Aarons 2011 Annual Report Download - page 20

We began ceasing the operations of the Aaron’s Office
Furniture segment in June of 2010. We closed 14 Aaron’s Office
Furniture stores during 2010 and had one remaining store open to
liquidate merchandise. As a result, in 2010 we recorded $3.3 mil-
lion in closed store reserves and $4.7 million in lease merchandise
write-downs and other miscellaneous expenses, totaling $9.0 mil-
lion in operating expenses, related to the closures. In 2009
we recorded a $2.2 million pre-tax charge to operating expenses
relating to the write-down of certain lease merchandise and the
impairment of long-lived assets associated with Aaron’s Office
Furniture stores.
Depreciation of lease merchandise increased $29.1 million
to $504.1 million in 2010 from $475.0 million during the
comparable period in 2009, a 6.1% increase as a result of higher
on-rent lease merchandise due to the growth of our Sales and Lease
Ownership segment. Depreciation and amortization in the Other
segment decreased $2.2 million or 24.6% due to the closure of
Aaron’s Office Furniture stores in 2010. As a percentage of total
lease revenues and fees, depreciation of lease merchandise decreased
slightly to 36.0% in 2010 from 36.2% in the prior year.
Interest expense decreased to $3.1 million in 2010 compared
with $4.3 million in 2009, a 28.0% decrease. The decrease in
interest expense was due to lower debt levels during 2010.
Income tax expense increased $8.8 million to $72.4 million in
2010, compared with $63.6 million in 2009, representing a 13.9%
increase. Our effective tax rate increased to 38.0% in 2010 from
36.0% in 2009 primarily related to the favorable impact of a $2.3
million reversal of previously recorded liabilities for uncertain
tax positions due to the expiration of the statute of limitations
in 2009.
Net Earnings from Continuing Operations
Net earnings from continuing operations increased $5.5 million to
$118.4 million in 2010 compared with $112.9 million in 2009,
representing a 4.9% increase. Earnings before income taxes from
continuing operations increased $14.3 million, or 8.1%, primarily
due to a $12.2 million, or 8.3%, increase in the Sales and Lease
Ownership segment and a $6.6 million, or 16.8%, increase in the
Franchise segment. As a percentage of total revenues, net earnings
from continuing operations were 6.3% and 6.4% in 2010 and 2009,
respectively. The increase in net earnings from continuing opera-
tions was primarily the result of the increase in profitability of new
Company-operated stores in our Sales and Lease Ownership segment
added over the past several years, contributing to a 3.5% increase in
same store revenues, and an 11.7% increase in franchise royalties
and fees.
Balance Sheet
Cash and Cash Equivalents. The Company’s cash balance increased
to $176.3 million at December 31, 2011 from $72.0 million at
December 31, 2010. The $104.2 million increase in our cash bal-
ance is due to cash flow generated from operations, less cash used by
investing and financing activities. For additional information, refer
to the “Liquidity and Capital Resources” section below.
Investment Securities. Our investment securities balance was $98.1
million at December 31, 2011 primarily as a result of purchases of
corporate bonds in 2011 and an investment in bonds issued by a
privately-held rent-to-own company based in the United Kingdom.
The securities are recorded at amortized cost in the consolidated
balance sheets and mature at various dates in the period April 2012
to December 2013. We did not hold any investment securities at
December 31, 2010.
Lease Merchandise, Net. The increase of $47.8 million in lease
merchandise, net of accumulated depreciation, to $862.3 million at
December 31, 2011 from $814.5 million at December 31, 2010, is
primarily the result of a net increase in lease merchandise of $24.9
million in the Sales and Lease Ownership segment and $25.9 million
in the HomeSmart segment.
Property, Plant and Equipment, Net. The increase of $21.7 mil-
lion in property, plant and equipment, net of accumulated deprecia-
tion, to $226.6 million at December 31, 2011 from $204.9 million
at December 31, 2010, is primarily due to $10.1 million in net
additions resulting from the growth of the HomeSmart segment and
$6.3 million in net additions from the growth of the Sales and Lease
Ownership segment.
Goodwill, Net. The $17.0 million increase in goodwill, to $219.3
million on December 31, 2011 from $202.4 million on December
31, 2010, is the result of a series of acquisitions of sales and lease
ownership businesses. During 2011, the Company acquired 38 Sales
and Lease Ownership stores with an aggregate purchase price of
$17.5 million. The Company acquired 47 stores that were converted
to HomeSmart with an aggregate purchase price of $23.9 million.
The principal tangible assets acquired consisted of lease merchandise,
vehicles and certain fixtures and equipment.
Prepaid Expenses and Other Assets. Prepaid expenses and other
assets decreased $73.8 million to $49.1 million at December 31,
2011 from $122.9 million at December 31, 2010, primarily as a
result of a decrease in prepaid income taxes primarily as a result of
the receipt of an $80.9 million income tax refund in February 2011.
Accounts Payable and Accrued Expenses. The increase of $20.1
million in accounts payable and accrued expenses, to $231.6 million
at December 31, 2011 from $211.5 million at December 31, 2010,
is primarily the result of fluctuations in the timing of payments.
Accrued Litigation Expense. Accrued litigation expense increased
$40.0 million to $41.7 million at December 31, 2011 from $1.7
million at December 31, 2010. In 2011 the Company accrued $41.5
million, which represents the judgment, as reduced, and associated
legal fees and expenses related to the Alford v. Aarons Rents, Inc. et al
case discussed in Item 3, “Legal Proceedings” of our Annual Report
on Form 10-K for the year ended December 31, 2011 filed with
the SEC and in Note F to our Consolidated Financial Statements.
Additional positive or negative developments in the lawsuit could
affect the assumptions, and therefore, the accrual. The Company has
also recorded insurance coverage receivable of $5 million in prepaid
expenses and other assets on the consolidated balance sheet as of
December 31, 2011
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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