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MarketScreener Homepage  >  Equities  >  Nyse  >  Aaron's, Inc.    AAN

AARON'S, INC.

(AAN)
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AARON : S INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/04/2019 | 04:39pm EST
Special Note Regarding Forward-Looking Information: Except for historical
information contained herein, the matters set forth in this Form 10-Q are
forward-looking statements. These statements are based on management's current
expectations and plans, which involve risks and uncertainties. Such
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "believe," "expect,"
"forecast," "guidance," "intend," "could," "project," "estimate," "anticipate,"
"should," and similar terminology. You are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the filing date of
this Quarterly Report and which involve risks and uncertainties that may cause
actual results to differ materially from those set forth in these statements.
These risks and uncertainties include factors such as the impact of increased
regulation, changes in general economic conditions, including consumer
confidence and demand for certain merchandise, increased competition, pricing
pressures, the impact of legal proceedings faced by the Company, costs relating
to protecting customer privacy and information security more generally and a
failure to realize the expected benefits of our restructuring plans and
strategic initiatives, the execution and results of our operational strategies,
risks related to Progressive Leasing's "virtual" lease-to-own business,
deteriorations in the business performance of our franchisees and our franchisee
relationships, and the other risks and uncertainties discussed under Item 1A,
"Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2018 (the "2018 Annual Report"). Except as required by law,
the Company undertakes no obligation to update these forward-looking statements
to reflect subsequent events or circumstances after the filing date of this
Quarterly Report.
The following discussion should be read in conjunction with the condensed
consolidated financial statements as of and for the three and nine months ended
September 30, 2019 and 2018, including the notes to those statements, appearing
elsewhere in this report. We also suggest that management's discussion and
analysis appearing in this report be read in conjunction with the management's
discussion and analysis and consolidated financial statements included in our
2018 Annual Report.
Business Overview
Aaron's, Inc. ("we", "our", "us" or the "Company") is a leading omnichannel
provider of lease-purchase solutions. As of September 30, 2019, the Company's
operating and reportable segments are Progressive Leasing, Aaron's Business and
DAMI.
Progressive Leasing is a virtual lease-to-own company that provides
lease-purchase solutions through approximately 20,000 retail locations in 46
states and the District of Columbia. It does so by purchasing merchandise from
third-party retailers desired by those retailers' customers and, in turn,
leasing that merchandise to the customers through a cancellable lease-to-own
transaction. Progressive Leasing consequently has no stores of its own, but
rather offers lease-purchase solutions to the customers of traditional and
e-commerce retailers.
Aaron's Business offers furniture, consumer electronics, home appliances and
accessories to consumers primarily with a month-to-month, lease-to-own agreement
with no credit needed through its Company-operated stores in the United States
and Canada as well as through its e-commerce platform, Aarons.com. This
operating segment also supports franchisees of its Aaron's stores. The Aaron's
Business segment also includes the operations of Woodhaven, which manufactures
and supplies the majority of the upholstered furniture and bedding leased and
sold in Company-operated and franchised stores.
DAMI partners with merchants to provide a variety of revolving credit products
originated through two third-party federally insured banks to customers that may
not qualify for traditional prime lending (called "second-look" financing
programs).

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Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the
internet and virtual marketplaces. We believe that the Progressive Leasing and
DAMI acquisitions have been strategically transformational in this respect by
allowing the Company to diversify its presence in the market and strengthen our
business, as demonstrated by Progressive Leasing's significant revenue and
profit growth throughout 2018 and through the first nine months of 2019. The
Company is also leveraging franchisee acquisition opportunities to expand into
new geographic markets, enhance operational control, and benefit more fully from
our business transformation initiatives on a broader scale. We believe the
traditional store based lease-to-own industry has been negatively impacted in
recent periods by: (i) increased competition from a wide range of competitors,
including national, regional and local operators of lease-to-own stores; virtual
lease-to-own companies; traditional and e-commerce retailers; traditional and
online sellers of used merchandise; and from a growing number of various types
of consumer finance companies that enable our customers to shop at traditional
or online retailers; (ii) the challenges faced by many traditional
"brick-and-mortar" retailers, with respect to a decrease in the number of
consumers visiting those stores, especially younger consumers; and (iii)
commoditization of pricing in electronics. In response to these changing market
conditions, we are executing a strategic plan that focuses on the following
items and that we believe positions us for success over the long-term:
• Strengthen relationships of Progressive Leasing current retail partners;


• Focus on converting existing pipeline into Progressive Leasing retail

partners;

• Drive operational excellence in our Aaron's Business stores;

• Grow revenue and new customers through our omnichannel platform;


•      Invest and innovate to provide a superior customer experience while
       lowering our costs to serve; and

• Accelerate our vision of business transformation in the Aaron's Business

at a larger scale.



We continue to invest in various Aaron's Business transformation initiatives
including rapid customer onboarding, centralized decisioning and collections,
and the introduction of our next generation store concepts to appeal to our
changing target consumer market. In addition, we are renewing our focus on
generating customer demand and driving sales conversion rates through enhanced
sales strategies, branding and direct response marketing.
We also continue to execute on various Aaron's Business store optimization
initiatives, including strategic store consolidations. As a result of these
store optimization initiatives and other cost-reduction initiatives, the Company
initiated a new restructuring program during the first quarter of 2019 to
further optimize its Company-operated Aaron's store base portfolio, which
resulted in the closure and consolidation of 84 underperforming Company-operated
stores throughout the first three months of 2019. During the second quarter of
2019, the Company identified an additional 70 stores to be closed, consolidated,
or relocated, which were all closed by the end of the third quarter. The Company
also further rationalized its home office and field support staff, which
resulted in a reduction in employee headcount in those areas to more closely
align with current business conditions.
During 2017 and 2018, the Company acquired substantially all of the assets of
the store operations of 111 and 152 Aaron's-branded franchised stores,
respectively. The acquisitions are benefiting the Company's omnichannel platform
through added scale, strengthening its presence in certain geographic markets,
enhancing operational control, including compliance, and enabling the Company to
execute its business transformation initiatives on a broader scale.
Highlights
The following summarizes significant highlights from the three and nine months
ended September 30, 2019:
•      The Company reported revenues of $963.8 million in the third quarter of

2019 compared to $953.1 million for the third quarter of 2018. Earnings

before income taxes decreased to $51.7 million compared to $53.4 million

       during the third quarter of 2018.


•      Progressive Leasing reported revenues of $528.9 million in the third
       quarter of 2019, an increase of 4.8% over the third quarter of 2018.
       Calculated on a basis consistent with the January 2019 adoption of ASC
       842, Leases (see the "Use of Non-GAAP Financial Information" section
       below), Progressive Leasing revenues increased 20.1% over the third
       quarter of 2018. Progressive Leasing's revenue growth is due to an 18.6%

increase in total invoice volume, which was driven by a 20.5% increase in

       invoice volume per active door.


•      Progressive Leasing's earnings before income taxes increased to $53.5
       million compared to $40.8 million during the third quarter of 2018, due
       mainly to its higher revenue.



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• Aaron's Business revenues decreased to $426.3 million for the third

quarter of 2019, compared to $439.2 million in the prior year period. The

decrease is primarily due to the net reduction of 149 Company-operated

       stores during 2019 and a 2.9% decrease in same store revenues in the third
       quarter of 2019, partially offset by the acquisitions of various
       franchisees in 2018. The Company launched new sales and marketing
       initiatives during the third quarter, which led to an increase in new
       customer agreements but also resulted in insufficient labor capacity to
       handle the elevated workload on our stores. This capacity imbalance

created a shortfall in collections performance which had an unfavorable

       impact on lease revenues, same store revenues, and write-offs in the
       quarter.

• Aaron's Business earnings before income taxes decreased to $0.9 million

during the third quarter of 2019 compared to $15.6 million in the prior

year period. Earnings before income taxes for the Aaron's Business during

the third quarter of 2019 includes restructuring charges of $5.5 million

related to the Company's closure and consolidation of underperforming

stores.

• The Company generated cash from operating activities of $350.8 million for

the nine months ended September 30, 2019 compared to $363.0 million for

the comparable period in 2018. The decrease in net cash from operating

activities was impacted by net income tax refunds of $5.5 million during

the nine months ended September 30, 2019, compared to net income tax

refunds of $64.8 million in the same period in 2018.



Invoice Volume. We believe that invoice volume is a key performance indicator of
our Progressive Leasing segment. Invoice volume is defined as the retail price
of lease merchandise acquired and then leased to customers during the period,
net of returns. The following table presents total invoice volume for the
Progressive Leasing segment:
For the Three Months Ended September 30 (Unaudited and
In Thousands)                                                2019           

2018

Progressive Leasing Invoice Volume                      $    420,902     $  

355,005



The increase in invoice volume was driven by a 20.5% increase in invoice volume
per active door, partially offset by a 1.6% decrease in active doors.
Active Doors. Progressive Leasing active doors are comprised of both (i) each
retail store location where at least one virtual lease-to-own transaction has
been completed during the trailing three-month period; and (ii) with respect to
an e-commerce merchant, each state where at least one virtual lease-to-own
transaction has been completed through that e-commerce merchant during the
trailing three-month period. The following table presents active doors for the
Progressive Leasing segment:
Active Doors at September 30 (Unaudited)  2019      2018
Progressive Leasing Active Doors         19,926    20,258


The decrease in active door count was due primarily to store consolidation in
the mattress industry and our exit from a mobile phone provider, partially
offset by additions in other verticals.
Same Store Revenues. We believe that changes in same store revenues are a key
performance indicator of the Aaron's Business. For the three months ended
September 30, 2019, we calculated this amount by comparing revenues for the
three months ended September 30, 2019 to revenues for the comparable period in
2018 for all stores open for the entire 15-month period ended September 30,
2019, excluding stores that received lease agreements from other acquired,
closed or merged stores. For the nine months ended September 30, 2019, we
calculated this amount by comparing revenues for the nine months ended September
30, 2019 to revenues for the comparable period in 2018 for all stores open for
the entire 24-month period ended September 30, 2019, excluding stores that
received lease agreements from other acquired, closed or merged stores. Same
store revenues, which were impacted by lower collections activity as described
above, decreased 2.9% and 0.3% for the three and nine months ended September 30,
2019, respectively.
Seasonality
Our revenue mix is moderately seasonal for both our Progressive Leasing and
Aaron's Business segments. Adjusting for growth, the first quarter of each year
generally has higher revenues than any other quarter. This is primarily due to
realizing the full benefit of business that historically gradually increases in
the fourth quarter as a result of the holiday season, as well as the receipt by
our customers in the first quarter of federal and state income tax refunds. Our
customers will more frequently exercise the early purchase option on their
existing lease agreements or purchase merchandise off the showroom floor during
the first quarter of the year. We expect these trends to continue in future
periods. Due to the seasonality of our business, results for any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year.

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Key Components of Earnings Before Income Taxes
In this management's discussion and analysis section, we review our condensed
consolidated results. For the three and nine months ended September 30, 2019 and
the comparable prior year periods, some of the key revenue, cost and expense
items that affected earnings before income taxes were as follows:
Revenues. We separate our total revenues into six components: (i) lease revenues
and fees; (ii) retail sales; (iii) non-retail sales; (iv) franchise royalties
and fees; (v) interest and fees on loans receivable; and (vi) other. Lease
revenues and fees include all revenues derived from lease agreements at retail
locations serviced by Progressive Leasing and the Aaron's Business
Company-operated stores and e-commerce platform. Retail sales represent sales of
both new and returned lease merchandise from our Company-operated stores.
Non-retail sales primarily represent new merchandise sales to our franchisees.
Franchise royalties and fees represent fees from the sale of franchise rights
and royalty payments from franchisees, as well as other related income from our
franchised stores. Interest and fees on loans receivable primarily represents
merchant fees, finance charges and annual and other fees earned on loans
originated by DAMI. Other revenues primarily relate to revenues from leasing
real estate properties to unrelated third parties, as well as other
miscellaneous revenues.
Depreciation of Lease Merchandise. Depreciation of lease merchandise primarily
reflects the expense associated with depreciating merchandise held for lease and
leased to customers by Progressive Leasing and our Company-operated Aaron's
stores and through our e-commerce platform.
Retail Cost of Sales. Retail cost of sales represents the depreciated cost of
merchandise sold through our Company-operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost
of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, occupancy costs,
store maintenance, provision for lease merchandise write-offs, shipping and
handling, advertising and marketing, the provision for loan losses, intangible
asset amortization expense, software licensing expense and third-party
consulting expense, among other expenses.
Restructuring Expenses, Net. Restructuring expenses primarily represent the cost
of optimization efforts and cost reduction initiatives related to the Aaron's
Business' home office and field support functions. Restructuring expenses, net
are comprised principally of closed store operating lease right-of-use asset
impairment and operating lease charges, the impairment of vacant store
properties, including the planned exit from one of our store support buildings,
workforce reductions, other impairment charges and reversals of previously
recorded restructuring charges.
Other Operating Income, Net. Other operating income, net consists of gains or
losses on sales of Company-operated stores and delivery vehicles, fair value
adjustments on assets held for sale, gains or losses on other transactions
involving property, plant and equipment, and gains related to property damage
and business interruption insurance claim recoveries.
Interest Expense. Interest expense consists of interest incurred on the
Company's fixed and variable rate debt.
Impairment of Investment. Impairment of investment consists of an
other-than-temporary loss to fully impair the Company's investment in
PerfectHome.
Other Non-Operating (Expense) Income, Net. Other non-operating (expense) income,
net includes the impact of foreign currency remeasurement, as well as gains and
losses resulting from changes in the cash surrender value of Company-owned life
insurance related to the Company's deferred compensation plan.

                                       34
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Results of Operations - Three months ended September 30, 2019 and 2018

                                         Three Months Ended
                                            September 30,                Change
(In Thousands)                           2019          2018           $           %
REVENUES:
Lease Revenues and Fees               $ 906,776$ 880,871$ 25,905       2.9  %
Retail Sales                              8,854         7,620        1,234      16.2
Non-Retail Sales                         31,085        44,368      (13,283 )   (29.9 )
Franchise Royalties and Fees              8,087        10,153       (2,066 )   (20.3 )
Interest and Fees on Loans Receivable     8,687         9,508         (821 )    (8.6 )
Other                                       319           551         (232 )   (42.1 )
                                        963,808       953,071       10,737       1.1
COSTS AND EXPENSES:
Depreciation of Lease Merchandise       489,199       434,593       54,606      12.6
Retail Cost of Sales                      5,742         4,877          865      17.7
Non-Retail Cost of Sales                 24,913        35,214      (10,301 )   (29.3 )
Operating Expenses                      383,264       420,602      (37,338 )    (8.9 )
Restructuring Expenses, Net               5,516           537        4,979       nmf
Other Operating Income, Net                (329 )         (38 )       (291 )     nmf
                                        908,305       895,785       12,520       1.4
OPERATING PROFIT                         55,503        57,286       (1,783 )    (3.1 )
Interest Income                             360            18          342       nmf
Interest Expense                         (3,991 )      (3,735 )        256       6.9
Other Non-Operating Expense, Net           (207 )        (154 )        (53 )   (34.4 )
EARNINGS BEFORE INCOME TAXES             51,665        53,415       (1,750 )    (3.3 )
INCOME TAXES                             11,864         9,695        2,169      22.4
NET EARNINGS                          $  39,801$  43,720$ (3,919 )    (9.0 )%


nmf-Calculation is not meaningful
Revenues
Information about our revenues by reportable segment is as follows:
                                          Three Months Ended
                                            September 30,                Change
(In Thousands)                            2019          2018          $           %
REVENUES:
Progressive Leasing                    $  528,850$ 504,407$ 24,443      4.8  %
Aaron's Business                          426,271      439,156     (12,885 )   (2.9 )
DAMI                                        8,687        9,508        (821 )   (8.6 )
Total Revenues from External Customers $  963,808$ 953,071$ 10,737      1.1  %



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The following table presents revenue by source and by segment for the three months ended September 30, 2019:

                                                     Three Months Ended September 30, 2019
                                               Progressive      Aaron's
(In Thousands)                                   Leasing1       Business      DAMI        Total
Lease Revenues and Fees                      $      528,850$  377,926   $       -   $ 906,776
Retail Sales                                              -        8,854           -       8,854
Non-Retail Sales                                          -       31,085           -      31,085
Franchise Royalties and Fees                              -        8,087           -       8,087
Interest and Fees on Loans Receivable                     -            -       8,687       8,687
Other                                                     -          319           -         319
Total Revenues                               $      528,850$  426,271$   8,687$ 963,808


1 For the three months ended September 30, 2019, the Progressive Leasing
provision for returns and uncollectible renewal payments was $78.4 million which
was recorded as a reduction to Lease Revenues and Fees as a result of the
Company's adoption of ASC 842, Leases. See Note 1 to these condensed
consolidated financial statements for more information regarding the impacts of
ASC 842 on the Company's financial results.
The following table presents revenue by source and by segment for the three
months ended September 30, 2018:
                                                     Three Months Ended September 30, 2018
                                               Progressive      Aaron's
(In Thousands)                                   Leasing        Business      DAMI        Total
Lease Revenues and Fees                      $      504,407$  376,464   $       -   $ 880,871
Retail Sales                                              -        7,620           -       7,620
Non-Retail Sales                                          -       44,368           -      44,368
Franchise Royalties and Fees                              -       10,153           -      10,153
Interest and Fees on Loans Receivable                     -            -       9,508       9,508
Other                                                     -          551           -         551
Total Revenues                               $      504,407$  439,156$   9,508$ 953,071
Progressive Bad Debt Expense                         64,213            -           -      64,213
Total Revenues, net of Progressive Bad Debt
Expense1                                     $      440,194$  439,156

$ 9,508$ 888,858



1 See the "Use of Non-GAAP Financial Information" section below.
Progressive Leasing. Progressive Leasing segment revenues increased primarily
due to an increase in total invoice volume, which was driven by a 20.5% increase
in invoice volume per active door, partially offset a 1.6% decrease in active
doors and the recognition of a provision for returns and uncollectible renewal
payments of $78.4 million as a reduction to lease revenues in accordance with
ASC 842 beginning in 2019.
Aaron's Business. The acquisitions of various franchisees throughout 2017, 2018
and 2019 impacted the Aaron's Business in the form of an increase in lease
revenues and fees, partially offset by lower non-retail sales and lower
franchise royalties and fees during the three months ended September 30, 2019
compared to the same period in the prior year.
Aaron's Business segment revenues decreased during the three months ended
September 30, 2019 due to a $13.3 million decrease in non-retail sales partially
offset by a $1.5 million increase in lease revenues and fees. The decrease in
non-retail sales is primarily due to the net reduction of 189 franchised stores
resulting from the Company's acquisition of various franchisees during the
15-month period ended September 30, 2019 and lower product purchases by
franchisees. Lease revenues and fees increased during the three months ended
September 30, 2019 primarily due to the franchisee acquisitions during 2018,
partially offset by the net reduction of 149 stores during 2019 and a 2.9%
decrease in same store revenues. The Company launched new sales and marketing
initiatives during the third quarter, which led to an increase in new customer
agreements but also resulted in insufficient labor capacity to handle the
elevated workload on our stores. This capacity imbalance created a shortfall in
collections performance which had an unfavorable impact on lease revenues, same
store revenues, and write-offs in the quarter. Aaron's Business e-commerce
revenues were approximately 10% of Aaron's Business total lease revenues and
fees during the three months ended September 30, 2019.

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Operating Expenses
Information about certain significant components of operating expenses for the
third quarter of 2019 as compared to the third quarter of 2018 is as follows:
                                              Three Months Ended
                                                September 30,                 Change
(In Thousands)                                2019          2018           $           %
Personnel Costs                            $  173,762$ 164,587$   9,175       5.6  %
Occupancy Costs                                59,264       56,860        2,404       4.2
Provision for Lease Merchandise Write-Offs     68,928       54,671       14,257      26.1
Bad Debt Expense                                  106       64,235      (64,129 )   (99.8 )
Shipping and Handling                          17,592       18,392         (800 )    (4.3 )
Advertising                                     9,189        9,814         (625 )    (6.4 )
Provision for Loan Losses                       6,068        6,471         (403 )    (6.2 )
Intangible Amortization                         7,938        8,807         (869 )    (9.9 )
Other Operating Expenses                       40,417       36,765        3,652       9.9
Operating Expenses                         $  383,264$ 420,602$ (37,338 )    (8.9 )%


As a percentage of total revenues, operating expenses decreased to 39.8% in 2019
from 44.1% in the same period in 2018. Calculated on a basis consistent with the
January 2019 adoption of ASC 842, Leases, operating expenses as a percentage of
total revenues for the three months ended September 30, 2019 decreased to 39.8%
in 2019 from 40.1% in the same period in 2018.
Personnel costs increased by $6.0 million at our Progressive Leasing segment and
by $3.5 million in our Aaron's Business segment. The increase in personnel costs
is due to hiring to support the growth of Progressive Leasing and the Aaron's
Business transformation initiatives and the Aaron's Business acquisition of 152
franchised stores during 2018, partially offset by the reduction of store
support center and field support staff from our Aaron's Business restructuring
programs in 2018 and 2019.
Occupancy costs increased primarily due to the acquisition of franchisee stores,
partially offset by the closure of underperforming stores as part of our
restructuring actions.
The provision for lease merchandise write-offs as a percentage of lease revenues
for the Progressive Leasing segment was 7.7% in 2019 compared to 7.8% in 2018,
calculated on a basis consistent with the January 2019 adoption of ASC 842,
Leases. The provision for lease merchandise write-offs as a percentage of lease
revenues for the Aaron's Business increased to 7.4% in 2019 from 5.4% in 2018.
This increase is due to the lower collections activity in the quarter resulting
from the redeployment of store labor towards enhanced sales activities described
above and to an increase in the number and type of promotional offerings, higher
ticket leases, store closure activity and an increasing mix of e-commerce as a
percentage of revenues during the three months ended September 30, 2019.
Bad debt expense decreased during the three months ended September 30, 2019. As
discussed above, the Company's adoption of ASC 842 resulted in the Company
classifying Progressive Leasing bad debt expense, which is reported within
operating expenses in 2018 and prior periods, as a reduction of lease revenue
and fees within the condensed consolidated statements of earnings beginning
January 1, 2019. The bad debt expense for the three months ended September 30,
2019 relates to uncollectible merchant accounts receivable for cardholder
refunded charges at DAMI.
Other operating expenses increased due to higher consulting expenses and
software licensing expense incurred during the three months ended September 30,
2019.
Other Costs and Expenses
Depreciation of lease merchandise. As a percentage of total lease revenues and
fees, depreciation of lease merchandise increased to 53.9% from 49.3% in the
prior year period, primarily due to a shift in lease merchandise mix from the
Aaron's Business to Progressive Leasing, which is consistent with the increasing
proportion of Progressive Leasing's revenue to total lease revenue. Progressive
Leasing generally experiences higher depreciation as a percentage of lease
revenues because, among other factors, its merchandise has a shorter average
life on lease, a higher rate of customer early buyouts, and the merchandise is
generally purchased at retail prices compared to the Aaron's Business, which
procures merchandise at wholesale prices. Progressive Leasing's depreciation of
lease merchandise as a percentage of Progressive Leasing's lease revenues and
fees was 68.3% in 2019 compared to 68.7% in 2018, calculated on a basis
consistent with the January 2019 adoption of ASC 842, Leases, due to a decrease
in revenue from early buyouts, which has a lower margin, quarter over quarter.
Aaron's Business depreciation of lease merchandise as a percentage of Aaron's
Business lease revenues and fees decreased to 33.9% in 2019 from 35.1% in the
prior year due to a decrease in revenue from early buyouts.

                                       37
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Retail cost of sales. Retail cost of sales as a percentage of retail sales
increased to 64.9% from 64.0% primarily due to higher sales price discounting of
pre-leased merchandise during 2019 as compared to 2018.
Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail
sales increased to 80.1% from 79.4% primarily due to lower inventory purchase
cost during 2018 as compared to 2019.
Restructuring Expenses, Net. Restructuring activity for the three months ended
September 30, 2019 was comprised of expenses of $5.5 million, which were
primarily to record closed store operating lease right-of-use asset impairment
and operating lease charges, the impairment of vacant store properties,
including the planned exit from one of our store support buildings, workforce
reductions, and a loss on the sale of six Canadian stores to a third party.
Restructuring activity for the three months ended September 30, 2018 was
comprised of net charges of $0.5 million to record changes in assumptions
related to Aaron's contractual lease obligations for closed stores partially
offset by gains recognized on the sale of properties closed under the
restructuring program.
Other Operating Income, Net
Information about the components of other operating income, net is as follows:
                                              Three Months Ended
                                                September 30,                     Change
(In Thousands)                               2019             2018            $             %

Net gains on sales of delivery vehicles $ (539 )$ (184 ) $

    (355 )         nmf
Impairment charges and net losses on
asset dispositions, assets held for
sale and other                                  210              146             64          43.8
Other operating income, net             $      (329 )$      (38 )$     (291 )         nmf


Operating Profit
Interest expense. Interest expense increased to $4.0 million in 2019 from $3.7
million in 2018 due primarily to a higher outstanding debt balance during the
three months ended September 30, 2019.
Other non-operating expense, net. Other non-operating expense, net includes the
impact of foreign currency remeasurement, as well as gains or losses resulting
from changes in the cash surrender value of Company-owned life insurance related
to the Company's deferred compensation plan. Foreign exchange remeasurement
losses resulting from net changes in the value of the U.S. dollar against the
Canadian dollar were not significant during the three months ended September 30,
2019 or 2018. Losses related to the changes in the cash surrender value of
Company-owned life insurance were $0.1 million during the three months ended
September 30, 2019 and were not significant during the three months ended
September 30, 2018.
Earnings Before Income Taxes
Information about our earnings (loss) before income taxes by reportable segment
is as follows:
                                        Three Months Ended
                                          September 30,                Change
(In Thousands)                          2019          2018          $           %
EARNINGS (LOSS) BEFORE INCOME TAXES:
Progressive Leasing                  $  53,473$ 40,839$ 12,634      30.9  %
Aaron's Business                           932       15,641      (14,709 )   (94.0 )
DAMI                                    (2,740 )     (3,065 )        325      10.6

Total Earnings Before Income Taxes $ 51,665$ 53,415$ (1,750 )

(3.3 )%



The factors impacting the change in earnings before income taxes are discussed
above.
Income Tax Expense
Income tax expense increased to $11.9 million for the three months ended
September 30, 2019 compared to $9.7 million in the prior year comparable period
due to an increase in the effective tax rate to 23.0% in 2019 from 18.2% in
2018. The increase in the effective tax rate is due to a measurement period
adjustment of $2.5 million income tax benefit related to the Tax Act that was
recognized during the three months ended September 30, 2018.

                                       38
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Results of Operations - Nine months ended September 30, 2019 and 2018

                                            Nine Months Ended
                                              September 30,                   Change
(In Thousands)                            2019            2018             $           %
REVENUES:
Lease Revenues and Fees               $ 2,758,498$ 2,596,876$ 161,622       6.2  %
Retail Sales                               30,561          22,728         7,833      34.5
Non-Retail Sales                          102,190         151,259       (49,069 )   (32.4 )
Franchise Royalties and Fees               25,899          35,140        (9,241 )   (26.3 )
Interest and Fees on Loans Receivable      25,943          28,258        (2,315 )    (8.2 )
Other                                         961           1,478          (517 )   (35.0 )
                                        2,944,052       2,835,739       108,313       3.8
COSTS AND EXPENSES:
Depreciation of Lease Merchandise       1,464,887       1,290,015       174,872      13.6
Retail Cost of Sales                       20,025          14,695         5,330      36.3
Non-Retail Cost of Sales                   83,057         130,302       (47,245 )   (36.3 )
Operating Expenses                      1,154,056       1,199,171       (45,115 )    (3.8 )
Restructuring Expenses                     37,535             561        36,974       nmf
Other Operating Income, Net                (4,712 )          (286 )      (4,426 )     nmf
                                        2,754,848       2,634,458       120,390       4.6
OPERATING PROFIT                          189,204         201,281       (12,077 )    (6.0 )
Interest Income                             1,405             374         1,031       nmf
Interest Expense                          (13,247 )       (11,868 )       1,379      11.6
Impairment of Investment                        -         (20,098 )     (20,098 )     nmf
Other Non-Operating Income, Net             1,430             458           972       nmf
EARNINGS BEFORE INCOME TAXES              178,792         170,147         8,645       5.1
INCOME TAXES                               40,263          35,680         4,583      12.8
NET EARNINGS                          $   138,529$   134,467$   4,062       3.0  %

nmf-Calculation is not meaningful

                                       39
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Revenues

Information about our revenues by reportable segment is as follows:

                                            Nine Months Ended
                                              September 30,                 Change
(In Thousands)                             2019           2018            $           %
REVENUES:
Progressive Leasing                    $ 1,568,584$ 1,474,590$  93,994      6.4  %
Aaron's Business                         1,349,525      1,332,891       16,634      1.2
DAMI                                        25,943         28,258      

(2,315 ) (8.2 ) Total Revenues from External Customers $ 2,944,052$ 2,835,739$ 108,313 3.8 %

The following table presents revenue by source and by segment for the nine months ended September 30, 2019:

                                                      Nine Months Ended September 30, 2019
                                              Progressive      Aaron's
(In Thousands)                                  Leasing1       Business       DAMI         Total
Lease Revenues and Fees                      $  1,568,584$  1,189,914   $       -   $ 2,758,498
Retail Sales                                            -         30,561           -        30,561
Non-Retail Sales                                        -        102,190           -       102,190
Franchise Royalties and Fees                            -         25,899           -        25,899
Interest and Fees on Loans Receivable                   -              -      25,943        25,943
Other                                                   -            961           -           961
Total Revenues                               $  1,568,584$  1,349,525$  25,943$ 2,944,052


1 For the nine months ended September 30, 2019, the Progressive Leasing
provision for returns and uncollectible renewal payments was $193.9 million
which was recorded as a reduction to Lease Revenues and Fees as a result of the
Company's adoption of ASC 842, Leases. See Note 1 to these condensed
consolidated financial statements for more information regarding the impacts of
ASC 842 on the Company's financial results.
The following table presents revenue by source and by segment for the nine
months ended September 30, 2018:
                                                      Nine Months Ended September 30, 2018
                                              Progressive      Aaron's
(In Thousands)                                  Leasing        Business       DAMI         Total
Lease Revenues and Fees                      $  1,474,590$  1,122,286   $       -   $ 2,596,876
Retail Sales                                            -         22,728           -        22,728
Non-Retail Sales                                        -        151,259           -       151,259
Franchise Royalties and Fees                            -         35,140           -        35,140
Interest and Fees on Loans Receivable                   -              -      28,258        28,258
Other                                                   -          1,478           -         1,478
Total Revenues                               $  1,474,590$  1,332,891$  28,258$ 2,835,739
Progressive Bad Debt Expense                      160,773              -           -       160,773
Total Revenues, net of Progressive Bad Debt
Expense1                                     $  1,313,817$  1,332,891

$ 28,258$ 2,674,966



1 See the "Use of Non-GAAP Financial Information" section below.
Progressive Leasing. Progressive Leasing segment revenues increased primarily
due to an increase in total invoice volume, which was driven by an increase in
invoice volume per active door, partially offset by a decrease in active doors
and the recognition of a provision for returns and uncollectible renewal
payments of $193.9 million as a reduction to lease revenues in accordance with
ASC 842 beginning in 2019.
Aaron's Business. The acquisitions of various franchisees throughout 2017, 2018
and 2019 impacted the Aaron's Business in the form of an increase in lease
revenues and fees, partially offset by lower non-retail sales and lower
franchise royalties and fees during the nine months ended September 30, 2019
compared to the same period in the prior year.

                                       40
--------------------------------------------------------------------------------

Aaron's Business lease revenues and fees increased $67.6 million during the nine
months ended September 30, 2019 primarily due to franchisee acquisitions during
2018, partially offset by the net reduction of 149 underperforming stores during
2019 and a 0.3% decrease in same store revenues. This increase in Aaron's
Business segment lease revenues was partially offset by a $49.1 million decrease
in non-retail sales primarily due to the net reduction of 228 franchised stores
resulting from the Company's acquisition of various franchisees during the
24-month period ended September 30, 2019, and lower product purchases by
franchisees. Aaron's Business e-commerce revenues were approximately 9% of
Aaron's Business total lease revenues and fees during the nine months ended
September 30, 2019.
Operating Expenses
Information about certain significant components of operating expenses is as
follows:
                                                 Nine Months Ended
                                                   September 30,                     Change
(In Thousands)                                 2019            2018             $              %
Personnel Costs                            $   531,725$   498,201$   33,524          6.7  %
Occupancy Costs                                174,833         164,780         10,053          6.1
Provision for Lease Merchandise Write-Offs     186,922         146,091         40,831         27.9
Bad Debt Expense                                 1,272         160,886       (159,614 )      (99.2 )
Shipping and Handling                           56,121          55,485            636          1.1
Advertising                                     39,366          26,197         13,169         50.3
Provision for Loan Losses                       15,291          16,011           (720 )       (4.5 )
Intangible Amortization                         27,797          23,745          4,052         17.1
Other Operating Expenses                       120,729         107,775         12,954         12.0
Operating Expenses                         $ 1,154,056$ 1,199,171$  (45,115 )       (3.8 )%


As a percentage of total revenues, operating expenses decreased to 39.2% in the
nine months ended September 30, 2019 from 42.3% in the same period in 2018.
Calculated on a basis consistent with the January 2019 adoption of ASC 842,
Leases, operating expenses as a percentage of total revenues for the nine months
ended September 30, 2019 increased to 39.2% in 2019 from 38.8% in the same
period in 2018.
Personnel costs increased by $18.4 million in our Aaron's Business segment and
$16.0 million at our Progressive Leasing segment. The increase in personnel
costs during the nine months ended September 30, 2019 is primarily due to the
Aaron's Business acquisition of 152 franchised stores during 2018, hiring to
support Aaron's Business transformation initiatives and the growth of
Progressive Leasing, partially offset by the closure and merger of
underperforming stores and a reduction of store support center and field support
staff from our Aaron's Business restructuring programs in 2018 and 2019.
Occupancy costs increased primarily due to the acquisition of franchisee stores,
partially offset by the closure of underperforming stores as part of our
restructuring actions.
The provision for lease merchandise write-offs increased during the nine months
ended September 30, 2019 primarily due to Progressive Leasing's invoice volume
growth. The provision for lease merchandise write-offs as a percentage of lease
revenues for the Progressive Leasing segment was 7.4% in both 2019 and 2018,
calculated on a basis consistent with the January 2019 adoption of ASC 842,
Leases. The provision for lease merchandise write-offs as a percentage of lease
revenues for the Aaron's Business increased to 5.9% in 2019 from 4.4% in 2018.
This increase is due to the lower collections activity in the third quarter of
2019 resulting from the redeployment of store labor towards enhanced sales
activities and to an increase in the number and type of promotional offerings,
higher ticket leases, store closure activity and an increasing mix of e-commerce
as a percentage of revenues during the nine months ended September 30, 2019.
Bad debt expense decreased during the nine months ended September 30, 2019. As
discussed above, the Company's adoption of ASC 842 resulted in the Company
classifying Progressive Leasing bad debt expense, which is reported within
operating expenses in 2018 and prior periods, as a reduction of lease revenue
and fees within the condensed consolidated statements of earnings beginning
January 1, 2019. The bad debt expense for the nine months ended September 30,
2019 relates to uncollectible merchant accounts receivable for cardholder
refunded charges at DAMI.
Advertising expense increased during the nine months ended September 30, 2019
due to the Aaron's Business rebranding campaign and direct response marketing
initiatives.
Intangible amortization expense increased primarily due to additional intangible
assets recorded as a result of the acquisition of 152 franchised stores
throughout 2018.
Other operating expenses increased due to higher merchant expenses at
Progressive Leasing due to the growth in invoice volume and higher software
licensing expense incurred during the nine months ended September 30, 2019.

                                       41
--------------------------------------------------------------------------------

Other Costs and Expenses
Depreciation of lease merchandise. As a percentage of total lease revenues and
fees, depreciation of lease merchandise increased to 53.1% from 49.7% in the
prior year period, primarily due to a shift in lease merchandise mix from the
Aaron's Business to Progressive Leasing, which is consistent with the increasing
proportion of Progressive Leasing's revenue to total lease revenue. Progressive
Leasing generally experiences higher depreciation as a percentage of lease
revenues because, among other factors, its merchandise has a shorter average
life on lease, a higher rate of early buyouts, and the merchandise is generally
purchased at retail prices compared to the Aaron's Business, which procures
merchandise at wholesale prices. Progressive Leasing's depreciation of lease
merchandise as a percentage of Progressive Leasing's lease revenues and fees was
68.0% in 2019 compared to 69.2% in 2018, calculated on a basis consistent with
the January 2019 adoption of ASC 842, Leases, due to a decrease in revenue from
early buyouts, which has a lower margin, quarter over quarter. Aaron's Business
depreciation of lease merchandise as a percentage of Aaron's Business lease
revenues and fees decreased to 33.5% in 2019 from 34.0% in the prior year.
Retail cost of sales. Retail cost of sales as a percentage of retail sales
increased to 65.5% from 64.7% primarily due to higher discounting of pre-leased
merchandise during 2019 as compared to 2018.
Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail
sales decreased to 81.3% from 86.1% primarily due to lower inventory purchase
cost during 2019 as compared to 2018.
Restructuring Expenses, Net. Restructuring activity for the nine months ended
September 30, 2019 resulted in expenses of $37.5 million, which were primarily
to record closed store operating lease right-of-use asset impairment and
operating lease charges, the impairment of vacant store properties, including
the planned exit from one of our store support buildings, workforce reductions,
and other impairment charges.
Other Operating Income, Net
Information about the components of other operating income, net is as follows:
                                             Nine Months Ended
                                               September 30,                    Change
(In Thousands)                              2019            2018            $             %
Losses (gains) on sales of stores and
customer agreements                     $         4     $      (46 )$       50          nmf
Net gains on sales of delivery vehicles        (869 )         (629 )         (240 )      (38.2 )
Gain on insurance recoveries                 (4,527 )            -         (4,527 )        nmf
Impairment charges and net losses on
asset dispositions, assets held for
sale and other                                  680            389            291         74.8
Other operating income, net             $    (4,712 )$     (286 )$   (4,426 )        nmf


nmf-Calculation is not meaningful
The gain on insurance recoveries of $4.5 million during the nine months ended
September 30, 2019 relates to payments received from insurance carriers for
Hurricanes Harvey and Irma property and business interruption claims in excess
of the related property insurance receivables.
Operating Profit
Interest expense. Interest expense increased to $13.2 million for the nine
months ended September 30, 2019 from $11.9 million in 2018 due primarily to a
higher outstanding debt balance during the nine months ended September 30, 2019.
Impairment of investment. During the nine months ended September 30, 2018, the
Company recorded an other-than-temporary loss of $20.1 million to impair its
remaining outstanding investment in PerfectHome.

                                       42
--------------------------------------------------------------------------------

Other non-operating income, net. Other non-operating income, net includes the
impact of foreign currency remeasurement, as well as gains or losses resulting
from changes in the cash surrender value of Company-owned life insurance related
to the Company's deferred compensation plan. Foreign exchange remeasurement
gains and losses were not significant during the nine months ended September 30,
2019 or 2018. Net gains related to the changes in the cash surrender value of
Company-owned life insurance were $1.5 million and $0.4 million during the nine
months ended September 30, 2019 and 2018, respectively.
Earnings Before Income Taxes
Information about our earnings (loss) before income taxes by reportable segment
is as follows:
                                         Nine Months Ended
                                           September 30,                Change
(In Thousands)                          2019          2018           $           %
EARNINGS (LOSS) BEFORE INCOME TAXES:
Progressive Leasing                  $ 167,267$ 120,393$ 46,874      38.9  %
Aaron's Business                        18,658        56,417      (37,759 )   (66.9 )
DAMI                                    (7,133 )      (6,663 )       (470 )    (7.1 )
Total Earnings Before Income Taxes   $ 178,792$ 170,147$  8,645

5.1 %



The factors impacting the change in earnings before income taxes are discussed
above.
Income Tax Expense
Income tax expense increased to $40.3 million for the nine months ended
September 30, 2019 compared to $35.7 million for the same period in 2018 due to
an increase in the effective tax rate to 22.5% in 2019 from 21.0% in 2018. The
increase in the effective tax rate is due to higher non-deductible expenses
during the nine months ended September 30, 2019 compared to the same period in
2018 and measurement period adjustments of $2.3 million income tax benefits
related to the Tax Act that were recognized during the nine months ended
September 30, 2018.


                                       43
--------------------------------------------------------------------------------

Overview of Financial Position
The major changes in the condensed consolidated balance sheet from December 31,
2018 to September 30, 2019 include:
•      Cash and cash equivalents increased $135.0 million to $150.3 million at

September 30, 2019. For additional information, refer to the "Liquidity

and Capital Resources" section below.

• As a result of the adoption of ASC 842 as of January 1, 2019, the Company

has operating lease right-of-use assets and operating lease liabilities of

       $330.5 million and $374.4 million, respectively, as of September 30, 2019.


•      Income tax receivable decreased $13.2 million due primarily to net income
       tax refunds of $5.5 million received during the nine months ended
       September 30, 2019.

• Accounts payable and accrued expenses decreased $38.9 million primarily

due to the seasonality of the Company's lease merchandise purchases and

timing of related payments. Additionally, upon transition to ASC 842, the

remaining balances of the Company's deferred rent, lease incentives, and

closed store reserve, which were previously recorded within accounts

payable and accrued expenses, were reclassified as a reduction to the

operating lease right-of-use asset in the accompanying condensed

consolidated balance sheet.

• Debt decreased $77.6 million due primarily to scheduled repayments on the

Company's senior unsecured notes.



Liquidity and Capital Resources
General
Our primary capital requirements consist of buying merchandise for the
operations of Progressive Leasing and the Aaron's Business. As we continue to
grow, the need for additional lease merchandise is expected to remain our major
capital requirement. Other capital requirements include (i) purchases of
property, plant and equipment; (ii) expenditures for acquisitions, including
franchisee acquisitions; (iii) expenditures related to our corporate operating
activities; (iv) personnel expenditures; (v) income tax payments; (vi) funding
of loans receivable for DAMI; and (vii) servicing our outstanding debt
obligations. The Company has also historically paid quarterly cash dividends and
periodically repurchases stock. Our capital requirements have been financed
through:
• cash flows from operations;


• private debt offerings;


• bank debt; and


• stock offerings.


As of September 30, 2019, the Company had $150.3 million of cash and $386.2
million of availability under its revolving credit facility.
Cash Provided by Operating Activities
Cash provided by operating activities was $350.8 million and $363.0 million
during the nine months ended September 30, 2019 and 2018, respectively. The
$12.2 million decrease in operating cash flows was primarily driven by net tax
refunds of $5.5 million during the nine months ended September 30, 2019 compared
to net tax refunds of $64.8 million during the nine months ended September 30,
2018. Other changes in cash provided by operating activities are discussed above
in our discussion of results for the nine months ended September 30, 2019.
Cash Used in Investing Activities
Cash used in investing activities was $83.2 million and $192.3 million during
the nine months ended September 30, 2019 and 2018, respectively. The $109.2
million decrease in investing cash outflows was primarily due to $128.2 million
lower outflows for the acquisition of businesses and customer agreements,
partially offset by (i) $14.1 million of additional outflows related to the
purchase of property, plant and equipment and (ii) $3.6 million lower proceeds
from DAMI loans receivable during the nine months ended September 30, 2019 as
compared to the same period in 2018.
Cash Used in Financing Activities
Cash used in financing activities was $132.7 million and $186.7 million during
the nine months ended September 30, 2019 and 2018, respectively. The $54.0
million decrease in financing cash outflows was primarily due to a $60.6 million
decrease in the Company's repurchases of outstanding common stock partially
offset by a $6.5 million increase in net repayments of debt during the nine
months ended September 30, 2019 as compared to the same period in 2018.

                                       44
--------------------------------------------------------------------------------

Share Repurchases
We purchase our stock in the market from time to time as authorized by our Board
of Directors. During the nine months ended September 30, 2019, the Company
purchased approximately 642,284 shares for $39.4 million. As of September 30,
2019, we have the authority to purchase additional shares up to our remaining
authorization limit of $291.8 million.
Dividends
We have paid quarterly cash dividends for 32 consecutive years. At its November
2018 meeting, our board of directors increased the quarterly dividend to $0.035
per share from $0.03 per share. Aggregate dividend payments for the nine months
ended September 30, 2019 were $7.1 million.
Subject to sufficient operating profits, any future capital needs and other
contingencies, we currently expect to continue our policy of paying quarterly
cash dividends.
Debt Financing
As of September 30, 2019, $225.0 million in term loans were outstanding under
our term loan and revolving credit agreement that matures on September 18, 2022.
The total available credit under our revolving credit facility as of
September 30, 2019 was $386.2 million. The revolving credit and term loan
agreement includes an uncommitted incremental facility increase option (an
"accordion facility") which, subject to certain terms and conditions, permits
the Company at any time prior to the maturity date to request an increase in
extensions of credit available thereunder by an aggregate additional principal
amount of up to $250.0 million.
As of September 30, 2019, the Company had outstanding $120.0 million in
aggregate principal amount of senior unsecured notes issued in a private
placement in connection with the April 14, 2014Progressive Leasing acquisition.
The notes bear interest at the rate of 4.75% per year and mature on April 14,
2021. Quarterly payments of interest commenced July 14, 2014, and annual
principal payments of $60.0 million commenced April 14, 2017.
Our revolving credit and term loan agreement contains certain financial
covenants, which include requirements that the Company maintain ratios of (i)
adjusted EBITDA plus lease expense to fixed charges of no less than 2.50:1.00
and (ii) total debt to adjusted EBITDA of no greater than 3.00:1.00. In each
case, adjusted EBITDA refers to the Company's consolidated net income before
interest and tax expense, depreciation (other than lease merchandise
depreciation), amortization expense, and other cash and non-cash charges. If we
fail to comply with these covenants, we will be in default under these
agreements, and all amounts could become due immediately. We are in compliance
with all of these covenants at September 30, 2019 and believe that we will
continue to be in compliance in the future.

                                       45
--------------------------------------------------------------------------------

Commitments

Income Taxes
During the nine months ended September 30, 2019, we received net tax refunds of
$5.5 million. Within the next three months, we anticipate we will make
$1.0 million in estimated tax payments for U.S. federal income taxes and
estimated payments of $0.3 million for Canadian income taxes as well as an
estimated $1.0 million for state income taxes.
The Tax Act, which was enacted in December 2017, provides for 100% expense
deduction of certain qualified depreciable assets, including lease merchandise
inventory, purchased by the Company after September 27, 2017 (but would be
phased down starting in 2023). Because of our sales and lease ownership model,
in which the Company remains the owner of merchandise on lease, we benefit more
from bonus depreciation, relatively, than traditional furniture, electronics and
appliance retailers. The Company made periodic tax payments throughout 2017
based on the tax laws in effect at that time. As a result of the Tax Act, the
Company applied for and received, during the three months ended March 31, 2018,
a $77 million refund from the Internal Revenue Service (the "IRS") for the 2017
tax year.
We estimate the tax deferral associated with bonus depreciation from the Tax Act
and the prior tax legislation is approximately $282.0 million as of December 31,
2018, of which approximately 87% is expected to reverse in 2019 and most of the
remainder during 2020. These amounts exclude bonus depreciation the Company will
receive on qualifying expenditures after December 31, 2018.
Franchise Loan Guarantee
We have guaranteed the borrowings of certain independent franchisees under a
franchise loan agreement with several banks, under which the maximum facility
commitment amount under the franchisee loan program was $55.0 million as of
September 30, 2019. At September 30, 2019, the total amount that we might be
obligated to repay in the event franchisees defaulted was $29.8 million.
However, due to franchisee borrowing limits, we believe any losses associated
with defaults would be substantially mitigated through recovery of lease
merchandise and other assets. Since the inception of the franchise loan program
in 1994, we have had no significant associated losses. We believe the likelihood
that the Company would fund any significant amounts in connection with these
commitments to be remote. On October 11, 2019, the Company amended its franchise
loan facility to (i) reduce the total commitment amount from $55.0 million to
$40.0 million; and (ii) extend the maturity date to October 22, 2020.
Contractual Obligations and Commitments
As part of our ongoing operations, we enter into various arrangements that
obligate us to make future payments, including debt agreements, operating
leases, and other purchase obligations. The future cash commitments owed under
these arrangements generally fluctuate in the normal course of business as we,
for example, borrow on or pay down our revolving lines of credit, make scheduled
payments on other debt, leases or purchase obligations and renegotiate
arrangements or enter into new arrangements. Nonetheless, as of September 30,
2019, there were no material changes outside the normal course of business in
our material cash commitments and contractual obligations from those reported in
our Annual Report on Form 10-K for the year ended December 31, 2018.
Unfunded Lending Commitments
The Company, through its DAMI business, has unfunded lending commitments
totaling approximately $262.3 million and $316.4 million as of September 30,
2019 and December 31, 2018, respectively, that do not give rise to revenues and
cash flows. These unfunded commitments arise in the ordinary course of business
from credit card agreements with individual cardholders that give them the
ability to borrow, against unused amounts, up to the maximum credit limit
assigned to their account. While these unfunded amounts represented the total
available unused lines of credit, the Company does not anticipate that all
cardholders will utilize their entire available line at any given point in time.
Commitments to extend unsecured credit are agreements to lend to a cardholder so
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The reserve for losses on unfunded loan commitments, which is
included in accounts payable and accrued expenses in the condensed consolidated
balance sheets, is calculated by the Company based on historical customer usage
of available credit and is approximately $0.5 million as of September 30, 2019
and December 31, 2018, respectively.
Critical Accounting Policies
Refer to the 2018 Annual Report.

                                       46

--------------------------------------------------------------------------------


Recent Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements for a
discussion of recently issued accounting pronouncements, including
pronouncements that were adopted in the current year.
Use of Non-GAAP Financial Information
The "Results of Operations" sections above disclose non-GAAP revenues as if the
lessor accounting impacts of ASC 842 were in effect for the three and nine
months ended September 30, 2018. "Total Revenues, net of Progressive Bad Debt
Expense" and the related percentages for the comparable prior year periods are a
supplemental measure of our performance that are not calculated in accordance
with generally accepted accounting principles in the United States ("GAAP") in
place during 2018. These non-GAAP measures assume that Progressive bad debt
expense is recorded as a reduction to lease revenues and fees instead of within
operating expenses in 2018.
Management believes these non-GAAP measures for 2018 provide relevant and useful
information for users of our financial statements, as it provides comparability
with the financial results we are reporting beginning in 2019 when ASC 842
became effective and we began reporting Progressive bad debt expense as a
reduction to lease revenues and fees. We believe these non-GAAP measures provide
management and investors the ability to better understand the results from the
primary operations of our business in 2019 compared with 2018 by classifying
Progressive bad debt expense consistently between the periods.
These non-GAAP financial measures should not be used as a substitute for, or
considered superior to, measures of financial performance prepared in accordance
with GAAP.

© Edgar Online, source Glimpses

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