Aarons 2009 Annual Report Download - page 23

Our revolving credit agreement and senior unsecured notes,
and our franchisee loan program discussed below, contain cer-
tain financial covenants. These covenants include requirements
that we maintain ratios of: (1) EBITDA plus lease expense to
fixed charges of no less than 2:1; (2) total debt to EBITDA of no
greater than 3:1; and (3) total debt to total capitalization of no
greater than 0.6:1. “EBITDA” in each case, means consolidated
net income before interest and tax expense, depreciation (other
than lease merchandise depreciation) and amortization expense,
and other non-cash charges. The Company is also required to
maintain a minimum amount of shareholders’ equity. See the
full text of the covenants themselves in our credit and guarantee
agreements, which we have filed as exhibits to our Securities and
Exchange Commission reports, for the details of these covenants
and other terms. If we fail to comply with these covenants,
we will be in default under these agreements, and all amounts
would become due immediately. We were in compliance with all
of these covenants at December 31, 2009 and believe that we
will continue to be in compliance in the future.
We purchase our common shares in the market from time
to time as authorized by our board of directors. We did not
repurchase shares during 2009 and have authority remaining to
purchase 3,920,413 shares.
We have a consistent history of paying dividends, having paid
dividends for 22 consecutive years. A $.016 per share dividend
on Common Stock and Class A Common Stock was paid in
January 2008, April 2008, July 2008, and October 2008 for a
total cash outlay of $3.4 million in 2008. Our board of directors
increased the dividend 6.3% for the fourth quarter of 2008 on
November 5, 2008 to $.017 per share from the previous quar-
terly dividend of $.016 per share. A $.017 per share dividend on
Common Stock and Class A Common Stock was paid in January
2009, April 2009, July 2009, and October 2009 for a total cash
outlay of $3.7 million in 2009. Our board of directors increased
the dividend 5.9% for the fourth quarter of 2009 to $.018 per
share from the previous quarterly dividend of $.017 per share.
Subject to sufficient operating profits, any future capital needs
and other contingencies, we currently expect to continue our
policy of paying dividends.
If we achieve our expected level of growth in our operations,
we anticipate we will supplement our expected cash flows from
operations, existing credit facilities, vendor credit and proceeds
from the sale of lease return merchandise by expanding our
existing credit facilities, by securing additional debt financing,
or by seeking other sources of capital to ensure we will be able
to fund our capital and liquidity needs for at least the next 24
months. We believe we can secure these additional sources of
capital in the ordinary course of business. However, if the credit
and capital markets experience disruptions like those that began
in the second half of 2008, we may not be able to obtain access
to capital at as favorable costs as we have historically been able
to, and some forms of capital may not be available at all.
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INCOME TAXES. During 2009, we made $15.3 million in income tax
payments. During 2010, we anticipate that we will make cash pay-
ments for income taxes approximating $120 million.
The Economic Stimulus Act of 2008 provided for accelerated
depreciation by allowing a bonus first-year depreciation deduc-
tion of 50% of the adjusted basis of qualified property placed
in service during 2008. Accordingly, our cash flow benefited in
2008 from having a lower cash tax obligation which, in turn,
provided additional cash flow from operations. We estimated
that our 2008 operating cash flow increased by approximately
$62.0 million as a result of the Economic Stimulus Act of 2008,
with the associated deferral generally expected to begin to
reverse over a three year period beginning in 2009. However,
in February 2009 the American Recovery and Reinvestment
Act of 2009 was signed into law which extended the bonus
depreciation provision of the Economic Stimulus Act of 2008
by continuing the bonus first-year depreciation deduction of
50% of the adjusted basis of qualified property placed in service
during 2009. We estimate the cash tax benefit of the American
Recovery and Reinvestment Act of 2009 to be approximately
$63.0 million, of which approximately $49.0 million offset the
2008 deferral that reverses in 2009, and the remaining $14.0
million increased our 2009 operating cash flow. We estimate that
at December 31, 2009 the remaining tax deferral associated with
the Economic Stimulus Act of 2008 and the American Recovery
and Reinvestment Act of 2009 is approximately $76.0 million of
which approximately 78% will reverse in 2010 and the remainder
will reverse between 2011 and 2012.
LEASES. We lease warehouse and retail store space for most of
our operations under operating leases expiring at various times
through 2028. Most of the leases contain renewal options for
additional periods ranging from one to 15 years or provide for
options to purchase the related property at predetermined pur-
chase prices that do not represent bargain purchase options. We
also lease transportation and computer equipment under operat-
ing leases expiring during the next five years. We expect that most
leases will be renewed or replaced by other leases in the normal
course of business. Approximate future minimum rental payments
required under operating leases that have initial or remaining
non-cancelable terms in excess of one year as of December 31,
2009, are shown in the below table under “Contractual Obligations
and Commitments.”
We have 20 capital leases, 19 of which are with a limited
liability company (“LLC”) whose managers and owners are 11
Aaron’s executive officers and its controlling shareholder, with
no individual, including the controlling shareholder, owning
more than 13.33% of the LLC. Nine of these related party leases
relate to properties purchased from Aaron’s in October and
November of 2004 by the LLC for a total purchase price of $6.8
million. The LLC is leasing back these properties to Aaron’s for
a 15-year term, with a five-year renewal at Aaron’s option, at
an aggregate annual lease amount of $716,000. Another ten of
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