ATLANTA - Aaron's, Inc., which leases furniture it manufactures at 14 captive plants, says it set aside $28 million in the past six months for a legal settlement with the California Attorney General.

As a result, net income fell by 26% to $21.1 million for the third quarter despite a 2% rise in sales to  $539.5 million. For the first nine months of the year Aaron's net income dropped to $98 million, down from $136.4 million for period in 2012 - that change impacted by extraordinary income from a legal settlement in the year prior period.

Aaron's reported in an SEC filing that its third quarter pre-tax earnings included an accrual of $13.4 million related to a pending regulatory investigation by the California Attorney General into Aaron's leasing, marketing and privacy practices. 

Another $15 million for the proceedings was set aside last quarter, and $4.9 in charges relating to retirement expense and changed vacation policies also bit into earnings.

Aaron's says its business model has income tax benefits, primarily related to its furniture manufacturing operations, which will give it an effective tax rate of approximately 35.5% in 2013. Its 14 factories, operating under the Woodhaven name, produced $92 million worth of furniture, at cost, for its stores.

Without the exceptional events over the past two years, Aaron's said net earnings for the third quarter of 2013 would have been $30.8 million compared to $35.5 million for the same period in 2012, a 13% decrease. Net earnings for the nine months of 2013 would have been $119.6 million compared to $120.8 million in 2012, and earnings per share assuming dilution would have been $1.56 versus $1.57 last year.

"The third quarter results did not meet our expectations for revenue and customer growth, said Ronald Allen, CEO. "Our low to middle income customers continue to be adversely affected by the present economic environment."

Aaron's had 1,114,000 customers and its franchisees 597,000 at the end of September, with 2,111 stores operating last year.