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EXCEL - IDEA: XBRL DOCUMENT - AARON'S INC | Financial_Report.xls |
EX-15 - EXHIBIT 15 - AARON'S INC | c06198exv15.htm |
EX-31.2 - EXHIBIT 31.2 - AARON'S INC | c06198exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - AARON'S INC | c06198exv32w1.htm |
EX-99.2 - EXHIBIT 99.2 - AARON'S INC | c06198exv99w2.htm |
EX-99.1 - EXHIBIT 99.1 - AARON'S INC | c06198exv99w1.htm |
EX-31.1 - EXHIBIT 31.1 - AARON'S INC | c06198exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - AARON'S INC | c06198exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
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
AARONS, 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.) |
|
309 E. Paces Ferry Road, N.E. Atlanta, Georgia |
30305-2377 |
|
(Address of principal executive offices) | (Zip Code) |
(404) 231-0011
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(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 þ 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 Regulations 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 þ 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 þ | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Shares Outstanding as of | ||
Title of Each Class | November 2, 2010 | |
Common Stock, $.50 Par Value | 69,427,694 | |
Class A Common Stock, $.50 Par Value | 11,635,056 |
AARONS, INC.
INDEX
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
AARONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(In Thousands, Except Share Data)
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS: |
||||||||
Cash and Cash Equivalents |
$ | 100,067 | $ | 109,685 | ||||
Accounts Receivable (net of allowances of $4,540 in 2010 and $4,157 in 2009) |
61,556 | 66,095 | ||||||
Lease Merchandise |
1,178,159 | 1,122,954 | ||||||
Less: Accumulated Depreciation |
(461,463 | ) | (440,552 | ) | ||||
716,696 | 682,402 | |||||||
Property, Plant and Equipment, Net |
206,862 | 215,183 | ||||||
Goodwill |
202,493 | 194,376 | ||||||
Other Intangibles, Net |
4,445 | 5,200 | ||||||
Prepaid Expenses and Other Assets |
98,223 | 36,082 | ||||||
Assets Held For Sale |
12,803 | 12,433 | ||||||
Total Assets |
$ | 1,403,145 | $ | 1,321,456 | ||||
LIABILITIES & SHAREHOLDERS EQUITY: |
||||||||
Accounts Payable and Accrued Expenses |
$ | 173,841 | $ | 177,284 | ||||
Deferred Income Taxes Payable |
186,317 | 163,670 | ||||||
Customer Deposits and Advance Payments |
32,936 | 38,198 | ||||||
Credit Facilities |
42,112 | 55,044 | ||||||
Total Liabilities |
435,206 | 434,196 | ||||||
Shareholders Equity: |
||||||||
Common Stock, Par Value $.50 Per Share; Authorized: 100,000,000 Shares;
Shares Issued: 72,656,391 at September 30, 2010 and 72,659,403 at December 31, 2009 |
36,328 | 36,330 | ||||||
Class A Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares;
Shares Issued: 18,095,732 at September 30, 2010 and 18,095,784 at December 31, 2009 |
9,048 | 9,048 | ||||||
Additional Paid-in Capital |
200,692 | 196,669 | ||||||
Retained Earnings |
779,349 | 694,689 | ||||||
Accumulated Other Comprehensive Income (Loss) |
454 | (101 | ) | |||||
1,025,871 | 936,635 | |||||||
Less: Treasury Shares at Cost, |
||||||||
Common Stock, 3,230,439 Shares at September 30, 2010 and 2,937,321 Shares at December 31, 2009 |
(26,760 | ) | (18,203 | ) | ||||
Class A Common Stock, 6,460,676 Shares at September 30, 2010 and December 31, 2009 |
(31,172 | ) | (31,172 | ) | ||||
Total Shareholders Equity |
967,939 | 887,260 | ||||||
Total Liabilities & Shareholders Equity |
$ | 1,403,145 | $ | 1,321,456 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements
3
Table of Contents
AARONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In Thousands, Except Per Share Data) | ||||||||||||||||
REVENUES: |
||||||||||||||||
Lease Revenues and Fees |
$ | 340,848 | $ | 320,603 | $ | 1,052,494 | $ | 989,216 | ||||||||
Retail Sales |
8,362 | 8,846 | 32,778 | 34,211 | ||||||||||||
Non-Retail Sales |
84,301 | 69,501 | 253,941 | 230,302 | ||||||||||||
Franchise Royalties and Fees |
14,537 | 12,881 | 43,611 | 38,908 | ||||||||||||
Other |
4,102 | 3,428 | 9,594 | 13,882 | ||||||||||||
452,150 | 415,259 | 1,392,418 | 1,306,519 | |||||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Retail Cost of Sales |
4,415 | 5,283 | 19,028 | 20,502 | ||||||||||||
Non-Retail Cost of Sales |
76,209 | 63,503 | 231,729 | 210,311 | ||||||||||||
Operating Expenses |
206,021 | 193,440 | 618,690 | 575,528 | ||||||||||||
Depreciation of Lease Merchandise |
122,692 | 117,024 | 379,580 | 360,143 | ||||||||||||
Interest |
728 | 1,010 | 2,415 | 3,450 | ||||||||||||
410,065 | 380,260 | 1,251,442 | 1,169,934 | |||||||||||||
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
42,085 | 34,999 | 140,976 | 136,585 | ||||||||||||
INCOME TAXES |
15,906 | 10,344 | 53,387 | 48,744 | ||||||||||||
NET EARNINGS FROM CONTINUING
OPERATIONS |
26,179 | 24,655 | 87,589 | 87,841 | ||||||||||||
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX |
| (19 | ) | | (304 | ) | ||||||||||
NET EARNINGS |
$ | 26,179 | $ | 24,636 | $ | 87,589 | $ | 87,537 | ||||||||
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS: |
||||||||||||||||
Basic |
$ | .32 | $ | .30 | $ | 1.08 | $ | 1.08 | ||||||||
Assuming Dilution |
.32 | .30 | 1.07 | 1.07 | ||||||||||||
LOSS PER SHARE FROM DISCONTINUED
OPERATIONS: |
||||||||||||||||
Basic |
$ | .00 | $ | .00 | $ | .00 | $ | .00 | ||||||||
Assuming Dilution |
.00 | .00 | .00 | .00 | ||||||||||||
CASH DIVIDENDS DECLARED PER SHARE: |
||||||||||||||||
Common Stock |
$ | .012 | $ | .011 | $ | .036 | $ | .034 | ||||||||
Class A Common Stock |
.012 | .011 | .036 | .034 | ||||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
||||||||||||||||
Basic |
81,070 | 81,366 | 81,315 | 81,066 | ||||||||||||
Assuming Dilution |
81,695 | 82,050 | 82,053 | 81,885 |
The accompanying notes are an integral part of the Consolidated Financial Statements
4
Table of Contents
AARONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In Thousands) | ||||||||
CONTINUING OPERATIONS: |
||||||||
OPERATING ACTIVITIES: |
||||||||
Net Earnings from Continuing Operations |
$ | 87,589 | $ | 87,841 | ||||
Depreciation of Lease Merchandise |
379,580 | 360,143 | ||||||
Other Depreciation and Amortization |
34,011 | 33,568 | ||||||
Additions to Lease Merchandise |
(696,231 | ) | (598,021 | ) | ||||
Book Value of Lease Merchandise Sold or Disposed |
285,377 | 257,596 | ||||||
Change in Deferred Income Taxes |
22,647 | 24,373 | ||||||
Loss on Sale of Property, Plant, and Equipment |
1,065 | 994 | ||||||
Gain on Asset Dispositions |
(1,582 | ) | (6,273 | ) | ||||
Change in Income Tax Receivable, Included in Prepaid Expenses and Other Assets |
(56,961 | ) | 19,978 | |||||
Change in Accounts Payable and Accrued Expenses |
(3,172 | ) | (33,223 | ) | ||||
Change in Accounts Receivable |
4,539 | 7,015 | ||||||
Excess Tax Benefits from Stock-Based Compensation |
(322 | ) | (3,906 | ) | ||||
Change in Other Assets |
(5,414 | ) | 1,710 | |||||
Change in Customer Deposits and Advanced Payments |
(5,262 | ) | (3,492 | ) | ||||
Stock-Based Compensation |
3,629 | 1,875 | ||||||
Other Changes, Net |
(179 | ) | 5,226 | |||||
Cash Provided by Operating Activities |
49,314 | 155,404 | ||||||
INVESTING ACTIVITIES: |
||||||||
Additions to Property, Plant and Equipment |
(64,014 | ) | (59,643 | ) | ||||
Acquisitions of Businesses and Contracts |
(17,475 | ) | (23,917 | ) | ||||
Proceeds from Sales of Property, Plant, and Equipment |
39,345 | 36,628 | ||||||
Proceeds from Dispositions of Businesses and Contracts |
6,182 | 24,091 | ||||||
Cash Used in Investing Activities |
(35,962 | ) | (22,841 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Proceeds from Credit Facilities |
2,429 | 57,034 | ||||||
Repayments on Credit Facilities |
(15,361 | ) | (116,513 | ) | ||||
Dividends Paid |
(2,931 | ) | (3,673 | ) | ||||
Acquisition of Treasury Stock |
(9,060 | ) | | |||||
Excess Tax Benefits from Stock-Based Compensation |
322 | 3,906 | ||||||
Issuance of Stock Under Stock Option Plans |
1,631 | 7,696 | ||||||
Cash Used in Financing Activities |
(22,970 | ) | (51,550 | ) | ||||
DISCONTINUED OPERATIONS: |
||||||||
Operating Activities |
| (304 | ) | |||||
Cash Used in Discontinued Operations |
| (304 | ) | |||||
(Decrease) Increase in Cash and Cash Equivalents |
(9,618 | ) | 80,709 | |||||
Cash and Cash Equivalents at Beginning of Period |
109,685 | 7,376 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 100,067 | $ | 88,085 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements
5
Table of Contents
AARONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Note A Basis of Presentation
The consolidated financial statements include the accounts of Aarons, Inc. (the Company) and its
wholly owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
The consolidated balance sheet as of September 30, 2010, the consolidated statements of earnings
for the three months and nine months ended September 30, 2010 and 2009, and the consolidated
statements of cash flows for the nine months ended September 30, 2010 and 2009, are unaudited. The
preparation of interim consolidated financial statements requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and accompanying notes.
Management does not believe these estimates or assumptions will change significantly in the future
absent unsurfaced and unforeseen events. Generally, actual experience has been consistent with
managements prior estimates and assumptions; however, actual results could differ from those
estimates.
On March 23, 2010, the Company announced a 3-for-2 stock split effected in the form of a 50%
stock dividend on both Common Stock and Class A Common Stock. New shares were distributed on April
15, 2010 to shareholders of record as of the close of business on April 1, 2010. All share and per
share information has been restated for all periods presented to reflect this stock split.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States have been condensed
or omitted. In the opinion of management, all adjustments (generally consisting of normal
recurring accruals) considered necessary for a fair presentation have been included in the
accompanying financial statements. We suggest you read these financial statements in conjunction
with the financial statements and notes thereto included in the Companys Annual Report on Form
10-K filed with the Securities and Exchange Commission for the year ended December 31, 2009. The
results of operations for the quarter and nine months ended September 30, 2010 are not necessarily
indicative of operating results for the full year.
Certain reclassifications have been made to the prior periods to conform to the current period
presentation. In all periods presented, the results from the Aarons Office Furniture division
were reclassified from the Sales and Lease Ownership Segment to the Other Segment. Refer to Note D
for the segment disclosure. Certain assets have been reclassified as held for sale in all periods
presented.
Accounting Policies and Estimates
See Note A to the consolidated financial statements in the 2009 Annual Report on Form 10-K.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with maturity dates of less than
three months when purchased.
Lease Merchandise
Lease merchandise adjustments for the three month periods ended September 30 were $12.2 million in
2010 and $9.9 million in 2009. Lease merchandise adjustments for the nine month periods ended
September 30 were $35.3 million in 2010 and $26.8 million in 2009. These charges are recorded as
a component of operating expenses under the allowance method, which includes losses incurred but
not yet identified.
6
Table of Contents
Goodwill and Other Intangibles
During the nine months ended September 30, 2010 the Company recorded $9.1 million in goodwill,
$693,000 in customer relationship intangibles, $520,000 in non-compete intangibles, and $496,000 in
acquired franchise development rights in connection with a series of acquisitions of sales and
lease ownership businesses. Customer relationship intangibles are amortized on a straight-line
basis over their estimated useful lives of two years. Other intangible assets are amortized using
the straight-line method over the life of the asset. Amortization expense was
$777,000 and $994,000 for the three month periods ended September 30, 2010 and 2009, respectively.
Amortization expense was $2.4 million and $3.0 million for the nine month periods ended September
30, 2010 and 2009, respectively. The aggregate purchase price for these asset acquisitions
totaled $17.5 million, with the principal tangible assets acquired consisting of lease merchandise
and certain fixtures and equipment. These purchase price allocations are tentative and
preliminary; the Company anticipates finalizing them prior to December 31, 2010. The results of
operations of the acquired businesses are included in the Companys results of operations from the
dates of acquisition and are not significant.
Stock Compensation
The results of operations for the three months ended September 30, 2010 and 2009 include $874,000
and $632,000, respectively, in compensation expense related to unvested stock option grants. The
results of operations for the nine months ended September 30, 2010 and 2009 include $2.5 million
and $1.9 million, respectively, in compensation expense related to unvested stock option grants.
The results of operations for the three months ended September 30, 2010 and 2009 include $359,000
and $219,000, respectively, in compensation expense related to restricted stock and restricted
stock unit (RSU) awards. The results of operations for the nine months ended September 30, 2010
and 2009 include $1.2 million and $1.0 million, respectively, in compensation expense related to
restricted stock and RSU awards.
The Company granted 347,000 stock options and 300,000 RSU awards in the nine months ended September
30, 2010. The Company did not grant stock options or RSU awards in the nine months ended September
30, 2009. Approximately 57,000 and 10,000 options were exercised during the three month period
ended September 30, 2010 and 2009, respectively. Approximately 86,000 and 1.0 million options were
exercised during the nine month period ended September 30, 2010 and 2009, respectively, and 146,000
restricted stock awards vested on February 28, 2010. The aggregate number of shares of common stock
that may be issued or transferred under the incentive stock awards plan is 11,127,750.
Issuance of RSUs That Settle in Class A Common Stock; Proposal for Unification of Common Stock
Classes
The 2001 Aarons, Inc. Stock Option and Incentive Award Plan was amended in May 2010 to allow for
the issuance of Class A shares, which is subject to shareholder approval. Therefore the recent RSU
awards, which settle in the Companys voting Class A Common Stock, are subject to shareholder
approval of the plan amendment.
During the third quarter of 2010, the Company announced that it was proposing to unify its two
classes of common stock into one voting class by converting all the outstanding Common Stock into
Class A Common Stock on a one-for-one basis, and then renaming the Class A Common Stock as Common
Stock. The unification is subject to the approval of the shareholders of both current classes of
common stock at a special meeting that is currently expected to be held during the fourth quarter
of 2010. In the event the unification proposal is approved, the Company does not intend to
separately submit the stock plan amendment described above to the shareholders, as all stock
incentives will thereafter be exercisable for, settle in or be issuable in the Class A Common
Stock. In the event the unification proposal is not approved and the dual class structure
continues, the Company believes that shareholder approval of the plan amendment at the next annual
meeting of shareholders is perfunctory, as it is expected in that case that R. Charles Loudermilk,
Sr., Chairman of the Board, will continue to hold more than 50% of the shares eligible to vote.
Deferred Compensation
Effective July 1, 2009, the Company implemented the Aarons, Inc. Deferred Compensation Plan an
unfunded, nonqualified deferred compensation plan for a select group of management, highly
compensated employees and non-employee directors. On a pre-tax basis, eligible employees can defer
receipt of up to 75% of their base compensation and up to 100% of their incentive pay compensation,
and eligible non-employee directors can defer receipt of up to 100% of both their cash and stock
director fees. In addition, the Company may elect to make restoration matching contributions on
behalf of eligible employees to compensate for certain limitations on the amount of matching
contributions an employee can receive under the Companys tax-qualified 401(k) plan.
7
Table of Contents
Compensation deferred under the plan is credited to each participants deferral account and a
deferred compensation liability is recorded in accounts payable and accrued expenses in the
consolidated balance sheets. The deferred compensation plan liability was approximately $2.8
million as of September 30, 2010. Liabilities under the plan are recorded at amounts due to
participants, based on the fair value of participants selected investments. The Company
has established a Rabbi Trust to fund obligations under the plan with Company-owned life insurance
(COLI) contracts. The obligations are unsecured general obligations of the Company and the
participants have no right, interest or claim in the assets of the Company, except as unsecured
general creditors. The cash surrender value of these policies totaled $3.3 million as of September
30, 2010 and is included in prepaid expenses and other assets in the consolidated balance sheets.
Deferred compensation expense charged to operations for the Companys matching contributions
totaled $59,000 and $173,000 in the three and nine month periods ended September 30, 2010,
respectively. No benefits have been paid as of September 30, 2010.
Income Taxes
The Company files a federal consolidated income tax return in the United States, and the parent
company and its subsidiaries file in various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to federal, state and local tax examinations by tax
authorities for years before 2006.
As of September 30, 2010 and December 31, 2009, the amount of uncertain tax benefits that, if
recognized, would affect the effective tax rate is $1.1 million in both periods, including interest
and penalties. The Company recognizes potential interest and penalties related to uncertain tax
benefits as a component of income tax expense.
Fair Value of Financial Instruments
The fair values of the Companys cash and cash equivalents, accounts receivable and accounts
payable approximate their carrying amounts due to their short-term nature. At September 30, 2010,
the fair value of fixed rate long-term debt approximated its carrying value. The fair value of
debt is estimated using valuation techniques that consider risk-free borrowing rates and credit
risk.
Earnings Per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of
Common Stock and Class A Common Stock outstanding during the period. The computation of earnings
per share assuming dilution includes the dilutive effect of stock options and RSU awards. Such
stock options and awards had the effect of increasing the weighted average shares outstanding
assuming dilution by approximately 625,000 and 568,000 for the three month periods ended September
30, 2010 and 2009, respectively. Such stock options and awards had the effect of increasing the
weighted average shares outstanding assuming dilution by approximately 738,000 and 698,000 for the
nine month periods ended September 30, 2010 and 2009, respectively.
The Company has issued restricted shares under its stock plan in which shares vest upon
satisfaction of certain performance and/or service conditions. The effect of unvested restricted
stock was to increase weighted average shares outstanding assuming dilution by 116,000 and 121,000
for the three and nine month periods ended September 30, 2009, respectively. There was no impact of
unvested restricted stock on the weighted average shares outstanding assuming dilution at September
30, 2010.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to mitigate its exposure to certain market
risks associated with its ongoing operations. The primary risk it seeks to manage through the use
of derivative financial instruments is commodity price risk, including the risk of increases in the
market price of diesel fuel used in the Companys delivery vehicles. All derivative financial
instruments are recorded at fair value on the consolidated balance sheets. The Company does not use
derivative financial instruments for trading or speculative purposes. The Company is exposed to
counterparty credit risk on all its derivative financial instruments. The counterparties to these
contracts are high credit quality commercial banks, which the Company believes largely minimize the
risk of counterparty default. The fair values of the Companys fuel hedges as of September 30,
2010 and the changes in their fair values during the three months and nine months ended September
30, 2010 were immaterial.
8
Table of Contents
Assets Held for Sale
Certain properties, primarily consisting of parcels of land, met the held for sale classification
criteria at September 30, 2010. After adjustment to fair value, the $12.8 million carrying value of
these properties has been classified as assets held for sale in the consolidated balance sheets as
of September 30, 2010 and December 31, 2009. The
Company estimated the fair values of these properties using the market values for similar
properties and these are considered Level 2 assets as defined in FASB ASC Topic 820, Fair Value
Measurements.
New Accounting Pronouncements
The pronouncements that the Company adopted in the first nine months of 2010 did not have a
material impact on the consolidated financial statements.
Disposal Activities
During the second quarter of 2010, the Company began ceasing the operations of its Aarons Office
Furniture division. During the third quarter of 2010, the Company closed two additional Aarons
Office Furniture stores and had two remaining stores open. As a result, the Company recorded
$949,000 in the three months ended September 30, 2010 related to the closing of this division. In
the first nine months of 2010, the Company closed 10 of its Aarons Office Furniture stores and
recorded $4.7 million in lease merchandise write-downs and other miscellaneous expenses, totaling
$8.1 million. The charges were recorded within operating expenses on the consolidated statement of
earnings and are included in the Other segment category.
Note B Credit Facilities
See Note D to the consolidated financial statements in the 2009 Annual Report on Form 10-K.
Note C Comprehensive Income
Comprehensive income is comprised of the net earnings of the Company, foreign currency translation
adjustments and unrealized loss from fuel hedges, as summarized below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In Thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net Earnings |
$ | 26,179 | $ | 24,636 | $ | 87,589 | $ | 87,537 | ||||||||
Other Comprehensive Income: |
||||||||||||||||
Foreign Currency Translation Adjustment |
613 | 328 | 547 | 941 | ||||||||||||
Unrealized Income from Fuel Hedges, Net of Tax |
13 | | 8 | | ||||||||||||
Comprehensive Income |
$ | 26,805 | $ | 24,964 | $ | 88,144 | $ | 88,478 | ||||||||
9
Table of Contents
Note D Segment Information
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In Thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues From External Customers: |
||||||||||||||||
Sales and Lease Ownership |
$ | 435,573 | $ | 396,175 | $ | 1,331,635 | $ | 1,250,138 | ||||||||
Franchise |
14,537 | 12,881 | 43,611 | 38,908 | ||||||||||||
Other |
3,940 | 4,451 | 13,343 | 14,649 | ||||||||||||
Manufacturing |
17,591 | 15,106 | 56,810 | 54,659 | ||||||||||||
Revenues of Reportable Segments |
471,641 | 428,613 | 1,445,399 | 1,358,354 | ||||||||||||
Elimination of Intersegment Revenues |
(17,783 | ) | (15,259 | ) | (57,383 | ) | (55,183 | ) | ||||||||
Cash to Accrual Adjustments |
(1,708 | ) | 1,905 | 4,402 | 3,348 | |||||||||||
Total Revenues from
External Customers from
Continuing Operations |
$ | 452,150 | $ | 415,259 | $ | 1,392,418 | $ | 1,306,519 | ||||||||
Earnings (Loss) Before Income Taxes: |
||||||||||||||||
Sales and Lease Ownership |
$ | 33,493 | $ | 24,507 | $ | 114,312 | $ | 108,652 | ||||||||
Franchise |
11,163 | 9,619 | 33,706 | 28,667 | ||||||||||||
Other |
(654 | ) | (1,266 | ) | (8,729 | ) | (4,040 | ) | ||||||||
Manufacturing |
891 | 767 | 2,443 | 2,883 | ||||||||||||
Earnings Before Income Taxes for
Reportable Segments |
44,893 | 33,627 | 141,732 | 136,162 | ||||||||||||
Elimination of Intersegment Profit |
(891 | ) | (764 | ) | (2,445 | ) | (2,881 | ) | ||||||||
Cash to Accrual and Other Adjustments |
(1,917 | ) | 2,136 | 1,689 | 3,304 | |||||||||||
Total Earnings from
Continuing Operations
Before Income Taxes |
$ | 42,085 | $ | 34,999 | $ | 140,976 | $ | 136,585 | ||||||||
Earnings from continuing operations before income taxes for each reportable segment are determined
in accordance with accounting principles generally accepted in the United States with the following
adjustments:
| Sales and lease ownership revenues are reported on a cash basis for management reporting purposes. |
| A predetermined amount of each reportable segments revenues is charged to the reportable segment as an allocation of corporate overhead. This allocation was approximately 2% in 2010 and 2009. |
| Accruals related to store closures are not recorded on the reportable segments financial statements, as they are maintained and controlled by corporate headquarters. |
| The capitalization and amortization of manufacturing and distribution variances are recorded in the consolidated financial statements as part of Cash to Accrual and Other Adjustments and are not allocated to the segment that holds the related lease merchandise. |
| Advertising expense in the sales and lease ownership division is estimated at the beginning of each year and then allocated to the division ratably over the year for management reporting purposes. For financial reporting purposes, advertising expense is recognized when the related advertising activities occur. The difference between these two methods is recorded as part of Cash to Accrual and Other Adjustments. |
| Sales and lease ownership lease merchandise write-offs are recorded using the direct write-off method for management reporting purposes. For financial reporting purposes, the allowance method is used and is recorded as part of Cash to Accrual and Other Adjustments. |
| Interest on borrowings is estimated at the beginning of each year. Interest is then allocated to operating segments on the basis of relative total assets. |
Revenues in the Other category are primarily revenues of the Aarons Office Furniture division,
from leasing space to unrelated third parties in the corporate headquarters building and revenues
from several minor unrelated activities. The pre-tax losses in the Other category are the net
result of the activity mentioned above, net of the portion of corporate overhead not allocated to
the reportable segments for management purposes.
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Note E Commitments
The Company leases warehouse and retail store space for substantially all of its operations under
operating leases expiring at various times through 2028. Most of the leases contain renewal
options for additional periods ranging from one to 15 years or provide for options to purchase the
related property at predetermined purchase prices that do not represent bargain purchase options.
The Company also leases transportation and computer equipment under operating leases expiring
during the next five years. The Company expects that most leases will be renewed or replaced by
other leases in the normal course of business.
On June 18, 2010, the Company entered into the second amended and restated loan facility agreement
and guaranty, which amends the previous loan facility agreement and guaranty. The new franchisee
loan facility extended the maturity date until May 20, 2011, increased the maximum commitment
amount under the facility from $175,000,000 to $200,000,000, provided for the ability to extend
loans to franchisees that operate stores located in Canada (other than in the Province of Quebec),
increased the maximum available amount of swing loans from $20,000,000 to $25,000,000, reduced the
Companys interest obligations with respect to franchisees that operate stores located in the U.S.
and established the Companys interest obligations with respect to franchisees that operate stores
located in Canada, and modified certain exhibits. The Company remains subject to the same
financial covenants under the new franchisee loan facility.
The Company has guaranteed the borrowings of certain independent franchisees under the
aforementioned franchise 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 franchise loan program, which would be due in full within 90 days of the event of
default. At September 30, 2010, the portion that the Company might be obligated to repay in the
event franchisees defaulted was $131.4 million. Of this amount, approximately $122.6 million
represents franchise borrowings outstanding under the franchise loan program and approximately $8.8
million represents franchise borrowings under other debt facilities. Due to franchisee borrowing
limits, management believes any losses associated with any defaults would be mitigated through
recovery of lease merchandise as well as the associated lease agreements and other assets. Since
its inception in 1994, the Company has had no significant losses associated with the franchisee
loan and guaranty program.
The Company has no long-term commitments to purchase merchandise. At September 30, 2010, the
Company had non-cancelable commitments primarily related to certain advertising and marketing
programs of $29.7 million.
The Company is a party to various claims and legal proceedings arising in the ordinary course of
business. The Company regularly assesses its insurance deductibles, analyzes litigation
information with its 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. The Company does not believe its
exposure to loss under any claims is probable nor can the Company estimate a range of amounts of
loss that are reasonably possible. The Companys requirement to record or disclose potential
losses under generally accepted accounting principles could change in the near term depending upon
changes in facts and circumstances.
See Note F to the consolidated financial statements in the 2009 Annual Report on Form 10-K for
further information.
Note F Related Party Transactions
The Company leases certain properties under capital leases from certain related parties that are
described in Note D to the consolidated financial statements in the 2009 Annual Report on Form
10-K.
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Report of Independent Registered Public Accounting Firm
The Board of Directors
Aarons, Inc.
Aarons, Inc.
We have reviewed the consolidated balance sheet of Aarons, Inc. and subsidiaries as of
September 30, 2010, and the related consolidated statements of
earnings for the threemonth and
ninemonth periods ended September 30, 2010 and 2009, and the consolidated statements of cash flows
for the ninemonth periods ended September 30, 2010 and 2009. These financial statements are the
responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
consolidated financial statements referred to above for them to be in conformity with US generally
accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Aarons, Inc. and subsidiaries
as of December 31, 2009, and the related consolidated statements of earnings, shareholders equity,
and cash flows for the year then ended not presented herein, and in our report dated February 26,
2010, we expressed an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance sheet as of December
31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 3, 2010
November 3, 2010
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ITEM 2. MANAGEMENTS 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. Forward-looking
statements involve a number of risks and uncertainties that could cause actual results to differ
materially from any such statements, including risks and uncertainties associated with our growth
strategy, competition, trends in corporate spending, the Companys franchise program, government
regulation and the risks and uncertainties discussed under Item 1A, Risk Factors, in the
Companys Annual Report on Form 10-K for the Year Ended December 31, 2009, filed with the
Securities and Exchange Commission, and in the Companys other public filings.
The following discussion should be read in conjunction with the consolidated financial statements
as of and for the three months and nine months ended September 30, 2010, including the notes to
those statements, appearing elsewhere in this report. We also suggest that managements discussion
and analysis appearing in this report be read in conjunction with the managements discussion and
analysis and consolidated financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2009.
Overview
Aarons, Inc. is a leading specialty retailer of residential furniture, consumer electronics,
computers, household appliances and accessories. Our major operating divisions are the Aarons
Sales & Lease Ownership Division and the Woodhaven Furniture Industries Division (formerly
MacTavish Furniture Industries Division), which manufactures and supplies nearly one-half of the
furniture and related accessories leased and sold in our stores.
Aarons has demonstrated strong revenue growth over the last three years. Total revenues have
increased from $1.395 billion in 2007 to $1.753 billion in 2009, representing a compound annual
growth rate of 12.1%. Total revenues from continuing operations for the three months ended
September 30, 2010, were $452.2 million, an increase of $36.9 million, or 8.9%, over the comparable
period in 2009. Total revenues from continuing operations for the nine months ended September 30,
2010, were $1.392 billion, an increase of $85.9 million, or 6.6%, over the comparable period in
2009.
Most of our growth comes from the opening of new sales and lease ownership stores and increases in
same store revenues from previously opened stores. We spend on average approximately $600,000 to
$700,000 in the first year of operation of a new store, which includes purchases of lease
merchandise, investments in leasehold improvements and financing first year start-up costs. Our new
sales and lease ownership stores typically achieve revenues of approximately $1.1 million in their
third year of operation. Our comparable stores open more than three years normally achieve
approximately $1.4 million in revenues per store, which we believe represents a higher per store
revenue volume than the typical rent-to-own store. Most of our stores are cash flow positive in
the second year of operations following their opening.
We believe that the decline in the number of furniture stores, the limited number of retailers that
focus on credit installment sales to lower and middle income consumers and increased consumer
credit constraints during the current economic downturn have created a market opportunity for our
unique sales and lease ownership concept. The traditional retail consumer durable goods market is
much larger than the lease market, leaving substantial potential for growth for our sales and lease
ownership division. We believe that the segment of the population targeted by our sales and lease
ownership division comprises approximately 50% of all households in the United States and that the
needs of these consumers are generally underserved. However, although we believe our business is
recession-resistant, with those who are no longer able to access consumer credit becoming new
customers of Aarons, there can be no guarantee that if the current economic downturn deepens or
continues for an extensive period of time that our customer base will not curtail spending on
household merchandise.
We also use our franchise program to help us expand our sales and lease ownership concept more
quickly and into more areas than we otherwise would by opening only Company-operated stores.
Franchise royalties and other related fees represent a growing source of high margin revenue for
us, accounting for approximately $52.9 million of revenues in 2009, up from $38.8 million in 2007,
representing a compound annual growth rate of 16.8%. Total revenues from franchise royalties and
fees for the three months ended September 30, 2010, were $14.5 million, an increase of $1.7
million, or 12.9%, over the comparable period in 2009. Total revenues from franchise royalties and
fees for the nine months ended September 30, 2010, were $43.6 million, an increase of $4.7 million,
or 12.1%, over the comparable period in 2009.
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Unification of our Dual Common Stock Class Structure. Aarons has had a dual common stock class
structure since 1992, whereby the Class A Common Stock possesses all the voting power and the
Common Stock is nonvoting. On September 13, 2010, the Company announced that its Board of
Directors has approved, and is recommending to the Companys shareholders for approval, the
conversion of the nonvoting Common Stock into voting Class A Common Stock on a one-for-one basis
and to rename the Companys Class A Common Stock after conversion as Common Stock. The
transaction is subject to the approval of the shareholders of the Companys Common
Stock and Class A Common Stock, each voting as a separate class, at a special meeting that is
currently expected to be held in December 2010.
The Company expects to realize a number of benefits from the proposed reclassification, including:
(1) increasing the trading volume and liquidity of its shares; (2) simplifying its equity capital
structure; (3) broadening the appeal of its shares to a larger base of investors; (4) aligning more
closely the voting rights of the Companys shareholders with their economic interests; and (5)
providing increased flexibility to use equity as acquisition currency and for possible future
offerings of our capital stock to potential investors.
As part of the proposal, the Company also expects to seek to amend and strengthen various
anti-takeover measures in its Bylaws.
Aarons Office Furniture Closure. In November 2008, the Company completed the sale of
substantially all of the assets and the transfer of certain liabilities of its legacy residential
rent-to-rent business, Aarons Corporate Furnishings division, to CORT Business Services
Corporation. When the Company sold its legacy rent-to-rent business, it decided to keep the 13
Aarons Office Furniture stores, a rent-to-rent concept aimed at
the office market. However, after disappointing results in a
difficult environment, in June 2010 the Company
announced its plans to close all of the then 12 remaining Aarons Office Furniture stores and focus solely on the
Companys Sales & Lease Ownership business. Since June 2010, the Company has closed ten of its
Aarons Office Furniture stores and has two remaining stores open to liquidate merchandise. The
Company currently estimates that it will record a total of approximately $9.2 million in charges
for the write-down and cost to dispose of office furniture, estimated future lease liabilities for
closed stores, write-off of leaseholds, severance pay, and other costs associated to closing the
stores and winding down the division. Approximately $8.1 million, or 88% of the total estimated
charges, has been recorded through September 30, 2010.
Same Store Revenues. We believe the changes in same store revenues are a key performance
indicator. For the three months ended September 30, 2010, we calculated this amount by comparing
revenues for the three months ended September 30, 2010 to revenues for the comparable period in
2009 for all stores open for the entire 15-month period ended September 30, 2010, excluding stores
that received lease agreements from other acquired, closed, or merged stores. For the nine months
ended September 30, 2010, we calculated this amount by comparing revenues for the nine months ended
September 30, 2010 to revenues for the comparable period in 2009 for all stores open for the entire
24-month period ended September 30, 2010, excluding stores that received lease agreements from
other acquired, closed or merged stores.
Key Components of Earnings
In this managements discussion and analysis section, we review the Companys consolidated results.
Revenues. We separate our total revenues into five components: lease revenues and fees, retail
sales, non-retail sales, franchise royalties and fees, and other. Lease revenues and fees includes
all revenues derived from lease agreements from our sales and lease ownership and office furniture
stores, including agreements that result in our customers acquiring ownership at the end of the
term. Retail sales represent sales of both new and lease return merchandise from our sales and
lease ownership and office furniture stores. Non-retail sales mainly represent new merchandise
sales to our sales and lease ownership division 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. Other revenues include, at times, income from
gains on sales of sales and lease ownership businesses and other miscellaneous revenues.
Cost of Sales. We separate our cost of sales into two components: retail and non-retail. Retail
cost of sales represents the original or depreciated cost of merchandise sold through our
Company-operated stores. Non-retail cost of sales primarily represents the cost of merchandise
sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, selling costs, occupancy costs,
and delivery costs, among other expenses.
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Depreciation of Lease Merchandise. Depreciation of lease merchandise reflects the expense
associated with depreciating merchandise leased to customers and held for lease by our
Company-operated sales and lease ownership and office furniture stores.
Critical Accounting Policies
Revenue Recognition. Lease revenues are recognized in the month they are due on the accrual basis
of accounting. For internal management reporting purposes, lease revenues from the sales and lease
ownership division are recognized as revenue in the month the cash is collected. On a monthly
basis, we record a deferral of revenue for lease payments received prior to the month due and an
accrual for lease revenues due but not yet received, net of allowances. Our revenue recognition
accounting policy matches the lease revenue with the corresponding costs, mainly depreciation,
associated with the lease merchandise. As of September 30, 2010 and December 31, 2009, we had a
revenue deferral representing cash collected in advance of being due or otherwise earned totaling
$32.2 million and $37.4 million, respectively, and accounts revenue receivable, net of allowance
for doubtful accounts, based on historical collection rates of $5.0 million and $5.3 million,
respectively. Revenues from the sale of merchandise to franchisees are recognized at the time of
receipt by the franchisee, and revenues from such sales to other customers are recognized at the
time of shipment.
Lease Merchandise. Our sales and lease ownership division depreciates merchandise over the
applicable agreement period, generally 12 to 24 months when leased, and 36 months when not leased,
to 0% salvage value. Our office furniture stores depreciate merchandise over its estimated useful
life, which ranges from 24 months to 48 months, net of salvage value, which ranges from 0% to 30%.
Sales and lease ownership merchandise is generally depreciated at a faster rate than our office
furniture merchandise. Our policies require weekly lease merchandise counts by store managers and
write-offs for unsalable, damaged, or missing merchandise inventories. Full physical inventories
are generally taken at our fulfillment and manufacturing facilities two to four times a year with
appropriate provisions made for missing, damaged and unsalable merchandise. In addition, we
monitor lease merchandise levels and mix by division, store and fulfillment center, as well as the
average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors,
its carrying value is adjusted to net realizable value or written off. All lease merchandise is
available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable.
We record lease merchandise carrying value adjustments on the allowance method, which estimates the
merchandise losses incurred but not yet identified by management as of the end of the accounting
period. Lease merchandise adjustments for the three month periods
ended September 30 were $12.2
million in 2010 and $9.9 million in 2009. Lease merchandise adjustments for the nine month periods
ended September 30 were $35.3 million in 2010 and $26.8 million in 2009.
Leases and Closed Store Reserves. The majority of our Company-operated stores are operated from
leased facilities under operating lease agreements. The majority of the leases are for periods
that do not exceed five years, although lease terms range in length up to 15 years. Leasehold
improvements related to these leases are generally amortized over periods that do not exceed the
lesser of the lease term or useful life. While some of our leases do not require escalating
payments, for the leases which do contain such provisions we record the related lease expense on a
straight-line basis over the lease term. We do not generally obtain significant amounts of lease
incentives or allowances from landlords. Any incentive or allowance amounts we receive are
recognized ratably over the lease term.
From time to time, we close or consolidate stores. Our primary costs associated with closing or
consolidating stores are the future lease payments and related commitments. We record an estimate
of the future obligation related to closed or consolidated stores based upon the present value of
the future lease payments and related commitments, net of estimated sublease income based upon
historical experience. As of September 30, 2010 and December 31, 2009, our reserve for closed or
consolidated stores was $5.8 million and $2.3 million, respectively. Due to changes in the market
conditions, our estimates related to sublease income may change and as a result, our actual
liability may be more or less than the liability recorded at September 30, 2010.
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Insurance Programs. Aarons maintains insurance contracts to fund workers compensation,
vehicle liability, general liability and group health insurance claims. Using actuarial analysis
and projections, we estimate the liabilities associated with open and incurred but not reported
workers compensation, vehicle liability and general liability claims. This analysis is based upon
an assessment of the likely outcome or historical experience, net of any stop loss or other
supplementary coverage. We also calculate the projected outstanding plan liability for our group
health insurance program. Our gross liability for workers compensation insurance claims, vehicle
liability, general
liability and group health insurance was estimated at $26.2 million and $22.5 million at September
30, 2010 and December 31, 2009, respectively. In addition, we have prefunding balances on deposit
with the insurance carriers of $22.2 million and $19.8 million at September 30, 2010 and December
31, 2009, respectively.
If we resolve insurance claims for amounts that are in excess of our current estimates and within
policy stop loss limits, we will be required to pay additional amounts beyond those accrued at
September 30, 2010.
The assumptions and conditions described above reflect managements best assumptions and estimates,
but these items involve inherent uncertainties as described above, which may or may not be
controllable by management. As a result, the accounting for such items could result in different
amounts if management used different assumptions or if different conditions occur in future
periods.
Income Taxes. The calculation of our income tax expense requires significant judgment and the use
of estimates. We periodically assess tax positions based on current tax developments, including
enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position,
consideration is given to the amount and timing of recognizing income tax liabilities and benefits.
In applying the tax and accounting guidance to the facts and circumstances, income tax balances are
adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are
maintained at levels we believe are adequate to absorb probable payments. Actual amounts paid, if
any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax
assets when we expect the amount of tax benefit to be realized is less than the carrying value of
the deferred tax asset.
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Table of Contents
Results of Operations
Three months ended September 30, 2010 compared with three months ended September 30, 2009
The following table shows key selected financial data for the three month periods ended September
30, 2010 and 2009, and the changes in dollars and as a percentage to 2010 from 2009:
Dollar Increase/ | % Increase/ | |||||||||||||||
Three Months Ended | Three Months Ended | (Decrease) to | (Decrease) to | |||||||||||||
(In Thousands) | September 30, 2010 | September 30, 2009 | 2010 from 2009 | 2010 from 2009 | ||||||||||||
REVENUES: |
||||||||||||||||
Lease Revenues and Fees |
$ | 340,848 | $ | 320,603 | $ | 20,245 | 6.3 | % | ||||||||
Retail Sales |
8,362 | 8,846 | (484 | ) | (5.5 | ) | ||||||||||
Non-Retail Sales |
84,301 | 69,501 | 14,800 | 21.3 | ||||||||||||
Franchise Royalties and Fees |
14,537 | 12,881 | 1,656 | 12.9 | ||||||||||||
Other |
4,102 | 3,428 | 674 | 19.7 | ||||||||||||
452,150 | 415,259 | 36,891 | 8.9 | |||||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Retail Cost of Sales |
4,415 | 5,283 | (868 | ) | (16.4 | ) | ||||||||||
Non-Retail Cost of Sales |
76,209 | 63,503 | 12,706 | 20.0 | ||||||||||||
Operating Expenses |
206,021 | 193,440 | 12,581 | 6.5 | ||||||||||||
Depreciation of Lease Merchandise |
122,692 | 117,024 | 5,668 | 4.8 | ||||||||||||
Interest |
728 | 1,010 | (282 | ) | (27.9 | ) | ||||||||||
410,065 | 380,260 | 29,805 | 7.8 | |||||||||||||
EARNINGS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES |
42,085 | 34,999 | 7,086 | 20.2 | ||||||||||||
INCOME TAXES |
15,906 | 10,344 | 5,562 | 53.8 | ||||||||||||
NET EARNINGS FROM
CONTINUING OPERATIONS |
26,179 | 24,655 | 1,524 | 6.2 | ||||||||||||
NET LOSS FROM DISCONTINUED
OPERATIONS |
| (19 | ) | 19 | (100.0 | ) | ||||||||||
NET EARNINGS |
$ | 26,179 | $ | 24,636 | $ | 1,543 | 6.3 | % | ||||||||
Revenues. The 8.9% increase in total revenues, to $452.2 million for the three months ended
September 30, 2010, from $415.3 million in the comparable period in 2009, was due mainly to a $20.2
million, or 6.3%, increase in lease revenues and fees. The $20.2 million increase in lease
revenues and fees was attributable to our sales and lease ownership division, which had a 3.2%
increase in same store revenues during the third quarter of 2010 and added a net of 44
Company-operated stores since September 30, 2009.
The 5.5% decrease in revenues from retail sales, to $8.4 million for the three months ended
September 30, 2010 from $8.8 million in the comparable period in 2009, was due to decreased demand
and decreased sales as a result of the closure of the majority of the Aarons Office Furniture
stores.
The 21.3% increase in non-retail sales (which mainly represents merchandise sold to our
franchisees), to $84.3 million for the three months ended September 30, 2010, from $69.5 million
for the comparable period in 2009, was due to the growth of our franchise operations. The total
number of franchised sales and lease ownership stores at September 30, 2010 was 637, reflecting a
net addition of 68 stores since September 30, 2009.
The 12.9% increase in franchise royalties and fees, to $14.5 million for the three months ended
September 30, 2010, from $12.9 million for the comparable period in 2009, primarily reflects an
increase in royalty income from franchisees, increasing 12.5% to $11.7 million for the three months
ended September 30, 2010, compared to $10.4 million for the three months ended September 30, 2009.
The increase in royalty income is due primarily to the growth in the number of franchised stores
and same store growth in the revenues of existing stores.
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Other revenues increased 19.7% to $4.1 million for the three months ended September 30, 2010, from
$3.4 million for the comparable period in 2009. Included in other revenues for the three months
ended September 30, 2010 and September 30, 2009, is a $1.2 million and $193,000, respectively, gain
on sales of Company-operated stores.
Cost of Sales. Retail cost of sales decreased 16.4% to $4.4 million for the three months ended
September 30, 2010, compared to $5.3 million for the comparable period in 2009, and as a percentage
of retail sales, decreased to 52.8% in 2010 from 59.7% in 2009 as a result of the decline in the
volume of lower margin office furniture retail sales.
Non-retail cost of sales increased 20.0% to $76.2 million for the three months ended September 30,
2010, from $63.5 million for the comparable period in 2009, and as a percentage of non-retail
sales, decreased to 90.4% from 91.4%.
Expenses. Operating expenses for the three months ended September 30, 2010, increased $12.6
million to $206.0 million from $193.4 million for the
comparable period in 2009, a 6.5% increase. As a percentage of total
revenues, operating expenses were 45.6% for the three months ended
September 30, 2010, and 46.6% for the comparable period in 2009.
The Company began ceasing the operations of its Aarons Office Furniture division in June of 2010.
The Company closed eight of its Aarons Office Furniture stores during the second quarter of 2010.
During the third quarter of 2010 the Company closed two additional Aarons Office Furniture stores
and had two remaining stores open to liquidate merchandise. As a result, the Company recorded
$949,000 in operating expenses related to the closures in the third quarter of 2010. In the third
quarter of 2009, the Company recorded a $2.2 million pre-tax charge to operating expenses relating
to the write-down of certain lease merchandise and the impairment of long-lived assets associated
with its Aarons Office Furniture stores.
Depreciation of lease merchandise increased $5.7 million to $122.7 million for the three months
ended September 30, 2010, from $117.0 million during the comparable period in 2009, a 4.8%
increase. As a percentage of total lease revenues and fees, depreciation of lease merchandise was
36.0% and 36.5%, for the three months ended September 30, 2010 and 2009, respectively.
Interest expense decreased to $728,000 for the three months ended September 30, 2010, compared with
$1.0 million for the comparable period in 2009, a 27.9% decrease. The decrease in interest expense
was due to lower debt levels during the third quarter of 2010.
Income tax expense increased $5.6 million to $15.9 million for the three months ended September 30,
2010, compared with $10.3 million for the comparable period in 2009, representing a 53.8% increase.
Aarons effective tax rate was 37.8% in 2010 and 29.6% in 2009. The increase in effective tax
rate was due to the favorable impact of a $2.3 million reversal in 2009 of previously recorded
liabilities for uncertain tax positions as a result of expiration of
statute of limitations on certain tax matters.
Net Earnings from Continuing Operations. Net earnings increased $1.5 million to $26.2 million for
the three months ended September 30, 2010, compared with $24.7 million for the comparable period in
2009, representing a 6.2% increase. As a percentage of total revenues, net earnings from continuing
operations were 5.8% and 5.9% for the three months ended September 30, 2010 and 2009. The increase
in net earnings was primarily the result of the increased store sales gains in 2010 discussed above
and the maturing of new Company-operated sales and lease ownership stores added over the past
several years, contributing to a 3.2% increase in same store revenues and a 12.9% increase in
franchise royalties and fees.
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Nine months ended September 30, 2010 compared with nine months ended September 30, 2009
The following table shows key selected financial data for the nine month periods ended September
30, 2010 and 2009, and the changes in dollars and as a percentage to 2010 from 2009:
Dollar Increase/ | % Increase/ | |||||||||||||||
Nine Months Ended | Nine Months Ended | (Decrease) to | (Decrease) to | |||||||||||||
(In Thousands) | September 30, 2010 | September 30, 2009 | 2010 from 2009 | 2010 from 2009 | ||||||||||||
REVENUES: |
||||||||||||||||
Lease Revenues and Fees |
$ | 1,052,494 | $ | 989,216 | $ | 63,278 | 6.4 | % | ||||||||
Retail Sales |
32,778 | 34,211 | (1,433 | ) | (4.2 | ) | ||||||||||
Non-Retail Sales |
253,941 | 230,302 | 23,639 | 10.3 | ||||||||||||
Franchise Royalties and Fees |
43,611 | 38,908 | 4,703 | 12.1 | ||||||||||||
Other |
9,594 | 13,882 | (4,288 | ) | (30.9 | ) | ||||||||||
1,392,418 | 1,306,519 | 85,899 | 6.6 | |||||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Retail Cost of Sales |
19,028 | 20,502 | (1,474 | ) | (7.2 | ) | ||||||||||
Non-Retail Cost of Sales |
231,729 | 210,311 | 21,418 | 10.2 | ||||||||||||
Operating Expenses |
618,690 | 575,528 | 43,162 | 7.5 | ||||||||||||
Depreciation of Lease Merchandise |
379,580 | 360,143 | 19,437 | 5.4 | ||||||||||||
Interest |
2,415 | 3,450 | (1,035 | ) | (30.0 | ) | ||||||||||
1,251,442 | 1,169,934 | 81,508 | 7.0 | |||||||||||||
EARNINGS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES |
140,976 | 136,585 | 4,391 | 3.2 | ||||||||||||
INCOME TAXES |
53,387 | 48,744 | 4,643 | 9.5 | ||||||||||||
NET EARNINGS FROM
CONTINUING OPERATIONS |
87,589 | 87,841 | (252 | ) | (0.3 | ) | ||||||||||
NET LOSS FROM DISCONTINUED
OPERATIONS |
| (304 | ) | 304 | (100.0 | ) | ||||||||||
NET EARNINGS |
$ | 87,589 | $ | 87,537 | $ | 52 | 0.1 | % | ||||||||
Revenues. The 6.6% increase in total revenues, to $1.392 billion for the nine months ended
September 30, 2010, from $1.307 billion in the comparable period in 2009, was due mainly to a $63.3
million, or 6.4%, increase in lease revenues and fees, plus a $23.6 million, or 10.3%, increase in
non-retail sales. The increase in lease revenues and fees was attributable to our sales and lease
ownership division, which had a 2.2% increase in same store revenues for the nine months ended
September 30, 2010 from the comparable period in 2009 and added a net of 44 Company-operated stores
since September 30, 2009.
The 4.2% decrease in revenues from retail sales, to $32.8 million for the nine months ended
September 30, 2010 from $34.2 million in the comparable period in 2009, was due to decreased demand
and decreased sales as a result of the closure of the majority of the Aarons Office Furniture
stores.
The 10.3% increase in non-retail sales (which mainly represents merchandise sold to our
franchisees), to $253.9 million for the nine months of September 30, 2010, from $230.3 million for
the comparable period in 2009, was due to the growth of our franchise operations. The total number
of franchised sales and lease ownership stores at September 30, 2010 was 637, reflecting a net
addition of 68 stores since September 30, 2009.
The 12.1% increase in franchise royalties and fees, to $43.6 million for the nine months ended
September 30, 2010, from $38.9 million for the comparable period in 2009, primarily reflects an
increase in royalty income from franchisees, increasing 13.7% to $35.6 million for the nine months
ended September 30, 2010, compared to $31.3 million for the nine months ended September 30, 2009.
The increase is due primarily to the growth in the number of franchised stores and same store
growth in the revenues of existing stores.
Other revenues decreased 30.9% to $9.6 million for the nine months ended September 30, 2010, from
$13.9 million for the comparable period in 2009. Included in other revenues for the nine months
ended September 30, 2010 and 2009, are gains of $1.6 million and a $6.3 million, respectively, on
sales of Company-operated stores.
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Cost of Sales. Retail cost of sales decreased 7.2% to $19.0 million for the nine months ended
September 30, 2010, compared to $20.5 million for the comparable period in 2009, and as a
percentage of retail sales, decreased to 58.1% in 2010 from 59.9% in 2009 primarily due to as a
result of the decline in the volume of lower margin office furniture retail sales.
Non-retail cost of sales increased 10.2%, to $231.7 million for the nine months ended September 30,
2010, from $210.3 million for the comparable period in 2009, and as a percentage of non-retail
sales, was 91.3% for both periods.
Expenses. Operating expenses for the nine months ended September 30, 2010, increased $43.2 million
to $618.7 million from $575.5 million for the comparable
period in 2009, a 7.5% increase. As a percentage of total revenues,
operating expenses were 44.4% for the nine months ended
September 30, 2010 and 44.1% for the comparable period in 2009.
The Company began ceasing the operations of its Aarons Office Furniture division in June of 2010.
The Company closed ten of its Aarons Office Furniture stores during the first nine months of 2010
and had two remaining stores open to liquidate merchandise. As a result, the Company recorded $2.8
million in closed store reserves, $4.7 million in lease merchandise write-downs and other
miscellaneous expenses in the first nine months of 2010, totaling
$8.1 million in operating expenses, related to the
closures. In the first nine months of 2009 the Company recorded a $2.2 million pre-tax charge to
operating expenses relating to the write-down of certain lease merchandise and the impairment of
long-lived assets associated with its Aarons Office Furniture stores.
Depreciation of lease merchandise increased $19.4 million to $379.6 million for the nine months
ended September 30, 2010, from $360.1 million during the comparable period in 2009, a 5.4%
increase, and as a percentage of total lease revenues and fees, decreased slightly to 36.1% in 2010
from 36.4% in 2009.
Interest expense decreased to $2.4 million for the nine months ended September 30, 2010, compared
with $3.5 million for the comparable period in 2009, a 30.0% decrease. The decrease in interest
expense was due to lower debt levels during the first nine months of 2010.
Income tax expense increased $4.6 million to $53.4 million for the nine months ended September 30,
2010, compared with $48.7 million for the comparable period in 2009, representing a 9.5% increase.
Aarons effective tax rate increased to 37.9% in 2010 from 35.7% in 2009 primarily due to the
favorable impact of a $2.3 million reversal in 2009 of previously recorded liabilities for
uncertain tax positions as a result of expiration of statute of limitations.
Net
Earnings from Continuing Operations. Net earnings decreased to $87.6 million for the nine
months ended September 30, 2010, from $87.8 million for the comparable period in 2010. As a
percentage of total revenues, net earnings from continuing operations were 6.3% for the nine months
ended September 30, 2010, and 6.7% for the nine months ended September 30, 2009. The decrease in
net earnings was primarily the result of the office furniture charges and decreased store sales
gains in 2010 discussed above, offset by the maturing of new Company-operated sales and lease
ownership stores added over the past several years, contributing to a 2.2% increase in same store
revenues, and a 12.1% increase in franchise royalties and fees.
Discontinued Operations. The loss from discontinued operations (which represents losses from the
Aarons Corporate Furnishings division that was sold in November 2008), net of tax, was $304,000
for the nine months ended September 30, 2009.
Balance Sheet
Cash and Cash Equivalents. Our cash balance decreased to $100.1 million at September 30, 2010,
from $109.7 million at December 31, 2009. The decrease in our cash balance is primarily due to
income tax payments. For additional information, refer to the Liquidity and Capital Resources
and Commitments sections below.
Lease Merchandise, Net. Lease merchandise, net of accumulated depreciation, increased $34.3
million to $716.7 million at September 30, 2010 from $682.4 million at December 31, 2009, primarily
due to fluctuations in the normal course of business.
Property,
Plant and Equipment, Net. The decrease of $8.3 million in property, plant and equipment,
net of accumulated depreciation, to $206.9 million at September 30, 2010 from $215.2 million at
December 31, 2009, is primarily the result of sale-leaseback transactions completed since December
31, 2009. Certain assets have been reclassified as held for sale in all periods presented.
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Goodwill. The $8.1 million increase in goodwill, to $202.5 million at September 30, 2010, from
$194.4 million on December 31, 2009, is the result of a series of acquisitions of sales and lease
ownership businesses since December 31, 2009. The aggregate purchase price for these asset
acquisitions totaled $17.5 million, with the principal tangible assets acquired consisting of lease
merchandise and certain fixtures and equipment.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets increased $62.1 million to
$98.2 million at September 30, 2010, from $36.1 million at December 31, 2009, primarily as a result
of an increase in prepaid income tax expense. The Small Business Jobs Act of 2010 was enacted after
the Company had paid its third quarter estimated federal tax. As a result of the bonus
depreciation provisions in this bill the Company had paid more than the anticipated 2010 federal
tax liability.
Deferred Income Taxes Payable. The increase of $22.6 million in deferred income taxes payable to
$186.3 million at September 30, 2010, from $163.7 million at December 31, 2009, is primarily
related to bonus depreciation deductions on leased merchandise under the Small Business Jobs Act of
2010. The additional bonus depreciation deductions are partially offset by the reversals of the
bonus depreciation deductions under the Economic Stimulus Act of 2008 and the American Recovery and
Reinvestment Act of 2009.
Liquidity and Capital Resources
General
Cash flows from operating activities for the nine months ended September 30, 2010 and 2009 were
$49.3 million and $155.4 million, respectively. The decrease in cash flows from operating
activities is primarily related to higher 2010 tax payments and purchases of lease merchandise.
Purchases of sales and lease ownership stores had a positive impact on operating cash flows in each
period presented. The positive impact on operating cash flows from purchasing stores occurs as the
result of lease merchandise, other assets and intangibles acquired in these purchases being treated
as an investing cash outflow. As such, the operating cash flows attributable to the newly
purchased stores usually have an initial positive effect on operating cash flows that may not be
indicative of the extent of their contributions in future periods. The amount of lease merchandise
purchased in these acquisitions and shown under investing activities was $6.3 million for the first
nine months of 2010 and $9.1 million for the comparable 2009 period. Our cash flows from
operations include profits on the sale of lease merchandise. Sales of sales and lease ownership
stores are an additional source of investing cash flows. Proceeds from such sales were $6.2
million for the first nine months of 2010. Proceeds from such sales were $24.1 million for the
first nine months of 2009.
Our primary capital requirements consist of buying lease merchandise for sales and lease ownership
stores. As Aarons continues to grow, the need for additional lease merchandise is expected to
continue to be our major capital requirement. Other capital requirements include purchases of
property, plant and equipment and expenditures for acquisitions. These capital requirements
historically have been financed through:
| cash flows from operations; |
| bank credit; |
| trade credit with vendors; |
| proceeds from the sale of lease return merchandise; |
| private debt offerings; and |
| stock offerings. |
At September 30, 2010, we did not have any amounts outstanding under our revolving credit
agreement. The balance under the credit facilities decreased by $12.9 million in 2010. Our
current revolving credit facility expires May 23, 2013. The total available credit on our
revolving credit agreement is $140.0 million. Additionally, we have $24.0 million currently
outstanding in aggregate principal amount of 5.03% senior unsecured notes due July 2012, principal
repayments of which were first required in 2008.
Our revolving credit agreement and senior unsecured notes, and our franchisee loan program
discussed below, contain certain financial covenants. These covenants include requirements that we
maintain ratios of: (1) EBITDA plus lease expense to fixed charges of no less than 2:1; (2) total
debt to EBITDA of no greater than 3:1; and (3) total debt to total capitalization of no greater
than 0.6:1. EBITDA in each case, means consolidated net income before interest and tax expense,
depreciation (other than lease merchandise depreciation) and amortization expense, and other
non-cash charges. The Company is also required to maintain a minimum amount of shareholders
equity. See the full text of the covenants themselves in our credit and guarantee agreements, which we have
filed as exhibits to our Securities and Exchange Commission reports, for the details of these
covenants and other terms. If we fail to comply with these covenants, we will be in default under
these agreements, and all amounts would become due immediately. We were in compliance with all of
these covenants at September 30, 2010 and believe that we will continue to be in compliance in the
future.
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We purchase our common shares in the market from time to time as authorized by our board of
directors. We repurchased 478,805 shares in the first nine months of 2010 and we have the have
authority to purchase 5,401,815 shares. We did not repurchase shares during 2009.
We have a consistent history of paying dividends, having paid dividends for 23 consecutive years.
A $.0113 per share dividend on Common Stock and Class A Common Stock was paid in January 2009,
April 2009, July 2009, and October 2009 for a total cash outlay of $3.7 million in 2009. Our board
of directors increased the dividend 6.6% for the third quarter of 2009 on November 4, 2009 to $.012
per share and the dividend was paid in January 2010. A $.012 per share dividend on Common Stock
and Class A Common Stock was paid in April 2010, July 2010 and October 2010. Subject to sufficient
operating profits, any future capital needs and other contingencies, we currently expect to
continue our policy of paying dividends.
If we achieve our expected level of growth in our operations, we anticipate we can supplement our
expected cash flows from operations, existing credit facilities, vendor credit, and proceeds from
the sale of lease return merchandise by expanding our existing credit facilities, by securing
additional debt financing, or by seeking other sources of capital to ensure we will be able to fund
our capital and liquidity needs for at least the next 24 months. We believe we can secure these
additional sources of capital in the ordinary course of business. However, if the credit and
capital market disruptions that began in the second half of 2008 continue for an extended period,
or if they deteriorate further, we may not be able to obtain access to capital at as favorable
costs as we have historically been able to, and some forms of capital may not be available at all.
Commitments
Income Taxes. During the nine months ended September 30, 2010, we made $94.4 million in income tax
payments. Within the next three months, we anticipate that we will make cash payments for state
income taxes of less than $1 million. The Small Business Jobs Act of 2010 was enacted after we
paid our third quarter estimated federal tax. As a result of the bonus depreciation provisions in
this bill we have paid more than our anticipated 2010 federal tax liability. We plan to file for a
refund of overpaid federal tax of approximately $34 million in January 2011.
The Economic Stimulus Act of 2008, the American Recovery and Reinvestment Act of 2009, and the
Small Business Jobs Act of 2010 provided for accelerated depreciation by allowing a bonus
first-year depreciation deduction of 50% of the adjusted basis of
qualified property, such as our lease merchandise, placed in
service during those years. Accordingly, our cash flow benefited from having a lower cash tax
obligation which, in turn, provided additional cash flow from
operations. Because of our sales and lease ownership model where
Aarons remains the owner of merchandise on lease, we benefit
more from bonus depreciation, relatively, than traditional furniture,
electronics and appliance retailers. In future years we anticipate
having to make increased tax payments on our earnings as a result of
expected profitability and the reversal of the accelerated
depreciation deductions that were taken in prior periods. We estimate that at
December 31, 2010 the remaining tax deferral associated with the Acts is approximately $77.0
million, of which approximately 78% will reverse in 2011 and the remainder will reverse between
2012 and 2013.
Leases. We lease warehouse and retail store space for most of our operations under operating
leases expiring at various times through 2028. Most of the leases contain renewal options for
additional periods ranging from one to 15 years or provide for options to purchase the related
property at predetermined purchase prices that do not represent bargain purchase options. We also
lease transportation and computer equipment under operating leases expiring during the next five
years. We expect that most leases will be renewed or replaced by other leases in the normal course
of business. Approximate future minimum rental payments required under operating leases that have
initial or remaining non-cancelable terms in excess of one year as of September 30, 2010 are shown
in the below table under Contractual Obligations and Commitments.
We have 20 capital leases, 19 of which are with a limited liability company (LLC) whose managers
and owners are 11 Aarons executive officers and its controlling shareholder, with no individual,
including the controlling shareholder, owning more than 13.33% of the LLC. Nine of these related
party leases relate to properties purchased from Aarons in October and November of 2004 by the LLC
for a total purchase price of $6.8 million. The LLC is leasing back these properties to Aarons
for a 15-year term, with a five-year renewal at Aarons option, at an aggregate annual lease amount
of $716,000. Another ten of these related party leases relate to properties purchased from Aarons
in December 2002 by the LLC for a total purchase price of approximately $5.0 million. The LLC is
leasing back these properties to Aarons for a 15-year term at an aggregate annual lease amount of
$556,000. We do not currently plan to enter into any similar related party lease transactions in
the future.
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We finance a portion of our store expansion through sale-leaseback transactions. The properties are
generally sold at net book value and the resulting leases qualify and are accounted for as
operating leases. We do not have any retained or contingent interests in the stores nor do we
provide any guarantees, other than a corporate level guarantee of lease payments, in connection
with the sale-leasebacks. The operating leases that resulted from these transactions are included
in the table below under Contractual Obligations and Commitments.
Franchisee Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees
under a franchisee loan program with several banks, and we also guarantee franchisee borrowings
under certain other debt facilities. On June 18, 2010, we entered into the second amended and
restated loan facility agreement and guaranty, which amends the previous loan facility agreement
and guaranty. The new franchisee loan facility extended the maturity date until May 20,
2011, increased the maximum commitment amount under the facility from $175,000,000 to $200,000,000,
provided for the ability to extend loans to franchisees that operate stores located in Canada
(other than in the Province of Quebec), increased the maximum available amount of swing loans from
$20,000,000 to $25,000,000, reduced the Companys interest obligations with respect to franchisees
that operate stores located in the U.S. and established the Companys interest obligations with
respect to franchisees that operate stores located in Canada, and modified certain exhibits. We
remain subject to the same financial covenants under the new franchisee loan facility.
At September 30, 2010, the debt amount that we might be obligated to repay in the event franchisees
defaulted was $131.4 million. Of this amount, approximately $122.6 million represents franchisee
borrowings outstanding under the franchisee loan program, and approximately $8.8 million represents
franchisee borrowings that we guarantee under other debt facilities. However, due to franchisee
borrowing limits, we believe any losses associated with any defaults would be mitigated through
recovery of lease merchandise and other assets. Since its inception in 1994, we have had no
significant losses associated with the franchisee loan and guaranty program. We believe the
likelihood of any significant amounts being funded in connection with these commitments to be
remote.
Contractual Obligations and Commitments. We have no long-term commitments to purchase merchandise.
The following table shows the approximate amounts of our contractual obligations, including
interest, and commitments to make future payments as of September 30, 2010:
Period Less | Period 1-3 | Period 3-5 | Period Over | |||||||||||||||||
(In Thousands) | Total | Than 1 Year | Years | Years | 5 Years | |||||||||||||||
Credit Facilities, Excluding Capital Leases |
$ | 27,305 | $ | 12,004 | $ | 12,000 | $ | | $ | 3,301 | ||||||||||
Capital Leases |
14,807 | 1,314 | 2,686 | 3,205 | 7,602 | |||||||||||||||
Operating Leases |
513,962 | 91,136 | 142,124 | 96,471 | 184,231 | |||||||||||||||
Purchase Obligations |
29,705 | 14,727 | 14,784 | 194 | | |||||||||||||||
Total Contractual Cash Obligations |
$ | 585,779 | $ | 119,181 | $ | 171,594 | $ | 99,870 | $ | 195,134 | ||||||||||
The following table shows the approximate amounts of the Companys commercial commitments as of
September 30, 2010:
Total | ||||||||||||||||||||
Amounts | Period Less | Period 1-3 | Period 3-5 | Period Over | ||||||||||||||||
(In Thousands) | Committed | Than 1 Year | Years | Years | 5 Years | |||||||||||||||
Guaranteed Borrowings of Franchisees |
$ | 131,430 | $ | 129,924 | $ | 1,506 | $ | | $ | |
Purchase obligations are primarily related to certain advertising and marketing programs. Purchase
orders or contracts for the purchase of lease merchandise and other goods and services are not
included in the tables above. We are not able to determine the aggregate amount of those purchase
orders that represent contractual obligations, as some purchase orders represent authorizations to
purchase rather than binding agreements. Our purchase orders are based on our current distribution
needs and are fulfilled by our vendors within short time horizons. We do not have a significant
number of agreements for the purchase of lease merchandise or other goods that specify minimum
quantities or set prices that exceed our expected requirements for twelve months.
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Deferred income tax liabilities as of September 30, 2010 were approximately $186.3 million. This
amount is not included in the total contractual obligations table because we believe this
presentation would not be meaningful. Deferred income tax liabilities are calculated based on
temporary differences between the tax basis of assets and
liabilities and their respective book basis, which will result in taxable amounts in future years
when the liabilities are settled at their reported financial statement amounts. The results of
these calculations do not have a direct connection with the amount of cash taxes to be paid in any
future periods. As a result, scheduling deferred income tax liabilities as payments due by period
could be misleading because this scheduling would not relate to liquidity needs.
Market Risk
Occasionally, we manage our exposure to changes in short-term interest rates, particularly to
reduce the impact on our floating-rate borrowings, by entering into interest rate swap agreements.
At September 30, 2010, we did not have any swap agreements. We do not use any market risk
sensitive instruments to hedge foreign currency or other risks and hold no market risk sensitive
instruments for trading or speculative purposes. In the first nine months of 2010, we entered into
a fuel hedge which had no material impact on our financial position or operating results during the
nine month period ended September 30, 2010.
Interest Rate Risk
We occasionally hold long-term debt with variable interest rates indexed to LIBOR or the prime rate
that exposes us to the risk of increased interest costs if interest rates rise. Based on our
overall interest rate exposure at September 30, 2010, a hypothetical 1.0% increase or decrease in
interest rates would not be material.
24
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New Accounting Pronouncements
The pronouncements that the Company adopted in the first nine months of 2010 did not have a
material impact on the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under Item 7A in the Companys Annual Report on
Form 10-K for the year ended December 31, 2009 and Part I, Item 2 of this Quarterly Report above
under the headings Market Risk and Interest Rate Risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
An evaluation of the Companys disclosure controls and procedures, as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, was carried out by management, with the participation of
the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as of the end of the
period covered by this Quarterly Report on Form 10-Q.
No system of controls, no matter how well designed and operated, can provide absolute assurance
that the objectives of the system of controls are met, and no evaluation of controls can provide
absolute assurance that the system of controls has operated effectively in all cases. Our
disclosure controls and procedures, however, are designed to provide reasonable assurance that the
objectives of disclosure controls and procedures are met.
Based on managements evaluation, the CEO and CFO concluded that the Companys disclosure controls
and procedures were effective as of the date of the evaluation to provide reasonable assurance that
the objectives of disclosure controls and procedures are met.
Internal Control Over Financial Reporting.
There were no changes in the Companys internal control over financial reporting, as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, during the Companys third quarter of
2010 that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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Table of Contents
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
The Company does not have any updates to its risk factors disclosure from that previously reported
in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company made repurchases of its Common Stock during the third quarter of 2010, however, the
Company made no repurchases of Class A Common Stock during 2010. As of September 30, 2010, the
Companys Board of Directors had authorized the repurchase of up to an additional 5,401,815 common
shares pursuant to repurchase authority publicly announced from time-to-time.
(c) Total Number of | ||||||||||||||||
(a) Total | Shares Purchased as | (d) Maximum Number of | ||||||||||||||
Number of | (b) Average | Part of Publicly | Shares that May Yet Be | |||||||||||||
Shares | Price Paid | Announced Plans or | Purchased Under the Plans | |||||||||||||
Period | Purchased | per Share | Programs | or Programs | ||||||||||||
July 1, 2010 through July 31, 2010 |
478,805 | $ | 16.89 | 478,805 | 5,401,815 | |||||||||||
August 1, 2010 through August 31, 2010 |
0 | 0 | 0 | 5,401,815 | ||||||||||||
September 1, 2010 through September
30, 2010 |
0 | 0 | 0 | 5,401,815 | ||||||||||||
Total |
478,805 | $ | 16.89 | 478,805 | 5,401,815 | |||||||||||
ITEM 5. OTHER INFORMATION
The Company issued a press release on July 26, 2010 announcing its results for the second quarter
ended June 30, 2010, and later that day, at 5:00 pm EDT or Eastern Daylight Time, held a conference
call accessible to the public through a webcast to discuss those results. However, due to an
inadvertent technical error, a Current Report on Form 8-K furnishing the press release pursuant to
Item 2.02 thereof was not filed.
Furnished herewith as Exhibits 99.1 and 99.2, respectively, are the Companys press
release issued July 26, 2010 reporting the Companys second quarter 2010 financial results and the
transcript of its subsequent conference call discussing such results. The earnings call is
also archived for playback at the Companys website,
http://www.aaronsinc.com/, in the Investor
Relations section.
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Table of Contents
ITEM 6. EXHIBITS
The following exhibits are furnished herewith:
15 | Letter re: Unaudited Interim Financial Information. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act, as amended. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act, as amended. |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
99.1 | Aarons, Inc. press release dated July 26, 2010, announcing the Companys
financial results for the second quarter of 2010 (furnished pursuant to Item
2.02 of Form 8-K). |
|||
99.2 | Transcript of the conference call discussing the second quarter of 2010 results. |
|||
101 | The following financial information from Aarons, Inc. Quarterly Report on
Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as
of September 30, 2010 and December 31, 2009, (ii) Consolidated Statements of
Earnings for the three and nine months ended September 30, 2010 and 2009,
(iii) Consolidated Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009, and (iv) the Notes to Consolidated Financial
Statements. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AARONS, INC. (Registrant) |
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Date November 3, 2010 | By: | /s/ Gilbert L. Danielson | ||
Gilbert L. Danielson | ||||
Executive Vice President, Chief Financial Officer |
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Date November 3, 2010 | /s/ Robert P. Sinclair, Jr. | |||
Robert P. Sinclair, Jr. | ||||
Vice President, Corporate Controller |
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