AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(In Thousands, Except Share Data)
|
ASSETS:
|
|
|
|
Cash and Cash Equivalents
|
$
|
100,242
|
|
|
$
|
15,278
|
|
Accounts Receivable (net of allowances of $63,000 in 2019 and $62,704 in 2018)
|
85,257
|
|
|
98,159
|
|
Lease Merchandise (net of accumulated depreciation and allowances of $855,365 in 2019 and $816,928 in 2018)
|
1,292,724
|
|
|
1,318,470
|
|
Loans Receivable (net of allowances and unamortized fees of $18,947 in 2019 and $19,941 in 2018)
|
69,974
|
|
|
76,153
|
|
Property, Plant and Equipment at Cost (net of accumulated depreciation of $300,983 in 2019 and $284,287 in 2018)
|
233,073
|
|
|
229,492
|
|
Operating Lease Right-of-Use Assets
|
338,805
|
|
|
—
|
|
Goodwill
|
736,202
|
|
|
733,170
|
|
Other Intangibles (net of accumulated amortization of $147,440 in 2019 and $130,116 in 2018)
|
207,066
|
|
|
228,600
|
|
Income Tax Receivable
|
11,921
|
|
|
29,148
|
|
Prepaid Expenses and Other Assets
|
104,934
|
|
|
98,222
|
|
Total Assets
|
$
|
3,180,198
|
|
|
$
|
2,826,692
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY:
|
|
|
|
Accounts Payable and Accrued Expenses
|
$
|
226,913
|
|
|
$
|
293,153
|
|
Deferred Income Taxes Payable
|
288,291
|
|
|
267,500
|
|
Customer Deposits and Advance Payments
|
80,680
|
|
|
80,579
|
|
Operating Lease Liabilities
|
386,989
|
|
|
—
|
|
Debt
|
347,767
|
|
|
424,752
|
|
Total Liabilities
|
1,330,640
|
|
|
1,065,984
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at June 30, 2019 and December 31, 2018; Shares Issued: 90,752,123 at June 30, 2019 and December 31, 2018
|
45,376
|
|
|
45,376
|
|
Additional Paid-in Capital
|
277,533
|
|
|
278,922
|
|
Retained Earnings
|
2,101,915
|
|
|
2,005,344
|
|
Accumulated Other Comprehensive Loss
|
(45
|
)
|
|
(1,087
|
)
|
|
2,424,779
|
|
|
2,328,555
|
|
Less: Treasury Shares at Cost
|
|
|
|
Common Stock: 23,204,626 Shares at June 30, 2019 and 23,567,979 at December 31, 2018
|
(575,221
|
)
|
|
(567,847
|
)
|
Total Shareholders’ Equity
|
1,849,558
|
|
|
1,760,708
|
|
Total Liabilities & Shareholders’ Equity
|
$
|
3,180,198
|
|
|
$
|
2,826,692
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements
.
AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In Thousands, Except Per Share Data)
|
REVENUES:
|
|
|
|
|
|
|
|
Lease Revenues and Fees
|
$
|
907,565
|
|
|
$
|
845,938
|
|
|
$
|
1,851,722
|
|
|
$
|
1,716,005
|
|
Retail Sales
|
8,898
|
|
|
6,592
|
|
|
21,707
|
|
|
15,108
|
|
Non-Retail Sales
|
34,124
|
|
|
53,661
|
|
|
71,105
|
|
|
106,891
|
|
Franchise Royalties and Fees
|
8,605
|
|
|
12,125
|
|
|
17,812
|
|
|
24,987
|
|
Interest and Fees on Loans Receivable
|
8,610
|
|
|
9,208
|
|
|
17,256
|
|
|
18,750
|
|
Other
|
339
|
|
|
335
|
|
|
642
|
|
|
927
|
|
|
968,141
|
|
|
927,859
|
|
|
1,980,244
|
|
|
1,882,668
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
Depreciation of Lease Merchandise
|
474,868
|
|
|
415,414
|
|
|
975,688
|
|
|
855,422
|
|
Retail Cost of Sales
|
5,651
|
|
|
4,156
|
|
|
14,283
|
|
|
9,818
|
|
Non-Retail Cost of Sales
|
28,948
|
|
|
47,068
|
|
|
58,144
|
|
|
95,088
|
|
Operating Expenses
|
383,576
|
|
|
388,337
|
|
|
770,792
|
|
|
778,569
|
|
Restructuring Expenses (Reversals), Net
|
18,738
|
|
|
(882
|
)
|
|
32,019
|
|
|
24
|
|
Other Operating Income, Net
|
(3,486
|
)
|
|
(165
|
)
|
|
(4,383
|
)
|
|
(248
|
)
|
|
908,295
|
|
|
853,928
|
|
|
1,846,543
|
|
|
1,738,673
|
|
OPERATING PROFIT
|
59,846
|
|
|
73,931
|
|
|
133,701
|
|
|
143,995
|
|
Interest Income
|
944
|
|
|
154
|
|
|
1,045
|
|
|
356
|
|
Interest Expense
|
(4,300
|
)
|
|
(3,807
|
)
|
|
(9,256
|
)
|
|
(8,133
|
)
|
Impairment of Investment
|
—
|
|
|
(20,098
|
)
|
|
—
|
|
|
(20,098
|
)
|
Other Non-Operating Income (Expense), Net
|
329
|
|
|
(200
|
)
|
|
1,637
|
|
|
612
|
|
EARNINGS BEFORE INCOME TAXES
|
56,819
|
|
|
49,980
|
|
|
127,127
|
|
|
116,732
|
|
INCOME TAXES
|
14,169
|
|
|
11,479
|
|
|
28,399
|
|
|
25,985
|
|
NET EARNINGS
|
$
|
42,650
|
|
|
$
|
38,501
|
|
|
$
|
98,728
|
|
|
$
|
90,747
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
Basic
|
$
|
0.63
|
|
|
$
|
0.55
|
|
|
$
|
1.46
|
|
|
$
|
1.30
|
|
Assuming Dilution
|
$
|
0.62
|
|
|
$
|
0.54
|
|
|
$
|
1.44
|
|
|
$
|
1.27
|
|
CASH DIVIDENDS DECLARED PER SHARE:
|
|
|
|
|
|
|
|
Common Stock
|
$
|
0.0350
|
|
|
$
|
0.0300
|
|
|
$
|
0.0700
|
|
|
$
|
0.0600
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
67,687
|
|
|
69,645
|
|
|
67,492
|
|
|
69,875
|
|
Assuming Dilution
|
68,793
|
|
|
70,837
|
|
|
68,784
|
|
|
71,428
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements
.
AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In Thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net Earnings
|
$
|
42,650
|
|
|
$
|
38,501
|
|
|
$
|
98,728
|
|
|
$
|
90,747
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
618
|
|
|
(535
|
)
|
|
1,042
|
|
|
(1,012
|
)
|
Total Other Comprehensive Income (Loss)
|
618
|
|
|
(535
|
)
|
|
1,042
|
|
|
(1,012
|
)
|
Comprehensive Income
|
$
|
43,268
|
|
|
$
|
37,966
|
|
|
$
|
99,770
|
|
|
$
|
89,735
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements
.
AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
(In Thousands)
|
OPERATING ACTIVITIES:
|
|
|
|
Net Earnings
|
$
|
98,728
|
|
|
$
|
90,747
|
|
Adjustments to Reconcile Net Earnings to Cash Provided by Operating Activities:
|
|
|
|
Depreciation of Lease Merchandise
|
975,688
|
|
|
855,422
|
|
Other Depreciation and Amortization
|
53,862
|
|
|
44,591
|
|
Accounts Receivable Provision
|
137,611
|
|
|
113,077
|
|
Provision for Credit Losses on Loans Receivable
|
9,223
|
|
|
9,540
|
|
Stock-Based Compensation
|
14,231
|
|
|
15,143
|
|
Deferred Income Taxes
|
19,928
|
|
|
39,684
|
|
Impairment of Assets
|
26,267
|
|
|
20,098
|
|
Non-Cash Lease Expense
|
58,073
|
|
|
—
|
|
Other Changes, Net
|
(3,390
|
)
|
|
(1,076
|
)
|
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:
|
|
|
|
|
|
Additions to Lease Merchandise
|
(1,141,863
|
)
|
|
(1,034,838
|
)
|
Book Value of Lease Merchandise Sold or Disposed
|
196,219
|
|
|
199,846
|
|
Accounts Receivable
|
(126,112
|
)
|
|
(97,385
|
)
|
Prepaid Expenses and Other Assets
|
(6,847
|
)
|
|
(7,965
|
)
|
Income Tax Receivable
|
17,227
|
|
|
54,242
|
|
Operating Lease Liabilities
|
(62,541
|
)
|
|
—
|
|
Accounts Payable and Accrued Expenses
|
(21,465
|
)
|
|
(36,165
|
)
|
Customer Deposits and Advance Payments
|
(200
|
)
|
|
1,819
|
|
Cash Provided by Operating Activities
|
244,639
|
|
|
266,780
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Investments in Loans Receivable
|
(29,506
|
)
|
|
(31,797
|
)
|
Proceeds from Loans Receivable
|
27,720
|
|
|
30,150
|
|
Proceeds from Investments
|
—
|
|
|
666
|
|
Outflows on Purchases of Property, Plant and Equipment
|
(48,059
|
)
|
|
(32,785
|
)
|
Proceeds from Property, Plant and Equipment
|
1,425
|
|
|
4,349
|
|
Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired
|
(7,612
|
)
|
|
(14,401
|
)
|
Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed
|
755
|
|
|
318
|
|
Cash Used in Investing Activities
|
(55,277
|
)
|
|
(43,500
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Repayments on Revolving Facility, Net
|
(16,000
|
)
|
|
—
|
|
Repayments on Debt
|
(61,465
|
)
|
|
(96,173
|
)
|
Dividends Paid
|
(4,717
|
)
|
|
(2,111
|
)
|
Acquisition of Treasury Stock
|
(14,414
|
)
|
|
(68,432
|
)
|
Issuance of Stock Under Stock Option Plans
|
5,056
|
|
|
4,134
|
|
Shares Withheld for Tax Payments
|
(12,977
|
)
|
|
(17,282
|
)
|
Debt Issuance Costs
|
—
|
|
|
(55
|
)
|
Cash Used in Financing Activities
|
(104,517
|
)
|
|
(179,919
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
119
|
|
|
(75
|
)
|
Increase in Cash and Cash Equivalents
|
84,964
|
|
|
43,286
|
|
Cash and Cash Equivalents at Beginning of Period
|
15,278
|
|
|
51,037
|
|
Cash and Cash Equivalents at End of Period
|
$
|
100,242
|
|
|
$
|
94,323
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements
.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
NOTE 1.
|
BASIS 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
June 30, 2019
, the Company's operating and reportable segments are Progressive Leasing, Aaron's Business and DAMI.
Progressive Leasing
is a virtual lease-to-own company that provides lease-purchase solutions in
46
states and the District of Columbia. It does so by purchasing merchandise from third-party retailers desired by those retailers' customers and, in turn, leasing that merchandise to the customers through a lease-to-own transaction. Progressive Leasing consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional and e-commerce retailers.
The following table presents invoice volume for Progressive Leasing:
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30 (Unaudited and In Thousands)
|
2019
|
|
2018
|
Progressive Leasing Invoice Volume
1
|
$
|
403,410
|
|
|
$
|
335,088
|
|
1
Invoice volume is defined as the retail price of lease merchandise acquired and then leased to customers during the period, net of returns.
The
Aaron's Business
segment offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a month-to-month, lease-to-own agreement with no credit needed through the Company's Aaron's-branded stores in the United States and Canada and its e-commerce platform. This operating segment also supports franchisees of its Aaron's-branded stores. In addition, the Aaron's Business segment includes the operations of Woodhaven Furniture Industries ("Woodhaven"), which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores.
The Company acquired the store operations of
five
franchisees during the
six months ended June 30, 2019
and
five
franchisees during the
six months ended June 30, 2018
. Refer to Note 2 to these condensed consolidated financial statements.
The following table presents store count by ownership type for the Aaron's Business operations:
|
|
|
|
|
|
|
Stores as of June 30 (Unaudited)
|
2019
|
|
2018
|
Company-operated Aaron's Branded Stores
|
1,171
|
|
|
1,179
|
|
Franchised Stores
|
357
|
|
|
530
|
|
Systemwide Stores
|
1,528
|
|
|
1,709
|
|
DAMI
partners with merchants to provide a variety of revolving credit products originated through two, third-party federally insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs).
Basis of Presentation
The preparation of the Company's condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Generally, actual experience has been consistent with management's prior estimates and assumptions. Management does not believe these estimates or assumptions will change significantly in the future absent unidentified and unforeseen events.
The accompanying unaudited condensed consolidated financial statements do not include all information required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2018
(the "
2018
Annual Report") filed with the U.S. Securities and Exchange Commission on February 14, 2019. The results of operations for the
three and six
months ended
June 30, 2019
are not necessarily indicative of operating results for the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Aaron's, Inc. and its subsidiaries, each of which is wholly owned. Intercompany balances and transactions between consolidated entities have been eliminated.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Policies and Estimates
See Note 1 to the consolidated financial statements in the
2018
Annual Report.
Earnings Per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs") and performance share units ("PSUs") and awards issuable under the Company's employee stock purchase plan ("ESPP") (collectively, "share-based awards") as determined under the treasury stock method. The following table shows the calculation of dilutive share-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Shares In Thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted Average Shares Outstanding
|
67,687
|
|
|
69,645
|
|
|
67,492
|
|
|
69,875
|
|
Dilutive Effect of Share-Based Awards
|
1,106
|
|
|
1,192
|
|
|
1,292
|
|
|
1,553
|
|
Weighted Average Shares Outstanding Assuming Dilution
|
68,793
|
|
|
70,837
|
|
|
68,784
|
|
|
71,428
|
|
Approximately
522,000
and
482,000
weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the
three and six
months ended
June 30, 2019
, respectively, as the awards would have been anti-dilutive for the periods presented.
Approximately
493,000
and
340,000
weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the
three and six
months ended
June 30, 2018
, respectively, as the awards would have been anti-dilutive for the periods presented.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting primarily of furniture, consumer electronics, home appliances, jewelry and accessories, to its customers for lease under certain terms agreed to by the customer. The Company's Progressive Leasing segment offers customers of traditional and e-commerce retailers a virtual lease purchase solution through leases with month to month terms that can be renewed up to
12 months
. The Company's Aaron's-branded stores and its e-commerce platform offer leases with month-to-month terms that can be renewed up to
12
,
18
or
24 months
. The Company does not require deposits upon inception of customer agreements. The customer has the right to acquire ownership either through a purchase option or through payment of all required lease payments.
Progressive 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 condensed consolidated balance sheets. Beginning January 1, 2019, Progressive lease revenues are recorded net of a provision for returns and uncollectible renewal payments.
Aaron's Business lease revenues are recognized as revenue net of related sales taxes in the month they are earned. Lease payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying condensed consolidated balance sheets. Aaron's Business lease revenues are recorded net of a provision for returns and uncollectible renewal payments.
All of the Company's customer agreements are considered operating leases. The Company maintains ownership of the lease merchandise until all payment obligations are satisfied under sales and lease ownership agreements. Initial direct costs related to Progressive Leasing's lease purchase agreements are capitalized as incurred and amortized as operating expense over the estimated lease term. The capitalized costs have been classified within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. Initial direct costs related to Aaron's Business customer agreements are expensed as incurred and have been classified as operating expenses in the Company's condensed consolidated statements of earnings. The statement of earnings effects of expensing the initial direct costs of the Aaron's Business as incurred are not materially different from amortizing initial direct costs over the lease term.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Retail and Non-Retail Sales
Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Revenues for the non-retail sale of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the merchandise.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying condensed 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 condensed consolidated statements of earnings.
Franchise Royalties and Fees
The Company has no current plans to franchise additional Aaron's stores. Current franchisees pay an ongoing royalty of
6%
of the weekly cash revenue collections, which is recognized as the fees become due. The Company received a non-refundable initial franchise fee from current franchisees from
$15,000
to
$50,000
per store depending upon market size. Franchise fees and area development fees were generated from the sale of rights to develop, own and operate sales and lease ownership stores and pre-opening services provided by Aaron's to assist in the start-up operations of the stores. The Company considers the rights to the intellectual property and the pre-opening services to be a single performance obligation, resulting in the recognition of revenue ratably over time from the store opening date throughout the remainder of the franchise agreement term. The Company believes that this period of time is most representative of the time period in which the franchisee realizes the benefits of having the right to access the Company's intellectual property.
The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. Refer to Note 6 of these condensed consolidated financial statements for additional discussion of the Company's franchise-related guarantee obligation. The Company also charges fees for advertising efforts that benefit the franchisees. Such fees are recognized at the time the advertising takes place and are presented as franchise royalties and fees in the Company's condensed consolidated statements of earnings.
Interest and Fees on Loans Receivable
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant's credit rating and other factors. Qualifying applicants receive a credit card to finance their initial purchase and to use in subsequent purchases at the merchant or other participating merchants for an initial
24
-month period, which DAMI may renew if the cardholder remains in good standing.
DAMI acquires the loan receivable from merchants through its third-party bank partners at a discount from the face value of the loan. The discount is comprised of a merchant fee discount and a promotional fee discount, if applicable.
The merchant fee discount represents a pre-negotiated, nonrefundable discount that generally ranges from
3%
to
25%
of the loan face value. The discount is designed to cover the risk of loss related to the portfolio of cardholder charges and DAMI's direct origination costs. The merchant fee discount and origination costs are presented net on the condensed 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 condensed consolidated statements of earnings on a straight-line basis over the initial
24
-month period.
The discount from the face value of the loan on the acquisition of the loan receivable from the merchant through the third-party bank partners may also include a promotional fee discount, which generally ranges from
1%
to
8%
. The promotional fee discount is intended to compensate the holder of the loan receivable (i.e. DAMI) for deferred or reduced interest rates that are offered to the cardholder for a specified period on the outstanding loan balance (generally for
six
,
12
or
18 months
). The promotional fee discount is amortized as interest and fee revenue on loans receivable in the condensed consolidated statements of earnings on a straight-line basis over the promotional interest period (i.e., over
six
,
12
or
18 months
, depending on the promotion). The unamortized promotional fee discount is netted on the condensed consolidated balance sheet in loans receivable.
The customer is typically required to make periodic minimum payments of at least
3.5%
of the outstanding loan balance, which includes outstanding interest. Fixed and variable interest rates, typically
25%
to
35.99%
, are compounded daily for cards that do not qualify for deferred or reduced interest promotional periods. Interest income, which is recognized based upon the amount of the loans outstanding, is recognized as interest and fees on loans receivable in the billing period in which they are assessed if collectability is reasonably assured. For credit cards that provide deferred interest, if the balance is not paid off during the promotional period or if the cardholder defaults, interest is billed to the customers at standard rates and the cumulative amount owed is charged to the cardholder account in the month that the promotional period expires. For credit cards that provide reduced interest, if the balance is not paid off during the promotional period, interest is billed to the cardholder at standard rates in the month that the promotional period expires or when the cardholder defaults.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Annual fees and other fees discussed are recognized as interest and fee revenue on loans receivable in the condensed consolidated statements of earnings.
Accounts Receivable
Accounts receivable consist primarily of receivables due from customers of Progressive Leasing and Company-operated stores, corporate receivables incurred during the normal course of business (primarily for vendor consideration and real estate leasing activities) and franchisee obligations.
Accounts receivable, net of allowances, consist of the following:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Customers
|
$
|
60,579
|
|
|
$
|
60,879
|
|
Corporate
|
12,024
|
|
|
18,171
|
|
Franchisee
|
12,654
|
|
|
19,109
|
|
Accounts Receivable
|
$
|
85,257
|
|
|
$
|
98,159
|
|
The Company maintains an accounts receivable allowance, which primarily relates to its Progressive Leasing operations and the Aaron's Business operations. The Company’s policy for its Progressive Leasing segment is to record an allowance for returns and uncollectible renewal payments based on historical collection experience. During 2019, the Company adopted ASU 2016-02,
Leases
("ASC 842") which resulted in the Progressive Leasing provision for returns and uncollectible renewal payments being recorded as a reduction of lease revenue and fees within the condensed consolidated statements of earnings beginning January 1, 2019. The provision for returns and uncollectible renewal payments for periods prior to 2019 are reported herein as bad debt expense within operating expenses in the condensed consolidated statements of earnings. The Progressive Leasing segment writes off lease receivables that are
120 days
or more contractually past due.
For the Aaron's Business operations, contractually required lease payments are accrued when due. The Aaron's Business policy is to record a provision for returns and uncollectible contractually due renewal payments based on historical collection experience, which is recognized as a reduction of lease revenues and fees within the condensed consolidated statements of earnings. Aaron's Business write-off of lease receivables that are
60 days
or more past due occur on pre-determined dates twice monthly.
DAMI's allowance for uncollectible merchant accounts receivable, which primarily relates to cardholder returns and refunds, is recorded as bad debt expense within operating expenses in the condensed consolidated statements of earnings.
The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(In Thousands)
|
2019
|
|
2018
|
Bad Debt Expense
1
|
$
|
1,166
|
|
|
$
|
96,651
|
|
Provision for Returns and Uncollectible Renewal Payments
2
|
136,445
|
|
|
16,426
|
|
Accounts Receivable Provision
|
$
|
137,611
|
|
|
$
|
113,077
|
|
1
Bad debt expense is recorded within operating expenses in the condensed consolidated financial statements.
2
In accordance with the adoption of ASC 842, Progressive Leasing provision for returns and uncollectible renewal payments are recorded as a reduction to lease revenues and fees within the condensed consolidated financial statements beginning January 1, 2019. Prior to January 1, 2019, Progressive Leasing provision for returns and uncollectible renewal payments were recorded as bad debt expense within operating expenses in the condensed consolidated financial statements.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Lease Merchandise
The Company's lease merchandise consists primarily of furniture, consumer electronics, home appliances, jewelry, and accessories and is recorded at the lower of cost or net realizable value. The cost of merchandise manufactured by our Woodhaven operations is recorded at cost and includes overhead from production facilities, shipping costs and warehousing costs. The Company's Progressive Leasing segment, at which substantially all merchandise is on lease, depreciates merchandise generally over
12
months. The Company's Aaron's Business segment begins depreciating merchandise at the earlier of 12 months and one day or when the item is leased. Aaron's Business depreciates merchandise to a
0%
salvage value over the lease agreement period when on lease, generally
12
to
24 months
, and generally
36 months
when not on lease. Depreciation is accelerated upon early payout.
The following is a summary of lease merchandise, net of accumulated depreciation and allowances:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Merchandise on Lease
|
$
|
1,036,456
|
|
|
$
|
1,053,684
|
|
Merchandise Not on Lease
|
256,268
|
|
|
264,786
|
|
Lease Merchandise, net of Accumulated Depreciation and Allowances
|
$
|
1,292,724
|
|
|
$
|
1,318,470
|
|
The Company's policies require weekly lease merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are generally taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, the Company monitors lease merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete lease merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off.
Generally, all lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off. The Company records a provision for write-offs on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write-off experience. The provision for write-offs is included in operating expenses in the accompanying condensed consolidated statements of earnings.
The following table shows the components of the allowance for lease merchandise write-offs:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(In Thousands)
|
2019
|
|
2018
|
Beginning Balance
|
$
|
46,694
|
|
|
$
|
35,629
|
|
Merchandise Written off, net of Recoveries
|
(105,571
|
)
|
|
(80,856
|
)
|
Provision for Write-offs
|
117,994
|
|
|
91,420
|
|
Ending Balance
|
$
|
59,117
|
|
|
$
|
46,193
|
|
Loans Receivable, Net
Gross loans receivable represents the principal balances of credit card charges at DAMI's participating merchants that remain due from cardholders, plus unpaid interest and fees due from cardholders. The allowances and unamortized fees represents an allowance for uncollectible amounts; merchant fee discounts, net of capitalized origination costs; promotional fee discounts; and deferred annual card fees.
Loans acquired in the October 15, 2015 DAMI acquisition (the "Acquired Loans") were recorded at their estimated fair value at the acquisition date. The projected net cash flows from expected payments of principal, interest, fees and servicing costs and anticipated charge-offs were included in the determination of fair value; therefore, an allowance for loan losses and an amount for unamortized fees were not recognized for the Acquired Loans. The difference, or discount, between the expected cash flows to be received and the fair value of the Acquired Loans is accreted to interest and fees on loans receivable based on the effective interest method. At each period end, the Company evaluates the appropriateness of the accretable discount on the Acquired Loans based on actual and revised projected future cash receipts.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Losses on loans receivable are recognized when they are incurred, which requires the Company to make its best estimate of probable losses inherent in the portfolio. The Company evaluates loans receivable collectively for impairment. The method for calculating the best estimate of probable losses takes into account the Company's historical experience, adjusted for current conditions and the Company's judgment concerning the probable effects of relevant observable data, trends and market factors. Economic conditions and loan performance trends are closely monitored to manage and evaluate exposure to credit risk. Trends in delinquency ratios are an indicator of credit risk within the loans receivable portfolio, including the migration of loans between delinquency categories over time. Charge-off rates represent another indicator of the potential for future credit losses. The risk in the loans receivable portfolio is correlated with broad economic trends, such as unemployment rates, gross domestic product growth and gas prices, which can have a material effect on credit performance. To the extent that actual results differ from estimates of uncollectible loans receivable, the Company's results of operations and liquidity could be materially affected.
The Company calculates the allowance for loan losses based on actual delinquency balances and historical average loss experience on loans receivable by aging category for the prior eight quarters. The allowance for loan losses is maintained at a level considered adequate to cover probable losses of principal, interest and fees on active loans in the loans receivable portfolio. The adequacy of the allowance is evaluated at each period end.
Delinquent loans receivable are those that are
30
days or more past due based on their contractual billing dates. The Company places loans receivable on nonaccrual status when they are greater than
90
days past due or upon notification of cardholder bankruptcy, death or fraud. The Company discontinues accruing interest and fees and amortizing merchant fee discounts and promotional fee discounts for loans receivable in nonaccrual status. Loans receivable are removed from nonaccrual status when cardholder payments resume, the loan becomes
90
days or less past due and collection of the remaining amounts outstanding is deemed probable. Payments received on nonaccrual loans are allocated according to the same payment hierarchy methodology applied to loans that are accruing interest. Loans receivable are charged off no later than the end of the following month after the billing cycle in which the loans receivable become
120
days past due.
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant's credit rating and other factors. Below is a summary of the credit quality of the Company's loan portfolio as of
June 30, 2019
and
December 31, 2018
by Fair Isaac and Company (FICO) score as determined at the time of loan origination:
|
|
|
|
|
|
|
FICO Score Category
|
June 30, 2019
|
|
December 31, 2018
|
600 or Less
|
4.5
|
%
|
|
3.7
|
%
|
Between 600 and 700
|
79.6
|
%
|
|
77.9
|
%
|
700 or Greater
|
15.9
|
%
|
|
18.4
|
%
|
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Prepaid Expenses
|
$
|
32,937
|
|
|
$
|
30,763
|
|
Prepaid Insurance
|
26,400
|
|
|
27,948
|
|
Assets Held for Sale
|
8,992
|
|
|
6,589
|
|
Deferred Tax Asset
|
8,761
|
|
|
8,761
|
|
Other Assets
|
27,844
|
|
|
24,161
|
|
Prepaid Expenses and Other Assets
|
$
|
104,934
|
|
|
$
|
98,222
|
|
Assets Held for Sale
Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of
June 30, 2019
and
December 31, 2018
. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell and are classified within prepaid expenses and other assets in the condensed 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
June 30, 2019
and
December 31, 2018
is
$9.0 million
and
$6.6 million
, respectively. The Company estimated the fair values of real estate properties using the market values for similar properties. These properties are considered Level 2 assets as defined below.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Accounts Payable
|
$
|
57,414
|
|
|
$
|
88,369
|
|
Accrued Insurance Costs
|
40,745
|
|
|
40,423
|
|
Accrued Salaries and Benefits
|
40,125
|
|
|
40,790
|
|
Accrued Real Estate and Sales Taxes
|
27,379
|
|
|
30,332
|
|
Deferred Rent
1
|
—
|
|
|
27,270
|
|
Other Accrued Expenses and Liabilities
1
|
61,250
|
|
|
65,969
|
|
Accounts Payable and Accrued Expenses
|
$
|
226,913
|
|
|
$
|
293,153
|
|
|
|
1
|
Amounts as of
June 30, 2019
were impacted by the January 1, 2019 adoption of ASC 842. Upon transition to ASC 842, the remaining balances of the Company's deferred rent, lease incentives, and closed store reserve were reclassified as a reduction to the operating lease right-of-use asset in the accompanying condensed consolidated balance sheet.
|
Debt
At
June 30, 2019
, the Company was in compliance with all covenants related to its outstanding debt. See Note 7 to the consolidated financial statements in the
2018
Annual Report for further information regarding the Company's indebtedness.
Stockholders' Equity
Changes in stockholders' equity for the
six months
ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
Common Stock
|
|
Additional
Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Income (Loss)
|
Total Shareholders’ Equity
|
(In Thousands, Except Per Share)
|
Shares
|
|
Amount
|
|
|
|
|
Balance, December 31, 2018
|
(23,568
|
)
|
|
$
|
(567,847
|
)
|
|
$
|
45,376
|
|
|
$
|
278,922
|
|
|
$
|
2,005,344
|
|
|
$
|
(1,087
|
)
|
$
|
1,760,708
|
|
Opening Balance Sheet Adjustment - ASC 842, net of taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,592
|
|
|
—
|
|
2,592
|
|
Cash Dividends, $0.035 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,363
|
)
|
|
—
|
|
(2,363
|
)
|
Stock-Based Compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
7,050
|
|
|
—
|
|
|
—
|
|
7,050
|
|
Reissued Shares
|
493
|
|
|
4,264
|
|
|
—
|
|
|
(15,245
|
)
|
|
—
|
|
|
—
|
|
(10,981
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,078
|
|
|
—
|
|
56,078
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
424
|
|
424
|
|
Balance, March 31, 2019
|
(23,075
|
)
|
|
$
|
(563,583
|
)
|
|
$
|
45,376
|
|
|
$
|
270,727
|
|
|
$
|
2,061,651
|
|
|
$
|
(663
|
)
|
$
|
1,813,508
|
|
Cash Dividends, $0.035 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,386
|
)
|
|
—
|
|
(2,386
|
)
|
Stock-Based Compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
6,522
|
|
|
—
|
|
|
—
|
|
6,522
|
|
Reissued Shares
|
113
|
|
|
2,776
|
|
|
—
|
|
|
284
|
|
|
—
|
|
|
—
|
|
3,060
|
|
Repurchased Shares
|
(243
|
)
|
|
(14,414
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(14,414
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,650
|
|
|
—
|
|
42,650
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
618
|
|
618
|
|
Balance, June 30, 2019
|
(23,205
|
)
|
|
$
|
(575,221
|
)
|
|
$
|
45,376
|
|
|
$
|
277,533
|
|
|
$
|
2,101,915
|
|
|
$
|
(45
|
)
|
$
|
1,849,558
|
|
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
Common Stock
|
|
Additional
Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Income (Loss)
|
Total Shareholders’ Equity
|
(In Thousands, Except Per Share)
|
Shares
|
|
Amount
|
|
|
|
|
Balance, December 31, 2017
|
(20,733
|
)
|
|
$
|
(407,713
|
)
|
|
$
|
45,376
|
|
|
$
|
270,043
|
|
|
$
|
1,819,524
|
|
|
$
|
774
|
|
$
|
1,728,004
|
|
Opening Balance Sheet Adjustment - ASC 606, net of taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,729
|
)
|
|
—
|
|
(1,729
|
)
|
Cash Dividends, $0.03 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,146
|
)
|
|
—
|
|
(2,146
|
)
|
Stock-Based Compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
7,862
|
|
|
—
|
|
|
—
|
|
7,862
|
|
Reissued Shares
|
545
|
|
|
3,441
|
|
|
—
|
|
|
(12,602
|
)
|
|
—
|
|
|
—
|
|
(9,161
|
)
|
Repurchased Shares
|
(391
|
)
|
|
(18,407
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(18,407
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52,246
|
|
|
—
|
|
52,246
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(477
|
)
|
(477
|
)
|
Balance, March 31, 2018
|
(20,579
|
)
|
|
$
|
(422,679
|
)
|
|
$
|
45,376
|
|
|
$
|
265,303
|
|
|
$
|
1,867,895
|
|
|
$
|
297
|
|
$
|
1,756,192
|
|
Cash Dividends, $0.03 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,087
|
)
|
|
—
|
|
(2,087
|
)
|
Stock-Based Compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
6,380
|
|
|
—
|
|
|
—
|
|
6,380
|
|
Reissued Shares
|
220
|
|
|
1,795
|
|
|
—
|
|
|
(5,408
|
)
|
|
—
|
|
|
—
|
|
(3,613
|
)
|
Repurchased Shares
|
(1,234
|
)
|
|
(50,025
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(50,025
|
)
|
Net Earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38,501
|
|
|
—
|
|
38,501
|
|
Foreign Currency Translation Adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(535
|
)
|
(535
|
)
|
Balance, June 30, 2018
|
(21,593
|
)
|
|
$
|
(470,909
|
)
|
|
$
|
45,376
|
|
|
$
|
266,275
|
|
|
$
|
1,904,309
|
|
|
$
|
(238
|
)
|
$
|
1,744,813
|
|
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, 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.
Related Party Transactions
Aaron Ventures I, LLC, which we refer to as "Aaron Ventures," was formed in December 2002 for the purpose of acquiring properties from the Company and leasing them back to the Company and is controlled by certain of the Company’s current and former executives. Aaron Ventures purchased a combined total of
21
properties from the Company in 2002 and 2004, and leased the properties back to the Company. As of
June 30, 2019
, the Company had
three
remaining operating leases with Aaron Ventures with expiration dates between 2023 and 2025. The rate of interest implicit in the leases is approximately
9.7%
. The land and buildings, associated depreciation expense and lease obligations are recorded in the Company's condensed consolidated financial statements. The
three
operating leases have aggregate annual rental payments of approximately
$0.2 million
.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental Disclosure of Noncash Investing Transactions
During the
three months ended June 30, 2018
, the Company entered into transactions to acquire and sell certain customer agreements and related lease merchandise with third parties which are accounted for as asset acquisitions and asset disposals. The fair value of the non-cash consideration exchanged in these transactions was
$0.6 million
.
In addition, the purchase price for the acquisition of certain franchisees made during the
six months
ended
June 30, 2019
and
2018
included the non-cash settlement of pre-existing accounts receivable the franchisees owed the Company of
$0.3 million
and
$0.4 million
, respectively. This non-cash consideration has been excluded from the line "Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired" in the investing activities section of the condensed consolidated statements of cash flows for the respective periods.
Hurricane Impact
During the third and fourth quarters of 2017, Hurricanes Harvey and Irma impacted the Company in the form of: (i) property damages (primarily in-store and on-lease merchandise, store leasehold improvements and furniture and fixtures) and employee assistance payments; (ii) increased customer-related accounts receivable allowances and lease merchandise allowances primarily in the impacted areas; (iii) lost lease revenue due to store closures of Aaron's Business and Progressive Leasing retail partners; and (iv) lost lease revenue due to the postponing of customer payments in the impacted areas.
During the
six months
ended
June 30, 2019
, the Company received cash payments of
$2.7 million
and an executed agreement confirming an additional, final settlement amount of
$4.3 million
to be received from its insurers related to the property damage and business interruption claims resulting from Hurricanes Harvey and Irma. Settled property damage claims (either received in cash or deemed collectible as of
June 30, 2019
) that were in excess of the respective insurance receivable balances, as well as business interruption proceeds, resulted in gains of
$4.5 million
during the
six months
ended
June 30, 2019
. These gains were recorded within
other operating income, net
in the condensed consolidated statements of earnings. As of
June 30, 2019
, the Company has an insurance receivable of
$4.3 million
related to the final settlement amount, which the Company believes is probable of receipt.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
Adopted
Leases
. In February 2016, the FASB issued ASU 2016-02,
Leases
("ASC 842"), which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Companies must use a modified retrospective approach to adopt ASC 842; however, the Company adopted an optional transition method in which entities are permitted to not apply the requirements of ASC 842 in the comparative periods presented within the financial statements in the year of adoption, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The application of this optional transition method resulted in a cumulative-effect adjustment of
$2.6 million
representing an increase to the Company’s January 1, 2019 retained earnings balance, net of tax, due primarily to the recognition of deferred gains recorded under previous sale and operating leaseback transactions for which the ASC 842 transition guidance requires companies to recognize any deferred gains not resulting from off-market terms as a cumulative adjustment to retained earnings upon adoption of ASC 842.
As a lessor, a majority of the Company’s revenue generating activities are within the scope of ASC 842. The new standard did not materially impact the timing of revenue recognition. Effective January 1, 2019, ASC 842 resulted in the Company classifying the Progressive Leasing provision for returns and uncollectible renewal payments as a reduction of lease revenue and fees within the condensed consolidated statements of earnings. For periods reported herein prior to January 1, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was recorded as bad debt expense within operating expenses in the condensed consolidated statements of earnings. The Aaron’s Business provision for returns and uncollectible renewal payments has historically been, and continues to be recorded as, a reduction to lease revenue and fees. The Company has customer lease agreements with lease and non-lease components that fall within the scope of ASU 2014-09,
Revenue from Contracts with Customers
("ASC 606"). The Company has elected to aggregate these components into a single component for all classes of underlying assets as the lease and non-lease components generally have the same timing and pattern of transfer.
The new standard also impacts the Company as a lessee by requiring substantially all of its operating leases to be recognized on the balance sheet as operating lease right-of-use assets and operating lease liabilities. See Note 5 to these condensed consolidated financial statements for further details regarding the Company’s leasing activities as a lessee. The Company elected to adopt a package of practical expedients offered by the FASB which removes the requirement to reassess whether expired or existing contracts contain leases and removes the requirement to reassess the lease classification for any existing leases prior to the adoption date of January 1, 2019. Additionally, the Company has elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease.
Cloud Computing Arrangements
. In August 2018, the FASB issued ASU 2018-15,
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The intent of the standard is to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. Under the new standard, entities will be required to apply the accounting guidance as prescribed by ASC 350-40,
Internal Use Software
,
in determining which implementation costs should be capitalized as assets or expensed as incurred. The internal-use software guidance requires the capitalization of certain costs incurred during the application development stage of an internal-use software project, while requiring companies to expense all costs incurred during preliminary project and post-implementation project stages. As a result, certain implementation costs which were previously expensed by the Company are now eligible for capitalization under ASU 2018-15. The standard may be applied either prospectively to all implementation costs incurred after the adoption date or retrospectively. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt ASU 2018-15 on a prospective basis effective January 1, 2019, and the impact to the condensed consolidated financial statements was not significant. Costs eligible for capitalization will be capitalized within prepaid expenses and other assets and expensed through operating expenses in the condensed consolidated balance sheets and statements of earnings, respectively.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pending Adoption
Financial Instruments - Credit Losses
. In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
("CECL"). The main objective of the update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by companies at each reporting date. For trade and other receivables, held to maturity debt securities and other instruments, companies will be required to use a new forward-looking "expected losses" model that generally will result in the recognition of allowances for losses earlier than under current accounting guidance. The standard will be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for the Company in the first quarter of 2020.
The Company's operating lease activities within Aaron's Business and Progressive Leasing will not be impacted by ASU 2016-13, as operating lease receivables are not in the scope of the CECL model. The Company will be impacted by ASU 2016-13 within its DAMI segment by requiring earlier recognition of estimated credit losses in the consolidated statements of earnings. DAMI acquires loan receivables from merchants through its third-party bank partners at a discount from the face value of the loan, referred to as the "merchant fee discount." The merchant fee discount represents a pre-negotiated, nonrefundable discount that generally ranges from
3%
to
25%
of the loan face value, which is primarily intended to cover the risk of credit loss related to the portfolio of loans originated. Although the CECL model will require the estimated credit losses to be recognized at the time of loan origination, the related merchant fee discount will continue to be amortized as interest and fee revenue on a straight-line basis over the initial 24-month period that the card is active. Therefore, on a loan-by-loan basis, the Company expects higher losses to be recognized upon loan origination for the estimated credit losses, generally followed by higher net earnings as the related merchant fee discount is amortized to interest income, and as interest income is accrued and earned on the outstanding loan. Although the CECL model will result in earlier recognition of credit losses in the statements of earnings, no changes are expected related to the loan cash flows.
The Company has evaluated the guidance in ASU 2016-13 related to purchased financial assets with credit deterioration ("PCD Method") and currently expects that its loans receivable would not qualify for the PCD Method as, generally, a more-than-insignificant deterioration in credit quality since origination does not occur. The Company is in the process of implementing a software solution to support the new accounting requirements for the Company's loans receivable and has organized a project implementation team to identify and implement changes to processes and procedures that will be necessary to adopt ASU 2016-13. The Company is also continuing to evaluate other various potential impacts of CECL, such as accounting for troubled debt restructuring and its reserve for losses on unfunded loan commitments.
NOTE 2. ACQUISITIONS
Franchisee Acquisitions - 2018
During 2018, the Company acquired
152
Aaron's-branded franchised stores operated by franchisees for an aggregate purchase price of
$189.8 million
, exclusive of the settlement of pre-existing receivables and post-closing working capital settlements.
The acquired operations generated revenues of
$45.9 million
and
$94.8 million
during the
three and six
months ended
June 30, 2019
, respectively, and
$4.0 million
and
$5.2 million
during the comparable prior year periods. The acquired operations generated losses before income taxes of
$1.1 million
and earnings before income taxes of
$1.5 million
during the
three and six
months ended
June 30, 2019
, respectively, and earnings before income taxes of
$0.6 million
and
$0.8 million
during the comparable prior year periods. The revenues and earnings before income taxes described above are included in our condensed consolidated statements of earnings for the respective periods.
The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisitions, and restructuring charges incurred under the 2019 restructuring program associated with the closure of a number of acquired stores. The revenues and earnings before income taxes of the acquired operations discussed above have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated as revenue and expenses to the Company from the franchisees during the
three and six
months ended
June 30, 2019
and
2018
had the transaction not been completed.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisition Accounting
The 2018 acquisitions are benefiting the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, and enabling the Company to execute its business transformation initiatives on a broader scale. The following table presents summaries of the preliminary fair value of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Amounts Recognized as of Acquisition Dates (as of March 31, 2019)
1
|
Acquisition Accounting Adjustments
|
Amounts Recognized as of Acquisition Dates (as of June 30, 2019)
|
Purchase Price
|
$
|
189,826
|
|
$
|
341
|
|
$
|
190,167
|
|
Add: Settlement of Pre-existing Relationship
|
5,405
|
|
—
|
|
5,405
|
|
Less: Working Capital Adjustments
|
155
|
|
—
|
|
155
|
|
Aggregate Consideration Transferred
|
195,386
|
|
341
|
|
195,727
|
|
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
|
|
|
|
Cash and Cash Equivalents
|
50
|
|
—
|
|
50
|
|
Lease Merchandise
|
59,616
|
|
—
|
|
59,616
|
|
Property, Plant and Equipment
|
5,568
|
|
—
|
|
5,568
|
|
Operating Lease Right-of-Use Assets
|
—
|
|
—
|
|
—
|
|
Other Intangibles
2
|
24,498
|
|
—
|
|
24,498
|
|
Prepaid Expenses and Other Assets
|
1,206
|
|
—
|
|
1,206
|
|
Total Identifiable Assets Acquired
|
90,938
|
|
—
|
|
90,938
|
|
Accounts Payable and Accrued Expenses
|
(910
|
)
|
(67
|
)
|
(977
|
)
|
Customer Deposits and Advance Payments
|
(5,156
|
)
|
—
|
|
(5,156
|
)
|
Total Liabilities Assumed
|
(6,066
|
)
|
(67
|
)
|
(6,133
|
)
|
Goodwill
3
|
110,514
|
|
408
|
|
110,922
|
|
Net Assets Acquired
|
$
|
84,872
|
|
$
|
(67
|
)
|
$
|
84,805
|
|
1
As previously reported in Note 2 to the condensed consolidated financial statements as of March 31, 2019.
2
Identifiable intangible assets are further disaggregated in the table set forth below.
3
The total goodwill recognized in conjunction with the franchisee acquisitions, all of which is expected to be deductible for tax purposes, has been assigned to the Aaron’s Business reporting unit. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand name in new geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The preliminary acquisition accounting presented above is subject to refinement. The Company is still finalizing the valuation of assumed favorable and unfavorable real estate operating leases based on comparable market terms of similar leases at the acquisition dates and obtaining additional information regarding other assets. The Company expects these items to be finalized prior to the one-year anniversary date of the acquisitions.
The estimated intangible assets attributable to the franchisee acquisitions are comprised of the following:
|
|
|
|
|
|
|
|
Fair Value
(In Thousands)
|
|
Weighted Average Life
(In Years)
|
Non-compete Agreements
|
$
|
1,872
|
|
|
3.0
|
Customer Lease Contracts
|
7,876
|
|
|
1.0
|
Customer Relationships
|
10,087
|
|
|
3.0
|
Reacquired Franchise Rights
|
4,663
|
|
|
3.9
|
Total Acquired Intangible Assets
1
|
$
|
24,498
|
|
|
|
1
Acquired definite-lived intangible assets have a total weighted average life of
2.5
years.
The Company incurred
$1.6 million
of acquisition-related costs in connection with the franchisee acquisitions, substantially all of which were incurred during 2018. These costs were included in operating expenses in the condensed consolidated statements of earnings.
Other Acquisitions
In addition to the acquisitions discussed above, the Company acquired the store operations of
five
franchisees during the
six months ended June 30, 2019
and the
six months ended June 30, 2018
.
Net cash outflows related to the acquisitions of other Aaron's franchisees, other rent-to-own store businesses, and customer contracts aggregated to
$7.6 million
and
$14.4 million
during the
six months ended June 30, 2019
and
2018
, respectively. The effect of these acquisitions on the condensed consolidated financial statements for the
three and six
months ended
June 30, 2019
and
2018
was not significant.
NOTE 3. FAIR VALUE MEASUREMENT
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Deferred Compensation Liability
|
$
|
—
|
|
|
$
|
(11,295
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,389
|
)
|
|
$
|
—
|
|
The Company maintains the Aaron’s, Inc. Deferred Compensation Plan, which is an unfunded, nonqualified deferred compensation plan for a select group of management, highly compensated employees and non-employee directors. The liability is recorded in accounts payable and accrued expenses in the condensed consolidated balance sheets. The liability representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment elections, which consist of equity and debt "mirror" funds. As such, the Company has classified the deferred compensation liability as a Level 2 liability.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes non-financial assets measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets Held for Sale
|
$
|
—
|
|
|
$
|
8,992
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,589
|
|
|
$
|
—
|
|
Assets classified as held for sale are recorded at the lower of carrying value or fair value less estimated costs to sell, and any adjustment is recorded in
other operating income, net
or restructuring expenses, net (if the asset is a part of the Company's restructuring program as described in Note 8) in the condensed consolidated statements of earnings. The highest and best use of the assets held for sale is as real estate land parcels for development or real estate properties for use or lease; however, the Company has chosen not to develop or use these properties.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain Financial Assets and Liabilities Not Measured at Fair Value
The following table summarizes the fair value of liabilities that are not measured at fair value in the condensed consolidated balance sheets, but for which the fair value is disclosed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fixed-Rate Long-Term Debt
1
|
—
|
|
|
(124,590
|
)
|
|
—
|
|
|
—
|
|
|
(183,765
|
)
|
|
—
|
|
1
The fair value of fixed-rate long-term debt is estimated using the present value of underlying cash flows discounted at a current market yield for similar instruments. The carrying amount of fixed-rate long-term debt was
$120.0 million
and
$180.0 million
at
June 30, 2019
and
December 31, 2018
, respectively.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. LOANS RECEIVABLE
The following is a summary of the Company’s loans receivable, net:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Credit Card Loans
1
|
$
|
86,763
|
|
|
$
|
90,406
|
|
Acquired Loans
2
|
2,158
|
|
|
5,688
|
|
Loans Receivable, Gross
|
88,921
|
|
|
96,094
|
|
|
|
|
|
Allowance for Loan Losses
|
(12,783
|
)
|
|
(12,970
|
)
|
Unamortized Fees
|
(6,164
|
)
|
|
(6,971
|
)
|
Loans Receivable, Net of Allowances and Unamortized Fees
|
$
|
69,974
|
|
|
$
|
76,153
|
|
1
"Credit Card Loans" are loans originated after the 2015 acquisition of DAMI.
2
"Acquired Loans" are credit card loans the Company purchased in the 2015 acquisition of DAMI.
Included in the table below is an aging of the loans receivable, gross balance:
|
|
|
|
|
|
|
|
|
(Dollar Amounts in Thousands)
|
|
|
|
Aging Category
1
|
June 30, 2019
|
|
December 31, 2018
|
30-59 days past due
|
6.9
|
%
|
|
6.9
|
%
|
60-89 days past due
|
3.6
|
%
|
|
3.4
|
%
|
90 or more days past due
|
4.1
|
%
|
|
4.3
|
%
|
Past due loans receivable
|
14.6
|
%
|
|
14.6
|
%
|
Current loans receivable
|
85.4
|
%
|
|
85.4
|
%
|
Balance of Credit Card Loans on Nonaccrual Status
|
$
|
1,756
|
|
|
$
|
2,110
|
|
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 tables below present the components of the allowance for loan losses for the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(In Thousands)
|
2019
|
|
2018
|
Beginning Balance
|
$
|
12,363
|
|
|
$
|
10,699
|
|
Provision for Loan Losses
|
4,968
|
|
|
5,048
|
|
Charge-offs
|
(5,158
|
)
|
|
(4,592
|
)
|
Recoveries
|
610
|
|
|
431
|
|
Ending Balance
|
$
|
12,783
|
|
|
$
|
11,586
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(In Thousands)
|
2019
|
|
2018
|
Beginning Balance
|
$
|
12,970
|
|
|
$
|
11,454
|
|
Provision for Loan Losses
|
9,223
|
|
|
9,540
|
|
Charge-offs
|
(10,642
|
)
|
|
(10,210
|
)
|
Recoveries
|
1,232
|
|
|
802
|
|
Ending Balance
|
$
|
12,783
|
|
|
$
|
11,586
|
|
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LEASES
Lessor Information
Refer to Note 1 to these condensed consolidated financial statements for further information about the Company's revenue generating activities as a lessor. All of the Company's customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases.
Lessee Information
As a lessee, the Company leases retail store and warehouse space for most of its Aaron's Business store-based operations, call center space and hubs for its Progressive Leasing segment, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. To the extent that a leased retail store or warehouse space is vacated prior to the termination of the lease, the Company may sublease these spaces to third parties while maintaining its primary obligation as the intermediate lessor. The Company leases transportation vehicles under operating and finance leases, most of which generally expire during the next three years. The transportation leases generally include a residual value that is guaranteed to the lessor, which ensures that the vehicles will be returned to the lessor in reasonable working condition. The Company has existing leases various IT equipment such as printers and computers under operating leases, most of which generally expire during the next three years. For all of its leases in which the Company is a lessee, the Company has elected to include both the lease and non-lease components as a single component and account for it as a lease.
Finance lease costs are comprised of the amortization of right-of-use assets and the interest accretion on discounted lease liabilities, which are recorded within operating expenses and interest expense, respectively, in the Company’s condensed consolidated statements of earnings. Operating lease costs are recorded on a straight-line basis within operating expenses. For stores that are related to the Company's restructuring programs as described in Note 8, operating lease costs recorded subsequent to any necessary operating lease right-of-use asset impairment charges are recognized in a pattern that is generally accelerated within restructuring expenses, net in the Company’s condensed consolidated statements of earnings. The Company’s total lease expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In Thousands)
|
June 30, 2019
|
|
June 30, 2019
|
Finance Lease Cost:
|
|
|
|
Amortization of Right-of-Use Assets
|
$
|
440
|
|
|
$
|
906
|
|
Interest on Lease Liabilities
|
100
|
|
|
213
|
|
Total Finance Lease Cost:
|
540
|
|
|
1,119
|
|
|
|
|
|
Operating Lease Cost:
|
|
|
|
Operating Lease Cost Classified within Operating Expenses
1
|
27,929
|
|
|
57,142
|
|
Operating Lease Cost Classified within Restructuring Expenses, Net
|
837
|
|
|
1,640
|
|
Sublease Receipts
|
(1,039
|
)
|
|
(1,771
|
)
|
Total Operating Lease Cost:
|
27,727
|
|
|
57,011
|
|
|
|
|
|
Total Lease Cost
|
$
|
28,267
|
|
|
$
|
58,130
|
|
1
Includes short-term and variable lease costs, which are not significant.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additional information regarding the Company’s leasing activities as a lessee is as follows:
|
|
|
|
|
|
Six Months Ended
|
(In Thousands)
|
June 30, 2019
|
Cash Paid for Amounts Included in Measurement of Lease Liabilities:
|
|
Operating Cash Flows for Finance Leases
|
$
|
261
|
|
Operating Cash Flows for Operating Leases
|
62,541
|
|
Financing Cash Flows for Finance Leases
|
1,202
|
|
Total Cash Paid for Amounts Included in Measurement of Lease Liabilities
|
64,004
|
|
Right-of-Use Assets Obtained in Exchange for New Finance Lease Liabilities
|
—
|
|
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities, Net of Exercised Early Lease Termination Options
|
$
|
14,891
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Balance Sheet Classification
|
|
June 30, 2019
|
Assets
|
|
|
|
|
Operating Lease Assets
|
|
Operating Lease Right-of-Use Assets
|
|
$
|
338,805
|
|
Finance Lease Assets
|
|
Property, Plant and Equipment, Net
|
|
2,116
|
|
Total Lease Assets
|
|
|
|
$
|
340,921
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating Lease Liabilities
|
|
Operating Lease Liabilities
|
|
$
|
386,989
|
|
Finance Lease Liabilities
|
|
Debt
|
|
3,962
|
|
Total Lease Liabilities
|
|
|
|
$
|
390,951
|
|
Most of the Company’s real estate leases contain renewal options for additional periods ranging from
one
to
20
years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. The Company currently does not have any real estate leases in which it considers the renewal options to be reasonably certain of exercise, as the Company's historical experience indicates that renewal options are not reasonably certain to be exercised. Additionally, the Company's leases contain contractual renewal rental rates that are considered to be in line with market rental rates, and there are not significant economic penalties or business disruptions incurred by not exercising any renewal options.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s finance and operating leases:
|
|
|
|
|
|
|
Weighted Average Discount Rate
1
|
|
Weighted Average Remaining Lease Term (in years)
|
Finance Leases
|
5.9
|
%
|
|
1.5
|
Operating Leases
|
3.6
|
%
|
|
5.1
|
1
Upon adoption of ASC 842, discount rates for existing operating leases were established as of January 1, 2019.
Under the short-term lease exception provided within ASC 842, the Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement, including renewal options that the Company is reasonably certain to exercise, and do not include purchase options. Below is a summary of undiscounted finance and operating lease liabilities that have initial terms in excess of one year as of
June 30, 2019
. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the condensed consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2019
|
$
|
55,063
|
|
|
$
|
1,327
|
|
|
$
|
56,390
|
|
2020
|
105,901
|
|
|
2,084
|
|
|
107,985
|
|
2021
|
83,319
|
|
|
853
|
|
|
84,172
|
|
2022
|
62,929
|
|
|
87
|
|
|
63,016
|
|
2023
|
42,406
|
|
|
—
|
|
|
42,406
|
|
Thereafter
|
76,525
|
|
|
—
|
|
|
76,525
|
|
Total Undiscounted Cash Flows
|
426,143
|
|
|
4,351
|
|
|
430,494
|
|
Less: Interest
|
39,154
|
|
|
389
|
|
|
39,543
|
|
Present Value of Lease Liabilities
|
$
|
386,989
|
|
|
$
|
3,962
|
|
|
$
|
390,951
|
|
NOTE 6. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has guaranteed certain debt obligations of some of the franchisees under a franchisee loan program with several banks.
In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of the franchisees’ debt obligations under the franchisee loan program, which would be due in full within
90 days
of the event of default. At
June 30, 2019
, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was
$35.4 million
. The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the franchisee 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 condensed consolidated balance sheets, is
$0.4 million
and
$0.3 million
as of
June 30, 2019
and
December 31, 2018
. The maximum facility commitment amount under the franchisee loan program was
$55.0 million
at
June 30, 2019
, including a Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of Quebec) of CAD
$25.0 million
.
The Company is subject to financial covenants under the franchisee loan program that are consistent with the Revolving Credit and Term Loan Agreement, which are more fully described in Note 7 to the consolidated financial statements in the
2018
Annual Report. The Company is in compliance with all covenants at
June 30, 2019
and believes it will continue to be in compliance in the future.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Legal and Regulatory Proceedings
From time to time, the Company is party to various legal and regulatory proceedings arising in the ordinary course of business.
Some of the proceedings to which the Company is currently a party are described below. The Company believes it has meritorious defenses to all of the claims described below, and intends to vigorously defend against the claims. However, these proceedings are still developing and due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings, there can be no guarantee that the Company will ultimately be successful in these proceedings, or in others to which it is currently a party. Substantial losses from these proceedings or the costs of defending them could have a material adverse impact upon the Company's business, financial position and results of operations.
The Company establishes an accrued liability for legal and regulatory proceedings when it determines that a loss is both probable and the amount of the loss can be reasonably estimated. The Company continually monitors its litigation and regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.
At
June 30, 2019
and
December 31, 2018
, the Company had accrued
$1.2 million
and
$1.4 million
, respectively, for pending legal and regulatory matters for which it believes losses are probable and is the Company's best estimate of its exposure to loss. The Company records these liabilities in accounts payable and accrued expenses in the condensed consolidated balance sheets. The Company estimated that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss contingencies is between
$0
and
$1.4 million
as of
June 30, 2019
.
At
June 30, 2019
, the Company estimated that the aggregate range of loss for all material pending legal and regulatory proceedings for which a loss is reasonably possible, but less likely than probable (i.e., excluding the contingencies described in the preceding paragraph), is between
$1.5 million
and
$3.0 million
. Those matters for which a reasonable estimate is not possible are not included within estimated ranges and, therefore, the estimated ranges do not represent the Company's maximum loss exposure. The Company’s estimates for legal and regulatory accruals, aggregate probable loss amounts and reasonably possible loss amounts are all subject to the uncertainties and variables described above.
Privacy and Related Matters
In
Crystal and Brian Byrd v. Aaron's, Inc., Aspen Way Enterprises, Inc., John Does (1-100) Aaron's Franchisees and Designerware, LLC,
filed on May 16, 2011, in the United States District Court, Western District of Pennsylvania, plaintiffs allege the Company and its independently owned and operated franchisee Aspen Way Enterprises ("Aspen Way") knowingly violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act ("ECPA") and the Computer Fraud Abuse Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called "PC Rental Agent." Plaintiffs filed an amended complaint, asserting claims under the ECPA, common law invasion of privacy, seeking an injunction, and naming additional independently owned and operated Company franchisees as defendants. Plaintiffs seek monetary damages as well as injunctive relief.
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. Following an appeal of the decision to deny class certification, the matter was sent back to the District Court and, on September 26, 2017, the District Court denied plaintiffs' motion for class certification. A petition with the United States Court of Appeals for permission to appeal the denial of class certification a second time was denied on December 11, 2018. The case is now proceeding for determination on an individual basis as to the named plaintiffs. The case is on a trial calendar in October 2019. The Company filed a motion for summary judgment in July 2019.
In
Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees and Designerware, LLC
, filed on March 5, 2013 in the Los Angeles Superior Court, plaintiffs assert claims against the Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiffs are seeking injunctive relief and damages as well as certification of a putative California class. In April 2013, the Company removed this matter to federal court. In May 2013, the Company filed a motion to stay this litigation pending resolution of the Byrd litigation, a motion to dismiss for failure to state a claim, and a motion to strike certain allegations in the complaint. The Court subsequently stayed the case. The Company's motions to dismiss and strike certain allegations remain pending. In June 2015, the plaintiffs filed a motion to lift the stay, which was denied in July 2015.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In Lomi Price v. Aaron's, Inc. and NW Freedom Corporation
, filed on February 27, 2013, in the State Court of Fulton County, Georgia, an individual plaintiff asserts claims against the Company and its independently owned and operated franchisee, NW Freedom Corporation, for invasion of privacy/intrusion on seclusion, computer invasion of privacy and infliction of emotional distress. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiff is seeking compensatory and punitive damages. This case has been stayed pending resolution of the Byrd litigation.
Regulatory Inquiries
In July 2018, the Company received civil investigative demands ("CIDs") from the Federal Trade Commission (the "FTC") regarding disclosures related to financial products offered by the Company through the Aaron’s Business and Progressive Leasing and whether such disclosures violate the Federal Trade Commission Act (the "FTC Act"). Although we believe we are in compliance with the FTC Act, these inquiries could lead to an enforcement action and/or a consent order, and substantial costs, including legal fees, fines, penalties, and remediation expenses. The Company submitted a significant amount of documentation from both the Aaron’s Business and Progressive Leasing in October 2018 and continues to work with the FTC as its inquiry proceeds.
In April 2019, the Aaron’s Business, along with other rent-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the purchase and sale of customer lease agreements, and whether such transactions violated the FTC Act. Although we believe such transactions were in compliance with the FTC Act, this inquiry could lead to an enforcement action and/or a consent order, and substantial costs. The Company is fully cooperating with the FTC in responding to this inquiry.
Other Contingencies
The Company is a party to various claims and legal proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, monitors the Company's litigation and regulatory exposure with the Company's attorneys and evaluates its loss experience. The Company also enters into various contracts in the normal course of business that may subject it to risk of financial loss if counterparties fail to perform their contractual obligations.
Off-Balance Sheet Risk
The Company, through its DAMI business, had unfunded lending commitments totaling
$307.5 million
and
$316.4 million
as of
June 30, 2019
and
December 31, 2018
, respectively. These unfunded commitments arise in the ordinary course of business from credit card agreements with individual cardholders that give them the ability to borrow, against unused amounts, up to the maximum credit limit assigned to their account. While these unfunded amounts represent the total available unused lines of credit, the Company does not anticipate that all cardholders will utilize their entire available line at any given point in time. Commitments to extend unsecured credit are agreements to lend to a cardholder so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The reserve for losses on unfunded loan commitments is calculated by the Company based on historical usage patterns of cardholders after the initial charge and was approximately
$0.6 million
and
$0.5 million
as of
June 30, 2019
and
December 31, 2018
, respectively. The reserve for losses on unfunded loan commitments is included in accounts payable and accrued expenses in the condensed consolidated balance sheets.
See Note 9 to the consolidated financial statements in the
2018
Annual Report for further information.
NOTE 7. SEGMENTS
As of
June 30, 2019
, the Company has
three
operating and reportable segments: Progressive Leasing, Aaron's Business and DAMI.
Progressive Leasing is a leading virtual lease-to-own company that provides lease-purchase solutions on a variety of products, including furniture and bedding, automobile electronics and accessories, mobile phones and accessories, jewelry, consumer electronics and appliances.
The Aaron's Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a month-to-month, lease-to-own agreement with no credit needed through the Company's Aaron's-branded stores in the United States and Canada and e-commerce platform. This operating segment also supports franchisees of its Aaron's stores. In addition, the Aaron's Business segment includes the operations of Woodhaven, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DAMI offers a variety of second-look financing programs originated through two third-party federally insured banks to customers of participating merchants and, together with Progressive Leasing, allows the Company to provide retail partners with below-prime customers
one
source for financing and leasing transactions.
Disaggregated Revenue
The following table presents revenue by source and by segment for the
three months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business
|
DAMI
|
Total
|
Lease Revenues and Fees
1
|
$
|
516,333
|
|
$
|
391,232
|
|
$
|
—
|
|
$
|
907,565
|
|
Retail Sales
2
|
—
|
|
8,898
|
|
—
|
|
8,898
|
|
Non-Retail Sales
2
|
—
|
|
34,124
|
|
—
|
|
34,124
|
|
Franchise Royalties and Fees
2
|
—
|
|
8,605
|
|
—
|
|
8,605
|
|
Interest and Fees on Loans Receivable
3
|
—
|
|
—
|
|
8,610
|
|
8,610
|
|
Other
|
—
|
|
339
|
|
—
|
|
339
|
|
Total
|
$
|
516,333
|
|
$
|
443,198
|
|
$
|
8,610
|
|
$
|
968,141
|
|
1
Substantially all lease revenues and fees are within the scope of ASC 842,
Leases
. The Company had
$6.9 million
of other revenue within the scope of ASC 606,
Revenue from Contracts with Customers.
|
|
2
|
Revenue within the scope of ASC 606,
Revenue from Contracts with Customers
. Of the Franchise Royalties and Fees,
$6.3 million
is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.
|
3
Revenue within the scope of ASC 310,
Credit Card Interest & Fees
.
The following table presents revenue by source and by segment for the
three months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business
|
DAMI
|
Total
|
Lease Revenues and Fees
1
|
$
|
483,666
|
|
$
|
362,272
|
|
$
|
—
|
|
$
|
845,938
|
|
Retail Sales
2
|
—
|
|
6,592
|
|
—
|
|
6,592
|
|
Non-Retail Sales
2
|
—
|
|
53,661
|
|
—
|
|
53,661
|
|
Franchise Royalties and Fees
2
|
—
|
|
12,125
|
|
—
|
|
12,125
|
|
Interest and Fees on Loans Receivable
3
|
—
|
|
—
|
|
9,208
|
|
9,208
|
|
Other
|
—
|
|
335
|
|
—
|
|
335
|
|
Total
|
$
|
483,666
|
|
$
|
434,985
|
|
$
|
9,208
|
|
$
|
927,859
|
|
1
Substantially all lease revenues and fees are within the scope of ASC 840,
Leases
. The Company had
$4.4 million
of other revenue within the scope of ASC 606,
Revenue from Contracts with Customers.
2
Revenue within the scope of ASC 606,
Revenue from Contracts with Customers
. Of the Franchise Royalties and Fees,
$9.1 million
is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.
3
Revenue within the scope of ASC 310,
Credit Card Interest & Fees
.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents revenue by source and by segment for the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business
|
DAMI
|
Total
|
Lease Revenues and Fees
1
|
$
|
1,039,734
|
|
$
|
811,988
|
|
$
|
—
|
|
$
|
1,851,722
|
|
Retail Sales
2
|
—
|
|
21,707
|
|
—
|
|
21,707
|
|
Non-Retail Sales
2
|
—
|
|
71,105
|
|
—
|
|
71,105
|
|
Franchise Royalties and Fees
2
|
—
|
|
17,812
|
|
—
|
|
17,812
|
|
Interest and Fees on Loans Receivable
3
|
—
|
|
—
|
|
17,256
|
|
17,256
|
|
Other
|
—
|
|
642
|
|
—
|
|
642
|
|
Total
|
$
|
1,039,734
|
|
$
|
923,254
|
|
$
|
17,256
|
|
$
|
1,980,244
|
|
1
Substantially all lease revenues and fees are within the scope of ASC 842,
Leases
. The Company had
$13.4 million
of other revenue within the scope of ASC 606,
Revenue from Contracts with Customers.
|
|
2
|
Revenue within the scope of ASC 606,
Revenue from Contracts with Customers
. Of the Franchise Royalties and Fees,
$13.4 million
is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.
|
3
Revenue within the scope of ASC 310,
Credit Card Interest & Fees
.
The following table presents revenue by source and by segment for the
six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
(In Thousands)
|
Progressive Leasing
|
Aaron's Business
|
DAMI
|
Total
|
Lease Revenues and Fees
1
|
$
|
970,183
|
|
$
|
745,822
|
|
$
|
—
|
|
$
|
1,716,005
|
|
Retail Sales
2
|
—
|
|
15,108
|
|
—
|
|
15,108
|
|
Non-Retail Sales
2
|
—
|
|
106,891
|
|
—
|
|
106,891
|
|
Franchise Royalties and Fees
2
|
—
|
|
24,987
|
|
—
|
|
24,987
|
|
Interest and Fees on Loans Receivable
3
|
—
|
|
—
|
|
18,750
|
|
18,750
|
|
Other
|
—
|
|
927
|
|
—
|
|
927
|
|
Total
|
$
|
970,183
|
|
$
|
893,735
|
|
$
|
18,750
|
|
$
|
1,882,668
|
|
1
Substantially all lease revenues and fees are within the scope of ASC 840,
Leases
. The Company had
$8.4 million
of other revenue within the scope of ASC 606,
Revenue from Contracts with Customers.
2
Revenue within the scope of ASC 606,
Revenue from Contracts with Customers
. Of the Franchise Royalties and Fees,
$19.2 million
is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.
3
Revenue within the scope of ASC 310,
Credit Card Interest & Fees
.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP. Interest expense is allocated to the Progressive Leasing and DAMI segments based on a percentage of the outstanding balances of their intercompany borrowings and of the debt incurred when they were acquired. The following is a summary of earnings (loss) before income taxes by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In Thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Earnings (Loss) Before Income Taxes:
|
|
|
|
|
|
|
|
Progressive Leasing
|
$
|
58,406
|
|
|
$
|
44,575
|
|
|
$
|
113,794
|
|
|
$
|
79,554
|
|
Aaron's Business
1
|
138
|
|
|
7,697
|
|
|
17,726
|
|
|
40,776
|
|
DAMI
|
(1,725
|
)
|
|
(2,292
|
)
|
|
(4,393
|
)
|
|
(3,598
|
)
|
Total Earnings Before Income Taxes
|
$
|
56,819
|
|
|
$
|
49,980
|
|
|
$
|
127,127
|
|
|
$
|
116,732
|
|
1
Earnings before income taxes for the Aaron's Business during the
six months ended June 30, 2019
were impacted by (i) restructuring charges of
$32.0 million
related to closed store right-of-use asset impairment and operating lease charges, the write-off and impairment of store property, plant and equipment and related workforce reductions, and other impairment charges in connection with the Company's strategic decision to close Company-operated stores, of which
$18.7 million
was incurred during the
three months ended June 30, 2019
and (ii) gains on insurance recoveries of
$4.5 million
related to payments received from and final settlements reached with insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of the related property insurance receivables, of which
$3.6 million
was recorded during the
three months ended June 30, 2019
.
Earnings before income taxes for the Aaron's Business during the
three and six
months ended
June 30, 2018
includes a full impairment of the PerfectHome investment of
$20.1 million
and restructuring reversals of
$0.9 million
.
The following is a summary of total assets by segment and shared corporate-related assets.
|
|
|
|
|
|
|
|
|
(In Thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Assets:
|
|
|
|
Progressive Leasing
|
$
|
1,128,719
|
|
|
$
|
1,088,227
|
|
Aaron's Business
1
|
1,727,615
|
|
|
1,483,102
|
|
DAMI
|
86,753
|
|
|
95,341
|
|
Other
2
|
237,111
|
|
|
160,022
|
|
Total Assets
|
$
|
3,180,198
|
|
|
$
|
2,826,692
|
|
1
Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the condensed consolidated balance sheets of
$15.7 million
and
$15.2 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
2
Corporate-related assets that benefit multiple segments are reported as other assets.
NOTE 8. RESTRUCTURING
2019 Restructuring Program
During the first quarter of 2019, the Company initiated a restructuring program to further optimize its Company-operated Aaron's store base portfolio, which resulted in the closure and consolidation of
84
underperforming Company operated stores throughout the first three months of 2019. During the second quarter of 2019, the Company identified an additional
70
stores to be closed, consolidated, or relocated, with the majority of the stores closing
during the
three months
ended
June 30, 2019
. The Company also further rationalized its home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions.
AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total net restructuring expenses of
$18.1 million
and
$31.0 million
were recorded for the
three and six
months ended
June 30, 2019
under the 2019 restructuring program, all of which were incurred within the Aaron's Business segment. Restructuring activity for the
three and six
months ended
June 30, 2019
was comprised of closed store operating lease right-of-use asset impairment and operating lease charges, the write-off and impairment of store property, plant and equipment
,
related workforce reductions, and other impairment charges. These costs were included in restructuring expenses, net in the condensed consolidated statements of earnings. The Company does not expect to incur material additional restructuring charges for this program. However, this estimate is subject to change based on future sublease activity and potential earlier buyouts of leases with landlords.
2017 and 2016 Restructuring Programs
During the years ended
December 31, 2017
and 2016, the Company initiated restructuring programs to rationalize its Company-operated Aaron's store base portfolio to better align with marketplace demand. The programs resulted in the closure and consolidation of
139
underperforming Company operated stores throughout 2016, 2017, and 2018. The Company also optimized its home office staff and field support, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions.
Total net restructuring expenses of
$0.6 million
and
$1.0 million
were recorded for the
three and six
months ended
June 30, 2019
under the 2017 and 2016 restructuring programs, all of which were incurred within the Aaron's Business segment. Restructuring activity for the
three and six
months ended
June 30, 2019
was comprised principally of additional operating lease right-of-use asset impairment charges due to changes in estimates of future sublease activity and early buyouts of leases with landlords, as well as operating lease charges for stores closed under the restructuring program. These costs were included in restructuring expenses, net in the condensed consolidated statements of earnings. The Company does not expect to incur any further material charges under the 2017 and 2016 restructuring programs. However, this estimate is subject to change based on future sublease activity and potential earlier buyouts of leases with landlords.
The following table summarizes restructuring charges for the
three and six
months ended
June 30, 2019
and
2018
, respectively, under the three programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
(In Thousands)
|
2019
|
|
2018
|
2019
|
|
2018
|
Right-of-Use Asset Impairment and Operating Lease Charges
|
$
|
15,266
|
|
|
$
|
207
|
|
$
|
24,788
|
|
|
$
|
926
|
|
Fixed Asset Impairment
|
1,072
|
|
|
—
|
|
2,569
|
|
|
—
|
|
Severance
|
1,856
|
|
|
87
|
|
2,992
|
|
|
601
|
|
Other Expenses (Reversals)
|
544
|
|
|
(1,176
|
)
|
1,670
|
|
|
(1,176
|
)
|
Gain on Sale of Closed Store Properties
|
—
|
|
|
—
|
|
—
|
|
|
(327
|
)
|
Total Restructuring Expenses (Reversals), Net
|
$
|
18,738
|
|
|
$
|
(882
|
)
|
$
|
32,019
|
|
|
$
|
24
|
|
To date, the Company has incurred charges of
$40.3 million
under the 2016 and 2017 restructuring programs.
The following table summarizes the balances of the accruals for the restructuring programs, which are recorded in accounts payable and accrued expenses in the condensed consolidated balance sheets, and the activity for the
six months
ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Contractual Lease Obligations
|
|
Severance
|
Balance at January 1, 2019
|
$
|
8,472
|
|
|
$
|
651
|
|
ASC 842 Transition Adjustment
1
|
(8,472
|
)
|
|
—
|
|
Adjusted Balance at January 1, 2019
|
—
|
|
|
651
|
|
Restructuring Charges
|
—
|
|
|
2,992
|
|
Payments
|
—
|
|
|
(2,427
|
)
|
Balance at June 30, 2019
|
$
|
—
|
|
|
$
|
1,216
|
|
1
Upon the adoption of ASC 842 on January 1, 2019, the Company reclassified the remaining liability for contractual lease obligations from accounts payable and accrued expenses to a reduction to operating lease right-of-use assets within its condensed consolidated balance sheets.