THE AARON'S COMPANY, INC. 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 "believe," "expect," "expectation," "anticipate," "may," "could," "should", "intend," "belief," "estimate," "plan," "target," "project," "likely," "will," "forecast,", "future", "outlook," and similar expressions. 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 (i) any ongoing impact of the COVID-19 pandemic due to new variants or efficacy and rate of vaccinations, as well as related measures taken by governmental or regulatory authorities to combat the pandemic, including whether additional government stimulus payments or supplemental unemployment benefits will be approved, and the nature, amount and timing of any such payments or benefits; (ii) the possibility that the operational, strategic and shareholder value creation opportunities expected from the separation and spin-off of the Aaron's Business (as defined below) into what is now The Aaron'sCompany, Inc. may not be achieved in a timely manner, or at all; (iii) the failure of that separation to qualify for the expected tax treatment; (iv) changes in the enforcement and interpretation of existing laws and regulations and the adoption of new laws and regulations that may unfavorably impact our business; (v) legal and regulatory proceedings and investigations, including those related to consumer protection laws and regulations, customer privacy, third party and employee fraud and information security; (vi) the risks associated with our strategy and strategic priorities not being successful, including our e-commerce and real estate repositioning and optimization initiatives or being more costly than anticipated; (vii) risks associated with the challenges faced by our business, including the commoditization of consumer electronics and our high fixed-cost operating model; (viii) increased competition from traditional and virtual lease-to-own competitors, as well as from traditional and online retailers and other competitors; (ix) financial challenges faced by our franchisees; (x) increases in lease merchandise write-offs and the potential limited duration and impact of stimulus and other government payments made by the federal and state governments to counteract the economic impact of the COVID-19 pandemic; and the other risks and uncertainties discussed under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 (the "2020 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 and combined financial statements as of and for the three and six months endedJune 30, 2021 and 2020, 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 the consolidated and combined financial statements included in our 2020 Annual Report. 22 -------------------------------------------------------------------------------- Description of Spin-off Transaction OnOctober 16, 2020 , management ofAaron's, Inc. finalized the formation of a new holding company structure in anticipation of the separation and distribution transaction described below. Under the holding company structure,Aaron's, Inc. became a direct, wholly owned subsidiary of a newly formed company, Aaron's HoldingsCompany, Inc. Aaron's, Inc. was subsequently converted to a limited liability company ("Aaron's, LLC") holding the assets and liabilities historically associated with the historical Aaron's Business segment (the "Aaron's Business"). Upon completion of the holding company formation, Aaron's HoldingsCompany, Inc. became the publicly traded parent company of theProgressive Leasing segment ("Progressive Leasing "), Aaron's Business, and Vive segment ("Vive"). OnNovember 30, 2020 (the "separation and distribution date"),Aaron's Holdings Company, Inc. completed the previously announced separation of the Aaron's Business fromProgressive Leasing and Vive and changed its name to PROG Holdings, Inc. (referred to herein as "PROG Holdings " or "Former Parent"). The separation of the Aaron's Business segment was effected through a distribution (the "separation", the "separation and distribution", or the "spin-off transaction") of all outstanding shares of common stock of a newly formed company called The Aaron'sCompany, Inc. ("Aaron's", "The Aaron's Company" or the "Company"), aGeorgia corporation, to the PROG Holdings shareholders of record as ofNovember 27, 2020 . Upon the separation and distribution, Aaron's, LLC became a wholly-owned subsidiary of The Aaron's Company. Shareholders of PROG Holdings received one share of The Aaron's Company for every two shares of PROG Holdings' common stock. Upon completion of the separation and distribution transaction, The Aaron's Company became an independent, publicly traded company under the ticker "AAN" on theNew York Stock Exchange . Unless the context otherwise requires or we specifically indicate otherwise, references to "we," "us," "our," "our Company," and "the Company" refer to The Aaron'sCompany, Inc. , which holds, directly or indirectly, the Aaron's Business prior to the separation and distribution date. References to "the Company", "Aaron's, Inc.", or "Aaron's HoldingsCompany, Inc. " for periods prior to the separation and distribution date refer to transactions, events, and obligations ofAaron's, Inc. , which took place prior to the separation and distribution. Historical amounts herein include revenues and costs directly attributable to the Company and an allocation to the Company of expenses of the Aaron's Business related to certain PROG Holdings' corporate functions prior to the separation and distribution date. Business Overview Aaron's is a leading, technology-enabled, omni-channel provider of lease-to-own ("LTO") and purchase solutions generally focused on serving the large, credit-challenged segment of the population. Through our portfolio of approximately 1,300 stores and our Aarons.com e-commerce platform, we provide consumers with LTO and purchase solutions for the products they need and want, including furniture, appliances, electronics, computers and a variety of other products and accessories. We focus on providing our customers with unparalleled customer service and an attractive value proposition, including low monthly payments and total cost of ownership, high approval rates and flexible lease ownership plans. In addition, we offer a wide product selection, and for our lease customers we offer free prompt delivery, setup, service and product returns, and the ability to pause, cancel or resume lease contracts at any time with no additional costs to the customer. Recent Restructuring Programs As a result of our real estate repositioning strategy and other cost-reduction initiatives, we initiated a restructuring program in 2020 to optimize our Company-operated store portfolio. This restructuring program has resulted in the closure, consolidation or relocation of a total of 111 Company-operated stores during 2020 and the first six months of 2021. We currently expect to close, consolidate, or relocate approximately 76 additional stores byDecember 31, 2021 under this program. Additionally, from 2016 to 2019, we closed and consolidated a total of 294 underperforming Company-operated stores under similar restructuring initiatives. We will continue to evaluate our Company-operated store portfolio to determine how to best rationalize and reposition our store base to better align with marketplace demand. Under the real estate repositioning and optimization restructuring program, though all specific locations have not yet been identified, the Company's current strategic plan is to remodel, reposition and consolidate our Company-operated store footprint over the next three to four years. We believe that such strategic actions will allow the Company to continue to successfully serve our markets while continuing to utilize our growing Aarons.com shopping and servicing platform. Management expects that this strategy, along with our increased use of technology, will enable us to reduce store count while retaining a significant portion of our existing customer relationships and attract new customers. To the extent that management executes on its long-term strategic plan, additional restructuring charges will likely result from our real estate repositioning and optimization initiatives, primarily related to operating lease right-of-use asset and fixed asset impairments. However, the extent of future restructuring charges is not estimable at this time, as specific store locations to be closed and/or consolidated, beyond the stores noted above, have not yet been identified by management. 23 -------------------------------------------------------------------------------- Recent Developments and Operational Measures Taken by Us in Response to the COVID-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. As a result of the COVID-19 pandemic, we temporarily closed our showrooms inMarch 2020 and shifted to e-commerce and curbside service only for all of our Company-operated stores to protect the health and safety of our customers and associates, except where such curbside service was prohibited by governmental authorities. Since that time, we have reopened our store showrooms, but there can be no assurance that those showrooms will not be closed in future months, or have their operations limited, if, for example, there are new variants of the virus, localized increases in infections or "additional waves" in the number of COVID-19 cases in the areas where our stores are located and, in response, governmental authorities issue orders requiring such closures or limitations on operations, or we voluntarily close our showrooms or limit their operations to protect the health and safety of our customers and associates. Furthermore, we have experienced disruptions in our supply chain which have impacted product availability in some of our stores and, in some situations, we are procuring inventory from alternative sources at higher costs. These developments have had an unfavorable impact on our generation of lease agreements. The COVID-19 pandemic may impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods. The extent of any such impacts likely would depend on several factors, including (a) the length and severity of any continuing impact of the pandemic, which may be affected by the successful distribution and efficacy of COVID-19 vaccines to our customers and associates, as well as any new variants of the virus, localized outbreaks or additional waves of COVID-19 cases, among other factors; (b) the impact of any such outbreaks on our customers, suppliers, and employees; (c) the nature of any government orders issued in response to such outbreaks, including whether we would be deemed essential, and thus, exempt from all or some portion of such orders; (d) the extent of the impact of additional government stimulus and/or enhanced unemployment benefits to our customers in response to the negative economic impacts of the COVID-19 pandemic, as well as the nature, timing and amount of any such stimulus payments or benefits; and (e) supply chain disruptions for our business. The following summarizes significant developments and operational measures taken by us in response to the COVID-19 pandemic: •In our Company-operated stores, we are monitoring and limiting, where possible, associates' potential exposure to persons at orwho may enter our stores, reviewing orders and industry-specific guidance from applicable federal and state laws,Occupational Safety and Health Administration regulations andCenters for Disease Control ("CDC") and state/local health authorities, evaluating our existing COVID-19 prevention controls and the need for different or additional controls, and conducting periodic inspections at our stores to identify unhealthy conditions, work practices and work procedures related to COVID-19 to help ensure compliance with our COVID-19 policies and procedures. We have also installed protective plexiglass barriers at check-out counters, implemented enhanced cleaning and sanitization procedures, and reconfigured our showrooms in a manner designed to reduce COVID-19 transmission. We also require associates to adhere to the latestCDC and state/local health authorities guidelines with respect to social distancing and face coverings. •In conjunction with the operational adjustments made at our Company-operated stores, we accelerated the national rollout of our centralized digital decisioning platform, which is an algorithm-driven lease decisioning tool used in our Company-operated stores that is designed to improve our customers' experiences by streamlining and standardizing the lease application decisioning process, shortening transaction times, and establishing appropriate transaction sizes and lease payment amounts, given the customer's profile. We completed the national rollout during the second quarter of 2020, and that decisioning platform is now being utilized in all of our Company-operated and most of our franchised store locations inthe United States . •To assist the franchisees of our businesswho were facing adverse impacts to their businesses, we offered a royalty fee abatement fromMarch 8, 2020 untilMay 16, 2020 and modified payment terms on outstanding accounts receivable owed to us by franchisees. In addition, payment terms were temporarily modified for the franchise loan facility under which certain franchisees have outstanding borrowings that are guaranteed by us. •Our management team and store support center associates are continuing to primarily work remotely through the end of the second quarter of this year. We expect that approximately 65% of our management and store support center associates will return to the office for between two and five days a week in the third quarter of 2021, with the remainder working fully remote moving forward. Additionally, we reduced our corporate real estate footprint by electing to permanently vacate one of our leased administrative offices inKennesaw, Georgia during the fourth quarter of 2020. Coronavirus Legislative Relief In response to the global impacts of COVID-19 onU.S. companies and citizens, the government enacted the Coronavirus, Aid, Relief, and Economic Security Act ("CARES Act") onMarch 27, 2020 , the Consolidated Appropriations Act onDecember 27 , 24 -------------------------------------------------------------------------------- 2020, and the American Rescue Plan Act of 2021 ("American Rescue Plan") onMarch 11, 2021 . We believe a significant portion of our customers have received stimulus payments and/or federally supplemented unemployment payments, pursuant to these economic stimulus measures, which we believe have enabled them to continue making payments to us under their lease-to-own agreements, despite the economically challenging times resulting from the COVID-19 pandemic. In addition to the stimulus payments mentioned above, we also believe that certain elements of the American Rescue Plan, primarily the temporary expansion of the child tax credit which increases the amount of the credit, makes the credit fully refundable, and allows for half of the credit to be paid in periodic installments beginning onJuly 15, 2021 , should have a beneficial impact to certain of our customers. Additionally, we may experience an increase in the exercise of early purchase options or decreases in the total number of new ownership plans, as customers could potentially opt to use such payments and credits to acquire merchandise outside of our LTO solutions. The CARES Act included several tax relief options for companies, which resulted in the following provisions available to the Company: •Aaron's, Inc. elected to carryback its 2018 net operating losses of$242.2 million to 2013, generating a refund of$84.4 million , which was received inJuly 2020 , and a discrete income tax benefit of$34.2 million recognized during the three months endedMarch 31, 2020 . The discrete tax benefit is the result of the federal income tax rate differential between the current statutory rate of 21% and the 35% rate applicable to 2013. •Throughout 2020, the Company deferred$16.5 million in payroll taxes that it was permitted to defer under the CARES Act, which generally applies toSocial Security taxes otherwise due, with 50% of the tax payable onDecember 31, 2021 and the remaining 50% payable onDecember 31, 2022 . •Certain wages and benefits that were paid to furloughed employees were eligible for an employee retention credit of up to 50% of wages paid to eligible associates. Separate from the CARES Act, the Internal Revenue Service extended the due dates for estimated tax payments for the first and second quarters of 2020 toJuly 15, 2020 . Additionally, many states offered similar deferrals. The Company took advantage of all such extended due dates. The federal supplement to unemployment payments originally lapsed onJuly 31, 2020 , but has been extended on a prospective basis throughSeptember 6, 2021 , although certain states have decided to stop participation in the supplemental payments prior to that date. The current nature and/or extent of future stimulus measures, if any, remains unknown. We cannot be certain that our customers will continue making their payments to us at recently experienced levels if the federal government does not continue supplemental measures or enact additional stimulus measures, which could result in a significant reduction in the portion of our customerswho continue making payments owed to us under their lease-to-own agreements. Highlights The following summarizes significant financial highlights from the three months endedJune 30, 2021 : •We reported revenues of$467.5 million in the second quarter of 2021 compared to$431.0 million for the second quarter of 2020, an increase of 8.5%. This increase is primarily due to a$33.2 million increase driven by an 11.2% increase in same store revenues, partially offset by the planned net reduction of 42 Company-operated stores and the reduction of 71 franchised stores during the 15-month period endedJune 30, 2021 . The increase in same store revenues was driven by a larger same store lease portfolio size, which ended the first quarter of 2021 at$98.1 million , up 5.3% compared to 2020, and ended the second quarter of 2021 at$101.6 million , up 8.7% compared to the second quarter of 2020, and strong customer payment activity. E-commerce revenues increased 16% compared to the prior year quarter and were approximately 14% and 13% of total lease revenues and fees during the three months endedJune 30, 2021 and 2020, respectively. •Earnings before income taxes were$44.3 million in the second quarter of 2021 compared to$29.4 million during the prior comparable period. Earnings before income taxes during the second quarter of 2021 were negatively impacted by restructuring charges of$1.8 million and separation-related costs of$1.2 million . Operating results from the second quarter of 2020 were negatively impacted by restructuring charges of$7.0 million . 25 -------------------------------------------------------------------------------- Key Metrics Lease Portfolio Size. Our lease portfolio size represents the total balance of collectible lease payments for the next month derived from our aggregate outstanding customer lease agreements at a point in time. As of the end of any period, the lease portfolio size is calculated as the lease portfolio size at the beginning of the period plus collectible lease payments for the next month derived from new lease agreements originated in the period less the reduction in collectible lease payments for the next month as a result primarily of customer agreements that reach full ownership, lease merchandise returns and write-offs, and customer early purchase option exercises. Lease portfolio size provides management insight into expected future collectible lease payments. The Company ended the second quarter of 2021 with a lease portfolio size for all Company-operated stores of$132.8 million , an increase of 7.6% compared to the balance as ofJune 30, 2020 . Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of the Company, as it provides management insight into our ability to collect customer payments, including contractually due payments and early purchase options exercised by our current customers. Additionally, this indicator allows management to gain insight into the Company's success in writing new leases into and retaining current customers. For the three months endedJune 30, 2021 , we calculated this amount by comparing revenues for the three months endedJune 30, 2021 to revenues for the comparable period in 2020 for all stores open for the entire 15-month period endedJune 30, 2021 , excluding stores that received lease agreements from other acquired, closed or merged stores. For the six months endedJune 30, 2021 , we calculated this amount by comparing revenues for the six months endedJune 30, 2021 to revenues for the six months endedJune 30, 2020 for all stores open for the entire 24-month period endedJune 30, 2021 , excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues increased 11.2% and 13.4% during the three and six months endedJune 30, 2021 , respectively, compared to the prior year comparable periods. Seasonality Our revenue mix is moderately seasonal. 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 and the extent of the impact of additional government stimulus, and/or enhanced unemployment benefits to our customers in response to the economic impacts of the COVID-19 pandemic as discussed above, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. 26 -------------------------------------------------------------------------------- Key Components of Earnings (Loss) Before Income Taxes In this management's discussion and analysis section, we review our condensed consolidated and combined results. The financial statements for periods prior to and through the date of the separation and distribution,November 30, 2020 , were prepared on a combined standalone basis and were derived from the consolidated financial statements and accounting records of PROG Holdings. The financial statements for the periods subsequent toDecember 1, 2020 and throughJune 30, 2021 are consolidated financial statements of the Company and its subsidiaries, each of which is wholly-owned, and is based on the financial position and results of operations of the Company as a standalone company. The combined financial statements prepared throughNovember 30, 2020 include all revenues and costs directly attributable to the Company and an allocation of expenses of the Aaron's Business related to certain PROG Holdings corporate functions. These expenses have been allocated to the Company based on direct usage or benefit where specifically identifiable, with the remaining expenses allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. The Company considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. The combined financial statements include assets and liabilities specifically attributable to the Company. All intercompany transactions and balances within the Company have been eliminated. Transactions between the Company and PROG Holdings that took place prior to the separation and distribution have been included as invested capital within the condensed consolidated and combined financial statements. For the three and six months endedJune 30, 2021 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings (loss) before income taxes were as follows: Revenues. We separate our total revenues into three components: (a) lease and retail revenues; (b) non-retail sales; and (c) franchise royalties and other revenues. Lease and retail revenues primarily include all revenues derived from lease agreements at our Company-operated stores and e-commerce platform, the sale of both new and returned lease merchandise from our Company-operated stores and fees from ourAaron's Club program. Lease and retail revenues are recorded net of a provision for uncollectible accounts receivable related to lease renewal payments from lease agreements with customers. Non-retail sales primarily represent new merchandise sales to our franchisees and, to a lesser extent, sales of Woodhaven manufactured products to third-party retailers. Franchise royalties and other revenues primarily represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Franchise royalties and other revenues also include revenues from leasing Company-owned real estate properties to unrelated third parties, as well as other miscellaneous revenues. Cost of Lease and Retail Revenues. Cost of lease and retail revenues is primarily comprised of the depreciation expense associated with depreciating merchandise held for lease and leased to customers by our Company-operated stores and through our e-commerce platform. Cost of lease and retail revenues also includes the depreciated cost of merchandise sold through our Company-operated stores as well as the costs associated with theAaron's Club program. Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees. Personnel Costs. Personnel costs represents total compensation costs incurred for services provided by employees of the Company, as well as an allocation of personnel costs for PROG Holdings' corporate and shared function employees for the periods prior to the separation and distribution date. Other Operating Expenses, Net. Other operating expenses, net includes occupancy costs (including rent expense, store maintenance and depreciation expense related to non-manufacturing facilities), shipping and handling, advertising and marketing, intangible asset amortization expense, professional services expense, bank and credit card related fees, an allocation of general corporate expenses from PROG Holdings for the periods prior to the separation and distribution date, and other miscellaneous expenses. Other operating expenses, net also includes 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. Provision for Lease Merchandise Write-offs. Provision for lease merchandise write-offs represents charges incurred related to estimated lease merchandise write-offs. 27 -------------------------------------------------------------------------------- Restructuring Expenses, Net. Restructuring expenses, net primarily represent the cost of real estate optimization efforts and cost reduction initiatives related to the Company's store support center functions. Restructuring expenses, net are comprised principally of closed store operating lease right-of-use asset impairment and operating lease charges, fixed asset impairment charges, and expenses related to workforce reductions. Impairment ofGoodwill . There were no impairments of goodwill recorded during the first six months of 2021. Impairment of goodwill is the write-off of our existing goodwill balance atMarch 31, 2020 that was recorded in the first quarter of 2020. Refer to Note 1 to the condensed consolidated and combined financial statements for further discussions of the interim goodwill impairment assessment and resulting impairment charge. Separation Costs. Separation costs represent expenses associated with the spin-off transaction, including employee-related costs, incremental stock-based compensation expense associated with the conversion and modification of unvested and unexercised equity awards and other one-time expenses incurred by the Company in order to operate as an independent, standalone public entity. Interest Expense. Interest expense for the six months endedJune 30, 2021 consists primarily of commitment fees on unused balances of the Revolving Facility, as well as the amortization of debt issuance costs. Interest expense for prior year periods consists primarily of interest incurred on the fixed and variable rate debt agreements ofAaron's, Inc. All of the interest expense for the historical debt obligations of Aaron's, LLC have been included within the condensed consolidated and combined financial statements of the Company for the periods prior to the separation and distribution date because Aaron's, LLC was the primary obligor for the external debt agreements and is one of the legal entities forming the basis of the Company. Other Non-Operating Income, Net. Other non-operating 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. This activity also includes earnings on cash and cash equivalent investments. 28 --------------------------------------------------------------------------------
Results of Operations - Three months ended
Three Months Ended
June 30, Change
(In Thousands) 2021 2020 $ %
REVENUES:
Lease and Retail Revenues $ 428,498 $ 394,257 $ 34,241 8.7 %
Non-Retail Sales 32,455 33,044 (589) (1.8)
Franchise Royalties and Other Revenue 6,542 3,654 2,888 79.0
467,495 430,955 36,540 8.5
COSTS OF REVENUES
Cost of Lease and Retail Revenues 143,206 137,718 5,488 4.0
Non-Retail Cost of Sales 29,609 29,316 293 1.0
172,815 167,034 5,781 3.5
GROSS PROFIT 294,680 263,921 30,759 11.7
Gross Profit % 63.0% 61.2%
OPERATING EXPENSES:
Personnel Costs 121,426 118,395 3,031 2.6
Other Operating Expenses, Net 114,046 93,993 20,053 21.3
Provision for Lease Merchandise Write-Offs 12,117 14,213 (2,096) (14.7)
Restructuring Expenses, Net 1,794 6,991 (5,197) (74.3)
Separation Costs 1,246 - 1,246 nmf
250,629 233,592 17,037 7.3
OPERATING PROFIT 44,051 30,329 13,722 45.2
Interest Expense (451) (2,853) 2,402 84.2
Other Non-Operating Income, Net 744 1,948 (1,204) (61.8)
EARNINGS BEFORE INCOME TAXES 44,344 29,424 14,920 50.7
INCOME TAX EXPENSE 11,369 7,050 4,319 61.3
NET EARNINGS $ 32,975 $ 22,374 $ 10,601 47.4 %
nmf-Calculation is not meaningful
Revenues
The following table presents revenue by source for the three months ended June
30, 2021 and 2020:
Change
Three Months Ended
June 30, 2021 vs. 2020
(In Thousands) 2021 2020 $ %
Lease Revenues and Fees $ 411,621 $ 380,237 $ 31,384 8.3 %
Retail Sales 16,877 14,020 2,857 20.4
Non-Retail Sales 32,455 33,044 (589) (1.8)
Franchise Royalties and Fees 6,253 3,365 2,888 85.8
Other 289 289 - -
Total Revenues $ 467,495 $ 430,955 $ 36,540 8.5 %
29-------------------------------------------------------------------------------- Lease revenues and fees and retail sales increased during the three months endedJune 30, 2021 primarily due to an 11.2% increase in same store revenues, inclusive of both in-store and e-commerce originated lease revenues and fees and retail sales, which resulted in an increase of$33.2 million . The increase in same store revenues was driven by a larger same store lease portfolio size and strong customer payment activity. We believe this was due in part to (a) operational investments including the national rollout of our centralized digital decisioning platform and digital customer onboarding; (b) new direct to consumer marketing programs in both in-store and e-commerce channels; (c) government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers; and (d) lower prior period revenues caused by the temporary closure of our showrooms and a shift to e-commerce and curbside service only for all of our Company-operated stores as described above in March of 2020. E-commerce revenues increased 16% compared to the prior year quarter and were approximately 14% and 13% of total lease revenues and fees during the three months endedJune 30, 2021 and 2020, respectively. The decrease in non-retail sales is primarily due to a$6.1 million decrease related to the reduction of 71 franchised stores during the 15-month period endedJune 30, 2021 , which was mostly offset by higher product demand from franchisees primarily as a result of government stimulus and unemployment benefits received by franchisee customers during the period as well as improved advertising and operational focus. The increase in franchise royalties and fees is primarily the result of the temporary royalty fee abatement offered by the Company fromMarch 8, 2020 throughMay 16, 2020 in response to the COVID-19 pandemic. We have provided no royalty fee abatements to our franchisees in 2021. Cost of Revenues and Gross Profit Information about the components of the cost of lease and retail revenues and non-retail sales is as follows: Change Three Months Ended June 30, 2021 vs. 2020 (In Thousands) 2021 2020 $ % Depreciation of Lease Merchandise and Other Lease Revenue Costs$ 132,319 $ 128,653 $ 3,666 2.8 % Retail Cost of Sales 10,887 9,065 1,822 20.1 Non-Retail Cost of Sales 29,609 29,316 293 1.0 Total Costs of Revenues$ 172,815 $ 167,034 $ 5,781 3.5 % Depreciation of lease merchandise and other lease revenue costs. Depreciation of lease merchandise and other lease revenue costs increased primarily due to a$3.5 million increase as a result of a higher lease portfolio size, a$2.3 million increase due to higher inventory purchase costs and a$1.6 million increase related to higher early purchase options exercised, partially offset by a$1.3 million decrease driven by the planned net reduction of 42 Company-operated stores during the 15-month period endedJune 30, 2021 and a$2.7 million decrease related to lower levels of idle inventory. Retail cost of sales. Retail cost of sales increased due to an increase in retail sales primarily driven by government stimulus and unemployment benefits received by a significant portion of our customers during the COVID-19 pandemic. Non-retail cost of sales. The increase in non-retail cost of sales during the three months endedJune 30, 2021 is primarily attributable to higher inventory purchase costs, partially offset by the decrease in non-retail sales which was driven by the factors discussed above. Gross Profit Gross profit for lease revenues and fees was$279.3 million and$251.6 million during the three months endedJune 30, 2021 and 2020, respectively, which represented a gross profit margin of 67.9% and 66.2% for the respective periods. The improvement in gross profit percentage was primarily driven by strong customer payment activity and lower depreciation on idle inventory. Gross profit for retail sales was$6.0 million and$5.0 million during the three months endedJune 30, 2021 and 2020, respectively, which represented a gross profit margin of 35.5% and 35.3% for the respective periods. The improvement in gross profit percentage is primarily due to a favorable mix shift from retail sales of returned merchandise to retail sales of new merchandise. Gross profit for non-retail sales was$2.8 million and$3.7 million during the three months endedJune 30, 2021 and 2020, respectively, which represented a gross profit percentage of 8.8% and 11.3% for the respective periods. The decline in gross profit percentage was driven by higher inventory purchase costs in 2021 compared to the prior year comparable period. 30 -------------------------------------------------------------------------------- As a percentage of total revenues, gross profit improved to 63.0% during the three months endedJune 30, 2021 compared to 61.2% for the comparable period in 2020. The factors impacting the change in gross profit are discussed above. Operating Expenses Personnel costs. Personnel costs increased by$3.0 million during the second quarter of 2021 due primarily to (a) higher store labor hours and store performance-based compensation as compared to the prior year comparable period, as personnel costs for the three months endedJune 30, 2020 reflected reduced store labor costs resulting from the temporary store closures; (b) higher standalone public company costs; and (c) cost cutting measures taken during the second quarter of 2020 in response to the COVID-19 pandemic that did not occur during 2021, including furloughing or terminating associates, and instituting temporary salary reductions for executive officers. The increases in 2021 were partially offset by the timing of recognition of corporate incentive compensation costs. Due to uncertainties around the realization of incentive compensation in early 2020, no expense was recognized in the first quarter of 2020. In the second quarter of 2020 this uncertainty was resolved, resulting in recognition of six months of expense in the quarter, compared to three months of expense included in the second quarter of 2021. Other Operating Expenses, Net. Information about certain significant components of other operating expenses, net is as follows: Three Months Ended June 30, Change (In Thousands) 2021 2020 $ % Occupancy Costs$ 42,316 $ 38,188 $ 4,128 10.8 Shipping and Handling 13,867 11,779 2,088 17.7 Advertising Costs 18,997 5,746 13,251 230.6 Intangible Amortization 1,599 1,632 (33) (2.0) Professional Services 4,332 4,273 59 1.4 Bank and Credit Card Related Fees 5,287 4,839 448 9.3 Gains on Insurance Recoveries (163) - (163) nmf Gains on Asset and Store Dispositions and Assets Held For Sale, net (895) (84) (811) (965.5) Other Miscellaneous Expenses, net 28,706 27,620 1,086 3.9 Other Operating Expenses, net$ 114,046 $ 93,993 $ 20,053 21.3 % nmf-Calculation is not meaningful As a percentage of total revenues, other operating expenses, net increased to 24.4% for the second quarter of 2021 from 21.8% in the same period in 2020. Occupancy costs increased primarily due to higher maintenance costs during 2021. Additionally, the comparability of occupancy costs for the second quarter of 2021 as compared to the same period in 2020 was impacted by$1.6 million in rent concessions that were negotiated and realized with the landlords of Company-operated stores during the second quarter of 2020 in response to the economic uncertainty created by the COVID-19 pandemic. Shipping and handling costs increased primarily due to higher fuel and distribution costs, as well as a 14% increase in both deliveries and handling costs associated with lease merchandise returns during the three months endedJune 30, 2021 as compared to the same period in 2020. Deliveries and return agreement activity was atypically low during the second quarter of 2020 due to the actions taken by the Company in response to the COVID-19 pandemic, such as temporarily closing stores and suspending customer home delivery activity. Advertising costs increased primarily due to higher advertising spend related to the launch of a new marketing campaign during the second quarter of 2021, reduced vendor marketing contributions resulting from a general shift towards brand-focused digital and traditional media advertising spend, and a reduction in marketing initiatives during the second quarter of 2020 as a result of the Company's cost cutting measures in response to the COVID-19 pandemic. Other miscellaneous expenses, net primarily represent the depreciation of IT-related property, plant and equipment, software licensing expenses, franchisee-related reserves, and other expenses. Expenses within this category did not fluctuate significantly versus the prior year. 31 -------------------------------------------------------------------------------- Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues and fees decreased to 2.9% for the three months endedJune 30, 2021 compared to 3.7% for the comparable period in 2020. This decrease was primarily driven by strong customer payment activity, strong operational focus, and the impact of improved decisioning technology. Restructuring expenses, net. Restructuring activity for the three months endedJune 30, 2021 resulted in expenses of$1.8 million , which were primarily comprised of$1.7 million of continuing variable occupancy costs incurred related to previously closed stores and$0.5 million of operating lease right-of-use asset and fixed asset impairment for Company-operated stores identified for closure during 2021, partially offset by gains of$0.5 million related to the sale of vehicle and real estate assets impaired in conjunction with the repositioning and optimization program in prior periods. Restructuring expenses for the three months endedJune 30, 2020 were$7.0 million and were primarily due to the identification of stores for closure during the second quarter of 2020 as well as a change in estimates of future sublease activity for vacant properties which resulted in incremental expense. Separation costs. Separation costs represent expenses associated with the separation and distribution, including employee-related costs, incremental stock-based compensation expense associated with the conversion and modification of unvested and unexercised equity awards, and other one-time expenses incurred by the Company in order to operate as an independent, separate publicly traded Company. Operating Profit Interest expense. Interest expense decreased to$0.5 million for three months endedJune 30, 2021 from$2.9 million for the three months endedJune 30, 2020 , which is the result of the full repayment of the outstanding borrowings of$285.0 million under the previousAaron's, Inc. revolving credit and term loan agreement and senior unsecured notes in conjunction with the separation and distribution in the fourth quarter of 2020. Interest expense for the three months endedJune 30, 2021 consists primarily of commitment fees on unused balances of the Revolving Facility, as well as the amortization of debt issuance costs. Other non-operating income, net. Other non-operating income, net includes (a) the impact of foreign currency remeasurement; (b) net gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan; and (c) earnings on cash and cash equivalent investments. Foreign currency remeasurement net gains resulting from changes in the value of theU.S. dollar against the Canadian dollar and earnings on cash and cash equivalent investments were not significant during the three months endedJune 30, 2021 or 2020. The changes in the cash surrender value of Company-owned life insurance resulted in net gains of$0.7 million and$1.7 million for the three months endedJune 30, 2021 and 2020, respectively. Income Tax Expense Income tax expense increased to$11.4 million during the three months endedJune 30, 2021 compared to$7.1 million for the same period in 2020 due to an increase in earnings before income taxes and an increase in the effective tax rate to 25.6% in 2021 from 24.0% in 2020. The increase in the effective tax rate is primarily related to the impact of non-deductible expenses on earnings before income taxes during the three months endedJune 30, 2021 compared to the same period in 2020. 32 --------------------------------------------------------------------------------
Results of Operations - Six months ended
Six Months Ended
June 30, Change
(In Thousands) 2021 2020 $ %
REVENUES
Lease Revenues and Fees $ 872,585 $ 793,167 $ 79,418 10.0 %
Non-Retail Sales 62,404 59,890 2,514 4.2
Franchise Royalties and Fees 13,560 10,729 2,831 26.4
948,549 863,786 84,763 9.8
COSTS AND EXPENSES
Cost of Lease and Retail Revenues 294,701 279,721 14,980 5.4
Non-Retail Cost of Sales 56,100 52,897 3,203 6.1
350,801 332,618 18,183 5.5
GROSS PROFIT 597,748 531,168 66,580 12.5
Gross Profit % 63.0% 61.5%
OPERATING EXPENSES
Personnel Costs 246,289 234,141 12,148 5.2
Other Operating Expenses, Net 222,412 217,058 5,354 2.5Provision for Lease Merchandise Write-Offs 25,534 38,173
(12,639) (33.1)
Restructuring Expenses, Net 5,235 29,277 (24,042) (82.1)
Impairment of Goodwill - 446,893 (446,893) nmf
Separation Costs 5,636 - 5,636 nmf
505,106 965,542 (460,436) (47.7)
OPERATING PROFIT (LOSS) 92,642 (434,374) 527,016 nmf
Interest Expense (795) (6,652) 5,857 88.0
Other Non-Operating Income, Net 1,146 189 957 506.3
EARNINGS (LOSS) BEFORE INCOME TAXES 92,993 (440,837) 533,830 nmf INCOME TAX EXPENSE (BENEFIT) 23,695 (139,437) 163,132 nmf NET EARNINGS (LOSS)$ 69,298 $ (301,400) $ 370,698 nmf
nmf-Calculation is not meaningful
33
--------------------------------------------------------------------------------Revenues
The following table presents revenue by source for the six months endedJune 30, 2021 : Change Six Months Ended June 30, 2021 vs. 2020 (In Thousands) 2021 2020 $ Lease Revenues and Fees$ 839,262 $ 769,616 $ 69,646 9.0 % Retail Sales 33,323 23,551 9,772 41.5 Non-Retail Sales 62,404 59,890 2,514 4.2 Franchise Royalties and Fees 12,962 10,089 2,873 28.5 Other 598 640 (42) (6.6) Total$ 948,549 $ 863,786 $ 84,763 9.8 % Lease revenues and fees and retail sales increased during the six months endedJune 30, 2021 primarily due to a 13.4% increase in same store revenues, inclusive of both in-store and e-commerce originated lease revenues and fees and retail sales, as well as early purchase options exercised, which resulted in an increase of$68.1 million , and the acquisition of franchised stores during the 24-month period endedJune 30, 2021 , which resulted in an increase of$9.4 million . The increase in same store revenues was driven by a larger same store lease portfolio size and strong customer payment activity, including retail sales and early purchase option exercises. We believe this was due in part to (a) operational investments including the national rollout of our centralized digital decisioning platform and digital customer onboarding; (b) new direct to consumer marketing programs in both in-store and e-commerce channels; (c) government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers; and (d) lower prior period revenues caused by the temporary closure of our showrooms and a shift to e-commerce and curbside service only for all of our Company-operated stores as described above in March of 2020. E-commerce revenues increased 28% compared to the prior year comparable period and were approximately 14% and 12% of total lease revenues and fees during the six months endedJune 30, 2021 and 2020, respectively. The increase in non-retail sales is due to higher product demand from franchisees primarily as a result of government stimulus and unemployment benefits received by franchisee customers during the period as well as improved advertising and operational focus, partially offset by an$11.1 million decrease related to the reduction of 110 franchised stores during the 24-month period endedJune 30, 2021 . The increase in franchise royalties and fees is primarily the result of stronger demand and customer payment activity during 2021 and the impact of the temporary royalty fee abatement offered by the Company fromMarch 8, 2020 throughMay 16, 2020 in response to the COVID-19 pandemic, partially offset by the reduction of 110 franchised stores during the 24-month period endedJune 30, 2021 . We have provided no royalty fee abatements to our franchisees in 2021. Cost of Revenues and Gross Profit Information about the components of the cost of lease and retail revenues and non-retail sales is as follows: Change Six Months Ended June 30, 2021 vs. 2020 (In Thousands) 2021 2020 $ % Depreciation of Lease Merchandise and Other Lease Revenue Costs$ 273,296 $ 263,794 $ 9,502 3.6 % Retail Cost of Sales 21,405 15,927 5,478 34.4 Non-Retail Cost of Sales 56,100 52,897 3,203 6.1 Total Costs of Revenues$ 350,801 $ 332,618 $ 18,183 5.5 % Depreciation of lease merchandise and other lease revenue costs. Depreciation of lease merchandise and other lease revenue costs increased primarily due to a$10.6 million increase related to higher early purchase options exercised, a$5.1 million increase due to higher inventory purchase costs, and a$4.9 million increase due to a larger lease portfolio size, partially offset by a$6.6 million decrease driven by the planned net reduction of 84 Company-operated stores during the 24-month period endedJune 30, 2021 and a$4.8 million decrease related to lower levels of idle inventory. Retail cost of sales. Retail cost of sales increased due to an increase in retail sales primarily driven by government stimulus and unemployment benefits received by a significant portion of our customers during the COVID-19 pandemic. 34 -------------------------------------------------------------------------------- Non-retail cost of sales. The increase in non-retail cost of sales during the six months endedJune 30, 2021 is primarily attributable to higher inventory purchase costs and the increase in non-retail sales, resulting from higher product demand from franchisees as a result of government stimulus and unemployment benefits received by franchisee customers during the period as well as improved advertising and operational focus, partially offset by the reduction of 110 franchised stores during the 24-month period endedJune 30, 2021 . Gross Profit Gross profit for lease revenues and fees was$566.0 million and$505.8 million during the six months endedJune 30, 2021 and 2020, respectively, which represented a gross profit margin of 67.4% and 65.7% for the respective periods. The improvement in gross profit percentage was primarily driven by strong customer payment activity and lower depreciation on idle inventory. Gross profit for retail sales was$11.9 million and$7.6 million during the six months endedJune 30, 2021 and 2020, respectively, which represented a gross profit margin of 35.8% and 32.4% for the respective periods. The improvement in gross profit percentage is primarily due to a favorable mix shift from retail sales of returned merchandise to retail sales of new merchandise. Gross profit for non-retail sales was$6.3 million and$7.0 million during the six months endedJune 30, 2021 and 2020, respectively, which represented a gross profit percentage of 10.1% and 11.7% for the respective periods. The decline in gross profit percentage was driven by higher inventory purchase costs in 2021 compared to the prior year comparable period. As a percentage of total revenues, gross profit improved to 63.0% during the six months endedJune 30, 2021 compared to 61.5% for the comparable period in 2020. The factors impacting the change in gross profit are discussed above. Operating Expenses Personnel costs. Personnel costs increased by$12.1 million during the six months endedJune 30, 2021 due primarily to (a) higher performance-based compensation; (b) higher store labor hours as compared to the prior year comparable period, as personnel costs for the six months endedJune 30, 2020 reflected reduced store labor costs resulting from the temporary store closures; (c) higher standalone public company costs; and (d) cost cutting measures taken during 2020 in response to the COVID-19 pandemic that did not occur during 2021, including furloughing or terminating associates and instituting temporary salary reductions for executive officers. Other Operating Expenses, Net. Information about certain significant components of other operating expenses, net is as follows: Six Months Ended June 30, Change (In Thousands) 2021 2020 $ % Occupancy Costs$ 85,625 $ 82,451 $ 3,174 3.8 Shipping and Handling 27,132 24,751 2,381 9.6 Advertising Costs 36,382 16,787 19,595 116.7 Intangible Amortization 3,283 3,474 (191) (5.5) Professional Services 7,368 23,314 (15,946) (68.4) Bank and Credit Card Related Fees 10,669 9,523 1,146 12.0 Gains on Insurance Recoveries (202) - (202) nmf Gains on Asset and Store Dispositions and Assets Held for Sale, net (2,118) 30 (2,148) nmf Other Miscellaneous Expenses, net 54,273 56,728 (2,455) (4.3) Other Operating Expenses, net$ 222,412 $ 217,058 $ 5,354 2.5 % nmf-Calculation is not meaningful As a percentage of total revenues, other operating expenses, net decreased to 23.4% for the six months endedJune 30, 2021 from 25.1% in the same period in 2020. Occupancy costs increased primarily due to higher maintenance costs during 2021. Additionally, the comparability of occupancy costs for the six months endedJune 30, 2021 as compared to the same period in 2020 was impacted by$1.6 million in rent concessions that were negotiated and realized with the landlords of Company-operated stores during the second quarter of 2020 in response to the economic uncertainty created by the COVID-19 pandemic. Shipping and handling costs increased primarily due to higher fuel and distribution costs, as well as a 7.6% increase in deliveries during the six months endedJune 30, 2021 as compared to the same period in 2020. 35 -------------------------------------------------------------------------------- Advertising costs increased primarily due to higher advertising spend related to the launch of a new marketing campaign during the second quarter of 2021, reduced vendor marketing contributions resulting from a general shift towards brand-focused digital and traditional media advertising spend and a reduction in marketing initiatives during the first and second quarters of 2020 as a result of the Company's cost cutting measures in response to the COVID-19 pandemic. Professional services decreased during the six months endedJune 30, 2021 compared to the same period in 2020 due primarily to an early termination fee of$14.1 million for a sales and marketing agreement that was recorded during the first quarter of 2020. Bank and credit card related fees increased during the six months endedJune 30, 2021 compared to the same period in 2020 primarily due to higher utilization of credit and debit cards by our customers, more payments due to strong customer payment activity, and more customer leases in our portfolio as ofJune 30, 2021 . Gains on asset dispositions increased primarily due to a$1.7 million gain related to the sale of Company-owned vehicles. Other miscellaneous expenses, net primarily represent the depreciation of IT-related property, plant and equipment, software licensing expenses, franchisee-related reserves, and other expenses. The primary decrease was related to the reduction in the provision for franchisee-related losses during the six months endedJune 30, 2021 as compared to the additional allowances and reserves of$3.0 million recognized during six months endedJune 30, 2020 due to the significant uncertainty regarding the future financial health of certain franchisees as a result of the COVID-19 pandemic. The remaining expenses did not fluctuate significantly versus the prior year comparable period. Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues and fees decreased to 3.0% for the six months endedJune 30, 2021 compared to 5.0% for the comparable period in 2020. This decrease was primarily driven by strong customer payment activity, strong operational focus, and the impact of improved decisioning technology. Restructuring expenses, net. Restructuring activity for the six months endedJune 30, 2021 resulted in expenses of$5.2 million , which were primarily comprised of$2.7 million of operating lease right-of-use asset and fixed asset impairment for Company-operated stores identified for closure during 2021 and$2.8 million of continuing variable occupancy costs incurred related to previously closed stores, partially offset by gains of$0.5 million related to the sale of vehicle and real estate assets impaired in conjunction with the repositioning and optimization program in prior periods. Restructuring expenses for the six months endedJune 30, 2020 were$29.3 million , primarily due to the identification of stores for closure during the first and second quarters of 2020 as well as a change in estimates of future sublease activity for vacant properties which resulted in incremental expense. Impairment of goodwill. During the first quarter of 2020, we recorded a loss of$446.9 million to fully write-off our existing goodwill balance as ofMarch 31, 2020 . Refer to Note 1 to the condensed consolidated and combined financial statements for further discussion of the interim goodwill impairment assessment and resulting impairment charge. Separation costs. Separation costs for the six months endedJune 30, 2021 consisted primarily of employee-related costs, incremental stock-based compensation expense associated with the conversion and modification of unvested and unexercised equity awards, and other one-time expenses incurred by the Company in order to operate as an independent, separate publicly traded Company. Operating Profit (Loss) Interest expense. Interest expense decreased to$0.8 million for the six months endedJune 30, 2021 from$6.7 million for the six months endedJune 30, 2020 , which is the result of the full repayment of the outstanding borrowings of$285.0 million under the previousAaron's, Inc. revolving credit and term loan agreement and senior unsecured notes in conjunction with the separation and distribution in the fourth quarter of 2020. Interest expense for the three months endedJune 30, 2021 consists primarily of commitment fees on unused balances of the Revolving Facility, as well as the amortization of debt issuance costs. Other non-operating income, net. Other non-operating income, net includes (a) the impact of foreign currency remeasurement; (b) net gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan; and (c) earnings on cash and cash equivalent investments. Foreign currency remeasurement net losses resulting from changes in the value of theU.S. dollar against the Canadian dollar and earnings on cash and cash equivalent investments were not significant during the six months endedJune 30, 2021 or 2020. The changes in the cash surrender value of Company-owned life insurance resulted in net gains of$1.1 million and net losses of$0.2 million for the six months endedJune 30, 2021 and 2020, respectively. 36 -------------------------------------------------------------------------------- Income Tax Expense (Benefit) The Company recorded income tax expense of$23.7 million during the six months endedJune 30, 2021 compared to a net income tax benefit of$139.4 million for the same period in 2020. The net income tax benefit recognized in 2020 was primarily the result of losses before income taxes of$440.8 million during the period as well as discrete tax benefits generated by the provisions of the CARES Act. The CARES Act, among other things, (a) waived the 80% taxable income limitation on the use of a net operating loss which was previously set forth under the Tax Cuts and Jobs Act of 2017 and (b) provided that a net operating loss arising in a taxable year beginning afterDecember 31, 2017 and beforeJanuary 1, 2021 may be treated as a carryback to each of the five preceding taxable years.Aaron's, Inc. elected to carryback its 2018 net operating loss of$242.2 million to 2013 which resulted in a discrete income tax benefit of$34.2 million recognized during the three months endedMarch 31, 2020 . The discrete tax benefit is the result of the federal income tax rate differential between the current statutory rate of 21% and the 35% rate applicable to 2013. The effective tax rate decreased to 25.5% for the six months endedJune 30, 2021 compared to 31.6% for the same period in 2020 due primarily to the impact of the discrete income tax benefit on our 2020 book loss as described above. Overview of Financial Position The major changes in the condensed consolidated balance sheet fromDecember 31, 2020 toJune 30, 2021 include: •Cash and cash equivalents decreased$28.1 million to$48.0 million atJune 30, 2021 . For additional information, refer to the "Liquidity and Capital Resources" section below. •Lease merchandise increased$40.1 million due to higher lease merchandise purchases and costs, as the Company continues to normalize lease merchandise levels after experiencing supply chain disruptions resulting from the COVID-19 pandemic throughout 2020 and the first half of 2021. •Property, plant and equipment increased$9.5 million due to an increase in capital expenditures associated with the Company's real estate optimization strategy. •Treasury shares increased$47.7 million due primarily to the Company's repurchase of 1,418,210 shares of common stock for$44.9 million during the six months endedJune 30, 2021 . Liquidity and Capital Resources General Our primary uses of capital consist of (a) buying merchandise; (b) personnel expenditures; (c) purchases of property, plant and equipment, including leasehold improvements for our new store concept and operating model; (d) expenditures related to corporate operating activities; (e) income tax payments; and (f) expenditures for acquisitions, including franchisee acquisitions. The Company also periodically repurchases common stock and has also paid quarterly cash dividends throughout 2021. Prior to the separation and distribution transaction, our capital requirements were financed through: •cash on hand; •cash flows from operations; •Aaron's, Inc. private debt offerings; •Aaron's, Inc. bank debt; and •Aaron's, Inc. stock offerings. As ofJune 30, 2021 , the Company had$48.0 million of cash and$233.5 million of availability under its$250.0 million senior unsecured revolving credit facility (the "Revolving Facility"). We currently expect to finance our primary capital requirements through cash flows from operations, and as necessary, borrowings under our Revolving Facility. Cash Provided by Operating Activities Cash provided by operating activities was$60.2 million and$214.4 million during the six months endedJune 30, 2021 and 2020, respectively. The$154.3 million decrease in operating cash flows was primarily driven by higher lease merchandise purchases, partially offset by improved lease portfolio performance resulting from a larger lease portfolio size and strong customer payment activity. Other changes in cash provided by operating activities are discussed above in our discussion of results for the six months endedJune 30, 2021 . 37 -------------------------------------------------------------------------------- Cash Used in Investing Activities Cash used in investing activities was$37.2 million and$28.7 million during the six months endedJune 30, 2021 and 2020, respectively. The$8.5 million increase in investing cash outflows was primarily due to$15.8 million higher cash outflows for purchases of property, plant and equipment, partially offset by$5.8 million higher proceeds from the sale of property, plant and equipment during the second quarter of 2021 compared to the prior year period. Cash (Used in) Provided by Financing Activities Cash used in financing activities was$51.1 million during the six months endedJune 30, 2021 compared to cash provided by financing activities of$70.1 million during the six months endedJune 30, 2020 , respectively. The$121.2 million change in financing cash flows was primarily due to cash inflows during the six months endedJune 30, 2020 from (i) net borrowings of debt of$55.1 million and (ii) net transfers from Former Parent of$126.3 million , compared to cash outflows during the six months endedJune 30, 2021 of (i)$42.6 million in share repurchases and (ii)$6.8 million in dividends paid. Share Repurchases At management's request, during itsMarch 2021 meeting, the Board of Directors of the Company (the "Board") authorized management to purchase the Company's common stock up to an aggregate amount of$150.0 million . This authorization expires onDecember 31, 2023 . During the six months endedJune 30, 2021 , the Company purchased 1,418,210 shares for$44.9 million . As ofJune 30, 2021 , we have the authority to purchase additional shares up to our remaining authorization limit of$105.1 million . As ofJuly 23, 2021 , the Company had repurchased 1,839,313 shares for$57.4 million and had$92.6 million remaining under its$150.0 million share repurchase program. Dividends At itsMay 2021 meeting, the Board approved a quarterly dividend of$0.10 per share, which was paid to shareholders onJuly 6, 2021 . Aggregate dividend payments for the six months endedJune 30, 2021 were$6.8 million . We expect to continue paying this quarterly cash dividend, subject to further approval from the Board. Debt Financing As ofJune 30, 2021 , the Company did not have any outstanding borrowings under the Revolving Facility, under which all borrowings and commitments will mature or terminate onNovember 9, 2025 . The total available credit under our Revolving Facility as ofJune 30, 2021 was$233.5 million , which was reduced by approximately$16.5 million for our outstanding letters of credit. The Revolving Facility contains financial covenants, which include requirements that we maintain ratios of (a) fixed charge coverage of no less than 1.75:1.00 and (b) total net leverage of no greater than 2.50:1.00. If we fail to comply with these covenants, we will be in default under these agreements, and all borrowings outstanding could become due immediately. Under the Revolving Facility and Franchise Loan Facility (as defined below), we may pay cash dividends in any year so long as, after giving pro forma effect to the dividend payment, we maintain compliance with our financial covenants and no event of default has occurred or would result from the payment. We are in compliance with all of these covenants atJune 30, 2021 . Commitments Income Taxes During the six months endedJune 30, 2021 , we made net income tax payments of$7.0 million . Within the next six months, we anticipate making estimated cash payments of$2.0 million forU.S. federal income taxes,$4.0 million for state income taxes, and$0.2 million for Canadian income taxes. The Tax Cuts and Jobs Act of 2017, which was enacted inDecember 2017 , provides for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased by the Company afterSeptember 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. We estimate the deferred tax liability associated with bonus depreciation from the Tax Cuts and Jobs Act of 2017 and the prior tax legislation is approximately$129.0 million as ofDecember 31, 2020 , of which approximately 75% is expected to reverse as a deferred income tax benefit in 2021 and most of the remainder during 2022. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures afterDecember 31, 2020 . Franchise Loan Guaranty We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement (the "Franchise Loan Facility") with banks that are parties to our Revolving Facility. The Franchise Loan Facility has a total commitment of$25.0 38
--------------------------------------------------------------------------------
million and expires onNovember 16, 2021 . We are able to request an additional 364-day extension of our franchise loan facility, as long as we are not in violation of any of the covenants under that facility or our Revolving Facility, and no event of default exists under those agreements, until such time as our Revolving Facility expires. We would expect to include a franchise loan facility as part of any extension or renewal of our Revolving Facility thereafter. AtJune 30, 2021 , the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was$10.8 million , which would be due in full within 75 days of the event of default. Since the inception of the franchise loan program in 1994, losses associated with the program have been immaterial. However, there can be no assurance that the Company will not incur future losses on outstanding franchisee borrowings under the Franchise Loan Facility in the event of defaults or impending defaults by franchisees. The Company records a liability related to estimated future losses from repaying the franchisees' outstanding debt obligations upon any possible future events of default. This liability is included in accounts payable and accrued expenses in the condensed consolidated balance sheets and was$2.2 million and$2.4 million as ofJune 30, 2021 andDecember 31, 2020 , respectively. The liability for both periods included qualitative consideration of potential losses, including uncertainties surrounding the normalization of current and future business trends associated with an anticipated end to the COVID-19 pandemic, and the corresponding unknown effect on the operations and liquidity of our franchisees. 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 leases or purchase obligations, and renegotiate arrangements or enter into new arrangements. There were no material changes outside the normal course of business in our material cash commitments and contractual obligations from those reported in the 2020 Annual Report. Critical Accounting Policies Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the 2020 Annual Report. Recent Accounting Pronouncements Refer to Note 1 to the condensed consolidated and combined financial statements for a discussion of recently issued accounting pronouncements, including pronouncements that were adopted in the current year.
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