our ability to serve our
customers, and expand our market opportunity. We will continue to look for complementary businesses while
maintaining a disciplined approach to that effort.
We have a long history of returning capital to shareholders and expect that, in the absence of a significant capital
investment or a large acquisition, we may continue to do so.
Supporting Our Customers’ and Employees’ Communities
Aaron’s, Inc. is committed to being a responsible corporate citizen and making a positive impact on the environment and
the communities we serve. We have a long history of corporate philanthropy. We provide financial, in-kind and
associate resources through several channels including our Aaron’s and Progressive giving initiatives, collectively known
as Aaron’s Gives, which includes the Aaron’s Foundation, ProgReach, Aaron’s Community Outreach Program (ACORP)
and our Matching Gift Program initiatives. Through these channels we donated nearly $3 million in 2018 to communities
throughout the United States.
During the year, our initiatives included:
• Renewing a second, three-year national partnership with the Boys & Girls Clubs of America, under which we
pledged $5 million of funding and other resources, including a commitment to complete 53 Boys & Girls Clubs of
America Keystone teen center makeovers by 2021 and sponsor the annual Boys & Girls Clubs National Keystone
Conference;
• Continuing our long-time support of Warrick Dunn’s Home for the Holidays, which in partnership with Habitat
for Humanity, provides single mothers and their children with affordable, furnished, new homes; and
• Utilizing our associates’ time and talents to support patients at children’s hospitals in Salt Lake City and Phoenix,
donate school supplies to hundreds of students in the Big Brothers Big Sisters Mentor 2.0 college readiness
program and renovate the Park City Tots and Tots Too nonprofit children’s facilities.
These are just a few examples of the ways Aaron’s, Inc. and its associates use their financial resources, time and talents
to make their communities better places to live. We will continue to support these efforts with a goal of contributing 1%
of our annual consolidated pre-tax profits to improve the communities where our employees and customers live and
work.
Conclusion
We are proud of the Company’s success in 2018. It was a year of strong performance, growth and innovation. As we look
to the future, we remain committed to our mission of providing high-quality products to underserved, credit-challenged
customers. It’s a mission we are committed to executing at the highest level for our customers, associates and
shareholders.
Sincerely,
John W. Robinson III
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file Number. 1-13941
AARON’S, INC.
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of
incorporation or organization)
400 Galleria Parkway SE, Suite 300
Atlanta, Georgia
(Address of principal executive offices)
58-0687630
(I.R.S. Employer
Identification No.)
30339-3182
(Zip Code)
Registrant’s telephone number, including area code: (678) 402-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.50 Par Value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
Emerging Growth Company
Accelerated Filer
Smaller Reporting Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2018 was $2,458,523,383
based on the closing price on that date as reported by the New York Stock Exchange. Solely for the purpose of this calculation and for
no other purpose, the non-affiliates of the registrant are assumed to be all shareholders of the registrant other than (i) directors of the
registrant, (ii) executive officers of the registrant, and (iii) any shareholder that beneficially owns 10% or more of the registrant’s
common shares.
As of February 8, 2019, there were 67,202,919 shares of the Company’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2019 annual meeting of shareholders, to be filed subsequently with
the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A, are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
SIGNATURES
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34
52
53
101
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Aaron’s, Inc. (the "Company") about future events and expectations, including
statements in this Annual Report on Form 10-K, are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. For those statements we claim the protection of the safe harbor provisions for
forward-looking statements contained in such section. Forward-looking statements are not statements of historical facts but 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 "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "project," "would," and similar
expressions identify forward-looking statements. All statements which address operating performance, events or developments
that we expect or anticipate will occur in the future, including the anticipated impacts and outcomes of our strategic plan, with
respect to improving our Aaron’s store profitability; accelerating our omnichannel platform; promoting communication,
coordination and integration; converting our existing pipeline into Progressive Leasing retail partners; optimizing the economic
return of our active lease portfolio; strengthening our relationships with Progressive Leasing’s and DAMI’s current retail
partners; and championing compliance, as well as the expected impacts and outcomes of closing and consolidating certain of
our Company-operated Aaron’s stores; initiatives to grow 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. Factors that could cause our actual results to differ materially from any forward-looking
statements include: (i) changes in the enforcement of existing laws and regulations and the adoption of new laws and
regulations that may unfavorably impact our businesses; (ii) our strategic plan failing to deliver the benefits and outcomes we
expect, with respect to improving our Aaron’s Business in particular; (iii) continuation of the economic challenges faced by
portions of our traditional lease-to-own customer base; (iv) increased competition from traditional and virtual lease-to-own
competitors, as well as from traditional and on-line retailers and other competitors; (v) financial challenges faced by our
franchisees; and (vi) other factors discussed in Item 1A. Risk Factors of this Annual Report on Form 10-K. We qualify any
forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements speak only as of the
date made, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly
or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or
otherwise.
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PART I
ITEM 1. BUSINESS
Unless otherwise indicated or unless the context otherwise requires, all references in this Annual Report on Form 10-K to the
"Company," "we," "us," "our" and similar expressions are references to Aaron’s, Inc. and its consolidated subsidiaries.
General Development of Business
Aaron's, Inc. is listed on the New York Stock Exchange under the symbol AAN. The Company is a leading omnichannel
provider of lease-purchase solutions primarily to an underserved, credit-challenged segment of the population. Through
multiple business segments, the Company primarily provides lease options for consumers for the products they need and want
including furniture, appliances, electronics, jewelry and a variety of other products. The Company provides flexible options to
help customers towards ownership, including early payment options low up-front payments, and flexible payment options.
Aaron's, Inc. conducts its business through three segments. Progressive Leasing, a virtual lease-to-own company, provides
lease-purchase solutions through approximately 24,000 retail locations in 46 states. The Aaron's Business engages in the sales
and lease ownership and specialty retailing of furniture, consumer electronics, home appliances and accessories through its
approximately 1,700 company-operated and franchised stores in 47 states and Canada as well as its e-commerce platform,
Aarons.com. Dent-A-Med, Inc., d/b/a the HELPcard®, provides a variety of second-look credit products that are originated
through federally insured banks.
During 2017 and 2018, the Company acquired substantially all of the assets of the store operations of 111 and 152 Aaron's-
branded franchised stores, respectively. The acquisitions are benefiting the Company's omnichannel platform through added
scale, strengthening its presence in certain geographic markets, enhancing operational control, including compliance, and
enabling the Company to execute its business transformation initiatives on a broader scale.
As of December 31, 2018, we had 1,689 Aaron's stores, comprised of 1,312 Company-operated stores in 42 states and Canada,
and 377 independently-owned franchised stores in 37 states, Canada and Puerto Rico.
We own, or are otherwise entitled to use, the various trademarks, trade names, service marks, and taglines used in our
businesses, including those used with the operations of Aaron’s®, Aaron’s Sales & Lease Ownership®, Progressive Leasing,
Dent-A-Med, the HELPcard®, and Woodhaven®. We intend to file for additional trade name and trademark protection when
appropriate.
Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplaces. We believe that
the Progressive Leasing and DAMI acquisitions have been strategically transformational in this respect by allowing the
Company to diversify its presence in the market and strengthen our business, as demonstrated by Progressive Leasing's
significant revenue and profit growth. The Company is also leveraging franchisee acquisition opportunities to expand into new
geographic markets, enhance operational control, and benefit more fully from our business transformation initiatives on a
broader scale. We believe the traditional store based lease-to-own industry has been negatively impacted in recent periods
by: (i) increased competition from a wide range of competitors, including national, regional and local operators of lease-to-own
stores; virtual lease-to-own companies; traditional and e-commerce retailers; traditional and online sellers of used merchandise;
and from a growing number of various types of consumer finance companies that enable our customers to shop at traditional or
online retailers; (ii) the challenges faced by many traditional "brick-and-mortar" retailers, with respect to a decrease in the
number of consumers visiting those stores, especially younger consumers; and (iii) commoditization of pricing in electronics.
In response to these changing market conditions, we are executing a strategic plan that focuses on the following items and that
we believe positions us for success over the long-term:
•
Improve Aaron's Business profitability – We remain committed to increasing profits through improved marketing and
customer acquisition strategies, improved collections and merchandise loss controls, optimization of product mix,
increases in customer retention and cost efficiency initiatives. We continue to execute on various real estate store
optimization initiatives, including strategic store consolidations. We are beginning to introduce our next generation
store concepts to appeal to our changing target consumer market. In addition, we are investing in improving our
analytical capabilities to optimize pricing, promotion and both product mix and product lifecycle management, which
is expected to enhance margins and drive lease volume.
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• Accelerate our omnichannel platform – We believe Aarons.com represents an opportunity to provide more options
and shopping convenience in the lease-to-own industry. We are focused on engaging customers in ways that are
convenient for them by providing them a seamless, direct-to-door platform through which to shop in store or online
across our product offerings. Through Aarons.com and our in-store kiosks, we expect to provide our customers with
expanded product selections. We are also digitizing our Aaron's Business customer decisioning, onboarding, and
servicing processes to provide for a more seamless and faster experience.
•
Strengthen relationships of current retail partners – Our Progressive Leasing business has benefited from both long-
term and relatively newer, mutually beneficial relationships with our existing retailer base. Our ability to maintain
these relationships and address the changing needs of these retailers is critical to the long-term growth strategy of our
business.
• Focus on converting existing pipeline into Progressive Leasing retail partners – Our Progressive Leasing business
segment is continuously focused on establishing new relationships with retailers and identifying solutions that address
their business needs. We believe these new relationships are fundamental to continued revenue growth for Progressive
Leasing.
• Champion compliance – Aaron's, Inc. is a large and diverse company with thousands of daily transactions that are
extensively regulated and subject to the requirements of various federal, state and local laws and regulations. We
continue to believe and set expectations that long-term success requires all associates to behave in an ethical manner
and to comply with all laws and regulations governing our Company's behavior.
Operating Segments
As of December 31, 2018, the Company has three operating and reportable segments: Progressive Leasing, Aaron's Business
and DAMI, which is consistent with the current organizational structure and how the chief operating decision maker regularly
reviews results to analyze performance and allocate resources.
The results of Progressive Leasing and DAMI have been included in the Company's consolidated results and presented as
operating segments from their April 14, 2014 and October 15, 2015 acquisition dates, respectively. On May 13, 2016, the
Company sold its HomeSmart operating segment, which included 82 stores.
The operating results of our three reportable segments may be found in (i) Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and (ii) Item 8. Financial Statements and Supplementary Data.
Progressive Leasing
Established in 1999 and acquired by the Company in 2014, Progressive Leasing is a leader in the expanding virtual lease-to-
own market. Progressive Leasing partners with retailers, primarily in the furniture and appliance, jewelry, mattress, automobile
electronics and accessories and mobile phones and accessories industries to offer a lease-purchase option for customers who
may not have access to traditional credit-based financing options.
We offer a proprietary, technology-based application and approval process that does not require Progressive Leasing employees
to be staffed in a store. Once a customer is approved, Progressive Leasing purchases the merchandise from the retailer and
enters into a lease-to-own agreement with the customer. The contract provides early-buyout options or ownership after a
contractually specified amount has been paid. Progressive Leasing provides lease-purchase solutions through more than 24,000
retail locations in 46 states and the District of Columbia and operates under state-and-District specific regulations.
Aaron's Business
Aaron's store-based and e-commerce operations
Our omnichannel platform allows us to engage customers in ways that are convenient for them by providing them a seamless,
direct-to-door platform through which to shop in an Aaron's store or through our e-commerce platform across our product
offerings. Aaron's store-based operations employ monthly, semi-monthly and weekly payment models to provide durable
household goods to consumers through our Aaron's stores. Aaron's e-commerce operations employ monthly payment models
through Aarons.com. Our customer base is comprised primarily of customers with limited access to traditional credit sources
such as bank financing, installment credit or credit cards. Customers of our Aaron's Business segment take advantage of our
services to acquire consumer goods they might not otherwise be able to without incurring additional debt or long-term
obligations.
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We have developed a distinctive concept for our stores including specific merchandising, store layout, pricing and agreement
terms all designed to appeal to our target consumer market. We are beginning to introduce our next generation store concepts to
appeal to our changing target consumer market. The typical store layout is a combination showroom and warehouse generally
comprising 6,000 to 10,000 square feet, with an average of approximately 8,000 square feet. Each store usually maintains at
least two trucks for delivery, service and return of product. We generally offer same or next day delivery for addresses located
within approximately ten miles of the store. Our stores provide a broad selection of brand name electronics, computers,
appliances, bedding and furniture, including bedding and furniture manufactured by our Woodhaven manufacturing division.
Over 90% of our lease agreements have monthly payment terms.
We may re-lease or sell merchandise that customers return to us prior to the expiration of their agreements. We may also offer
up-front purchase options at prices we believe are competitive.
Franchise
Our franchise program adds value to our Company by allowing us to (i) recognize additional revenues from franchise fees and
royalties; (ii) lower our average costs of purchasing, manufacturing and advertising through economies of scale; and (iii)
increase customer recognition of our brand.
We entered into agreements with our current franchisees to govern the opening and operations of franchised stores. Under our
standard agreement, we received a franchise fee from $15,000 to $50,000 per store depending upon market size. Our standard
agreement is for a term of ten years, with one ten-year renewal option. Franchisees are also obligated to remit to us royalty
payments of 6% of the weekly cash revenue collections from their stores. Most franchisees are involved in the day-to-day
operations of their stores.
Some qualifying franchisees took part in a financing arrangement we established with several financial institutions to assist our
existing franchisees in establishing and operating their store(s). Although an inventory financing plan is the primary component
of the financing program, we have also arranged, in certain circumstances, for the franchisee to receive a revolving credit line
and/or term loan. We provide guarantees to the financial institutions that provide the loan facilities for amounts outstanding
under this franchise financing program. At December 31, 2018, the maximum amount that the Company would be obligated to
repay in the event franchisees defaulted was $39.0 million.
All franchisees are required to complete a comprehensive training program and to operate their franchised sales and lease
ownership stores in compliance with our policies, standards and specifications. Annually, each franchisee is required to
represent and warrant its compliance with all applicable federal, state and/or local laws, regulations and ordinances with respect
to its business operations. Although franchisees are not generally required to purchase their lease merchandise from our
fulfillment centers, many do so in order to take advantage of Company-sponsored financing, bulk purchasing discounts and
favorable delivery terms.
Manufacturing
Woodhaven Furniture Industries ("Woodhaven"), our manufacturing division, was established by the Company in 1982.
Integrated manufacturing enables us to control critical features such as the quality, cost, delivery, styling, durability and
quantity of our furniture products, and we believe this provides an integration advantage over our competitors. Substantially all
produced items continue to be leased or sold through Aaron's stores, including franchised stores. However, we also manufacture
and sell furniture products to other retailers.
Woodhaven produces upholstered living-room furniture (including contemporary sofas, chairs and modular sofa and ottoman
collections in a variety of natural and synthetic fabrics) and bedding (including standard sizes of mattresses and box springs).
The furniture designed and produced by this division incorporates features that we believe result in reduced production costs,
enhanced durability and improved shipping processes all relative to furniture we would otherwise purchase from third parties.
These features include (i) standardized components, (ii) reduced number of parts and features susceptible to wear or damage,
(iii) more resilient foam, (iv) durable fabrics and sturdy frames which translate to longer life and higher residual value and (v)
devices that allow sofas to stand on end for easier and more efficient transport. The division also provides replacement covers
for all styles and fabrics of its upholstered furniture, as well as other parts, for use in reconditioning leased furniture that has
been returned.
Woodhaven Furniture Industries consists of five furniture manufacturing plants and seven bedding manufacturing facilities
totaling approximately 819,000 square feet of manufacturing capacity.
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DAMI
Founded in 1983 and acquired by the Company in 2015, DAMI primarily serves customers that may not qualify for traditional
prime lending who desire to purchase goods and services from participating merchants. DAMI, which operates as a wholly-
owned subsidiary of Progressive Leasing, offers customized programs, with services that include revolving loans through
private label cards. DAMI's current network of merchants includes medical and dental markets, furniture and bedding, and
mattresses and fitness equipment. The Company believes the DAMI product offerings are complementary to those of
Progressive Leasing and is allowing Progressive to expand into the markets and merchants that DAMI serves.
We extend or decline credit to an applicant through third-party bank partners based upon the customer's credit rating. Our bank
partners originate the loan by providing financing to the merchant at the point of sale and acquiring the receivable at a discount
from the face value, which represents a pre-negotiated fee between DAMI and the merchant. DAMI then acquires the
receivable from the bank.
Qualifying customers receive a credit card to finance their initial purchase and to use in subsequent purchases at the merchant
or other participating merchants for an initial two-year period, which we will renew if the cardholder remains in good standing.
The customer is required to make periodic minimum monthly payments and may pay certain annual and other periodic fees.
Operations
Operating Strategy
Our operating strategy is based on distinguishing our brands from those of our competitors along with maximizing our
operational efficiencies. Our Progressive Leasing and DAMI operating strategies are based on providing excellent service to
our merchant partners and our customers, along with continued development of technology-based solutions. This allows us to
increase our merchant partners' sales, drive demand for our service, and scale in an efficient manner. Specifically with
Progressive Leasing, we believe our ability to service a retailer with limited labor costs allows us to maintain a cost of
ownership for leased merchandise lower than that of other options available to our customers.
We execute on our strategy for our Aaron's store-based and e-commerce operations by (i) emphasizing the uniqueness of our
sales and lease ownership concept from those in our industry generally; (ii) offering high levels of customer service; (iii)
promoting our vendors' and Aaron's brand names; and (iv) managing merchandise through our manufacturing and distribution
capabilities.
We believe that the success of our store-based and e-commerce operations is attributable to our distinctive approach to the
business that distinguishes us from both our lease-to-own and credit retail competitors. We have pioneered innovative
approaches to meeting changing customer needs that we believe differ from many of our competitors. These include (i) offering
lease ownership agreements that result in a lower cost to own; (ii) maintaining larger and more attractive store showrooms; (iii)
offering a wider selection of higher-quality merchandise; (iv) digital customer onboarding and decisioning; and (v) providing
an up-front cash and carry purchase option on select merchandise at competitive prices.
Aaron's Business Operations
The Aaron's Business segment has various levels of executive leadership, area directors, and regional managers that oversee our
Aaron's Business operations. At the individual store level, the store manager is primarily responsible for managing and
supervising all aspects of store operations, including (i) customer relations and account management, (ii) deliveries and
pickups, (iii) warehouse and inventory management, (iv) partial merchandise selection, (v) employment decisions, including
hiring, training and terminating store employees and (vi) certain marketing initiatives. Store managers also administer the
processing of lease return merchandise including making determinations with respect to inspection, repairs, sales,
reconditioning and subsequent leasing.
Our business philosophy emphasizes safeguarding of Company assets, strict cost containment and financial controls. All
personnel are expected to monitor expenses to contain costs. We pay all material invoices from Company headquarters in order
to enhance financial accountability. We believe that careful monitoring of lease merchandise as well as operational expenses
enables us to maintain financial stability and profitability.
We use management information systems to facilitate customer orders, collections, merchandise returns and inventory
monitoring. Each of our stores is network linked directly to corporate headquarters enabling us to monitor single store
performance on a daily basis. This network system assists the store manager in (i) tracking merchandise on the showroom floor
and warehouse, (ii) minimizing delivery times, (iii) assisting with product purchasing and (iv) matching customer needs with
available inventory.
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Lease Agreement Approval, Renewal and Collection
Our Progressive Leasing business uses proprietary decisioning algorithms to determine which customers would meet our
leasing qualifications. The transaction is completed online or through a point of sale integration with our retail partners.
Contractual payments are usually based on a customer's pay frequency and are typically processed through automated clearing
house payments. If the payment is unsuccessful, collections are managed in-house through our call center, customer service
hubs and proprietary lease management system. The call center contacts customers within a few days after the due date to
encourage them to keep their agreement current. If the customer chooses to return the merchandise, arrangements are made to
receive the merchandise from the customer, either through our retail partners, our Draper, Utah location, our customer service
hubs, or our Aaron's operated stores.
One of the factors in the success of our Aaron's Business operations is timely collections, which are monitored by store
managers and our call center associates. Customers are contacted within a few days after their lease payment due dates to
encourage them to keep their agreement current. Careful attention to collections is particularly important in sales and lease
ownership operations, where the customer typically has the option to cancel the agreement at any time and each contractually
due payment is generally considered a renewal of the agreement. The Company continues to encourage customers to take
advantage of the convenience of enrolling in the Company's automatic payment program, EZ Pay.
We have a proprietary lease approval process with respect to store customers, which includes obtaining customer data from
third-party service providers, verifying employment or other reliable sources of income and using personal references supplied
by the customer. Generally, our Aaron's store operations and e-commerce agreements for merchandise require payments in
advance, and the merchandise normally is recovered if a payment is significantly in arrears.
The provision for lease merchandise write-offs as a percentage of consolidated lease revenues was 5.5%, 4.8% and 4.8% in
2018, 2017 and 2016, respectively. We believe that our collection and recovery policies comply with applicable laws, and we
discipline any employee we determine to have deviated from such policies.
Credit Agreement Approval and Collection
DAMI partners with merchants to provide a variety of revolving credit products originated through two third-party federally
insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs). We
believe DAMI provides the following strategic benefits when combined with Progressive Leasing's product offerings:
• Enhanced product for retail partners - DAMI enhances Progressive Leasing's best-in-class product with an integrated
solution for below-prime customers. DAMI has a centralized, scalable underwriting model with a long operating
history, deployed through its established bank partners, and a receivable management system.
• Higher consumer credit quality - DAMI primarily serves customers with FICO scores between 600 and 700, which
make up approximately a quarter of the U.S. population. These customers generally have greater purchasing power
with stronger credit profiles than Progressive Leasing's current customers.
• Expanded customer base - In addition to complementing Progressive Leasing's traditional offering for existing and
prospective retail partners, DAMI's strong relationships with merchant partners who provide services offer an
additional channel for longer-term growth.
DAMI uses an underwriting model that provides standardized credit decisions, including borrowing limit amounts. Credit
decisions are primarily based on a proprietary underwriting algorithm. Loans receivable are unsecured, and collections on loans
receivable are managed in-house through DAMI's call center and proprietary loans receivable management system.
Customer Service
A critical component of the success in our operations is our commitment to developing good relationships with our customers.
The Company consistently monitors consumer interests and trends to ensure that our business model is aligned with our
customer's needs. The Company believes that building a relationship with the customer that ensures customer satisfaction is
critical because customers of Progressive Leasing and Aaron's store-based and e-commerce operations have the option of
returning the leased merchandise at any time. Our goal, therefore, is to develop a positive experience with the Company and
our products, service and support in the minds of our customers from the moment they enter our showrooms and the
showrooms of our retail partners. We demonstrate our commitment to superior customer service by providing customers with
access to product through multiple channels, including Progressive Leasing's and DAMI's network of retail partner locations,
Aarons.com, and Aaron's store-based operations. Aaron's store-based operations provide rapid delivery of leased merchandise
(often on same or next day delivery) and investments in technology that improve the customer experience.
Our Progressive Leasing business offers centralized customer and retailer support through contact centers located in Draper,
Utah and Glendale, Arizona.
9
We believe our strong focus on customer satisfaction generates repeat business and long-lasting relationships with our
customers and retail partners. Our customers receive multiple complimentary service benefits. These benefits vary according to
applicable state law but generally include a same-as-cash option, merchandise repair service, lifetime reinstatement, product
replacement, and other discounts and benefits. In order to increase leasing transactions, we foster relationships with our retail
partners and existing customers to attract recurring business, and many new agreements are attributable to repeat customers.
During 2015, the Company announced the launch of Approve.Me, which is a proprietary platform that provides a single
interface for all Progressive Leasing and DAMI customers seeking credit approval or lease options, from prime to second-look
financing, or to Progressive Leasing's lease offering. Approve.Me is compatible with most primary or secondary providers and
is designed as a faster and more efficient way to service customers seeking to finance transactions or secure a lease option.
During 2017, Aaron's store-based operations began offering customers the option to obtain a membership in the Aaron's Club
Program (the "Club Program"). The benefits to customers of the Club Program are separated into three general categories: (i)
product protection benefits; (ii) health & wellness discounts; and (iii) dining, shopping and consumer savings. The product
protection benefits provide Club Program members with lease payment waivers for up to four months or a maximum of $1,000
on active customer lease agreements in the event of customer unemployment or illness; replacement of the product in the event
the product is stolen or damaged by an act of God; waiver of remaining lease payments on lease agreements in the event of
death of any member named on the lease agreement; and/or repair of the product for an extended period after the customer
takes ownership.
Our employees at Progressive Leasing are our competitive advantage. We provide extensive, on-going, hands-on training to all
employees that interact daily with our customers. In addition, developing our leaders is a key priority and is part of our cultural
DNA. We help our leaders achieve their strategic goals by providing a robust leadership development curriculum for all
leaders. We also provide an online learning curriculum that includes content around specific business-related needs in multiple
delivery formats and includes tools, assessments, videos, digital learning modules, which are available live, in-person and
online.
Our emphasis on customer service at the Aaron's store-based operations requires that we develop skilled, effective employees
who value our customers and who possess and project a genuine desire to serve our customers' needs. To meet this requirement,
we have created and implemented a comprehensive associate development program for both new and tenured associates.
Our Aaron's associate development program is designed to train our associates to provide a uniform and enhanced customer
service experience. The primary focus of the associate development program is to equip all associates with the knowledge and
skills needed to build strong relationships with our customers and to service customers in a manner that complies with
applicable laws, regulations and Company policies. Our learning and development coaches provide live, interactive instruction
via webinars. In addition, associates are provided training through an Intranet-based learning management system that can be
accessed at any time. Additionally, Aaron’s has a management development program that offers development for current and
future store managers and a leadership development program for our multi-unit managers. Also, we produce and post video-
based communications regarding important Company initiatives on our intranet site.
Purchasing and Retail Relationships
The following table shows the percentage of Progressive Leasing's revenues attributable to different retail partner categories
(Note that a retail partner is attributed to a single product category even if they may carry products across multiple product
categories):
Progressive Leasing Retail Partner Category
Furniture and Appliance
Jewelry
Mattress
Automobile electronics and accessories
Mobile phones and accessories
Other
Year Ended December 31,
2018
2017
2016
54%
14%
12%
9%
9%
2%
55%
7%
15%
11%
10%
2%
57%
4%
19%
12%
5%
3%
During 2018, one retail partner, Big Lots Stores, Inc., provided greater than 10% of the lease merchandise acquired by
Progressive Leasing and subsequently leased to customers. We derived 11% of our consolidated revenues from customers of
this retail partner for the year ended December 31, 2018.
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For our Aaron's store-based operations, our merchandise product mix is determined by executive leadership and our
merchandising department based on an analysis of customer demands. The following table shows the percentage of our Aaron's
Business revenues attributable to different merchandise categories:
Aaron's Business Merchandise Category
Furniture
Consumer Electronics
Home Appliances
Computers
Other
Year Ended December 31,
2018
2017
2016
44%
22%
25%
6%
3%
45%
24%
24%
5%
2%
42%
26%
24%
6%
2%
One of Aaron's Business largest suppliers is our own Woodhaven manufacturing division, which supplies the majority of the
upholstered furniture and bedding we lease or sell through our Aaron's Business segment. We purchase the remaining
merchandise directly from manufacturers and local distributors and are generally able to obtain bulk discounts that provide us
with cost advantages. Our stores carry well-known brands such as Samsung®, GE®, Hewlett-Packard®, LG®, Whirlpool®,
Simmons®, Philips®, and Ashley®. To a lesser extent, we also may sell or re-lease certain merchandise returned by our
Progressive Leasing and Aaron's Business customers. We have no long-term agreements for the purchase of merchandise.
The following table shows the percentage of DAMI's revenues attributable to different merchant partner categories:
DAMI Merchant Partner Category
Medical and Dental
Retail
Furniture and Bedding
Other
Year Ended December 31,
2018
2017
52%
17%
23%
8%
49%
20%
23%
8%
Distribution for Aaron's Store-based Operations
The Aaron's store-based operations utilize our 16 fulfillment centers to control merchandise. These centers average
approximately 124,000 square feet, giving us approximately 2.0 million square feet of logistical capacity, outside of our
network of stores.
We believe that our network of fulfillment centers provides us with a strategic advantage over our competitors. Our distribution
system allows us to deliver merchandise promptly to our stores in order to quickly meet customer demand and effectively
manage inventory levels. Most of our continental U.S. stores are within a 250-mile radius of a fulfillment center, facilitating
timely shipment of products to the stores and fast delivery of orders to customers.
We realize freight savings from bulk discounts and more efficient distribution of merchandise by using fulfillment centers. We
use our own tractor-trailers, local delivery trucks and various contract carriers to make weekly deliveries to individual stores.
Marketing and Advertising
Progressive Leasing and DAMI execute their marketing strategy in partnership with retailers and other merchants. This is
typically accomplished through in-store signage and marketing material, direct marketing activities, and the education of sales
associates.
The Aaron's Business marketing targets current and previous Aaron's customers and potential new customers. We feature brand
name products available through our no-credit-needed lease ownership plans. We reach our customer demographics by utilizing
national and local television and radio with a combination of brand/image messaging and product/price promotions. In
addition, we have enhanced our broadcast presence with digital marketing and via social platforms such as Facebook,
Instagram, Twitter and YouTube.
The Aaron's Business also targets new, current and previous Aaron's customers each month by distributing over 27 million,
two-page or four-page circulars to homes in the United States and Canada. The circulars advertise brand name merchandise
along with the features, options and benefits of Aaron's no-credit-needed lease ownership plans. We also distribute millions of
email and direct mail promotions on an annual basis and monitor store layout plans to attempt to optimally attract customers.
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Competition
Aaron's competes with national, regional and local operators of lease-to-own stores, virtual lease-to-own companies, traditional
and e-commerce retailers (including many that offer layaway programs and title or installment lending), traditional and online
sellers of used merchandise, and various types of consumer finance companies that may enable our customers to shop at
traditional or online retailers, as well as with rental stores that do not offer their customers a purchase option. We also compete
with retail stores for customers desiring to purchase merchandise for cash or on credit. Competition is based primarily on
product selection and availability, customer service and lease rates, store location and terms.
Working Capital
The Aaron's Business and Progressive Leasing sales and lease ownership model results in the Company remaining the owner of
merchandise on lease; therefore, the Company's most significant working capital asset is merchandise inventory on lease. The
Aaron's Business store-based and e-commerce operations also require the Company to maintain significant levels of
merchandise inventory available for lease in order to provide the service demanded by our customers and to ensure timely
delivery of our products. Consistent and dependable sources of liquidity are required to maintain such merchandise levels.
Failure to maintain appropriate levels of merchandise could materially adversely affect our customer relationships and our
business. We believe our cash on hand, operating cash flows, credit availability under our financing agreements and other
sources of financing are adequate to meet our normal liquidity requirements.
Raw Materials
The principal raw materials we use in furniture manufacturing at Woodhaven are fabric, foam, fiber, wire-innerspring
assemblies, plywood, oriented strand board and hardwood. All of these materials are purchased in the open market from
unaffiliated sources. We have a diverse base of suppliers; therefore, we are not dependent on any single supplier. The sourcing
of raw materials from our suppliers is not overly dependent on any particular country. None of the raw materials we use are in
short supply.
Seasonality
Our revenue mix is moderately seasonal for both our Progressive Leasing and Aaron's Business segments. Adjusting for
growth, the first quarter of each year generally has higher revenues than any other quarter. This is primarily due to realizing the
full benefit of business that historically gradually increases in the fourth quarter as a result of the holiday season, as well as the
receipt by our customers in the first quarter of federal and state income tax refunds. Our customers will more frequently
exercise the early purchase option on their existing lease agreements or purchase merchandise off the showroom floor during
the first quarter of the year. We expect these trends to continue in future periods.
Industry Overview
The Lease-to-Own Industry
The lease-to-own industry offers customers an alternative to traditional methods of obtaining home furnishings, electronics,
appliances, computers and other durable consumer goods. In a standard industry lease-to-own transaction, the customer has the
option to acquire ownership of merchandise over a fixed term, usually 12 to 24 months, normally by making weekly, semi-
monthly, or monthly lease payments. The customer may cancel the agreement at any time without penalty by returning the
merchandise to the lessor. If the customer leases the item through the completion of the full term, he or she then obtains
ownership of the item. The customer may also purchase the item at any time by tendering the contractually specified payment.
The lease-to-own model is particularly attractive to customers who are unable to pay the full upfront purchase price for
merchandise or who lack the credit to qualify for conventional financing programs. Other individuals who find the lease-to-
own model attractive are customers who, despite access to credit, do not wish to incur additional debt, have only a temporary
need for the merchandise or desire to field test a particular brand or model before purchasing it.
Aaron's, Inc. versus Traditional Lease-to-Own
We blend elements of lease-to-own and traditional retailing by providing customers with the option to either lease merchandise
with the opportunity to obtain ownership or to purchase merchandise outright. We believe our sales and lease ownership
program is a more effective method of retailing our merchandise to customers than a typical lease-to-own business or the
traditional method of credit installment sales.
Our model is distinctive from the conventional lease-to-own model in that we encourage our customers to obtain ownership of
their leased merchandise. Based upon our own data and industry data, our customers obtain ownership more often (between
50% to 60%) than in the lease-to-own businesses in general (approximately 25%).
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We believe our sales and lease ownership model offers the following distinguishing characteristics when compared to
traditional lease-to-own stores:
• Lower total cost - Our agreement terms generally provide a lower cost of ownership to the customer.
• Wider merchandise selection - Our Progressive Leasing operations allow us to offer a wider selection of merchandise
via partnerships with various merchants. Additionally, we also generally offer a larger selection of higher-quality
merchandise through our Aaron's e-commerce and store-based operations than others in the lease-to-own industry.
• Larger store layout - Aaron's stores average 8,000 square feet, which is significantly larger than the average size of
our largest competitor's lease-to-own stores.
• Fewer payments - Our typical plan offers semi-monthly or monthly payments versus the industry standard of weekly
payments.
• Flexible payment methods - We offer our customers the opportunity to pay by automated clearing house (ACH), debit
card, credit card, cash or check. We also offer an EZ Pay option which gives customers the ease of using their debit or
credit card to set up an automatic payment on the date they select. Our Progressive Business operations receive
substantially all of their payments from customers by ACH, debit card or credit card. Our Aaron's Business operations
currently receive approximately 74% of their payment volume (in dollars) from customers by debit card or credit card.
Unlike transactions with traditional retailers, in which the customer is committed to purchasing the merchandise, our sales and
lease ownership transactions are not credit installment contracts. Therefore, the customer may elect to terminate the transaction
after a short, initial lease period, without penalty. Progressive Leasing provides a 90-day buy-out option on lease-purchase
solutions offered through traditional retailers. Our Aaron's Business operations offer an up-front "cash and carry" purchase
option and generally a same-as-cash option on most merchandise at prices that we believe are competitive with traditional
retailers.
Government Regulation
Our operations are extensively regulated by and subject to the requirements of various federal, state and local laws and
regulations, and are subject to oversight by various government agencies, including the Federal Trade Commission ("FTC"), for
example, which may exercise oversight of the advertising and other business practices of our Company. In general, such laws
regulate applications for leases, pricing, late charges and other fees, lease disclosures, the content of advertising materials, and
certain collection procedures. Violations of certain provisions of these laws may result in material penalties. We are unable to
predict the nature or effect on our operations or earnings of unknown future legislation, regulations and judicial decisions or
future interpretations of existing and future legislation or regulations relating to our operations, and there can be no assurance
that future laws, decisions or interpretations will not have a material adverse effect on our operations or earnings.
A summary of certain laws under which we operate follows. This summary does not purport to be a complete summary of the
laws referred to below or of all the laws regulating our operations.
Currently, nearly every state and most provinces in Canada specifically regulate lease-to-own transactions via state or
provincial statutes. This includes states in which our Progressive Leasing business has retail partners and also includes states in
which we currently operate our Aaron's Business. Most state lease purchase laws require lease-to-own companies to disclose to
their customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any
other charges that may be imposed and miscellaneous other items. The more restrictive state lease purchase laws limit the retail
price for an item, the total amount that a customer may be charged for an item, or regulate the "cost-of-rental" amount that
lease-to-own companies may charge on lease-to-own transactions, generally defining "cost-of-rental" as lease fees paid in
excess of the "retail" price of the goods. Our long-established policy in all states is to disclose the terms of our lease purchase
transactions as a matter of good business ethics and customer service. We believe we are in material compliance with the
various state lease purchase laws. At the present time, no federal law specifically regulates the lease-to-own transaction.
Federal legislation to regulate the transaction has been proposed from time to time. In addition, certain elements of the business
including matters such as collections activity, marketing, customer contact and credit reporting may be subject to federal laws
and regulation.
13
There has been increased legislative and regulatory attention in the United States, at both the federal and state levels, on
financial services products offered to near-prime and subprime consumers in general, which may result in an increase in
legislative regulatory efforts directed at the lease-to-own industry. We cannot predict whether any such legislation or
regulations will be enacted and what the impact would be on us. From time to time, certain state attorneys general or federal
regulatory agencies have directed investigations or regulatory initiatives toward our industry, or toward certain companies
within the industry. For example, as we have disclosed previously, in July 2018 we received civil investigative demands
("CIDs") from the Federal Trade Commission (the "FTC") that request the production of documents and answers to written
questions to determine whether disclosures related to financial products offered by our traditional, lease-to-own store-based
business, including our Aarons.com e-commerce business (the "Aaron's Business"), and Progressive Leasing are in violation of
the FTC Act. We have incurred substantial expenses in responding to these CIDs and, although we believe we are in
compliance with the FTC Act, the CIDs could lead to an enforcement action and/or a consent order which, in turn, could lead to
investigations and enforcement actions by, and/or consent orders with, state attorneys general and regulatory agencies. We
cannot predict whether any state attorneys general or federal regulatory agencies will direct other investigations or regulatory
initiatives towards us or our industry in the future, or what the impact of any such future regulatory initiatives may be.
Our sales and lease ownership franchise program is subject to FTC oversight and various state laws regulating the offer and
sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC
requires us to furnish to prospective franchisees a Franchise Disclosure Document ("FDD") containing prescribed information.
A number of states in which we might consider franchising also regulate the sale of franchises and, in certain circumstances,
require registration of the franchise disclosure document with state authorities. We believe we are in material compliance with
all applicable franchise laws in those states in which we do business and with similar laws in Canada.
DAMI is subject to various federal and state laws that address lending regulations, consumer information, consumer rights, and
certain credit card specific requirements, among other things. In addition, DAMI services credit cards issued through third
party bank partners and therefore is subject to those banks' Federal Deposit Insurance Corporation regulators. Several
regulations affecting DAMI have been updated in recent years through The Credit Card Act and The Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act). Additional regulations are being developed, as the attention placed
on the True Lender Doctrine and consumer debt transactions has grown significantly. We believe we are in material compliance
with all applicable laws and regulations. Although we are unable to predict the results of any regulatory initiatives, we do not
believe that existing and currently proposed regulations will have a material adverse impact on our Progressive Leasing,
Aaron's Business and/or DAMI businesses or other operations.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd-Frank Act was adopted to further the humanitarian goal of ending the violent conflict and human
rights abuses in the Democratic Republic of the Congo and adjoining countries ("DRC"). This conflict has been partially
financed by the exploitation and trade of tantalum, tin, tungsten and gold, often referred to as conflict minerals, which originate
from mines or smelters in the region. Securities and Exchange Commission ("SEC") rules adopted pursuant to the Dodd-Frank
Act require reporting companies to disclose annually, among other things, whether any such minerals that are necessary to the
functionality or production of products they manufactured during the prior calendar year originated in the DRC and, if so,
whether the related revenues were used to support the conflict and/or abuses.
Some of the products manufactured by Woodhaven Furniture Industries, our manufacturing division, may contain tantalum, tin,
tungsten and/or gold. Consequently, in compliance with SEC rules, we have adopted a policy on conflict minerals, which can
be found on our website at investor.aarons.com. We have also implemented a supply chain due diligence and risk mitigation
process with reference to the Organisation for Economic Co-operation and Development, or the OECD, guidance approved by
the SEC to assess and report annually whether our products are conflict free.
We expect our suppliers to comply with the OECD guidance and industry standards and to ensure that their supply chains
conform to our policy and the OECD guidance. We plan to mitigate identified risks by working with our suppliers and may
alter our sources of supply or modify our product design if circumstances require.
Employees
At December 31, 2018, the Company had approximately 11,800 employees. None of our employees are covered by a collective
bargaining agreement, and we believe that our relations with employees are good.
Available Information
We make available free of charge on our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports and the Proxy Statement for our Annual Meeting of
Shareholders. Our Internet address is www.aarons.com.
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ITEM 1A. RISK FACTORS
The Company’s business is subject to certain risks and uncertainties. Any of the following risk factors could cause our actual
results to differ materially from historical or anticipated results. These risks and uncertainties are not the only ones we face, but
represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be
material or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from
historical or anticipated results.
We are subject to various existing federal and state laws and regulations which may require us to incur significant costs
and expenses associated with government investigations, enforcement actions and private litigation, and we may be
subject to new or additional federal and state laws and regulations (or changes in interpretations of existing laws and
regulations) that could expose us to government investigations, significant costs or compliance-related burdens or force
us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial
condition.
Currently, nearly every state, the District of Columbia, Puerto Rico, and most provinces in Canada specifically regulate lease-
to-own transactions. This includes states in which we currently operate Aaron’s stores, as well as states in which our
Progressive Leasing business has retail partners. Furthermore, certain aspects of our business, such as our debt collection and
any collection by third parties of debt owed by our current or former customers, customer contact, our decisioning process
regarding whether to lease merchandise to customers, credit reporting practices, the manner in which we process and store
certain customer, employee and other information, and various aspects of our cybersecurity risks and mitigation efforts, are
subject to federal and state laws and regulations. Many of these laws and regulations are evolving, unclear and inconsistent
across various jurisdictions, and ensuring compliance with them is difficult and costly. We have incurred and will continue to
incur substantial costs to comply with these laws and regulations. In addition to compliance costs, we may incur substantial
expenses to respond to government investigations and enforcement actions, proposed fines and penalties, criminal or civil
sanctions, and private litigation, arising out of our or our franchisees’ alleged violations of existing laws and/or regulations. For
example, and as we have disclosed previously, in July 2018 we received civil investigative demands ("CIDs") from the Federal
Trade Commission (the "FTC") that request the production of documents and answers to written questions to determine
whether disclosures related to financial products offered by our traditional, lease-to-own store-based business, including our
Aarons.com e-commerce business (the "Aaron’s Business"), and Progressive Leasing are in violation of the FTC Act. We have
incurred substantial expenses in responding to these CIDs and, although we believe we are in compliance with the FTC Act, the
CIDs could lead to an enforcement action and/or a consent order which, in turn, could lead to investigations and enforcement
actions by, and/or consent orders with, state attorneys general and regulatory agencies. The CIDs also may result in us incurring
additional costs, including fines, penalties, remediation expenses and legal fees. Further, the CIDs may harm Progressive
Leasing’s business relationships with existing and potential retail partners, regardless of whether the FTC alleges any violations
of the FTC Act.
In addition, existing laws and regulations have and will continue to, and future laws and regulations may, place limitations and
restrictions on how we conduct our businesses. While no federal law currently specifically regulates the lease-to-own industry,
federal legislation to regulate the industry has been proposed in the past and may be proposed in the future. For example,
federal and regulatory authorities such as the CFPB and the FTC are increasingly focused on the subprime financial
marketplace in which the lease-to-own industry operates, and may propose and adopt new regulations (or interpret existing
regulations) that could result in significant adverse changes in the regulatory landscape for businesses such as ours. In addition,
our manufacturing and distribution facilities are subject to various regulations as set forth by the Environmental Protection
Agency ("EPA"), Occupational Safety and Health Administration ("OSHA") and Department of Transportation ("DOT").
Furthermore, with increasing frequency, federal and state regulators are holding businesses like ours to higher standards of
training, monitoring and compliance. Failure by us or those businesses to comply with the laws and regulations to which we are
or may become subject could result in fines, penalties or limitations on our ability to conduct our business, or federal or state
actions, or private litigation, any of which could significantly harm our reputation with consumers and Progressive Leasing’s
and DAMI’s retail and merchant partners and could materially and adversely affect our business, prospects and financial
condition.
Additionally, as we execute on our strategic plans, we may continue to expand into complementary businesses, such as DAMI,
that engage in financial, banking or lending services, or rent-to-own or rent-to-rent transactions involving products that we do
not currently offer our customers, all of which may be subject to a variety of statutes and regulatory requirements in addition to
those regulations currently applicable to our legacy operations, which may impose significant costs, limitations or prohibitions
on the manner in which we currently conduct our businesses as well as those we may acquire in the future. In addition, our
aarons.com e-commerce business may be subject to statutes and regulatory requirements in addition to those that apply to our
legacy store-based operations, and/or existing laws and regulations may apply to our e-commerce business in ways that are
different from their application to our legacy store-based operations. Any additional laws or regulations may result in changes
in the way our operations are regulated, exposing us to increased regulatory oversight, more burdensome regulations and
15
increased litigation risk, each of which could have a material adverse effect on us. For example, the California Consumer
Privacy Act of 2018 (the "CCPA"), which is expected to become effective in January 2020, will change the manner in which
our transactions with California residents are regulated with respect to the manner in which we collect, store and use consumer
and employee data and may result in increased regulatory oversight and litigation risks and increase our compliance-related
costs in California. Moreover, Congress and/or other states may adopt privacy-related laws whose restrictions and requirements
differ from those of the CCPA, requiring us to design, implement and maintain different types of state-based, privacy-related
compliance controls and programs simultaneously in multiple states, thereby further increasing the complexity and cost of
compliance.
Any proposed rulemaking or enforcement action by the CFPB, the FTC or any other federal or state regulators or other adverse
changes in (or interpretations of) existing laws and regulations, the passage of new adverse legislation or regulations by the
federal government or the states applicable to our traditional lease-to-own business, our Progressive Leasing virtual lease-to-
own business, our Aarons.com e-commerce business and any complementary businesses into which we may expand could
materially increase both our compliance costs and the risk that we could be subject to government investigations and subject to
sanctions if we are not in compliance. In addition, new burdensome laws or regulations, which (among others) could include
new interpretations of the types of conduct that constitutes unfair or deceptive acts or practices, could prohibit or force us to
modify our business model, expose us to increased litigation risk, and might reduce the economic potential or sales and
profitability of our sales and lease ownership operations.
Progressive Leasing’s virtual lease-to-own business differs in some potentially significant respects from the risks of the
traditional store-based lease-to-own business. The risks could have a material negative effect on Progressive Leasing,
which could result in a material adverse effect on our entire business.
Progressive Leasing segment offers its lease-to-own solution through the stores of third-party retailers. Progressive Leasing
consequently faces some different risks than are associated with our traditional store-based sales and lease ownership concept,
which our Aaron’s Business segment and its franchisees offer through their own stores. These potential risks include, among
others, Progressive Leasing’s:
•
•
•
•
•
•
•
reliance on third-party retailers (over whom Progressive Leasing cannot exercise the degree of control and oversight
that Aaron’s and its franchisees can assert over their own respective employees) for many important business
functions, from advertising through assistance with lease transaction applications, including, for example, explaining
the nature of the lease-to-own transaction when asked to do so by the customer, and that the transaction is with
Progressive Leasing and not with the third-party retailer;
possibly different regulatory risks than apply to our traditional store-based lease-to-own business , whether arising
from the offer by third-party retailers of Progressive Leasing’s lease-purchase solution alongside traditional cash,
check or credit payment options or otherwise, including the risk that regulators may mistakenly treat virtual lease-to-
own transactions as some other type of transaction that would face different and more burdensome and complex
regulations;
potential that regulators may target the virtual lease-to-own transaction and/or adopt new regulations or legislation (or
existing laws and regulations may be interpreted in a manner) that negatively impact Progressive Leasing’s ability to
offer virtual lease-to-own programs through third-party retail partners, and/or that regulators may attempt to force the
application of laws and regulations on Progressive Leasing’s virtual lease-to-own business in inconsistent and
unpredictable ways that could increase the compliance-related costs incurred by Progressive Leasing, and negatively
impact Progressive Leasing’s financial and operational performance;
reliance on automatic bank account drafts for lease payments, which may become disfavored as a payment method for
these transactions by regulators and/or providers, or may otherwise become unavailable;
lack of control over, and more product diversity within, its lease merchandise inventory relative to our traditional
store-based lease-to-own business, which can complicate matters such as merchandise repair and disposition of
merchandise that is returned;
lower barriers to entry and start-up capital costs to launch a competitor due to the reliance of Progressive Leasing and
its competitors on the store locations and inventories of third-party retailers, and online connections with retailers,
rather than incurring the cost to obtain and maintain brick and mortar locations and in-store or in-warehouse
inventories; and
indemnification obligations to Progressive Leasing’s retail partners and their service providers for losses stemming
from Progressive Leasing’s failure to perform with respect to its products and services.
These risks could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our
entire business.
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Our Aaron’s Business faces many challenges which could materially and adversely affect our overall results of
operations, including increased competition from traditional and "big-box" retailers, e-commerce retailers and virtual
rent-to-own companies, the impact of uncertain economic conditions on segments of our customers, and increasing costs
for merchandise, labor and transportation.
Our Aaron’s Business faces a number of challenges from traditional and "big-box" retailers and the continued expansion of
digital retail, which includes a wide array of e-commerce retailers that have established far larger digital operations than our
Aarons.com e-commerce platform has been able to achieve to date. Increasing competition from the digital sector, as well as
more competitive in-store and e-commerce pricing offered by traditional and "big-box" retailers, and competition from
traditional and on-line providers of used goods and products may reduce the market share held by our Aaron’s Business as well
as its operating margins, and may materially and adversely affect our overall results of operations. Furthermore, as virtual
lease-to-own companies continue to partner with traditional and "big-box" retailers, those retailers may increasingly compete
with our Aaron’s Business. Many of the competitors discussed above have more advanced and modern e-commerce, logistics
and other technology applications and systems that offer them a competitive advantage in attracting and retaining customers for
whom our Aaron’s Business competes, especially with respect to younger customers. In addition, those competitors may offer a
larger selection of products and more competitive prices than our Aaron’s Business.
In addition, we believe a portion of our Aaron’s Business customer base continues to experience significant economic
uncertainty that could be exacerbated by increasing inflationary pressures and rising interest rates. We believe the extended
duration of that economic uncertainty may result in those customers of our Aaron’s Business curtailing entering into sales and
lease ownership agreements for the types of merchandise we offer, or entering into agreements that generate less revenue for
us, resulting in lower same store sales, revenue and profits. For example, our Company-operated stores experienced same store
revenue declines of 1.5% and 7.0% in fiscal years 2018 and 2017, respectively. Additionally, our franchised stores experienced
same store revenue declines of 1.4% and 5.4% in fiscal years 2018 and 2017, respectively. We calculate same store revenue
growth by comparing revenues for comparable periods for stores open during the entirety of those periods. A number of factors
have historically affected our same store revenues for our Aaron's Business, including:
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changes in competition;
general economic conditions;
economic challenges faced by our customer base;
new product introductions;
consumer trends;
changes in our merchandise mix;
timing of promotional events; and
our ability to execute our business strategy effectively.
In addition, any increases in unemployment or underemployment within our customer base may result in increased defaults on
lease payments, resulting in increased merchandise return costs and merchandise losses, which also may adversely affect our
business and results of operations.
Our Aaron’s Business has experienced and may continue to experience increases in the cost it incurs to purchase certain
merchandise that it offers to sale or lease to its customers, due to tariffs, increases in prices for certain commodities and
increases in the costs of shipping the merchandise to its distribution centers and store locations. At the same time, it has
experienced and may continue to experience significant increases in labor costs, including due to wage inflation for hourly
employees in many regions, and increasing competition to recruit and retain both professional and hourly employees as a result
of relatively low unemployment rates. The Aaron’s Business has limited or no control over many of these inflationary forces on
its costs. In addition, it may not be able to recover all or even a portion of such cost increases by increasing its merchandise
prices, fees, or otherwise, and even if it is able to increase merchandise prices or fees, those cost increases to its customers
could result in the customers curtailing entering into sales and lease ownership agreements for the types of merchandise we
offer, or entering into agreements that generate less revenue for us, resulting in lower same store sales, revenue and profits.
If our Aaron’s Business is unable to successfully address these challenges, our overall business and results of operations may be
materially and adversely affected as well.
We continue to implement a strategic plan and there is no guarantee that the strategic plan will produce results superior
to those achieved under the Company’s prior plan.
Our current strategic plan includes focusing on improving Aaron’s store profitability; accelerating our omnichannel platform;
promoting communication, coordination and integration; and championing compliance.
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As part of our efforts to improve the profitability of our Aaron’s stores, we recently have focused on identifying and closing
underperforming stores and consolidating the customers of those stores into existing, higher performing and larger stores, as
opposed to opening new stores, which had traditionally been a central tenet of the Company’s strategy. We also have acquired
the operations of a total of 263 of our former franchisees’ store locations during 2017 and 2018. There can be no assurance that
those acquisitions will produce the results we expected at the time we entered into those acquisitions, or that we will be able to
successfully integrate the operations of those former franchisee locations, including their customers and personnel. In addition,
we have implemented, and dedicated significant resources to, other business improvement initiatives that we believe will lower
costs and enhance the experience for customers of our Aaron’s Business. For example, our omnichannel platform is a
significant component of our strategic plan and we believe it will drive future growth of our business. However, to promote our
products and services and allow customers to transact online and reach new customers, we must effectively maintain, improve
and grow our omnichannel platform. In addition, we plan to significantly increase our automation and centralization of several
key business and operational functions of the Aaron’s Business during our 2019 fiscal year, including automating and
centralizing customer lease decisioning and collections functions, as opposed to our historical practice of having store-based
employees carrying out those functions. Moreover, our future business improvement initiatives for the Aaron’s Business likely
will include geographically repositioning a significant number of our store locations into larger buildings and/or into different
geographic locations that we believe will be more advantageous. We may incur significant capital costs, including build-out
costs for new, larger store locations and exit costs from the termination of current leases and sale of current properties, in
connection with such business improvement initiatives.
There can be no guarantee that our current strategy, and our current or future business improvement initiatives related thereto,
including our recent focus on identifying and closing underperforming stores and maintaining, improving and growing our
omnichannel platform, or our initiatives in 2019 to automate and centralize a significant portion of the Aaron’s Business
customer lease decisioning and collections functions, or our store repositioning initiatives in the future will yield the results we
currently anticipate (or results that will exceed those that might be obtained under prior or other strategies). We may fail to
successfully execute on one or more elements of our current strategy, even if we successfully implement one or more other
components. For example, as part of our efforts to reduce costs and improve profitability, we closed 123 under-performing
Company-operated stores during the 2016 through 2018 time period. We may not be successful in transitioning the customers
of the Company-operated Aaron’s stores that are closed to other Company-operated stores that remain open, and thus, could
experience a reduction in revenue and profits associated with such a loss of customers. In addition, the estimated costs and
charges associated with these initiatives may vary materially and adversely based upon various factors, including the timing of
execution, the outcome of negotiations with landlords and other third parties, or unexpected costs, any of which could result in
our not realizing the anticipated benefits from our strategic plan. In addition, with respect to our omnichannel platform, there
can be no assurance that we will be able to maintain, improve or grow that platform in a profitable manner. Moreover, there can
be no assurance that we will be able to effectively execute or implement our initiatives to automate and centralize certain key
business functions of the Aaron’s Business, including our customer lease decisioning and collections activities during 2019 or
in future years, or that the repositioning of the location and size of certain of our stores will result in the increased revenue and
profitability that we expect, or result in any meaningful return on the capital expenditures we would expect to invest in those
new store locations, and the failure to do so could result in a meaningful decrease in the profitability of our Aaron’s Business.
We may not fully execute on one or more elements of our current strategy due to any number of reasons, including, for
instance, because of the division of management, financial and Company resources among multiple objectives, or other factors
beyond or not completely within our control. The successful execution of our current strategy depends on, among other things,
our ability to:
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improve same store revenues and profitability in stores that may be maturing;
drive recurring cost savings to recapture margin;
transition customers of stores to other stores that remain open; and
successfully manage and grow our omnichannel platform.
If we cannot address these challenges successfully, or overcome other critical obstacles that may emerge as we continue to
pursue our current strategy, we may not be able to achieve our revenue or profitability goals at the rates we currently
contemplate, if at all.
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If we do not maintain the privacy and security of customer, retail partner, employee or other confidential information,
due to cybersecurity-related “hacking” attacks, intrusions into our systems by unauthorized parties or otherwise, we
could incur significant costs, litigation, regulatory enforcement actions and damage to our reputation, any one of which
could have a material adverse impact on our business, operating results and financial condition.
Our business involves the collection, processing, transmission and storage of customers’ personal and confidential information,
including social security numbers, dates of birth, banking information, credit and debit card information, data we receive from
consumer reporting companies, including credit report information, as well as confidential information about our retail partners
and employees, among others. Much of this data constitutes confidential personally identifiable information (“PII”) which, if
unlawfully accessed, either through a “hacking” attack or otherwise, could subject us to significant liabilities as further
discussed below. We also serve as an information technology provider to our franchisees, including by storing and processing
PII relating to their customers and potential customers.
Companies like us that possess significant amounts of PII and/or other confidential information have experienced a significant
increase in cyber security risks in recent years from increasingly aggressive and sophisticated cyberattacks, including hacking,
computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and
impersonation), denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to
information technology (“IT”) systems. Our IT systems are subject to constant attempts to gain unauthorized access in order to
disrupt our business operations and capture, destroy or manipulate various types of information that we rely on, including PII
and/or other confidential information. In addition, various third parties, including employees, contractors or others with whom
we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a
breach involving such information. Any significant compromise or breach of our data security, whether external or internal, or
misuse of PII and/or other confidential information may result in significant costs, litigation and regulatory enforcement actions
and, therefore, may have a material adverse impact on our business, operating results and financial condition. Further, if any
such compromise, breach or misuse is not detected quickly, the effect could be compounded.
While we have implemented network security systems and processes to protect against unauthorized access to or use of secured
data and to prevent data loss and theft, there is no guarantee that these procedures are adequate to safeguard against all data
security breaches or misuse of the data. We maintain private liability insurance intended to help mitigate the financial risks of
such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents, and
our exposure resulting from any serious unauthorized access to, or use of, secured data, or serious data loss or theft, could far
exceed the limits of our insurance coverage for such events. Further, a significant compromise of PII and/or other confidential
information could result in regulatory penalties and harm our reputation with our customers, retail partners and others,
potentially resulting in a material adverse impact on our business, operating results and financial condition.
The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with
new and constantly changing requirements applicable to our business, and compliance with those requirements could result in
additional costs. For example, we are currently subject to settlements with the FTC that we entered into in 2013, as well as the
State of California and the Commonwealth of Pennsylvania regarding our business practices and compliance with privacy laws
in those states, and data breaches of this nature could result in additional penalties under the terms of those settlements. In
addition, and as discussed above, the CCPA, which is expected to become effective in January 2020, will change the manner in
which our transactions with California residents are regulated with respect to the manner in which we collect, store and use
consumer and employee data; expose our operations in California to increased regulatory oversight and litigation risks; and
increase our compliance-related costs. These costs, including others relating to increased regulatory oversight and compliance,
could be substantial and adversely impact our business.
We also believe successful data breaches or cybersecurity incidents at other companies, whether or not we are involved, could
lead to a general loss of customer confidence that could negatively affect us, including harming the market perception of the
effectiveness of our security measures or financial technology in general. We believe our exposure to this risk will increase as
we expand our use of financial technology to communicate with our customers and retail partners and as we increase the
number of retail partners with whom we work.
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Our competitors could impede our ability to attract new customers, or cause current customers to cease doing business
with us.
The industries in which we operate are highly competitive and highly fluid, particularly in light of the sweeping new regulatory
environment we are witnessing from regulators such as the CFPB and the FTC, among others, as discussed above.
The competitors of our Aaron’s Business include national, regional and local operators of lease-to-own stores, virtual lease-to-
own companies, traditional and on-line providers of used goods and merchandise, traditional, "big-box" and e-commerce
retailers (including many retailers who offer layaway programs) and various types of consumer finance companies, including
installment, payday and title loan companies, that may enable our customers to shop at traditional or on-line retailers, as well as
rental stores that do not offer their customers a purchase option. Our Progressive segment also faces competition from other
virtual lease-to-own companies, traditional store-based lease to own companies and consumer finance companies, including
installment, payday and title loan companies, that may enable Progressive’s customers to shop at traditional or on-line retailers.
Our competitors in the traditional and virtual sales and lease ownership and traditional retail markets may have significantly
greater financial and operating resources and greater name recognition in certain markets. Greater financial resources may
allow our competitors to grow faster than us, including through acquisitions. This in turn may enable them to enter new markets
before we can, which may decrease our opportunities in those markets. Greater name recognition, or better public perception of
a competitor’s reputation, may help them divert market share away from us, even in our established markets. Some competitors
may be willing to offer competing products on an unprofitable basis in an effort to gain market share, which could compel us to
match their pricing strategy or lose business. In addition, some competitors of Progressive may be willing to lease certain types
of products that Progressive will not agree to lease, enter into customer leases that have services, as opposed to goods, as a
significant portion of the lease value, or engage in other practices related to pricing, compliance, and other areas that
Progressive will not, in an effort to gain market share at Progressive’s expense..
Our Progressive Leasing business relies heavily on relationships with retail partners. An increase in competition could cause
our retail partners to no longer offer the Progressive Leasing product in favor of our competitors, or to offer the Progressive
Leasing product and the products of its competitors simultaneously at the same store locations, which could slow growth in the
Progressive Leasing business and limit or reduce profitability.
In addition, as a result of changes to the regulatory framework within which we operate, among other reasons, new competitors
may emerge or current and potential competitors may establish financial or strategic relationships among themselves or with
third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. The occurrence of any of these events could materially adversely impact our business.
Progressive Leasing’s loss of operating revenues from key retail partners could materially and adversely affect our
business.
Progressive Leasing’s relationship with its largest retail partners will have a significant impact on our operating revenues in
future periods. The loss of any key retailers would have a material adverse effect on our business and could be caused by
factors beyond our control. For example, the customers that Progressive obtained through its relationship with one of its retail
partners accounted for 11% of our consolidated revenues for our 2018 fiscal year. Any extended discontinuance of
Progressive’s relationship with that retailer could, if not replaced, have a material adverse impact on our results of operations.
In addition, in the event that Progressive enters into new or amended business or contractual terms or conditions with any of its
largest retail partners that are less favorable to Progressive than its current arrangements with those retail partners, including
with respect to the prices Progressive pays those retail partners for merchandise that Progressive leases to its customers,
whether due to competitive pressures or otherwise, our business could be materially and adversely effected. Any publicity
associated with the loss of any of Progressive Leasing’s large retail partners could harm our reputation, making it more difficult
to attract and retain consumers and other retail partners, and could lessen Progressive Leasing’s negotiating power with its
remaining and prospective retail partners. Our operating revenues and operating results could also suffer if any of Progressive
Leasing’s retail partners experiences a significant decline in sales for any reason.
Many of Progressive Leasing’s contracts with its retail partners can be terminated by them on relatively short notice, and all can
be terminated in limited circumstances, such as our material breach or insolvency, certain changes in control of Progressive
Leasing, and its inability or unwillingness to agree to requested pricing changes. There can be no assurance that Progressive
Leasing will be able to continue its relationships with its largest retail partners on the same or more favorable terms in future
periods or that its relationships will continue beyond the terms of our existing contracts with them. Our operating revenues and
operating results could suffer if, among other things, any of Progressive Leasing’s retail partners renegotiates, terminates or
fails to renew, or fails to renew on similar or favorable terms, their agreements with Progressive Leasing or otherwise chooses
to modify the level of support they provide for Progressive Leasing’s lease-purchase option.
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We may pursue acquisitions or investments of complementary companies or businesses, and the failure of an acquisition
or investment to produce the anticipated results or the inability to fully integrate the acquired companies could have an
adverse impact on our business.
We may from time to time acquire or invest in complementary companies or businesses, and acquire our franchisees, as we
have done in recent years. For example, we acquired the operations of a total of 263 of our former franchisees’ store locations
during 2017 and 2018. There can be no assurance that those acquisitions will produce the results we expected at the time we
entered into those acquisitions, or that we will be able to successfully integrate the operations of those former franchisee
locations, including their customers and personnel. The companies and businesses we may acquire may operate lines of
business or offer services and products that we have never operated or offered previously. These companies and businesses may
also be subject to regulatory regimes that have not previously applied and may significantly impact our business. The success
of any acquisitions or investments we undertake is based on our ability to make accurate assumptions regarding the valuation,
operations, growth potential, integration and other factors relating to the respective business.
There can be no assurance that our acquisitions or investments will produce the results that we expect at the time we enter into
or complete the transaction. Furthermore, acquisitions may result in dilutive issuances of our equity securities, the incurrence of
debt, contingent liabilities, amortization expenses or write-offs of goodwill or other intangibles, any of which could harm our
financial condition. We also may not be able to successfully integrate operations that we acquire, including their customers,
personnel, financial systems, supply chain and other operations, which could adversely affect our business. Acquisitions may
also result in the diversion of our capital and our management’s attention from other business issues and opportunities and from
our on-going strategic plan to improve the performance of the Aaron’s Business even if we are unable to successfully complete
the acquisition.
Our proprietary algorithms and customer lease decisioning tools used to approve customers could no longer be
indicative of our customers’ ability to perform under their lease agreements with us.
We believe Progressive Leasing’s proprietary, centralized customer lease decisioning process to be a key to the success of the
Progressive Leasing business. That and other decisioning processes and tools are also used to approve customers of Aaron’s
and DAMI. We assume behavior and attributes observed for prior customers, among other factors, are indicative of
performance by future customers. Unexpected changes in behavior caused by macroeconomic conditions, including, for
example, the U.S. economy experiencing a recession and job losses related thereto, increases in interest rates, inflationary
pressures, changes in consumer preferences, availability of alternative products or other factors, however, could lead to
increased incidence and costs related to defaulted leases and/or merchandise losses.
We could lose our access to data sources, which could cause us competitive harm and have a material adverse effect on
our business, operating results, and financial condition.
We are heavily dependent on data provided by third-party providers. For example, our Progressive Leasing business employs a
proprietary customer lease decisioning algorithm when making lease approval decisions for its customers. This algorithm
depends extensively upon continued access to and receipt of data from external sources, such as third-party data vendors. In
addition, our Aarons.com and DAMI businesses are similarly dependent on customer attribute data provided by external
sources. Our data providers could stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for
their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach,
regulatory concerns or for competitive reasons. We could also become subject to increased legislative, regulatory or judicial
restrictions or mandates on the collection, disclosure or use of such data, in particular if such data is not collected by our
providers in a way that allows us to legally use the data. If we were to lose access to this external data or if our access or use
were restricted or were to become less economical or desirable, our Progressive Leasing, Aaron’s Business and DAMI
businesses would be negatively impacted, which would adversely affect our operating results and financial condition. We
cannot provide assurance that we will be successful in maintaining our relationships with these external data source providers
or that we will be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide
assurance that we will be able to obtain data from alternative sources if our current sources become unavailable.
If our information technology systems are impaired, our business could be interrupted, our reputation could be harmed
and we may experience lost revenues and increased costs and expenses.
We rely on our information technology systems to process transactions with our customers, including tracking lease payments
on merchandise, and to manage other important functions of our business. Failures of our systems, such as “bugs,” crashes,
internet failures and outages, operator error, or catastrophic events, could seriously impair our ability to operate our business,
and our business continuity and contingency plans related to such information technology failures may not be adequate to
prevent that type of serious impairment. If our information technology systems are impaired, our business (and that of our
franchisees) could be interrupted, our reputation could be harmed, we may experience lost revenues or sales and we could
experience increased costs and expenses to remediate the problem.
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The transactions offered to consumers by our businesses may be negatively characterized by consumer advocacy
groups, the media and certain federal, state and local government officials, and if those negative characterizations
become increasingly accepted by consumers and/or Progressive Leasing’s or DAMI’s retail and merchant partners,
demand for our goods and the transactions we offer could decrease and our business could be materially adversely
affected.
Certain consumer advocacy groups, media reports and federal and state legislators have asserted that laws and regulations
should be broader and more restrictive regarding lease-to-own transactions. The consumer advocacy groups and media reports
generally focus on the total cost to a consumer to acquire an item, which is often alleged to be higher than the interest typically
charged by banks or similar lending institutions to consumers with better credit histories. This "cost-of-rental" amount, which is
generally defined as lease fees paid in excess of the "retail" price of the goods, is from time to time characterized by consumer
advocacy groups and media reports as predatory or abusive without discussing benefits associated with our lease-to-own
programs or the lack of viable alternatives for our customers’ needs. Although we strongly disagree with these
characterizations, if the negative characterization of these types of lease-to-own transactions becomes increasingly accepted by
consumers or Progressive Leasing’s or DAMI’s retail and merchant partners, demand for our products and services could
significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition.
Additionally, if the negative characterization of these types of transactions is accepted by legislators and regulators, we could
become subject to more restrictive laws and regulations, which could have a material adverse effect on our business, results of
operations and financial condition. The vast expansion and reach of technology, including social media platforms, has increased
the risk that our reputation could be significantly impacted by these negative characterizations in a relatively short amount of
time. If we are unable to quickly and effectively respond to such characterizations, we may experience declines in customer
loyalty and traffic and our relationships with our retail partners may suffer, which could have a material adverse effect on our
business, results of operations and financial condition. Additionally, any failure by our competitors, including smaller, regional
competitors, for example, to comply with the laws and regulations applicable to the traditional and/or virtual lease-to-own
models, or any actions by those competitors that are challenged by consumers, advocacy groups, the media or governmental
agencies or entities as being abusive or predatory could result in our Aaron’s Business and/or Progressive Leasing being
mischaracterized, by implication, as engaging in similar unlawful or inappropriate activities or business practices, merely
because we operate in the same general industries as such competitors.
We may engage in litigation with our franchisees.
Although we believe we generally enjoy a positive working relationship with our franchisees, the nature of the franchisor-
franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of
complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the
franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise
agreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our
products and the customer experience. In addition, we may be subject to claims by our franchisees relating to our franchise
disclosure documents, including claims based on financial information contained in those documents. Engaging in such
litigation may be costly, time-consuming and may distract management and materially adversely affect our relationships with
franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations and
may damage our reputation and brand. Furthermore, existing and future franchise-related legislation could subject us to
additional litigation risk in the event we terminate or fail to renew a franchise relationship.
From time to time we are subject to legal and regulatory proceedings which seek material damages or seek to place
significant restrictions on our business operations. These proceedings may be negatively perceived by the public and
materially and adversely affect our business. Certain judicial or regulatory decisions may restrict or eliminate the
enforceability of certain types of contractual provisions designed to limit costly litigation, including class actions, as a
dispute resolution method.
We are subject to legal and regulatory proceedings from time to time which may result in material damages or place significant
restrictions on our business operations. For example, we are currently subject to settlements with the FTC that we entered into
in 2013, as well as the State of California and the Commonwealth of Pennsylvania regarding our business practices and
compliance with privacy laws in those states. Those settlements prohibit us from engaging in certain business practices that
many of our competitors continue to engage in, and that our competitors have not been prohibited from engaging in, which may
place us at a competitive disadvantage. If we violate the terms of those settlements, we may be subject to additional
proceedings, further restrictions on our business, or civil or other penalties. Although we do not presently believe that any of
our current legal or regulatory proceedings will ultimately have a material adverse impact on our operations, we cannot assure
you that we will not incur material damages or penalties in a lawsuit or other proceeding in the future and/or significant defense
costs related to such lawsuits or regulatory proceedings. For example, we operate a fleet of approximately 3,000 delivery trucks
and, in addition to the significant compliance-related costs associated with operating such a fleet, we may incur significant
adverse judgments, damages and penalties related to accidents that those trucks may be involved in from time to time.
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Similarly, other companies may pursue legal action against us for allegedly violating their intellectual property rights, including
with respect to the manner in which our omnichannel platform and aspects of Progressive Leasing’s virtual lease-to-own
technology are designed and operate, whether in conjunction with the e-commerce platforms of Progressive Leasing’s retail
partners, or otherwise. Significant adverse judgments, penalties, settlement amounts, amounts needed to post a bond pending an
appeal or defense costs could materially and adversely affect our liquidity and capital resources. It is also possible that, as a
result of a present or future governmental or other proceeding or settlement, significant restrictions will be placed upon, or
significant changes made to, our business practices, operations or methods, including pricing or similar terms. Any such
restrictions or changes may adversely affect our profitability or increase our compliance costs.
To attempt to limit costly and lengthy consumer, employee and other litigation, including class actions, the Company requires
its customers and employers to sign arbitration agreements and class action waivers, many of which offer opt-out provisions.
Recent judicial and regulatory actions have attempted to restrict or eliminate the enforceability of such agreements and waivers.
If the Company is not permitted to use arbitration agreements and/or class action waivers, or if the enforceability of such
agreements and waivers is restricted or eliminated, the Company could incur increased costs to resolve legal actions brought by
customers, employees and others, as it would be forced to participate in more expensive and lengthy dispute resolution
processes.
We depend on hiring an adequate number of hourly employees to run our business and are subject to government
regulations concerning these and our other employees, including wage and hour regulations.
Our workforce is comprised primarily of employees who work on an hourly basis. To grow our operations and meet the needs
and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same time
controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention
and other costs. In certain areas where we operate, there is significant competition for employees, including from retailers and
restaurants. The lack of availability of an adequate number of hourly employees, or our inability to attract and retain them, or
an increase in wages and benefits to attract and maintain current employees could adversely affect our business, results of
operations, cash flows and financial condition. We are subject to applicable rules and regulations relating to our relationship
with our employees, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and
working conditions and immigration status. Accordingly, federal, state or local legislated increases in the minimum wage, as
well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates,
compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business,
prospects, results of operations and financial condition.
The geographic concentration of our Aaron’s stores, as well as those of Progressive Leasing’s retail partners, may
magnify the impact of conditions in a particular region, including economic downturns and other occurrences.
The concentration of our Aaron’s stores, and/or those of our retail partners at Progressive Leasing, in one region or a limited
number of markets may expose us to risks of adverse economic developments that are greater than if our store portfolio and
retail partners were more geographically diverse.
In addition, our store operations, as well as those of our retail partners at Progressive Leasing, are subject to the effects of
adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornadoes, which have in
the past caused damage such as flooding and other damage to our stores and those of our retail partners in specific geographic
locations, including in Florida and Texas, two of our large markets, and may, depending upon the location and severity of such
events, unfavorably impact our business continuity. Additionally, we cannot assure you that the amount of our hurricane,
windstorm, earthquake, flood, business interruption or other casualty insurance we maintain from time to time would entirely
cover damages caused by any such event.
23
DAMI’s "second-look" credit programs for below-prime consumers differ in significant respects from the risks of
Aaron’s store-based lease-to-own business. The risks could have a material negative effect on Progressive Leasing,
which could result in a material adverse effect on our entire business.
As discussed above, as we execute on our strategic plans, we may continue to expand into complementary businesses that
engage in financial, banking or lending services. For example, DAMI, which through its HELPcard® and other private label
credit products, offers merchant partners one source for a variety of open-end credit programs for below-prime consumers, is a
business that differs in significant respects from our sales and lease ownership businesses. Consequently, DAMI faces different
risks than are associated with Aaron’s sales and lease ownership concept, which Aaron’s and its franchisees offer through their
own stores. Because DAMI is operated as a wholly-owned subsidiary of Progressive Leasing, the risks DAMI faces could have
a material negative effect on Progressive Leasing, which could result in a material adverse effect on our entire business. These
potential risks include, among others, DAMI’s:
•
•
•
reliance on third-party retailers (over whom DAMI cannot exercise the degree of control and oversight that Aaron’s
Business, including franchisees, can assert over their own respective employees) for many important business
functions, from advertising through assistance with finance applications;
reliance on two bank partners to issue DAMI’s HELPcard® and other credit products. The banks’ regulators, including
the FDIC, could at any time limit or otherwise modify the banks’ ability to continue their relationships with DAMI and
any significant interruption of those relationships would result in DAMI being unable to use exported rates or acquire
new receivables without moving to a costly and inefficient state-by-state model, and being unable to provide other
credit products. It is possible that a regulatory position or action taken with respect to DAMI’s issuing banks might
result in the banks’ inability or unwillingness to originate future credit products on DAMI’s behalf or in partnership
with it, which would adversely affect DAMI’s ability to grow its point-of-sale and direct-to-consumer credit products
and other consumer credit offerings and underlying receivables. In addition, DAMI’s agreements with its issuing bank
partners have scheduled expiration dates. Although those expiration dates are several months apart, if DAMI is unable
to extend or execute new agreements with both of its issuing banks upon the expiration of its current agreements, or if
its existing agreements both were terminated or otherwise disrupted, there is a risk that DAMI would not be able to
enter into an agreement with an alternative bank provider on terms that DAMI would consider favorable or in a timely
manner without disruption of its business; and
different legal and regulatory risks, and different regulators (including the FDIC, for example), than those applicable
to Aaron’s and Progressive Leasing’s sales and lease ownership businesses, including risks arising from the Truth in
Lending Act, state credit laws and the offering of open-end credit, the potential that regulators may target DAMI’s
operating model and the interest rates it charges, and the risk of unfavorable court decisions relating to the True
Lender Doctrine, including among other factors, exporting of interest rates and state usury laws.
These risks could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our
entire business.
If our independent franchisees fail to meet their debt service payments or other obligations under outstanding loans
guaranteed by us as part of a franchise loan program, we may be required to pay to satisfy these obligations which
could have a material adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain franchisees under a franchise loan program with several banks with a maximum
commitment amount of $55.0 million. In the event these franchisees are unable to meet their debt service payments or
otherwise experience events of default, we would be unconditionally liable for a portion of the outstanding balance of the
franchisees’ debt obligations, which at December 31, 2018 was $39.0 million.
We have had no significant losses associated with the franchise loan and guaranty program since its inception. Although we
believe that any losses associated with defaults would be mitigated through recovery of lease merchandise and other assets, we
cannot guarantee that there will be no significant losses in the future or that we will be able to adequately mitigate any such
losses. In addition to being liable for franchisee loan defaults under this loan and guaranty program, we could suffer a loss of
franchisee fees and royalties, and a loss of revenue and profit derived from our sales of merchandise to franchisees, in the event
that any defaulting franchisees become insolvent and/or cease business operations due to financial difficulties, and could suffer
write-downs of outstanding receivables those franchisees owe us if they fail to make those payments to us. If we fail to
adequately mitigate any such future losses, our business and financial condition could be materially adversely impacted.
24
Operational and other failures by our franchisees may adversely impact us.
Qualified franchisees who conform to our standards and requirements are important to the overall success of our business. Our
franchisees, however, are independent businesses and not employees, and consequently we cannot and do not control them to
the same extent as our Company-operated stores. Our franchisees may fail in key areas, or experience significant business or
financial difficulties, which could slow our growth, reduce our franchise revenues, damage our reputation, expose us to
regulatory enforcement actions or private litigation and/or cause us to incur additional costs. If our franchisees experience
business or financial difficulties, we could suffer a loss of franchisee fees, royalties, and revenue and profits derived from our
sales of merchandise to franchisees, and could suffer write-downs of outstanding receivables those franchisees owe us if they
fail to make those payments to us. If we fail to adequately mitigate any such future losses, our business and financial condition
could be materially adversely impacted.
We are subject to laws that regulate franchisor-franchisee relationships. Our ability to enforce our rights against our
franchisees may be adversely affected by these laws, which could impair our growth strategy and cause our franchise
revenues to decline.
As a franchisor, we are subject to regulation by the FTC, state laws and certain Canadian provincial laws regulating the offer
and sale of franchises. Our failure to comply with applicable franchise regulations could cause us to lose franchise fees and
ongoing royalty revenues. Moreover, state and provincial laws that regulate substantive aspects of our relationships with
franchisees may limit our ability to terminate or otherwise resolve conflicts with our franchisees or enforce contractual duties
or rights we believe we have with respect to our franchisees.
Changes to the current law with respect to the assignment of liabilities in the franchise business model could adversely
impact our profitability.
One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a
franchisor is generally not responsible for the acts, omissions or liabilities of its franchisees. Recently, established law has been
challenged and questioned by the plaintiffs’ bar and certain regulators, and the outcome of these challenges and new regulatory
positions remains unknown. If these challenges and/or new positions are successful in altering currently settled law, it could
significantly change the way we and other franchisors conduct business and adversely impact our profitability.
For example, a determination that we are a joint employer with our franchisees or that franchisees are part of one unified
system with joint and several liability under the National Labor Relations Act, statutes administered by the Equal Employment
Opportunity Commission, OSHA regulations and other areas of labor and employment law could subject us and/or our
franchisees to liability for the unfair labor practices, wage-and-hour law violations, employment discrimination law violations,
OSHA regulation violations and other employment-related liabilities of one or more franchisees. Furthermore, any such change
in law would create an increased likelihood that certain franchised networks would be required to employ unionized labor,
which could impact franchisors like us through, among other things, increased labor costs and difficulty in attracting new
franchisees. In addition, if these changes were to be expanded outside of the employment context, we could be held liable for
other claims against franchisees. Therefore, any such regulatory action or court decisions could have a material adverse effect
on our results of operations.
The loss of the services of our key executives, or our inability to attract and retain key talent in the areas of IT and
analytics, sales, marketing, finance and operations could have a material adverse impact on our operations.
We believe that we have benefited substantially from our current executive leadership and that the unexpected loss of their
services in the future could adversely affect our business and operations. We also depend on the continued services of the rest
of our management team. The loss of these individuals without adequate replacement could adversely affect our business.
Further, we believe that the unexpected loss of certain key talent in the areas of information technology and analytics, sales,
marketing, finance and operations in the future could adversely affect our business and operations. We do not carry key man
life insurance on any of our personnel. The inability to attract and retain qualified individuals, or a significant increase in the
costs to do so, would materially adversely affect our operations.
If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and
procedures, we may not be able to accurately report our financial results, or report them in a timely manner.
As a public reporting company subject to the rules and regulations established from time to time by the SEC and the New York
Stock Exchange, we are required to, among other things, establish and periodically evaluate procedures with respect to our
disclosure controls and procedures. In addition, as a public company, we are required to document and test our internal control
over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify, on an
annual basis, that our internal control over financial reporting is effective.
25
If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we
may not be able to accurately report our financial results, or report them in a timely manner, which could cause a decline in our
stock price and adversely affect our results of operations and financial condition. In addition, if our senior management is
unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such
controls, or if our independent registered public accounting firm cannot render an unqualified opinion on the effectiveness of
our internal control over financial reporting, when required, or if material weaknesses in our internal controls are identified, we
could be subject to increased regulatory scrutiny and a loss of public and investor confidence, which could also have a material
adverse effect on our business and our stock price.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
•
•
•
•
•
•
•
•
our ability to meet market expectations with respect to the growth and profitability of each of our operating segments;
quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store
revenues or when and how many locations we acquire, open or close;
quarterly variations in our competitors’ results of operations;
changes in earnings estimates or buy/sell recommendations by financial analysts;
how our actual financial performance compares to the financial performance outlook we provide;
state or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be,
adverse to our operations;
the stock price performance of comparable companies; and
continuing unpredictable global and regional economic conditions.
In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the
market price of many specialty retailers in ways that may have been unrelated to these companies’ operating performance.
We are subject to sales, income and other taxes, which can be difficult and complex to calculate due to the nature of our
various businesses. A failure to correctly calculate and pay such taxes could result in substantial tax liabilities and a
material adverse effect on our results of operations.
The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the lease-to-
own industry generally and our virtual lease-to-own Progressive Leasing and Aarons.com businesses more specifically. Many
of the fundamental statutes and regulations that impose these taxes were established before the growth of the lease-to-own
industry and e-commerce and, therefore, in many cases it is not clear how existing statutes apply to our various businesses. In
addition, governments are increasingly looking for ways to increase revenues, which has resulted in discussions about tax
reform and other legislative action to increase tax revenues, including through indirect taxes. This also could result in other
adverse changes in or interpretations of existing sales, income and other tax regulations. For example, from time to time, some
taxing authorities in the United States have notified us that they believe we owe them certain taxes imposed on transactions
with our customers, including some state tax authorities suggesting that our Progressive Leasing business may owe certain state
taxes based on the locations of Progressive Leasing’s retail partners where Progressive Leasing’s lease-to-own transactions are
originated. Although these notifications have not resulted in material tax liabilities to date, there is a risk that one or more
jurisdictions may be successful in the future, which could have a material adverse effect on our results of operations.
We must successfully order and manage our Aaron’s Business inventory to reflect customer demand and anticipate
changing consumer preferences and buying trends or our revenue and profitability will be adversely affected.
The success of our Aaron’s Business depends upon our ability to successfully manage our inventory and to anticipate and
respond to merchandise trends and customer demands in a timely manner. We cannot always accurately predict consumer
preferences and they may change over time. We must order certain types of merchandise, such as electronics, well in advance
of seasonal increases in customer demand for those products. The extended lead times for many of our purchases may make it
difficult for us to respond rapidly to new or changing product trends or changes in prices. If we misjudge either the market for
our merchandise, our customers’ product preferences or our customers’ leasing habits, our revenue may decline significantly
and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down
excess inventory, either of which would result in lower profit margins. In addition, our level of profitability and success in our
Aaron’s Business depends on our ability to successfully re-lease or sale our inventory of merchandise that we take back from
the customers of our Aaron’s Business, due to their lease agreements expiring, or otherwise.
26
Employee misconduct or misconduct by third parties acting on our behalf, or third parties to whom our Aaron’s
Business previously sold certain of its past due customer accounts for the third parties to attempt to collect, could harm
us by subjecting us to monetary loss, significant legal liability, regulatory scrutiny and reputational harm.
Our reputation is critical to maintaining and developing relationships with our existing and potential customers and third parties
with whom we do business. There is a risk that our employees or the employees of a third-party retailer with whom our
Progressive Leasing business partners, or of a third-party merchant with whom our DAMI segment does business, or a third-
party to whom our Aaron’s Business previously sold past due customer accounts for the third-party to attempt to collect, a type
of transaction we no longer enter into, could engage in misconduct that adversely affects our reputation and business. For
example, if one of our employees engages in discrimination or harassment in the workplace, or if an employee or a third-party
directly or indirectly associated with our business were to engage in, or be accused of engaging in, illegal or suspicious
activities including fraud or theft of our customers’ information, we could suffer direct losses from the activity and, in addition,
we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, customer
relationships and ability to attract future customers. Employee or third-party misconduct could prompt regulators to allege or to
determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform
employees of applicable rules or to detect violations of such rules. Our Company-operated Aaron’s Business stores have
experienced employee fraud from time to time, and it is not always possible to deter employee or third-party misconduct. The
precautions that we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees or
third-party contractors or other third parties who are directly or indirectly associated with our business, or even unsubstantiated
allegations of misconduct, could result in a material adverse effect on our reputation and our business.
Product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce
sales and increase costs.
The products we sell and lease in our Aaron’s Business and lease through our Progressive Leasing business are subject to
regulation by the U.S. Consumer Product Safety Commission and similar state regulatory authorities. Such products could be
subject to recalls and other actions by these authorities. Product safety or quality concerns may require us to voluntarily remove
selected products from our Aaron’s stores, or from our customers’ homes. Such recalls and voluntary removal of products can
result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service
costs, which could have a material adverse effect on our financial condition. In addition, given the terms of our lease
agreements with our customers, in the event of such a product quality or safety issue, our customers who have leased the
defective merchandise from us could terminate their lease agreements for that merchandise and/or not renew those lease
arrangements, which could have a material adverse effect on our financial condition, if we are unable to recover those losses
from the vendor who supplied us with the defective merchandise.
We may be alleged to have infringed upon intellectual property rights owned by others, or may be unable to protect our
intellectual property.
Competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us,
infringe on their intellectual property rights. Given the complex, rapidly changing and competitive technological and business
environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an
assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim (even if we
ultimately prevail); to pay significant money damages; to lose significant revenues; to be prohibited from using the relevant
systems, processes, technologies or other intellectual property; to cease offering certain products or services or to incur
significant license, royalty or technology development expenses. Even in instances where we believe that claims and
allegations of intellectual property infringement against us are without merit, defending against such claims is time consuming
and expensive and could result in the diversion of time and attention of our management and employees. Moreover, we rely on
a variety of measures to protect our intellectual property and proprietary information. These measures may not prevent
misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive
advantage, and in any event, we may be required to litigate to protect our intellectual property and proprietary information from
misappropriation or infringement by others, which is expensive, could cause a diversion of resources and may not be
successful.
27
Interest rates on certain of our outstanding indebtedness are tied to LIBOR and may be subject to change.
LIBOR and certain other "benchmarks" are the subject of recent national, international, and other regulatory guidance and
proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other
consequences which cannot be predicted. In particular, on July 27, 2017, the United Kingdom’s Financial Conduct Authority,
which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after
2021. It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established.
As of December 31, 2018, approximately $240 million of our outstanding indebtedness had interest rate payments determined
based directly or indirectly on LIBOR, including our outstanding indebtedness under our revolving credit facility. If there is
uncertainty as to whether LIBOR will continue to be quoted, if LIBOR ceases to exist or if the methods of calculating LIBOR
change from current methods for any reason, the interest rates on this indebtedness may increase substantially from those we
have previously experienced. Further, our revolving credit facility contains provisions specifying that, if LIBOR is no longer
available and the condition is unlikely to be temporary, then we and the lenders can establish an alternative benchmark rate for
indebtedness under our revolving credit facility. Any such alternative benchmark rate would give due consideration to
prevailing market convention for determining rates for syndicated loans in the United States. At this point it is not clear what, if
any, alternative benchmark measure may be adopted in the marketplace generally to replace LIBOR should it cease to exist,
however, any alternative benchmark rate could increase the interest expense we have historically realized on our indebtedness
or realize on future indebtedness.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
28
ITEM 2. PROPERTIES
The Company leases warehouse and retail store space for most of its store-based operations, call center space, and management
and information technology space for corporate functions under operating leases expiring at various times through 2033. 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 purchase options. The following table sets forth
certain information regarding our furniture manufacturing plants, bedding facilities, fulfillment centers, service centers,
warehouses, corporate management and call center facilities as of December 31, 2018:
LOCATION
Atlanta, Georgia
Kennesaw, Georgia
Draper, Utah
Glendale, Arizona
Cairo, Georgia
Cairo, Georgia
Cairo, Georgia
Coolidge, Georgia
Coolidge, Georgia
Coolidge, Georgia
Coolidge, Georgia
Lewisberry, Pennsylvania
Fairburn, Georgia
Sugarland, Texas
Auburndale, Florida
Kansas City, Kansas
Phoenix, Arizona
Plainfield, Indiana
Auburndale, Florida
Belcamp, Maryland
Obetz, Ohio
Dallas, Texas
Fairburn, Georgia
Sugarland, Texas
Huntersville, North Carolina
LaVergne, Tennessee
Oklahoma City, Oklahoma
Phoenix, Arizona
Magnolia, Mississippi
Plainfield, Indiana
Portland, Oregon
Westfield, Massachusetts
Kansas City, Kansas
Cheswick, Pennsylvania
SEGMENT, PRIMARY USE AND HOW HELD
SQ. FT.
Aaron's, Inc.—Executive/Administrative Offices – Leased
Aaron's, Inc.—Administrative Offices – Leased
Progressive Leasing—Corporate Management/Call Center –
Leased
Progressive Leasing—Corporate Management/Call Center –
Leased
Aaron's Business—Furniture Manufacturing – Owned
Aaron's Business—Furniture Manufacturing – Owned
Aaron's Business—Furniture Parts Warehouse – Leased
Aaron's Business—Furniture Manufacturing – Owned
Aaron's Business—Furniture Manufacturing – Owned
Aaron's Business—Furniture Manufacturing – Owned
Aaron's Business—Administration and Showroom – Owned
Aaron's Business—Bedding Manufacturing – Leased
Aaron's Business—Bedding Manufacturing – Leased
Aaron's Business—Bedding Manufacturing – Owned
Aaron's Business—Bedding Manufacturing – Leased
Aaron's Business—Bedding Manufacturing – Leased
Aaron's Business—Bedding Manufacturing – Leased
Aaron's Business—Bedding Manufacturing – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Owned
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
Aaron's Business—Fulfillment Center – Leased
72,000
115,000
148,000
69,000
300,000
147,000
111,000
81,000
48,000
41,000
10,000
25,000
57,000
23,000
20,000
13,000
24,000
40,000
131,000
95,000
91,000
133,000
115,000
135,000
206,000
100,000
130,000
107,000
125,000
156,000
98,000
131,000
103,000
126,000
29
LOCATION
Auburndale, Florida
Belcamp, Maryland
Cheswick, Pennsylvania
Fairburn, Georgia
Grand Prairie, Texas
Hartford, Connecticut
Houston, Texas
Huntersville, North Carolina
Kansas City, Kansas
Obetz, Ohio
Oklahoma City, Oklahoma
Phoenix, Arizona
Plainfield, Indiana
Ridgeland, Mississippi
South Madison, Tennessee
Draper, Utah
Fayetteville, Arkansas
SEGMENT, PRIMARY USE AND HOW HELD
SQ. FT.
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
Aaron's Business—Service Center – Leased
DAMI—Corporate Management/Call Center – Leased
DAMI—Corporate Management – Leased
7,000
5,000
10,000
10,000
7,000
9,000
20,000
18,000
8,000
7,000
10,000
7,000
13,000
10,000
23,000
25,000
7,000
We believe that all of our facilities are well maintained and adequate for their current and reasonably foreseeable uses.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings arising in the ordinary course of business. While any proceeding
contains an element of uncertainty, we do not currently believe that any of the outstanding legal proceedings to which we are a
party will have a material adverse impact on our business, financial position or results of operations. However, an adverse
resolution of a number of these items may have a material adverse impact on our business, financial position or results of
operations. For further information, see Note 9 to these consolidated financial statements under the heading "Legal
Proceedings," which discussion is incorporated by reference in response to this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Effective December 13, 2010, all shares of the Company's common stock began trading as a single class on the New York
Stock Exchange under the ticker symbol "AAN." The CUSIP number of the Company's common stock is 002535300.
The number of shareholders of record of the Company's common stock at February 8, 2019 was 151. The closing price for the
common stock at February 8, 2019 was $49.93.
The following table shows the range of high and low sales prices per share for the Company's common stock and the quarterly
cash dividends declared per share for the periods indicated.
Common Stock
Year Ended December 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Common Stock
Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
$
$
49.77
48.97
56.00
54.71
32.88
40.33
48.22
45.06
High
$
$
36.20
38.77
41.73
39.28
26.12
29.05
37.14
34.29
Low
Cash
Dividends
Per Share
0.0300
0.0300
0.0300
0.0350
Cash
Dividends
Per Share
0.0275
0.0275
0.0275
0.0300
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. Dividends will be payable only when, and if, declared by the Company's
Board of Directors. Under our revolving credit agreement, we may pay cash dividends in any year so long as, after giving pro
forma effect to the dividend payment, we maintain compliance with our financial covenants and no event of default has
occurred or would result from the payment.
Issuer Purchases of Equity Securities
The following table presents our share repurchase activity for the three months ended December 31, 2018:
Period
October 1, 2018 through October 31, 2018
November 1, 2018 through November 30, 2018
December 1, 2018 through December 31, 2018
Total
Total Number of
Shares
Purchased
Average Price
Paid Per
Share
69,049
949,897
430,000
1,448,946
47.09
49.24
43.51
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
69,049
949,897
430,000
1,448,946
Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
1
Programs
396,745,397
349,976,362
331,265,263
1Share repurchases are conducted under authorizations made from time to time by the Company’s Board of Directors. The most
recent authorization, which replaced our previous repurchase program, was publicly announced on February 15, 2018 and
authorized the repurchase of shares up to a maximum amount of $500 million. Subject to the terms of the Board's authorization
and applicable law, repurchases may be made at such times and in such amounts as the Company deems appropriate.
Repurchases may be discontinued at any time.
31
Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning the Company's equity compensation plans is set forth in Item 12 of Part III of this Annual Report on
Form 10-K.
Performance Graph
Comparison of 5 Year Cumulative Total Return*
Among Aaron's, Inc., the S&P Midcap 400 Index, and S&P 400 Retailing Index
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
The line graph above and the table below compare, for the last five years, the yearly dollar 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 the S&P 400 Retailing Index.
December 31,
Aaron's, Inc.
S&P Midcap 400
S&P 400 Retailing Index
2013
2014
2015
2016
2017
2018
$
100.00 $
104.29 $
76.62 $
109.90 $
137.33 $
145.31
100.00
100.00
109.77
112.56
107.38
92.64
129.65
92.30
150.71
92.53
134.01
86.28
32
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data of Aaron's, Inc., which have been derived from its
Consolidated Financial Statements for each of the five years in the period ended December 31, 2018. This historical
information may not be indicative of the Company's future performance. The information set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the notes thereto.
(Dollar Amounts in Thousands, Except Per Share Data)
OPERATING RESULTS
Revenues:
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Interest and Fees on Loans Receivable
Other
Costs and Expenses:
Depreciation of Lease Merchandise
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Financial Advisory and Legal Costs
Restructuring Expenses
Retirement and Vacation Charges
Progressive-Related Transaction Costs
Legal and Regulatory Income
Other Operating (Income) Expense
Operating Profit
Interest Income
Interest Expense
Impairment of Investment
Other Non-Operating (Expense) Income, Net
Earnings Before Income Tax Expense (Benefit)
Income Tax Expense (Benefit)
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
Cash Dividends Per Share
FINANCIAL POSITION
Lease Merchandise, Net
Property, Plant and Equipment, Net
Total Assets
Debt
Shareholders' Equity
AT YEAR END (unaudited)
Stores Open:
Company-operated
Franchised
Lease Agreements in Effect1
Progressive Leasing Invoice Volume2
Number of Employees1
2018
2017
2016
2015
2014
Year Ended December 31,
$ 3,506,418
31,271
207,262
44,815
37,318
1,839
3,828,923
$ 3,000,231
27,465
270,253
48,278
34,925
2,556
3,383,708
$ 2,780,824
29,418
309,446
58,350
24,080
5,598
3,207,716
$ 2,684,184
32,872
390,137
63,507
2,845
6,211
3,179,756
$ 2,221,574
38,360
363,355
65,902
—
5,842
2,695,033
1,727,904
19,819
174,180
1,618,423
—
1,105
—
—
—
(2,116)
3,539,315
289,608
454
(16,440)
(20,098)
(1,320)
252,204
55,994
196,210
2.84
2.78
0.1250
$
$
$
1,448,631
17,578
241,356
1,403,985
—
17,994
—
—
—
(535)
3,129,009
254,699
1,835
(20,538)
—
3,581
239,577
(52,959)
292,536
4.13
4.06
0.1125
$
$
$
$ 1,318,470
229,492
2,826,692
424,752
1,760,708
$ 1,152,135
207,687
2,692,264
368,798
1,728,004
1,304,295
18,580
276,608
1,351,785
—
20,218
—
—
—
(6,446)
2,965,040
242,676
2,699
(23,390)
—
(3,563)
218,422
79,139
139,283
1.93
1.91
0.1025
1,212,644
21,040
351,777
1,357,030
—
—
—
—
—
1,324
2,943,815
235,941
2,185
(23,339)
—
(1,667)
213,120
77,411
135,709
1.87
1.86
0.0940
$
$
$
932,634
24,541
330,057
1,231,801
13,661
9,140
9,094
6,638
(1,200)
(1,176)
2,555,190
139,843
2,921
(19,215)
—
(1,845)
121,704
43,471
78,233
1.08
1.08
0.0860
$
$
$
999,381
211,271
2,615,736
497,829
1,481,598
$ 1,138,938
225,836
2,698,488
606,746
1,366,618
$ 1,087,032
219,417
2,456,844
606,082
1,223,521
$
$
$
$
1,312
377
2,463,400
1,429,550
11,800
1,175
551
2,263,200
1,160,732
11,900
1,165
699
2,104,700
884,812
11,500
1,305
734
2,164,200
780,038
12,700
1,326
782
2,111,800
471,902
12,400
1 Excludes Franchised operations
2 Progressive Leasing was acquired on April 14, 2014. Invoice volume is defined as the retail price of lease merchandise acquired and then leased to customers
during the period, net of returns.
33
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business Overview
Aaron’s, Inc. ("we," "our," "us," or the "Company") is a leading omnichannel provider of lease-purchase solutions. As of
December 31, 2018, the Company’s operating segments are Progressive Leasing, Aaron’s Business and DAMI.
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions through more than 24,000 retail
locations in 46 states and the District of Columbia. It does so by purchasing merchandise from third-party retailers desired by
those retailers’ customers and, in turn, leasing that merchandise to the customers through a cancellable lease-to-own
transaction. Progressive Leasing consequently has no stores of its own, but rather offers lease-purchase solutions to the
customers of traditional and e-commerce retailers.
Aaron’s Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a
month-to-month, lease-to-own agreement with no credit needed through its Company-operated stores in the United States and
Canada as well as through its e-commerce platform, Aarons.com. This operating segment also supports franchisees of its
Aaron’s stores. In addition, the Aaron’s Business segment also includes the operations of Woodhaven, which manufactures and
supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores.
DAMI partners with merchants to provide a variety of revolving credit products originated through two third-party federally
insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs).
Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplaces. We believe that
the Progressive Leasing and DAMI acquisitions have been strategically transformational in this respect by allowing the
Company to diversify its presence in the market and strengthen our business, as demonstrated by Progressive Leasing's
significant revenue and profit growth. The Company is also leveraging franchisee acquisition opportunities to expand into new
geographic markets, enhance operational control, and benefit more fully from our business transformation initiatives on a
broader scale. We believe the traditional store based lease-to-own industry has been negatively impacted in recent periods
by: (i) increased competition from a wide range of competitors, including national, regional and local operators of lease-to-own
stores; virtual lease-to-own companies; traditional and e-commerce retailers; traditional and online sellers of used merchandise;
and from a growing number of various types of consumer finance companies that enable our customers to shop at traditional or
online retailers; (ii) the challenges faced by many traditional "brick-and-mortar" retailers, with respect to a decrease in the
number of consumers visiting those stores, especially younger consumers; and (iii) commoditization of pricing in electronics.
In response to these changing market conditions, we are executing a strategic plan that focuses on the following items and that
we believe positions us for success over the long-term:
•
Improve Aaron’s Business profitability;
• Accelerate our omnichannel platform;
•
•
Strengthen relationships of Progressive Leasing current retail and merchant partners;
Focus on converting existing pipeline into Progressive Leasing retail partners; and
• Champion compliance.
During 2017 and 2018, the Company acquired substantially all of the assets of the store operations of 111 and 152 Aaron's-
branded franchised stores, respectively. The acquisitions are benefiting the Company's omnichannel platform through added
scale, strengthening its presence in certain geographic markets, enhancing operational control, including compliance, and
enabling the Company to execute its business transformation initiatives on a broader scale.
We continue to execute on various Aaron's Business store optimization initiatives, including strategic store consolidations. As a
result of these store optimization initiatives and other cost-reduction initiatives, the Company closed and consolidated 139
underperforming Company-operated stores throughout 2016, 2017 and 2018. In January 2019, the Company announced plans
to close and consolidate approximately 85 additional Company-operated stores during 2019.
34
Highlights
The following summarizes significant highlights from 2018:
• The Company acquired substantially all of the assets of the store operations of 13 franchisees, adding 152 Aaron's-
branded stores to our portfolio of Company-operated stores, for an aggregated consideration of $195.4 million.
• The Company reported record revenues of $3.8 billion in 2018 compared to $3.4 billion in 2017. Earnings before
income taxes increased to a record $252.2 million compared to $239.6 million in 2017.
•
Progressive Leasing achieved record revenues of nearly $2.0 billion in 2018, an increase of 27.6% over 2017.
Progressive Leasing’s revenue growth is due to a 23.2% increase in total invoice volume, which was generated
through an increase in invoice volume per active door. Progressive Leasing's earnings before income taxes increased
to $175.0 million compared to $140.2 million in 2017, due mainly to its higher revenue.
• Aaron’s Business revenues increased to $1.79 billion in 2018 compared to $1.78 billion in 2017. Aaron's Business
lease revenue and fees increased due to the acquisitions of various franchisees during 2017 and 2018, partially offset
by declines in non-retail sales to our franchisees and a 1.5% decrease in same store sales. Earnings before income
taxes decreased to $84.7 million in 2018 compared to $110.6 million in 2017, primarily due to the $20.1 million
impairment of our investment in PerfectHome, a rent-to-own company in the United Kingdom.
• The Company generated cash from operating activities of $356.5 million in 2018 compared to $159.1 million in 2017.
The increase in net cash from operating activities was impacted by net income tax refunds received of $63.8 million
during 2018 compared to net income tax payments made of $98.3 million in 2017. The Company ended 2018 with
$15.3 million in cash and $373.0 million available on our revolving credit facility.
• The Company returned $175.0 million to our shareholders in 2018 through the repurchase of 3.7 million shares and
the payment of our quarterly cash dividends, which we have paid for 31 consecutive years.
Key Metrics
Invoice Volume. We believe that invoice volume is a key performance indicator of our Progressive Leasing segment. Invoice
volume is defined as the retail price of lease merchandise acquired and then leased to customers during the period, net of
returns. The following table presents total invoice volume for the Progressive Leasing segment:
For the Year Ended December 31 (In Thousands)
Progressive Leasing Invoice Volume
2018
2017
2016
$
1,429,550
$
1,160,732
$
884,812
Active Doors. Progressive Leasing active doors are comprised of both (i) each retail store location where at least one virtual
lease-to-own transaction has been completed during the trailing twelve-month period; and (ii) with respect to an e-commerce
merchant, each state where at least one virtual lease-to-own transaction has been completed through that e-commerce merchant
during the trailing twelve-month period. The following table presents active doors for the Progressive Leasing segment:
Active Doors at December 31
Progressive Leasing Active Doors
2018
2017
2016
24,198
26,861
21,840
35
The Company’s franchised and Company-operated store activity (unaudited) is summarized as follows:
Company-operated Aaron’s stores
Company-operated Aaron’s stores open at January 1,
Opened
Added through acquisition
Closed, sold or merged
Company-operated Aaron’s stores open at December 31,
Franchised stores
Franchised stores open at January 1,
Opened
Purchased from the Company
Purchased by the Company
Closed, sold or merged
Franchised stores open at December 31,
2018
2017
2016
1,175
—
152
(15)
1,312
551
2
—
(152)
(24)
377
1,165
—
110
(100)
1,175
699
1
—
(111)
(38)
551
1,223
—
16
(74)
1,165
734
1
—
(16)
(20)
699
In May 2016, we sold our 82 Company-operated HomeSmart stores.
Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of the Aaron’s Business.
For the year ended December 31, 2018, we calculated this amount by comparing revenues for the year ended December 31,
2018 to revenues for the year ended December 31, 2017 for all stores open for the entire 24-month period ended December 31,
2018, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues
declined by 1.5% during the 24-month period ended December 31, 2018.
Key Components of Earnings Before Income Taxes
In this management’s discussion and analysis section, we review our consolidated results. For the years ended December 31,
2018 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings before
income taxes were as follows:
Revenues. We separate our total revenues into six components: (i) lease revenues and fees; (ii) retail sales; (iii) non-retail sales;
(iv) franchise royalties and fees; (v) interest and fees on loans receivable; and (vi) other. Lease revenues and fees include all
revenues derived from lease agreements at retail locations serviced by Progressive Leasing and the Aaron's Business Company-
operated stores and e-commerce platform. Retail sales represent sales of both new and returned lease merchandise from our
Company-operated stores. Non-retail sales primarily represent new merchandise sales to our 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. Interest and fees on loans receivable primarily represents merchant fees, finance charges and annual
and other fees earned on loans originated since the DAMI acquisition, as well as the accretion of the discount on loans acquired
in the acquisition. Other revenues primarily relate to revenues from leasing real estate properties to unrelated third parties, as
well as other miscellaneous revenues.
Depreciation of Lease Merchandise. Depreciation of lease merchandise primarily reflects the expense associated with
depreciating merchandise held for lease and leased to customers by Progressive Leasing and our Company-operated Aaron's
stores and through our e-commerce platform.
Retail Cost of Sales. Retail cost of sales represents the depreciated cost of merchandise sold through our Company-operated
stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, occupancy costs, store maintenance, provision for lease
merchandise write-offs, Progressive Leasing bad debt expense, shipping and handling, advertising and marketing, the provision
for loan losses, intangible asset amortization expense, software licensing expense and third-party consulting expense, among
other expenses.
36
Restructuring Expenses, Net. Restructuring expenses primarily represent the cost of optimization efforts and cost reduction
initiatives related to the Aaron’s Business, home office and field support functions. Restructuring charges, net are comprised
principally of closed store contractual lease obligations, the write-off and impairment of store property, plant and equipment
and related workforce reductions, and reversals of previously recorded restructuring charges.
Other Operating Income. Other operating income consists of gains or losses on sales of Company-operated stores and delivery
vehicles, fair value adjustments on assets held for sale and gains or losses on other transactions involving property, plant and
equipment.
Interest Expense. Interest expense consists of interest incurred on fixed and variable rate debt.
Impairment of Investment. Impairment of investment consists of an other-than-temporary loss to fully impair the Company's
investment in PerfectHome.
Other Non-Operating (Expense) Income, Net. Other non-operating (expense) income, net includes the impact of foreign
currency remeasurement, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life
insurance related to the Company’s deferred compensation plan.
37
Results of Operations
Results of Operations – Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
REVENUES:
Lease Revenues
and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and
Fees
Interest and Fees on
Loans Receivable
Other
COSTS AND EXPENSES:
Depreciation of Lease
Merchandise
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Restructuring Expenses
Other Operating Income
OPERATING PROFIT
Interest Income
Interest Expense
Impairment of Investment
Other Non-Operating
(Expense) Income, Net
EARNINGS BEFORE
INCOME TAX EXPENSE
(BENEFIT)
INCOME TAX EXPENSE
(BENEFIT)
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
2018
2017
2016
$
%
$
%
Change
$3,506,418
31,271
207,262
$3,000,231
27,465
270,253
$2,780,824
29,418
309,446
$ 506,187
3,806
(62,991)
16.9 % $ 219,407
(1,953)
13.9
(39,193)
(23.3)
7.9%
(6.6)
(12.7)
44,815
48,278
58,350
(3,463)
(7.2)
(10,072)
(17.3)
37,318
1,839
3,828,923
34,925
2,556
3,383,708
24,080
5,598
3,207,716
2,393
(717)
445,215
1,727,904
19,819
174,180
1,618,423
1,105
(2,116)
3,539,315
289,608
454
(16,440)
(20,098)
1,448,631
17,578
241,356
1,403,985
17,994
(535)
3,129,009
254,699
1,835
(20,538)
—
1,304,295
18,580
276,608
1,351,785
20,218
(6,446)
2,965,040
242,676
2,699
(23,390)
—
279,273
2,241
(67,176)
214,438
(16,889)
1,581
410,306
34,909
(1,381)
(4,098)
20,098
6.9
(28.1)
13.2
19.3
12.7
(27.8)
15.3
(93.9)
nmf
13.1
13.7
(75.3)
(20.0)
nmf
10,845
(3,042)
175,992
144,336
(1,002)
(35,252)
52,200
(2,224)
(5,911)
163,969
12,023
(864)
(2,852)
—
45.0
(54.3)
5.5
11.1
(5.4)
(12.7)
3.9
(11.0)
(91.7)
5.5
5.0
(32.0)
(12.2)
—
(1,320)
3,581
(3,563)
(4,901)
nmf
(7,144)
nmf
252,204
239,577
218,422
12,627
5.3
21,155
9.7
55,994
(52,959)
79,139
108,953
nmf
(132,098)
nmf
NET EARNINGS
$ 196,210
$ 292,536
$ 139,283
$ (96,326)
(32.9)% $ 153,253
110.0%
nmf—Calculation is not meaningful
38
Revenues
Information about our revenues by reportable segment is as follows:
(In Thousands)
REVENUES:
Progressive Leasing1
Aaron’s Business2
DAMI3
Total Revenues from
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
2018
2017
2016
$
%
$
%
Change
$1,998,981
$1,566,413
$1,237,597
$ 432,568
1,792,624
1,782,370
1,946,039
37,318
34,925
24,080
10,254
2,393
27.6% $ 328,816
(163,669)
10,845
0.6
6.9
26.6%
(8.4)
45.0
5.5%
External Customers
$3,828,923
1 Segment revenue consists of lease revenues and fees.
2 Segment revenue principally consists of lease revenues and fees, retail sales, non-retail sales and franchise royalties and fees.
3 Segment revenue consists of interest and fees on loans receivable, and excludes the effect of interest expense.
$ 445,215
$3,207,716
$3,383,708
13.2% $ 175,992
Refer to Note 13 to our consolidated financial statements for additional disaggregated revenue by segment disclosures.
Year Ended December 31, 2018 Versus Year Ended December 31, 2017
Progressive Leasing. Progressive Leasing segment revenues increased primarily due to an annualized 23.2% increase in total
invoice volume, which was driven mainly by an increase in invoice volume per active door.
Aaron’s Business. Aaron’s Business segment revenues increased primarily due to a $73.6 million increase in lease revenues and
fees as a result of the net addition of 147 Company-operated stores during the 24-month period ended December 31, 2018. This
increase was partially offset by a 1.5% decrease in same store sales and a $63.0 million decrease in non-retail sales due to the
net reduction of 322 franchised stores during the 24-month period ended December 31, 2018, primarily resulting from the
Company's acquisition of various franchisees, and from decreasing demand for product by franchisees. Franchise royalties and
fees decreased $3.5 million due to the acquisitions of franchisees discussed above, partially offset by an increase of $8.6
million related primarily to the new presentation of advertising fees charged to franchisees to be reported as revenue in the
consolidated statements of earnings as a result of our adoption of ASU 2014-09, Revenue from Contracts with Customers
("Topic 606") on January 1, 2018, rather than the 2017 presentation as a reduction to operating expenses. The acquisitions of
various franchisees during 2017 and 2018 impacted the Aaron's Business in the form of an increase in lease revenues and fees,
partially offset by lower non-retail sales and lower franchise royalties and fees during the year ended December 31, 2018 as
compared to the prior year.
DAMI. DAMI segment revenues increased due to higher interest and fee revenue recognized as a result of the growth of
DAMI’s post-acquisition loan portfolio subsequent to the October 15, 2015 DAMI acquisition. The balance of outstanding
loans originated since the acquisition was $90.4 million at December 31, 2018 compared to $89.7 million at December 31,
2017.
Year Ended December 31, 2017 Versus Year Ended December 31, 2016
Progressive Leasing. Progressive Leasing segment revenues increased primarily due to an annualized 31.2% increase in total
invoice volume, which was driven by a 23.0% growth in active doors.
Aaron’s Business. Aaron’s Business segment revenues decreased primarily due to a $109.4 million decrease in lease revenues
and fees and a $39.2 million decrease in non-retail sales. Lease revenues and fees decreased primarily due to a 7.0% decrease
in same store revenues and the net reduction of 130 Company-operated stores during the 24-month period ended December 31,
2017, including the sale of 82 HomeSmart stores in May 2016. The decrease in non-retail sales was mainly due to decreasing
demand for product by franchisees as a result of the net reduction of 183 franchised stores, which includes the Company's
acquisition of its largest franchisee, during the 24-month period ended December 31, 2017. The franchisee acquisition during
2017 impacted the Aaron's Business in the form of an increase in lease revenues and fees, partially offset by lower non-retail
sales and lower franchise royalties and fees during the year ended December 31, 2017 as compared to the prior year.
DAMI. DAMI segment revenues increased due to higher interest and fee revenue recognized as a result of the growth of
DAMI's post-acquisition loan portfolio subsequent to the October 15, 2015 DAMI acquisition. The balance of outstanding
loans originated since the acquisition was $89.7 million at December 31, 2017 compared to $64.8 million at December 31,
2016.
39
Operating Expenses
Information about certain significant components of operating expenses is as follows:
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
Change
(In Thousands)
Personnel Costs
Occupancy Costs
Provision for Lease
Merchandise Write-Offs
Bad Debt Expense
Shipping and Handling
Advertising
Provision for Loan Losses
Intangible Amortization
Other Operating Expenses
Operating Expenses
2018
$ 664,412
223,304
2017
$ 615,378
199,638
2016
$ 611,113
208,712
$
$
49,034
23,666
%
8.0% $
11.9
192,317
227,960
75,211
37,718
21,063
32,985
143,453
$ 1,618,423
145,460
170,574
67,299
34,026
20,973
27,477
123,160
$ 1,403,985
134,104
128,333
69,939
40,823
11,251
28,776
118,734
$ 1,351,785
46,857
57,386
7,912
3,692
90
5,508
20,293
$ 214,438
32.2
33.6
11.8
10.9
0.4
20.0
16.5
15.3% $
$
4,265
(9,074)
11,356
42,241
(2,640)
(6,797)
9,722
(1,299)
4,426
52,200
%
0.7%
(4.3)
8.5
32.9
(3.8)
(16.6)
86.4
(4.5)
3.7
3.9%
Year Ended December 31, 2018 Versus Year Ended December 31, 2017
As a percentage of total revenues, operating expenses increased to 42.3% in 2018 from 41.5% in 2017.
Personnel costs increased by $27.8 million in our Aaron's Business segment and $19.8 million at our Progressive Leasing
segment. The increase in personnel costs is primarily the result of increased labor costs in the Aaron's Business Company-
operated stores due to the acquisitions of 111 franchised stores during 2017 and 152 franchised stores during 2018, the growth
of Progressive Leasing, and hiring to support Aaron's Business strategic operating and business improvement initiatives,
partially offset by the closure and merger of underperforming stores and a reduction of home office and field support staff from
our Aaron's Business restructuring programs in 2017 and 2018.
Occupancy costs increased primarily due to higher store maintenance expenses and the acquisition of franchisee stores,
partially offset by the closure of underperforming stores as part of our restructuring actions.
The provision for lease merchandise write-offs increased during 2018 due primarily to Progressive Leasing's revenue growth.
The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment increased
to 6.2% in 2018 from 5.5% in 2017 due to an expected shift in Progressive Leasing's portfolio mix. The provision for lease
merchandise write-offs as a percentage of lease revenues for the Aaron’s Business increased to 4.6% in 2018 compared to 4.2%
in 2017.
Bad debt expense increased primarily due to the increase in invoice volume from Progressive Leasing as discussed above.
Progressive Leasing’s bad debt expense as a percentage of Progressive Leasing’s revenues increased to 11.4% in 2018
compared to 10.9% in 2017 due primarily to an expected shift in the portfolio mix.
Shipping and handling expense increased due to a shortage of trucking labor in relation to marketplace demand and higher fuel
costs.
Intangible amortization expense increased primarily due to additional intangible assets recorded as a result of the acquisitions
of 111 franchised stores during 2017 and 152 franchised stores during 2018.
Other operating expenses increased due to higher third-party consulting costs, legal expenses and software licensing expense.
Year Ended December 31, 2017 Versus Year Ended December 31, 2016
As a percentage of total revenues, operating expense decreased to 41.5% during 2017 from 42.1% in 2016.
Personnel costs increased primarily due to a $23.7 million increase at Progressive Leasing offset by a $21.0 million decrease at
the Aaron's Business. The net increase in personnel costs in 2017 was the result of hiring to support the growth of Progressive
Leasing, the acquisition of our largest franchisee in July 2017 and higher stock-based compensation expense, partially offset by
a reduction of home office and field support staff from our Aaron's Business restructuring programs in 2017 and additional
charges incurred in 2016 related to the retirement of the Company's former Chief Financial Officer.
40
Occupancy costs decreased primarily due to the net reduction of 130 Company-operated stores during the 24-month period
ended December 31, 2017. The occupancy costs were impacted by the closure and consolidation of our stores from our Aaron's
Business restructuring programs, partially offset by the addition of stores from the acquisition of our largest franchisee in July
2017.
The provision for lease merchandise write-offs increased during 2017 primarily due to Progressive Leasing's revenue growth.
The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment
decreased to 5.5% in 2017 compared to 5.7% in 2016 due to continued operational improvements and enhancements to the
lease decisioning process. This was partially offset by damaged inventory written off, net of probable insurance recoveries, and
higher estimated inventory charge-offs caused by Hurricanes Harvey and Irma. The provision for lease merchandise write-offs
as a percentage of lease revenues for the Aaron’s Business increased slightly to 4.2% in 2017 from 4.1% in 2016 due to higher
lease merchandise write-offs caused by the Hurricanes.
Bad debt expense increased by $42.2 million during 2017 primarily due to the increase in invoice volume from Progressive
Leasing as discussed above. Progressive Leasing’s bad debt expense as a percentage of Progressive Leasing’s revenues
increased to 10.9% in 2017 compared to 10.3% in 2016 due primarily to an expected shift in the portfolio mix, as well as
higher bad debt expense from customers impacted by Hurricanes Harvey and Irma.
The provision for loan losses increased during 2017 due to the growth of DAMI's post-acquisition loan portfolio subsequent to
the October 15, 2015 acquisition of DAMI.
Other operating expenses increased primarily due to higher third-party consulting costs related to various Aaron's Business
strategic operating initiatives as well as transaction costs incurred related to the acquisition of SEI.
Other Costs and Expenses
Year Ended December 31, 2018 Versus Year Ended December 31, 2017
Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise
increased to 49.3% from 48.3% in the prior year period, primarily due to a shift in lease merchandise mix from the Aaron’s
Business to Progressive Leasing, which is consistent with the increasing proportion of Progressive Leasing’s revenue to total
lease revenue. Progressive Leasing generally experiences higher depreciation as a percentage of lease revenues because, among
other factors, its merchandise has a shorter average life on lease, a higher rate of customer early buyouts, and the merchandise
is generally purchased at retail prices compared to the Aaron’s Business, which procures merchandise at wholesale prices.
Progressive Leasing's depreciation of lease merchandise as a percentage of Progressive Leasing's lease revenues and fees
increased to 61.0% in 2018 from 60.6% in 2017 due to an increase in revenue from customer early buyouts, which has a lower
margin, year over year. Aaron's Business depreciation of lease merchandise as a percentage of Aaron's Business lease revenues
and fees decreased to 33.8% in 2018 from 34.8% in 2017, which was primarily driven by changes in merchandising and pricing
strategies in 2018 compared to the prior year period.
Retail cost of sales. Retail cost of sales as a percentage of retail sales decreased to 63.4% from 64.0% primarily due to lower
inventory purchase cost during 2018 as compared to 2017.
Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales decreased to 84.0% from 89.3% primarily
due to lower inventory purchase cost during 2018 as compared to 2017.
Restructuring Expenses, Net. In connection with the announced closure and consolidation of underperforming Company-
operated stores and workforce reductions in our field support operations, net restructuring charges of $1.1 million were
incurred during the year ended December 31, 2018. The charges are primarily comprised of $2.1 million related to changes in
estimates to the Aaron’s store contractual lease obligations for closed stores and $0.6 million related to workforce reductions,
partially offset by $1.2 million in reversals of previously recorded restructuring charges and gains of $0.4 million from the sale
of store properties. The Company does not expect to incur any additional material charges in 2019 or future years under the
2017 and 2016 restructuring programs. However, this estimate is subject to change based on future changes in assumptions for
the remaining minimum lease obligation for stores closed under the restructuring program, including changes related to
sublease assumptions and potential earlier buyouts of leases with landlords. In January 2019, the Company announced plans to
close and consolidate approximately 85 underperforming Company-operated stores during 2019, which is estimated to result in
$12 million to $15 million of additional restructuring expenses primarily in 2019.
41
Year Ended December 31, 2017 Versus Year Ended December 31, 2016
Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise
increased to 48.3% in 2017 from 46.9% in 2016, primarily due to a shift in product mix from the Aaron’s Business to
Progressive Leasing, which is consistent with the increasing proportion of Progressive Leasing’s revenue to total lease revenue.
Progressive Leasing generally experiences higher depreciation as a percentage of lease revenues because, among other factors,
its merchandise has a shorter average life on lease, a higher rate of early buyouts, and the merchandise is generally purchased at
retail prices compared to the Aaron’s Business, which procures merchandise at wholesale prices. Progressive Leasing's
depreciation of lease merchandise as a percentage of Progressive Leasing's lease revenues and fees increased to 60.6% in 2017
from 60.2% in 2016 due to an increase in revenue from early buyouts, which has a lower margin, year over year. Aaron's
Business depreciation of lease merchandise as a percentage of Aaron's Business lease revenues and fees decreased to 34.8% in
2017 from 36.2% in 2016, which was primarily driven by less promotional pricing in 2017 and a favorable revenue mix shift
from lower-margin early payout revenue to higher-margin lease revenue year over year.
Retail cost of sales. Retail cost of sales as a percentage of retail sales increased to 64.0% from 63.2% primarily due to higher
inventory purchase cost during 2017 as compared to 2016.
Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales remained consistent at approximately 89% in
both periods.
Restructuring Expenses, Net. In connection with the announced closure and consolidation of underperforming Company-
operated stores and workforce reductions in our home office and field support operations, charges of $18.0 million were
incurred during the year ended December 31, 2017. The charges are comprised of $13.4 million related to Aaron’s Business
store contractual lease obligations for closed stores, $3.2 million related to workforce reductions, and $1.4 million primarily
related to the write-down to fair value, less estimated selling costs, of land and buildings from stores closed under the
restructuring program and impairment of Aaron’s Business store property, plant and equipment.
Other Operating Income
Information about the components of other operating income is as follows:
(In Thousands)
Net gains on sales of stores
Net gains on sales of delivery vehicles
Gains on insurance recoveries
Net (gains) losses and impairment charges on
asset dispositions and assets held for sale
Change
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
2018
2017
2016
$
%
$
(185) $
(722)
(1,094)
(743) $
(937)
—
(126) $
(1,319)
—
558
215
(1,094)
(75.1)% $
(22.9)
nmf
$
(617)
382
—
%
489.7 %
(29.0)
—
(115)
1,145
(5,001)
(1,260)
110.0
6,146
(122.9)
Other Operating Income
$ (2,116) $
(535) $ (6,446) $ (1,581)
295.5 % $ 5,911
(91.7)%
nmf—Calculation is not meaningful
In 2018, other operating income, net of $2.1 million included gains on insurance recoveries of $1.1 million related primarily to
damages the Company incurred in 2017 from hurricanes and a gain of $0.8 million related to the sale of DAMI's former
corporate office building.
In 2016, other operating income, net of $6.4 million included a gain of $11.1 million related to the sale of the Company’s
former corporate headquarters building in January 2016, partially offset by a loss and other charges related to the sale of
HomeSmart of $5.4 million.
Operating Profit
Interest income. Interest income decreased to $0.5 million in 2018 from $1.8 million in 2017 and $2.7 million in 2016 primarily
due to the discontinuation of accruing interest income related to the PerfectHome Notes effective April 1, 2017. Interest income
in 2018 was also negatively impacted by lower cash and cash equivalent balances throughout 2018, while interest income in
2017 benefited from higher cash and cash equivalent balances throughout 2017.
Interest expense. Interest expense decreased to $16.4 million in 2018 from $20.5 million in 2017 and $23.4 million in 2016 due
primarily to an average lower outstanding debt balance throughout 2018 and 2017.
42
Impairment of investment. During the year ended December 31, 2018, the Company recorded an other-than-temporary loss of
$20.1 million to impair its remaining outstanding investment in PerfectHome, a rent-to-own company in the United Kingdom.
During the second quarter of 2018, PerfectHome's liquidity deteriorated significantly due to continuing operating losses and the
senior lender's decision to no longer provide additional funding under a secured revolving debt agreement resulting from
PerfectHome's default of certain covenants. Additionally, the senior lender notified PerfectHome in May 2018 of its intent to
exercise remedies available under its credit documentation, which included the right to call its outstanding debt. Furthermore,
the U.K. governing authority for rent-to-own companies, the Financial Conduct Authority, proposed new regulatory measures
which could adversely affect PerfectHome's business. In July 2018, PerfectHome entered into the U.K.’s insolvency process
and was subsequently acquired by the senior lender. The Company believes it will not receive any further payments on its
subordinated secured Notes.
Other non-operating (expense) income, net. Other non-operating (expense) income, net includes the impact of foreign currency
remeasurement, as well as gains resulting from changes in the cash surrender value of Company-owned life insurance related to
the Company’s deferred compensation plan. Included in other non-operating (expense) income, net were foreign currency
remeasurement losses of $0.1 million and $3.7 million during 2018 and 2016, respectively, and gains of $2.1 million during
2017. These net gains and losses result from changes in the value of the U.S. dollar against the British pound and Canadian
dollar. The changes in the cash surrender value of Company-owned life insurance resulted in net losses of $1.2 million during
2018 and net gains of $1.5 million and $0.2 million during 2017 and 2016, respectively.
Earnings (Loss) Before Income Taxes
Information about our earnings (loss) before income tax (benefit) expense by reportable segment is as follows:
(In Thousands)
EARNINGS (LOSS)
BEFORE INCOME TAX
EXPENSE (BENEFIT):
Progressive Leasing
Aaron’s Business
DAMI
Total Earnings Before Income
Tax Expense (Benefit)
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
Change
$ 175,015
84,683
(7,494)
$ 140,224
110,642
(11,289)
$ 104,686
123,009
(9,273)
$
34,791
(25,959)
3,795
24.8% $
(23.5)
33.6
35,538
(12,367)
(2,016)
33.9%
(10.1)
(21.7)
$ 252,204
$ 239,577
$ 218,422
$
12,627
5.3% $
21,155
9.7%
The factors impacting the change in earnings (loss) before income tax expense (benefit) are discussed above.
Income Tax Expense (Benefit)
The Company recorded income tax expense of $56.0 million for 2018, which resulted in an effective tax rate of 22.2%. The
Company recorded a net income tax benefit of $53.0 million for 2017, which was the result of the Tax Act signed into law on
December 22, 2017. The Tax Act, among other things, (i) lowered the U.S. corporate income tax rate from 35% to 21%
effective January 1, 2018; (ii) provided for 100% expense deduction of certain qualified depreciable assets, including lease
merchandise inventory, purchased after September 27, 2017 (but would be phased down starting in 2023); and (iii) failed to
extend the manufacturing deduction that expired in 2017 under the terms of previous tax law. During the three months ended
December 31, 2017, the Company recorded a net non-cash provisional income tax benefit of $137.0 million related to the Tax
Act, which is comprised of an estimated $140.0 million remeasurement of deferred tax liabilities at the lower tax rates, partially
offset by an estimated $3.0 million from the loss of the manufacturing deduction and other impacts. The impact of the tax
adjustments recorded in 2018 for the finalization of the Tax Act analysis was immaterial. The Company recorded income tax
expense of $79.1 million for 2016, which resulted in an effective tax rate of 36.2%. The decline in the effective tax rate since
2016 is primarily the result of the lower U.S. corporate tax rate enacted within the Tax Act.
43
Overview of Financial Position
The major changes in the consolidated balance sheet from December 31, 2017 to December 31, 2018, include:
• Cash and cash equivalents decreased $35.8 million to $15.3 million at December 31, 2018 primarily due to cash used
to fund the 2018 franchisee acquisitions as discussed in Note 2 to these consolidated financial statements, scheduled
repayments of the Company's unsecured notes and credit facilities, and the return of $175.0 million to shareholders in
the form of share repurchases and cash dividends. This was partially offset by $356.5 million of cash inflows from
operating activities and cash inflows from the October 2018 amendment of the Company's term loan facility, resulting
in an increase of the term loan facility to $225.0 million from the $87.5 million remaining principal outstanding. For
additional information, refer to the "Liquidity and Capital Resources" section below.
•
Investments declined due to the full impairment of the PerfectHome Notes as discussed in Note 1 to these consolidated
financial statements.
• Lease merchandise increased $166.3 million due primarily to an increase in lease merchandise in our Aaron's Business
as a result of the 2018 franchisee acquisitions as well as increases in lease merchandise at Progressive Leasing to
support higher invoice volume.
• Goodwill increased $110.2 million due primarily to goodwill recorded as a result of the franchisee acquisitions
executed during 2018.
•
Income tax receivable decreased $70.9 million to $29.1 million due to outstanding income tax refunds as of December
31, 2017 as a result of the Tax Act, which were subsequently received in 2018.
• Debt increased $56.0 million to $424.8 million at December 31, 2018 due primarily to $137.5 million of additional
borrowings on the refinanced term loan in October 2018 and $16.0 million in revolving borrowings during the year
ended December 31, 2018, partially offset by scheduled repayments of $85.0 million on the Company’s unsecured
notes and $10.0 million on the Company's term loan facility. Refer to the "Liquidity and Capital Resources" section
below for further details regarding the Company’s financing arrangements.
44
Liquidity and Capital Resources
General
Our primary capital requirements consist of buying merchandise for the operations of Progressive Leasing and the Aaron’s
Business. As we continue to grow, the need for additional lease merchandise is expected to remain our major capital
requirement. Other capital requirements include (i) purchases of property, plant and equipment; (ii) expenditures for
acquisitions, including franchisee acquisitions; (iii) expenditures related to our corporate operating activities; (iv) personnel
expenditures; (v) income tax payments; (vi) funding of loans receivable for DAMI; and (vii) servicing our outstanding debt
obligations. The Company has also historically paid quarterly cash dividends and periodically repurchases stock. Our capital
requirements have been financed through:
•
•
•
•
cash flows from operations;
private debt offerings;
bank debt; and
stock offerings.
As of December 31, 2018, the Company had $15.3 million of cash and $373.0 million of availability under its revolving credit
facility.
Cash Provided by Operating Activities
Cash provided by operating activities was $356.5 million, $159.1 million and $467.2 million during the years ended
December 31, 2018, 2017 and 2016, respectively.
The $197.4 million increase in operating cash flows in 2018 as compared to 2017 was primarily driven by net tax refunds of
$63.8 million during the year ended December 31, 2018 compared to net tax payments of $98.3 million during the year ended
December 31, 2017. The Tax Act changed previous tax laws by providing for 100% expense deduction of the Company's lease
merchandise inventory purchased by the Company after September 27, 2017. As a result of the Tax Act not being enacted until
December 22, 2017, the Company made more than the required estimated federal tax liability payments throughout 2017 and
therefore qualified for and received a refund related to 2017 income tax payments during the year ended December 31, 2018.
Other changes in cash provided by operating activities are discussed above in our discussion of results for the year ended
December 31, 2018.
The $308.1 million decrease in operating cash flows in 2017 as compared to 2016 was driven partially by an increase in
purchases of lease merchandise for Progressive Leasing during the year ended December 31, 2017 relative to the same period in
2016 due to continuing invoice volume growth. Additionally, the Company made net tax payments of $98.3 million during the
year ended December 31, 2017 compared to net tax refunds of $54.3 million during the year ended December 31, 2016. The
Protecting Americans from Tax Hikes Act ("the 2015 Act"), which was signed into law on December 18, 2015, extended 50%
bonus depreciation and reauthorized work opportunity tax credits through the end of 2019. This act allowed us to qualify for
and receive a refund related to 2015 income tax payments and to limit federal tax payments during the year ended
December 31, 2016.
Cash Used in Investing Activities
Cash used in investing activities was $263.1 million, $205.3 million and $20.1 million during the years ended December 31,
2018, 2017, and 2016, respectively.
The $57.8 million increase in investing cash outflows in 2018 as compared to 2017 was primarily due to: (i) cash outflows of
$189.8 million for the acquisitions of franchisees throughout 2018 as compared to cash outflows of approximately $140 million
for the franchisee acquisition of SEI in July 2017 and (ii) $20.9 million higher cash outflows for purchases of property, plant
and equipment; partially offset by $10.7 million lower net cash outflows for investments in DAMI loans receivable in 2018 as
compared to 2017.
The $185.3 million increase in investing cash outflows in 2017 as compared to 2016 was primarily due to: (i) a $140 million
cash outflow for the acquisition of SEI in July 2017; (ii) $10.2 million higher net cash outflows for investments in DAMI loans
receivable in 2017 as compared to 2016; (iii) $35.0 million cash inflow related to the sale of the HomeSmart division in May
2016; and (iv) $13.6 million cash inflow from the sale of the Company’s former corporate headquarters building in January
2016; partially offset by $2.7 million of cash inflows in 2017 from our PerfectHome investment and $6.9 million of additional
proceeds from the sale of other property, plant, and equipment in 2017 compared to 2016.
45
Cash Used in Financing Activities
Cash used in financing activities was $129.0 million, $211.4 million and $153.7 million during the years ended December 31,
2018, 2017 and 2016, respectively.
The $82.4 million decrease in financing cash outflows in 2018 as compared to 2017 was primarily due to net borrowings of
$55.9 million in 2018 as compared to net repayments of outstanding debt of $135.0 million in 2017 partially offset by: (i) a
$106.2 million increase in Company repurchases of outstanding common stock in 2018 compared to 2017 and (ii) an
$11.2 million increase in cash payments to tax authorities for shares withheld from employees as part of our long-term incentive
program in 2018 compared to 2017.
The $57.7 million increase in financing cash outflows in 2017 as compared to 2016 was primarily due to: (i) a $28.0 million
increase in Company repurchases of outstanding common stock in 2017 compared to 2016 and (ii) a $25.4 million increase in
the net repayments of outstanding debt in 2017 compared to 2016. During 2017, the Company made scheduled repayments of
$85.0 million on unsecured notes, $15.0 million on the term loan facility, and paid $53.0 million to pay off the DAMI credit
facility, partially offset by $15.6 million in borrowings from the refinanced term loan in September 2017.
Share Repurchases
We purchase our stock in the market from time to time as authorized by our Board of Directors. During the year ended
December 31, 2018, the Company purchased 3,749,493 shares for $168.7 million. During the year ended December 31, 2017,
the Company purchased 1,961,442 shares for $62.6 million. As of December 31, 2018, we have the authority to purchase
additional shares up to our remaining authorization limit of $331.3 million.
Dividends
We have a consistent history of paying dividends, having paid dividends for 31 consecutive years. Our annual common stock
dividend was $0.1250 per share, $0.1125 per share and $0.1025 per share in 2018, 2017 and 2016, respectively, and resulted in
aggregate dividend payments of $6.2 million, $8.0 million and $7.4 million in 2018, 2017 and 2016, respectively. At its
November 2018 meeting, our Board of Directors increased the quarterly dividend by 16.7%, raising it to $0.035 per share.
Subject to sufficient operating profits, any future capital needs and other contingencies, we currently expect to continue our
policy of paying quarterly cash dividends.
Debt Financing
As of December 31, 2018, $225.0 million in term loans were outstanding under the term loan and revolving credit agreement
that matures on September 18, 2022. The total available credit under our revolving credit facility as of December 31, 2018 was
$373.0 million. The revolving credit and term loan agreement includes an uncommitted incremental facility increase option (an
"accordion facility") which, subject to certain terms and conditions, permits the Company at any time prior to the maturity date
to request an increase in extensions of credit available thereunder by an aggregate additional principal amount of up to $250.0
million.
On October 23, 2018, the Company amended its second amended and restated revolving credit and term loan agreement (the
"Amended Agreement") primarily to increase the term loan to $225.0 million from the $87.5 million remaining principal
outstanding. The Company used the incremental borrowings for general corporate and working capital purposes and for the
repayment of outstanding borrowings under the revolver. The maturity date for the $225.0 million term loan is September 18,
2022. The interest rate on the term loan remains unchanged. The Company also amended its franchise loan facility to (i) reduce
the total commitment amount from $85.0 million to $55.0 million; and (ii) extend the maturity date to October 23, 2019.
As of December 31, 2018, the Company had outstanding $180.0 million in aggregate principal amount of senior unsecured
notes issued in a private placement in connection with the April 14, 2014 Progressive Leasing acquisition. The notes bear
interest at the rate of 4.75% per year and mature on April 14, 2021. Quarterly payments of interest commenced July 14, 2014,
and annual principal payments of $60.0 million each commenced April 14, 2017. During the year ended December 31, 2018,
the Company repaid the remaining $25.0 million outstanding under its 3.95% senior unsecured notes originally issued in a
private placement in July 2011.
Our revolving credit and term loan agreement contains certain financial covenants, which include requirements that the
Company maintain ratios of (i) adjusted EBITDA plus lease expense to fixed charges of no less than 2.50:1.00 and (ii) total
debt to adjusted EBITDA of no greater than 3.00:1.00. In each case, adjusted EBITDA refers to the Company’s consolidated net
income before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense, and
other cash and non-cash charges. If we fail to comply with these covenants, we will be in default under these agreements, and
all amounts could become due immediately. We are in compliance with all of these covenants at December 31, 2018 and
believe that we will continue to be in compliance in the future.
46
Commitments
Income Taxes. During the year ended December 31, 2018, the Company received net income tax refunds of
$63.8 million. During the year ended December 31, 2019, we do not anticipate making any cash payments for U.S. federal
income taxes, and anticipate making estimated cash payments of $2.0 million for Canadian income taxes and $14.0 million for
state income taxes.
The Tax Act, which was enacted in December 2017, provides for 100% expense deduction of certain qualified depreciable
assets, including lease merchandise inventory, purchased by the Company after September 27, 2017 (but would be phased down
starting in 2023). Because of our sales and lease ownership model, in which the Company remains the owner of merchandise on
lease, we benefit more from bonus depreciation, relatively, than traditional furniture, electronics and appliance retailers.
We estimate the tax deferral associated with bonus depreciation from the Tax Act and the prior tax legislation is approximately
$282.0 million as of December 31, 2018, of which approximately 87% is expected to reverse in 2019 and most of the remainder
during 2020. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures after
December 31, 2018. During the year ended December 31, 2019, the Company estimates it will receive $18 million in U.S.
federal income tax refunds.
Leases. We lease warehouse and retail store space for most of our store-based operations, call center space, and management
and information technology space for corporate functions under operating leases expiring at various times through 2033. Most
of the leases contain renewal options for additional periods ranging from one to 20 years. We also lease transportation vehicles
under operating and capital leases which generally expire during the next three 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, 2018 are
shown in the table set forth below under "Contractual Obligations and Commitments."
As of December 31, 2018, the Company had three remaining capital leases with a limited liability company ("LLC") controlled
by a group of current and former executives of the Company. In October and November 2004, the Company sold 11 properties,
including leasehold improvements, to the LLC. 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 at an
aggregate annual rental of $0.2 million. The transaction has been accounted for as a capital lease 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 related to the properties sold to the LLC. In January 2018, the Company extended
the lease agreements with an additional five-year term commencing at the expiration of the original lease agreements in
November of 2019.
The Company also had five operating leases with the same LLC as of December 31, 2018. In December 2002, the Company
sold ten properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and
buildings totaling $5.0 million. Upon the initial sale, no gain or loss was recognized related to the properties sold to the LLC
and the leases were originally accounted for as capital leases in the Company's consolidated financial statements. In January
2018, the Company renewed the lease agreements to occupy the land and buildings collateralizing the borrowings under a range
of five to eight-year term leases at an aggregate annual rental of approximately $0.3 million.
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees under a franchise loan
agreement with several banks, which has a total maximum commitment amount of $55.0 million and a maturity date of October
23, 2019.
At December 31, 2018, the total amount that we might be obligated to repay in the event franchisees defaulted was
$39.0 million, all of which would be due within the next twelve months. However, due to franchisee borrowing limits, we
believe any losses associated with defaults would be substantially mitigated through recovery of lease merchandise and other
assets. Since the inception of the franchise loan program in 1994, we have had no significant associated losses. We believe the
likelihood that the Company would fund any significant amounts in connection with these commitments to be remote.
47
Contractual Obligations and Commitments. The following table shows the approximate contractual obligations, including
interest, and commitments to make future payments as of December 31, 2018:
(In Thousands)
Debt, Excluding Capital Leases
Capital Leases
Interest Obligations
Operating Leases
Purchase Obligations
Severance and Retirement Obligations
Total Contractual Cash Obligations
Total
421,000
5,165
45,316
456,852
25,501
1,036
954,870
$
$
$
$
Period Less
Than 1 Year
81,625
2,550
17,159
113,393
12,219
975
227,921
Period 1-3
Years
165,000
2,550
23,079
175,267
12,288
46
378,230
$
$
Period 3-5
Years
174,375
65
5,078
97,631
994
15
278,158
$
$
$
$
Period Over
5 Years
—
—
—
70,561
—
—
70,561
For future interest payments on variable-rate debt, which are based on the adjusted London Interbank Overnight (LIBO) rate
plus a margin ranging from 1.25% to 2.25% or the administrative agent's prime rate plus a margin ranging from 0.25% to
1.25%, as specified in the agreement, we used the variable rate in effect at December 31, 2018 to calculate these payments. Our
variable rate debt at December 31, 2018 consisted of term loan borrowings under our revolving credit and term loan agreement.
Future interest payments related to our revolving credit and term loan agreement are based on the borrowings outstanding at
December 31, 2018 through the maturity date, assuming such borrowings are outstanding at that time. The variable rate for our
term loan borrowings under the unsecured revolving credit and term loan agreement was 3.78% at December 31, 2018. Future
interest payments may be different depending on future borrowing activity and interest rates.
Operating lease obligations represent amounts scheduled to be paid through the remaining lease term for real estate, vehicle,
and equipment lease contracts. These amounts do not include estimated future sublease receipts and include restructuring
liabilities related to contractual lease obligations for stores closed under the 2016 and 2017 restructuring programs, which are
recorded in accounts payable and accrued expenses in the consolidated balance sheets.
Purchase obligations are primarily related to certain advertising programs, marketing programs, software licenses, hardware and
software maintenance and support and telecommunications services. The table above includes only those purchase obligations
for which the timing and amount of payments is certain. We have no long-term commitments to purchase merchandise nor do
we have significant purchase agreements that specify minimum quantities or set prices that exceed our expected requirements
for three months.
Severance and retirement obligations represent primarily future severance payments to former employees under the Company's
2016 and 2017 restructuring programs as well as future payments to be made related to the retirement of a former executive
officer.
Deferred income tax liabilities as of December 31, 2018 were approximately $267.5 million. This amount is not included in the
total contractual obligations table because we believe this presentation 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, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling
would not necessarily relate to liquidity needs.
Unfunded Lending Commitments. The Company, through its DAMI business, has unfunded lending commitments totaling
approximately $316.4 million and $354.5 million as of December 31, 2018 and 2017, respectively, that do not give rise to
revenues and cash flows. These unfunded commitments arise in the ordinary course of business from credit card agreements
with individual cardholders that give them the ability to borrow, against unused amounts, up to the maximum credit limit
assigned to their account. While these unfunded amounts represented the total available unused lines of credit, the Company
does not anticipate that all cardholders will utilize their entire available line at any given point in time. Commitments to extend
unsecured credit are agreements to lend to a cardholder so long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The reserve for losses on unfunded loan commitments, which is included in accounts payable and accrued
expenses in the consolidated balance sheets, is calculated by the Company based on historical customer usage of available
credit and is approximately $0.5 million and $0.6 million as of December 31, 2018 and 2017, respectively.
48
Critical Accounting Policies
We discuss the most critical accounting policies below. For a discussion of the Company’s significant accounting policies, see
Note 1 to these consolidated financial statements.
Revenue Recognition
Progressive Leasing lease revenues are earned prior to the lease payment due date and are recorded in the statement of earnings
net of related sales taxes as earned. Progressive Leasing revenues recorded prior to the payment due date results in unbilled
accounts receivable in the accompanying consolidated balance sheets. Aaron's Business lease payments are due in advance of
when the lease revenues are earned. Lease revenues net of related sales taxes are recognized in the statement of earnings in the
month they are earned. Aaron's Business lease payments received prior to the month earned are recorded as deferred lease
revenue, and this amount is included in customer deposits and advance payments in the accompanying consolidated balance
sheets.
Our revenue recognition accounting policy matches the lease revenue with the corresponding costs, mainly depreciation,
associated with lease merchandise. At December 31, 2018 and 2017, we had deferred revenue representing cash collected in
advance of being due or otherwise earned totaling $74.6 million and $67.6 million, respectively, and leases accounts receivable,
net of an allowance for doubtful accounts, based on historical collection rates, of $59.9 million and $47.3 million, respectively.
For the year ended December 31, 2018 and years prior, the Aaron's Business segment recorded its provision for returns and
uncollected payments as a reduction to lease revenue and fees in the consolidated statement of earnings. For the year ended
December 31, 2018 and years prior, Progressive Leasing recorded bad debt charges within operating expenses in the
consolidated statement of earnings.
Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Revenues for the non-retail sale
of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the
merchandise.
DAMI recognizes interest income based upon the amount of the loans outstanding, which is recognized as interest and fees on
loans receivable in the billing period in which they are assessed if collectibility is reasonably assured. DAMI acquires loans
receivable from merchants through its third-party bank partners at a discount from the face value of the loan. The discount is
comprised mainly of a merchant fee discount, which represents a pre-negotiated, nonrefundable discount that generally ranges
from 3% to 25% of the loan face value. The discount is designed to cover the risk of loss related to the portfolio of cardholder
charges and DAMI’s direct origination costs. The merchant fee discount, net of the origination costs, is amortized on a net basis
and is recorded as interest and fee revenue on loans receivable on a straight-line basis over the initial 24-month period that the
card is active.
Lease Merchandise
Our Aaron's Business segment begins depreciating merchandise at the earlier of twelve months and one day or when the item is
leased. We depreciate merchandise to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24
months, and generally 36 months when not on lease. The Company’s Progressive Leasing segment, at which substantially all
merchandise is on lease, depreciates merchandise generally over 12 months.
Our policies generally require weekly lease merchandise counts at our store-based operations, which include write-offs for
unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are
generally taken at our fulfillment and manufacturing facilities annually, and 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 obsolete lease merchandise cannot be returned to vendors, its carrying
amount 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 a provision for write-offs on the allowance method, which estimates the merchandise losses incurred but not yet
identified by management as of the end of the accounting period based on historical write-off experience. As of December 31,
2018 and 2017, the allowance for lease merchandise write-offs was $46.7 million and $35.6 million, respectively. The
provision for lease merchandise write-offs was $192.3 million, $145.5 million and $134.1 million for the years ended
December 31, 2018, 2017 and 2016, respectively, and is included in operating expenses in the accompanying consolidated
statements of earnings.
49
Goodwill and Other Intangible Assets
Intangible assets are classified into one of three categories: (i) intangible assets with definite lives subject to amortization; (ii)
intangible assets with indefinite lives not subject to amortization; and (iii) goodwill. For intangible assets with definite lives,
tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. For
intangible assets with indefinite lives and goodwill, tests for impairment must be performed at least annually, and sooner if
events or circumstances indicate that an impairment may have occurred. Factors which could necessitate an interim impairment
assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends and
significant underperformance relative to historical or projected future operating results. As an alternative to this annual
impairment testing for intangible assets with indefinite lives and goodwill, the Company may perform a qualitative assessment
for impairment if it believes it is not more likely than not that the carrying amount of a reporting unit’s net assets exceeds the
reporting unit’s fair value.
Indefinite-lived intangible assets represent the value of trade names acquired as part of the Progressive Leasing acquisition. At
the date of acquisition, the Company determined that no legal, regulatory, contractual, competitive, economic or other factors
limit the useful life of the trade name intangible asset and, therefore, the useful life is considered indefinite. The Company
reassesses this conclusion quarterly and continues to believe the useful life of this asset is indefinite.
The Company performed a qualitative assessment to complete its indefinite-lived intangible asset impairment test as of October
1, 2018 and determined that no impairment had occurred.
The following table presents the carrying amount of goodwill and other intangible assets, net:
(In Thousands)
Goodwill
Other Indefinite-Lived Intangible Assets
Definite-Lived Intangible Assets, Net
Goodwill and Other Intangibles, Net
December 31,
2018
$
$
733,170
53,000
175,600
961,770
Management has deemed its operating segments to be reporting units due to the fact that the components included in each
operating segment have similar economic characteristics. As of December 31, 2018, the Company had three operating segments
and reporting units: Progressive Leasing, Aaron’s Business, and DAMI. The following is a summary of the Company’s
goodwill by reporting unit:
(In Thousands)
Aaron’s Business
Progressive Leasing
Total
December 31,
2018
444,369
288,801
733,170
$
$
The Company performs its annual goodwill impairment testing as of October 1 each year. When evaluating goodwill for
impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a
reporting unit or intangible asset group is impaired. The decision to perform a qualitative impairment assessment for an
individual reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit’s goodwill,
the current and projected operating results, the significance of the excess of the reporting unit’s estimated fair value over
carrying amount at the last quantitative assessment date and the amount of time in between quantitative fair value assessments
and the date of acquisition. As of October 1, 2018, the Company performed a qualitative assessment for the goodwill of the
Progressive Leasing and Aaron's Business reporting units and concluded no indications of impairment existed.
50
Provision for Loan Losses and Loan Loss Allowance
Losses on loans receivable are recognized when they are incurred, which requires the Company to make its best estimate of
probable losses inherent in the portfolio. The Company evaluates loans receivable collectively for impairment. The method for
calculating the best estimate of probable losses takes into account the Company’s historical experience, adjusted for current
conditions and the Company’s judgment concerning the probable effects of relevant observable data, trends and market factors.
Economic conditions and loan performance trends are closely monitored to manage and evaluate exposure to credit risk. Trends
in delinquency ratios are an indicator of credit risk within the loans receivable portfolio, including the migration of loans
between delinquency categories over time (roll rates). Charge-off rates represent another indicator of the potential for future
credit losses. The risk in the loans receivable portfolio is correlated with broad economic trends, such as unemployment rates,
gross domestic product growth and gas prices, which can have a material effect on credit performance. To the extent that actual
results differ from our estimates of uncollectible loans receivable, the Company’s results of operations and liquidity could be
materially affected.
The Company initially calculates the allowance for loan losses based on actual delinquency balances and historical average loss
experience on loans receivable by aging category for the prior eight quarters. The allowance for loan losses is maintained at a
level considered adequate to cover probable losses of principal, interest and fees on active loans in the loans receivable
portfolio. The adequacy of the allowance is evaluated at each period end.
Delinquent loans receivable are those that are 30 days or more past due based on their contractual billing dates. The Company
places loans receivable on nonaccrual status when they are greater than 90 days past due or upon notification of cardholder
bankruptcy, death or fraud. The Company discontinues accruing interest and fees and amortizing merchant fee discounts and
promotional fee discounts for loans receivable in nonaccrual status. Loans receivable are removed from nonaccrual status when
cardholder payments resume, the loan becomes 90 days or less past due and collection of the remaining amounts outstanding is
deemed probable. Payments received on nonaccrual loans are allocated according to the same payment hierarchy methodology
applied to loans that are accruing interest. Loans receivable are charged off at the end of the month following the billing cycle
in which the loans receivable become 120 days past due.
The provision for loan losses was $21.1 million and $21.0 million for the years ended December 31, 2018 and 2017,
respectively. The allowance for loan losses was $13.0 million and $11.5 million as of December 31, 2018 and 2017,
respectively.
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. For operating leases which contain escalating payments, we record the related lease expense on a
straight-line basis over the lease term. We generally do not obtain significant amounts of lease incentives or allowances from
landlords. Any incentive or allowance amounts we receive are recognized on a straight-line basis 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 receipts based upon historical
experience. As of December 31, 2018 and 2017, our reserve for closed stores was $10.7 million and $15.7 million, respectively.
Due to changes in market conditions, our estimates related to sublease receipts may change and, as a result, our actual liability
may be more or less than the recorded amount. Excluding actual and estimated sublease receipts, our future obligations related
to closed stores on an undiscounted basis were $23.7 million and $35.6 million as of December 31, 2018 and 2017,
respectively.
Insurance Programs
We maintain insurance contracts to fund workers compensation, vehicle liability, general liability and group health insurance
claims. Using actuarial analyses 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. Our gross estimated liability for workers compensation insurance claims, vehicle liability, and
general liability was $39.7 million and $40.5 million at December 31, 2018 and 2017, respectively, which was recorded within
accounts payable and accrued expenses in our consolidated balance sheets. In addition, we have prefunding balances on deposit
and other insurance receivables with the insurance carriers of $24.9 million and $33.8 million at December 31, 2018 and 2017,
respectively, which were recorded within prepaid expenses and other assets in our consolidated balance sheets.
If we resolve insurance claims for amounts that are in excess of our current estimates, we will be required to pay additional
amounts beyond those accrued at December 31, 2018.
51
The assumptions and conditions described above reflect management’s best assumptions and estimates, but these items involve
inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting
for such items could result in different amounts if management used different assumptions or if different conditions occur in
future periods.
Recent Accounting Pronouncements
Refer to Note 1 to the Company’s consolidated financial statements for a discussion of recently issued accounting
pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2018, we had $180.0 million of senior unsecured notes outstanding at a weighted-average fixed rate of
4.75%. Amounts outstanding under our unsecured revolving credit and term loan agreement as of December 31, 2018 consisted
of $225.0 million in term loans. Borrowings under the revolving credit and term loan agreement are indexed to the LIBOR rate
or the prime rate, which exposes us to the risk of increased interest costs if interest rates rise. Based on the Company’s variable-
rate debt outstanding as of December 31, 2018, a hypothetical 1.0% increase or decrease in interest rates would increase or
decrease interest expense by $2.3 million on an annualized basis.
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.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Aaron’s, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aaron’s, Inc. and subsidiaries (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of earnings, comprehensive income, shareholders’ equity and
cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as
the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2018, 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)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1991.
Atlanta, Georgia
February 14, 2019
53
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Aaron’s, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Aaron’s, Inc. and subsidiaries (the Company)
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated
statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and our report dated February 14, 2019 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 14, 2019
54
Management Report on Internal Control over Financial Reporting
Management of Aaron’s, Inc. and subsidiaries (the "Company") is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2018. In making this assessment, the Company’s management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control-Integrated Framework. Based on
its assessment using those criteria, management concluded that, as of December 31, 2018, the Company’s internal control over
financial reporting was effective.
The Company’s internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in its report dated February 14, 2019, which expresses an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.
55
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS:
Cash and Cash Equivalents
Investments
Accounts Receivable (net of allowances of $62,704 in 2018 and $46,946 in 2017)
Lease Merchandise (net of accumulated depreciation and allowances of $816,928 in 2018
and $760,722 in 2017)
Loans Receivable (net of allowances and unamortized fees of $19,941 in 2018 and $19,829
in 2017)
Property, Plant and Equipment, Net
Goodwill
Other Intangibles, Net
Income Tax Receivable
Prepaid Expenses and Other Assets
Total Assets
LIABILITIES & SHAREHOLDERS’ EQUITY:
Accounts Payable and Accrued Expenses
Deferred Income Taxes Payable
Customer Deposits and Advance Payments
Debt
Total Liabilities
Commitments and Contingencies (Note 9)
Shareholders’ Equity:
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at December
31, 2018 and 2017; Shares Issued: 90,752,123 at December 31, 2018 and 2017
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Less: Treasury Shares at Cost
Common Stock: 23,567,979 Shares at December 31, 2018 and 20,733,010 at December
31, 2017
Total Shareholders’ Equity
Total Liabilities & Shareholders’ Equity
December 31,
2018
2017
(In Thousands, Except Share Data)
$
$
$
$
15,278
—
98,159
51,037
20,385
99,887
1,318,470
1,152,135
$
$
76,153
229,492
733,170
228,600
29,148
98,222
2,826,692
293,153
267,500
80,579
424,752
1,065,984
—
45,376
278,922
2,005,344
(1,087)
2,328,555
86,112
207,687
622,948
235,551
100,023
116,499
2,692,264
304,810
222,592
68,060
368,798
964,260
—
45,376
270,043
1,819,524
774
2,135,717
(567,847)
1,760,708
2,826,692
$
(407,713)
1,728,004
2,692,264
$
The accompanying notes are an integral part of the Consolidated Financial Statements.
56
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
REVENUES:
Lease Revenues and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Interest and Fees on Loans Receivable
Other
COSTS AND EXPENSES:
Depreciation of Lease Merchandise
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Restructuring Expenses, Net
Other Operating Income
OPERATING PROFIT
Interest Income
Interest Expense
Impairment of Investment
Other Non-Operating (Expense) Income, Net
EARNINGS BEFORE INCOME TAX EXPENSE (BENEFIT)
INCOME TAX EXPENSE (BENEFIT)
NET EARNINGS
EARNINGS PER SHARE
EARNINGS PER SHARE ASSUMING DILUTION
Year Ended December 31,
2018
2017
2016
(In Thousands, Except Per Share Data)
$
$
$
$
3,506,418
31,271
207,262
44,815
37,318
1,839
3,828,923
1,727,904
19,819
174,180
1,618,423
1,105
(2,116)
3,539,315
289,608
454
(16,440)
(20,098)
(1,320)
252,204
55,994
196,210
2.84
2.78
$
$
$
$
3,000,231
27,465
270,253
48,278
34,925
2,556
3,383,708
1,448,631
17,578
241,356
1,403,985
17,994
(535)
3,129,009
254,699
1,835
(20,538)
—
3,581
239,577
(52,959)
292,536
4.13
4.06
$
$
$
$
2,780,824
29,418
309,446
58,350
24,080
5,598
3,207,716
1,304,295
18,580
276,608
1,351,785
20,218
(6,446)
2,965,040
242,676
2,699
(23,390)
—
(3,563)
218,422
79,139
139,283
1.93
1.91
The accompanying notes are an integral part of the Consolidated Financial Statements.
57
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Net Earnings
Other Comprehensive (Loss) Income:
Foreign Currency Translation Adjustment
Total Other Comprehensive (Loss) Income
Comprehensive Income
Year Ended December 31,
2018
196,210
(1,861)
(1,861)
194,349
$
$
2017
292,536
1,305
1,305
293,841
$
$
$
$
2016
139,283
(14)
(14)
139,269
The accompanying notes are an integral part of the Consolidated Financial Statements.
58
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Treasury Stock
Shares
Amount
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
(18,152) $
(321,473) $
45,376
$
240,112
$
1,403,120
$
(517) $
1,366,618
(In Thousands, Except Per
Share)
Balance, January 1, 2016
Cash Dividends, $0.1025
per share
Stock-Based Compensation
Reissued Shares
Repurchased Shares
Net Earnings
Foreign Currency
Translation Adjustment
—
4
217
(1,373)
—
—
—
68
3,188
(34,525)
—
—
—
—
—
—
—
—
—
20,160
(5,760)
—
—
—
(7,420)
—
—
—
139,283
—
Balance, December 31, 2016
(19,304)
(352,742)
45,376
254,512
1,534,983
Cash Dividends, $0.1125 per
share
Stock-Based Compensation
Reissued Shares
Repurchased Shares
Net Earnings
Foreign Currency
Translation Adjustment
—
3
529
(1,961)
—
—
—
48
7,531
(62,550)
—
—
—
—
—
—
—
—
—
25,782
(10,251)
—
—
—
(7,995)
—
—
—
292,536
—
Balance, December 31, 2017
(20,733)
(407,713)
45,376
270,043
1,819,524
Opening Balance Sheet
Adjustment - ASC 606
Cash Dividends, $0.1250
per share
Stock-Based Compensation
Reissued Shares
Repurchased Shares
Net Earnings
Foreign Currency
Translation Adjustment
—
—
—
915
(3,750)
—
—
—
—
—
8,601
(168,735)
—
—
—
—
—
—
—
—
—
—
—
26,852
(17,973)
—
—
—
(1,729)
(8,661)
—
—
—
196,210
—
—
—
—
—
(7,420)
20,228
(2,572)
(34,525)
139,283
(14)
(531)
(14)
1,481,598
—
—
—
—
—
(7,995)
25,830
(2,720)
(62,550)
292,536
1,305
774
1,305
1,728,004
—
—
—
—
—
—
(1,729)
(8,661)
26,852
(9,372)
(168,735)
196,210
—
(1,861)
(1,861)
Balance, December 31, 2018
(23,568) $
(567,847) $
45,376
$
278,922
$
2,005,344
$
(1,087) $
1,760,708
The accompanying notes are an integral part of the Consolidated Financial Statements.
59
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net Earnings
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities:
Depreciation of Lease Merchandise
Other Depreciation and Amortization
Accounts Receivable Provision
Provision for Credit Losses on Loans Receivable
Stock-Based Compensation
Deferred Income Taxes
Impairment of Investment
Other Changes, Net
Changes in Operating Assets and Liabilities, Net of Effects of
Acquisitions and Dispositions:
Additions to Lease Merchandise
Book Value of Lease Merchandise Sold or Disposed
Accounts Receivable
Prepaid Expenses and Other Assets
Income Tax Receivable
Accounts Payable and Accrued Expenses
Accrued Litigation Expense
Customer Deposits and Advance Payments
Cash Provided by Operating Activities
INVESTING ACTIVITIES:
Investments in Loans Receivable
Proceeds from Loans Receivable
Proceeds from Investments
Outflows on Purchases of Property, Plant & Equipment
Proceeds from Property, Plant, and Equipment
Outflows on Acquisitions of Businesses and Customer Agreements, Net
of Cash Acquired
Proceeds from Dispositions of Businesses and Customer Agreements,
Net of Cash Disposed
Cash Used in Investing Activities
FINANCING ACTIVITIES:
Proceeds from Debt
Repayments on Debt
Acquisition of Treasury Stock
Dividends Paid
Issuance of Stock Under Stock Option Plans
Shares Withheld for Tax Payments
Debt Issuance Costs
Cash Used in Financing Activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
(Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Net Cash Paid (Received) During the Year:
Interest
Income Taxes
Year Ended December 31,
2018
2017
2016
(In Thousands)
$
196,210
$
292,536
$
139,283
1,727,904
94,150
268,088
21,063
28,182
48,359
20,098
(2,198)
(2,234,646)
398,748
(270,888)
5,903
70,875
(20,367)
—
5,017
356,498
(64,914)
57,328
3,066
(78,845)
9,191
1,448,631
82,572
203,389
20,973
27,400
(59,201)
—
(3,964)
(1,976,012)
415,607
(208,947)
2,711
(88,139)
(2,736)
1,314
3,001
159,135
(77,951)
59,641
2,658
(57,973)
12,705
1,304,295
82,378
167,923
11,251
21,470
(35,162)
—
(2,751)
(1,615,064)
433,464
(149,826)
1,229
167,290
(49,186)
(4,737)
(4,621)
467,236
(72,897)
64,739
—
(57,453)
19,393
(189,901)
(145,558)
(9,762)
942
(263,133)
240,800
(184,883)
(168,735)
(6,243)
7,975
(17,347)
(535)
(128,968)
(156)
(35,759)
51,037
15,278
$
1,141
(205,337)
27,875
(162,910)
(62,550)
(7,962)
3,457
(6,177)
(3,130)
(211,397)
75
(257,524)
308,561
51,037
16,243
$
(63,829) $
20,492
98,296
$
$
$
35,899
(20,081)
98,928
(208,607)
(34,525)
(7,420)
550
(2,457)
(132)
(153,663)
127
293,619
14,942
308,561
22,511
(54,258)
$
$
$
The accompanying notes are an integral part of the Consolidated Financial Statements.
60
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Aaron’s, Inc. (the "Company") is a leading omnichannel provider of lease-purchase solutions to individual consumers. As of
December 31, 2018, the Company’s operating segments are Progressive Leasing, Aaron’s Business and Dent-A-Med, Inc.
("DAMI").
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions in 46 states and the District of
Columbia. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers and, in turn,
leasing that merchandise to the customers through a lease-to-own transaction. Progressive Leasing consequently has no stores
of its own, but rather offers lease-purchase solutions to the customers of traditional and e-commerce retailers.
The following table presents invoice volume for Progressive Leasing:
For the Year Ended December 31 (Unaudited and In Thousands)
Progressive Leasing Invoice Volume1
2018
2017
2016
$
1,429,550
$
1,160,732
$
884,812
1 Invoice volume is defined as the retail price of lease merchandise acquired and then leased to customers during the period, net
of returns.
The Aaron’s Business segment offers furniture, consumer electronics, home appliances and accessories to consumers primarily
with a month-to-month, lease-to-own agreement with no credit needed through the Company’s Aaron’s-branded stores in the
United States and Canada and its e-commerce website. This operating segment also supports franchisees of its Aaron’s-branded
stores. In addition, the Aaron’s Business segment includes the operations of Woodhaven Furniture Industries ("Woodhaven"),
which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated
and franchised stores.
The Company acquired the Aaron's-branded store operations and related assets of 13 franchisees during the year ended
December 31, 2018. On July 27, 2017, the Company acquired substantially all of the assets of the store operations of SEI/
Aaron’s, Inc. ("SEI"), the Company’s largest franchisee at that time. Refer to Note 2 to these consolidated financial statements
for additional discussion of franchisee acquisitions.
On May 13, 2016, the Company sold the 82 Company-operated HomeSmart stores and ceased operations of that segment. See
the Assets Held for Sale section below for further discussion of the disposition.
The following table presents store count by ownership type for the Aaron’s Business operations:
Stores at December 31 (Unaudited)
Company-operated Aaron's Branded Stores
Franchised Stores1
Systemwide Stores
2018
2017
2016
1,312
377
1,689
1,175
551
1,726
1,165
699
1,864
1As of December 31, 2018, 2017 and 2016, the Company has awarded 388, 580 and 749 franchises, respectively.
DAMI, which was acquired by Progressive Leasing on October 15, 2015, partners with merchants to provide a variety of
revolving credit products originated through two third-party federally insured banks to customers that may not qualify for
traditional prime lending (called "second-look" financing programs).
Basis of Presentation
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally
accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts
reported in these consolidated 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 unidentified and unforeseen events.
Principles of Consolidation
The consolidated financial statements include the accounts of Aaron’s, Inc. and its subsidiaries, each of which is wholly owned.
Intercompany balances and transactions between consolidated entities have been eliminated.
61
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting primarily of furniture, consumer electronics, home appliances and accessories,
to its customers for lease under certain terms agreed to by the customer. The Company’s Progressive Leasing segment offers
virtual lease-purchase solutions, typically over 12 months, to the customers of traditional and e-commerce retailers. The
Company’s Aaron's-branded stores offer leases with month-to-month terms that can be renewed up to 12, 18 or 24 months. The
Company does not require deposits upon inception of customer agreements. The customer has the right to acquire ownership
either through a purchase option or through payment of all required lease payments.
Progressive Leasing lease revenues are earned prior to the lease payment due date and are recorded net of related sales taxes as
earned. Revenue recorded prior to the payment due date results in unbilled accounts receivable in the accompanying
consolidated balance sheets.
Aaron's Business lease revenues are recognized as revenue net of related sales taxes in the month they are earned. Lease
payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer
deposits and advance payments in the accompanying consolidated balance sheets.
All of the Company’s customer agreements are considered operating leases. The Company maintains ownership of the lease
merchandise until all payment obligations are satisfied under sales and lease ownership agreements. Initial direct costs related
to Progressive Leasing's lease purchase agreements are capitalized as incurred and amortized as operating expense over the
estimated lease term. The capitalized costs have been classified within prepaid expenses and other assets in the accompanying
consolidated balance sheets. Initial direct costs related to Aaron's Business customer agreements are expensed as incurred and
have been classified as operating expenses in the Company’s consolidated statements of earnings. The statement of earnings
effects of expensing the initial direct costs of the Aaron's Business as incurred are not materially different from amortizing
initial direct costs over the lease term.
Retail and Non-Retail Sales
Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Revenues for the non-retail sale
of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the
merchandise.
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. The Company classifies the sale of merchandise to
other customers as retail sales in the consolidated statements of earnings.
Franchise Royalties and Fees
The Company has no current plans to franchise additional Aaron's stores. Current franchisees pay an ongoing royalty of 6% of
the weekly cash revenue collections, which is recognized as the fees become due. The Company received a non-refundable
initial franchise fee from current franchisees from $15,000 to $50,000 per store depending upon market size. Franchise fees and
area development fees were generated from the sale of rights to develop, own and operate sales and lease ownership stores and
pre-opening services provided by Aaron's to assist in the start-up operations of the stores. The Company considers the rights to
the intellectual property and the pre-opening services to be a single performance obligation, resulting in the recognition of
revenue ratably over time from the store opening date throughout the remainder of the franchise agreement term. The Company
believes that this period of time is most representative of the time period in which the customer realizes the benefits of having
the right to access the Company's intellectual property. The deferred revenue balance related to initial franchise fees was $1.4
million as of December 31, 2018 and is included in customer deposits and advance payments on the consolidated balance
sheets. Revenue related to initial franchise fees recognized during the year ended December 31, 2018 was $1.4 million.
The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the
outstanding debt obligations of such franchisees. Refer to Note 9 of these consolidated financial statements for additional
discussion of the Company's franchise-related guarantee obligation. The Company also charges fees for advertising efforts that
benefit the franchisees. Such fees are recognized at the time the advertising takes place and are presented as franchise royalties
and fees in the Company's consolidated statements of earnings.
Initial direct costs related to the pre-opening services provided to franchisees are immaterial and are expensed as incurred.
These expenses have been classified as operating expenses in the Company's consolidated statements of earnings.
62
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest and Fees on Loans Receivable
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant’s credit rating and other
factors. Qualifying applicants receive a credit card to finance their initial purchase and to use in subsequent purchases at the
merchant or other participating merchants for an initial 24-month period, which DAMI may renew if the cardholder remains in
good standing.
DAMI acquires the loan receivable from merchants through its third-party bank partners at a discount from the face value of the
loan. The discount is comprised of a merchant fee discount and a promotional fee discount, if applicable.
The merchant fee discount represents a pre-negotiated, nonrefundable discount that generally ranges from 3% to 25% of the
loan face value. The discount is designed to cover the risk of loss related to the portfolio of cardholder charges and DAMI’s
direct origination costs. The merchant fee discount and origination costs are netted on the consolidated balance sheet in loans
receivable. Cardholders generally have an initial 24-month period that the card is active. The merchant fee discount, net of the
origination costs, is amortized on a net basis and is recorded as interest and fee revenue on loans receivable in the consolidated
statements of earnings on a straight-line basis over the initial 24-month period.
The discount from the face value of the loan on the acquisition of the loan receivable from the merchant through the third-party
bank partners may also include a promotional fee discount, which generally ranges from 1% to 8%. The promotional fee
discount is intended to compensate the holder of the loan receivable (e.g. DAMI) for deferred or reduced interest rates that are
offered to the cardholder for a specified period on the outstanding loan balance (generally for six, 12 or 18 months). The
promotional fee discount is amortized as interest and fee revenue on loans receivable in the consolidated statements of earnings
on a straight-line basis over the promotional interest period (i.e., over six, 12 or 18 months, depending on the promotion). The
unamortized promotional fee discount is netted on the consolidated balance sheet in loans receivable.
The customer is typically required to make periodic minimum payments of at least 3.5% of the outstanding loan balance, which
includes outstanding interest. Fixed and variable interest rates, typically 25% to 34.99%, are compounded daily for cards that
do not qualify for deferred or reduced interest promotional periods. Interest income, which is recognized based upon the
amount of the loans outstanding, is recognized as interest and fees on loans receivable in the billing period in which they are
assessed if collectibility is reasonably assured. For credit cards that provide for deferred or reduced interest, if the balance is not
paid off during the promotional period, interest is billed to the customers at standard rates and the cumulative amount owed is
charged to the cardholder account in the month that the promotional period expires or defaults. The Company recognizes
interest revenue during the promotional period based on its historical experience related to cardholders that fail to pay off
balances during the promotional period.
Annual fees are charged to cardholders at the commencement of the loan and on each subsequent anniversary date. Annual fees
are deferred and recognized into revenue on a straight-line basis over a one-year period. Under the provisions of the credit card
agreements, the Company also may assess fees for service calls or for missed or late payments, which are recognized as
revenue in the billing period in which they are assessed if collectibility is reasonably assured. Annual fees and other fees
discussed are recognized as interest and fee revenue on loans receivable in the consolidated statements of earnings.
Lease Merchandise
The Company’s lease merchandise consists primarily of furniture, consumer electronics, home appliances and accessories and
is recorded at the lower of cost or net realizable value. The cost of merchandise manufactured by our Woodhaven operations is
recorded at cost and includes overhead from production facilities, shipping costs and warehousing costs. The Company’s
Progressive Leasing segment, at which substantially all merchandise is on lease, depreciates merchandise generally over 12
months. The Company-operated stores begin depreciating merchandise at the earlier of 12 months and one day or when the item
is leased and depreciate merchandise to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24
months, and generally 36 months when not on lease. Depreciation is accelerated upon early payout.
The following is a summary of lease merchandise, net of accumulated depreciation and allowances:
(In Thousands)
Merchandise on Lease
Merchandise Not on Lease
Lease Merchandise, net of Accumulated Depreciation and Allowances
December 31,
2018
1,053,684
264,786
1,318,470
$
$
2017
908,268
243,867
1,152,135
$
$
63
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s policies require weekly lease merchandise counts at its store-based operations, which include write-offs for
unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are
generally taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing,
damaged 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 obsolete lease merchandise cannot be returned to
vendors, its carrying amount is adjusted to its net realizable value or written off.
Generally, all lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise
identified is written off. The Company records a provision for write-offs on the allowance method, which estimates the
merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical
write-off experience. The provision for write-offs is included in operating expenses in the accompanying consolidated
statements of earnings.
The following table shows the components of the allowance for lease merchandise write-offs:
(In Thousands)
Beginning Balance
Merchandise Written off, net of Recoveries
Provision for Write-offs
Ending Balance
Retail and Non-Retail Cost of Sales
Year ended December 31,
2018
2017
$
$
35,629
(181,252)
192,317
46,694
$
$
33,399
(143,230)
145,460
35,629
$
$
2016
33,405
(134,110)
134,104
33,399
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 $75.2 million, $67.3 million and $69.9 million in 2018, 2017 and 2016, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising production costs are initially recognized as a prepaid
advertising asset and are expensed when an advertisement appears for the first time. Total advertising costs amounted to $37.7
million, $34.0 million and $40.8 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are classified
within operating expenses in the consolidated statements of earnings. These advertising costs are shown net of cooperative
advertising considerations received from vendors, which represents reimbursement of specific, identifiable and incremental
costs incurred in selling those vendors’ products. The amount of cooperative advertising consideration recorded as a
reimbursement of such advertising expense was $28.3 million, $22.5 million and $22.2 million for the years ended December
31, 2018, 2017 and 2016, respectively. The prepaid advertising asset was $1.6 million and $1.4 million at December 31, 2018
and 2017, respectively, and is reported within prepaid expenses and other assets on the consolidated balance sheets.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 12 to these consolidated
financial statements. The Company estimates the fair value for the options granted on the grant date using a Black-Scholes-
Merton option-pricing model. The fair value of each share of restricted stock units ("RSUs"), restricted stock awards ("RSAs")
and performance share units ("PSUs") awarded is equal to the market value of a share of the Company’s common stock on the
grant date.
Deferred Income Taxes
Deferred income taxes represent primarily 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.
64
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"), restricted stock awards ("RSAs"), performance share units ("PSUs") and awards
issuable under the Company's employee stock purchase plan ("ESPP") (collectively, "share-based awards") as determined under
the treasury stock method. The following table shows the calculation of dilutive share-based awards:
(Shares In Thousands)
Weighted Average Shares Outstanding
Dilutive Effect of Share-Based Awards
Weighted Average Shares Outstanding Assuming Dilution
Year Ended December 31,
2018
2017
2016
69,128
1,469
70,597
70,837
1,284
72,121
72,354
659
73,013
Approximately 347,000, 140,000 and 939,000 weighted-average share-based awards were excluded from the computation of
earnings per share assuming dilution during the years ended December 31, 2018, 2017 and 2016, respectively, as the awards
would have been anti-dilutive for the periods presented.
Cash and Cash Equivalents
The Company classifies highly liquid investments with maturity dates of three months or less when purchased as cash
equivalents. The Company maintains its cash and cash equivalents in a limited number of banks. Bank balances typically
exceed coverage provided by the Federal Deposit Insurance Corporation. However, due to the size and strength of the banks in
which the balances are held, any exposure to loss is believed to be minimal.
Investments
At December 31, 2017, investments classified as held-to-maturity securities consisted of British pound-denominated notes
issued by PerfectHome, which is based in the U.K. The PerfectHome Notes ("Notes") consisted of outstanding principal and
accrued interest of £15.1 million ($20.4 million) at December 31, 2017. PerfectHome was a variable interest entity ("VIE")
because it did not have sufficient equity at risk. However, the Company was not the primary beneficiary and did not consolidate
PerfectHome since the Company lacked power through voting or similar rights to direct the activities that most significantly
affected PerfectHome's economic performance.
During the second quarter of 2018, PerfectHome's liquidity deteriorated significantly due to continuing operating losses and the
senior lender's decision to no longer provide additional funding under a secured revolving debt agreement resulting from
PerfectHome's default of certain covenants. Additionally, the senior lender notified PerfectHome in May 2018 of its intent to
exercise remedies available under its credit documentation, which included the right to call its outstanding debt. Furthermore,
the U.K. governing authority for rent-to-own companies, the Financial Conduct Authority, proposed new regulatory measures
which could adversely affect PerfectHome's business. In July 2018, PerfectHome entered into the U.K.’s insolvency process
and was subsequently acquired by the senior lender. The Company believes it will not receive any further payments on its
subordinated secured Notes. As a result, the Company recorded a full impairment of the PerfectHome investment of $20.1
million during the second quarter of 2018.
Accounts Receivable
Accounts receivable consist primarily of receivables due from customers of Progressive Leasing and Company-operated stores,
corporate receivables incurred during the normal course of business (primarily for real estate leasing activities and vendor
consideration) and franchisee obligations.
Accounts receivable, net of allowances, consist of the following:
(In Thousands)
Customers
Corporate
Franchisee
December 31,
2018
2017
$
$
60,879
$
18,171
19,109
98,159
$
48,661
23,431
27,795
99,887
65
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains an accounts receivable allowance, which primarily relates to its Progressive Leasing operations and its
store-based operations. The Company’s policy for its Progressive Leasing segment is to accrue for uncollected amounts due
based on historical collection experience. The provision is recognized as bad debt expense, which is classified in operating
expenses within the consolidated statements of earnings. The Progressive Leasing segment writes-off lease receivables that are
120 days or more contractually past due.
For the Company’s store-based operations, contractually required lease payments are accrued when due; however, they are not
always collected and customers can terminate the lease agreements at any time. For customers that do not pay timely, the
Company’s store-based operations generally focus on obtaining a return of the lease merchandise. Therefore, the Company’s
policy for its store-based operations is to accrue a provision for returns and uncollectible contractually due renewal payments
based on historical collection experience, which is recognized as a reduction of lease revenues and fees. Store-based operations
write-off lease receivables that are 60 days or more past due on pre-determined dates occurring twice monthly.
The following table shows the components of the accounts receivable allowance:
(In Thousands)
Beginning Balance
Accounts Written Off, net of Recoveries
Accounts Receivable Provision
Ending Balance
Year Ended December 31,
2018
2017
$
$
46,946
(252,330)
268,088
62,704
$
$
35,690
(192,133)
203,389
46,946
$
$
2016
34,861
(167,094)
167,923
35,690
The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments for
the fiscal years presented:
(In Thousands)
Bad Debt Expense
Provision for Returns and Uncollected Renewal Payments
Accounts Receivable Provision
Loans Receivable
Year Ended December 31,
2018
227,960
40,128
268,088
$
$
2017
170,574
32,815
203,389
$
$
2016
128,333
39,590
167,923
$
$
Gross loans receivable represents the principal balances of credit card charges at DAMI’s participating merchants that remain
due from cardholders, plus unpaid interest and fees due from cardholders. The allowances and unamortized fees represents an
allowance for uncollectible amounts; merchant fee discounts, net of capitalized origination costs; promotional fee discounts;
and deferred annual card fees.
Loans acquired in the October 15, 2015 DAMI acquisition (the "Acquired Loans") were recorded at their estimated fair value at
the acquisition date. The projected net cash flows from expected payments of principal, interest, fees and servicing costs and
anticipated charge-offs were included in the determination of fair value; therefore, an allowance for loan losses and an amount
for unamortized fees were not recognized for the Acquired Loans. The difference, or discount, between the expected cash flows
to be received and the fair value of the Acquired Loans is accreted to interest and fees on loans receivable based on the effective
interest method. At each period end, the Company evaluates the appropriateness of the accretable discount on the Acquired
Loans based on actual and revised projected future cash receipts.
Losses on loans receivable are recognized when they are incurred, which requires the Company to make its best estimate of
probable losses inherent in the portfolio. The Company evaluates loans receivable collectively for impairment. The method for
calculating the best estimate of probable losses takes into account the Company’s historical experience, adjusted for current
conditions and the Company’s judgment concerning the probable effects of relevant observable data, trends and market factors.
Economic conditions and loan performance trends are closely monitored to manage and evaluate exposure to credit risk. Trends
in delinquency ratios are an indicator of credit risk within the loans receivable portfolio, including the migration of loans
between delinquency categories over time. Charge-off rates represent another indicator of the potential for future credit losses.
The risk in the loans receivable portfolio is correlated with broad economic trends, such as unemployment rates, gross domestic
product growth and gas prices, which can have a material effect on credit performance. To the extent that actual results differ
from estimates of uncollectible loans receivable, the Company’s results of operations and liquidity could be materially affected.
66
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company calculates the allowance for loan losses based on actual delinquency balances and historical average loss
experience on loans receivable by aging category for the prior eight quarters. The allowance for loan losses is maintained at a
level considered adequate to cover probable losses of principal, interest and fees on active loans in the loans receivable
portfolio. The adequacy of the allowance is evaluated at each period end.
Delinquent loans receivable are those that are 30 days or more past due based on their contractual billing dates. The Company
places loans receivable on nonaccrual status when they are greater than 90 days past due or upon notification of cardholder
bankruptcy, death or fraud. The Company discontinues accruing interest and fees and amortizing merchant fee discounts and
promotional fee discounts for loans receivable in nonaccrual status. Loans receivable are removed from nonaccrual status when
cardholder payments resume, the loan becomes 90 days or less past due and collection of the remaining amounts outstanding is
deemed probable. Payments received on nonaccrual loans are allocated according to the same payment hierarchy methodology
applied to loans that are accruing interest. Loans receivable are charged off at the end of the month following the billing cycle
in which the loans receivable become 120 days past due.
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant’s credit rating and other
factors. Below is a summary of the credit quality of the Company’s loan portfolio as of December 31, 2018 and 2017 by Fair
Isaac and Company (FICO) score as determined at the time of loan origination:
FICO Score Category
600 or Less
Between 600 and 700
700 or Greater
Property, Plant and Equipment
December 31,
2018
2017
3.7%
77.9%
18.4%
1.7%
76.5%
21.8%
The Company records property, 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 range from five to 20 years for buildings and improvements
and from one to 15 years for other depreciable property and equipment.
Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software,
which ranges from five to 10 years. The Company primarily develops software for use in its Progressive Leasing and store-
based operations. The Company uses an agile development methodology in which feature-by-feature updates are made to its
software. Costs are capitalized when management, with the relevant authority, authorizes and commits to funding a feature
update and it is probable that the project will be completed and the software will be used to perform the function intended.
Capitalization of costs ceases when the feature update is substantially complete and ready for its intended use. Generally, the
life cycle for each feature update implementation is one month.
Gains and losses related to dispositions and retirements are recognized as incurred. Maintenance and repairs are also expensed
as incurred, and leasehold improvements are capitalized and amortized over the lesser of the lease term or the asset's useful life.
Depreciation expense for property, plant and equipment is included in operating expenses in the accompanying consolidated
statements of earnings and was $61.2 million, $54.8 million and $53.6 million during the years ended December 31, 2018, 2017
and 2016, respectively. Amortization of previously capitalized internal use software development costs, which is a component
of depreciation expense for property, plant and equipment, was $14.1 million, $11.5 million and $9.2 million during the years
ended December 31, 2018, 2017 and 2016, respectively.
The Company assesses its long-lived assets other than goodwill and other indefinite-lived intangible assets for impairment
whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. If it is determined that the
carrying amount of an asset is not recoverable, the Company compares the carrying amount of the asset to its fair value as
estimated using discounted expected future cash flows, market values or replacement values for similar assets. The amount by
which the carrying amount exceeds the fair value of the asset, if any, is recognized as an impairment loss.
67
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
(In Thousands)
Prepaid Expenses
Prepaid Insurance
Assets Held for Sale
Deferred Tax Asset
Other Assets
Assets Held for Sale
December 31,
2018
2017
$
30,763
$
27,948
6,589
8,761
24,161
31,509
36,735
10,118
11,589
26,548
$
98,222
$
116,499
Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of
December 31, 2018 and 2017. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated
cost to sell and are classified within prepaid expenses and other assets in the consolidated balance sheets. Depreciation is
suspended on assets upon classification to held for sale.
The carrying amount of the properties held for sale as of December 31, 2018 and 2017 was $6.6 million and $10.1 million,
respectively. The Company estimated the fair values of real estate properties using the market values for similar properties.
These properties are considered Level 2 assets as defined below.
The Company recorded impairment charges on assets held for sale of $0.2 million, $0.7 million and $5.8 million during the
years ended December 31, 2018, 2017 and 2016, respectively, in other operating income within the consolidated statements of
earnings. These impairment charges related to the impairment of various parcels of land and buildings that the Company
decided not to utilize for future expansion as well as the sale of the net assets of the HomeSmart disposal group in May 2016 as
described below.
The Company recognized net gains of $0.4 million related to the disposal of certain assets held for sale during the year ended
December 31, 2018 of land and buildings that the Company closed under the 2016 and 2017 restructuring plans described in
Note 10 to these consolidated financial statements. These gains were recorded as a reduction to restructuring expenses within
the consolidated statements of earnings. The Company also recognized a gain of $0.8 million during the year ended
December 31, 2018 related to the sale of the former headquarters building of its DAMI segment for a selling price of $2.2
million. The disposal of assets held for sale also resulted in the recognition of net gains of $11.4 million for the year ended
December 31, 2016 due mainly to the sale of the Company's former corporate headquarters building in January 2016 for cash of
$13.6 million, resulting in a gain of $11.1 million. These cash proceeds from the respective sales of the former DAMI and
Corporate headquarters buildings were recorded in proceeds from sales of property, plant and equipment in the consolidated
statements of cash flows and the net gains were recorded in other operating income in the consolidated statements of earnings.
Gains and losses on the disposal of assets held for sale were not significant in 2017.
On May 13, 2016, the Company sold its 82 remaining Company-operated HomeSmart stores for $35.0 million and ceased
operations of that segment. The sale did not represent a strategic shift that would have a major effect on the Company’s
operations and financial results and therefore the HomeSmart segment was not classified as discontinued operations. The cash
proceeds were recorded in proceeds from dispositions of businesses and contracts, net in the consolidated statements of cash
flows. During the year ended December 31, 2016, the Company recognized an impairment loss of $4.3 million on the
disposition and recorded additional charges of $1.1 million related to exiting the HomeSmart business, primarily consisting of
impairment charges on certain assets related to the division that were not included in the May 2016 disposition. The impairment
loss and additional charges were recorded in other operating income in the consolidated statements of earnings.
68
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net tangible and intangible
assets acquired in connection with business acquisitions. Impairment occurs when the carrying amount of goodwill is not
recoverable from future cash flows. The Company’s goodwill is not amortized but is subject to an impairment test at the
reporting unit level annually as of October 1 and more frequently if 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 negative industry or economic trends and significant underperformance relative to historical or projected
future operating results. The Company performed a qualitative assessment to complete its annual goodwill impairment test as of
October 1, 2018 and determined that no impairment had occurred. The Company determined that there were no events that
occurred or circumstances that changed in the fourth quarter of 2018 that would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
Other Intangibles
Other intangibles include favorable operating leases, customer relationships, customer lease contracts, non-compete
agreements, reacquired franchise rights, and expanded customer base intangible assets acquired in connection with store-based
business acquisitions, asset acquisitions of customer contracts, and franchisee acquisitions. The favorable operating lease
intangible asset is amortized to rent expense, which is recorded within operating expenses in the consolidated statements of
earnings, on a straight-line basis over the remaining lease terms, plus any renewal terms that are considered to be favorable
compared to market. The customer relationship intangible asset is amortized on a straight-line basis over a three-year estimated
useful life. The customer lease contract intangible asset is amortized on a straight-line basis over a one-year estimated useful
life. The non-compete intangible asset is amortized on a straight-line basis over the life of the agreement (generally one to five
years). The expanded customer base intangible asset represents the estimated fair value paid by the Company in an asset
acquisition for the ability to advertise and execute lease agreements with a larger pool of customers in the respective markets,
and is generally amortized on a straight-line basis over two to six years. Acquired franchise rights are amortized on a straight-
line basis over the remaining life of the franchisee’s ten-year license term.
Other intangibles also include the identifiable intangible assets acquired as a result of the DAMI and Progressive Leasing
acquisitions, which the Company recorded at the estimated fair value as of the respective acquisition dates. The Company
amortizes the definite-lived intangible assets acquired as a result of the DAMI acquisition on a straight-line basis over five
years. The Company amortizes the definite-lived intangible assets acquired as a result of the Progressive Leasing acquisition on
a straight-line basis over periods ranging from one to three years for customer lease contracts and internal use software and ten
to 12 years for technology and merchant relationships.
Indefinite-lived intangible assets represent the value of trade names acquired as part of the Progressive Leasing acquisition. At
the date of acquisition, the Company determined that no legal, regulatory, contractual, competitive, economic or other factors
limit the useful life of the trade name intangible asset and, therefore, the useful life is considered indefinite. The Company
reassesses this conclusion quarterly and continues to believe the useful life of this asset is indefinite.
Indefinite-lived intangible assets are not amortized but are subject to an impairment test annually and when events or
circumstances indicate that impairment may have occurred. The Company performs the impairment test for its indefinite-lived
intangible assets on October 1 in conjunction with its annual goodwill impairment test. The Company completed its indefinite-
lived intangible asset impairment test as of October 1, 2018 and determined that no impairment had occurred.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
(In Thousands)
Accounts Payable
Accrued Insurance Costs
Accrued Salaries and Benefits
Accrued Real Estate and Sales Taxes
Deferred Rent
Other Accrued Expenses and Liabilities
69
December 31,
2018
2017
$
88,369
$
40,423
40,790
30,332
27,270
65,969
80,821
41,680
46,511
31,054
29,912
74,832
$
293,153
$
304,810
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Insurance Reserves
Estimated insurance reserves are accrued primarily for workers compensation, vehicle liability, general liability and group
health insurance benefits provided to the Company’s employees. Insurance reserves are recorded within accrued insurance costs
in accounts payable and accrued expense in the consolidated balance sheets. Estimates for these insurance reserves are made
based on actual reported but unpaid claims and actuarial analysis of the projected claims run off for both reported and incurred
but not reported claims. This analysis is based upon an assessment of the likely outcome or historical experience. The Company
makes periodic prepayments to its insurance carrier to cover the projected claims run off for both reported and incurred but not
reported claims, considering its retention or stop loss limits.
Asset Retirement Obligations
The Company accrues for asset retirement obligations, which relate to expected costs to remove exterior signage, in the period
in which the obligations are incurred. These costs are accrued at fair value. When the related liability is initially recorded, the
Company capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its settlement value and updated for changes in estimates. Upon settlement of the liability, the Company recognizes
a gain or loss for any differences between the settlement amount and the liability recorded. Asset retirement obligations, which
are included in accounts payable and accrued expenses in the consolidated balance sheets, amounted to approximately $2.7
million and $2.5 million as of December 31, 2018 and 2017, respectively. The capitalized cost is depreciated over the useful life
of the related asset.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. To increase the comparability of fair value measures, the following
hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that
are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with
reasonably available assumptions made by other market participants. These valuations require significant judgment.
The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are
deemed to be impaired. The Company maintains certain financial assets and liabilities, including fixed-rate long term debt, that
are not measured at fair value but for which fair value is disclosed.
The fair values of the Company’s other current financial assets and liabilities, including cash and cash equivalents, accounts
receivable and accounts payable, approximate their carrying values due to their short-term nature. The fair value for the loans
receivable, net of allowances, and any revolving credit borrowings also approximate their carrying amounts.
Foreign Currency
The financial statements of the Company’s Canadian subsidiary are translated from the Canadian dollar to U.S. dollars using
month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses.
Translation gains and losses of the subsidiary are recorded in accumulated other comprehensive income as a component of
shareholders’ equity.
Foreign currency remeasurement gains and losses are recorded due to our previous investment in PerfectHome as well as
remeasurement of the operating results of the Company's Canadian Aaron's-branded stores from the Canadian dollar to U.S.
dollars. These gains and losses are recorded as a component of other non-operating (expense) income, net in the consolidated
statements of earnings and were losses of approximately $0.1 million and $3.7 million for the years ended December 31, 2018
and 2016, respectively, and gains of $2.1 million for the year ended December 31, 2017.
Supplemental Disclosure of Noncash Investing Transactions
During the year ended December 31, 2018, the Company entered into exchange transactions to acquire and sell certain
customer agreements and related lease merchandise with third parties which are accounted for as asset acquisitions and asset
disposals. The fair value of the non-cash consideration exchanged in these transactions was $0.6 million.
70
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As described in Note 2 to these consolidated financial statements, the purchase price for the acquisition of SEI during the year
ended December 31, 2017 included the non-cash settlement of pre-existing accounts receivable SEI owed the Company of $3.5
million. In addition, the purchase price for the acquisition of certain franchisees made during the year ended December 31,
2018 included the non-cash settlement of pre-existing amounts the franchisees owed the Company of $5.4 million. This non-
cash consideration has been excluded from the line "Outflows on Acquisitions of Businesses, Net of Cash Acquired" in the
investing activities section of the statement of cash flows.
Hurricane Impact
During the third and fourth quarters of 2017, Hurricanes Harvey and Irma impacted the Company in the form of: (i) property
damages (primarily in-store and on-lease merchandise, store leasehold improvements and furniture and fixtures) and employee
assistance payments; (ii) increased customer-related accounts receivable allowances and lease merchandise allowances
primarily in the impacted areas; and (iii) lost lease revenue due to store closures of Aaron’s Business and Progressive Leasing
retail partners; and (iv) lost lease revenue due to the postponing of customer payments in the impacted areas.
During the year ended December 31, 2017, the Company recorded pre-tax losses of $4.7 million related to property that was
either destroyed or severely damaged by Hurricanes Harvey or Irma, store repair costs and other storm related remediation
costs. The Company recognized $3.3 million of pre-tax income for property-related insurance proceeds that were probable of
receipt as of December 31, 2017. In December 2017, the Company received a partial cash payment of $0.4 million from its
insurers. As of December 31, 2017, the Company had an insurance receivable for property-related damages of $2.9 million. The
Company also increased its customer-related accounts receivable allowances and lease merchandise allowances by a combined
$3.6 million during the year ended December 31, 2017, primarily due to delays in payments from customers in the impacted
areas. The property losses, net of probable insurance retention and probable recoveries, and customer-related allowances were
recorded within operating expenses in the consolidated statements of earnings. The insurance receivable was classified within
prepaid expenses and other assets in the consolidated balance sheets.
During the year ended December 31, 2018, the Company received cash payments of $2.2 million from its insurers related to the
partial settlements of property damage claims resulting from Hurricanes Harvey and Irma. Settled property damage claims
(either received in cash or deemed collectible as of December 31, 2018) that were in excess of the respective insurance
receivable balances resulted in gains of $0.9 million during the year ended December 31, 2018. These gains were recorded
within other operating income in the consolidated statements of earnings. As of December 31, 2018, the Company has an
insurance receivable of $2.5 million, which the Company believes is probable of receipt.
Recent Accounting Pronouncements
Adopted
Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("Topic 606").
ASU 2014-09 replaces substantially all existing revenue recognition guidance with a single, comprehensive revenue recognition
model that requires a company to recognize revenue to depict the transfer of promised goods and services to customers at the
amount to which it expects to be entitled in exchange for transferring those goods or services. On January 1, 2018, the
Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as
of January 1, 2018. Results for reporting periods beginning on January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
The standard changed the timing of recognition of store pre-opening revenue from franchisees. Previously, the Company's
accounting policy was to recognize initial franchise store pre-opening revenue when earned, which is generally when a new
store opens. Under Topic 606, the initial franchise pre-opening services are not considered distinct from the continuing
franchise services as they would not transfer a benefit to the franchisee directly without use of the franchise license and should
be bundled with the franchise license as a single performance obligation. As a result, the pre-opening revenues is recognized
from the store opening date over the remaining life of the franchise license term.
The standard also changed the presentation of certain fees charged to franchisees, primarily advertising fees. Previously, there
was diversity in practice and advertising fees charged to franchisees were recorded as a reduction to advertising expense, which
is classified within operating expenses in the consolidated statements of earnings. Topic 606 resulted in the presentation of
advertising fees charged to franchisees to be reported as franchise royalties and fee revenue in the consolidated statements of
earnings, instead of a reduction to advertising expense.
The changes associated with the adoption of Topic 606 did not require significant changes to controls and procedures around
the revenue recognition process. The Company adopted the standard on January 1, 2018 using the modified retrospective
approach and recorded a pre-tax adjustment to opening retained earnings and deferred revenue of $2.4 million on January 1,
2018.
71
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The impact of adoption on the consolidated statements of earnings and balance sheets was as follows:
Consolidated Statements of Earnings
Twelve Months Ended December 31, 2018
(In Thousands)
Franchise Royalties and Fees
Operating Expenses
OPERATING PROFIT
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS
Consolidated Balance Sheets
Balance at December 31, 2018
(In Thousands)
Deferred Income Taxes Payable
Customer Deposits and Advance Payments
Total Liabilities
Retained Earnings
Total Shareholders’ Equity
$
$
$
As Reported
Balance Without ASC
606 Adoption
Effect of Change
Higher/(Lower)
44,815 $
36,245 $
1,618,423
1,611,210
289,608
252,204
55,994
288,250
250,846
55,661
196,210 $
195,185 $
8,570
7,213
1,358
1,358
333
1,025
As Reported
Balance Without ASC
606 Adoption
Effect of Change
Higher/(Lower)
267,500 $
267,790 $
80,579
1,065,984
2,005,344
1,760,708
79,585
1,065,280
2,006,048
1,761,412
(290)
994
704
(704)
(704)
—
Total Liabilities & Shareholders’ Equity
$
2,826,692 $
2,826,692 $
Comprehensive Statements of Income
Twelve Months Ended December 31, 2018
(In Thousands)
Comprehensive Income
As Reported
Balance Without ASC
606 Adoption
Effect of Change
Higher/(Lower)
$
194,349 $
193,324 $
1,025
Business Combinations. In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. The objective
of the update is to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions,
disposals, goodwill, and consolidation. The Company prospectively adopted ASU 2017-01 in the first quarter of 2018.
The new standard results in certain store acquisitions (or disposals) which do not transfer a substantive process to be accounted
for as asset acquisitions (or disposals). The Company routinely enters into arrangements to acquire lease merchandise inventory
and the related customer lease agreements of a store; however, the arrangement does not transfer a substantive process. The
Company has identified a separate "expanded customer base" intangible asset, which is separately valued and recorded in these
asset acquisitions. The "expanded customer base" represents the estimated fair value of the acquisition purchase price paid by
the Company for the ability to advertise and execute lease agreements with a larger pool of customers in the respective markets.
This intangible asset was previously subsumed in goodwill under the business combinations accounting guidance. In situations
in which the purchase price exceeds the fair value of the assets acquired, any remaining economic goodwill is allocated on a
relative fair value basis to all acquired assets, including merchandise inventory. In situations in which the fair value of the assets
acquired exceeds the purchase price, the acquisition is treated as a bargain purchase with the excess allocated on a relative fair
value basis to all assets. This results in the recognition of the initial asset bases at less than fair value, including merchandise
inventory.
Under ASU 2017-01, these acquisitions result in all of the purchase price getting assigned to definite lived assets, instead of a
portion going to goodwill. This results in higher depreciation and amortization expense under the new standard for asset
acquisitions that would have been accounted for as business combinations under the prior guidance. Transactions that are now
accounted for as asset disposals, instead of business disposals, do not result in the write-off of goodwill as part of the disposal.
72
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of ASU 2017-01 did not have a material impact to the Company's consolidated financial statements during the
year ended December 31, 2018. The future impact of this new standard will depend on the quantity and magnitude of future
acquisitions (or disposals) that will be treated as asset acquisitions (or disposals) in accordance with ASU 2017-01.
Pending Adoption
Leases. In February 2016, the FASB issued ASU 2016-02, Leases ("Topic 842"), which requires lessees to recognize assets and
liabilities for most leases and changes certain aspects of lessor accounting, among other things. ASU 2016-02 is effective for
annual and interim periods beginning after December 15, 2018, with early adoption permitted. Companies must use a modified
retrospective approach to adopt Topic 842; however, the Company plans to adopt an optional transition method finalized by the
FASB in July 2018 in which entities are permitted to not apply the requirements of Topic 842 in the comparative periods
presented within the financial statements in the year of adoption, with recognition of a cumulative-effect adjustment to the
opening balance of retained earnings in the period of adoption. The Company will be impacted by Topic 842 as a lessor
(operating leases with customers) and lessee (primarily store, fleet, and equipment operating leases) and will adopt the new
standard in the first quarter of 2019.
A majority of the Company's revenue generating activities will be within the scope of Topic 842. The Company has determined
that the new standard will not materially impact the timing of revenue recognition. The new standard will result in the Company
classifying Progressive Leasing bad debt expense, which is currently reported within operating expenses, as a reduction of lease
revenue and fees within the consolidated statements of earnings. The Aaron's Business bad debt expense is currently, and will
continue to be, recorded as a reduction to lease revenue and fees. The Progressive Leasing segment incurred bad debt expense
of $227.8 million, $170.5 million and $127.9 million during the years ended December 31, 2018, 2017, and 2016 respectively.
These amounts would have been recorded as a reduction to lease revenues and fees rather than within operating expenses in our
consolidated statements of earnings, had the requirements of Topic 842 been in place for those periods. The Company is also
electing the practical expedient provided under ASU 2018-20, Leases (Topic 842) - Narrow-scope improvements for lessors,
which allows issuers to make an accounting policy election not to evaluate whether certain sales and other taxes should be
excluded from the measurement of lease revenues and fees.
The new standard will also impact the Company as a lessee by requiring substantially all of its operating leases to be recognized
on the balance sheet as a right-to-use asset and operating lease liability. The Company plans to elect a package of optional
practical expedients which includes the option to retain the current classification of leases entered into prior to January 1, 2019,
and thus does not anticipate a material impact to the consolidated statements of earnings or consolidated statements of cash
flows. The Company expects to be affected by the transition guidance related to the recognition of deferred gains recorded
under previous sale and operating leaseback transactions, which requires companies to recognize any deferred gains not
resulting from off-market terms as a cumulative adjustment to retained earnings upon adoption of Topic 842. The Company also
expects to be impacted by the transition guidance related to one Aaron's store that was identified for closure under the
Company's 2016 and 2017 restructuring programs, but has not closed as of the adoption date. Topic 842 requires companies to
determine whether impairment indicators for the right-of-use asset at the asset or asset-group level exist as of the January 1,
2019 adoption date. If impairment indicators exist, a recoverability test is performed to determine whether an impairment loss
exists immediately prior to the date of initial adoption. As of January 1, 2019, the Company determined that an impairment loss
exists related to the right-of-use asset for this store identified for closure, which will be recorded as an adjustment to retained
earnings upon adoption of Topic 842. The Company is currently quantifying the cumulative adjustments to retained earnings for
the transition impacts of its deferred gain on sale leasebacks and right-of-use impairment for the store identified for closure. The
Company does not believe the cumulative adjustments to retained earnings at transition will be material.
The Company has implemented a new lease accounting module within its lease management system to support the new
accounting requirements for the Company's operating leases as a lessee. The Company has also finalized changes to our
accounting policies, processes, and internal controls to ensure compliance with the standard’s reporting and disclosure
requirements. The Company, as a lessee, is currently quantifying the impacts of its operating leases that will be reported on its
balance sheet upon adoption and is finalizing its incremental borrowing rate used to determine remaining present value of lease
payments.
Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments ("CECL"). The main objective of the update is to provide financial statement users with more decision-
useful information about the expected credit losses on financial instruments and other commitments to extend credit held by
companies at each reporting date. For trade and other receivables, held to maturity debt securities and other instruments,
companies will be required to use a new forward-looking "expected losses" model that generally will result in the recognition of
allowances for losses earlier than under current accounting guidance. The standard will be adopted on a modified retrospective
basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the
guidance is effective. ASU 2016-13 is effective for the Company in the first quarter of 2020.
73
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's operating lease activities within Aaron's Business and Progressive Leasing will not be impacted by ASU
2016-13, as operating lease receivables are not in the scope of the CECL model. The Company will be impacted by ASU
2016-13 within its DAMI segment by requiring earlier recognition of estimated credit losses in the consolidated statements of
earnings. DAMI acquires loan receivables from merchants through its third-party bank partners at a discount from the face
value of the loan, referred to as the "merchant fee discount." The merchant fee discount represents a pre-negotiated,
nonrefundable discount that generally ranges from 3% to 25% of the loan face value, which is primarily intended to cover the
risk of credit loss related to the portfolio of loans originated. Although the CECL model will require the estimated credit losses
to be recognized at the time of loan origination, the related merchant fee discount will continue to be amortized as interest and
fee revenue on a straight-line basis over the initial 24-month period that the card is active. Therefore, on a loan-by-loan basis,
the Company expects higher losses to be recognized upon loan origination for the estimated credit losses, generally followed by
higher net earnings as the related merchant fee discount is amortized as interest income, and as interest income is accrued and
earned on the outstanding loan. Although the CECL model will result in earlier recognition of credit losses in the statement of
earnings, no changes are expected related to the loan cash flows.
The Company has evaluated the guidance in ASU 2016-13 related to purchased financial assets with credit deterioration (“PCD
Method”). The Company's loans receivable would not qualify for the PCD Method as a more-than-insignificant deterioration in
credit quality since origination has not occurred.
The Company is continuing to evaluate the various impacts of CECL, including identifying changes to processes and
procedures that will be necessary to adopt ASU 2016-13. The Company is also evaluating whether it will choose to measure
future loans at fair value under the fair value option as an alternative to CECL. The fair value option would result in the
Company measuring loans at fair value on an instrument-by-instrument basis with changes in fair value reported in net
earnings. Election of the fair value option could cause volatility in our reported results, primarily in periods with large
fluctuations in interest rates. The Company is also monitoring emerging guidance which would allow companies to choose a
one-time election of the fair value option for loans previously recorded at amortized cost under the current incurred loss model.
As a result, we are continuing to evaluate transition options and alternatives available under ASU 2016-13.
Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The intent of the standard is to reduce diversity
in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. Under the new
standard, entities will be required to apply the accounting guidance as prescribed by ASC 350-40, Internal Use Software, in
determining which implementation costs should be capitalized as assets or expensed as incurred. The internal-use software
guidance requires the capitalization of certain costs incurred during the application development stage of an internal-use
software project, while requiring companies to expense all costs incurred during preliminary project and post-implementation
project stages. The standard may be applied either prospectively to all implementation costs incurred after the adoption date or
retrospectively. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early
adoption permitted. The Company is currently evaluating the adoption approach and assessing the potential effects of adopting
ASU 2018-15 on its consolidated financial statements, but expects certain implementation costs which are currently expensed
by the Company will be eligible for capitalization under ASU 2018-15.
NOTE 2: ACQUISITIONS
During the years ended December 31, 2018, 2017 and 2016, cash payments, net of cash acquired, related to the acquisitions of
businesses and contracts were $189.9 million, $145.6 million and $9.8 million, respectively. Cash payments made during the
years ended December 31, 2018, 2017 and 2016 principally relate to the acquisitions of Aaron's-branded franchised stores as
described below.
The franchisee acquisitions have been accounted for as business combinations 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 the Company’s
other acquisitions of businesses and contracts to the consolidated financial statements for the years ended December 31, 2018,
2017 and 2016 was not significant.
74
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchisee Acquisitions - 2018
During 2018, the Company acquired 152 Aaron's-branded franchised stores operated by franchisees for an aggregated purchase
price of $189.8 million, exclusive of the settlement of pre-existing receivables and post-closing working capital settlements.
The acquired operations generated revenues of $72.0 million and earnings before income taxes of $0.8 million from their
respective acquisition dates during 2018 through December 31, 2018 which are included in our consolidated statements of
earnings. The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs
and amortization expense of the various intangible assets recorded from the acquisitions. The revenues and losses before
income taxes above have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses
that the Company could have generated as revenue to the Company from the franchisees during the year ended December 31,
2018 had the transaction not been completed.
Acquisition Accounting
The 2018 acquisitions are expected to benefit the Company's omnichannel platform through added scale, strengthening its
presence in certain geographic markets, and enhancing operational control, including compliance, and by enabling it to execute
its business transformation initiatives on a broader scale. The following table presents summaries of the preliminary fair value
of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:
(in Thousands)
Purchase Price
Add: Settlement of Pre-existing Relationship
Less: Working Capital Adjustments
Aggregated Consideration Transferred
Estimated Fair Value of Identifiable Assets
Acquired and Liabilities Assumed
Cash and Cash Equivalents
Lease Merchandise
Property, Plant and Equipment
Other Intangibles2
Prepaid Expenses and Other Assets
Total Identifiable Assets Acquired
Accounts Payable and Accrued Expenses
Customer Deposits and Advance
Payments
Total Liabilities Assumed
Goodwill3
Net Assets Acquired (before Goodwill)
Amounts Recognized as of
Acquisition Dates
Measurement Period
Adjustments1
Amounts Recognized as of
Acquisition Date (as adjusted)
$
189,826
$
5,405
241
195,472
43
59,587
5,493
25,069
1,060
91,252
(826)
(5,156)
(5,982)
110,202
$
85,270
$
— $
—
(86)
(86)
—
29
75
(539)
108
(327)
(26)
—
(26)
267
(353) $
189,826
5,405
155
195,386
43
59,616
5,568
24,530
1,168
90,925
(852)
(5,156)
(6,008)
110,469
84,917
1 The acquisition accounting adjustments relate to finalizing information that existed as of the acquisition date regarding the
valuation of certain intangible assets and lease merchandise and obtaining additional information regarding acquired other
assets.
2 Identifiable intangible assets are further disaggregated in the table set forth below.
3 The total goodwill recognized in conjunction with the franchisee acquisitions, all of which is expected to be deductible for tax
purposes, has been assigned to the Aaron’s Business operating segment. The purchase price exceeded the fair value of the net
assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future
benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected
inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand
name in new geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate
recognition, such as an assembled workforce.
75
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The preliminary acquisition accounting presented above is subject to refinement. The Company is still finalizing the valuation
of acquired customer contracts, customer relationships, and assumed favorable and unfavorable property operating leases,
obtaining additional information regarding acquired other assets, and finalizing certain working capital adjustments.
The estimated intangible assets attributable to the franchisee acquisitions are comprised of the following:
Fair Value (in thousands)
Weighted Average Useful Life (in years)
Non-compete Agreements
Customer Contracts
Customer Relationships
Reacquired Franchise Rights
Total Acquired Intangible Assets1
$
$
1,872
7,864
10,131
4,663
24,530
3.0
1.0
3.0
3.9
1 Acquired definite-lived intangible assets have a total weighted average life of 2.5 years.
During the year ended December 31, 2018, the Company incurred $1.3 million of acquisition-related costs in connection with
the franchisee acquisitions. These costs were included in operating expenses in the consolidated statements of earnings.
Franchisee Acquisition - 2017
On July 27, 2017, the Company acquired substantially all of the assets and liabilities of the store operations of a franchisee,
SEI, for approximately $140 million in cash. At the time of the acquisition, those store operations served approximately 90,000
customers through 104 Aaron's-branded stores in 11 states primarily in the Northeast. The acquisition is benefiting the
Company’s omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing
operational control, including compliance, and enabling the Company to execute its business transformation initiatives on a
broader scale.
The acquired operations generated revenues and earnings before income taxes of $58.3 million and $2.5 million from July 27,
2017 through December 31, 2017 and revenues and earnings before income taxes of $129.4 million and $11.0 million for the
year ended December 31, 2018, which are included in our consolidated statements of earnings. Included in the earnings before
income taxes of the acquired operations are acquisition-related transaction and transition costs, amortization expense of the
various intangible assets recorded from the acquisition and restructuring expenses associated with the closure of several
acquired stores. The revenues and earnings before income taxes above have not been adjusted for estimated non-retail sales and
franchise royalties and fees and related expenses that the Company could have generated from SEI, as a franchisee, from
July 27, 2017 through December 31, 2018 had the transaction not been completed.
76
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition Accounting
The SEI acquisition has been accounted for as a business combination, and the results of operations of the acquired business is
included in the Company’s results of operations from the date of acquisition. The following table presents a summary of the fair
value of the assets acquired and liabilities assumed in the SEI franchisee acquisition:
(In Thousands)
Purchase Price
Settlement of Pre-existing Accounts Receivable SEI owed Aaron's, Inc.
Reimbursement for Insurance Costs
Working Capital Adjustment
Consideration Transferred
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents
Receivables
Lease Merchandise
Property, Plant and Equipment
Other Intangibles1
Prepaid Expenses and Other Assets
Total Identifiable Assets Acquired
Accounts Payable and Accrued Expenses
Customer Deposits and Advance Payments
Capital Leases
Total Liabilities Assumed
Goodwill2
Net Assets Acquired
$
$
Final Amounts Recognized as of
Acquisition Date
140,000
3,452
(100)
188
143,540
34
1,345
40,941
8,832
13,779
440
65,371
(6,698)
(2,500)
(4,514)
(13,712)
91,881
51,659
1 Identifiable intangible assets are further disaggregated in the table set forth below.
2 The total goodwill recognized in conjunction with the SEI acquisition, all of which is expected to be deductible for tax
purposes, has been assigned to the Aaron’s Business operating segment. The purchase price exceeded the fair value of the net
assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future
benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected
inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand
name in new geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate
recognition, such as an assembled workforce.
The estimated intangible assets attributable to the SEI acquisition are comprised of the following:
Non-compete Agreements
Customer Lease Contracts
Customer Relationships
Reacquired Franchise Rights
Favorable Operating Leases
Total Acquired Intangible Assets1
Fair Value
(in thousands)
Weighted Average Life
(in years)
$
1,244
2,154
3,215
3,640
3,526
$
13,779
5.0
1.0
2.0
4.1
11.3
1 Acquired definite-lived intangible assets have a total weighted average life of 5.1 years.
77
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company incurred $2.1 million of acquisition-related costs in connection with the franchisee acquisition, substantially all
of which were incurred during the third quarter of 2017. These costs were included in operating expenses in the consolidated
statements of earnings.
NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
The following table summarizes information related to indefinite-lived intangible assets at December 31:
(In Thousands)
Trade Name
Goodwill
Indefinite-lived Intangible Assets
December 31,
2018
53,000
733,170
786,170
$
$
2017
53,000
622,948
675,948
$
$
The following table provides information related to the carrying amount of goodwill by operating segment:
(In Thousands)
Balance at January 1, 2017
Acquisitions
Disposals, Currency Translation and Other
Adjustments
Acquisition Accounting Adjustments
Balance at December 31, 2017
Acquisitions
Disposals, Currency Translation and Other
Adjustments
Acquisition Accounting Adjustments
Progressive Leasing
Aaron’s Business
Total
$
288,801
$
—
—
—
288,801
—
—
—
237,922
$
97,460
(1,271)
36
334,147
110,469
(260)
13
526,723
97,460
(1,271)
36
622,948
110,469
(260)
13
Balance at December 31, 2018
$
288,801
$
444,369
$
733,170
78
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Definite-Lived Intangible Assets
The following table summarizes information related to definite-lived intangible assets at December 31:
(In Thousands)
2018
Accumulated
Amortization
Gross
Acquired Internal Use Software
$
14,000
$
Technology
Merchant Relationships
Other Intangibles1
Total
68,550
181,000
42,165
$ 305,715
Net
Gross
— $
14,000
(14,000) $
(32,749)
(71,101)
(12,265)
35,801
109,899
29,900
$ (130,115) $ 175,600
68,550
181,000
19,558
$ 283,108
2017
Accumulated
Amortization
$ (14,000) $
(25,639)
(56,018)
(4,900)
Net
—
42,911
124,982
14,658
$ (100,557) $ 182,551
1 Other intangibles primarily include favorable operating leases, customer relationships, customer lease contracts, non-compete
agreements, reacquired franchise rights and the expanded customer base intangible asset.
Total amortization expense of definite-lived intangible assets, which includes rent expense on favorable operating leases,
included in operating expenses in the accompanying consolidated statements of earnings, was $33.0 million, $27.7 million and
$28.8 million during the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, estimated
future amortization expense for the next five years related to definite-lived intangible assets is as follows:
(In Thousands)
2019
2020
2021
2022
2023
$
35,612
28,537
26,198
23,123
22,803
NOTE 4: FAIR VALUE MEASUREMENT
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial liabilities measured at fair value on a recurring basis:
(In Thousands)
Deferred Compensation Liability
Level 1
Level 2
— $ (10,389) $
$
Level 3
— $
Level 1
Level 2
— $ (12,927) $
Level 3
—
December 31, 2018
December 31, 2017
The Company maintains the Aaron's, Inc. Deferred Compensation Plan as described in Note 16 to these consolidated financial
statements. The liability is recorded in accounts payable and accrued expenses in the consolidated balance sheets. The liability
representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment
elections, which consist of equity and debt "mirror" funds. As such, the Company has classified the deferred compensation
liability as a Level 2 liability.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes non-financial assets measured at fair value on a nonrecurring basis:
(In Thousands)
Assets Held for Sale
December 31, 2018
December 31, 2017
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$
— $
6,589
$
— $
— $
10,118
$
—
Assets classified as held for sale are recorded at the lower of carrying value or fair value less estimated costs to sell, and any
adjustment is recorded in other operating income or restructuring expenses (if the asset is a part of the 2016 or 2017
restructuring program) in the consolidated statements of earnings. The highest and best use of the assets held for sale is as real
estate land parcels for development or real estate properties for use or lease; however, the Company has chosen not to develop
or use these properties.
79
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain Financial Assets and Liabilities Not Measured at Fair Value
The following table summarizes the fair value of assets (liabilities) that are not measured at fair value in the consolidated
balance sheets, but for which the fair value is disclosed:
(In Thousands)
PerfectHome Notes 1
Fixed-Rate Long Term Debt 2
December 31, 2018
December 31, 2017
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$
— $
— (183,765)
— $
— $
—
— $
— (273,476)
— $
20,385
—
1 The PerfectHome Notes were carried at cost, which approximated fair value. The Company recorded a full impairment of the
PerfectHome notes during the year ended December 31, 2018. Refer to Note 1 to the consolidated financial statements for
further discussion of the PerfectHome impairment.
2 The fair value of fixed-rate long term debt is estimated using the present value of underlying cash flows discounted at a
current market yield for similar instruments. The carrying amount of fixed-rate long term debt was $180.0 million and $265.0
million at December 31, 2018 and 2017, respectively.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the Company’s property, plant, and equipment:
(In Thousands)
Land
Buildings and Improvements
Leasehold Improvements and Signs
Fixtures and Equipment
Software - Internal Use
Assets Under Capital Leases:
with Related Parties
with Unrelated Parties
Construction in Progress
Less: Accumulated Depreciation and Amortization1
December 31,
2018
2017
19,950
67,081
83,867
210,747
106,671
872
9,487
15,104
513,779
(284,287)
229,492
$
$
19,768
67,053
69,407
180,553
86,208
4,032
12,426
10,863
450,310
(242,623)
207,687
$
$
1 Accumulated amortization of internal-use software development costs amounted to $56.9 million and $42.6 million as of
December 31, 2018 and 2017, respectively.
Amortization expense on assets recorded under capital leases is included in operating expenses and was $0.8 million,
$1.5 million and $1.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. Capital leases primarily
consist of buildings and improvements, as well as vehicles assumed as part of the SEI acquisition. Assets under capital leases
with related parties included $0.8 million and $3.6 million in accumulated depreciation and amortization as of December 31,
2018 and 2017, respectively. Assets under capital leases with unrelated parties included $8.3 million and $4.7 million in
accumulated depreciation and amortization as of December 31, 2018 and 2017, respectively.
80
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LOANS RECEIVABLE
The following is a summary of the Company’s loans receivable, net:
(In Thousands)
Credit Card Loans1
Acquired Loans2
Loans Receivable, Gross
Allowance for Loan Losses
Unamortized Fees
Loans Receivable, Net of Allowances and Unamortized Fees
December 31,
2018
2017
$
90,406
$
5,688
96,094
89,728
16,213
105,941
(12,970)
(6,971)
76,153
$
(11,454)
(8,375)
86,112
$
1 "Credit Card Loans" are loans originated after the 2015 acquisition of DAMI.
2 "Acquired Loans" are credit card loans the Company purchased in the 2015 acquisition of DAMI.
Included in the table below is an aging of the loans receivable, gross balance:
(Dollar Amounts in Thousands)
1
Aging Category
30-59 Days Past Due
60-89 Days Past Due
90 or more Days Past Due
Past Due Loans Receivable
Current Loans Receivable
Balance of Loans Receivable on Nonaccrual Status
Balance of Loans Receivable Greater Than 90 Days Past Due and Still Accruing Interest
and Fees
December 31,
2018
2017
6.9%
3.4%
4.3%
14.6%
85.4%
7.1%
3.6%
4.1%
14.8%
85.2%
$
$
2,110
$
2,016
— $
—
1 This aging is based on the contractual amounts outstanding for each loan as of period end, and does not reflect the fair value
adjustments for the Acquired Loans.
The table below presents the components of the allowance for loan losses:
(In Thousands)
Beginning Balance1
Provision for Loan Losses
Charge-offs
Recoveries
Ending Balance
December 31,
2018
2017
$
11,454
$
6,624
21,063
(21,190)
1,643
20,973
(16,852)
709
$
12,970
$
11,454
1 The Company acquired DAMI on October 15, 2015 and recorded $89.1 million of loans receivable as of the acquisition date.
No corresponding allowance for loan losses was recorded as the loans receivable were established at fair value in acquisition
accounting.
81
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: INDEBTEDNESS
Following is a summary of the Company’s debt, net of unamortized debt issuance costs:
(In Thousands) 1
Revolving Facility
Senior Unsecured Notes, 3.95%, Due in Installments through April 2018
Senior Unsecured Notes, 4.75%, Due in Installments through April 2021
Term Loan, Due in Installments through September 2022
Capital Lease Obligation:
with Related Parties
with Unrelated Parties
Total Debt
Less: Current Maturities
Long-Term Debt
December 31,
2018
2017
16,000
—
179,750
223,837
123
5,042
424,752
83,778
340,974
$
$
—
24,994
239,784
96,272
1,314
6,434
368,798
97,192
271,606
$
$
1 Total debt as of December 31, 2018 and 2017 includes unamortized debt issuance costs of $1.4 million and $1.5 million,
respectively. The Company also recorded $2.6 million and $3.2 million of debt issuance costs as of December 31, 2018 and
2017 related to the revolving credit facility within prepaid expenses and other assets in the consolidated balance sheets.
Revolving Credit Agreement and Term Loan
On October 23, 2018, the Company amended its second amended and restated revolving credit and term loan agreement (the
"Amended Agreement") primarily to increase the term loan to $225.0 million from the $87.5 million remaining principal
outstanding. The incremental borrowings were used for general corporate and working capital purposes and for the repayment
of outstanding borrowings under the revolver, under which repayments were made in the fourth quarter of 2018. The Amended
Agreement provides for quarterly term loan repayment installments of $5.6 million, payable on the last day of each March,
June, September, and December beginning on December 31, 2019, with the remaining principal balance payable upon the
maturity date of September 18, 2022. The term loan interest rate was 3.78% as of December 31, 2018. The maximum revolving
credit commitment of $400.0 million remained unchanged under the Amended Agreement. The Company concluded the
Amended Agreement constituted a debt modification and is deferring approximately $0.4 million of lender fees, with third party
legal and administrative fees of less than $0.1 million expensed during the fourth quarter of 2018.
The interest rate on the term loan bears interest at an adjusted London Interbank Overnight (LIBO) rate plus a margin within a
range of 1.25% to 2.25% depending on the Company’s total net debt to EBITDA ratio or, alternatively, the administrative
agent's prime rate plus a margin ranging from 0.25% to 1.25%, with the amount of such margin determined based upon the ratio
of the Company's total net debt to EBITDA, for loans based on the base rate.
The revolving credit and term loan agreement also provides for an uncommitted incremental facility increase option which,
subject to certain terms and conditions, permits the Company at any time prior to the maturity date to request an increase in
extensions of credit available thereunder (whether through additional term loans and/or revolving credit commitments or any
combination thereof) by an aggregate additional principal amount of up to the greater of $250.0 million or any amount provided
that the incremental borrowing does not result in a total debt to adjusted EBITDA ratio greater than 2.50:1.00, with such
additional credit extensions provided by one or more lenders thereunder at their sole discretion.
The Company pays a commitment fee on unused balances, which ranges from 0.15% to 0.30% as determined by the Company's
ratio of total debt to adjusted EBITDA. As of December 31, 2018, the amount available under the revolving credit component
of the Amended Agreement was reduced by approximately $16.0 million for outstanding borrowings and $11.0 million for our
outstanding letters of credit, resulting in availability of $373.0 million.
Senior Unsecured Notes
2011 Note Purchase Agreement
Pursuant to the note purchase agreement dated as of July 5, 2011, and further amended on April 14, 2014, the Company and
certain of its subsidiaries as co-obligors previously issued $125.0 million in senior unsecured notes to the purchasers in a
private placement which bore interest at a rate of 3.95% and matured on April 27, 2018. During 2018, the Company repaid the
remaining $25.0 million outstanding under the 3.95% senior unsecured notes.
82
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Agreements
On April 14, 2014, the Company entered into note purchase agreements, as amended, pursuant to which the Company and
certain of its subsidiaries as co-obligors issued $300.0 million in aggregate principal amount of senior unsecured notes in a
private placement. The notes bear interest at the rate of 4.75% per year and mature on April 14, 2021. Payments of interest
commenced on July 14, 2014 and are due quarterly, and principal payments of $60.0 million commenced on April 14, 2017 and
are due annually until maturity.
Financial Covenants
The revolving credit and term loan agreement, senior unsecured notes discussed above, and franchise loan program discussed in
Note 9 to these consolidated financial statements contain financial covenants, which include requirements that the Company
maintain ratios of (i) adjusted EBITDA plus lease expense to fixed charges of no less than 2.50:1.00 and (ii) total debt to
adjusted EBITDA of no greater than 3.00:1.00. In each case, adjusted EBITDA refers to the Company’s consolidated net
income before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense, and
other cash and non-cash charges as defined in the Amended Agreement.
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. Under the Company’s revolving credit and term loan agreement, senior unsecured notes and
franchise loan program, the Company may pay cash dividends in any year so long as, after giving pro forma effect to the
dividend payment, the Company maintains compliance with its financial covenants and no event of default has occurred or
would result from the payment. At December 31, 2018, the Company was in compliance with all covenants related to its
outstanding debt.
Capital Leases with Related Parties
As of December 31, 2018, the Company had three remaining capital leases with a limited liability company ("LLC") controlled
by a group of current and former executives of the Company. In October and November 2004, the Company sold 11 properties,
including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling
$6.8 million. The Company leases the land and buildings collateralizing the borrowings under a 15-year term lease at an
aggregate annual rental of $0.2 million. The transaction has been accounted for as a capital lease 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 related to the properties sold to the LLC in 2004. In January 2018, the Company
renewed its remaining lease agreements to lease the land and buildings with an additional five-year term commencing at the
expiration of the original lease agreements in November 2019.
Future principal maturities under the Company’s debt and capital lease obligations are as follows:
(In Thousands)
2019
2020
2021
2022
2023
Thereafter
Total
$
$
84,175
84,644
82,906
174,440
—
—
426,165
83
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: INCOME TAXES
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, among other things, (i)
lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018; (ii) provided for 100% expense
deduction of certain qualified depreciable assets, which includes the Company's lease merchandise inventory, purchased after
September 27, 2017 (but would be phased down starting in 2023); and (iii) the manufacturing deduction that expired in 2017
under the previous tax legislation was not extended. Consequently, the Company remeasured its net deferred tax liabilities as
of December 31, 2017 using the lower U.S. corporate income tax rate, which resulted in a provisional estimated $140 million
non-cash income tax benefit recognized during the year ended December 31, 2017. The Company lost its 2017 manufacturing
deduction, which was limited to 9% of taxable income, as the Company was in a net operating loss position for tax purposes in
2017 as a result of the Tax Act's 100% expense deduction on qualified depreciable assets discussed above. The Company is
estimating that it will again be in a net operating loss position for tax purposes in 2018 as a result of the 100% expense
deduction on qualified depreciable assets. The net operating loss and credits earned during 2017 have been carried back. As of
December 31, 2018, the Company is anticipating refunds of $14.5 million related to the carrybacks and $5.4 million related to
overpayments on the federal returns. At December 31, 2018, the Company had $7.7 million of state tax credit carryforwards,
which will begin to expire in 2022, and approximately $267 million of federal tax net operating loss carryforwards, which can
be carried forward indefinitely and will not expire.
In connection with the provisional analysis, the Company recorded an immaterial income tax net benefit during the year ended
December 31, 2018 and finalized its analysis over the one-year measurement period that ended on December 22, 2018.
As result of the 100% bonus depreciation provisions in the Tax Act not being enacted until December 22, 2017, the Company
made more than the required estimated federal tax liability payments in 2017; and therefore, had a $100.0 million income tax
receivable as of December 31, 2017. The Company received a refund of $77.0 million in February 2018. In addition, as a result
of the extended bonus depreciation provisions in the Protecting Americans From Tax Hikes Act of 2015 not being enacted until
December 2015, the Company paid more than the amount ultimately required for the 2015 federal tax liability. Due to that
overpayment the Company received a refund of $120.0 million in February 2016.
Following is a summary of the Company’s income tax expense (benefit):
(In Thousands)
Current Income Tax Expense:
Federal
State
Deferred Income Tax Expense (Benefit):
Federal
State
Income Tax Expense (Benefit)
Year Ended December 31,
2018
2017
2016
$
$
(5,380) $
13,015
7,635
48,287
72
48,359
55,994
$
(3,530) $
9,772
6,242
103,993
10,308
114,301
(60,547)
1,346
(59,201)
(52,959) $
(33,470)
(1,692)
(35,162)
79,139
84
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred income tax liabilities and assets are as follows:
(In Thousands)
Deferred Tax Liabilities:
Lease Merchandise and Property, Plant and Equipment
Goodwill and Other Intangibles
Investment in Partnership
Other, Net
Total Deferred Tax Liabilities
Deferred Tax Assets:
Accrued Liabilities
Advance Payments
Other, Net
Total Deferred Tax Assets
Less Valuation Allowance
Net Deferred Tax Liabilities
December 31,
2018
2017
174,171
41,183
159,070
1,804
376,228
21,918
9,232
86,339
117,489
—
258,739
$
$
122,155
37,080
107,173
2,074
268,482
25,509
8,199
23,771
57,479
—
211,003
$
$
The Company’s effective tax rate differs from the statutory United States Federal income tax rate as follows:
Statutory Rate
Increases (Decreases) in United States Federal Taxes
Resulting From:
State Income Taxes, net of Federal Income Tax Benefit
Other Permanent Differences
Federal Tax Credits
Change in Valuation Allowance
Remeasurement of net Deferred Tax Liabilities
Other, net
Effective Tax Rate
Year Ended December 31,
2018
2017
2016
21.0%
35.0 %
35.0%
4.0
(1.2)
(0.5)
—
(0.2)
(0.9)
22.2%
2.7
—
(0.8)
(0.4)
(58.2)
(0.4)
(22.1)%
2.6
—
(1.1)
—
—
(0.3)
36.2%
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 2015.
The following table summarizes the activity related to the Company’s uncertain tax positions:
(In Thousands)
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,
Year Ended December 31,
2018
2017
2016
2,269
269
615
(85)
(257)
(282)
2,529
$
$
2,594
456
232
(236)
(346)
(431)
2,269
$
$
3,561
258
293
(776)
(609)
(133)
2,594
$
$
As of December 31, 2018 and 2017, the amount of uncertain tax benefits that, if recognized, would affect the effective tax rate
is $2.5 million and $1.7 million, respectively, including interest and penalties.
During the year ended December 31, 2018, the Company recognized interest and penalties of $0.1 million. During the years
ended December 31, 2017 and 2016, the Company recognized a net benefit of $0.6 million and $0.1 million, respectively,
related to interest and penalties. The Company had $0.3 million of accrued interest and penalties at December 31, 2018 and
2017, respectively. The Company recognizes potential interest and penalties related to uncertain tax benefits as a component of
income tax expense (benefit).
85
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases warehouse and retail store space for most of its store-based operations, call center space, and management
and information technology space for corporate functions under operating leases expiring at various times through 2033. The
Company also leases certain properties under capital leases that are more fully described in Note 7 to these consolidated
financial statements. Most of the leases contain renewal options for additional periods ranging from one to 20 years. In
addition, certain properties occupied under operating 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
expense on a straight-line basis over the lease term. The Company leases transportation vehicles mainly under operating leases,
with the exception of the acquired SEI vehicles which are leased under capital leases.
Rental expense, net of sublease receipts, was $112.8 million, $104.3 million, and $116.2 million in the years ended
December 31, 2018, 2017, and 2016, respectively, which are reported within operating expenses in the consolidated statements
of earnings. The Company also incurred contractual lease obligations charges, net of estimated sublease receipts, of $2.1
million, $13.4 million and $11.6 million in the years ended December 31, 2018, 2017, and 2016 respectively, related to the
closure of Company-operated stores which are reported within restructuring expenses in the consolidated statements of
earnings.
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, 2018 are as follows:
(In Thousands)
2019
2020
2021
2022
2023
Thereafter
Total
113,393
97,640
77,627
58,793
38,838
70,561
456,852
$
$
The Company has anticipated future sublease receipts from executed sublease agreements of $4.1 million in 2019, $3.0 million
in 2020, $2.3 million in 2021, $1.4 million in 2022, $1.0 million in 2023 and $0.8 million thereafter through 2025.
Guarantees
The Company has guaranteed certain debt obligations of some of the franchisees under a franchise loan program with several
banks. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default,
the Company would be unconditionally liable for the outstanding balance of the franchisees’ debt obligations under the
franchisee loan program, which would be due in full within 90 days of the event of default. At December 31, 2018, the
maximum amount that the Company would be obligated to repay in the event franchisees defaulted was $39.0 million. The
Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise
and fixed assets. Since the inception of the franchise loan program in 1994, the Company has had no significant associated
losses. The Company believes the likelihood of any significant amounts being funded by the Company in connection with these
guarantees to be remote. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts
payable and accrued expenses in the consolidated balance sheets, is $0.3 million as of December 31, 2018.
On October 23, 2018, the Company amended its franchisee loan facility to (i) reduce the total commitment amount from $85.0
million to $55.0 million; and (ii) extend the maturity date to October 23, 2019. The loan agreement continues to provide a
Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of
Quebec) of CAD $25.0 million. See Note 7 to these consolidated financial statements for more information regarding the
Company's financial covenants.
86
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
From time to time, the Company is party to various legal and regulatory proceedings arising in the ordinary course of business.
Some of the proceedings to which the Company is currently a party are described below. The Company believes it has
meritorious defenses to all of the claims described below, and intends to vigorously defend against the claims. However, these
proceedings are still developing and due to the inherent uncertainty in litigation, regulatory 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 these proceedings or the costs of defending them could have a material adverse impact
upon the Company’s business, financial position and results of operations.
The Company establishes an accrued liability for legal and regulatory proceedings when it determines that a loss is both
probable and the amount of the loss can be reasonably estimated. The Company continually monitors its litigation and
regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis. The amount of any loss
ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts
accrued for such matters.
At December 31, 2018 and 2017, the Company had accrued $1.4 million and $7.3 million, respectively, for pending legal and
regulatory matters for which it believes losses are probable and is the Company’s best estimate of its exposure to loss. The
Company records these liabilities in accounts payable and accrued expenses in the consolidated balance sheets. The Company
estimates that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss
contingencies is between $0 and $1.5 million.
At December 31, 2018, the Company estimated that the aggregate range of loss for all material pending legal and regulatory
proceedings for which a loss is reasonably possible, but less likely than probable (i.e., excluding the contingencies described in
the preceding paragraph), is between $2.0 million and $6.0 million. Those matters for which a reasonable estimate is not
possible are not included within estimated ranges and, therefore, the estimated ranges do not represent the Company’s
maximum loss exposure. The Company’s estimates for legal and regulatory accruals, aggregate probable loss amounts and
reasonably possible loss amounts, are all subject to the uncertainties and variables described above.
Privacy and Related Matters
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 the Company and its independently owned and operated franchisee Aspen Way Enterprises ("Aspen Way") knowingly
violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act ("ECPA") and the Computer Fraud Abuse
Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software
program called "PC Rental Agent." Plaintiffs filed an amended complaint, asserting claims under the ECPA, common law
invasion of privacy, seeking an injunction, and naming additional independently owned and operated Company franchisees as
defendants. Plaintiffs seek monetary damages as well as injunctive relief.
87
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2014, the United States District Court dismissed all claims against all franchisees other than Aspen Way Enterprises,
LLC, dismissed claims for invasion of privacy, aiding and abetting, and conspiracy against all defendants, and denied plaintiffs’
motion to certify a class action, but denied the Company’s motion to dismiss the claims alleging ECPA violations. In April
2015, the United States Court of Appeals for the Third Circuit reversed the denial of class certification on the grounds stated by
the District Court, and remanded the case back to the District Court for further consideration of that and the other elements
necessary for class certification. On September 26, 2017, the District Court again denied plaintiffs' motion for class
certification. Plaintiffs filed a petition with the United States Court of Appeals for the Third Circuit for permission to appeal the
denial of class certification. On December 11, 2018, the Third Circuit denied plaintiffs’ petition. The case will now proceed for
determination on an individual basis as to the named plaintiffs. In March 2018, the District Court granted plaintiff's motion to
reconsider the prior dismissal of the Wyoming invasion of privacy claim, so that claim will now be considered as part of the
individual plaintiffs’ case.
In Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees
and Designerware, LLC, filed on March 5, 2013 in the Los Angeles Superior Court, plaintiffs assert claims against the
Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe
franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive
Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC
Rental Agent software. The plaintiffs are seeking injunctive relief and damages as well as certification of a putative California
class. In April 2013, the Company removed this matter to federal court. In May 2013, the Company filed a motion to stay this
litigation pending resolution of the Byrd litigation, a motion to dismiss for failure to state a claim, and a motion to strike certain
allegations in the complaint. The Court subsequently stayed the case. The Company's motions to dismiss and strike certain
allegations remain pending. In June 2015, the plaintiffs filed a motion to lift the stay, which was denied in July 2015.
In Lomi Price v. Aaron's, Inc. and NW Freedom Corporation, filed on February 27, 2013, in the State Court of Fulton County,
Georgia, an individual plaintiff asserts claims against the Company and its independently owned and operated franchisee, NW
Freedom Corporation, for invasion of privacy/intrusion on seclusion, computer invasion of privacy and infliction of emotional
distress. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiff is seeking compensatory
and punitive damages. This case has been stayed pending resolution of the Byrd litigation.
Securities
In Re Aaron's Securities Litigation, f/k/a Arkansas Teacher Retirement System, et al (f/k/a Employees' Retirement System of the
City of Baton Rouge) v. Aaron's, Inc., John W. Robinson, III, Ryan K. Woodley, and Gilbert L. Danielson, was filed on June 16,
2017, in the United States District Court for the Northern District of Georgia. The complaint alleged that during the period from
February 6, 2015 through October 29, 2015, Aaron's made misleading public statements about the Company's expected
financial results and business prospects. The Company filed a motion to dismiss the lawsuit on December 15, 2017. On
September 26, 2018, the District Court granted the Company's motion to dismiss in its entirety. Plaintiffs did not appeal that
decision.
Regulatory Inquiries
In July 2018, the Company received civil investigative demands ("CIDs") from the Federal Trade Commission (the "FTC").
The CIDs request the production of documents and answers to written questions to determine whether disclosures related to
financial products offered by the Company through the Aaron’s Business and Progressive Leasing are in violation of the
Federal Trade Commission Act. Although we believe we are in compliance with the FTC Act, these inquiries could lead to an
enforcement action and/or a consent order, and substantial costs, including legal fees, fines, penalties, and remediation
expenses. The Company is fully cooperating with the FTC in responding to these inquiries and has provided the FTC with the
information and documents the FTC has requested. The Company submitted a significant amount of documentation from both
the Aaron’s Business and Progressive Leasing in October 2018. The FTC made requests for a limited number of follow up
documents from both businesses. All such documents were produced by the Aaron’s Business in December 2018, and by
Progressive Leasing in December 2018 and January 2019.
88
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Contingencies
At December 31, 2018, the Company had non-cancelable commitments primarily related to certain advertising and marketing
programs of $25.5 million. Payments under these commitments are scheduled to be $12.2 million in 2019, $9.4 million in 2020,
$2.9 million in 2021 and $1.0 million in 2022.
Management regularly assesses the Company’s insurance deductibles, monitors the Company’s litigation and regulatory
exposure 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.
Off-Balance Sheet Risk
The Company, through its DAMI business, had unfunded lending commitments totaling $316.4 million and $354.5 million as
of December 31, 2018 and 2017, respectively. These unfunded commitments arise in the ordinary course of business from
credit card agreements with individual cardholders that give them the ability to borrow, against unused amounts, up to the
maximum credit limit assigned to their account. While these unfunded amounts represented the total available unused lines of
credit, the Company does not anticipate that all cardholders will utilize their entire available line at any given point in time.
Commitments to extend unsecured credit are agreements to lend to a cardholder so long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The reserve for losses on unfunded loan commitments is calculated by the Company based on
historical usage patterns of cardholders after the initial charge and was approximately $0.5 million and $0.6 million as of
December 31, 2018 and 2017, respectively. The reserve for losses on unfunded loan commitments is included in accounts
payable and accrued expenses in the consolidated balance sheets.
NOTE 10: RESTRUCTURING
2017 and 2016 Restructuring Programs
During the year ended December 31, 2017 and 2016, the Company initiated restructuring programs to rationalize its Company-
operated Aaron's store base portfolio to better align with marketplace demand. The programs resulted in the closure and
consolidation of 139 underperforming Company-operated Aaron's stores throughout 2016, 2017, and 2018. The Company also
optimized its home office staff and field support, which resulted in a reduction in employee headcount in those areas to more
closely align with current business conditions.
Total net restructuring expenses of $1.1 million were recorded during the year ended December 31, 2018, which were incurred
within the Aaron's Business segment. Restructuring activity for the year ended December 31, 2018 was comprised of expenses
to record changes in sublease assumptions related to Aaron’s Business contractual lease obligations for closed stores, which
were partially offset by reversals of previously recorded restructuring expenses and gains recorded on the sale of properties
closed under the restructuring programs. These costs were included in restructuring expenses in the consolidated statements of
earnings. The Company does not expect to incur any material expenses under the 2017 and 2016 restructuring programs during
2019 or future periods. However, this estimate is subject to change based on future changes in assumptions for the remaining
minimum lease obligation for stores closed under the restructuring program, including changes related to sublease assumptions
and potential earlier buyouts of leases with landlords.
89
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the balances of the accruals for both programs, which are recorded in accounts payable and
accrued expenses in the consolidated balance sheets, and the activity for the years ended December 31, 2018 and 2017:
(In Thousands)
Balance at January 1, 2017
Charges
Adjustments1
Restructuring Charges
Payments
Balance at December 31, 2017
Charges
Adjustments1
Restructuring Charges
Payments
Balance at December 31, 2018
Contractual
Lease
Obligations
Severance
Total
$
$
10,583
13,501
(69)
13,432
(11,578)
12,437
—
2,057
2,057
(6,022)
8,472
$
$
2,079
3,176
—
3,176
(2,952)
2,303
601
—
601
(2,253)
651
$
$
12,662
16,677
(69)
16,608
(14,530)
14,740
601
2,057
2,658
(8,275)
9,123
1Adjustments relate to changes in sublease assumptions and interest accretion.
The following table summarizes restructuring charges by segment for the years ended:
(In Thousands)
Contractual Lease Obligations
Severance
Other (Reversals) Expenses
Gain on Sale of Closed Store Properties
Total Restructuring Expenses
$
$
December 31, 2018
December 31, 2017
December 31, 2016
Aaron’s Business
Aaron’s
Business
DAMI
Total
Aaron’s Business
2,057
$ 13,432
$ — $ 13,432
$
601
(1,176)
(377)
1,105
2,705
1,386
—
471
—
—
3,176
1,386
—
$ 17,523
$
471
$ 17,994
$
11,589
3,883
4,746
—
20,218
To date, the Company has incurred charges of $39.3 million under the 2016 and 2017 restructuring programs.
2019 Restructuring Program - Subsequent Event
In January 2019, the Company initiated a restructuring program (the "2019 Restructuring Program") to further align its
Company-operated Aaron's store base portfolio with marketplace demand. As a result of management's strategic review of the
existing store portfolio, the Company will close and consolidate approximately 85 underperforming Company-operated Aaron's
stores during 2019. The Company currently expects to incur $12 million to $15 million of restructuring expenses, which will be
incurred within the Aaron's Business segment primarily during 2019. The restructuring expenses will primarily consist of
impairment charges associated with the closed stores.
90
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: SHAREHOLDERS’ EQUITY
At December 31, 2018, the Company held 23,567,979 shares in its treasury and had the authority to purchase additional shares
up to its remaining authorization limit of $331.3 million. The holders of common stock are entitled to receive dividends and
other distributions in cash or stock of the Company as and when declared by its Board of Directors out of legally available
funds. Certain unvested time-based restricted stock awards entitle participants to vote and accrue dividends during the vesting
period. As of December 31, 2018, the Company had issued approximately 387,000 unvested restricted stock awards that contain
voting rights but are not presented as outstanding on the consolidated balance sheet.
In 2018, the Company repurchased 3,749,493 shares of its common stock for $168.7 million. In 2017, the Company
repurchased 1,961,442 shares of its common stock for $62.6 million. In 2016, the Company repurchased 1,372,700 shares of its
common stock for $34.5 million.
The Company has 1,000,000 shares of preferred stock authorized. The shares are issuable in series with terms for each series
fixed by, and such issuance subject to approval by, the Board of Directors. As of December 31, 2018, no preferred shares have
been issued.
NOTE 12: STOCK-BASED COMPENSATION
The Company grants stock options, RSUs, RSAs and PSUs to certain employees and directors of the Company under the 2015
Equity and Incentive Award Plan and previously did so under the 2001 Stock Option and Incentive Award Plan (the "2015 Plan"
and "2001 Plan"). The 2001 Plan was originally approved by the Company’s shareholders in May 2001 and was amended and
restated with shareholder approval in May 2009 and discontinued with the approval of the 2015 Plan on May 6, 2015.
Beginning in 2015, as part of the Company’s long-term incentive compensation program ("LTIP Plan") and pursuant to the
Company’s 2001 Plan and 2015 Plan, the Company granted a mix of stock options, time-based restricted stock and performance
share units to key executives and managers.
As of December 31, 2018, the aggregate number of shares of common stock that may be issued or transferred under the 2015
Plan is 1,441,744.
The Company has elected a policy to estimate forfeitures in determining the amount of stock compensation expense. Total
stock-based compensation expense was $28.2 million (including $0.2 million of expense related to the Company's Employee
Stock Purchase Plan ("ESPP") discussed further below), $27.4 million and $21.5 million for the years ended December 31,
2018, 2017 and 2016, respectively. These costs were included as a component of operating expenses in the consolidated
statements of earnings.
The total income tax benefit recognized in the consolidated statements of earnings for stock-based compensation arrangements
was $6.9 million, $10.4 million and $8.2 million in the years ended December 31, 2018, 2017 and 2016, respectively. Benefits
of tax deductions in excess of recognized compensation cost, which are included in operating cash flows, were $5.7 million and
$1.1 million for the years ended December 31, 2018 and 2017, respectively. Tax deductions less than recognized compensation
cost were $0.7 million for the year ended December 31, 2016.
As of December 31, 2018, there was $24.6 million of total unrecognized compensation expense related to non-vested stock-
based compensation which is expected to be recognized over a period of 1.3 years.
Stock Options
Under the Company’s 2001 Plan, options granted become exercisable after a period of one to five years and unexercised
options lapse 10 years after the date of grant. Under the Company’s 2015 Plan, options granted to date become exercisable after
a period of one to three years and unexercised options lapse 10 years after the date of the grant. Unvested options are subject to
forfeiture upon termination of service for both plans. The Company recognizes compensation expense for options that have a
graded vesting schedule on a straight-line basis over the requisite service period. Shares are issued from the Company’s treasury
shares upon share option exercises.
91
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company determines the fair value of stock options on the grant date using a Black-Scholes-Merton option pricing model
that incorporates expected volatility, expected option life, risk-free interest rates and expected dividend yields. The expected
volatility is based on implied volatilities from traded options on the Company’s stock and the historical volatility of the
Company’s common stock over the most recent period generally commensurate with the expected estimated life of each
respective grant. The expected lives of options are based on the Company’s historical option exercise experience. The Company
believes that the historical experience method is the best estimate of future exercise 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.
The Company granted 361,000, 518,000 and 634,000 stock options during the years ended December 31, 2018, 2017 and 2016,
respectively. The weighted-average fair value of options granted and the weighted-average assumptions used in the Black-
Scholes-Merton option pricing model for such grants were as follows:
Dividend Yield
Expected Volatility
Risk-free Interest Rate
Expected Term (in years)
Weighted-average Fair Value of Stock Options Granted
2018
2017
2016
0.3%
34.8%
2.6%
5.3
16.54
$
$
0.4%
32.8%
1.9%
5.3
8.55
$
0.4%
34.2%
1.3%
5.3
7.10
The following table summarizes information about stock options outstanding at December 31, 2018:
Range of Exercise
Prices
$19.92-20.00
20.01-30.00
30.01-40.00
40.01-47.26
19.92-47.26
Number Outstanding
December 31, 2018
33,250
1,174,285
116,496
352,650
1,676,681
Options Outstanding
Weighted Average
Remaining Contractual
Life
(in Years)
Options Exercisable
Weighted Average
Exercise Price
Number Exercisable
December 31, 2018
Weighted Average
Exercise Price
$
1.15
7.29
6.07
9.18
7.48
19.92
25.50
32.13
47.26
30.42
$
33,250
666,915
116,496
—
816,661
19.92
25.47
32.13
—
26.20
The table below summarizes option activity for the year ended December 31, 2018:
Outstanding at January 1, 2018
Granted
Exercised
Forfeited/expired
Outstanding at December 31, 2018
Expected to Vest
Exercisable at December 31, 2018
Options
(In Thousands)
1,652
361
(296)
(40)
1,677
844
817
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(in Years)
Aggregate
Intrinsic Value
(in Thousands)
Weighted
Average Fair
Value
$
25.56
47.26
23.90
29.77
30.42
34.20
26.20
$
7.48
8.35
6.55
$
19,496
6,624
12,947
9.98
11.42
8.36
The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on
December 31, 2018 in excess of the exercise price, multiplied by the number of in-the-money stock options as of that same
date. Options outstanding that are expected to vest are net of estimated future option forfeitures.
The aggregate intrinsic value of options exercised, which represents the value of the Company’s common stock at the time of
exercise in excess of the exercise price, was $6.6 million, $2.6 million and $0.4 million during the years ended December 31,
2018, 2017 and 2016, respectively. The total grant-date fair value of options vested during the year ended December 31, 2018,
2017 and 2016 was $3.5 million, $1.7 million and $1.4 million, respectively.
92
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
Shares of restricted stock units or restricted stock awards (collectively, "restricted stock") may be granted to employees and
directors under the 2015 Plan and typically vest over approximately one to three-year periods; under the 2001 Plan restricted
stock typically vests over approximately one to five-year periods. Restricted stock grants are generally settled in stock and may
be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant.
The Company generally recognizes compensation expense for restricted stock with a graded vesting schedule on a straight-line
basis over the requisite service period as restricted stock are generally not subject to Company performance metrics.
Compensation expense for performance-based restricted stock is recognized on an accelerated basis over the vesting period
based on the Company’s projected assessment of the level of performance that will be achieved and earned. Shares are issued
from the Company’s treasury shares upon vesting. Any shares of restricted stock that are forfeited may again become available
for issuance.
The fair value of restricted stock is generally based on the fair market value of the Company’s common stock on the date of
grant.
In 2011, the Company established a restricted stock program as a component of the 2001 Plan, referred to as the Aaron’s
Management Performance Plan ("AMP Plan"). Under the AMP Plan, which expired on December 31, 2012, restricted shares
were granted quarterly to eligible participants upon achievement of certain pre-tax profit and revenue levels by the employees’
operating units or the overall Company. Restricted stock granted under the AMP Plan vests over four to five years from the date
of grant. Plan participants included certain vice presidents, director level employees and other key personnel in the Company’s
home office, divisional vice presidents and regional managers. These grants began vesting in 2016.
During 2013, the Company granted performance-based restricted stock to certain executive officers. During 2016, the
performance-based restricted stock under this program vested with the completion of the three-year service period and the
achievement of specific performance criteria. The compensation expense associated with these awards was recognized on an
accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that would
be achieved and earned.
During 2015, 2016 and 2017, the Company granted performance-based restricted stock to certain executive officers that vest
over a three-year service period and with the achievement of specific performance criteria. The compensation expense
associated with these awards is recognized on an accelerated basis over the respective vesting periods based on the Company's
projected assessment of the level of performance that will be achieved and earned. As of December 31, 2018, there are no
performance-based restricted shares still subject to performance conditions.
The Company granted 248,000, 375,000 and 379,000 shares of restricted stock at weighted-average fair values of $46.01,
$29.27 and $22.81 in the years ended December 31, 2018, 2017 and 2016, respectively. The following table summarizes
information about restricted stock activity during 2018:
Non-vested at January 1, 2018
Granted
Vested
Forfeited
Non-vested at December 31, 2018
Restricted Stock
(In Thousands)
Weighted Average
Fair Value
947 $
248
(544)
(62)
589
27.96
46.01
28.33
37.46
34.18
The total vest-date fair value of restricted stock described above that vested during the year was $24.8 million, $9.9 million and
$3.8 million in the years ended December 31, 2018, 2017 and 2016, respectively.
93
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance Share Units
For performance share units, which are generally settled in stock, the number of shares earned is determined at the end of the
one-year performance period based upon achievement of various performance criteria, which have included adjusted EBITDA,
revenue and invoice volume levels of the respective segments and return on capital for Aaron's, Inc. Beginning in 2016, the
Company added adjusted pre-tax profit and production volume levels as additional performance criteria for certain segments.
When the performance criteria are met, the award is earned and one-third of the award vests. One-third of the remaining earned
award is subject to an additional one-year service period and one-third of the remaining earned award is subject to an additional
two-year service period. Shares are issued from the Company’s treasury shares upon vesting. The number of performance-based
shares which could potentially be issued ranges from zero to 200% of the target award.
The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of
grant. The compensation expense associated with these awards is amortized on an accelerated basis over the vesting period
based on the Company’s projected assessment of the level of performance that will be achieved and earned. In the event the
Company determines it is no longer probable that the minimum performance criteria specified in the plan will be achieved, all
previously recognized compensation expense is reversed in the period such a determination is made.
The following table summarizes information about performance share unit activity during 2018:
Non-vested at January 1, 2018
Granted
Vested
Forfeited/unearned
Non-vested at December 31, 2018
Performance
Share Units
(In Thousands)
Weighted Average
Fair Value
$
822
486
(458)
(51)
799
26.31
38.51
26.96
30.06
33.11
The total vest-date fair value of performance share units described above that vested during the period was $22.6 million, $7.9
million and $3.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Employee Stock Purchase Plan
Effective May 9, 2018, the Company's Board of Directors and shareholders approved the Employee Stock Purchase Plan
("ESPP"), which is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purpose of the Company's ESPP
is to encourage ownership of the Company's common stock by eligible employees of Aaron's, Inc. and certain Aaron's
subsidiaries. Under the ESPP, eligible employees are allowed to purchase common stock of the Company during six-month
offering periods at the lower of: (i) 85% of the closing trading price per share of the common stock on the first trading date of
an offering period in which a participant is enrolled; or (ii) 85% of the closing trading price per share of the common stock on
the last day of an offering period. Employees participating in the ESPP can contribute up to an amount not exceeding 10% of
their base salary and wages to a maximum of $25,000 annually.
The compensation cost related to the ESPP is measured on the grant date based on eligible employees' expected withholdings
and is recognized over each six-month offering period. During the year ended December 31, 2018, total compensation cost
recognized in connection with the ESPP was $0.2 million. These costs were included as a component of operating expenses in
the consolidated statements of earnings. During the year ended December 31, 2018, the Company issued 25,239 shares under
the ESPP at a purchase price of $35.74. As of December 31, 2018, the aggregate number of shares of common stock that may
be issued under the ESPP is 174,761.
94
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SEGMENTS
Description of Products and Services of Reportable Segments
As of December 31, 2018, the Company has three operating and reportable segments: Progressive Leasing, Aaron’s Business
and DAMI.
Progressive Leasing is a leading virtual lease-to-own company that provides lease-purchase solutions on a variety of products,
including furniture and appliance, jewelry, mattress, automobile electronics and mobile phones and accessories.
The Aaron’s Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a
month-to-month, lease-to-own agreement with no credit needed through the Company’s Aaron’s-branded stores in the United
States and Canada and e-commerce website. This operating segment also supports franchisees of its Aaron’s stores. In addition,
the Aaron’s Business segment includes the operations of Woodhaven, which manufactures and supplies the majority of the
upholstered furniture and bedding leased and sold in Company-operated and franchised stores. The HomeSmart operations,
prior to the May 2016 disposition, is reflected within the Aaron’s Business segment and offered furniture, electronics,
appliances and computers to customers primarily on a weekly payment basis with no credit needed.
DAMI offers a variety of second-look financing programs originated through two third-party federally insured banks to
customers of participating merchants and, together with Progressive Leasing, allows the Company to provide retail partners
with below-prime customers one source for financing and leasing transactions.
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 business units of the Company.
Disaggregated Revenue
The following table presents revenue by source and by segment for the year ended December 31, 2018:
(In Thousands)
Lease Revenues and Fees1
Retail Sales2
Non-Retail Sales2
Franchise Royalties and Fees2
Interest and Fees on Loans Receivable3
Other
Total
Year Ended December 31, 2018
Progressive
Leasing
Aaron's
Business4
DAMI
Total
$ 1,998,981 $ 1,507,437 $
— $ 3,506,418
—
—
—
—
—
31,271
207,262
44,815
—
1,839
—
—
—
37,318
—
31,271
207,262
44,815
37,318
1,839
$ 1,998,981 $ 1,792,624 $
37,318 $ 3,828,923
1 Substantially all lease revenues and fees are within the scope of ASC 840, Leases. The Company had $19.8 million of other
revenue within the scope of ASC 606, Revenue from Contracts with Customers.
2 Revenue within the scope of ASC 606, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $33.3
million is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers.
The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and
recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as
revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.
3 Revenue within the scope of ASC 310, Credit Card Interest & Fees.
4 Includes revenues from Canadian operations of $21.3 million, which are primarily Lease Revenues and Fees.
95
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenue by source and by segment for the year ended December 31, 2017:
(In Thousands)
Lease Revenues and Fees1
Retail Sales2
Non-Retail Sales2
Franchise Royalties and Fees2
Interest and Fees on Loans Receivable3
Other
Total
Year Ended December 31, 2017
Progressive
Leasing
Aaron's
Business4
DAMI
Total
$ 1,566,413 $ 1,433,818 $
— $ 3,000,231
—
—
—
—
—
27,465
270,253
48,278
—
2,556
—
—
—
34,925
—
27,465
270,253
48,278
34,925
2,556
$ 1,566,413 $ 1,782,370 $
34,925 $ 3,383,708
1 Substantially all revenue is within the scope of ASC 840, Leases. The Company had $6.3 million of other revenue within the
scope of ASC 606, Revenue from Contracts with Customers.
2 Revenue within the scope of ASC 605, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $44.6
million relates to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers.
Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the
merchandise.
3 Revenue within the scope of ASC 310, Credit Card Interest & Fees.
4 Includes revenues from Canadian operations of $18.3 million, which are primarily Lease Revenues and Fees.
The following table presents revenue by source and by segment for the year ended December 31, 2016:
(In Thousands)
Lease Revenues and Fees1
Retail Sales2
Non-Retail Sales2
Franchise Royalties and Fees2
Interest and Fees on Loans Receivable3
Other
Total
Year Ended December 31, 2016
Progressive
Leasing
Aaron's
Business4
DAMI
Total
$ 1,237,597 $ 1,543,227 $
— $ 2,780,824
—
—
—
—
—
29,418
309,446
58,350
—
5,598
—
—
—
24,080
—
29,418
309,446
58,350
24,080
5,598
$ 1,237,597 $ 1,946,039 $
24,080 $ 3,207,716
1 Substantially all revenue is within the scope of ASC 840, Leases. The Company had $2.8 million of other revenue within the
scope of ASC 606, Revenue from Contracts with Customers.
2 Revenue within the scope of ASC 605, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $53.7
million relates to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers.
Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the
merchandise.
3 Revenue within the scope of ASC 310, Credit Card Interest & Fees.
4 Includes revenues from Canadian operations of $12.4 million, which are primarily Lease Revenues and Fees.
96
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Intersegment sales are completed at internally negotiated amounts. Since the intersegment profit affects inventory
valuation, depreciation and cost of goods sold are adjusted when intersegment profit is eliminated in consolidation.
(In Thousands)
Earnings (Loss) Before Income Tax (Benefit) Expense:
Progressive Leasing
Aaron’s Business
DAMI
Total Earnings Before Income Tax (Benefit) Expense
Year Ended December 31,
2018
2017
2016
$
$
175,015
84,683
(7,494)
252,204
$
$
140,224
110,642
(11,289)
239,577
$
$
104,686
123,009
(9,273)
218,422
Corporate-related assets that benefit multiple segments are reported as other assets in the table below.
(In Thousands)
Assets:
Progressive Leasing
Aaron’s Business1
DAMI
Other
Total Assets
Assets From Canadian Operations (included in totals above):
Aaron’s Business
December 31,
2018
2017
1,088,227
1,483,102
95,341
160,022
2,826,692
$
$
1,022,413
1,261,234
108,306
300,311
2,692,264
25,893
$
20,223
$
$
$
1 Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the
consolidated balance sheets of $15.2 million and $16.3 million as of December 31, 2018 and 2017, respectively.
(In Thousands)
Depreciation and Amortization1:
Progressive Leasing
Aaron’s Business
DAMI
Total Depreciation and Amortization
Interest Expense:
Progressive Leasing
Aaron’s Business
DAMI
Total Interest Expense
Capital Expenditures:
Progressive Leasing
Aaron’s Business
DAMI
Total Capital Expenditures
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
$
27,974
64,744
1,432
94,150
16,288
(2,944)
3,096
16,440
10,711
67,099
1,035
78,845
$
$
$
$
$
$
29,048
52,251
1,273
82,572
18,577
(2,366)
4,327
20,538
8,213
48,335
1,425
57,973
$
$
$
$
$
$
30,727
50,658
993
82,378
20,042
(768)
4,116
23,390
6,084
50,582
787
57,453
1 Excludes depreciation of lease merchandise, which is not included in the chief operating decision maker's measure of
depreciation and amortization.
97
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2018, the results of the Company’s operating segments were impacted by the following items:
• Earnings before income taxes for the Aaron's Business includes a full impairment of the PerfectHome investment of
$20.1 million.
• DAMI's loss before income taxes includes a gain of $0.8 million related to the sale of DAMI's former corporate office
building.
In 2017, the results of the Company’s operating segments were impacted by the following items:
• Aaron's Business earnings before income taxes were impacted by $17.5 million of restructuring charges related to
store contractual lease obligations, severance costs and impairment charges in connection with the Company's strategic
decision to close Company-operated stores as discussed in Note 10 to these consolidated financial statements.
In 2016, the results of the Company’s operating segments were impacted by the following items:
• Aaron's Business earnings before income taxes were impacted by $20.2 million of restructuring charges incurred in
connection with the Company’s strategic decision to close Company-operated stores as discussed in Note 10 to these
consolidated financial statements.
• Aaron's Business earnings before income taxes includes a loss on the sale of HomeSmart of $4.3 million and
additional charges of $1.1 million related to exiting the HomeSmart business.
• Earnings before income taxes for the Aaron's Business were also impacted by a gain of $11.1 million on the
January 2016 sale of the Company’s former corporate office building.
The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP with
the following adjustments:
• Generally, a predetermined amount of Corporate overhead is allocated to each reportable segment based on segment
revenues. Any unallocated Corporate overhead in excess of predetermined amounts is assigned to the Aaron's
Business, which is consistent with how the chief operating decision maker regularly reviews the segment results.
•
Interest expense is allocated from Aaron's Business to the Progressive Leasing and DAMI segments based on a
percentage of the outstanding balances of its intercompany borrowings and of the debt incurred when it was acquired.
Interest expense allocated to Progressive Leasing and DAMI in excess of interest expense incurred by Aaron's
Business from third party lenders is reflected in the table above.
NOTE 14: RELATED PARTY TRANSACTIONS
The Company leases certain properties under capital leases with certain related parties that are more fully described in Note 7
above.
In addition to the related party capital leases that are fully described in Note 7, the Company also had five remaining store
operating leases with the same limited liability company ("LLC") controlled by a group of current and former executives of the
Company as of December 31, 2018. In December 2002, the Company sold 10 properties, including leasehold improvements, to
the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling $5.0 million. Upon the initial sale, no
gain or loss was recognized related to the properties sold to the LLC and the leases were originally accounted for as capital
leases in the Company's consolidated financial statements. During January 2018, the Company renewed its remaining lease
agreements to lease the land and buildings collateralizing the borrowings under a range of five to eight-year term leases at an
aggregate annual rental of approximately $0.3 million. The transaction has been accounted for as an operating lease in the
accompanying consolidated financial statements.
98
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands, Except Per Share Data)
Year Ended December 31, 2018
Revenues
Gross Profit *
Earnings Before Income Taxes
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
Year Ended December 31, 2017
Revenues
Gross Profit *
Earnings Before Income Taxes
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
954,809
398,703
66,752
52,246
0.75
0.73
844,554
365,920
82,623
53,300
0.75
0.74
$
$
927,859
396,763
49,980
38,501
0.55
0.54
815,644
352,639
56,995
36,335
0.51
0.51
$
$
953,071
406,541
53,415
43,720
0.64
0.62
838,883
356,743
39,221
25,341
0.36
0.35
993,184
444,979
82,057
61,743
0.91
0.89
884,627
383,574
60,738
177,560
2.51
2.46
* Gross profit is the sum of lease revenues and fees, retail sales, non-retail sales, and interest and fees on loans receivable less
retail cost of sales, non-retail cost of sales, depreciation of lease merchandise, provision for write-offs of lease merchandise,
and provision for credit losses.
The comparability of the Company’s quarterly financial results during 2018 and 2017 was impacted by certain events, as
described below on a pre-tax basis, except for the Tax Act impacts which are not pre-tax:
• The second quarter of 2018 included the full impairment of the PerfectHome investment of $20.1 million.
• The first, second, third and fourth quarter of 2018 included net restructuring charges (reversals) of $0.9 million, $(0.9)
million, $0.5 million, and $0.6 million, respectively. The first, second, third and fourth quarter of 2017 included
restructuring charges of $0.3 million, $13.5 million, $0.8 million and $3.4 million, respectively. The restructuring
activity in both years relates primarily to store contractual lease obligations, severance costs and impairment charges in
connection with the Company's strategic decision to close Company-operated stores as discussed in Note 10 to these
consolidated financial statements.
• The comparability of the Company's fourth quarter 2017 net earnings and earnings per share data were impacted by
the Tax Act enactment on December 22, 2017. The estimated net impact of the Tax Act to income tax (benefit) expense
during the fourth quarter of 2017 was a non-cash provisional income tax benefit of $137 million, which was an
estimated $140 million remeasurement of net deferred tax liabilities at the lower U.S. corporate income tax rate
provided by the Tax Act, partially offset by an estimated $3 million expense from the loss of the manufacturing
deduction in 2017 and other impacts.
99
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: COMPENSATION ARRANGEMENTS
Deferred Compensation
The Company maintains the Aaron’s, Inc. Deferred Compensation Plan, which is an unfunded, nonqualified 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 75% of their incentive pay
compensation, and eligible non-employee directors can defer receipt of up to 100% of their cash director fees.
Compensation deferred under the plan is credited to each participant’s deferral account and a deferred compensation liability is
recorded in accounts payable and accrued expenses in the consolidated balance sheets. The deferred compensation plan liability
was $10.4 million and $12.9 million as of December 31, 2018 and 2017, respectively. Liabilities under the plan are recorded at
amounts due to participants, based on the fair value of participants’ 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 investments in the rabbi trust were $13.5 million and $17.1 million as of December 31, 2018 and 2017,
respectively. The rabbi trust investments include debt and equity securities as well as money market funds and are included in
prepaid expenses and other assets in the consolidated balance sheets. The Company recorded losses related to changes in the
cash surrender value of the Company-owned life insurance plans of $1.2 million during the year ended December 31, 2018 and
gains of $1.5 million and $0.2 million during the years ended December 31, 2017 and 2016, respectively, which were recorded
within other non-operating (expense) income, net in the consolidated statements of earnings.
Benefits of $2.7 million, $2.3 million and $1.4 million were paid during the years ended December 31, 2018, 2017 and 2016,
respectively. Effective January 1, 2018 the Company implemented a discretionary match within the nonqualified Deferred
Compensation Plan. The match allows eligible employees to receive 100% matching by the Company on the first 3% of
contributions and 50% on the next 2% of contributions for a total of a 4% match. The match is not to exceed $11,000 for an
individual employee for 2018 and is subject to a three-year cliff vesting schedule. Deferred compensation expense charged to
operations for the Company’s matching contributions was not significant during any of the periods presented.
401(k) Defined Contribution Plan
The Company maintains a 401(k) savings plan for all its full-time employees who meet certain eligibility requirements.
Effective January 1, 2015, the 401(k) savings plan was amended to allow employees to contribute up to 75% of their annual
compensation in accordance with federal contribution limits with 100% matching by the Company on the first 3% of
compensation and 50% on the next 2% of compensation for a total of a 4% match. The Company’s expense related to the plan
was $6.9 million in 2018, $5.7 million in 2017 and $5.4 million in 2016.
Employee Stock Purchase Plan
See Note 12 to these consolidated financial statements for more information regarding the Company's compensatory Employee
Stock Purchase Plan.
100
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation of Aaron’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, was carried out by management, with the participation of the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as of the end of the period covered by this Annual Report on Form 10-K. Based on management’s
evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of
December 31, 2018 to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
Reports of Management and Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Management has assessed, and the Company’s independent registered public accounting firm, Ernst & Young LLP, has audited,
the Company’s internal control over financial reporting as of December 31, 2018. The unqualified reports of management and
Ernst & Young LLP thereon are included in Item 8 of this Annual Report on Form 10-K and are incorporated by reference
herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, during the Company’s fourth fiscal quarter of 2018 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
101
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
The information required in response to this Item is contained under the captions "Nominees to Serve as Directors," "Executive
Officers Who Are Not Directors," "Communicating with the Board of Directors and Corporate Governance Documents,"
"Composition, Meetings and Committees of the Board of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement to be filed with the SEC pursuant to Regulation 14A. These portions of the Proxy
Statement are hereby incorporated by reference.
We have adopted a written code of business conduct and ethics that applies to all our directors, officers and employees,
including our principal executive officer, principal financial officer, principal accounting officer or controller and other
executive officers identified pursuant to this Item 10 who perform similar functions, which we refer to as the Selected Officers.
The code is posted on our website at http://www.aarons.com. We will disclose any material changes in or waivers from our
code of business conduct and ethics applicable to any Selected Officer on our website at http://www.aarons.com or by filing a
Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is contained under the captions "Compensation Discussion and Analysis,"
"Summary Compensation Table," "Grants of Plan Based Awards in Fiscal Year 2018," "Outstanding Equity Awards at 2018
Fiscal Year-End," "Option Exercises and Stock Vested in Fiscal Year 2018," "Non-Qualified Deferred Compensation as of
December 31, 2018," "Potential Payments Upon Termination or Change in Control," "Non-Management Director
Compensation in 2018," "Employment Agreements with Named Executive Officers," "Executive Bonus Plan," "Aaron’s, Inc.
2015 Equity and Incentive Plan," "Amended and Restated 2001 Stock Option and Incentive Award Plan," "Compensation
Committee Interlocks and Insider Participation" and "Compensation Committee Report" in the Proxy Statement. These portions
of the Proxy Statement are hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required in response to this Item is contained under the captions "Beneficial Ownership of Common Stock"
and "Securities Authorized for Issuance under Equity Compensation Plans" in the Proxy Statement. These portions of the Proxy
Statement are hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item is contained under the captions "Certain Relationships and Related
Transactions" and "Election of Directors" in the Proxy Statement. These portions of the Proxy Statement are hereby
incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this Item is contained under the caption "Audit Matters" in the Proxy Statement. This
portion of the Proxy Statement is hereby incorporated by reference.
102
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS and SCHEDULES
a) 1. FINANCIAL STATEMENTS
PART IV
The following financial statements and notes thereto of Aaron’s, Inc. and Subsidiaries, and the related Reports of Independent
Registered Public Accounting Firm are set forth in Item 8 and Item 9A.
Consolidated Balance Sheets—December 31, 2018 and 2017
Consolidated Statements of Earnings—Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income—Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders’ Equity—Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows—Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Management Report on Internal Control over Financial Reporting
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they
are not applicable or the required information is included in the financial statements or notes thereto.
3. EXHIBITS
EXHIBIT
NO.
DESCRIPTION OF EXHIBIT
2.1†
2.2†
3(i)
3(ii)
4
10.1
Plans of Acquisition
Agreement and Plan of Merger, dated April 14, 2014, by and among the Company, Progressive Finance Holdings,
LLC, Virtual Acquisition Company, LLC, and John W. Robinson, III in his capacity as the representative of the
selling unitholders (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed
with the SEC on April 15, 2014).
Purchase Agreement, dated April 14, 2014, by and among the Company, SP GE VIII-B Progressive Blocker Corp.,
SP SD IV-B Progressive Blocker Corp., Summit Partners Growth Equity Fund VIII-B, L.P., and Summit Partners
Subordinated Debt Fund IV-B, L.P. (incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on
Form 8-K filed with the SEC on April 15, 2014).
Articles of Incorporation and Bylaws
Amended and Restated Articles of Incorporation of Aaron’s, Inc. (incorporated by reference to Exhibit 3(i) of the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February
24, 2014).
Amended and Restated By-laws of Aaron’s, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed with the SEC on January 29, 2016).
Instruments Defining the Rights of Security Holders, Including Indentures
Specimen of Form of Stock Certificate Representing Shares of Common Stock of the Registrant, par value $0.50
per share (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form 8-A/A filed
with the SEC on December 10, 2010).
Material Contracts
Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the purchasers dated as of July
5, 2011 and Form of Senior Note (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on
Form 8-K filed with the SEC on July 8, 2011).
103
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Amendment No. 1 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the
purchasers, dated as of December 19, 2012 (incorporated by reference to Exhibit 10 of the Registrant’s Current Report
on Form 8-K filed with the SEC on December 26, 2012).
Amendment No. 2 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the
purchasers, dated as of October 8, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current
Report on Form 8-K filed with the SEC on October 15, 2013).
Amendment No. 3 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the
purchasers, dated as of April 14, 2014 and Form of Senior Note (incorporated by reference to Exhibit 10.4 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8,
2014).
Amendment No. 4 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the
purchasers, dated as of December 9, 2014 (incorporated by reference to Exhibit 10.7 of the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 2, 2015).
Amendment No. 5 to Note Purchase Agreement by and among Aaron’s Inc. and certain other obligors and the
purchasers, dated as of September 21, 2015 (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 9, 2015).
Amendment No. 6 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the
purchasers, dated as of June 30, 2016 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 4, 2016).
Amendment No. 7 to Note Purchase Agreement by and amount Aaron's Inc. and certain other obligors and
purchasers dated as of September 18, 2017 (incorporated by reference to Exhibit 10.3 of the Registrant's Current
Report on Form 8-K filed with the SEC on September 21, 2017).
Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the purchasers dated as of
April 14, 2014 with respect to $225 million in aggregate principal amount of the Company’s 4.75% Series A Senior
Notes due April 14, 2021 and Form of Senior Note (incorporated by reference to Exhibit 10.2 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014).
Amendment No. 1 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the
purchasers dated as of December 9, 2014 with respect to $225 million in aggregate principal amount of the
Company’s 4.75% Series A Senior Notes Due April 14, 2021 and Form of Senior Note (incorporated by reference
to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with
the SEC on March 2, 2015).
Amendment No. 2 to Note Purchase Agreement by and among Aaron’s Inc. and certain other obligors and the
purchasers dated as of September 21, 2015 with respect to $225 million in aggregate principal amount of the
Company’s 4.75% Series A Senior Notes due April 14, 2021 and Form of Senior Note (incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed
with the SEC on November 9, 2015).
Amendment No. 3 to Note Purchase Agreement by and among Aaron’s Inc. and certain other obligors and the
purchasers dated as of June 30, 2016 with respect to $225 million in aggregate principal amount of the Company’s
4.75% Series A senior Notes Due April 14, 2021 and Form of Senior Note (incorporated by reference to Exhibit
10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on
August 4, 2016).
Amendment No. 4 to Note Purchase Agreement by and among Aaron's Inc. and certain other obligors and the
purchasers, dated as of September 18, 2017 with respect to $225 million in aggregate principal amount of the
Company's 4.75% Series A senior Notes Due April 14, 2021 (incorporated by reference to Exhibit 10.4 of the
Registrant's Current Report on Form 8-K filed with the SEC on September 21, 2017).
Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the purchasers dated as of
April 14, 2014 with respect to $75 million in aggregate principal amount of the Company’s 4.75% Series B Senior
Notes due April 14, 2021 and Form of Senior Note (incorporated by reference to Exhibit 10.3 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014).
Amendment No. 1 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and
purchasers dated as of December 9, 2014 with respect to $75 million in aggregate principal amount of the
Company’s 4.75% Series B Senior Notes due April 14, 2021 and Form of Senior Notes (incorporated by reference
to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with
the SEC on March 2, 2015).
Amendment No. 2 to Note Purchase Agreement by and among Aaron’s Inc. and certain other obligors and
purchasers dated as of September 21, 2015 with respect to $75 million in aggregate principal amount of the
Company’s 4.75% Series B Senior Notes due April 14, 2021 and Form of Senior Note (incorporated by reference
to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed
with the SEC on November 9, 2015).
104
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Amendment No. 3 to Note Purchase Agreement by and among Aaron’s Inc. and certain other obligors and
purchasers dated as of June 30, 2016 with respect to $75 million in aggregate principal amount of the Company’s
4.75% Series B Senior Notes due April 14, 2021 and Form of Senior Note (incorporated by reference to Exhibit
10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on
August 4, 2016).
Amendment No. 4 to Note Purchase Agreement by and among Aaron's Inc. and certain other obligors and the
purchasers, dated as of September 18, 2017 with respect to $75 million in aggregate principal amount of the
Company's 4.75% Series B Senior Notes due April 14, 2021 (incorporated by reference to Exhibit 10.5 of the
Registrant's Current Report on Form 8-K filed with the SEC on September 21, 2017).
Second Amended and Restated Revolving Credit Term and Term Loan Agreement by and among Aaron’s Inc. as
borrower, the several banks and other financial institutions from time to time party thereto and SunTrust Bank as
administrative agent, dated as of September 18, 2017 (incorporated by reference to Exhibit 10.1 of the Registrant’s
Current Report on Form 8-K filed with the SEC on September 21, 2017).
First Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, entered into
among Aaron’s, Inc., as borrower, the several banks and other financial institutions from time to time party thereto,
and SunTrust Bank, as administrative agent, dated October 23, 2018 (incorporated by reference to Exhibit 10.2 of
Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2018 filed with the SEC on
October 25, 2018).
Fourth Amended and Restated Loan Facility Agreement and Guaranty among Aaron’s Inc. as sponsor, SunTrust
Bank, as servicer, and each of the other lending institutions party thereto as participants, dated October 25, 2017
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on
October 31, 2017).
First Amendment to Fourth Amended and Restated Loan Facility Agreement and Guarantee, entered into among
Aaron’s, Inc., as sponsor, SunTrust Bank, as servicer, and each of the other lending institutions party thereto as
participants, dated October 23, 2018 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report
on Form 10-Q for the Quarter ended September 30, 2018 filed with the SEC on October 25, 2018).
Loan and Security Agreement by and among Dent-A-Med Inc., Dent-A-Med Receivables Corporation, HC
Recovery, Inc. and Wells Fargo Preferred Capital, Inc., dated as of May 18, 2011 (incorporated by reference to
Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 21, 2015).
First Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., Dent-A-Med Receivables
Corporation, HC Recovery, Inc. and Wells Fargo Preferred Capital, Inc., dated as of August 3, 2011 (incorporated
by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 21,
2015).
Second Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., Dent-A-Med Receivables
Corporation, HC Recovery, Inc. and Wells Fargo Bank, N.A, dated as of July 26, 2012 (incorporated by reference
to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 21, 2015).
Third Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., HC Recovery, Inc. and Wells
Fargo Bank, N.A, dated as of June 6, 2013 (incorporated by reference to Exhibit 10.4 of the Registrant’s Current
Report on Form 8-K filed with the SEC on October 21, 2015).
Fourth Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., HC Recovery, Inc. and Wells
Fargo Bank, N.A, dated as of November 7, 2013 (incorporated by reference to Exhibit 10.5 of the Registrant’s
Current Report on Form 8-K filed with the SEC on October 21, 2015).
Fifth Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., HC Recovery, Inc. and Wells
Fargo Bank, N.A, dated as of March 31, 2014 (incorporated by reference to Exhibit 10.6 of the Registrant’s Current
Report on Form 8-K filed with the SEC on October 21, 2015).
Sixth Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., HC Recovery, Inc. and Wells
Fargo Bank, N.A, dated as of October 24, 2014 (incorporated by reference to Exhibit 10.7 of the Registrant’s
Current Report on Form 8-K filed with the SEC on October 21, 2015).
Seventh Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., HC Recovery, Inc. and
Wells Fargo Bank, N.A, dated as of February 3, 2015 (incorporated by reference to Exhibit 10.8 of the Registrant’s
Current Report on Form 8-K filed with the SEC on October 21, 2015).
Eighth Amendment to Loan and Security Agreement by and among Dent-A-Med Inc., HC Recovery, Inc. and Wells
Fargo Bank, N.A, dated as of September 21, 2015 (incorporated by reference to Exhibit 10.9 of the Registrant’s
Current Report on Form 8-K filed with the SEC on October 21, 2015).
Ninth Amendment to the Loan and Security Agreement by and among Dent-A-Med, Inc., HC Recovery, Inc. and
Wells Fargo Bank, N.A, dated as of December 29, 2015 (incorporated by reference to Exhibit 10.29 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 29, 2016).
Tenth Amendment to the Loan and Security Agreement by and among Dent-A-Med, Inc., HC Recovery, Inc. and
Wells Fargo Bank, N.A, dated as of February 23, 2016 (incorporated by reference to Exhibit 10.30 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 29, 2016).
105
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
Eleventh Amendment to the Loan and Security Agreement by and among Dent-A-Med, Inc., HC Recovery, Inc.
and Wells Fargo Bank, N.A., dated as of May 5, 2016 (incorporated by reference to Exhibit 10.1 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 5, 2016).
Twelfth Amendment to the Loan and Security Agreement by and among Dent-A-Med, Inc., HC Recovery, Inc. and
Wells Fargo Bank, N.A., dated as of June 30, 2016 (incorporated by reference to Exhibit 10.1 of the Registrant’s
Current Report on Form 8-K filed with the SEC on July 7, 2016).
Management Contracts and Compensatory Plans or Arrangements
Aaron’s Inc. Employees Retirement Plan, as amended and restated, effective January 1, 2016 (incorporated by
reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016
filed with the SEC on August 4, 2016).
First Amendment to the Employees Retirement Plan, dated as of June 28, 2016, to be effective October 4, 2016
(incorporated by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016 filed with the SEC on August 4, 2016).
Amended and Restated Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2009).
Form of Restricted Stock Unit Award Agreement for awards made prior to February 2014 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 filed with
the SEC on May 8, 2012).
Amendment to Form of Restricted Stock Unit Award Agreement for awards made prior to February 2014 (incorporated
by reference to Exhibit 10.11 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
filed with the SEC on August 6, 2015).
Form of Restricted Stock Unit Award for awards made in or after February 2014 (incorporated by reference to Exhibit
10.29 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on
February 24, 2014).
Form of Option Award Agreement for awards made prior to February 2014 (incorporated by reference to Exhibit 10.28
of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February
24, 2014).
Form of Option Award Agreement for awards made in or after February 2014 (incorporated by reference to Exhibit
10.30 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on
February 24, 2014).
Amendment to Form of Option Award Agreement for awards made in or after February 2014 (incorporated by reference
to Exhibit 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 filed with
the SEC on August 6, 2015).
Form of Performance Share Award Agreement for awards made in or after February 2014 (incorporated by reference
to Exhibit 10.31 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with
the SEC on February 24, 2014).
Amendment to Form of Performance Share Award Agreement for awards made in or after February 2014
(incorporated by reference to Exhibit 10.12 of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2015 filed with the SEC on August 6, 2015).
Aaron’s Management Performance Plan (Summary of terms for Home Office Vice Presidents) (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 5, 2011).
Aaron’s, Inc. 2001 Stock Option and Incentive Award Plan Master Restricted Stock Unit Agreement (Aaron’s
Management Performance Plan) (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on
Form 8-K filed with the SEC on August 5, 2011).
Aaron’s, Inc. Deferred Compensation Plan as amended and restated effective January 1, 2017 (incorporated by
reference to Exhibit 10.53 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016
filed with the SEC on February 24, 2017).
Aaron’s, Inc. 2015 Equity and Incentive Plan (incorporated by reference to Appendix A to the Company’s
Definitive Proxy Statement filed on April 7, 2015).
Form of Employee Stock Option Award Agreement under the Aaron’s, Inc. 2015 Equity and Incentive Plan
(incorporated by reference to Exhibit 99.2 of the Company’s Registration Statement on Form S-8 (333-204014)
filed with the SEC on May 8, 2015).
Form of Executive Performance Share Award Agreement under the Aaron’s, Inc. 2015 Equity and Incentive Plan
(incorporated by reference to Exhibit 99.3 of the Company’s Registration Statement on Form S-8 (333-204014)
filed with the SEC on May 8, 2015).
Amendment to Form of Executive Performance Share Award Agreement under the Aaron’s, Inc. 2015 Equity and
Incentive Plan (incorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2015 filed with the SEC on August 6, 2015).
106
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
21*
23*
31.1*
31.2*
32.1*
32.2*
101
Form of Executive Officer Restricted Stock Unit Award Agreement under the Aaron’s, Inc. 2015 Equity and
Incentive Plan (incorporated by reference to Exhibit 99.4 of the Company’s Registration Statement on Form S-8
(333-204014) filed with the SEC on May 8, 2015).
Amendment to Form of Executive Officer Restricted Stock Unit Award Agreement under the Aaron’s, Inc. 2015
Equity and Incentive Plan (incorporated by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2015 filed with the SEC on August 6, 2015).
Form of Director Restricted Stock Unit Award Agreement under the Aaron’s, Inc. 2015 Equity and Incentive Plan
(incorporated by reference to Exhibit 99.5 of the Company’s Registration Statement on Form S-8 (333-204014)
filed with the SEC on May 8, 2015).
Form of Restricted Stock Award Agreement under the Aaron's Inc. 2015 Equity and Incentive Plan (incorporated
by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
2017 filed with the SEC on May 3, 2017.
Aaron’s Inc. Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Definitive
Proxy Statement filed on March 29, 2018).
Compensation Plan for Non-Employee Directors, as amended and Restated, effective May 4, 2016 (incorporated
by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016
filed with the SEC on August 4, 2016).
First Amendment to Compensation Plan for Non-Employee Directors, effective May 9, 2018 (incorporated by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018
filed with the SEC on April 26, 2018)
Employment Agreement, dated as of November 10, 2014, by and between Aaron’s, Inc. and John W. Robinson
(incorporated by reference to Exhibit 10.47 of the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2014 filed with the SEC on March 2, 2015).
Amended and Restated Executive Severance Pay Plan of Aaron’s, Inc., effective as of August 5, 2015 (incorporated
by reference to Exhibit 10.59 of the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2015 filed with the SEC on February 29, 2016.
Retirement Agreement between Aaron’s, Inc. and R. Charles Loudermilk, Sr., dated August 24, 2012 (incorporated
by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 30,
2012).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on
Form 8-K filed with the SEC on May 14, 2014).
Other Exhibits and Certifications
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Certification of the Chief Executive Officer of Aaron’s, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of the Chief Financial Officer of Aaron’s, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of the Chief Executive Officer of Aaron’s, Inc. furnished herewith pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer of Aaron’s, Inc. furnished herewith pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following financial information from Aaron’s, Inc. Annual Report on Form 10-K for the year ended December
31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of
December 31, 2018 and 2017, (ii) Consolidated Statements of Earnings for the Years ended December 31, 2018, 2017
and 2016, (iii) Consolidated Statements of Comprehensive Income for the Years ended December 31, 2018, 2017 and
2016, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016, (v)
Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2018, 2017 and 2016 and (v) the
Notes to Consolidated Financial Statements.
† The Company hereby agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon the
request of the SEC.
* Filed herewith.
(b) EXHIBITS
The exhibits listed in Item 15(a)(3) are included elsewhere in this Report.
107
(c) FINANCIAL STATEMENTS AND SCHEDULES
The financial statements listed in Item 15(a)(1) are included in Item 8 in this Report.
108
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 14, 2019.
SIGNATURES
AARON’S, INC.
By:
/s/ STEVEN A. MICHAELS
Steven A. Michaels
Chief Financial Officer and President of Strategic Operations
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on February 14, 2019.
SIGNATURE
/s/ JOHN W. ROBINSON, III
John W. Robinson III
/s/ STEVEN A. MICHAELS
Steven A. Michaels
/s/ ROBERT P. SINCLAIR, JR.
Robert P. Sinclair, Jr.
/s/ KATHY T. BETTY
Kathy T. Betty
/s/ DOUGLAS C. CURLING
Douglas C. Curling
/s/ CYNTHIA N. DAY
Cynthia N. Day
/s/ CURTIS L. DOMAN
Curtis L. Doman
/s/ WALTER EHMER
Walter Ehmer
/s/ HUBERT L. HARRIS, JR.
Hubert L. Harris, Jr.
/s/ RAY M. ROBINSON
Ray M. Robinson
/s/ ROBERT YANKER
Robert Yanker
TITLE
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer and President of Strategic
Operations (Principal Financial Officer)
Vice President, Corporate Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
109
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