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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ________________________________
 FORM 10-Q
________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER 1-13941
 ________________________________
 AARON’S, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Georgia
58-0687630
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
400 Galleria Parkway SE Suite 300 Atlanta Georgia 30339-3182
(Address of principal executive offices) (Zip Code)
(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     No  
        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     No 
        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 Accelerated Filer
Non-Accelerated Filer (Do not check if a smaller reporting company) Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act
        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
        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
July 22, 2020
Common Stock, $0.50 Par Value 67,140,559

1


AARON’S, INC.
INDEX
 
3
3
4
5
6
7
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
2


PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
2020
December 31,
2019
(In Thousands, Except Share Data)
ASSETS:
Cash and Cash Equivalents $ 313,057    $ 57,755   
Accounts Receivable (net of allowances of $73,294 in 2020 and $76,293 in 2019)
79,933    104,159   
Lease Merchandise (net of accumulated depreciation and allowances of $878,259 in 2020 and $896,056 in 2019)
1,119,640    1,433,417   
Loans Receivable (net of allowances and unamortized fees of $37,649 in 2020 and $21,134 in 2019)
58,870    75,253   
Property, Plant and Equipment at Cost (net of accumulated depreciation of $326,340 in 2020 and $311,252 in 2019)
228,088    237,666   
Operating Lease Right-of-Use Assets 279,802    329,211   
Goodwill 288,801    736,582   
Other Intangibles (net of accumulated amortization of $164,324 in 2020 and $151,932 in 2019)
176,104    190,796   
Income Tax Receivable 57,487    18,690   
Prepaid Expenses and Other Assets 113,920    114,271   
Total Assets $ 2,715,702    $ 3,297,800   
LIABILITIES & SHAREHOLDERS’ EQUITY:
Accounts Payable and Accrued Expenses $ 249,182    $ 272,816   
Accrued Regulatory Expense —    175,000   
Deferred Income Taxes Payable 234,380    310,395   
Customer Deposits and Advance Payments 89,435    91,914   
Operating Lease Liabilities 335,705    369,386   
Debt 285,801    341,030   
Total Liabilities 1,194,503    1,560,541   
Commitments and Contingencies (Note 4)
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000 Shares at June 30, 2020 and December 31, 2019; Shares Issued: 90,752,123 at June 30, 2020 and December 31, 2019
45,376    45,376   
Additional Paid-in Capital 290,653    290,229   
Retained Earnings 1,805,869    2,029,613   
Accumulated Other Comprehensive Loss (1,442)   (19)  
2,140,456    2,365,199   
Less: Treasury Shares at Cost
Common Stock: 23,613,045 Shares at June 30, 2020 and 24,034,053 at December 31, 2019
(619,257)   (627,940)  
Total Shareholders’ Equity 1,521,199    1,737,259   
Total Liabilities & Shareholders’ Equity $ 2,715,702    $ 3,297,800   
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3


AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
2020 2019 2020 2019
(In Thousands, Except Per Share Data)
REVENUES:
Lease Revenues and Fees $ 969,987    $ 907,565    $ 2,017,900    $ 1,851,722   
Retail Sales 14,020    8,898    23,551    21,707   
Non-Retail Sales 33,044    34,124    59,890    71,105   
Franchise Royalties and Fees 3,365    8,605    10,089    17,812   
Interest and Fees on Loans Receivable 9,414    8,610    19,322    17,256   
Other 289    339    641    642   
1,030,119    968,141    2,131,393    1,980,244   
COSTS AND EXPENSES:
Depreciation of Lease Merchandise 547,551    474,868    1,144,958    975,688   
Retail Cost of Sales 9,065    5,651    15,927    14,283   
Non-Retail Cost of Sales 29,316    28,948    52,897    58,144   
Operating Expenses 343,850    383,576    756,820    770,792   
Restructuring Expenses, Net 6,991    18,738    29,277    32,019   
Impairment of Goodwill —    —    446,893    —   
Other Operating (Income) Expense, Net (96)   (3,486)   74    (4,383)  
936,677    908,295    2,446,846    1,846,543   
OPERATING PROFIT (LOSS) 93,442    59,846    (315,453)   133,701   
Interest Income 227    944    419    1,045   
Interest Expense (2,853)   (4,300)   (6,652)   (9,256)  
Other Non-Operating Income (Expense), Net 1,721    329    (230)   1,637   
EARNINGS (LOSS) BEFORE INCOME TAXES 92,537    56,819    (321,916)   127,127   
INCOME TAX EXPENSE (BENEFIT) 24,160    14,169    (110,288)   28,399   
NET EARNINGS (LOSS) $ 68,377    $ 42,650    $ (211,628)   $ 98,728   
EARNINGS (LOSS) PER SHARE
Basic $ 1.02    $ 0.63    $ (3.16)   $ 1.46   
Assuming Dilution $ 1.01    $ 0.62    $ (3.16)   $ 1.44   
CASH DIVIDENDS DECLARED PER SHARE:
Common Stock $ 0.040    $ 0.035    $ 0.080    $ 0.070   
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 67,097    67,687    66,959    67,492   
Assuming Dilution 67,523    68,793    66,959    68,784   
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4


AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
(In Thousands) 2020 2019 2020 2019
Net Earnings (Loss) $ 68,377    $ 42,650    $ (211,628)   $ 98,728   
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment 331    618    (1,423)   1,042   
Total Other Comprehensive Income (Loss) 331    618    (1,423)   1,042   
Comprehensive Income (Loss) $ 68,708    $ 43,268    $ (213,051)   $ 99,770   
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

5


AARON’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2020 2019
(In Thousands)
OPERATING ACTIVITIES:
Net (Loss) Earnings $ (211,628)   $ 98,728   
Adjustments to Reconcile Net (Loss) Earnings to Cash Provided by Operating Activities:
Depreciation of Lease Merchandise 1,144,958    975,688   
Other Depreciation and Amortization 50,154    53,862   
Accounts Receivable Provision 158,587    137,611   
Provision for Credit Losses on Loans Receivable 16,150    9,223   
Stock-Based Compensation 12,487    14,231   
Deferred Income Taxes (73,656)   19,928   
Impairment of Goodwill and Other Assets 468,634    26,267   
Non-Cash Lease Expense 50,638    58,073   
Other Changes, Net 5,109    (3,390)  
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:
Additions to Lease Merchandise (1,032,977)   (1,141,863)  
Book Value of Lease Merchandise Sold or Disposed 201,058    196,219   
Accounts Receivable (134,467)   (126,112)  
Prepaid Expenses and Other Assets (4,711)   (6,847)  
Income Tax Receivable (38,797)   17,227   
Operating Lease Liabilities (53,544)   (62,541)  
Accounts Payable and Accrued Expenses (19,713)   (21,465)  
Accrued Regulatory Expense (175,000)   —   
Customer Deposits and Advance Payments (2,527)   (200)  
Cash Provided by Operating Activities 360,755    244,639   
INVESTING ACTIVITIES:
Investments in Loans Receivable (39,986)   (29,506)  
Proceeds from Loans Receivable 32,248    27,720   
Outflows on Purchases of Property, Plant and Equipment (33,885)   (48,059)  
Proceeds from Property, Plant and Equipment 2,220    1,425   
Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired (1,209)   (7,612)  
Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed 359    755   
Cash Used in Investing Activities (40,253)   (55,277)  
FINANCING ACTIVITIES:
Repayments on Revolving Facility, Net —    (16,000)  
Proceeds from Debt 5,625    —   
Repayments on Debt (60,748)   (61,465)  
Dividends Paid (5,351)   (4,717)  
Acquisition of Treasury Stock —    (14,414)  
Issuance of Stock Under Stock Option Plans 2,250    5,056   
Shares Withheld for Tax Payments (5,877)   (12,977)  
Debt Issuance Costs (1,020)   —   
Cash Used in Financing Activities (65,121)   (104,517)  
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (79)   119   
Increase in Cash and Cash Equivalents 255,302    84,964   
Cash and Cash Equivalents at Beginning of Period 57,755    15,278   
Cash and Cash Equivalents at End of Period $ 313,057    $ 100,242   
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
6


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As described elsewhere in this Quarterly Report on Form 10-Q, the Coronavirus Disease ("COVID-19") pandemic has led to significant market disruption and adverse impacts on many aspects of our operations, directly and indirectly. Throughout these notes to the condensed consolidated financial statements, the impacts of the COVID-19 pandemic on the financial results for the three and six months ended June 30, 2020 have been identified under the respective sections. Additionally, there are significant uncertainties regarding the future scope and nature of these impacts, which continue to evolve each day. For a discussion of operational measures taken, as well as trends and uncertainties that have affected our business, as a result of the COVID-19 pandemic see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the "Recent Developments," "Results of Operations", "Liquidity and Capital Resources", and Part II, Item 1A "Risk Factors", below.
Description of Business
Aaron's, Inc. (the "Company") is a leading omnichannel provider of lease-purchase solutions. As of June 30, 2020, the Company's operating and reportable segments are Progressive Leasing, Aaron's Business and Vive. We have updated all disclosures and references to Dent-A-Med, Inc. and/or DAMI in this Quarterly Report on Form 10-Q to reflect the operating segment's new name, "Vive." On July 29, 2020, the Company announced its intention to separate into two independent, publicly traded companies: (i) Progressive (comprised of Progressive Leasing and Vive) and (ii) Aaron's (comprised of the Aaron’s Business).
Progressive Leasing is a virtual lease-to-own company that provides 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 cancelable 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 June 30 (Unaudited and In Thousands) 2020 2019
Progressive Leasing Invoice Volume1
$ 394,335    $ 403,410   
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, home appliances, consumer electronics and accessories to consumers through a lease-to-own agreement through the Company’s Aaron’s-branded stores in the United States, Canada and Puerto Rico, as well as through its e-commerce 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 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 for the Aaron's Business operations:
Stores as of June 30 (Unaudited) 2020 2019
Company-operated Aaron's Branded Stores 1,098    1,171   
Franchised Stores 316    357   
Systemwide Stores 1,414    1,528   
Vive partners with merchants to provide a variety of revolving credit products originated through third-party federally insured banks to customers that may not qualify for traditional prime lending (called "second-look" financing programs).
7


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. However, as described above, the extent to which the COVID-19 pandemic and resulting measures taken by the Company will impact the Company's business will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time. In many cases, management's estimates and assumptions are highly dependent on estimates of future developments and may change significantly in the future due to unforeseen direct and indirect impacts of the COVID-19 pandemic.
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, 2019 (the "2019 Annual Report") filed with the U.S. Securities and Exchange Commission on February 20, 2020. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of operating results for the full year.
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.
Accounting Policies and Estimates
See Note 1 to the consolidated financial statements in the 2019 Annual Report for 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 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") 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
June 30,
Six Months Ended
June 30,
(Shares In Thousands) 2020 2019 2020 2019
Weighted Average Shares Outstanding 67,097    67,687    66,959    67,492   
Dilutive Effect of Share-Based Awards1
426    1,106    —    1,292   
Weighted Average Shares Outstanding Assuming Dilution 67,523    68,793    66,959    68,784   
1 There was no dilutive effect to the earnings (loss) per common share for the six months ended June 30, 2020 due to the net loss incurred in the year-to-date period.
Approximately 1,429,000 and 1,908,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three and six months ended June 30, 2020, respectively, as the awards would have been anti-dilutive for the periods presented.
Approximately 522,000 and 482,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three and six months ended June 30, 2019, respectively, as the awards would have been anti-dilutive for the periods presented.
8


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting primarily of furniture, appliances, electronics, jewelry and a variety of other products, to its customers for lease under certain terms agreed to by the customer. The Company's Progressive Leasing segment offers customers of traditional and e-commerce retailers a virtual lease-purchase solution through leases with payment terms that can be renewed up to 12 months. The Company's Aaron's-branded stores and its e-commerce platform offer leases with flexible terms that can be renewed up to 12, 18 or 24 months. 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 terms include weekly, bi-weekly, and monthly frequencies. Revenue recorded prior to the payment due date results in unbilled receivables recognized in accounts receivable, net of allowances in the accompanying condensed consolidated balance sheets. 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. Progressive Leasing 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 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.
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 other customers as retail sales in the condensed consolidated statements of earnings.
Franchise Royalties and Fees
The Company has no current plans to franchise additional Aaron's stores. Franchisees have historically paid an ongoing royalty fee of 6% of the weekly cash revenue collections, which is recognized as the fees become due. In response to the COVID-19 pandemic, the Company temporarily suspended, as opposed to deferring, the royalty fee obligation in March 2020, effectively forgiving the franchisee royalty payments that otherwise would have been due during the suspension period. The Company reinstated the requirement that franchisees make royalty payments during the second quarter of 2020, but there can be no assurance that the Company will not implement another suspension or a deferral of franchisee royalty payments in future periods, such as, for example, in response to our franchisees experiencing financial difficulty due to a resurgence of COVID-19 cases.
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 4 of these condensed consolidated financial statements for additional discussion of the Company's franchise-related guarantee obligation.
9


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest and Fees on Loans Receivable
Vive 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 Vive may renew if the cardholder remains in good standing.
Vive 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 Vive's direct origination costs. The merchant fee discount and origination costs are presented net on the condensed consolidated balance sheets 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 (i.e. Vive) 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 presented net on the condensed consolidated balance sheets in loans receivable.
The customer is typically required to make monthly minimum payments of at least 3.5% of the outstanding loan balance, which includes outstanding interest. Fixed and variable interest rates, typically 27% to 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 when earned if collectibility is reasonably assured. For credit cards that provide deferred 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 if collectibility is reasonably assured.
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 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 collectibility is reasonably assured. Annual fees and other fees discussed are recognized as interest and fee revenue on loans receivable in the condensed consolidated statements of 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 franchisee obligations.
Accounts receivable, net of allowances, consist of the following: 
(In Thousands) June 30, 2020 December 31, 2019
Customers $ 57,134    $ 76,819   
Corporate 12,141    14,109   
Franchisee 10,658    13,231   
Accounts Receivable $ 79,933    $ 104,159   
The Company maintains an accounts receivable allowance, which primarily relates to its Progressive Leasing operations and, to a lesser extent, its Aaron's Business operations. The Company’s policy for both its Progressive Leasing and Aaron's Business segments is to record an allowance for returns and uncollectible renewal payments based on historical collection experience.
10


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other qualitative factors are considered in estimating the allowance, such as current and forecasted business trends including, but not limited to, the anticipated unfavorable impacts of the COVID-19 pandemic on our businesses. The provision for returns and uncollectible renewal payments for both the Progressive Leasing and Aaron's Business segments is recognized as a reduction of lease revenues and fees within the condensed consolidated statements of earnings. The Progressive Leasing segment writes off lease receivables that are 120 days or more contractually past due. Aaron's Business writes off lease receivables that are 60 days or more past due.
The Company also maintains an allowance for outstanding franchisee accounts receivable. The Company's policy is to estimate a specific allowance on accounts receivable to estimate future losses related to certain franchisees that are deemed higher risk of non-payment and a general allowance based on historical losses as well as the Company's assessment of the financial health of all other franchisees. The estimated allowance on accounts receivable in the current quarter includes consideration of broad macroeconomic trends, such as the unfavorable impacts of the COVID-19 pandemic on the franchisees' ability to satisfy their obligations. The provision for uncollectible franchisee accounts receivable is recorded as bad debt expense in operating expenses within the condensed consolidated statements of earnings.
Vive'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.
Given the significant uncertainty regarding the impacts of the COVID-19 pandemic on our businesses, a high level of estimation was involved in determining the allowance for accounts receivable as of June 30, 2020; therefore, actual accounts receivable write-offs could differ materially from the allowance.
The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments:
Six Months Ended June 30,
(In Thousands) 2020 2019
Bad Debt Expense1
$ 1,016    $ 1,166   
Provision for Returns and Uncollectible Renewal Payments 157,571    136,445   
Accounts Receivable Provision $ 158,587    $ 137,611   
1 Bad debt expense is recorded within operating expenses in the condensed consolidated financial statements.
Lease Merchandise
The Company's lease merchandise consists primarily of furniture, appliances, electronics, jewelry and a variety of other products and is recorded at the lower of 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's Progressive Leasing segment, at which substantially all merchandise is on lease, depreciates merchandise to a 0% salvage value generally over 12 months. The Company's Aaron's Business segment begins depreciating merchandise at the earlier of 12 months and one day from purchase or when the item is 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. Depreciation is accelerated upon the early payout of a lease.
The following is a summary of lease merchandise, net of accumulated depreciation and allowances:
(In Thousands) June 30, 2020 December 31, 2019
Merchandise on Lease, net of Accumulated Depreciation and Allowances $ 969,364    $ 1,156,798   
Merchandise Not on Lease, net of Accumulated Depreciation and Allowances 150,276    276,619   
Lease Merchandise, net of Accumulated Depreciation and Allowances $ 1,119,640    $ 1,433,417   
The Company's policies require weekly merchandise counts at its Aaron's Business 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 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.
11


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company records a provision for write-offs on the allowance method, which primarily relates to its Progressive Leasing operations and, to a lesser extent, its Aaron's Business operations. 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 current and forecasted business trends including, but not limited to, the anticipated unfavorable impacts of the COVID-19 pandemic on our businesses. Given the significant uncertainty regarding the impacts of the COVID-19 pandemic on our businesses, a high level of estimation was involved in determining the allowance as of June 30, 2020; therefore, actual lease merchandise write-offs could differ materially from the allowance. 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, which is included within lease merchandise, net within the condensed consolidated balance sheets:
Six Months Ended June 30,
(In Thousands) 2020 2019
Beginning Balance $ 61,185    $ 46,694   
Merchandise Written off, net of Recoveries (119,221)   (105,571)  
Provision for Write-offs 130,039    117,994   
Ending Balance $ 72,003    $ 59,117   
Loans Receivable, Net
Gross loans receivable represents the principal balances of credit card charges at Vive's participating merchants that remain due from cardholders, plus unpaid interest and fees due from cardholders. The allowance and unamortized fees represent an allowance for uncollectible amounts; merchant fee discounts, net of capitalized origination costs; promotional fee discounts; and deferred annual card fees.
Economic conditions and loan performance trends are closely monitored to manage and evaluate exposure to credit risk. Trends in delinquency rates 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 current and projected unemployment rates, stock market volatility, and changes in medium and long-term risk-free rates, which are considered in determining the allowance for loan losses and can have a material effect on credit performance.
Effective January 1, 2020 with the adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL") as discussed within "Recent Accounting Pronouncements" in Note 1 to these condensed consolidated financial statements, expected lifetime losses on loans receivable are recognized upon loan origination, which requires the Company to make its best estimate of probable lifetime losses at the time of origination. Our credit card loans do not have contractually stated maturity dates, which requires the Company to estimate an average life of loan by analyzing historical payment trends to determine an expected remaining life of the loan balance. The Company segments its loans receivable portfolio into homogenous pools by FICO score and by delinquency status and evaluates loans receivable collectively for impairment when similar risk characteristics exist.
12


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company calculates the allowance for loan losses based on internal historical loss information and incorporates observable and forecasted macroeconomic data over a twelve-month reasonable and supportable forecast period. Incorporating macroeconomic data could have a material impact on the measurement of the allowance to the extent that forecasted data changes significantly, such as higher forecasted unemployment rates and the observed significant market volatility associated with the COVID-19 pandemic. For any periods beyond the twelve-month reasonable and supportable forecast period described above, the Company reverts to using historical loss information on a straight-line basis over a period of six months and utilizes historical loss information for the remaining life of the portfolio. The Company may also consider other qualitative factors in estimating the allowance, as necessary. For the purposes of determining the allowance as of June 30, 2020, management considered other qualitative factors such as the beneficial impact of recent government stimulus measures to our customer base that were not fully factored into the macroeconomic forecasted data. We believe those stimulus measures may have contributed to the recent favorable cardholder payment trends we are experiencing. We also considered the uncertain nature and extent of any future government stimulus programs and the potential impact, if any, these programs may have on the ability of Vive's cardholders to make payments as they come due. The allowance for loan losses is maintained at a level considered appropriate to cover expected future losses of principal, interest and fees on active loans in the loans receivable portfolio. The appropriateness of the allowance is evaluated at each period end. To the extent that actual results differ from estimates of uncollectible loans receivable, including the significant uncertainties caused by the COVID-19 pandemic, the Company's results of operations and liquidity could be materially affected.
Delinquent loans receivable includes those that are 30 days or more past due based on their contractual billing dates. In response to the COVID-19 pandemic, the Company has granted affected customers payment deferrals while allowing them to maintain their delinquency status for an additional 30 days per deferral. 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 no later than the end of the following month after the billing cycle in which the loans receivable become 120 days past due.
Vive 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 June 30, 2020 and December 31, 2019 by Fair Isaac and Company (FICO) score as determined at the time of loan origination:
FICO Score Category June 30, 2020 December 31, 2019
600 or Less 7.5  % 6.7  %
Between 600 and 700 79.8  % 80.1  %
700 or Greater 12.7  % 13.2  %
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
(In Thousands) June 30, 2020 December 31, 2019
Prepaid Expenses $ 49,134    $ 45,034   
Prepaid Insurance 29,086    26,393   
Assets Held for Sale 9,193    10,131   
Deferred Tax Asset 826    826   
Other Assets 25,681    31,887   
Prepaid Expenses and Other Assets $ 113,920    $ 114,271   
Assets Held for Sale
Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of June 30, 2020 and December 31, 2019. 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.
13


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying amount of the properties held for sale as of June 30, 2020 and December 31, 2019 is $9.2 million and $10.1 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) June 30, 2020 December 31, 2019
Accounts Payable $ 56,680    $ 89,959   
Accrued Insurance Costs 54,314    44,032   
Accrued Salaries and Benefits 53,636    43,972   
Accrued Real Estate and Sales Taxes 34,394    32,763   
Other Accrued Expenses and Liabilities 50,158    62,090   
Accounts Payable and Accrued Expenses $ 249,182    $ 272,816   
Debt
During the first quarter of 2020, the Company temporarily borrowed $300.0 million from its revolving credit facility to preserve and protect its cash position in light of the COVID-19 pandemic. This amount was subsequently repaid on April 30, 2020. The total available credit under our revolving credit facility as of June 30, 2020 was $486.2 million.
At June 30, 2020, the Company was in compliance with all covenants related to its outstanding debt. However, given the uncertainties associated with the COVID-19 pandemic's impact on our operations and financial performance in future periods, there can be no assurances that we will not be required to seek amendments or modifications to one or more of the covenants in our debt agreements and/or waivers of potential or actual defaults of those covenants. See Note 8 to the consolidated financial statements in the 2019 Annual Report for further information regarding the Company's indebtedness.
Leases
In response to the adverse impacts of the COVID-19 pandemic on the Aaron's Business, the Company negotiated lease concessions for approximately 175 of our Company-operated Aaron's store locations and received near-term rent abatements and deferrals of approximately $1.8 million as of June 30, 2020. On April 10, 2020, the Financial Accounting Standards Board ("FASB") issued guidance for lease concessions executed in response to the COVID-19 pandemic, which provides a practical expedient to forego an evaluation of whether a lease concession should be accounted for as a modification if the concession does not result in a substantial increase of the lessee's obligations. The Company has elected to apply this guidance to all lease concessions negotiated as a result of the COVID-19 pandemic that meet these criteria.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net tangible and intangible assets acquired in connection with business acquisitions. The following table provides information related to the carrying amount of goodwill by operating segment.
(In Thousands) Progressive Leasing Aaron’s Business Total
Balance at December 31, 2019 $ 288,801    $ 447,781    $ 736,582   
Acquisition Accounting Adjustments —    53    53   
Disposals, Currency Translation and Other Adjustments —    (941)   (941)  
Impairment Loss —    (446,893)   (446,893)  
Balance at June 30, 2020 $ 288,801    $ —    $ 288,801   
14


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 one or more reporting units exceeds the reporting units' fair value. The Company concluded that the need for an interim goodwill impairment test was triggered for the Aaron's Business segment as of March 31, 2020. Factors that led to this conclusion included: (i) a significant decline in the Company's stock price and market capitalization in March 2020; (ii) the temporary closure of all Company-operated store showrooms due to the COVID-19 pandemic, which adversely impacted our financial results and was expected to adversely impact future financial results; (iii) the significant uncertainty with regard to the short-term and long-term impacts that adverse macroeconomic conditions arising from the COVID-19 pandemic and related government emergency and executive orders would have on the financial health of our customers and franchisees; and (iv) consideration given to the amount by which the Aaron's Business fair value exceeded the carrying value from the October 1, 2019 annual goodwill impairment test.
As of March 31, 2020, the Company determined the Aaron's Business goodwill was fully impaired and recorded a goodwill impairment loss of $446.9 million during the three months ended March 31, 2020. The Company engaged the assistance of a third-party valuation firm to perform the interim goodwill impairment test for the Aaron’s Business reporting unit. This entailed an assessment of the Aaron's Business reporting unit’s fair value relative to the carrying value that was derived using a combination of both income and market approaches and performing a market capitalization reconciliation which included an assessment of the control premium implied from the Company's estimated fair values of its reporting units. The fair value measurement involved significant unobservable inputs (Level 3 inputs, as discussed more fully below). The income approach utilized the discounted future expected cash flows, which required assumptions about short-term and long-term revenue growth or decline rates, operating margins, capital requirements, and a weighted-average cost of capital. The income approach reflects assumptions and estimates made by management regarding direct and indirect impacts of the COVID-19 pandemic on the short-term and long-term cash flows for the Aaron's Business reporting unit. Due to the significant uncertainty associated with the impacts of the COVID-19 pandemic, the assumptions and estimates used by management were highly subjective. The weighted-average cost of capital used in the income approach was adjusted to reflect the specific risks and uncertainties associated with the COVID-19 pandemic in developing the cash flow projections. Given the uncertainty discussed above, the Company performed certain sensitivity analyses including considering reasonably possible alternative assumptions for short-term and long-term growth or decline rates, operating margins, capital requirements, and weighted-average cost of capital rates. Each of the sensitivity analyses performed supported the conclusion of a full impairment of the Aaron's Business goodwill.
The market approach, which includes the guideline public company method, utilized pricing multiples derived from an analysis of comparable publicly traded companies. We believe the comparable companies we evaluate as marketplace participants serve as an appropriate reference when calculating fair value because those companies have similar risks, participate in similar markets, provide similar products and services for their customers and compete with us directly. However, we considered that such publicly available information regarding the comparable companies evaluated likely does not reflect the impact of the COVID-19 pandemic in determining the multiple assumptions selected.
As of October 1, 2019, the Company performed a qualitative assessment for the goodwill of the Progressive Leasing reporting unit and concluded no indications of impairment existed. As of March 31, 2020, the Company performed certain qualitative and quantitative procedures to estimate the Progressive Leasing's reporting unit fair value, primarily for purposes of reconciling the estimated fair values of the Company's reporting units to the Company's overall market capitalization, and concluded that a quantitative assessment was not necessary at that time. Subsequent to these procedures, the Company's overall market capitalization significantly increased during the second quarter of 2020 and nearly all of Progressive Leasing's merchant partners have reopened most or all of their physical store locations. As a result, the Company concluded that it is not more likely than not that the fair value of the Progressive Leasing reporting unit is below its carrying amount based on the significance of Progressive Leasing's estimated fair value in excess of carrying value.
15


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stockholders' Equity
Changes in stockholders' equity for the six months ended June 30, 2020 and 2019 are as follows:
  Treasury Stock Common Stock Additional
Paid-in Capital
Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity
(In Thousands, Except Per Share) Shares Amount
Balance, December 31, 2019 (24,034)   $ (627,940)   $ 45,376    $ 290,229    $ 2,029,613    $ (19)   $ 1,737,259   
Opening Balance Sheet Adjustment - ASU 2016-13, net of taxes
—    —    —    —    (6,715)   —    (6,715)  
Cash Dividends, $0.04 per share
—    —    —    —    (2,700)   —    (2,700)  
Stock-Based Compensation —    —    —    5,878    —    —    5,878   
Reissued Shares 368    7,291    —    (12,640)   —    —    (5,349)  
Net Loss —    —    —    —    (280,005)   —    (280,005)  
Foreign Currency Translation Adjustment —    —    —    —    —    (1,754)   (1,754)  
Balance, March 31, 2020 (23,666)   $ (620,649)   $ 45,376    $ 283,467    $ 1,740,193    $ (1,773)   $ 1,446,614   
Cash Dividends, $0.04 per share
—    —    —    —    (2,701)   —    (2,701)  
Stock-Based Compensation —    —    —    6,856    —    —    6,856   
Reissued Shares 53    1,392    —    330    —    —    1,722   
Repurchased Shares —    —    —    —    —    —    —   
Net Earnings —    —    —    —    68,377    —    68,377   
Foreign Currency Translation Adjustment —    —    —    —    —    331    331   
Balance, June 30, 2020 (23,613)   $ (619,257)   $ 45,376    $ 290,653    $ 1,805,869    $ (1,442)   $ 1,521,199   
  Treasury Stock Common Stock Additional
Paid-in Capital
Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity
(In Thousands, Except Per Share) Shares Amount
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   
16


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 plan participants 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 Company maintains certain financial assets and liabilities, including fixed-rate long term debt, that are not measured at fair value but for which fair value is disclosed. As discussed above, the Company performed an interim goodwill impairment analysis for the Aaron's Business which required multiple Level 3 inputs and assumptions, such as estimates about costs of capital, future projected performance and cash flows.
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 of loans receivable and any revolving credit borrowings also approximate their carrying amounts.
Recent Accounting Pronouncements
Adopted
Intangibles - Goodwill and Other. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to measure an impairment of goodwill, if any, by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. In accordance with the amendment, entities should perform the annual goodwill impairment test by comparing the carrying value of their reporting units to their fair value. If the carrying value of the reporting unit exceeds the fair value, an entity should record an impairment charge for the amount by which its carrying amount exceeds its reporting unit’s fair value; however, the charge recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted the amendment in the first quarter of 2020 and recorded a $446.9 million impairment charge, representing a full impairment of the goodwill within the Aaron's Business reporting unit.
Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. 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 are required to use a new forward-looking "expected losses" model that generally results in the recognition of allowances for losses earlier than under previous accounting guidance. The Company's operating lease activities within Progressive Leasing and Aaron's Business are not impacted by ASU 2016-13, as operating lease receivables are not in the scope of the CECL model. The implementation of CECL also did not have a material impact to the Company's Progressive Leasing or Aaron's Business segments. The Company is impacted by ASU 2016-13 within its Vive segment by requiring earlier recognition of estimated credit losses in the consolidated statements of earnings. Although the CECL model requires the estimated credit losses to be recognized at the time of loan origination, the related merchant fee discount continues 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 CECL model results in higher losses 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 and fee revenue, and as interest revenue is accrued and earned on the outstanding loan. Although the CECL model results in earlier recognition of credit losses in the statements of earnings, the adoption of CECL results in no changes related to the loan's cash flows or the fundamental economics of the business.
17


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company adopted ASU 2016-13 on a modified retrospective basis during the first quarter of 2020, which required a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The application of this transition method resulted in a cumulative-effect non-cash adjustment of $6.7 million, representing a decrease to the Company's January 1, 2020 retained earnings balance, net of tax. This was due primarily to the recognition of a $9.5 million increase to the allowance for loan losses as a result of the new CECL model. The Company has finalized its CECL controls and accounting policies, which were in place as of January 1, 2020.
NOTE 2. 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) June 30, 2020 December 31, 2019
  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Deferred Compensation Liability $ —    $ (10,657)   $ —    $ —    $ (11,201)   $ —   
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 represents benefits accrued for plan participants and 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) June 30, 2020 December 31, 2019
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets Held for Sale $ —    $ 9,193    $ —    $ —    $ 10,131    $ —   
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, net or restructuring expenses, net (if the asset is a part of the Company's restructuring programs as described in Note 6) 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.
Certain Financial Assets and Liabilities Not Measured at Fair Value
The following table summarizes the fair value of liabilities that are not measured at fair value in the condensed consolidated balance sheets, but for which the fair value is disclosed: 
(In Thousands) June 30, 2020 December 31, 2019
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Fixed-Rate Long Term Debt1
$ —    $ (62,431)   $ —    $ —    $ (123,705)   $ —   
1 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 $60.0 million and $120.0 million at June 30, 2020 and December 31, 2019, respectively.
18


AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. LOANS RECEIVABLE
The following is a summary of the Company’s loans receivable, net:
(In Thousands) June 30, 2020 December 31, 2019
Loans Receivable, Gross $ 96,519    $ 96,387   
   Unamortized Fees (6,956)   (6,223)  
Loans Receivable, Amortized Cost 89,563    90,164   
   Allowance for Loan Losses (30,693)   (14,911)  
Loans Receivable, Net of Allowances and Unamortized Fees $ 58,870    $ 75,253   
The table below presents credit quality indicators of the amortized cost of the Company's loans receivable by origination year:
(In Thousands)
As of June 30, 2020 2020 2019 2018 2017 2016 Prior Total
FICO Score Category:
600 or Less $ 3,237    $ 2,781    $ 840    $ 130    $ 86    $ 16    $ 7,090   
Between 600 and 700 24,541    25,584    10,656    6,042    3,485    962    71,270   
700 or Greater 4,248    3,078    1,604    1,123    929    221    11,203   
Total Amortized Cost $ 32,026    $ 31,443    $ 13,100    $ 7,295    $ 4,500    $ 1,199    $ 89,563   
Included in the table below is an aging of the loans receivable, gross balance:
(Dollar Amounts in Thousands)
Aging Category1
June 30, 2020 December 31, 2019
30-59 days past due 5.1  % 6.9  %
60-89 days past due 2.5  % 3.6  %
90 or more days past due 3.6  % 5.0  %
Past due loans receivable 11.2  % 15.5  %
Current loans receivable 88.8  % 84.5  %
Balance of Credit Card Loans on Nonaccrual Status $ 2,038    $ 2,284   
Balance of Loans Receivable 90 or More Days Past Due and Still Accruing Interest and Fees $ —    $ —   
1 Customers that were granted a payment deferral due to factors caused by the COVID-19 pandemic maintained their delinquency status for an additional 30 days. This did not materially impact the aging disclosed above.
19


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 six months ended June 30, 2020 and 2019:
Three Months Ended June 30,
(In Thousands) 2020 2019
Beginning Balance $ 31,594    $ 12,363   
Provision for Loan Losses 3,428    4,968   
Charge-offs (5,132)   (5,158)  
Recoveries 803    610   
Ending Balance $ 30,693    $ 12,783   
Six Months Ended June 30,
(In Thousands) 2020 2019
Beginning Balance $ 14,911    $ 12,970   
CECL Transition Adjustment1
9,463    —   
Provision for Loan Losses 16,150    9,223   
Charge-offs (11,333)   (10,642)  
Recoveries 1,502    1,232   
Ending Balance $ 30,693    $ 12,783   
1 Upon the January 1, 2020 adoption of CECL as further described in Note 1 to these condensed consolidated financial statements, the Company increased its allowance for loan losses by $9.5 million, which was recorded as a cumulative-effect adjustment to the opening balance of the Company's 2020 retained earnings adjustment.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has guaranteed certain debt obligations of some of the Aaron's Business franchisees under a franchise loan program with one of the banks in our Credit Agreement. 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 franchise loan program, which would be due in full within 90 days of the event of default. At June 30, 2020, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was $19.5 million, and the total facility commitment was $25.0 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 franchise loan program in 1994, the Company's losses associated with the program have been immaterial, but could be material in a future period due to the COVID-19 pandemic's impact on franchisee operations and financial performance or other adverse trends in the liquidity and/or financial performance of the Company's franchisees. The Company records a liability related to estimated future losses from repaying the franchisees' outstanding debt obligations upon any possible future events of default. This is included in accounts payable and accrued expenses in the condensed consolidated balance sheets and was $2.4 million and $0.4 million as of June 30, 2020 and December 31, 2019, respectively.
The Company is subject to financial covenants under the franchise loan program that are consistent with the Revolving Credit and Term Loan Agreement, which are more fully described in Note 8 to the consolidated financial statements in the 2019 Annual Report. The Company is in compliance with all covenants at June 30, 2020 and believes it will continue to be in compliance in the future. However, given the uncertainties associated with the COVID-19 pandemic's impact on our operations and financial performance in future periods, there can be no assurances that we will not be required to seek amendments or modifications to one or more of the covenants in our debt agreements and/or waivers of potential or actual defaults of those covenants.
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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.
The Company accrued $3.2 million and $182.9 million as of June 30, 2020 and December 31, 2019, 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. The accrual at December 31, 2019 included a $175.0 million settlement with the Federal Trade Commission (the "FTC") discussed in more detail below, which was recorded as accrued regulatory expense in the consolidated balance sheet. The Company records the other legal and regulatory liabilities in accounts payable and accrued expenses in the condensed consolidated balance sheet. As of June 30, 2020, the Company has a receivable of $1.3 million for anticipated insurance proceeds on outstanding and settled legal matters which 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 as of June 30, 2020.
At June 30, 2020, 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 $0 and $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.
Regulatory Inquiries
In July 2018, the Company received civil investigative demands ("CIDs") from the FTC regarding disclosures related to lease-to-own and other financial products offered by the Company through the Aaron's Business and Progressive Leasing and whether such disclosures violate the Federal Trade Commission Act (the "FTC Act"). Although we believe such disclosures were in compliance with the FTC Act and have not admitted to any wrongdoing, in December 2019, Progressive Leasing reached an agreement in principle with the staff of the FTC with respect to a tentative settlement to resolve the FTC inquiry, pursuant to which Progressive would pay $175.0 million to the FTC. Because Progressive reached a tentative agreement with respect to the financial terms of the settlement in December 2019, the Company recognized a charge of $179.3 million during the fourth quarter of 2019, including $4.3 million of incurred legal fees. In January 2020, Progressive and the FTC staff agreed in principle on the terms of a related consent order which, among other matters, requires Progressive to undertake certain compliance-related activities, including monitoring, disclosure and reporting requirements. The proposed consent order was approved by the FTC on April 17, 2020 and approved by the United States District Court for the Northern District of Georgia on April 22, 2020. The Company paid the $175.0 million settlement amount to the FTC on April 27, 2020.
In April 2019, the Aaron’s Business, along with other lease-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements with other lease-to-own companies, and whether such transactions violated the FTC Act. Although we believe those transactions did not violate any laws and we have not admitted any wrongdoing, in August 2019, the Company reached an agreement in principle with the FTC staff to resolve the issues raised in that CID. The proposed consent agreement, which would prohibit such contingent purchases and sales of customer lease portfolios in the future but would not require any payments to the FTC, was approved by the FTC on February 21, 2020.
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AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Litigation Matters
In Stein v. Aaron's, Inc., et. al., filed in the United States District Court for the Southern District of New York on February 28, 2020, the plaintiffs allege that from March 2, 2018 through February 19, 2020, Aaron's made certain misleading public statements about the Company's business, operations, and prospects. The allegations underlying the lawsuit principally relate to the Federal Trade Commission's inquiry into disclosures related to lease-to-own and other financial products offered by the Company through the Aaron's Business and Progressive Leasing segments. The Company believes the claims are without merit and intends to vigorously defend against this lawsuit. The case has been transferred to the United States District Court for the Northern District of Georgia, where the Company intends to file a motion to dismiss the case.
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 Vive business, had unconditionally cancellable unfunded lending commitments totaling approximately $224.7 million and $225.0 million as of June 30, 2020 and December 31, 2019, 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 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.
Prior to the January 1, 2020 adoption of CECL as discussed further in Note 1, the Company recorded a reserve for losses on unfunded loan commitments, which was approximately $0.4 million as of December 31, 2019 and was included in accounts payable and accrued expenses in the consolidated balance sheet. Upon the adoption of CECL, the Company reversed the aforementioned reserve for losses on unfunded loan commitments and recorded a corresponding increase of $0.4 million to its January 1, 2020 retained earnings balance.
NOTE 5. SEGMENTS
As of June 30, 2020, the Company has three operating and reportable segments: Progressive Leasing, Aaron's Business and Vive.
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, mobile phones and accessories, mattresses, and automobile electronics and accessories.
The Aaron's Business offers furniture, home appliances, consumer electronics and accessories to consumers through a lease-to-own agreement through the Company's Aaron's-branded stores in the United States and Canada and e-commerce platform. 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 bedding and a significant portion of the upholstered furniture leased and sold in Company-operated and franchised stores.
Vive offers a variety of second-look financing programs originated through 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.
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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 June 30, 2020:
Three Months Ended June 30, 2020
(In Thousands) Progressive Leasing Aaron's Business Vive Total
Lease Revenues and Fees1
$ 589,749    $ 380,238    $ —    $ 969,987   
Retail Sales2
—    14,020    —    14,020   
Non-Retail Sales2
—    33,044    —    33,044   
Franchise Royalties and Fees2
—    3,365    —    3,365   
Interest and Fees on Loans Receivable3
—    —    9,414    9,414   
Other —    289    —    289   
Total $ 589,749    $ 430,956    $ 9,414    $ 1,030,119   
1 Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $6.8 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.
Substantially all retail sales, non-retail sales and franchise royalties and fees are within the scope of ASC 606, Revenue from Contracts with Customers.
3 All interest and fees on loans receivable are within the scope of ASC 310, Credit Card Interest & Fees.
The following table presents revenue by source and by segment for the three months ended June 30, 2019:
Three Months Ended June 30, 2019
(In Thousands) Progressive Leasing Aaron's Business Vive Total
Lease Revenues and Fees1
$ 516,333    $ 391,232    $ —    $ 907,565   
Retail Sales2
—    8,898    —    8,898   
Non-Retail Sales2
—    34,124    —    34,124   
Franchise Royalties and Fees2
—    8,605    —    8,605   
Interest and Fees on Loans Receivable3
—    —    8,610    8,610   
Other —    339    —    339   
Total $ 516,333    $ 443,198    $ 8,610    $ 968,141   
1 Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $6.9 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.
2 Substantially all retail sales, non-retail sales and franchise royalties and fees are within the scope of ASC 606, Revenue from Contracts with Customers.
3 All interest and fees on loans receivable are within the scope of ASC 310, Credit Card Interest & Fees.
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AARON'S, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents revenue by source and by segment for the six months ended June 30, 2020:
Six Months Ended June 30, 2020
(In Thousands) Progressive Leasing Aaron's Business Vive Total
Lease Revenues and Fees1
$ 1,248,283    $ 769,617    $ —    $ 2,017,900   
Retail Sales2
—    23,551    —    23,551   
Non-Retail Sales2
—    59,890    —    59,890   
Franchise Royalties and Fees2
—    10,089    —    10,089   
Interest and Fees on Loans Receivable3
—    —    19,322    19,322   
Other —    641    —    641   
Total $ 1,248,283    $ 863,788    $ 19,322    $ 2,131,393   
1 Substantially all lease revenues and fees are within the scope of ASC 842, Leases. The Company had $13.5 million of other revenue within the scope of ASC 606, Revenue from Contracts with Customers.
Substantially all retail sales, non-retail sales and franchise royalties and fees are within the scope of ASC 606, Revenue from Contracts with Customers.
3 All interest and fees on loans receivable are within the scope of ASC 310, Credit Card Interest & Fees.
The following table presents revenue by source and by segment for the six months ended June 30, 2019:
Six Months Ended June 30, 2019
(In Thousands) Progressive Leasing Aaron's Business Vive Total
Lease Revenues and Fees1
$