ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements, including the notes to those statements, appearing elsewhere in this report.
Management's Discussion and Analysis comparing the results for the year ended December 31, 2018 to the results for the year ended December 31, 2017 can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 14, 2019, which is hereby incorporated by reference.
Business Overview
Aaron’s, Inc. ("we," "our," "us," or the "Company") is a leading omnichannel provider of lease-purchase solutions. As of December 31, 2019, the Company’s operating segments are Progressive Leasing, Aaron’s Business and Vive. As discussed above, we have updated all disclosures and references of DAMI in this Annual Report on Form 10-K to reflect the January 1, 2020 name change to Vive.
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions through approximately 25,000 retail locations in 46 states and the District of Columbia, including e-commerce merchants. 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, home appliances, consumer electronics and accessories to consumers with a lease-to-own agreement with no credit needed through its Company-operated stores in the United States, Canada and Puerto Rico, 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 includes the operations of Woodhaven, which manufactures and supplies the majority of the bedding and a significant portion of the upholstered furniture leased and sold in Company-operated and franchised stores.
Vive partners with merchants to provide a variety of revolving credit products originated through 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 Vive 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) commoditization of pricing in consumer electronics; (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) 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. 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:
|
|
•
|
Strengthen relationships of Progressive Leasing current retail and merchant partners;
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|
|
•
|
Focus on converting existing pipeline into Progressive Leasing retail partners;
|
|
|
•
|
Enhance our virtual offering at Progressive Leasing;
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|
|
•
|
Drive omnichannel demand generation at the Aaron's Business;
|
|
|
•
|
Reposition and reinvest in our real estate at the Aaron's Business; and
|
|
|
•
|
Manage the Aaron's Business stores with operational excellence.
|
We continue to invest in various Aaron's Business transformation initiatives such as generating customer demand and driving sales conversion rates through enhanced customer insights, direct response marketing and increased investment in e-commerce. We believe Aarons.com represents an opportunity to provide our customers with expanded product selections 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.
In addition to generating customer demand, we are also focused on executing a balanced business approach through customer retention and renewals, investing in our leadership talent, and improving our store staffing model to ensure we have our staff available to meet our customers' needs. Another key focus for the Aaron's Business includes the roll out of Rapid Customer Onboarding, which is a decisioning tool designed to improve our customer experience by streamlining and standardizing the decisioning process, shortening transaction times, and establishing appropriate transaction sizes and lease payment amounts, given the customer’s profile.
Finally, we also continue to execute on various Aaron's Business store optimization and real estate initiatives, including strategic store consolidations. We continue to roll out our next generation store concepts to adapt to our changing competitive environment.
As a result of store optimization initiatives and other cost-reduction initiatives, the Company initiated a new restructuring program in 2019 to further optimize its Company-operated Aaron's store base portfolio, which resulted in the closure, consolidation or relocation of 155 underperforming Company-operated stores throughout 2019. The Company also further rationalized its home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions. The Company closed and consolidated 139 underperforming Company-operated stores throughout 2016, 2017 and 2018 under similar restructuring initiatives. The Company continually evaluates its Company-operated Aaron's Business store portfolio to determine if it will further rationalize its store base to better align with marketplace demand. Additional restructuring charges may result from our strategy to reposition and reinvest in our next generation store concepts to appeal to our target customer market in better, more profitable locations.
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.
Highlights
The following summarizes significant highlights from the year ended December 31, 2019:
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|
•
|
The Company reported record revenues of $3.9 billion in 2019 compared to $3.8 billion in 2018. Earnings before income taxes decreased to $92.8 million compared to $252.2 million in 2018. The decrease in earnings before income taxes is primarily due to $179.3 million in regulatory charges and legal expenses incurred related to Progressive Leasing's tentative settlement of the FTC matter discussed in Note 10 in the accompanying consolidated financial statements.
|
|
|
•
|
Progressive Leasing reported revenues of $2.1 billion in 2019, an increase of 6.5% over 2018. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases (see the "Use of Non-GAAP Financial Information" section below), Progressive Leasing revenues increased 20.2% over 2018. Progressive Leasing's revenue growth is due to a 22.3% increase in total invoice volume, which was generated through an increase in invoice volume per active door. Progressive Leasing's earnings before income taxes decreased to $55.7 million compared to $175.0 million in 2018, due primarily to $179.3 million in regulatory charges and legal expenses incurred related to Progressive's tentative settlement of the FTC matter, partially offset by revenue growth during 2019.
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|
|
•
|
Aaron’s Business revenue growth was nearly flat, reporting revenues of $1.8 billion in 2019 and 2018. Key factors impacting revenue trends year-over-year include the net reduction of 145 Company-operated stores during 2019 as well as the acquisitions of various franchisees in 2018. Same store revenues were flat in 2019 compared to 2018.
|
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|
•
|
Aaron's Business earnings before income taxes decreased to $46.7 million in 2019 compared to $84.7 million in 2018. Earnings before income taxes for the Aaron's Business during 2019 includes restructuring charges of $40.0 million related to the Company's closure and consolidation of underperforming stores, $7.4 million in gains from the sale of various real estate properties and gains on insurance recoveries of $4.5 million. Aaron's Business earnings before income taxes were also impacted by a higher provision for lease merchandise write-offs as a percentage of Aaron's Business lease revenues and fees, which increased to 6.2% in 2019 compared to 4.6% in 2018. That increase was due to the lower collections activity resulting from the redeployment of store labor towards enhanced sales activities, an increase in the number and type of promotional offerings, higher ticket leases, store closure activity and an increasing mix of e-commerce as a percentage of revenues.
|
|
|
•
|
The Company generated cash from operating activities of $317.2 million in 2019 compared to $356.5 million in 2018. The decrease in net cash from operating activities was impacted by net income tax refunds of $0.7 million during 2019 compared to net income tax refunds of $63.8 million in 2018. The Company ended 2019 with $57.8 million in cash and $386.2 million available on our revolving credit facility.
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|
•
|
The Company returned $78.7 million to our shareholders in 2019 through the repurchase of 1.2 million shares and the payment of our quarterly cash dividends, which we have paid for 32 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:
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|
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|
|
|
For the Year Ended December 31 (Unaudited and In Thousands)
|
2019
|
|
2018
|
|
2017
|
Progressive Leasing Invoice Volume
|
$
|
1,747,902
|
|
|
$
|
1,429,550
|
|
|
$
|
1,160,732
|
|
The increase in invoice volume was driven by a 19.4% increase in invoice volume per active door and a 2.4% increase in active doors.
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:
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Active Doors at December 31 (Unaudited)
|
2019
|
|
2018
|
|
2017
|
Progressive Leasing Active Doors
|
24,772
|
|
|
24,198
|
|
|
26,861
|
|
Company-operated and franchised store activity (unaudited) is summarized as follows:
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2019
|
|
2018
|
|
2017
|
Company-operated Aaron’s stores
|
|
|
|
|
|
Company-operated Aaron’s stores open at January 1,
|
1,312
|
|
|
1,175
|
|
|
1,165
|
|
Opened
|
—
|
|
|
—
|
|
|
—
|
|
Added through acquisition
|
18
|
|
|
152
|
|
|
110
|
|
Closed, sold or merged
|
(163
|
)
|
|
(15
|
)
|
|
(100
|
)
|
Company-operated Aaron’s stores open at December 31,
|
1,167
|
|
|
1,312
|
|
|
1,175
|
|
|
|
|
|
|
|
Franchised stores
|
|
|
|
|
|
Franchised stores open at January 1,
|
377
|
|
|
551
|
|
|
699
|
|
Opened
|
—
|
|
|
2
|
|
|
1
|
|
Purchased from the Company
|
—
|
|
|
—
|
|
|
—
|
|
Purchased by the Company
|
(18
|
)
|
|
(152
|
)
|
|
(111
|
)
|
Closed, sold or merged
|
(24
|
)
|
|
(24
|
)
|
|
(38
|
)
|
Franchised stores open at December 31,
|
335
|
|
|
377
|
|
|
551
|
|
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, 2019, we calculated this amount by comparing revenues for the year ended December 31, 2019 to revenues for the year ended December 31, 2018 for all stores open for the entire 24-month period ended December 31, 2019, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues were flat during the 24-month period ended December 31, 2019.
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, 2019 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 primarily 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 by Vive. Other revenues primarily relate to revenues from leasing Company-owned 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, shipping and handling, advertising and marketing, the provision for loan losses, depreciation of property, plant and equipment, intangible asset amortization expense and professional services expense, among other expenses.
Restructuring Expenses, Net. Restructuring expenses, net primarily represent the cost of optimization efforts and cost reduction initiatives related to the Aaron’s Business home office and field support functions. Restructuring expenses, net are comprised principally of closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the closure of one of our store support buildings, workforce reductions, other impairment charges and reversals of previously recorded restructuring charges.
Legal and Regulatory Expense. Legal and regulatory expense includes regulatory charges and legal expenses incurred related to Progressive Leasing's tentative settlement of the FTC matter discussed in Note 10 in the accompanying consolidated financial statements.
Other Operating Income, Net. Other operating income, net consists of gains or losses on sales of Company-operated stores and delivery vehicles, fair value adjustments on assets held for sale, gains or losses on other transactions involving property, plant and equipment, and gains related to property damage and business interruption insurance claim recoveries.
Interest Expense. Interest expense consists primarily 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 Income (Expense), Net. Other non-operating income (expense), 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.
Results of Operations
Results of Operations – Years Ended December 31, 2019 and 2018
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|
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|
Change
|
|
Year Ended December 31,
|
|
2019 vs. 2018
|
(In Thousands)
|
2019
|
|
2018
|
|
$
|
|
%
|
REVENUES:
|
|
|
|
|
|
|
|
Lease Revenues and Fees
|
$
|
3,698,491
|
|
|
$
|
3,506,418
|
|
|
$
|
192,073
|
|
|
5.5
|
%
|
Retail Sales
|
38,474
|
|
|
31,271
|
|
|
7,203
|
|
|
23.0
|
|
Non-Retail Sales
|
140,950
|
|
|
207,262
|
|
|
(66,312
|
)
|
|
(32.0
|
)
|
Franchise Royalties and Fees
|
33,432
|
|
|
44,815
|
|
|
(11,383
|
)
|
|
(25.4
|
)
|
Interest and Fees on Loans Receivable
|
35,046
|
|
|
37,318
|
|
|
(2,272
|
)
|
|
(6.1
|
)
|
Other
|
1,263
|
|
|
1,839
|
|
|
(576
|
)
|
|
(31.3
|
)
|
|
3,947,656
|
|
|
3,828,923
|
|
|
118,733
|
|
|
3.1
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
Depreciation of Lease Merchandise
|
1,972,358
|
|
|
1,727,904
|
|
|
244,454
|
|
|
14.1
|
|
Retail Cost of Sales
|
24,024
|
|
|
19,819
|
|
|
4,205
|
|
|
21.2
|
|
Non-Retail Cost of Sales
|
113,229
|
|
|
174,180
|
|
|
(60,951
|
)
|
|
(35.0
|
)
|
Operating Expenses
|
1,524,849
|
|
|
1,618,423
|
|
|
(93,574
|
)
|
|
(5.8
|
)
|
Restructuring Expenses
|
39,990
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|
|
1,105
|
|
|
38,885
|
|
|
nmf
|
Legal and Regulatory Expense
|
179,261
|
|
|
—
|
|
|
179,261
|
|
|
nmf
|
Other Operating Income, Net
|
(11,929
|
)
|
|
(2,116
|
)
|
|
(9,813
|
)
|
|
nmf
|
|
3,841,782
|
|
|
3,539,315
|
|
|
302,467
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT
|
105,874
|
|
|
289,608
|
|
|
(183,734
|
)
|
|
(63.4
|
)
|
Interest Income
|
1,790
|
|
|
454
|
|
|
1,336
|
|
|
nmf
|
Interest Expense
|
(16,967
|
)
|
|
(16,440
|
)
|
|
(527
|
)
|
|
(3.2
|
)
|
Impairment of Investment
|
—
|
|
|
(20,098
|
)
|
|
20,098
|
|
|
nmf
|
Other Non-Operating Income (Expense), Net
|
2,091
|
|
|
(1,320
|
)
|
|
3,411
|
|
|
nmf
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
92,788
|
|
|
252,204
|
|
|
(159,416
|
)
|
|
(63.2
|
)
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
61,316
|
|
|
55,994
|
|
|
5,322
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
$
|
31,472
|
|
|
$
|
196,210
|
|
|
$
|
(164,738
|
)
|
|
(84.0
|
)%
|
nmf—Calculation is not meaningful
Revenues
Information about our revenues by reportable segment is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2019 vs. 2018
|
(In Thousands)
|
2019
|
|
2018
|
|
$
|
|
%
|
REVENUES:
|
|
|
|
|
|
|
|
Progressive Leasing
|
$
|
2,128,133
|
|
|
$
|
1,998,981
|
|
|
$
|
129,152
|
|
|
6.5
|
%
|
Aaron’s Business
|
1,784,477
|
|
|
1,792,624
|
|
|
(8,147
|
)
|
|
(0.5
|
)
|
Vive
|
35,046
|
|
|
37,318
|
|
|
(2,272
|
)
|
|
(6.1
|
)
|
Total Revenues from External Customers
|
$
|
3,947,656
|
|
|
$
|
3,828,923
|
|
|
$
|
118,733
|
|
|
3.1
|
%
|
The following table presents revenue by source and by segment for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(In Thousands)
|
Progressive Leasing1
|
Aaron's Business
|
Vive
|
Total
|
Lease Revenues and Fees
|
$
|
2,128,133
|
|
$
|
1,570,358
|
|
$
|
—
|
|
$
|
3,698,491
|
|
Retail Sales
|
—
|
|
38,474
|
|
—
|
|
38,474
|
|
Non-Retail Sales
|
—
|
|
140,950
|
|
—
|
|
140,950
|
|
Franchise Royalties and Fees
|
—
|
|
33,432
|
|
—
|
|
33,432
|
|
Interest and Fees on Loans Receivable
|
—
|
|
—
|
|
35,046
|
|
35,046
|
|
Other
|
—
|
|
1,263
|
|
—
|
|
1,263
|
|
Total Revenues
|
$
|
2,128,133
|
|
$
|
1,784,477
|
|
$
|
35,046
|
|
$
|
3,947,656
|
|
1 For the year ended December 31, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was $274.9 million which was recorded as a reduction to Lease Revenues and Fees as a result of the Company's adoption of ASC 842, Leases. See Note 1 in the accompanying consolidated financial statements for more information regarding the impacts of ASC 842 on the Company's financial results.
The following table presents revenue by source and by segment for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business
|
Vive
|
Total
|
Lease Revenues and Fees
|
$
|
1,998,981
|
|
$
|
1,507,437
|
|
$
|
—
|
|
$
|
3,506,418
|
|
Retail Sales
|
—
|
|
31,271
|
|
—
|
|
31,271
|
|
Non-Retail Sales
|
—
|
|
207,262
|
|
—
|
|
207,262
|
|
Franchise Royalties and Fees
|
—
|
|
44,815
|
|
—
|
|
44,815
|
|
Interest and Fees on Loans Receivable
|
—
|
|
—
|
|
37,318
|
|
37,318
|
|
Other
|
—
|
|
1,839
|
|
—
|
|
1,839
|
|
Total Revenues
|
$
|
1,998,981
|
|
$
|
1,792,624
|
|
$
|
37,318
|
|
$
|
3,828,923
|
|
Progressive Bad Debt Expense
|
227,813
|
|
—
|
|
—
|
|
227,813
|
|
Total Revenues, net of Progressive Bad Debt Expense1
|
$
|
1,771,168
|
|
$
|
1,792,624
|
|
$
|
37,318
|
|
$
|
3,601,110
|
|
1 See the "Use of Non-GAAP Financial Information" section below.
Progressive Leasing. Progressive Leasing segment revenues increased primarily due to an annualized 22.3% increase in total invoice volume, which was driven mainly by an increase in invoice volume per active door. The increase was partially offset by the recognition of a provision for returns and uncollectible renewal payments of $274.9 million as a reduction to lease revenues in accordance with ASC 842 beginning in 2019. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Progressive Leasing revenues increased 20.2% during the year ended December 31, 2019 as compared to the prior year.
Aaron’s Business. The acquisitions of various franchisees throughout 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, 2019 as compared to the prior year.
Aaron’s Business segment revenues decreased during 2019 primarily due to a $66.3 million decrease in non-retail sales and an $11.4 million decrease in franchise royalties and fees, partially offset by a $62.9 million increase in lease revenues and fees. The decrease in non-retail sales and franchise royalties and fees is primarily due to the reduction of 42 franchised stores and a net reduction of 174 franchised stores during the years ended December 31, 2019 and 2018, respectively. Lease revenues and fees increased during 2019 primarily due to the franchisee acquisitions during 2018, partially offset by the net reduction of 145 Company-operated stores during 2019 resulting from the Aaron's Business restructuring and store optimization initiatives. Aaron's Business e-commerce revenues were approximately 9% and 7% of the Aaron's Business total lease revenues and fees during the years ended December 31, 2019 and 2018, respectively.
Operating Expenses
Information about certain significant components of operating expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2019 vs. 2018
|
(In Thousands)
|
2019
|
|
2018
|
|
$
|
|
%
|
Personnel Costs
|
$
|
706,843
|
|
|
$
|
664,412
|
|
|
$
|
42,431
|
|
|
6.4
|
%
|
Occupancy Costs
|
230,244
|
|
|
223,304
|
|
|
6,940
|
|
|
3.1
|
|
Provision for Lease Merchandise Write-Offs
|
251,419
|
|
|
192,317
|
|
|
59,102
|
|
|
30.7
|
|
Bad Debt Expense
|
1,337
|
|
|
227,960
|
|
|
(226,623
|
)
|
|
(99.4
|
)
|
Shipping and Handling
|
74,264
|
|
|
75,211
|
|
|
(947
|
)
|
|
(1.3
|
)
|
Advertising
|
44,023
|
|
|
37,718
|
|
|
6,305
|
|
|
16.7
|
|
Provision for Loan Losses
|
21,667
|
|
|
21,063
|
|
|
604
|
|
|
2.9
|
|
Intangible Amortization
|
35,557
|
|
|
32,985
|
|
|
2,572
|
|
|
7.8
|
|
Professional Services
|
35,975
|
|
|
35,330
|
|
|
645
|
|
|
1.8
|
|
Other Operating Expenses
|
123,520
|
|
|
108,123
|
|
|
15,397
|
|
|
14.2
|
|
Operating Expenses
|
$
|
1,524,849
|
|
|
$
|
1,618,423
|
|
|
$
|
(93,574
|
)
|
|
(5.8
|
)%
|
As a percentage of total revenues, operating expenses decreased to 38.6% in 2019 from 42.3% in 2018. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases, operating expenses as a percentage of total revenues remained consistent at 38.6% for both 2019 and 2018.
Personnel costs increased by $24.3 million at our Progressive Leasing segment and by $19.5 million in our Aaron's Business segment. The increase in personnel costs is due to hiring to support the growth of Progressive Leasing and the Aaron's Business transformation initiatives and the Aaron's Business acquisition of 152 stores during 2018, partially offset by the reduction of store support center and field support staff from our Aaron's Business restructuring programs in 2018 and 2019.
Occupancy costs increased primarily due to the acquisition of franchisee stores, partially offset by the closure of underperforming stores as part of our Aaron's Business restructuring actions.
The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment increased to 7.2% in 2019 from 7.0% in 2018, calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases. The provision for lease merchandise write-offs as a percentage of lease revenues and fees for the Aaron’s Business increased to 6.2% in 2019 compared to 4.6% in 2018. This increase in 2019 is due to the lower collections activity resulting from the redeployment of store labor towards enhanced sales activities, an increase in the number and type of promotional offerings, higher ticket leases, store closure activity and an increasing mix of e-commerce as a percentage of revenues.
Bad debt expense decreased during the year ended December 31, 2019. As discussed above, the Company's adoption of ASC 842 resulted in the Company classifying Progressive Leasing bad debt expense, which is reported within operating expenses in 2018 and prior periods, as a reduction of lease revenue and fees within the consolidated statements of earnings beginning January 1, 2019. The bad debt expense for the year ended December 31, 2019 relates to uncollectible merchant accounts receivable for cardholder refunded charges at Vive.
Advertising expense increased during 2019 due to the Aaron's Business rebranding campaign and direct response marketing initiatives.
Intangible amortization expense increased primarily due to additional intangible assets recorded as a result of the acquisitions of 152 franchised stores during 2018.
Other operating expenses increased during 2019 due to higher merchant expenses at Progressive Leasing resulting from growth in invoice volume and higher software licensing expense.
Other Costs and Expenses
Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 53.3% from 49.3% 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 was 67.9% in 2019 compared to 68.8% in 2018, calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases, due to a decrease in early buyouts, which have a lower margin. Aaron's Business depreciation of lease merchandise as a percentage of Aaron's Business lease revenues and fees decreased to 33.6% in 2019 from 33.8% in 2018.
Retail cost of sales. Retail cost of sales as a percentage of retail sales decreased to 62.4% from 63.4% primarily due to lower inventory purchase cost during 2019 as compared to 2018, partially offset by higher sales price discounting of pre-leased merchandise during 2019.
Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales decreased to 80.3% from 84.0% primarily due to lower inventory purchase cost during 2019 as compared to 2018.
Restructuring expenses, net. Restructuring activity for the year ended December 31, 2019 resulted in expenses of $40.0 million, which were primarily to record closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the closure of one of our store support buildings, workforce reductions, and other impairment charges.
Legal and regulatory expense. Legal and regulatory expense for the year ended December 31, 2019 relates to $179.3 million in regulatory charges and legal expenses incurred related to Progressive Leasing's tentative settlement of the FTC matter.
Other Operating Income, Net
Information about the components of other operating income, net is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2019 vs. 2018
|
(In Thousands)
|
2019
|
|
2018
|
|
$
|
|
%
|
Net losses (gains) on sales of stores
|
$
|
4
|
|
|
$
|
(185
|
)
|
|
$
|
189
|
|
|
nmf
|
Net gains on sales of delivery vehicles
|
(1,233
|
)
|
|
(722
|
)
|
|
(511
|
)
|
|
(70.8
|
)
|
Gains on insurance recoveries
|
(4,520
|
)
|
|
(1,094
|
)
|
|
(3,426
|
)
|
|
nmf
|
Gains on asset dispositions and assets held for sale, net of impairment charges
|
(6,180
|
)
|
|
(115
|
)
|
|
(6,065
|
)
|
|
nmf
|
Other Operating Income, Net
|
$
|
(11,929
|
)
|
|
$
|
(2,116
|
)
|
|
$
|
(9,813
|
)
|
|
nmf
|
nmf—Calculation is not meaningful
In 2019, other operating income, net of $11.9 million included gains from the sale of various real estate properties of $7.4 million and gains on insurance recoveries of $4.5 million related to payments received from insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of the related property insurance receivables.
Operating Profit
Interest expense. Interest expense increased to $17.0 million in 2019 from $16.4 million in 2018 due primarily to a higher outstanding debt balance during 2019.
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.
Other non-operating income (expense), net. Other non-operating income (expense), net includes the impact of foreign currency remeasurement, as well as net gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company’s deferred compensation plan. Foreign currency remeasurement net losses resulting from changes in the value of the U.S. dollar against the British pound and Canadian dollar were not significant in 2019 or 2018. The changes in the cash surrender value of Company-owned life insurance resulted in net gains of $2.1 million during 2019 and net losses of $1.2 million during 2018.
Earnings (Loss) Before Income Taxes
Information about our earnings (loss) before income tax expense by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2019 vs. 2018
|
(In Thousands)
|
2019
|
|
2018
|
|
$
|
|
%
|
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE:
|
|
|
|
|
|
|
|
Progressive Leasing
|
$
|
55,711
|
|
|
$
|
175,015
|
|
|
$
|
(119,304
|
)
|
|
(68.2
|
)%
|
Aaron’s Business
|
46,731
|
|
|
84,683
|
|
|
(37,952
|
)
|
|
(44.8
|
)
|
Vive
|
(9,654
|
)
|
|
(7,494
|
)
|
|
(2,160
|
)
|
|
(28.8
|
)
|
Total Earnings Before Income Tax Expense
|
$
|
92,788
|
|
|
$
|
252,204
|
|
|
$
|
(159,416
|
)
|
|
(63.2
|
)%
|
The factors impacting the change in earnings (loss) before income tax expense are discussed above.
Income Tax Expense
Income tax expense increased to $61.3 million for the year ended December 31, 2019 compared to $56.0 million for 2018 due to an increase in the effective tax rate to 66.1% in 2019 from 22.2% in 2018. The increase in the effective tax rate for the year ended December 31, 2019 is primarily due to a $175.0 million non-deductible regulatory charge related to Progressive Leasing's tentative settlement of the FTC matter.
Overview of Financial Position
The major changes in the consolidated balance sheet from December 31, 2018 to December 31, 2019, include:
|
|
•
|
Cash and cash equivalents increased $42.5 million to $57.8 million at December 31, 2019. For additional information, refer to the "Liquidity and Capital Resources" section below.
|
|
|
•
|
Lease merchandise increased $114.9 million due primarily to increases at Progressive Leasing to support higher invoice volume, partially offset by a reduction in lease merchandise at the Aaron's Business as a result of the 2019 store closures.
|
|
|
•
|
As a result of the adoption of ASC 842 as of January 1, 2019, the Company has operating lease right-of-use assets and operating lease liabilities of $329.2 million and $369.4 million, respectively, as of December 31, 2019.
|
|
|
•
|
Income tax receivable decreased $10.5 million to $18.7 million due primarily to net income tax refunds received and current tax expense recognized during the year ended December 31, 2019.
|
|
|
•
|
Accounts payable and accrued expenses decreased $20.3 million. This decrease is primarily due to the transition to ASC 842, which resulted in the remaining balances of the Company's deferred rent, lease incentives, and closed store reserve, which were previously recorded within accounts payable and accrued expenses, being reclassified as a reduction to the operating lease right-of-use asset in the accompanying consolidated balance sheet.
|
|
|
•
|
Accrued regulatory expense of $175.0 million at December 31, 2019 relates to Progressive Leasing's tentative settlement of the FTC matter.
|
|
|
•
|
Debt decreased $83.7 million to $341.0 million at December 31, 2019 due primarily to scheduled repayments of $60.0 million on the Company’s unsecured notes and net repayments of $21.6 million on the Company's term loan and revolving credit facility. Refer to the "Liquidity and Capital Resources" section below for further details regarding the Company’s financing arrangements.
|
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 Progressive Leasing continues 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, including leasehold improvements for our next generation store concepts; (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 Vive; 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;
|
As of December 31, 2019, the Company had $57.8 million of cash and $386.2 million of availability under its revolving credit facility.
As discussed in Note 10 in the accompanying consolidated financial statements, the Company has accrued $175.0 million related to Progressive Leasing's tentative settlement of the FTC matter. Upon final settlement with the FTC, the Company anticipates satisfying the obligation with a combination of cash on hand and borrowings available under our revolving credit facility.
Cash Provided by Operating Activities
Cash provided by operating activities was $317.2 million and $356.5 million during the years ended December 31, 2019 and 2018, respectively. The $39.3 million decrease in operating cash flows was primarily driven by net income tax refunds of $0.7 million during 2019 compared to net income tax refunds of $63.8 million in 2018, partially offset by an increase in operating cash flows driven by the growth of Progressive Leasing. Other changes in cash provided by operating activities are discussed above in our discussion of results for the year ended December 31, 2019.
Cash Used in Investing Activities
Cash used in investing activities was $106.3 million and $263.1 million during the years ended December 31, 2019 and 2018, respectively.
The $156.9 million decrease in investing cash outflows in 2019 as compared to 2018 was primarily due to: (i) cash outflows of $14.3 million for the acquisitions of businesses and contracts throughout 2019 as compared to cash outflows of approximately $190 million for the acquisitions of franchisees throughout 2018 and (ii) $4.9 million higher proceeds from the sale of property, plant and equipment in 2019 as compared to 2018; partially offset by (iii) $14.1 million of additional cash outflows related to the purchase of property, plant and equipment and (iv) $9.6 million higher net cash outflows for investments in Vive loans receivable in 2019 as compared to 2018.
Cash Used in Financing Activities
Cash used in financing activities was $168.6 million and $129.0 million during the years ended December 31, 2019 and 2018, respectively. The $39.6 million increase in financing cash outflows in 2019 as compared to 2018 was primarily due to net repayments of outstanding debt of $84.5 million in 2019 as compared to net borrowings of $55.9 million in 2018 partially offset by a $99.5 million decrease in Company repurchases of outstanding common stock in 2019 as compared to 2018.
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, 2019, the Company purchased 1,156,184 shares for $69.3 million. During the year ended December 31, 2018, the Company purchased 3,749,493 shares for $168.7 million. As of December 31, 2019, we have the authority to purchase additional shares up to our remaining authorization limit of $262.0 million.
Dividends
We have a consistent history of paying dividends, having paid dividends for 32 consecutive years. Our annual common stock dividend was $0.1450 per share, $0.1250 per share and $0.1125 per share in 2019, 2018 and 2017, respectively, and resulted in aggregate dividend payments of $9.4 million, $6.2 million and $8.0 million in 2019, 2018 and 2017, respectively. At its November 2019 meeting, our Board of Directors increased the quarterly dividend by 14.3%, raising it to $0.040 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, 2019, $219.4 million in term loans were outstanding under the revolving credit and term loan agreement (the "Credit Agreement"). The total available credit under our revolving credit facility as of December 31, 2019 was $386.2 million. The Credit 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 January 21 and February 19, 2020, the Company amended its Credit Agreement to, among other changes: (i) increase the revolving credit commitment from $400.0 million to $500.0 million, (ii) increase borrowings under the term loan to $225.0 million, (iii) extend the maturity date from September 18, 2022 to January 21, 2025, (iv) amend the definition of adjusted EBITDA to exclude certain charges, and (v) modify certain other terms and conditions. The amended agreement continues to provide for quarterly repayment installments of $5.6 million under the $225.0 million term loan, with the installments beginning on December 31, 2020, with the remaining principal balance payable upon the maturity date of January 21, 2025. Prior to the amendment, the term loan outstanding balance was $219.4 million as of December 31, 2019.
As of December 31, 2019, the Company had outstanding $120.0 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, 2019 and believe that we will continue to be in compliance in the future.
Commitments
Income Taxes. During the year ended December 31, 2019, we received net tax refunds of $0.7 million. During the year ended December 31, 2020, we anticipate making estimated cash payments of $18.0 million for U.S. federal income taxes, $2.0 million for Canadian income taxes and $16.0 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 $321.0 million as of December 31, 2019, of which approximately 88% is expected to reverse in 2020 and most of the remainder during 2021. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures after December 31, 2019. During the year ended December 31, 2020, the Company estimates it will receive $0.2 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 finance 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, 2019 are shown in the table set forth below under "Contractual Obligations and Commitments."
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement with one of the banks in our Credit Facilities, which had a total maximum commitment amount of $40.0 million as of December 31, 2019. On January 21 and February 19, 2020, the Company further amended the franchisee loan agreement to, among other changes: (i) reduce the maximum facility commitment from $40.0 million to $35.0 million, (ii) extend the commitment termination date thereunder from October 22, 2020 to January 20, 2021, (iii) amend the definition of adjusted EBITDA to exclude certain charges, and (iv) modify certain other terms and conditions. The terms of the loan facility include an option to further reduce the maximum facility commitment amount by providing written notice to the lender, which the Company subsequently exercised on February 11, 2020 to reduce the facility commitment to $25.0 million.
At December 31, 2019, the total amount that we might be obligated to repay in the event franchisees defaulted was $29.4 million, all of which would be due within the next two years. 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, the Company's losses associated with the program have been immaterial. The Company believes that any future amounts to be funded by the Company in connection with these guarantees will be immaterial. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the consolidated balance sheets, was $0.3 million as of December 31, 2019 and 2018, respectively.
Contractual Obligations and Commitments. The following table shows the approximate contractual obligations, including interest, and commitments to make future payments as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Total
|
|
Period Less
Than 1 Year
|
|
Period 1-3
Years
|
|
Period 3-5
Years
|
|
Period Over
5 Years
|
Debt, Excluding Finance Leases
|
$
|
339,375
|
|
|
$
|
82,500
|
|
|
$
|
256,875
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance Leases
|
2,670
|
|
|
1,821
|
|
|
849
|
|
|
—
|
|
|
—
|
|
Interest Obligations
|
21,274
|
|
|
10,837
|
|
|
10,437
|
|
|
—
|
|
|
—
|
|
Operating Leases
|
404,230
|
|
|
108,089
|
|
|
161,584
|
|
|
81,118
|
|
|
53,439
|
|
Purchase Obligations
|
30,886
|
|
|
18,348
|
|
|
12,538
|
|
|
—
|
|
|
—
|
|
Severance and Retirement Obligations
|
829
|
|
|
769
|
|
|
24
|
|
|
24
|
|
|
12
|
|
Total Contractual Cash Obligations
|
$
|
799,264
|
|
|
$
|
222,364
|
|
|
$
|
442,307
|
|
|
$
|
81,142
|
|
|
$
|
53,451
|
|
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, 2019 to calculate these payments. Our variable rate debt at December 31, 2019 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, 2019 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 3.05% at December 31, 2019. Future interest payments may be different depending on future borrowing activity and interest rates.
Operating lease obligations represent fixed amounts scheduled to be paid through the remaining lease term for real estate, vehicle, and equipment lease contracts. These amounts do not include estimated or actual future sublease receipts.
Purchase obligations are primarily related to certain consulting agreements, 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 various 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, 2019 were approximately $310.4 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 Vive business, has unfunded lending commitments totaling approximately $225.0 million and $316.4 million as of December 31, 2019 and 2018, 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 $0.4 million and $0.5 million as of December 31, 2019 and 2018, respectively.
Legal and Regulatory. As discussed in Note 10 in the accompanying consolidated financial statements, the Company has accrued $175.0 million related to Progressive Leasing's tentative settlement of the FTC matter.
Critical Accounting Policies
We discuss the most critical accounting policies below. For a discussion of the Company’s significant accounting policies, see Note 1 in the accompanying consolidated financial statements.
Revenue Recognition
Progressive Leasing bills customers in arrears and therefore, 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, 2019 and 2018, we had deferred revenue representing cash collected in advance of being due or otherwise earned totaling $89.6 million and $74.6 million, respectively, and leases accounts receivable, net of an allowance for doubtful accounts, based on historical collection rates, of $74.9 million and $59.9 million, respectively. Our accounts receivable allowance, which relates primarily to our Progressive Leasing segment and, to a lesser extent, our Aaron's Business operations, is estimated using one year of historical write-off and collection experience. Other qualitative factors, such as seasonality and current business trends, are considered in estimating the allowance. For customer agreements that are past due, the Company's policy is to write-off lease receivables after 120 days and 60 days for Progressive Leasing and Aaron's Business, respectively.
For the year ended December 31, 2019 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 statements of earnings. During the year ended December 31, 2019, the Company adopted ASU 2016-02, Leases ("ASC 842"), which resulted in the Progressive Leasing provision for returns and uncollectible renewal payments being recorded as a reduction of lease revenue and fees within the consolidated statements of earnings beginning January 1, 2019. The provision for returns and uncollectible renewal payments for periods prior to 2019 are reported herein as bad debt expense within operating expenses in the consolidated statements of earnings.
Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Generally, the transfer of control occurs near or at the point of sale for retail sales. 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.
Vive 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. Vive 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 Vive’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
The Company’s Progressive Leasing segment, at which substantially all merchandise is on lease, depreciates merchandise on a straight-line basis to a 0% salvage value generally over 12 months. 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 on a straight-line basis 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.
All lease merchandise is available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable. For merchandise on lease, we record a provision for write-offs using the allowance method, which primarily relates to our Progressive Leasing operations and, to a lesser extent, our Aaron's Business operations. The allowance for lease merchandise write-offs estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period. The Company estimates its allowance for lease merchandise write-offs using one year of historical write-off experience. Other qualitative factors, such as seasonality and current business trends, are considered in estimating the allowance. For customer agreements that are past due, the Company's policy is to write-off lease merchandise after 120 days and 60 days for Progressive Leasing and Aaron's Business, respectively. As of December 31, 2019 and 2018, the allowance for lease merchandise write-offs was $61.2 million and $46.7 million, respectively. The provision for lease merchandise write-offs was $251.4 million and $192.3 million for the years ended December 31, 2019 and 2018, respectively, and is included in operating expenses in the accompanying consolidated statements of earnings.
For merchandise not on lease, our policies generally require weekly merchandise counts at our Aaron's Business 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 merchandise levels and mix by division, store and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to net realizable value or written off.
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, 2019 and determined that no impairment had occurred.
The following table presents the carrying amount of goodwill and other intangible assets, net:
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December 31,
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(In Thousands)
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2019
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Goodwill
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$
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736,582
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Other Indefinite-Lived Intangible Assets
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53,000
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Definite-Lived Intangible Assets, Net
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137,796
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Goodwill and Other Intangibles, Net
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$
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927,378
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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, 2019, the Company had three operating segments and reporting units: Progressive Leasing, Aaron’s Business, and Vive. The following is a summary of the Company’s goodwill by reporting unit:
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December 31,
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(In Thousands)
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2019
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Aaron’s Business
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$
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447,781
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Progressive Leasing
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288,801
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Total
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$
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736,582
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We performed our annual goodwill impairment testing as of October 1, 2019. 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, 2019, the Company performed a qualitative assessment for the goodwill of the Progressive Leasing reporting unit and concluded no indications of impairment existed. The Company may be required to recognize material impairments to the Progressive Leasing's goodwill balance in the future if: (i) actual results are unfavorable to the Company's estimates and assumptions used to calculate the most recent fair value analysis; and/or (ii) the Company experiences significant deterioration of macroeconomic market conditions in which it operates. The Company determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2019 that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
As of October 1, 2019, the Company, with the assistance of a third-party valuation specialist, performed a quantitative assessment for the goodwill of the Aaron’s Business reporting unit, which entailed an assessment of the reporting unit’s fair value relative to the carrying value that was derived using a combination of both income and market approaches. The fair value measurement involved significant unobservable inputs (Level 3 inputs). Our income approach utilized the discounted future expected cash flows, which required assumptions about short-term and long-term revenue growth rates, operating margins, capital requirements, and a weighted-average cost of capital. Our income approach reflects assumptions and estimates of future cash flows related to our strategy to reposition and reinvest in our next generation store concepts to adapt to our changing competitive environment.
Our market approach, which includes the guideline public company method, utilized pricing multiples derived from an analysis of comparable publicly traded companies. We believe the comparable companies we evaluate as marketplace participants serve as an appropriate reference when calculating fair value because those companies have similar risks, participate in similar markets, provide similar products and services for their customers and compete with us directly.
Based on testing as of October 1, 2019, the fair value of the Aaron’s Business reporting unit exceeded its carrying value by a substantial amount and thus, goodwill is not impaired. The short-term and long-term revenue growth rates, operating margins, capital requirements and weighted-average cost of capital are the assumptions that are most sensitive and susceptible to change as they require significant management judgment. The Company may be required to recognize material impairments to the Aaron's Business goodwill balance in the future if: (i) the Company fails to successfully execute on one or more elements of the Aaron’s Business strategic plan; (ii) actual results are unfavorable to the Company's estimates and assumptions used to calculate fair value; (iii) the Aaron’s Business carrying value increases, such as through a material franchisee acquisition(s), without an associated increase in the fair value; and/or (iv) the Company experiences significant deterioration of macroeconomic market conditions in which it operates. The Company determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2019 that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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 rates 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 $21.7 million and $21.1 million for the years ended December 31, 2019 and 2018, respectively. The allowance for loan losses was $14.9 million and $13.0 million as of December 31, 2019 and 2018, respectively.
Leases and Right-of-Use Asset Impairment
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 recorded as reductions of the operating lease right-of-use asset within the consolidated balance sheet and are amortized within operating expenses over the lease term in the consolidated statements of earnings.
From time to time, we close or consolidate stores. Our primary costs associated with closing stores are the future lease payments and related commitments. Prior to the 2019 adoption of ASC 842, the Company recorded 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 savings from lease buyouts or terminations and sublease receipts based upon historical experience. As of December 31, 2018, this amount was $10.7 million and was recorded as a liability in accounts payable and accrued expenses on the consolidated balance sheet. Upon the 2019 adoption of ASC 842, this amount was reclassified to a reduction of operating lease right-of-use assets. Effective January 1, 2019, the Company began recording estimates of future obligations related to closed stores as described above as impairments of the right-of-use asset for all subsequent store closures.
Due to changes in market conditions, our estimates related to future lease buyouts and sublease receipts may change. Excluding actual and estimated sublease receipts, our future obligations related to closed stores on an undiscounted basis were $36.5 million and $23.7 million as of December 31, 2019 and 2018, 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 $43.3 million and $39.7 million at December 31, 2019 and 2018, 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 $22.5 million and $24.9 million at December 31, 2019 and 2018, 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, 2019.
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.
Use of Non-GAAP Financial Information
The "Results of Operations" sections above disclose non-GAAP revenues as if the lessor accounting impacts of ASC 842 were in effect for the twelve months ended December 31, 2018. "Total Revenues, net of Progressive Bad Debt Expense" and the related percentages for the comparable prior year periods are a supplemental measure of our performance that are not calculated in accordance with generally accepted accounting principles in the United States ("GAAP") in place during 2018. These non-GAAP measures assume that Progressive bad debt expense is recorded as a reduction to lease revenues and fees instead of within operating expenses in 2018.
Management believes these non-GAAP measures for 2018 provide relevant and useful information for users of our financial statements, as it provides comparability with the financial results we are reporting beginning in 2019 when ASC 842 became effective and we began reporting Progressive bad debt expense as a reduction to lease revenues and fees. We believe these non-GAAP measures provide management and investors the ability to better understand the results from the primary operations of our business in 2019 compared with 2018 by classifying Progressive bad debt expense consistently between the periods.
These non-GAAP financial measures should not be used as a substitute for, or considered superior to, measures of financial performance prepared in accordance with GAAP.
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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 20, 2020 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.
Adoption of ASU 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02, Leases (ASC 842), as amended, effective January 1, 2019, using the modified retrospective approach.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Allowance for accounts receivables
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Description of the Matter
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At December 31, 2019, the Company’s consolidated allowance for accounts receivable related to operating leases was $76.3 million. As discussed in Note 1 to the consolidated financial statements, management calculates and records an allowance for uncollectible operating lease accounts receivables, which primarily relates to the Progressive Leasing segment. For the Progressive Leasing segment, the Company determines the allowance for uncollectible accounts receivable by considering, among other factors, historical charge-offs of operating lease receivables by aging category and applying its historical experience to the current balances as of each period-end date. The Company will also consider any known issues with particular customers or customer classes that could materially impact the allowance to estimate the loss on operating lease receivables.
Auditing management’s estimates of the allowance for accounts receivable for the Progressive Leasing segment was judgmental due to the necessary assessment by management of whether historical collection experience is representative of current circumstances, including whether the delinquency experience is indicative of incurred but not yet identified losses in the operating lease portfolio.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the measurement and valuation processes for the allowance for the Progressive Leasing operating lease accounts receivable. For example, we tested controls over management's review of the allowance calculation, methodologies applied, and significant assumptions used, including their review of the historical operating lease portfolio write-off trends by accounts receivable aging category.
To test the estimated allowance for uncollectible accounts receivable for the Progressive Leasing segment, our audit procedures included, among others, evaluating the Company's significant assumptions, including the utilization of historical collection, delinquency and charge-off trends, and testing the completeness and accuracy of the underlying historical data used by the Company and its application to the current balances. We tested the accuracy of historical charge-off rates compared to the various delinquency categories and analyzed whether the historical loss data was representative of current circumstances by comparing to recent trends in accounts receivable charge-offs. We also inspected and reperformed the Company’s sensitivity analysis of the estimate, evaluated the length of the historical periods utilized by the Company and considered alternative assumptions to evaluate the allowance for uncollectible accounts receivable. In addition to the sensitivity analysis, we assessed trends in the historical aging categories of outstanding receivables utilized in the allowance estimate as compared to the current period.
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Allowance for lease merchandise write-offs
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Description of the Matter
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At December 31, 2019, the Company’s consolidated estimate for lease merchandise write-offs was $61.2 million, representing impairments of unrecoverable merchandise on lease. As discussed in Note 1 to the consolidated financial statements, management records a provision for lease merchandise write-offs on the allowance method to recognize merchandise losses incurred, but not yet identified, which primarily relates to the Progressive Leasing segment. This estimate of the lease merchandise losses incurred, but not yet identified by management, as of the end of the accounting period, for the Progressive Leasing segment, is primarily based on historical write-off experience applied to the current lease merchandise balances as of each period-end date.
Auditing management’s estimate of the lease merchandise write-offs for the Progressive Leasing segment was judgmental due to the assessment of whether historical write-offs of unrecoverable lease merchandise are representative of current circumstances and indicative of incurred, but not yet identified, losses in the operating lease portfolio of leased merchandise.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the measurement and valuation processes for the estimate of lease merchandise write-offs and recovery rates for the Progressive Leasing segment. For example, we tested controls over management's review of the data used in the calculations, the methodologies selected, and significant assumptions that included the write-off and recovery history of lease merchandise, the lookback analysis of actual results from prior periods, and the number and recency of historical periods of time evaluated to estimate the write-offs required.
To test the estimated lease merchandise write-offs for the Progressive Leasing segment, our audit procedures included, among others, evaluating the Company's selection of the estimation methodology, significant assumptions, including estimates of unrecoverable lease merchandise using historical information from the periods of time utilized in its estimate calculations, the appropriateness of the historical write-off percentages applied to the current portfolio of merchandise on lease, and the completeness and accuracy of the underlying data used by the Company in its estimate calculations. We tested historical write-offs of lease merchandise identified by management to be unrecoverable by testing the completeness and accuracy of the underlying historical data, which included historical write-offs and recoveries, and further analyzed whether the historical loss data was representative of recent write-offs incurred in the merchandise on lease portfolios by comparing the period-end balances to actual historical lease merchandise write-offs. Additionally, we performed sensitivity analyses of historical write-offs to evaluate the changes in the estimate of probable losses that would result from reasonable changes in the assumptions, such as evaluating the impact of utilizing different historical time periods, and including consideration of the Company’s customer, retail partners and products offered or on lease to evaluate the Company’s conclusions on qualitative factors considered.
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Goodwill
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Description of the Matter
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As discussed in Note 1 of the consolidated financial statements, the Company’s goodwill is assigned to its reporting units and tested for impairment at the reporting unit level at least annually, as well as at interim dates upon an indicator of impairment. At December 31, 2019, the Company’s goodwill balance was $447.8 million at the Aaron’s Business reporting unit.
Auditing management’s annual goodwill impairment test for the Aaron’s Business reporting unit was complex and judgmental due to the significant estimation required in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to certain assumptions, such as the weighted average cost of capital, as well as others used to project future cash flows, such as EBITDA, long-term growth rates, and capital expenditures. These assumptions were affected by management’s business plans and expectations about future market conditions.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process for the Aaron’s Business reporting unit. For example, we tested controls over management's review of the valuation model and the significant assumptions used, as discussed above, to estimate the fair value of the reporting unit.
To test the estimated fair value of the Company’s Aaron’s Business reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, and other relevant factors. We assessed the historical accuracy of management’s previous projections and forecasts and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. We also involved our valuation specialists to assist in our evaluation of the valuation methodology and testing of the assumptions used, as described above, to estimate the fair value of the reporting unit. In addition, we tested the reconciliation of the aggregate estimated fair value of the Company’s reporting units to the market capitalization of the Company.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1991.
Atlanta, Georgia
February 20, 2020
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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and our report dated February 20, 2020 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 20, 2020
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, 2019. 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, 2019, the Company’s internal control over financial reporting was effective.
The Company’s internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report dated February 20, 2020, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
|
(In Thousands, Except Share Data)
|
ASSETS:
|
|
|
|
Cash and Cash Equivalents
|
$
|
57,755
|
|
|
$
|
15,278
|
|
Accounts Receivable (net of allowances of $76,293 in 2019 and $62,704 in 2018)
|
104,159
|
|
|
98,159
|
|
Lease Merchandise (net of accumulated depreciation and allowances of $896,056 in 2019 and $816,928 in 2018)
|
1,433,417
|
|
|
1,318,470
|
|
Loans Receivable (net of allowances and unamortized fees of $21,134 in 2019 and $19,941 in 2018)
|
75,253
|
|
|
76,153
|
|
Property, Plant and Equipment, Net
|
237,666
|
|
|
229,492
|
|
Operating Lease Right-of-Use Assets
|
329,211
|
|
|
—
|
|
Goodwill
|
736,582
|
|
|
733,170
|
|
Other Intangibles, Net
|
190,796
|
|
|
228,600
|
|
Income Tax Receivable
|
18,690
|
|
|
29,148
|
|
Prepaid Expenses and Other Assets
|
114,271
|
|
|
98,222
|
|
Total Assets
|
$
|
3,297,800
|
|
|
$
|
2,826,692
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY:
|
|
|
|
Accounts Payable and Accrued Expenses
|
$
|
272,816
|
|
|
$
|
293,153
|
|
Accrued Regulatory Expense
|
175,000
|
|
|
—
|
|
Deferred Income Taxes Payable
|
310,395
|
|
|
267,500
|
|
Customer Deposits and Advance Payments
|
91,914
|
|
|
80,579
|
|
Operating Lease Liabilities
|
369,386
|
|
|
—
|
|
Debt
|
341,030
|
|
|
424,752
|
|
Total Liabilities
|
1,560,541
|
|
|
1,065,984
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
Shareholders’ Equity:
|
|
|
|
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at December 31, 2019 and 2018; Shares Issued: 90,752,123 at December 31, 2019 and 2018
|
45,376
|
|
|
45,376
|
|
Additional Paid-in Capital
|
290,229
|
|
|
278,922
|
|
Retained Earnings
|
2,029,613
|
|
|
2,005,344
|
|
Accumulated Other Comprehensive Loss
|
(19
|
)
|
|
(1,087
|
)
|
|
2,365,199
|
|
|
2,328,555
|
|
Less: Treasury Shares at Cost
|
|
|
|
Common Stock: 24,034,053 Shares at December 31, 2019 and 23,567,979 at December 31, 2018
|
(627,940
|
)
|
|
(567,847
|
)
|
Total Shareholders’ Equity
|
1,737,259
|
|
|
1,760,708
|
|
Total Liabilities & Shareholders’ Equity
|
$
|
3,297,800
|
|
|
$
|
2,826,692
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In Thousands, Except Per Share Data)
|
REVENUES:
|
|
|
|
|
|
Lease Revenues and Fees
|
$
|
3,698,491
|
|
|
$
|
3,506,418
|
|
|
$
|
3,000,231
|
|
Retail Sales
|
38,474
|
|
|
31,271
|
|
|
27,465
|
|
Non-Retail Sales
|
140,950
|
|
|
207,262
|
|
|
270,253
|
|
Franchise Royalties and Fees
|
33,432
|
|
|
44,815
|
|
|
48,278
|
|
Interest and Fees on Loans Receivable
|
35,046
|
|
|
37,318
|
|
|
34,925
|
|
Other
|
1,263
|
|
|
1,839
|
|
|
2,556
|
|
|
3,947,656
|
|
|
3,828,923
|
|
|
3,383,708
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
Depreciation of Lease Merchandise
|
1,972,358
|
|
|
1,727,904
|
|
|
1,448,631
|
|
Retail Cost of Sales
|
24,024
|
|
|
19,819
|
|
|
17,578
|
|
Non-Retail Cost of Sales
|
113,229
|
|
|
174,180
|
|
|
241,356
|
|
Operating Expenses
|
1,524,849
|
|
|
1,618,423
|
|
|
1,403,985
|
|
Restructuring Expenses, Net
|
39,990
|
|
|
1,105
|
|
|
17,994
|
|
Legal and Regulatory Expense
|
179,261
|
|
|
—
|
|
|
—
|
|
Other Operating Income, Net
|
(11,929
|
)
|
|
(2,116
|
)
|
|
(535
|
)
|
|
3,841,782
|
|
|
3,539,315
|
|
|
3,129,009
|
|
OPERATING PROFIT
|
105,874
|
|
|
289,608
|
|
|
254,699
|
|
Interest Income
|
1,790
|
|
|
454
|
|
|
1,835
|
|
Interest Expense
|
(16,967
|
)
|
|
(16,440
|
)
|
|
(20,538
|
)
|
Impairment of Investment
|
—
|
|
|
(20,098
|
)
|
|
—
|
|
Other Non-Operating Income (Expense), Net
|
2,091
|
|
|
(1,320
|
)
|
|
3,581
|
|
EARNINGS BEFORE INCOME TAX EXPENSE (BENEFIT)
|
92,788
|
|
|
252,204
|
|
|
239,577
|
|
INCOME TAX EXPENSE (BENEFIT)
|
61,316
|
|
|
55,994
|
|
|
(52,959
|
)
|
NET EARNINGS
|
$
|
31,472
|
|
|
$
|
196,210
|
|
|
$
|
292,536
|
|
EARNINGS PER SHARE
|
$
|
0.47
|
|
|
$
|
2.84
|
|
|
$
|
4.13
|
|
EARNINGS PER SHARE ASSUMING DILUTION
|
$
|
0.46
|
|
|
$
|
2.78
|
|
|
$
|
4.06
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Net Earnings
|
$
|
31,472
|
|
|
$
|
196,210
|
|
|
$
|
292,536
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
1,068
|
|
|
(1,861
|
)
|
|
1,305
|
|
Total Other Comprehensive Income (Loss)
|
1,068
|
|
|
(1,861
|
)
|
|
1,305
|
|
Comprehensive Income
|
$
|
32,540
|
|
|
$
|
194,349
|
|
|
$
|
293,841
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
Common Stock
|
|
Additional
Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Income (Loss)
|
Total Shareholders’ Equity
|
(In Thousands, Except Per Share)
|
Shares
|
|
Amount
|
|
|
|
|
Balance, January 1, 2017
|
(19,304
|
)
|
|
$
|
(352,742
|
)
|
|
$
|
45,376
|
|
|
$
|
254,512
|
|
|
$
|
1,534,983
|
|
|
$
|
(531
|
)
|
$
|
1,481,598
|
|
Cash Dividends, $0.1125 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,995
|
)
|
|
—
|
|
(7,995
|
)
|
Stock-Based Compensation
|
3
|
|
|
48
|
|
|
—
|
|
|
25,782
|
|
|
—
|
|
|
—
|
|
25,830
|
|
Reissued Shares
|
529
|
|
|
7,531
|
|
|
—
|
|
|
(10,251
|
)
|
|
—
|
|
|
—
|
|
(2,720
|
)
|
Repurchased Shares
|
(1,961
|
)
|
|
(62,550
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(62,550
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
292,536
|
|
|
—
|
|
292,536
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,305
|
|
1,305
|
|
Balance, December 31, 2017
|
(20,733
|
)
|
|
(407,713
|
)
|
|
45,376
|
|
|
270,043
|
|
|
1,819,524
|
|
|
774
|
|
1,728,004
|
|
Opening Balance Sheet Adjustment - ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,729
|
)
|
|
—
|
|
(1,729
|
)
|
Cash Dividends, $0.125 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,661
|
)
|
|
—
|
|
(8,661
|
)
|
Stock-Based Compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
26,852
|
|
|
—
|
|
|
—
|
|
26,852
|
|
Reissued Shares
|
915
|
|
|
8,601
|
|
|
—
|
|
|
(17,973
|
)
|
|
—
|
|
|
—
|
|
(9,372
|
)
|
Repurchased Shares
|
(3,750
|
)
|
|
(168,735
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(168,735
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
196,210
|
|
|
—
|
|
196,210
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,861
|
)
|
(1,861
|
)
|
Balance, December 31, 2018
|
(23,568
|
)
|
|
(567,847
|
)
|
|
45,376
|
|
|
278,922
|
|
|
2,005,344
|
|
|
(1,087
|
)
|
1,760,708
|
|
Opening Balance Sheet Adjustment - ASC 842
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,592
|
|
|
—
|
|
2,592
|
|
Cash Dividends, $0.145 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,795
|
)
|
|
—
|
|
(9,795
|
)
|
Stock-Based Compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
25,758
|
|
|
—
|
|
|
—
|
|
25,758
|
|
Reissued Shares
|
690
|
|
|
9,162
|
|
|
—
|
|
|
(14,451
|
)
|
|
—
|
|
|
—
|
|
(5,289
|
)
|
Repurchased Shares
|
(1,156
|
)
|
|
(69,255
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(69,255
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,472
|
|
|
—
|
|
31,472
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,068
|
|
1,068
|
|
Balance, December 31, 2019
|
(24,034
|
)
|
|
$
|
(627,940
|
)
|
|
$
|
45,376
|
|
|
$
|
290,229
|
|
|
$
|
2,029,613
|
|
|
$
|
(19
|
)
|
$
|
1,737,259
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net Earnings
|
$
|
31,472
|
|
|
$
|
196,210
|
|
|
$
|
292,536
|
|
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
Depreciation of Lease Merchandise
|
1,972,358
|
|
|
1,727,904
|
|
|
1,448,631
|
|
Other Depreciation and Amortization
|
105,061
|
|
|
94,150
|
|
|
82,572
|
|
Accounts Receivable Provision
|
322,963
|
|
|
268,088
|
|
|
203,389
|
|
Provision for Credit Losses on Loans Receivable
|
21,667
|
|
|
21,063
|
|
|
20,973
|
|
Stock-Based Compensation
|
26,548
|
|
|
28,182
|
|
|
27,400
|
|
Deferred Income Taxes
|
49,967
|
|
|
48,359
|
|
|
(59,201
|
)
|
Impairment of Assets
|
30,344
|
|
|
20,098
|
|
|
1,968
|
|
Non-Cash Lease Expense
|
114,934
|
|
|
—
|
|
|
—
|
|
Other Changes, Net
|
(9,886
|
)
|
|
(2,198
|
)
|
|
(5,932
|
)
|
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:
|
|
|
|
|
|
Additions to Lease Merchandise
|
(2,484,755
|
)
|
|
(2,234,646
|
)
|
|
(1,976,012
|
)
|
Book Value of Lease Merchandise Sold or Disposed
|
401,960
|
|
|
398,748
|
|
|
415,607
|
|
Accounts Receivable
|
(331,636
|
)
|
|
(270,888
|
)
|
|
(208,947
|
)
|
Prepaid Expenses and Other Assets
|
(25,860
|
)
|
|
5,903
|
|
|
2,711
|
|
Income Tax Receivable
|
10,458
|
|
|
70,875
|
|
|
(88,139
|
)
|
Operating Lease Right-of-Use Assets and Liabilities
|
(124,384
|
)
|
|
—
|
|
|
—
|
|
Accounts Payable and Accrued Expenses
|
20,183
|
|
|
(20,367
|
)
|
|
(2,736
|
)
|
Accrued Regulatory Expense
|
175,000
|
|
|
—
|
|
|
1,314
|
|
Customer Deposits and Advance Payments
|
10,791
|
|
|
5,017
|
|
|
3,001
|
|
Cash Provided by Operating Activities
|
317,185
|
|
|
356,498
|
|
|
159,135
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Investments in Loans Receivable
|
(70,313
|
)
|
|
(64,914
|
)
|
|
(77,951
|
)
|
Proceeds from Loans Receivable
|
53,170
|
|
|
57,328
|
|
|
59,641
|
|
Proceeds from Investments
|
1,212
|
|
|
3,066
|
|
|
2,658
|
|
Outflows on Purchases of Property, Plant & Equipment
|
(92,963
|
)
|
|
(78,845
|
)
|
|
(57,973
|
)
|
Proceeds from Property, Plant, and Equipment
|
14,090
|
|
|
9,191
|
|
|
12,705
|
|
Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired
|
(14,285
|
)
|
|
(189,901
|
)
|
|
(145,558
|
)
|
Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed
|
2,813
|
|
|
942
|
|
|
1,141
|
|
Cash Used in Investing Activities
|
(106,276
|
)
|
|
(263,133
|
)
|
|
(205,337
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
(Repayments) Borrowings on Revolving Facility, Net
|
(16,000
|
)
|
|
16,000
|
|
|
(47,531
|
)
|
Proceeds from Debt
|
—
|
|
|
137,500
|
|
|
15,625
|
|
Repayments on Debt
|
(68,531
|
)
|
|
(97,583
|
)
|
|
(103,129
|
)
|
Acquisition of Treasury Stock
|
(69,255
|
)
|
|
(168,735
|
)
|
|
(62,550
|
)
|
Dividends Paid
|
(9,437
|
)
|
|
(6,243
|
)
|
|
(7,962
|
)
|
Issuance of Stock Under Stock Option Plans
|
7,749
|
|
|
7,975
|
|
|
3,457
|
|
Shares Withheld for Tax Payments
|
(13,038
|
)
|
|
(17,347
|
)
|
|
(6,177
|
)
|
Debt Issuance Costs
|
(40
|
)
|
|
(535
|
)
|
|
(3,130
|
)
|
Cash Used in Financing Activities
|
(168,552
|
)
|
|
(128,968
|
)
|
|
(211,397
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
120
|
|
|
(156
|
)
|
|
75
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
42,477
|
|
|
(35,759
|
)
|
|
(257,524
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
15,278
|
|
|
51,037
|
|
|
308,561
|
|
Cash and Cash Equivalents at End of Year
|
$
|
57,755
|
|
|
$
|
15,278
|
|
|
$
|
51,037
|
|
Net Cash Paid (Received) During the Year:
|
|
|
|
|
|
Interest
|
$
|
16,460
|
|
|
$
|
16,243
|
|
|
$
|
20,492
|
|
Income Taxes
|
$
|
(726
|
)
|
|
$
|
(63,829
|
)
|
|
$
|
98,296
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
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, 2019, the Company’s operating and reportable segments are Progressive Leasing, Aaron’s Business and Vive. As part of a rebranding effort, Dent-A-Med, Inc. ("DAMI") merged into a newly created wholly-owned subsidiary of the Company, Vive Financial, LLC (“Vive”), and began operating under the Vive name effective January 1, 2020. We have updated all disclosures and references of Dent-A-Med, Inc. and/or DAMI in this Annual Report on Form 10-K to reflect the change to Vive.
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions in 46 states and the District of Columbia, including e-commerce merchants. 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.
The following table presents invoice volume for Progressive Leasing:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31 (Unaudited and In Thousands)
|
2019
|
|
2018
|
|
2017
|
Progressive Leasing Invoice Volume1
|
$
|
1,747,902
|
|
|
$
|
1,429,550
|
|
|
$
|
1,160,732
|
|
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, home appliances, consumer electronics and accessories to consumers with a lease-to-own agreement with no credit needed through the Company’s Aaron’s-branded stores in the United States, Canada and Puerto Rico, as well as through its e-commerce platform. 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 bedding and a significant portion of the upholstered furniture leased and sold in Company-operated and franchised stores.
The following table presents store count by ownership type for the Aaron’s Business operations:
|
|
|
|
|
|
|
|
|
|
Stores at December 31 (Unaudited)
|
2019
|
|
2018
|
|
2017
|
Company-operated Aaron's branded Stores
|
1,167
|
|
|
1,312
|
|
|
1,175
|
|
Franchised Stores
|
335
|
|
|
377
|
|
|
551
|
|
Systemwide Stores
|
1,502
|
|
|
1,689
|
|
|
1,726
|
|
Vive partners with merchants to provide a variety of revolving credit products originated through 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting primarily of furniture, appliances, electronics, jewelry and a variety of other products, to its customers for lease under certain terms agreed to by the customer. The Company’s Progressive Leasing segment offers customers of traditional and e-commerce retailers a virtual lease-purchase solution through leases with payment terms that can be renewed up to 12 months. The Company’s Aaron's-branded stores and its e-commerce platform offer leases flexible 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. The agreements are cancelable at any time by either party without penalty.
Progressive Leasing lease revenues are earned prior to the lease payment due date and are recorded net of related sales taxes as earned. Payment due date terms include weekly, bi-weekly, and monthly frequencies. Revenue recorded prior to the payment due date results in unbilled receivables recognized in accounts receivable, net of allowances in the accompanying consolidated balance sheets. Beginning January 1, 2019, Progressive Leasing lease revenues are recorded net of a provision for returns and uncollectible renewal payments.
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. Aaron's Business lease revenues are recorded net of a provision for returns and uncollectible renewal payments.
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. Generally, the transfer of control occurs near or at the point of sale for retail sales. 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 franchisee realizes the benefits of having the right to access the Company's intellectual property.
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 10 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest and Fees on Loans Receivable
Vive 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 Vive may renew if the cardholder remains in good standing.
Vive 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 Vive’s direct origination costs. The merchant fee discount and origination costs are presented net on the consolidated balance sheets 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 (i.e., Vive) 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 presented net on the consolidated balance sheets in loans receivable.
The customer is typically required to make monthly minimum payments of at least 3.5% of the outstanding loan balance, which includes outstanding interest. Fixed and variable interest rates, typically 29% to 35.99%, 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 when earned if collectibility is reasonably assured. For credit cards that provide deferred interest, if the balance is not paid off during the promotional period or if the cardholder defaults, 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. For credit cards that provide reduced interest, if the balance is not paid off during the promotional period, interest is billed to the cardholder at standard rates in the month that the promotional period expires or when the cardholder 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 if collectibility is reasonably assured.
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, appliances, electronics, jewelry and a variety of other products 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 to a 0% salvage value generally over 12 months. The Company's Aaron's Business segment begins depreciating merchandise at the earlier of 12 months and one day or when the item is leased. Aaron's Business depreciates 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of lease merchandise, net of accumulated depreciation and allowances:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Merchandise on Lease, net of Accumulated Depreciation and Allowances
|
$
|
1,156,798
|
|
|
$
|
1,053,684
|
|
Merchandise Not on Lease, net of Accumulated Depreciation and Allowances
|
276,619
|
|
|
264,786
|
|
Lease Merchandise, net of Accumulated Depreciation and Allowances
|
$
|
1,433,417
|
|
|
$
|
1,318,470
|
|
The Company’s policies require weekly merchandise counts at its Aaron's Business 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 merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off. Generally, all merchandise not on lease 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 primarily relates to its Progressive Leasing operations and, to a lesser extent, its Aaron's Business operations. The allowance for lease merchandise write-offs 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, which is included within lease merchandise, net within the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Beginning Balance
|
$
|
46,694
|
|
|
$
|
35,629
|
|
|
$
|
33,399
|
|
Merchandise Written off, net of Recoveries
|
(236,928
|
)
|
|
(181,252
|
)
|
|
(143,230
|
)
|
Provision for Write-offs
|
251,419
|
|
|
192,317
|
|
|
145,460
|
|
Ending Balance
|
$
|
61,185
|
|
|
$
|
46,694
|
|
|
$
|
35,629
|
|
Retail and Non-Retail Cost of Sales
Included in cost of sales is the net book value of merchandise sold, primarily using specific identification. It is not practicable to allocate operating expenses between selling and lease operations.
Shipping and Handling Costs
The Company incurred shipping and handling costs of $74.3 million, $75.2 million and $67.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. These costs are primarily classified within operating expenses in the accompanying consolidated statements of earnings and to a lesser extent capitalized into the cost of lease merchandise and subsequently depreciated.
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 $44.0 million, $37.7 million and $34.0 million for the years ended December 31, 2019, 2018 and 2017, 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 reduction of such advertising expense was $27.7 million, $28.3 million and $22.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The prepaid advertising asset was $0.3 million and $1.6 million at December 31, 2019 and 2018, respectively, and is reported within prepaid expenses and other assets on the consolidated balance sheets.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 13 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. The Company estimates the fair value of awards issued under the Company's employee stock purchase plan ("ESPP") using a series of Black-Scholes pricing models that consider the components of the "lookback" feature of the plan, including the underlying stock, call option and put option. The design of awards issued under the Company's ESPP is more fully described in Note 13 to these consolidated financial statements.
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.
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, RSUs, RSAs, PSUs and awards issuable under the Company's ESPP (collectively, "share-based awards") as determined under the treasury stock method. The following table shows the calculation of dilutive share-based awards:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Shares In Thousands)
|
2019
|
|
2018
|
|
2017
|
Weighted Average Shares Outstanding
|
67,322
|
|
|
69,128
|
|
|
70,837
|
|
Dilutive Effect of Share-Based Awards
|
1,309
|
|
|
1,469
|
|
|
1,284
|
|
Weighted Average Shares Outstanding Assuming Dilution
|
68,631
|
|
|
70,597
|
|
|
72,121
|
|
Approximately 417,000, 347,000 and 140,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the years ended December 31, 2019, 2018 and 2017, 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, the Company maintained an investment classified as held-to-maturity securities in PerfectHome, which is based in the U.K., of £15.1 million ($20.4 million). 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. In July 2018, PerfectHome entered into the U.K.’s insolvency process and was subsequently acquired by the senior lender. The Company recorded a full impairment of the PerfectHome investment of $20.1 million during the second quarter of 2018 and has not received any repayments since the impairment charge, and the Company does not believe it will not receive any further payments on its subordinated secured notes.
Accounts Receivable
Accounts receivable consist primarily of receivables due from customers of Progressive Leasing and Company-operated Aaron's stores, corporate receivables incurred during the normal course of business (primarily for vendor consideration and real estate leasing activities) and franchisee obligations.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable, net of allowances, consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Customers
|
$
|
76,819
|
|
|
$
|
60,879
|
|
Corporate
|
14,109
|
|
|
18,171
|
|
Franchisee
|
13,231
|
|
|
19,109
|
|
|
$
|
104,159
|
|
|
$
|
98,159
|
|
The Company maintains an accounts receivable allowance, which primarily relates to its Progressive Leasing operations and, to a lesser extent, its Aaron's Business operations. The Company’s policy for its Progressive Leasing segment is to record an allowance for returns and uncollectible renewal payments based on historical collection experience. During 2019, the Company adopted ASC 842, which resulted in the Progressive Leasing provision for returns and uncollectible renewal payments being recorded as a reduction of lease revenue and fees within the consolidated statements of earnings beginning January 1, 2019. The provision for returns and uncollectible renewal payments for periods prior to 2019 are reported herein as bad debt expense within operating expenses in the consolidated statements of earnings. The Progressive Leasing segment writes off lease receivables that are 120 days or more contractually past due.
The Aaron's Business policy is to record 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 within the consolidated statements of earnings. Aaron's Business writes off lease receivables that are 60 days or more past due on pre-determined dates twice monthly.
Vive's allowance for uncollectible merchant accounts receivable, which primarily related to cardholder returns and refunds, is recorded as bad debt expense within operating expenses in the consolidated statements of earnings.
The following table shows the components of the accounts receivable allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Beginning Balance
|
$
|
62,704
|
|
|
$
|
46,946
|
|
|
$
|
35,690
|
|
Accounts Written Off, net of Recoveries
|
(309,374
|
)
|
|
(252,330
|
)
|
|
(192,133
|
)
|
Accounts Receivable Provision
|
322,963
|
|
|
268,088
|
|
|
203,389
|
|
Ending Balance
|
$
|
76,293
|
|
|
$
|
62,704
|
|
|
$
|
46,946
|
|
The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments for the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Bad Debt Expense1
|
$
|
1,337
|
|
|
$
|
227,960
|
|
|
$
|
170,574
|
|
Provision for Returns and Uncollected Renewal Payments2
|
321,626
|
|
|
40,128
|
|
|
32,815
|
|
Accounts Receivable Provision
|
$
|
322,963
|
|
|
$
|
268,088
|
|
|
$
|
203,389
|
|
1 Bad debt expense is recorded within operating expenses in the consolidated financial statements.
2 In accordance with the adoption of ASC 842, Progressive Leasing provision for returns and uncollectible renewal payments are recorded as a reduction to lease revenues and fees within the consolidated financial statements beginning January 1, 2019. Prior to January 1, 2019, Progressive Leasing provision for returns and uncollectible renewal payments were recorded as bad debt expense within operating expenses in the consolidated financial statements.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Receivable
Gross loans receivable represents the principal balances of credit card charges at Vive’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 Vive 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 was 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. As of December 31, 2019, the Acquired Loans balance was zero.
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 rates 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.
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 includes 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 no later than the end of the following month after the billing cycle in which the loans receivable become 120 days past due.
Vive 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, 2019 and 2018 by Fair Isaac and Company (FICO) score as determined at the time of loan origination:
|
|
|
|
|
|
|
|
December 31,
|
FICO Score Category
|
2019
|
|
2018
|
600 or Less
|
6.7
|
%
|
|
3.7
|
%
|
Between 600 and 700
|
80.1
|
%
|
|
77.9
|
%
|
700 or Greater
|
13.2
|
%
|
|
18.4
|
%
|
Property, Plant and Equipment
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
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
software. Certain costs incurred during the application development stage of an internal-use software project 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. All costs incurred during preliminary project and post-implementation project stages are expensed appropriately. 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 $69.5 million, $61.2 million and $54.8 million during the years ended December 31, 2019, 2018 and 2017, respectively. Amortization of previously capitalized internal use software development costs, which is a component of depreciation expense for property, plant and equipment, was $18.6 million, $14.1 million and $11.5 million during the years ended December 31, 2019, 2018 and 2017, 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.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Prepaid Expenses
|
$
|
45,034
|
|
|
$
|
30,763
|
|
Prepaid Insurance
|
26,393
|
|
|
27,948
|
|
Assets Held for Sale
|
10,131
|
|
|
6,589
|
|
Deferred Tax Asset
|
826
|
|
|
8,761
|
|
Other Assets
|
31,887
|
|
|
24,161
|
|
|
$
|
114,271
|
|
|
$
|
98,222
|
|
Assets Held for Sale
Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of December 31, 2019 and 2018. 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, 2019 and 2018 was $10.1 million and $6.6 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 charges of $1.2 million and $0.9 million within restructuring expenses, net during the years ended December 31, 2019 and 2017, with insignificant charges recorded during 2018. These charges related to the impairment of store properties that the Company decided to close under its restructuring programs as described in Note 11. The Company also recorded impairment charges on assets held for sale not part of a restructuring program of $0.2 million and $0.7 million during the years ended December 31, 2018, and 2017, respectively, in other operating income, net within the consolidated statements of earnings. These charges related to the impairment of various parcels of land and buildings that were not part of a restructuring program and that the Company decided not to utilize for future expansion. Impairment charges on assets held for sale recorded in other operating income, net were not significant in 2019.
The Company also recognized net gains of $1.7 million and $0.8 million during the years ended December 31, 2019 and 2018 related to the 2019 sale of four former Company-operated store properties for a total selling price of $2.6 million and the 2018 sale of the former headquarters building of its Vive segment for a selling price of $2.2 million. The respective sales proceeds 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, net in the consolidated statements of earnings. The Company recognized net
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
gains of $0.4 million during the year ended December 31, 2018 related to the disposal of certain land and buildings that the Company closed under the 2016 and 2017 restructuring plans as described in Note 11 to these consolidated financial statements. These gains were recorded as a reduction to restructuring expenses within the consolidated statements of earnings. Gains and losses on the disposal of assets held for sale were not significant in 2017.
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 results, projected future operating results, or the Company fails to successfully execute on one or more elements of the reporting units' strategic plans. The Company completed its annual goodwill impairment test as of October 1, 2019 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 2019 that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Other Intangibles
Other intangibles include customer relationships, non-compete agreements, reacquired franchise rights, customer lease contracts and expanded customer base intangible assets acquired in connection with store-based business acquisitions, asset acquisitions of customer contracts, and franchisee acquisitions. 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 Vive 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 Vive 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, 2019 and determined that no impairment had occurred.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Accounts Payable
|
89,959
|
|
|
88,369
|
|
Accrued Insurance Costs
|
44,032
|
|
|
40,423
|
|
Accrued Salaries and Benefits
|
43,972
|
|
|
40,790
|
|
Accrued Real Estate and Sales Taxes
|
32,763
|
|
|
30,332
|
|
Deferred Rent1
|
—
|
|
|
27,270
|
|
Other Accrued Expenses and Liabilities1
|
62,090
|
|
|
65,969
|
|
|
$
|
272,816
|
|
|
$
|
293,153
|
|
1 Amounts as of December 31, 2019 were impacted by the January 1, 2019 adoption of ASC 842. Upon transition to ASC 842, the remaining balances of the Company's deferred rent, lease incentives, and closed store reserve were reclassified as a reduction to the operating lease right-of-use asset in the accompanying consolidated balance sheet.
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 carriers to cover the projected claims run off for both reported and incurred but not reported claims, considering its retention or stop loss limits. In addition, we have prefunding balances on deposit and other insurance receivables with the insurance carriers which are recorded within prepaid expenses and other assets in our consolidated balance sheets.
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 as of December 31, 2019 and 2018. 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 a liability related to its non-qualified deferred compensation plan, which represents benefits accrued for plan participants and is valued at the quoted market prices of the participants’ investment elections, at fair value on a recurring basis. 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of loans receivable 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, which was fully impaired during 2018, 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 net gains and losses are recorded as a component of other non-operating income (expense), net in the consolidated statements of earnings and were gains of $2.1 million during 2017. Foreign currency remeasurement losses were not significant in 2019 or 2018.
Supplemental Disclosure of Non-Cash Investing Transactions
The purchase price for the acquisition of certain franchisees made during the year ended December 31, 2019 and 2018 included the non-cash settlement of pre-existing accounts receivable the franchisees owed the Company of $1.7 million and $5.4 million, respectively. This non-cash consideration has been excluded from the line "Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired" in the investing activities section of the consolidated statements of cash flows for the respective periods.
During the year ended December 31, 2018, the Company entered into transactions to acquire and sell certain customer agreements and related lease merchandise with third parties which were accounted for as asset acquisitions and asset disposals. The fair value of the non-cash consideration exchanged in these transactions was $0.6 million.
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.
Hurricane Impact
During the third and fourth quarters of 2017, Hurricanes Harvey and Irma impacted the Company in the form of property damages (primarily in-store and on-lease merchandise, store leasehold improvements and furniture and fixtures), increased customer-related accounts receivable allowances and lease merchandise allowances, and lost lease revenue due to store closures of Aaron’s Business and Progressive Leasing retail partners. During the year ended December 31, 2017, the Company recorded pre-tax losses of $4.7 million related to property damages and remediation costs and $3.6 million for increases in its accounts receivable allowance and lease merchandise allowances from customers in the impacted areas. The Company also recognized $3.3 million of pre-tax income for estimated property-related insurance proceeds in 2017. The property damage losses, net of estimated property-related insurance proceeds, and customer-related allowances were recorded within operating expenses in the consolidated statements of earnings during the year ended December 31, 2017.
During the years ended December 31, 2019 and 2018, the Company recognized insurance recovery gains of $4.5 million and $0.9 million, respectively, related to the settlement of property damage claims and business interruption claims, which are recorded within other operating income, net in the consolidated statements of earnings.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Adopted
Leases. In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases ("ASC 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. Companies must use a modified retrospective approach to adopt ASC 842; however, the Company adopted an optional transition method in which entities are permitted to not apply the requirements of ASC 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 application of this optional transition method resulted in a cumulative-effect adjustment of $2.6 million representing an increase to the Company’s January 1, 2019 retained earnings balance, net of tax, due primarily to the recognition of deferred gains recorded under previous sale and operating leaseback transactions. The ASC 842 transition guidance requires companies to recognize any deferred gains not resulting from off-market terms as a cumulative adjustment to retained earnings upon adoption of ASC 842.
As a lessor, a majority of the Company’s revenue generating activities are within the scope of ASC 842. The new standard did not materially impact the timing of revenue recognition. Effective January 1, 2019, ASC 842 resulted in the Company classifying the Progressive Leasing provision for returns and uncollectible renewal payments as a reduction of lease revenue and fees within the consolidated statements of earnings. For periods reported herein prior to January 1, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was recorded as bad debt expense within operating expenses in the consolidated statements of earnings. The Aaron’s Business provision for returns and uncollectible renewal payments has historically been, and continues to be recorded as, a reduction to lease revenue and fees. The Company has customer lease agreements with lease and non-lease components that fall within the scope of ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"). The Company has elected to aggregate these components into a single component for all classes of underlying assets as the lease and non-lease components generally have the same timing and pattern of transfer.
The new standard also impacts the Company as a lessee by requiring substantially all of its operating leases to be recognized on the balance sheet as operating lease right-of-use assets and operating lease liabilities. See Note 7 to these consolidated financial statements for further details regarding the Company’s leasing activities as a lessee. The Company elected to adopt a package of practical expedients offered by the FASB which removes the requirement to reassess whether expired or existing contracts contain leases and removes the requirement to reassess the lease classification for any existing leases prior to the adoption date of January 1, 2019. Additionally, the Company has elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease.
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. As a result, certain implementation costs which were previously expensed by the Company are now eligible for capitalization under ASU 2018-15. 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 elected to early adopt ASU 2018-15 on a prospective basis effective January 1, 2019, and the impact to the consolidated financial statements was not significant. Costs eligible for capitalization will be capitalized within prepaid expenses and other assets and expensed through operating expenses in the consolidated balance sheets and statements of earnings, respectively.
Pending Adoption
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.
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 standard. The Company will be impacted by ASU 2016-13 within its Vive segment by requiring earlier recognition of estimated credit losses in the consolidated statements of earnings. Vive 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 standard 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 to interest income, and as interest income is accrued and earned on the outstanding loan. Although the CECL standard will result in earlier recognition of credit losses in the statements 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") and does not believe that its loans receivable will qualify for the PCD Method as, generally, a more-than-insignificant deterioration in credit quality since origination does not occur. The Company has finalized the implementation of a software solution to support the new accounting requirements and is finalizing changes to its accounting policies, processes, and internal controls to ensure compliance with CECL's reporting and disclosure requirements. The Company is currently quantifying the cumulative adjustments to retained earnings for the transition impacts of CECL and will record the transition adjustments during the first quarter of 2020.
NOTE 2: ACQUISITIONS
During the years ended December 31, 2019, 2018 and 2017, cash payments, net of cash acquired, related to the acquisitions of businesses and contracts were $14.3 million, $189.9 million and $145.6 million, respectively. Cash payments made during the years ended December 31, 2019, 2018 and 2017 principally relate to the acquisitions of Aaron's-branded franchised stores 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 acquisitions of businesses and contracts to the consolidated financial statements, other than those acquisitions described below, was not significant for the years ended December 31, 2019, 2018 and 2017.
Franchisee Acquisitions - 2018
During 2018, the Company acquired 152 Aaron's-branded franchised stores operated by franchisees for an aggregate purchase price of $190.2 million, exclusive of the settlement of pre-existing receivables and post-closing working capital settlements.
The acquired operations generated revenues of $183.3 million and $72.0 million and earnings before income taxes of $3.3 million and $0.8 million during the years ended December 31, 2019 and 2018, respectively, which are included in our consolidated statements of earnings for the respective periods.
The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisitions, and restructuring charges incurred under the 2019 restructuring program associated with the closure of a number of acquired stores. The revenues and earnings before income taxes of the acquired operations discussed 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 and expenses to the Company from the franchisees during the years ended December 31, 2019 and 2018 had the transaction not been completed.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2018 acquisitions are 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 following table presents summaries of the fair value of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:
|
|
|
|
|
(in Thousands)
|
Final Amounts Recognized as of Acquisition Dates
|
Purchase Price
|
$
|
190,167
|
|
Add: Settlement of Accounts Receivable from Pre-existing Relationship
|
5,405
|
|
Add: Working Capital Adjustments
|
155
|
|
Aggregate Consideration Transferred
|
195,727
|
|
|
|
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
|
|
Cash and Cash Equivalents
|
50
|
|
Lease Merchandise
|
59,616
|
|
Property, Plant and Equipment
|
5,568
|
|
Operating Lease Right-of-Use Assets1
|
4,338
|
|
Other Intangibles2
|
23,322
|
|
Prepaid Expenses and Other Assets
|
1,241
|
|
Total Identifiable Assets Acquired
|
94,135
|
|
Accounts Payable and Accrued Expenses
|
(977
|
)
|
Customer Deposits and Advance Payments
|
(5,156
|
)
|
Total Liabilities Assumed
|
(6,133
|
)
|
Goodwill3
|
107,725
|
|
Net Assets Acquired (excluding Goodwill)
|
$
|
88,002
|
|
1 As of the respective acquisition dates, the Company had not yet adopted ASC 842. As such, there were no operating lease right-of-use assets or operating lease liabilities recognized within the consolidated financial statements at the time of acquisition. The Company recognized operating lease right-of-use assets and operating lease liabilities for the acquired stores as part of the transition to ASC 842 on January 1, 2019. The Company finalized its valuation of assumed favorable and unfavorable real estate operating leases during 2019, which also impacted the valuation of the Company's customer lease contract and customer relationship intangible assets. As a result, measurement period adjustments of $4.3 million were recorded within operating lease right-of-use assets as net favorable, with a corresponding reduction of $1.2 million within other intangibles, net in our consolidated balance sheet. The adjustment also resulted in the recognition of immaterial adjustments to operating expenses and restructuring expenses, net during 2019 to recognize expense that would have been recorded in prior periods had the favorable lease and intangible assets been recorded as of the acquisition date.
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 the acquired geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 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
|
$
|
1,872
|
|
|
3.0
|
Customer Contracts
|
7,457
|
|
|
1.0
|
Customer Relationships
|
9,330
|
|
|
3.0
|
Reacquired Franchise Rights
|
4,663
|
|
|
3.9
|
Total Acquired Intangible Assets1
|
$
|
23,322
|
|
|
|
1 Acquired definite-lived intangible assets have a total weighted average life of 2.5 years.
The Company incurred $1.7 million of acquisition-related costs in connection with the franchisee acquisitions, substantially all of which were incurred during 2018. 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 of $122.5 million, $129.4 million, and $58.3 million, and earnings before income taxes of $3.6 million, $11.0 million, and $2.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. These revenues and earnings before income taxes are included in our consolidated statements of earnings since the date of acquisition. 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, 2019 had the transaction not been completed.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
|
Final Amounts Recognized as of Acquisition Date
|
Purchase Price
|
$
|
140,000
|
|
Add: Settlement of Accounts Receivable from Pre-existing Relationship
|
3,452
|
|
Less: Reimbursement for Insurance Costs
|
(100
|
)
|
Add: Working Capital Adjustments
|
188
|
|
Consideration Transferred
|
143,540
|
|
|
|
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
|
|
Cash and Cash Equivalents
|
34
|
|
Accounts Receivable
|
1,345
|
|
Lease Merchandise
|
40,941
|
|
Property, Plant and Equipment
|
8,832
|
|
Other Intangibles1
|
13,779
|
|
Prepaid Expenses and Other Assets
|
440
|
|
Total Identifiable Assets Acquired
|
65,371
|
|
Accounts Payable and Accrued Expenses
|
(6,698
|
)
|
Customer Deposits and Advance Payments
|
(2,500
|
)
|
Capital Leases
|
(4,514
|
)
|
Total Liabilities Assumed
|
(13,712
|
)
|
Goodwill2
|
91,881
|
|
Net Assets Acquired (excluding Goodwill)
|
$
|
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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated intangible assets attributable to the SEI acquisition are comprised of the following:
|
|
|
|
|
|
|
|
Fair Value (in thousands)
|
|
Weighted Average Useful Life (in years)
|
Non-compete Agreements
|
$
|
1,244
|
|
|
5.0
|
Customer Lease Contracts
|
2,154
|
|
|
1.0
|
Customer Relationships
|
3,215
|
|
|
2.0
|
Reacquired Franchise Rights
|
3,640
|
|
|
4.1
|
Favorable Operating Leases1
|
3,526
|
|
|
11.3
|
Total Acquired Intangible Assets2
|
$
|
13,779
|
|
|
|
1 Upon the adoption of ASC 842 on January 1, 2019, the Company reclassified the remaining favorable operating lease asset from other intangibles, net to operating lease right-of-use assets within its consolidated balance sheets.
2 Acquired definite-lived intangible assets have a total weighted average life of 5.1 years.
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:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Trade Name
|
$
|
53,000
|
|
|
$
|
53,000
|
|
Goodwill
|
736,582
|
|
|
733,170
|
|
Indefinite-lived Intangible Assets
|
$
|
789,582
|
|
|
$
|
786,170
|
|
The following table provides information related to the carrying amount of goodwill by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Progressive Leasing
|
|
Aaron’s Business
|
|
Total
|
Balance at January 1, 2018
|
$
|
288,801
|
|
|
$
|
334,147
|
|
|
$
|
622,948
|
|
Acquisitions
|
—
|
|
|
110,469
|
|
|
110,469
|
|
Disposals, Currency Translation and Other Adjustments
|
—
|
|
|
(260
|
)
|
|
(260
|
)
|
Acquisition Accounting Adjustments
|
—
|
|
|
13
|
|
|
13
|
|
Balance at December 31, 2018
|
288,801
|
|
|
444,369
|
|
|
733,170
|
|
Acquisitions
|
—
|
|
|
6,526
|
|
|
6,526
|
|
Disposals, Currency Translation and Other Adjustments
|
—
|
|
|
(362
|
)
|
|
(362
|
)
|
Acquisition Accounting Adjustments
|
—
|
|
|
(2,752
|
)
|
|
(2,752
|
)
|
Balance at December 31, 2019
|
$
|
288,801
|
|
|
$
|
447,781
|
|
|
$
|
736,582
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
(In Thousands)
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Acquired Internal-Use Software
|
14,000
|
|
|
(14,000
|
)
|
|
—
|
|
14,000
|
|
|
(14,000
|
)
|
|
—
|
|
Technology
|
68,550
|
|
|
(39,859
|
)
|
|
28,691
|
|
68,550
|
|
|
(32,749
|
)
|
|
35,801
|
|
Merchant Relationships
|
181,000
|
|
|
(86,184
|
)
|
|
94,816
|
|
181,000
|
|
|
(71,101
|
)
|
|
109,899
|
|
Other Intangibles1
|
26,178
|
|
|
(11,889
|
)
|
|
14,289
|
|
42,165
|
|
|
(12,265
|
)
|
|
29,900
|
|
Total
|
$
|
289,728
|
|
|
$
|
(151,932
|
)
|
|
$
|
137,796
|
|
$
|
305,715
|
|
|
$
|
(130,115
|
)
|
|
$
|
175,600
|
|
1 Other intangibles include customer relationships, non-compete agreements, reacquired franchise rights, customer lease contracts and the expanded customer base intangible asset.
Total amortization expense of definite-lived intangible assets included in operating expenses in the accompanying consolidated statements of earnings was $35.6 million, $33.0 million and $27.7 million during the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, estimated future amortization expense for the next five years related to definite-lived intangible assets is as follows:
|
|
|
|
|
(In Thousands)
|
|
2020
|
$
|
28,722
|
|
2021
|
26,038
|
|
2022
|
23,111
|
|
2023
|
22,527
|
|
2024
|
17,440
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
(In Thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Deferred Compensation Liability
|
$
|
—
|
|
|
$
|
(11,201
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,389
|
)
|
|
$
|
—
|
|
The Company maintains the Aaron's, Inc. Deferred Compensation Plan as described in Note 17 to these consolidated financial statements. The liability is recorded in accounts payable and accrued expenses in the consolidated balance sheets. The liability represents benefits accrued for plan participants and 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
(In Thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets Held for Sale
|
$
|
—
|
|
|
$
|
10,131
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,589
|
|
|
$
|
—
|
|
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, net or restructuring expenses, net (if the asset is a part of the Company's restructuring programs as described in Note 11) 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.
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 liabilities that are not measured at fair value in the consolidated balance sheets, but for which the fair value is disclosed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
(In Thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed-Rate Long Term Debt 1
|
$
|
—
|
|
|
$
|
(123,705
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(183,765
|
)
|
|
$
|
—
|
|
1 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 $120.0 million and $180.0 million at December 31, 2019 and 2018, respectively.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the Company’s property, plant, and equipment:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Land
|
$
|
16,427
|
|
|
$
|
19,950
|
|
Buildings and Improvements
|
54,923
|
|
|
67,081
|
|
Leasehold Improvements and Signs
|
87,126
|
|
|
83,867
|
|
Fixtures and Equipment
|
244,623
|
|
|
210,747
|
|
Software - Internal-Use
|
135,076
|
|
|
106,671
|
|
Assets Under Finance Leases:
|
|
|
|
with Related Parties
|
—
|
|
|
872
|
|
with Unrelated Parties
|
3,189
|
|
|
9,487
|
|
Construction in Progress
|
7,554
|
|
|
15,104
|
|
|
548,918
|
|
|
513,779
|
|
Less: Accumulated Depreciation and Amortization1
|
(311,252
|
)
|
|
(284,287
|
)
|
|
$
|
237,666
|
|
|
$
|
229,492
|
|
|
|
1
|
Accumulated amortization of internal-use software development costs amounted to $75.2 million and $56.9 million as of December 31, 2019 and 2018, respectively.
|
Depreciation expense on assets recorded under finance leases is included in operating expenses and was $1.5 million, $0.8 million and $1.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Finance leases as of December 31, 2019 relate to vehicles assumed as part of the SEI acquisition. Finance leases as of December 31, 2018 primarily consist of buildings and improvements, as well as vehicles assumed as part of the SEI acquisition. Assets under finance leases with related parties included $0.8 million in accumulated depreciation as of December 31, 2018. Assets under finance leases with unrelated parties included $2.4 million and $8.3 million in accumulated depreciation as of December 31, 2019 and 2018, respectively.
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:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Credit Card Loans1
|
$
|
96,387
|
|
|
$
|
90,406
|
|
Acquired Loans2
|
—
|
|
|
5,688
|
|
Loans Receivable, Gross
|
96,387
|
|
|
96,094
|
|
|
|
|
|
|
Allowance for Loan Losses
|
(14,911
|
)
|
|
(12,970
|
)
|
Unamortized Fees
|
(6,223
|
)
|
|
(6,971
|
)
|
Loans Receivable, Net of Allowances and Unamortized Fees
|
$
|
75,253
|
|
|
$
|
76,153
|
|
1 "Credit Card Loans" are loans originated after the 2015 acquisition of Vive.
2 "Acquired Loans" are credit card loans the Company purchased in the 2015 acquisition of Vive.
Included in the table below is an aging of the loans receivable, gross balance:
|
|
|
|
|
|
|
|
|
(Dollar Amounts in Thousands)
|
December 31,
|
Aging Category1
|
2019
|
|
2018
|
30-59 Days Past Due
|
6.9
|
%
|
|
6.9
|
%
|
60-89 Days Past Due
|
3.6
|
%
|
|
3.4
|
%
|
90 or more Days Past Due
|
5.0
|
%
|
|
4.3
|
%
|
Past Due Loans Receivable
|
15.5
|
%
|
|
14.6
|
%
|
Current Loans Receivable
|
84.5
|
%
|
|
85.4
|
%
|
Balance of Loans Receivable on Nonaccrual Status
|
$
|
2,284
|
|
|
$
|
2,110
|
|
Balance of Loans Receivable Greater Than 90 Days Past Due and Still Accruing Interest and Fees
|
$
|
—
|
|
|
$
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Beginning Balance
|
$
|
12,970
|
|
|
$
|
11,454
|
|
Provision for Loan Losses
|
21,667
|
|
|
21,063
|
|
Charge-offs
|
(22,204
|
)
|
|
(21,190
|
)
|
Recoveries
|
2,478
|
|
|
1,643
|
|
Ending Balance
|
$
|
14,911
|
|
|
$
|
12,970
|
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: LEASES
Lessor Information
Refer to Note 1 to these consolidated financial statements for further information about the Company's revenue generating activities as a lessor. All of the Company's customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases.
Lessee Information
As a lessee, the Company leases retail store and warehouse space for most of its Aaron's Business store-based operations, call center space and customer service centers for its Progressive Leasing segment, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. To the extent that a leased retail store or warehouse space is vacated prior to the termination of the lease, the Company may sublease these spaces to third parties while maintaining its primary obligation as the lessee in the head lease. The Company leases transportation vehicles under operating and finance leases, most of which generally expire during the next three years. The vehicle leases generally include a residual value that is guaranteed to the lessor, which ensures that the vehicles will be returned to the lessor in reasonable working condition. The Company also leases various IT equipment such as printers and computers under operating leases, most of which generally expire during the next three years. For all of its leases in which the Company is a lessee, the Company has elected to include both the lease and non-lease components as a single component and account for it as a lease.
Rental charges incurred, net of sublease receipts, was $111.7 million, $112.8 million, and $104.3 million in the years ended December 31, 2019, 2018, and 2017, respectively, which are primarily classified within operating expenses in the consolidated statements of earnings, and to a lesser extent capitalized into the cost of lease merchandise and subsequently depreciated. The Company also incurred right-of-use asset impairment and contractual lease obligation charges, net of estimated sublease receipts and early lease buyout discounts, of $28.4 million, $2.1 million and $13.4 million in the years ended December 31, 2019, 2018, and 2017 respectively, related to the closure of Company-operated stores which are reported within restructuring expenses in the consolidated statements of earnings.
Finance lease costs are comprised of the amortization of right-of-use assets and the interest accretion on discounted lease liabilities, which are recorded within operating expenses and interest expense, respectively, in the Company’s consolidated statements of earnings. Operating lease costs are recorded on a straight-line basis within operating expenses. For stores that are related to the Company's restructuring programs as described in Note 11, operating lease costs recorded subsequent to any necessary operating lease right-of-use asset impairment charges are recognized in a pattern that is generally accelerated within restructuring expenses, net in the Company’s consolidated statements of earnings. The Company’s total lease expense is comprised of the following:
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
Finance Lease cost:
|
|
Amortization of Right-of-Use Assets
|
$
|
1,542
|
|
Interest on Lease Liabilities
|
363
|
|
Total Finance Lease cost:
|
1,905
|
|
|
|
Operating Lease cost:
|
|
Operating Lease cost classified within Operating Expenses1
|
112,092
|
|
Operating Lease cost classified within Restructuring Expenses, Net
|
3,339
|
|
Sublease Receipts2
|
(3,044
|
)
|
Total Operating Lease cost:
|
112,387
|
|
|
|
Total Lease cost
|
$
|
114,292
|
|
1 Includes short-term and variable lease costs, which are not significant. Short-term lease expense is defined as leases with a lease term of greater than one month, but not greater than 12 months.
2 The Company has anticipated future sublease receipts from executed sublease agreements of $2.7 million in 2020, $2.4 million in 2021, $1.5 million in 2022, $1.0 million in 2023, $0.5 million in 2024 and $0.3 million thereafter through 2025.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information regarding the Company’s leasing activities as a lessee is as follows:
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
Cash Paid for amounts included in measurement of Lease Liabilities:
|
|
Operating Cash Flows for Finance Leases
|
$
|
411
|
|
Operating Cash Flows for Operating Leases
|
126,361
|
|
Financing Cash Flows for Finance Leases
|
2,493
|
|
Total Cash paid for amounts included in measurement of Lease Liabilities
|
129,265
|
|
Right-of-Use Assets obtained in exchange for new Finance Lease Liabilities
|
—
|
|
Right-of-Use Assets obtained in exchange for new Operating Lease Liabilities
|
$
|
53,883
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Balance Sheet Classification
|
|
December 31, 2019
|
Assets
|
|
|
|
|
Operating Lease Assets
|
|
Operating Lease Right-of-Use Assets
|
|
$
|
329,211
|
|
Finance Lease Assets
|
|
Property, Plant and Equipment, Net
|
|
768
|
|
Total Lease Assets
|
|
|
|
$
|
329,979
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating Lease Liabilities
|
|
Operating Lease Liabilities
|
|
$
|
369,386
|
|
Finance Lease Liabilities
|
|
Debt
|
|
2,670
|
|
Total Lease Liabilities
|
|
|
|
$
|
372,056
|
|
Most of the Company’s real estate 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 Company currently does not have any real estate leases in which it considers the renewal options to be reasonably certain of exercise, as the Company's historical experience indicates that renewal options are not reasonably certain to be exercised. Additionally, the Company's leases contain contractual renewal rental rates that are considered to be in line with market rental rates, and there are not significant economic penalties or business disruptions incurred by not exercising any renewal options.
The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s finance and operating leases:
|
|
|
|
|
|
|
Weighted Average Discount Rate1
|
|
Weighted Average Remaining Lease Term (in years)
|
Finance Leases
|
5.7
|
%
|
|
1.5
|
Operating Leases
|
3.6
|
%
|
|
4.9
|
1 Upon adoption of ASC 842, discount rates for existing operating leases were established as of January 1, 2019.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the short-term lease exception provided within ASC 842, the Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement. Below is a summary of undiscounted finance and operating lease liabilities that have initial terms in excess of one year as of December 31, 2019. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2020
|
$
|
108,089
|
|
|
$
|
2,006
|
|
|
$
|
110,095
|
|
2021
|
91,376
|
|
|
801
|
|
|
92,177
|
|
2022
|
70,208
|
|
|
80
|
|
|
70,288
|
|
2023
|
48,773
|
|
|
—
|
|
|
48,773
|
|
2024
|
32,345
|
|
|
—
|
|
|
32,345
|
|
Thereafter
|
53,439
|
|
|
—
|
|
|
53,439
|
|
Total Undiscounted Cash Flows
|
404,230
|
|
|
2,887
|
|
|
407,117
|
|
Less: Interest
|
34,844
|
|
|
217
|
|
|
35,061
|
|
Present Value of Lease Liabilities
|
$
|
369,386
|
|
|
$
|
2,670
|
|
|
$
|
372,056
|
|
Sale-Leaseback Transactions
In addition to the leasing activities described above, the Company entered into two separate sale and leaseback transactions related to a fulfillment and distribution center and three Company-operated store properties during the fourth quarter of 2019. The Company received net proceeds of $8.1 million and recorded gains of $5.6 million related to the sale and leaseback transactions, which were classified within other operating income in the consolidated statements of earnings.
NOTE 8: INDEBTEDNESS
Following is a summary of the Company’s debt, net of unamortized debt issuance costs:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Revolving Facility
|
$
|
—
|
|
|
$
|
16,000
|
|
Senior Unsecured Notes, 4.75%, Due in Installments through April 2021
|
119,847
|
|
|
179,750
|
|
Term Loan, Due in Installments through September 2022
|
218,513
|
|
|
223,837
|
|
|
|
|
|
Finance Lease Obligation:
|
|
|
|
with Related Parties
|
—
|
|
|
123
|
|
with Unrelated Parties
|
2,670
|
|
|
5,042
|
|
Total Debt1
|
341,030
|
|
|
424,752
|
|
Less: Current Maturities
|
83,886
|
|
|
83,778
|
|
Long-Term Debt
|
$
|
257,144
|
|
|
$
|
340,974
|
|
1 Total debt as of December 31, 2019 and 2018 includes unamortized debt issuance costs of $1.0 million and $1.4 million, respectively. The Company also recorded $1.9 million and $2.6 million of debt issuance costs as of December 31, 2019 and 2018 related to the revolving credit facility within prepaid expenses and other assets in the consolidated balance sheets.
Revolving Credit and Term Loan Agreement
On January 21 and February 19, 2020, the Company amended its revolving credit and term loan agreement (the "Credit Agreement") to, among other changes: (i) increase the revolving credit commitment from $400.0 million to $500.0 million, (ii) increase borrowings under the term loan to $225.0 million, (iii) extend the maturity date for the revolving credit commitment and term loan from September 18, 2022 to January 21, 2025, (iv) amend the definition of adjusted EBITDA to exclude certain charges, and (v) modify certain other terms and conditions. The amended agreement continues to provide for quarterly repayment installments of $5.6 million under the $225.0 million term loan. The quarterly term loan repayment installments are payable on the last day of each March, June, September, and December beginning on December 31, 2020, with the remaining principal balance payable upon the maturity date of January 21, 2025. Prior to the amendment, the term loan outstanding balance was $219.4 million as of December 31, 2019, and the term loan interest rate was 3.05%.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The interest rate on the revolving credit and term loan agreement borrowings bear 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 adjusted 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 adjusted EBITDA. Total net debt refers to the Company's consolidated total debt minus certain unrestricted cash, as defined in the Credit Agreement. 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 Credit Agreement.
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 net debt to adjusted EBITDA. As of December 31, 2019, the amount available under the revolving credit component of the Credit Agreement was reduced by approximately $13.8 million for our outstanding letters of credit, resulting in availability of $386.2 million.
Senior Unsecured Notes
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 10 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.
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, 2019, the Company was in compliance with all covenants related to its outstanding debt.
Future principal maturities under the Company’s debt and finance lease obligations as of December 31, 2019 are as follows:
|
|
|
|
|
(In Thousands)
|
|
2020
|
$
|
84,321
|
|
2021
|
83,271
|
|
2022
|
174,453
|
|
2023
|
—
|
|
2024
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
342,045
|
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: INCOME TAXES
Following is a summary of the Company’s income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Current Income Tax Expense:
|
|
|
|
|
|
Federal
|
$
|
2,033
|
|
|
$
|
(5,380
|
)
|
|
$
|
(3,530
|
)
|
State
|
9,316
|
|
|
13,015
|
|
|
9,772
|
|
|
11,349
|
|
|
7,635
|
|
|
6,242
|
|
Deferred Income Tax Expense (Benefit):
|
|
|
|
|
|
Federal
|
49,911
|
|
|
48,287
|
|
|
(60,547
|
)
|
State
|
56
|
|
|
72
|
|
|
1,346
|
|
|
49,967
|
|
|
48,359
|
|
|
(59,201
|
)
|
Income Tax Expense (Benefit)
|
$
|
61,316
|
|
|
$
|
55,994
|
|
|
$
|
(52,959
|
)
|
Significant components of the Company’s deferred income tax liabilities and assets are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Deferred Tax Liabilities:
|
|
|
|
Lease Merchandise and Property, Plant and Equipment
|
$
|
176,017
|
|
|
$
|
174,171
|
|
Goodwill and Other Intangibles
|
44,435
|
|
|
41,183
|
|
Investment in Partnership
|
191,114
|
|
|
159,070
|
|
Operating Lease Right-of-Use Assets
|
75,146
|
|
|
—
|
|
Other, Net
|
2,019
|
|
|
1,804
|
|
Total Deferred Tax Liabilities
|
488,731
|
|
|
376,228
|
|
Deferred Tax Assets:
|
|
|
|
Accrued Liabilities
|
20,221
|
|
|
21,918
|
|
Advance Payments
|
9,575
|
|
|
9,232
|
|
Operating Lease Liabilities
|
83,154
|
|
|
—
|
|
Other, Net
|
66,212
|
|
|
86,339
|
|
Total Deferred Tax Assets
|
179,162
|
|
|
117,489
|
|
Less Valuation Allowance
|
—
|
|
|
—
|
|
Net Deferred Tax Liabilities
|
$
|
309,569
|
|
|
$
|
258,739
|
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s effective tax rate differs from the statutory United States Federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Statutory Rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
Increases (Decreases) in United States Federal Taxes
|
|
|
|
|
|
Resulting From:
|
|
|
|
|
|
State Income Taxes, net of Federal Income Tax Benefit
|
9.8
|
|
|
4.0
|
|
|
2.7
|
|
Permanent difference for loss on Progressive FTC matter
|
39.6
|
|
|
—
|
|
|
—
|
|
Other Permanent Differences
|
(2.5
|
)
|
|
(1.2
|
)
|
|
—
|
|
Federal Tax Credits
|
(2.3
|
)
|
|
(0.5
|
)
|
|
(0.8
|
)
|
Change in Valuation Allowance
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Remeasurement of net Deferred Tax Liabilities
|
(1.8
|
)
|
|
(0.2
|
)
|
|
(58.2
|
)
|
Other, net
|
2.3
|
|
|
(0.9
|
)
|
|
(0.4
|
)
|
Effective Tax Rate
|
66.1
|
%
|
|
22.2
|
%
|
|
(22.1
|
)%
|
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. 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. The Company was in a net operating loss position for tax purposes in 2017 and 2018 as a result of the Tax Act's 100% expense deduction on qualified depreciable assets discussed above. The net operating loss and credits earned during 2017 were carried back and generated refunds of $15.6 million received in March 2019. The net operating loss earned during 2018 must be carried forward and will be available to offset 80% of future taxable income as provided by the Tax Act.
The Company is estimating taxable income in 2019. As stated above, the net operating loss earned during 2018 will be available to offset 80% of 2019 taxable income. At December 31, 2019, the Company had approximately $187 million of federal tax net operating loss carryforwards, which can be carried forward indefinitely and will not expire, and $4.1 million of federal foreign tax credit carryforwards, which will begin to expire in 2027. In addition, at December 31, 2019, the Company had $4.7 million of tax-effected state net operating loss carryforwards and $8.1 million of state tax credit carryforwards, which will both begin to expire in 2022.
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.
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 2016.
The following table summarizes the activity related to the Company’s uncertain tax positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Balance at January 1,
|
$
|
2,529
|
|
|
$
|
2,269
|
|
|
$
|
2,594
|
|
Additions Based on Tax Positions Related to the Current Year
|
236
|
|
|
269
|
|
|
456
|
|
Additions for Tax Positions of Prior Years
|
1,957
|
|
|
615
|
|
|
232
|
|
Prior Year Reductions
|
(76
|
)
|
|
(85
|
)
|
|
(236
|
)
|
Statute Expirations
|
(306
|
)
|
|
(257
|
)
|
|
(346
|
)
|
Settlements
|
—
|
|
|
(282
|
)
|
|
(431
|
)
|
Balance at December 31,
|
$
|
4,340
|
|
|
$
|
2,529
|
|
|
$
|
2,269
|
|
As of December 31, 2019 and 2018, the amount of uncertain tax benefits that, if recognized, would affect the effective tax rate is $4.2 million and $2.5 million, respectively, including interest and penalties.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2019 and 2018, the Company recognized interest and penalties of $0.2 million and $0.1 million, respectively. During the year ended December 31, 2017, the Company recognized a net benefit of $0.6 million related to interest and penalties. The Company had $0.5 million and $0.3 million of accrued interest and penalties at December 31, 2019 and 2018, respectively. The Company recognizes potential interest and penalties related to uncertain tax benefits as a component of income tax expense (benefit).
NOTE 10: COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has guaranteed certain debt obligations of some of the franchisees under a franchise loan program with one of the banks in our Credit Facilities. 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, 2019, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was $29.4 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's losses associated with the program have been immaterial. The Company believes that any future amounts to be funded by the Company in connection with these guarantees will be immaterial. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the consolidated balance sheets, was $0.3 million as of December 31, 2019 and 2018, respectively.
On October 11, 2019, the Company amended its franchisee loan facility to (i) reduce the total commitment amount from $55.0 million to $40.0 million; and (ii) extend the maturity date to October 22, 2020. 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 8 to these consolidated financial statements for more information regarding the Company's financial covenants.
Subsequent Event - Franchisee Loan Facility Amendment
On January 21 and February 19, 2020, the Company further amended the franchisee loan agreement to, among other changes: (i) reduce the facility commitment from $40.0 million to $35.0 million, (ii) extend the commitment termination date thereunder from October 22, 2020 to January 20, 2021, (iii) amend the definition of adjusted EBITDA to exclude certain charges, and (iv) modify certain other terms and conditions. The terms of the loan facility include an option to further reduce the maximum facility commitment amount by providing written notice to the lender, which the Company subsequently exercised on February 11, 2020 to reduce the facility commitment to $25.0 million.
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, 2019 and 2018, the Company had accrued $182.9 million and $1.4 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 December 31, 2019 accrual includes a $175.0 million tentative settlement with the Federal Trade Commission (the "FTC") discussed in more detail below. Of the amount accrued, the Company believes that $5.7 million is probable of recovery via payments received from insurance proceeds as of December 31, 2019. The Company records these liabilities in accounts payable and accrued expenses in the consolidated balance sheet. The corresponding expected insurance recoveries are recorded
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
within prepaid expenses and other assets in the consolidated balance sheet. 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 $2.0 million.
At December 31, 2019, 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 $0 and $1.0 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.
Regulatory Inquiries
In July 2018, the Company received civil investigative demands ("CIDs") from the FTC regarding disclosures related to lease-to-own and other financial products offered by the Company through the Aaron's Business and Progressive Leasing and whether such disclosures violate the Federal Trade Commission Act (the "FTC Act"). Although we believe such disclosures were in compliance with the FTC Act and have not admitted to any wrongdoing, in December 2019, Progressive Leasing reached an agreement in principle with the staff of the FTC with respect to a tentative settlement to resolve the FTC inquiry, with Progressive undertaking to make a lump-sum payment of $175.0 million to the FTC. In January 2020, Progressive and FTC staff agreed in principle on the terms of a related consent order which, among other matters, requires Progressive to undertake certain compliance-related activities, including monitoring, disclosure and reporting requirements. Because Progressive reached a tentative agreement with respect to the financial terms of the settlement in December 2019, the Company has recognized a charge during the fourth quarter of $179.3 million, including $4.3 million of incurred legal fees. The proposed consent order is subject to the approval of both the FTC and the United States District Court for the Northern District of Georgia, and there can be no assurance that such approval will be obtained or that the terms of any settlement will be as currently agreed between the parties.
In April 2019, the Aaron’s Business, along with other lease-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements with other lease-to-own companies, and whether such transactions violated the FTC Act. Although we believe those transactions did not violate any laws, in August 2019, the Company reached an agreement in principle with the FTC staff to resolve that CID. The proposed consent agreement, which would prohibit such contingent purchases and sales of customer lease portfolios in the future but would not require any payments to the FTC, remains subject to the approval of the Commission.
Other Contingencies
At December 31, 2019, the Company had non-cancelable commitments primarily related to certain advertising and marketing programs, consulting agreements, software licenses, and hardware and software maintenance of $30.9 million. Payments under these commitments are scheduled to be $18.3 million in 2020, $11.0 million in 2021, and $1.6 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 Vive business, had unfunded lending commitments totaling $225.0 million and $316.4 million as of December 31, 2019 and 2018, 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 $0.4 million and $0.5 million as of December 31, 2019 and 2018, respectively. The reserve for losses on unfunded loan commitments is included in accounts payable and accrued expenses in the consolidated balance sheets.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: RESTRUCTURING
2019 Restructuring Program
During the first quarter of 2019, the Company initiated a restructuring program to further optimize its Company-operated Aaron's Business store portfolio, which resulted in the closure and consolidation of 155 underperforming Company-operated stores during 2019. The Company also further rationalized its home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions.
Total net restructuring expenses of $38.4 million were recorded during the year ended December 31, 2019 under the 2019 restructuring program, all of which were incurred within the Aaron's Business segment. Restructuring expenses were comprised mainly of closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the planned exit from one of our store support buildings, workforce reductions, and a loss on the sale of six Canadian stores to a third party. These costs were included in restructuring expenses, net in the consolidated statements of earnings. We also expect future restructuring expenses (reversals) due to changes in expected sublease activity and potential early buyouts of leases with landlords, as well as continuing variable maintenance charges and taxes.
The Company continually evaluates its Company-operated Aaron's Business store portfolio to determine if it will further rationalize its store base to better align with marketplace demand. Additional restructuring charges may result from our strategy to reposition and reinvest in our next generation store concepts to appeal to our target customer market in better, more profitable locations.
2017 and 2016 Restructuring Programs
During the years 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 $1.6 million were recorded during the year ended December 31, 2019 under the 2017 and 2016 restructuring programs, all of which were incurred within the Aaron's Business segment. Restructuring activity for the year ended December 31, 2019 was comprised principally of operating lease charges for stores closed under the restructuring programs. These costs were included in restructuring expenses, net in the consolidated statements of earnings. We expect future restructuring expenses (reversals) due to changes in expected future sublease activity and potential early buyouts of leases with landlords, as well as continuing variable maintenance charges and taxes. To date, the Company has incurred charges of $40.9 million under the 2017 and 2016 restructuring programs.
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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Contractual Lease Obligations
|
|
Severance
|
|
Total
|
Balance at January 1, 2018
|
$
|
12,437
|
|
|
$
|
2,303
|
|
|
$
|
14,740
|
|
Charges
|
—
|
|
|
601
|
|
|
601
|
|
Adjustments1
|
2,057
|
|
|
—
|
|
|
2,057
|
|
Restructuring Charges
|
2,057
|
|
|
601
|
|
|
2,658
|
|
Payments
|
(6,022
|
)
|
|
(2,253
|
)
|
|
(8,275
|
)
|
Balance at December 31, 2018
|
8,472
|
|
|
651
|
|
|
9,123
|
|
ASC 842 Transition Adjustment1
|
(8,472
|
)
|
|
—
|
|
|
(8,472
|
)
|
Adjusted Balance at January 1, 2019
|
—
|
|
|
651
|
|
|
651
|
|
Restructuring Charges
|
—
|
|
|
3,403
|
|
|
3,403
|
|
Payments
|
—
|
|
|
(3,298
|
)
|
|
(3,298
|
)
|
Balance at December 31, 2019
|
$
|
—
|
|
|
$
|
756
|
|
|
$
|
756
|
|
1 Upon the adoption of ASC 842 on January 1, 2019, the Company reclassified the remaining liability for contractual lease obligations from accounts payable and accrued expenses to a reduction to operating lease right-of-use assets within its consolidated balance sheets.
The following table summarizes restructuring charges by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
(In Thousands)
|
Aaron’s Business
|
|
Aaron’s Business
|
|
Aaron’s Business
|
|
Vive
|
|
Total
|
Right-of-Use Asset Impairment and Operating Lease Charges
|
$
|
28,411
|
|
|
$
|
2,057
|
|
|
$
|
13,432
|
|
|
$
|
—
|
|
|
$
|
13,432
|
|
Fixed Asset Impairment
|
5,238
|
|
|
—
|
|
|
1,386
|
|
|
—
|
|
|
1,386
|
|
Severance
|
3,403
|
|
|
601
|
|
|
2,705
|
|
|
471
|
|
|
3,176
|
|
Other Expenses (Reversals)
|
1,886
|
|
|
(1,176
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss (Gain) on Sale of Store Properties
|
1,052
|
|
|
(377
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Restructuring Expenses
|
$
|
39,990
|
|
|
$
|
1,105
|
|
|
$
|
17,523
|
|
|
$
|
471
|
|
|
$
|
17,994
|
|
NOTE 12: SHAREHOLDERS’ EQUITY
At December 31, 2019, the Company held 24,034,053 shares in its treasury and had the authority to purchase additional shares up to its remaining authorization limit of $262.0 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, 2019, the Company had issued approximately 398,000 unvested restricted stock awards that contain voting rights but are not presented as outstanding on the consolidated balance sheet.
In 2019, the Company repurchased 1,156,184 shares of its common stock for $69.3 million. 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.
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, 2019, no preferred shares have been issued.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: 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. The 2015 Plan was subsequently amended and restated with shareholder approval in February 2019. 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, 2019, the aggregate number of shares of common stock that may be issued or transferred under the 2015 Plan is 3,772,517.
The Company has elected a policy to estimate forfeitures in determining the amount of stock compensation expense. Total stock-based compensation expense was $26.5 million, $28.2 million and $27.4 million for the years ended December 31, 2019, 2018 and 2017, 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 $6.6 million, $6.9 million and $10.4 million in the years ended December 31, 2019, 2018 and 2017, respectively. Benefits of tax deductions in excess of recognized compensation cost, which are included in operating cash flows, were $4.8 million, $5.7 million and $1.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019, 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.
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 293,000, 361,000 and 518,000 stock options during the years ended December 31, 2019, 2018 and 2017, 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:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
2017
|
Dividend Yield
|
0.3
|
%
|
0.3
|
%
|
0.4
|
%
|
Expected Volatility
|
36.5
|
%
|
34.8
|
%
|
32.8
|
%
|
Risk-free Interest Rate
|
2.5
|
%
|
2.6
|
%
|
1.9
|
%
|
Expected Term (in years)
|
5.3
|
|
5.3
|
|
5.3
|
|
Weighted-average Fair Value of Stock Options Granted
|
$
|
19.59
|
|
$
|
16.54
|
|
$
|
8.55
|
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
Number Outstanding
December 31, 2019
|
|
Weighted Average Remaining Contractual
Life
(in Years)
|
|
Weighted Average
Exercise Price
|
|
Number Exercisable
December 31, 2019
|
|
Weighted Average
Exercise Price
|
$19.92-20.00
|
11,250
|
|
|
0.15
|
|
$
|
19.92
|
|
|
11,250
|
|
|
$
|
19.92
|
|
20.01-30.00
|
1,006,783
|
|
|
6.23
|
|
25.51
|
|
|
851,403
|
|
|
25.21
|
|
30.01-40.00
|
97,301
|
|
|
5.01
|
|
32.16
|
|
|
97,301
|
|
|
32.16
|
|
40.01-50.00
|
330,890
|
|
|
8.04
|
|
47.26
|
|
|
103,430
|
|
|
47.26
|
|
50.01-54.18
|
283,590
|
|
|
9.02
|
|
54.18
|
|
|
—
|
|
|
—
|
|
19.92-54.18
|
1,729,814
|
|
|
6.93
|
|
34.71
|
|
|
1,063,384
|
|
|
27.93
|
|
The table below summarizes option activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
(In Thousands)
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(in Years)
|
|
Aggregate
Intrinsic Value
(in Thousands)
|
|
Weighted
Average Fair
Value
|
Outstanding at January 1, 2019
|
1,677
|
|
|
$
|
30.42
|
|
|
|
|
|
|
|
Granted
|
293
|
|
|
54.18
|
|
|
|
|
|
|
|
Exercised
|
(217
|
)
|
|
26.76
|
|
|
|
|
|
|
|
Forfeited/expired
|
(23
|
)
|
|
44.69
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
1,730
|
|
|
34.71
|
|
|
6.93
|
|
$
|
38,754
|
|
|
$
|
11.67
|
|
Expected to Vest
|
654
|
|
|
45.36
|
|
|
8.29
|
|
7,687
|
|
|
15.91
|
|
Exercisable at December 31, 2019
|
1,063
|
|
|
27.93
|
|
|
6.10
|
|
31,028
|
|
|
8.97
|
|
The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on December 31, 2019 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 $6.5 million, $6.6 million and $2.6 million during the years ended December 31, 2019, 2018 and 2017, respectively. The total grant-date fair value of options vested during the year ended December 31, 2019, 2018 and 2017 was $4.6 million, $3.5 million and $1.7 million, respectively.
Restricted Stock
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 is 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 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
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019, there are no performance-based restricted shares still subject to performance conditions.
The Company granted 225,000, 248,000 and 375,000 shares of restricted stock at weighted-average fair values of $54.28, $46.01 and $29.27 in the years ended December 31, 2019, 2018 and 2017, respectively. The following table summarizes information about restricted stock activity during 2019:
|
|
|
|
|
|
|
|
Restricted Stock
(In Thousands)
|
Weighted Average
Fair Value
|
Non-vested at January 1, 2019
|
589
|
|
$
|
34.18
|
|
Granted
|
225
|
|
54.28
|
|
Vested
|
(280
|
)
|
30.96
|
|
Forfeited/unearned
|
(40
|
)
|
44.45
|
|
Non-vested at December 31, 2019
|
494
|
|
44.33
|
|
The total vest-date fair value of restricted stock described above that vested during the year was $14.6 million, $24.8 million and $9.9 million in the years ended December 31, 2019, 2018 and 2017, respectively.
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. Another one-third of the earned award is subject to an additional one-year service period and the remaining one-third of the 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 2019:
|
|
|
|
|
|
|
|
|
Performance Share Units
(In Thousands)
|
|
Weighted Average
Fair Value
|
Non-vested at January 1, 2019
|
799
|
|
|
$
|
33.11
|
|
Granted
|
248
|
|
|
54.27
|
|
Vested
|
(425
|
)
|
|
29.89
|
|
Forfeited/unearned
|
(40
|
)
|
|
41.27
|
|
Non-vested at December 31, 2019
|
582
|
|
|
43.93
|
|
The total vest-date fair value of performance share units described above that vested during the period was $22.1 million, $22.6 million and $7.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
Effective May 9, 2018, the Company's Board of Directors and shareholders approved the Employee Stock Purchase Plan, 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 up to an annual maximum of $25,000 in total fair market value of the common stock.
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. Total compensation cost recognized in connection with the ESPP was $0.5 million and $0.2 million for years ended December 31, 2019 and 2018, respectively. These costs were included as a component of operating expenses in the consolidated statements of earnings. During the year ended December 31, 2019, the Company issued 46,642 shares under the ESPP at a weighted average purchase price of $42.07. During the year ended December 31, 2018, the Company issued 25,239 shares at a purchase price of $35.74. As of December 31, 2019, the aggregate number of shares of common stock that may be issued under the ESPP was 128,134.
NOTE 14: SEGMENTS
Description of Products and Services of Reportable Segments
As of December 31, 2019, the Company has three operating and reportable segments: Progressive Leasing, Aaron’s Business and Vive. As discussed above, we have updated all disclosures and references of DAMI in this Annual Report on Form 10-K to reflect the January 1, 2020 name change to Vive.
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, mobile phones and accessories, mattress, and automobile electronics and accessories.
The Aaron’s Business offers furniture, home appliances, consumer electronics and accessories to consumers with a 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 platform. 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 bedding and a significant portion of the upholstered furniture leased and sold in Company-operated and franchised stores.
Vive offers a variety of second-look financing programs originated through 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregated Revenue
The following table presents revenue by source and by segment for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business4
|
Vive
|
Total
|
Lease Revenues and Fees1
|
$
|
2,128,133
|
|
$
|
1,570,358
|
|
$
|
—
|
|
$
|
3,698,491
|
|
Retail Sales2
|
—
|
|
38,474
|
|
—
|
|
38,474
|
|
Non-Retail Sales2
|
—
|
|
140,950
|
|
—
|
|
140,950
|
|
Franchise Royalties and Fees2
|
—
|
|
33,432
|
|
—
|
|
33,432
|
|
Interest and Fees on Loans Receivable3
|
—
|
|
—
|
|
35,046
|
|
35,046
|
|
Other
|
—
|
|
1,263
|
|
—
|
|
1,263
|
|
Total
|
$
|
2,128,133
|
|
$
|
1,784,477
|
|
$
|
35,046
|
|
$
|
3,947,656
|
|
1 Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $27.4 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, $25.5 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 $24.7 million, which are primarily Lease Revenues and Fees.
The following table presents revenue by source and by segment for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business4
|
Vive
|
Total
|
Lease Revenues and Fees1
|
$
|
1,998,981
|
|
$
|
1,507,437
|
|
$
|
—
|
|
$
|
3,506,418
|
|
Retail Sales2
|
—
|
|
31,271
|
|
—
|
|
31,271
|
|
Non-Retail Sales2
|
—
|
|
207,262
|
|
—
|
|
207,262
|
|
Franchise Royalties and Fees2
|
—
|
|
44,815
|
|
—
|
|
44,815
|
|
Interest and Fees on Loans Receivable3
|
—
|
|
—
|
|
37,318
|
|
37,318
|
|
Other
|
—
|
|
1,839
|
|
—
|
|
1,839
|
|
Total
|
$
|
1,998,981
|
|
$
|
1,792,624
|
|
$
|
37,318
|
|
$
|
3,828,923
|
|
1 Substantially all revenue is 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 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 $21.3 million, which are primarily Lease Revenues and Fees.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business4
|
Vive
|
Total
|
Lease Revenues and Fees1
|
$
|
1,566,413
|
|
$
|
1,433,818
|
|
$
|
—
|
|
$
|
3,000,231
|
|
Retail Sales2
|
—
|
|
27,465
|
|
—
|
|
27,465
|
|
Non-Retail Sales2
|
—
|
|
270,253
|
|
—
|
|
270,253
|
|
Franchise Royalties and Fees2
|
—
|
|
48,278
|
|
—
|
|
48,278
|
|
Interest and Fees on Loans Receivable3
|
—
|
|
—
|
|
34,925
|
|
34,925
|
|
Other
|
—
|
|
2,556
|
|
—
|
|
2,556
|
|
Total
|
$
|
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 605, 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Earnings (Loss) Before Income Tax (Benefit) Expense:
|
|
|
|
|
|
Progressive Leasing
|
$
|
55,711
|
|
|
$
|
175,015
|
|
|
$
|
140,224
|
|
Aaron’s Business
|
46,731
|
|
|
84,683
|
|
|
110,642
|
|
Vive
|
(9,654
|
)
|
|
(7,494
|
)
|
|
(11,289
|
)
|
Total Earnings Before Income Tax (Benefit) Expense
|
$
|
92,788
|
|
|
$
|
252,204
|
|
|
$
|
239,577
|
|
Corporate-related assets that benefit multiple segments are reported as other assets in the table below.
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2019
|
|
2018
|
Assets:
|
|
|
|
Progressive Leasing
|
$
|
1,261,786
|
|
|
$
|
1,088,227
|
|
Aaron’s Business1
|
1,740,281
|
|
|
1,483,102
|
|
Vive
|
85,825
|
|
|
95,341
|
|
Other
|
209,908
|
|
|
160,022
|
|
Total Assets2
|
$
|
3,297,800
|
|
|
$
|
2,826,692
|
|
|
|
|
|
Assets From Canadian Operations (included in totals above):
|
|
|
|
Aaron’s Business
|
$
|
28,152
|
|
|
$
|
25,893
|
|
1 Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $14.0 million and $15.2 million as of December 31, 2019 and 2018, respectively.
|
|
2
|
In accordance with the adoption of ASC 842 the Company, as a lessee, is required to recognize substantially all of its operating leases on the balance sheet as operating lease right-of-use assets and operating lease liabilities. For periods prior to the year ended December 31, 2019 the Company's operating lease right of use assets and liabilities are not included on the Company's balance sheet.
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2019
|
|
2018
|
|
2017
|
Depreciation and Amortization1:
|
|
|
|
|
|
Progressive Leasing
|
$
|
29,967
|
|
|
$
|
27,974
|
|
|
$
|
29,048
|
|
Aaron’s Business
|
73,709
|
|
|
64,744
|
|
|
52,251
|
|
Vive
|
1,385
|
|
|
1,432
|
|
|
1,273
|
|
Total Depreciation and Amortization
|
$
|
105,061
|
|
|
$
|
94,150
|
|
|
$
|
82,572
|
|
|
|
|
|
|
|
Depreciation of Lease Merchandise:
|
|
|
|
|
|
Progressive Leasing
|
$
|
1,445,027
|
|
|
$
|
1,219,035
|
|
|
$
|
949,167
|
|
Aaron’s Business
|
527,331
|
|
|
508,869
|
|
|
499,464
|
|
Vive
|
—
|
|
|
—
|
|
|
—
|
|
Total Depreciation of Lease Merchandise
|
$
|
1,972,358
|
|
|
$
|
1,727,904
|
|
|
$
|
1,448,631
|
|
|
|
|
|
|
|
Interest Expense (Income):
|
|
|
|
|
|
Progressive Leasing
|
$
|
8,572
|
|
|
$
|
16,288
|
|
|
$
|
18,577
|
|
Aaron’s Business
|
4,868
|
|
|
(2,944
|
)
|
|
(2,366
|
)
|
Vive
|
3,527
|
|
|
3,096
|
|
|
4,327
|
|
Total Interest Expense
|
$
|
16,967
|
|
|
$
|
16,440
|
|
|
$
|
20,538
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
Progressive Leasing
|
$
|
12,608
|
|
|
$
|
10,711
|
|
|
$
|
8,213
|
|
Aaron’s Business
|
79,931
|
|
|
67,099
|
|
|
48,335
|
|
Vive
|
424
|
|
|
1,035
|
|
|
1,425
|
|
Total Capital Expenditures
|
$
|
92,963
|
|
|
$
|
78,845
|
|
|
$
|
57,973
|
|
1 Excludes depreciation of lease merchandise, which is not included in the chief operating decision maker's measure of depreciation and amortization.
In 2019, the results of the Company's operating segments were impacted by the following items:
|
|
•
|
Aaron's Business earnings before income taxes were impacted by $40.0 million of restructuring charges which were primarily to record closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the closure of one of our store support buildings, workforce reductions, and other impairment charges related to the Company's strategic decision to close Company-operated stores as discussed in Note 11 to these consolidated financial statements.
|
|
|
•
|
Aaron's Business earnings before income taxes were impacted by gains of $7.4 million from the sale of various real estate properties which were classified within other operating income in the consolidated statements of earnings.
|
|
|
•
|
Aaron's Business earnings before income taxes were impacted by gains on insurance recoveries of $4.5 million related to payments received from and final settlements reached with insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of related property insurance receivables. Such gains were classified within other operating income in the consolidated statements of earnings.
|
|
|
•
|
Progressive earnings before taxes were impacted by $179.3 million in regulatory charges and legal expenses incurred related to Progressive Leasing's tentative settlement of the FTC matter discussed in Note 10 to these 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.
|
|
|
•
|
Vive's loss before income taxes includes a gain of $0.8 million related to the sale of Vive's former corporate office building.
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 11 to these consolidated financial statements.
|
For the year ended December 31, 2019 and all prior reporting periods, the Company determined 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 Vive 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 Vive in excess of interest expense incurred by Aaron's Business from third party lenders is reflected in the table above.
|
NOTE 15: RELATED PARTY TRANSACTIONS
Aaron Ventures I, LLC, which we refer to as "Aaron Ventures," was formed in December 2002 for the purpose of acquiring properties from the Company and leasing them back to the Company and is controlled by certain of the Company’s current and former executives. Aaron Ventures purchased a combined total of 21 properties from the Company in 2002 and 2004, and leased the properties back to the Company. As of December 31, 2019, the Company had no remaining finance or operating leases with Aaron Ventures. The Company paid annual rent for the various properties leased from Aaron's Ventures of $0.2 million, $1.2 million, and $2.0 million for the years ending December 31, 2019, 2018, and 2017 respectively.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data)
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
Revenues2
|
$
|
1,012,103
|
|
|
$
|
968,141
|
|
|
$
|
963,808
|
|
|
$
|
1,003,604
|
|
Gross Profit1
|
399,978
|
|
|
381,965
|
|
|
358,667
|
|
|
381,491
|
|
Earnings (Loss) Before Income Taxes
|
70,308
|
|
|
56,819
|
|
|
51,665
|
|
|
(86,004
|
)
|
Net Earnings (Loss)
|
56,078
|
|
|
42,650
|
|
|
39,801
|
|
|
(107,057
|
)
|
Earnings (Loss) Per Share
|
0.83
|
|
|
0.63
|
|
|
0.59
|
|
|
(1.60
|
)
|
Earnings (Loss) Per Share Assuming Dilution
|
0.82
|
|
|
0.62
|
|
|
0.58
|
|
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
954,809
|
|
|
$
|
927,859
|
|
|
$
|
953,071
|
|
|
$
|
993,184
|
|
Gross Profit1, 2, 3
|
351,241
|
|
|
345,557
|
|
|
341,074
|
|
|
376,497
|
|
Earnings Before Income Taxes
|
66,752
|
|
|
49,980
|
|
|
53,415
|
|
|
82,057
|
|
Net Earnings
|
52,246
|
|
|
38,501
|
|
|
43,720
|
|
|
61,743
|
|
Earnings Per Share
|
0.75
|
|
|
0.55
|
|
|
0.64
|
|
|
0.91
|
|
Earnings Per Share Assuming Dilution
|
0.73
|
|
|
0.54
|
|
|
0.62
|
|
|
0.89
|
|
1 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, bad debt expense, provision for write-offs of lease merchandise, provision for credit losses and certain other costs that are directly attributable to the derived revenue.
2 In accordance with the adoption of ASC 842, Progressive Leasing provision for returns and uncollectible renewal payments are recorded as a reduction to lease revenues and fees within the consolidated financial statements beginning January 1, 2019. Prior to January 1, 2019, Progressive Leasing provision for returns and uncollectible renewal payments were recorded as bad debt expense within operating expenses in the consolidated financial statements. Progressive Leasing bad debt expense included in the 2018 quarterly gross profits were $46.5 million, $50.0 million, $64.2 million and $67.0 million for the first, second, third and fourth quarter of 2018, respectively.
3 Quarterly gross profit for the year ended December 31, 2018 has been adjusted to include Progressive Leasing bad debt expense and certain other costs that are directly attributable to the derived revenue.
The comparability of the Company’s quarterly financial results during 2019 and 2018 was impacted by certain events, as described below on a pre-tax basis:
|
|
•
|
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 2019 included net restructuring charges (reversals) of $13.3 million, $18.7 million, $5.5 million, and $2.5 million, respectively. 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 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. Restructuring activity during 2019 also included impairment charges for the planned exit from one of our support buildings along with a loss on the sale of six Canadian stores to a third party as discussed in Note 11 to these consolidated financial statements.
|
|
|
•
|
The third quarter of 2019 includes gains on insurance recoveries of $4.5 million related to payments received from and final settlements reached with insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of related property insurance receivables. Such gains were classified within other operating income in the consolidated statements of earnings.
|
|
|
•
|
The fourth quarter of 2019 included gains of $7.4 million from the sale of various real estate properties which were classified within other operating income in the consolidated statements of earnings.
|
|
|
•
|
The fourth quarter of 2019 included $179.3 million in regulatory charges and legal expenses incurred related to Progressive Leasing's tentative settlement of the FTC matter.
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: 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 recorded as a deferred compensation liability, which is recorded in accounts payable and accrued expenses in the consolidated balance sheets. The deferred compensation plan liability was $11.2 million and $10.4 million as of December 31, 2019 and 2018, respectively. Liabilities under the plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments, which consist of equity and debt "mirror" funds. 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 Company has established a rabbi trust to fund obligations under the plan primarily with Company-owned life insurance policies. The value of the assets within the rabbi trust, which is primarily the cash surrender value of the Company-owned life insurance, was $14.4 million and $13.5 million as of December 31, 2019 and 2018, respectively, and is included in prepaid expenses and other assets in the consolidated balance sheets. The Company recorded gains related primarily to changes in the cash surrender value of the Company-owned life insurance plans of $2.1 million and $1.5 million during the years ended December 31, 2019 and 2017, respectively, and recorded losses of $1.2 million during the year ended December 31, 2018, which were recorded within other non-operating income (expense), net in the consolidated statements of earnings.
Benefits of $3.0 million, $2.7 million and $2.3 million were paid during the years ended December 31, 2019, 2018 and 2017, 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 annual match is not to exceed $11,000 for an individual employee and is subject to a three-year cliff vesting schedule. Deferred compensation expense charged to operations for the Company’s matching contributions was $0.4 million during the year ended December 31, 2019 and was not significant during the years ended December 31, 2018 and 2017.
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 $7.4 million in 2019, $6.9 million in 2018 and $5.7 million in 2017.
Employee Stock Purchase Plan
See Note 13 to these consolidated financial statements for more information regarding the Company's compensatory Employee Stock Purchase Plan.