SEGMENTS

As of June 30, 2014, the Company had five operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. The results of Progressive, which is presented as a reportable segment, have been included in the Company's consolidated results from the April 14, 2014 acquisition date. In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.

The Aaron’s Sales & Lease Ownership division offers furniture, electronics, appliances and computers to consumers primarily on a monthly payment basis with no credit requirements. Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions through over 15,000 retail locations in 46 states. The HomeSmart division was established to offer furniture, electronics, appliances and computers to consumers primarily on a weekly payment basis with no credit requirements. 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 June 30,						Six Months Ended June 30,
(In Thousands)	2014			2013			2014			2013
Revenues From External Customers:
Sales and Lease Ownership	$	495,049		$	504,560		$	1,043,760		$	1,056,271
Progressive	138,879			—			138,879			—
HomeSmart	15,749			15,588			33,153			32,525
Franchise	16,225			16,834			34,309			35,034
Manufacturing	23,743			27,410			54,898			55,121
Other	367			5,354			2,265			11,203
Revenues of Reportable Segments	690,012			569,746			1,307,264			1,190,154
Elimination of Intersegment Revenues	(23,404		)	(26,729		)	(53,662		)	(53,754		)
Cash to Accrual Adjustments	5,902			7,528			4,331			7,155
Total Revenues from External Customers	$	672,510		$	550,545		$	1,257,933		$	1,143,555
Earnings (Loss) Before Income Taxes:
Sales and Lease Ownership	$	32,132		$	47,449		$	87,751		$	111,274
Progressive	(323		)	—			(323		)	—
HomeSmart	(662		)	(779		)	(731		)	(988		)
Franchise	11,073			13,248			25,631			27,757
Manufacturing	(89		)	(548		)	458			45
Other	(28,547		)	(28,046		)	(38,474		)	(30,745		)
Earnings Before Income Taxes for Reportable Segments	13,584			31,324			74,312			107,343
Elimination of Intersegment Profit (Loss)	82			554			(427		)	(50		)
Cash to Accrual and Other Adjustments	(104		)	8,509			387			14,136
Total Earnings Before Income Taxes	$	13,562		$	40,387		$	74,272		$	121,429



(In Thousands)	June 30, 2014		December 31, 2013
Assets:
Sales and Lease Ownership	$	1,273,921	$	1,431,720
Progressive	804,703		—
HomeSmart	47,177		47,970
Franchise	33,812		47,788
Manufacturing¹	24,305		24,305
Other	185,569		275,393
Total Assets	$	2,369,487	$	1,827,176


¹	Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $13.6 million and $14.0 million as of June 30, 2014 and December 31, 2013, respectively.

Earnings (loss) before income taxes for the Progressive reportable segment are determined in accordance with accounting principles generally accepted in the United States. The Company determines earnings (loss) before income taxes for all other reportable segments in accordance with accounting principles generally accepted in the United States with the following adjustments:


•	Revenues in the Sales and Lease Ownership and HomeSmart 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 2014 and 2013.


•	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 and HomeSmart 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 attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities. 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 six months ended June 30, 2014, the pre-tax losses of the “Other” category include $13.3 million in financial advisory and legal costs related to addressing strategic matters, including proxy contests, of which $12.4 million was recorded during the three months ended June 30, 2014. “Other” pre-tax losses for the six months ended June 30, 2014 also include $6.3 million in transaction costs related to the Progressive acquisition, of which $5.5 million was recorded during the three months ended June 30, 2014. In addition, earnings before income taxes for the three and six ended June 30, 2014 included $2.3 million in leasehold improvement impairment charges related to the store closures announced on July 15, 2014, which has been included in the Sales and Lease Ownership segment.

For the three and six months ended June 30, 2013, the pre-tax losses of the “Other” category were impacted by $15.0 million in regulatory expense related to a pending regulatory investigation and charges of $4.9 million due to the retirement of the Company's Chief Operating Officer and a change in the Company's vacation policies.