ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors of Aaron’s, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aaron’s, Inc. and subsidiaries as of
December 31, 2016
and
2015
, 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, 2016
. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aaron’s, Inc. and subsidiaries at
December 31, 2016
and
2015
, and the consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2016
, 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 24, 2017
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 24, 2017
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors of Aaron’s, Inc. and Subsidiaries
We have audited Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2016
, 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). Aaron’s, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Aaron’s, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016
, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aaron’s, Inc. and subsidiaries as of
December 31, 2016
and
2015
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, 2016
of Aaron’s, Inc. and subsidiaries and our report dated
February 24, 2017
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 24, 2017
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, 2016
. 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, 2016
, the Company’s internal control over financial reporting was effective.
The Company’s internal control over financial reporting as of
December 31, 2016
has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report dated
February 24, 2017
, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016
.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(In Thousands, Except Share Data)
|
ASSETS:
|
|
|
|
Cash and Cash Equivalents
|
$
|
308,561
|
|
|
$
|
14,942
|
|
Investments
|
20,519
|
|
|
22,226
|
|
Accounts Receivable (net of allowances of $35,690 in 2016 and $34,861 in 2015)
|
95,777
|
|
|
113,439
|
|
Lease Merchandise (net of accumulated depreciation and allowances of $743,222 in 2016 and $738,657 in 2015)
|
999,381
|
|
|
1,138,938
|
|
Loans Receivable (net of allowances and unamortized fees of $13,830 in 2016 and $2,971 in 2015)
|
84,804
|
|
|
85,795
|
|
Property, Plant and Equipment, Net
|
211,271
|
|
|
225,836
|
|
Goodwill
|
526,723
|
|
|
539,475
|
|
Other Intangibles, Net
|
247,672
|
|
|
275,912
|
|
Income Tax Receivable
|
11,884
|
|
|
179,174
|
|
Prepaid Expenses and Other Assets
|
109,144
|
|
|
102,751
|
|
Total Assets
|
$
|
2,615,736
|
|
|
$
|
2,698,488
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY:
|
|
|
|
Accounts Payable and Accrued Expenses
|
$
|
297,766
|
|
|
$
|
343,673
|
|
Accrued Regulatory Expense
|
—
|
|
|
4,737
|
|
Deferred Income Taxes Payable
|
276,116
|
|
|
307,481
|
|
Customer Deposits and Advance Payments
|
62,427
|
|
|
69,233
|
|
Debt
|
497,829
|
|
|
606,746
|
|
Total Liabilities
|
1,134,138
|
|
|
1,331,870
|
|
Commitments and Contingencies (Note 9)
|
—
|
|
|
—
|
|
Shareholders’ Equity:
|
|
|
|
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at December 31, 2016 and 2015; Shares Issued: 90,752,123 at December 31, 2016 and 2015
|
45,376
|
|
|
45,376
|
|
Additional Paid-in Capital
|
254,512
|
|
|
240,112
|
|
Retained Earnings
|
1,534,983
|
|
|
1,403,120
|
|
Accumulated Other Comprehensive Loss
|
(531
|
)
|
|
(517
|
)
|
|
1,834,340
|
|
|
1,688,091
|
|
Less: Treasury Shares at Cost
|
|
|
|
Common Stock: 19,303,578 Shares at December 31, 2016 and 18,151,560 at December 31, 2015
|
(352,742
|
)
|
|
(321,473
|
)
|
Total Shareholders’ Equity
|
1,481,598
|
|
|
1,366,618
|
|
Total Liabilities & Shareholders’ Equity
|
$
|
2,615,736
|
|
|
$
|
2,698,488
|
|
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,
|
|
2016
|
|
2015
|
|
2014
|
|
(In Thousands, Except Per Share Data)
|
REVENUES:
|
|
|
|
|
|
Lease Revenues and Fees
|
$
|
2,780,824
|
|
|
$
|
2,684,184
|
|
|
$
|
2,221,574
|
|
Retail Sales
|
29,418
|
|
|
32,872
|
|
|
38,360
|
|
Non-Retail Sales
|
309,446
|
|
|
390,137
|
|
|
363,355
|
|
Franchise Royalties and Fees
|
58,350
|
|
|
63,507
|
|
|
65,902
|
|
Interest and Fees on Loans Receivable
|
24,080
|
|
|
2,845
|
|
|
—
|
|
Other
|
5,598
|
|
|
6,211
|
|
|
5,842
|
|
|
3,207,716
|
|
|
3,179,756
|
|
|
2,695,033
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
Depreciation of Lease Merchandise
|
1,304,295
|
|
|
1,212,644
|
|
|
932,634
|
|
Retail Cost of Sales
|
18,580
|
|
|
21,040
|
|
|
24,541
|
|
Non-Retail Cost of Sales
|
276,608
|
|
|
351,777
|
|
|
330,057
|
|
Operating Expenses
|
1,351,785
|
|
|
1,357,030
|
|
|
1,231,801
|
|
Financial Advisory and Legal Costs
|
—
|
|
|
—
|
|
|
13,661
|
|
Restructuring Expenses
|
20,218
|
|
|
—
|
|
|
9,140
|
|
Retirement and Vacation Charges
|
—
|
|
|
—
|
|
|
9,094
|
|
Progressive-Related Transaction Costs
|
—
|
|
|
—
|
|
|
6,638
|
|
Legal and Regulatory Income
|
—
|
|
|
—
|
|
|
(1,200
|
)
|
Other Operating (Income) Expense, Net
|
(6,446
|
)
|
|
1,324
|
|
|
(1,176
|
)
|
|
2,965,040
|
|
|
2,943,815
|
|
|
2,555,190
|
|
OPERATING PROFIT
|
242,676
|
|
|
235,941
|
|
|
139,843
|
|
Interest Income
|
2,699
|
|
|
2,185
|
|
|
2,921
|
|
Interest Expense
|
(23,390
|
)
|
|
(23,339
|
)
|
|
(19,215
|
)
|
Other Non-Operating Expense
|
(3,563
|
)
|
|
(1,667
|
)
|
|
(1,845
|
)
|
EARNINGS BEFORE INCOME TAXES
|
218,422
|
|
|
213,120
|
|
|
121,704
|
|
INCOME TAXES
|
79,139
|
|
|
77,411
|
|
|
43,471
|
|
NET EARNINGS
|
$
|
139,283
|
|
|
$
|
135,709
|
|
|
$
|
78,233
|
|
EARNINGS PER SHARE
|
$
|
1.93
|
|
|
$
|
1.87
|
|
|
$
|
1.08
|
|
EARNINGS PER SHARE ASSUMING DILUTION
|
$
|
1.91
|
|
|
$
|
1.86
|
|
|
$
|
1.08
|
|
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)
|
2016
|
|
2015
|
|
2014
|
Net Earnings
|
$
|
139,283
|
|
|
$
|
135,709
|
|
|
$
|
78,233
|
|
Other Comprehensive Loss:
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
(14
|
)
|
|
(427
|
)
|
|
(26
|
)
|
Total Other Comprehensive Loss
|
(14
|
)
|
|
(427
|
)
|
|
(26
|
)
|
Comprehensive Income
|
$
|
139,269
|
|
|
$
|
135,282
|
|
|
$
|
78,207
|
|
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 Loss
|
Total Shareholders' Equity
|
(In Thousands, Except Per Share)
|
Shares
|
|
Amount
|
|
|
|
|
Balance, January 1, 2014
|
(17,795
|
)
|
|
$
|
(305,750
|
)
|
|
$
|
45,376
|
|
|
$
|
198,182
|
|
|
$
|
1,202,219
|
|
|
$
|
(64
|
)
|
$
|
1,139,963
|
|
Dividends, $0.0860 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,219
|
)
|
|
—
|
|
(6,219
|
)
|
Stock-Based Compensation
|
17
|
|
|
300
|
|
|
—
|
|
|
10,398
|
|
|
—
|
|
|
—
|
|
10,698
|
|
Reissued Shares
|
515
|
|
|
7,162
|
|
|
—
|
|
|
(6,290
|
)
|
|
—
|
|
|
—
|
|
872
|
|
Repurchased Shares
|
(1,001
|
)
|
|
(25,000
|
)
|
|
—
|
|
|
25,000
|
|
|
—
|
|
|
—
|
|
—
|
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
78,233
|
|
|
—
|
|
78,233
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26
|
)
|
(26
|
)
|
Balance, December 31, 2014
|
(18,264
|
)
|
|
(323,288
|
)
|
|
45,376
|
|
|
227,290
|
|
|
1,274,233
|
|
|
(90
|
)
|
1,223,521
|
|
Dividends, $0.0940 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,822
|
)
|
|
—
|
|
(6,822
|
)
|
Stock-Based Compensation
|
5
|
|
|
89
|
|
|
—
|
|
|
13,605
|
|
|
—
|
|
|
—
|
|
13,694
|
|
Reissued Shares
|
107
|
|
|
1,726
|
|
|
—
|
|
|
(783
|
)
|
|
—
|
|
|
—
|
|
943
|
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135,709
|
|
|
—
|
|
135,709
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(427
|
)
|
(427
|
)
|
Balance, December 31, 2015
|
(18,152
|
)
|
|
(321,473
|
)
|
|
45,376
|
|
|
240,112
|
|
|
1,403,120
|
|
|
(517
|
)
|
1,366,618
|
|
Dividends, $0.1025 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,420
|
)
|
|
—
|
|
(7,420
|
)
|
Stock-Based Compensation
|
4
|
|
|
68
|
|
|
—
|
|
|
20,160
|
|
|
—
|
|
|
—
|
|
20,228
|
|
Reissued Shares
|
217
|
|
|
3,188
|
|
|
—
|
|
|
(5,760
|
)
|
|
—
|
|
|
—
|
|
(2,572
|
)
|
Repurchased Shares
|
(1,373
|
)
|
|
(34,525
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(34,525
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
139,283
|
|
|
—
|
|
139,283
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
(14
|
)
|
Balance, December 31, 2016
|
(19,304
|
)
|
|
$
|
(352,742
|
)
|
|
$
|
45,376
|
|
|
$
|
254,512
|
|
|
$
|
1,534,983
|
|
|
$
|
(531
|
)
|
$
|
1,481,598
|
|
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,
|
|
2016
|
|
2015
|
|
2014
|
|
(In Thousands)
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net Earnings
|
$
|
139,283
|
|
|
$
|
135,709
|
|
|
$
|
78,233
|
|
Adjustments to Reconcile Net Earnings to Net Cash Provided by (Used in) Operating Activities:
|
|
|
|
|
|
Depreciation of Lease Merchandise
|
1,304,295
|
|
|
1,212,644
|
|
|
932,634
|
|
Other Depreciation and Amortization
|
82,378
|
|
|
80,203
|
|
|
85,600
|
|
Accounts Receivable Provision
|
167,923
|
|
|
163,111
|
|
|
99,283
|
|
Provision for Credit Losses on Loans Receivable
|
11,251
|
|
|
937
|
|
|
—
|
|
Stock-Based Compensation
|
21,470
|
|
|
14,163
|
|
|
10,863
|
|
Deferred Income Taxes
|
(35,162
|
)
|
|
38,970
|
|
|
(7,157
|
)
|
Other Changes, Net
|
(2,086
|
)
|
|
(4,815
|
)
|
|
2,214
|
|
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:
|
|
|
|
|
|
Additions to Lease Merchandise
|
(1,615,064
|
)
|
|
(1,775,479
|
)
|
|
(1,465,501
|
)
|
Book Value of Lease Merchandise Sold or Disposed
|
433,464
|
|
|
510,657
|
|
|
456,713
|
|
Accounts Receivable
|
(149,826
|
)
|
|
(173,159
|
)
|
|
(110,269
|
)
|
Prepaid Expenses and Other Assets
|
1,229
|
|
|
(35,649
|
)
|
|
(5,332
|
)
|
Income Tax Receivable
|
167,290
|
|
|
(54,351
|
)
|
|
(117,894
|
)
|
Accounts Payable and Accrued Expenses
|
(51,643
|
)
|
|
68,775
|
|
|
(12,788
|
)
|
Accrued Litigation Expense
|
(4,737
|
)
|
|
(22,463
|
)
|
|
(1,200
|
)
|
Customer Deposits and Advance Payments
|
(4,621
|
)
|
|
7,508
|
|
|
5,639
|
|
Cash Provided by (Used in) Operating Activities
|
465,444
|
|
|
166,761
|
|
|
(48,962
|
)
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Loans Receivable Originated
|
(72,897
|
)
|
|
(11,700
|
)
|
|
—
|
|
Repayments of Loans Receivable
|
64,739
|
|
|
15,211
|
|
|
—
|
|
Proceeds from Maturities and Calls of Investments
|
—
|
|
|
—
|
|
|
89,993
|
|
Outflows on Purchases of Property, Plant & Equipment
|
(57,453
|
)
|
|
(60,557
|
)
|
|
(47,565
|
)
|
Acquisitions of Businesses and Contracts, Net of Cash Acquired
|
(9,762
|
)
|
|
(73,295
|
)
|
|
(700,509
|
)
|
Proceeds from Dispositions of Businesses and Contracts, Net of Cash Disposed
|
35,899
|
|
|
13,976
|
|
|
16,525
|
|
Proceeds from Sale of Property, Plant, and Equipment
|
19,393
|
|
|
7,515
|
|
|
6,032
|
|
Cash Used in Investing Activities
|
(20,081
|
)
|
|
(108,850
|
)
|
|
(635,524
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from Issuances of Debt
|
98,928
|
|
|
290,090
|
|
|
904,956
|
|
Repayments of Debt
|
(208,607
|
)
|
|
(330,747
|
)
|
|
(441,603
|
)
|
Acquisition of Treasury Stock
|
(34,525
|
)
|
|
—
|
|
|
—
|
|
Dividends Paid
|
(7,420
|
)
|
|
(6,822
|
)
|
|
(7,823
|
)
|
Excess Tax (Deficiencies) Benefits From Stock-Based Compensation
|
(665
|
)
|
|
348
|
|
|
1,392
|
|
Issuance of Stock Under Stock Option Plans
|
550
|
|
|
1,038
|
|
|
4,388
|
|
Other
|
(132
|
)
|
|
(425
|
)
|
|
(4,366
|
)
|
Cash (Used in) Provided by Financing Activities
|
(151,871
|
)
|
|
(46,518
|
)
|
|
456,944
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
127
|
|
|
—
|
|
|
—
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
293,619
|
|
|
11,393
|
|
|
(227,542
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
14,942
|
|
|
3,549
|
|
|
231,091
|
|
Cash and Cash Equivalents at End of Year
|
$
|
308,561
|
|
|
$
|
14,942
|
|
|
$
|
3,549
|
|
Cash Paid (Received) During the Year:
|
|
|
|
|
|
Interest
|
$
|
22,511
|
|
|
$
|
23,405
|
|
|
$
|
16,344
|
|
Income Taxes
|
(54,258
|
)
|
|
91,720
|
|
|
187,709
|
|
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. As of
December 31, 2016
, the Company's operating segments are Sales and Lease Ownership, Progressive, DAMI, Franchise, and Woodhaven Furniture Industries.
The Sales and Lease Ownership segment offers furniture, consumer electronics, home appliances and accessories to consumers primarily on a month-to-month lease-to-own basis with no credit needed through the Company's Aaron's stores. Progressive is a 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 two third-party federally insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs). The Franchise operation awards franchises and supports franchisees of its Aaron's stores. Woodhaven Furniture Industries 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 the
82
Company-operated HomeSmart stores and ceased operations of that segment. See below for further discussion of the disposition.
The following table presents store count by ownership type for the Company’s store-based operations:
|
|
|
|
|
|
|
|
|
|
Stores at December 31 (Unaudited)
|
2016
|
|
2015
|
|
2014
|
Company-Operated Stores
|
|
|
|
|
|
Sales and Lease Ownership - Aaron's stores
|
1,165
|
|
|
1,223
|
|
|
1,243
|
|
HomeSmart
|
—
|
|
|
82
|
|
|
83
|
|
Total Company-Operated Stores
|
1,165
|
|
|
1,305
|
|
|
1,326
|
|
Franchised Stores
1
|
699
|
|
|
734
|
|
|
782
|
|
Systemwide Stores
|
1,864
|
|
|
2,039
|
|
|
2,108
|
|
1
The Company has awarded
749
,
813
and
920
franchises as of
December 31, 2016
,
2015
and
2014
, respectively.
The following table presents active doors for Progressive:
|
|
|
|
|
|
|
|
|
|
Active Doors at December 31 (Unaudited)
|
2016
|
|
2015
|
|
2014
|
Progressive Active Doors
1
|
17,963
|
|
|
13,248
|
|
|
12,307
|
|
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 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.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting of furniture, consumer electronics, computers, appliances and household accessories, to its customers for lease under certain terms agreed to by the customer. The Company's Sales and Lease Ownership stores offer leases with month-to-month terms that can be renewed up to
12
,
18
or
24 months
. The Company’s Progressive segment offers virtual lease-purchase solutions, typically over
12 months
, to the customers of traditional retailers.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Sales and Lease Ownership lease revenues are recognized as revenue net of related sales taxes in the month they are due. Lease payments received prior to the month due are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying consolidated balance sheets.
Progressive lease revenues are earned prior to the lease payment due date and are recorded net of related sales taxes as earned. Revenue recorded prior to the payment due date results in unbilled accounts receivable in the accompanying consolidated balance sheets.
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 the Company’s customer agreements are expensed as incurred and have been classified as operating expenses in the Company’s consolidated statements of earnings. The income statement effects of expensing initial direct costs as incurred are not materially different from amortizing initial direct costs, if deferred over the lease term.
Retail and Non-Retail Sales
Revenues from the sale of merchandise to franchisees are recognized when title and risk of ownership transfer to the franchisee upon its receipt of the merchandise. Revenues from the sale of merchandise to other customers are recognized at the time of shipment, at which time title and risk of ownership are transferred to the customer.
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 franchises its Aaron's stores in markets where the Company has no immediate plans to enter. Franchisees pay an ongoing royalty of either
5%
or
6%
of the weekly cash revenue collections.
In addition, franchisees typically pay a non-refundable initial franchise fee from
$15,000
to
$50,000
depending upon market size. Franchise fees and area development fees are generated from the sale of rights to develop, own and operate sales and lease ownership stores. These fees are recognized as income when substantially all of the Company’s obligations per location are satisfied, generally at the date of the store opening. The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. The Company recognizes finance fee revenue as the guarantee obligation is satisfied. Refer to Note 9 for additional discussion of the Company’s franchise-related guarantee obligation.
Franchise fee revenue was
$0.4 million
,
$0.6 million
and
$1.0 million
; royalty revenue was
$53.7 million
,
$57.7 million
and
$58.8 million
; and finance fee revenue was
$2.3 million
,
$2.9 million
and
$3.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Deferred franchise and area development agreement fees, included in accounts payable and accrued expenses in the accompanying consolidated balance sheets, were
$1.1 million
and
$1.6 million
at
December 31, 2016
and
2015
, respectively.
Interest and Fees on Loans Receivable
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant’s credit rating and other factors. Qualifying applicants receive a credit card to finance their initial purchase and to use in subsequent purchases at the merchant or other participating merchants for an initial
24
-month period, which DAMI may renew if the cardholder remains in good standing.
DAMI acquires the loan receivable from merchants through its third-party bank partners at a discount from the face value of the loan. The discount is comprised of a merchant fee discount and a promotional fee discount.
The merchant fee discount represents a pre-negotiated, nonrefundable discount that generally ranges from
3.5%
to
25%
of the loan face value. The discount is designed to cover the risk of loss related to the portfolio of cardholder charges and DAMI's direct origination costs. The merchant fee discount and origination costs are netted on the consolidated balance sheet in loans receivable. Cardholders generally have an initial
24
-month period that the card is active. The merchant fee discount, net of the origination costs, is amortized on a net basis and is recorded as interest and fee revenue on loans receivable in the consolidated statements of earnings on a straight-line basis over the initial
24
-month period.
The discount from the face value of the loan on the acquisition of the loan receivable from the merchant through the third-party bank partners also includes a promotional fee discount, which generally ranges from
1%
to
8%
. The promotional fee discount is intended to compensate the holder of the loan receivable (e.g. DAMI) for deferred or reduced interest rates that are offered to
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 customer is required to make periodic minimum payments that are generally
3.5%
of the outstanding loan balance, which includes outstanding interest. Fixed and variable interest rates, typically
17.90%
to
29.99%
, are compounded daily for cards that do not qualify for deferred or reduced interest promotional periods. Interest income, which is recognized based upon the amount of the loans outstanding, is recognized as interest and fees on loans receivable in the billing period in which they are assessed if collectability is reasonably assured. For credit cards that provide for deferred or reduced interest, if the balance is not paid off during the promotional period, interest is billed to the customers at standard rates and the cumulative amount owed is charged to the cardholder account in the month that the promotional period expires or defaults. The Company recognizes interest revenue during the promotional period based on its historical experience related to cardholders that fail to pay off balances during the promotional period.
Annual fees are charged to cardholders at the commencement of the loan and on each subsequent anniversary date. Annual fees are deferred and recognized into revenue on a straight-line basis over a one year period. Under the provisions of the credit card agreements, the Company also may assess fees for service calls or for missed or late payments, which are recognized as revenue in the billing period in which they are assessed if collectability is reasonably assured.
Lease Merchandise
The Company’s lease merchandise consists primarily of furniture, consumer electronics, computers, appliances and household accessories and is recorded at the lower of cost or market. The cost of merchandise manufactured by the Woodhaven Furniture Industries segment is determined using standard cost and includes overhead from production facilities, shipping costs and warehousing costs. The Company-operated stores depreciate merchandise to a
0%
salvage value over the lease agreement period when on lease, generally
12
to
24 months
, and generally
36 months
when not on lease. The Company’s Progressive segment, at which substantially all merchandise is on lease, depreciates merchandise over the lease agreement period, which is typically over
12 months
.
The following is a summary of lease merchandise, net of accumulated depreciation and allowances:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2016
|
|
2015
|
Merchandise on Lease
|
$
|
786,936
|
|
|
$
|
826,872
|
|
Merchandise Not on Lease
|
212,445
|
|
|
312,066
|
|
Lease Merchandise, net of Accumulated Depreciation and Allowances
|
$
|
999,381
|
|
|
$
|
1,138,938
|
|
The Company’s policies require weekly lease merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to daily cycle counting, full physical inventories are generally taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, the Company monitors lease merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off.
All lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off. The Company records a provision for write-offs on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write-off experience. The provision for write-offs is included in operating expenses in the accompanying consolidated statements of earnings.
The following table shows the components of the allowance for lease merchandise write-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Beginning Balance
|
$
|
33,405
|
|
|
$
|
27,573
|
|
|
$
|
8,323
|
|
Merchandise Written off, net of Recoveries
|
(134,110
|
)
|
|
(130,548
|
)
|
|
(80,692
|
)
|
Provision for Write-offs
|
134,104
|
|
|
136,380
|
|
|
99,942
|
|
Ending Balance
|
$
|
33,399
|
|
|
$
|
33,405
|
|
|
$
|
27,573
|
|
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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shipping and Handling Costs
The Company classifies shipping and handling costs as operating expenses in the accompanying consolidated statements of earnings, and these costs totaled
$69.9 million
,
$77.9 million
and
$81.1 million
in
2016
,
2015
and
2014
, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising production costs are initially recognized as a prepaid advertising asset and are expensed when an advertisement appears for the first time. Total advertising costs amounted to
$40.8 million
,
$39.3 million
and
$50.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and are classified within operating expenses in the consolidated statements of earnings. These advertising costs are shown net of cooperative advertising considerations received from vendors, which represents reimbursement of specific, identifiable and incremental costs incurred in selling those vendors’ products. The amount of cooperative advertising consideration recorded as a reimbursement of such advertising expense was
$22.2 million
,
$36.3 million
and
$28.3 million
in
2016
,
2015
and
2014
, respectively. The prepaid advertising asset was
$1.2 million
and
$0.9 million
at
December 31, 2016
and
2015
, respectively, and is reported within prepaid expenses and other assets on the consolidated balance sheets.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 12. The Company estimates the fair value for the options granted on the grant date using a Black-Scholes-Merton option-pricing model. The fair value of each share of restricted stock units ("RSUs"), restricted stock awards ("RSAs") and performance share units ("PSUs") awarded is equal to the market value of a share of the Company’s common stock on the grant date.
Deferred Income Taxes
Deferred income taxes represent primarily temporary differences between the amounts of assets and liabilities for financial and tax reporting purposes. The Company’s largest temporary differences arise principally from the use of accelerated depreciation methods on lease merchandise for tax purposes.
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 and PSUs (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)
|
2016
|
|
2015
|
|
2014
|
Weighted Average Shares Outstanding
|
72,354
|
|
|
72,568
|
|
|
72,384
|
|
Dilutive Effect of Share-Based Awards
|
659
|
|
|
475
|
|
|
339
|
|
Weighted Average Shares Outstanding Assuming Dilution
|
73,013
|
|
|
73,043
|
|
|
72,723
|
|
Approximately
939,000
,
460,000
and
164,000
weighted-average share-based awards were excluded from the computations of earnings per share assuming dilution during the years ended
December 31, 2016
,
2015
and
2014
, 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
At
December 31, 2016
and
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
December 31, 2016
. The Perfect Home notes, which totaled
£16.6 million
(
$20.5 million
) and
£15.1 million
(
$22.2 million
) at
December 31, 2016
and
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 consolidated balance sheets. During 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 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
December 31, 2016
.
Historically, the Company maintained investments in various corporate debt securities, or bonds, that were classified as held-to-maturity securities. During the year ended
December 31, 2014
, the Company sold all of its investments in corporate bonds due to the Progressive acquisition. The amortized cost of the investments sold was
$68.7 million
, and a net realized gain of approximately
$0.1 million
was recorded during the year ended
December 31, 2014
.
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, real estate leasing activities and vendor consideration) and franchisee obligations.
Accounts receivable, net of allowances, consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2016
|
|
2015
|
Customers
|
$
|
36,227
|
|
|
$
|
35,153
|
|
Corporate
|
26,375
|
|
|
26,175
|
|
Franchisee
|
33,175
|
|
|
52,111
|
|
|
$
|
95,777
|
|
|
$
|
113,439
|
|
The Company maintains an accounts receivable allowance, which primarily relates to its store-based operations and its Progressive operations. For the Company's store-based operations, contractually required lease payments are accrued when due; however, they are not always collected and customers can terminate the lease agreements at any time. For customers that do not pay timely, the Company's store-based operations generally focus on obtaining a return of the lease merchandise. Therefore the Company’s policy for its store-based operations is to accrue a provision for returns and uncollectible contractually due renewal payments based on historical collection experience, which is recognized as a reduction of lease revenues and fees. Store-based operations write-off lease receivables that are
60 days
or more past due on pre-determined dates occurring twice monthly.
The Company’s policy for its Progressive segment is to accrue for uncollected amounts due based on historical collection experience. The provision is recognized as bad debt expense classified in operating expenses. The Progressive segment writes off lease receivables that are
120 days
or more contractually past due.
The following table shows the components of the accounts receivable allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Beginning Balance
|
$
|
34,861
|
|
|
$
|
27,401
|
|
|
$
|
7,172
|
|
Accounts Written Off
|
(167,094
|
)
|
|
(155,651
|
)
|
|
(79,054
|
)
|
Accounts Receivable Provision
|
167,923
|
|
|
163,111
|
|
|
99,283
|
|
Ending Balance
|
$
|
35,690
|
|
|
$
|
34,861
|
|
|
$
|
27,401
|
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected renewal payments for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Bad Debt Expense
|
128,333
|
|
|
122,184
|
|
|
60,514
|
|
Provision for Returns and Uncollected Renewal Payments
|
39,590
|
|
|
40,927
|
|
|
38,769
|
|
Accounts Receivable Provision
|
$
|
167,923
|
|
|
$
|
163,111
|
|
|
$
|
99,283
|
|
Loans Receivable
Gross loans receivable 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. The allowances and unamortized fees represents an allowance for uncollectible amounts; merchant fee discounts, net of capitalized origination costs; promotional fee discounts; and deferred annual card fees.
Loans acquired in the October 15, 2015 DAMI acquisition (the "Acquired Loans") were recorded at their estimated fair value at the acquisition date. The projected net cash flows from expected payments of principal, interest, fees and servicing costs and anticipated charge-offs were included in the determination of fair value; therefore, an allowance for loan losses and an amount for unamortized fees were not recognized for the Acquired Loans. The difference, or discount, between the expected cash flows to be received and the fair value of the Acquired Loans is accreted to 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.
Losses on loans receivable are recognized when they are incurred, which requires the Company to make its best estimate of probable losses inherent in the portfolio. The Company evaluates loans receivable collectively for impairment. The method for calculating the best estimate of probable losses takes into account the Company’s historical experience, adjusted for current conditions and the Company's judgment concerning the probable effects of relevant observable data, trends and market factors. Economic conditions and loan performance trends are closely monitored to manage and evaluate exposure to credit risk. Trends in delinquency ratios are an indicator of credit risk within the loans receivable portfolio, including the migration of loans between delinquency categories over time (roll rates). Charge-off rates represent another indicator of the potential for future credit losses. The risk in the loans receivable portfolio is correlated with broad economic trends, such as unemployment rates, gross domestic product growth and gas prices, which can have a material effect on credit performance. To the extent that actual results differ from 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 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 deferred merchant fees (net of origination costs) and promotional fees for loans receivable in nonaccrual status. Loans receivable are removed from nonaccrual status when cardholder payments resume, the loan becomes less than
90
days 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant’s credit rating. Below is a summary of the credit quality of the Company’s loan portfolio as of
December 31, 2016
and
2015
by Fair Issac and Company (FICO) score as determined at the time of loan origination:
|
|
|
|
|
|
|
|
December 31,
|
FICO Score Category
|
2016
|
|
2015
|
600 or Less
|
1.8
|
%
|
|
1.1
|
%
|
Between 600 and 700
|
78.1
|
%
|
|
79.8
|
%
|
700 or Greater
|
20.1
|
%
|
|
19.1
|
%
|
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
40
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 store-based operations. The Company uses an agile development methodology in which feature-by-feature updates are made to its software. Costs are capitalized when management, with the relevant authority, authorizes and commits to funding a feature update and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization of costs ceases when the feature update is substantially complete and ready for its intended use. Generally, the life cycle for each feature update implementation is
one
month.
Gains and losses related to dispositions and retirements are recognized as incurred. Maintenance and repairs are also expensed as incurred; renewals on capital leases and improvements are capitalized. Depreciation expense for property, plant and equipment is included in operating expenses in the accompanying consolidated statements of earnings and was
$53.6 million
,
$52.0 million
and
$53.7 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively. Amortization of previously capitalized internal use software development costs, which is a component of depreciation expense for property, plant and equipment, was
$9.2 million
,
$7.4 million
and
$5.4 million
during the years ended
December 31, 2016
,
2015
and
2014
, 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)
|
2016
|
|
2015
|
Prepaid Expenses
|
$
|
75,485
|
|
|
$
|
76,118
|
|
Assets Held for Sale
|
8,866
|
|
|
6,976
|
|
Deferred Tax Asset
|
5,912
|
|
|
—
|
|
Other Assets
|
18,881
|
|
|
19,657
|
|
|
$
|
109,144
|
|
|
$
|
102,751
|
|
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, 2016
and
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 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, 2016
and
2015
was
$8.9 million
and
$7.0 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded impairment charges on assets held for sale of
$5.8 million
,
$0.5 million
and
$0.8 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively. The impairment charges are generally included in
other operating (income) expense, net
within the consolidated statements of earnings. These impairment charges related to the sale of the net assets of the HomeSmart disposal group in May 2016 as described below, as well as the impairment of various parcels of land and buildings that the Company decided not to utilize for future expansion.
On
May 13, 2016
, the Company sold its
82
remaining Company-operated HomeSmart stores for
$35.0 million
and ceased operations of that segment. The cash proceeds are recorded in proceeds from dispositions of businesses and contracts, net in the consolidated statements of cash flows. During the year ended
December 31, 2016
, the Company recognized a loss of
$4.3 million
on the disposition which is recorded in
other operating (income) expense, net
in the 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
$1.1 million
during the year ended
December 31, 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
December 31, 2016
.
The disposal of assets held for sale resulted in the recognition of net gains of
$11.4 million
in
2016
and net losses of
$0.8 million
in
2014
. Gains and losses on the disposal of assets held for sale were not significant in
2015
.
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
in the year ended
December 31, 2016
. The cash proceeds are recorded in proceeds from sales of property, plant and equipment in the consolidated statements of cash flows and the gain is recorded in
other operating (income) expense, net
in the consolidated statements of earnings.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net tangible and intangible assets acquired in connection with business acquisitions. Impairment occurs when the carrying amount of goodwill is not recoverable from future cash flows. The Company’s goodwill is not amortized but is subject to an impairment test at the reporting unit level annually as of October 1 and more frequently if events or circumstances indicate that impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results. The Company completed its annual goodwill impairment test as of October 1,
2016
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
2016
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 and franchise development rights acquired in connection with store-based business acquisitions. The customer relationship intangible asset is amortized on a straight-line basis over a
two
-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
three
years). Acquired franchise development rights are amortized on a straight-line basis over the unexpired life of the franchisee’s
ten
year area development agreement.
Other intangibles also include the identifiable intangible assets acquired as a result of the DAMI and Progressive acquisitions, which the Company recorded at the estimated fair value as of the respective acquisition dates. As more fully described in Note 2 to these consolidated financial statements, the Company amortizes the definite-lived intangible assets acquired as a result of the DAMI acquisition on a straight-line basis over
five
years. The Company amortizes the definite-lived intangible assets acquired as a result of the Progressive 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 and trademarks acquired as part of the Progressive 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 and trademark 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 by comparing the asset’s fair value to its carrying amount. The Company estimates the fair value based on projected discounted future cash flows under a relief from royalty method. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying amount.
The Company completed its indefinite-lived intangible asset impairment test as of October 1,
2016
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)
|
2016
|
|
2015
|
Accounts Payable
|
$
|
71,941
|
|
|
$
|
98,655
|
|
Accrued Insurance Costs
|
47,649
|
|
|
55,411
|
|
Accrued Salaries and Benefits
|
41,612
|
|
|
47,939
|
|
Accrued Real Estate and Sales Taxes
|
32,986
|
|
|
32,952
|
|
Deferred Rent
|
31,859
|
|
|
25,110
|
|
Other Accrued Expenses and Liabilities
|
71,719
|
|
|
83,606
|
|
|
$
|
297,766
|
|
|
$
|
343,673
|
|
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. Estimates for these insurance reserves are made based on actual reported but unpaid claims and actuarial analysis of the projected claims run off for both reported and incurred but not reported claims. This analysis is based upon an assessment of the likely outcome or historical experience. The Company makes periodic prepayments to its insurance carrier to cover the projected claims run off for both reported and incurred but not reported claims, considering its retention or stop loss limits. The Company made a reclassification to the December 31, 2015 balance sheet to record the estimated insurance coverage in excess of the stop-loss policy limits and to reflect certain prepayments to the insurance carrier as a prepaid and other asset and the related gross insurance reserve as accounts payable and accrued expenses, rather than presenting them on a net basis.
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
$2.5 million
and
$2.6 million
as of
December 31, 2016
and
2015
, respectively. The capitalized cost is depreciated over the useful life of the related asset.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company's own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are deemed to be impaired. The Company maintains certain financial assets and liabilities, including 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.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as a component of
other non-operating expense
in the consolidated statements of earnings and were
losses
of approximately
$3.7 million
,
$2.5 million
and
$2.3 million
for the years ended
December 31, 2016
,
2015
, and
2014
respectively.
Recent Accounting Pronouncements
Adopted
Debt Issuance Costs
. In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03,
Interest - Imputation of Interest: 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 unamortized 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 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.
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, certain narrow scope improvements, practical expedients and technical corrections. The Company is in the final stages of evaluating the effects of adopting ASU 2014-09 and preliminarily determined that it will have no material impact on the consolidated financial statements as a majority of the Company’s revenue generating activities are leasing arrangements and are outside the scope of this standard. The Company intends to apply the full retrospective approach upon adoption in the first quarter of 2018.
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. A majority of the Company's revenue generating activities will be within the scope of ASU 2016-02. The Company has preliminarily determined that the new standard will not materially impact the timing of revenue recognition. The new standard will impact the Company as a lessee by requiring substantially all of its operating leases to be recognized on the balance sheet as a right-to-use asset and lease liability. The Company is currently quantifying the impacts of its operating leases to the consolidated financial statements, as well as evaluating the other impacts of adopting ASU 2016-02. The Company intends to adopt the new standard in the first quarter of 2019.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO 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 excess income tax effects of awards in earnings when they 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 statements 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 adopted the standard effective January 1, 2017 and believes that the impact to the financial statements will not be material.
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.
Business Combinations
. In January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business
. The objective of the update is to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. Companies must use a prospective approach to adopt ASU 2017-01, which is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet determined the potential effects of adopting ASU 2017-01 on its consolidated financial statements.
NOTE 2: ACQUISITIONS
During the years ended
December 31, 2016
,
2015
and
2014
, cash payments, net of cash acquired, related to the acquisitions of businesses and contracts were
$9.8 million
,
$73.3 million
and
$700.5 million
, respectively. Cash payments made during the year ended December 31, 2015 principally relate to the DAMI acquisition as described below. Cash payments made during the year ended December 31, 2014 principally relate to the Progressive acquisition as described below.
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 results of DAMI and Progressive have been presented as reportable segments from their
October 15, 2015
and
April 14, 2014
acquisition dates, respectively. Refer to Note 13 for more information on their revenues and earnings before income taxes since their respective acquisition dates. The effect of the Company’s other acquisitions on the consolidated financial statements for the years ended
December 31, 2016
,
2015
and
2014
was not significant.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DAMI Acquisition
On
October 15, 2015
, Progressive acquired a
100%
ownership interest in DAMI for a total purchase price of
$54.9 million
, inclusive of cash acquired of
$4.2 million
. Together with Progressive, DAMI allows the Company to provide retail and merchant partners with one source for financing and leasing transactions with below-prime customers. The following table presents the summary of the assets acquired and liabilities assumed as of the acquisition date, as well as the acquisition accounting adjustments. The final acquisition accounting adjustments did not have a significant effect on the consolidated statements of earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Amounts Recognized as of Acquisition Date
1
|
|
Acquisition Accounting 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
4
|
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 acquisition accounting 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
.
4
Identifiable intangible assets are further disaggregated in the table below.
The intangible assets attributable to the DAMI acquisition are comprised of the following:
|
|
|
|
|
|
|
|
Fair Value
(in thousands)
|
|
Weighted Average Life
(in years)
|
Technology
|
$
|
2,550
|
|
|
5.0
|
Non-compete Agreements
|
350
|
|
|
5.0
|
Total Acquired Intangible Assets
|
$
|
2,900
|
|
|
|
During the year ended December 31, 2015, the Company incurred
$3.7 million
of transaction costs in connection with the acquisition of DAMI. These costs were included in the line item operating expenses in the consolidated statements of earnings. In addition, the Company incurred approximately
$0.4 million
in debt financing costs related to the assumed debt, which was recorded as a deduction from the corresponding debt liability in the consolidated balance sheets.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Progressive Acquisition
On April 14, 2014, the Company acquired a
100%
ownership interest in Progressive, a leading virtual lease-to-own company, for a total purchase price of
$705.8 million
, inclusive of cash acquired of
$5.8 million
. Progressive provides lease-to-own solutions in
46
states. The acquisition of Progressive provided the Company with expansion into the virtual lease-to-own marketplace through Progressive's wide network of retail partners.
The following table details the sources of cash for the purchase price of the Company’s acquisition of Progressive:
|
|
|
|
|
(In Thousands)
|
|
Proceeds from Private Placement Note Issuance
|
$
|
300,000
|
|
Proceeds from Term Loan
|
126,250
|
|
Proceeds from Revolving Credit Facility
|
65,000
|
|
Cash Consideration
|
185,454
|
|
Deferred Cash Consideration
|
29,106
|
|
Purchase Price
|
$
|
705,810
|
|
Refer to Note 7 for additional information regarding the debt incurred to partially finance the Progressive acquisition.
The initial deferred cash consideration had amounts outstanding as of
December 31, 2016
of
$0.7 million
in withheld escrow accounts.
The purchase price includes a primary escrow of
$35.8 million
to secure indemnification obligations of the sellers relating to the accuracy of representations, warranties and the satisfaction of covenants. As of
December 31, 2016
, primary escrow funds of
$8.5 million
have been withheld to cover pending litigation.
In addition, the purchase price includes a secondary escrow of
$15.8 million
to secure indemnification obligations of the sellers relating to certain acquired tax-related contingent liabilities. The Company believes that
$13.4 million
is fully recoverable from the secondary escrow account and included this indemnification asset as a receivable in the Company's acquisition accounting. As of
December 31, 2016
,
$11.4 million
had been distributed to the Company. Any remaining undisputed balance is payable to the sellers by April 14, 2017.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the summary of the assets acquired and liabilities assumed as of the April 14, 2014 acquisition date, as well as the acquisition adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Amounts Recognized as of Acquisition Date (as adjusted)
1
|
|
Acquisition Accounting Adjustments
2
|
|
Amounts Recognized as of Acquisition Date (as adjusted)
|
Purchase Price
|
$
|
705,810
|
|
|
$
|
—
|
|
|
$
|
705,810
|
|
|
|
|
|
|
|
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
|
|
|
|
|
|
Cash and Cash Equivalents
|
5,810
|
|
|
—
|
|
|
5,810
|
|
Receivables
2, 3
|
27,581
|
|
|
(4,245
|
)
|
|
23,336
|
|
Lease Merchandise
2
|
141,185
|
|
|
110
|
|
|
141,295
|
|
Property, Plant and Equipment
|
4,010
|
|
|
—
|
|
|
4,010
|
|
Other Intangibles
4
|
325,000
|
|
|
—
|
|
|
325,000
|
|
Prepaid Expenses and Other Assets
|
893
|
|
|
—
|
|
|
893
|
|
Total Identifiable Assets Acquired
|
504,479
|
|
|
(4,135
|
)
|
|
500,344
|
|
Accounts Payable and Accrued Expenses
2
|
(29,104
|
)
|
|
3,049
|
|
|
(26,055
|
)
|
Deferred Income Taxes Payable
2
|
(48,749
|
)
|
|
(335
|
)
|
|
(49,084
|
)
|
Customer Deposits and Advance Payments
|
(10,000
|
)
|
|
—
|
|
|
(10,000
|
)
|
Total Liabilities Assumed
|
(87,853
|
)
|
|
2,714
|
|
|
(85,139
|
)
|
Goodwill
5
|
289,184
|
|
|
1,421
|
|
|
290,605
|
|
Net Assets Acquired
|
$
|
705,810
|
|
|
$
|
—
|
|
|
$
|
705,810
|
|
1
As previously reported in the notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, which includes the effects of certain acquisition accounting adjustments recognized in 2014.
2
The acquisition accounting adjustments recognized in 2015 related to the resolution of income tax uncertainties and sales tax exposures, which also impacted the fair value estimates of receivables and lease merchandise related to the secondary escrow amount, subsequent to the acquisition date.
3
Receivables include
$13.4 million
related to the secondary escrow amount, which the Company expects to recover prior to April 14, 2017. The gross amount due under customer-related receivables acquired was
$22.7 million
, of which
$10.9 million
was expected to be uncollectible.
4
Identifiable intangible assets are further disaggregated in the following table.
5
The total goodwill recognized in conjunction with the Progressive acquisition has been assigned to the Progressive operating segment. Of the goodwill recognized as part of this acquisition,
$247.0 million
is expected to be deductible for tax purposes. The primary reasons the purchase price of the acquisition exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, is related to synergistic value created from the combination of Progressive’s virtual customer payment capabilities with the Company’s leading traditional lease-to-own model. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.
The intangible assets attributable to the Progressive acquisition are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Fair Value
(in thousands)
|
|
Weighted Average Life
(in years)
|
Internal Use Software
|
|
$
|
14,000
|
|
|
3.0
|
Technology
|
|
66,000
|
|
|
10.0
|
Trade Names and Trademarks
|
|
53,000
|
|
|
Indefinite
|
Customer Lease Contracts
|
|
11,000
|
|
|
1.0
|
Merchant Relationships
|
|
181,000
|
|
|
12.0
|
Total Acquired Intangible Assets
1
|
|
$
|
325,000
|
|
|
|
1
Acquired definite-lived intangible assets have a total weighted average life of
10.6
years.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2014, the Company incurred
$6.6 million
of transaction costs in connection with the acquisition of Progressive. These costs were included in the line item "Progressive-related transaction costs" in the consolidated statements of earnings. In addition, during the year ended December 31, 2014, the Company incurred
$2.3 million
in debt financing costs related to the
$491.3 million
of new indebtedness incurred to partially finance the acquisition, which has been recorded as a deduction from the corresponding debt liability in the consolidated balance sheets.
Pro Forma Financial Information
The following table presents unaudited consolidated pro forma information as if the acquisition of Progressive had occurred on January 1, 2013:
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2014
|
(In Thousands)
|
As Reported
|
|
Pro Forma
|
Revenues
|
$
|
2,695,033
|
|
|
$
|
2,851,631
|
|
Net Earnings
|
78,233
|
|
|
86,038
|
|
The unaudited pro forma financial information presented above does not purport to represent what the actual results of the Company's operations would have been if the acquisition of Progressive had occurred on January 1, 2013, nor is it indicative of future performance. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated cost savings from operating synergies.
The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, amortization related to fair value adjustments to intangible assets and the adjustment of interest expense to reflect the additional borrowings of the Company in conjunction with the acquisition.
NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
The following table summarizes information related to indefinite-lived intangible assets at
December 31
:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
2016
|
|
2015
|
Trade Names and Trademarks
|
$
|
53,000
|
|
|
$
|
53,000
|
|
Goodwill
|
526,723
|
|
|
539,475
|
|
Indefinite-lived Intangible Assets
|
$
|
579,723
|
|
|
$
|
592,475
|
|
The following table provides information related to the carrying amount of goodwill by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Sales and Lease
Ownership
|
|
Progressive
|
|
DAMI
|
|
HomeSmart
|
|
Total
|
Balance at January 1, 2015
|
$
|
226,828
|
|
|
$
|
289,184
|
|
|
$
|
—
|
|
|
$
|
14,658
|
|
|
$
|
530,670
|
|
Acquisitions
|
9,529
|
|
|
—
|
|
|
290
|
|
|
229
|
|
|
10,048
|
|
Disposals
|
(2,506
|
)
|
|
—
|
|
|
—
|
|
|
(158
|
)
|
|
(2,664
|
)
|
Acquisition Accounting Adjustments
|
—
|
|
|
1,421
|
|
|
—
|
|
|
—
|
|
|
1,421
|
|
Balance at December 31, 2015
|
233,851
|
|
|
290,605
|
|
|
290
|
|
|
14,729
|
|
|
539,475
|
|
Acquisitions
|
4,345
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,345
|
|
Disposals, Currency Translation and Other Adjustments
|
(444
|
)
|
|
(1,804
|
)
|
|
—
|
|
|
(14,729
|
)
|
|
(16,977
|
)
|
Acquisition Accounting Adjustments
|
170
|
|
|
—
|
|
|
(290
|
)
|
|
—
|
|
|
(120
|
)
|
Balance at December 31, 2016
|
$
|
237,922
|
|
|
$
|
288,801
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
526,723
|
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(In Thousands)
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Internal Use Software
|
$
|
14,000
|
|
|
$
|
(12,665
|
)
|
|
$
|
1,335
|
|
|
$
|
14,000
|
|
|
$
|
(7,998
|
)
|
|
$
|
6,002
|
|
Technology
|
68,550
|
|
|
(18,529
|
)
|
|
50,021
|
|
|
68,550
|
|
|
(11,419
|
)
|
|
57,131
|
|
Merchant Relationships
|
181,000
|
|
|
(40,934
|
)
|
|
140,066
|
|
|
181,000
|
|
|
(25,851
|
)
|
|
155,149
|
|
Other Intangibles
1
|
6,581
|
|
|
(3,331
|
)
|
|
3,250
|
|
|
7,383
|
|
|
(2,753
|
)
|
|
4,630
|
|
Total
|
$
|
270,131
|
|
|
$
|
(75,459
|
)
|
|
$
|
194,672
|
|
|
$
|
270,933
|
|
|
$
|
(48,021
|
)
|
|
$
|
222,912
|
|
1
Other intangibles primarily includes customer relationships, non-compete agreements and franchise development rights.
Total amortization expense of definite-lived intangible assets, included in operating expenses in the accompanying consolidated statements of earnings, was
$28.8 million
,
$28.2 million
and
$31.9 million
during the years ended
December 31,
2016
,
2015
and
2014
, respectively. As of
December 31, 2016
, estimated future amortization expense for the next five years related to definite-lived intangible assets is as follows:
|
|
|
|
|
(In Thousands)
|
|
2017
|
$
|
25,031
|
|
2018
|
22,795
|
|
2019
|
22,549
|
|
2020
|
22,357
|
|
2021
|
21,837
|
|
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, 2016
|
|
December 31, 2015
|
(In Thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Deferred Compensation Liability
|
$
|
—
|
|
|
$
|
(11,978
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,576
|
)
|
|
$
|
—
|
|
The Company maintains a deferred compensation plan as described in Note 16 to these consolidated financial statements. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(In Thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets Held for Sale
|
$
|
—
|
|
|
$
|
8,866
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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 (income) expense, net
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 assets (liabilities) that are not measured at fair value in the consolidated balance sheets, but for which the fair value is disclosed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(In Thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Perfect Home Notes
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,226
|
|
Fixed-Rate Long Term Debt
2
|
—
|
|
|
(368,408
|
)
|
|
—
|
|
|
—
|
|
|
(395,618
|
)
|
|
—
|
|
1
The Perfect Home notes are carried at cost, which approximates fair value. 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
December 31, 2016
and
2015
, respectively.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the Company’s property, plant, and equipment:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2016
|
|
2015
|
Land
|
$
|
22,843
|
|
|
$
|
24,300
|
|
Buildings and Improvements
|
69,935
|
|
|
76,982
|
|
Leasehold Improvements and Signs
|
75,786
|
|
|
98,435
|
|
Fixtures and Equipment
1
|
247,565
|
|
|
223,382
|
|
Assets Under Capital Leases:
|
|
|
|
with Related Parties
|
10,573
|
|
|
10,573
|
|
with Unrelated Parties
|
11,063
|
|
|
11,063
|
|
Construction in Progress
|
4,568
|
|
|
3,853
|
|
|
442,333
|
|
|
448,588
|
|
Less: Accumulated Depreciation and Amortization
|
(231,062
|
)
|
|
(222,752
|
)
|
|
$
|
211,271
|
|
|
$
|
225,836
|
|
|
|
1
|
Includes internal-use software development costs of
$73.0 million
and
$60.7 million
as of
December 31, 2016
and
2015
, respectively. Accumulated amortization of internal-use software development costs amounted to
$31.1 million
and
$22.2 million
as of
December 31, 2016
and
2015
, respectively.
|
Amortization expense on assets recorded under capital leases is included in operating expenses and was
$1.7 million
in the years ended
2016
,
2015
and
2014
. Capital leases primarily consist of buildings and improvements. Assets under capital leases with related parties included
$9.0 million
and
$8.0 million
in accumulated depreciation and amortization as of
December 31, 2016
and
2015
, respectively. Assets under capital leases with unrelated parties included
$6.9 million
and
$6.3 million
in accumulated depreciation and amortization as of
December 31, 2016
and
2015
, 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)
|
2016
|
|
2015
|
Credit Card Loans
|
$
|
64,794
|
|
|
$
|
13,900
|
|
Acquired Loans
|
33,840
|
|
|
74,866
|
|
Loans Receivable, Gross
|
98,634
|
|
|
88,766
|
|
|
|
|
|
|
Allowance for Loan Losses
|
(6,624
|
)
|
|
(937
|
)
|
Unamortized Fees
|
(7,206
|
)
|
|
(2,034
|
)
|
Loans Receivable, Net of Allowances and Unamortized Fees
|
$
|
84,804
|
|
|
$
|
85,795
|
|
Included in the table below is an aging of the loans receivable, gross balance:
|
|
|
|
|
|
|
|
|
(Dollar Amounts in Thousands)
|
December 31,
|
Aging Category
1
|
2016
|
|
2015
|
30-59 Days Past Due
|
6.8
|
%
|
|
7.9
|
%
|
60-89 Days Past Due
|
3.2
|
%
|
|
3.3
|
%
|
90 or more Days Past Due
|
4.3
|
%
|
|
4.1
|
%
|
Past Due Loans Receivable
|
14.3
|
%
|
|
15.3
|
%
|
Current Loans Receivable
|
85.7
|
%
|
|
84.7
|
%
|
Balance of Credit Card Loans on Nonaccrual Status
|
$
|
1,072
|
|
|
$
|
—
|
|
Balance of Loans Receivable 90 or More 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:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2016
|
|
2015
|
Beginning Balance
1
|
$
|
937
|
|
|
$
|
—
|
|
Provision for Loan Losses
|
11,251
|
|
|
937
|
|
Charge-offs
|
(5,675
|
)
|
|
—
|
|
Recoveries
|
111
|
|
|
—
|
|
Ending Balance
|
$
|
6,624
|
|
|
$
|
937
|
|
1
The Company acquired DAMI on October 15, 2015 and recorded
$89.1 million
of loans receivable as of the acquisition date. No corresponding allowance for loan losses was recorded as the loans receivable were established at fair value in acquisition accounting.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: INDEBTEDNESS
Following is a summary of the Company’s debt, net of unamortized debt issuance costs:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
1
|
2016
|
|
2015
|
DAMI Credit Facility
|
$
|
47,302
|
|
|
$
|
41,409
|
|
Revolving Facility
|
—
|
|
|
73,232
|
|
Senior Unsecured Notes, 3.95%, Due in Installments through April 2018
|
49,975
|
|
|
74,956
|
|
Term Loan, Due in Installments through December 2019
|
94,626
|
|
|
108,393
|
|
Senior Unsecured Notes, 4.75%, Due in Installments through April 2021
|
299,562
|
|
|
299,462
|
|
|
|
|
|
Capital Lease Obligation:
|
|
|
|
with Related Parties
|
3,095
|
|
|
4,703
|
|
with Unrelated Parties
|
3,269
|
|
|
4,591
|
|
Total Debt
|
497,829
|
|
|
606,746
|
|
Less: Current Maturities
|
146,515
|
|
|
156,235
|
|
Long-Term Debt
|
$
|
351,314
|
|
|
$
|
450,511
|
|
1
Total debt as of
December 31, 2016
includes unamortized debt issuance costs of
$2.9 million
. The Company retrospectively adopted ASU 2015-03 in the first quarter of 2016, which resulted in the reclassification of unamortized debt issuance costs of
$3.7 million
from prepaid and other expenses to a direct reduction from debt in the consolidated balance sheet as of
December 31, 2015
.
DAMI Credit Facility
In connection with the
October 15, 2015
acquisition of DAMI, the Company assumed the loan and security agreement, dated as of May 18, 2011 (as amended), which provides for a secured revolving credit facility in an amount not to exceed
$85.0 million
in outstanding principal balance (the "DAMI credit facility").
In addition, the loan and security agreement includes an uncommitted incremental facility increase option (an "accordion facility") which, subject to certain terms and conditions, permits DAMI 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
$25.0 million
.
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 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 earnings before income taxes, depreciation and amortization (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.
The DAMI credit facility includes financial covenants that, among other things, require DAMI to maintain a senior debt to capital base ratio of not more than 2.0 to 1.0. Furthermore, the DAMI credit facility restricts DAMI's ability to transfer funds by limiting intercompany dividends to an amount not to exceed the amount of capital the Company has invested in DAMI. The aggregate amount of such dividends made in a calendar year are limited to 75% of DAMI's net income for the immediately preceding calendar year. 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. The Company is in compliance with these covenants at
December 31, 2016
.
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%
. The interest rate for secured revolving credit borrowings as of
December 31, 2016
was
5.00%
. As of
December 31, 2016
,
$7.6 million
was available for borrowing under the DAMI credit facility.
The DAMI credit facility is currently set to mature on October 15, 2017 and contains representations, warranties and covenants consistent with those of other facilities of similar size and type. Collateral under the loan and security agreement is limited to the assets and operations of DAMI.
DAMI pays a non-refundable monthly unused line fee on the line of credit which ranges from
0.5%
to
0.75%
as determined by DAMI's average daily unused commitments.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revolving Credit Agreement and Term Loan
The revolving credit and term loan agreement, which expires
December 9, 2019
, permits the Company to borrow, subject to certain terms and conditions, on an unsecured basis up to
$225.0 million
in revolving loans. The revolving credit and term loan agreement also provides for an accordion facility that permits the Company at any time prior to the maturity date to request an increase in credit extensions thereunder (whether through additional term loans and/or revolving credit commitments or any combination thereof) by an aggregate additional principal amount of up to
$200.0 million
, with such additional credit extensions provided by
one
or more lenders thereunder at their sole discretion.
The revolving credit borrowings and term loans bear interest at the lower of the lender's prime rate or one-month LIBOR plus a margin ranging from
1.75%
to
2.25%
as determined by the Company's ratio of total debt to EBITDA, and interest is payable quarterly. The interest rate for revolving credit borrowings and term loans outstanding as of
December 31, 2016
was
2.52%
. For the term loan facility, as amended, installment payments of
$3.1 million
commenced on December 31, 2014 and are due quarterly, with the remaining unpaid principal balance due at maturity on
December 9, 2019
.
The Company pays a commitment fee on unused balances, which ranges from
0.15%
to
0.30%
as determined by the Company's ratio of total debt to EBITDA. As of
December 31, 2016
,
$225.0 million
was available for borrowings under the revolving credit agreement.
The revolving credit and term loan agreement, senior unsecured notes discussed below and franchise loan program discussed in Note 9 contain financial covenants. These covenants include requirements that the Company maintain ratios of (i) EBITDA plus lease expense to fixed charges of no less than 2.00 to 1.00 and (ii) total debt to EBITDA of no greater than 3.00 to 1.00. In each case, EBITDA refers to the Company’s consolidated net income before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense and other non-cash charges, and it excludes the results of DAMI.
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, 2016
, the Company was in compliance with all covenants related to the revolving credit and term loan agreement, senior unsecured notes and franchise loan program.
Senior Unsecured Notes
2011 Note Purchase Agreement
Pursuant to the note purchase agreement dated as of July 5, 2011, as amended, the Company and certain of its subsidiaries as co-obligors previously issued
$125.0 million
in senior unsecured notes to the purchasers in a private placement. The notes bear interest at a rate of
3.95%
per year and mature on April 27, 2018. Payments of interest commenced on
July 27, 2011
and are due quarterly, and principal payments of
$25.0 million
commenced on
April 27, 2014
and are due annually until maturity.
On April 14, 2014, the Company entered into the third amendment which revised the 2011 note purchase agreement to, among other things, replace the interest rate of
3.75%
per year with an interest rate of
3.95%
commencing
April 28, 2014
, conform the covenants, representations, warranties and events of default to the changes reflected in the revolving credit and term loan agreement, to contemplate the acquisition of Progressive and to authorize the new 2014 senior unsecured notes.
2014 Note Purchase Agreements
On April 14, 2014, the Company entered into note purchase agreements, as amended, pursuant to which the Company and certain of its subsidiaries as co-obligors issued
$300.0 million
in aggregate principal amount of senior unsecured notes in a private placement. The notes bear interest at the rate of
4.75%
per year and mature on
April 14, 2021
. Payments of interest are due quarterly, commencing
July 14, 2014
, with principal payments of
$60.0 million
each due annually commencing
April 14, 2017
.
On September 21, 2015, the Company entered into the fifth amendment to the 2011 note purchase agreement and the second amendment to the 2014 note purchase agreements to, among other things, exclude DAMI financial information from the calculation of financial debt covenants.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Leases with Related Parties
As of
December 31, 2016
, the Company had
19
remaining capital leases with a limited liability company ("LLC") controlled by a group of current and former executives of the Company. In October and November 2004, the Company sold
11
properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling
$6.8 million
. The Company occupies the land and buildings collateralizing the borrowings under a
15
-year term lease, with a
five
-year renewal at the Company’s option, at an aggregate annual rental of
$0.8 million
. The transaction has been accounted for as a capital lease in the accompanying consolidated financial statements. The rate of interest implicit in the leases is approximately
9.7%
. Accordingly, the land and buildings, associated depreciation expense and lease obligations are recorded in the Company’s consolidated financial statements.
No
gain or loss was recognized related to the properties sold to the LLC.
In December 2002, the Company sold
10
properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling
$5.0 million
. The Company occupies the land and buildings collateralizing the borrowings under a
15
-year term lease at an aggregate annual rental of approximately
$1.2 million
. The transaction has been accounted for as a capital lease in the accompanying consolidated financial statements. The rate of interest implicit in the leases is approximately
10.1%
. Accordingly, the land and buildings, associated depreciation expense and lease obligations are recorded in the Company’s consolidated financial statements.
No
gain or loss was recognized related to the properties sold to the LLC.
Future principal maturities under the Company’s debt and capital lease obligations are as follows:
|
|
|
|
|
(In Thousands)
|
|
2017
|
$
|
147,637
|
|
2018
|
98,851
|
|
2019
|
133,190
|
|
2020
|
60,755
|
|
2021
|
60,337
|
|
Thereafter
|
—
|
|
Total
|
$
|
500,770
|
|
NOTE 8: INCOME TAXES
Following is a summary of the Company’s income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Current Income Tax Expense:
|
|
|
|
|
|
Federal
|
$
|
103,993
|
|
|
$
|
32,999
|
|
|
$
|
41,946
|
|
State
|
10,308
|
|
|
5,442
|
|
|
8,682
|
|
|
114,301
|
|
|
38,441
|
|
|
50,628
|
|
Deferred Income Tax (Benefit) Expense:
|
|
|
|
|
|
Federal
|
(33,470
|
)
|
|
35,413
|
|
|
(3,314
|
)
|
State
|
(1,692
|
)
|
|
3,557
|
|
|
(3,843
|
)
|
|
(35,162
|
)
|
|
38,970
|
|
|
(7,157
|
)
|
|
$
|
79,139
|
|
|
$
|
77,411
|
|
|
$
|
43,471
|
|
As a result of the extended bonus depreciation provisions in the Protecting Americans From Tax Hikes Act of 2015 not being enacted until December 2015, the Company paid more than the amount ultimately required for the 2015 federal tax liability. Due to that overpayment the Company received a refund of
$120.0 million
in February 2016.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred income tax liabilities and assets are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
2016
|
|
2015
|
Deferred Tax Liabilities:
|
|
|
|
Lease Merchandise and Property, Plant and Equipment
|
$
|
185,891
|
|
|
$
|
228,174
|
|
Goodwill and Other Intangibles
|
52,135
|
|
|
47,421
|
|
Investment in Partnership
|
96,291
|
|
|
88,913
|
|
Other, Net
|
1,619
|
|
|
2,062
|
|
Total Deferred Tax Liabilities
|
335,936
|
|
|
366,570
|
|
Deferred Tax Assets:
|
|
|
|
Accrued Liabilities
|
33,243
|
|
|
29,192
|
|
Advance Payments
|
13,087
|
|
|
15,713
|
|
Other, Net
|
20,277
|
|
|
14,936
|
|
Total Deferred Tax Assets
|
66,607
|
|
|
59,841
|
|
Less Valuation Allowance
|
(875
|
)
|
|
(752
|
)
|
Net Deferred Tax Liabilities
|
$
|
270,204
|
|
|
$
|
307,481
|
|
The Company’s effective tax rate differs from the statutory United States Federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Statutory Rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increases (Decreases) in United States Federal Taxes
|
|
|
|
|
|
Resulting From:
|
|
|
|
|
|
State Income Taxes, Net of Federal Income Tax Benefit
|
2.6
|
|
|
2.7
|
|
|
2.6
|
|
Federal Tax Credits
|
(1.1
|
)
|
|
(0.5
|
)
|
|
(1.8
|
)
|
Other, Net
|
(0.3
|
)
|
|
(0.9
|
)
|
|
(0.1
|
)
|
Effective Tax Rate
|
36.2
|
%
|
|
36.3
|
%
|
|
35.7
|
%
|
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 2013.
The following table summarizes the activity related to the Company’s uncertain tax positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Balance at January 1,
|
$
|
3,561
|
|
|
$
|
2,644
|
|
|
$
|
1,960
|
|
Additions Based on Tax Positions Related to the Current Year
|
258
|
|
|
331
|
|
|
311
|
|
Additions for Tax Positions of Prior Years
|
293
|
|
|
1,176
|
|
|
928
|
|
Prior Year Reductions
|
(776
|
)
|
|
(1
|
)
|
|
(370
|
)
|
Statute Expirations
|
(609
|
)
|
|
(589
|
)
|
|
(94
|
)
|
Settlements
|
(133
|
)
|
|
—
|
|
|
(91
|
)
|
Balance at December 31,
|
$
|
2,594
|
|
|
$
|
3,561
|
|
|
$
|
2,644
|
|
As of
December 31, 2016
and
2015
, the amount of uncertain tax benefits that, if recognized, would affect the effective tax rate is
$2.5 million
and
$3.1 million
, respectively, including interest and penalties.
During the year ended
December 31, 2016
, the Company recognized a net benefit of
$0.1 million
related to interest and penalties. During the years ended
December 31, 2015
and
2014
, the Company recognized interest and penalties of
$0.4 million
and
$0.3 million
, respectively. The Company had
$0.9 million
and
$1.0 million
of accrued interest and penalties at
December 31, 2016
and
2015
, respectively. The Company recognizes potential interest and penalties related to uncertain tax benefits as a component of income tax expense.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases warehouse and retail store space for most of its store-based operations, call center space, and management and information technology space for corporate functions under operating leases expiring at various times through
2033
. The Company also leases certain properties under capital or financing type leases that are more fully described in Note 7 to these consolidated financial statements. Most of the leases contain renewal options for additional periods ranging from
one
to
20
years. In addition, certain properties occupied under operating leases contain normal purchase options. Leasehold improvements related to these leases are generally amortized over periods that do not exceed the lesser of the lease term or
15
years. While a majority of leases do not require escalating payments, for the leases which do contain such provisions, the Company records the related expense on a straight-line basis over the lease term. The Company also leases transportation vehicles under operating leases. Management expects that most leases will be renewed or replaced by other leases in the normal course of business.
Future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of
December 31, 2016
are as follows:
|
|
|
|
|
(In Thousands)
|
|
2017
|
$
|
107,985
|
|
2018
|
91,703
|
|
2019
|
77,932
|
|
2020
|
65,571
|
|
2021
|
48,711
|
|
Thereafter
|
114,660
|
|
|
$
|
506,562
|
|
Rental expense was
$116.2 million
,
$116.5 million
, and
$111.6 million
in the years ended December 31, 2016, 2015, and 2014, respectively, which are reported within operating expenses in the consolidated statements of earnings. The Company also incurred contractual lease obligations charges, net of estimated sublease receipts, of
$11.6 million
and
$4.8 million
, in the years ended December 31, 2016 and 2014, respectively, related to the closure of Company-operated stores which are reported within restructuring expenses in the consolidated statements of earnings.
The Company has anticipated future sublease receipts from executed sublease agreements of
$4.8 million
in
2017
,
$4.3 million
in
2018
,
$3.4 million
in
2019
,
$2.4 million
in
2020
,
$1.8 million
in
2021
and
$2.0 million
thereafter through 2025.
Guarantees
The Company has guaranteed certain debt obligations of some of the franchisees under a franchise loan program with several banks. On December 6, 2016, the Company amended the fifth amended and restated loan facility to, among other things, reduce the maximum facility commitment amount under the franchise loan program from
$175.0 million
to
$125.0 million
, reduce the Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of Quebec) from CAD
$50.0 million
to CAD
$25.0 million
, and to extend the maturity date to December 7, 2017. The Company remains subject to the financial covenants under the franchisee loan facility.
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, 2016
, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was
$56.7 million
. The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the franchise loan program in 1994, the Company has had no significant associated losses. The Company believes the likelihood of any significant amounts being funded by the Company in connection with these guarantees to be remote. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the consolidated balance sheets, is
$0.8 million
as of
December 31, 2016
.
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
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016
, the Company had accrued
$6.0 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 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
$3.6 million
.
At
December 31, 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
$0.6 million
and
$2.9 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 equitable relief, 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 complaint also seeks 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. 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 a pro-rate feature of the lease agreements violated the New Jersey Consumer Fraud Act, but denying summary judgment on the claim that Aaron’s Service Plus violated the same act. In December 2016, a class notice was mailed to certain individuals who were customers of Company-operated stores in New Jersey from March 16, 2006 to March 31, 2011.
Privacy and Related Matters
In
Crystal and Brian Byrd v. Aaron's, Inc., Aspen Way Enterprises, Inc., John Does (1-100) Aaron's Franchisees and Designerware, LLC,
filed on May 16, 2011, in the United States District Court, Western District of Pennsylvania, plaintiffs allege the Company and its independently owned and operated franchisee Aspen Way Enterprises ("Aspen Way") knowingly violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act ("ECPA") and the Computer Fraud Abuse Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called "PC Rental Agent." Plaintiffs have filed an amended complaint, which asserts claims under the ECPA, common law invasion of privacy, seeks an injunction, and names additional independently owned and operated Company franchisees as defendants. Plaintiffs seek monetary damages as well as injunctive relief.
In March 2014, the United States District Court dismissed all claims against all franchisees other than Aspen Way Enterprises, LLC, dismissed claims for invasion of privacy, aiding and abetting, and conspiracy against all defendants, and denied plaintiffs’ motion to certify a class action, but denied the Company’s motion to dismiss the claims alleging ECPA violations. In April 2015, the United States Court of Appeals for the Third Circuit reversed the denial of class certification on the grounds stated by the District Court, and remanded the case back to the District Court for further consideration of that and the other elements necessary for class certification. On January 24, 2017, final briefs were submitted on the remand of plaintiffs’ motion for class certification with the District Court.
In
Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees and Designerware, LLC,
filed on March 5, 2013 in the Los Angeles Superior Court, plaintiffs assert claims against the Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiffs are seeking injunctive relief and damages, as well as certification of a putative California class. In April 2013, the Company removed this matter to federal court. In May 2013, the Company filed a motion to stay this litigation pending resolution of the
Byrd
litigation, a motion to dismiss for failure to state a claim, and a motion to strike certain
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allegations in the complaint. The Court subsequently stayed the case. The Company's motions to dismiss and strike certain allegations remain pending. In June 2015, the plaintiffs filed a motion to lift the stay, which was denied in July 2015.
In
Lomi Price v. Aaron's, Inc. and NW Freedom Corporation
, filed on February 27, 2013, in the State Court of Fulton County, Georgia (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. This case has been stayed pending resolution of the
Byrd
litigation.
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, plaintiffs claim that the Company and Aspen Way knowingly violated plaintiffs' privacy and the privacy of plaintiffs' law firm’s 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 Court has dismissed all claims except a claim for aiding and abetting invasion of privacy. Plaintiffs filed a motion for class certification which the Court denied on January 25, 2017.
Other Contingencies
At
December 31, 2016
, the Company had non-cancelable commitments primarily related to certain advertising and marketing programs of
$28.2 million
. Payments under these commitments are scheduled to be
$17.4 million
in
2017
,
$6.1 million
in
2018
,
$3.5 million
in
2019
and
$1.2 million
in
2020
.
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
$5.4 million
in
2016
,
$4.7 million
in
2015
and
$4.3 million
in
2014
.
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.
Off-Balance Sheet Risk
The Company, through its DAMI business, has unfunded lending commitments totaling
$366.4 million
and
$378.7 million
as of
December 31, 2016
and
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 losses on unfunded loan commitments is calculated by the Company based on historical usage patterns of cardholders after the initial charge and is
$0.5 million
as of
December 31, 2016
and
2015
, 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 10: RESTRUCTURING
2016 Restructuring Program
During the year ended December 31, 2016, the Company initiated a restructuring program related to its Sales and Lease Ownership segment and supporting corporate functions. The program resulted in a thorough review of the Company-operated Aaron's store portfolio and the subsequent closure or planned closure of underperforming stores. As a result of this restructuring program, the Company closed
56
underperforming Aaron's Company-operated stores, primarily in the fourth quarter of 2016, and committed to plans to close approximately
70
additional stores during 2017. The Company estimates it will incur additional restructuring charges of
$13.0 million
in 2017 related to the loss on contractual lease obligations for the stores that the Company expects to close in 2017. The Company also optimized its home office and field support staff during 2016, which resulted in a reduction in employee headcount in those areas, to more closely align with current business conditions.
Total restructuring charges of
$20.2 million
were recorded during the year ended
December 31, 2016
, comprised principally of
$11.6 million
related to Aaron's store contractual lease obligations for closed stores,
$4.5 million
related to the write-off and impairment of Aaron's store property, plant and equipment and
$3.9 million
related to workforce reductions. Contractual lease obligations are recorded at the cease use date of the related property. These costs were included in the line item "Restructuring expenses" in the consolidated statements of earnings.
The following table summarizes the balances of the restructuring accruals, which are recorded in accounts payable and accrued expenses in the consolidated balance sheets, and the activity for the year ended
December 31, 2016
related to the 2016 restructuring program:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Contractual Lease Obligations
|
|
Severance
|
Balance at January 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
11,830
|
|
|
3,883
|
|
Adjustments
1
|
(241
|
)
|
|
—
|
|
Restructuring Charges
|
11,589
|
|
|
3,883
|
|
Payments
|
(1,006
|
)
|
|
(1,804
|
)
|
Balance at December 31, 2016
|
$
|
10,583
|
|
|
$
|
2,079
|
|
1
Adjustments relate to changes in sublease assumptions and interest accretion.
The following table summarizes restructuring charges by segment for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Sales and Lease Ownership
|
|
Franchise
|
|
Other
|
|
Total
|
Contractual Lease Obligations
|
$
|
11,589
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,589
|
|
Severance
|
287
|
|
|
88
|
|
|
3,508
|
|
|
3,883
|
|
Fixed Asset Impairment
|
4,538
|
|
|
—
|
|
|
—
|
|
|
4,538
|
|
Lease Merchandise Write-Offs
|
208
|
|
|
—
|
|
|
—
|
|
|
208
|
|
Total Restructuring Expense
|
$
|
16,622
|
|
|
$
|
88
|
|
|
$
|
3,508
|
|
|
$
|
20,218
|
|
2014 Restructuring Program
During the year ended
December 31, 2014
, the Company closed 44 underperforming Company-operated stores and restructured its home office and field support to more closely align with current business conditions. The restructuring was completed during the third quarter of 2014 and total restructuring charges of
$9.1 million
were recorded during the year ended
December 31, 2014
, principally comprised of
$4.8 million
related to contractual lease obligations,
$3.3 million
related to the write-off and impairment of property, plant and equipment and
$0.6 million
related to workforce reductions. These costs were included in the line item "Restructuring Expenses" in the consolidated statements of earnings. The Company does not currently anticipate any remaining costs related to this restructuring plan to be material.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the balances of the remaining restructuring accrual and the activity in that accrual related to the 2014 restructuring program:
|
|
|
|
|
(In Thousands)
|
Contractual Lease Obligations
|
Balance at January 1, 2014
|
$
|
—
|
|
Charges
|
4,797
|
|
Payments
|
(1,570
|
)
|
Balance at December 31, 2014
|
3,227
|
|
Payments
|
(1,559
|
)
|
Balance at December 31, 2015
|
1,668
|
|
Payments
|
(766
|
)
|
Adjustments
1
|
110
|
|
Balance at December 31, 2016
|
$
|
1,012
|
|
1
Adjustments relate to changes in sublease assumptions and interest accretion.
The following table summarizes the activity related to the restructuring charges by segment for the year ended
December 31, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Sales and Lease Ownership
|
|
HomeSmart
|
|
Other
|
|
Total
|
Contractual Lease Obligations
|
$
|
694
|
|
|
$
|
6
|
|
|
$
|
4,097
|
|
|
$
|
4,797
|
|
Severance
|
419
|
|
|
—
|
|
|
201
|
|
|
620
|
|
Fixed Asset Impairment
|
3,328
|
|
|
—
|
|
|
—
|
|
|
3,328
|
|
Lease Merchandise Write-Offs
|
395
|
|
|
—
|
|
|
—
|
|
|
395
|
|
Total Restructuring Expense
|
$
|
4,836
|
|
|
$
|
6
|
|
|
$
|
4,298
|
|
|
$
|
9,140
|
|
NOTE 11: SHAREHOLDERS’ EQUITY
The Company held
19,303,578
shares in its treasury and was authorized to purchase an additional
9,123,721
shares at
December 31, 2016
. The holders of common stock are entitled to receive dividends and other distributions in cash, stock or property of the Company as and when declared by its Board of Directors out of legally available funds. In 2016, the Company repurchased
1,372,700
shares of its common stock for
$34.5 million
. In 2014, the Company repurchased
1,000,952
shares of its common stock through an accelerated share repurchase program as discussed below. There was
no
share repurchase activity during 2015.
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, 2016
,
no
preferred shares have been issued.
Accelerated Share Repurchase Program
In December 2013, the Company entered into an accelerated share repurchase program with a third-party financial institution to purchase
$125.0 million
of the Company’s common stock, as part of its previously announced share repurchase program. The Company paid
$125.0 million
at the beginning of the program and received an initial delivery of
3,502,627
shares, estimated to be approximately
80%
of the total number of shares to be repurchased under the agreement, which reduced the Company's shares outstanding at
December 31, 2013
. The value of the initial shares received on the date of purchase was
$100.0 million
, reflecting a
$28.55
price per share, which was recorded as treasury shares. The Company recorded the remaining
$25.0 million
as a forward contract indexed to its own common stock in additional paid-in capital for the year ended
December 31, 2013
.
In
February 2014
, the accelerated share repurchase program was completed and the Company received
1,000,952
additional shares determined using a volume weighted average price of the Company's stock (inclusive of a discount) during the trading period, which resulted in an effective average price per share of
$27.76
. All amounts initially classified as additional paid-in capital were reclassified to treasury shares during the first quarter of 2014 upon settlement.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: STOCK OPTIONS AND RESTRICTED STOCK
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.
As of
December 31, 2016
, the aggregate number of shares of common stock that may be issued or transferred under the 2015 Plan is
3,449,854
.
Total stock-based compensation expense was
$21.5 million
,
$14.2 million
and
$10.9 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively. Stock-based compensation expense for the year ended December 31, 2014 included
$5.1 million
related to the accelerated vesting of restricted stock and stock options upon the retirement of the Company’s former Chief Executive Officer in 2014, as provided for in his employment agreement. These costs were included in the line item Retirement and Vacation Charges in the consolidated statements of earnings. All other stock-based compensation expense was 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
$8.2 million
,
$5.4 million
and
$3.8 million
in the years ended December 31,
2016
,
2015
and
2014
, respectively. Tax deductions less than recognized compensation cost, which are included in financing cash flows, were
$0.7 million
for the year ended December 31,
2016
. Benefits of tax deductions in excess of recognized compensation cost were
$0.3 million
and
$1.4 million
for the years ended December 31,
2015
and
2014
, respectively.
As of
December 31, 2016
, there was
$21.4 million
of total unrecognized compensation expense related to non-vested stock-based compensation which is expected to be recognized over a period of
1.5
years.
Stock Options
Under the Company's 2001 Plan, options granted to date 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. 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
634,000
,
338,000
and
351,000
stock options during the years ended December 31,
2016
,
2015
and
2014
, respectively. The weighted-average fair value of options granted in
2016
,
2015
and
2014
and the weighted-average assumptions used in the Black-Scholes-Merton option pricing model for such grants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Dividend Yield
|
0.4
|
%
|
0.3
|
%
|
0.3
|
%
|
Expected Volatility
|
34.2
|
%
|
28.9
|
%
|
31.9
|
%
|
Risk-free Interest Rate
|
1.3
|
%
|
1.6
|
%
|
1.9
|
%
|
Expected Term (in years)
|
5.3
|
|
5.2
|
|
6.2
|
|
Weighted-average Fair Value of Stock Options Granted
|
$
|
7.10
|
|
$
|
8.41
|
|
$
|
9.61
|
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
Number Outstanding
December 31, 2016
|
|
Weighted Average Remaining Contractual
Life
(in Years)
|
|
Weighted Average
Exercise Price
|
|
Number Exercisable
December 31, 2016
|
|
Weighted Average
Exercise Price
|
$10.01-15.00
|
167
|
|
|
1.79
|
|
$
|
14.11
|
|
|
167
|
|
|
$
|
14.11
|
|
15.01-20.00
|
66
|
|
|
3.15
|
|
19.92
|
|
|
66
|
|
|
19.92
|
|
20.01-25.00
|
623
|
|
|
9.14
|
|
22.67
|
|
|
—
|
|
|
—
|
|
25.01-30.00
|
356
|
|
|
7.91
|
|
28.20
|
|
|
199
|
|
|
28.13
|
|
30.01-32.20
|
195
|
|
|
7.98
|
|
31.95
|
|
|
58
|
|
|
32.20
|
|
10.01-32.20
|
1,407
|
|
|
7.52
|
|
24.21
|
|
|
490
|
|
|
22.73
|
|
The table below summarizes option activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
872
|
|
|
$
|
25.05
|
|
|
|
|
|
|
|
Granted
|
634
|
|
|
22.64
|
|
|
|
|
|
|
|
Exercised
|
(35
|
)
|
|
15.47
|
|
|
|
|
|
|
|
Forfeited/expired
|
(64
|
)
|
|
24.96
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,407
|
|
|
24.21
|
|
|
7.52
|
|
$
|
10,945
|
|
|
$
|
7.81
|
|
Expected to Vest at December 31, 2016
|
818
|
|
|
25.01
|
|
|
8.75
|
|
5,710
|
|
|
7.77
|
|
Exercisable at December 31, 2016
|
490
|
|
|
22.73
|
|
|
5.21
|
|
4,541
|
|
|
7.92
|
|
The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on
December 31, 2016
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
$0.4 million
,
$0.8 million
and
$4.4 million
during the years ended December 31,
2016
,
2015
and
2014
, respectively. The total grant-date fair value of options vested during the year ended December 31,
2016
,
2015
and
2014
was
$1.4 million
,
$1.1 million
and
$1.3 million
, respectively.
Restricted Stock
Shares of restricted stock units or restricted stock awards (collectively, "restricted stock") may be granted to employees and directors under the 2015 Plan and typically vest over approximately
one
to
three
year periods; under the 2001 Plan restricted stock typically vests over approximately
one
to
five
year periods. Restricted stock grants are generally settled in stock and may be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant. The Company recognizes compensation expense for restricted stock with a graded vesting schedule on a straight-line basis over the requisite service period. Shares are issued from the Company’s treasury shares upon vesting. Any shares of restricted stock that are forfeited may again become available for issuance.
The fair value of restricted stock is generally based on the fair market value of the Company’s common stock on the date of grant.
In 2011, the Company established a restricted stock program as a component of the 2001 Plan, referred to as the Aaron’s Management Performance Plan ("AMP Plan"). Under the AMP Plan, which expired on December 31, 2012, restricted shares were granted quarterly to eligible participants upon achievement of certain pre-tax profit and revenue levels by the employees’ operating units or the overall Company. Restricted stock granted under the AMP Plan vests over
four
to
five
years from the date of grant. Plan participants included certain vice presidents, director level employees and other key personnel in the Company’s home office, divisional vice presidents and regional managers. These grants began vesting in 2016.
During 2013, the Company granted performance-based restricted stock to certain executive officers. During 2016, the performance-based restricted stock under this program vested with the completion of the
three
-year service period and the achievement of specific performance criteria. The compensation expense associated with these awards was amortized ratably over the vesting period based on the Company’s projected assessment of the level of performance that would be achieved and earned.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company granted
379,000
,
261,000
and
548,000
shares of restricted stock at weighted-average fair values of
$22.81
,
$31.78
and
$29.11
in the years ended December 31,
2016
,
2015
and
2014
, respectively. The following table summarizes information about restricted stock activity during
2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock
(In Thousands)
|
|
Weighted Average
Fair Value
|
Non-vested at January 1, 2016
|
821
|
|
|
$
|
29.77
|
|
Granted
|
379
|
|
|
22.81
|
|
Vested
|
(158
|
)
|
|
30.01
|
|
Forfeited
|
(89
|
)
|
|
27.61
|
|
Non-vested at December 31, 2016
|
953
|
|
|
27.45
|
|
The total vest-date fair value of restricted stock described above that vested during the year was
$3.8 million
,
$1.8 million
and
$10.2 million
in the years ended December 31,
2016
,
2015
and
2014
, respectively.
Performance Share Units
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. 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, return on capital and invoice volume levels of the respective segments. 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 full award is earned and one-third of the award vests. One third of the earned award is subject to an additional
one
year service period and 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
2016
:
|
|
|
|
|
|
|
|
|
Performance Share Units
(In Thousands)
|
|
Weighted Average
Fair Value
|
Non-vested at January 1, 2016
|
345
|
|
|
$
|
32.80
|
|
Granted
|
530
|
|
|
23.19
|
|
Vested
|
(139
|
)
|
|
32.39
|
|
Forfeited/unearned
|
(43
|
)
|
|
24.59
|
|
Non-vested at December 31, 2016
|
693
|
|
|
25.67
|
|
The total vest-date fair value of performance share units described above that vested during the period was
$3.4 million
and
$0.9 million
for the years ended December 31,
2016
and
2014
, respectively. There were
no
performance share units that vested during
2015
.
NOTE 13: SEGMENTS
Description of Products and Services of Reportable Segments
As of
December 31, 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 segment. The results of DAMI and Progressive have been included in the Company’s consolidated results and presented as reportable segments from their October 15, 2015 and
April 14, 2014
acquisition dates, respectively.
The Sales and Lease Ownership segment offers furniture, electronics, appliances and computers to consumers primarily through its stores with no credit needed. Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions on
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a variety of products, including furniture and bedding, consumer electronics, appliances and jewelry. The HomeSmart segment, 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
two
third-party federally insured banks 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, which are eliminated through the elimination of intersegment revenues and intersegment profit or loss.
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.
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.
During the year ended
December 31, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Revenues:
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
1,852,312
|
|
|
$
|
1,997,270
|
|
|
$
|
2,040,617
|
|
Progressive
|
1,237,597
|
|
|
1,049,681
|
|
|
519,342
|
|
HomeSmart
|
25,392
|
|
|
63,204
|
|
|
64,441
|
|
DAMI
1
|
24,080
|
|
|
2,845
|
|
|
—
|
|
Franchise
|
58,350
|
|
|
63,507
|
|
|
65,902
|
|
Manufacturing
|
90,274
|
|
|
106,020
|
|
|
104,058
|
|
Other
2
|
950
|
|
|
1,118
|
|
|
2,969
|
|
Revenues of Reportable Segments
|
3,288,955
|
|
|
3,283,645
|
|
|
2,797,329
|
|
Elimination of Intersegment Revenues
|
(81,239
|
)
|
|
(103,889
|
)
|
|
(102,296
|
)
|
Total Revenues from External Customers
|
$
|
3,207,716
|
|
|
$
|
3,179,756
|
|
|
$
|
2,695,033
|
|
|
|
|
|
|
|
Earnings (Loss) Before Income Taxes:
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
127,306
|
|
|
$
|
162,996
|
|
|
$
|
145,068
|
|
Progressive
|
104,686
|
|
|
54,525
|
|
|
4,603
|
|
HomeSmart
|
(3,479
|
)
|
|
606
|
|
|
(2,613
|
)
|
DAMI
|
(9,273
|
)
|
|
(1,964
|
)
|
|
—
|
|
Franchise
|
46,766
|
|
|
48,576
|
|
|
50,504
|
|
Manufacturing
|
(27
|
)
|
|
2,520
|
|
|
860
|
|
Other
3
|
(48,164
|
)
|
|
(51,651
|
)
|
|
(75,905
|
)
|
Earnings Before Income Taxes for Reportable Segments
|
217,815
|
|
|
215,608
|
|
|
122,517
|
|
Elimination of Intersegment Loss (Profit)
|
607
|
|
|
(2,488
|
)
|
|
(813
|
)
|
Total Earnings Before Income Taxes
|
$
|
218,422
|
|
|
$
|
213,120
|
|
|
$
|
121,704
|
|
1
Represents interest and fees on loans receivable and excludes the effect of interest expense.
2
Revenues in the Other category are primarily attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities.
3
The pre-tax losses in the Other category are the result of the activity mentioned above, net of the portion of corporate overhead not allocated to the reportable segments for management purposes.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
Sales and Lease Ownership
|
$
|
1,142,474
|
|
|
$
|
1,261,040
|
|
Progressive
|
919,487
|
|
|
878,457
|
|
HomeSmart
|
—
|
|
|
44,429
|
|
DAMI
|
102,958
|
|
|
97,486
|
|
Franchise
|
34,188
|
|
|
53,693
|
|
Manufacturing
1
|
22,551
|
|
|
28,986
|
|
Other
|
394,078
|
|
|
334,397
|
|
Total Assets
|
$
|
2,615,736
|
|
|
$
|
2,698,488
|
|
|
|
|
|
Assets From Canadian Operations (included in totals above):
|
|
|
|
Sales and Lease Ownership
|
$
|
17,199
|
|
|
$
|
8,900
|
|
1
Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of
$14.3 million
,
$19.4 million
and
$13.2 million
as of
December 31, 2016
,
2015
and
2014
, respectively.
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
2016
|
|
2015
|
|
2014
|
Depreciation and Amortization:
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
581,738
|
|
|
$
|
592,450
|
|
|
$
|
633,119
|
|
Progressive
|
776,207
|
|
|
661,646
|
|
|
346,343
|
|
HomeSmart
|
8,103
|
|
|
20,817
|
|
|
22,407
|
|
DAMI
|
993
|
|
|
218
|
|
|
—
|
|
Franchise
|
1,149
|
|
|
1,429
|
|
|
1,599
|
|
Manufacturing
|
1,297
|
|
|
1,482
|
|
|
1,649
|
|
Other
|
17,186
|
|
|
14,805
|
|
|
13,117
|
|
Total Depreciation and Amortization
|
$
|
1,386,673
|
|
|
$
|
1,292,847
|
|
|
$
|
1,018,234
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
8,257
|
|
|
$
|
7,751
|
|
|
$
|
7,834
|
|
Progressive
|
20,042
|
|
|
21,959
|
|
|
14,992
|
|
HomeSmart
|
294
|
|
|
900
|
|
|
922
|
|
DAMI
|
4,116
|
|
|
764
|
|
|
—
|
|
Franchise
|
—
|
|
|
—
|
|
|
—
|
|
Manufacturing
|
1
|
|
|
26
|
|
|
50
|
|
Other
|
(9,320
|
)
|
|
(8,061
|
)
|
|
(4,583
|
)
|
Total Interest Expense
|
$
|
23,390
|
|
|
$
|
23,339
|
|
|
$
|
19,215
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
29,561
|
|
|
$
|
23,082
|
|
|
$
|
24,135
|
|
Progressive
|
6,084
|
|
|
8,175
|
|
|
1,625
|
|
HomeSmart
|
304
|
|
|
374
|
|
|
1,020
|
|
DAMI
|
787
|
|
|
40
|
|
|
—
|
|
Franchise
|
—
|
|
|
—
|
|
|
—
|
|
Manufacturing
|
492
|
|
|
387
|
|
|
1,477
|
|
Other
|
20,225
|
|
|
28,499
|
|
|
19,308
|
|
Total Capital Expenditures
|
$
|
57,453
|
|
|
$
|
60,557
|
|
|
$
|
47,565
|
|
|
|
|
|
|
|
Revenues From Canadian Operations (included in totals above):
|
|
|
|
|
|
Sales and Lease Ownership
|
$
|
12,434
|
|
|
$
|
3,431
|
|
|
$
|
179
|
|
In 2016, the results of the Company's operating segments were impacted by the following items:
|
|
•
|
Sales and Lease Ownership earnings before income taxes were impacted by
$16.6 million
of restructuring charges incurred during the year ended
December 31, 2016
in connection with the Company's strategic decision to close Company-operated stores as discussed in Note 10.
|
|
|
•
|
HomeSmart earnings before income taxes includes a loss on the sale of HomeSmart of
$4.3 million
and additional charges of
$1.1 million
related to exiting the HomeSmart business during the year ended
December 31, 2016
.
|
|
|
•
|
Earnings before income taxes for the Other category during the year ended
December 31, 2016
were impacted by a gain of
$11.1 million
on the January 2016 sale of the Company's former corporate office building and
$3.5 million
of restructuring charges related to a reduction in workforce incurred during the year ended
December 31, 2016
.
|
In 2015, the results of the Company's operating segments were impacted by the following items:
|
|
•
|
Earnings before income taxes of the Other category included a
$3.5 million
loss related to a lease termination on a Company aircraft.
|
|
|
•
|
Progressive earnings before income taxes included
$3.7 million
of transaction costs related to the
October 15, 2015
DAMI acquisition.
|
In 2014, the results of the Company's operating segments were impacted by the following items:
|
|
•
|
Sales and Lease Ownership earnings before income taxes included
$4.8 million
of restructuring charges related to the Company's strategic decision to close
44
Company-operated stores.
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
•
|
Other category loss before income taxes included
$13.7 million
in financial and advisory costs related to addressing now-resolved strategic matters, including proxy contests,
$4.3 million
of restructuring charges in connection with the store closures noted above,
$9.1 million
of charges associated with the retirements of both the Company's Chief Executive Officer and Chief Operating Officer,
$6.6 million
in transaction costs related to the Progressive acquisition and
$1.2 million
of regulatory income that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General.
|
The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP with the following adjustments:
|
|
•
|
Generally a predetermined amount of Corporate overhead is allocated to each reportable segment based on segment revenues.
|
|
|
•
|
Accruals related to store closures, with the exception of the 2016 restructuring plan, 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 14: RELATED PARTY TRANSACTIONS
The Company leases certain properties under capital leases with certain related parties that are more fully described in Note 7 above.
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 1 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.
In February 2017, the Company entered into transactions with
five
franchisees of Buddy’s (the “Franchisees”), pursuant to which the Company acquired certain customer rental contracts from those Franchisees, and the Franchisees acquired from the Company certain Company customer rental contracts, as well as Company inventory (collectively, the “Transactions”). The aggregate, net amount of the consideration the Company paid to the Franchisees in connection with the Transactions was approximately
$0.6 million
. In addition, the Franchisees agreed to sublease certain former Company store locations from the Company for aggregate payments of approximately
$40,000
per month. As discussed in the preceding paragraphs of this Note, Buddy’s is a portfolio company of Vintage, and Vintage owns approximately
10%
of the Company’s outstanding common stock. In addition, Mr. Avril, who resigned from the Company’s Board effective June 3, 2016, but not due to any disagreement with the Company, has, as discussed above, served as a limited partner of and strategic advisor to Vintage and served on the board of a Vintage portfolio company.
Before the Company entered into the Transactions and the sublease arrangements related thereto, the Audit Committee of the Company’s Board of Directors held a meeting during which Company management provided the Audit Committee with information regarding matters such as: (i) the aggregate, net amount the Company proposed to pay the Franchisees upon the consummation of the Transactions; (ii) the valuation method utilized in determining the pricing and financial terms for the Transactions and sublease arrangements related thereto; (iii) the remaining duration of the leases for the Company stores that Franchisees would sublease from the Company, and the aggregate amount of the proposed sublease payments arising therefrom,
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as compared to the aggregate amount of the payments owed by the Company under those leases; (iv) how the proposed pricing (and valuation methods related thereto) and other terms and conditions of the proposed Transactions compared to those of similar transactions the Company previously has engaged in with other parties who are not affiliated with Buddy’s, Vintage or any other related party; (v) the nature of the negotiations that had taken place between the Company and the Franchisees with respect to the proposed Transactions; and (vi) why the proposed Transactions were in the best interests of the Company and its shareholders. After reviewing that information, and other information presented by management, and consulting with an external professional advisor, the Audit Committee approved and authorized Company management to enter into the Transactions with the Franchisees, and the sublease arrangements related thereto, on the financial terms and other terms and conditions that had been presented to the Audit Committee, and management subsequently did so.
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data)
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
854,427
|
|
|
$
|
789,353
|
|
|
$
|
768,982
|
|
|
$
|
794,954
|
|
Gross Profit *
|
374,268
|
|
|
352,576
|
|
|
332,487
|
|
|
339,599
|
|
Earnings Before Income Taxes
|
79,728
|
|
|
61,124
|
|
|
45,282
|
|
|
32,288
|
|
Net Earnings
|
49,687
|
|
|
38,501
|
|
|
29,464
|
|
|
21,631
|
|
Earnings Per Share
|
0.68
|
|
|
0.53
|
|
|
0.41
|
|
|
0.30
|
|
Earnings Per Share Assuming Dilution
|
0.68
|
|
|
0.53
|
|
|
0.40
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
Revenues
|
$
|
821,814
|
|
|
$
|
769,049
|
|
|
$
|
767,694
|
|
|
$
|
821,199
|
|
Gross Profit *
|
363,478
|
|
|
346,110
|
|
|
331,628
|
|
|
344,144
|
|
Earnings Before Income Taxes
|
77,830
|
|
|
64,354
|
|
|
36,556
|
|
|
34,380
|
|
Net Earnings
|
49,243
|
|
|
40,546
|
|
|
24,194
|
|
|
21,726
|
|
Earnings Per Share
|
0.68
|
|
|
0.56
|
|
|
0.33
|
|
|
0.30
|
|
Earnings Per Share Assuming Dilution
|
0.68
|
|
|
0.56
|
|
|
0.33
|
|
|
0.30
|
|
* Gross profit is the sum of lease revenues and fees, retail sales, non-retail sales, and interest and fees on loans receivable less retail cost of sales, non-retail cost of sales, depreciation of lease merchandise, provision for write-offs of lease merchandise, and provision for credit losses.
The comparability of the Company's quarterly financial results during
2016
and
2015
was impacted by certain events, as described below on a pre-tax basis:
|
|
•
|
The first quarter of 2016 included a gain of
$11.1 million
on the January 29, 2016 sale of the Company's former corporate office building, a loss of
$4.6 million
related to the write-down of the HomeSmart disposal group to its fair value less estimated costs to sell upon its classification as held for sale, and charges of
$3.7 million
related to the retirement of the Company's former Chief Financial Officer.
|
|
|
•
|
The second quarter of 2016 included a loss of
$1.0 million
primarily consisting of impairment charges on certain assets related to the HomeSmart segment that have been sold or are held for sale.
|
|
|
•
|
The third and fourth quarter of 2016 included restructuring expenses of
$4.7 million
and
$15.5 million
, respectively. See Note 10 for further discussion of restructuring activities.
|
|
|
•
|
The fourth quarter of 2015 included
$2.7 million
of transaction costs related to the
October 15, 2015
DAMI acquisition and a
$3.5 million
loss related to a lease termination on a Company aircraft.
|
AARON’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: DEFERRED COMPENSATION PLAN
The Company maintains the Aaron’s, Inc. Deferred Compensation Plan, which is an unfunded, nonqualified deferred compensation plan for a select group of management, highly compensated employees and non-employee directors. On a pre-tax basis, eligible employees can defer receipt of up to
75%
of their base compensation and up to
75%
of their incentive pay compensation, and eligible non-employee directors can defer receipt of up to
100%
of their cash director fees.
Compensation deferred under the plan is credited to each participant’s deferral account and a deferred compensation liability is recorded in accounts payable and accrued expenses in the consolidated balance sheets. The deferred compensation plan liability was
$12.0 million
and
$11.6 million
as of
December 31, 2016
and
2015
, respectively. Liabilities under the plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments. The Company has established a rabbi trust to fund obligations under the plan with Company-owned life insurance. The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The cash surrender value of these policies totaled
$15.6 million
and
$15.4 million
as of
December 31, 2016
and
2015
, respectively, and is included in prepaid expenses and other assets in the consolidated balance sheets.
Deferred compensation expense charged to operations for the Company’s discretionary matching contributions was not significant during any of the periods presented. Benefits of
$1.4 million
,
$1.7 million
and
$1.9 million
were paid during the years ended
December 31, 2016
,
2015
and
2014
, respectively.