| Basis and Summary of Significant Accounting Policies | BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES As described elsewhere in this Quarterly Report on Form 10-Q, the novel coronavirus ("COVID-19") pandemic led to significant market disruption in 2020 and 2021 and has continued to impact various aspects of our operations, directly and indirectly on a moderated basis. Throughout these notes to the condensed consolidated financial statements, the impacts of the COVID-19 pandemic on the financial results for the three months ended March 31, 2022 and comparable prior periods have been identified to the best of our ability under the respective sections. For a discussion of trends that we believe have affected our business as a result of the COVID-19 pandemic, see Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations", including the "Recent Developments and Operational Measures Taken by Us in Response to the COVID-19 Pandemic," "Results of Operations" and "Liquidity and Capital Resources", below, and Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on February 24, 2022 (the "2021 Annual Report"). Description of Spin-off Transaction On November 30, 2020 (the "separation and distribution date"), Aaron's Holdings Company, Inc. completed the previously announced separation of the Aaron's Business segment (the "Aaron's Business") from Progressive Leasing and Vive and changed its name to PROG Holdings, Inc. (referred to herein as "PROG Holdings" or "Former Parent"). The separation of the Aaron's Business was effected through a distribution (the "separation", the "separation and distribution", or the "spin-off transaction") of all outstanding shares of common stock of a newly formed company called The Aaron's Company, Inc., a Georgia corporation ("Aaron's", "The Aaron's Company" or "the Company"), to the PROG Holdings shareholders of record as of November 27, 2020. Upon the separation and distribution, Aaron's, LLC became a wholly-owned subsidiary of The Aaron's Company. Unless the context otherwise requires or we specifically indicate otherwise, references to "we," "us," "our," "the Company," and "Aaron's" refer to The Aaron's Company, Inc., which holds, directly or indirectly, the Aaron’s Business prior to the separation and distribution date. Further details of the spin-off transaction are discussed in Part I, Item 1, of the 2021 Annual Report. BrandsMart U.S.A. Acquisition On April 1, 2022, the Company completed the previously announced transaction to acquire a 100% ownership of Interbond Corporation of America, doing business as BrandsMart U.S.A. ("BrandsMart"). Founded in 1977, BrandsMart is one of the leading appliance and consumer electronics retailers in the southeast United States and one of the largest appliance retailers in the country with ten stores in Florida and Georgia and a growing e-commerce presence on brandsmartusa.com. The Company paid total consideration of approximately $230 million in cash under the terms of the agreement and additional amounts for working capital adjustments and transaction related fees, subject to certain closing adjustments. Refer to subsequent events further described in Note 6 to these condensed consolidated financial statements for additional information. The Company's financial results for the three months ended March 31, 2022 and comparable prior period do not include the results of BrandsMart, which will be included in the condensed consolidated financial statements during the second quarter of 2022. Management believes that the acquisition will strengthen Aaron’s ability to deliver on its mission of enhancing people’s lives by providing easy access to high quality furniture, appliances, electronics, and other home goods through affordable lease-to-own and retail purchase options. Management believes that value creation opportunities include leveraging Aaron’s lease-to-own expertise to provide BrandsMart's customers enhanced payment options and offering a wide selection of BrandsMart product assortment to millions of Aaron’s customers. Description of Business Aaron's is a leading, technology-enabled, omni-channel provider of lease-to-own ("LTO") and retail purchase solutions of appliances, electronics, furniture, and other home goods. Since its founding in 1955, Aaron's has been committed to serving the overlooked and underserved customer with a dedication to inclusion and improving the communities in which it operates. Through our portfolio of approximately 1,300 stores and our Aarons.com e-commerce platform, we provide consumers with LTO and purchase solutions for the products they need and want, with a focus on providing our customers with unparalleled customer service and an attractive value proposition, including competitive monthly payments and total cost of ownership, as compared to other LTO providers, high approval rates, and lease plan flexibility. In addition, the Company's business includes the operations of Woodhaven Furniture Industries ("Woodhaven"), which manufactures and supplies the majority of the bedding and a significant portion of the upholstered furniture leased and sold in Company-operated and franchised stores. The following table presents store count by ownership type: Stores as of March 31 (Unaudited) 2022 2021 Company-operated Stores 1,070 1,089 Franchised Stores 236 247 Systemwide Stores 1,306 1,336 Basis of Presentation The financial statements for the three months ended March 31, 2022 and comparable prior year period are consolidated financial statements of the Company and its subsidiaries, each of which is wholly-owned, and is based on the financial position and results of operations of the Company. Intercompany balances and transactions between consolidated entities have been eliminated. These condensed consolidated financial statements reflect the historical results of operations, financial position and cash flows of the Company in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of the Company's condensed consolidated financial statements in conformity with 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. However, as described above, the extent to which the normalization of business trends since the start of the COVID-19 pandemic, and the resulting measures taken by the Company and federal and state governments will impact the Company's business will depend on future developments. These developments are uncertain and cannot be precisely predicted at this time. In many cases, management's estimates and assumptions are dependent on estimates of such future developments and may change in the future. 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 2021 Annual Report. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of operating results that may be achieved for any other interim period or for the full year. Reclassifications Certain reclassifications have been made to the prior periods to conform to the current period presentation. For previously reported interim and annual periods prior to December 31, 2021, the Company reported the additions to lease merchandise and the book value of lease merchandise sold or disposed as separate lines within operating activities in the condensed consolidated statements of cash flows. Effective with the year ended December 31, 2021, the Company revised its presentation of changes to lease merchandise to separately present the provision for lease merchandise write-offs, and combine the remaining operating activity-related changes in lease merchandise, with the exception of depreciation of lease merchandise, in a single line under changes in operating assets and liabilities in the condensed consolidated statements of cash flows. This revised presentation and the related adjustments to the prior period presentation do not have an impact on cash provided by operating activities. Accounting Policies and Estimates See Note 1 to the consolidated and combined financial statements in the 2021 Annual Report for an expanded discussion of accounting policies and estimates. Discussions of accounting estimates and application of accounting policies herein have also been updated as applicable to describe the uncertainty associated with any impacts of the COVID-19 pandemic described above. 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"), performance share units ("PSUs") and other awards issuable under the Company's employee stock purchase plan ("ESPP") (collectively, "share-based awards") as determined under the treasury stock method, unless the inclusion of such awards would have been anti-dilutive. The following table shows the calculation of weighted-average shares outstanding assuming dilution: Three Months Ended (Shares In Thousands) 2022 2021 Weighted Average Shares Outstanding 31,062 34,262 Dilutive Effect of Share-Based Awards 698 657 Weighted Average Shares Outstanding Assuming Dilution 31,760 34,919 Approximately 0.5 million and 0.1 million weighted-average shares-based awards were excluded from the computation of earnings per share assuming dilution during the three months ended March 31, 2022 and March 31, 2021, respectively, as the awards would have been anti-dilutive for the periods presented. Revenue Recognition The Company provides lease merchandise, consisting of appliances, electronics, furniture, and other home goods to its customers for lease under certain terms agreed to by the customer. Our stores and e-commerce platform offer leases with flexible ownership plans that can be renewed monthly up to 12, 18 or 24 months. The Company also earns revenue from the sale of merchandise to customers and its franchisees, and earns ongoing revenue from its franchisees in the form of royalties and through advertising efforts that benefit the franchisees. See Note 3 to these condensed consolidated financial statements for further information regarding the Company's revenue recognition policies and disclosures. Accounts Receivable Accounts receivable consist primarily of receivables due from customers on lease agreements, corporate receivables incurred during the normal course of business (primarily for vendor consideration and real estate leasing activities) and franchisee obligations. Accounts receivable, net of allowances, consist of the following: (In Thousands) March 31, 2022 December 31, 2021 Customers $ 7,343 $ 8,635 Corporate 10,603 11,478 Franchisee 8,984 9,330 $ 26,930 $ 29,443 The Company maintains an accounts receivable allowance, under which the Company's policy is to record a provision for returns and uncollectible contractually due renewal payments based on historical payments experience, which is recognized as a reduction of lease and retail revenues within the condensed consolidated statements of earnings. Other qualitative factors are considered in estimating the allowance, such as current and forecasted business trends. The Company writes off customer lease receivables that are 60 days or more past due on pre-determined dates twice monthly. The Company also maintains an allowance for outstanding franchisee accounts receivable. The Company's policy is to estimate future losses related to certain franchisees that are deemed to have a higher risk of non-payment and record an allowance for these estimated losses. The estimated allowance on franchisee accounts receivable includes consideration of broad macroeconomic trends, such as the uncertainty surrounding the impacts of the normalization of current and future business trends associated with the COVID-19 pandemic on the franchisees' ability to satisfy their obligations. Accordingly, actual accounts receivable write-offs could differ from the allowance. The provision for uncollectible franchisee accounts receivable is recorded as bad debt expense in other operating expenses, net within the condensed consolidated statements of earnings. The following table shows the components of the accounts receivable allowance: Three Months Ended March 31, (In Thousands) 2022 2021 Beginning Balance $ 7,163 $ 7,613 Accounts Written Off, net of Recoveries (8,665) (7,456) Accounts Receivable Provision 6,753 3,763 Ending Balance $ 5,251 $ 3,920 The following table shows the components of the accounts receivable provision, which includes amounts recognized for bad debt expense and the provision for returns and uncollected payments: Three Months Ended March 31, (In Thousands) 2022 2021 Bad Debt (Reversal) Expense $ (175) $ (700) Provision for Returns and Uncollectible Renewal Payments 6,928 4,463 Accounts Receivable Provision $ 6,753 $ 3,763 Lease Merchandise The Company’s lease merchandise is recorded at the lower of depreciated cost or net realizable value. The cost of merchandise manufactured by our Woodhaven operations is recorded at cost and includes overhead from production facilities, shipping costs and warehousing costs. The Company begins depreciating merchandise at the earlier of 12 months and one day from its purchase of the merchandise or when the item is leased to customers. Lease merchandise depreciates 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. Depreciation is accelerated upon early payout. The following is a summary of lease merchandise, net of accumulated depreciation and allowances: (In Thousands) March 31, 2022 December 31, 2021 Merchandise on Lease, net of Accumulated Depreciation and Allowances $ 473,100 $ 496,506 Merchandise Not on Lease, net of Accumulated Depreciation and Allowances 1 295,918 275,648 Lease Merchandise, net of Accumulated Depreciation and Allowances $ 769,018 $ 772,154 1 Includes Woodhaven raw materials, finished goods and work-in-process inventory that has been classified within lease merchandise in the condensed consolidated balance sheets of $19.1 million and $20.2 million as of March 31, 2022 and December 31, 2021, respectively. The Company's policies require weekly merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. Monthly cycle counting procedures are performed at both the Company's fulfillment centers and manufacturing facilities. Physical inventories are also taken at the manufacturing facilities annually. The Company also monitors merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off. Generally, all merchandise not on lease 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 using the allowance method, which is included within lease merchandise, net within the condensed consolidated balance sheets. The allowance method for lease merchandise write-offs estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based primarily on historical write-off experience. Other qualitative factors are considered in estimating the allowance, such as seasonality and uncertainty surrounding the impacts of the normalization of current and future business trends associated with the COVID-19 pandemic. Therefore, actual lease merchandise write-offs could differ from the allowance. The provision for write-offs is included in provision for lease merchandise write-offs in the accompanying condensed consolidated statements of earnings. The Company writes off lease merchandise on lease agreements that are 60 days or more past due on pre-determined dates twice monthly. The following table shows the components of the allowance for lease merchandise write-offs: Three Months Ended March 31, (In Thousands) 2022 2021 Beginning Balance $ 12,339 $ 11,599 Merchandise Written off, net of Recoveries (22,183) (14,849) Provision for Write-offs 21,957 13,417 Ending Balance $ 12,113 $ 10,167 Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of the following: (In Thousands) March 31, 2022 December 31, 2021 Prepaid Expenses $ 19,870 $ 14,651 Insurance Related Assets 26,249 30,757 Company-Owned Life Insurance 14,862 15,808 Assets Held for Sale 1,910 1,550 Deferred Tax Asset 8,013 7,994 Other Assets 26,895 15,240 $ 97,799 $ 86,000 Assets Held for Sale Certain properties, consisting of parcels of land and commercial buildings, and certain company-owned vehicles met the held for sale classification criteria as of March 31, 2022 and December 31, 2021. 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. Gains and losses related to the sale of assets held for sale are recorded in other operating expenses, net or restructuring expenses, net (if the asset is a part of the Company's restructuring programs further described in Note 5 to these condensed consolidated financial statements) in the condensed consolidated statements of earnings. Such gains and losses were not significant for the three months ended March 31, 2022 and March 31, 2021. Management estimated the fair values of real estate properties using the market values for similar properties. Real estate properties represent $1.6 million and $1.2 million as of March 31, 2022 and December 31, 2021, respectively. These properties are considered Level 2 assets as defined below. The carrying amount of all assets held for sale as of March 31, 2022 and December 31, 2021 is $1.9 million and $1.6 million, respectively. Sale-Leaseback Transaction During the three months ended March 31, 2022, the Company entered into a sale and leaseback transaction related to three Company-owned store properties. The Company received net proceeds of $5.7 million, which were presented within proceeds from dispositions of property, plant and equipment in the condensed consolidated statements of cash flows and recorded a gain of $3.8 million related to the sale and leaseback transaction, which was classified within other operating expenses, net in the condensed consolidated statements of earnings and was presented within other changes, net in the condensed consolidated statements of cash flows. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: (In Thousands) March 31, 2022 December 31, 2021 Accounts Payable $ 83,865 $ 83,118 Estimated Claims Liability Costs 58,847 57,381 Accrued Salaries and Benefits 52,141 57,837 Accrued Real Estate and Sales Taxes 21,528 22,754 Other Accrued Expenses and Liabilities 26,321 23,580 $ 242,702 $ 244,670 Estimated Claims Liability Costs Estimated claims liability costs are accrued primarily for workers compensation and vehicle liability, as well as general liability and group health insurance benefits provided to team members. These liabilities are recorded within estimated claims liability costs within accounts payable and accrued expenses in the condensed consolidated balance sheets. Estimates for these claims liabilities are made based on actual reported but unpaid claims and actuarial analysis of the projected claims run off for both reported and incurred but not reported claims. This analysis is based upon an assessment of the likely outcome or historical experience and considers a variety of factors, including the actuarial loss forecasts, company-specific development factors, general industry loss development factors and third-party claim administrator loss estimates of individual claims. The Company makes periodic prepayments to its insurance carriers to cover the projected claims run off for both reported and incurred but not reported claims, considering its retention or stop loss limits. In addition, we have prefunding balances on deposit and other insurance receivables with the insurance carriers which are recorded within prepaid expenses and other assets in our condensed consolidated balance sheets. Segment Reporting As of March, 31 2022, management concluded that the Company has one operating and reportable segment based on the nature of the financial information regularly reviewed by the chief operating decision maker to assess performance and allocate resources. We have also concluded that the Company has one reporting unit due to the fact that the components included within the operating segment have similar economic characteristics, such as the nature of the products and services provided, the nature of the customers we serve, and the interrelated nature of the components that are aggregated to form the sole reporting unit. The Company evaluates performance and allocates resources as a single operating segment based on revenue growth and pre-tax profit or loss from operations. Goodwill The Company’s goodwill is not amortized but is subject to an impairment test at the reporting unit level annually as of October 1 and more frequently if events or circumstances indicate that an impairment may have occurred. An interim goodwill impairment test is required if the Company believes it is more likely than not that the carrying amount of its reporting unit exceeds the reporting unit's fair value. The Company determined that there were no events that occurred or circumstances that changed during the three months ended March 31, 2022 that would more likely than not reduce the fair value of its reporting unit below its carrying amount. The Company completed acquisitions of certain franchisees and third party rent-to-own stores throughout 2020 and 2021, which resulted in a goodwill balance of $13.0 million and $13.1 million as of March 31, 2022 and December 31, 2021, respectively. Stockholders' Equity Changes in stockholders' equity for the three months ended March 31, 2022 and 2021 are as follows: Treasury Stock Common Stock Additional Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (In Thousands, Except Per Share) Shares Amount Shares Amount Balance, December 31, 2021 (4,580) $ (121,804) 35,559 $ 17,779 $ 724,384 $ 98,546 $ (739) $ 718,166 Cash Dividends, $0.11 per share — — — — — (3,584) — (3,584) Stock-Based Compensation — — — — 3,611 — — 3,611 Issuance of Shares under Equity Plans (163) (3,541) 410 205 (153) — — (3,489) Acquisition of Treasury Stock (262) (5,720) — — — — — (5,720) Net Earnings — — — — — 21,532 — 21,532 Unrealized Gain on Fuel Hedge Derivative Instrument — — — — — — 154 154 Foreign Currency Translation Adjustment — — — — — — 238 238 Balance, March 31, 2022 (5,005) $ (131,065) 35,969 $ 17,984 $ 727,842 $ 116,494 $ (347) $ 730,908 Treasury Stock Common Stock Additional Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (In Thousands, Except Per Share) Shares Amount Shares Amount Balance, December 31, 2020 (895) $ (15,977) 35,100 $ 17,550 $ 708,668 $ 1,881 $ (797) $ 711,325 Cash Dividends, $0.10 per share — — — — — (3,472) — (3,472) Stock-Based Compensation — — — — 3,551 — — 3,551 Issuance of Shares Under Equity Plans (114) (2,729) 331 165 378 — — (2,186) Acquisition of Treasury Stock (252) (6,280) — — — — — (6,280) Net Earnings — — — — — 36,323 — 36,323 Foreign Currency Translation Adjustment — — — — — — 127 127 Balance, March 31, 2021 (1,261) $ (24,986) 35,431 $ 17,715 $ 712,597 $ 34,732 $ (670) $ 739,388 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 a liability related to its non-qualified deferred compensation plan, which represents benefits accrued for participants that are part of the plan and is valued at the quoted market prices of the participants' investment election, at fair value on a recurring basis. 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 fair values of the Company's other current financial assets and liabilities, such as cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying values due to their short-term nature. The Company's outstanding debt borrowings as of December 31, 2021 were subject to a variable interest rate and short term maturities. Therefore, the fair value of these borrowings also approximates its carrying value. These assets and liabilities are measured within Level 2 of the fair value hierarchy. The Company also measures certain non-financial assets at fair value on a nonrecurring basis, such as goodwill, intangible assets, operating lease right-of-use assets, and property, plant, and equipment, in connection with periodic evaluations for potential impairment. Recent Accounting Pronouncements Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The standard provides temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the cessation of the publication of certain tenors of the London Interbank Overnight ("LIBO") rate on December 31, 2021, with complete elimination of the publication of the LIBO rate by June 30, 2023. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts referencing the LIBO rate. The Company's outstanding debt borrowing as of December 31, 2021 included an election of a LIBO rate that has not yet eliminated. Also, as further described in Note 6 to these condensed consolidated financial statements, the Company modified its debt agreement in conjunction with the acquisition of BrandsMart. Borrowings under the new debt agreement bear interest at a rate per annum equal to, at the option of the Company, (i) the forward-looking term rate based on the Secured Overnight Financing Rate ("SOFR") plus an applicable margin ranging between 1.50% and 2.25%, based on the Company's Total Net Debt to EBITDA Ratio (as defined in the debt agreement), or (ii) the base rate plus an applicable margin, which is 1.00% lower than the applicable margin for SOFR loans. Therefore, there is no impact on the consolidated financial statements of the Company related to the adoption of ASU 2020-04. |
