10-K 1 a10k4q2017.htm 10-K 4Q2017 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                  to                 
Commission file Number. 1-13941
 
 AARON’S, INC.
(Exact name of registrant as specified in its charter)
 
GEORGIA
 
58-0687630
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
400 Galleria Parkway SE, Suite 300
Atlanta, Georgia
 
30339-3182
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (678) 402-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.50 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
ý
 
Accelerated Filer
 
¨
 
 
 
 
 
 
Non-Accelerated Filer
¨
 
Smaller Reporting Company
 
¨
 
 
 
 
 
 
Emerging Growth Company
¨
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act

 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2017 was $2,390,290,895 based on the closing price on that date as reported by the New York Stock Exchange. Solely for the purpose of this calculation and for no other purpose, the non-affiliates of the registrant are assumed to be all shareholders of the registrant other than (i) directors of the registrant, (ii) executive officers of the registrant, and (iii) any shareholder that beneficially owns 10% or more of the registrant’s common shares.
As of February 23, 2018, there were 70,077,559 shares of the Company’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2018 annual meeting of shareholders, to be filed subsequently with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Aaron’s, Inc. (the "Company") about future events and expectations, including statements in this Annual Report on Form 10-K, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For those statements we claim the protection of the safe harbor provisions for forward-looking statements contained in such section. Forward-looking statements are not statements of historical facts but are based on management’s current beliefs, assumptions and expectations regarding our future economic performance, taking into account the information currently available to management.
Generally, the words "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "project," "would," and similar expressions identify forward-looking statements. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including the anticipated impacts and outcomes of our strategic plan, with respect to improving our Aaron’s store profitability; accelerating our omnichannel platform; promoting communication, coordination and integration; converting our existing pipeline into Progressive Leasing retail partners; optimizing the economic return of our active lease portfolio; strengthening our relationships with Progressive Leasing’s and DAMI’s current retail partners; and championing compliance, as well as the expected impacts and outcomes of closing and consolidating certain of our Company-operated Aaron’s stores; initiatives to grow market share and statements expressing general optimism about future operating results, are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and the Company’s present expectations or projections. Factors that could cause our actual results to differ materially from any forward-looking statements include: (i) changes in the enforcement of existing laws and regulations and the adoption of new laws and regulations that may unfavorably impact our businesses; (ii) our strategic plan failing to deliver the benefits and outcomes we expect, with respect to improving our Aaron’s Business in particular; (iii) continuation of the economic challenges faced by portions of our traditional lease-to-own customer base; (iv) increased competition from traditional and virtual lease-to-own competitors, as well as from traditional and on-line retailers and other competitors; (v) financial challenges faced by our franchisees; and (vi) other factors discussed in Item 1A. Risk Factors of this Annual Report on Form 10-K. We qualify any forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements speak only as of the date made, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.


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PART I
ITEM 1. BUSINESS
Unless otherwise indicated or unless the context otherwise requires, all references in this Annual Report on Form 10-K to the "Company," "we," "us," "our" and similar expressions are references to Aaron’s, Inc. and its consolidated subsidiaries.
General Development of Business
Established in 1955 and incorporated in 1962 as a Georgia corporation, Aaron's, Inc., is a leading omnichannel provider of lease-purchase solutions. Aaron's engages in the sales and lease ownership and specialty retailing of furniture, consumer electronics, home appliances and accessories through its more than 1,700 Company-operated and franchised stores in 47 states and Canada as well as its e-commerce platform, Aarons.com. Our stores carry well-known brands such as Samsung®, Frigidaire®, Hewlett-Packard®, LG®, Whirlpool®, Simmons®, Philips®, Ashley®, and United Furniture Industries.
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC ("Progressive Leasing"), a leading virtual lease-to-own company, providing lease-purchase solutions through approximately 27,000 retail locations in 46 states and the District of Columbia.
On October 15, 2015, Progressive Leasing acquired a 100% ownership interest in Dent-A-Med, Inc., d/b/a the HELPcard® (collectively, "DAMI"), which provides a variety of "second-look" credit products that are originated through federally insured banks. Together with Progressive Leasing, DAMI allows the Company to provide retail and merchant partners one source for financing and leasing transactions with below-prime customers.
On May 13, 2016, the Company sold its 82 Company-operated HomeSmart stores (our weekly pay concept) and ceased operations of that division.
On July 27, 2017, the Company acquired substantially all of the assets of the store operations of SEI/Aaron's, Inc. ("SEI"), the Company's largest franchisee. At the time of the acquisition, the SEI store operations served approximately 90,000 customers through 104 Aaron's-branded stores in 11 states primarily in the Northeast. The acquisition is benefiting the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing Aaron's ability to drive inventory supply-chain synergies between the Aaron's Business and Progressive Leasing in markets that SEI served.
As of December 31, 2017, we had 1,726 Aaron's stores, comprised of 1,175 Company-operated stores in 35 states and Canada, and 551 independently-owned franchised stores in 40 states and Canada.
We own, or are otherwise entitled to use, the various trademarks, trade names, service marks, and taglines used in our businesses, including those used with the operations of Aaron’s®, Aaron’s Sales & Lease Ownership®, Progressive Leasing, Dent-A-Med, the HELPcard®, and Woodhaven®. We intend to file for additional trade name and trademark protection when appropriate.
Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplace. We believe that the Progressive Leasing and DAMI acquisitions have been strategically transformational in this respect by allowing the Company to diversify its presence in the market and strengthen our business, as demonstrated by Progressive Leasing's significant revenue and profit growth in 2017. The Company is also leveraging franchisee acquisition opportunities to expand into new geographic markets and benefit from synergies. We believe the traditional store based lease-to-own industry has been negatively impacted in recent periods by: (i) increased competition from a wide range of competitors, including national, regional and local operators of lease-to-own stores; virtual lease-to-own companies; traditional and e-commerce retailers; and, indirectly, from various types of consumer finance companies that enable our customers to shop at traditional or online retailers; (ii) the challenges faced by many traditional "brick-and-mortar" retailers, with respect to a decrease in the number of consumers visiting those stores, especially younger consumers; (iii) the continuing economic challenges facing many traditional lease-to-own customers; and (iv) commoditization of pricing in electronics. In response to these changing market conditions, we are executing a strategic plan that focuses on the following items and that we believe position us for success over the long-term:
Improve Aaron's store profitability – We remain committed to increasing profits through improved marketing and customer acquisition strategies, rapid customer onboarding, improved collections and merchandise loss controls, optimization of product mix, increases in customer retention, cost efficiency initiatives and strategic store consolidations. In addition, our Aaron's Business is investing in improving its analytical capabilities to optimize pricing, promotion, and both product mix and product lifecycle management, which is expected to enhance margins and drive lease volume.  

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Accelerate our omnichannel platform – We believe Aarons.com represents an opportunity to provide more options and shopping convenience in the lease-to-own industry. We are focused on engaging customers in ways that are convenient for them by providing them a seamless, direct-to-door platform through which to shop in store or online across our product offering.
Strengthen relationships of Progressive Leasing and DAMI's current retail partners – Our Progressive Leasing and DAMI businesses have benefited from both long-term and relatively newer, mutually beneficial relationships with our existing retailer base. Our ability to maintain these relationships and address the changing needs of these retailers is critical to the long-term growth strategy of our business.
Focus on converting existing pipeline into Progressive Leasing retail partners – Our Progressive Leasing business segment is continuously focused on establishing new relationships with retailers and identifying solutions that address their business needs. We believe these new relationships are fundamental to continued revenue growth for Progressive Leasing.
Champion compliance – Aaron's, Inc. is a large and diverse company with thousands of daily transactions that are extensively regulated and subject to the requirements of various federal, state, and local laws and regulations. We continue to believe and set expectations that long-term success requires all associates to behave in an ethical manner and to comply with all laws and regulations governing our company's behavior.
Operating Segments
As of December 31, 2017, the Company has three operating and reportable segments: Progressive Leasing, Aaron's Business and DAMI. During 2017, the Company changed its composition of reportable segments by combining the Sales and Lease Ownership, Franchise and Woodhaven components into one reportable segment, the Aaron's Business, to align the reportable segments with the current organizational structure and the operating results that the chief operating decision maker regularly reviews to analyze performance and allocate resources. The Company has retroactively adjusted, for all periods presented, its segment disclosures to align with the current composition of reportable segments.
The results of Progressive Leasing and DAMI have been included in the Company's consolidated results and presented as operating segments from their April 14, 2014 and October 15, 2015 acquisition dates, respectively. On May 13, 2016, the Company sold its HomeSmart operating segment, which included 82 stores.
The operating results of our three reportable segments may be found in (i) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and (ii) Item 8. Financial Statements and Supplementary Data.
Progressive Leasing
Established in 1999 and acquired by the Company in 2014, Progressive Leasing is a leader in the expanding virtual lease-to-own market. Progressive Leasing partners with retailers, primarily in the furniture and bedding, automobile electronics and accessories, mobile, jewelry, consumer electronics and appliance industries to offer a lease-purchase option for credit-challenged customers who may not have access to traditional credit-based financing options.
We offer a proprietary, technology-based application and approval process that does not require Progressive Leasing employees to be staffed in a store. Once a customer is approved, Progressive Leasing purchases the merchandise from the retailer and enters into a lease-to-own agreement with the customer. The contract provides early-buyout options or ownership after a contractually specified amount has been paid. Progressive Leasing has retail partners in 46 states and the District of Columbia, and operates under state-and-District specific regulations.
Aaron's Business
Aaron's store-based and e-commerce operations
Our omnichannel platform allows us to engage customers in ways that are convenient for them by providing them a seamless, direct-to-door platform through which to shop in an Aaron's store or through our e-commerce platform across our product offering. Aaron's store-based and e-commerce operations employ monthly, semi-monthly and weekly payment models to provide durable household goods to consumers through our Aaron's stores and at Aarons.com. Its customer base is comprised primarily of customers with limited access to traditional credit sources such as bank financing, installment credit or credit cards. Customers of our Aaron's Business segment take advantage of our services to acquire consumer goods they might not otherwise be able to without incurring additional debt or long-term obligations.

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We have developed a distinctive concept for our stores including specific merchandising, store layout, pricing and agreement terms all designed to appeal to our target consumer market. The typical store layout is a combination showroom and warehouse generally comprising 6,000 to 10,000 square feet, with an average of approximately 8,000 square feet. Each store usually maintains at least two trucks for delivery, service and return of product. We generally offer same or next day delivery for addresses located within approximately ten miles of the store. Our stores provide a broad selection of brand name electronics, computers, appliances, bedding and furniture, including bedding and furniture manufactured by our Woodhaven Furniture Industries division.
Approximately 96% of our store lease agreements have monthly payment terms and most of the remaining 4% are semi-monthly. By comparison, weekly agreements are the industry standard. Additionally, our proprietary management information system links each Company-operated store to our corporate headquarters.
We may re-lease or sell merchandise that customers return to us prior to the expiration of their agreements. We may also offer up-front purchase options at prices we believe are competitive.
Franchise
We franchise our Aaron's stores in markets where we have no immediate plans to enter. Our franchise program adds value to our Company by allowing us to (i) recognize additional revenues from franchise fees and royalties; (ii) lower our average costs of purchasing, manufacturing and advertising through economies of scale; and (iii) increase customer recognition of our brand.
We enter into agreements with our franchisees to govern the opening and operations of franchised stores. Under our standard agreement, we receive a franchise fee from $15,000 to $50,000 per store depending upon market size. Our standard agreement is for a term of ten years, with one ten-year renewal option. Franchisees are also obligated to remit to us royalty payments of 6% of the weekly collections from their stores. Most franchisees are involved in the day-to-day operations of their stores.
Qualifying franchisees may take part in a financing arrangement we have established with several financial institutions to assist the franchisee in establishing and operating their store(s). Although an inventory financing plan is the primary component of the financing program, we have also arranged, in certain circumstances, for the franchisee to receive a revolving credit line, allowing them to expand operations. We provide guarantees for amounts outstanding under this franchise financing program.
All franchisees are required to complete a comprehensive training program and to operate their franchised sales and lease ownership stores in compliance with our policies, standards and specifications. Annually, each franchise is required to represent and warrant its compliance with all applicable federal, state and/or local laws, regulations and ordinances with respect to its business operations. Although franchisees are not generally required to purchase their lease merchandise from our fulfillment centers, many do so in order to take advantage of Company-sponsored financing, bulk purchasing discounts and favorable delivery terms.
Manufacturing
Woodhaven Furniture Industries, our manufacturing segment, was established by the Company in 1982. Integrated manufacturing enables us to control critical features such as the quality, cost, delivery, styling, durability and quantity of our furniture products, and we believe this provides an integration advantage over our competitors. Substantially all produced items continue to be leased or sold through Aaron's stores, including franchised stores. However, we also manufacture and sale furniture products to other retailers.
Our Woodhaven Furniture Industries division produces upholstered living-room furniture (including contemporary sofas, chairs and modular sofa and ottoman collections in a variety of natural and synthetic fabrics) and bedding (including standard sizes of mattresses and box springs). The furniture designed and produced by this division incorporates features that we believe result in reduced production costs, enhanced durability and improved shipping processes all relative to furniture we would otherwise purchase from third parties. These features include (i) standardized components, (ii) reduced number of parts and features susceptible to wear or damage, (iii) more resilient foam, (iv) durable fabrics and sturdy frames which translate to longer life and higher residual value and (v) devices that allow sofas to stand on end for easier and more efficient transport. The division also provides replacement covers for all styles and fabrics of its upholstered furniture, as well as other parts, for use in reconditioning leased furniture that has been returned.
Woodhaven Furniture Industries consists of five furniture manufacturing plants and seven bedding manufacturing facilities totaling approximately 819,000 square feet of manufacturing capacity.

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DAMI
Founded in 1983 and acquired by the Company in 2015, DAMI primarily serves customers that may not qualify for traditional prime lending who desire to purchase goods and services from participating merchants. DAMI, which operates as a wholly-owned subsidiary of Progressive Leasing, offers customized programs, with services that include revolving loans, private label cards and access to a unique processing platform. DAMI's current network of merchants includes medical and dental markets, furniture, mattresses, fitness equipment, and jewelry. The Company believes the DAMI product offerings are complementary to those of Progressive Leasing and is expanding into the markets and merchants that DAMI serves.
We extend or decline credit to an applicant through third party bank partners based upon the customer's credit rating. Our bank partners originate the loan by providing financing to the merchant at the point of sale and acquiring the receivable at a discount from the face value, which represents a pre-negotiated fee between DAMI and the merchant. DAMI then acquires the receivable from the bank.
Qualifying customers receive a credit card to finance their initial purchase and to use in subsequent purchases at the merchant or other participating merchants for an initial two year period, which we will renew if the cardholder remains in good standing. The customer is required to make periodic minimum payments and may pay certain annual and other periodic fees.
Operations
Operating Strategy
Our operating strategy is based on distinguishing our brands from those of our competitors along with maximizing our operational efficiencies. Our Progressive Leasing and DAMI operating strategies are based on providing excellent service to our merchant partners and our customers, along with continued development of technology-based solutions. This allows us to increase our merchant partners' sales, drive demand for our service, and scale in an efficient manner. Specifically with Progressive Leasing, we believe our ability to service a retailer with limited labor costs allows us to maintain a cost of ownership for leased merchandise lower than that of other options available to our customers.
We implement this strategy for our Aaron's store-based and e-commerce operations by (i) emphasizing the uniqueness of our sales and lease ownership concept from those in our industry generally; (ii) offering high levels of customer service; (iii) promoting our vendors' and Aaron's brand names; (iv) managing merchandise through our manufacturing and distribution capabilities; and (v) utilizing proprietary management information systems.
We believe that the success of our store-based and e-commerce operations is attributable to our distinctive approach to the business that distinguishes us from both our lease-to-own and credit retail competitors. We have pioneered innovative approaches to meeting changing customer needs that we believe differ from many of our competitors. These include (i) offering lease ownership agreements that result in a lower cost to own; (ii) maintaining larger and more attractive store showrooms; (iii) offering a wider selection of higher-quality merchandise; (iv) providing an up-front cash and carry purchase option on select merchandise at competitive prices; and (v) establishing an online platform that provides access to our product offerings.
Aaron's Store-Based Operations
The Aaron's store-based operations has one President, one Chief Operations Officer, five Senior Vice Presidents and one Divisional Vice President that provide executive leadership to their respective operations. Each operation is subdivided into geographic groupings overseen by a total of 25 Regional Directors, including one Canadian Regional Director and 141 Regional Managers, including three Canadian Regional Managers.
At the individual store level, the store manager is primarily responsible for managing and supervising all aspects of store operations, including (i) customer relations and account management, (ii) deliveries and pickups, (iii) warehouse and inventory management, (iv) partial merchandise selection, (v) employment decisions, including hiring, training and terminating store employees and (vi) certain marketing initiatives. Store managers also administer the processing of lease return merchandise including making determinations with respect to inspection, repairs, sales, reconditioning and subsequent leasing.
Our business philosophy emphasizes safeguarding of Company assets, strict cost containment and financial controls. All personnel are expected to monitor expenses to contain costs. We pay all material invoices from Company headquarters in order to enhance financial accountability. We believe that careful monitoring of lease merchandise as well as operational expenses enables us to maintain financial stability and profitability.
We use management information systems to facilitate customer orders, collections, merchandise returns and inventory monitoring. Through the use of proprietary software, each of our stores is network linked directly to corporate headquarters enabling us to monitor single store performance on a daily basis. This network system assists the store manager in (i) tracking merchandise on the showroom floor and warehouse, (ii) minimizing delivery times, (iii) assisting with product purchasing and (iv) matching customer needs with available inventory.

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Lease Agreement Approval, Renewal and Collection
Our Progressive Leasing business uses a proprietary decisioning algorithm to determine which customers would meet our leasing qualifications. The transaction is completed online or through a point of sale integration with our retail partners. Contractual payments are usually based on a customer's pay frequency and are typically processed through automated clearing house payments. Progressive Leasing agreements for merchandise require payments in arrears. If the payment is unsuccessful, collections are managed in-house through our call center, customer service hubs and proprietary lease management system. The call center contacts customers within a few days after the due date to encourage them to keep their agreement current. If the customer chooses to return the merchandise, arrangements are made to receive the merchandise from the customer, either through our retail partners, our Draper, Utah location, our customer service hubs or our Aaron's operated stores.
One of the factors in the success of our store-based operations is timely collections, which are monitored by store managers. Customers are contacted within a few days after their lease payment due dates to encourage them to keep their agreement current. Careful attention to collections is particularly important in sales and lease ownership operations, where the customer typically has the option to cancel the agreement at any time and each contractually due payment is generally considered a renewal of the agreement. The Company continues to encourage customers to take advantage of the convenience of enrolling in the Company's automatic payment program, EZ Pay.
We have a proprietary lease approval process with respect to store customers, which includes obtaining customer data from third party service providers, verifying employment or other reliable sources of income and using personal references supplied by the customer. Generally our Aaron's store operations and e-commerce agreements for merchandise require payments in advance and the merchandise normally is recovered if a payment is significantly in arrears. We currently do not extend credit to our customers at our stores.
The provision for lease merchandise write-offs as a percentage of consolidated lease revenues was 4.8%, 4.8% and 5.1% in 2017, 2016 and 2015, respectively. We believe that our collection and recovery policies comply with applicable laws, and we discipline any employee we determine to have deviated from such policies.
Credit Agreement Approval and Collection
DAMI partners with merchants to provide a variety of revolving credit products originated through two third-party federally insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs). We believe DAMI provides the following strategic benefits when combined with Progressive Leasing's product offerings:
Enhanced product for retail partners - DAMI enhances Progressive Leasing's best-in-class point-of-sale product with an integrated solution for below-prime customers. DAMI has a centralized, scalable underwriting model with a long operating history, deployed through its established bank partners, and a receivable management system.
Higher consumer credit quality - DAMI primarily serves customers with FICO scores between 600 and 700, which make up approximately a quarter of the U.S. population. These customers generally have greater purchasing power with stronger credit profiles than Progressive Leasing's current customers.
Expanded customer base - In addition to complementing Progressive Leasing's traditional offering for existing and prospective retail partners, DAMI's strong relationships with merchant partners who provide services offer an additional channel for longer-term growth.
DAMI uses an underwriting model that provides standardized credit decisions, including borrowing limit amounts. Credit decisions are primarily based on the customer's credit rating and ability-to-pay ratio. Loans receivable are unsecured, and collections on loans receivable are managed in-house through DAMI's call center and proprietary loans receivable management system.
Customer Service
A critical component of the success in our operations is our commitment to developing good relationships with our customers. The Company consistently monitors consumer interests and trends to ensure that our business model is aligned with our customer's needs. The Company believes that building a relationship with the customer that ensures customer satisfaction is critical because customers of Progressive Leasing and Aaron's store-based and e-commerce operations have the option of returning the leased merchandise at any time. Our goal, therefore, is to develop positive associations about the Company and our products, service, and support in the minds of our customers from the moment they enter our showrooms and the showrooms of our retail partners. We demonstrate our commitment to superior customer service by providing customers with access to product through multiple channels, including Progressive Leasing's and DAMI's network of retail partner locations, Aarons.com, and Aaron's store-based operations. Aaron's store-based operations provide rapid delivery of leased merchandise (often on same or next day delivery) and investments in technology that improve the customer experience.
Our Progressive Leasing business offers centralized customer and retailer support through contact centers located in Draper, Utah and Glendale, Arizona.

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We believe our strong focus on customer satisfaction at Progressive Leasing and DAMI generates repeat business and long-lasting relationships with our retail and merchant partners. Aaron's store-based and e-commerce operations customers receive multiple complimentary service benefits. These benefits vary according to applicable state law but generally include a same-as-cash option, merchandise repair service, lifetime reinstatement and other discounts and benefits. In order to increase leasing at existing stores, we foster relationships with existing customers to attract recurring business, and many new agreements are attributable to repeat customers.
During 2015, the Company announced the launch of Approve.Me, which is a proprietary platform that provides a single interface for all Progressive Leasing and DAMI customers seeking credit approval or lease options, from prime to second-look financing, or to Progressive Leasing's lease offering. Approve.Me is compatible with most primary or secondary providers and is designed to give retailers a faster and more efficient way to service customers seeking to finance transactions or secure a lease option.
During 2017, Aaron's store-based operations began offering customers the option to obtain a membership in the Aaron's Club Program (the "Club Program"). The benefits to customers of the Club Program are separated into three general categories: (i) health & wellness discounts; (ii) dining, shopping and consumer savings; and (iii) product protection benefits. The product protection benefits provide Club Program members with lease payment waivers for up to four months or a maximum of $1,000 on active customer lease agreements in the event of customer unemployment or illness; replacement of the product in the event the product is stolen or damaged by an act of God; waiver of remaining lease payments on lease agreements in the event of death of any member named on the lease agreement; and/or repair of the product for an extended period after the customer takes ownership.
Our emphasis on customer service at the Aaron's store-based operations requires that we develop skilled, effective employees who value our customers and who possess and project a genuine desire to serve our customers' needs. To meet this requirement, we have created and implemented a very comprehensive associate development program. The associate development program focuses on and meets the needs of both new and tenured associates.
Our associate development program is designed to train our associates to provide a uniform and enhanced customer service experience. The primary focus of the associate development program is to equip all associates with the knowledge and skills needed to build strong relationships with our customers and to service customers in a manner that complies with applicable laws, regulations and Company policies. Our learning and development coaches provide live, interactive instruction via webinars. In addition, associates are provided training through an Intranet-based learning management system that can be accessed at any time. Additionally, Aaron’s has a management development program that offers development for current and future store managers and a leadership development program for our multi-unit managers. Also, we produce and post video-based communications regarding important Company initiatives on our intranet site.
Purchasing and Retail Relationships
The following table shows the percentage of Progressive Leasing's revenues attributable to different retail partner categories:
 
Year Ended December 31,
Progressive Leasing Retail Partner Category
2017
 
2016
 
2015
Furniture
55
%
 
57
%
 
53
%
Mattress
15
%
 
19
%
 
20
%
Automobile electronics and accessories
11
%
 
12
%
 
12
%
Mobile
10
%
 
5
%
 
8
%
Jewelry
7
%
 
4
%
 
4
%
Other
2
%
 
3
%
 
3
%
During 2017, two retail partners each provided greater than 10% of the lease merchandise acquired by Progressive Leasing and subsequently leased to customers.

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For our Aaron's store-based operations, our merchandise product mix is determined by executive leadership and our merchandising department based on an analysis of customer demands. The following table shows the percentage of our Aaron's Business revenues attributable to different merchandise categories:
 
Year Ended December 31,
Aaron's Business Merchandise Category
2017
 
2016
 
2015
Furniture
45
%
 
42
%
 
42
%
Electronics
24
%
 
26
%
 
25
%
Appliances
24
%
 
24
%
 
24
%
Computers
5
%
 
6
%
 
7
%
Other
2
%
 
2
%
 
2
%
One of Aaron's Business largest suppliers is our own Woodhaven Furniture Industries, which supplies the majority of the upholstered furniture and bedding we lease or sell through our Aaron's Business segment. We purchase the remaining merchandise directly from manufacturers and local distributors and are generally able to obtain bulk discounts that provide us with cost advantages. To a lesser extent, we also may sell or re-lease certain merchandise returned by our Progressive Leasing customers. We have no long-term agreements for the purchase of merchandise.
The following table shows the percentage of DAMI's revenues attributable to different merchant partner categories:
 
Year Ended December 31,
DAMI Merchant Partner Category
2017
 
2016
Medical
49
%
 
48
%
Retail
20
%
 
20
%
Furniture
23
%
 
22
%
Other
8
%
 
10
%
Distribution for Aaron's Store-based Operations
The Aaron's store-based operations utilize our 16 fulfillment centers to control merchandise. These centers average approximately 124,000 square feet, giving us approximately 2.0 million square feet of logistical capacity.
We believe that our network of fulfillment centers provides us with a strategic advantage over our competitors. Our distribution system allows us to deliver merchandise promptly to our stores in order to quickly meet customer demand and effectively manage inventory levels. Most of our continental U.S. stores are within a 250-mile radius of a fulfillment center, facilitating timely shipment of products to the stores and fast delivery of orders to customers.
We realize freight savings from bulk discounts and more efficient distribution of merchandise by using fulfillment centers. We use our own tractor-trailers, local delivery trucks and various contract carriers to make weekly deliveries to individual stores. 
Marketing and Advertising
Progressive Leasing and DAMI execute their marketing strategy in partnership with retailers and other merchants. This is typically accomplished through in-store signage and marketing material, direct marketing activities, and the education of sales associates.
Our marketing for store-based and e-commerce operations targets both current Aaron's customers and potential customers. We feature brand name products available through our no-credit-needed lease ownership plans. We reach our customer demographics by utilizing national and local television and radio with a combination of brand/image messaging and product/price promotions. In addition, we have enhanced our broadcast presence with digital marketing and via social environments such as Facebook, Instagram, Google+, YouTube and Twitter.
We target new and current customers each month by distributing over 27 million, two-page circulars to homes in the United States and Canada. The circulars advertise brand name merchandise along with the features, options, and benefits of Aaron's no-credit-needed lease ownership plans. We also distribute millions of email and direct mail promotions on an annual basis and monitor store layout plans to ensure that we are optimally attracting customers.
Aaron's, Inc. sponsors events at various levels along with select professional and collegiate teams. All of the Company's sports partnerships are supported with advertising, promotional, marketing and brand activation initiatives that we believe significantly enhance the Company's brand awareness and customer loyalty.

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Competition
Aaron's competes with national, regional and local operators of lease-to-own stores, virtual lease-to-own companies, traditional and e-commerce retailers (including many that offer layaway programs) and, indirectly, various types of consumer finance companies that may enable our customers to shop at traditional or on-line retailers, as well as with rental stores that do not offer their customers a purchase option. We also compete with retail stores for customers desiring to purchase merchandise for cash or on credit. Competition is based primarily on product selection and availability, customer service and lease rates, store location and terms. Our largest competitor for Aaron's store-based and e-commerce operations is Rent-A-Center.
Working Capital
The Aaron's Business and Progressive Leasing sales and lease ownership model results in the Company remaining the owner of merchandise on lease; therefore, the Company's most significant working capital asset is merchandise inventory on lease. The Aaron's Business store-based and e-commerce operations also require the Company to maintain significant levels of merchandise inventory available for lease in order to provide the service demanded by our customers and to ensure timely delivery of our products. Consistent and dependable sources of liquidity are required to maintain such merchandise levels. Failure to maintain appropriate levels of merchandise could materially adversely affect our customer relationships and our business. We believe our cash on hand, operating cash flows, credit availability under our financing agreements and other sources of financing are adequate to meet our normal liquidity requirements.
Raw Materials
The principal raw materials we use in furniture manufacturing at Woodhaven are fabric, foam, fiber, wire-innerspring assemblies, plywood, oriented strand board and hardwood. All of these materials are purchased in the open market from unaffiliated sources. We are not dependent on any single supplier. None of the raw materials we use are in short supply.
Seasonality
Our revenue mix is moderately seasonal for both our Aaron's Business and Progressive Leasing segments. 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.
Industry Overview
The Lease-to-Own Industry
The lease-to-own industry offers customers an alternative to traditional methods of obtaining home furnishings, electronics, appliances, computers and other durable consumer goods. In a standard industry lease-to-own transaction, the customer has the option to acquire ownership of merchandise over a fixed term, usually 12 to 24 months, normally by making weekly, semi-monthly, or monthly lease payments. The customer may cancel the agreement at any time by returning the merchandise to the lessor. If the customer leases the item through the completion of the full term, he or she then obtains ownership of the item. The customer may also purchase the item at any time by tendering the contractually specified payment.
The lease-to-own model is particularly attractive to customers who are unable to pay the full upfront purchase price for merchandise or who lack the credit to qualify for conventional financing programs. Other individuals who find the lease-to-own model attractive are customers who, despite access to credit, do not wish to incur additional debt, have only a temporary need for the merchandise or desire to field test a particular brand or model before purchasing it.
Aaron's, Inc. versus Traditional Lease-to-Own
We blend elements of lease-to-own and traditional retailing by providing customers with the option to either lease merchandise with the opportunity to obtain ownership or to purchase merchandise outright. We believe our sales and lease ownership program is a more effective method of retailing our merchandise to customers than a typical lease-to-own business or the traditional method of credit installment sales. 
Our model is distinctive from the conventional lease-to-own model in that we encourage our customers to obtain ownership of their leased merchandise. Based upon our own data and industry data, our customers obtain ownership more often (between 50% - 60%) than in the lease-to-own businesses in general (approximately 25%).

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We believe our sales and lease ownership model offers the following distinguishing characteristics when compared to traditional lease-to-own stores:
Lower total cost - Our agreement terms generally provide a lower cost of ownership to the customer.
Wider merchandise selection - Our Progressive Leasing and DAMI operations allow us to offer a wider selection of merchandise via partnerships with various merchants. Additionally, we also generally offer a larger selection of higher-quality merchandise through our Aaron's e-commerce and store-based operations than others in the lease to own industry.
Larger store layout - Aaron's stores average 8,000 square feet, which is significantly larger than the average size of our largest competitor's lease-to-own stores.
Fewer payments - Our typical plan offers semi-monthly or monthly payments versus the industry standard of weekly payments.
Flexible payment methods - We offer our customers the opportunity to pay by cash, check, ACH, debit card or credit card. We also offer an EZ Pay option which gives customers the ease of using their debit or credit card to set up an automatic payment on the date they select. Our Aaron's stores currently receive approximately 68% of their payment volume (in dollars) from customers by check, debit card or credit card.
We believe our sales and lease ownership model also compares well against traditional retailers in areas such as merchandise selection and the latest product offerings. As technology advances and home furnishings and appliances evolve, we expect to continue offering our customers the latest product at affordable prices.
Unlike transactions with traditional retailers, in which the customer is committed to purchasing the merchandise, our sales and lease ownership transactions are not credit installment contracts. Therefore, the customer may elect to terminate the transaction after a short, initial lease period. Progressive Leasing provides a 90-day buy-out option on lease-purchase solutions offered through traditional retailers. Our store and e-commerce based operations offer an up-front "cash and carry" purchase option and generally a same-as-cash option on most merchandise at prices that we believe are competitive with traditional retailers.
Government Regulation
Our operations are extensively regulated by and subject to the requirements of various federal, state and local laws and regulations, and are subject to oversight by various government agencies, including the Federal Trade Commission ("FTC"), for example, which may exercise oversight of the advertising and other business practices of our Company. In general, such laws regulate applications for leases, pricing, late charges and other fees, lease disclosures, the content of advertising materials, and certain collection procedures. Violations of certain provisions of these laws may result in material penalties. We are unable to predict the nature or effect on our operations or earnings of unknown future legislation, regulations and judicial decisions or future interpretations of existing and future legislation or regulations relating to our operations, and there can be no assurance that future laws, decisions or interpretations will not have a material adverse effect on our operations or earnings.
A summary of certain laws under which we operate follows. This summary does not purport to be a complete summary of the laws referred to below or of all the laws regulating our operations.
Currently, nearly every state and most provinces in Canada specifically regulate lease-to-own transactions via state or provincial statutes. This includes states in which our Progressive Leasing business has retail partners and also includes states in which we currently operate our Aaron's Business. Most state lease purchase laws require lease-to-own companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed and miscellaneous other items. The more restrictive state lease purchase laws limit the total amount that a customer may be charged for an item, or regulate the "cost-of-rental" amount that lease-to-own companies may charge on lease-to-own transactions, generally defining "cost-of-rental" as lease fees paid in excess of the "retail" price of the goods. Our long-established policy in all states is to disclose the terms of our lease purchase transactions as a matter of good business ethics and customer service. We believe we are in material compliance with the various state lease purchase laws. At the present time, no federal law specifically regulates the lease-to-own transaction. Federal legislation to regulate the transaction has been proposed from time to time. In addition, certain elements of the business including matters such as collections activity, customer contact and credit reporting may be subject to federal laws and regulation.

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There has been increased legislative and regulatory attention in the United States, at both the federal and state levels, on financial services products offered to near-prime and subprime consumers in general, which may result in an increase in legislative regulatory efforts directed at the lease-to-own industry. We cannot predict whether any such legislation or regulations will be enacted and what the impact would be on us. From time to time, certain state attorneys general or federal regulatory agencies, such as the Consumer Financial Protection Bureau ("CFPB"), have directed investigations or regulatory initiatives toward our industry, or toward certain companies within the industry. We cannot predict whether any state attorneys general or federal regulatory agencies, including the CFPB, will direct other investigations or regulatory initiatives towards us or our industry in the future, or what the impact of any such future regulatory initiatives may be.
Our sales and lease ownership franchise program is subject to FTC oversight and various state laws regulating the offer and sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires us to furnish to prospective franchisees a Franchise Disclosure Document ("FDD") containing prescribed information. A number of states in which we might consider franchising also regulate the sale of franchises and require registration of the franchise disclosure document with state authorities. We believe we are in material compliance with all applicable franchise laws in those states in which we do business and with similar laws in Canada.
DAMI is subject to various federal and state laws that address lending regulations, consumer information, consumer rights, and certain credit card specific requirements, among other things. In addition, DAMI services credit cards issued through third party bank partners and therefore is subject to those banks' Federal Deposit Insurance Corporation regulators. Several regulations affecting DAMI have been updated in recent years through The Credit Card Act and The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Additional regulations are being developed, as the attention placed on the True Lender Doctrine and consumer debt transactions has grown significantly. We believe we are in material compliance with all applicable laws and regulations. Although we are unable to predict the results of any regulatory initiatives, we do not believe that existing and currently proposed regulations will have a material adverse impact on our Progressive Leasing, Aaron's Business and/or DAMI businesses or other operations.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd-Frank Act was adopted to further the humanitarian goal of ending the violent conflict and human rights abuses in the Democratic Republic of the Congo and adjoining countries ("DRC"). This conflict has been partially financed by the exploitation and trade of tantalum, tin, tungsten and gold, often referred to as conflict minerals, which originate from mines or smelters in the region. Securities and Exchange Commission ("SEC") rules adopted pursuant to the Dodd-Frank Act require reporting companies to disclose annually, among other things, whether any such minerals that are necessary to the functionality or production of products they manufactured during the prior calendar year originated in the DRC and, if so, whether the related revenues were used to support the conflict and/or abuses.
Some of the products manufactured by Woodhaven Furniture Industries, our manufacturing division, may contain tantalum, tin, tungsten and/or gold. Consequently, in compliance with SEC rules, we have adopted a policy on conflict minerals, which can be found on our website at investor.aarons.com. We have also implemented a supply chain due diligence and risk mitigation process with reference to the Organisation for Economic Co-operation and Development, or the OECD, guidance approved by the SEC to assess and report annually whether our products are conflict free.
We expect our suppliers to comply with the OECD guidance and industry standards and to ensure that their supply chains conform to our policy and the OECD guidance. We plan to mitigate identified risks by working with our suppliers and may alter our sources of supply or modify our product design if circumstances require.
Employees
At December 31, 2017, the Company had approximately 11,900 employees. None of our employees are covered by a collective bargaining agreement, and we believe that our relations with employees are good.
Available Information
We make available free of charge on our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports and the Proxy Statement for our Annual Meeting of Shareholders. Our Internet address is investor.aarons.com.

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ITEM 1A. RISK FACTORS
The Company's business is subject to certain risks and uncertainties. Any of the following risk factors could cause our actual results to differ materially from historical or anticipated results. These risks and uncertainties are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results.
We are subject to various existing federal and state laws and regulations which may require us to incur significant compliance costs and expenses associated with government investigations, enforcement actions and private litigation, and we may be subject to new or additional federal and state laws and regulations (or changes in interpretations of existing laws and regulations) that could expose us to government investigations, significant compliance costs or burdens or force us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial condition.
Currently, nearly every state, the District of Columbia, and most provinces in Canada specifically regulate lease-to-own transactions. This includes states in which we currently operate Aaron's stores, as well as states in which our Progressive Leasing business has retail partners. Furthermore, certain aspects of our business, such as our debt collection and any collection by third parties of debt owed by our current or former customers, customer contact, credit reporting practices, the manner in which we process and store certain customer, employee and other information, and various aspects of our cybersecurity risks and mitigation efforts, are subject to federal and state laws and regulations. Many of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with them is difficult and costly. We have incurred and will continue to incur substantial costs to comply with these laws and regulations. In addition to compliance costs, we may incur substantial expenses to respond to government investigations and enforcement actions, proposed fines and penalties, criminal or civil sanctions, and private litigation, arising out of our or our franchisees' alleged violations of existing laws and/or regulations. In addition, existing laws and regulations have and will continue to, and future laws and regulations may, place limitations and restrictions on how we conduct our businesses. While no federal law currently specifically regulates the lease-to-own industry, federal legislation to regulate the industry has been proposed in the past and may be proposed in the future. For example, federal and regulatory authorities such as the CFPB and the FTC are increasingly focused on the subprime financial marketplace in which the lease-to-own industry operates, and may propose and adopt new regulations (or interpret existing regulations) that could result in significant adverse changes in the regulatory landscape for businesses such as ours. In addition, our manufacturing and distribution facilities are subject to various regulations as set forth by the Environmental Protection Agency ("EPA"), Occupational Safety and Health Administration ("OSHA") and Department of Transportation ("DOT"). Furthermore, with increasing frequency, federal and state regulators are holding businesses like ours to higher standards of training, monitoring and compliance. Failure by us or those businesses to comply with the laws and regulations to which we are or may become subject could result in fines, penalties or limitations on our ability to conduct our business, or federal or state actions, or private litigation, any of which could significantly harm our reputation with consumers and Progressive Leasing's and DAMI's retail and merchant partners and could materially and adversely affect our business, prospects and financial condition.
In addition, as we execute on our strategic plans, we may continue to expand into complementary businesses, such as DAMI, that engage in financial, banking or lending services that are subject to a variety of statutes and regulatory requirements in addition to those regulations currently applicable to our legacy operations, which may impose significant costs, limitations or prohibitions on the manner in which we currently conduct our businesses as well as those we may acquire in the future. Any additional laws or regulations may result in changes in the way our operations are regulated, exposing us to increased regulatory oversight, more burdensome regulations and increased litigation risk, each of which could have a material adverse effect on us.
Any proposed rulemaking or enforcement action by the CFPB, the FTC or any other federal or state regulators or other adverse changes in (or interpretations of) existing laws and regulations, the passage of new adverse legislation or regulations by the federal government or the states applicable to our traditional lease-to-own business, our Progressive Leasing virtual lease-to-own business, our Aarons.com e-commerce business and any complementary businesses into which we may expand could materially increase both our compliance costs and the risk that we could be subject to government investigations and subject to sanctions if we are not in compliance. In addition, new burdensome laws or regulations could prohibit or force us to modify our business model, expose us to increased litigation risk, and might reduce the economic potential or sales and profitability of our sales and lease ownership operations.

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Progressive Leasing's virtual lease-to-own business differs in some potentially significant respects from the risks of Aaron's store-based lease-to-own business. The risks could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our entire business.
Progressive Leasing segment offers its lease-to-own solution through the stores of third party retailers. Progressive Leasing consequently faces some different risks than are associated with Aaron's sales and lease ownership concept, which Aaron's and its franchisees offer through their own stores. These potential risks include, among others, Progressive Leasing's:
reliance on third party retailers (over whom Progressive Leasing cannot exercise the degree of control and oversight that Aaron's and its franchisees can assert over their own respective employees) for many important business functions, from advertising through assistance with lease transaction applications, including, for example, explaining the nature of the lease-to-own transaction when asked to do so by the customer, and that the transaction is with Progressive Leasing and not with the third-party retailer;
possibly different regulatory risks than apply to our traditional, lease-to-own store-based business, which now includes our Aarons.com e-commerce business (the "Aaron's Business"), whether arising from the offer by third party retailers of Progressive Leasing's lease-purchase solution alongside traditional cash, check or credit payment options or otherwise, including the risk that regulators may mistakenly treat virtual lease-to-own transactions as some other type of transaction that would face different and more burdensome and complex regulations;
potential that regulators may target the virtual lease-to-own transaction and/or adopt new regulations or legislation (or existing laws and regulations may be interpreted in a manner) that negatively impact Progressive Leasing's ability to offer virtual lease-to-own programs through third party retail partners, and/or that regulators may attempt to force the application of laws and regulations on Progressive Leasing's virtual lease-to-own business in inconsistent and unpredictable ways that could increase the compliance-related costs incurred by Progressive Leasing, and negatively impact Progressive Leasing's financial and operational performance;
reliance on automatic bank account drafts for lease payments, which may become disfavored as a payment method for these transactions by regulators;
revenue concentration in the customers of a relatively small number of retailers, as further discussed below;
lack of control over, and more product diversity within, its lease merchandise inventory relative to the Aaron's Business, which can complicate matters such as merchandise repair and disposition of merchandise that is returned;
indemnification obligations to Progressive Leasing's retail partners and their service providers for losses stemming from Progressive Leasing's failure to perform with respect to its products and services.
These risks could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our entire business.
Our Aaron's Business faces many challenges which could materially and adversely affect our overall results of operations, including increased competition from traditional retailers, e-commerce retailers and virtual rent-to-own companies and the impact of unfavorable and uncertain economic conditions on segments of our customers.
Our Aaron's Business faces a number of challenges from traditional retailers and the continued expansion of digital retail, which includes a wide array of e-commerce retailers that have established far larger digital operations than our Aarons.com e-commerce platform has been able to achieve to date. Increasing competition from the digital sector, as well as more competitive in-store and e-commerce pricing offered by traditional retailers, may reduce the market share held by our Aaron's Business as well as its operating margins, and may materially and adversely affect our overall results of operations. Furthermore, as virtual lease-to-own companies continue to partner with traditional retailers, including possibly "big box" retailers, those retailers may increasingly compete with our Aaron's Business. Many of the competitors discussed above have more advanced and modern e-commerce, logistics and other technology applications and systems that offer them a competitive advantage in attracting and retaining customers for whom our Aaron’s Business competes, especially with respect to younger customers. In addition, those competitors may offer a larger selection of products and more competitive prices than our Aaron’s Business.

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In addition, we believe a portion of our Aaron's Business customer base continues to experience significant economic challenges and uncertainty, including stagnant incomes or incomes that have not returned to pre-recession levels, and that those challenges could be exacerbated by increasing inflationary pressures and rising interest rates. We believe the extended duration of that economic uncertainty, unfavorable economic conditions and related challenges may result in those customers of our Aaron's Business curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, or entering into agreements that generate less revenue for us, resulting in lower same store sales, revenue and profits. For example, our Company-operated stores experienced same store revenue declines of 7.0% and 3.4% in fiscal years 2017 and 2016, respectively. Additionally, our franchised stores experienced same store revenue declines of 5.4% and 2.2% in fiscal years 2017 and 2016, respectively. We calculate same store revenue growth by comparing revenues for comparable periods for stores open during the entirety of those periods. A number of factors have historically affected our same store revenues for our Aaron's Business, including:
changes in competition;
general economic conditions;
economic challenges faced by our customer base;
new product introductions;
consumer trends;
changes in our merchandise mix;
timing of promotional events; and
our ability to execute our business strategy effectively.
If our Aaron's Business is unable to successfully address these challenges, our overall business and results of operations may be materially and adversely affected as well. In addition, any increases in unemployment or underemployment within our customer base may result in increased defaults on lease payments, resulting in increased merchandise return costs and merchandise losses, which also may adversely affect our business and results of operations.
We continue to implement a strategic plan and there is no guarantee that the strategic plan will produce results superior to those achieved under the Company's prior plan.
Our current strategic plan includes focusing on improving Aaron's store profitability; accelerating our omnichannel platform; promoting communication, coordination and integration; and championing compliance.
As part of our efforts to improve the profitability of our Aaron's stores, we recently have focused on identifying and closing underperforming stores and consolidating the customers of those stores into existing, higher performing stores, as opposed to opening new stores, which had traditionally been a central tenet of the Company's strategy. In addition, we have implemented, and dedicated significant resources to, other business improvement initiatives that we believe will lower costs and enhance the experience for customers of our Aaron's Business. There can be no guarantee that our current strategy, and our business improvement initiatives related thereto, including our recent focus on identifying and closing underperforming stores, will yield the results we currently anticipate (or results that will exceed those that might be obtained under prior or other strategies). We may fail to successfully execute on one or more elements of our current strategy, even if we successfully implement one or more other components. For example, as part of our efforts to reduce costs and improve profitability, we closed 123 under-performing Company-operated stores during 2016 and 2017 under the 2016 restructuring program, and an additional 15 Company-operated stores under the 2017 restructuring plan. We may not be successful in transitioning the customers of the Company-operated Aaron's stores that are closed to other Company-operated stores that remain open, and thus, could experience a reduction in revenue and profits associated with such a loss of customers. In addition, the estimated costs and charges associated with these initiatives may vary materially and adversely based upon various factors, including the timing of execution, the outcome of negotiations with landlords and other third parties, or unexpected costs, any of which could result in our not realizing the anticipated benefits from our strategic plan.


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We may not fully execute on one or more elements of our current strategy due to any number of reasons, including, for instance, because of the division of management, financial and Company resources among multiple objectives, or other factors beyond or not completely within our control. The successful execution of our current strategy depends on, among other things, our ability to:
improve same store revenues and profitability in stores that may be maturing;
drive recurring cost savings to recapture margin;
transition customers of stores to other stores that remain open; and
successfully manage and grow our Aarons.com e-commerce platform.
If we cannot address these challenges successfully, or overcome other critical obstacles that may emerge as we continue to pursue our current strategy, we may not be able to achieve our revenue or profitability goals at the rates we currently contemplate, if at all.
We could lose our access to data sources, which could cause us competitive harm and have a material adverse effect on our business, operating results, and financial condition.
We are heavily dependent on data provided by third party providers. For example, our Progressive Leasing business employs a proprietary decisioning algorithm when making lease approval decisions for its customers. This algorithm depends extensively upon continued access to and receipt of data from external sources, such as third party data vendors. In addition, our Aarons.com and DAMI businesses are similarly dependent on customer attribute data provided by external sources. Our data providers could stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach, regulatory concerns or for competitive reasons. We could also become subject to increased legislative, regulatory or judicial restrictions or mandates on the collection, disclosure or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data. If we were to lose access to this external data or if our access or use were restricted or were to become less economical or desirable, our Progressive Leasing, Aarons.com and DAMI businesses would be negatively impacted, which would adversely affect our operating results and financial condition. We cannot provide assurance that we will be successful in maintaining our relationships with these external data source providers or that we will be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative sources if our current sources become unavailable.
Our proprietary algorithms and decisioning tools used to approve customers could no longer be indicative of our customer's ability to pay.
We believe Progressive Leasing's proprietary, centralized underwriting process to be a key to the success of the Progressive Leasing business. That and other underwriting processes and tools are also used to approve customers of Aaron's and DAMI. We assume behavior and attributes observed for prior customers, among other factors, are indicative of performance by future customers. Unexpected changes in behavior caused by macroeconomic conditions, changes in consumer preferences, availability of alternative products or other factors, however, could lead to increased incidence and costs related to unpaid leases and/or merchandise losses.
Progressive Leasing's loss of operating revenues from key retail partners could materially and adversely affect our business.
Progressive Leasing's relationship with its largest retail partners will have a significant impact on our operating revenues in future periods. The loss of any such key retailers would have a material adverse effect on our business. In addition, any publicity associated with the loss of any of Progressive Leasing's large retail partners could harm our reputation, making it more difficult to attract and retain consumers and other retail partners, and could lessen Progressive Leasing's negotiating power with its remaining and prospective retail partners.
Many of Progressive Leasing's contracts with its retail partners can be terminated by them on relatively short notice, and all can be terminated in limited circumstances, such as our material breach or insolvency, our failure to meet agreed-upon service levels, certain changes in control of Progressive Leasing, and its inability or unwillingness to agree to requested pricing changes. There can be no assurance that Progressive Leasing will be able to continue its relationships with its largest retail partners on the same or more favorable terms in future periods or that its relationships will continue beyond the terms of our existing contracts with them. Our operating revenues and operating results could suffer if, among other things, any of Progressive Leasing's retail partners renegotiates, terminates or fails to renew, or fails to renew on similar or favorable terms, their agreements with Progressive Leasing or otherwise chooses to modify the level of support they provide for Progressive Leasing's lease-purchase option.


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If our independent franchisees fail to meet their debt service payments or other obligations under outstanding loans guaranteed by us as part of a franchise loan program, we may be required to pay to satisfy these obligations which could have a material adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain franchisees under a franchise loan program with several banks with a maximum commitment amount of $85.0 million. In the event these franchisees are unable to meet their debt service payments or otherwise experience events of default, we would be unconditionally liable for a portion of the outstanding balance of the franchisees' debt obligations, which at December 31, 2017 was $45.3 million.
We have had no significant losses associated with the franchise loan and guaranty program since its inception. Although we believe that any losses associated with defaults would be mitigated through recovery of lease merchandise and other assets, we cannot guarantee that there will be no significant losses in the future or that we will be able to adequately mitigate any such losses. In addition to being liable for franchisee loan defaults under this loan and guaranty program, we could suffer a loss of franchisee fees and royalties, and a loss of revenue and profit derived from our sales of merchandise to franchisees, in the event that any defaulting franchisees become insolvent and/or cease business operations due to financial difficulties, and could suffer write-downs of outstanding receivables those franchisees owe us if they fail to make those payments to us. If we fail to adequately mitigate any such future losses, our business and financial condition could be materially adversely impacted.
Operational and other failures by our franchisees may adversely impact us.
Qualified franchisees who conform to our standards and requirements are important to the overall success of our business. Our franchisees, however, are independent businesses and not employees, and consequently we cannot and do not control them to the same extent as our Company-operated stores. Our franchisees may fail in key areas, or experience significant business or financial difficulties, which could slow our growth, reduce our franchise revenues, damage our reputation, expose us to regulatory enforcement actions or private litigation and/or cause us to incur additional costs. If our franchisees experience business or financial difficulties, we could suffer a loss of franchisee fees, royalties, and revenue and profits derived from our sales of merchandise to franchisees, and could suffer write-downs of outstanding receivables those franchisees owe us if they fail to make those payments to us. If we fail to adequately mitigate any such future losses, our business and financial condition could be materially adversely impacted.
We may engage in litigation with our franchisees.
Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our products and the customer experience. In addition, we may be subject to claims by our franchisees relating to our franchise disclosure documents, including claims based on financial information contained in those documents. Engaging in such litigation may be costly, time-consuming and may distract management and materially adversely affect our relationships with franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations and may damage our reputation and brand. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.
If we do not maintain the privacy and security of customer, employee, supplier or Company information, we could damage our reputation, incur substantial additional costs and become subject to litigation and regulatory enforcement actions.
Our business involves the collection, storage and transmission of customers' personal information, consumer preferences and credit and debit card information, as well as confidential information about our customers, retail partners, employees, suppliers and the Company. We also serve as an information technology provider to our franchisees including storing and processing information related to their customers on our systems. Our information systems are vulnerable to an increasing threat of continually evolving cybersecurity risks. Any significant compromise or breach of our data security, whether external or internal, or misuse of employee or customer data, could significantly damage our reputation, cause the disclosure of confidential customer, associate, supplier or Company information, and result in significant costs, lost revenues or sales, fines, regulatory enforcement actions and lawsuits. For example, we are currently subject to settlements with the FTC as well as the State of California and the Commonwealth of Pennsylvania regarding our business practices and compliance with privacy laws in those states, and data breaches of this nature could result in additional penalties under the terms of those settlements.


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Various third parties, including computer hackers, who are continually becoming more aggressive and sophisticated, may attempt to penetrate our network security and, if successful, misappropriate confidential customer, retailer partner, employee and/or supplier information. In addition, one of our employees, contractors or other third parties with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. While we have implemented systems and processes to protect against unauthorized access to or use of secured data and to prevent data loss and theft, there is no guarantee that these procedures are adequate to safeguard against all data security breaches or misuse of the data. The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs. These costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could be substantial and adversely impact our business.

We have experienced security incidents in the past, including an incident in which customer information was compromised, although no security incidents have resulted in a material loss to date. We have been and are continuously in the process of improving our system security, although there can be no assurance that improvements we have already implemented, or others that we may implement from time to time in the future, will be effective to prevent all security incidents. We maintain network security and private liability insurance intended to help mitigate the financial risk of such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents.

A significant compromise of sensitive employee, customer or supplier information in our possession could result in legal damages and regulatory penalties. In addition, the costs of defending such actions or remediating breaches could be material. Security breaches could also harm our reputation with our customers and retail partners, potentially leading to decreased revenues, and with federal and state government agencies and bodies.
The geographic concentration of our Aaron's stores, as well as those of Progressive Leasing's retail partners, may magnify the impact of conditions in a particular region, including economic downturns and other occurrences.
The concentration of our Aaron's stores, and/or those of our retail partners at Progressive Leasing, in one region or a limited number of markets may expose us to risks of adverse economic developments that are greater than if our store portfolio and retail partners were more geographically diverse.
In addition, our store operations, as well as those of our retail partners at Progressive Leasing, are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornadoes, which have in the past caused damage such as flooding and other damage to our stores and those of our retail partners in specific geographic locations, including in Florida and Texas, two of our large markets, and may, depending upon the location and severity of such events, unfavorably impact our business continuity. Additionally, we cannot assure you that the amount of our hurricane, windstorm, earthquake, flood, business interruption or other casualty insurance we maintain from time to time would entirely cover damages caused by any such event.
The transactions offered to consumers by our businesses may be negatively characterized by consumer advocacy groups, the media and certain federal, state and local government officials, and if those negative characterizations become increasingly accepted by consumers and/or Progressive Leasing's or DAMI's retail and merchant partners, demand for our goods and the transactions we offer could decrease and our business could be materially adversely affected.
Certain consumer advocacy groups, media reports and federal and state legislators have asserted that laws and regulations should be broader and more restrictive regarding lease-to-own transactions. The consumer advocacy groups and media reports generally focus on the total cost to a consumer to acquire an item, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. This "cost-of-rental" amount, which is generally defined as lease fees paid in excess of the "retail" price of the goods, is from time to time characterized by consumer advocacy groups and media reports as predatory or abusive without discussing benefits associated with our lease-to-own programs or the lack of viable alternatives for our customers' needs. If the negative characterization of these types of lease-to-own transactions becomes increasingly accepted by consumers or Progressive Leasing's or DAMI's retail and merchant partners, demand for our products and services could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, if the negative characterization of these types of transactions is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition. The vast expansion and reach of technology, including social media platforms, has increased the risk that our reputation could be significantly impacted by these negative characterizations in a relatively short amount of time. If we are unable to quickly and effectively respond to such characterizations, we may experience declines in customer loyalty and traffic and our relationships with our retail partners may suffer, which could have a material adverse effect on our business, results of operations and financial condition.

19


If our information technology systems are impaired, our business could be interrupted, our reputation could be harmed and we may experience lost revenues and increased costs and expenses.
We rely on our information technology systems to process transactions with our customers, including tracking lease payments on merchandise, and to manage other important functions of our business. Failures of our systems, such as "bugs," crashes, internet failures and outages, operator error or catastrophic events, could seriously impair our ability to operate our business, and our business continuity and contingency plans related to such information technology failures may not be adequate to prevent that type of serious impairment. If our information technology systems are impaired, our business (and that of our franchisees) could be interrupted, our reputation could be harmed, we may experience lost revenues or sales and we could experience increased costs and expenses to remediate the problem.
From time to time we are subject to legal and regulatory proceedings which seek material damages or seek to place significant restrictions on our business operations. These proceedings may be negatively perceived by the public and materially and adversely affect our business. Certain judicial or regulatory decisions may restrict or eliminate the enforceability of certain types of contractual provisions designed to limit costly litigation, including class actions, as a dispute resolution method.
We are subject to legal and regulatory proceedings from time to time which may result in material damages or place significant restrictions on our business operations. For example, we are currently subject to settlements with the FTC as well as the State of California and the Commonwealth of Pennsylvania regarding our business practices and compliance with privacy laws in those states. Although we do not presently believe that any of our current legal or regulatory proceedings will ultimately have a material adverse impact on our operations, we cannot assure you that we will not incur material damages or penalties in a lawsuit or other proceeding in the future and/or significant defense costs related to such lawsuits or regulatory proceedings. For example, we operate a fleet of approximately 3,000 delivery trucks and, in addition to the significant compliance-related costs associated with operating such a fleet, we may incur significant adverse judgments, damages and penalties related to accidents that those trucks may be involved in from time to time. Significant adverse judgments, penalties, settlement amounts, amounts needed to post a bond pending an appeal or defense costs could materially and adversely affect our liquidity and capital resources. It is also possible that, as a result of a future governmental or other proceeding or settlement, significant restrictions will be placed upon, or significant changes made to, our business practices, operations or methods, including pricing or similar terms. Any such restrictions or changes may adversely affect our profitability or increase our compliance costs.
To attempt to limit costly and lengthy consumer, employee and other litigation, including class actions, the Company requires its customers and employers to sign arbitration agreements and class action waivers, many of which offer opt-out provisions. Recent judicial and regulatory actions have attempted to restrict or eliminate the enforceability of such agreements and waivers. If the Company is not permitted to use arbitration agreements and/or class action waivers, or if the enforceability of such agreements and waivers is restricted or eliminated, the Company could incur increased costs to resolve legal actions brought by customers, employees and others, as it would be forced to participate in more expensive and lengthy dispute resolution processes.
Failure to successfully manage and grow our Aarons.com e-commerce platform could materially adversely affect our business and future prospects.
Our Aarons.com e-commerce platform provides customers the ability to review our product offerings and prices and enter into lease agreements as well as make payments on existing leases from the comfort of their homes and on their mobile devices. Our e-commerce platform is a significant component of our strategic plan and we believe will drive future growth of our business. In order to promote our products and services and allow customers to transact online and reach new customers, we must effectively maintain, improve and grow our e-commerce platform. There can be no assurance that we will be able to maintain, improve or grow our e-commerce platform in a profitable manner.
DAMI's "second-look" credit programs for below-prime consumers differ in significant respects from the risks of Aaron's store-based lease-to-own business. The risks could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our entire business.
As discussed above, as we execute on our strategic plans, we may continue to expand into complementary businesses that engage in financial, banking or lending services. For example, DAMI, which through its HELPcard® and other private label credit products, offers merchant partners one source for a variety of open-end credit programs for below-prime consumers, is a business that differs in significant respects from our sales and lease ownership businesses. Consequently, DAMI faces different risks than are associated with Aaron's sales and lease ownership concept, which Aaron's and its franchisees offer through their own stores. Because DAMI is operated as a wholly-owned subsidiary of Progressive Leasing, the risks DAMI faces could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our entire business. These potential risks include, among others, DAMI's:

20


reliance on third party retailers (over whom DAMI cannot exercise the degree of control and oversight that Aaron's Business, including franchisees, can assert over their own respective employees) for many important business functions, from advertising through assistance with finance applications;
reliance on two bank partners to issue DAMI's HELPcard® and other credit products. The banks' regulators, including the FDIC, could at any time limit or otherwise modify the banks' ability to continue their relationships with DAMI and any significant interruption of those relationships would result in DAMI being unable to use exported rates or acquire new receivables without moving to a costly and inefficient state-by-state model, and being unable to provide other credit products. It is possible that a regulatory position or action taken with respect to DAMI's issuing banks might result in the banks' inability or unwillingness to originate future credit products on DAMI's behalf or in partnership with it, which would adversely affect DAMI's ability to grow its point-of-sale and direct-to-consumer credit products and other consumer credit offerings and underlying receivables. In addition, DAMI's agreements with its issuing bank partners have scheduled expiration dates. Although those expiration dates are several months apart, if DAMI is unable to extend or execute new agreements with both of its issuing banks upon the expiration of its current agreements, or if its existing agreements both were terminated or otherwise disrupted, there is a risk that DAMI would not be able to enter into an agreement with an alternative bank provider on terms that DAMI would consider favorable or in a timely manner without disruption of its business; and
different legal and regulatory risks, and different regulators (including the FDIC, for example), than those applicable to Aaron's and Progressive Leasing's sales and lease ownership businesses, including risks arising from the Truth in Lending Act, state credit laws and the offering of open-end credit, the potential that regulators may target DAMI's operating model and the interest rates it charges, and the risk of unfavorable court decisions relating to the True Lender Doctrine, including among other factors, exporting of interest rates and state usury laws.
These risks could have a material negative effect on Progressive Leasing, which could result in a material adverse effect on our entire business.
If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.
As a public reporting company subject to the rules and regulations established from time to time by the SEC and the New York Stock Exchange, we are required to, among other things, establish and periodically evaluate procedures with respect to our disclosure controls and procedures. In addition, as a public company, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify, on an annual basis, that our internal control over financial reporting is effective.
If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner, which could cause a decline in our stock price and adversely affect our results of operations and financial condition. In addition, if our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on the effectiveness of our internal control over financial reporting, when required, or if material weaknesses in our internal controls are identified, we could be subject to increased regulatory scrutiny and a loss of public and investor confidence, which could also have a material adverse effect on our business and our stock price.
We are subject to laws that regulate franchisor-franchisee relationships. Our ability to enforce our rights against our franchisees may be adversely affected by these laws, which could impair our growth strategy and cause our franchise revenues to decline.
As a franchisor, we are subject to regulation by the FTC, state laws and certain Canadian provincial laws regulating the offer and sale of franchises. Our failure to comply with applicable franchise regulations could cause us to lose franchise fees and ongoing royalty revenues. Moreover, state and provincial laws that regulate substantive aspects of our relationships with franchisees may limit our ability to terminate or otherwise resolve conflicts with our franchisees or enforce contractual duties or rights we believe we have with respect to our franchisees.
Changes to the current law with respect to the assignment of liabilities in the franchise business model could adversely impact our profitability.
One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not responsible for the acts, omissions or liabilities of its franchisees. Recently, established law has been challenged and questioned by the plaintiffs' bar and certain regulators, and the outcome of these challenges and new regulatory positions remains unknown. If these challenges and/or new positions are successful in altering currently settled law, it could significantly change the way we and other franchisors conduct business and adversely impact our profitability.

21


For example, a determination that we are a joint employer with our franchisees or that franchisees are part of one unified system with joint and several liability under the National Labor Relations Act, statutes administered by the Equal Employment Opportunity Commission, OSHA regulations and other areas of labor and employment law could subject us and/or our franchisees to liability for the unfair labor practices, wage-and-hour law violations, employment discrimination law violations, OSHA regulation violations and other employment-related liabilities of one or more franchisees. Furthermore, any such change in law would create an increased likelihood that certain franchised networks would be required to employ unionized labor, which could impact franchisors like us through, among other things, increased labor costs and difficulty in attracting new franchisees. In addition, if these changes were to be expanded outside of the employment context, we could be held liable for other claims against franchisees. Therefore, any such regulatory action or court decisions could have a material adverse effect on our results of operations.
The loss of the services of our key executives, or our inability to attract and retain key technical talent in the areas of IT and analytics, could have a material adverse impact on our operations.
We believe that we have benefited substantially from our current executive leadership and that the unexpected loss of their services in the future could adversely affect our business and operations. We also depend on the continued services of the rest of our management team. The loss of these individuals without adequate replacement could adversely affect our business. Further, we believe that the unexpected loss of certain key technical talent in the areas of information technology and analytics in the future could adversely affect our business and operations. We do not carry key man life insurance on any of our personnel. The inability to attract and retain qualified individuals, or a significant increase in the costs to do so, would materially adversely affect our operations.
Our competitors could impede our ability to attract new customers, or cause current customers to cease doing business with us.
The industries in which we operate are highly competitive and highly fluid, particularly in light of the sweeping new regulatory environment we are witnessing from regulators such as the CFPB and the FTC, among others, as discussed above.
In the sales and lease ownership market, our competitors include national, regional and local operators of lease-to-own stores, virtual lease-to-own companies, traditional and e-commerce retailers (including many retailers who offer layaway programs) and, indirectly, various types of consumer finance companies, including installment, payday and title loan companies, that may enable our customers to shop at traditional or on-line retailers, as well as rental stores that do not offer their customers a purchase option. Our competitors in the traditional and virtual sales and lease ownership and traditional retail markets may have significantly greater financial and operating resources and greater name recognition in certain markets. Greater financial resources may allow our competitors to grow faster than us, including through acquisitions. This in turn may enable them to enter new markets before we can, which may decrease our opportunities in those markets. Greater name recognition, or better public perception of a competitor's reputation, may help them divert market share away from us, even in our established markets. Some competitors may be willing to offer competing products on an unprofitable basis in an effort to gain market share, which could compel us to match their pricing strategy or lose business.
Our Progressive Leasing business relies heavily on relationships with retail partners. An increase in competition could cause our retail partners to no longer offer the Progressive Leasing product in favor of our competitors which could slow growth in the Progressive Leasing business and limit or reduce profitability.
In addition, as a result of changes to the regulatory framework within which we operate, among other reasons, new competitors may emerge or current and potential competitors may establish financial or strategic relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. The occurrence of any of these events could materially adversely impact our business.
We may pursue strategic alliances, acquisitions or investments and the failure of an alliance, acquisition or investment to produce the anticipated results or the inability to fully integrate the acquired companies could have an adverse impact on our business.
We may from time to time acquire or invest in complementary companies or businesses, as we have done in recent years. The success of such acquisitions or investments is based on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors relating to the respective business. There can be no assurance that our acquisitions or investments will produce the results that we expect at the time we enter into or complete the transaction. Furthermore, acquisitions may result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses or write-offs of goodwill or other intangibles, any of which could harm our financial condition. We also may not be able to successfully integrate operations that we acquire, including their customers, personnel, financial systems, supply chain and other operations, which could adversely affect our business. Acquisitions may also result in the diversion of our capital and our management's attention from other business issues and opportunities and from our on-going strategic plan to improve the performance of the Aaron's Business.

22


We depend on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including wage and hour regulations.
Our workforce is comprised primarily of employees who work on an hourly basis. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same time controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. In certain areas where we operate, there is significant competition for employees, including from retailers and the restaurant industries. The lack of availability of an adequate number of hourly employees, or our inability to attract and retain them, or an increase in wages and benefits to attract and maintain current employees could adversely affect our business, results of operations, cash flows and financial condition. We are subject to applicable rules and regulations relating to our relationship with our employees, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and working conditions and immigration status. Accordingly, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers' compensation insurance rates, compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, prospects, results of operations and financial condition.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
our ability to meet market expectations with respect to the growth and profitability of each of our operating segments;
quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store revenues or when and how many locations we acquire, open or close;
quarterly variations in our competitors' results of operations;
changes in earnings estimates or buy/sell recommendations by financial analysts;
how our actual financial performance compares to the financial performance outlook we provide;
state or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our operations;
the stock price performance of comparable companies; and
continuing unpredictable global and regional economic conditions.
In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies' operating performance.
We are subject to sales, income and other taxes, which can be difficult and complex to calculate due to the nature of our various businesses. A failure to correctly calculate and pay such taxes could result in substantial tax liabilities and a material adverse effect on our results of operations.
The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the lease-to-own industry generally and our virtual lease-to-own Progressive Leasing and Aarons.com businesses more specifically. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the lease-to-own industry and e-commerce and, therefore, in many cases it is not clear how existing statutes apply to our various businesses. In addition, governments are increasingly looking for ways to increase revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through indirect taxes. This also could result in other adverse changes in or interpretations of existing sales, income and other tax regulations. For example, from time to time, some taxing authorities in the United States have notified us that they believe we owe them certain taxes imposed on transactions with our customers, including some state tax authorities suggesting that our Progressive Leasing business may owe certain state taxes based on the locations of Progressive Leasing's retail partners where Progressive Leasing's lease-to-own transactions are originated. Although these notifications have not resulted in material tax liabilities to date, there is a risk that one or more jurisdictions may be successful in the future, which could have a material adverse effect on our results of operations.

23


We must successfully order and manage our Aaron's Business inventory to reflect customer demand and anticipate changing consumer preferences and buying trends or our revenue and profitability will be adversely affected.
The success of our Aaron's Business depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. We cannot always accurately predict consumer preferences and they may change over time. We must order certain types of merchandise, such as electronics, well in advance of seasonal increases in customer demand for those products. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends or changes in prices. If we misjudge either the market for our merchandise, our customers' product preferences or our customers' leasing habits, our revenue may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins. In addition, our level of profitability and success in our Aaron's Business depends on our ability to successfully re-lease or sale our inventory of merchandise that we take back from the customers of our Aaron's Business, due to their lease agreements expiring, or otherwise.
Employee misconduct or misconduct by third parties acting on our behalf could harm us by subjecting us to monetary loss, significant legal liability, regulatory scrutiny and reputational harm.
Our reputation is critical to maintaining and developing relationships with our existing and potential customers and third parties with whom we do business. There is a risk that our employees or the employees of a third party retailer with whom our Progressive Leasing business partners, or of a third party merchant with whom our DAMI segment does business, could engage in misconduct that adversely affects our reputation and business. For example, if one of our employees engages in discrimination or harassment in the workplace, or if an employee or a third party associated with our business were to engage in, or be accused of engaging in, illegal or suspicious activities including fraud or theft of our customers' information, we could suffer direct losses from the activity and, in addition, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, customer relationships and ability to attract future customers. Employee or third-party misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect violations of such rules. Our Company-operated Aaron's stores have experienced employee fraud from time to time, and it is not always possible to deter employee or third-party misconduct. The precautions that we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees or third party contractors, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.
Product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.
The products we sell and lease in our Aaron’s Business and lease through our Progressive Leasing business are subject to regulation by the U.S. Consumer Product Safety Commission and similar state regulatory authorities. Such products could be subject to recalls and other actions by these authorities. Product safety or quality concerns may require us to voluntarily remove selected products from our Aaron's stores, or from our customers' homes. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our financial condition. In addition, given the terms of our lease agreements with our customers, in the event of such a product quality or safety issue, our customers who have leased the defective merchandise from us could terminate their lease agreements for that merchandise and/or not renew those lease arrangements, which could have a material adverse effect on our financial condition, if we are unable to recover those losses from the vendor who supplied us with the defective merchandise.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
The Company leases warehouse and retail store space for most of its store-based operations, call center space, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. Most of the leases contain renewal options for additional periods ranging from one to 20 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. The following table sets forth certain information regarding our furniture manufacturing plants, bedding facilities, fulfillment centers, service centers, warehouses, corporate management and call center facilities as of December 31, 2017:
LOCATION
SEGMENT, PRIMARY USE AND HOW HELD
SQ. FT.
Cairo, Georgia
Aaron's Business—Furniture Manufacturing – Owned
300,000

Cairo, Georgia
Aaron's Business—Furniture Manufacturing – Owned
147,000

Cairo, Georgia
Aaron's Business—Furniture Parts Warehouse – Leased
111,000

Coolidge, Georgia
Aaron's Business—Furniture Manufacturing – Owned
81,000

Coolidge, Georgia
Aaron's Business—Furniture Manufacturing – Owned
48,000

Coolidge, Georgia
Aaron's Business—Furniture Manufacturing – Owned
41,000

Coolidge, Georgia
Aaron's Business—Administration and Showroom – Owned
10,000

Lewisberry, Pennsylvania
Aaron's Business—Bedding Manufacturing – Leased
25,000

Fairburn, Georgia
Aaron's Business—Bedding Manufacturing – Leased
57,000

Sugarland, Texas
Aaron's Business—Bedding Manufacturing – Owned
23,000

Auburndale, Florida
Aaron's Business—Bedding Manufacturing – Leased
20,000

Kansas City, Kansas
Aaron's Business—Bedding Manufacturing – Leased
13,000

Phoenix, Arizona
Aaron's Business—Bedding Manufacturing – Leased
24,000

Plainfield, Indiana
Aaron's Business—Bedding Manufacturing – Leased
40,000

Auburndale, Florida
Aaron's Business—Fulfillment Center – Leased
131,000

Belcamp, Maryland
Aaron's Business—Fulfillment Center – Leased
95,000

Obetz, Ohio
Aaron's Business—Fulfillment Center – Leased
91,000

Dallas, Texas
Aaron's Business—Fulfillment Center – Leased
133,000

Fairburn, Georgia
Aaron's Business—Fulfillment Center – Leased
115,000

Sugarland, Texas
Aaron's Business—Fulfillment Center – Owned
135,000

Huntersville, North Carolina
Aaron's Business—Fulfillment Center – Leased
206,000

LaVergne, Tennessee
Aaron's Business—Fulfillment Center – Leased
100,000

Oklahoma City, Oklahoma
Aaron's Business—Fulfillment Center – Leased
130,000

Phoenix, Arizona
Aaron's Business—Fulfillment Center – Leased
107,000

Magnolia, Mississippi
Aaron's Business—Fulfillment Center – Leased
125,000

Plainfield, Indiana
Aaron's Business—Fulfillment Center – Leased
156,000

Portland, Oregon
Aaron's Business—Fulfillment Center – Leased
98,000

Westfield, Massachusetts
Aaron's Business—Fulfillment Center – Leased
131,000

Kansas City, Kansas
Aaron's Business—Fulfillment Center – Leased
103,000

Cheswick, Pennsylvania
Aaron's Business—Fulfillment Center – Leased
126,000


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LOCATION
SEGMENT, PRIMARY USE AND HOW HELD
SQ. FT.
Auburndale, Florida
Aaron's Business—Service Center – Leased
7,000

Belcamp, Maryland
Aaron's Business—Service Center – Leased
5,000

Buffalo, New York
Aaron's Business—Service Center – Leased
1,000

Cheswick, Pennsylvania
Aaron's Business—Service Center – Leased
10,000

Citrus Heights, California
Aaron's Business—Service Center – Leased
8,000

Fairburn, Georgia
Aaron's Business—Service Center – Leased
10,000

Grand Prairie, Texas
Aaron's Business—Service Center – Leased
7,000

Hartford, Connecticut
Aaron's Business—Service Center – Leased
9,000

Houston, Texas
Aaron's Business—Service Center – Leased
20,000

Huntersville, North Carolina
Aaron's Business—Service Center – Leased
18,000

Kansas City, Kansas
Aaron's Business—Service Center – Leased
8,000

Obetz, Ohio
Aaron's Business—Service Center – Leased
7,000

Oklahoma City, Oklahoma
Aaron's Business—Service Center – Leased
10,000

Phoenix, Arizona
Aaron's Business—Service Center – Leased
7,000

Plainfield, Indiana
Aaron's Business—Service Center – Leased
13,000

Ridgeland, Mississippi
Aaron's Business—Service Center – Leased
10,000

South Madison, Tennessee
Aaron's Business—Service Center – Leased
23,000

Draper, Utah
Progressive Leasing —Corporate Management/Call Center – Leased
148,000

Glendale, Arizona
Progressive Leasing —Corporate Management/Call Center – Leased
52,000

Draper, Utah
DAMI—Corporate Management/Call Center – Leased
25,000

Springdale, Arkansas
DAMI—Corporate Management/Call Center – Owned
29,000

Tulsa, Oklahoma
DAMI—Call Center – Leased
3,000

We sold the building that previously contained our executive and administrative offices in January 2016, and secured a lease in a different part of Atlanta for approximately 64,000 square feet of a building that we began occupying in 2016 and use for our permanent executive and administrative offices.
We currently lease 115,000 square feet in Kennesaw, Georgia, which is used for other administrative functions.
We believe that all of our facilities are well maintained and adequate for their current and reasonably foreseeable uses.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings arising in the ordinary course of business. While any proceeding contains an element of uncertainty, we do not currently believe that any of the outstanding legal proceedings to which we are a party will have a material adverse impact on our business, financial position or results of operations. However, an adverse resolution of a number of these items may have a material adverse impact on our business, financial position or results of operations. For further information, see Note 9 to these consolidated financial statements under the heading "Legal Proceedings," which discussion is incorporated by reference in response to this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Effective December 13, 2010, all shares of the Company's common stock began trading as a single class on the New York Stock Exchange under the ticker symbol "AAN." The CUSIP number of the Company's common stock is 002535300.
The number of shareholders of record of the Company's common stock at February 23, 2018 was 162. The closing price for the common stock at February 23, 2018 was $44.87.
The following table shows the range of high and low sales prices per share for the Company's common stock and the quarterly cash dividends declared per share for the periods indicated. 
Common Stock
High
 
Low
 
Cash
Dividends
Per Share
Year Ended December 31, 2017
 
 
 
 
 
First Quarter
$
32.88

 
$
26.12

 
$
0.0275

Second Quarter
40.33

 
29.05

 
0.0275

Third Quarter
48.22

 
37.14

 
0.0275

Fourth Quarter
45.06

 
34.29

 
0.0300

Common Stock
High
 
Low
 
Cash
Dividends
Per Share
Year Ended December 31, 2016
 
 
 
 
 
First Quarter
$
25.25

 
$
20.24

 
$
0.0250

Second Quarter
27.72

 
20.51

 
0.0250

Third Quarter
25.90

 
21.50

 
0.0250

Fourth Quarter
34.22

 
22.37

 
0.0275

Subject to our ongoing ability to generate sufficient income, any future capital needs and other contingencies, we expect to continue our policy of paying quarterly dividends. Dividends will be payable only when, and if, declared by the Company's Board of Directors. Under our revolving credit agreement, 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.
Issuer Purchases of Equity Securities
As of December 31, 2017, 7,162,279 shares of common stock remained available for repurchase from time to time under the purchase authority previously approved by the Company's Board of Directors. On February 13, 2018, the Company replaced the stock repurchase program previously authorized by its Board of Directors with a newly authorized $500 million common repurchase program. The following table presents our share repurchase activity for the three months ended December 31, 2017:
Period
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
October 1 through October 31, 2017

 

 

November 1 through November 30, 2017

 

 

December 1 through December 31, 2017
752,976

 
37.51

 
752,976

Total
752,976

 
 
 
752,976

1 Share repurchases are conducted under repurchase programs authorized by the Company's Board of Directors from time to time. Under our previous share repurchase program, the maximum number of shares the Company could repurchase at December 31, 2017 was 7,162,279 shares. On February 13, 2018, the Company's Board of Directors authorized a new $500 million share repurchase program, which replaces our previous repurchase program. Subject to the terms of the Board's authorization given on February 13, 2018, and applicable law, repurchases may be made at such times and in such amounts as the Company deems appropriate. The share repurchase program may be discontinued at any time.

27


Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning the Company's equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.
Performance Graph
Comparison of 5 Year Cumulative Total Return*
Among Aaron's, Inc., the S&P Midcap 400 Index, and S&P 400 Retailing Index
a10k4q2017_chart-04832a01.jpg
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
The line graph above and the table below compare, for the last five years of the Company, the yearly dollar change in the cumulative total shareholder returns (assuming reinvestment of dividends) on the Company's common stock with that of the S&P Midcap 400 Index and the S&P 400 Retailing Index.
December 31,
2012
2013
2014
2015
2016
2017
Aaron's, Inc.
$
100.00

$
104.23

$
108.70

$
79.86

$
114.55

$
143.14

S&P Midcap 400
100.00

133.50

146.54

143.35

173.08

201.20

S&P 400 Retailing Index
100.00

126.74

136.14

108.53

107.38

105.45




28


ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data of Aaron's, Inc., which have been derived from its Consolidated Financial Statements for each of the five years in the period ended December 31, 2017. This historical information may not be indicative of the Company's future performance. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto. 
 
Year Ended December 31,
(Dollar Amounts in Thousands, Except Per Share Data)
2017
 
2016
 
2015
 
2014
 
2013
OPERATING RESULTS
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Lease Revenues and Fees
$
3,000,231

 
$
2,780,824

 
$
2,684,184

 
$
2,221,574

 
$
1,748,699

Retail Sales
27,465

 
29,418

 
32,872

 
38,360

 
40,876

Non-Retail Sales
270,253

 
309,446

 
390,137

 
363,355

 
371,292

Franchise Royalties and Fees
48,278

 
58,350

 
63,507

 
65,902

 
68,575

Interest and Fees on Loans Receivable
34,925

 
24,080

 
2,845

 

 

Other
2,556

 
5,598

 
6,211

 
5,842

 
5,189

 
3,383,708

 
3,207,716

 
3,179,756

 
2,695,033

 
2,234,631

Costs and Expenses:
 
 
 
 
 
 
 
 
 
Depreciation of Lease Merchandise
1,448,631

 
1,304,295

 
1,212,644

 
932,634

 
628,089

Retail Cost of Sales
17,578

 
18,580

 
21,040

 
24,541

 
24,318

Non-Retail Cost of Sales
241,356

 
276,608

 
351,777

 
330,057

 
337,581

Operating Expenses
1,403,985

 
1,351,785

 
1,357,030

 
1,231,801

 
1,022,684

Financial Advisory and Legal Costs

 

 

 
13,661

 

Restructuring Expenses
17,994

 
20,218

 

 
9,140

 

Retirement and Vacation Charges

 

 

 
9,094

 
4,917

Progressive-Related Transaction Costs

 

 

 
6,638

 

Legal and Regulatory (Income) Expense

 

 

 
(1,200
)
 
28,400

Other Operating (Income) Expense, Net
(535
)
 
(6,446
)
 
1,324

 
(1,176
)
 
1,584

 
3,129,009

 
2,965,040

 
2,943,815

 
2,555,190

 
2,047,573

Operating Profit
254,699

 
242,676

 
235,941

 
139,843

 
187,058

Interest Income
1,835

 
2,699

 
2,185

 
2,921

 
2,998

Interest Expense
(20,538
)
 
(23,390
)
 
(23,339
)
 
(19,215
)
 
(5,613
)
Other Non-Operating Income (Expense), Net
3,581

 
(3,563
)
 
(1,667
)
 
(1,845
)
 
517

Earnings Before Income Tax (Benefit) Expense
239,577

 
218,422

 
213,120

 
121,704

 
184,960

Income Tax (Benefit) Expense
(52,959
)
 
79,139

 
77,411

 
43,471

 
64,294

Net Earnings
$
292,536


$
139,283


$
135,709


$
78,233


$
120,666

 
 
 
 
 
 
 
 
 
 
Earnings Per Share
$
4.13

 
$
1.93

 
$
1.87

 
$
1.08

 
$
1.59

Earnings Per Share Assuming Dilution
4.06

 
1.91

 
1.86

 
1.08

 
1.58

Dividends Per Share
0.1125

 
0.1025

 
0.0940

 
0.0860

 
0.0720

FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
Lease Merchandise, Net
$
1,152,135

 
$
999,381

 
$
1,138,938

 
$
1,087,032

 
$
869,725

Property, Plant and Equipment, Net
207,687

 
211,271

 
225,836

 
219,417

 
231,293

Total Assets
2,692,264

 
2,615,736

 
2,698,488

 
2,456,844

 
1,827,176

Debt
368,798

 
497,829

 
606,746

 
606,082

 
142,704

Shareholders' Equity
1,728,004

 
1,481,598

 
1,366,618

 
1,223,521

 
1,139,963

AT YEAR END (unaudited)
 
 
 
 
 
 
 
 
 
Stores Open:
 
 
 
 
 
 
 
 
 
Company-operated
1,175

 
1,165

 
1,305

 
1,326

 
1,370

Franchised
551

 
699

 
734

 
782

 
781

Lease Agreements in Effect1
2,263,200

 
2,104,700

 
2,164,200

 
2,111,800

 
1,751,000

Progressive Leasing Active Doors2
26,861

 
21,840

 
16,947

 
15,754

 

Number of Employees1
11,900

 
11,500

 
12,700

 
12,400

 
12,600

1 Excludes Franchised operations
2 Progressive Leasing was acquired on April 14, 2014. Active doors represent retail store locations at which at least one virtual lease-to-own transaction has been completed during the trailing twelve month period.

29


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
Aaron’s, Inc. ("we," "our," "us," or the "Company") is a leading omnichannel provider of lease-purchase solutions to individual consumers. As of December 31, 2017, the Company’s operating segments are Progressive Leasing, Aaron’s Business and DAMI.
Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions through approximately 27,000 retail locations in 46 states and the District of Columbia. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers and, in turn, leasing that merchandise to the customers on a lease-to-own basis. Progressive Leasing consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional retailers.
Aaron’s Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily on a month-to-month, lease-to-own basis with no credit needed through the Company’s Aaron’s stores. This operating segment also supports franchisees of its Aaron’s stores. We have more than 1,700 Company-operated and franchised Aaron’s stores in 47 states and Canada. In addition, the Aaron’s Business segment also includes the operations of Woodhaven Furniture Industries, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores.
DAMI, which was acquired by Progressive Leasing on October 15, 2015, partners with merchants to provide a variety of revolving credit products originated through two third-party federally insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs).
Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplace. We believe that the Progressive Leasing and DAMI acquisitions have been strategically transformational in this respect by allowing the Company to diversify its presence in the market and strengthen our business, as demonstrated by Progressive Leasing's significant revenue and profit growth in 2017. The Company is also leveraging franchisee acquisition opportunities to expand into new geographic markets and benefit from synergies. We believe the traditional store based lease-to-own industry has been negatively impacted in recent periods by: (i) increased competition from a wide range of competitors, including national, regional and local operators of lease-to-own stores; virtual lease-to-own companies; traditional and e-commerce retailers; and, indirectly, from various types of consumer finance companies that enable our customers to shop at traditional or online retailers; (ii) the challenges faced by many traditional "brick-and-mortar" retailers, with respect to a decrease in the number of consumers visiting those stores, especially younger consumers; (iii) the continuing economic challenges facing many traditional lease-to-own customers; and (iv) commoditization of pricing in electronics. In response to these changing market conditions, we are executing a strategic plan that focuses on the following items and that we believe position us for success over the long-term:
Improve Aaron’s store profitability;
Accelerate our omnichannel platform;
Strengthen relationships of Progressive Leasing and DAMI’s current retail and merchant partners;
Focus on converting existing pipeline into Progressive Leasing retail partners; and
Champion compliance.
As part of executing this strategy, we sold the 82 Company-operated HomeSmart stores on May 13, 2016, which we believe has enabled us to sharpen our focus on activities that have the highest potential for return.
In July 2017, the Company acquired substantially all of the assets of the store operations of SEI/Aaron’s, Inc. ("SEI"), the Company’s largest franchisee. At the time of the acquisition, the SEI store operations served approximately 90,000 customers through 104 Aaron's-branded stores in 11 states primarily in the Northeast. The acquisition has benefited our omnichannel platform through added scale, has strengthened the Company’s presence in certain geographic markets, and has enhanced the Company's ability to drive inventory supply-chain synergies between the Aaron’s Business and Progressive Leasing in markets that SEI served.

30


We also took steps to further address the expense structure of our Aaron’s Business by completing a thorough review of our remaining store base in order to identify opportunities for rationalization. As a result of this evaluation and other cost-reduction initiatives, the Company closed 56 underperforming Company-operated stores during 2016, closed 82 stores during 2017 and anticipates closing an additional eight stores in the first six months of 2018. The Company also optimized its home office and field support staff in 2016 and 2017, which resulted in a reduction in employee headcount in those areas, to more closely align with current business conditions.
Highlights
The following summarizes significant highlights from our 2017 fiscal year:
The Company reported record revenues of $3.4 billion, and its net earnings before income tax (benefit) expense increased to a record $239.6 million compared to $218.4 million in 2016.
The Tax Cuts and Jobs Act (the "Tax Act") enacted in December 2017, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The estimated net impact of the Tax Act to our income tax (benefit) expense for the year ended December 31, 2017 is a non-cash provisional income tax benefit of $137 million, which primarily relates to the remeasurement of net deferred tax liabilities at the lower tax rate.
Progressive Leasing achieved record revenues of $1.6 billion, an increase of 26.6% over 2016. Progressive Leasing’s revenue growth is due to a 23.0% increase in active doors, which contributed to a 31.2% increase in total invoice volume. Progressive Leasing increased its earnings before income taxes to $140.2 million compared to $104.7 million in 2016, due mainly to its revenue growth.
Aaron’s Business revenues decreased to $1.8 billion, an 8.4% decrease compared to 2016. The decline is due primarily to a 7.0% decrease in same store sales, the net reduction of 130 Company-operated stores during the 24-month period ended December 31, 2017, and declines in non-retail sales to our franchisees. Earnings before income taxes decreased to $110.6 million in 2017 compared to $123.0 million in the prior year due primarily to the decline in same store sales and the reduction in non-retail sales to franchisees.
The Company acquired substantially all of the assets of the store operations of SEI, its largest franchisee, for approximately $140 million in cash.
The Company generated cash from operating activities of $159.1 million compared to $467.2 million in 2016 and ended 2017 with $51.0 million in cash and $393.9 million available on our revolving credit facility.
The Company returned $70.5 million to our shareholders through the repurchase of 2.0 million shares and the payment of our quarterly dividends, which we have paid for 30 consecutive years.
Key Metrics
Active Doors. We believe that active doors are a key performance indicator of our Progressive Leasing segment. Active doors represent retail store locations at which at least one virtual lease-to-own transaction has been completed during the trailing twelve month period. The following table presents active doors for the Progressive Leasing segment:
For the Year Ended December 31 (Unaudited)
2017
 
2016
 
2015
Progressive Leasing Active Doors
26,861

 
21,840

 
16,947

Invoice Volume. We also believe that invoice volume is a key performance indicator of our Progressive Leasing segment. Invoice volume is defined as the retail price of lease merchandise acquired and leased by Progressive Leasing during the period, net of returns. The following table presents total invoice volume for the Progressive Leasing segment:
For the Year Ended December 31 (Unaudited and In Thousands)
2017
 
2016
 
2015
Progressive Leasing Invoice Volume
$
1,160,732

 
$
884,812

 
$
780,038


31


The Company’s franchised and Company-operated store activity (unaudited) is summarized as follows:
 
2017
 
2016
 
2015
Company-operated Aaron’s stores
 
 
 
 
 
Company-operated Aaron’s stores open at January 1,
1,165

 
1,223

 
1,243

Opened

 

 
7

Added through acquisition
110

 
16

 
25

Closed, sold or merged
(100
)
 
(74
)
 
(52
)
Company-operated Aaron’s stores open at December 31,
1,175

 
1,165

 
1,223

 
 
 
 
 
 
Franchised stores
 
 
 
 
 
Franchised stores open at January 1,
699

 
734

 
782

Opened
1

 
1

 
10

Purchased from the Company

 

 
16

Purchased by the Company
(111
)
 
(16
)
 
(25
)
Closed, sold or merged
(38
)
 
(20
)
 
(49
)
Franchised stores open at December 31,
551

 
699

 
734

 
 
 
 
 
 
Company-operated HomeSmart stores 1
 
 
 
 
 
Company-operated HomeSmart stores open at January 1,

 
82

 
83

Opened

 

 

Closed, sold or merged

 
(82
)
 
(1
)
Company-operated HomeSmart stores open at December 31,

 

 
82

1 In May 2016, we sold our 82 Company-operated HomeSmart stores.
Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of the Aaron’s Business. For the year ended December 31, 2017, we calculated this amount by comparing revenues for the year ended December 31, 2017 to revenues for the year ended December 31, 2016 for all stores open for the entire 24-month period ended December 31, 2017, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues declined by 7.0% during the 24 month period ended December 31, 2017.
Key Components of Earnings Before Income Taxes
In this management’s discussion and analysis section, we review our consolidated results. For the years ended December 31, 2017 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings before income tax (benefit) expense were as follows:
Revenues. We separate our total revenues into six components: (i) lease revenues and fees; (ii) retail sales; (iii) non-retail sales; (iv) franchise royalties and fees; (v) interest and fees on loans receivable; and (vi) other. Lease revenues and fees include all revenues derived from lease agreements at Company-operated stores and retail locations serviced by Progressive Leasing. Retail sales represent sales of both new and returned lease merchandise from our Company-operated stores. Non-retail sales primarily represent new merchandise sales to our franchisees. Franchise royalties and fees represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Interest and fees on loans receivable primarily represents merchant fees, finance charges and annual and other fees earned on loans originated since the DAMI acquisition, as well as the accretion of the discount on loans acquired in the acquisition. Other revenues primarily relate to revenues from leasing real estate properties to unrelated third parties, as well as other miscellaneous revenues.
Depreciation of Lease Merchandise. Depreciation of lease merchandise primarily reflects the expense associated with depreciating merchandise held for lease and leased to customers by Progressive Leasing and our Company-operated stores.
Retail Cost of Sales. Retail cost of sales represents the depreciated cost of merchandise sold through our Company-operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, occupancy costs, provision for lease merchandise write-offs, bad debt expense, shipping and handling, advertising and the provision for loan losses, among other expenses.

32


Restructuring Expenses. Restructuring expenses primarily represent the cost of optimization efforts and cost reduction initiatives related to the Aaron’s Business, home office and field support functions. Restructuring charges were comprised principally of closed store contractual lease obligations, the write-off and impairment of store property, plant and equipment, and related workforce reductions.
Other Operating (Income) Expense, Net. Other operating (income) expense, net consists of gains or losses on sales of Company-operated stores and delivery vehicles, fair value adjustments on assets held for sale and gains or losses on other transactions involving property, plant and equipment.
Interest Expense. Interest expense consists of interest incurred on fixed and variable rate notes and outstanding borrowings from the revolving credit facility.
Other Non-Operating Income (Expense), Net. Other non-operating income (expense), net includes the impact of foreign currency remeasurement, as well as gains resulting from changes in the cash surrender value of Company-owned life insurance related to the Company’s deferred compensation plan.

33


Results of Operations
The results of DAMI have been included in the Company’s consolidated results and presented as a reportable segment from the October 15, 2015 acquisition date. During the year ended December 31, 2017, the Company changed its composition of reportable segments by combining the Sales and Lease Ownership, Franchise and Woodhaven components into one reportable segment, the Aaron’s Business, to align the reportable segments with the current organizational structure and the operating results that the chief operating decision maker regularly reviews to analyze performance and allocate resources. The Company has retroactively adjusted, for all periods presented, its segment disclosures to align with the current composition of reportable segments.
Results of Operations – Years Ended December 31, 2017, 2016 and 2015
 
 
 
Change
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(In Thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Revenues
and Fees
$
3,000,231

 
$
2,780,824

 
$
2,684,184

 
$
219,407

 
7.9
 %
 
$
96,640

 
3.6
 %
Retail Sales
27,465

 
29,418

 
32,872

 
(1,953
)
 
(6.6
)
 
(3,454
)
 
(10.5
)
Non-Retail Sales
270,253

 
309,446

 
390,137

 
(39,193
)
 
(12.7
)
 
(80,691
)
 
(20.7
)
Franchise Royalties and Fees
48,278

 
58,350

 
63,507

 
(10,072
)
 
(17.3
)
 
(5,157
)
 
(8.1
)
Interest and Fees on Loans Receivable
34,925

 
24,080

 
2,845

 
10,845

 
45.0

 
21,235

 
746.4

Other
2,556

 
5,598

 
6,211

 
(3,042
)
 
(54.3
)
 
(613
)
 
(9.9
)
 
3,383,708

 
3,207,716

 
3,179,756

 
175,992

 
5.5

 
27,960

 
0.9

COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation of Lease Merchandise
1,448,631

 
1,304,295

 
1,212,644

 
144,336

 
11.1

 
91,651

 
7.6

Retail Cost of Sales
17,578

 
18,580

 
21,040

 
(1,002
)
 
(5.4
)
 
(2,460
)
 
(11.7
)
Non-Retail Cost of Sales
241,356

 
276,608

 
351,777

 
(35,252
)
 
(12.7
)
 
(75,169
)
 
(21.4
)
Operating Expenses
1,403,985

 
1,351,785

 
1,357,030

 
52,200

 
3.9

 
(5,245
)
 
(0.4
)
Restructuring Expenses
17,994

 
20,218

 

 
(2,224
)
 
(11.0
)
 
20,218

 
nmf

Other Operating (Income) Expense, Net
(535
)
 
(6,446
)
 
1,324

 
(5,911
)
 
(91.7
)
 
(7,770
)
 
nmf

 
3,129,009

 
2,965,040

 
2,943,815

 
163,969

 
5.5

 
21,225

 
0.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING PROFIT
254,699

 
242,676

 
235,941

 
12,023

 
5.0

 
6,735

 
2.9

Interest Income
1,835

 
2,699

 
2,185

 
(864
)
 
(32.0
)
 
514

 
23.5

Interest Expense
(20,538
)
 
(23,390
)
 
(23,339
)
 
(2,852
)
 
(12.2
)
 
51

 
0.2

Other Non-Operating Income (Expense), Net
3,581

 
(3,563
)
 
(1,667
)
 
7,144

 
nmf

 
(1,896
)
 
(113.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EARNINGS BEFORE INCOME TAX (BENEFIT) EXPENSE
239,577

 
218,422

 
213,120

 
21,155

 
9.7

 
5,302

 
2.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME TAX (BENEFIT) EXPENSE
(52,959
)
 
79,139

 
77,411

 
(132,098
)
 
nmf

 
1,728

 
2.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET EARNINGS
$
292,536

 
$
139,283

 
$
135,709

 
$
153,253

 
110.0
 %
 
$
3,574

 
2.6
 %
nmf—Calculation is not meaningful

34


Revenues
Information about our revenues by reportable segment is as follows:
 
 
 
 
Change
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(In Thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Progressive Leasing1
$
1,566,413

 
$
1,237,597

 
$
1,049,681

 
$
328,816

 
26.6
 %
 
$
187,916

 
17.9
 %
Aaron’s Business2
1,782,370

 
1,946,039

 
2,127,230

 
(163,669
)
 
(8.4
)
 
(181,191
)
 
(8.5
)
DAMI3
34,925

 
24,080

 
2,845

 
10,845

 
45.0

 
21,235

 
nmf

Total Revenues from External Customers
$
3,383,708

 
$
3,207,716

 
$
3,179,756

 
$
175,992

 
5.5
 %
 
$
27,960

 
0.9
 %
1 Segment revenue consists of lease revenues and fees.
2 Segment revenue principally consists of lease revenues and fees, retail sales, non-retail sales and franchise royalties and fees.
3 Segment revenue consists of interest and fees on loans receivable, and excludes the effect of interest expense.
Year Ended December 31, 2017 Versus Year Ended December 31, 2016
Progressive Leasing. Progressive Leasing segment revenues increased primarily due to an annualized 23.0% growth in active doors, which contributed to a 31.2% increase in total invoice volume.
Aaron’s Business. Aaron’s Business segment revenues decreased primarily due to a $109.4 million decrease in lease revenues and fees and a $39.2 million decrease in non-retail sales. Lease revenues and fees decreased primarily due to a 7.0% decrease in same store revenues and the net reduction of 130 Company-operated stores during the 24 month period ended December 31, 2017, including the sale of 82 HomeSmart stores in May 2016. The decrease in non-retail sales was mainly due to decreasing demand for product by franchisees as a result of the net reduction of 183 franchised stores, which includes the Company’s acquisition of SEI, during the 24 month period ended December 31, 2017. The July 2017 acquisition of SEI impacted Aaron's Business in the form of an increase in lease revenues and fees, partially offset by lower non-retail sales and franchise royalties and fees during the year ended December 31, 2017 as compared to the same period in the prior year.
DAMI. DAMI segment revenues increased due to higher interest and fee revenue recognized as a result of the growth of DAMI’s post-acquisition loan portfolio subsequent to the October 15, 2015 DAMI acquisition. The balance of loans originated since the acquisition was approximately $89.7 million at December 31, 2017 compared to $64.8 million at December 31, 2016.
Year Ended December 31, 2016 Versus Year Ended December 31, 2015
Progressive Leasing. Progressive Leasing segment revenues increased primarily due to an annualized 28.9% growth in active doors, which contributed to a 13.4% increase in total invoice volume.
Aaron’s Business. Aaron’s Business segment revenues decreased primarily due to a $91.3 million decrease in lease revenues and fees and an $80.7 million decrease in non-retail sales. Lease revenues and fees decreased primarily due to a 3.4% decrease in same store revenues and the net reduction of 161 Company-operated stores during the 24 month period ended December 31, 2016, including the sale of 82 HomeSmart stores in May 2016. The decrease in non-retail sales was mainly due to decreasing demand for product by franchisees as a result of the net reduction of 83 franchised stores during the 24 month period ended December 31, 2016.
DAMI. DAMI segment revenues increased due to DAMI’s results being included for a full year in 2016 as compared to a partial year in 2015 from the October 15, 2015 acquisition date.

35


Operating Expenses
Information about certain significant components of operating expenses is as follows:
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(In Thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Personnel Costs
$
615,378

 
$
611,113

 
$
619,557

 
$
4,265

 
0.7
 %
 
$
(8,444
)
 
(1.4
)%
Occupancy Costs
199,638

 
208,712

 
208,927

 
(9,074
)
 
(4.3
)
 
(215
)
 
(0.1
)
Provision for Lease Merchandise Write-Offs
145,460

 
134,104

 
136,380

 
11,356

 
8.5

 
(2,276
)
 
(1.7
)
Bad Debt Expense
170,574

 
128,333

 
122,184

 
42,241

 
32.9

 
6,149

 
5.0

Shipping and Handling
67,299

 
69,939

 
77,944

 
(2,640
)
 
(3.8
)
 
(8,005
)
 
(10.3
)
Advertising
34,026

 
40,823

 
39,334

 
(6,797
)
 
(16.6
)
 
1,489

 
3.8

Provision for Loan Losses
20,973

 
11,251

 
937

 
9,722

 
86.4

 
10,314

 
nmf

Other Operating Expenses
150,637

 
147,510

 
151,767

 
3,127

 
2.1

 
(4,257
)
 
(2.8
)
Operating Expenses
$
1,403,985

 
$
1,351,785

 
$
1,357,030

 
$
52,200

 
3.9
 %
 
$
(5,245
)
 
(0.4
)%
nmf—Calculation is not meaningful
Year Ended December 31, 2017 Versus Year Ended December 31, 2016
As a percentage of total revenues, operating expenses decreased to 41.5% in 2017 from 42.1% in 2016.
Personnel costs increased primarily due to a $23.7 million increase at Progressive Leasing offset by a $21.0 million decrease at the Aaron's Business. The net increase in personnel costs in 2017 is the result of hiring to support the growth of Progressive Leasing, the acquisition of our largest franchisee in July 2017 and higher stock-based compensation expense, partially offset by a reduction of home office and field support staff from our Aaron’s Business restructuring programs in 2017 and additional charges incurred in 2016 related to the retirement of the Company’s former Chief Financial Officer.
Occupancy costs decreased primarily due to the net reduction of 130 Company-operated stores during the 24 month period ended December 31, 2017. The occupancy costs were impacted by the closure and consolidation of our stores from our Aaron's Business restructuring programs, partially offset by the addition of stores from our acquisition of our largest franchisee in July 2017.
The provision for lease merchandise write-offs increased during 2017 primarily due to Progressive Leasing's revenue growth. The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment decreased to 5.5% in 2017 from 5.7% in 2016 due to continued operational improvements and enhancements to the lease decisioning process. This was partially offset by damaged inventory written off, net of probable insurance recoveries, and higher estimated inventory charge-offs caused by Hurricanes Harvey and Irma. The provision for lease merchandise write-offs as a percentage of lease revenues for the Aaron’s Business increased slightly to 4.2% in 2017 from 4.1% in 2016 due to higher lease merchandise write-offs caused by the Hurricanes.
Bad debt expense increased by $42.2 million during 2017 primarily due to the increases in invoice volume from Progressive Leasing as discussed above. Progressive Leasing’s bad debt expense as a percentage of Progressive Leasing’s revenues increased to 10.9% in 2017 from 10.3% in 2016 due primarily to a shift in the portfolio mix, as well as higher bad debt expense from customers impacted by Hurricanes Harvey and Irma.
The provision for loan losses increased during 2017 due to the growth of DAMI’s post-acquisition loan portfolio subsequent to the October 15, 2015 acquisition of DAMI.
Other operating expenses increased primarily due to higher third-party consulting costs related to various Aaron's Business strategic operating initiatives as well as transaction costs incurred related to the acquisition of SEI.
Year Ended December 31, 2016 Versus Year Ended December 31, 2015
As a percentage of total revenues, operating expense decreased to 42.1% during 2016 from 42.7% in 2015.
Personnel costs decreased primarily due to the disposition of the HomeSmart business, in which the Company sold all of its 82 HomeSmart stores on May 13, 2016, and a reduction of Corporate support staff. This was partially offset by increases in hiring to support the growth of Progressive Leasing and DAMI, the inclusion of a full year of DAMI personnel costs in 2016 and additional charges related to the retirement of the Company’s former Chief Financial Officer in 2016.

36


The provision for lease merchandise write-offs decreased during 2016. Progressive Leasing’s provision for lease merchandise write-offs as a percentage of Progressive Leasing’s lease revenues decreased to 5.7% in 2016 compared to 7.0% in 2015 due to continued operational improvements and enhancements to the lease decisioning process. The provision for lease merchandise write-offs as a percentage of lease revenues for the Aaron’s Business increased to 4.1% in 2016 compared to 3.8% in 2015.
Bad debt expense increased due to the increase in invoice volume from Progressive Leasing as discussed above. Progressive Leasing’s bad debt expense as a percentage of Progressive Leasing’s revenues decreased to 10.3% in 2016 compared to 11.6% in 2015 due to continued operational improvements and enhancements to the lease decisioning process.
Shipping and handling expense decreased during 2016 due to lower delivery volumes as a result of the net reduction of 161 Company-operated stores during the 24 month period ending December 31, 2016, including the disposition of the 82 HomeSmart stores on May 13, 2016.
The provision for loan losses increased during 2016 due to the inclusion of DAMI’s results for a full year in 2016 compared to a partial year in 2015 from the October 15, 2015 acquisition date.
Other operating expenses during 2015 included $3.7 million of one-time transaction costs incurred by Progressive Leasing in connection with the acquisition of DAMI.
Other Costs and Expenses
Year Ended December 31, 2017 Versus Year Ended December 31, 2016
Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 48.3% from 46.9% in the prior year, primarily due to a shift in product mix from the Aaron’s Business to Progressive Leasing, which is consistent with the increasing proportion of Progressive Leasing’s revenue to total lease revenue. Progressive Leasing generally experiences higher depreciation as a percentage of lease revenues because, among other factors, its merchandise has a shorter average life on lease, a higher rate of early buyouts, and the merchandise is generally purchased at retail prices compared to the Aaron’s Business, which procures merchandise at wholesale prices. Progressive Leasing's depreciation of lease merchandise as a percentage of Progressive Leasing's lease revenues and fees increased to 60.6% in 2017 from 60.2% in the prior year due to an increase in revenue from early buyouts, which has a lower margin, year over year. Aaron's Business depreciation of lease merchandise as a percentage of Aaron's Business lease revenues and fees decreased to 34.8% in 2017 from 36.2% in the prior year, which was primarily driven by less promotional pricing in 2017 and a favorable revenue mix shift from lower-margin early payout revenue to higher-margin lease revenue year over year.
Retail cost of sales. Retail cost of sales as a percentage of retail sales increased to 64.0% from 63.2% primarily due to higher inventory purchase cost during 2017 as compared to 2016.
Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales remained consistent at approximately 89% in both periods.
Restructuring expenses. In connection with the announced closure and consolidation of underperforming Company-operated stores and workforce reductions in our home office and field support operations, charges of $18.0 million were incurred during the year ended December 31, 2017. The charges are comprised of $13.4 million related to Aaron’s store contractual lease obligations for closed stores, $3.2 million related to workforce reductions, and $1.4 million primarily related to the write-down to fair value, less estimated selling costs, of land and buildings from stores closed under the restructuring program and impairment of Aaron’s store property, plant and equipment. The Company expects to incur approximately $1.5 million of additional charges related to the 2017 restructuring program, which are expected to be incurred in the first six months of 2018.
Year Ended December 31, 2016 Versus Year Ended December 31, 2015
Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 46.9% in 2016 from 45.2% in 2015, primarily due to a shift in product mix from the Aaron’s Business to Progressive Leasing, which is consistent with the increasing proportion of Progressive Leasing’s revenue to total lease revenue. Progressive Leasing generally experiences higher depreciation as a percentage of lease revenues because, among other factors, its merchandise has a shorter average life on lease, a higher rate of early buyouts, and the merchandise is generally purchased at retail prices compared to the Aaron’s Business, which procures merchandise at wholesale prices.
Retail cost of sales. Retail cost of sales as a percentage of retail sales decreased to 63.2% from 64.0% primarily due to lower inventory purchase cost in 2016.

37


Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales decreased to 89.4% from 90.2% primarily due to lower inventory purchase cost in 2016.
Restructuring expenses. In connection with the closure and consolidation of underperforming Company-operated Aaron’s stores and the optimization of our home office and field support staff, charges of $20.2 million were incurred during the year ended December 31, 2016. These charges were principally comprised of $11.6 million related to Aaron’s store contractual lease obligations for closed stores, $4.5 million related to impairment of Aaron’s store property, plant and equipment and $3.9 million related to workforce reductions.
Other Operating (Income) Expense, Net
Information about the components of other operating (income) expense, net is as follows:
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(In Thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Net gains on sales of stores
$
(743
)
 
$
(126
)
 
$
(2,139
)
 
$
(617
)
 
489.7
 %
 
$
2,013

 
(94.1
)%
Net gains on sales of delivery vehicles
(937
)
 
(1,319
)
 
(1,706
)
 
382

 
(29.0
)
 
387

 
(22.7
)
Impairment charges and net losses (gains) on asset dispositions and assets held for sale

1,145

 
(5,001
)
 
5,169

 
6,146

 
(122.9
)
 
(10,170
)
 
(196.7
)
Other Operating (Income) Expense, Net
$
(535
)
 
$
(6,446
)
 
$
1,324

 
$
5,911

 
(91.7
)%
 
$
(7,770
)
 
(586.9
)%
In 2016, other operating income, net of $6.4 million included a gain of $11.1 million related to the sale of the Company’s former corporate headquarters building in January 2016, partially offset by a loss and other charges related to the sale of HomeSmart of $5.4 million.
In 2015, other operating expense, net of $1.3 million included a $3.5 million loss related to a lease termination on a Company aircraft, impairment charges of $0.8 million on leasehold improvements related to Company-operated stores that were closed during the period and impairment charges of $0.5 million on assets held for sale. In addition, the Company recognized gains of $2.1 million from the sale of 25 Company-operated stores during 2015.
Operating Profit
Interest income. Interest income decreased to $1.8 million in 2017 from $2.7 million in 2016 due to the discontinuation of accruing interest income related to the Perfect Home Notes effective April 1, 2017, partially offset by an increase in interest income from higher cash and cash equivalent balances throughout 2017. Interest income increased to $2.7 million in 2016 from $2.2 million in 2015 primarily due to an increase in the interest rate of the Perfect Home Notes during 2016.
Interest expense. Interest expense decreased to $20.5 million in 2017 from $23.4 million in 2016 and $23.3 million in 2015 due primarily to a lower outstanding debt balance throughout 2017.
Other non-operating income (expense), net. Other non-operating income (expense), net includes the impact of foreign currency remeasurement, as well as gains resulting from changes in the cash surrender value of Company-owned life insurance related to the Company’s deferred compensation plan. Included in other non-operating income (expense), net were foreign currency remeasurement gains of $2.1 million during 2017 and losses of $3.7 million and $2.5 million during 2016 and 2015, respectively. These gains and losses result from changes in the value of the U.S. dollar against the British pound and Canadian dollar. Gains related to the changes in the cash surrender value of Company-owned life insurance were $1.5 million, $0.2 million and $0.8 million during 2017, 2016 and 2015, respectively.

38


Earnings (Loss) Before Income Taxes
Information about our earnings (loss) before income tax (benefit) expense by reportable segment is as follows: 
 
 
 
Change
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(In Thousands)
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
EARNINGS (LOSS) BEFORE INCOME TAX (BENEFIT) EXPENSE:
 
 
 
 
 
 
 
 
 
 
 
 
 
Progressive Leasing
$
140,224

 
$
104,686

 
$
54,525

 
$
35,538

 
33.9
 %
 
$
50,161

 
92.0
 %
Aaron’s Business
110,642

 
123,009

 
160,559

 
(12,367
)
 
(10.1
)
 
(37,550
)
 
(23.4
)
DAMI
(11,289
)
 
(9,273
)
 
(1,964
)
 
(2,016
)
 
(21.7
)
 
(7,309
)
 
(372.1
)
Total Earnings Before Income Tax (Benefit) Expense
$
239,577

 
$
218,422

 
$
213,120

 
$
21,155

 
9.7
 %
 
$
5,302

 
2.5
 %
The factors impacting the change in earnings (loss) before income tax (benefit) expense are discussed above.
Income Tax (Benefit) Expense
The Company recorded a net income tax benefit of $53.0 million for the year ended December 31, 2017 as compared to income tax expense of $79.1 million in 2016. The net income tax benefit recognized in 2017 was the result of the Tax Act which was signed into law on December 22, 2017. The Tax Act, among other things, (i) lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018; (ii) provided for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased after September 27, 2017 (but would be phased down starting in 2023); and (iii) failed to extend the manufacturing deduction that expired in 2017 under the terms of previous tax law. During the three months ended December 31, 2017, the Company recorded a net non-cash provisional income tax benefit of $137.0 million related to the Tax Act, which is comprised of an estimated $140.0 million remeasurement of deferred tax liabilities at the lower tax rates, partially offset by an estimated $3.0 million from the loss of the manufacturing deduction and other impacts.
Income tax expense increased in 2016 compared to 2015 due primarily to higher pretax income. The effective tax rate remained relatively unchanged at 36.2% in 2016 compared to 36.3% in 2015.
Overview of Financial Position
The major changes in the consolidated balance sheet from December 31, 2016 to December 31, 2017, include:
Cash and cash equivalents decreased $257.5 million to $51.0 million at December 31, 2017 primarily due to the acquisition of our largest franchisee, scheduled repayments of the Company's unsecured notes and credit facilities, repayment of the DAMI credit facility, and the return of $70.5 million to shareholders in the form of share repurchases and dividends. For additional information, refer to the "Liquidity and Capital Resources" section below.
Lease merchandise increased $152.8 million due primarily to increases in lease merchandise purchases at Progressive Leasing to support higher invoice volume and growth in active doors and the acquisition of our largest franchisee, partially offset by stores closed as part of the Company's restructuring initiatives.
Goodwill increased $96.2 million due primarily to the addition of estimated SEI-related goodwill of $91.8 million. Refer to Note 2 to these consolidated financial statements for further details regarding the acquisition accounting for SEI.
Income tax receivable increased $88.1 million to $100.0 million primarily due to the enactment of the Tax Act in December 2017. The Company made periodic tax payments throughout 2017 based on the previous tax laws. The Tax Act changed those laws by providing for 100% expense deduction of the Company's lease merchandise inventory purchased by the Company after September 27, 2017, which resulted in an increase to income tax receivable as of December 31, 2017.
Deferred income tax payable decreased by $53.5 million primarily due to the remeasurement of the deferred tax liabilities at the lower corporate income tax rate enacted by the Tax Act.
Debt decreased $129.0 million to $368.8 million at December 31, 2017 due primarily to scheduled repayments of $85.0 million on the Company’s unsecured notes, $15.0 million on the Company's term loan facility, and the $53.0 million payoff of the DAMI credit facility, partially offset by $15.6 million of additional borrowings on the refinanced term loan in September 2017. Refer to the "Liquidity and Capital Resources" section below for further details regarding the Company’s financing arrangements.

39


Liquidity and Capital Resources
General
Our primary capital requirements consist of buying merchandise for the operations of Progressive Leasing and the Aaron’s Business. As we continue to grow, the need for additional lease merchandise is expected to remain our major capital requirement. Other capital requirements include (i) purchases of property, plant and equipment; (ii) expenditures for acquisitions; (iii) expenditures related to our corporate operating activities; (iv) personnel expenditures; (v) income tax payments; (vi) funding of loans receivable for DAMI; and (vii) servicing our outstanding debt obligations. The Company has also historically paid quarterly cash dividends and periodically repurchases stock. Our capital requirements have been financed through:
cash flows from operations;
private debt offerings;
bank debt; and
stock offerings.
As of December 31, 2017, the Company has $51.0 million of cash and $393.9 million of availability under its revolving credit facility.
Cash Provided by Operating Activities
Cash provided by operating activities was $159.1 million, $467.2 million and $167.6 million during the years ended December 31, 2017, 2016 and 2015, respectively.
The $308.1 million decrease in operating cash flows in 2017 as compared to 2016 was driven partially by an increase in purchases of lease merchandise for Progressive Leasing during the year ended December 31, 2017 relative to the same period in 2016 due to continuing invoice volume growth. Additionally, the Company made net tax payments of $98.3 million during the year ended December 31, 2017 compared to net tax refunds of $54.3 million received during the year ended December 31, 2016. The Protecting Americans from Tax Hikes Act ("the 2015 Act"), which was signed into law on December 18, 2015, extended 50% bonus depreciation and reauthorized work opportunity tax credits through the end of 2019. This act allowed us to qualify for and receive a refund related to 2015 income tax payments and to limit federal tax payments during the year ended December 31, 2016.
The $299.7 million increase in operating cash flows in 2016 as compared to 2015 was primarily due to net tax refunds of $54.3 million received during the year ended December 31, 2016 compared to net tax payments of $91.7 million made during the year ended December 31, 2015, an increase in Progressive Leasing total invoice volumes and operating margins, and inventory reductions in our Aaron’s Business store merchandise not on lease. This was partially offset by declines in the operating results of the Aaron’s Business and declines in accounts payable and accrued expenses. The operating results of Progressive Leasing and the Aaron’s Business are described in more detail in the "Results of Operations" section above. The Company received net tax refunds in 2016 compared to making net tax payments in 2015 as a result of the enactment of the 2015 Act as discussed above and further in the "Commitments" section below. Lease merchandise inventory declined in 2016 due to inventory reduction initiatives at the Aaron’s Business, which also contributed to declines in accounts payable and accrued expenses as compared to 2015.
Cash Used in Investing Activities
Cash used in investing activities was $205.3 million, $20.1 million and $108.9 million during the years ended December 31, 2017, 2016, and 2015, respectively.
The $185.3 million increase in investing cash outflows in 2017 as compared to 2016 was primarily due to: (i) a $140.2 million cash outflow for the acquisition of SEI in July 2017; (ii) $10.2 million higher net cash outflows for investments in DAMI loans receivable in 2017 as compared to 2016; (iii) $35.0 million cash inflow related to the sale of the HomeSmart division in May 2016; and (iv) $13.6 million cash inflow from the sale of the Company’s former corporate headquarters building in January 2016; partially offset by $2.7 million of cash inflows in 2017 from an investment and $6.9 million of additional proceeds from the sale of other property, plant, and equipment in 2017 compared to 2016.
The $88.8 million decrease in investing cash outflows in 2016 as compared to 2015 is primarily due to 2016 cash inflows of (i) $35.0 million related to the sale of the HomeSmart division in May 2016 and (ii) $13.6 million from the sale of the Company’s former corporate headquarters building in January 2016 as compared to 2015 cash outflows of $50.7 million to acquire a 100% ownership interest in DAMI.

40


Cash Used in Financing Activities
Cash used in financing activities was $211.4 million, $153.7 million and $47.3 million during the years ended December 31, 2017, 2016 and 2015, respectively.
The $57.7 million increase in financing cash outflows in 2017 as compared to 2016 is primarily due to (i) a $28.0 million increase in Company repurchases of outstanding common stock in 2017 compared to 2016 and (ii) a $25.4 million increase in the net repayments of outstanding debt in 2017 compared to 2016. During 2017, the Company made scheduled repayments of $85.0 million on unsecured notes, $15.0 million on the term loan facility, and paid $53.0 million to pay off the DAMI credit facility, partially offset by $15.6 million in borrowings from the refinanced term loan in September 2017.
The $106.4 million increase in financing cash outflows in 2016 as compared to 2015 is primarily due to the net repayments of outstanding debt in each period. In 2016, the following net repayments were made: $75.0 million on our revolving facility, $25.0 million on our 3.95% senior unsecured notes, and $12.5 million on our term loan. In 2015, total net repayments of outstanding debt were $40.7 million. Separately, the Company repurchased $34.5 million of its common stock in 2016.
Share Repurchases
We purchase our stock in the market from time to time as authorized by our Board of Directors. During the year ended December 31, 2017, the Company purchased 1,961,442 shares for $62.6 million. During the year ended December 31, 2016, the Company purchased 1,372,700 shares for $34.5 million. As of December 31, 2017, we have the authority to purchase 7,162,279 additional shares.
Dividends
We have a consistent history of paying dividends, having paid dividends for 30 consecutive years. Our annual common stock dividend was $0.1125 per share, $0.1025 per share and $0.094 per share in 2017, 2016 and 2015, respectively, and resulted in aggregate dividend payments of $8.0 million, $7.4 million and $6.8 million in 2017, 2016 and 2015, respectively. At its November 2017 meeting, our Board of Directors increased the quarterly dividend by 9.1%, raising it to $0.030 per share. The Company also increased its quarterly dividend rate by 10.0%, to $0.0275 per share, in November 2016 and by 8.7%, to $0.025 per share, in November 2015.
Subject to sufficient operating profits, any future capital needs and other contingencies, we currently expect to continue our policy of paying dividends.
Debt Financing
As of December 31, 2017, $97.5 million of term loans were outstanding under the term loan and revolving credit agreement. Our current revolving credit facility matures September 18, 2022, and the total available credit on the facility as of December 31, 2017 was $393.9 million. The revolving credit and term loan agreement includes an uncommitted incremental facility increase option (an "accordion facility") which, subject to certain terms and conditions, permits the Company at any time prior to the maturity date to request an increase in extensions of credit available thereunder by an aggregate additional principal amount of up to $250.0 million. In conjunction with the amendment and restatement of the term loan and revolving credit agreement as discussed within Note 7 to these consolidated financial statements, the Company repaid the $53.0 million remaining balance under its DAMI credit facility and terminated the agreement, which was scheduled to mature on October 15, 2017.
As of December 31, 2017, the Company had outstanding $240.0 million in aggregate principal amount of senior unsecured notes issued in a private placement in connection with the April 14, 2014 Progressive Leasing acquisition. The notes bear interest at the rate of 4.75% per year and mature on April 14, 2021. Payments of interest are due quarterly and commenced on July 14, 2014, with principal payments of $60.0 million each due annually which commenced April 14, 2017.
As of December 31, 2017, the Company had outstanding $25.0 million in senior unsecured notes originally issued in a private placement in July 2011. The notes bear interest at the rate of 3.95% per year and mature on April 27, 2018. Quarterly payments of interest commenced July 27, 2011, and annual principal payments of $25.0 million each commenced April 27, 2014.
Our revolving credit and term loan agreement and senior unsecured notes, and our franchisee loan agreement discussed below, contain certain financial covenants. These covenants include requirements that the Company maintain ratios of (i) adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") plus lease expense to fixed charges of no less than 2.50:1.00 and (ii) total debt to adjusted EBITDA of no greater than 3.00:1.00. In each case, adjusted EBITDA refers to the Company’s consolidated net earnings before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense and other cash and non-cash charges. If we fail to comply with these covenants, we will be in default under these agreements, and all amounts could become due immediately. We are in compliance with all of these covenants at December 31, 2017 and believe that we will continue to be in compliance in the future.

41


Commitments
Income Taxes. During the year ended December 31, 2017, the Company made net income tax payments of $98.3 million. During the year ended December 31, 2018, we anticipate we will make no cash payments for U.S. federal income taxes, an estimated $2 million for Canadian income taxes, and an estimated $20 million for state income taxes.
The Tax Act, which was enacted in December 2017 provides for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased by the Company after September 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. The Company made periodic tax payments throughout 2017 based on the tax laws in effect at that time. As a result of the Tax Act, the Company applied, in January 2018, for a $77 million quick refund from the Internal Revenue Service (the "IRS") for the 2017 tax year. Excluding the effects of bonus depreciation on future qualifying expenditures, we estimate that at December 31, 2017, the remaining tax deferral associated with bonus depreciation from the Tax Act and the prior tax legislation is approximately $168.0 million, of which approximately 88% is expected to reverse in 2018 and most of the remainder during 2019.
Leases. We lease warehouse and retail store space for most of our store-based operations, call center space, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. Most of the leases contain renewal options for additional periods ranging from one to 20 years. We also lease transportation vehicles under operating and capital leases which generally expire during the next three 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, 2017 are shown in the table set forth below under "Contractual Obligations and Commitments."
As of December 31, 2017, the Company had nine remaining capital leases with a limited liability company ("LLC") controlled by a group of current and former executives of the Company. In October and November 2004, the Company sold 11 properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling $6.8 million. The Company occupies the land and buildings collateralizing the borrowings under a 15-year term lease at an aggregate annual rental of $0.8 million. The transaction has been accounted for as a capital lease in the accompanying consolidated financial statements. The rate of interest implicit in the leases is approximately 9.7%. Accordingly, the land and buildings, associated depreciation expense and lease obligations are recorded in the Company’s consolidated financial statements. No gain or loss was recognized related to the properties sold to the LLC. In January 2018, the Company extended the lease agreements with an additional five year term commencing at the expiration of the original lease agreements in November of 2019.
The Company also had ten operating leases with the same limited liability company ("LLC") controlled by a group of current and former executives of the Company as of December 31, 2017. In December 2002, the Company sold ten properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling $5.0 million. Upon the initial sale, no gain or loss was recognized related to the properties sold to the LLC and the leases were originally accounted for as Capital leases in the Company's consolidated financial statements. In January 2018, the Company renewed the lease agreements to occupy the land and buildings collateralizing the borrowings under a range of five to eight year term leases at an aggregate annual rental of approximately $0.8 million. In 2018, the transactions will be accounted for as operating leases.
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement with several banks, which has a maturity date of October 24, 2018.
At December 31, 2017, the portion that we might be obligated to repay in the event franchisees defaulted was $45.3 million. However, due to franchisee borrowing limits, we believe any losses associated with defaults would be substantially mitigated through recovery of lease merchandise and other assets. Since the inception of the franchise loan program in 1994, we have had no significant associated losses. We believe the likelihood that the Company would fund any significant amounts in connection with these commitments to be remote.
The following table shows the Company’s approximate commercial commitments as of December 31, 2017:
(In Thousands)
Total
Amounts
Committed
 
Period Less
Than 1 Year
 
Period 1-3
Years
 
Period 3-5
Years
 
Period Over
5 Years
Guaranteed Borrowings of Franchisees
$
45,301

 
$
35,704

 
$
9,597

 
$

 
$


42


Contractual Obligations and Commitments. The following table shows the approximate contractual obligations, including interest, and commitments to make future payments as of December 31, 2017:
(In Thousands)
Total
 
Period Less
Than 1 Year
 
Period 1-3
Years
 
Period 3-5
Years
 
Period Over
5 Years
Debt, Excluding Capital Leases
$
362,500

 
$
95,000

 
$
140,000

 
$
127,500

 
$

Capital Leases
7,748

 
2,556

 
4,438

 
754

 

Interest Obligations
34,573

 
14,091

 
16,353

 
4,129

 

Operating Leases
457,023

 
107,038

 
168,373

 
100,328

 
81,284

Purchase Obligations
20,261

 
9,761

 
9,804

 
696

 

Severance and Retirement Obligations
3,536

 
3,174

 
339

 
23

 

Total Contractual Cash Obligations
$
885,641

 
$
231,620


$
339,307


$
233,430


$
81,284

For future interest payments on variable-rate debt, which are based on the adjusted London Interbank Overnight (LIBO) rate plus a margin ranging from 1.25% to 2.25% or the administrative agent's prime rate plus a margin ranging from 0.25% to 1.25%, as specified in the agreement, we used the variable rate in effect at December 31, 2017 to calculate these payments. Our variable rate debt at December 31, 2017 consisted of term loan borrowings under our revolving credit and term loan agreement. Future interest payments related to our revolving credit and term loan agreement are based on the borrowings outstanding at December 31, 2017 through the maturity date, assuming such borrowings are outstanding at that time. The variable rate for our term loan borrowings under the unsecured revolving credit and term loan agreement was 2.82% at December 31, 2017. Future interest payments may be different depending on future borrowing activity and interest rates.
Operating lease obligations represent amounts scheduled to be paid through the remaining lease term for real estate, vehicle, and equipment lease contracts. These amounts do not include estimated future sublease receipts and include restructuring liabilities related to contractual lease obligations for stores closed under the 2016 and 2017 restructuring programs, which are recorded in accounts payable and accrued expenses in the consolidated balance sheets.
Purchase obligations are primarily related to certain advertising programs, marketing programs, software licenses, hardware and software maintenance and support and telecommunications services. The table above includes only those purchase obligations for which the timing and amount of payments is certain. We have no long-term commitments to purchase merchandise nor do we have significant purchase agreements that specify minimum quantities or set prices that exceed our expected requirements for three months.
Severance and retirement obligations represent future severance payments to former employees under the Company's 2016 and 2017 restructuring programs as well as future payments associated with the retirement of a former executive officer during the year ended December 31, 2016.
Deferred income tax liabilities as of December 31, 2017 were approximately $222.6 million. This amount is not included in the total contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their respective book basis, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not necessarily relate to liquidity needs.
Unfunded Lending Commitments. The Company, through its DAMI business, has unfunded lending commitments totaling approximately $354.5 million and $366.4 million as of December 31, 2017 and 2016, respectively, that do not give rise to revenues and cash flows. These unfunded commitments arise in the ordinary course of business from credit card agreements with individual cardholders that give them the ability to borrow, against unused amounts, up to the maximum credit limit assigned to their account. While these unfunded amounts represented the total available unused lines of credit, the Company does not anticipate that all cardholders will utilize their entire available line at any given point in time. Commitments to extend unsecured credit are agreements to lend to a cardholder so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily re