SEGMENTS

Description of Products and Services of Reportable Segments

As of December 31, 2018, the Company has three 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 appliance, jewelry, mattress, automobile electronics and mobile phones and accessories.

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. This operating segment also supports franchisees of its Aaron’s stores. In addition, the Aaron’s Business segment includes the operations of Woodhaven, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in Company-operated and franchised stores. The HomeSmart operations, prior to the May 2016 disposition, is reflected within the Aaron’s Business segment and offered furniture, electronics, appliances and computers to customers primarily on a weekly payment basis with no credit needed.

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 source for financing and leasing transactions.

Factors Used by Management to Identify the Reportable Segments

The Company’s reportable segments are based on the operations of the Company that the chief operating decision maker regularly reviews to analyze performance and allocate resources among business units of the Company.

Disaggregated Revenue

The following table presents revenue by source and by segment for the year ended December 31, 2018:



	Year Ended December 31, 2018
(In Thousands)	Progressive Leasing		Aaron's Business⁴		DAMI		Total
Lease Revenues and Fees¹	$	1,998,981	$	1,507,437	$	—	$	3,506,418
Retail Sales²	—		31,271		—		31,271
Non-Retail Sales²	—		207,262		—		207,262
Franchise Royalties and Fees²	—		44,815		—		44,815
Interest and Fees on Loans Receivable³	—		—		37,318		37,318
Other	—		1,839		—		1,839
Total	$	1,998,981	$	1,792,624	$	37,318	$	3,828,923

¹Substantially all lease revenues and fees are within the scope of ASC 840, Leases. The Company had $19.8 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, $33.3 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.

⁴Includes revenues from Canadian operations of $21.3 million, which are primarily Lease Revenues and Fees.

The following table presents revenue by source and by segment for the year ended December 31, 2017:



	Year Ended December 31, 2017
(In Thousands)	Progressive Leasing		Aaron's Business⁴		DAMI		Total
Lease Revenues and Fees¹	$	1,566,413	$	1,433,818	$	—	$	3,000,231
Retail Sales²	—		27,465		—		27,465
Non-Retail Sales²	—		270,253		—		270,253
Franchise Royalties and Fees²	—		48,278		—		48,278
Interest and Fees on Loans Receivable³	—		—		34,925		34,925
Other	—		2,556		—		2,556
Total	$	1,566,413	$	1,782,370	$	34,925	$	3,383,708

¹Substantially all revenue is within the scope of ASC 840, Leases. The Company had $6.3 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.

²Revenue within the scope of ASC 605, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $44.6 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.

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

⁴Includes revenues from Canadian operations of $18.3 million, which are primarily Lease Revenues and Fees.

The following table presents revenue by source and by segment for the year ended December 31, 2016:



	Year Ended December 31, 2016
(In Thousands)	Progressive Leasing		Aaron's Business⁴		DAMI		Total
Lease Revenues and Fees¹	$	1,237,597	$	1,543,227	$	—	$	2,780,824
Retail Sales²	—		29,418		—		29,418
Non-Retail Sales²	—		309,446		—		309,446
Franchise Royalties and Fees²	—		58,350		—		58,350
Interest and Fees on Loans Receivable³	—		—		24,080		24,080
Other	—		5,598		—		5,598
Total	$	1,237,597	$	1,946,039	$	24,080	$	3,207,716

¹Substantially all revenue is within the scope of ASC 840, Leases. The Company had $2.8 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.

²Revenue within the scope of ASC 605, Revenue from Contracts with Customers. Of the Franchise Royalties and Fees, $53.7 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.

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

⁴Includes revenues from Canadian operations of $12.4 million, which are primarily Lease Revenues and Fees.

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.



	Year Ended December 31,
(In Thousands)	2018			2017			2016
Earnings (Loss) Before Income Tax (Benefit) Expense:
Progressive Leasing	$	175,015		$	140,224		$	104,686
Aaron’s Business	84,683			110,642			123,009
DAMI	(7,494		)	(11,289		)	(9,273		)
Total Earnings Before Income Tax (Benefit) Expense	$	252,204		$	239,577		$	218,422

Corporate-related assets that benefit multiple segments are reported as other assets in the table below.



	December 31,
(In Thousands)	2018		2017
Assets:
Progressive Leasing	$	1,088,227	$	1,022,413
Aaron’s Business¹	1,483,102		1,261,234
DAMI	95,341		108,306
Other	160,022		300,311
Total Assets	$	2,826,692	$	2,692,264

Assets From Canadian Operations (included in totals above):
Aaron’s Business	$	25,893	$	20,223

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



	Year Ended December 31,
(In Thousands)	2018			2017			2016
Depreciation and Amortization¹:
Progressive Leasing	$	27,974		$	29,048		$	30,727
Aaron’s Business	64,744			52,251			50,658
DAMI	1,432			1,273			993
Total Depreciation and Amortization	$	94,150		$	82,572		$	82,378

Interest Expense:
Progressive Leasing	$	16,288		$	18,577		$	20,042
Aaron’s Business	(2,944		)	(2,366		)	(768		)
DAMI	3,096			4,327			4,116
Total Interest Expense	$	16,440		$	20,538		$	23,390

Capital Expenditures:
Progressive Leasing	$	10,711		$	8,213		$	6,084
Aaron’s Business	67,099			48,335			50,582
DAMI	1,035			1,425			787
Total Capital Expenditures	$	78,845		$	57,973		$	57,453

¹Excludes depreciation of lease merchandise, which is not included in the chief operating decision maker's measure of depreciation and amortization.

In 2018, the results of the Company’s operating segments were impacted by the following items:


•	Earnings before income taxes for the Aaron's Business includes a full impairment of the PerfectHome investment of $20.1 million.


•	DAMI's loss before income taxes includes a gain of $0.8 million related to the sale of DAMI's former corporate office building.

In 2017, the results of the Company’s operating segments were impacted by the following items:


•	Aaron's Business earnings before income taxes were impacted by $17.5 million of restructuring charges related to store contractual lease obligations, severance costs and impairment charges in connection with the Company's strategic decision to close Company-operated stores as discussed in Note 10 to these consolidated financial statements.

In 2016, the results of the Company’s operating segments were impacted by the following items:


•	Aaron's Business earnings before income taxes were impacted by $20.2 million of restructuring charges incurred in connection with the Company’s strategic decision to close Company-operated stores as discussed in Note 10 to these consolidated financial statements.


•	Aaron's Business earnings before income taxes includes a loss on the sale of HomeSmart of $4.3 million and additional charges of $1.1 million related to exiting the HomeSmart business.


•	Earnings before income taxes for the Aaron's Business were also impacted by a gain of $11.1 million on the January 2016 sale of the Company’s former corporate office building.

The Company determines earnings (loss) before income taxes for all reportable segments in accordance with U.S. GAAP with the following adjustments:


•	Generally, a predetermined amount of Corporate overhead is allocated to each reportable segment based on segment revenues. Any unallocated Corporate overhead in excess of predetermined amounts is assigned to the Aaron's Business, which is consistent with how the chief operating decision maker regularly reviews the segment results.

•

Interest expense is allocated from Aaron's Business to the Progressive Leasing and DAMI segments based on a percentage of the outstanding balances of its intercompany borrowings and of the debt incurred when it was acquired. Interest expense allocated to Progressive Leasing and DAMI in excess of interest expense incurred by Aaron's Business from third party lenders is reflected in the table above.