NOTE 12: SEGMENTS

Description of Products and Services of Reportable Segments

As of December 31, 2012, the Company had five operating segments: Sales and Lease Ownership, RIMCO, HomeSmart, Franchise and Manufacturing. The Company’s RIMCO stores lease automobile wheels, tires and rims to customers under sales and lease ownership agreements. Although the products offered are different, these stores are managed, monitored and operated similarly to our other sales and lease ownership stores.

The Company has evaluated the characteristics of its operating segments and has determined that certain of its operating segments meet the aggregation criteria in ASC 280, Segment Reporting. Accordingly, the Company has identified four reportable segments: Sales and Lease Ownership, Franchise, HomeSmart and Manufacturing. In all periods presented, HomeSmart was reclassified from “Other” to the HomeSmart 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 on a weekly payment basis with no credit requirements. 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 primarily the result of intercompany transactions, substantially all of which revenues and earnings are eliminated through the elimination of intersegment revenues.

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.

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


	Year Ended December 31,			Year Ended December 31,			Year Ended December 31,
(In Thousands)	2012			2011			2010
Revenues From External Customers:
Sales and Lease Ownership	$	2,088,894		$	1,938,614		$	1,803,601
HomeSmart		55,226			15,624			56
Franchise		66,655			63,255			59,112
Manufacturing		95,693			89,430			79,113
Other		9,122			8,096			15,132

Revenues of Reportable Segments		2,315,590			2,115,019			1,957,014
Elimination of Intersegment Revenues		(95,150	)		(89,430	)		(79,113	)
Cash to Accrual Adjustments		2,148			(3,258	)		(1,563	)

Total Revenues from External Customers	$	2,222,588		$	2,022,331		$	1,876,338

Earnings Before Income Taxes:
Sales and Lease Ownership	$	243,531		$	143,686		$	159,417
HomeSmart		(6,962	)		(7,283	)		(318	)
Franchise		52,672			49,577			45,935
Manufacturing		382			2,960			3,218
Other		(11,854	)		818			(12,437	)

Earnings Before Income Taxes for Reportable Segments		277,769			189,758			195,815
Elimination of Intersegment Profit		(393	)		(2,960	)		(3,218	)
Cash to Accrual and Other Adjustments		(521	)		(3,421	)		(1,811	)

Total Earnings Before Income Taxes	$	276,855		$	183,377		$	190,786

Assets:
Sales and Lease Ownership	$	1,421,812		$	1,293,151		$	1,248,785
HomeSmart		58,347			50,600			955
Franchise		53,820			56,131			55,789
Manufacturing¹		24,787			21,691			22,312
Other		254,163			310,326			173,012

Total Assets	$	1,812,929		$	1,731,899		$	1,500,853

¹ Includes inventory (principally raw materials) that has been classified within lease merchandise in the consolidated balance sheets of $14.1 million, $11.2 million and $11.2 million as of December 31, 2012, 2011 and 2010, respectively.

Depreciation and Amortization:
Sales and Lease Ownership		$629,119			$588,036		$	539,669
HomeSmart		20,482			5,933			21
Franchise		146			41			41
Manufacturing		4,430			1,294			2,958
Other		7,256			8,260			6,843

Total Depreciation and Amortization	$	661,433		$	603,564		$	549,532

Interest Expense:
Sales and Lease Ownership	$	5,531		$	4,473		$	2,937
HomeSmart		846			201			2
Franchise		—			—			—
Manufacturing		106			142			15
Other		(91	)		(107	)		142

Total Interest Expense	$	6,392		$	4,709		$	3,096

Capital Expenditures:
Sales and Lease Ownership	$	35,480		$	53,402		$	72,832
HomeSmart		4,121			10,950			202
Franchise		—			—			—
Manufacturing		4,493			2,107			5,484
Other		20,979			11,752			9,118

Total Capital Expenditures	$	65,073		$	78,211		$	87,636
Revenues From Canadian Operations (included in totals above):
Sales and Lease Ownership	$	308		$	3,258		$	4,470
Assets From Canadian Operations (included in totals above):
Sales and Lease Ownership	$	1,391		$	1,527		$	15,093

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 year ended December 31, 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 former Chairman of the Board. Earnings Before Income Taxes above for the Sales and Lease Ownership segment includes the $36.5 million accrual of a lawsuit for 2011 and the reversal of the lawsuit accrual of $35.5 million in 2012. In addition, during 2011, the Company incurred $3.5 million in separation costs related to the departure of the Company’s former Chief Executive Officer.