SEGMENTS

Description of Products and Services of Reportable Segments

As of December 31, 2015, the Company had six operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, DAMI, Franchise and Manufacturing. The results of DAMI and Progressive have been included in the Company’s consolidated results and presented as reportable segments from their October 15, 2015 and April 14, 2014 acquisition dates, respectively.

The Aaron’s Sales & Lease Ownership division offers furniture, electronics, appliances and computers to customers primarily on a monthly payment basis with no credit needed. Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions on a variety of products, including furniture and bedding, consumer electronics, appliances and jewelry. The HomeSmart division offers furniture, electronics, appliances and computers to customers primarily on a weekly payment basis with no credit needed. DAMI offers a variety of second-look financing programs originated through a federally insured bank. Together with Progressive, DAMI allows the Company to provide retail partners one source for financing and leasing transactions with below-prime customers. 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 are eliminated through the elimination of intersegment revenues and intersegment profit or loss.

Measurement of Segment Profit or Loss and Segment Assets

The Company evaluates performance and allocates resources based on revenue growth and pre-tax profit or loss from operations. Intersegment sales are completed at internally negotiated amounts. Since the intersegment profit affects inventory valuation, depreciation and cost of goods sold are adjusted when intersegment profit is eliminated in consolidation.

Factors Used by Management to Identify the Reportable Segments

The Company’s reportable segments are based on the operations of the Company that the chief operating decision maker regularly reviews to analyze performance and allocate resources among business units of the Company.

Information on segments and a reconciliation to earnings before income taxes are as follows for the years ended December 31:



(In Thousands)	2015			2014			2013
Revenues From External Customers:
Sales and Lease Ownership	$	2,001,682		$	2,037,101		$	2,076,269
Progressive	1,049,681			519,342			—
HomeSmart	63,477			64,276			62,840
DAMI ¹	2,845			—			—
Franchise	63,507			65,902			68,575
Manufacturing	106,020			104,058			106,523
Other	1,118			2,969			22,158
Revenues of Reportable Segments	3,288,330			2,793,648			2,336,365
Elimination of Intersegment Revenues	(103,890		)	(102,296		)	(103,834		)
Cash to Accrual Adjustments	(4,684		)	3,681			2,100
Total Revenues from External Customers	$	3,179,756		$	2,695,033		$	2,234,631

Earnings (Loss) Before Income Taxes:
Sales and Lease Ownership	$	166,838		$	140,854		$	183,965
Progressive	54,525			4,603			—
HomeSmart	771			(2,643		)	(3,428		)
DAMI	(1,964		)	—			—
Franchise	48,576			50,504			54,171
Manufacturing	2,520			860			107
Other	(51,651		)	(75,905		)	(56,114		)
Earnings Before Income Taxes for Reportable Segments	219,615			118,273			178,701
Elimination of Intersegment Profit	(2,488		)	(813		)	(94		)
Cash to Accrual and Other Adjustments	(4,007		)	4,244			6,353
Total Earnings Before Income Taxes	$	213,120		$	121,704		$	184,960

Assets:
Sales and Lease Ownership	$	1,261,040		$	1,246,325		$	1,431,720
Progressive	878,457			858,159			—
HomeSmart	44,429			47,585			47,970
DAMI	97,858			—			—
Franchise	53,693			46,755			47,788
Manufacturing ²	28,986			23,050			24,305
Other	294,412			234,970			275,393
Total Assets	$	2,658,875		$	2,456,844		$	1,827,176

¹ Represents interest and fees on loans receivable, and excludes the effect of interest expense.


²	Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $19.4 million, $13.2 million and $14.0 million as of December 31, 2015, 2014 and 2013, respectively.



(In Thousands)	2015			2014			2013
Depreciation and Amortization:
Sales and Lease Ownership	$	592,450		$	633,119		$	639,951
Progressive	661,646			346,343			—
HomeSmart	20,817			22,407			23,977
DAMI	218			—			—
Franchise	1,429			1,599			1,781
Manufacturing	1,482			1,649			2,081
Other	14,805			13,117			17,315
Total Depreciation and Amortization	$	1,292,847		$	1,018,234		$	685,105

Interest Expense:
Sales and Lease Ownership	$	7,751		$	7,834		$	7,070
Progressive	21,959			14,992			—
HomeSmart	900			922			916
DAMI	764			—			—
Franchise	—			—			—
Manufacturing	26			50			80
Other	(8,061		)	(4,583		)	(2,453		)
Total Interest Expense	$	23,339		$	19,215		$	5,613

Capital Expenditures:
Sales and Lease Ownership	$	23,082		$	24,135		$	30,831
Progressive	8,175			1,625			—
HomeSmart	374			1,020			994
DAMI	40			—			—
Franchise	—			—			—
Manufacturing	387			1,477			1,531
Other	28,499			19,308			24,789
Total Capital Expenditures	$	60,557		$	47,565		$	58,145

Revenues From Canadian Operations (included in totals above):
Sales and Lease Ownership	$	3,384		$	179		$	300

Assets From Canadian Operations (included in totals above):
Sales and Lease Ownership	$	8,900		$	776		$	1,021

Revenues in the Other category are primarily 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 in the Other category are the result of the activity mentioned above, net of the portion of corporate overhead not allocated to the reportable segments for management purposes.

In 2015, the results of the Company's operating segments were impacted by the following items:


•	Sales and Lease Ownership earnings before income taxes included a $3.5 million loss related to a lease termination on a Company aircraft.


•	Progressive earnings before income taxes included $3.7 million of transaction costs related to the October 15, 2015 DAMI acquisition.

In 2014, the results of the Company's operating segments were impacted by the following items:


•	Sales and Lease Ownership earnings before income taxes included $4.8 million of restructuring charges related to the Company's strategic decision to close 44 Company-operated stores.

•

Other category loss before income taxes included $13.7 million in financial and advisory costs related to addressing now-resolved strategic matters, including proxy contests, $4.3 million of restructuring charges in connection with the store closures noted above, $9.1 million of charges associated with the retirements of both the Company's Chief Executive Officer and Chief Operating Officer, $6.6 million in transaction costs related to the Progressive acquisition and $1.2 million of regulatory income that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General.

In 2013, the results of the Company's operating segments were impacted by the following items:


•	Other category loss before income taxes included $28.4 million related to an accrual for loss contingencies for the then-pending regulatory investigation by the California Attorney General and $4.9 million related to retirement expense and a change in vacation policies.

The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP with

the following adjustments:


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


•	Generally a predetermined amount of each reportable segment’s revenues is charged to the reportable segment as an allocation of corporate overhead.


•	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 is allocated to the Sales and Lease Ownership and HomeSmart segments based a percentage of their revenues. Interest is allocated to the Progressive segment based on a percentage of the outstanding balances of its intercompany borrowings and of the debt incurred when it was acquired.