Aarons 2003 Annual Report Download - page 35

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of its rent-to-rent stores. In 2002, the Company sold four
of its sales and lease ownership stores to an existing
franchisee. In 2001, the Company sold three of its sales
and lease ownership stores to existing franchisees and sold
five of its rent-to-rent stores. The effect of these sales on
the consolidated financial statements was not significant.
Note L: Segments
Description of Products and Services of
Reportable Segments
Aaron Rents, Inc. has four reportable segments: sales and
lease ownership, rent-to-rent, franchise, and manufacturing.
The sales and lease ownership division offers electronics,
residential furniture, appliances, and computers to consumers
primarily on a monthly payment basis with no credit require-
ments. The rent-to-rent division rents and sells residential
and office furniture to businesses and consumers who meet
certain minimum credit requirements. The Company’s
franchise operation sells and supports franchises of its sales
and lease ownership concept. The manufacturing division
manufactures upholstered furniture, office furniture, lamps
and accessories, and bedding predominantly for use by the
other divisions.
Earnings before income taxes for each reportable segment
are generally determined in accordance with accounting
principles generally accepted in the United States with the
following adjustments:
• A predetermined amount of each reportable segment’s
revenues is charged to the reportable segment as an
allocation of corporate overhead. This allocation was
approximately 2.3% in 2003 and 2.2% in 2002 and 2001.
• Accruals related to store closures are not recorded on the
reportable segments’ financial statements, but are rather
maintained and controlled by corporate headquarters.
• The capitalization and amortization of manufacturing
variances are recorded on the consolidated financial
statements as part of Cash to Accrual and Other
Adjustments and are not allocated to the segment
that holds the related rental merchandise.
• Interest on borrowings is estimated at the beginning of
each year. Interest is then allocated to operating segments
on the basis of relative total assets.
• Sales and lease ownership revenues are reported on the
cash basis for management reporting purposes.
Revenues in the “Other” category are primarily from leasing
space to unrelated third parties in our corporate headquarters
building and revenues from several minor unrelated activities.
The pretax losses in the “Other” category are the net result of
the activity mentioned above, net of the portion of corporate
overhead not allocated to the reportable segments.
Measurement of Segment Profit or Loss and
Segment Assets
The Company evaluates performance and allocates resources
based on revenue growth and pretax profit or loss from
operations. The accounting policies of the reportable segments
are the same as those described in the summary of significant
accounting policies except that the sales and lease ownership
division revenues and certain other items are presented on a
cash basis. Intersegment sales are completed at internally
negotiated amounts ensuring competitiveness with outside
vendors. Since the intersegment profit and loss affect inventory
valuation, depreciation and cost of goods sold are adjusted
when intersegment profit is eliminated in consolidation.
Factors Used by Management to Identify the
Reportable Segments
The Company’s reportable segments are business units
that service different customer profiles using distinct payment
arrangements. The reportable segments are each managed
separately because of differences in both customer base and
infrastructure.
Information on segments and a reconciliation to earnings
before income taxes are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(In Thousands) 2003 2002 2001
Revenues From
External Customers:
Sales & Lease Ownership $634,489 $501,390 $380,404
Rent-to-Rent 109,083 119,885 150,002
Franchise 19,347 16,663 13,913
Other 4,206 4,746 4,243
Manufacturing 60,608 56,002 47,035
Elimination of
Intersegment Revenues (60,995) (56,141) (47,801)
Cash to Accrual Adjustments 59 (1,857) (1,115)
Total Revenues From
External Customers $766,797 $640,688 $546,681
Earnings Before Income Taxes:
Sales & Lease Ownership $ 43,325 $ 31,220 $ 11,314
Rent-to-Rent 6,341 9,057 9,152
Franchise 13,600 10,919 9,212
Other (2,356) (5,544) (3,244)
Manufacturing 1,222 989 (587)
Earnings Before Income
Taxes For Reportable
Segments 62,132 46,641 25,847
Elimination of Intersegment
Profit (2,338) (760) (1,449)
Cash to Accrual and
Other Adjustments (1,951) (2,229) (4,543)
Total Earnings Before
Income Taxes $ 57,843 $ 43,652 $ 19,855
Assets:
Sales & Lease Ownership $408,244 $327,845 $241,245
Rent-to-Rent 79,984 89,133 107,882
Franchise 19,493 12,627 13,991
Other 29,244 35,488 17,533
Manufacturing 18,327 18,555 16,545
Total Assets $555,292 $483,648 $397,196
Depreciation & Amortization:
Sales & Lease Ownership $191,777 $154,310 $121,953
Rent-to-Rent 21,266 22,901 29,736
Franchise 547 486 444
Other 839 541 690
Manufacturing 968 802 725
Total Depreciation
& Amortization $215,397 $179,040 $153,548
Interest Expense:
Sales & Lease Ownership $ 5,215 $ 4,768 $ 4,620
Rent-to-Rent 1,583 2,493 3,010
Franchise 93 83 119
Other (1,109) (2,577) (1,491)
Total Interest Expense $ 5,782 $ 4,767 $ 6,258