
NOTE 6.	SEGMENTS

As of September 30, 2013, the Company had five operating and reportable segments: Sales and Lease Ownership, HomeSmart, RIMCO, Franchise and Manufacturing. In the first quarter of 2013, the Company determined that the RIMCO segment no longer meets the aggregation criteria in ASC 280, Segment Reporting. Accordingly, for all periods presented, RIMCO has been reclassified from the Sales and Lease Ownership segment to the RIMCO segment.

The Aaron’s Sales & Lease Ownership division offers electronics, residential furniture, appliances and computers to consumers primarily on a monthly payment basis with no credit requirements. The HomeSmart division was established to offer electronics, residential furniture, appliances and computers to consumers primarily on a weekly payment basis with no credit requirements. The Company’s RIMCO stores lease automobile tires, wheels and rims to customers under sales and lease ownership agreements. The Company’s Franchise operation awards franchises and supports franchisees of its sales and lease ownership concept. The Manufacturing segment manufactures upholstered furniture and bedding predominantly for use by Company-operated and franchised stores. Therefore, the Manufacturing segment's revenues and earnings before income taxes are primarily the result of intercompany transactions, substantially all of which revenues and earnings are eliminated through the elimination of intersegment revenues and intersegment profit.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2013			2012			2013			2012
Revenues From External Customers:
Sales and Lease Ownership	$	499,979		$	485,326		$	1,559,951		$	1,539,702
HomeSmart	15,098			14,104			47,623			40,384
RIMCO	5,054			4,127			15,447			12,430
Franchise	16,530			15,981			51,564			49,628
Manufacturing	23,501			20,030			78,622			72,124
Other	888			887			2,120			3,230
Revenues of Reportable Segments	561,050			540,455			1,755,327			1,717,498
Elimination of Intersegment Revenues	(22,673		)	(20,030		)	(76,427		)	(72,124		)
Cash to Accrual Adjustments	1,081			9,085			7,763			8,751
Total Revenues from External Customers	$	539,458		$	529,510		$	1,686,663		$	1,654,125
Earnings (Loss) Before Income Taxes:
Sales and Lease Ownership	$	34,521		$	39,580		$	145,795		$	190,690
HomeSmart	(1,480		)	(2,264		)	(2,468		)	(5,222		)
RIMCO	(221		)	170			(18		)	596
Franchise	13,084			12,417			40,841			39,137
Manufacturing	22			53			67			579
Other	(19,071		)	(11,359		)	(50,019		)	(13,786		)
Earnings Before Income Taxes for Reportable Segments	26,855			38,597			134,198			211,994
Elimination of Intersegment Profit	(5		)	(53		)	(55		)	(579		)
Cash to Accrual and Other Adjustments	2,570			7,500			16,706			8,248
Total Earnings Before Income Taxes	$	29,420		$	46,044		$	150,849		$	219,663



(In Thousands)	September 30, 2013		December 31, 2012
Assets:
Sales and Lease Ownership	$	1,453,869	$	1,410,075
HomeSmart	47,743		58,347
RIMCO	13,584		11,737
Franchise	41,776		53,820
Manufacturing¹	28,211		24,787
Other	332,298		254,163
Total Assets	$	1,917,481	$	1,812,929


¹	Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $17.2 million and $14.1 million as of September 30, 2013 and December 31, 2012, respectively.

Earnings (loss) before income taxes for each reportable segment are determined in accordance with accounting principles generally accepted in the United States with the following adjustments:


•	Revenues in the Sales and Lease Ownership, HomeSmart and RIMCO segments are reported on the cash basis for management reporting purposes.


•	A predetermined amount of each reportable segment’s revenues is charged to the reportable segment as an allocation of corporate overhead. This allocation was approximately 5% in 2013 and 2012.


•	Accruals related to store closures are not recorded on the reportable segments’ financial statements, but are maintained and controlled by corporate headquarters.


•	The capitalization and amortization of manufacturing variances are recorded on 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, HomeSmart and RIMCO segments is estimated at the beginning of each year and then allocated to the division ratably over time 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 reflected 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 and using the allowance method for financial reporting purposes. The difference between these two methods is reflected 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 reportable segments based on relative total assets.

Revenues in the “Other” category are primarily revenues from leasing space to unrelated third parties in the corporate headquarters building, revenues of the Aaron’s Office Furniture division through the date of sale in August 2012 and revenues from several minor unrelated activities. The pre-tax losses or earnings 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. For the nine months ended September 30, 2013, the pre-tax losses of the "Other" category include $28.4 million related to an accrual for loss contingencies for a pending regulatory investigation, of which $13.4 million was recorded during the three months ended September 30, 2013. "Other" pre-tax losses for the nine months ended September 30, 2013 also include $4.9 million related to retirement expense and a change in vacation policies.

For the three and nine months ended September 30, 2012, the pre-tax losses of the "Other" category include $10.4 million related to retirement charges. Earnings (Loss) Before Income Taxes above for the Sales and Lease Ownership segment includes $35.5 million related to the reversal of a lawsuit accrual during the nine months ended September 30, 2012.