NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
NOTE 1.
|
BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
Aaron’s, Inc. (the "Company" or "Aaron’s") is a leader in the sales and lease ownership and specialty retailing of furniture, consumer electronics, computers, and home appliances and accessories throughout the United States and Canada.
As of
September 30, 2016
, the Company's major operating divisions are the Aaron’s Sales & Lease Ownership division, Progressive, DAMI and Woodhaven Furniture Industries, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores. On
May 13, 2016
, the Company sold its
82
remaining Company-operated HomeSmart stores and ceased operations of that division. See Note 2 for further discussion of the disposition.
Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions in
46
states. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers and, in turn, leasing that merchandise to the customers on a lease-to-own basis. Progressive consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional retailers. DAMI, which was acquired by Progressive on October 15, 2015, partners with merchants to provide a variety of revolving credit products originated through a third party federally insured bank to customers that may not qualify for traditional prime lending (called "second-look" financing programs).
The following table presents store count by ownership type for the Company's store-based operations:
|
|
|
|
|
|
|
Stores as of September 30 (Unaudited)
|
2016
|
|
2015
|
Company-operated stores
|
|
|
|
Sales and Lease Ownership
|
1,228
|
|
|
1,218
|
|
HomeSmart
|
—
|
|
|
82
|
|
Total Company-operated stores
|
1,228
|
|
|
1,300
|
|
Franchised stores
|
703
|
|
|
764
|
|
Systemwide stores
|
1,931
|
|
|
2,064
|
|
The following table presents active doors for Progressive:
|
|
|
|
|
|
|
Active Doors at September 30 (Unaudited)
|
2016
|
|
2015
|
Progressive Active Doors
1
|
15,493
|
|
|
12,132
|
|
1
An active door is a retail store location at which at least
one
virtual lease-to-own transaction has been completed during the trailing three month period.
Basis of Presentation
The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Generally, actual experience has been consistent with management’s prior estimates and assumptions. Management does not believe these estimates or assumptions will change significantly in the future absent unidentified and unforeseen events.
The accompanying unaudited condensed consolidated financial statements do not include all information required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission for the year ended
December 31, 2015
(the "
2015
Annual Report"). The results of operations for the
three and nine
months ended
September 30, 2016
are not necessarily indicative of operating results for the full year.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principles of Consolidation
The condensed 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.
Accounting Policies and Estimates
See Note 1 to the consolidated financial statements in the
2015
Annual Report.
Earnings Per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock options, restricted stock units and performance share units (collectively, "share-based awards") as determined under the treasury stock method. The following table shows the calculation of dilutive share-based awards for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(Shares In Thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted average shares outstanding
|
72,608
|
|
|
72,586
|
|
|
72,667
|
|
|
72,558
|
|
Dilutive effect of share-based awards
|
591
|
|
|
490
|
|
|
564
|
|
|
408
|
|
Weighted average shares outstanding assuming dilution
|
73,199
|
|
|
73,076
|
|
|
73,231
|
|
|
72,966
|
|
During the
three and nine
months ended
September 30, 2016
, there were approximately
1,193,000
and
1,102,000
weighted-average share-based awards, respectively, excluded from the computation for earnings per share assuming dilution because the awards would have been anti-dilutive for the periods presented.
During the
three and nine
months ended
September 30, 2015
, there were approximately
281,000
and
431,000
weighted-average share-based awards, respectively, excluded from the computation for earnings per share assuming dilution because the awards would have been anti-dilutive for the periods presented.
Investments
At
September 30, 2016
and
December 31, 2015
, investments classified as held-to-maturity securities consisted of British pound-denominated notes issued by Perfect Home Holdings Limited ("Perfect Home"). Perfect Home is based in the U.K. and operates
57
retail stores as of
September 30, 2016
. The Perfect Home notes, which totaled
£16.1 million
(
$20.9 million
) and
£15.1 million
(
$22.2 million
)
at
September 30, 2016
and
December 31, 2015
, respectively, are classified as held-to-maturity securities because the Company has the positive intent and ability to hold the investments to maturity. The Perfect Home notes are carried at amortized cost in investments in the condensed consolidated balance sheets. During the three months ended September 30, 2016, the Company amended the terms of the Perfect Home notes, which extended the maturity date from June 30, 2016 to June 30, 2017, increased the interest rate from
10%
to
12%
and provided the Company with a subordinated security interest in the assets of Perfect Home.
The Company does not intend to sell the aforementioned held-to-maturity securities and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis. The Company has estimated that the carrying amount of its Perfect Home notes approximates fair value and, therefore, no impairment is considered to have occurred as of
September 30, 2016
.
Accounts Receivable
Accounts receivable consist primarily of receivables due from customers of Company-operated stores and Progressive, corporate receivables incurred during the normal course of business (primarily for in-transit credit card transactions and vendor consideration) and franchisee obligations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounts receivable, net of allowances, consist of the following:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Customers
|
$
|
33,022
|
|
|
$
|
35,153
|
|
Corporate
|
23,054
|
|
|
26,175
|
|
Franchisee
|
30,708
|
|
|
52,111
|
|
|
$
|
86,784
|
|
|
$
|
113,439
|
|
The following table shows the components of the accounts receivable provision for the
nine months
ended
September 30
:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
2016
|
|
2015
|
Bad debt expense
|
$
|
91,635
|
|
|
$
|
87,817
|
|
Provision for returns and uncollected renewal payments
|
28,045
|
|
|
30,081
|
|
Accounts receivable provision
|
$
|
119,680
|
|
|
$
|
117,898
|
|
Refer to Note 1 to the consolidated financial statements in the
2015
Annual Report for information on the Company's accounting policy for the accounts receivable provision.
Lease Merchandise
All lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off. The Company records lease merchandise adjustments on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write-off experience. As of
September 30, 2016
and
December 31, 2015
, the allowance for lease merchandise write-offs was
$31.9 million
and
$33.4 million
, respectively.
Lease merchandise adjustments was
$36.6 million
and
$38.8 million
for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$98.6 million
and
$98.3 million
for the
nine months
ended
September 30, 2016
and
2015
, respectively. Lease merchandise adjustments are included in operating expenses in the accompanying condensed consolidated statements of earnings.
Loans Receivable, Net
Loans receivable, net represents the principal balances of credit card charges at DAMI's participating merchants that remain outstanding to cardholders, plus unpaid interest and fees due from cardholders, net of an allowance for uncollectible amounts and unamortized fees (which include merchant fees, net of capitalized origination costs, promotional fees and deferred annual card fees).
The Company acquired outstanding credit card loans in the October 15, 2015 DAMI acquisition (the "Acquired Loans"). Loans acquired in a business acquisition are recorded at their 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 are included in the determination of fair value; therefore, an allowance for loan losses and an amount for unamortized fees are 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 revenue 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.
Assets Held for Sale
Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of
September 30, 2016
and
December 31, 2015
. 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 condensed consolidated balance sheets. The carrying amount of the properties held for sale as of
September 30, 2016
and
December 31, 2015
is
$9.3 million
and
$7.0 million
, respectively.
On
January 29, 2016
, the Company sold its corporate headquarters building for cash of
$13.6 million
, resulting in a gain of
$11.1 million
, which was recorded to
other operating expense (income), net
in the condensed consolidated statements of earnings.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the
nine months
ended
September 30, 2016
are as follows:
|
|
|
|
|
(In Thousands)
|
Foreign Currency
|
Balance at January 1, 2016
|
$
|
(517
|
)
|
Other comprehensive income
|
445
|
|
Balance at September 30, 2016
|
$
|
(72
|
)
|
There were no reclassifications out of accumulated other comprehensive income (loss) for the
nine months
ended
September 30, 2016
.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company's own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are deemed to be impaired. The Company maintains certain financial assets and liabilities, including investments and fixed-rate long-term debt, that are not measured at fair value but for which fair value is disclosed.
The fair values of the Company’s other current financial assets and liabilities, including cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying values due to their short-term nature. The fair value for the loans receivable, net of allowances, and the revolving credit borrowings also approximate their carrying amounts.
Recent Accounting Pronouncements
Adopted
Debt Issuance Costs
. In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which requires debt issuance costs to be presented in the balance sheet as a deduction from the corresponding debt liability rather than as a separate asset. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted this ASU retrospectively in the first quarter of 2016 and as a result debt issuance costs of
$3.7 million
at
December 31, 2015
, previously recognized as an asset in prepaid expenses and other assets, are now classified as a direct deduction from debt in the condensed consolidated balance sheet as of that date.
Measurement-Period Adjustments
. In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
. ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the adjustment amounts. The adjustment amounts must include the effect on earnings of any amounts the acquirer would have recorded in previous periods if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU 2015-16 is applied prospectively to adjustments to provisional amounts that occur after the effective date. That is, ASU 2015-16 applies to open measurement periods, regardless of the acquisition date. The Company adopted this standard in the first quarter of 2016 and applied it to the measurement period adjustments related to the DAMI acquisition. See Note 2 for more information.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pending adoption
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 replaces substantially all existing revenue recognition guidance with a single, comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods and services to customers at the amount to which it expects to be entitled in exchange for transferring those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09, and, as a result of a subsequent update, it will be effective in annual reporting periods, and interim periods within that period, beginning after December 15, 2017. In 2016, the FASB issued additional updates to the revenue recognition guidance in ASU 2014-09 related to principal versus agent assessments, identifying performance obligations, the accounting for licenses, and certain narrow scope improvements and practical expedients. The Company is evaluating the potential effects of adopting ASU 2014-09 and any related updates on its consolidated financial statements.
Leases.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which would require lessees to recognize assets and liabilities for most leases and would change certain aspects of today’s lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Companies must use a modified retrospective approach to adopt ASU 2016-02. The Company has not yet determined the potential effects of adopting ASU 2016-02 on its consolidated financial statements.
Share-Based Payments.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The objective of the update is to simplify the accounting for employee share-based awards by, among other things, requiring companies to recognize the income tax effects of awards in earnings when they vest or are settled, providing companies with an option to recognize forfeitures in earnings as they occur, and clarifying certain guidance on classification of awards as either equity or liabilities and classification of tax payment activity on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company does not believe the adoption of this standard will be material to its consolidated financial statements.
Financial Instruments - Credit Losses
. In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments.
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 prospective 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 annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not yet determined the potential effects of adopting ASU 2016-13 on its consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. ACQUISITIONS AND DISPOSITIONS
During the
nine months
ended
September 30, 2016
and
2015
, net cash payments related to the acquisitions of businesses, including contracts, were
$9.7 million
and
$16.8 million
, respectively. The effect of these acquisitions on the condensed consolidated financial statements for the
nine months
ended
September 30, 2016
and
2015
was not significant.
DAMI Acquisition
On
October 15, 2015
, the Company acquired a
100%
ownership interest in DAMI for a total purchase price of
$54.9 million
, inclusive of cash acquired of
$4.2 million
. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date, as well as adjustments made during the
nine months ended September 30, 2016
(referred to as the "measurement period adjustments"). The final measurement period adjustments did not have a significant effect on the condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Amounts Recognized as of Acquisition Date
1
|
|
Measurement Period Adjustments
2
|
|
Amounts Recognized as of Acquisition Date (as adjusted)
|
Purchase Price
|
$
|
54,900
|
|
|
$
|
—
|
|
|
$
|
54,900
|
|
|
|
|
|
|
|
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
|
Cash and Cash Equivalents
|
4,185
|
|
|
—
|
|
|
4,185
|
|
Loans Receivable
3
|
89,186
|
|
|
(60
|
)
|
|
89,126
|
|
Receivables
|
45
|
|
|
—
|
|
|
45
|
|
Property, Plant and Equipment
|
2,754
|
|
|
—
|
|
|
2,754
|
|
Other Intangibles
|
3,400
|
|
|
(500
|
)
|
|
2,900
|
|
Income Tax Receivable
|
728
|
|
|
—
|
|
|
728
|
|
Prepaid Expenses and Other Assets
|
671
|
|
|
—
|
|
|
671
|
|
Deferred Income Tax Assets
|
375
|
|
|
2,115
|
|
|
2,490
|
|
Total Identifiable Assets Acquired
|
101,344
|
|
|
1,555
|
|
|
102,899
|
|
Accounts Payable and Accrued Expenses
|
(1,709
|
)
|
|
(1,265
|
)
|
|
(2,974
|
)
|
Debt
|
(45,025
|
)
|
|
—
|
|
|
(45,025
|
)
|
Total Liabilities Assumed
|
(46,734
|
)
|
|
(1,265
|
)
|
|
(47,999
|
)
|
Goodwill
|
290
|
|
|
(290
|
)
|
|
—
|
|
Net Assets Acquired
|
$
|
54,900
|
|
|
$
|
—
|
|
|
$
|
54,900
|
|
1
As previously reported in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
2
The measurement period adjustments primarily relate to the resolution of certain income tax-related matters and contingencies that existed as of the acquisition date.
3
Contractually required amounts due at the acquisition date were
$94.2 million
.
HomeSmart Disposition
On
May 13, 2016
, the Company sold its
82
remaining Company-operated HomeSmart stores and ceased operations of that division. During the
nine months ended September 30, 2016
, the Company recognized a loss of
$4.2 million
on the disposition which is recorded in
other operating expense (income), net
in the condensed consolidated statements of earnings. The sale does not represent a strategic shift that will have a major effect on the Company’s operations and financial results and therefore the HomeSmart segment has not been classified as discontinued operations. The Company recorded additional charges of
$1.4 million
during the
nine months ended September 30, 2016
primarily related to the write-down to fair value, less estimated selling costs, of certain HomeSmart assets classified as held for sale as of
September 30, 2016
.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
NOTE 3.
|
FAIR VALUE MEASUREMENT
|
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
September 30, 2016
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Deferred Compensation Liability
|
$
|
—
|
|
|
$
|
(12,436
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,576
|
)
|
|
$
|
—
|
|
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. The liability is included in accounts payable and accrued expenses in the condensed consolidated balance sheets. The liability representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment elections, which consist of equity and debt "mirror" funds. As such, the Company has classified the deferred compensation liability as a Level 2 liability.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes non-financial assets measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
September 30, 2016
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets Held for Sale
|
$
|
—
|
|
|
$
|
9,285
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,976
|
|
|
$
|
—
|
|
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 expense (income), net
in the condensed 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. The Company estimated the fair values of real estate properties using the market values for similar properties.
Certain Financial Assets and Liabilities Not Measured at Fair Value
The following table summarizes the fair value of assets (liabilities) that are not measured at fair value in the condensed consolidated balance sheets, but for which the fair value is disclosed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
September 30, 2016
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Perfect Home Notes
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,948
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,226
|
|
Fixed-Rate Long-Term Debt
2
|
—
|
|
|
(372,778
|
)
|
|
—
|
|
|
—
|
|
|
(395,618
|
)
|
|
—
|
|
|
|
1
|
The Perfect Home notes are carried at cost. The Company periodically reviews the carrying amount utilizing company-specific transactions or changes in Perfect Home’s financial performance to determine if the notes are impaired.
|
|
|
2
|
The fair value of fixed-rate long-term debt is estimated using the present value of underlying cash flows discounted at a current market yield for similar instruments. The carrying amount of fixed-rate long-term debt was
$350.0 million
and
$375.0 million
at
September 30, 2016
and
December 31, 2015
, respectively.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. LOANS RECEIVABLE
The following is a summary of the Company’s loans receivable, net:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
September 30, 2016
|
|
December 31, 2015
|
Credit Card Loans
|
|
$
|
56,010
|
|
|
$
|
13,900
|
|
Acquired Loans
|
|
39,763
|
|
|
74,866
|
|
Loans Receivable, Gross
|
|
95,773
|
|
|
88,766
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
(5,588
|
)
|
|
(937
|
)
|
Unamortized Fees
|
|
(6,637
|
)
|
|
(2,034
|
)
|
Loans Receivable, Net
|
|
$
|
83,548
|
|
|
$
|
85,795
|
|
The following table summarizes the aging of the Company’s finance receivables portfolio, including delinquency percentage rates. A cardholder account is measured as past due when a current account’s minimum payment due has been outstanding for 30 days or longer. The aging is based on the contractual amounts outstanding for each loan as of period end and does not reflect the fair value of the Acquired Loans.
|
|
|
|
|
|
|
|
|
|
Aging Category
|
|
September 30, 2016
|
|
December 31, 2015
|
30-59 days past due
|
|
7.1
|
%
|
|
7.9
|
%
|
60-89 days past due
|
|
3.4
|
%
|
|
3.3
|
%
|
90 or more days past due
|
|
4.6
|
%
|
|
4.1
|
%
|
Past due loans receivable
|
|
15.1
|
%
|
|
15.3
|
%
|
Current loans receivable
|
|
84.9
|
%
|
|
84.7
|
%
|
Balance of loans receivable 90 or more days past due and still accruing interest and fees
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 5. INDEBTEDNESS
On June 30, 2016, DAMI, and HC Recovery, Inc., a wholly owned subsidiary of DAMI, entered into the twelfth amendment (the "Twelfth Amendment") to the 2011 loan and security agreement assumed by the Company in the October 2015 acquisition of DAMI (the "DAMI credit facility"). The Twelfth Amendment amends the DAMI credit facility to, among other things, (i) remove the financial covenant that requires DAMI to maintain a certain EBITDA ratio, (ii) include a financial covenant that requires DAMI to meet certain trailing twelve month and fiscal quarter EBITDA thresholds, (iii) include a minimum tangible net worth requirement for DAMI, and (iv) include a financial covenant that DAMI shall maintain a monthly Cash Collection Percentage (as defined in the DAMI credit facility) of greater than or equal to
5.0%
. The Twelfth Amendment also amends the definition of "Permitted Indebtedness" in the DAMI credit facility to include non-interest bearing debt owed
to the Company and certain of its affiliates under certain circumstances.
As amended, borrowings under the DAMI credit facility bear interest at
4.375%
plus one-month LIBOR, provided that the applicable margin will increase by
0.25%
if Monthly Excess Availability (as defined in the DAMI credit facility) is less than
20%
.
At
September 30, 2016
, the Company was in compliance with all covenants related to its outstanding debt.
See further discussion of Company indebtedness in Note 7 to the consolidated financial statements in the
2015
Annual Report.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has guaranteed certain debt obligations of some of its franchisees under a franchisee loan program with several banks.
In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of the franchisees’ debt obligations under the franchisee loan program, which would be due in full within
90 days
of the event of default. At
September 30, 2016
, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was
$58.8 million
.
The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets.
Since the inception of the franchise loan program in 1994, the Company has had no significant associated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
losses. The Company believes the likelihood of any significant amounts being funded in connection with these commitments to be remote. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the condensed consolidated balance sheets, is approximately
$1.1 million
as of
September 30, 2016
.
The maximum facility commitment amount under the franchisee loan program is
$175.0 million
, including a Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of Quebec) of CAD
$50.0 million
. The Company remains subject to the financial covenants under the franchisee loan facility.
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
September 30, 2016
, the Company had accrued
$5.2 million
for pending legal and regulatory matters for which it believes losses are probable and is the Company's best estimate of its exposure to loss. The Company records these liabilities in accounts payable and accrued expenses in the condensed consolidated balance sheets. The Company estimates that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss contingencies is between
$0
and
$4.0 million
.
At
September 30, 2016
, 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
$546,000
and
$2.6 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.
Consumer
In
Margaret Korrow, et al. v. Aaron's, Inc.,
originally filed in the Superior Court of New Jersey, Middlesex County, Law Division on October 26, 2010, plaintiff filed suit on behalf of herself and others similarly situated alleging that the Company is liable in damages to plaintiff and each class member because the Company's lease agreements issued after March 16, 2006 purportedly violated certain New Jersey state consumer statutes. Plaintiff's complaint seeks treble damages under the New Jersey Consumer Fraud Act, and statutory penalty damages of
$100
per violation of all contracts issued in New Jersey, and also claims that there are multiple violations per contract. The Company removed the lawsuit to the United States District Court for the District of New Jersey on December 6, 2010 (Civil Action No.: 10-06317(JAP)(LHG)). Plaintiff on behalf of herself and others similarly situated seeks equitable relief, statutory and treble damages, pre- and post-judgment interest and attorneys' fees. On July 31, 2013, the Court certified a class comprising all persons who entered into a rent-to-own contract with the Company in New Jersey from March 16, 2006 through March 31, 2011. In August 2013, the Court of Appeals denied the Company’s request for an interlocutory appeal of the class certification issue. On October 4, 2013, the Company also filed a motion to allow counterclaims against all newly certified class members who may owe legitimate fees or damages to the Company or who failed to return merchandise to the Company prior to obtaining ownership. On August 14, 2015, the Company filed a motion for partial summary judgment seeking judicial dismissal of a portion of the claims in the case. The motion filed October 4, 2013 to allow counterclaims was denied by the magistrate judge on June 30, 2014, and that decision was confirmed by the District Court on November 30, 2015. On December 23, 2015, the Company filed a motion with the District Court requesting permission for an interlocutory appeal of the denial of the motion to add counterclaims, which also remains pending. On February 23, 2016, the Court granted in part and denied in part the Company’s motion for partial summary judgment filed August 14, 2015, dismissing plaintiff’s claims that the pro-rate violated the New Jersey Consumer Fraud Act, but denying summary judgment on the claim that Aaron’s Service Plus violated the same act. On March 7, 2016, the Company moved for limited reconsideration of that ruling. On March 24, 2016, plaintiff filed a motion for approval of issuance of class notice. The
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company has filed a motion requesting a stay on issuance of class notice pending the ruling on the request for limited reconsideration of the partial summary judgment ruling and the request for interlocutory review of the denial of the motion to add counterclaims filed on December 23, 2015. Those motions remain pending, but the Court has allowed limited pre-notice class discovery to proceed.
Privacy and Related Matters
In
Crystal and Brian Byrd v. Aaron's, Inc., Aspen Way Enterprises, Inc., John Does (1-100) Aaron's Franchisees and Designerware, LLC,
filed on May 16, 2011, in the United States District Court, Western District of Pennsylvania (Case No. 1:11-CV-00101-SPB), plaintiffs alleged that the Company and its independently owned and operated franchisee Aspen Way Enterprises ("Aspen Way") knowingly violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act ("ECPA") and the Computer Fraud Abuse Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called "PC Rental Agent." Although the District Court dismissed the Company from the original lawsuit on March 20, 2012, after certain procedural motions, on May 23, 2013, the Court granted plaintiffs' motion for leave to file a third amended complaint, which asserted the claims under the ECPA, common law invasion of privacy, added a request for injunction, and named additional independently owned and operated Company franchisees as defendants. Plaintiffs filed the third amended complaint, and the Company moved to dismiss that complaint on substantially the same grounds as it sought to dismiss plaintiffs' prior complaints. Plaintiffs seek monetary damages as well as injunctive relief.
Plaintiffs filed their motion for class certification on July 1, 2013, and the Company's response was filed in August 2013. On March 31, 2014, the United States District Judge dismissed all claims against all franchisees other than Aspen Way Enterprises, LLC. The Court also dismissed claims for invasion of privacy, aiding and abetting, and conspiracy against all defendants. In addition, the Court denied the plaintiffs’ motion to certify the class. Finally, the Judge denied the Company’s motion to dismiss the violation of ECPA claims. Plaintiffs requested and received immediate appellate review of these rulings by the United States Third Circuit Court of Appeals. On April 10, 2015, the Court of Appeals reversed the denial of class certification on the grounds stated by the District Court, and remanded the case back to the District Court for further consideration of that and the other elements necessary for class certification. The District Court has not issued a briefing schedule for evaluating the motion for class certification on remand.
In
Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees and Designerware, LLC,
filed on March 5, 2013 in the Los Angeles Superior Court (Case No. BC502304), plaintiffs assert claims against the Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiffs are seeking injunctive relief and damages in connection with the allegations of the complaint. Plaintiffs are also seeking certification of a putative California class. Plaintiffs are represented by the same counsel as in the above-described
Byrd
litigation. In April 2013, the Company timely removed this matter to federal court. On May 8, 2013, the Company filed a motion to stay this litigation pending resolution of the
Byrd
litigation, a motion to dismiss for failure to state a claim, and a motion to strike certain allegations in the complaint. The Court subsequently stayed the case. The Company's motions to dismiss and strike certain allegations remain pending. On June 6, 2015, the plaintiffs filed a motion to lift the stay, which was denied on July 11, 2015.
In
Lomi Price v. Aaron's, Inc. and NW Freedom Corporation
, filed on February 27, 2013, in the State Court of Fulton County, Georgia (Case No. 13-EV-016812B), an individual plaintiff asserts claims against the Company and its independently owned and operated franchisee, NW Freedom Corporation, for invasion of privacy/intrusion on seclusion, computer invasion of privacy and infliction of emotional distress. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiff is seeking compensatory and punitive damages of not less than
$250,000
. On April 3, 2013, the Company filed an answer and affirmative defenses. On that same day, the Company also filed a motion to stay the litigation pending resolution of the
Byrd
litigation, a motion to dismiss for failure to state a claim and a motion to strike certain allegations in the complaint. The Court stayed the proceeding pending rulings on certain motions in the
Byrd
case, which expired upon remand of the case back to the District Court. On April 24, 2015, the Company filed a renewed motion to stay, which was granted on June 15, 2015.
In
Michael Peterson v. Aaron’s, Inc. and Aspen Way Enterprises, Inc.
, filed on June 19, 2014, in the United States District Court for the Northern District of Georgia (Case No. 1:14-cv-01919-TWT), several plaintiffs allege that they leased computers for use in their law practice. The plaintiffs claim that the Company and Aspen Way knowingly violated plaintiffs' privacy and the privacy of plaintiffs' legal clients in violation of the ECPA and the Computer Fraud Abuse Act. Plaintiffs seek certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of PC Rental Agent software. The plaintiffs claim that information and data obtained by defendants through PC Rental Agent was attorney-client privileged. The Company filed a motion to dismiss plaintiffs' amended complaint. On June 4, 2015, the Court granted the Company’s motion to dismiss all
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
claims except a claim for aiding and abetting invasion of privacy. Plaintiffs then filed a second amended complaint alleging only the invasion of privacy claims that survived the June 4, 2015 court order, and adding a claim for unjust enrichment. The Company filed a motion to dismiss the second amended complaint, and on September 16, 2015, the Court granted the Company’s motion to dismiss plaintiffs’ unjust enrichment claim. The only remaining claim against the Company is a claim for aiding and abetting invasion of privacy. Plaintiffs filed their motion for class certification on March 18, 2016. The Company responded in opposition to that motion, and oral argument was held on September 27, 2016. A decision on that motion is pending.
Other Matters
In
Foster v. Aaron’s, Inc.,
filed on August 21, 2015, in the United States District Court in Phoenix, Arizona (No. CV-15-1637-PHX-SRB), the plaintiff in this putative class action alleges that the Company violated the Telephone Consumer Protection Act ("TCPA") by placing automated calls to customer references, or otherwise violated the TCPA in the manner in which the Company contacts customer references. The Company's initial responsive pleading was filed on October 7, 2015. A Scheduling Order was entered on January 26, 2016. This case was dismissed with prejudice on August 4, 2016.
Other Contingencies
The Company is a party to various claims and legal proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, 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.
Unfunded Lending Commitments
The Company, through its DAMI business, has unfunded lending commitments totaling approximately
$396.2 million
and
$378.7 million
as of
September 30, 2016
and
December 31, 2015
, 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 unfunded loan commitments, which is included in accounts payable and accrued expenses, is approximately
$505,000
as of
September 30, 2016
.
See Note 9 to the consolidated financial statements in the
2015
Annual Report for further information.
NOTE 7. SEGMENTS
As of
September 30, 2016
, the Company had five operating and reportable segments: Sales and Lease Ownership, Progressive, DAMI, Franchise and Manufacturing. On
May 13, 2016
, the Company sold its
82
remaining Company-operated HomeSmart stores and ceased operations of that division. The results of DAMI have been included in the Company's consolidated results and presented as a reportable segment from its October 15, 2015 acquisition date.
The Aaron’s Sales & Lease Ownership division offers furniture, electronics, appliances and computers to consumers primarily on a monthly payment basis with no credit needed. Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions on a variety of products, including furniture and bedding, consumer electronics, appliances and jewelry. The HomeSmart division, prior to its disposition, offered furniture, electronics, appliances and computers to customers primarily on a weekly payment basis with no credit needed. DAMI offers a variety of second-look financing programs originated through a third party federally insured bank to customers of participating merchants and, together with Progressive, allows the Company to provide retail partners with below prime customers
one
source for financing and leasing transactions. The Franchise operation awards franchises and supports franchisees of its sales and lease ownership concept. The Manufacturing segment manufactures upholstered furniture and bedding predominantly for use by Company-operated and franchised stores. Therefore, the Manufacturing segment's revenues and earnings before income taxes are primarily the result of intercompany transactions, substantially all of which are eliminated through the elimination of intersegment revenues and intersegment profit or loss.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended September 30, 2016, management of the Company changed its internal segment measure of profit and loss for the Sales and Lease Ownership and HomeSmart segments to be on an accrual basis rather than on a cash basis. The Company retroactively adjusted Revenues of Reportable Segments and Earnings Before Income Taxes for Reportable Segments disclosed in the tables below to conform to this change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In Thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
REVENUES:
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
437,075
|
|
|
$
|
470,478
|
|
|
$
|
1,405,990
|
|
|
$
|
1,487,217
|
|
Progressive
|
308,397
|
|
|
265,986
|
|
|
913,636
|
|
|
773,551
|
|
HomeSmart
|
—
|
|
|
15,137
|
|
|
25,392
|
|
|
47,453
|
|
DAMI
1
|
6,480
|
|
|
—
|
|
|
16,545
|
|
|
—
|
|
Franchise
|
13,898
|
|
|
15,574
|
|
|
44,965
|
|
|
48,069
|
|
Manufacturing
|
21,051
|
|
|
24,014
|
|
|
67,564
|
|
|
78,048
|
|
Other
|
102
|
|
|
307
|
|
|
739
|
|
|
1,002
|
|
Revenues of Reportable Segments
|
787,003
|
|
|
791,496
|
|
|
2,474,831
|
|
|
2,435,340
|
|
Elimination of Intersegment Revenues
|
(18,021
|
)
|
|
(23,802
|
)
|
|
(62,069
|
)
|
|
(76,783
|
)
|
Total Revenues from External Customers
|
$
|
768,982
|
|
|
$
|
767,694
|
|
|
$
|
2,412,762
|
|
|
$
|
2,358,557
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES:
|
|
|
|
|
|
|
|
Sales and Lease Ownership
2
|
$
|
23,385
|
|
|
$
|
32,348
|
|
|
$
|
118,910
|
|
|
$
|
132,079
|
|
Progressive
|
24,655
|
|
|
5,617
|
|
|
75,652
|
|
|
44,761
|
|
HomeSmart
3
|
(40
|
)
|
|
(335
|
)
|
|
(3,693
|
)
|
|
239
|
|
DAMI
|
(2,524
|
)
|
|
—
|
|
|
(7,686
|
)
|
|
—
|
|
Franchise
4
|
11,022
|
|
|
11,327
|
|
|
35,922
|
|
|
37,218
|
|
Manufacturing
|
(545
|
)
|
|
349
|
|
|
859
|
|
|
2,007
|
|
Other
5
|
(11,430
|
)
|
|
(12,397
|
)
|
|
(33,401
|
)
|
|
(35,545
|
)
|
Earnings Before Income Taxes for Reportable Segments
|
44,523
|
|
|
36,909
|
|
|
186,563
|
|
|
180,759
|
|
Elimination of Intersegment Loss (Profit)
|
759
|
|
|
(353
|
)
|
|
(429
|
)
|
|
(2,019
|
)
|
Total Earnings Before Income Taxes
|
$
|
45,282
|
|
|
$
|
36,556
|
|
|
$
|
186,134
|
|
|
$
|
178,740
|
|
1
Represents interest and fees on loans receivable, and excludes the effect of interest expense.
2
Sales and Lease Ownership earnings before income taxes were impacted by
$2.6 million
of restructuring charges incurred during the
three months ended September 30, 2016
, primarily related to impairment charges incurred in conjunction with the Company's strategic decision to close
56
Company-operated stores.
3
HomeSmart earnings before income taxes includes a loss on the sale of HomeSmart of
$4.2 million
and additional charges of
$1.4 million
related to exiting the HomeSmart business during the
nine months
ended
September 30, 2016
, of which
$40,000
was incurred during the
three months ended September 30, 2016
.
4
Franchise earnings before income taxes were impacted by
$88,000
of restructuring charges related to a reduction in workforce incurred during the
three months ended September 30, 2016
.
5
Earnings before income taxes for the Other category during the
nine months
ended
September 30, 2016
were impacted by a gain of
$11.1 million
on the
January 29, 2016
sale of the Company's corporate office building and
$2.0 million
of restructuring charges related to a reduction in workforce incurred during the
three months ended September 30, 2016
.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The pre-tax losses or earnings in the Other category generally are the result of corporate overhead not allocated to the reportable segments for management purposes.
|
|
|
|
|
|
|
|
|
(In Thousands)
|
September 30,
2016
|
|
December 31,
2015
|
Assets:
|
|
|
|
Sales and Lease Ownership
|
$
|
1,130,717
|
|
|
$
|
1,261,040
|
|
Progressive
|
872,168
|
|
|
878,457
|
|
HomeSmart
|
—
|
|
|
44,429
|
|
DAMI
|
95,211
|
|
|
97,486
|
|
Franchise
|
33,465
|
|
|
53,693
|
|
Manufacturing
1
|
24,943
|
|
|
28,986
|
|
Other
|
394,886
|
|
|
291,080
|
|
Total Assets
|
$
|
2,551,390
|
|
|
$
|
2,655,171
|
|
1
Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the condensed consolidated balance sheets of
$16.7 million
and
$19.4 million
as of
September 30, 2016
and
December 31, 2015
, respectively.
The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP with the following adjustments:
|
|
•
|
Generally a predetermined amount of each reportable segment’s revenues is charged to the reportable segment as an allocation of corporate overhead.
|
|
|
•
|
Accruals related to store closures are not recorded on the reportable segments’ financial statements, but are maintained and controlled by corporate headquarters.
|
|
|
•
|
Interest expense has been allocated to the Sales and Lease Ownership and HomeSmart segments based on a percentage of their revenues. Interest expense is allocated to the Progressive and DAMI segments based on a percentage of the outstanding balances of its intercompany borrowings and of the debt incurred when it was acquired.
|
NOTE 8. RELATED PARTY TRANSACTIONS
The Company leases certain properties under capital leases from related parties that are described in Notes 7 and 14 to the consolidated financial statements in the
2015
Annual Report.
On
May 13, 2016
, the Company sold its remaining
82
Company-operated HomeSmart stores to Buddy's Newco for
$35.0 million
. Refer to Note 2 for more information on the sale. Buddy’s Newco is a subsidiary of Buddy’s Home Furnishings ("Buddy’s"), the third largest lease-to-own home furnishings provider in the United States. Buddy’s is a portfolio company of Vintage Capital Management ("Vintage"), a private equity fund controlled by Brian R. Kahn. Based on information provided in a Schedule 13G filed with the Securities Exchange Commission on August 12, 2015 (the latest available filing made by Vintage), Vintage owned approximately
10%
of the Company’s outstanding common stock. In May 2014, Mr. Kahn and Matthew E. Avril joined the Company’s Board of Directors. In August 2015, Mr. Kahn resigned from the Board, but not due to any disagreement with the Company. At the time the HomeSmart transaction was approved by the Company’s Board of Directors, Mr. Avril owned a limited partnership interest in Vintage, served as a strategic advisor to Vintage and served as a director of a Vintage portfolio company.
In connection with the HomeSmart transaction, the Company engaged a nationally recognized and independent financial advisor with substantial experience in transactions involving lease-to-own companies to conduct a thorough review of likely potential purchasers of the HomeSmart business. Through that process, Buddy’s emerged as the only interested potential purchaser of the business with the financial ability to consummate such a transaction on terms likely satisfactory to the Company. In addition, prior to its approval of the HomeSmart transaction, the Company’s Board of Directors obtained a fairness opinion from a nationally recognized and independent valuation firm, to opine on the fairness, from a financial point of view, of the consideration to be paid by Vintage to the Company in connection with the HomeSmart transaction. Based on these and other factors, the Company’s Board of Directors approved the HomeSmart transaction, with Mr. Avril abstaining from the Board’s vote on the transaction.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. RESTRUCTURING
On July 29, 2016, the Company announced that a thorough review of the Company-operated store portfolio would be performed. As a result of this evaluation and other cost-reduction initiatives, during the three months ended September 30, 2016, the Company closed
two
underperforming Company-operated stores and will close
54
additional Company-operated stores during the three months ending December 31, 2016. Additional store closings are expected during 2017. The Company also optimized 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 restructuring charges of
$4.7 million
were recorded during the three months ended September 30, 2016, comprised of
$2.5 million
related to the write-off and impairment of store property, plant and equipment and
$2.1 million
related to workforce reductions. These costs were included in the line item "Restructuring expenses" in the condensed consolidated statements of earnings.
Total restructuring charges of
$2.6 million
,
$2.0 million
, and
$88,000
have been included in the Sales and Lease Ownership, Other, and Franchise segment results, respectively. The Company currently anticipates it will incur approximately
$13.0 million
related to this restructuring plan in the fourth quarter of 2016, principally related to contractual lease obligations for store locations that are being closed, all of which will be included within the Sales and Lease Ownership segment results.
The following table summarizes the balance of the accruals related to the restructuring charges and the movement in that accrual for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Severance
|
Fixed Assets
|
Total
|
Balance at January 1, 2016
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Restructuring Expenses
|
2,115
|
|
2,543
|
|
4,658
|
|
Payments
|
(1,229
|
)
|
—
|
|
(1,229
|
)
|
Impairment and Assets Written Off
|
—
|
|
(2,543
|
)
|
(2,543
|
)
|
Balance at September 30, 2016
|
$
|
886
|
|
$
|
—
|
|
$
|
886
|
|