Segment Information

9 Months Ended

Sep. 30, 2012

Segment Information

Note C—Segment Information

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.

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2012			2011			2012			2011
Revenues From External Customers:
Sales and Lease Ownership	$	488,233		$	467,307		$	1,549,096		$	1,439,936
HomeSmart		14,167			5,760			40,384			6,747
Franchise		15,981			15,889			49,628			47,408
Manufacturing		20,030			17,178			72,124			66,300
Other		2,377			1,121			6,266			5,424
Revenues of Reportable Segments		540,788			507,255			1,717,498			1,565,815
Elimination of Intersegment Revenues		(20,030	)		(17,178	)		(72,124	)		(66,300	)
Cash to Accrual Adjustments		8,752			(5,346	)		8,751			111
Total Revenues from External Customers	$	529,510		$	484,731		$	1,654,125		$	1,499,626
Earnings (Loss) Before Income Taxes:
Sales and Lease Ownership	$	38,061		$	39,523		$	190,287		$	98,974
HomeSmart		(1,949	)		(2,594	)		(5,222	)		(4,220	)
Franchise		12,417			12,431			39,137			37,193
Manufacturing		53			687			579			2,005
Other		(10,730	)		857			(12,787	)		2,698
Earnings Before Income Taxes for Reportable Segments		37,852			50,904			211,994			136,650
Elimination of Intersegment Profit		(53	)		(687	)		(579	)		(2,005	)
Cash to Accrual and Other Adjustments		8,245			(5,125	)		8,248			(7	)
Total Earnings Before Income Taxes	$	46,044		$	45,092		$	219,663		$	134,638

Earnings 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 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 2% in 2012 and 2011.

• 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 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 three and nine month periods ended September 30, 2012, the pre-tax losses of the “Other” category include $10.4 million in retirement charges associated with the retirement of the Company’s founder and Chairman of the Board. Included in the nine months Earnings Before Income Taxes above for the Sales and Lease Ownership segment is the reversal of a lawsuit accrual of $35.5 million.