PROG (PRG) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for PROG Holdings, Inc., including the Balance Sheets, Statements of Earnings (Loss), Statements of Comprehensive Income (Loss), and Statements of Cash Flows for the periods ended March 31, 2021, and December 31, 2020, or March 31, 2021 and 2020. It also includes detailed notes explaining significant accounting policies, discontinued operations, fair value measurements, loans receivable, commitments and contingencies, and segment information Condensed Consolidated Balance Sheets This table presents the company's assets, liabilities, and shareholders' equity as of March 31, 2021, and December 31, 2020 | ASSETS (In Thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Cash and Cash Equivalents | $151,151 | $36,645 | | Accounts Receivable (net) | $53,996 | $61,254 | | Lease Merchandise (net) | $574,581 | $610,263 | | Loans Receivable (net) | $91,368 | $79,148 | | Total Assets | $1,398,798 | $1,317,404 | | LIABILITIES & SHAREHOLDERS' EQUITY: | | | | Accounts Payable and Accrued Expenses | $105,146 | $78,249 | | Deferred Income Tax Liability | $132,467 | $126,938 | | Total Liabilities | $361,842 | $331,268 | | Total Shareholders' Equity | $1,036,956 | $986,136 | | Total Liabilities & Shareholders' Equity | $1,398,798 | $1,317,404 | Condensed Consolidated Statements of Earnings (Loss) This table details the company's revenues, costs, operating profit, and net earnings for the three months ended March 31, 2021 and 2020 | REVENUES (In Thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Lease Revenues and Fees | $707,982 | $658,534 | | Interest and Fees on Loans Receivable | $13,019 | $9,908 | | Total Revenues | $721,001 | $668,442 | | COSTS AND EXPENSES: | | | | Depreciation of Lease Merchandise | $505,057 | $463,919 | | Provision for Lease Merchandise Write-offs | $18,640 | $55,714 | | Operating Expenses | $91,196 | $98,984 | | Total Costs and Expenses | $614,893 | $618,617 | | OPERATING PROFIT | $106,108 | $49,825 | | NET EARNINGS (LOSS) | $79,488 | $(280,005) | | BASIC EARNINGS (LOSS) PER SHARE: | | | | Continuing Operations | $1.17 | $0.86 |\n| TOTAL BASIC EARNINGS (LOSS) PER SHARE | $1.17 | $(4.19) | | DILUTED EARNINGS (LOSS) PER SHARE: | | | | Continuing Operations | $1.16 | $0.85 |\n| TOTAL DILUTED EARNINGS (LOSS) PER SHARE | $1.16 | $(4.13) | Condensed Consolidated Statements of Comprehensive Income (Loss) This table outlines the company's net earnings and other comprehensive loss components for the three months ended March 31, 2021 and 2020 | (In Thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Net Earnings (Loss) | $79,488 | $(280,005) | | Other Comprehensive Loss: | | | | Foreign Currency Translation Adjustment | — | $(1,754) | | Total Other Comprehensive Loss | — | $(1,754) | | Comprehensive Income (Loss) | $79,488 | $(281,759) | Condensed Consolidated Statements of Cash Flows This table summarizes cash flows from operating, investing, and financing activities for the three months ended March 31, 2021 and 2020 | (In Thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Cash Provided by Operating Activities | $167,068 | $227,760 | | Cash Used in Investing Activities | $(19,731) | $(30,577) | | Cash (Used in) Provided by Financing Activities | $(32,831) | $296,196 | | Increase in Cash and Cash Equivalents | $114,506 | $493,262 | | Cash and Cash Equivalents at End of Period | $151,151 | $551,017 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, discontinued operations, fair value measurements, loans, commitments, and segment information NOTE 1. BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's business segments, Progressive Leasing and Vive Financial, and details the impact of the COVID-19 pandemic on operations and financial estimates. It also covers key accounting policies for revenue recognition (lease revenues and interest/fees on loans), accounts receivable, lease merchandise, vendor incentives, loans receivable, debt, goodwill, shareholders' equity, and fair value measurement, along with recent accounting pronouncements - PROG Holdings operates two segments: Progressive Leasing (lease-to-own solutions) and Vive Financial (second-look revolving credit products)[21] - Government stimulus measures in 2020 and 2021 positively influenced customer payment trends and early lease buyouts, leading to lower write-offs for lease merchandise, accounts receivable, and loans receivable[42][45][50] Accounts Receivable Allowance Components (In Thousands) | (In Thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Beginning Balance | $56,364 | $65,573 | | Accounts Written Off, Net of Recoveries | $(45,103) | $(72,951) | | Accounts Receivable Provision | $36,496 | $76,274 | | Ending Balance | $47,757 | $68,896 | Allowance for Lease Merchandise Write-offs Components (In Thousands) | (In Thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Beginning Balance | $45,992 | $47,362 | | Merchandise Written off, Net of Recoveries | $(25,546) | $(40,159) | | Provision for Write-offs | $18,640 | $55,714 | | Ending Balance | $39,086 | $62,917 | Vive Loan Portfolio Credit Quality by FICO Score Category | FICO Score Category | March 31, 2021 | December 31, 2020 | | :------------------ | :------------- | :---------------- | | 600 or Less | 7.4 % | 7.5 % | | Between 600 and 700 | 79.5 % | 79.3 % | | 700 or Greater | 13.1 % | 13.2 % | - The Company had $50.0 million of outstanding borrowings and $300.0 million total available credit under its $350.0 million senior unsecured revolving credit facility as of March 31, 2021, and was in compliance with all debt covenants[55][56] - Goodwill is not amortized but is tested for impairment annually as of October 1, with no impairment identified in the first quarter of 2021[59] NOTE 2. DISCONTINUED OPERATIONS This note details the separation and distribution of the Aaron's Business segment on November 30, 2020. All direct revenues and expenses of Aaron's Business are classified as discontinued operations, net of income tax, for periods through the separation date. Corporate overhead costs previously associated with Aaron's Business are now classified as continuing operations - PROG Holdings completed the separation of its Aaron's Business segment on November 30, 2020, through a tax-free distribution of common stock to shareholders[71] Loss from Discontinued Operations (Aaron's Business Segment) (In Thousands) | (In Thousands) | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | | Revenues | $432,831 | | Operating Loss | $(458,720) | | Loss from Discontinued Operations, Net of Income Tax | $(337,687) | - The Loss from Discontinued Operations Before Income Tax for Q1 2020 included a $446.9 million goodwill impairment loss related to the Aaron's Business segment and a $14.1 million early termination fee[73] NOTE 3. FAIR VALUE MEASUREMENT This note describes the fair value measurement hierarchy (Level 1, 2, 3) and applies it to the company's financial liabilities and assets. It specifically details the fair value of the deferred compensation liability (Level 2) and Vive's loans receivable (Level 3), which are measured at amortized cost but disclosed at fair value using a discounted cash flow methodology - The Company classifies its deferred compensation liability as a Level 2 liability, valued at quoted market prices of participants' investment elections[76] - Vive's loans receivable are measured at amortized cost, with fair value disclosed as Level 3, estimated using a discounted cash flow methodology with unobservable inputs like future loss rates and credit-risk adjusted discount rates[77][78] NOTE 4. LOANS RECEIVABLE This note provides a summary of Vive's loans receivable, including gross amounts, unamortized fees, and the allowance for loan losses. It also presents credit quality indicators based on FICO scores at origination and an aging analysis of the gross loans receivable balance, highlighting a decrease in past due loans Loans Receivable Summary (In Thousands) | (In Thousands) | March 31, 2021 | December 31, 2020 | | :------------- | :------------- | :---------------- | | Loans Receivable, Gross | $147,867 | $131,422 | | Unamortized Fees | $(11,843) | $(10,147) | | Loans Receivable, Amortized Cost | $136,024 | $121,275 | | Allowance for Loan Losses | $(44,656) | $(42,127) | | Loans Receivable, Net of Allowances and Unamortized Fees | $91,368 | $79,148 | Aging of Loans Receivable, Gross Balance | Aging Category | March 31, 2021 | December 31, 2020 | | :------------- | :------------- | :---------------- | | 30-59 days past due | 3.5 % | 5.7 % | | 60-89 days past due | 1.9 % | 2.6 % | | 90 or more days past due | 2.8 % | 3.1 % | | Past due loans receivable | 8.2 % | 11.4 % | | Current loans receivable | 91.8 % | 88.6 % | Allowance for Loan Losses Components (In Thousands) | (In Thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Beginning Balance | $42,127 | $14,911 | | Provision for Loan Losses | $6,468 | $12,722 | | Charge-offs | $(4,883) | $(6,201) | | Recoveries | $944 | $699 | | Ending Balance | $44,656 | $31,594 | NOTE 5. COMMITMENTS AND CONTINGENCIES This note addresses the company's legal and regulatory proceedings, including a subpoena from the California DFPI and a class-action lawsuit (Stein v. Aaron's, Inc.). It also outlines other contingencies such as non-cancelable commitments for services and software, and off-balance sheet risks related to unfunded lending commitments from the Vive segment - The Company has accrued $0.1 million for probable legal and regulatory matters as of March 31, 2021, with an estimated aggregate range of reasonably possible loss in excess of accrued liabilities between zero and $0.2 million[85] - In January 2021, the Company received a subpoena from the California Department of Financial Protection and Innovation (DFPI) regarding compliance with state consumer protection laws[87] - The Company is a defendant in Stein v. Aaron's, Inc., a class-action lawsuit alleging misleading public statements related to lease-to-own and other financial products, which the Company intends to vigorously defend[88] - As of March 31, 2021, the Company had non-cancelable commitments totaling $19.8 million, primarily for consulting, IT services, software licenses, and minimum customer loan amounts[89] - Vive segment has unconditionally cancellable unfunded lending commitments of approximately $349.7 million as of March 31, 2021, representing available unused credit lines for cardholders[91] NOTE 6. SEGMENTS This note details the company's two operating segments: Progressive Leasing and Vive. It provides a disaggregated view of revenues by source and segment, and a summary of earnings before income taxes and total assets for each segment, highlighting the financial performance and asset distribution between Progressive Leasing and Vive - PROG Holdings operates two reportable segments: Progressive Leasing (lease-purchase solutions) and Vive Financial (second-look financing programs)[93][94][95] Disaggregated Revenue by Segment (In Thousands) | (In Thousands) | Progressive Leasing (2021) | Vive (2021) | Total (2021) | Progressive Leasing (2020) | Vive (2020) | Total (2020) | | :------------- | :------------------------- | :---------- | :----------- | :------------------------- | :---------- | :----------- | | Lease Revenues and Fees | $707,982 | — | $707,982 | $658,534 | — | $658,534 | | Interest and Fees on Loans Receivable | — | $13,019 | $13,019 | — | $9,908 | $9,908 | | Total Revenues | $707,982 | $13,019 | $721,001 | $658,534 | $9,908 | $668,442 | Earnings Before Income Taxes by Segment (In Thousands) | (In Thousands) | March 31, 2021 | March 31, 2020 | | :------------- | :------------- | :------------- | | Progressive Leasing | $104,172 | $62,707 | | Vive | $1,424 | $(7,152) | | Unallocated Corporate Expenses | — | $(5,730) | | Total Earnings Before Income Taxes | $105,596 | $49,825 | Total Assets by Segment (In Thousands) | (In Thousands) | March 31, 2021 | December 31, 2020 | | :------------- | :------------- | :---------------- | | Progressive Leasing | $1,277,420 | $1,209,650 | | Vive | $121,378 | $107,754 | | Total Assets | $1,398,798 | $1,317,404 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, focusing on continuing operations. It discusses the business overview, the impact of the COVID-19 pandemic and government stimulus, key operating metrics like Gross Merchandise Volume (GMV) and active customer count, and a detailed analysis of revenues, operating expenses, and other costs. It also covers the company's financial position, liquidity, capital resources, share repurchases, and debt financing Business Overview This section introduces PROG Holdings, Inc. as a financial technology holding company with two operating segments - PROG Holdings, Inc. is a financial technology holding company with two operating segments: Progressive Leasing (lease-to-own solutions) and Vive Financial (second-look revolving credit products)[102] Separation and Distribution of the Aaron's Business Segment This section details the tax-free separation of the Aaron's Business segment completed on November 30, 2020 - On November 30, 2020, PROG Holdings completed the tax-free separation of its Aaron's Business segment, with all related direct revenues and expenses classified as discontinued operations[105][106] COVID-19 Pandemic This section discusses the pandemic's impact on operations, customer payment trends, and the effects of government stimulus measures - The COVID-19 pandemic negatively impacted POS partners with decreased in-store traffic and supply chain disruptions, affecting Progressive Leasing's new lease agreements, GMV, and revenues[107] - Government stimulus measures (CARES Act, December 2020 stimulus, American Rescue Plan Act of 2021) provided economic support to customers, increasing payment activity and early lease buyouts, and lowering write-offs[109] - Future customer payment levels are uncertain without continued government stimulus, and stimulus payments could shift consumer behavior towards fewer new agreements or more early buyouts with lower margins[110][111] Highlights This section summarizes key financial and operational performance metrics for the first quarter of 2021 - Revenues increased by 7.9% to $721.0 million in Q1 2021, driven by strong customer payment activity and elevated early lease buyouts, partially offset by a delayed tax refund season[114] - Earnings before income taxes increased by 111.9% to $105.6 million in Q1 2021, primarily due to revenue growth and a decrease in the provision for lease merchandise write-offs[114] - The company released $2.5 million of COVID-19 allowances for lease merchandise and accounts receivable and $2.4 million for loan losses in Q1 2021, contributing to increased earnings[114] Gross Merchandise Volume (GMV) (In Thousands) | For the Three Months Ended March 31 | 2021 | 2020 | | :---------------------------------- | :-------- | :-------- | | Progressive Leasing | $510,046 | $462,025 | | Vive | $55,898 | $25,376 | | Total GMV | $565,944 | $487,401 | - Progressive Leasing's GMV increased due to higher average merchandise price, increased new leases, growth from large national POS partners, and increased e-commerce penetration (14.3% of GMV in Q1 2021 vs. 1.9% in Q1 2020)[115] Active Customer Count | As of March 31 | 2021 | 2020 | | :------------- | :------ | :-------- | | Progressive Leasing | 878,000 | 998,000 | | Vive | 74,000 | 50,000 | | Total Active Customer Count | 952,000 | 1,048,000 | - The decline in Progressive Leasing's active customer count was attributed to more early lease buyouts due to government stimulus and disruptions experienced by POS partners in 2020[116] Key Components of Earnings Before Income Taxes This section outlines the primary revenue and expense categories contributing to earnings before income taxes - Revenues are categorized into lease revenues and fees (Progressive Leasing) and interest and fees on loans receivable (Vive)[117] - Key expense components include depreciation of lease merchandise, provision for lease merchandise write-offs, operating expenses (personnel, stock-based compensation, loan losses, professional services, etc.), and interest expense[118][119] Results of Operations – Three months ended March 31, 2021 and 2020 This section provides a detailed comparative analysis of the company's financial performance for the specified periods Consolidated Statements of Earnings (Loss) Comparison (In Thousands) | (In Thousands) | March 31, 2021 | March 31, 2020 | Change ($) | Change (%) | | :------------- | :------------- | :------------- | :--------- | :--------- | | Lease Revenues and Fees | $707,982 | $658,534 | $49,448 | 7.5 % | | Interest and Fees on Loans Receivable | $13,019 | $9,908 | $3,111 | 31.4 % | | Total Revenues | $721,001 | $668,442 | $52,559 | 7.9 % | | OPERATING PROFIT | $106,108 | $49,825 | $56,283 | 113.0 % | | EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | $105,596 | $49,825 | $55,771 | 111.9 % | | NET EARNINGS (LOSS) | $79,488 | $(280,005) | $359,493 | nmf | - Progressive Leasing revenues increased due to strong customer payment performance, elevated early lease buyouts, and growth from large national POS partners and e-commerce platforms[122] - Vive revenues increased by 31.4% due to a 120.3% increase in GMV, leading to growth in the loans receivable portfolio and additional interest revenues[122] Operating Expenses Comparison (In Thousands) | (In Thousands) | March 31, 2021 | March 31, 2020 | Change ($) | Change (%) | | :------------- | :------------- | :------------- | :--------- | :--------- | | Personnel Costs | $44,217 | $43,029 | $1,188 | 2.8 % | | Stock-based Compensation | $4,163 | $4,862 | $(699) | (14.4) % | | Advertising | $2,920 | $1,675 | $1,245 | 74.3 % | | Provision for Loan Losses | $6,468 | $12,722 | $(6,254) | (49.2) % | | Professional Services | $4,347 | $3,060 | $1,287 | 42.1 % | | Operating Expenses | $91,196 | $98,984 | $(7,788) | (7.9) % | - The provision for lease merchandise write-offs decreased by $37.1 million (66.5%) due to strong customer payment activity, lower write-offs, and a $1.9 million release of COVID-19 allowances[120][129] - Income tax expense increased to $26.1 million in Q1 2021 from a $7.9 million benefit in Q1 2020, primarily due to a $34.2 million discrete income tax benefit in 2020 from the CARES Act[132] Overview of Financial Position This section summarizes changes in key balance sheet items, including cash, lease merchandise, loans receivable, and accounts payable - Cash and cash equivalents increased by $114.5 million to $151.2 million during Q1 2021[133] - Lease merchandise, net, decreased by $35.7 million due to increased early lease buyouts, partially offset by a reduction in the allowance for lease merchandise write-offs[133] - Loans receivable, net, increased by $12.2 million due to growth in loan originations with Vive's POS partners[133] - Accounts payable and accrued expenses increased by $26.9 million, driven by a $20.5 million increase in income taxes payable[133] Liquidity and Capital Resources This section discusses the company's capital requirements, cash flow activities, share repurchases, and credit facility status - Primary capital requirements include reinvesting in Progressive Leasing merchandise, merger and acquisition investments, and returning excess cash to shareholders through stock repurchases[134] - Cash provided by operating activities decreased by $60.7 million to $167.1 million in Q1 2021, primarily due to the separation of Aaron's Business ($80.0 million contribution in Q1 2020). Continuing operations saw a $19.3 million increase in operating cash flow[136] - Cash used in investing activities decreased by $10.9 million to $19.7 million in Q1 2021, driven by reduced capital expenditures on Aaron's Business and increased proceeds from loans receivable, partially offset by increased investments in Vive loans receivable[137] - Cash used in financing activities was $32.8 million in Q1 2021, a significant change from $296.2 million provided in Q1 2020, which included $305.2 million from net debt borrowings. The company repurchased $28.1 million of common stock in Q1 2021[138] - The Board of Directors authorized a new share repurchase program of up to $300.0 million on February 22, 2021. As of March 31, 2021, $271.9 million remained authorized[139][160] - The Company has a $350.0 million senior unsecured revolving credit facility, with $50.0 million outstanding and $300.0 million available as of March 31, 2021. It was in compliance with all financial covenants[141][142] - The Vive segment has unfunded lending commitments of approximately $349.7 million as of March 31, 2021, representing available unused credit lines for cardholders[148] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the company's exposure to market risks, specifically interest rate risk. It notes that borrowings under the Revolving Facility are indexed to variable rates, making the company susceptible to increased interest costs if rates rise. The company does not use market risk sensitive instruments for hedging or speculative purposes - The Company is exposed to interest rate risk due to its $50.0 million outstanding variable-rate debt under the Revolving Facility, indexed to LIBO or prime rate[151] - A hypothetical 1.0% increase or decrease in interest rates would impact annual interest expense by approximately $0.5 million[151] Item 4. Controls and Procedures This section confirms that management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2021, and concluded they were effective in providing reasonable assurance that required information is accumulated, communicated, and reported timely. No material changes in internal control over financial reporting occurred during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance for timely and accurate financial reporting[156] - There were no material changes in the Company's internal control over financial reporting during the three months ended March 31, 2021[157] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings This section incorporates by reference the discussion of legal and regulatory proceedings from Note 5 of the condensed consolidated financial statements. The company does not currently believe that any outstanding legal proceedings will have a material adverse impact on its business, financial position, or results of operations, though an adverse resolution of multiple items could - The Company does not currently believe that any outstanding legal proceedings will have a material adverse impact on its business, financial position, or results of operations[158] Item 1A. Risk Factors This section states that there are no updates to the risk factors disclosure from the Company's 2020 Annual Report - The Company has no updates to its risk factors disclosure from the 2020 Annual Report[159] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity for the three months ended March 31, 2021. It highlights the number of shares purchased, the average price paid, and the remaining authorization limit under the new $300.0 million repurchase program Share Repurchase Activity (Three Months Ended March 31, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | March 1, 2021 through March 31, 2021 | 588,726 | $47.73 | 588,726 | $271,898,180 | | Total | 588,726 | | 588,726 | | - A new share repurchase program authorizing up to $300.0 million was effective February 22, 2021, replacing the previous program[160] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - No defaults upon senior securities were reported[161] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[162] Item 5. Other Information This section indicates that there is no other information to report - No other information was reported[163] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and a transition services agreement - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2), XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE), and a Blake Wakefield Transition Services Agreement (10.1)[165] Signatures This section contains the signatures of the Chief Financial Officer and Vice President, Financial Reporting, certifying the filing of the report on behalf of PROG Holdings, Inc - The report is signed by Brian Garner, Chief Financial Officer, and Matt Sewell, Vice President, Financial Reporting, on April 29, 2021[169]