PROG (US:PRG)2024-02-20 16:00Part I Business PROG Holdings, Inc. is a financial technology holding company primarily focused on lease-to-own solutions through Progressive Leasing, operating in a highly regulated and competitive market with a strategy to grow GMV and enhance customer experience - PROG Holdings is a financial technology holding company whose primary operating segment, Progressive Leasing, provides lease-to-own solutions and constituted approximately 97% of consolidated revenues for the year ended December 31, 20231620 - The company's strategy is centered on three pillars: growing Gross Merchandise Volume (GMV) through new and existing partners, enhancing the consumer experience via technology investment, and expanding its financial product ecosystem through R&D and strategic acquisitions22 Progressive Leasing POS Partner Merchandise Category Revenue Mix | Merchandise Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Furniture, Appliances and Electronics | 58% | 57% | 57% | | Jewelry | 15% | 17% | 17% | | Mobile Phones and Accessories | 15% | 14% | 12% | | Mattresses | 6% | 6% | 7% | | Automobile Electronics and Accessories | 3% | 3% | 4% | | Other | 3% | 3% | 3% | - During 2023, three Point-of-Sale (POS) partners each individually generated greater than 10% of the company's consolidated revenues, indicating significant partner concentration33 - The business is subject to extensive federal and state regulation, including a 2020 settlement with the FTC for $175 million and ongoing scrutiny from the CFPB and state attorneys general5152 Risk Factors The company faces substantial risks from extensive regulation, macroeconomic conditions, reliance on subprime consumers, partner concentration, cybersecurity threats, and indebtedness - The company's businesses are subject to extensive federal, state, and local laws, which can lead to government investigations, significant monetary penalties, and costly changes to operations, including a $175 million settlement with the FTC in 2020 and increased scrutiny from the CFPB57 - A large percentage of revenue is concentrated with a few key POS partners, with 51.3% of consolidated revenues coming from the top three and 78.6% from the top ten in 2023, making the loss of any key partner materially adverse to performance72 - Macroeconomic conditions such as inflation and elevated interest rates adversely affect consumer confidence and their ability to make payments, potentially leading to increased delinquencies and write-offs6768 - The company's ability to protect sensitive customer information is critical, as highlighted by a cybersecurity incident at Progressive Leasing in September 2023, which can result in significant costs, litigation, and reputational damage8285 - The terms of the company's indebtedness, including a Revolving Facility and Senior Notes, contain restrictive covenants that may limit its ability to respond to changes or take certain actions, such as incurring more debt or paying dividends150151 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments from the SEC171 Cybersecurity The company's cybersecurity program, based on NIST framework and overseen by the Board, experienced an incident in September 2023 affecting customer data - The company's cybersecurity program is based on the NIST Cybersecurity Framework and includes measures like audits, penetration tests, and vendor risk management172173 - Oversight is provided by the Board of Directors, the Audit Committee, and an internal Enterprise Information Security Committee, with the program led by a Chief Information Security Officer with over twenty years of experience174175 - Progressive Leasing experienced a cybersecurity incident in September 2023, which affected certain systems and involved personally identifiable information of customers176 Properties The company leases corporate facilities in Utah and Arizona, with plans to reduce Utah office space by 50% and vacate the Arizona office in Q1 2024 - The company leases its primary corporate facilities in Draper, Utah, and Glendale, Arizona177 - In Q1 2024, the company plans to reduce its Utah office space by 50% and vacate its Arizona office space as part of restructuring actions177 Legal Proceedings The company is involved in various legal proceedings but does not anticipate a material adverse impact on its financial position or operations - The company is involved in various legal proceedings but does not expect them to have a material adverse impact on its business, financial position, or results of operations178 Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable179 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE, with recent share repurchases and a reauthorized $500 million program, alongside a declared quarterly dividend of $0.12 per share - On February 21, 2024, the Board of Directors declared a quarterly cash dividend of $0.12 per share183 Share Repurchases for Q4 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2023 | 200,000 | $27.75 | | November 2023 | 683,913 | $28.16 | | December 2023 | 220,000 | $29.48 | | Total | 1,103,913 | | - As of December 31, 2023, $197.7 million remained available under the share repurchase program, and on February 21, 2024, the Board reauthorized the program for up to $500 million over three years184 Management's Discussion and Analysis of Financial Condition and Results of Operations The company navigated a challenging macroeconomic environment in 2023, with revenues decreasing to $2.41 billion but net earnings increasing to $138.8 million due to improved portfolio performance and cost controls Business Overview and Macroeconomic Environment Operating in a challenging macroeconomic environment, the company implemented cost reductions, while a September 2023 cybersecurity incident incurred $2.8 million in related costs - The company faces a challenging macroeconomic environment where inflation has negatively impacted consumer demand and lease portfolio performance, prompting cost reduction initiatives195 - In response to rising delinquencies in 2022, Progressive Leasing tightened its lease decisioning, which adversely impacted GMV in 2022 and 2023 but improved portfolio performance to pre-pandemic levels196197 - A September 2023 cybersecurity incident at Progressive Leasing compromised personally identifiable information, leading to multiple lawsuits and $2.8 million in related costs for the year ended December 31, 2023198199201 Key Operating Metrics Total GMV decreased to $2.04 billion in 2023, primarily due to declines at Progressive Leasing and Vive, partially offset by 67.2% growth in the 'Other' segment Gross Merchandise Volume (GMV) by Segment (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Progressive Leasing | $1,796,647 | $1,976,794 | $2,143,948 | | Vive | $143,541 | $178,002 | $199,139 | | Other | $101,099 | $60,459 | $8,651 | | Total GMV | $2,041,287 | $2,215,255 | $2,351,738 | Active Customer Count by Segment (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Progressive Leasing | 893 | 943 | 1,044 | | Vive | 86 | 92 | 88 | | Other | 113 | 39 | 18 | Results of Operations – Years Ended December 31, 2023 and 2022 In 2023, total revenues decreased by 7.3% to $2.41 billion, but operating profit increased by 21.5% to $225.6 million and net earnings grew by 40.7% to $138.8 million, driven by lower write-offs and no goodwill impairment Consolidated Results of Operations (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,408,264 | $2,597,826 | $(189,562) | (7.3)% | | Operating Profit | $225,627 | $185,645 | $39,982 | 21.5% | | Net Earnings | $138,838 | $98,709 | $40,129 | 40.7% | - Progressive Leasing's revenues decreased due to a smaller lease portfolio resulting from lower GMV and tightened decisioning, partially offset by improved customer payment activity213 - Personnel costs decreased by $7.0 million due to workforce reductions at Progressive Leasing in late 2022; however, stock-based compensation increased by $7.4 million, and professional services expense rose by $4.1 million, partly due to costs from the cybersecurity incident215216217 - The provision for lease merchandise write-offs as a percentage of lease revenues decreased to 6.7% in 2023 from 7.7% in 2022, reflecting improved customer payment activity and the impact of tighter lease decisioning220 Results of Operations – Years Ended December 31, 2022 and 2021 In 2022, total revenues decreased by 3.0% to $2.60 billion, while operating profit declined 44.3% to $185.6 million and net earnings fell 59.5% to $98.7 million, primarily due to increased write-offs, a goodwill impairment, and higher interest expense Consolidated Results of Operations (2022 vs. 2021, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,597,826 | $2,677,920 | $(80,094) | (3.0)% | | Operating Profit | $185,645 | $333,527 | $(147,882) | (44.3)% | | Net Earnings | $98,709 | $243,557 | $(144,848) | (59.5)% | - The provision for lease merchandise write-offs increased by $66.9 million (52.7%) in 2022 due to higher customer payment delinquencies and write-offs compared to the historically strong performance in 2021236 - Operating expenses increased by $53.0 million (13.3%), driven by a $23.6 million increase in the provision for loan losses, $9.0 million in restructuring expenses, and higher personnel and software costs228 - A goodwill impairment loss of $10.2 million was recorded in Q3 2022 related to the Four reporting unit238 - Net interest expense increased by $32.1 million due to the issuance of $600 million in senior unsecured notes in November 2021238 Liquidity and Capital Resources As of December 31, 2023, the company held $155.4 million in cash, generated $204.2 million from operations, and used $141.9 million in financing activities, primarily for share repurchases, while maintaining $350.0 million available on its Revolving Facility Cash Flow Summary (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Cash Provided by Operating Activities | $204.2 | $242.5 | | Cash Used in Investing Activities | $(38.8) | $(53.5) | | Cash Used in Financing Activities | $(141.9) | $(227.2) | - The company repurchased 4,691,274 shares of its common stock for $139.6 million during the year ended December 31, 2023251 - As of December 31, 2023, the company had $600 million in Senior Notes due 2029 and no outstanding balance on its $350 million Revolving Facility254256 Critical Accounting Policies Key accounting policies involve significant estimates for revenue recognition, lease merchandise depreciation and write-offs, and the provision for loan losses, incorporating historical data and macroeconomic forecasts - Lease revenue is recognized on a straight-line basis over the estimated lease term, net of a provision for uncollectible renewal payments267 - The allowance for lease merchandise write-offs is estimated using historical write-off experience and qualitative factors like customer payment trends, with merchandise written off after 120 days past due270 - The allowance for loan losses is calculated based on expected lifetime losses, incorporating historical loss data, a six-month forecast of macroeconomic factors (e.g., unemployment rates), and other qualitative adjustments271272 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk from its variable-rate Revolving Facility, which had no outstanding borrowings as of December 31, 2023, thus mitigating current impact - The company's primary market risk is interest rate risk from its variable-rate Revolving Facility; however, with no outstanding borrowings as of December 31, 2023, there is no current impact from interest rate fluctuations277 Financial Statements and Supplementary Data This section presents the consolidated financial statements, including balance sheets, statements of earnings, shareholders' equity, and cash flows, along with an unqualified audit opinion from Ernst & Young LLP Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, identifying the valuation of allowance for loan losses as a critical audit matter - The independent auditor, Ernst & Young LLP, provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting281290 - The valuation of the allowance for loan losses was identified as a critical audit matter, involving complex and subjective judgments regarding historical loss experience, macroeconomic forecasts, and qualitative factors285286 Consolidated Financial Statements As of December 31, 2023, total assets were $1.491 billion, with total liabilities of $899.9 million, and 2023 net earnings were $138.8 million on revenues of $2.41 billion Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,491,255 | $1,491,909 | | Total Liabilities | $899,924 | $921,448 | | Total Shareholders' Equity | $591,331 | $570,461 | Consolidated Earnings Highlights (in thousands, except per share data) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | $2,408,264 | $2,597,826 | $2,677,920 | | Net Earnings | $138,838 | $98,709 | $243,557 | | Diluted EPS | $2.98 | $1.90 | $3.67 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, the $10.2 million goodwill impairment in 2022, terms of the $600 million Senior Notes, a $46.2 million uncertain tax position related to the $175 million FTC settlement, and ongoing restructuring activities - In Q3 2022, the company recorded a $10.2 million impairment of goodwill for the Four reporting unit due to declines in market multiples of comparable companies in the BNPL industry362384 - The company has $600 million in 6.00% senior unsecured notes due 2029, with their fair value estimated at $559.5 million as of December 31, 2023402403391 - The company has a significant uncertain tax position of $46.2 million related to the deductibility of a $175 million settlement paid to the FTC in 2020421423 - Restructuring activities initiated in 2022 continued in 2023, with charges of $12.5 million recorded in 2023, primarily for early termination of sales agent agreements and severance, and additional charges of $18 to $21 million are expected in Q1 2024442443 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None498 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023499 - There were no changes in internal control over financial reporting during Q4 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting501 Other Information No directors or executive officers adopted, modified, or terminated Rule 10b5-1 trading plans during Q4 2023 - No directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading plans in Q4 2023502 Part III Directors, Executive Officers of the Registrant and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders504 Executive Compensation Executive compensation details are incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders506 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders507 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders508 Principal Accountant Fees and Services Details on principal accountant fees and services are incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement for the 2024 annual meeting of shareholders509 Part IV Exhibits, Financial Statements and Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, with consolidated financial statements located in Item 8 - This section provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K511514 Form 10-K Summary The company has not provided a summary for Form 10-K - None522