NOTE 6: SEGMENTS

As of March 31, 2013, the Company had five operating and reportable segments: Sales and Lease Ownership, HomeSmart, RIMCO, Franchise and Manufacturing. The Company has evaluated the characteristics of its operating segments and has determined that certain of its operating segments no longer meet the aggregation criteria in ASC 280, Segment Reporting. Accordingly, for all periods presented, RIMCO has been reclassified from the Sales and Lease Ownership segment to the RIMCO 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 primarily on a weekly payment basis with no credit requirements. The Company’s RIMCO stores lease automobile wheels, tires and rims to customers under sales and lease ownership agreements. 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.


	Three Months Ended March 31,
(In Thousands)	2013			2012

Revenues From External Customers:
Sales and Lease Ownership	$	552,225		$	553,635
HomeSmart		16,937			12,635
RIMCO		5,433			4,307
Franchise		18,200			17,505
Manufacturing		27,711			30,228
Other		2,304			2,584

Revenues of Reportable Segments		622,810			620,894
Elimination of Intersegment Revenues		(27,025	)		(30,228	)
Cash to Accrual Adjustments		(644	)		(4,670	)

Total Revenues from External Customers	$	595,141		$	585,996

Earnings Before Income Taxes:
Sales and Lease Ownership	$	63,620		$	104,276
HomeSmart		(209	)		(1,655	)
RIMCO		294			277
Franchise		14,509			14,166
Manufacturing		593			1,104
Other		(2,788	)		1,426

Earnings Before Income Taxes for Reportable Segments		76,019			119,594
Elimination of Intersegment Profit		(604	)		(1,104	)
Cash to Accrual and Other Adjustments		5,627			(3,461	)

Total Earnings Before Income Taxes	$	81,042		$	115,029


	March 31,			December 31,
(In Thousands)	2013			2012
Assets:
Sales and Lease Ownership	$	1,444,990		$	1,410,075
HomeSmart		55,789			58,347
RIMCO		12,184			11,737
Franchise		44,943			53,820
Manufacturing¹		27,255			24,787
Other		276,665			254,163

Total Assets	$	1,861,826		$	1,812,929

Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $17.7 million and $14.1 million as of March 31, 2013 and December 31, 2012, respectively.

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, RIMCO 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 2013 and 2012.

•

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, HomeSmart and RIMCO 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. Earnings before income taxes above for the Sales and Lease Ownership segment includes $35.5 million related to the reversal of a lawsuit accrual during the three months ended March 31, 2012.