UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________

FORM 10-Q



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~September 30, ~~2018~~2019



o ☐	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)

~~(678)~~ (678) 402-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.50 Par Value	AAN	New York Stock Exchange

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

___________________________________

Indicate by check mark whether registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of l934 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 o☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 o☐

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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	ý☒		Accelerated Filer	o☐

Non-Accelerated Filer	o☐	(Do not check if a smaller reporting company)	Smaller Reporting Company	o☐

Emerging Growth Company	o☐

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				o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o ☐No ý☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Title of Each Class		Shares Outstanding as of October ~~19, 2018~~28, 2019
Common Stock, $0.50 Par Value		~~68,594,784~~67,151,778

AARON’S, INC.

INDEX



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets – September 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018	3

Condensed Consolidated Statements of Earnings (Unaudited) – Three and Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018	4

Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018	5

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018	6

Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3231

Item 3. Quantitative and Qualitative Disclosures About Market Risk	47

Item 4. Controls and Procedures	48

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	49

Item 1A. Risk Factors	49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3. Defaults Upon Senior Securities	49

Item 4. Mine Safety Disclosures	49

Item 5. Other Information	49

Item 6. Exhibits	50

Signatures	51

PART I – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

AARON’S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	(Unaudited)
	September 30, 2019			December 31, 2018
	(In Thousands, Except Share Data)
ASSETS:
Cash and Cash Equivalents	$	150,261		$	15,278
Accounts Receivable (net of allowances of $74,752 in 2019 and $62,704 in 2018)	93,090			98,159
Lease Merchandise (net of accumulated depreciation and allowances of $890,932 in 2019 and $816,928 in 2018)	1,281,872			1,318,470
Loans Receivable (net of allowances and unamortized fees of $19,970 in 2019 and $19,941 in 2018)	72,130			76,153
Property, Plant and Equipment at Cost (net of accumulated depreciation of $311,155 in 2019 and $284,287 in 2018)	230,347			229,492
Operating Lease Right-of-Use Assets	330,508			—
Goodwill	735,782			733,170
Other Intangibles (net of accumulated amortization of $147,389 in 2019 and $130,116 in 2018)	198,216			228,600
Income Tax Receivable	15,931			29,148
Prepaid Expenses and Other Assets	111,483			98,222
Total Assets	$	3,219,620		$	2,826,692
LIABILITIES & SHAREHOLDERS’ EQUITY:
Accounts Payable and Accrued Expenses	$	254,234		$	293,153
Deferred Income Taxes Payable	297,110			267,500
Customer Deposits and Advance Payments	79,071			80,579
Operating Lease Liabilities	374,443			—
Debt	347,107			424,752
Total Liabilities	1,351,965			1,065,984
Commitments and Contingencies (Note 6)
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at September 30, 2019 and December 31, 2018; Shares Issued: 90,752,123 at September 30, 2019 and December 31, 2018	45,376			45,376
Additional Paid-in Capital	283,454			278,922
Retained Earnings	2,139,353			2,005,344
Accumulated Other Comprehensive Loss	(348		)	(1,087		)
	2,467,835			2,328,555
Less: Treasury Shares at Cost
Common Stock: 23,602,055 Shares at September 30, 2019 and 23,567,979 at December 31, 2018	(600,180		)	(567,847		)
Total Shareholders’ Equity	1,867,655			1,760,708
Total Liabilities & Shareholders’ Equity	$	3,219,620		$	2,826,692

(Unaudited)
September 30,
2018 December 31,
2017
(In Thousands, Except Share Data)
ASSETS:
Cash and Cash Equivalents $ 34,986
$ 51,037
Investments —
20,385
Accounts Receivable (net of allowances of $57,839 in 2018 and $46,946 in 2017) 92,311
99,887
Lease Merchandise (net of accumulated depreciation and allowances of $805,816 in 2018 and $760,722 in 2017) 1,196,812
1,152,135
Loans Receivable (net of allowances and unamortized fees of $20,538 in 2018 and $19,829 in 2017) 78,062
86,112
Property, Plant and Equipment at Cost (net of accumulated depreciation of $273,122 in 2018 and $242,623 in 2017) 216,337
207,687
Goodwill 703,437
622,948
Other Intangibles (net of accumulated amortization of $121,100 in 2018 and $100,557 in 2017) 230,874
235,551
Income Tax Receivable 29,724
100,023
Prepaid Expenses and Other Assets 116,355
116,499
Total Assets $ 2,698,898
$ 2,692,264
LIABILITIES & SHAREHOLDERS’ EQUITY:
Accounts Payable and Accrued Expenses $ 318,396
$ 304,810
Deferred Income Taxes Payable 248,102
222,592
Customer Deposits and Advance Payments 71,554
68,060
Debt 297,340
368,798
Total Liabilities 935,392
964,260
Commitments and Contingencies (Note 5)

SHAREHOLDERS' EQUITY:
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at September 30, 2018 and December 31, 2017; Shares Issued: 90,752,123 at September 30, 2018 and December 31, 2017 45,376
45,376
Additional Paid-in Capital 272,269
270,043
Retained Earnings 1,945,961
1,819,524
Accumulated Other Comprehensive Income 59
774
2,263,665
2,135,717
Less: Treasury Shares at Cost
Common Stock: 22,164,789 Shares at September 30, 2018 and 20,733,010 at December 31, 2017 (500,159 ) (407,713 )
Total Shareholders’ Equity 1,763,506
1,728,004
Total Liabilities & Shareholders’ Equity $ 2,698,898
$ 2,692,264

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

AARON’S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(In Thousands, Except Per Share Data)												(In Thousands, Except Per Share Data)
REVENUES:
Lease Revenues and Fees	$	880,871		$	755,318		$	2,596,876		$	2,217,029		$	906,776		$	880,871		$	2,758,498		$	2,596,876
Retail Sales	7,620			6,274			22,728			21,158			8,854			7,620			30,561			22,728
Non-Retail Sales	44,368			56,443			151,259			195,372			31,085			44,368			102,190			151,259
Franchise Royalties and Fees	10,153			11,140			35,140			38,165			8,087			10,153			25,899			35,140
Interest and Fees on Loans Receivable	9,508			8,936			28,258			25,669			8,687			9,508			25,943			28,258
Other	551			772			1,478			1,688			319			551			961			1,478
	953,071			838,883			2,835,739			2,499,081			963,808			953,071			2,944,052			2,835,739
COSTS AND EXPENSES:
Depreciation of Lease Merchandise	434,593			365,576			1,290,015			1,072,972			489,199			434,593			1,464,887			1,290,015
Retail Cost of Sales	4,877			4,380			14,695			13,711			5,742			4,877			20,025			14,695
Non-Retail Cost of Sales	35,214			50,750			130,302			174,653			24,913			35,214			83,057			130,302
Operating Expenses	420,602			374,157			1,199,171			1,033,530			383,264			420,602			1,154,056			1,199,171
Restructuring Expenses, Net	537			845			561			14,617			5,516			537			37,535			561
Other Operating (Income) Expense, Net	(38		)	486			(286		)	(586		)
Other Operating Income, Net													(329		)	(38		)	(4,712		)	(286		)
	895,785			796,194			2,634,458			2,308,897			908,305			895,785			2,754,848			2,634,458
OPERATING PROFIT	57,286			42,689			201,281			190,184			55,503			57,286			189,204			201,281
Interest Income	18			344			374			1,696			360			18			1,405			374
Interest Expense	(3,735		)	(4,707		)	(11,868		)	(16,074		)	(3,991		)	(3,735		)	(13,247		)	(11,868		)
Impairment of Investment	—			—			(20,098		)	—			—			—			—			(20,098		)
Other Non-Operating (Expense) Income, Net	(154		)	895			458			3,033			(207		)	(154		)	1,430			458
EARNINGS BEFORE INCOME TAXES	53,415			39,221			170,147			178,839			51,665			53,415			178,792			170,147
INCOME TAXES	9,695			13,880			35,680			63,863			11,864			9,695			40,263			35,680
NET EARNINGS	$	43,720		$	25,341		$	134,467		$	114,976		$	39,801		$	43,720		$	138,529		$	134,467
EARNINGS PER SHARE
Basic	$	0.64		$	0.36		$	1.93		$	1.62		$	0.59		$	0.64		$	2.05		$	1.93
Assuming Dilution	$	0.62		$	0.35		$	1.89		$	1.60		$	0.58		$	0.62		$	2.02		$	1.89
CASH DIVIDENDS DECLARED PER SHARE:
Common Stock	$	0.0300		$	0.0275		$	0.0900		$	0.0825		$	0.0350		$	0.0300		$	0.1050		$	0.0900
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	68,819			70,746			69,521			70,914			67,400			68,819			67,461			69,521
Assuming Dilution	70,139			72,095			70,996			72,057			68,652			70,139			68,739			70,996

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

AARON’S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
(In Thousands)	2018		2017		2018			2017		2019			2018		2019		2018
Net Earnings	$	43,720	$	25,341	$	134,467		$	114,976	$	39,801		$	43,720	$	138,529	$	134,467
Other Comprehensive Income (Loss):
Other Comprehensive (Loss) Income:
Foreign Currency Translation Adjustment	297		782		(715		)	1,431		(303		)	297		739		(715		)
Total Other Comprehensive Income (Loss)	297		782		(715		)	1,431
Total Other Comprehensive (Loss) Income										(303		)	297		739		(715		)
Comprehensive Income	$	44,017	$	26,123	$	133,752		$	116,407	$	39,498		$	44,017	$	139,268	$	133,752

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

AARON’S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2019			2018
	(In Thousands)						(In Thousands)
OPERATING ACTIVITIES:
Net Earnings	$	134,467		$	114,976		$	138,529		$	134,467
Adjustments to Reconcile Net Earnings to Cash Provided by Operating Activities:
Depreciation of Lease Merchandise	1,290,015			1,072,972			1,464,887			1,290,015
Other Depreciation and Amortization	68,730			61,274			79,419			68,730
Accounts Receivable Provision	188,763			142,142			228,608			188,763
Provision for Credit Losses on Loans Receivable	16,011			15,140			15,291			16,011
Stock-Based Compensation	21,793			19,886			20,261			21,793
Deferred Income Taxes	30,166			(16,970		)	28,747			30,166
Impairment of Investment	20,098			—
Impairment of Assets							29,031			20,098
Non-Cash Lease Expense							86,367			—
Other Changes, Net	(1,625		)	283			3,423			(1,625		)
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:
Additions to Lease Merchandise	(1,583,184		)	(1,388,435		)	(1,723,385		)	(1,583,184		)
Book Value of Lease Merchandise Sold or Disposed	289,859			306,766			298,904			289,859
Accounts Receivable	(181,512		)	(140,370		)	(225,372		)	(181,512		)
Prepaid Expenses and Other Assets	(6,685		)	(16,535		)	(19,642		)	(6,685		)
Income Tax Receivable	70,299			(10,596		)	13,217			70,299
Operating Lease Liabilities							(91,333		)	—
Accounts Payable and Accrued Expenses	7,998			21,491			5,762			7,998
Customer Deposits and Advance Payments	(2,198		)	(1,751		)	(1,954		)	(2,198		)
Cash Provided by Operating Activities	362,995			180,273			350,760			362,995
INVESTING ACTIVITIES:
Investments in Loans Receivable	(49,311		)	(58,042		)	(49,311		)	(49,311		)
Proceeds from Loans Receivable	44,016			45,362			40,423			44,016
Proceeds from Investments	666			—			—			666
Outflows on Purchases of Property, Plant and Equipment	(52,927		)	(42,105		)	(67,049		)	(52,927		)
Proceeds from Property, Plant and Equipment	5,488			10,149			2,805			5,488
Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired	(141,079		)	(142,278		)	(12,873		)	(141,079		)
Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed	802			1,130			2,813			802
Cash Used in Investing Activities	(192,345		)	(185,784		)	(83,192		)	(192,345		)
FINANCING ACTIVITIES:
Proceeds from Debt	50,000			27,875
(Repayments) Borrowings on Revolving Facility, Net							(16,000		)	25,000
Repayments on Debt	(121,857		)	(159,237		)	(62,317		)	(96,857		)
Dividends Paid	(4,186		)	(5,848		)	(7,086		)	(4,186		)
Acquisition of Treasury Stock	(100,004		)	(34,302		)	(39,422		)	(100,004		)
Issuance of Stock Under Stock Option Plans	6,684			3,439			5,115			6,684
Shares Withheld for Tax Payments	(17,282		)	(5,991		)	(12,977		)	(17,282		)
Debt Issuance Costs	(55		)	(2,835		)	—			(55		)
Cash Used in Financing Activities	(186,700		)	(176,899		)	(132,687		)	(186,700		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(1		)	102			102			(1		)
Decrease in Cash and Cash Equivalents	(16,051		)	(182,308		)
Increase (Decrease) in Cash and Cash Equivalents							134,983			(16,051		)
Cash and Cash Equivalents at Beginning of Period	51,037			308,561			15,278			51,037
Cash and Cash Equivalents at End of Period	$	34,986		$	126,253		$	150,261		$	34,986

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


NOTE 1.	BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Aaron's, Inc. (the "Company") is a leading omnichannel provider of lease-purchase solutions. As of September 30, ~~2018,~~2019, the Company's operating and reportable segments are Progressive Leasing, Aaron's Business and ~~DAMI.~~Dent-A-Med, Inc. ("DAMI").

Progressive Leasing is a virtual lease-to-own company that provides month-to-month lease-purchase solutions 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 through a lease-to-own transaction. Progressive Leasing consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional and e-commerce retailers.

The following table presents invoice volume for Progressive Leasing:


For the Three Months Ended September 30 (Unaudited and In Thousands)	2018		2017		2019		2018
Progressive Leasing Invoice Volume¹	$	355,005	$	281,724	$	420,902	$	355,005

¹ Invoice volume is defined as the retail price of lease merchandise acquired and then leased to customers during the period, net of returns.

The Aaron's Business segment offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a month-to-month, lease-to-own agreement with no credit needed through the Company's Aaron's-branded stores in the United States and Canada and its e-commerce ~~website.~~platform. This operating segment also supports franchisees of its Aaron's-branded stores. In addition, the Aaron's Business segment includes the operations of Woodhaven Furniture Industries ("Woodhaven"), which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores.

The Company acquired the store operations of ~~eight~~6 franchisees during the nine months ended September 30, ~~2018~~2019 and ~~four~~8 franchisees during the ~~year~~nine months ended ~~December 31, 2017.~~ September 30, 2018.Refer to Note 2 to these condensed consolidated financial statements.

The following table presents store count by ownership type for the Aaron's Business operations:



Stores as of September 30 (Unaudited)	2019	2018
Company-operated Aaron's Branded Stores	1,163	1,267
Franchised Stores	341	432
Systemwide Stores	1,504	1,699

Stores as of September 30 (Unaudited) 2018 2017
Company-operated Aaron's Branded Stores 1,267
1,181
Franchised Stores 432
569
Systemwide Stores 1,699
1,750

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).

Basis of Presentation

The preparation of the Company's condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Generally, actual experience has been consistent with management's prior estimates and assumptions. Management does not believe these estimates or assumptions will change significantly in the future absent unidentified and unforeseen events.

The accompanying unaudited condensed consolidated financial statements do not include all information required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 (the ~~"2017~~"2018 Annual Report") filed with the U.S. Securities and Exchange Commission on ~~March 1, 2018.~~February 14, 2019. The results of operations for the three and nine months ended September 30, ~~2018~~2019 are not necessarily indicative of operating results for the full year.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Aaron's, Inc. and its subsidiaries, each of which is wholly owned. Intercompany balances and transactions between consolidated entities have been eliminated.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Accounting Policies and Estimates

See Note 1 to the consolidated financial statements in the ~~2017~~2018 Annual Report.

Earnings Per Share

Earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs") and performance share units ("PSUs") and awards issuable under the Company's employee stock purchase plan ("ESPP") (collectively, "share-based awards") as determined under the treasury stock method. The following table shows the calculation of dilutive share-based awards:



	Three Months Ended September 30,		Nine Months Ended September 30,
(Shares In Thousands)	2019	2018	2019	2018
Weighted Average Shares Outstanding	67,400	68,819	67,461	69,521
Dilutive Effect of Share-Based Awards	1,252	1,320	1,278	1,475
Weighted Average Shares Outstanding Assuming Dilution	68,652	70,139	68,739	70,996

Three Months Ended
September 30, Nine Months Ended
September 30,
(Shares In Thousands) 2018 2017 2018 2017
Weighted Average Shares Outstanding 68,819
70,746
69,521
70,914
Dilutive Effect of Share-Based Awards 1,320
1,349
1,475
1,143
Weighted Average Shares Outstanding Assuming Dilution 70,139
72,095
70,996
72,057
Approximately 400,000 and 455,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three and nine months ended September 30, 2019, respectively, as the awards would have been anti-dilutive for the periods presented.

Approximately 356,000 and 345,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three and nine months ended September 30, 2018, respectively, as the awards would have been anti-dilutive for the periods presented.

Approximately 9,000 and 180,000 weighted-average share-based awards were excluded from the computations of earnings per share assuming dilution during the three and nine months ended September 30, 2017, respectively, as the awards would have been anti-dilutive for the periods presented.

Revenue Recognition

Lease Revenues and Fees

The Company provides merchandise, consisting primarily of furniture, consumer electronics, ~~computers,~~home appliances, jewelry and ~~household~~ accessories, to its customers for lease under certain terms agreed to by the customer. The Company's ~~Aaron's Business~~Progressive Leasing segment offers customers of traditional and e-commerce retailers a virtual lease-purchase solution through leases with month-to-month terms that can be renewed up to 12 months. The Company's Aaron's-branded stores and its e-commerce platform offer leases with month-to-month terms that can be renewed up to 12, 18 or 24 months. ~~The Company's Progressive Leasing segment offers virtual lease-purchase solutions, typically over 12 months, to the customers of traditional and e-commerce retailers.~~ The Company does not require deposits upon inception of customer agreements. The customer has the right to acquire ownership either through a purchase option or through payment of all required lease payments. The agreements are cancelable at any time by either party without penalty.

Progressive ~~Leasing~~ lease revenues are earned prior to the lease payment due date and are recorded net of related sales taxes as earned. Payment due dates terms include weekly, bi-weekly, and monthly. Revenue recorded prior to the payment due date results in unbilled accounts receivable in the accompanying condensed consolidated balance sheets. Beginning January 1, 2019, Progressive lease revenues are recorded net of a provision for returns and uncollectible renewal payments.

Aaron's Business lease revenues are recognized as revenue net of related sales taxes in the month they are earned. Lease payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying condensed consolidated balance sheets. Aaron's Business lease revenues are recorded net of a provision for returns and uncollectible renewal payments.

All of the Company's customer agreements are considered operating leases. The Company maintains ownership of the lease merchandise until all payment obligations are satisfied under sales and lease ownership agreements. Initial direct costs related to Progressive Leasing's lease purchase agreements are capitalized as incurred and amortized as operating expense over the estimated lease term. The capitalized costs have been classified within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. Initial direct costs related to Aaron's Business customer agreements are expensed as incurred and have been classified as operating expenses in the Company's condensed consolidated statements of earnings. The

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

statement of earnings effects of expensing the initial direct costs of the Aaron's Business as incurred are not materially different from amortizing initial direct costs over the lease term.

Retail and Non-Retail Sales

Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Generally, the transfer of control occurs near or at the point of sale for retail sales. Revenues for the non-retail sale of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the merchandise.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying condensed consolidated statements of earnings relate to the sale of lease merchandise to franchisees. The Company classifies the sale of merchandise to ~~retail~~other customers as retail sales in the condensed consolidated statements of earnings.

Franchise Royalties and Fees

The Company ~~franchises its Aaron's stores in markets where the Company~~ has no ~~immediate~~current plans to ~~enter. Franchisees~~franchise additional Aaron's stores. Current franchisees pay an ongoing royalty of 6% of the weekly cash revenue collections, which is recognized as the fees become due.

~~In addition, franchisees typically pay~~ The Company received a non-refundable initial franchise fee from current franchisees from $15,000 to $50,000 per store depending upon market size. Franchise fees and area development fees ~~are~~were generated from the sale of rights to develop, own and operate sales and lease ownership stores and pre-opening services provided by Aaron's to assist in the start-up operations of the stores. The Company considers the rights to the intellectual property and the pre-opening services to be a single performance obligation, resulting in the recognition of revenue ratably over time from the store opening date throughout the remainder of the franchise agreement term. The Company believes that this period of time is most representative of the time period in which the ~~customer~~franchisee realizes the benefits of having the right to access the Company's intellectual property. The deferred revenue balance related to initial franchise fees is $1.9 million as of September 30, 2018 and is included in customer deposits and advance payments on the condensed consolidated balance sheets. Revenue related to initial franchise fees recognized during the three and nine months ended September 30, 2018 was $0.4 million and $0.8 million, respectively.

The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. Refer to Note 56 of these condensed consolidated financial statements for additional discussion of the Company's franchise-related guarantee obligation. The Company also charges fees for advertising efforts that benefit the franchisees. Such fees are recognized at the time the advertising takes place and are presented as franchise royalties and fees ~~in the Company's condensed consolidated statements of earnings.~~

~~Initial direct costs related to the pre-opening services provided to franchisees are immaterial and are expensed as incurred. These expenses have been classified as operating expenses~~ in the Company's condensed consolidated statements of earnings.

Interest and Fees on Loans Receivable

DAMI extends or declines credit to an applicant through its bank partners based upon the applicant's credit rating and other factors. Qualifying applicants 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 24-month period, which DAMI may renew if the cardholder remains in good standing.

DAMI acquires the loan receivable from merchants through its third-party bank partners at a discount from the face value of the loan. The discount is comprised of a merchant fee discount and a promotional fee discount, if applicable.

The merchant fee discount represents a pre-negotiated, nonrefundable discount that generally ranges from 3% to 25% of the loan face value. The discount is designed to cover the risk of loss related to the portfolio of cardholder charges and DAMI's direct origination costs. The merchant fee discount and origination costs are ~~netted~~presented net on the condensed consolidated balance sheet in loans receivable. Cardholders generally have an initial 24-month period that the card is active. The merchant fee discount, net of the origination costs, is amortized on a net basis and is recorded as interest and fee revenue on loans receivable in the condensed consolidated statements of earnings on a straight-line basis over the initial 24-month period.

The discount from the face value of the loan on the acquisition of the loan receivable from the merchant through the third-party bank partners may also include a promotional fee discount, which generally ranges from 1% to 8%. The promotional fee discount is intended to compensate the holder of the loan receivable ~~(e.g.~~(i.e. DAMI) for deferred or reduced interest rates that are offered to the cardholder for a specified period on the outstanding loan balance (generally for six, 12 or 18 months). The promotional fee discount is amortized as interest and fee revenue on loans receivable in the condensed consolidated statements of earnings on a straight-line basis over the promotional interest period (i.e., over six, 12 or 18 months, depending on the promotion). The unamortized promotional fee discount is netted on the condensed consolidated balance sheet in loans receivable.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The customer is typically required to make periodic minimum payments of at least 3.5% of the outstanding loan balance, which includes outstanding interest. Fixed and variable interest rates, typically 25% to ~~34.99%~~35.99%, are compounded daily for cards that do not qualify for deferred or reduced interest promotional periods. Interest income, which is recognized based upon the amount of the loans outstanding, is recognized as interest and fees on loans receivable in the billing period in which they are assessed if collectability is reasonably assured. For credit cards that provide ~~for~~ deferred ~~or reduced~~ interest, if the balance is not paid off during the promotional period or if the cardholder defaults, interest is billed to the customers at standard rates and the cumulative amount owed is charged to the cardholder account in the month that the promotional period expires. For credit cards that provide reduced interest, if the balance is not paid off during the promotional period, interest is billed to the cardholder at standard rates in the month that the promotional period expires or when the cardholder defaults.

The Company recognizes interest revenue during the promotional period based on its historical experience related to cardholders that fail to pay off balances during the promotional period.

Annual fees are charged to cardholders at the commencement of the loan and on each subsequent anniversary date. Annual fees are deferred and recognized into revenue on a straight-line basis over a ~~one year~~one-year period. Under the provisions of the credit card agreements, the Company also may assess fees for service calls or for missed or late payments, which are recognized as revenue in the billing period in which they are assessed if collectability is reasonably assured.

~~Investments~~

~~At December 31, 2017, investments classified~~ Annual fees and other fees discussed are recognized as ~~held-to-maturity securities consisted of British pound-denominated notes issued by PerfectHome, which is based~~interest and fee revenue on loans receivable in the ~~U.K. The PerfectHome Notes ("Notes") consisted~~condensed consolidated statements of outstanding principal and accrued interest of £15.1 million ($20.4 million) at December 31, 2017. PerfectHome was a variable interest entity ("VIE") because it did not have sufficient equity at risk. However, the Company was not the primary beneficiary and did not consolidate PerfectHome since the Company lacked power through voting or similar rights to direct the activities that most significantly affected PerfectHome's economic performance.

During the second quarter of 2018, PerfectHome's liquidity deteriorated significantly due to continuing operating losses and the senior lender's decision to no longer provide additional funding under a secured revolving debt agreement resulting from PerfectHome's default of certain covenants. Additionally, the senior lender notified PerfectHome in May 2018 of its intent to exercise remedies available under its credit documentation, which included the right to call its outstanding debt. Furthermore, the U.K. governing authority for rent-to-own companies, the Financial Conduct Authority, has proposed new regulatory measures which could adversely affect PerfectHome's business. In July 2018, PerfectHome entered into the U.K.’s insolvency process and was subsequently acquired by the senior lender. The Company believes it will not receive any further payments on its subordinated secured Notes. As a result, the Company recorded a full impairment of the PerfectHome investment of $20.1 million during the second quarter of 2018.earnings.

Accounts Receivable

Accounts receivable consist primarily of receivables due from customers of Progressive Leasing and Company-operated stores, corporate receivables incurred during the normal course of business (primarily for vendor consideration and real estate leasing ~~activities and vendor consideration)~~activities) and franchisee obligations.

Accounts receivable, net of allowances, consist of the following:



(In Thousands)	September 30, 2019		December 31, 2018
Customers	$	67,359	$	60,879
Corporate	12,600		18,171
Franchisee	13,131		19,109
Accounts Receivable	$	93,090	$	98,159

The Company maintains an accounts receivable allowance, which primarily relates to its Progressive Leasing operations and the Aaron's Business operations. The Company’s policy for its Progressive Leasing segment is to record an allowance for returns and uncollectible renewal payments based on historical collection experience. During 2019, the Company adopted ASU 2016-02, Leases ("ASC 842") which resulted in the Progressive Leasing provision for returns and uncollectible renewal payments being recorded as a reduction of lease revenue and fees within the condensed consolidated statements of earnings beginning January 1, 2019. The provision for returns and uncollectible renewal payments for periods prior to 2019 are reported herein as bad debt expense within operating expenses in the condensed consolidated statements of earnings. The Progressive Leasing segment writes off lease receivables that are 120 days or more contractually past due.

For the Aaron's Business operations, contractually required lease payments are accrued when due. The Aaron's Business policy is to record a provision for returns and uncollectible contractually due renewal payments based on historical collection experience, which is recognized as a reduction of lease revenues and fees within the condensed consolidated statements of earnings. Aaron's Business writes off lease receivables that are 60 days or more past due on pre-determined dates twice monthly.

DAMI's allowance for uncollectible merchant accounts receivable, which primarily relates to cardholder returns and refunds, is recorded as bad debt expense within operating expenses in the condensed consolidated statements of earnings.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In Thousands) September 30, 2018
December 31, 2017
Customers $ 54,463
$ 48,661
Corporate 15,500
23,431
Franchisee 22,348
27,795
Accounts Receivable $ 92,311
$ 99,887

The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments:



	Nine Months Ended September 30,
(In Thousands)	2019		2018
Bad Debt Expense¹	$	1,272	$	160,886
Provision for Returns and Uncollectible Renewal Payments²	227,336		27,877
Accounts Receivable Provision	$	228,608	$	188,763

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2018 2017 2018 2017
Bad Debt Expense¹
$ 64,235
$ 50,705
$ 160,886
$ 118,749
Provision for Returns and Uncollected Renewal Payments²
11,451
9,331
27,877
23,393
Accounts Receivable Provision $ 75,686
$ 60,036
$ 188,763
$ 142,142

¹ Bad debt expense is recorded within operating expenses in the condensed consolidated financial statements.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

² ~~The~~ In accordance with the adoption of ASC 842, Progressive Leasing provision for returns and ~~uncollected~~uncollectible renewal payments isare recorded as a reduction to lease revenues and fees within the condensed consolidated financial ~~statements.~~

~~Refer~~statements beginning January 1, 2019. Prior to ~~Note~~January 1, to2019, Progressive Leasing provision for returns and uncollectible renewal payments were recorded as bad debt expense within operating expenses in the condensed consolidated financial ~~statements in the 2017 Annual Report for information on the Company's accounting policy for the accounts receivable provision.~~statements.

Lease Merchandise

The Company's lease merchandise consists primarily of furniture, consumer electronics, home appliances, jewelry, and accessories and is recorded at the lower of ~~amortized~~ cost or net realizable value. The cost of merchandise manufactured by our Woodhaven ~~Furniture Industries~~ operations is recorded at cost and includes overhead from production facilities, shipping costs and warehousing costs. The ~~Company-operated stores begin~~Company's Progressive Leasing segment, at which substantially all merchandise is on lease, depreciates merchandise generally over 12 months. The Company's Aaron's Business segment begins depreciating merchandise at the earlier of ~~twelve~~12 months and one day or when the item is ~~leased and depreciate~~leased. Aaron's Business depreciates merchandise to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24 months, and generally 36 months when not on lease. ~~The Company's Progressive Leasing segment, at which substantially all merchandise is on lease, depreciates merchandise generally over 12 months.~~ Depreciation is accelerated upon early payout.

The following is a summary of lease merchandise, net of accumulated depreciation and allowances:



(In Thousands)	September 30, 2019		December 31, 2018
Merchandise on Lease	$	1,034,855	$	1,053,684
Merchandise Not on Lease	247,017		264,786
Lease Merchandise, net of Accumulated Depreciation and Allowances	$	1,281,872	$	1,318,470

(In Thousands) September 30, 2018 December 31, 2017
Merchandise on Lease $ 933,569
$ 908,268
Merchandise not on Lease 263,243
243,867
Lease Merchandise, net of Accumulated Depreciation and Allowances $ 1,196,812
$ 1,152,135

The Company's policies require weekly lease merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are generally taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, the Company monitors lease merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete lease merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off.

~~All~~Generally, all lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off. The Company records a provision for write-offs on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write-off experience. The provision for write-offs is included in operating expenses in the accompanying condensed consolidated statements of earnings.

The following table shows the components of the allowance for lease merchandise write-offs:



	Nine Months Ended September 30,
(In Thousands)	2019			2018
Beginning Balance	$	46,694		$	35,629
Merchandise Written off, net of Recoveries	(168,770		)	(130,946		)
Provision for Write-offs	186,922			146,091
Ending Balance	$	64,846		$	50,774

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Nine Months Ended Year Ended
(In Thousands) September 30, 2018 December 31, 2017
Beginning Balance $ 35,629
$ 33,399
Merchandise Written off, net of Recoveries (130,946 ) (143,230 )
Provision for Write-offs 146,091
145,460
Ending Balance $ 50,774
$ 35,629

Loans Receivable, Net

Gross loans receivable represents the principal balances of credit card charges at DAMI's participating merchants that remain ~~outstanding to~~due from cardholders, plus unpaid interest and fees due from cardholders. The allowances and unamortized fees represents an allowance for uncollectible amounts; merchant fee discounts, net of capitalized origination costs; promotional fee discounts; and deferred annual card fees.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Loans acquired in the October 15, 2015 DAMI acquisition (the "Acquired Loans") were recorded at their estimated fair value at the acquisition date. The projected net cash flows from expected payments of principal, interest, fees and servicing costs and anticipated charge-offs were included in the determination of fair value; therefore, an allowance for loan losses and an amount for unamortized fees were not recognized for the Acquired Loans. The difference, or discount, between the expected cash flows to be received and the fair value of the Acquired Loans is accreted to interest and fees on loans receivable based on the effective interest method. At each period end, the Company evaluates the appropriateness of the accretable discount on the Acquired Loans based on actual and revised projected future cash receipts.

Losses on loans receivable are recognized when they are incurred, which requires the Company to make its best estimate of probable losses inherent in the portfolio. The Company evaluates loans receivable collectively for impairment. The method for calculating the best estimate of probable losses takes into account the Company's historical experience, adjusted for current conditions and the Company's judgment concerning the probable effects of relevant observable data, trends and market factors. Economic conditions and loan performance trends are closely monitored to manage and evaluate exposure to credit risk. Trends in delinquency ratios are an indicator of credit risk within the loans receivable portfolio, including the migration of loans between delinquency categories over time. Charge-off rates represent another indicator of the potential for future credit losses. The risk in the loans receivable portfolio is correlated with broad economic trends, such as unemployment rates, gross domestic product growth and gas prices, which can have a material effect on credit performance. To the extent that actual results differ from estimates of uncollectible loans receivable, the Company's results of operations and liquidity could be materially affected.

The Company calculates the allowance for loan losses based on actual delinquency balances and historical average loss experience on loans receivable by aging category for the prior eight quarters. The allowance for loan losses is maintained at a level considered adequate to cover probable losses of principal, interest and fees on active loans in the loans receivable portfolio. The adequacy of the allowance is evaluated at each period end.

Delinquent loans receivable ~~are~~includes those that are 30 days or more past due based on their contractual billing dates. The Company places loans receivable on nonaccrual status when they are greater than 90 days past due or upon notification of cardholder bankruptcy, death or fraud. The Company discontinues accruing interest and fees and amortizing merchant fee discounts and promotional fee discounts for loans receivable in nonaccrual status. Loans receivable are removed from nonaccrual status when cardholder payments resume, the loan becomes 90 days or less past due and collection of the remaining amounts outstanding is deemed probable. Payments received on nonaccrual loans are allocated according to the same payment hierarchy methodology applied to loans that are accruing interest. Loans receivable are charged off atno later than the end of the following month ~~following~~after the billing cycle in which the loans receivable become 120 days past due.

DAMI extends or declines credit to an applicant through its bank partners based upon the applicant's credit rating and other factors. Below is a summary of the credit quality of the Company's loan portfolio as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 by Fair Isaac and Company (FICO) score as determined at the time of loan origination:



FICO Score Category	September 30, 2019		December 31, 2018
600 or Less	5.6	%	3.7	%
Between 600 and 700	79.9	%	77.9	%
700 or Greater	14.5	%	18.4	%

FICO Score Category September 30, 2018 December 31, 2017
600 or Less 3.1 % 1.7 %
Between 600 and 700 77.5 % 76.5 %
700 or Greater 19.4 % 21.8 %

~~Prepaid Expenses and Other Assets~~

~~Prepaid expenses and other assets consist of the following:~~

(In Thousands) September 30, 2018 December 31, 2017
Prepaid Expenses $ 37,981
$ 31,509
Prepaid Insurance 33,370
36,735
Assets Held for Sale 9,626
10,118
Deferred Tax Asset 7,556
11,589
Other Assets 27,822
26,548
Prepaid Expenses and Other Assets $ 116,355
$ 116,499

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following:



(In Thousands)	September 30, 2019		December 31, 2018
Prepaid Expenses	$	37,658	$	30,763
Prepaid Insurance	26,535		27,948
Assets Held for Sale	10,017		6,589
Deferred Tax Asset	8,761		8,761
Other Assets	28,512		24,161
Prepaid Expenses and Other Assets	$	111,483	$	98,222

Assets Held for Sale

Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell and are classified within prepaid expenses and other assets in the condensed consolidated balance sheets. Depreciation is suspended on assets upon classification to held for sale.

The carrying amount of the properties held for sale as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 is ~~$9.6~~$10.0 millionand ~~$10.1~~$6.6 million, respectively. The Company estimated the fair values of real estate properties using the market values for similar properties. These properties are considered Level 2 assets as defined below.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:



(In Thousands)	September 30, 2019		December 31, 2018
Accounts Payable	$	72,190	$	88,369
Accrued Insurance Costs	41,872		40,423
Accrued Salaries and Benefits	49,052		40,790
Accrued Real Estate and Sales Taxes	32,337		30,332
Deferred Rent¹	—		27,270
Other Accrued Expenses and Liabilities¹	58,783		65,969
Accounts Payable and Accrued Expenses	$	254,234	$	293,153

(In Thousands) September 30, 2018 December 31, 2017
Accounts Payable $ 98,460
$ 80,821
Accrued Insurance Costs 42,268
41,680
Accrued Salaries and Benefits 49,849
46,511
Accrued Real Estate and Sales Taxes 31,184
31,054
Deferred Rent 27,454
29,912
Other Accrued Expenses and Liabilities 69,181
74,832
Accounts Payable and Accrued Expenses $ 318,396
$ 304,810


¹	Amounts as of September 30, 2019 were impacted by the January 1, 2019 adoption of ASC 842. Upon transition to ASC 842, the remaining balances of the Company's deferred rent, lease incentives, and closed store reserve were reclassified as a reduction to the operating lease right-of-use asset in the accompanying condensed consolidated balance sheet.

Debt

At September 30, ~~2018,~~2019, the Company was in compliance with all covenants related to its outstanding debt. See Note 7 to the consolidated financial statements in the ~~2017~~2018 Annual Report for further information regarding the Company's indebtedness.

~~Amendment to Term Loan Agreement and Franchisee Loan Facility~~

On October 23, 2018, the Company amended its second amended and restated revolving credit and term loan agreement (the "Amended Agreement") primarily to increase the term loan to $225.0 million from the $87.5 million remaining principal outstanding. The Company intends to use the incremental borrowings for general corporate and working capital purposes and for the repayment of outstanding borrowings under the revolver. The maturity date for the $225.0 million term loan is September 2022. The interest rate on the term loan remains unchanged. The Company also amended its franchise loan facility to (i) reduce the total commitment amount from $85.0 million to $55.0 million; and (ii) extend the maturity date to October 23, 2019.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Income Taxes~~

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the "Tax Act"). 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, which includes the Company's 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 previous tax legislation. Consequently, the Company remeasured its net deferred tax liabilities as of December 31, 2017 using the lower U.S. corporate income tax rate, which resulted in a provisional estimated $140 million non-cash income tax benefit recognized during the year ended December 31, 2017. In connection with the provisional analysis, the Company recorded additional income tax net benefits of $2.3 million during the nine months ended September 30, 2018.

This estimated tax benefit recorded related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of our federal and state calculations, changes in interpretations and assumptions that we have made, and additional guidance that may be issued by the U.S. Government. We will complete our analysis over a one-year measurement period ending December 22, 2018, and any further adjustments during this measurement period will be included in net earnings as an adjustment to income tax expense (benefit) in the reporting period when such adjustments are determined.

~~Accumulated Other Comprehensive Income~~Stockholders' Equity

Changes in ~~accumulated other comprehensive income~~stockholders' equity for the nine months ended September 30, 2019 and 2018 are as follows:

(In Thousands) Foreign Currency
Balance at January 1, 2018 $ 774
Other Comprehensive Loss (715 )
Balance at September 30, 2018 $ 59



	Treasury Stock					Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
(In Thousands, Except Per Share)	Shares		Amount			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance, December 31, 2018	(23,568	)	$	(567,847	)	$	45,376	$	278,922		$	2,005,344		$	(1,087	)	$	1,760,708
Opening Balance Sheet Adjustment - ASC 842, net of taxes	—		—			—		—			2,592			—			2,592
Cash Dividends, $0.035 per share	—		—			—		—			(2,363		)	—			(2,363		)
Stock-Based Compensation	—		—			—		7,050			—			—			7,050
Reissued Shares	493		4,264			—		(15,245		)	—			—			(10,981		)
Net Earnings	—		—			—		—			56,078			—			56,078
Foreign Currency Translation Adjustment	—		—			—		—			—			424			424
Balance, March 31, 2019	(23,075	)	(563,583		)	45,376		270,727			2,061,651			(663		)	1,813,508
Cash Dividends, $0.035 per share	—		—			—		—			(2,386		)	—			(2,386		)
Stock-Based Compensation	—		—			—		6,522			—			—			6,522
Reissued Shares	113		2,776			—		284			—			—			3,060
Repurchased Shares	(243	)	(14,414		)	—		—			—			—			(14,414		)
Net Earnings	—		—			—		—			42,650			—			42,650
Foreign Currency Translation Adjustment	—		—			—		—			—			618			618
Balance, June 30, 2019	(23,205	)	(575,221		)	45,376		277,533			2,101,915			(45		)	1,849,558
Cash Dividends, $0.035 per share	—		—			—		—			(2,363		)	—			(2,363		)
Stock-Based Compensation	—		—			—		5,911			—			—			5,911
Reissued Shares	2		49			—		10			—			—			59
Repurchased Shares	(399	)	(25,008		)	—		—			—			—			(25,008		)
Net Earnings	—		—			—		—			39,801			—			39,801
Foreign Currency Translation Adjustment	—		—			—		—			—			(303		)	(303		)
Balance, September 30, 2019	(23,602	)	$	(600,180	)	$	45,376	$	283,454		$	2,139,353		$	(348	)	$	1,867,655

~~There were no reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2018.~~

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Treasury Stock					Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
(In Thousands, Except Per Share)	Shares		Amount			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, December 31, 2017	(20,733	)	$	(407,713	)	$	45,376	$	270,043		$	1,819,524		$	774		$	1,728,004
Opening Balance Sheet Adjustment - ASC 606, net of taxes	—		—			—		—			(1,729		)	—			(1,729		)
Cash Dividends, $0.03 per share	—		—			—		—			(2,146		)	—			(2,146		)
Stock-Based Compensation	—		—			—		7,862			—			—			7,862
Reissued Shares	545		3,441			—		(12,602		)	—			—			(9,161		)
Repurchased Shares	(391	)	(18,407		)	—		—			—			—			(18,407		)
Net Earnings	—		—			—		—			52,246			—			52,246
Foreign Currency Translation Adjustment	—		—			—		—			—			(477		)	(477		)
Balance, March 31, 2018	(20,579	)	(422,679		)	45,376		265,303			1,867,895			297			1,756,192
Cash Dividends, $0.03 per share	—		—			—		—			(2,087		)	—			(2,087		)
Stock-Based Compensation	—		—			—		6,380			—			—			6,380
Reissued Shares	220		1,795			—		(5,408		)	—			—			(3,613		)
Repurchased Shares	(1,234	)	(50,025		)	—		—			—			—			(50,025		)
Net Earnings	—		—			—		—			38,501			—			38,501
Foreign Currency Translation Adjustment	—		—			—		—			—			(535		)	(535		)
Balance, June 30, 2018	(21,593	)	(470,909		)	45,376		266,275			1,904,309			(238		)	1,744,813
Cash Dividends, $0.03 per share	—		—			—		—			(2,068		)	—			(2,068		)
Stock-Based Compensation	—		—			—		6,140			—			—			6,140
Reissued Shares	104		2,322			—		(146		)	—			—			2,176
Repurchased Shares	(676	)	(31,572		)	—		—			—			—			(31,572		)
Net Earnings	—		—			—		—			43,720			—			43,720
Foreign Currency Translation Adjustment	—		—			—		—			—			297			297
Balance, September 30, 2018	(22,165	)	$	(500,159	)	$	45,376	$	272,269		$	1,945,961		$	59		$	1,763,506

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting the Company's own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are deemed to be impaired. The Company maintains certain financial assets and liabilities, and fixed-rate long-term debt, that are not measured at fair value but for which fair value is disclosed.

The fair values of the Company's other current financial assets and liabilities, including cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying values due to their short-term nature. The fair value for the loans receivable, net of allowances, and the revolving credit borrowings also approximate their carrying amounts.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Related Party Transactions

Aaron Ventures I, LLC, which we refer to as "Aaron Ventures," was formed in December 2002 for the purpose of acquiring properties from the Company and leasing them back to the Company and is controlled by certain of the Company’s current and former executives. Aaron Ventures purchased a combined total of 21 properties from the Company in 2002 and 2004, and leased the properties back to the Company. As of September 30, ~~2018,~~2019, the Company ~~has four remaining capital leases and six~~had 1 remaining operating ~~leases~~lease with Aaron Ventures with ~~lease~~an expiration dates between 2019 and 2026. During late 2017 and early 2018, all of these leases were renegotiated with Aaron Ventures. The four capital leases have aggregate annual rental payments of approximately $0.2 million.date in 2023. The rate of interest implicit in the ~~leases~~lease is approximately 9.7%. The ~~land and buildings, associated depreciation expense~~building's right-of-use asset and lease ~~obligations~~obligation are recorded in the Company's condensed consolidated financial statements. The ~~six operating leases have aggregate annual~~ rental payments ~~of approximately $0.3 million.~~related to this operating lease are not significant.

Supplemental Disclosure of Noncash Investing Transactions

During the ~~nine~~three months ended September 30, 2018, the Company entered into ~~exchange~~ transactions to acquire and sell certain customer agreements and related lease merchandise with third parties which are accounted for as asset acquisitions and asset disposals. The fair value of the non-cash consideration exchanged in these transactions was $0.6 million.

In addition, the purchase price for the acquisition of certain franchisees made during the nine months ended September 30, 2019 and 2018 included the non-cash settlement of pre-existing accounts receivable the franchisees owed the Company of$0.9 millionand $0.4 ~~million.~~million, respectively. This non-cash consideration has been excluded from the line "Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired" in the investing activities section of the condensed consolidated ~~statement~~statements of cash ~~flows.~~flows for the respective periods.

Hurricane Impact

During the third and fourth quarters of 2017, Hurricanes Harvey and Irma impacted the Company in the form of: (i) property damages (primarily in-store and on-lease merchandise, store leasehold improvements and furniture and fixtures) and employee assistance payments; (ii) increased customer-related accounts receivable allowances and lease merchandise allowances primarily in the impacted areas; (iii) lost lease revenue due to store closures of Aaron's Business and Progressive Leasing retail partners; and (iv) lost lease revenue due to the postponing of customer payments in the impacted areas.

During the ~~three~~nine months ended September 30, ~~2017,~~2019, the Company ~~recorded pre-tax losses~~received cash payments of ~~$2.9~~$7.0 million related to the settled property ~~that was either destroyed or severely damaged by~~damage and business interruption claims resulting from Hurricanes Harvey ~~or Irma, store repair costs~~ and ~~other storm related remediation costs. The Company recognized $1.5 million of pre-tax income for property-related insurance proceeds~~Irma. Settled property damage claims received in cash that were ~~probable~~in excess of ~~receipt~~the respective insurance receivable balances, as well as business interruption proceeds, resulted in gains of ~~September 30, 2017. The Company also increased its customer-related accounts receivable allowances~~$4.5 million which were recorded during the first and ~~lease merchandise allowances by a combined $3.6 million, primarily due to delays in payments from customers in the impacted areas. The losses, net~~second quarters of ~~probable insurance retention and probable recoveries,~~2019. These gains were recorded within other operating ~~expenses~~income, net in the condensed consolidated statements of ~~earnings, and the insurance receivable was classified within prepaid expenses and other assets in the condensed consolidated balance sheets.~~earnings.

~~During the nine months ended September 30, 2018, the Company received partial cash payments of~~$2.2 million from its insurers related to the property damage claims. As of September 30, 2018, the Company has an insurance receivable for property-related damages of $1.8 million, which the Company believes is probable of receipt.

~~Recent Accounting Pronouncements~~

~~Adopted~~

~~Revenue Recognition.~~ ~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers ("Topic 606").~~ ASU 2014-09 replaces substantially all existing revenue recognition guidance with a single, comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods and services to customers at the amount to which it expects to be entitled in exchange for transferring those goods or services. On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The standard changed the timing of recognition of store pre-opening revenue from franchisees. Previously, the Company's accounting policy was to recognize initial franchise store pre-opening revenue when earned, which is generally when a new store opens. Under the new standard, the initial franchise pre-opening services are not considered distinct from the continuing franchise services as they would not transfer a benefit to the franchisee directly without use of the franchise license and should be bundled with the franchise license as a single performance obligation. As a result, the pre-opening revenues will be recognized from the store opening date over the remaining life of the franchise license term.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The standard also changed the presentation of certain fees charged to franchisees, primarily advertising fees. Previously, there was diversity in practice and advertising fees charged to franchisees were recorded as a reduction to advertising expense, which is classified within operating expenses in the consolidated statements of earnings. The new standard resulted in the presentation of advertising fees charged to franchisees to be reported as franchise royalties and fee revenue in the consolidated statements of earnings, instead of a reduction to advertising expense.Recent Accounting Pronouncements

The changes associated with the adoption of Topic 606 did not require significant changes to controls and procedures around the revenue recognition process. The Company adopted the standard on January 1, 2018 using the modified retrospective approach and recorded a pre-tax adjustment to opening retained earnings and deferred revenue of $2.4 million on January 1, 2018. The Company expects to recognize such amounts in revenue over an average of the next 5 years.Adopted

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~The impact of adoption on the condensed consolidated statements of earnings and balance sheets was as follows:~~

~~Condensed Consolidated Statements of Earnings~~

Three Months Ended September 30, 2018

(In Thousands) As Reported Balance Without ASC 606 Adoption Effect of Change Higher/(Lower)
Franchise Royalties and Fees $ 10,153
$ 8,118
$ 2,035
Operating Expenses 420,602
418,928
1,674
OPERATING PROFIT 57,286
56,924
362
EARNINGS BEFORE INCOME TAXES 53,415
53,053
362
INCOME TAXES 9,695
9,606
89
NET EARNINGS $ 43,720
$ 43,447
$ 273

Nine Months Ended September 30, 2018
(In Thousands) As Reported Balance Without ASC 606 Adoption Effect of Change Higher/(Lower)
Franchise Royalties and Fees $ 35,140
$ 28,962
$ 6,178
Operating Expenses 1,199,171
1,193,819
5,352
OPERATING PROFIT 201,281
200,455
826
EARNINGS BEFORE INCOME TAXES 170,147
169,321
826
INCOME TAXES 35,680
35,478
202
NET EARNINGS $ 134,467
$ 133,843
$ 624

~~Condensed Consolidated Balance Sheets~~

Balance at September 30, 2018
(In Thousands) As Reported Balance Without ASC 606 Adoption Effect of Change Higher/(Lower)
Deferred Income Taxes Payable $ 248,102
$ 248,522
$ (420 )
Customer Deposits and Advance Payments 71,554
70,028
1,526
Total Liabilities 935,392
934,286
1,106
Retained Earnings 1,945,961
1,947,067
(1,106 )
Total Shareholders’ Equity 1,763,506
1,764,612
(1,106 )
Total Liabilities & Shareholders’ Equity $ 2,698,898
$ 2,698,898
$ —

~~Condensed Comprehensive Statements of Income~~

Three Months Ended September 30, 2018

(In Thousands) As Reported Balance Without ASC 606 Adoption Effect of Change Higher/(Lower)
Comprehensive Income $ 44,017
$ 43,744
$ 273

Nine Months Ended September 30, 2018
(In Thousands) As Reported Balance Without ASC 606 Adoption Effect of Change Higher/(Lower)
Comprehensive Income $ 133,752
$ 133,128
$ 624

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Business Combinations~~Leases. ~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Clarifying the Definition of a Business~~. The objective of the update is to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The Company prospectively adopted this ASU in the first quarter of 2018.

The new standard results in certain store acquisitions (or disposals) which do not transfer a substantive process to be accounted for as asset acquisitions (or disposals). The Company has identified a separate "expanded customer base" intangible asset, which is separately valued and recorded in asset acquisitions. The "expanded customer base" represents the estimated fair value of the acquisition purchase price paid by the Company for the ability to advertise and execute lease agreements with a larger pool of customers in the respective markets. This intangible asset was previously subsumed in goodwill under the business combinations accounting guidance. In situations in which the purchase price exceeds the fair value of the assets acquired, any remaining economic goodwill is allocated on a relative fair value basis to all acquired assets, including merchandise inventory. In situations in which the fair value of the assets acquired exceeds the purchase price, the acquisition is treated as a bargain purchase with the excess allocated on a relative fair value basis to all assets. This results in the recognition of the initial asset bases at less than fair value, including merchandise inventory.

The Company routinely enters into arrangements to acquire lease merchandise inventory and the related customer lease agreements of a store; however, the arrangement does not transfer a substantive process. Under ASU 2017-01, these acquisitions result in all of the purchase price getting assigned to definite lived assets, instead of a portion going to goodwill. This results in higher depreciation and amortization expense under the new standard for asset acquisitions that would have been accounted for as business combinations under the prior guidance. Transactions that are now accounted for as asset disposals, instead of business disposals, do not result in the write-off of goodwill as part of the disposal.

The new standard did not have a material impact to the Company's condensed consolidated financial statements during the first nine months of 2018. The future impact of this new standard will depend on the quantity and magnitude of future acquisitions (or disposals) that will be treated as asset acquisitions (or disposals) in accordance with ASU 2017-01.

~~Pending Adoption~~

~~Leases.~~ In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"), which ~~will require~~requires lessees to recognize assets and liabilities for most leases and ~~would change~~changes certain aspects of lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, ~~2018, with early adoption permitted.~~2018. Companies must use a modified retrospective approach to adopt ~~ASU 2016-02. A~~ASC 842; however, the Company adopted an optional transition method in which entities are permitted to not apply the requirements of ASC 842 in the comparative periods presented within the financial statements in the year of adoption, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The application of this optional transition method resulted in a cumulative-effect adjustment of $2.6 million representing an increase to the Company’s January 1, 2019 retained earnings balance, net of tax, due primarily to the recognition of deferred gains recorded under previous sale and operating leaseback transactions for which the ASC 842 transition guidance requires companies to recognize any deferred gains not resulting from off-market terms as a cumulative adjustment to retained earnings upon adoption of ASC 842.

As a lessor, a majority of the ~~Company's~~Company’s revenue generating activities ~~will be~~are within the scope of ~~ASU 2016-02.~~ASC 842. The ~~Company has preliminarily determined that the~~ new standard ~~will~~did not materially impact the timing of revenue recognition. ~~The new standard will result~~Effective January 1, 2019, ASC 842 resulted in the Company classifying ~~bad debt expense incurred within its~~the Progressive Leasing ~~segment~~provision for returns and uncollectible renewal payments as a reduction of lease revenue and fees within the condensed consolidated statements of earnings. For periods reported herein prior to January 1, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was recorded as bad debt expense within operating expenses in the condensed consolidated statements of earnings. The Aaron’s Business provision for returns and uncollectible renewal payments has historically been, and continues to be recorded as, a reduction to lease revenue and fees. The Company has customer lease agreements with lease and non-lease components that fall within the scope of ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"). The Company has elected to aggregate these components into a single component for all classes of underlying assets as the lease and non-lease components generally have the same timing and pattern of transfer.

The new standard ~~will~~ also ~~impact~~impacts the Company as a lessee by requiring substantially all of its operating leases to be recognized on the balance sheet as operating lease right-of-use assets and operating lease liabilities. See Note 5 to these condensed consolidated financial statements for further details regarding the Company’s leasing activities as a ~~right-to-use asset and lease liability.~~lessee. The Company ~~plans~~elected to ~~elect~~adopt a package of ~~optional~~ practical expedients offered by the FASB which ~~includes~~removes the ~~option~~requirement to ~~retain~~reassess whether expired or existing contracts contain leases and removes the ~~current~~requirement to reassess the lease classification offor any existing leases ~~entered into~~ prior to the adoption date of January 1, 2019. Additionally, the Company has elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease.

Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The intent of the standard is to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. Under the new standard, entities will be required to apply the accounting guidance as prescribed by ASC 350-40, Internal Use Software,in determining which implementation costs should be capitalized as assets or expensed as incurred. The internal-use software guidance requires the capitalization of certain costs incurred during the application development stage of an internal-use software project, while requiring companies to expense all costs incurred during preliminary project and post-implementation project stages. As a result, certain implementation costs which were previously expensed by the Company are now eligible for capitalization under ASU 2018-15. The standard may be applied either prospectively to all implementation costs incurred after the adoption date or retrospectively. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt ASU 2018-15 on a prospective basis effective January 1, 2019, and ~~thus does not anticipate a material~~the impact to the condensed consolidated financial statements was not significant. Costs eligible for capitalization will be capitalized within prepaid expenses and other assets and expensed through operating expenses in the condensed consolidated balance sheets and statements of earnings, or consolidated statements of cash flows. Additionally, the Company also plans to adopt an optional transition method finalized by the FASB in July 2018 in which entities are permitted to not apply ASU 2016-02 in the comparative periods presented within the financial statements in the year of adoption. The Company expects to be affected by the transition guidance related to recognition of deferred gains recorded under previous sale and operating leaseback transactions, which requires companies to recognize any deferred gains not resulting from off-market terms as a cumulative-effect adjustment to retained earnings upon adoption of ASU 2016-02.

The Company is implementing a new lease accounting module within its lease management system to support the new accounting requirements, and development and testing of the accounting solution is ongoing. The Company is also evaluating and implementing changes to our accounting policies, processes, and internal controls to ensure compliance with the standard’s reporting and disclosure requirements. The Company is currently quantifying the impacts of its operating leases to the consolidated financial statements, as well as evaluating other impacts of adopting ASU 2016-02, and will adopt the new standard in the first quarter of 2019.respectively.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Pending Adoption

Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial ~~Instruments.~~ Instruments ("CECL"). The main objective of the update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by companies at each reporting date. For trade and other receivables, held to maturity debt securities and other instruments, companies will be required to use a new forward-looking "expected losses" model that generally will result in the recognition of allowances for losses earlier than under current accounting guidance. The standard will be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for ~~annual~~the Company in the first quarter of 2020.

The Company's operating lease activities within Aaron's Business and ~~interim periods beginning after December 15, 2019, with early adoption permitted.~~ Progressive Leasing will not be impacted by ASU 2016-13, as operating lease receivables are not in the scope of the CECL standard. The Company will be impacted by ASU 2016-13 within its DAMI segment by requiring earlier recognition of estimated credit losses in the consolidated statements of earnings. DAMI acquires loan receivables from merchants through its third-party bank partners at a discount from the face value of the loan, referred to as the "merchant fee discount." The merchant fee discount represents a pre-negotiated, nonrefundable discount that generally ranges from 3% to 25% of the loan face value, which is primarily intended to cover the risk of credit loss related to the portfolio of loans originated. Although the CECL standard will require the estimated credit losses to be recognized at the time of loan origination, the related merchant fee discount will continue to be amortized as interest and fee revenue on a straight-line basis over the initial 24-month period that the card is active. Therefore, on a loan-by-loan basis, the Company expects higher losses to be recognized upon loan origination for the estimated credit losses, generally followed by higher net earnings as the related merchant fee discount is amortized to interest income, and as interest income is accrued and earned on the outstanding loan. Although the CECL standard will result in earlier recognition of credit losses in the statements of earnings, no changes are expected related to the loan cash flows.

The Company has ~~not yet determined~~evaluated the ~~potential effects of adopting~~guidance in ASU 2016-13 onrelated to purchased financial assets with credit deterioration ("PCD Method") and currently expects that its ~~consolidated financial statements.~~

~~Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15,~~ ~~Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.~~ ~~The intent of the standard is to reduce diversity in practice in accounting~~loans receivable would not qualify for the ~~costs of implementing cloud computing arrangements that are service contracts. Under the new standard, entities will be required to apply the accounting guidance~~PCD Method as, ~~prescribed by ASC 350-40,~~ ~~Internal Use Software~~,generally, a more-than-insignificant deterioration in determining which implementation costs should be capitalized as assets or expensed as incurred. The internal-use software guidance requires the capitalization of certain costs incurred during the application development stage of an internal-use software project, while requiring companies to expense all costs incurred during preliminary project and post-implementation project stages. The standard may be applied either prospectively to all implementation costs incurred after the adoption date or retrospectively. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted.credit quality since origination does not occur. The Company is ~~currently evaluating~~finalizing the ~~adoption approach~~implementation of a software solution to support the new accounting requirements and ~~assessing the~~is finalizing its evaluation of other various potential ~~effects~~impacts of adopting ASU 2018-15 on its consolidated financial statements, but expects certain implementation costs which are currently expensed by the Company will be eligible for capitalization under ASU 2018-15.CECL.

NOTE 2. ACQUISITIONS

Franchisee Acquisitions - 2018

During ~~July~~ 2018, the Company acquired 90152 Aaron's-branded franchised stores operated by ~~three~~ franchisees for an ~~aggregated~~aggregate purchase price of ~~$127.1~~$190.2 million, ~~in cash. The acquisitions are expected to benefit~~exclusive of the ~~Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets,~~settlement of pre-existing receivables and ~~enhancing operational control, including compliance, to execute its business transformation initiatives.~~post-closing working capital settlements.

The acquired operations generated revenues of ~~$22.5~~$43.9 millionand ~~pre-tax losses of$0.2~~$138.7 millionduring the three and nine months ended September 30, ~~2018 which~~2019, respectively, and $26.8 million and $32.0 million during the comparable prior year periods. The acquired operations generated earnings before income taxes of $0.4 million and $1.6 million during the three and nine months ended September 30, 2019, respectively, and losses before income taxes of $0.2 million during the respective comparable prior year periods. The revenues and earnings before income taxes described above are included in our condensed consolidated statements of ~~earnings.~~ earnings for the respective periods.

The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs, ~~and~~ amortization expense of the various intangible assets recorded from the ~~acquisition.~~acquisitions, and restructuring charges incurred under the 2019 restructuring program associated with the closure of a number of acquired stores. The revenues and ~~losses~~earnings before income taxes of the acquired operations discussed above have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated as revenue and expenses to the Company from the franchisees during the three and nine months ended September 30, 2019 and 2018 had the transaction not been completed.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Preliminary~~ Acquisition Accounting

The ~~franchisee~~2018 acquisitions ~~have been accounted for as~~are benefiting the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, and enabling the Company to execute its business ~~combinations, and the results of operations of the acquired businesses are included in the Company’s results of operations from the respective dates of acquisition.~~transformation initiatives on a broader scale. The following table presents ~~a summary~~summaries of the preliminary and final fair value of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:



~~(In Thousands)~~	~~Amounts Recognized as of Acquisition Dates (preliminary)~~
~~Purchase Price~~	$	~~127,498~~
~~Working Capital Adjustment~~	~~(445~~		)
~~Consideration Transferred~~	~~127,053~~
~~Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed~~
~~Cash and Cash Equivalents~~	43
~~Lease Merchandise~~	~~35,281~~
~~Property, Plant and Equipment~~	~~4,570~~
~~Other Intangibles~~¹	~~14,283~~
~~Prepaid Expenses and Other Assets~~	~~571~~
~~Total Identifiable Assets Acquired~~	~~54,748~~
~~Accounts Payable and Accrued Expenses~~	~~(562~~		)
~~Customer Deposits and Advance Payments~~	~~(2,958~~		)
~~Total Liabilities Assumed~~	~~(3,520~~		)
~~Goodwill~~²	~~75,825~~
~~Net Assets Acquired~~	$	~~51,228~~



(In Thousands)	Amounts Recognized as of Acquisition Dates (as of June 30, 2019)¹			Acquisition Accounting Adjustments²			Final Amounts Recognized as of Acquisition Dates
Purchase Price	$	190,167		$	—		$	190,167
Add: Settlement of Pre-existing Relationship	5,405			—			5,405
Less: Working Capital Adjustments	155			—			155
Aggregate Consideration Transferred	195,727			—			195,727
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents	50			—			50
Lease Merchandise	59,616			—			59,616
Property, Plant and Equipment	5,568			—			5,568
Operating Lease Right-of-Use Assets³	—			4,338			4,338
Other Intangibles⁴	24,498			(1,176		)	23,322
Prepaid Expenses and Other Assets	1,206			35			1,241
Total Identifiable Assets Acquired	90,938			3,197			94,135
Accounts Payable and Accrued Expenses	(977		)	—			(977		)
Customer Deposits and Advance Payments	(5,156		)	—			(5,156		)
Total Liabilities Assumed	(6,133		)	—			(6,133		)
Goodwill⁵	110,922			(3,197		)	107,725
Net Assets Acquired	$	84,805		$	3,197		$	88,002

¹ As previously reported in Note 2 to the condensed consolidated financial statements as of June 30, 2019.

²During the third quarter, the Company finalized its valuation of assumed favorable and unfavorable real estate operating leases based on comparable market terms of similar leases at the acquisition dates, which also impacted the valuation of the Company's customer lease contract and customer relationship intangible assets. The adjustment also resulted in the recognition of immaterial adjustments to operating expenses within the condensed consolidated statements of earnings, as well as restructuring expenses (reversals), net during the three months ended September 30, 2019 to recognize expense that would have been recognized in prior periods had the favorable lease asset been recorded as of the acquisition date.

³As of the respective acquisition dates, the Company had not yet adopted ASC 842. As such, there were no operating lease right-of-use assets or operating lease liabilities recognized within the condensed consolidated financial statements at the time of acquisition. The Company recognized operating lease right-of-use assets and operating lease liabilities for the acquired stores as part of the transition to ASC 842 on January 1, 2019. As discussed above, the Company finalized its valuation of assumed favorable and unfavorable real estate operating leases, which was recorded within operating lease right-of-use assets in our condensed consolidated balance sheet.

⁴ Identifiable intangible assets are further disaggregated in the table set forth below.

^{2 5}The total goodwill recognized in conjunction with the franchisee acquisitions, all of which is expected to be deductible for tax purposes, has been assigned to the Aaron’s Business reporting unit. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand name in new geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled ~~workforce and the ability to advertise and execute lease agreements with a larger pool of customers in the respective markets.~~workforce.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The preliminary acquisition accounting presented above is subject to refinement. The Company is still assessing the valuation of assumed favorable and unfavorable real estate operating leases based on comparable market terms of similar leases at the acquisition dates, finalizing inputs and assumptions used to value intangible assets acquired, and finalizing certain working capital items. The Company expects these items to be finalized prior to the one year anniversary date of the acquisitions.

~~The estimated~~ intangible assets attributable to the franchisee acquisitions are comprised of the following:


	Fair Value (in thousands)		Weighted Average Life (in years)	Fair Value (In Thousands)		Weighted Average Life (In Years)
Non-compete Agreements	$	615	3.0	$	1,872	3.0
Customer Lease Contracts	4,687		1.0	7,457		1.0
Customer Relationships	6,195		3.0	9,330		3.0
Reacquired Franchise Rights	2,786		4.3	4,663		3.9
Total Acquired Intangible Assets¹	$	14,283		$	23,322

¹Acquired definite-lived intangible assets have a total weighted average life of ~~2.6~~2.5 years.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The Company incurred ~~$0.5~~$1.6 million of acquisition-related costs in connection with the franchisee acquisitions, ~~during the three months ended September 30, 2018. These costs were included in operating expenses in the condensed consolidated statements of earnings.~~

~~2017 Franchisee Acquisition~~

On July 27, 2017, the Company acquired substantially all of the assets and liabilities of the store operations of a franchisee, SEI, for approximately $140 million in cash. At the time of the acquisition, those 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 operational control, including compliance, to execute its business transformation initiatives.

The acquired operations generated revenues of $58.3 million and earnings before income taxes of $2.5 million from July 27, 2017 through December 31, 2017. During the three and nine months ended September 30, 2018, the acquired operations generated revenues of $31.1 million and $98.9 million, respectively, and earnings before income taxes of $1.5 million and $9.5 million, respectively, which are included in our condensed consolidated statements of earnings. Included in the earnings before income taxes of the acquired operations are acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisition and restructuring expenses associated with the closure of several acquired stores. The revenues and earnings before income taxes have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated as revenue to the Company from SEI, as a franchisee, from July 27, 2017 through September 30, 2018 had the transaction not been completed.

~~Acquisition Accounting~~

The SEI franchisee acquisition has been accounted for as a business combination, and the results of operations of the acquired business are included in the Company’s results of operations from the date of acquisition. The following table presents a summary of the fair value of the assets acquired and liabilities assumed in the SEI franchisee acquisition.

(In Thousands) Final Amounts Recognized as of Acquisition Date
Purchase Price $ 140,000
Settlement of Pre-existing Accounts Receivable SEI owed Aaron's, Inc. 3,452
Reimbursement for Insurance Costs (100 )
Working Capital Adjustment 188
Consideration Transferred 143,540
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents 34
Receivables 1,345
Lease Merchandise 40,941
Property, Plant and Equipment 8,832
Other Intangibles¹
13,779
Prepaid Expenses and Other Assets 440
Total Identifiable Assets Acquired 65,371
Accounts Payable and Accrued Expenses (6,698 )
Customer Deposits and Advance Payments (2,500 )
Capital Leases (4,514 )
Total Liabilities Assumed (13,712 )
Goodwill²
91,881
Net Assets Acquired $ 51,659

¹ ~~Identifiable intangible assets are further disaggregated in the table set forth below.~~

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

²The total goodwill recognized in conjunction with the franchisee acquisition, all of which is deductible for tax purposes, has been assigned to the Aaron’s Business reporting unit. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand name in new geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce and the ability to advertise and execute lease agreements with a larger pool of customers in the respective markets.

~~The intangible assets attributable to the SEI franchisee acquisition are comprised of the following:~~

Fair Value
(in thousands)

Weighted Average Life
(in years)
Non-compete Agreements $ 1,244
5.0
Customer Lease Contracts 2,154
1.0
Customer Relationships 3,215
2.0
Reacquired Franchise Rights 3,640
4.1
Favorable Operating Leases 3,526
11.3
Total Acquired Intangible Assets¹
$ 13,779

¹~~Acquired definite-lived intangible assets have a total weighted average life of 5.1 years.~~

~~The Company incurred $2.1 million of acquisition-related costs in connection with the franchisee acquisition,~~ substantially all of which were incurred during ~~the third quarter of 2017.~~2018. These costs were included in operating expenses in the condensed consolidated statements of earnings.

Other Acquisitions

In addition to the acquisitions discussed above, the Company acquired the store operations of ~~five~~6 franchisees during the nine months ended September 30, ~~2018~~2019 and ~~three~~5 franchisees during the ~~year~~nine months ended ~~December 31, 2017.~~September 30, 2018.

Net cash outflows related to the acquisitions of other Aaron's franchisees, other rent-to-own store businesses, and customer contracts aggregated to$12.9 million and $14.1 ~~millionand $2.4~~ million during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The effect of these acquisitions on the condensed consolidated financial statements for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 was not significant.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 3. FAIR VALUE MEASUREMENT

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes financial liabilities measured at fair value on a recurring basis:



(In Thousands)	September 30, 2019							December 31, 2018
	Level 1		Level 2			Level 3		Level 1		Level 2			Level 3
Deferred Compensation Liability	$	—	$	(10,708	)	$	—	$	—	$	(10,389	)	$	—

(In Thousands) September 30, 2018 December 31, 2017
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Deferred Compensation Liability $ —
$ (11,910 ) $ —
$ —
$ (12,927 ) $ —

The Company maintains the Aaron’s, Inc. Deferred Compensation Plan, which is an unfunded, nonqualified deferred compensation plan for a select group of management, highly compensated employees and non-employee directors. The liability is recorded in accounts payable and accrued expenses in the condensed consolidated balance sheets. The liability representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment elections, which consist of equity and debt "mirror" funds. As such, the Company has classified the deferred compensation liability as a Level 2 liability.

Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table summarizes non-financial assets measured at fair value on a nonrecurring basis:



(In Thousands)	September 30, 2019						December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets Held for Sale	$	—	$	10,017	$	—	$	—	$	6,589	$	—

(In Thousands) September 30, 2018 December 31, 2017
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets Held for Sale $ —
$ 9,626
$ —
$ —
$ 10,118
$ —

Assets classified as held for sale are recorded at the lower of carrying value or fair value less estimated costs to sell, and any adjustment is recorded in other operating ~~(income) expense,~~income, net or restructuring expenses, net (if the asset is a part of the ~~2016 or 2017~~Company's restructuring ~~program)~~program as described in Note 8) in the condensed consolidated statements of earnings. The highest and best use of the assets held for sale is as real estate land parcels for development or real estate properties for use or lease; however, the Company has chosen not to develop or use these properties.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Certain Financial Assets and Liabilities Not Measured at Fair Value

The following table summarizes the fair value of ~~assets (liabilities)~~liabilities that are not measured at fair value in the condensed consolidated balance sheets, but for which the fair value is disclosed:



(In Thousands)	September 30, 2019				December 31, 2018
	Level 1	Level 2		Level 3	Level 1	Level 2		Level 3
Fixed-Rate Long-Term Debt¹	—	(124,239	)	—	—	(183,765	)	—

(In Thousands) September 30, 2018 December 31, 2017
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
PerfectHome Notes¹
$ —
$ —
$ —
$ —
$ —
$ 20,385
Fixed-Rate Long-Term Debt²
—
(184,249 ) —
—
(273,476 ) —
¹The fair value of fixed-rate long-term debt is estimated using the present value of underlying cash flows discounted at a current market yield for similar instruments. The carrying amount of fixed-rate long-term debt was $120.0 million and $180.0 million at September 30, 2019 and December 31, 2018, respectively.


¹	The PerfectHome notes were carried at cost, which approximated fair value. The Company recorded a full impairment of the PerfectHome notes during the second quarter of 2018. Refer to Note 1 to the condensed consolidated financial statements for further discussion of the PerfectHome impairment.


²	The fair value of fixed-rate long-term debt is estimated using the present value of underlying cash flows discounted at a current market yield for similar instruments. The carrying amount of fixed-rate long-term debt was $180.0 million and $265.0 million at September 30, 2018 and December 31, 2017, respectively.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 4. LOANS RECEIVABLE

The following is a summary of the Company’s loans receivable, net:



(In Thousands)	September 30, 2019			December 31, 2018
Credit Card Loans¹	$	91,279		$	90,406
Acquired Loans²	821			5,688
Loans Receivable, Gross	92,100			96,094

Allowance for Loan Losses	(14,054		)	(12,970		)
Unamortized Fees	(5,916		)	(6,971		)
Loans Receivable, Net of Allowances and Unamortized Fees	$	72,130		$	76,153

(In Thousands) September 30, 2018 December 31, 2017
Credit Card Loans¹
$ 90,944
$ 89,728
Acquired Loans²
7,656
16,213
Loans Receivable, Gross 98,600
105,941

Allowance for Loan Losses (13,138 ) (11,454 )
Unamortized Fees (7,400 ) (8,375 )
Loans Receivable, Net of Allowances and Unamortized Fees $ 78,062
$ 86,112

¹ "Credit Card Loans" are loans originated after the 2015 acquisition of DAMI.

² "Acquired Loans" are credit card loans the Company purchased in the 2015 acquisition of DAMI.

Included in the table below is an aging of the loans receivable, gross balance:



(Dollar Amounts in Thousands)
Aging Category¹	September 30, 2019			December 31, 2018
30-59 days past due	6.6		%	6.9		%
60-89 days past due	3.6		%	3.4		%
90 or more days past due	5.0		%	4.3		%
Past due loans receivable	15.2		%	14.6		%
Current loans receivable	84.8		%	85.4		%
Balance of Credit Card Loans on Nonaccrual Status	$	2,330		$	2,110
Balance of Loans Receivable 90 or More Days Past Due and Still Accruing Interest and Fees	$	—		$	—

(Dollar Amounts in Thousands)
Aging Category¹
September 30, 2018 December 31, 2017
30-59 days past due 7.0 % 7.1 %
60-89 days past due 3.4 % 3.6 %
90 or more days past due 4.5 % 4.1 %
Past due loans receivable 14.9 % 14.8 %
Current loans receivable 85.1 % 85.2 %
Balance of Credit Card Loans on Nonaccrual Status $ 2,016
$ 2,016
Balance of Loans Receivable 90 or More Days Past Due and Still Accruing Interest and Fees $ —
$ —

¹This aging is based on the contractual amounts outstanding for each loan as of period end, and does not reflect the fair value adjustments for the Acquired Loans.

~~The table below presents the components of the allowance for loan losses:~~

Nine Months Ended Year Ended
(In Thousands) September 30, 2018 December 31, 2017
Beginning Balance¹
$ 11,454
$ 6,624
Provision for Loan Losses 16,011
20,973
Charge-offs (15,504 ) (16,852 )
Recoveries 1,177
709
Ending Balance $ 13,138
$ 11,454

¹The Company acquired DAMI on October 15, 2015 and recorded $89.1 million of loans receivable as of the acquisition date. No corresponding allowance for loan losses was recorded as the loans receivable were established at fair value in acquisition accounting.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The tables below present the components of the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,
(In Thousands)	2019			2018
Beginning Balance	$	12,783		$	11,586
Provision for Loan Losses	6,068			6,471
Charge-offs	(5,423		)	(5,294		)
Recoveries	626			375
Ending Balance	$	14,054		$	13,138



	Nine Months Ended September 30,
(In Thousands)	2019			2018
Beginning Balance	$	12,970		$	11,454
Provision for Loan Losses	15,291			16,011
Charge-offs	(16,065		)	(15,504		)
Recoveries	1,858			1,177
Ending Balance	$	14,054		$	13,138

NOTE 5. LEASES

Lessor Information

Refer to Note 1 to these condensed consolidated financial statements for further information about the Company's revenue generating activities as a lessor. All of the Company's customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases.

Lessee Information

As a lessee, the Company leases retail store and warehouse space for most of its Aaron's Business store-based operations, call center space and hubs for its Progressive Leasing segment, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. To the extent that a leased retail store or warehouse space is vacated prior to the termination of the lease, the Company may sublease these spaces to third parties while maintaining its primary obligation as the lessee in the head lease. The Company leases transportation vehicles under operating and finance leases, most of which generally expire during the next three years. The transportation leases generally include a residual value that is guaranteed to the lessor, which ensures that the vehicles will be returned to the lessor in reasonable working condition. The Company also leases various IT equipment such as printers and computers under operating leases, most of which generally expire during the next three years. For all of its leases in which the Company is a lessee, the Company has elected to include both the lease and non-lease components as a single component and account for it as a lease.

Finance lease costs are comprised of the amortization of right-of-use assets and the interest accretion on discounted lease liabilities, which are recorded within operating expenses and interest expense, respectively, in the Company’s condensed consolidated statements of earnings. Operating lease costs are recorded on a straight-line basis within operating expenses. For stores that are related to the Company's restructuring programs as described in Note 8, operating lease costs recorded subsequent to any necessary operating lease right-of-use asset impairment charges are recognized in a pattern that is generally accelerated within restructuring expenses, net in the Company’s condensed consolidated statements of earnings. The Company’s total lease expense is comprised of the following:

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended			Nine Months Ended
(In Thousands)	September 30, 2019			September 30, 2019
Finance Lease Cost:
Amortization of Right-of-Use Assets	$	396		$	1,302
Interest on Lease Liabilities	83			296
Total Finance Lease Cost:	479			1,598

Operating Lease Cost:
Operating Lease Cost Classified within Operating Expenses¹	27,647			84,789
Operating Lease Cost Classified within Restructuring Expenses, Net	881			2,521
Sublease Receipts	(628		)	(2,399		)
Total Operating Lease Cost:	27,900			84,911

Total Lease Cost	$	28,379		$	86,509

¹ Includes short-term and variable lease costs, which are not significant.

Additional information regarding the Company’s leasing activities as a lessee is as follows:



	Nine Months Ended
(In Thousands)	September 30, 2019
Cash Paid for Amounts Included in Measurement of Lease Liabilities:
Operating Cash Flows for Finance Leases	$	345
Operating Cash Flows for Operating Leases	91,333
Financing Cash Flows for Finance Leases	1,971
Total Cash Paid for Amounts Included in Measurement of Lease Liabilities	93,649
Right-of-Use Assets Obtained in Exchange for New Finance Lease Liabilities	—
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities, Net of Exercised Early Lease Termination Options	$	27,185

Supplemental balance sheet information related to leases is as follows:



(In Thousands)	Balance Sheet Classification	September 30, 2019
Assets
Operating Lease Assets	Operating Lease Right-of-Use Assets	$	330,508
Finance Lease Assets	Property, Plant and Equipment, Net	1,018
Total Lease Assets		$	331,526

Liabilities
Operating Lease Liabilities	Operating Lease Liabilities	$	374,443
Finance Lease Liabilities	Debt	3,192
Total Lease Liabilities		$	377,635

Most of the Company’s real estate 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 Company currently does not have any real estate leases in which it considers the renewal options to be reasonably certain of exercise, as the Company's historical experience indicates that renewal options are not reasonably certain to be exercised. Additionally, the Company's leases contain contractual renewal rental rates that are considered to be in line with market rental rates, and there are not significant economic penalties or business disruptions incurred by not exercising any renewal options.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s finance and operating leases:



	Weighted Average Discount Rate¹		Weighted Average Remaining Lease Term (in years)
Finance Leases	5.8	%	1.3
Operating Leases	3.6	%	5.0

¹Upon adoption of ASC 842, discount rates for existing operating leases were established as of January 1, 2019.

Under the short-term lease exception provided within ASC 842, the Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement, including renewal options that the Company is reasonably certain to exercise, and do not include purchase options. Below is a summary of undiscounted finance and operating lease liabilities that have initial terms in excess of one year as of September 30, 2019. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the condensed consolidated balance sheet.



(In Thousands)	Operating Leases		Finance Leases		Total
2019	$	27,105	$	561	$	27,666
2020	108,113		2,001		110,114
2021	85,651		841		86,492
2022	65,160		83		65,243
2023	44,363		—		44,363
Thereafter	78,980		—		78,980
Total Undiscounted Cash Flows	409,372		3,486		412,858
Less: Interest	34,929		294		35,223
Present Value of Lease Liabilities	$	374,443	$	3,192	$	377,635

NOTE 5.6. COMMITMENTS AND CONTINGENCIES

Guarantees

The Company has guaranteed certain debt obligations of some of the franchisees under a franchisee loan program with several banks.In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of the franchisees’ debt obligations under the franchisee loan program, which would be due in full within 90 days of the event of default. At September 30, ~~2018,~~2019, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was ~~$41.0~~$29.8 million. The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the franchisee loan program in 1994, the ~~Company has had no significant~~Company's losses associated ~~losses.~~with the program have been immaterial. The Company believes the likelihood of any ~~significant~~future amounts ~~being~~to be funded by the Company in connection with these guarantees to be ~~remote.~~immaterial. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the condensed consolidated balance sheets, is ~~$0.5~~$0.3 million as of September 30, 2019 and December 31, 2018.

The maximum facility commitment amount under the franchisee loan program was ~~$85.0~~$55.0 million at September 30, ~~2018,~~2019, including a Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of Quebec) of CAD $25.0 million. On October ~~23, 2018,~~11, 2019, the Company amended its franchise loan facility to (i) reduce the total commitment amount from ~~$85.0~~$55.0 million to ~~$55.0~~$40.0 million; and (ii) extend the maturity date to October ~~23, 2019.~~22, 2020.

The Company is subject to financial covenants under the franchisee loan program that are consistent with the Revolving Credit and Term Loan Agreement, which are more fully described in Note 7 to the consolidated financial statements in the ~~2017~~2018 Annual Report. The Company is in compliance with all covenants at September 30, ~~2018~~2019 and believes it will continue to be in compliance in the future. ~~Refer to Note 1 to these condensed consolidated financial statements for amendments to the franchisee loan program subsequent to September 30, 2018.~~

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Legal and Regulatory Proceedings

From time to time, the Company is party to various legal and regulatory proceedings arising in the ordinary course of business.

Some of the proceedings to which the Company is currently a party are described below. The Company believes it has meritorious defenses to all of the claims described below, and intends to vigorously defend against the claims. However, these proceedings are still developing and due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings, there can be no guarantee that the Company will ultimately be successful in these proceedings, or in others to which it is currently a party. Substantial losses from these proceedings or the costs of defending them could have a material adverse impact upon the Company's business, financial position and results of operations.

The Company establishes an accrued liability for legal and regulatory proceedings when it determines that a loss is both probable and the amount of the loss can be reasonably estimated. The Company continually monitors its litigation and regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had accrued ~~$2.3~~$5.7 million and ~~$7.3~~$1.4 million, respectively, for pending legal and regulatory matters for which it believes losses are probable and is the Company's best estimate of its exposure to loss. Of the amount accrued as of September 30, 2019, the Company expects to recover $4.8 million via payments received from insurance proceeds. The Company records these liabilities in accounts payable and accrued expenses in the condensed consolidated balance sheets. The corresponding expected insurance recovery is recorded within prepaid expenses and other assets in the condensed consolidated balance sheet. The Company estimated that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss contingencies is between $0 and $1.0 ~~million.~~million as of September 30, 2019.

At September 30, ~~2018,~~2019, the Company estimated that the aggregate range of loss for all material pending legal and regulatory proceedings for which a loss is reasonably possible, but less likely than probable (i.e., excluding the contingencies described in the preceding paragraph), is between ~~$3.0 million~~$0 and ~~$7.0~~$1.0 million. Those matters for which a reasonable estimate is not possible are not included within estimated ranges and, therefore, the estimated ranges do not represent the Company's maximum loss exposure. The Company’s estimates for legal and regulatory accruals, aggregate probable loss amounts and reasonably possible loss amounts are all subject to the uncertainties and variables described above.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Privacy and Related Matters

In Crystal and Brian Byrd v. Aaron's, Inc., Aspen Way Enterprises, Inc., John Does (1-100) Aaron's Franchisees and Designerware, LLC, filed on May 16, 2011, in the United States District Court, Western District of Pennsylvania, plaintiffs allege the Company and its independently owned and operated franchisee Aspen Way Enterprises ("Aspen Way") knowingly violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act ("ECPA") and the Computer Fraud Abuse Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called "PC Rental Agent." Plaintiffs filed an amended complaint, asserting claims under the ECPA, common law invasion of privacy, seeking an injunction, and naming additional independently owned and operated Company franchisees as defendants. Plaintiffs ~~seek~~sought monetary damages as well as injunctive relief.

~~In March 2014,~~After a protracted period of litigation, in August 2019, the ~~United States District Court dismissed all claims against all franchisees other than Aspen Way Enterprises, LLC, dismissed claims for invasion~~Company reached a global settlement of ~~privacy, aiding~~the Byrd case, and ~~abetting,~~of the Winslow and ~~conspiracy against all defendants, and denied plaintiffs’ motion to certify a class action, but denied~~Price cases described below. The Company anticipates that the ~~Company’s motion to~~trial courts will dismiss the ~~claims alleging ECPA violations.~~ Company as a defendant in each of these cases in the near future.

In April 2015, the United States Court of Appeals for the Third Circuit reversed the denial of class certification on the grounds stated by the District Court, and remanded the case back to the District Court for further consideration of that and the other elements necessary for class certification. On September 26, 2017, the District Court again denied plaintiffs' motion for class certification. Plaintiffs have filed a petition with the United States Court of Appeals for the Third Circuit for permission to appeal the denial of class certification. The Company is opposing this petition, and a decision remains pending. In March 2018, the District Court granted plaintiff's motion to reconsider the prior dismissal of the Wyoming invasion of privacy claim. That claim is now under evaluation for class certification. The Court also denied the Company's pending motion for summary judgment as moot, but the Company is free to re-file the motion at a future date.

In Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees and Designerware, LLC, filed on March 5, 2013 in the Los Angeles Superior Court, plaintiffs assert claims against the Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiffs ~~are seeking~~sought injunctive relief and damages as well as certification of a putative California class. In ~~April 2013,~~August 2019, the Company ~~removed~~reached a global settlement of this ~~matter to federal court.~~ case, along with the Byrd and Price cases.

In ~~May 2013, the Company filed a motion to stay this litigation pending resolution of the~~ ~~Byrd~~ litigation, a motion to dismiss for failure to state a claim, and a motion to strike certain allegations in the complaint. The Court subsequently stayed the case. The Company's motions to dismiss and strike certain allegations remain pending. In June 2015, the plaintiffs filed a motion to lift the stay, which was denied in July 2015.

In Lomi Price v. Aaron's, Inc. and NW Freedom Corporation, filed on February 27, 2013, in the State Court of Fulton County, Georgia, an individual plaintiff asserts claims against the Company and its independently owned and operated franchisee, NW Freedom Corporation, for invasion of privacy/intrusion on seclusion, computer invasion of privacy and infliction of emotional distress. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiff ~~is seeking~~sought compensatory and punitive damages. This case has been stayed pending resolution of the Byrd litigation. In August 2019, the Company reached a global settlement of this case, along with the Byrd ~~litigation.~~

~~Securities~~

In Re Aaron's Securities Litigation, f/k/a Arkansas Teacher Retirement System, et al (f/k/a Employees' Retirement System of the City of Baton Rouge) v. Aaron's, Inc., John W. Robinson, III, Ryan K. Woodley, and ~~Gilbert L. Danielson~~, was filed on June 16, 2017, in the United States District Court for the Northern District of Georgia. The litigation relates to the temporary drop in Aaron’s stock price following the Company’s announcement of 2015 third quarter results. The complaint alleges that during the period from February 6, 2015 through October 29, 2015, Aaron's made misleading public statements about the Company's expected financial results and business prospects. The allegations underlying the lawsuit principally relate to the loss of certain data feeds experienced by Progressive Leasing beginning in February 2015 and the alleged failure to disclose the same in a timely manner, as well as certain software issues that allegedly hindered the identification of delinquent accounts during certain limited times in 2015. The Company filed a motion to dismiss the lawsuit on December 15, 2017. On September 26, 2018, the District Court granted the Company's motion to dismiss in its entirety. Plaintiffs have until October 26, 2018 to file a Notice of Appeal, if they intend to do so. The Company believes the claims are without merit and intends to vigorously defend against this lawsuit. Winslow cases.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Regulatory Inquiries

In July 2018, the Company received civil investigative demands ("CIDs") from the Federal Trade Commission (the "FTC")~~. The CIDs request the production of documents and answers to written questions to determine whether~~ regarding disclosures related to lease-to-own and other financial products offered by the Company through the Aaron’s Business and Progressive Leasing ~~are in violation of~~and whether such disclosures violate the Federal Trade Commission ~~Act. Although~~Act (the "FTC Act"). The Company submitted a significant amount of documentation from both the Aaron’s Business and Progressive Leasing in October 2018 and continued to work with the staff of the FTC during the course of its inquiry.

In October 2019, the staff of the FTC informed us that it had recommended to the FTC that it commence an enforcement action against Progressive Leasing for alleged violations of the FTC Act and the Restore Online Shoppers’ Confidence Act ("ROSCA") with respect to Progressive Leasing’s marketing and sales of its lease-to-own products. Notwithstanding this recommendation, the staff of the FTC continues to engage with us on terms for a possible settlement with the FTC, including with respect to the scope of possible monetary relief as well as various changes in the manner in which Progressive Leasing markets its lease-to-own products.

We believe that we ~~believe we are~~conduct our Progressive Leasing business in compliance with the FTC Act ~~these inquiries could lead~~and ROSCA and are prepared to vigorously defend our position. There can be no assurance, however, that we will reach a settlement with the FTC in connection with this matter or, if we fail to reach a settlement, that the FTC will not commence an enforcement action ~~and/~~against Progressive Leasing.

The Company has incurred and, continues to incur, substantial legal and other fees related to this inquiry. Any settlement of this matter, or ~~a consent order, and~~defense against any enforcement action, could involve substantial costs to the Company, including legal fees, fines, penalties, and remediation ~~expenses.~~expenses, as well as changes in the manner in which Progressive Leasing markets its lease-to-own products, which could have a material adverse impact on our results of operations, cash flows or financial position. While the Company believes it is probable that it will incur a loss from this matter, in view of the complexity and ongoing nature of the matter, we are unable to estimate the reasonably possible loss or range of loss that we may incur to settle this matter or defend against any enforcement action potentially brought by the FTC.

In April 2019, the Aaron’s Business, along with other rent-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements, and whether such transactions violated the FTC Act. Although we believe such transactions were in compliance with the FTC Act, in August 2019, the Company reached a proposed consent agreement with FTC staff that prohibits such contingent purchases and sales in the future. The Company is ~~fully cooperating with~~awaiting final approval of the ~~FTC in responding to these inquiries and has provided~~consent agreement by the ~~FTC with the information and documents the FTC has requested.~~FTC.

Other Contingencies

The Company is a party to various claims and legal proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, monitors the Company's litigation and regulatory exposure with the Company's attorneys and evaluates its loss experience. The Company also enters into various contracts in the normal course of business that may subject it to risk of financial loss if counterparties fail to perform their contractual obligations.

Off-Balance Sheet Risk

The Company, through its DAMI business, had unfunded lending commitments totaling ~~$350.4~~$262.3 million and ~~$354.5~~$316.4 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. 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 represent 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 represent future cash requirements. The reserve for losses on unfunded loan commitments is calculated by the Company based on historical usage patterns of cardholders after the initial charge and was approximately ~~$0.7 million and $0.6~~$0.5 million as of September 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018. The reserve for losses on unfunded loan commitments is included in accounts payable and accrued expenses in the condensed consolidated balance sheets.

See Note 9 to the consolidated financial statements in the ~~2017~~2018 Annual Report for further information.

NOTE 6.7. SEGMENTS

As of September 30, ~~2018,~~2019, the Company has ~~three~~3 operating and reportable segments: Progressive Leasing, Aaron's Business and DAMI.

Progressive Leasing is a leading virtual lease-to-own company that provides lease-purchase solutions on a variety of products, including furniture and bedding, automobile electronics and accessories, mobile phones and accessories, jewelry, consumer electronics ~~appliances~~ and ~~jewelry.~~appliances.

The Aaron's Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a month-to-month, lease-to-own agreement with no credit needed through the Company's Aaron's-branded stores in the United States and Canada and e-commerce ~~website.~~platform. This operating segment also supports franchisees of its Aaron's stores. In addition, the Aaron's Business segment 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 offers a variety of second-look financing programs originated through two third-party federally insured banks to customers of participating merchants and, together with Progressive Leasing, allows the Company to provide retail partners with below-prime customers ~~one~~1 source for financing and leasing transactions.

~~AARON'S, INC AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Disaggregated Revenue

The following table presents revenue by source and by segment for the three months ended September 30, ~~2018:~~2019:


	Three Months Ended September 30, 2018								Three Months Ended September 30, 2019
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total		Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees¹	$	504,407	$	376,464	$	—	$	880,871	$	528,850	$	377,926	$	—	$	906,776
Retail Sales²	—		7,620		—		7,620		—		8,854		—		8,854
Non-Retail Sales²	—		44,368		—		44,368		—		31,085		—		31,085
Franchise Royalties and Fees²	—		10,153		—		10,153		—		8,087		—		8,087
Interest and Fees on Loans Receivable³	—		—		9,508		9,508		—		—		8,687		8,687
Other	—		551		—		551		—		319		—		319
Total	$	504,407	$	439,156	$	9,508	$	953,071	$	528,850	$	426,271	$	8,687	$	963,808

¹Substantially all lease revenues and fees are within the scope of ASC ~~840,~~ 842, Leases. The Company had ~~$5.6~~$7.0 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.

Revenue within the scope of ASC 606, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, ~~$7.4~~$6.3 million is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.

³Revenue within the scope of ASC 310, Credit Card Interest & Fees.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents revenue by source and by segment for the three months ended September 30, ~~2017:~~2018:


	Three Months Ended September 30, 2017								Three Months Ended September 30, 2018
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total		Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees¹	$	398,282	$	357,036	$	—	$	755,318	$	504,407	$	376,464	$	—	$	880,871
Retail Sales²	—		6,274		—		6,274		—		7,620		—		7,620
Non-Retail Sales²	—		56,443		—		56,443		—		44,368		—		44,368
Franchise Royalties and Fees²	—		11,140		—		11,140		—		10,153		—		10,153
Interest and Fees on Loans Receivable³	—		—		8,936		8,936		—		—		9,508		9,508
Other	—		772		—		772		—		551		—		551
Total	$	398,282	$	431,665	$	8,936	$	838,883	$	504,407	$	439,156	$	9,508	$	953,071

¹Substantially all ~~revenue is~~lease revenues and fees are within the scope of ASC 840, Leases. The Company had ~~$2.0~~$5.6 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.

²Revenue within the scope of ASC 606, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, ~~$10.2~~$7.4 million ~~relates~~is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.

³Revenue within the scope of ASC 310, Credit Card Interest & ~~Fees.~~Fees.

The following table presents revenue by source and by segment for the nine months ended September 30, 2019:



	Nine Months Ended September 30, 2019
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees¹	$	1,568,584	$	1,189,914	$	—	$	2,758,498
Retail Sales²	—		30,561		—		30,561
Non-Retail Sales²	—		102,190		—		102,190
Franchise Royalties and Fees²	—		25,899		—		25,899
Interest and Fees on Loans Receivable³	—		—		25,943		25,943
Other	—		961		—		961
Total	$	1,568,584	$	1,349,525	$	25,943	$	2,944,052

¹Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $20.4 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.

Revenue within the scope of ASC 606, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $19.6 million is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.

³Revenue within the scope of ASC 310, Credit Card Interest & Fees.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents revenue by source and by segment for the nine months ended September 30, 2018:



	Nine Months Ended September 30, 2018
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees¹	$	1,474,590	$	1,122,286	$	—	$	2,596,876
Retail Sales²	—		22,728		—		22,728
Non-Retail Sales²	—		151,259		—		151,259
Franchise Royalties and Fees²	—		35,140		—		35,140
Interest and Fees on Loans Receivable³	—		—		28,258		28,258
Other	—		1,478		—		1,478
Total	$	1,474,590	$	1,332,891	$	28,258	$	2,835,739

¹Substantially all lease revenues and fees are within the scope of ASC 840, Leases. The Company had $13.0 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.

²Revenue within the scope of ASC 606, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $26.6 million is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.

³Revenue within the scope of ASC 310, Credit Card Interest & Fees.

~~The following table presents revenue by source and by segment for the nine months ended September 30, 2017:~~

Nine Months Ended September 30, 2017
(In Thousands) Progressive Leasing Aaron's Business DAMI Total
Lease Revenues and Fees¹
$ 1,137,896
$ 1,079,133
$ —
$ 2,217,029
Retail Sales²
—
21,158
—
21,158
Non-Retail Sales²
—
195,372
—
195,372
Franchise Royalties and Fees²
—
38,165
—
38,165
Interest and Fees on Loans Receivable³
—
—
25,669
25,669
Other —
1,688
—
1,688
Total $ 1,137,896
$ 1,335,516
$ 25,669
$ 2,499,081

¹~~Substantially all revenue is within the scope of ASC 840,~~ ~~Leases. The Company had $2.7 million of other revenue within the scope of ASC 606,~~ ~~Revenue from Contracts with Customers.~~

²~~Revenue within the scope of ASC 606,~~ ~~Revenue from Contracts with Customers~~. Of the Franchise Royalties and Fees, $35.4 million relates to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. Retail sales are recognized as revenue at the point of sale. Non-retail sales are recognized as revenue upon delivery of the merchandise.

³~~Revenue within the scope of ASC 310,~~ ~~Credit Card Interest & Fees.~~

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Measurement of Segment Profit or Loss and Segment Assets

The Company evaluates performance and allocates resources based on revenue growth and pre-tax profit or loss from operations. Intersegment sales are completed at internally negotiated amounts. Since the intersegment profit affects inventory valuation, depreciation and cost of goods sold are adjusted when intersegment profit is eliminated in consolidation. The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP. Interest expense is allocated to the Progressive Leasing and DAMI segments based on a percentage of the outstanding balances of their intercompany borrowings and of the debt incurred when they were acquired. The following is a summary of earnings (loss) before income taxes by segment:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
Earnings (Loss) Before Income Taxes:
Progressive Leasing	$	53,473		$	40,839		$	167,267		$	120,393
Aaron's Business¹	932			15,641			18,658			56,417
DAMI	(2,740		)	(3,065		)	(7,133		)	(6,663		)
Total Earnings Before Income Taxes	$	51,665		$	53,415		$	178,792		$	170,147

Three Months Ended
September 30, Nine Months Ended
September 30,
(In Thousands) 2018 2017 2018 2017
Earnings (Loss) Before Income Taxes:
Progressive Leasing $ 40,839
$ 27,734
$ 120,393
$ 101,732
Aaron's Business¹
15,641
15,484
56,417
85,564
DAMI (3,065 ) (3,997 ) (6,663 ) (8,457 )
Total Earnings Before Income Taxes $ 53,415
$ 39,221
$ 170,147
$ 178,839
¹Earnings before income taxes for the Aaron's Business during the nine months ended September 30, 2019 were impacted by (i) restructuring charges of $37.5 million related to closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the planned exit from one of our store support buildings, workforce reductions, and a loss on sale of 6 Canadian stores to a third party, of which $5.5 million was incurred during the three months ended September 30, 2019 and (ii) gains on insurance recoveries of $4.5 million recorded during the first and second quarters of 2019 related to payments received from and final settlements reached with insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of the related property insurance receivables.

¹Earnings before income taxes for the Aaron's Business during the nine months ended September 30, 2018 includes athe full impairment of the PerfectHome investment of $20.1 ~~million.~~

~~Earnings before income taxes for the Aaron's Business~~million recorded during the ~~nine months ended September 30, 2017 includes restructuring charges~~second quarter of $14.4 million related to store contractual lease obligations, severance costs and impairment charges in connection with the Company's strategic decision to close Company-operated stores, of which $0.8 million was incurred during the three months ended September 30, 2017.2018.

The following is a summary of total assets by segment and shared corporate-related assets.


(In Thousands)	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Assets:
Progressive Leasing	$	1,037,017	$	1,022,413	$	1,128,831	$	1,088,227
Aaron's Business¹	1,388,850		1,261,234		1,693,574		1,483,102
DAMI	96,297		108,306		89,951		95,341
Other²	176,734		300,311		307,264		160,022
Total Assets	$	2,698,898	$	2,692,264	$	3,219,620	$	2,826,692

¹Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the condensed consolidated balance sheets of ~~$17.9~~$15.8 million and ~~$16.3~~$15.2 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

²Corporate-related assets that benefit multiple segments are reported as other assets.

NOTE 8. RESTRUCTURING

2019 Restructuring Program

During the first quarter of 2019, the Company initiated a restructuring program to further optimize its Company-operated Aaron's Business store portfolio, which resulted in the closure and consolidation of 154 underperforming Company-operated stores during the first nine months of 2019. The Company also further rationalized its home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions.

AARON'S, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~NOTE 7. RESTRUCTURING~~Total net restructuring expenses of $5.2 million and $36.2 million were recorded for the three and nine months ended September 30, 2019 under the 2019 restructuring program, all of which were incurred within the Aaron's Business segment. Restructuring expenses for the three and nine months ended September 30, 2019 was comprised of closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the planned exit from one of our store support buildings, workforce reductions, and a loss on the sale of 6 Canadian stores to a third party. These costs were included in restructuring expenses, net in the condensed consolidated statements of earnings. The Company continually evaluates its Company-operated Aaron's Business store portfolio to determine if it will further rationalize its store base to better align with marketplace-demand. As such, future restructuring expenses related to store relocations, consolidations, and store sales to third parties may be recorded depending on future decisions made regarding our current store footprint. We also expect future restructuring expenses (reversals) due to changes in future sublease activity and potential early buyouts of leases with landlords.

2017 and 2016 Restructuring Programs

During the years ended December 31, 2017 and 2016, the Company initiated restructuring programs to rationalize its Company-operated Aaron's Business store ~~base~~ portfolio to better align with marketplace demand. The programs resulted in the closure and consolidation of 139 underperforming ~~Company operated~~Company-operated stores throughout 2016, 2017, and 2018. The Company also optimized its home office staff and field support, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions.

Total net restructuring ~~charges~~expenses of ~~$0.5~~$0.3 million and ~~$0.6~~$1.3 million were recorded for the three and nine months ended September 30, ~~2018,~~2019 under the 2017 and 2016 restructuring programs, all of which were incurred within the Aaron's Business segment. Restructuring ~~activity~~expenses for the three and nine months ended September 30, ~~2018~~2019 was comprised principally of operating lease charges ~~to record changes in assumptions related to Aaron's contractual lease obligations~~ for ~~closed~~ stores ~~partially offset by gains recorded on the sale of properties~~ closed under the restructuring program. These costs were included in ~~net~~ restructuring expenses, net in the condensed consolidated statements of earnings. ~~The Company does not~~We expect ~~to incur any further material charges under the 2017 and 2016~~future restructuring ~~programs. However, this estimate is subject~~expenses (reversals) due to ~~change based on future~~ changes in ~~assumptions for the remaining minimum lease obligations for stores closed under the restructuring programs, including changes related to~~future sublease ~~assumptions~~activity and potential ~~earlier~~early buyouts of leases with landlords.

The following table summarizes restructuring charges for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, under ~~both plans:~~the three programs:



	Three Months Ended September 30,					Nine Months Ended September 30,
(In Thousands)	2019		2018			2019		2018
Right-of-Use Asset Impairment and Operating Lease Charges	$	1,828	$	586		$	26,616	$	1,512
Fixed Asset Impairment	2,174		—			4,743		—
Severance	376		—			3,368		601
Other Expenses (Reversals)	73		—			1,743		(1,176		)
Loss (Gain) on Sale of Store Properties	1,065		(49		)	1,065		(376		)
Total Restructuring Expenses, Net	$	5,516	$	537		$	37,535	$	561

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2018 2017 2018
2017¹
Contractual Lease Obligations $ 586
$ 694
$ 1,512
$ 12,011
Severance (Reversals) Expense, Net —
(285 ) 601
1,306
Other Reversals —
—
(1,176 ) —
Gain on Sale of Closed Store Properties (49 ) —
(376 ) —
Fixed Asset Impairment —
436
—
1,300
Restructuring Expenses, Net $ 537
$ 845
$ 561
$ 14,617

¹ Substantially all restructuring charges incurred during 2017 were incurred within the Aaron's Business segment. The Company also incurred restructuring charges of $0.3 million during the nine months ended September 30, 2017 within the DAMI segment related primarily to the segment's relocation of its corporate offices.

To date, the Company has incurred charges of ~~$38.8~~$40.6 million under the 2016 and 2017 restructuring programs.

The following table summarizes the balances of the accruals for the restructuring programs, which are recorded in accounts payable and accrued expenses in the condensed consolidated balance sheets, and the activity for the nine months ended September 30, ~~2018:~~2019:



(In Thousands)	Contractual Lease Obligations			Severance
Balance at January 1, 2019	$	8,472		$	651
ASC 842 Transition Adjustment¹	(8,472		)	—
Adjusted Balance at January 1, 2019	—			651
Restructuring Charges	—			3,368
Payments	—			(2,902		)
Balance at September 30, 2019	$	—		$	1,117

(In Thousands) Contractual Lease Obligations Severance
Balance at January 1, 2018 $ 12,437
$ 2,303
Charges —
601
Adjustments¹
1,512
—
Restructuring Charges 1,512
601
Payments (4,559 ) (1,895 )
Balance at September 30, 2018 $ 9,390
$ 1,009

¹~~Adjustments relate~~Upon the adoption of ASC 842 on January 1, 2019, the Company reclassified the remaining liability for contractual lease obligations from accounts payable and accrued expenses to ~~early buyouts of leases, changes in sublease assumptions and interest accretion.~~a reduction to operating lease right-of-use assets within its condensed consolidated balance sheets.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Information: Except for historical information contained herein, the matters set forth in this Form 10-Q are forward-looking statements. These statements are based on management’s current expectations and plans, which involve risks and uncertainties. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "believe," "expect," "forecast," "guidance," "intend," "could," "project," "estimate," "anticipate," "should," and similar terminology. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the filing date of this Quarterly Report and which involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. These risks and uncertainties include factors such as the impact of increased regulation, changes in general economic conditions, including consumer confidence and demand for certain merchandise, increased competition, pricing pressures, the impact of legal proceedings faced by the Company, costs relating to protecting customer privacy and information security more generally and a failure to realize the expected benefits of our restructuring plans and strategic initiatives, the execution and results of our operational strategies, risks related to Progressive Leasing's "virtual" lease-to-own business, deteriorations in the business performance of our franchisees and our franchisee relationships, and the other risks and uncertainties discussed under Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 (the ~~"2017~~"2018 Annual Report"). Except as required by law, the Company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances after the filing date of this Quarterly Report.

The following discussion should be read in conjunction with the condensed consolidated financial statements as of and for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, including the notes to those statements, appearing elsewhere in this report. We also suggest that management’s discussion and analysis appearing in this report be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our ~~2017~~2018 Annual Report.

Business Overview

Aaron’s, Inc. ("we", "our", "us" or the "Company") is a leading omnichannel provider of lease-purchase solutions. As of September 30, ~~2018,~~2019, the Company's operating and reportable segments are Progressive Leasing, Aaron's Business and DAMI.

Progressive Leasing is a virtual lease-to-own company that provides lease-purchase solutions through ~~more than~~approximately 20,000 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 through a cancellable lease-to-own transaction. Progressive Leasing consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional and e-commerce retailers.

~~Aaron's~~Aaron’s Business offers furniture, consumer electronics, home appliances and accessories to consumers primarily with a month-to-month, lease-to-own agreement with no credit needed through ~~the Company's Aaron's~~its Company-operated stores in the United States and Canada ~~and~~as well as through its e-commerce ~~website.~~platform, Aarons.com. This operating segment also supports franchisees of its ~~Aaron's~~Aaron’s stores. ~~In addition, the Aaron's~~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 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.~~marketplaces. 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~~Leasing's significant revenue and profit growth ~~in 2017~~throughout 2018 and through the first nine months of ~~2018.~~2019. The Company is also leveraging franchisee acquisition opportunities to expand into new geographic markets, enhance operational control, and benefit more fully from ~~synergies.~~our business transformation initiatives on a broader scale. We believe the traditional ~~store-based~~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; traditional and ~~indirectly,~~online sellers of used merchandise; and from a growing number of 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)~~(iii) commoditization of pricing in ~~consumer~~ electronics. In response to these changing market conditions, we are executing a strategic plan that focuses on the following items and that we believe positions 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;

Drive operational excellence in our Aaron's Business stores;

Grow revenue and new customers through our omnichannel platform;

Invest and innovate to provide a superior customer experience while lowering our costs to serve; and

~~Champion compliance.~~

~~In July 2017, the Company acquired substantially all~~Accelerate our vision of the assets of the store operations of its largest franchisee. At the time of acquisition, the store operations served approximately 90,000 customers through 104 Aaron's-branded stores in 11 states primarilybusiness transformation in the ~~Northeast.~~Aaron's Business at a larger scale.

We continue to invest in various Aaron's Business transformation initiatives including rapid customer onboarding, centralized decisioning and collections, and the introduction of our next generation store concepts to appeal to our changing target consumer market. In July 2018, the Company acquired substantially all of the assets of the store operations of three franchisees. At the time of the acquisitions, the franchisees operated a total of 90 Aaron's-branded stores.

~~The Company also acquired the store operations of five additional franchisees during the nine months ended September 30, 2018~~addition, we are renewing our focus on generating customer demand and ~~three franchisees during the year ended December 31, 2017. We believe the acquisitions of franchisees benefit our omnichannel platform~~driving sales conversion rates through ~~added scale, strengthen the Company's presence in certain geographic markets,~~enhanced sales strategies, branding and ~~enhance operational control to execute our business transformation initiatives.~~direct response marketing.

We also ~~have taken steps~~continue to ~~address further the expense structure of our~~execute on various Aaron's Business ~~by completing a thorough review of our remaining~~ store ~~base in order to identify opportunities for rationalization.~~optimization initiatives, including strategic store consolidations. As a result of ~~this evaluation~~these store optimization initiatives and other cost-reduction initiatives, the Company ~~closed 139~~initiated a new restructuring program during the first quarter of 2019 to further optimize its Company-operated Aaron's store base portfolio, which resulted in the closure and consolidation of 84 underperforming Company-operated stores throughout ~~2016, 2017, and 2018.~~the first three months of 2019. During the second quarter of 2019, the Company identified an additional 70 stores to be closed, consolidated, or relocated, which were all closed by the end of the third quarter. The Company also ~~optimized~~further rationalized its home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions.

During 2017 and 2018, the Company acquired substantially all of the assets of the store operations of 111 and 152 Aaron's-branded franchised stores, respectively. The acquisitions are benefiting the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, enhancing operational control, including compliance, and enabling the Company to execute its business transformation initiatives on a broader scale.

Highlights

The following summarizes significant highlights from the three and nine months ended September 30, ~~2018:~~2019:

The Company acquired substantially all of the assets of the store operations of three franchisees, adding 90 Aaron's-branded stores to our portfolio of Company-operated stores, for approximately $127.1 million.

The Company reported revenues of ~~$953.1~~$963.8 million in the third quarter of ~~2018~~2019 compared to ~~$838.9~~$953.1 million for ~~the third quarter of 2017. Earnings before income taxes increased~~ ~~to $53.4 million compared to $39.2 million during the third quarter of 2017.~~

Progressive Leasing reported revenues of $504.4 million in the third quarter of 2018, an increase of 26.6% over the third quarter of 2017. Progressive Leasing's revenue growth is due to a 26.0% increase in total invoice volume, which was generated through an increase in invoice volume per active door and a 3.8% increase in active doors. Progressive Leasing's earnings before income taxes increased to $40.8 million compared to $27.7 million during the third quarter of 2017, due mainly to its higher revenue.

~~Aaron's Business revenues increased to $439.2 million for t~~he third quarter of 2018, compared to $431.7 million in the prior year. Aaron's Business lease revenue and fees increased due to the acquisitions of various franchisees during 2017 and 2018, partially offset by declines in non-retail sales to our franchisees. Same store revenues remained relatively flat in the third quarter of 2018. Earnings before income taxes decreased to $51.7 million compared to $53.4 million during the third quarter of 2018.

•

Progressive Leasing reported revenues of $528.9 million in the third quarter of 2019, an increase of 4.8% over the third quarter of 2018. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases (see the "Use of Non-GAAP Financial Information" section below), Progressive Leasing revenues increased 20.1% over the third quarter of 2018. Progressive Leasing's revenue growth is due to an 18.6% increase in total invoice volume, which was driven by a 20.5% increase in invoice volume per active door.

Progressive Leasing's earnings before income taxes increased to ~~$15.6~~$53.5 million compared to $40.8 million during the third quarter of 2018, due mainly to its higher revenue.

•

Aaron's Business revenues decreased to $426.3 million for the third quarter of 2019, compared to $439.2 million in the prior year period. The decrease is primarily due to the net reduction of 149 Company-operated stores during 2019 and a 2.9% decrease in same store revenues in the third quarter of 2019, partially offset by the acquisitions of various franchisees in 2018. The Company launched new sales and marketing initiatives during the third quarter, which led to an increase in new customer agreements but also resulted in insufficient labor capacity to handle the elevated workload on our stores. This capacity imbalance created a shortfall in collections performance which had an unfavorable impact on lease revenues, same store revenues, and write-offs in the quarter.

Aaron's Business earnings before income taxes decreased to $0.9 million during the third quarter of 2019 compared to ~~$15.5~~$15.6 million in the prior year period.

Earnings before income taxes for the Aaron's Business during the third quarter of 2019 includes restructuring charges of $5.5 million related to the Company's closure and consolidation of underperforming stores.

The Company generated cash from operating activities of ~~$363.0~~$350.8 million for the nine months ended September 30, ~~2018~~2019 compared to ~~$180.3~~$363.0 million for the comparable period in ~~2017.~~2018. The ~~increase~~decrease in net cash from operating activities was impacted by net income tax refunds of ~~$64.8~~$5.5 million during the nine months ended September 30, ~~2018,~~2019, compared to net income tax ~~payments~~refunds of ~~$95.7~~$64.8 million in ~~2017.~~the same period in 2018.

The Company returned $104.2 million to shareholders for the nine months ended September 30, 2018 through the repurchase of 2.3 million shares and the payment of our dividend, which we have paid for 31 consecutive years.

Invoice Volume. We 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 then leased to customers during the period, net of returns. The following table presents total invoice volume for the Progressive Leasing segment:


For the Three Months Ended September 30 (Unaudited and In Thousands)	2018		2017		2019		2018
Progressive Leasing Invoice Volume	$	355,005	$	281,724	$	420,902	$	355,005

The increase in invoice volume was driven by a 20.5% increase in invoice volume per active door, partially offset by a 1.6% decrease in active doors.

Active Doors. Progressive Leasing active doors are comprised of both (i) each retail store location where at least one virtual lease-to-own transaction has been completed during the trailing ~~three month~~three-month period; and (ii) with respect to an e-commerce merchant, each state where at least one virtual lease-to-own transaction has been completed through that e-commerce merchant during the trailing ~~three month~~three-month period.

The following table presents active doors for the Progressive Leasing segment:


Active Doors at September 30 (Unaudited)	2018	2017	2019	2018
Progressive Leasing Active Doors	20,258	19,523	19,926	20,258

The decrease in active door count was due primarily to store consolidation in the mattress industry and our exit from a mobile phone provider, partially offset by additions in other verticals.

Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of the Aaron's Business. For the three months ended September 30, ~~2018,~~2019, we calculated this amount by comparing revenues for the three months ended September 30, ~~2018~~2019 to revenues for the comparable period in ~~2017~~2018 for all stores open for the entire ~~15 month~~15-month period ended September 30, ~~2018,~~2019, excluding stores that received lease agreements from other acquired, closed or merged stores. For the nine months ended September 30, ~~2018,~~2019, we calculated this amount by comparing revenues for the nine months ended September 30, ~~2018~~2019 to revenues for the comparable period in ~~2017~~2018 for all stores open for the entire ~~24 month~~24-month period ended September 30, ~~2018,~~2019, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues, which were ~~flat~~impacted by lower collections activity as described above, decreased 2.9% and 0.3% for the three ~~months ended September 30, 2018~~ and ~~declined 2.1% for the~~ nine months ended September 30, ~~2018.~~2019, respectively.

Seasonality

Our revenue mix is moderately seasonal for both our Progressive Leasing and Aaron's Business 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. Due to the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

Key Components of Earnings Before Income Taxes

In this management’s discussion and analysis section, we review our condensed consolidated results. For the three and nine months ended September 30, ~~2018~~2019 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings before income taxes 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.~~Leasing and the Aaron's Business Company-operated stores and e-commerce platform. 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.~~by DAMI. 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 Aaron's ~~stores.~~stores and through our e-commerce platform.

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, store maintenance, provision for lease merchandise write-offs, ~~bad debt expense,~~ shipping and handling, advertising and marketing, ~~software licensing expense, third-party consulting expense, intangible asset amortization expense, and~~ the provision for loan losses, intangible asset amortization expense, software licensing expense and third-party consulting expense, among other expenses.

Restructuring Expenses, Net. Restructuring expenses primarily represent the cost of optimization efforts and cost reduction initiatives related to the ~~Aaron's Business,~~Aaron’s Business' home office and field support functions. Restructuring ~~charges,~~expenses, net are comprised principally of closed store ~~contractual~~operating lease ~~obligations,~~right-of-use asset impairment and operating lease charges, the ~~write-off and~~ impairment of vacant store ~~property, plant and equipment and~~ properties, including the planned exit from one of our store support buildings, workforce reductions, other impairment charges and reversals of previously recorded restructuring charges.

Other Operating ~~(Income) Expense,~~Income, Net. Other operating ~~(income) expense,~~income, 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.~~equipment, and gains related to property damage and business interruption insurance claim recoveries.

Interest Expense. Interest expense consists of interest incurred on the Company's fixed and variable rate debt.

Impairment of ~~Investment.~~Investment. Impairment of investment consists of an other-than-temporary loss to fully impair the Company's investment in PerfectHome.

Other Non-Operating (Expense) Income, Net. Other non-operating (expense) income, net includes the impact of foreign currency remeasurement, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the ~~Company's~~Company’s deferred compensation plan.

Results of Operations – Three months ended September 30, ~~2018~~2019 and ~~2017~~2018


	Three Months Ended September 30,						Change					Three Months Ended September 30,						Change
(In Thousands)	2018			2017			$			%		2019			2018			$			%
REVENUES:
Lease Revenues and Fees	$	880,871		$	755,318		$	125,553		16.6	%	$	906,776		$	880,871		$	25,905		2.9	%
Retail Sales	7,620			6,274			1,346			21.5		8,854			7,620			1,234			16.2
Non-Retail Sales	44,368			56,443			(12,075		)	(21.4	)	31,085			44,368			(13,283		)	(29.9	)
Franchise Royalties and Fees	10,153			11,140			(987		)	(8.9	)	8,087			10,153			(2,066		)	(20.3	)
Interest and Fees on Loans Receivable	9,508			8,936			572			6.4		8,687			9,508			(821		)	(8.6	)
Other	551			772			(221		)	(28.6	)	319			551			(232		)	(42.1	)
	953,071			838,883			114,188			13.6		963,808			953,071			10,737			1.1
COSTS AND EXPENSES:
Depreciation of Lease Merchandise	434,593			365,576			69,017			18.9		489,199			434,593			54,606			12.6
Retail Cost of Sales	4,877			4,380			497			11.3		5,742			4,877			865			17.7
Non-Retail Cost of Sales	35,214			50,750			(15,536		)	(30.6	)	24,913			35,214			(10,301		)	(29.3	)
Operating Expenses	420,602			374,157			46,445			12.4		383,264			420,602			(37,338		)	(8.9	)
Restructuring Expenses, Net	537			845			(308		)	(36.4	)	5,516			537			4,979			nmf
Other Operating (Income) Expense, Net	(38		)	486			(524		)	nmf
Other Operating Income, Net												(329		)	(38		)	(291		)	nmf
	895,785			796,194			99,591			12.5		908,305			895,785			12,520			1.4
OPERATING PROFIT	57,286			42,689			14,597			34.2		55,503			57,286			(1,783		)	(3.1	)
Interest Income	18			344			(326		)	(94.8	)	360			18			342			nmf
Interest Expense	(3,735		)	(4,707		)	(972		)	(20.7	)	(3,991		)	(3,735		)	256			6.9
Other Non-Operating (Expense) Income, Net	(154		)	895			(1,049		)	nmf
Other Non-Operating Expense, Net												(207		)	(154		)	(53		)	(34.4	)
EARNINGS BEFORE INCOME TAXES	53,415			39,221			14,194			36.2		51,665			53,415			(1,750		)	(3.3	)
INCOME TAXES	9,695			13,880			(4,185		)	(30.2	)	11,864			9,695			2,169			22.4
NET EARNINGS	$	43,720		$	25,341		$	18,379		72.5	%	$	39,801		$	43,720		$	(3,919	)	(9.0	)%

nmf—Calculation is not meaningful

Revenues

Information about our revenues by reportable segment is as follows:

Three Months Ended
September 30, Change
(In Thousands) 2018 2017 $ %
REVENUES:
Progressive Leasing¹
$ 504,407
$ 398,282
$ 106,125
26.6 %
Aaron's Business²
439,156
431,665
7,491
1.7
DAMI³
9,508
8,936
572
6.4
Total Revenues from External Customers $ 953,071
$ 838,883
$ 114,188
13.6 %
¹ Segment revenue principally 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.



	Three Months Ended September 30,				Change
(In Thousands)	2019		2018		$			%
REVENUES:
Progressive Leasing	$	528,850	$	504,407	$	24,443		4.8	%
Aaron's Business	426,271		439,156		(12,885		)	(2.9	)
DAMI	8,687		9,508		(821		)	(8.6	)
Total Revenues from External Customers	$	963,808	$	953,071	$	10,737		1.1	%

~~Refer~~

The following table presents revenue by source and by segment for the three months ended September 30, 2019:



	Three Months Ended September 30, 2019
(In Thousands)	Progressive Leasing¹		Aaron's Business		DAMI		Total
Lease Revenues and Fees	$	528,850	$	377,926	$	—	$	906,776
Retail Sales	—		8,854		—		8,854
Non-Retail Sales	—		31,085		—		31,085
Franchise Royalties and Fees	—		8,087		—		8,087
Interest and Fees on Loans Receivable	—		—		8,687		8,687
Other	—		319		—		319
Total Revenues	$	528,850	$	426,271	$	8,687	$	963,808

¹ For the three months ended September 30, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was $78.4 million which was recorded as a reduction to Lease Revenues and Fees as a result of the Company's adoption of ASC 842, Leases. See Note 61 to ~~our~~these condensed consolidated financial statements for ~~additional disaggregated~~more information regarding the impacts of ASC 842 on the Company's financial results.

The following table presents revenue by source and by segment ~~disclosures.~~for the three months ended September 30, 2018:



	Three Months Ended September 30, 2018
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees	$	504,407	$	376,464	$	—	$	880,871
Retail Sales	—		7,620		—		7,620
Non-Retail Sales	—		44,368		—		44,368
Franchise Royalties and Fees	—		10,153		—		10,153
Interest and Fees on Loans Receivable	—		—		9,508		9,508
Other	—		551		—		551
Total Revenues	$	504,407	$	439,156	$	9,508	$	953,071
Progressive Bad Debt Expense	64,213		—		—		64,213
Total Revenues, net of Progressive Bad Debt Expense¹	$	440,194	$	439,156	$	9,508	$	888,858

¹ See the "Use of Non-GAAP Financial Information" section below.

Progressive Leasing. Progressive Leasing segment revenues increased primarily due to ~~a 26.0%~~an increase in total invoice volume, which was driven by ana 20.5% increase in invoice volume per active door, ~~and~~partially offset a ~~3.8% growth~~1.6% decrease in active ~~doors.~~doors and the recognition of a provision for returns and uncollectible renewal payments of $78.4 million as a reduction to lease revenues in accordance with ASC 842 beginning in 2019.

Aaron's Business. The acquisitions of various franchisees throughout 2017, 2018 and 2019 impacted the Aaron's Business in the form of an increase in lease revenues and fees, partially offset by lower non-retail sales and lower franchise royalties and fees during the three months ended September 30, 2019 compared to the same period in the prior year.

Aaron's Business segment revenues ~~increased $7.5 million primarily due to the net addition of 174 Company-operated stores~~decreased during the ~~15 month period~~three months ended September 30, ~~2018, which contributed~~2019 due to ~~the $19.4~~a $13.3 million decrease in non-retail sales partially offset by a $1.5 million increase in lease revenues and ~~fees for the three months ended September 30, 2018. This increase was offset by a $12.1 million~~fees. The decrease in non-retail sales is primarily due to the net reduction of ~~248~~189 franchised stores resulting from the Company's acquisition of various franchisees during the ~~15 month~~15-month period ended September 30, ~~2018,~~2019 and ~~decreasing demand for~~lower product purchases by franchisees. Lease revenues and fees increased during the three months ended September 30, 2019 primarily due to the franchisee acquisitions during 2018, partially offset by the net reduction of 149 stores during 2019 and a 2.9% decrease in same store revenues. The ~~acquisitions of various franchisees~~Company launched new sales and marketing initiatives during ~~2017 and 2018 impacted Aaron's Business in~~ the ~~form of~~third quarter, which led to an increase in new customer agreements but also resulted in insufficient labor capacity to handle the elevated workload on our stores. This capacity imbalance created a shortfall in collections performance which had an unfavorable impact on lease ~~revenue~~revenues, same store revenues, and ~~fees, partially offset by lower non-retail sales and franchise royalties~~write-offs in the quarter. Aaron's Business e-commerce revenues were approximately 10% of Aaron's Business total lease revenues and fees during the three months ended September 30, ~~2018 compared to the same period in the prior year.~~2019.

~~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 outstanding loans originated since the acquisition was $90.9 million as of September 30, 2018 compared to $84.2 million as of September 30, 2017.

Operating Expenses

Information about certain significant components of operating expenses for the third quarter of ~~2018~~2019 as compared to the third quarter of ~~2017~~2018 is as follows:


	Three Months Ended September 30,				Change				Three Months Ended September 30,				Change
(In Thousands)	2018		2017		$		%		2019		2018		$			%
Personnel Costs	$	164,587	$	155,717	$	8,870	5.7	%	$	173,762	$	164,587	$	9,175		5.6	%
Occupancy Costs	56,860		51,590		5,270		10.2		59,264		56,860		2,404			4.2
Provision for Lease Merchandise Write-Offs	54,671		43,512		11,159		25.6		68,928		54,671		14,257			26.1
Bad Debt Expense	64,235		50,705		13,530		26.7		106		64,235		(64,129		)	(99.8	)
Shipping and Handling	18,392		16,403		1,989		12.1		17,592		18,392		(800		)	(4.3	)
Advertising	9,814		7,621		2,193		28.8		9,189		9,814		(625		)	(6.4	)
Provision for Loan Losses	6,471		6,010		461		7.7		6,068		6,471		(403		)	(6.2	)
Intangible Amortization	8,807		7,022		1,785		25.4		7,938		8,807		(869		)	(9.9	)
Other Operating Expenses	36,765		35,577		1,188		3.3		40,417		36,765		3,652			9.9
Operating Expenses	$	420,602	$	374,157	$	46,445	12.4	%	$	383,264	$	420,602	$	(37,338	)	(8.9	)%

As a percentage of total revenues, operating expenses decreased to ~~44.1%~~39.8% in ~~2018~~2019 from ~~44.6%~~44.1% in the same period in ~~2017.~~2018. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases, operating expenses as a percentage of total revenues for the three months ended September 30, 2019 decreased to 39.8% in 2019 from 40.1% in the same period in 2018.

Personnel costs increased by ~~$6.7~~$6.0 million at our Progressive Leasing segment and by $3.5 million in our Aaron's Business ~~segment and $1.8 million at our Progressive Leasing~~ segment. The increase in personnel costs is ~~primarily the result of~~due to hiring to support ~~both Aaron's Business strategic operating and business improvement initiatives,~~ the growth of Progressive Leasing and ~~increased labor costs in~~ the Aaron's Business ~~Company-operated stores due to~~transformation initiatives and the ~~acquisitions~~Aaron's Business acquisition of ~~111~~152 franchised stores during ~~2017 and 103 franchised stores during the nine months ended September 30,~~ 2018, partially offset by the ~~closure and merger of underperforming stores and a~~ reduction of ~~home office~~store support center and field support staff from our Aaron's Business restructuring programs in ~~2017~~2018 and ~~2018.~~2019.

Occupancy costs increased primarily due to ~~higher store maintenance expenses and~~ the acquisition of franchisee stores, partially offset by the closure of underperforming stores as part of our restructuring actions.

The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment was 7.7% in 2019 compared to 7.8% in 2018, calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases. The provision for lease merchandise write-offs as a percentage of lease revenues for the Aaron's Business increased to 7.4% in 2019 from 5.4% in 2018. This increase is due to the lower collections activity in the quarter resulting from the redeployment of store labor towards enhanced sales activities described above and to an increase in the number and type of promotional offerings, higher ticket leases, store closure activity and an increasing mix of e-commerce as a percentage of revenues during the three months ended September 30, 2019.

Bad debt expense decreased during the three months ended September 30, 2019. As discussed above, the Company's adoption of ASC 842 resulted in the Company classifying Progressive Leasing bad debt expense, which is reported within operating expenses in 2018 and prior periods, as a reduction of lease revenue and fees within the condensed consolidated statements of earnings beginning January 1, 2019. The bad debt expense for the three months ended September 30, 2019 relates to uncollectible merchant accounts receivable for cardholder refunded charges at DAMI.

Other operating expenses increased due to higher consulting expenses and software licensing expense incurred during the three months ended September 30, 2019.

Other Costs and Expenses

Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 53.9% from 49.3% in the prior year period, primarily due to a shift in lease merchandise 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 customer 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 was 68.3% in 2019 compared to 68.7% in 2018, calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases, due to a decrease in revenue from early buyouts, which has a lower margin, quarter over quarter. Aaron's Business depreciation of lease merchandise as a percentage of Aaron's Business lease revenues and fees decreased to 33.9% in 2019 from 35.1% in the prior year due to a decrease in revenue from early buyouts.

Retail cost of sales. Retail cost of sales as a percentage of retail sales increased to 64.9% from 64.0% primarily due to higher sales price discounting of pre-leased merchandise during 2019 as compared to 2018.

Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales increased to 80.1% from 79.4% primarily due to lower inventory purchase cost during 2018 as compared to 2019.

Restructuring Expenses, Net. Restructuring activity for the three months ended September 30, 2019 was comprised of expenses of $5.5 million, which were primarily to record closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the planned exit from one of our store support buildings, workforce reductions, and a loss on the sale of six Canadian stores to a third party. Restructuring activity for the three months ended September 30, 2018 was comprised of net charges of $0.5 million to record changes in assumptions related to Aaron's contractual lease obligations for closed stores partially offset by gains recognized on the sale of properties closed under the restructuring program.

Other Operating Income, Net

Information about the components of other operating income, net is as follows:



	Three Months Ended September 30,						Change
(In Thousands)	2019			2018			$			%
Net gains on sales of delivery vehicles	$	(539	)	$	(184	)	$	(355	)	nmf
Impairment charges and net losses on asset dispositions, assets held for sale and other	210			146			64			43.8
Other operating income, net	$	(329	)	$	(38	)	$	(291	)	nmf

Operating Profit

Interest expense. Interest expense increased to $4.0 million in 2019 from $3.7 million in 2018 due primarily to a higher outstanding debt balance during the three months ended September 30, 2019.

Other non-operating expense, net. Other non-operating expense, net includes the impact of foreign currency remeasurement, as well as gains or losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan. Foreign exchange remeasurement losses resulting from net changes in the value of the U.S. dollar against the Canadian dollar were not significant during the three months ended September 30, 2019 or 2018. Losses related to the changes in the cash surrender value of Company-owned life insurance were $0.1 million during the three months ended September 30, 2019 and were not significant during the three months ended September 30, 2018.

Earnings Before Income Taxes

Information about our earnings (loss) before income taxes by reportable segment is as follows:



	Three Months Ended September 30,						Change
(In Thousands)	2019			2018			$			%
EARNINGS (LOSS) BEFORE INCOME TAXES:
Progressive Leasing	$	53,473		$	40,839		$	12,634		30.9	%
Aaron's Business	932			15,641			(14,709		)	(94.0	)
DAMI	(2,740		)	(3,065		)	325			10.6
Total Earnings Before Income Taxes	$	51,665		$	53,415		$	(1,750	)	(3.3	)%

The factors impacting the change in earnings before income taxes are discussed above.

Income Tax Expense

Income tax expense increased to $11.9 million for the three months ended September 30, 2019 compared to $9.7 million in the prior year comparable period due to an increase in the effective tax rate to 23.0% in 2019 from 18.2% in 2018. The increase in the effective tax rate is due to a measurement period adjustment of $2.5 million income tax benefit related to the Tax Act that was recognized during the three months ended September 30, 2018.

Results of Operations – Nine months ended September 30, 2019 and 2018



	Nine Months Ended September 30,						Change
(In Thousands)	2019			2018			$			%
REVENUES:
Lease Revenues and Fees	$	2,758,498		$	2,596,876		$	161,622		6.2	%
Retail Sales	30,561			22,728			7,833			34.5
Non-Retail Sales	102,190			151,259			(49,069		)	(32.4	)
Franchise Royalties and Fees	25,899			35,140			(9,241		)	(26.3	)
Interest and Fees on Loans Receivable	25,943			28,258			(2,315		)	(8.2	)
Other	961			1,478			(517		)	(35.0	)
	2,944,052			2,835,739			108,313			3.8
COSTS AND EXPENSES:
Depreciation of Lease Merchandise	1,464,887			1,290,015			174,872			13.6
Retail Cost of Sales	20,025			14,695			5,330			36.3
Non-Retail Cost of Sales	83,057			130,302			(47,245		)	(36.3	)
Operating Expenses	1,154,056			1,199,171			(45,115		)	(3.8	)
Restructuring Expenses	37,535			561			36,974			nmf
Other Operating Income, Net	(4,712		)	(286		)	(4,426		)	nmf
	2,754,848			2,634,458			120,390			4.6
OPERATING PROFIT	189,204			201,281			(12,077		)	(6.0	)
Interest Income	1,405			374			1,031			nmf
Interest Expense	(13,247		)	(11,868		)	1,379			11.6
Impairment of Investment	—			(20,098		)	(20,098		)	nmf
Other Non-Operating Income, Net	1,430			458			972			nmf
EARNINGS BEFORE INCOME TAXES	178,792			170,147			8,645			5.1
INCOME TAXES	40,263			35,680			4,583			12.8
NET EARNINGS	$	138,529		$	134,467		$	4,062		3.0	%

nmf—Calculation is not meaningful

Revenues

Information about our revenues by reportable segment is as follows:



	Nine Months Ended September 30,				Change
(In Thousands)	2019		2018		$			%
REVENUES:
Progressive Leasing	$	1,568,584	$	1,474,590	$	93,994		6.4	%
Aaron's Business	1,349,525		1,332,891		16,634			1.2
DAMI	25,943		28,258		(2,315		)	(8.2	)
Total Revenues from External Customers	$	2,944,052	$	2,835,739	$	108,313		3.8	%

The following table presents revenue by source and by segment for the nine months ended September 30, 2019:



	Nine Months Ended September 30, 2019
(In Thousands)	Progressive Leasing¹		Aaron's Business		DAMI		Total
Lease Revenues and Fees	$	1,568,584	$	1,189,914	$	—	$	2,758,498
Retail Sales	—		30,561		—		30,561
Non-Retail Sales	—		102,190		—		102,190
Franchise Royalties and Fees	—		25,899		—		25,899
Interest and Fees on Loans Receivable	—		—		25,943		25,943
Other	—		961		—		961
Total Revenues	$	1,568,584	$	1,349,525	$	25,943	$	2,944,052

¹ For the nine months ended September 30, 2019, the Progressive Leasing provision for returns and uncollectible renewal payments was $193.9 million which was recorded as a reduction to Lease Revenues and Fees as a result of the Company's adoption of ASC 842, Leases. See Note 1 to these condensed consolidated financial statements for more information regarding the impacts of ASC 842 on the Company's financial results.

The following table presents revenue by source and by segment for the nine months ended September 30, 2018:



	Nine Months Ended September 30, 2018
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees	$	1,474,590	$	1,122,286	$	—	$	2,596,876
Retail Sales	—		22,728		—		22,728
Non-Retail Sales	—		151,259		—		151,259
Franchise Royalties and Fees	—		35,140		—		35,140
Interest and Fees on Loans Receivable	—		—		28,258		28,258
Other	—		1,478		—		1,478
Total Revenues	$	1,474,590	$	1,332,891	$	28,258	$	2,835,739
Progressive Bad Debt Expense	160,773		—		—		160,773
Total Revenues, net of Progressive Bad Debt Expense¹	$	1,313,817	$	1,332,891	$	28,258	$	2,674,966

¹ See the "Use of Non-GAAP Financial Information" section below.

Progressive Leasing. Progressive Leasing segment revenues increased primarily due to an increase in total invoice volume, which was driven by an increase in invoice volume per active door, partially offset by a decrease in active doors and the recognition of a provision for returns and uncollectible renewal payments of $193.9 million as a reduction to lease revenues in accordance with ASC 842 beginning in 2019.

Aaron's Business. The acquisitions of various franchisees throughout 2017, 2018 and 2019 impacted the Aaron's Business in the form of an increase in lease revenues and fees, partially offset by lower non-retail sales and lower franchise royalties and fees during the nine months ended September 30, 2019 compared to the same period in the prior year.

Aaron's Business lease revenues and fees increased $67.6 million during the nine months ended September 30, 2019 primarily due to franchisee acquisitions during 2018, partially offset by the net reduction of 149 underperforming stores during 2019 and a 0.3% decrease in same store revenues. This increase in Aaron's Business segment lease revenues was partially offset by a $49.1 million decrease in non-retail sales primarily due to the net reduction of 228 franchisedstores resulting from the Company's acquisition of various franchisees during the 24-month period ended September 30, 2019, and lower product purchases by franchisees. Aaron's Business e-commerce revenues were approximately 9% of Aaron's Business total lease revenues and fees during the nine months ended September 30, 2019.

Operating Expenses

Information about certain significant components of operating expenses is as follows:



	Nine Months Ended September 30,				Change
(In Thousands)	2019		2018		$			%
Personnel Costs	$	531,725	$	498,201	$	33,524		6.7	%
Occupancy Costs	174,833		164,780		10,053			6.1
Provision for Lease Merchandise Write-Offs	186,922		146,091		40,831			27.9
Bad Debt Expense	1,272		160,886		(159,614		)	(99.2	)
Shipping and Handling	56,121		55,485		636			1.1
Advertising	39,366		26,197		13,169			50.3
Provision for Loan Losses	15,291		16,011		(720		)	(4.5	)
Intangible Amortization	27,797		23,745		4,052			17.1
Other Operating Expenses	120,729		107,775		12,954			12.0
Operating Expenses	$	1,154,056	$	1,199,171	$	(45,115	)	(3.8	)%

As a percentage of total revenues, operating expenses decreased to 39.2% in the nine months ended September 30, 2019 from 42.3% in the same period in 2018. Calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases, operating expenses as a percentage of total revenues for the nine months ended September 30, 2019 increased to 39.2% in 2019 from 38.8% in the same period in 2018.

Personnel costs increased by $18.4 million in our Aaron's Business segment and $16.0 million at our Progressive Leasing segment. The increase in personnel costs during the nine months ended September 30, 2019 is primarily due to the Aaron's Business acquisition of 152 franchised stores during 2018, hiring to support Aaron's Business transformation initiatives and the growth of Progressive Leasing, partially offset by the closure and merger of underperforming stores and a reduction of store support center and field support staff from our Aaron's Business restructuring programs in 2018 and 2019.

Occupancy costs increased primarily due to the acquisition of franchisee stores, partially offset by the closure of underperforming stores as part of our restructuring actions.

The provision for lease merchandise write-offs increased during the ~~three~~nine months ended September 30, ~~2018~~2019 primarily due to Progressive Leasing's ~~revenue~~invoice volume growth. The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment ~~increased to 6.8%~~was 7.4% in both 2019 and 2018, ~~from 6.2% in 2017 due to an expected shift in Progressive Leasing's portfolio mix.~~calculated on a basis consistent with the January 2019 adoption of ASC 842, Leases. The provision for lease merchandise write-offs as a percentage of lease revenues for the Aaron's Business increased to ~~5.4%~~5.9% in ~~2018~~2019 from ~~5.2%~~4.4% in ~~2017.~~2018. This increase is due to the lower collections activity in the third quarter of 2019 resulting from the redeployment of store labor towards enhanced sales activities and to an increase in the number and type of promotional offerings, higher ticket leases, store closure activity and an increasing mix of e-commerce as a percentage of revenues during the nine months ended September 30, 2019.

Bad debt expense decreased during the nine months ended September 30, 2019. As discussed above, the Company's adoption of ASC 842 resulted in the Company classifying Progressive Leasing bad debt expense, which is reported within operating expenses in 2018 and prior periods, as a reduction of lease revenue and fees within the condensed consolidated statements of earnings beginning January 1, 2019. The bad debt expense for the nine months ended September 30, 2019 relates to uncollectible merchant accounts receivable for cardholder refunded charges at DAMI.

Advertising expense increased during the nine months ended September 30, 2019 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 remained consistent at 12.7% for both periods.

~~Shipping~~Aaron's Business rebranding campaign and ~~handling expense increased due to a shortage of trucking labor in relation to marketplace demand and higher fuel costs.~~direct response marketing initiatives.

Intangible amortization expense increased primarily due to additional intangible assets recorded as a result of the acquisition of ~~103~~152 franchised stores throughout 2018.

Other operating expenses increased due to higher merchant expenses at Progressive Leasing due to the growth in invoice volume and higher software licensing expense incurred during the nine months ended September 30, ~~2018.~~2019.

Other Costs and Expenses

Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to ~~49.3%~~53.1% from ~~48.4%~~49.7% in the prior year period, primarily due to a shift in lease merchandise 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~~was 68.0% in 2019 compared to ~~59.9%~~69.2% in 2018, ~~from 59.6% in~~calculated on a basis consistent with the ~~prior year period~~January 2019 adoption of ASC 842, Leases, due to ~~an increase~~a decrease in revenue from early buyouts, which has a lower margin, quarter over quarter. Aaron's Business depreciation of lease merchandise as a percentage of Aaron's Business lease revenues and fees decreased to ~~35.1%~~33.5% in ~~2018~~2019 from ~~35.9%~~34.0% in the prior ~~year, which was primarily driven by changes in merchandising and pricing strategies in 2018 compared to the prior year period.~~year.

Retail cost of sales. Retail cost of sales as a percentage of retail sales ~~decreased~~increased to ~~64.0%~~65.5% from ~~69.8%~~64.7% primarily due to ~~lower inventory purchase cost.~~higher discounting of pre-leased merchandise during 2019 as compared to 2018.

Non-retail cost of sales. Non-retail cost of sales as a percentage of non-retail sales decreased to ~~79.4%~~81.3% from ~~89.9%~~86.1% primarily due to lower inventory purchase cost during ~~2018~~2019 as compared to ~~2017.~~2018.

Restructuring Expenses, Net. The Company's restructuring actions relate to announced closures and consolidations of underperforming Company-operated Aaron's stores and workforce reductions in our home office and field support operations in prior periods. Restructuring activity for the ~~three~~nine months ended September 30, ~~2018 was comprised~~2019 resulted in expenses of ~~charges of $0.6~~$37.5 million, which were primarily to record ~~changes in assumptions related to Aaron's contractual~~closed store operating lease ~~obligations for closed stores, partially offset by gains~~right-of-use asset impairment and operating lease charges, the impairment of ~~less than $0.1 million recognized on~~vacant store properties, including the ~~sale~~planned exit from one of ~~properties closed under the restructuring program.~~our store support buildings, workforce reductions, and other impairment charges.

Other Operating ~~(Income) Expense,~~Income, Net

Information about the components of other operating ~~(income) expense,~~income, net is as follows:


	Three Months Ended September 30,						Change					Nine Months Ended September 30,						Change
(In Thousands)	2018			2017			$			%		2019			2018			$			%
Losses (gains) on sales of stores and customer agreements	$	—		$	(232	)	$	232		nmf		$	4		$	(46	)	$	50		nmf
Net gains on sales of delivery vehicles	(184		)	(126		)	(58		)	(46.0	)	(869		)	(629		)	(240		)	(38.2	)
Gain on insurance recoveries												(4,527		)	—			(4,527		)	nmf
Impairment charges and net losses on asset dispositions, assets held for sale and other	146			844			(698		)	(82.7	)	680			389			291			74.8
Other operating (income) expense, net	$	(38	)	$	486		$	(524	)	nmf
Other operating income, net												$	(4,712	)	$	(286	)	$	(4,426	)	nmf

nmf—Calculation is not meaningful

The gain on insurance recoveries of $4.5 million during the nine months ended September 30, 2019 relates to payments received from insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of the related property insurance receivables.

Operating Profit

Interest expense.Interest expense ~~decreased~~increased to ~~$3.7~~$13.2 million for the nine months ended September 30, 2019 from $11.9 million in 2018 ~~from $4.7 million in 2017~~ due primarily to a ~~lower~~higher outstanding debt balance during the ~~three~~nine months ended September 30, ~~2018.~~2019.

Impairment of investment. During the nine months ended September 30, 2018, the Company recorded an other-than-temporary loss of $20.1 million to impair its remaining outstanding investment in PerfectHome.

Other non-operating ~~(expense)~~ income, net. Other non-operating ~~(expense)~~ income, net includes the impact of foreign currency remeasurement, as well as gains or losses 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, net were foreign~~Foreign exchange remeasurement gains and losses ~~of $0.1 million and gains of $0.7 million~~were not significant during the ~~three~~nine months ended September 30, ~~2018 and 2017, respectively. These net losses and~~2019 or 2018. Net gains ~~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 ~~not significant~~$1.5 million and $0.4 million during the ~~three~~nine months ended September 30, 2019 and 2018, ~~and were $0.2 million during the three months ended September 30, 2017.~~

respectively.

Earnings Before Income Taxes

Information about our earnings (loss) before income taxes by reportable segment is as follows:


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
(In Thousands)	2018			2017			$		%		2019			2018			$			%
EARNINGS (LOSS) BEFORE INCOME TAXES:
Progressive Leasing	$	40,839		$	27,734		$	13,105	47.3	%	$	167,267		$	120,393		$	46,874		38.9	%
Aaron's Business	15,641			15,484			157		1.0		18,658			56,417			(37,759		)	(66.9	)
DAMI	(3,065		)	(3,997		)	932		23.3		(7,133		)	(6,663		)	(470		)	(7.1	)
Total Earnings Before Income Taxes	$	53,415		$	39,221		$	14,194	36.2	%	$	178,792		$	170,147		$	8,645		5.1	%

The factors impacting the change in earnings before income taxes are discussed above.

Income Tax Expense

Income tax expense ~~decreased~~increased to ~~$9.7~~$40.3 million for the ~~three~~nine months ended September 30, ~~2018~~2019 compared to ~~$13.9~~$35.7 million for the same period in ~~the prior year comparable period~~2018 due to ~~a decrease~~an increase in the effective tax rate to ~~18.2%~~22.5% in ~~2018~~2019 from ~~35.4%~~21.0% in ~~2017.~~2018. The ~~decrease~~increase in the effective tax rate is primarily 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. Separately, our effective tax rate was reduced as a result of a measurement period adjustment of $2.5 million income tax benefit related to the Tax Act that was recognized during the three months ended September 30, 2018 as well as the recognition of higher excess tax benefits related to stock compensation activity during the three months ended September 30, 2018 as compared to the prior year.

~~Results of Operations – Nine months ended September 30, 2018 and 2017~~

Nine Months Ended
September 30, Change
(In Thousands) 2018 2017 $ %
REVENUES:
Lease Revenues and Fees $ 2,596,876
$ 2,217,029
$ 379,847
17.1 %
Retail Sales 22,728
21,158
1,570
7.4
Non-Retail Sales 151,259
195,372
(44,113 ) (22.6 )
Franchise Royalties and Fees 35,140
38,165
(3,025 ) (7.9 )
Interest and Fees on Loans Receivable 28,258
25,669
2,589
10.1
Other 1,478
1,688
(210 ) (12.4 )
2,835,739
2,499,081
336,658
13.5
COSTS AND EXPENSES:
Depreciation of Lease Merchandise 1,290,015
1,072,972
217,043
20.2
Retail Cost of Sales 14,695
13,711
984
7.2
Non-Retail Cost of Sales 130,302
174,653
(44,351 ) (25.4 )
Operating Expenses 1,199,171
1,033,530
165,641
16.0
Restructuring Expenses 561
14,617
(14,056 ) (96.2 )
Other Operating Income, Net (286 ) (586 ) 300
51.2
2,634,458
2,308,897
325,561
14.1
OPERATING PROFIT 201,281
190,184
11,097
5.8
Interest Income 374
1,696
(1,322 ) (77.9 )
Interest Expense (11,868 ) (16,074 ) (4,206 ) (26.2 )
Impairment of Investment (20,098 ) —
20,098
nmf
Other Non-Operating Income, Net 458
3,033
(2,575 ) (84.9 )
EARNINGS BEFORE INCOME TAXES 170,147
178,839
(8,692 ) (4.9 )
INCOME TAXES 35,680
63,863
(28,183 ) (44.1 )
NET EARNINGS $ 134,467
$ 114,976
$ 19,491
17.0 %

~~nmf—Calculation is not meaningful~~

~~Revenues~~

~~Information about our revenues by reportable segment is as follows:~~

Nine Months Ended
September 30, Change
(In Thousands) 2018 2017 $ %
REVENUES:
Progressive Leasing¹
$ 1,474,590
$ 1,137,896
$ 336,694
29.6 %
Aaron's Business²
1,332,891
1,335,516
(2,625 ) (0.2 )
DAMI³
28,258
25,669
2,589
10.1
Total Revenues from External Customers $ 2,835,739
$ 2,499,081
$ 336,658
13.5 %
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.

~~Refer to Note 6 to our condensed consolidated financial statements for additional disaggregated revenue by segment disclosures.~~

~~Progressive Leasing.~~ ~~Progressive Leasing segment revenues increased primarily due to an increase in total invoice volume, which was driven by an increase in invoice volume per active door and growth in active doors.~~

~~Aaron's Business.~~ Aaron's Business segment revenues decreased primarily due to a $44.1 million decrease in non-retail sales, partially offset by a $43.2 million increase in lease revenues and fees. The decrease in non-retail sales was mainly due to the net reduction of 271 franchised stores resulting primarily from the Company's acquisition of various franchisees and decreasing demand for product by franchisees during the 24-month period ended September 30, 2018. Lease revenues and fees increased due to the acquisition of various franchisees during 2017 and the first nine months of 2018, partially offset by the closure of underperforming stores as part of the Company's restructuring actions.

~~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 $90.9 million as of September 30, 2018~~compared to $84.2 million as of September 30, 2017.~~

~~Operating Expenses~~

~~Information about certain significant components of operating~~non-deductible expenses ~~is as follows:~~

Nine Months Ended
September 30, Change
(In Thousands) 2018 2017 $ %
Personnel Costs $ 498,201
$ 452,608
$ 45,593
10.1 %
Occupancy Costs 164,780
148,465
16,315
11.0
Provision for Lease Merchandise Write-Offs 146,091
107,450
38,641
36.0
Bad Debt Expense 160,886
118,749
42,137
35.5
Shipping and Handling 55,485
49,111
6,374
13.0
Advertising 26,197
27,938
(1,741 ) (6.2 )
Provision for Loan Losses 16,011
15,140
871
5.8
Intangible Amortization 23,745
20,501
3,244
15.8
Other Operating Expenses 107,775
93,568
14,207
15.2
Operating Expenses $ 1,199,171
$ 1,033,530
$ 165,641
16.0 %

~~As a percentage of total revenues, operating expenses increased to 42.3% in the nine months ended September 30, 2018 from 41.4% in the same period in 2017.~~

~~Personnel costs increased by $26.7 million in our Aaron's Business segment and $17.5 million at our Progressive Leasing segment. The increase in personnel costs~~ during the nine months ended September 30, 2018 is primarily the result of hiring to support both Aaron's Business strategic operating and business improvement initiatives, the growth of Progressive Leasing, increased labor costs in the Aaron's Business Company-operated stores due to the acquisitions of 111 franchised stores during 2017 and 103 franchised stores during the nine months ended September 30, 2018 and higher stock-based compensation expense, partially offset by the closure and merger of underperforming stores and a reduction of home office and field support staff from our Aaron's Business restructuring programs in 2017 and 2018.

Occupancy costs increased primarily due to higher store maintenance expenses and the acquisition of franchisee stores, partially offset by the closure of underperforming stores as part of our restructuring actions.

The provision for lease merchandise write-offs increased during the nine months ended September 30, 2018 due primarily to Progressive Leasing's revenue growth. The provision for lease merchandise write-offs as a percentage of lease revenues for the Progressive Leasing segment increased to 6.6% in 20182019 compared to ~~5.5% in~~ the same period in ~~2017 due to an expected shift in Progressive Leasing's portfolio mix. The provision for lease merchandise write-offs as a percentage~~2018 and measurement period adjustments of ~~lease revenues for the Aaron's Business increased to 4.4% in 2018 compared to 4.1% in the same period in 2017.~~

~~Bad debt expense increased due~~$2.3 million income tax benefits related 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 increased to 10.9% in 2018 compared to 10.4% in the same period in 2017 due primarily to an expected shift in Progressive Leasing's portfolio mix.

~~Shipping and handling expense increased due to a shortage of trucking labor in relation to marketplace demand and higher fuel costs.~~

~~Intangible amortization expense increased primarily due to additional intangible assets recorded as a result of the acquisitions of 111 franchised stores during 2017 and 103 franchised stores~~Tax Act that were recognized during the nine months ended September 30, 2018.

Other operating expenses increased due to higher third-party consulting costs, including legal and other expenses associated with the Company's investment in and the insolvency of PerfectHome, and higher software licensing expense.

~~Other Costs and Expenses~~

~~Depreciation of lease merchandise.~~ As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 49.7% from 48.4% in the prior year period, primarily due to a shift in lease merchandise 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 61.6% in 2018 from 60.9% 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 34.0% in 2018 from 35.2% in the prior year, which was primarily driven by changes in merchandising and pricing strategies in 2018 compared to the prior year period.

~~Retail cost of sales.~~ ~~Retail cost of sales as a percentage of retail sales decreased to 64.7% from 64.8% primarily due to lower inventory purchase cost during 2018 as compared to 2017.~~

~~Non-retail cost of sales.~~ ~~Non-retail cost of sales as a percentage of non-retail sales decreased to 86.1% from 89.4% primarily due to lower inventory purchase cost during 2018 as compared to 2017.~~

~~Restructuring Expenses, Net.~~ In connection with the announced closure and consolidation of underperforming Company-operated Aaron's stores and workforce reductions in our home office and field support operations, net restructuring charges of $0.6 million were incurred during the nine months ended September 30, 2018. The charges are primarily comprised of $1.5 million related to additional charges for changes in estimates to the Aaron's store contractual lease obligations for closed stores and $0.6 million related to workforce reductions, partially offset by $1.2 million related to reversals of previously recorded restructuring charges and gains of $0.4 million recognized from the sale of the associated properties of stores closed under the restructuring program.

~~Other Operating Income, Net~~

~~Information about the components of other operating income, net is as follows:~~

Nine Months Ended
September 30, Change
(In Thousands) 2018 2017 $ %
Net gains on sales of stores $ (46 ) $ (609 ) $ 563
92.4 %
Net gains on sales of delivery vehicles (629 ) (918 ) 289
31.5
Impairment charges and net losses on asset dispositions, assets held for sale and other 389
941
(552 ) (58.7 )
Other operating income, net $ (286 ) $ (586 ) $ 300
51.2 %

~~Operating Profit~~

~~Interest income.~~ Interest income decreased to $0.4 million during the nine months ended September 30, 2018 from $1.7 million for the comparable period in 2017 due to the discontinuation of accruing interest income related to the PerfectHome notes effective April 1, 2017.

~~Interest expense.~~Interest expense decreased to $11.9 million for the nine months ended September 30, 2018 from $16.1 million in 2017 due primarily to a lower outstanding debt balance during the nine months ended September 30, 2018.

~~Impairment of investment.~~ During the nine months ended September 30, 2018, the Company recorded an other-than-temporary loss of $20.1 million to impair its remaining outstanding investment in PerfectHome. During the second quarter of 2018, PerfectHome's liquidity deteriorated significantly due to continuing operating losses and the senior lender's decision to no longer provide additional funding under a secured revolving debt agreement resulting from PerfectHome's default of certain covenants. Additionally, the senior lender notified PerfectHome in May 2018 of its intent to exercise remedies available under its credit documentation, which included the right to call its outstanding debt. Furthermore, the U.K. governing authority for rent-to-own companies, the Financial Conduct Authority, proposed new regulatory measures which could adversely affect PerfectHome's business. In July 2018, PerfectHome entered into the U.K.’s insolvency process and was subsequently acquired by the senior lender. The Company believes it will not receive any further payments on its subordinated secured Notes.

~~Other non-operating income, net~~. Other non-operating income, 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, net were foreign exchange remeasurement gains of $0.1 million and $1.9 million during the nine months ended September 30, 2018 and 2017, respectively. These net gains 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 $0.4 million and $1.1 million during the nine months ended September 30, 2018 and 2017, respectively.

~~Earnings Before Income Taxes~~

~~Information about our earnings (loss) before income taxes by reportable segment is as follows:~~

Nine Months Ended
September 30, Change
(In Thousands) 2018 2017 $ %
EARNINGS (LOSS) BEFORE INCOME TAXES:
Progressive Leasing $ 120,393
$ 101,732
$ 18,661
18.3 %
Aaron's Business 56,417
85,564
(29,147 ) (34.1 )
DAMI (6,663 ) (8,457 ) 1,794
21.2
Total Earnings Before Income Taxes $ 170,147
$ 178,839
$ (8,692 ) (4.9 )%

~~The factors impacting the change in earnings before income taxes are discussed above.~~

~~Income Tax Expense~~

Income tax expense decreased to $35.7 million for the nine months ended September 30, 2018 compared to $63.9 million for the same period in 2017 due to a decrease in the effective tax rate to 21.0% in 2018 from 35.7% in 2017. Thedecrease in the effective tax rate is primarily 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. Separately, our effective tax rate was reduced as a result of Tax Act measurement period adjustments of $2.3 million and the recognition of higher excess tax benefits related to stock compensation activity during the nine months ended September 30, 2018 as compared to the prior year period.

Overview of Financial Position

The major changes in the condensed consolidated balance sheet from December 31, ~~2017~~2018 to September 30, ~~2018~~2019 include:

Cash and cash equivalents ~~decreased $16.1~~increased $135.0 million to ~~$35.0~~$150.3 million at September 30, ~~2018.~~2019. For additional information, refer to the "Liquidity and Capital Resources" section below.

~~Investments declined due to the full impairment of the PerfectHome Notes as discussed above.~~

~~Goodwill~~ ~~increased~~ ~~$80.5 million due primarily to goodwill recorded as~~As a result of the ~~franchisee acquisitions executed during~~adoption of ASC 842 as of January 1, 2019, the ~~third quarter~~Company has operating lease right-of-use assets and operating lease liabilities of ~~2018. Refer to Note 2 to the condensed consolidated financial statements for further details regarding the acquisition accounting for these franchisees.~~

$330.5 million and $374.4 million, respectively, as of September 30, 2019.

Income tax receivable decreased ~~$70.3~~$13.2 million due primarily to net income tax refunds ~~net~~ of ~~tax~~$5.5 million received during the nine months ended September 30, 2019.

Accounts payable and accrued expenses decreased $38.9 million primarily due to the seasonality of the Company's lease merchandise purchases and timing of related payments. Additionally, upon transition to ASC 842, the remaining balances of the Company's deferred rent, lease incentives, and closed store reserve, which were previously recorded within accounts payable and accrued expenses, were reclassified as a reduction to the operating lease right-of-use asset in the accompanying condensed consolidated balance sheet.

Debt decreased ~~$71.5~~$77.6 million due primarily to scheduled repayments ~~of $95.0 million~~ on the Company's senior unsecured notes and term loan, including repayment of the remaining $25.0 million outstanding under its 3.95% senior unsecured notes, partially offset by net borrowings of $25.0 million on the Company's revolving credit facility.

~~Refer to "Liquidity and Capital Resources" below for further details regarding the Company's financing arrangements.~~notes.

Liquidity and Capital Resources

General

Our primary capital requirements consist of buying merchandise for the operations of Progressive Leasing and the ~~Aaron's~~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, including franchisee acquisitions; (iii) expenditures related to our corporate operating activities; (iv) personnel expenditures; (v) income tax payments; (vi) funding of ~~loan receivables~~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 September 30, ~~2018,~~2019, the Company had ~~$35.0~~$150.3 million of cash and ~~$364.0~~$386.2 million of availability under its revolving credit facility.

Cash Provided by Operating Activities

Cash provided by operating activities was ~~$363.0~~$350.8 million and ~~$180.3~~$363.0 million during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~$182.7~~$12.2 million ~~increase~~decrease in operating cash flows was primarily driven by net tax refunds of ~~$64.8~~$5.5 million during the nine months ended September 30, ~~2018~~2019 compared to net tax ~~payments~~refunds of ~~$95.7~~$64.8 million paid during the nine months ended September 30, 2017. The Tax Act changed previous tax laws by providing for 100% expense deduction of the Company's lease merchandise inventory purchased by the Company after September 27, 2017. As a result of the provisions in the Tax Act not being enacted until December 22, 2017, the Company made more than the required estimated federal tax liability payments in 2017 and therefore qualified for and received a refund related to 2017 income tax payments during the nine months ended September 30, 2018. Other changes in cash provided by operating activities are discussed above in our discussion of results for the nine months ended September 30, ~~2018.~~2019.

Cash Used in Investing Activities

Cash used in investing activities was ~~$192.3~~$83.2 million and ~~$185.8~~$192.3 million during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~$6.6~~$109.2 million ~~increase~~decrease in investing cash outflows was primarily due to $128.2 million lower outflows for the acquisition of businesses and customer agreements, partially offset by (i) ~~$10.8~~$14.1 million of additional outflows related to the purchase of property, plant and ~~equipment;~~equipment and (ii) ~~$4.7~~$3.6 million lower proceeds from ~~the sale of property, plant and equipment, partially offset by $7.4 million lower net cash outflows on investments in~~ DAMI loans receivable ~~and $1.2 million lower outflows as a result of the acquisition of businesses and customer agreements~~ during the nine months ended September 30, ~~2018~~2019 as compared to the same period in ~~2017.~~2018.

Cash Used in Financing Activities

Cash used in financing activities was ~~$186.7~~$132.7 million and ~~$176.9~~$186.7 million during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The~~$9.8~~ $54.0 million ~~increase~~decrease in financing cash outflows was primarily due to ~~(i)~~ a ~~$65.7~~$60.6 million ~~increase~~decrease in the Company's repurchases of outstanding common stock ~~in 2018 compared to 2017; and (ii) an $11.3~~partially offset by a $6.5 million increase in ~~cash payments to tax authorities for shares withheld from employees as part~~net repayments of ~~our long-term incentive program~~debt during the nine months ended September 30, ~~2018, partially offset by a $37.4 million decrease in repayments of debt and a $22.1 million increase in borrowings~~2019 as compared to the ~~nine months ended September 30, 2017.~~same period in 2018.

Share Repurchases

We purchase our stock in the market from time to time as authorized by our Board of Directors. During the nine months ended September 30, ~~2018,~~2019, the Company purchased approximately ~~2,300,500~~642,284 shares for ~~$100.0~~$39.4 million. As of September 30, ~~2018,~~2019, we have the authority to purchase additional shares up to our remaining authorization limit of ~~$400.0~~$291.8 million.

Dividends

We have ~~a consistent history of paying dividends, having~~ paid quarterly cash dividends for 3132 consecutive years. At its November ~~2017~~2018 meeting, our board of directors increased the quarterly dividend to ~~$0.030~~$0.035 per share from ~~$0.0275~~$0.03 per share. Aggregate dividend payments for the nine months ended September 30, ~~2018~~2019 were ~~$4.2~~$7.1 million.

Subject to sufficient operating profits, any future capital needs and other contingencies, we currently expect to continue our policy of paying quarterly cash dividends.

Debt Financing

As of September 30, ~~2018, $87.5~~2019, $225.0 million in term loans were outstanding under ~~the~~our term loan and revolving credit agreement that matures on September 18, 2022. The total available credit under our revolving credit facility as of September 30, ~~2018~~2019 was ~~$364.0~~$386.2 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.

As of September 30, ~~2018,~~2019, the Company had outstanding ~~$180.0~~$120.0 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. Quarterly payments of interest commenced July 14, 2014, and annual principal payments of $60.0 million ~~each~~ commenced April 14, 2017. During the nine months ended September 30, 2018, the Company repaid the remaining $25.0 million outstanding under its 3.95% senior unsecured notes originally issued in a private placement in July 2011.

Our revolving credit and term loan agreement contains certain financial covenants, which include requirements that the Company maintain ratios of (i) adjusted 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 income before interest ~~income~~ 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 September 30, ~~2018~~2019 and believe that we will continue to be in compliance in the future.

Commitments

Income Taxes

During the nine months ended September 30, ~~2018,~~2019, we received net tax refunds of ~~$64.8~~$5.5 million. Within the next three months, we anticipate ~~a federal refund of $4.9~~we will make $1.0 million in estimated tax payments for U.S. federal income taxes and estimated payments of ~~$3.0~~$0.3 million for Canadian income taxes as well as an estimated $1.0 million for state ~~and Canadian~~ 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 for and received, during the three months ended March 31, 2018, a $77 million refund from the Internal Revenue Service (the "IRS") for the 2017 tax year.

We estimate the tax deferral associated with bonus depreciation from the Tax Act and the prior tax legislation is approximately ~~$168.0~~$282.0 million as of December 31, ~~2017,~~2018, of which approximately ~~88%~~87% is expected to reverse in ~~2018~~2019 and most of the remainder during ~~2019.~~2020. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures after December 31, ~~2017.~~

~~Leases~~

The Company leases various properties and other assets in the normal course of business, including certain properties under capital leases with related parties. Our lease agreements are more fully described in Note 7 to the consolidated financial statements in the 2017 Annual Report.2018.

Franchise Loan Guarantee

We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement with several banks, under which the maximum facility commitment amount under the franchisee loan program was ~~$85.0~~$55.0 million as of September 30, 2018. On October 23, 2018, the Company amended its franchise loan facility to (i) reduce the total commitment amount from $85.0 million to $55.0 million; and (ii) extend the maturity date to October 23, 2019.

At September 30, ~~2018,~~2019, the total amount that we might be obligated to repay in the event franchisees defaulted was ~~$41.0~~$29.8 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. On October 11, 2019, the Company amended its franchise loan facility to (i) reduce the total commitment amount from $55.0 million to $40.0 million; and (ii) extend the maturity date to October 22, 2020.

Contractual Obligations and Commitments

As part of our ongoing operations, we enter into various arrangements that obligate us to make future payments, including debt agreements, operating leases, and other purchase obligations. The future cash commitments owed under these arrangements generally fluctuate in the normal course of business as we, for example, borrow on or pay down our revolving lines of credit, make scheduled payments on other debt, leases or purchase obligations and renegotiate arrangements or enter into new arrangements. Nonetheless, as of September 30, ~~2018,~~2019, there were no material changes outside the normal course of business in our material cash commitments and contractual obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Unfunded Lending Commitments

The Company, through its DAMI business, has unfunded lending commitments totaling approximately ~~$350.4~~$262.3 million and ~~$354.5~~$316.4 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 represent future cash requirements. The reserve for losses on unfunded loan commitments, which is included in accounts payable and accrued expenses in the condensed consolidated balance sheets, is calculated by the Company based on historical customer usage of available credit and is approximately ~~$0.7 million and $0.6~~$0.5 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Critical Accounting Policies

Refer to the ~~2017~~2018 Annual Report.

Recent Accounting Pronouncements

Refer to Note 1 to the condensed consolidated financial statements for a discussion of recently issued accounting pronouncements, including pronouncements that were adopted in the current year.

Use of Non-GAAP Financial Information

The "Results of Operations" sections above disclose non-GAAP revenues as if the lessor accounting impacts of ASC 842 were in effect for the three and nine months ended September 30, 2018. "Total Revenues, net of Progressive Bad Debt Expense" and the related percentages for the comparable prior year periods are a supplemental measure of our performance that are not calculated in accordance with generally accepted accounting principles in the United States ("GAAP") in place during 2018. These non-GAAP measures assume that Progressive bad debt expense is recorded as a reduction to lease revenues and fees instead of within operating expenses in 2018.

Management believes these non-GAAP measures for 2018 provide relevant and useful information for users of our financial statements, as it provides comparability with the financial results we are reporting beginning in 2019 when ASC 842 became effective and we began reporting Progressive bad debt expense as a reduction to lease revenues and fees. We believe these non-GAAP measures provide management and investors the ability to better understand the results from the primary operations of our business in 2019 compared with 2018 by classifying Progressive bad debt expense consistently between the periods.

These non-GAAP financial measures should not be used as a substitute for, or considered superior to, measures of financial performance prepared in accordance with GAAP.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Our exposures to market risk have not changed materially since December 31, ~~2017.~~2018.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, was carried out by management, with the participation of the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as of the end of the period covered by this Quarterly Report on Form 10-Q.

This evaluation is performed to determine if our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures, however, are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

Based on management’s evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the date of the evaluation to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

Changes in Internal Control Over Financial Reporting.

There were no changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, during the nine months ended September 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION


ITEM 1.	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 56 to the condensed consolidated financial statements, which discussion is incorporated herein by reference.


ITEM 1A.	RISK FACTORS

The Company does not have any updates to its risk factors disclosure from that previously reported in the ~~2017~~2018 Annual Report.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents our share repurchase activity for the three months ended September 30, ~~2018:~~2019:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ¹
July 1, 2018 through July 31, 2018 —
—
—
$ 431,568,742
August 1, 2018 through August 31, 2018 675,552
46.74
675,552
399,996,734
September 1, 2018 through September 30, 2018 —
—
—
399,996,734
Total 675,552

675,552



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ¹
July 1, 2019 through July 31, 2019	10,100	63.85	10,100	$	316,206,310
August 1, 2019 through August 31, 2019	204,477	63.29	204,477	303,265,450
September 1, 2019 through September 30, 2019	184,847	61.79	184,847	291,843,242
Total	399,424		399,424

¹Share repurchases are conducted under authorizations made from time to time by the Company’s Board of Directors. The most recent authorization, which replaced our previous repurchase program, was publicly announced on February 15, 2018 and authorized the repurchase of shares up to a maximum amount of $500 million. Subject to the terms of the Board's authorization and applicable law, repurchases may be made at such times and in such amounts as the Company deems appropriate. Repurchases may be discontinued at any time.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

None.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS



EXHIBIT NO.		DESCRIPTION OF EXHIBIT


10.1*		~~First~~Third Amendment to the Employees Retirement Plan, dated August 23, 2019, to be effective January 1, 2020.

10.2		Second Amendment to Fourth Amended and Restated Loan Facility Agreement and Guaranty, entered into among Aaron’s, Inc., as sponsor, SunTrust Bank, as servicer, and each of the other lending institutions party thereto as participants, dated as of October ~~23, 2018.~~

10.2*		~~First Amendment~~11, 2019 (incorporated by reference to ~~Second Amended and Restated Revolving Credit and Term Loan Agreement, entered into among Aaron’s, Inc., as borrower,~~Exhibit 10.1 of the ~~several banks and other financial institutions from time to time party thereto, and SunTrust Bank, as administrative agent, dated~~Registrant’s Current Report on Form 8-K filed with the SEC on October ~~23, 2018.~~16, 2019).

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101~~101.INS		XBRL Instance Document - The ~~following financial information from~~instance document does not appear in the ~~Registrant’s Quarterly Report on Form 10-Q for~~interactive data file because its XBRL tags are embedded within the ~~quarter ended September 30, 2018, formatted in~~inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, (ii) Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2018 and 2017, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, and (v) the Notes to Condensed Consolidated Financial Statements.document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		AARON’S, INC.
			(Registrant)

Date:	~~October 25, 2018~~November 4, 2019	By:	/s/ Steven A. Michaels
			Steven A. Michaels
			Chief Financial Officer,
			President Strategic Operations
			(Principal Financial Officer)

Date:	~~October 25, 2018~~November 4, 2019	By:	/s/ Robert P. Sinclair, Jr.
			Robert P. Sinclair, Jr.
			Vice President,
			Corporate Controller
			(Principal Accounting Officer)



(In Thousands)	September 30, 2018		December 31, 2017
Customers	$	54,463	$	48,661
Corporate	15,500		23,431
Franchisee	22,348		27,795
Accounts Receivable	$	92,311	$	99,887



	Nine Months Ended			Year Ended
(In Thousands)	September 30, 2018			December 31, 2017
Beginning Balance	$	35,629		$	33,399
Merchandise Written off, net of Recoveries	(130,946		)	(143,230		)
Provision for Write-offs	146,091			145,460
Ending Balance	$	50,774		$	35,629



(In Thousands)	Foreign Currency
Balance at January 1, 2018	$	774
Other Comprehensive Loss	(715		)
Balance at September 30, 2018	$	59



Three Months Ended September 30, 2018
(In Thousands)	As Reported		Balance Without ASC 606 Adoption		Effect of Change Higher/(Lower)
Franchise Royalties and Fees	$	10,153	$	8,118	$	2,035
Operating Expenses	420,602		418,928		1,674
OPERATING PROFIT	57,286		56,924		362
EARNINGS BEFORE INCOME TAXES	53,415		53,053		362
INCOME TAXES	9,695		9,606		89
NET EARNINGS	$	43,720	$	43,447	$	273



	Nine Months Ended September 30, 2017
(In Thousands)	Progressive Leasing		Aaron's Business		DAMI		Total
Lease Revenues and Fees¹	$	1,137,896	$	1,079,133	$	—	$	2,217,029
Retail Sales²	—		21,158		—		21,158
Non-Retail Sales²	—		195,372		—		195,372
Franchise Royalties and Fees²	—		38,165		—		38,165
Interest and Fees on Loans Receivable³	—		—		25,669		25,669
Other	—		1,688		—		1,688
Total	$	1,137,896	$	1,335,516	$	25,669	$	2,499,081