Company Quick10K Filing
Quick10K
Aaron's
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$56.74 68 $3,840
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-13 Officers, Shareholder Vote, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2019-02-14 Regulation FD
8-K 2019-01-08 Earnings, Exhibits
8-K 2018-10-25 Enter Agreement, Earnings, Off-BS Arrangement, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-09 Shareholder Vote
8-K 2018-03-01 Regulation FD
8-K 2018-02-15 Earnings, Exhibits
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GHM Graham 203
ROX Castle Brands 101
PIH 1347 Property Insurance Holdings 30
LTN Union Acquisition 0
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DDDR DD's Deluxe Rod Holder 0
AAN 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1. Basis and Summary of Significant Accounting Policies
Note 2. Acquisitions
Note 3. Fair Value Measurement
Note 4. Loans Receivable
Note 5. Leases
Note 6. Commitments and Contingencies
Note 7. Segments
Note 8. Restructuring
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 a2019q110-qexhibit101.htm
EX-31.1 a2019q110-qexhibit311.htm
EX-31.2 a2019q110-qexhibit312.htm
EX-32.1 a2019q110-qexhibit321.htm
EX-32.2 a2019q110-qexhibit322.htm

Aaron's Earnings 2019-03-31

AAN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019q110-q.htm 10-Q 1Q2019 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ________________________________
 FORM 10-Q
________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
OR
o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER 1-13941
 ________________________________
 AARON’S, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Georgia
 
58-0687630
(State or other jurisdiction of
incorporation or organization)
 
(I. R. S. Employer
Identification No.)
 
 
 
400 Galleria Parkway SE, Suite 300
Atlanta, Georgia
 
30339-3182
(Address of principal executive offices)
 
(Zip Code)
(678) 402-3000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 ___________________________________

Indicate by check mark whether registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
ý
 
 
Accelerated Filer
 
o
 
 
 
 
 
 
 
 
Non-Accelerated Filer
 
o
(Do not check if a smaller reporting company)
 
Smaller Reporting Company
 
o
 
 
 
 
 
 
 
 
Emerging Growth Company
 
o
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Shares Outstanding as of
April 19, 2019
Common Stock, $0.50 Par Value
 
67,677,449



1


AARON’S, INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
Item 4. Mine Safety Disclosures
 
 
Item 5. Other Information
 
 
 
 

2


PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
 
March 31,
2019
 
December 31,
2018
 
(In Thousands, Except Share Data)
ASSETS:
 
 
 
Cash and Cash Equivalents
$
124,154

 
$
15,278

Accounts Receivable (net of allowances of $56,785 in 2019 and $62,704 in 2018)
84,037

 
98,159

Lease Merchandise (net of accumulated depreciation and allowances of $808,056 in 2019 and $816,928 in 2018)
1,301,066

 
1,318,470

Loans Receivable (net of allowances and unamortized fees of $18,925 in 2019 and $19,941 in 2018)
72,564

 
76,153

Property, Plant and Equipment at Cost (net of accumulated depreciation of $291,750 in 2019 and $284,287 in 2018)
228,864

 
229,492

Operating Lease Right-of-Use Assets
370,282

 

Goodwill
734,558

 
733,170

Other Intangibles (net of accumulated amortization of $138,308 in 2019 and $130,116 in 2018)
216,559

 
228,600

Income Tax Receivable
13,401

 
29,148

Prepaid Expenses and Other Assets
92,481

 
98,222

Total Assets
$
3,237,966

 
$
2,826,692

LIABILITIES & SHAREHOLDERS’ EQUITY:
 
 
 
Accounts Payable and Accrued Expenses
$
246,779

 
$
293,153

Deferred Income Taxes Payable
279,224

 
267,500

Customer Deposits and Advance Payments
83,610

 
80,579

Operating Lease Liabilities
406,559

 

Debt
408,286

 
424,752

Total Liabilities
1,424,458

 
1,065,984

Commitments and Contingencies (Note 6)


 


SHAREHOLDERS' EQUITY:
 
 
 
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at March 31, 2019 and December 31, 2018; Shares Issued: 90,752,123 at March 31, 2019 and December 31, 2018
45,376

 
45,376

Additional Paid-in Capital
270,727

 
278,922

Retained Earnings
2,061,651

 
2,005,344

Accumulated Other Comprehensive Loss
(663
)
 
(1,087
)
 
2,377,091

 
2,328,555

Less: Treasury Shares at Cost
 
 
 
Common Stock: 23,074,674 Shares at March 31, 2019 and 23,567,979 at December 31, 2018
(563,583
)
 
(567,847
)
Total Shareholders’ Equity
1,813,508

 
1,760,708

Total Liabilities & Shareholders’ Equity
$
3,237,966

 
$
2,826,692

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

3


AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
 
(In Thousands, Except Per Share Data)
REVENUES:
 
 
 
Lease Revenues and Fees
$
944,157

 
$
870,067

Retail Sales
12,809

 
8,516

Non-Retail Sales
36,981

 
53,230

Franchise Royalties and Fees
9,207

 
12,862

Interest and Fees on Loans Receivable
8,646

 
9,542

Other
303

 
592

 
1,012,103

 
954,809

COSTS AND EXPENSES:
 
 
 
Depreciation of Lease Merchandise
500,820

 
440,008

Retail Cost of Sales
8,632

 
5,662

Non-Retail Cost of Sales
29,196

 
48,020

Operating Expenses
387,216

 
390,232

Restructuring Expenses, Net
13,281

 
906

Other Operating Income, Net
(897
)
 
(83
)
 
938,248

 
884,745

OPERATING PROFIT
73,855

 
70,064

Interest Income
101

 
202

Interest Expense
(4,956
)
 
(4,326
)
Other Non-Operating Income, Net
1,308

 
812

EARNINGS BEFORE INCOME TAXES
70,308

 
66,752

INCOME TAXES
14,230

 
14,506

NET EARNINGS
$
56,078

 
$
52,246

EARNINGS PER SHARE
 
 
 
Basic
$
0.83

 
$
0.75

Assuming Dilution
$
0.82

 
$
0.73

CASH DIVIDENDS DECLARED PER SHARE:
 
 
 
Common Stock
$
0.0350

 
$
0.0300

WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
Basic
67,294

 
70,105

Assuming Dilution
68,773

 
72,018

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

4


AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 March 31,
(In Thousands)
2019
 
2018
Net Earnings
$
56,078

 
$
52,246

Other Comprehensive Income (Loss):
 
 
 
Foreign Currency Translation Adjustment
424

 
(477
)
Total Other Comprehensive Income (Loss)
424

 
(477
)
Comprehensive Income
$
56,502

 
$
51,769

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


5


AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended 
 March 31,
 
2019
 
2018
 
(In Thousands)
OPERATING ACTIVITIES:



Net Earnings
$
56,078


$
52,246

Adjustments to Reconcile Net Earnings to Cash Provided by Operating Activities:



Depreciation of Lease Merchandise
500,820


440,008

Other Depreciation and Amortization
26,562


22,115

Accounts Receivable Provision
63,235


51,458

Provision for Credit Losses on Loans Receivable
4,255


4,492

Stock-Based Compensation
7,549


8,519

Deferred Income Taxes
10,861


23,201

Impairment of Assets
10,492



Amortization of Right of Use Assets
25,802

 

Other Changes, Net
883


(1,014
)
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:





Additions to Lease Merchandise
(580,089
)

(514,055
)
Book Value of Lease Merchandise Sold or Disposed
98,257


98,797

Accounts Receivable
(50,467
)

(33,591
)
Prepaid Expenses and Other Assets
1,550


(6,022
)
Income Tax Receivable
15,747


68,214

Operating Lease Liabilities
(27,890
)
 

Accounts Payable and Accrued Expenses
(1,854
)

(21,598
)
Customer Deposits and Advance Payments
2,947


3,806

Cash Provided by Operating Activities
164,738


196,576

INVESTING ACTIVITIES:





Investments in Loans Receivable
(14,493
)

(14,598
)
Proceeds from Loans Receivable
14,482


15,135

Proceeds from Investments


666

Outflows on Purchases of Property, Plant and Equipment
(23,807
)

(17,254
)
Proceeds from Property, Plant and Equipment
511


2,731

Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired
(3,470
)

(4,774
)
Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed
755


144

Cash Used in Investing Activities
(26,022
)

(17,950
)
FINANCING ACTIVITIES:





Repayments on Revolving Facility, Net
(16,000
)


Repayments on Debt
(575
)

(10,511
)
Dividends Paid
(2,366
)

(2,111
)
Acquisition of Treasury Stock


(18,407
)
Issuance of Stock Under Stock Option Plans
1,996


3,182

Shares Withheld for Tax Payments
(12,977
)

(12,343
)
Debt Issuance Costs


(55
)
Cash Used in Financing Activities
(29,922
)

(40,245
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
82


(8
)
Increase in Cash and Cash Equivalents
108,876


138,373

Cash and Cash Equivalents at Beginning of Period
15,278


51,037

Cash and Cash Equivalents at End of Period
$
124,154


$
189,410

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

6


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 March 31, 2019, the Company's operating segments are Progressive Leasing, Aaron's Business and DAMI.
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions 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 March 31 (Unaudited and In Thousands)
2019
 
2018
Progressive Leasing Invoice Volume1
$
394,727

 
$
345,562

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 two franchisees during the three months ended March 31, 2019. 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 March 31 (Unaudited)
2019
 
2018
Company-operated Aaron's Branded Stores
1,230

 
1,182

Franchised Stores
369

 
537

Systemwide Stores
1,599

 
1,719

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 months ended March 31, 2019 are not necessarily indicative of operating results for the full year.

7


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Principles of Consolidation
The condensed consolidated financial statements include the accounts of Aaron's, Inc. and its subsidiaries, each of which is wholly owned. Intercompany balances and transactions between consolidated entities have been eliminated.
Accounting Policies and Estimates
See Note 1 to the consolidated financial statements in the 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") (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 
 March 31,
(Shares In Thousands)
2019
 
2018
Weighted Average Shares Outstanding
67,294

 
70,105

Dilutive Effect of Share-Based Awards
1,479

 
1,913

Weighted Average Shares Outstanding Assuming Dilution
68,773

 
72,018

Approximately 443,000 and 187,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three months ended March 31, 2019 and 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 and accessories, to its customers for lease under certain terms agreed to by the customer. The Company's Progressive Leasing segment offers virtual lease-purchase solutions, typically over 12 months, to the customers of traditional and e-commerce retailers. The Company's Aaron's-branded stores 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.
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.

8


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.
Initial direct costs related to the pre-opening services provided to franchisees are immaterial and are expensed as incurred. These expenses have been classified as operating expenses in the Company's 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 for deferred or reduced interest, if the balance is not paid off during the promotional period, interest is billed to the customers at standard rates and the cumulative amount owed is charged to the cardholder account in the month that the promotional period expires or defaults. The Company recognizes interest revenue during the promotional period based on its historical experience related to cardholders that fail to pay off balances during the promotional period.

9


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 real estate leasing activities and vendor consideration) and franchisee obligations.
Accounts receivable, net of allowances, consist of the following: 
(In Thousands)
March 31, 2019

December 31, 2018
Customers
$
54,517

 
$
60,879

Corporate
13,405

 
18,171

Franchisee
16,115

 
19,109

Accounts Receivable
$
84,037

 
$
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 statement 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 statement 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 statement of earnings.
The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments:
 
Three Months Ended March 31,
(In Thousands)
2019
 
2018
Bad Debt Expense1
$
1,125

 
$
46,542

Provision for Returns and Uncollectible Renewal Payments2
62,110

 
4,916

Accounts Receivable Provision
$
63,235

 
$
51,458

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.

10


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)
March 31, 2019
 
December 31, 2018
Merchandise on Lease
$
1,022,902

 
$
1,053,684

Merchandise Not on Lease
278,164

 
264,786

Lease Merchandise, net of Accumulated Depreciation and Allowances
$
1,301,066

 
$
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:
 
Three Months Ended March 31,
(In Thousands)
2019
 
2018
Beginning Balance
$
46,694

 
$
35,629

Merchandise Written off, net of Recoveries
(53,222
)
 
(40,511
)
Provision for Write-offs
56,995

 
44,470

Ending Balance
$
50,467

 
$
39,588

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.

11


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 at the end of the month following the billing cycle in which the loans receivable become 120 days past due.
DAMI extends or declines credit to an applicant through its bank partners based upon the applicant's credit rating and other factors. Below is a summary of the credit quality of the Company's loan portfolio as of March 31, 2019 and December 31, 2018 by Fair Isaac and Company (FICO) score as determined at the time of loan origination:
FICO Score Category
March 31, 2019
 
December 31, 2018
600 or Less
4.1
%
 
3.7
%
Between 600 and 700
79.0
%
 
77.9
%
700 or Greater
16.9
%
 
18.4
%
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
(In Thousands)
March 31, 2019
 
December 31, 2018
Prepaid Expenses
$
27,467

 
$
30,763

Prepaid Insurance
24,072

 
27,948

Assets Held for Sale
8,974

 
6,589

Deferred Tax Asset
8,761

 
8,761

Other Assets
23,207

 
24,161

Prepaid Expenses and Other Assets
$
92,481

 
$
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 March 31, 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 March 31, 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.

12


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)
March 31, 2019
 
December 31, 2018
Accounts Payable
$
71,751

 
$
88,369

Accrued Insurance Costs
39,181

 
40,423

Accrued Salaries and Benefits
45,832

 
40,790

Accrued Real Estate and Sales Taxes
30,749

 
30,332

Deferred Rent1

 
27,270

Other Accrued Expenses and Liabilities1
59,266

 
65,969

Accounts Payable and Accrued Expenses
$
246,779

 
$
293,153

1
Amounts as of March 31, 2019 were impacted by the January 1, 2019 adoption of ASC 842. Upon transition to ASC 842, the remaining balances of the Company's deferred rent, lease incentives, and closed store reserve were reclassified as a reduction to the operating lease right-of-use asset in the accompanying condensed consolidated balance sheet.
Debt
At March 31, 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 three months ended March 31, 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

 
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


13


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 March 31, 2019, the Company has two remaining capital leases and four remaining operating leases with Aaron Ventures with lease expiration dates between 2019 and 2026. The two capital leases have aggregate annual rental payments of approximately $0.1 million. 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 four operating leases have aggregate annual rental payments of approximately $0.2 million.
Supplemental Disclosure of Noncash Investing Transactions
During the three months ended March 31, 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 $0.4 million.
In addition, the purchase price for the acquisition of certain franchisees made during the three months ended March 31, 2019 and 2018 included the non-cash settlement of pre-existing accounts receivable the franchisees owed the Company of $0.1 million and $0.2 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 three months ended March 31, 2019, the Company received cash payments of $2.7 million from its insurers related to the partial settlements of property damage and business interruption claims resulting from Hurricanes Harvey and Irma. Settled property damage claims that were in excess of the respective insurance receivable balances as well as business interruption proceeds resulted in gains of $0.9 million during the three months ended March 31, 2019. These gains were recorded within other operating income, net in the condensed consolidated statements of earnings. As of March 31, 2019, the Company has an insurance receivable of $0.7 million, which the Company believes is probable of receipt.


14


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 statement 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-to-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 during the three months ended March 31, 2019, and the impact to the condensed consolidated financial statements was not significant. Costs eligible for capitalization will be classified within prepaid expenses and other assets and operating expenses in the condensed consolidated balance sheets and statements of earnings, respectively.

15


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 statement of earnings, no changes are expected related to the loan cash flows.
The Company has evaluated the guidance in ASU 2016-13 related to purchased financial assets with credit deterioration (“PCD Method”) 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 continuing to evaluate the various impacts of CECL, including identifying changes to processes and procedures that will be necessary to adopt ASU 2016-13, and is in the process of identifying and testing potential software solutions to support the new accounting requirements for the Company's loans receivable. The Company is also evaluating whether it will choose to measure future loans at fair value under the fair value option as an alternative to CECL. The fair value option would result in the Company measuring loans at fair value on an instrument-by-instrument basis with changes in fair value reported in net earnings. Election of the fair value option could cause volatility in our reported results, primarily in periods with large fluctuations in interest rates. The Company is also evaluating emerging guidance which would allow companies to choose a one-time election of the fair value option for loans previously recorded at amortized cost under the current incurred loss model. As a result, we are continuing to evaluate transition options and alternatives available under ASU 2016-13.
NOTE 2. ACQUISITIONS
Franchisee Acquisitions - 2018
During 2018, the Company acquired 152 Aaron's-branded franchised stores operated by franchisees for an aggregated purchase price of $189.8 million, exclusive of the settlement of pre-existing receivables and post-closing working capital settlements. The acquired operations generated revenues of $48.9 million and $1.3 million and earnings before income taxes of $3.0 million and $0.1 million during the three months ended March 31, 2019 and 2018, respectively which are included in our condensed consolidated statements of earnings. The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs and amortization expense of the various intangible assets recorded from the acquisitions. The revenues and 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 months ended March 31, 2019 and 2018 had the transaction not been completed.

16


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 December 31, 2018)1
Acquisition Accounting Adjustments
Amounts Recognized as of Acquisition Dates (as of March 31, 2019)
Purchase Price
$
189,826

$

$
189,826

Add: Settlement of Pre-existing Relationship
5,405


5,405

Less: Working Capital Adjustments
155


155

Aggregated Consideration Transferred
195,386


195,386

Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
 
 
 
Cash and Cash Equivalents
43

7

50

Lease Merchandise
59,616


59,616

Property, Plant and Equipment
5,568


5,568

Other Intangibles2
24,530

(32
)
24,498

Prepaid Expenses and Other Assets
1,168

38

1,206

Total Identifiable Assets Acquired
90,925

13

90,938

Accounts Payable and Accrued Expenses
(852
)
(58
)
(910
)
Customer Deposits and Advance Payments
(5,156
)

(5,156
)
Total Liabilities Assumed
(6,008
)
(58
)
(6,066
)
Goodwill3
110,469

45

110,514

Net Assets Acquired
$
84,917

$
(45
)
$
84,872

1 As previously reported in Note 2 to the consolidated financial statements in the 2018 Annual Report.
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.


17


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 Assets1
$
24,498

 
 
1 Acquired definite-lived intangible assets have a total weighted average life of 2.5 years.
The Company incurred $1.4 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 two franchisees during the three months ended March 31, 2019.
Net cash outflows related to the acquisitions of other Aaron's franchisees, other rent-to-own store businesses, and customer contracts aggregated to $3.5 million and $4.8 million during the three months ended March 31, 2019 and 2018, respectively. The effect of these acquisitions on the condensed consolidated financial statements for the three months ended March 31, 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)
March 31, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Deferred Compensation Liability
$

 
$
(10,790
)
 
$

 
$

 
$
(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)
March 31, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets Held for Sale
$

 
$
8,974

 
$

 
$

 
$
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.

18


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)
March 31, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Fixed-Rate Long-Term Debt1

 
(184,835
)
 

 

 
(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 $180.0 million at March 31, 2019 and December 31, 2018, respectively.

19


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)
March 31, 2019
 
December 31, 2018
Credit Card Loans1
$
87,768

 
$
90,406

Acquired Loans2
3,721

 
5,688

Loans Receivable, Gross
91,489

 
96,094

 
 
 
 
Allowance for Loan Losses
(12,363
)
 
(12,970
)
Unamortized Fees
(6,562
)
 
(6,971
)
Loans Receivable, Net of Allowances and Unamortized Fees
$
72,564

 
$
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 Category1
March 31, 2019
 
December 31, 2018
30-59 days past due
6.3
%
 
6.9
%
60-89 days past due
3.1
%
 
3.4
%
90 or more days past due
4.1
%
 
4.3
%
Past due loans receivable
13.5
%
 
14.6
%
Current loans receivable
86.5
%
 
85.4
%
Balance of Credit Card Loans on Nonaccrual Status
$
1,954

 
$
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 table below presents the components of the allowance for loan losses:
 
Three Months Ended
(In Thousands)
March 31, 2019
 
March 31, 2018
Beginning Balance
$
12,970

 
$
11,454

Provision for Loan Losses
4,255

 
4,492

Charge-offs
(5,484
)
 
(5,619
)
Recoveries
622

 
372

Ending Balance
$
12,363

 
$
10,699








20


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 also leases various IT equipment such as printers and computers under operating leases, most of which generally expire during the next three years. For all of its leases in which the Company is a lessee, the Company has elected to include both the lease and non-lease components as a single component and account for it as a lease.
Finance lease costs are comprised of the amortization of right-of-use assets and interest on 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 or restructuring expenses, net (if the lease costs are related to the Company's restructuring programs as described in Note 8) in the Company’s condensed consolidated statements of earnings. The Company’s total lease expense is comprised of the following:
 
Three Months Ended
(In Thousands)
March 31, 2019
Finance Lease Cost:

  Amortization of Right-of-Use Assets
$
465

  Interest on Lease Liabilities
114

Total Finance Lease Cost:
579

 
 
Operating Lease Cost:

  Operating Lease Cost Classified within Operating Expenses1   
29,213

  Operating Lease Cost Classified within Restructuring Expenses, Net
804

  Sublease Receipts
(732
)
Total Operating Lease Cost:
29,285

 
 
Total Lease Cost
$
29,864

1 Includes short-term and variable lease costs, which are not significant.

21


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:
 
Three Months Ended
(In Thousands)
March 31, 2019
Cash Paid for Amounts Included in Measurement of Lease Liabilities:

  Operating Cash Flows for Finance Leases
$
113

  Operating Cash Flows for Operating Leases
31,643

  Financing Cash Flows for Finance Leases
574

Total Cash Paid for Amounts Included in Measurement of Lease Liabilities
32,330

Right-of-Use Assets Obtained in Exchange for New Finance Lease Liabilities

Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities
$
6,587

Supplemental balance sheet information related to leases is as follows:
(In Thousands)
 
Balance Sheet Classification
 
March 31, 2019
Assets
 
 
 
 
Operating Lease Assets
 
Operating Lease Right-of-Use Assets
 
$
370,282

Finance Lease Assets
 
Property, Plant and Equipment, Net
 
2,578

Total Lease Assets
 
 
 
$
372,860

 
 
 
 
 
Liabilities
 
 
 
 
Operating Lease Liabilities
 
Operating Lease Liabilities
 
$
406,559

Finance Lease Liabilities
 
Debt
 
4,590

Total Lease Liabilities
 
 
 
$
411,149

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, as well as contractual renewal rental rates that are considered to be in line with market rental rates and lack of significant economic penalties or business disruptions incurred by not exercising any renewal options.

22


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 Rate1
 
Weighted Average Remaining Lease Term (in years)
Finance Leases
6.0
%
 
2
Operating Leases
3.6
%
 
5
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 March 31, 2019. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the condensed consolidated balance sheet.
(In Thousands)
Operating Leases
 
Finance Leases
 
Total
2019
$
89,172

 
$
2,407

 
$
91,579

2020
104,166

 
2,028

 
106,194

2021
81,568

 
772

 
82,340

2022
61,345

 
74

 
61,419

2023
40,967

 

 
40,967

Thereafter
75,891

 

 
75,891

Total Undiscounted Cash Flows
453,109

 
5,281

 
458,390

Less: Interest
46,550

 
691

 
47,241

Present Value of Lease Liabilities
$
406,559

 
$
4,590

 
$
411,149

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 March 31, 2019, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was $36.8 million. The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the 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 $0.1 million and $0.3 million as of March 31, 2019 and December 31, 2018. The maximum facility commitment amount under the franchisee loan program was $55.0 million at March 31, 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 March 31, 2019 and believes it will continue to be in compliance in the future.

23


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 March 31, 2019 and December 31, 2018, the Company had accrued $1.7 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 $1.0 million.
At March 31, 2019, the Company estimated that the aggregate range of loss for all material pending legal and regulatory proceedings for which a loss is reasonably possible, but less likely than probable (i.e., excluding the contingencies described in the preceding paragraph), is between $2.6 million and $5.2 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.
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.

24


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 $316.0 million and $316.4 million as of March 31, 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 March 31, 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 March 31, 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.

25


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 March 31, 2019:
 
Three Months Ended March 31, 2019
(In Thousands)
Progressive Leasing
Aaron's Business
DAMI
Total
Lease Revenues and Fees1
$
523,401

$
420,756

$

$
944,157

Retail Sales2

12,809


12,809

Non-Retail Sales2

36,981


36,981

Franchise Royalties and Fees2

9,207


9,207

Interest and Fees on Loans Receivable3


8,646

8,646

Other

303


303

Total
$
523,401

$
480,056

$
8,646

$
1,012,103

1 Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $7.9 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, $7.0 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 March 31, 2018:
 
Three Months Ended March 31, 2018
(In Thousands)
Progressive Leasing
Aaron's Business
DAMI
Total
Lease Revenues and Fees1
$
486,517

$
383,550

$

$
870,067

Retail Sales2

8,516


8,516

Non-Retail Sales2

53,230


53,230

Franchise Royalties and Fees2

12,862


12,862

Interest and Fees on Loans Receivable3


9,542

9,542

Other

592


592

Total
$
486,517

$
458,750

$
9,542

$
954,809

1 Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $5.0 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, $10.2 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.

26


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 
 March 31,
(In Thousands)
2019
 
2018
Earnings (Loss) Before Income Taxes:
 
 
 
Progressive Leasing
$
55,388

 
$
34,979

Aaron's Business1
17,588

 
33,079

DAMI
(2,668
)
 
(1,306
)
Total Earnings Before Income Taxes
$
70,308

 
$
66,752

1 Earnings before income taxes for the Aaron's Business during the three months ended March 31, 2019 includes restructuring charges of $13.3 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 84 Company-operated stores.
Earnings before income taxes for the Aaron's Business during the three months ended March 31, 2018 includes net restructuring charges of $0.9 million related to store contractual lease obligations and severance costs, partially offset by gains recognized from the sale of the associated properties of stores closed under the restructuring program.
The following is a summary of total assets by segment and shared corporate-related assets.
(In Thousands)
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
Progressive Leasing
$
1,106,668

 
$
1,088,227

Aaron's Business1
1,774,858

 
1,483,102

DAMI
89,533

 
95,341

Other2
266,907

 
160,022

Total Assets
$
3,237,966

 
$
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 $14.5 million and $15.2 million as of March 31, 2019 and December 31, 2018, respectively.
2 Corporate-related assets that benefit multiple segments are reported as other assets.
NOTE 8. RESTRUCTURING
2019 Restructuring Programs
During the three months ended March 31, 2019, the Company initiated a restructuring program to further align its Company-operated Aaron's store base portfolio with marketplace demand. The program resulted in the closure and consolidation of 84 underperforming Company operated stores throughout the three months of 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.

27


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Total net restructuring expenses of $12.9 million were recorded for the three months ended March 31, 2019 under the 2019 restructuring program, all of which were incurred within the Aaron's Business segment. Restructuring activity for the three months ended March 31, 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 and 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.
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 $0.4 million and $0.9 million were recorded for the three months ended March 31, 2019 and 2018 under the 2017 and 2016 restructuring programs, all of which were incurred within the Aaron's Business segment. Restructuring activity for the three months ended March 31, 2019 was comprised principally of 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 months ended March 31, 2019 and 2018, respectively, under the three programs:
 
Three Months Ended March 31,
(In Thousands)
2019
 
2018
Right-of-Use Asset Impairment and Operating Lease Charges
$
9,522

 
$
719

Fixed Asset Impairment
1,497

 

Severance
1,136

 
514

Other Expenses
1,126

 

Gain on Sale of Closed Store Properties

 
(327
)
Total Restructuring Expenses
$
13,281

 
$
906

To date, the Company has incurred charges of $39.7 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 three months ended March 31, 2019:
(In Thousands)
Contractual Lease Obligations
 
Severance
Balance at January 1, 2019
$
8,472

 
$
651

ASC 842 Transition Adjustment1
(8,472
)
 

Adjusted Balance at January 1, 2019

 
651

Restructuring Charges

 
1,136

Payments

 
(1,033
)
Balance at March 31, 2019
$

 
$
754

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.

28


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Information: Except for historical information contained herein, the matters set forth in this Form 10-Q are forward-looking statements. These statements are based on management’s current expectations and plans, which involve risks and uncertainties. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "believe," "expect," "forecast," "guidance," "intend," "could," "project," "estimate," "anticipate," "should," and similar terminology. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the filing date of this Quarterly Report and which involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. These risks and uncertainties include factors such as the impact of increased regulation, changes in general economic conditions, including consumer confidence and demand for certain merchandise, increased competition, pricing pressures, the impact of legal proceedings faced by the Company, costs relating to protecting customer privacy and information security more generally and a failure to realize the expected benefits of our restructuring plans and strategic initiatives, the execution and results of our operational strategies, risks related to Progressive Leasing's "virtual" lease-to-own business, deteriorations in the business performance of our franchisees and our franchisee relationships, and the other risks and uncertainties discussed under Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 Annual Report"). Except as required by law, the Company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances after the filing date of this Quarterly Report.
The following discussion should be read in conjunction with the condensed consolidated financial statements as of and for the three months ended March 31, 2019 and 2018, including the notes to those statements, appearing elsewhere in this report. We also suggest that management’s discussion and analysis appearing in this report be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our 2018 Annual Report.
Business Overview
Aaron’s, Inc. ("we", "our", "us" or the "Company") is a leading omnichannel provider of lease-purchase solutions. As of March 31, 2019, the Company's operating segments are Progressive Leasing, Aaron's Business and DAMI.
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions through approximately 20,000 retail locations in 46 states and the District of Columbia. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers and, in turn, leasing that merchandise to the customers through a cancellable lease-to-own transaction. Progressive Leasing consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional and e-commerce retailers.
Aaron’s Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a month-to-month, lease-to-own agreement with no credit needed through its Company-operated stores in the United States and Canada as well as through its e-commerce platform, Aarons.com. This operating segment also supports franchisees of its Aaron’s stores. In addition, the Aaron’s Business segment also includes the operations of Woodhaven, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores.
DAMI partners with merchants to provide a variety of revolving credit products originated through two third-party federally insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs).

29


Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplaces. We believe that the Progressive Leasing and DAMI acquisitions have been strategically transformational in this respect by allowing the Company to diversify its presence in the market and strengthen our business, as demonstrated by Progressive Leasing's significant revenue and profit growth throughout 2018 and through the first three months of 2019. The Company is also leveraging franchisee acquisition opportunities to expand into new geographic markets, enhance operational control, and benefit more fully from our business transformation initiatives on a broader scale. We believe the traditional store based lease-to-own industry has been negatively impacted in recent periods by: (i) increased competition from a wide range of competitors, including national, regional and local operators of lease-to-own stores; virtual lease-to-own companies; traditional and e-commerce retailers; traditional and online sellers of used merchandise; and from a growing number of various types of consumer finance companies that enable our customers to shop at traditional or online retailers; (ii) the challenges faced by many traditional "brick-and-mortar" retailers, with respect to a decrease in the number of consumers visiting those stores, especially younger consumers; and (iii) commoditization of pricing in electronics. In response to these changing market conditions, we are executing a strategic plan that focuses on the following items and that we believe positions us for success over the long-term:
Strengthen relationships of Progressive Leasing current retail partners;
Focus on converting existing pipeline into Progressive Leasing retail partners;
Drive operational excellence in our Aaron's Business stores;
Grow revenue and new customers through our omnichannel platform;
Invest and innovate to provide a superior customer experience while lowering our costs to serve; and
Accelerate our vision of business transformation in the Aaron's Business at a larger scale.
We continue to invest in various Aaron's Business transformation initiatives including rapid customer onboarding, centralized decisioning and collections, and the introduction of our next generation store concepts to appeal to our changing target consumer market. We also continue to execute on various Aaron's Business store optimization initiatives, including strategic store consolidations. As a result of these store optimization initiatives and other cost-reduction initiatives, the Company closed and consolidated 84 Company-operated stores during the first three months of 2019 under a new restructuring program announced in January 2019.
During 2017 and 2018, the Company acquired substantially all of the assets of the store operations of 111 and 152 Aaron's-branded franchised stores, respectively. The acquisitions are benefiting the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, enhancing operational control, including compliance, and enabling the Company to execute its business transformation initiatives on a broader scale.
Highlights
The following summarizes significant highlights from the three months ended March 31, 2019:
The Company reported record revenues of $1.012 billion in the first quarter of 2019 compared to $954.8 million for the first quarter of 2018. Earnings before income taxes increased to $70.3 million compared to $66.8 million during the first quarter of 2018.
Progressive Leasing reported revenues of $523.4 million in the first quarter of 2019, an increase of 7.6% over the first quarter of 2018. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases (see the “Use of Non-GAAP Financial Information” section below), Progressive Leasing revenues increased 19.0% over the first quarter of 2018. Progressive Leasing's revenue growth is due to a 14.2% increase in total invoice volume, which was generated through an increase in invoice volume per active door. Progressive Leasing's earnings before income taxes increased to $55.4 million compared to $35.0 million during the first quarter of 2018, due mainly to its higher revenue.
Aaron's Business revenues increased to $480.1 million for the first quarter of 2019, compared to $458.8 million in the prior year period. Aaron's Business lease revenue and fees increased due to the acquisitions of various franchisees throughout 2017 and 2018, partially offset by declines in non-retail sales to our franchisees. Same store revenues increased 0.7% in the first quarter of 2019. Earnings before income taxes decreased to $17.6 million during the first quarter of 2019 compared to $33.1 million in the prior year period primarily due to restructuring charges of $13.3 million.
The Company generated cash from operating activities of $164.7 million for the three months ended March 31, 2019 compared to $196.6 million for the comparable period in 2018. The decrease in net cash from operating activities was impacted by net income tax refunds of $15.3 million during the three months ended March 31, 2019, compared to net income tax refunds of $75.4 million in the same period in 2018.

30


Invoice Volume. We believe that invoice volume is a key performance indicator of our Progressive Leasing segment. Invoice volume is defined as the retail price of lease merchandise acquired and then leased to customers during the period, net of returns. The following table presents total invoice volume for the Progressive Leasing segment:
For the Three Months Ended March 31 (Unaudited and In Thousands)
2019
 
2018
Progressive Leasing Invoice Volume
$
394,727

 
$
345,562

The increase in invoice volume was driven by a 17.9% increase in invoice volume per active door, partially offset by a 3.1% decrease in active doors.
Active Doors. Progressive Leasing active doors are comprised of both (i) each retail store location where at least one virtual lease-to-own transaction has been completed during the trailing twelve-month period; and (ii) with respect to an e-commerce merchant, each state where at least one virtual lease-to-own transaction has been completed through that e-commerce merchant during the trailing twelve-month period. The following table presents active doors for the Progressive Leasing segment:
Active Doors at March 31 (Unaudited)
2019
 
2018
Progressive Leasing Active Doors
19,795

 
20,434

The decrease in active door count was due primarily to store consolidation in the mattress industry and our exit from a mobile provider, partially offset by additions in other verticals.
Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of Aaron's Business. For the three months ended March 31, 2019, we calculated this amount by comparing revenues for the three months ended March 31, 2019 to revenues for the comparable period in 2018 for all stores open for the entire 15-month period ended March 31, 2019, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues increased 0.7% for the three months ended March 31, 2019.
Seasonality
Our revenue mix is moderately seasonal for both our Progressive Leasing and Aaron's Business segments. Adjusting for growth, the first quarter of each year generally has higher revenues than any other quarter. This is primarily due to realizing the full benefit of business that historically gradually increases in the fourth quarter as a result of the holiday season, as well as the receipt by our customers in the first quarter of federal and state income tax refunds. Our customers will more frequently exercise the early purchase option on their existing lease agreements or purchase merchandise off the showroom floor during the first quarter of the year. We expect these trends to continue in future periods. Due to the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
Key Components of Earnings Before Income Taxes
In this management’s discussion and analysis section, we review our consolidated results. For the three months ended March 31, 2019 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings before income taxes were as follows:
Revenues. We separate our total revenues into six components: (i) lease revenues and fees; (ii) retail sales; (iii) non-retail sales; (iv) franchise royalties and fees; (v) interest and fees on loans receivable; and (vi) other. Lease revenues and fees include all revenues derived from lease agreements at retail locations serviced by Progressive Leasing and the Aaron's Business Company-operated stores and e-commerce platform. Retail sales represent sales of both new and returned lease merchandise from our Company-operated stores. Non-retail sales primarily represent new merchandise sales to our franchisees. Franchise royalties and fees represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Interest and fees on loans receivable primarily represents merchant fees, finance charges and annual and other fees earned on loans originated since the DAMI acquisition, as well as the accretion of the discount on loans acquired in the acquisition. Other revenues primarily relate to revenues from leasing real estate properties to unrelated third parties, as well as other miscellaneous revenues.
Depreciation of Lease Merchandise. Depreciation of lease merchandise primarily reflects the expense associated with depreciating merchandise held for lease and leased to customers by Progressive Leasing and our Company-operated Aaron's stores and through our e-commerce platform.
Retail Cost of Sales. Retail cost of sales represents the depreciated cost of merchandise sold through our Company-operated stores.

31


Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, occupancy costs, store maintenance, provision for lease merchandise write-offs, shipping and handling, advertising and marketing, the provision for loan losses, intangible asset amortization expense, software licensing expense and third-party consulting expense, among other expenses.
Restructuring Expenses, Net. Restructuring expenses primarily represent the cost of optimization efforts and cost reduction initiatives related to the Aaron’s Business, home office and field support functions. Restructuring expenses, net are comprised principally of 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.
Other Operating Income, Net. Other operating income, net consists of gains or losses on sales of Company-operated stores and delivery vehicles, fair value adjustments on assets held for sale, gains or losses on other transactions involving property, plant and equipment, and gains related to property damage and business interruption insurance claim recoveries.
Interest Expense. Interest expense consists of interest incurred on fixed and variable rate debt.
Other Non-Operating Income, Net. Other non-operating income, net includes the impact of foreign currency remeasurement, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company’s deferred compensation plan.

32


Results of Operations – Three months ended March 31, 2019 and 2018
 
Three Months Ended 
 March 31,
 
Change
(In Thousands)
2019
 
2018
 
$
 
%
REVENUES:
 
 
 
 
 
 
 
Lease Revenues and Fees
$
944,157

 
$
870,067

 
$
74,090

 
8.5
 %
Retail Sales
12,809

 
8,516

 
4,293

 
50.4

Non-Retail Sales
36,981

 
53,230

 
(16,249
)
 
(30.5
)
Franchise Royalties and Fees
9,207

 
12,862

 
(3,655
)
 
(28.4
)
Interest and Fees on Loans Receivable
8,646

 
9,542

 
(896
)
 
(9.4
)
Other
303

 
592

 
(289
)
 
(48.8
)
 
1,012,103

 
954,809

 
57,294

 
6.0

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Depreciation of Lease Merchandise
500,820

 
440,008

 
60,812

 
13.8

Retail Cost of Sales
8,632

 
5,662

 
2,970

 
52.5

Non-Retail Cost of Sales
29,196

 
48,020

 
(18,824
)
 
(39.2
)
Operating Expenses
387,216

 
390,232

 
(3,016
)
 
(0.8
)
Restructuring Expenses, Net
13,281

 
906

 
12,375

 
nmf

Other Operating Income, Net
(897
)
 
(83
)
 
(814
)
 
nmf

 
938,248

 
884,745

 
53,503

 
6.0

OPERATING PROFIT
73,855

 
70,064

 
3,791

 
5.4

Interest Income
101

 
202

 
(101
)
 
(50.0
)
Interest Expense
(4,956
)
 
(4,326
)
 
630

 
14.6

Other Non-Operating Income, Net
1,308

 
812

 
496

 
61.1

EARNINGS BEFORE INCOME TAXES
70,308

 
66,752

 
3,556

 
5.3

INCOME TAXES
14,230

 
14,506

 
(276
)
 
(1.9
)
NET EARNINGS
$
56,078

 
$
52,246

 
$
3,832

 
7.3
 %
nmf—Calculation is not meaningful
Revenues
Information about our revenues by reportable segment is as follows: 
 
Three Months Ended 
 March 31,
 
Change
(In Thousands)
2019
 
2018
 
$
 
%
REVENUES:
 
 
 
 
 
 
 
Progressive Leasing
$
523,401

 
$
486,517

 
$
36,884

 
7.6
 %
Aaron's Business
480,056

 
458,750

 
21,306

 
4.6

DAMI
8,646

 
9,542

 
(896
)
 
(9.4
)
Total Revenues from External Customers
$
1,012,103

 
$
954,809

 
$
57,294

 
6.0
 %

33


The following table presents revenue by source and by segment for the three months ended March 31, 2019:
 
Three Months Ended March 31, 2019
(In Thousands)
Progressive Leasing1
Aaron's Business
DAMI
Total
Lease Revenues and Fees
$
523,401

$
420,756

$

$
944,157

Retail Sales

12,809


12,809

Non-Retail Sales

36,981


36,981

Franchise Royalties and Fees

9,207


9,207

Interest and Fees on Loans Receivable


8,646

8,646

Other

303


303

Total Revenues
$
523,401

$
480,056

$
8,646

$
1,012,103

1 For the three months ended March 31, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was $56.1 million which was recorded as a reduction to Lease Revenues and Fees as a result of the Company's adoption of ASC 842, Leases. See Note 1 to these condensed consolidated financial statements for more information regarding the impacts of ASC 842 on the Company's financial results.
The following table presents revenue by source and by segment for the three months ended March 31, 2018:
 
Three Months Ended March 31, 2018
(In Thousands)
Progressive Leasing
Aaron's Business
DAMI
Total
Lease Revenues and Fees
$
486,517

$
383,550

$

$
870,067

Retail Sales

8,516


8,516

Non-Retail Sales

53,230


53,230

Franchise Royalties and Fees

12,862


12,862

Interest and Fees on Loans Receivable


9,542

9,542

Other

592


592

Total Revenues
$
486,517

$
458,750

$
9,542

$
954,809

Progressive Bad Debt Expense
46,525



46,525

Total Revenues, net of Progressive Bad Debt Expense1
$
439,992

$
458,750

$
9,542

$
908,284

1 See the “Use of Non-GAAP Financial Information” section below.
Progressive Leasing. Progressive Leasing segment revenues increased primarily due to a 14.2% increase in total invoice volume, which was driven by an increase in invoice volume per active door, partially offset by the recognition of a provision for returns and uncollectible renewal payments of $56.1 million as a reduction to lease revenues in accordance with ASC 842 beginning in 2019.
Aaron's Business. Aaron's Business segment revenues increased $21.3 million primarily due to the net addition of 55 Company-operated stores and a 0.7% increase in same store revenues during the 15-month period ended March 31, 2019, which contributed to a $37.2 million increase in lease revenues and fees for the three months ended March 31, 2019. This increase was offset by a $16.2 million decrease in non-retail sales primarily due to the net reduction of 182 franchised stores resulting from the Company's acquisition of various franchisees during the 15-month period ended March 31, 2019, and decreasing demand for product by franchisees. The acquisitions of various franchisees throughout 2017, 2018 and 2019 impacted the Aaron's Business in the form of an increase in lease revenues and fees, partially offset by lower non-retail sales and lower franchise royalties and fees during the three months ended March 31, 2019 compared to the same period in the prior year.

34


Operating Expenses
Information about certain significant components of operating expenses for the first quarter of 2019 as compared to the first quarter of 2018 is as follows:
 
Three Months Ended 
 March 31,
 
Change
(In Thousands)
2019
 
2018
 
$
 
%
Personnel Costs
$
181,750

 
$
170,213

 
$
11,537

 
6.8
 %
Occupancy Costs
58,128

 
54,217

 
3,911

 
7.2

Provision for Lease Merchandise Write-Offs
56,995

 
44,470

 
12,525

 
28.2

Bad Debt Expense
1,125

 
46,542

 
(45,417
)
 
(97.6
)
Shipping and Handling
19,188

 
18,435

 
753

 
4.1

Advertising
13,583

 
10,399

 
3,184

 
30.6

Provision for Loan Losses
4,255

 
4,492

 
(237
)
 
(5.3
)
Intangible Amortization
9,997

 
7,319

 
2,678

 
36.6

Other Operating Expenses
42,195

 
34,145

 
8,050

 
23.6

Operating Expenses
$
387,216

 
$