PROG (PRG) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the reporting period Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of earnings, and cash flows, along with detailed notes explaining significant accounting policies, fair value measurements, loan receivable details, commitments, contingencies, restructuring expenses, and segment information for PROG Holdings, Inc. for the periods ended September 30, 2023 and December 31, 2022 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at period-end | ASSETS (In Millions) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------- | :----------- | | Cash and Cash Equivalents | $294.8 | $131.9 | | Accounts Receivable (net) | $55.8 | $64.5 | | Lease Merchandise (net) | $521.2 | $648.0 | | Loans Receivable (net) | $119.9 | $131.0 | | Total Assets | $1,489.2 | $1,491.9 | | LIABILITIES & SHAREHOLDERS' EQUITY (In Millions) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------------ | :----------- | :----------- | | Accounts Payable and Accrued Expenses | $146.5 | $135.0 | | Deferred Income Tax Liabilities | $104.8 | $137.3 | | Debt | $591.9 | $591.0 | | Total Liabilities | $891.0 | $921.4 | | Total Shareholders' Equity | $598.1 | $570.5 | | Total Liabilities & Shareholders' Equity | $1,489.2 | $1,491.9 | - Cash and Cash Equivalents increased by $162.9 million from December 31, 2022, to September 30, 2023, reaching $294.8 million[10][150] - Lease Merchandise (net) decreased by $126.8 million, primarily due to a 24.4% decrease in Progressive Leasing's Gross Merchandise Volume (GMV) in Q3 2023 compared to Q4 2022[10][150] Condensed Consolidated Statements of Earnings This section details the company's financial performance over specific periods, presenting revenues, expenses, and net earnings | (In Millions, Except Per Share Data) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | REVENUES: | | | | | | Lease Revenues and Fees | $564.2 | $606.6 | $1,776.1 | $1,930.8 | | Interest and Fees on Loans Receivable | $18.7 | $19.2 | $54.8 | $54.9 | | Total Revenues | $582.9 | $625.8 | $1,830.9 | $1,985.7 | | OPERATING PROFIT | $54.9 | $36.8 | $190.3 | $123.2 | | EARNINGS BEFORE INCOME TAX EXPENSE | $48.1 | $27.3 | $167.7 | $94.5 | | NET EARNINGS | $35.0 | $16.0 | $120.3 | $62.6 | | EARNINGS PER SHARE: | | | | | | Basic | $0.77 | $0.32 | $2.58 | $1.18 | | Assuming Dilution | $0.76 | $0.32 | $2.56 | $1.18 | - Net Earnings for the three months ended September 30, 2023, increased by 118.8% to $35.0 million, up from $16.0 million in the prior year, driven by improved customer payment activity, absence of goodwill impairment, and lower restructuring costs[12][115][126] - Diluted EPS for the three months ended September 30, 2023, was $0.76, a significant increase from $0.32 in the same period of 2022[12] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods | (In Millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash Provided by Operating Activities | $292.5 | $283.2 | | Cash Used in Investing Activities | $(18.8) | $(39.9) | | Cash Used in Financing Activities | $(110.9) | $(191.5) | | Increase in Cash and Cash Equivalents | $162.9 | $51.7 | | Cash and Cash Equivalents at End of Period | $294.8 | $221.9 | - Cash provided by operating activities increased by $9.3 million to $292.5 million for the nine months ended September 30, 2023, primarily due to a $174.3 million decrease in lease merchandise purchases and increased interest income[15][152] - Cash used in investing activities decreased by $21.1 million to $18.8 million, driven by an $11.9 million increase in proceeds from loans receivable and an $8.8 million decrease in investments in loans receivable[15][153] Notes to Condensed Consolidated Financial Statements This section covers Notes to Condensed Consolidated Financial Statements NOTE 1. BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note describes the foundational accounting principles and significant policies applied in preparing the financial statements - PROG Holdings operates two reportable segments: Progressive Leasing (lease-to-own solutions) and Vive Financial (second-look revolving credit products). Four Technologies, Inc. (BNPL) is not a reportable segment due to immaterial financial results[16][17][18][19] - The company experienced a cybersecurity incident affecting Progressive Leasing's data and IT systems in September 2023, incurring $1.8 million in related costs for Q3 and YTD 2023. The incident is believed to be contained with no ongoing operational impact[66][67][113][114] NOTE 2. FAIR VALUE MEASUREMENT This note details the methodologies and classifications used for measuring the fair value of financial instruments | (In Millions) | September 30, 2023 (Level 2) | December 31, 2022 (Level 2) | | :------------- | :--------------------------- | :-------------------------- | | Senior Notes | $524.7 | $481.3 | | (In Millions) | September 30, 2023 (Level 3) | December 31, 2022 (Level 3) | | :------------- | :--------------------------- | :-------------------------- | | Loans Receivable, Net | $145.3 | $165.7 | - The fair value of Senior Notes is classified as Level 2, estimated based on quoted market prices in less active markets. Loans Receivable, Net, for Vive and Four are measured at amortized cost but disclosed at fair value using a discounted cash flow methodology (Level 3)[76][78][79] NOTE 3. LOANS RECEIVABLE This note provides a breakdown of the company's loans receivable, including gross amounts, allowances, and aging categories | (In Millions) | September 30, 2023 | December 31, 2022 | | :------------- | :----------------- | :---------------- | | Loans Receivable, Gross | $169.7 | $184.6 | | Unamortized Fees | $(9.6) | $(11.2) | | Loans Receivable, Amortized Cost | $160.1 | $173.4 | | Allowance for Loan Losses | $(40.2) | $(42.4) | | Loans Receivable, Net of Allowances and Unamortized Fees | $119.9 | $131.0 | | Aging Category (Gross Balance) | September 30, 2023 | December 31, 2022 | | :----------------------------- | :----------------- | :---------------- | | 30-59 Days Past Due | 6.5 % | 6.6 % | | 60-89 Days Past Due | 3.7 % | 3.5 % | | 90 or More Days Past Due | 5.6 % | 5.1 % | | Past Due Loans Receivable | 15.8 % | 15.2 % | | Current Loans Receivable | 84.2 % | 84.8 % | - The allowance for loan losses decreased to $40.2 million as of September 30, 2023, from $42.4 million at December 31, 2022. The provision for loan losses for the nine months ended September 30, 2023, was $28.0 million, slightly down from $28.5 million in the prior year[81] NOTE 4. COMMITMENTS AND CONTINGENCIES This note discloses the company's legal, regulatory, and contractual obligations and potential future liabilities - The Company has accrued $1.1 million for probable legal and regulatory matters as of September 30, 2023, an increase from $0.6 million at December 31, 2022[86] - Regulatory inquiries include a subpoena from the California DFPI regarding compliance with state consumer protection laws. Litigation includes a complaint from the Pennsylvania Attorney General alleging violations of the Pennsylvania Rental Purchase Agreement Act[88][89] - Unfunded lending commitments for Vive totaled $531.2 million as of September 30, 2023, an increase from $513.7 million at December 31, 2022, representing available unused credit lines[92] NOTE 5. RESTRUCTURING EXPENSES This note details the costs associated with restructuring activities, including severance and asset impairment charges | (In Millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :------------- | :------------------------------ | :------------------------------ | | Severance | $0.3 | $2.1 | | Right-of-Use Asset Impairment | $0.0 | $2.3 | | Total Restructuring Expenses | $0.2 | $4.7 | | (In Millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------- | :----------------------------- | :----------------------------- | | Severance | $2.0 | $5.6 | | Right-of-Use Asset Impairment | $0.0 | $2.9 | | Total Restructuring Expenses | $2.0 | $9.0 | - Restructuring expenses significantly decreased to $0.2 million for Q3 2023 and $2.0 million for YTD 2023, down from $4.7 million and $9.0 million respectively in the prior year, primarily due to reduced employee severance and the absence of asset impairment charges[94][95][131][143] NOTE 6. SEGMENTS This note presents financial information by the company's reportable segments, including revenues and earnings before income tax expense | (In Millions) | Progressive Leasing (Q3 2023) | Vive (Q3 2023) | Other (Q3 2023) | Total (Q3 2023) | | :------------- | :---------------------------- | :------------- | :-------------- | :-------------- | | Lease Revenues and Fees | $564.2 | $0.0 | $0.0 | $564.2 | | Interest and Fees on Loans Receivable | $0.0 | $17.5 | $1.1 | $18.7 | | Total Revenues | $564.2 | $17.5 | $1.1 | $582.9 | | (In Millions) | Progressive Leasing (YTD 2023) | Vive (YTD 2023) | Other (YTD 2023) | Total (YTD 2023) | | :------------- | :----------------------------- | :-------------- | :--------------- | :--------------- | | Lease Revenues and Fees | $1,776.1 | $0.0 | $0.0 | $1,776.1 | | Interest and Fees on Loans Receivable | $0.0 | $51.9 | $2.9 | $54.8 | | Total Revenues | $1,776.1 | $51.9 | $2.9 | $1,830.9 | | (In Millions) | Progressive Leasing (Q3 2023) | Vive (Q3 2023) | Other (Q3 2023) | Total (Q3 2023) | | :------------- | :---------------------------- | :------------- | :-------------- | :-------------- | | Earnings Before Income Tax Expense | $53.9 | $0.6 | $(6.4) | $48.1 | | (In Millions) | Progressive Leasing (YTD 2023) | Vive (YTD 2023) | Other (YTD 2023) | Total (YTD 2023) | | :------------- | :----------------------------- | :-------------- | :--------------- | :--------------- | | Earnings Before Income Tax Expense | $180.4 | $4.5 | $(17.2) | $167.7 | - Progressive Leasing's earnings before income tax expense increased by 24.0% to $53.9 million for Q3 2023 and by 59.7% to $180.4 million for YTD 2023, compared to the prior year periods[103][136][147] 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 condition and results of operations, highlighting the impact of macroeconomic factors, the cybersecurity incident, and key performance indicators. It details revenue, expense, and profit changes for the three and nine months ended September 30, 2023, compared to 2022, and discusses liquidity, capital resources, and debt management Business Overview This section provides an overview of PROG Holdings' business model and its key operating segments - PROG Holdings is a financial technology holding company with two reportable segments: Progressive Leasing (lease-to-own solutions) and Vive Financial (second-look revolving credit products). Four Technologies, Inc. (BNPL) is also part of the ecosystem but not a reportable segment[106][107][108][109] Macroeconomic and Business Environment This section discusses the external economic factors and internal business responses impacting the company's performance - The company continues to face a challenging macroeconomic environment due to high inflation, particularly in housing, food, and gas, which negatively impacts customer payment delinquencies and Gross Merchandise Volume (GMV)[110] - Progressive Leasing tightened its lease decisioning in mid-2022, leading to improved customer payment delinquencies and write-offs for new leases, but also contributing to decreased GMV[110] - Cost reduction initiatives were implemented in 2022 and 2023 to align the cost structure with the near-term revenue outlook amidst macroeconomic challenges[112] Cybersecurity Incident This section details the cybersecurity incident, its financial impact, and the company's response - Progressive Leasing experienced a cybersecurity incident in September 2023, incurring $1.8 million in costs for Q3 and YTD 2023, primarily for legal, consulting, and credit monitoring services. The company believes the incident is contained with no ongoing operational impact[113][114] Highlights This section summarizes key financial and operational achievements and changes for the reporting period - Revenues decreased by 6.9% to $582.9 million in Q3 2023, primarily due to a smaller lease portfolio and decreased customer demand, partially offset by improved customer payment activity[115] - Gross Merchandise Volume (GMV) decreased by $28.2 million for Progressive Leasing and $12.7 million for Vive in Q3 2023, while GMV from other operations (Four) increased by $3.8 million[115] - Earnings before income taxes increased to $48.1 million in Q3 2023 from $27.3 million in Q3 2022, driven by improved customer payments, absence of goodwill impairment, lower restructuring costs, and higher interest income[115] Key Operating Metrics This section presents crucial performance indicators, including Gross Merchandise Volume and active customer counts by segment | (Unaudited and In Millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :--------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Progressive Leasing GMV | $409.2 | $437.4 | $(28.2) | (6.5)% | | Vive GMV | $35.2 | $48.0 | $(12.7) | (26.5)% | | Other GMV | $19.6 | $15.8 | $3.8 | 24.4% | | Total GMV | $464.0 | $501.2 | $(37.1) | (7.4)% | | As of September 30 (Unaudited and In Thousands) | 2023 | 2022 | | :---------------------------------------------- | :---- | :---- | | Progressive Leasing Active Customer Count | 820 | 915 | | Vive Active Customer Count | 88 | 92 | | Other Active Customer Count | 35 | 27 | | Total Active Customer Count | 943 | 1,034 | - Progressive Leasing's GMV decreased by 6.5% due to lower customer demand, while Vive's GMV decreased by 26.5% due to tighter loan decisioning. Four's GMV increased by 24.4%[117] Key Components of Earnings Before Income Taxes This section identifies the primary revenue and expense items that influence the company's earnings before tax - Key components affecting earnings include Lease Revenues and Fees, Interest and Fees on Loans Receivable, Depreciation of Lease Merchandise, Provision for Lease Merchandise Write-offs, Operating Expenses, Impairment of Goodwill, and Interest Expense, Net[120][121][122][123][124] Results of Operations – Three months ended September 30, 2023 and 2022 This section analyzes the company's financial performance for the three-month period, comparing current and prior year results | (In Millions) | Sep 30, 2023 | Sep 30, 2022 | Change ($) | Change (%) | | :------------- | :----------- | :----------- | :--------- | :--------- | | Total Revenues | $582.9 | $625.8 | $(42.9) | (6.9)% | | Operating Profit | $54.9 | $36.8 | $18.1 | 49.1% | | Earnings Before Income Tax Expense | $48.1 | $27.3 | $20.8 | 75.9% | | Net Earnings | $35.0 | $16.0 | $19.0 | 118.8% | - Progressive Leasing revenues decreased by 7.0% due to a smaller lease portfolio and fewer early lease buyouts, partially offset by improved customer payment activity. Vive revenues remained flat[127] - Operating expenses decreased by 3.1%, primarily due to a $4.4 million reduction in restructuring expense and a $1.5 million decrease in provision for loan losses, partially offset by increases in stock-based compensation ($1.9 million) and professional services ($3.1 million)[129][130][131] Results of Operations – Nine Months Ended September 30, 2023 and 2022 This section analyzes the company's financial performance for the nine-month period, comparing current and prior year results | (In Millions) | Sep 30, 2023 | Sep 30, 2022 | Change ($) | Change (%) | | :------------- | :----------- | :----------- | :--------- | :--------- | | Total Revenues | $1,830.9 | $1,985.7 | $(154.9) | (7.8)% | | Operating Profit | $190.3 | $123.2 | $67.0 | 54.4% | | Earnings Before Income Tax Expense | $167.7 | $94.5 | $73.2 | 77.4% | | Net Earnings | $120.3 | $62.6 | $57.6 | 92.0% | - Progressive Leasing revenues decreased by 8.0% for the nine months ended September 30, 2023, due to a smaller lease portfolio from tightened decisioning and decreased customer demand, partially offset by improved customer payment activity[139] - Operating expenses decreased by 4.7%, driven by a $7.2 million decrease in personnel costs (due to employee reductions) and a $7.0 million decrease in restructuring expense, partially offset by a $5.2 million increase in stock-based compensation[141][142][143] Overview of Financial Position This section provides a summary of significant changes in the company's balance sheet items - Cash and cash equivalents increased by $162.9 million to $294.8 million. Lease merchandise, net, decreased by $126.8 million due to a decline in Progressive Leasing's GMV. Deferred tax liability decreased by $32.4 million[150] Liquidity and Capital Resources This section discusses the company's cash position, debt, credit facilities, and share repurchase activities - As of September 30, 2023, the Company had $294.8 million in cash, $350.0 million available under its Revolving Facility, and $600.0 million in Senior Notes indebtedness[151] - The Company repurchased 3,587,361 shares for $108.3 million during the nine months ended September 30, 2023, with $229.0 million remaining under the $1 billion share repurchase authorization[154][156] - The Company was in compliance with all financial covenants related to its $350.0 million senior revolving credit facility and $600 million senior unsecured notes as of September 30, 2023[159][161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk. As of September 30, 2023, the company had no outstanding variable-rate debt, thus a hypothetical change in interest rates would not affect interest expense. The company does not use significant market risk sensitive instruments for hedging or speculative purposes - As of September 30, 2023, the Company had no outstanding borrowings under its Revolving Facility, meaning a hypothetical 1.0% increase or decrease in interest rates would not affect interest expense[170] - The Company does not use significant market risk sensitive instruments for hedging commodity, foreign currency, or other risks, nor does it hold them for trading or speculative purposes[171] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2023, concluding they were effective. There were no material changes in internal control over financial reporting during the three and nine months ended September 30, 2023 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance that disclosure objectives are met[172][174] - No material changes in internal control over financial reporting occurred during the three and nine months ended September 30, 2023[175] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, and other miscellaneous disclosures Item 1. Legal Proceedings This section refers to Note 4 of the financial statements for details on legal and regulatory proceedings. 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[176] Item 1A. Risk Factors This section supplements previously reported risk factors, focusing on the adverse impact of cyber-attacks, employee misconduct, and other disruptions on the company's ability to protect confidential information. It highlights the costs and potential liabilities associated with security breaches, including the recent cybersecurity incident at Progressive Leasing - Cyber-attacks, employee misconduct, and other disruptions can adversely affect the company's ability to protect confidential information, leading to potential data loss, unauthorized access, litigation, government investigations, and reputational damage[178][183] - The recent cybersecurity incident at Progressive Leasing, disclosed on September 21, 2023, while not causing major operational impact, underscores these risks. The full scope of costs and insurance offsets are still being determined[181][184] - Insurance coverage for cyber-attacks may not be adequate to cover all losses, and future coverage may not be available on acceptable terms[184] 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 September 30, 2023, under its authorized program | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------------- | :------------------------------- | :--------------------------- | | July 1, 2023 through July 31, 2023 | — | — | | August 1, 2023 through August 31, 2023 | 603,975 | $35.55 | | September 1, 2023 through Sep 30, 2023 | 441,622 | $33.89 | | Total | 1,045,597 | | - The Company repurchased 1,045,597 shares during the three months ended September 30, 2023, under its $1 billion share repurchase program, with $229.0 million remaining authorization[185] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - No defaults upon senior securities were reported[186] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[187] Item 5. Other Information This section states that there is no other information to report - No other information was reported[188] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the CEO and CFO, XBRL documents, and the Inline XBRL cover page - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and various XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[190] Signatures This section contains the signatures of the Chief Financial Officer and Vice President, Financial Reporting, certifying 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 October 25, 2023[193]