SEGMENTS

As of September 30, 2014, the Company had five operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. The results of Progressive, which is presented as a reportable segment, have been included in the Company's consolidated results from the April 14, 2014 acquisition date. In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.

The Aaron’s Sales & Lease Ownership division offers furniture, electronics, appliances and computers to consumers primarily on a monthly payment basis with no credit requirements. Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions through over 15,000 retail locations in 46 states. The HomeSmart division was established to offer furniture, electronics, appliances and computers to consumers primarily on a weekly payment basis with no credit requirements. The Company’s Franchise operation awards franchises and supports franchisees of its sales and lease ownership concept. The Manufacturing segment manufactures upholstered furniture and bedding predominantly for use by Company-operated and franchised stores. Therefore, the Manufacturing segment's revenues and earnings before income taxes are primarily the result of intercompany transactions, substantially all of which revenues and earnings are eliminated through the elimination of intersegment revenues and intersegment profit.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2014			2013			2014			2013
Revenues From External Customers:
Sales and Lease Ownership	$	481,340		$	498,151		$	1,525,100		$	1,554,422
Progressive	189,826			—			328,705			—
HomeSmart	15,445			15,098			48,598			47,623
Franchise	15,838			16,530			50,147			51,564
Manufacturing	20,794			23,501			75,692			78,622
Other	361			5,440			2,626			16,643
Revenues of Reportable Segments	723,604			558,720			2,030,868			1,748,874
Elimination of Intersegment Revenues	(20,713		)	(22,673		)	(74,375		)	(76,427		)
Cash to Accrual Adjustments	4,673			1,177			9,004			8,332
Total Revenues from External Customers	$	707,564		$	537,224		$	1,965,497		$	1,680,779
Earnings (Loss) Before Income Taxes:
Sales and Lease Ownership¹	$	21,415		$	34,521		$	109,166		$	145,795
Progressive	1,689			—			1,366			—
HomeSmart	(986		)	(1,480		)	(1,717		)	(2,468		)
Franchise	12,542			13,084			38,173			40,841
Manufacturing	(17		)	22			441			67
Other^{2, 3}	(23,945		)	(19,292		)	(62,419		)	(50,037		)
Earnings Before Income Taxes for Reportable Segments	10,698			26,855			85,010			134,198
Elimination of Intersegment Loss (Profit)	22			(5		)	(405		)	(55		)
Cash to Accrual and Other Adjustments	2,479			2,570			2,866			16,706
Total Earnings Before Income Taxes	$	13,199		$	29,420		$	87,471		$	150,849

¹Sales and Lease Ownership segment earnings before income taxes were impacted by $4.8 million of restructuring charges incurred during the nine months ended September 30, 2014 related to the closure of 44 Company-operated stores, of which $2.6 million was incurred during the three months ended September 30, 2014.

²Other segment loss before income taxes for the three and nine months ended September 30, 2014 were impacted by $9.1 million due to the retirements of both the Company's Chief Executive Officer and Chief Operating Officer, $4.3 million of restructuring charges related to the closure of 44 Company-operated stores and $1.2 million of regulatory income that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General.

For the nine months ended September 30, 2014, pre-tax losses include $13.7 million in financial advisory and legal costs related to addressing strategic matters, including proxy contests, of which $385,000 was recorded during the three months ended September 30, 2014, and $6.6 million in transaction costs related to the Progressive acquisition, of which $371,000 was recorded during the three months ended September 30, 2014.

³Other segment loss before income taxes for the nine months ended September 30, 2013 include $28.4 million related to an accrual for loss contingencies for the then-pending regulatory investigation, of which $13.4 million was recorded during the three months ended September 30, 2013. Other pre-tax losses for the nine months ended September 30, 2013 also include $4.9 million related to retirement expense and a change in vacation policies.

Revenues in the Other segment are primarily revenues attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities. The pre-tax losses or earnings in the Other segment are the net result of the activity mentioned above, net of the portion of corporate overhead not allocated to the reportable segments for management purposes.



(In Thousands)	September 30, 2014		December 31, 2013
Assets:
Sales and Lease Ownership	$	1,242,931	$	1,431,720
Progressive	819,587		—
HomeSmart	46,384		47,970
Franchise	37,600		47,788
Manufacturing¹	27,131		24,305
Other	114,295		275,393
Total Assets	$	2,287,928	$	1,827,176


¹	Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $16.4 million and $14.0 million as of September 30, 2014 and December 31, 2013, respectively.

Earnings (loss) before income taxes for the Progressive reportable segment are determined in accordance with accounting principles generally accepted in the United States. The Company determines earnings (loss) before income taxes for all other reportable segments in accordance with accounting principles generally accepted in the United States with the following adjustments:


•	Revenues in the Sales and Lease Ownership and HomeSmart segments are reported on the cash basis for management reporting purposes.


•	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 5% in 2014 and 2013.


•	Accruals related to store closures are not recorded on the reportable segments’ financial statements, but are 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 lease merchandise.

•

Advertising expense in the Sales and Lease Ownership and HomeSmart segments is estimated at the beginning of each year and then allocated to the division ratably over time for management reporting purposes. For financial reporting purposes, advertising expense is recognized when the related advertising activities occur. The difference between these two methods is reflected as part of Cash to Accrual and Other Adjustments.


•	Sales and lease ownership lease merchandise write-offs are recorded using the direct write-off method for management reporting purposes and using the allowance method for financial reporting purposes. The difference between these two methods is reflected as part of Cash to Accrual and Other Adjustments.


•	Interest on borrowings is estimated at the beginning of each year. Interest is then allocated to reportable segments based on relative total assets.