Note K: Segments

Description of Products and Services of Reportable Segments

Aaron’s, Inc. has four reportable segments: Sales and Lease Ownership, Franchise, HomeSmart and Manufacturing. In all periods presented, HomeSmart was reclassified from the Other segment to the HomeSmart segment. During 2008, the Company sold its corporate furnishings division. 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 offers electronics, residential furniture, appliances and consumers primarily on a weekly payment basis with no credit requirement. The Company’s franchise operation sells 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 revenues and earnings before income taxes are solely the result of intercompany transactions and are eliminated through the Elimination of Intersegment Revenues. The Company has elected to aggregate certain operating segments.

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

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Sales and lease ownership revenues are reported on the cash basis for management reporting purposes.

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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 2% in 2011, 2010 and 2009.

•

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

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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 the Cash to Accrual and Other Adjustments line below.

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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 the Cash to Accrual and Other Adjustments line below.

•

Interest on borrowings is estimated at the beginning of each year. Interest is then allocated to operating segments based on relative total assets.

Revenues in the “Other” category are primarily revenues of the Aaron’s 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.

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. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the sales and lease ownership division revenues and certain other items are presented on a cash basis. Intersegment sales are completed at internally negotiated amounts. Since the intersegment profit and loss affect 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.

Included in the Earnings Before Income Taxes results above for the Sales and Lease Ownership segment is a $36.5 million charge for the lawsuit expense described in Note F. As discussed in Note N, the Company sold substantially all of the assets of the Aaron’s Corporate Furnishings division during the fourth quarter of 2008. For financial reporting purposes, this division has been classified as a discontinued operation and is not included in our segment information as shown below.

Information on segments and a reconciliation to earnings before income taxes from continuing operations are as follows:


(In Thousands)	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Revenues From External Customers:
Sales and Lease Ownership	$	1,938,991		$	1,803,778		$	1,685,841
Franchise		63,255			59,112			52,941
HomeSmart		15,624			56			—
Manufacturing		89,430			79,115			72,473
Other		9,960			16,458			19,320

Revenues of Reportable Segments		2,117,260			1,958,519			1,830,575
Elimination of Intersegment Revenues		(89,953	)		(80,109	)		(73,184	)
Cash to Accrual Adjustments		(3,258	)		(1,563	)		(4,604	)

Total Revenues from External Customers	$	2,024,049		$	1,876,847		$	1,752,787

Earnings Before Income Taxes:
Sales and Lease Ownership	$	143,686		$	159,417		$	147,261
Franchise		49,577			45,935			39,335
HomeSmart		(7,283	)		(318	)		—
Manufacturing		2,960			3,216			3,329
Other		(141	)		(7,847	)		(5,676	)

Earnings Before Income Taxes for Reportable Segments		188,799			200,403			184,249
Elimination of Intersegment Profit		(2,959	)		(3,218	)		(3,341	)
Cash to Accrual and Other Adjustments		(2,463	)		(6,399	)		(4,469	)

Total Earnings Before Income Taxes From Continuing Operations	$	183,377		$	190,786		$	176,439

Assets:
Sales and Lease Ownership	$	1,293,151		$	1,248,785		$	1,110,675
Franchise		56,131			55,789			51,245
HomeSmart		50,600			955			—
Manufacturing		11,142			14,723			15,512
Other		324,125			181,820			144,024

Total Assets	$	1,735,149		$	1,502,072		$	1,321,456

Depreciation and Amortization:
Sales and Lease Ownership	$	588,036		$	539,669		$	508,218
Franchise		41			41			192
HomeSmart		5,933			21			—
Manufacturing		1,294			2,958			1,888
Other		8,260			6,843			9,073

Total Depreciation and Amortization	$	603,564		$	549,532		$	519,371

Interest Expense:
Sales and Lease Ownership	$	4,473		$	2,937		$	4,030
Franchise		—			—			—
HomeSmart		201			2			—
Manufacturing		142			15			15
Other		(107	)		142			254

Total Interest Expense	$	4,709		$	3,096		$	4,299


Capital Expenditures:
Sales and Lease Ownership	$	53,502	$	73,166	$	76,151
HomeSmart		11,349		202		—
Manufacturing		6,521		6,584		1,474
Other		11,752		9,118		6,338

Total Capital Expenditures from Continuing Operations	$	83,124	$	89,070	$	83,963

Revenues From Canadian Operations (included in totals above):
Sales and Lease Ownership	$	3,258	$	4,470	$	3,781
Assets From Canadian Operations (included in totals above):
Sales and Lease Ownership	$	1,527	$	15,093	$	6,469