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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED September 30, 2022
OR
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☐ |
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 1-39628
________________________________
PROG
HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
_________________________________
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Georgia
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85-2484385 |
(State or other jurisdiction of
incorporation or organization) |
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(I. R. S. Employer
Identification No.) |
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256 W. Data Drive |
Draper, |
Utah |
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84020-2315 |
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(Address of principal executive offices) |
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(Zip Code) |
(385) 351-1369
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Common Stock, $0.50 Par Value |
PRG |
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):
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Large Accelerated Filer |
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Accelerated Filer |
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Non-Accelerated Filer |
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(Do not check if a smaller reporting company) |
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Smaller Reporting Company |
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☐ |
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Emerging Growth Company |
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☐ |
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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 |
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☐ |
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.
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Title of Each Class |
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Shares Outstanding as of
October 21, 2022
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Common Stock, $0.50 Par Value |
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50,032,640 |
PROG HOLDINGS, INC.
INDEX
PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL
STATEMENTS
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(Unaudited) |
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September 30,
2022 |
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December 31,
2021 |
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(In Thousands, Except Share Data) |
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ASSETS: |
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Cash and Cash Equivalents |
$ |
221,886 |
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$ |
170,159 |
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Accounts Receivable (net of allowances of $85,734 in 2022 and
$71,233 in 2021)
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56,543 |
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66,270 |
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Lease Merchandise (net of accumulated depreciation and allowances
of $510,217 in 2022 and $463,929 in 2021)
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566,148 |
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714,055 |
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Loans Receivable (net of allowances and unamortized fees of $54,031
in 2022 and $53,300 in 2021)
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130,136 |
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119,315 |
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Property and Equipment, Net |
24,871 |
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25,648 |
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Operating Lease Right-of-Use Assets |
12,448 |
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17,488 |
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Goodwill |
296,061 |
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306,212 |
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Other Intangibles, Net |
120,135 |
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137,305 |
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Income Tax Receivable |
10,968 |
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14,352 |
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Deferred Income Tax Assets |
2,760 |
|
|
2,760 |
|
|
Prepaid Expenses and Other Assets |
49,535 |
|
|
48,197 |
|
|
Total Assets |
$ |
1,491,491 |
|
|
$ |
1,621,761 |
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY: |
|
|
|
|
Accounts Payable and Accrued Expenses |
$ |
137,575 |
|
|
$ |
135,954 |
|
|
Deferred Income Tax Liabilities |
140,517 |
|
|
146,265 |
|
|
Customer Deposits and Advance Payments |
33,952 |
|
|
45,070 |
|
|
Operating Lease Liabilities |
22,341 |
|
|
25,410 |
|
|
Debt |
590,642 |
|
|
589,654 |
|
|
Total Liabilities |
925,027 |
|
|
942,353 |
|
|
Commitments and Contingencies (Note 4) |
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
Common Stock, Par Value $0.50 Per Share: Authorized: 225,000,000
Shares at September 30, 2022 and December 31, 2021;
Shares Issued: 82,078,654
at September 30, 2022 and December 31, 2021
|
41,039 |
|
|
41,039 |
|
|
Additional Paid-in Capital |
335,642 |
|
|
332,244 |
|
|
Retained Earnings |
1,118,150 |
|
|
1,055,526 |
|
|
|
1,494,831 |
|
|
1,428,809 |
|
|
Less: Treasury Shares at Cost |
|
|
|
|
Common Stock: 32,046,014
Shares at September 30, 2022 and 25,638,057 at
December 31, 2021
|
(928,367) |
|
|
(749,401) |
|
|
Total Shareholders’ Equity |
566,464 |
|
|
679,408 |
|
|
Total Liabilities & Shareholders’ Equity |
$ |
1,491,491 |
|
|
$ |
1,621,761 |
|
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
|
|
|
|
(In Thousands, Except Per Share Data) |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
$ |
606,585 |
|
|
$ |
635,025 |
|
|
$ |
1,930,843 |
|
|
$ |
1,989,055 |
|
|
|
|
|
|
Interest and Fees on Loans Receivable |
19,236 |
|
|
15,380 |
|
|
54,886 |
|
|
42,322 |
|
|
|
|
|
|
|
625,821 |
|
|
650,405 |
|
|
1,985,729 |
|
|
2,031,377 |
|
|
|
|
|
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of Lease Merchandise |
422,589 |
|
|
435,857 |
|
|
1,358,713 |
|
|
1,380,572 |
|
|
|
|
|
|
Provision for Lease Merchandise Write-offs |
43,537 |
|
|
34,174 |
|
|
155,655 |
|
|
84,072 |
|
|
|
|
|
|
Operating Expenses |
112,733 |
|
|
102,053 |
|
|
337,997 |
|
|
289,994 |
|
|
|
|
|
|
Impairment of Goodwill |
10,151 |
|
|
— |
|
|
10,151 |
|
|
— |
|
|
|
|
|
|
|
589,010 |
|
|
572,084 |
|
|
1,862,516 |
|
|
1,754,638 |
|
|
|
|
|
|
OPERATING PROFIT |
36,811 |
|
|
78,321 |
|
|
123,213 |
|
|
276,739 |
|
|
|
|
|
|
Interest Expense |
(9,463) |
|
|
(444) |
|
|
(28,700) |
|
|
(1,392) |
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAX EXPENSE |
27,348 |
|
|
77,877 |
|
|
94,513 |
|
|
275,347 |
|
|
|
|
|
|
INCOME TAX EXPENSE |
11,343 |
|
|
20,464 |
|
|
31,889 |
|
|
69,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
$ |
16,005 |
|
|
$ |
57,413 |
|
|
$ |
62,624 |
|
|
$ |
205,738 |
|
|
|
|
|
|
EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.32 |
|
|
$ |
0.87 |
|
|
$ |
1.18 |
|
|
$ |
3.07 |
|
|
|
|
|
|
Assuming Dilution |
$ |
0.32 |
|
|
$ |
0.86 |
|
|
$ |
1.18 |
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
50,461 |
|
|
66,092 |
|
|
52,896 |
|
|
66,938 |
|
|
|
|
|
|
Assuming Dilution |
50,547 |
|
|
66,385 |
|
|
53,053 |
|
|
67,319 |
|
|
|
|
|
The
accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, |
|
2022 |
|
2021 |
|
|
(In Thousands) |
|
OPERATING ACTIVITIES: |
|
|
|
|
Net Earnings |
$ |
62,624 |
|
|
$ |
205,738 |
|
|
Adjustments to Reconcile Net Earnings to Cash Provided by Operating
Activities: |
|
|
|
|
Depreciation of Lease Merchandise |
1,358,713 |
|
|
1,380,572 |
|
|
Other Depreciation and Amortization |
25,446 |
|
|
21,954 |
|
|
Provisions for Accounts Receivable and Loan Losses |
318,314 |
|
|
152,523 |
|
|
Stock-Based Compensation |
13,930 |
|
|
14,803 |
|
|
Deferred Income Taxes |
(5,748) |
|
|
16,948 |
|
|
Impairment of Goodwill |
10,151 |
|
|
— |
|
|
Non-Cash Lease Expense |
838 |
|
|
708 |
|
|
Other Changes, Net |
(5,785) |
|
|
(2,715) |
|
|
Changes in Operating Assets and Liabilities, Net of Effects of
Acquisitions: |
|
|
|
|
Additions to Lease Merchandise |
(1,369,388) |
|
|
(1,446,046) |
|
|
Book Value of Lease Merchandise Sold or Disposed |
158,582 |
|
|
87,005 |
|
|
Accounts Receivable |
(280,096) |
|
|
(143,970) |
|
|
Prepaid Expenses and Other Assets |
(1,077) |
|
|
(3,864) |
|
|
Income Tax Receivable and Payable |
3,411 |
|
|
(18,529) |
|
|
Operating Lease Right-of-Use Assets and Liabilities |
1,133 |
|
|
(1,411) |
|
|
Accounts Payable and Accrued Expenses |
3,220 |
|
|
37,973 |
|
|
Customer Deposits and Advance Payments |
(11,118) |
|
|
(6,799) |
|
|
Cash Provided by Operating Activities |
283,150 |
|
|
294,890 |
|
|
INVESTING ACTIVITIES: |
|
|
|
|
Investments in Loans Receivable |
(147,711) |
|
|
(139,980) |
|
|
Proceeds from Loans Receivable |
115,226 |
|
|
97,158 |
|
|
Outflows on Purchases of Property and Equipment |
(7,488) |
|
|
(6,815) |
|
|
Proceeds from Property and Equipment |
18 |
|
|
55 |
|
|
Proceeds (Outflows) from Acquisitions of Businesses |
6 |
|
|
(22,942) |
|
|
|
|
|
|
Cash Used in Investing Activities |
(39,949) |
|
|
(72,524) |
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Treasury Stock |
(187,361) |
|
|
(128,233) |
|
|
Tender Offer Shares Repurchased and Retired |
(274) |
|
|
— |
|
|
Issuance of Stock Under Stock Option Plans |
663 |
|
|
3,133 |
|
|
Shares Withheld for Tax Payments |
(2,902) |
|
|
(5,123) |
|
|
Debt Issuance Costs |
(1,600) |
|
|
— |
|
|
Cash Used in Financing Activities |
(191,474) |
|
|
(130,223) |
|
|
Increase in Cash and Cash Equivalents |
51,727 |
|
|
92,143 |
|
|
Cash and Cash Equivalents at Beginning of Period |
170,159 |
|
|
36,645 |
|
|
Cash and Cash Equivalents at End of Period |
$ |
221,886 |
|
|
$ |
128,788 |
|
|
Net Cash Paid During the Period: |
|
|
|
|
Interest |
$ |
17,306 |
|
|
$ |
1,093 |
|
|
Income Taxes |
$ |
31,087 |
|
|
$ |
43,985 |
|
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
PROG HOLDINGS, INC.
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 and the rampant increase
in inflation has led to significant market uncertainty and
disruption and has impacted many aspects of our businesses and
operations, directly and indirectly. Throughout these notes to the
condensed consolidated financial statements, the impacts of the
COVID-19 pandemic and inflation on the financial results for the
three and nine
months ended September 30, 2022 and 2021 have been identified
under the respective sections. For a discussion of customer payment
trends and significant estimates made by management regarding
allowances for lease merchandise, accounts receivable, and loans
receivable, as well as the impacts COVID-19 and supply chain
disruptions had on generating new lease and loan originations
during the three and nine months
ended September 30, 2022 and 2021, see Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of
Operations," including the "COVID-19 Pandemic," "Results of
Operations," and "Liquidity and Capital Resources"
below.
Description of Business
PROG Holdings, Inc. ("we," "our," "us," the "Company," or "PROG
Holdings") is a financial technology holding company that provides
leading financial solutions to empower consumers and retailers.
PROG Holdings has two reportable segments: (i) Progressive Leasing,
an e-commerce, app-based, and in-store point-of-sale lease-to-own
solutions provider; and (ii) Vive Financial ("Vive"), an
omnichannel provider of second-look revolving credit
products.
Our Progressive Leasing segment provides consumers with
lease-purchase solutions through its point-of-sale partner
locations and e-commerce website partners in the United States
(collectively, "POS partners"). It does so by purchasing
merchandise from the POS partners desired by customers and, in
turn, leasing that merchandise to the customers through a
cancellable lease-to-own transaction. Progressive Leasing has no
stores of its own, but rather offers lease-purchase solutions to
the customers of traditional and e-commerce retailers.
Our Vive segment primarily serves customers that may not qualify
for traditional prime lending offers who desire to purchase goods
and services from participating merchants. Vive offers customized
programs, with services that include revolving loans through
private label and Vive-branded credit cards. Vive's current network
of POS partner locations and e-commerce websites includes
furniture, mattresses, home exercise equipment, and home
improvement retailers, as well as medical and dental service
providers.
On June 25, 2021, the Company completed the acquisition of Four
Technologies, Inc. ("Four"), an innovative Buy Now, Pay Later
company that allows shoppers to pay for merchandise through four
interest-free installments. Four’s proprietary platform
capabilities and its base of customers and retailers expand PROG
Holdings’ ecosystem of financial technology offerings by
introducing a payment solution that further diversifies the
Company's consumer fintech offerings. Shoppers use Four to purchase
furniture, clothing, electronics, health and beauty products,
footwear, jewelry, and other consumer goods from retailers across
the United States. Four is not a reportable segment for the three
and nine month periods ended September 30, 2022 and 2021 as
its financial results are not material to the Company's condensed
consolidated financial results.
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 condensed consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates. Management does not believe these
estimates or assumptions will change significantly in the future
absent unidentified and unforeseen events, such as possible direct
or indirect impacts associated with the COVID-19 pandemic and/or
increasing inflation.
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, which are of a normal recurring nature, considered
necessary for a fair presentation have been included in the
accompanying unaudited condensed consolidated financial statements.
These condensed consolidated 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, 2021 (the "2021 Annual Report") filed with
the United States Securities and Exchange Commission on February
23, 2022. The results of operations for the three and nine
months ended September 30, 2022 are not necessarily indicative
of operating results for the full year.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of PROG Holdings, 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 2021
Annual Report for an expanded discussion of accounting policies and
estimates.
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"), 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 September 30, |
|
Nine Months Ended September 30, |
|
(Shares In Thousands) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Weighted Average Shares Outstanding |
50,461 |
|
|
66,092 |
|
|
52,896 |
|
|
66,938 |
|
|
Dilutive Effect of Share-Based Awards |
86 |
|
|
293 |
|
|
157 |
|
|
381 |
|
|
Weighted Average Shares Outstanding Assuming Dilution |
50,547 |
|
|
66,385 |
|
|
53,053 |
|
|
67,319 |
|
Approximately 1,622,000 and 1,418,000 weighted-average share-based
awards were excluded from the computation of earnings per share
assuming dilution during the three and nine months ended
September 30, 2022, respectively, as the awards would have
been anti-dilutive for the periods presented.
Approximately 725,000 and 464,000 weighted-average share-based
awards were excluded from the computation of earnings per share
assuming dilution during the three and nine months ended
September 30, 2021, respectively, as the awards would have
been anti-dilutive for the periods presented.
Revenue Recognition
Lease
Revenues and Fees
Progressive Leasing provides merchandise, consisting primarily of
furniture, appliances, electronics, jewelry, mobile phones and
accessories, mattresses, automobile electronics and accessories,
and a variety of other products, to its customers for lease under
terms agreed to by the customer. Progressive Leasing offers
customers of traditional and e-commerce retailers a lease-purchase
solution through leases with payment terms that can generally be
renewed up to 12 months. Progressive Leasing does not require
deposits upon inception of customer agreements. The customer has
the right to acquire ownership either through early buyout options
or through payment of all required lease payments. The agreements
are cancellable at any time by either party without
penalty.
All of Progressive Leasing's customer agreements are considered
operating leases. The Company maintains ownership of the lease
merchandise until all payment obligations are satisfied under the
lease ownership agreements. Initial lease payments made by the
customer upon lease execution are recognized as deferred revenue
and are amortized as lease revenue over the estimated lease term on
a straight-line basis. All other customer lease billings are earned
prior to the lease payment due date and are recorded net of related
sales taxes as earned. Payment due date terms include weekly,
bi-weekly, semi-monthly and monthly frequencies. Initial lease
payments and other cash collected in advance of being due or earned
are recognized as deferred revenue within customer deposits and
advance payments in the accompanying condensed consolidated balance
sheets. 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 revenues are recorded net of a provision for
uncollectible renewal payments.
Initial direct costs related to 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.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest
and Fees on Loans Receivable
Interest and fees on loans receivable is primarily generated from
our Vive segment. 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 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, Vive also may assess fees for missed or late payments,
which are recognized as interest and fee revenue in the billing
period in which they are assessed if collectibility is reasonably
assured. Annual fees and other fees 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 amounted to $56.5 million and
$66.3 million, net of allowances, as of September 30, 2022 and
December 31, 2021, respectively.
The Company maintains an accounts receivable allowance, which
primarily relates to its Progressive Leasing operations and, to a
lesser extent, receivables from Vive's POS partners. The Company’s
policy is to record an allowance for uncollectible renewal payments
based on historical collection experience. Other qualitative
factors are considered in estimating the allowance, such as current
and forecasted business trends including, but not limited to, the
potential unfavorable impacts of the significant increase in
inflation and the COVID-19 pandemic on our businesses. Given the
significant uncertainty regarding the impacts of increasing
inflation and the COVID-19 pandemic on our business, a high level
of estimation was involved in determining the allowance as of
September 30, 2022. Therefore, actual future accounts
receivable write-offs may differ materially from the allowance. If
the recent increase in inflation, which has risen at a greater pace
than seen in decades, continues in future periods, or if the
current level of inflation does not decrease, such developments may
further adversely impact our customers' ability to continue to make
payments to the Company. The provision for uncollectible renewal
payments is recorded as a reduction of lease revenues and fees
within the condensed consolidated statements of earnings. For
customer lease agreements that are past due, the Company's policy
is to write-off lease receivables after 120 days.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. See below for
discussion of Vive's loans receivable and related allowance for
loan losses.
The following table shows the components of the accounts receivable
allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In Thousands) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Beginning Balance |
|
$ |
81,898 |
|
|
$ |
48,459 |
|
|
$ |
71,233 |
|
|
$ |
56,364 |
|
|
Net Book Value of Accounts Written Off |
|
(109,203) |
|
|
(56,507) |
|
|
(302,945) |
|
|
(164,518) |
|
|
Recoveries |
|
8,736 |
|
|
7,085 |
|
|
27,623 |
|
|
30,933 |
|
|
Accounts Receivable Provision |
|
104,303 |
|
|
61,541 |
|
|
289,823 |
|
|
137,799 |
|
|
Ending Balance |
|
$ |
85,734 |
|
|
$ |
60,578 |
|
|
$ |
85,734 |
|
|
$ |
60,578 |
|
Lease
Merchandise
Progressive Leasing's merchandise consists primarily of furniture,
appliances, electronics, jewelry, mobile phones and accessories,
mattresses, automobile electronics and accessories, and a variety
of other products, and is recorded at the lower of depreciated cost
or net realizable value. Progressive Leasing depreciates lease
merchandise to a 0% salvage value generally over 12 months.
Depreciation is accelerated upon early buyout. All of Progressive
Leasing's merchandise, net of accumulated depreciation and
allowances, represents on-lease merchandise.
The Company records a provision for write-offs using the allowance
method. 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 on
historical write-off experience. Other qualitative factors, such as
current and forecasted customer payment trends, are considered in
estimating the allowance. Given the significant uncertainty
regarding the impacts of inflation, which has increased at a
greater pace than seen in decades, and the COVID-19 pandemic on our
business, a high level of estimation was involved in determining
the allowance as of September 30, 2022. Actual lease
merchandise write-offs may differ materially from the allowance as
of September 30, 2022. If the recent increase in the rate of
inflation continues in future periods, or if the current level of
inflation does not decrease, such developments may further
adversely impact our customers' ability to continue to make
payments to the Company. For customer lease agreements that are
past due, the Company's policy is to write-off lease merchandise
after 120 days.
The following table shows the components of the allowance for lease
merchandise write-offs, which is included within lease merchandise,
net in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In Thousands) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Beginning Balance |
$ |
70,579 |
|
|
$ |
45,627 |
|
|
$ |
54,367 |
|
|
$ |
45,992 |
|
|
Net Book Value of Merchandise Written off |
(56,810) |
|
|
(30,340) |
|
|
(157,376) |
|
|
(85,240) |
|
|
Recoveries |
2,329 |
|
|
2,361 |
|
|
6,989 |
|
|
6,998 |
|
|
Provision for Write-offs |
43,537 |
|
|
34,174 |
|
|
155,655 |
|
|
84,072 |
|
|
Ending Balance |
$ |
59,635 |
|
|
$ |
51,822 |
|
|
$ |
59,635 |
|
|
$ |
51,822 |
|
Vendor Incentives and Rebates Provided to POS Partners
Progressive Leasing has agreements with some of its POS partners
that require additional consideration to be paid to the POS
partner, including payments for exclusivity, rebates based on lease
volume originations generated through the POS partners, and
payments to the POS partners for marketing or other development
initiatives to promote additional lease originations through these
POS partners. Payments made to POS partners as consideration for
them providing exclusivity to Progressive Leasing for lease-to-own
transactions with customers of the POS partner are expensed on a
straight-line basis over the exclusivity term. Rebates are accrued
over the period the POS partner is earning the rebate, which is
typically based on quarterly or annual lease origination volumes.
Payments made to POS partners for marketing or development
initiatives are expensed on a straight-line basis over the period
the POS partner is earning the funds or the specified marketing
term. Progressive Leasing expensed $6.2 million and
$19.0 million for such additional consideration to POS
partners, during the three and nine months ended September 30,
2022, respectively, compared to $3.9 million and
$13.5 million during the three and nine
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
months ended September 30, 2021. Expenses related to
additional consideration provided to POS partners are classified
within operating expenses in the condensed consolidated statements
of earnings.
Loans
Receivable, Net
Gross loans receivable primarily 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
uncollectible amounts; merchant fee discounts, net of capitalized
origination costs; promotional fee discounts; and deferred annual
card fees. Loans receivable, net also includes $2.7 million
and $1.5 million of outstanding receivables from customers of
Four as of September 30, 2022 and December 31, 2021,
respectively.
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.
Expected lifetime losses on loans receivable are recognized upon
loan acquisition, which requires the Company to make its best
estimate of probable lifetime losses at the time of acquisition.
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 Fair Isaac
and Company ("FICO") score and by delinquency status and evaluates
loans receivable collectively for impairment when similar risk
characteristics exist.
The Company calculates Vive's 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 inflation and 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
September 30, 2022, management considered other qualitative
factors such as the unfavorable impact of the rapid increase in the
rate of inflation in recent months and the beneficial impact of
government stimulus measures to our customer base in 2020 and 2021
that were not fully factored into the macroeconomic forecasted data
and resulted in internal historical loss rates incorporated in
Vive's baseline allowance estimate being lower than current
forecasted loss rates. We believe those stimulus measures may have
contributed to the favorable cardholder payment trends experienced
at Vive in 2020 and 2021. 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. If the recent increase
in inflation continues in future periods, such a development may
adversely impact our customers' ability to continue to make
payments to the Company. To the extent that actual results differ
from estimates of uncollectible loans receivable, including the
significant uncertainties caused by rapidly increasing inflation
and the COVID-19 pandemic, the Company's results of operations and
liquidity may be materially affected.
Vive's delinquent loans receivable includes those that are 30 days
or more past due based on their contractual billing dates. Vive's
loans receivable are placed 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 Vive's 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.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2022 and December 31,
2021 by FICO score as determined at the time of loan
origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
FICO Score Category |
September 30, 2022 |
|
December 31, 2021 |
|
600 or Less |
7.4 |
% |
|
7.7 |
% |
|
Between 600 and 700 |
76.2 |
% |
|
78.0 |
% |
|
700 or Greater |
13.8 |
% |
|
12.7 |
% |
|
No Score Identified |
2.6 |
% |
|
1.6 |
% |
Prepaid
Expenses and Other Assets
Prepaid expenses and other assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
September 30, 2022 |
|
December 31, 2021 |
|
Prepaid Expenses |
$ |
27,596 |
|
|
$ |
28,283 |
|
|
Prepaid Software Expenses |
8,664 |
|
|
7,102 |
|
|
Unamortized Initial Direct Costs on Lease Agreement
Originations |
5,781 |
|
|
5,326 |
|
|
Prepaid Insurance |
1,073 |
|
|
40 |
|
|
Other Assets |
6,421 |
|
|
7,446 |
|
|
Prepaid Expenses and Other Assets |
$ |
49,535 |
|
|
$ |
48,197 |
|
The Company incurs costs to implement cloud computing arrangements
("CCA") that are hosted by third-party vendors. Implementation
costs associated with CCA are capitalized when incurred during the
application development phase and are recorded within prepaid
software expenses above. Amortization is calculated on a
straight-line basis over the contractual term of the arrangement
and is included within computer software expense as a component of
operating expenses in the condensed consolidated statements of
earnings.
Accounts
Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
September 30, 2022 |
|
December 31, 2021 |
|
Accounts Payable |
$ |
9,379 |
|
|
$ |
13,741 |
|
|
Accrued Salaries and Benefits |
21,095 |
|
|
25,861 |
|
|
Accrued Sales and Personal Property Taxes |
14,463 |
|
|
14,851 |
|
|
Income Taxes Payable |
2,809 |
|
|
2,782 |
|
|
Uncertain Tax Positions1
|
51,509 |
|
|
48,451 |
|
|
Other Accrued Expenses and Liabilities |
38,320 |
|
|
30,268 |
|
|
Accounts Payable and Accrued Expenses |
$ |
137,575 |
|
|
$ |
135,954 |
|
1
The uncertain tax positions as of September 30, 2022, and
December 31, 2021 are primarily related to the Company’s tax
treatment of the $175.0 million settlement payment made in 2020 to
the FTC as discussed in Note 10 and Note 11 to the consolidated
financial statements in the 2021 Annual Report.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt
On November 24, 2020, the Company entered into a credit agreement
with a consortium of lenders providing for a $350.0 million senior
revolving credit facility (the "Revolving Facility"), under which
revolving borrowings became available at the completion of the
separation and distribution transaction through which the Company's
historical Aaron's Business segment was spun-off into a separate
company, and under which all borrowings and commitments will mature
or terminate on November 24, 2025. The Company expects that the
Revolving Facility will be used to provide for working capital and
capital expenditures, to finance future permitted acquisitions, and
for other general corporate purposes. If the Company's total net
debt to EBITDA ratio as defined by the Revolving Facility exceeds
1.25, the Revolving Facility becomes fully secured for the
remaining duration of the Revolving Facility term. As of June 30,
2022, the Company exceeded the 1.25 total net debt to EBITDA ratio
and the Revolving Facility became fully secured. The Company had no
outstanding borrowings and $350.0 million total available credit
under the Revolving Facility as of September 30, 2022 and
December 31, 2021.
On November 26, 2021, the Company entered into an indenture in
connection with an offering of $600 million aggregate
principal amount of its 6.00% senior unsecured notes due 2029 (the
"Senior Notes"). The Senior Notes were issued at 100% of their par
value. The Senior Notes are general unsecured obligations of the
Company and are guaranteed by certain of the Company’s existing and
future domestic subsidiaries.
The net proceeds from the Senior Notes were used to fund the
purchase price, and related fees and expenses, of the Company’s
tender offer to purchase $425 million of the Company’s common
stock as discussed in Note 12 to the consolidated financial
statements in the 2021 Annual Report. The Company intends to use
any remaining proceeds for future share repurchases or, to the
extent the Company determines not to repurchase additional shares,
for general corporate purposes.
At September 30, 2022, the Company was in compliance with all
covenants related to its outstanding debt. See Note 9 to the
consolidated financial statements in the 2021 Annual Report for
further information regarding the Company's
indebtedness.
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. Progressive
Leasing and Four are the only reporting units with goodwill as of
September 30, 2022. Impairment occurs when the reporting
unit's carrying value exceeds its fair value. 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. Factors which could necessitate an interim
impairment assessment include a sustained decline in the Company’s
stock price, prolonged negative industry or economic trends and
significant underperformance relative to historical results,
projected future operating results, or the Company failing to
successfully execute on one or more elements of Progressive Leasing
and/or Four's strategic plans.
The Company concluded an interim goodwill impairment test was
triggered for the Four reporting unit as of September 30, 2022.
Factors that led to this conclusion include: (i) a significant
decline in valuations and related market multiples for peers in the
Buy Now, Pay Later industry; (ii) an increase in Four's forecasted
losses; and (iii) projected negative cash flows for the reporting
unit in future periods.
As of September 30, 2022, the Company determined the Four goodwill
was partially impaired and recorded an impairment of goodwill of
$10.2 million during the three months ended September 30,
2022. The Company engaged the assistance of a third-party valuation
firm to perform the interim goodwill impairment test for the Four
reporting unit. This included an assessment of the Four reporting
unit's fair value relative to the carrying value that was derived
using a market approach. The market approach, which includes the
guideline public company method, utilized pricing multiples derived
from an analysis of other publicly traded companies that operate in
the Buy Now, Pay Later industry. 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 Four directly. As of September 30, 2022, Four's
goodwill balance was $7.3 million. Additional goodwill
impairment charges may occur in future periods if the Company fails
to execute on one or more elements of Four's strategic plan, Four's
actual or projected results are unfavorable compared to the current
forecasted operating results, and/or there are further declines in
the Buy Now, Pay Later peer market multiples.
The Company completed its annual goodwill impairment test for
Progressive Leasing as of October 1, 2021 and concluded that no
impairment had occurred. The Company determined that there were no
events or circumstances that occurred during the nine months ended
September 30, 2022 that would more likely than not reduce the fair
value of Progressive Leasing below its carrying
amount.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Shareholders'
Equity
Changes in shareholders' equity for the nine months ended September
30, 2022 and 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
Common Stock |
|
Additional
Paid-in Capital |
|
Retained Earnings |
|
Total Shareholders’ Equity |
|
(In Thousands) |
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
Balance, December 31, 2021 |
(25,638) |
|
|
$ |
(749,401) |
|
|
82,079 |
|
|
$ |
41,039 |
|
|
$ |
332,244 |
|
|
$ |
1,055,526 |
|
|
$ |
679,408 |
|
|
Stock-Based Compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,587 |
|
|
— |
|
|
6,587 |
|
|
Reissued Shares |
177 |
|
|
5,260 |
|
|
— |
|
|
— |
|
|
(7,776) |
|
|
— |
|
|
(2,516) |
|
|
Repurchased Shares |
(2,200) |
|
|
(78,080) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(78,080) |
|
|
Net Earnings |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
27,135 |
|
|
27,135 |
|
|
Balance, March 31, 2022 |
(27,661) |
|
|
$ |
(822,221) |
|
|
82,079 |
|
|
$ |
41,039 |
|
|
$ |
331,055 |
|
|
$ |
1,082,661 |
|
|
$ |
632,534 |
|
|
Stock-Based Compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,484 |
|
|
— |
|
|
2,484 |
|
|
Reissued Shares |
47 |
|
|
1,380 |
|
|
— |
|
|
— |
|
|
(716) |
|
|
— |
|
|
664 |
|
|
Repurchased Shares |
(3,899) |
|
|
(98,395) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(98,395) |
|
|
Net Earnings |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
19,484 |
|
|
19,484 |
|
|
Balance, June 30, 2022 |
(31,513) |
|
|
$ |
(919,236) |
|
|
82,079 |
|
|
$ |
41,039 |
|
|
$ |
332,823 |
|
|
$ |
1,102,145 |
|
|
$ |
556,771 |
|
|
Stock-Based Compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,960 |
|
|
— |
|
|
4,960 |
|
|
Reissued Shares |
56 |
|
|
1,755 |
|
|
— |
|
|
— |
|
|
(2,141) |
|
|
— |
|
|
(386) |
|
|
Repurchased Shares |
(589) |
|
|
(10,886) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,886) |
|
|
Net Earnings |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
16,005 |
|
|
16,005 |
|
|
Balance, September 30, 2022 |
(32,046) |
|
|
$ |
(928,367) |
|
|
82,079 |
|
|
$ |
41,039 |
|
|
$ |
335,642 |
|
|
$ |
1,118,150 |
|
|
$ |
566,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
Common Stock |
|
Additional
Paid-in Capital |
|
Retained Earnings |
|
Total Shareholders’ Equity |
|
(In Thousands) |
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
Balance, December 31, 2020 |
(23,029) |
|
|
$ |
(613,881) |
|
|
90,752 |
|
|
$ |
45,376 |
|
|
$ |
318,263 |
|
|
$ |
1,236,378 |
|
|
$ |
986,136 |
|
|
Stock-Based Compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,163 |
|
|
— |
|
|
4,163 |
|
|
Reissued Shares |
216 |
|
|
3,671 |
|
|
— |
|
|
— |
|
|
(8,400) |
|
|
— |
|
|
(4,729) |
|
|
Repurchased Shares |
(589) |
|
|
(28,102) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(28,102) |
|
|
Net Earnings |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
79,488 |
|
|
79,488 |
|
|
Balance, March 31, 2021 |
(23,402) |
|
|
$ |
(638,312) |
|
|
90,752 |
|
|
$ |
45,376 |
|
|
$ |
314,026 |
|
|
$ |
1,315,866 |
|
|
$ |
1,036,956 |
|
|
Stock-Based Compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,973 |
|
|
— |
|
|
3,973 |
|
|
Reissued Shares |
61 |
|
|
1,751 |
|
|
— |
|
|
— |
|
|
912 |
|
|
— |
|
|
2,663 |
|
|
Repurchased Shares |
(911) |
|
|
(49,094) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(49,094) |
|
|
Net Earnings |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
68,837 |
|
|
68,837 |
|
|
Balance, June 30, 2021 |
(24,252) |
|
|
$ |
(685,655) |
|
|
90,752 |
|
|
$ |
45,376 |
|
|
$ |
318,911 |
|
|
$ |
1,384,703 |
|
|
$ |
1,063,335 |
|
|
Stock-Based Compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,667 |
|
|
— |
|
|
6,667 |
|
|
Reissued Shares |
16 |
|
|
347 |
|
|
— |
|
|
— |
|
|
(269) |
|
|
— |
|
|
78 |
|
|
Repurchased Shares |
(1,125) |
|
|
(51,037) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(51,037) |
|
|
Net Earnings |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
57,413 |
|
|
57,413 |
|
|
Balance, September 30, 2021 |
(25,361) |
|
|
$ |
(736,345) |
|
|
90,752 |
|
|
$ |
45,376 |
|
|
$ |
325,309 |
|
|
$ |
1,442,116 |
|
|
$ |
1,076,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
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|
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|
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based Compensation
During the nine months ended September 30, 2022, the Company issued
539,085 restricted stock units and 264,132 stock options to certain
employees, and 389,529 performance share units to certain employees
and third-parties, which vest over
one to three-year periods for certain units and upon the
achievement of specified performance conditions for other units.
The weighted average fair value of the restricted stock and
performance share awards was $28.00, which was based on the fair
market value of the Company’s common stock on the dates of grant.
The weighted average fair value of the stock option awards was
$10.89, which was based on a grant date value using a
Black-Scholes-Merton option pricing model. The Company will
recognize the grant date fair value of the restricted stock units
and stock options as stock-based compensation expense over the
requisite service period of
one to three years. The Company will recognize the grant
date fair value of the performance units as stock-based
compensation expense over the estimated vesting period based on the
Company's projected assessment of the performance conditions that
are probable of being achieved in accordance with ASC 718,
Stock-based Compensation.
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 maintains certain financial assets and
liabilities that are not measured at fair value but for which fair
value is disclosed.
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 any revolving
credit borrowings also approximate their carrying
amounts.
Recent
Accounting Pronouncements
Pending Adoption
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform: Facilitation of the Effects of Reference
Rate Reform on Financial Reporting (Topic 848)
("ASU 2020-04"). The standard provides temporary guidance to ease
the potential burden in accounting for reference rate reform
primarily resulting from the discontinuation of the London
Interbank Overnight ("LIBO") rate or another reference rate
expected to be discontinued. Entities may apply the provisions of
the new standard as of the beginning of the reporting period when
the election is made. The provisions of this update have been
extended to December 31, 2024, when the reference rate replacement
activity is expected to have completed. The Company's Revolving
Facility currently references the LIBO rate for determining
interest payable on outstanding borrowings. The amendments in ASU
2020-04 are elective and apply to all entities that have contracts
referencing the LIBO rate. The new guidance provides an expedient
which simplifies accounting analyses under current U.S. GAAP for
contract modifications if the change is directly related to a
change from the LIBO rate to a new interest rate index. The Company
plans to amend the Revolving Facility agreement to change the
reference rate from LIBO to the Secured Overnight Financing Rate
("SOFR"). The Company does not expect the adoption of ASU 2020-04
to have a material impact to the Company's condensed consolidated
financial statements or to any key terms of our Revolving Facility
other than the discontinuation of the LIBO rate.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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) |
September 30, 2022 |
|
December 31, 2021 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Deferred Compensation Liability |
$ |
— |
|
|
$ |
2,023 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,423 |
|
|
$ |
— |
|
The Company maintains the PROG Holdings, 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.
Financial Assets and Liabilities Not Measured at Fair Value for
Which Fair Value is Disclosed
Vive's loans receivable are measured at amortized cost, net of an
allowance for loan losses on the condensed consolidated balance
sheets. In estimating fair value for Vive's loans receivable, the
Company utilized a discounted cash flow methodology. The Company
used various unobservable inputs reflecting its own assumptions,
such as contractual future principal and interest cash flows,
future loss rates, and discount rates (which consider current
interest rates and are adjusted for credit risk, among other
factors).
Four's loans receivable, net of an allowance for loan losses and
unamortized fees, are included within loans receivable, net on the
condensed consolidated balance sheet as of September 30, 2022
and approximated fair value based on a discounted cash flow
methodology.
The Company's Senior Notes are carried at amortized cost on the
condensed consolidated balance sheets and are measured at fair
value for disclosure purposes. The fair value of the Senior Notes
was estimated based on quoted market prices in less active markets
and has been classified as Level 2 in the fair value
hierarchy.
The following table summarizes the fair value of the Company's debt
and loans receivable held by Vive and Four:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
September 30, 2022 |
|
December 31, 2021 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Senior Notes |
$ |
— |
|
|
$ |
478,320 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
616,080 |
|
|
$ |
— |
|
|
Loans Receivable, Net |
$ |
— |
|
|
$ |
— |
|
|
$ |
165,371 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
157,070 |
|
PROG HOLDINGS, INC.
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) |
September 30, 2022 |
|
December 31, 2021 |
|
Loans Receivable, Gross |
$ |
184,167 |
|
|
$ |
172,615 |
|
|
Unamortized Fees |
(11,729) |
|
|
(12,511) |
|
|
Loans Receivable, Amortized Cost |
172,438 |
|
|
160,104 |
|
|
Allowance for Loan Losses |
(42,302) |
|
|
(40,789) |
|
|
Loans Receivable, Net of Allowances and Unamortized
Fees1
|
$ |
130,136 |
|
|
$ |
119,315 |
|
1
Loans Receivable, Net of Allowances and Unamortized Fees,
attributable to Four was $2.7 million and $1.5 million as of
September 30, 2022 and December 31, 2021,
respectively.
The table below presents credit quality indicators of the amortized
cost of the Company's loans receivable by origination
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2022
|
2022 |
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
Prior |
|
Total |
|
FICO Score Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600 or Less |
$ |
6,456 |
|
|
$ |
4,924 |
|
|
$ |
1,223 |
|
|
$ |
336 |
|
|
$ |
95 |
|
|
$ |
35 |
|
|
$ |
13,069 |
|
|
Between 600 and 700 |
65,751 |
|
|
45,295 |
|
|
13,984 |
|
|
3,792 |
|
|
1,004 |
|
|
1,840 |
|
|
131,666 |
|
|
700 or Greater |
14,938 |
|
|
5,537 |
|
|
1,686 |
|
|
356 |
|
|
161 |
|
|
403 |
|
|
23,081 |
|
|
No Score Identified |
4,622 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,622 |
|
|
Total Amortized Cost |
$ |
91,767 |
|
|
$ |
55,756 |
|
|
$ |
16,893 |
|
|
$ |
4,484 |
|
|
$ |
1,260 |
|
|
$ |
2,278 |
|
|
$ |
172,438 |
|
Included in the table below is an aging of the loans receivable,
gross balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar Amounts in Thousands) |
|
|
|
|
Aging Category |
September 30, 2022 |
|
December 31, 2021 |
|
30-59 Days Past Due |
6.1 |
% |
|
6.3 |
% |
|
60-89 Days Past Due |
3.6 |
% |
|
3.1 |
% |
|
90 or More Days Past Due |
5.6 |
% |
|
4.0 |
% |
|
Past Due Loans Receivable |
15.3 |
% |
|
13.4 |
% |
|
Current Loans Receivable |
84.7 |
% |
|
86.6 |
% |
|
|
|
|
|
Balance of Credit Card Loans on Nonaccrual Status |
5,004 |
|
|
3,527 |
|
|
Balance of Loans Receivable 90 or More Days Past Due and Still
Accruing Interest and Fees |
$ |
— |
|
|
$ |
— |
|
The table below presents the components of the allowance for loan
losses for the three and nine months ended September 30, 2022
and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In Thousands) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Beginning Balance |
$ |
40,797 |
|
|
$ |
45,151 |
|
|
$ |
40,789 |
|
|
$ |
42,127 |
|
|
Provision for Loan Losses |
12,031 |
|
|
3,868 |
|
|
28,491 |
|
|
14,724 |
|
|
Charge-offs |
(11,612) |
|
|
(5,381) |
|
|
(30,286) |
|
|
(15,031) |
|
|
Recoveries |
1,086 |
|
|
1,012 |
|
|
3,308 |
|
|
2,830 |
|
|
Ending Balance |
$ |
42,302 |
|
|
$ |
44,650 |
|
|
$ |
42,302 |
|
|
$ |
44,650 |
|
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. COMMITMENTS AND CONTINGENCIES
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.
At September 30, 2022 and December 31, 2021, the Company
had accrued $0.7 million and an immaterial amount,
respectively for pending legal and regulatory matters for which it
believes losses are probable and the amount of the loss can be
reasonably estimated. The Company records its best estimate of the
loss to legal and regulatory liabilities in accounts payable and
accrued expenses in the condensed consolidated balance sheets. The
Company estimates that the aggregate range of reasonably possible
loss in excess of accrued liabilities for such probable loss
contingencies is immaterial. Those matters for which a probable
loss cannot be reasonably estimated are not included within the
estimated ranges.
At September 30, 2022, 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 immaterial. 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 January 2021, the Company, along with other lease-to-own
companies, received a subpoena from the California Department of
Financial Protection and Innovation (the "DFPI") requesting the
production of documents regarding the Company’s compliance with
state consumer protection laws, including new legislation that went
into effect on January 1, 2021. Although the Company believes it is
in compliance with all applicable consumer financial laws and
regulations in California, this inquiry may lead to an enforcement
action and/or a consent order, and substantial costs, including
legal fees, fines, penalties, and remediation expenses. While the
Company intends to preserve defenses surrounding the jurisdiction
of DFPI in this matter, it anticipates cooperating with the DFPI in
responding to its inquiry.
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 plaintiff alleged that from
March 2, 2018 through February 19, 2020, the Company made certain
misleading public statements about the Company's business,
operations, and prospects. The allegations underlying the lawsuit
principally relate to the FTC's inquiry into disclosures related to
lease-to-own and other financial products offered by the Company
through its historical Aaron's Business and Progressive Leasing
segments. The United States District Court for the Northern
District of Georgia, the Court to whom the case was transferred,
granted the Company's motion to dismiss the case on September 29,
2022. Plaintiff has agreed that it will not appeal the matter and
the Company has agreed that it will not pursue attorneys' fees and
costs from Plaintiff. The United States District Court for the
Northern District of Georgia entered a judgment dismissing the
action on October 20, 2022.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 25, 2022, the Pennsylvania Attorney General filed a
complaint against Progressive Leasing in the Philadelphia County
Court of Common Pleas alleging, among other things, that
Progressive Leasing was operating in the Commonwealth of
Pennsylvania in violation of the Pennsylvania Rental Purchase
Agreement Act by failing to disclose certain terms and conditions
of rent-to-own ("RTO") transactions on "hang tags" physically
attached to RTO merchandise. The complaint seeks, among other
things, to convert all RTO agreements entered into by Progressive
Leasing prior to September 9, 2022 into retail installment
contracts for which the maximum interest rate is 6% per annum,
civil penalties in the amount of $1,000 for each violation of
Pennsylvania’s Unfair Trade Practices and Consumer Protection Law
(and $3,000 for each such violation involving a consumer age 60 or
older) and unspecified investigation and prosecution costs.
Progressive Leasing believes the Pennsylvania Attorney General’s
claims are without merit and intends to vigorously defend itself in
this matter.
Other Contingencies
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 segment, had unconditionally
cancellable unfunded lending commitments totaling approximately
$505.8 million and $467.6 million as of
September 30, 2022 and December 31, 2021, 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.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. SEGMENTS
As of September 30, 2022, the Company has two reportable
segments: Progressive Leasing and Vive.
Progressive Leasing partners with traditional and e-commerce
retailers, primarily in the furniture and appliance, jewelry,
mobile phones and accessories, mattresses, and automobile
electronics and accessories industries to offer a lease-purchase
solution for customers who may not have access to traditional
credit-based financing options. It does so by offering leases with
monthly, semi-monthly, bi-weekly and weekly payment
models.
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 POS partners with near-prime and
below-prime customers one source for financing and leasing
transactions.
As discussed in Note 1 of the 2021 Annual Report, on June 25, 2021,
the Company completed the acquisition of Four, an innovative Buy
Now, Pay Later company that allows shoppers to pay for merchandise
through four interest-free installments. Four is not a reportable
segment for the three and nine month periods ended
September 30, 2022 and 2021 as its financial results are not
material to the Company's condensed consolidated financial results.
The revenues, loss before income taxes, and assets within "other"
below is primarily comprised of the operating activities of
Four.
Disaggregated Revenue
The following table presents revenue by source and by segment for
the three months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|
|
|
|
|
(In Thousands) |
Progressive Leasing |
Vive |
Other |
Total |
Progressive Leasing |
Vive |
Other |
Total |
|
|
|
|
|
Lease Revenues and Fees1
|
$ |
606,585 |
|
$ |
— |
|
$ |
— |
|
$ |
606,585 |
|
$ |
635,025 |
|
$ |
— |
|
$ |
— |
|
$ |
635,025 |
|
|
|
|
|
|
Interest and Fees on Loans Receivable2
|
— |
|
18,392 |
|
844 |
|
19,236 |
|
— |
|
15,212 |
|
168 |
|
15,380 |
|
|
|
|
|
|
Total |
$ |
606,585 |
|
$ |
18,392 |
|
$ |
844 |
|
$ |
625,821 |
|
$ |
635,025 |
|
$ |
15,212 |
|
$ |
168 |
|
$ |
650,405 |
|
|
|
|
|
1
Revenue within the scope of ASC 842,
Leases.
2
Revenue within the scope of ASC 310,
Receivables.
The following table presents revenue by source and by segment for
the nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|
|
|
|
|
(In Thousands) |
Progressive Leasing |
Vive |
Other |
Total |
Progressive Leasing |
Vive |
Other |
Total |
|
|
|
|
|
Lease Revenues and Fees1
|
$ |
1,930,843 |
|
$ |
— |
|
$ |
— |
|
$ |
1,930,843 |
|
$ |
1,989,055 |
|
$ |
— |
|
$ |
— |
|
$ |
1,989,055 |
|
|
|
|
|
|
Interest and Fees on Loans Receivable2
|
— |
|
53,026 |
|
1,860 |
|
54,886 |
|
— |
|
42,154 |
|
168 |
|
42,322 |
|
|
|
|
|
|
Total |
$ |
1,930,843 |
|
$ |
53,026 |
|
$ |
1,860 |
|
$ |
1,985,729 |
|
$ |
1,989,055 |
|
$ |
42,154 |
|
$ |
168 |
|
$ |
2,031,377 |
|
|
|
|
|
1
Revenue within the scope of ASC 842,
Leases.
2
Revenue within the scope of ASC 310,
Receivables.
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Measurement of Segment Profit or Loss and Segment
Assets
The Company evaluates performance and allocates resources based on
revenues and earnings (loss) before income taxes from operations.
The Company determines earnings (loss) before income tax expense
for all reportable segments in accordance with U.S. GAAP. A portion
of interest expense is allocated from the Progressive Leasing
segment to the Vive segment based on the balance of outstanding
intercompany debt.
The Company incurred various corporate overhead expenses for
certain executive management, finance, treasury, tax, audit, legal,
risk management, and other overhead functions during the three and
nine months ended September 30, 2022 and 2021. Corporate
overhead expenses incurred are primarily reflected as expenses of
the Progressive Leasing segment and an immaterial amount was
allocated to the Vive segment. The allocation of corporate overhead
costs to the Progressive Leasing and Vive segments is consistent
with how the chief operating decision maker analyzed performance
and allocated resources among the segments of the Company during
the three and nine months ended September 30, 2022 and 2021.
The following is a summary of earnings before income tax expense by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(In Thousands) |
2022 |
|
2021 |
|
Earnings Before Income Tax Expense: |
|
|
|
|
Progressive Leasing |
$ |
43,492 |
|
|
$ |
76,435 |
|
|
Vive |
1,376 |
|
|
6,354 |
|
|
Other1
|
(17,520) |
|
|
(4,912) |
|
|
Total Earnings Before Income Tax Expense |
$ |
27,348 |
|
|
$ |
77,877 |
|
1
Earnings Before Income Tax Expense attributable to Other for the
three months ended September 30, 2022 includes a $10.2 million
goodwill impairment loss related to the partial impairment of
Four's goodwill as discussed in Note 1 above.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(In Thousands) |
2022 |
|
2021 |
|
Earnings Before Income Tax Expense: |
|
|
|
|
Progressive Leasing |
$ |
112,956 |
|
|
$ |
268,128 |
|
|
Vive |
9,154 |
|
|
12,131 |
|
|
Other1
|
(27,597) |
|
|
(4,912) |
|
|
Total Earnings Before Income Tax Expense |
$ |
94,513 |
|
|
$ |
275,347 |
|
1
Earnings Before Income Tax Expense attributable to Other for the
nine months ended September 30, 2022 includes a $10.2 million
goodwill impairment loss related to the partial impairment of
Four's goodwill as discussed in Note 1 above.
The following is a summary of total assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
September 30, 2022 |
|
December 31, 2021 |
|
Assets: |
|
|
|
|
Progressive Leasing |
$ |
1,311,583 |
|
|
$ |
1,445,612 |
|
|
Vive |
157,178 |
|
|
149,628 |
|
|
Other |
22,730 |
|
|
26,521 |
|
|
Total Assets |
$ |
1,491,491 |
|
|
$ |
1,621,761 |
|
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. RESTRUCTURING EXPENSES
During the second quarter of 2022, the Company initiated
restructuring activities intended to reduce expenses, consolidate
certain segment corporate headquarters, and align the cost
structure of the business with the Company's near-term revenue
outlook. The Company continued such activities during the third
quarter and recorded restructuring expenses of $4.7 million
and $9.0 million for the three and nine months ended
September 30, 2022, respectively. These costs were primarily
comprised of employee severance within Progressive Leasing and
operating lease right-of-use asset impairment charges related to
relocation of the Vive corporate headquarters to the Company's
corporate office building and a reduction of call center office
space. The Company will continue to monitor the impacts of changes
in macroeconomic conditions on its businesses and may take
additional steps to further adjust the Company's cost structure
based on unfavorable changes in these conditions, which may result
in further restructuring charges in future periods.
The following tables summarize restructuring charges recorded
within operating expenses in the condensed consolidated statements
of earnings for the three and nine months ended September 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
|
(In Thousands) |
Progressive Leasing |
|
Vive |
|
Other |
|
Total |
|
Severance |
$ |
2,076 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,076 |
|
|
Right-of-Use Asset Impairment |
2,285 |
|
|
— |
|
|
— |
|
|
2,285 |
|
|
Property and Equipment Impairment |
309 |
|
|
— |
|
|
— |
|
|
309 |
|
|
Other Expenses |
— |
|
|
3 |
|
|
— |
|
|
3 |
|
|
Total Restructuring Expenses |
$ |
4,670 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
4,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
|
(In Thousands) |
Progressive Leasing |
|
Vive |
|
Other |
|
Total |
|
Severance |
$ |
5,611 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,611 |
|
|
Right-of-Use Asset Impairment |
2,285 |
|
|
655 |
|
|
— |
|
|
2,940 |
|
|
Property and Equipment Impairment |
309 |
|
|
— |
|
|
— |
|
|
309 |
|
|
Other Expenses |
138 |
|
|
3 |
|
|
— |
|
|
141 |
|
|
Total Restructuring Expenses |
$ |
8,343 |
|
|
$ |
658 |
|
|
$ |
— |
|
|
$ |
9,001 |
|
The following table summarizes the accrual and payment activity
related to the restructuring program for the nine months ended
September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Severance |
|
Other Restructuring Activities |
|
Total |
|
Balance at December 31, 2021 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Charges |
|
5,611 |
|
|
138 |
|
|
5,749 |
|
|
Cash Payments |
|
(1,954) |
|
|
(88) |
|
|
(2,042) |
|
|
Balance at September 30, 2022 |
|
$ |
3,657 |
|
|
$ |
50 |
|
|
$ |
3,707 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Information: Except for
historical information contained herein, the matters set forth in
this Form 10-Q are forward-looking statements. These
statements are based on management’s current expectations and
plans, which involve risks and uncertainties. Such forward-looking
statements generally can be identified by the use of
forward-looking terminology such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "plan," "project,"
"would," "should," and similar expressions. You are cautioned not
to place undue reliance on these forward-looking statements, which
speak only as of the filing date of this Quarterly Report and which
involve risks and uncertainties that may cause actual results to
differ materially from those set forth in these statements. These
risks and uncertainties include factors that could cause our actual
results and financial condition to differ materially from those
expressed or implied in our forward-looking statements. Such risks
and uncertainties include, among others, those discussed in
"Item 1A. Risk Factors" in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2021 (the "2021 Annual
Report"). Except as required by law, the Company undertakes no
obligation to update these forward-looking statements to reflect
subsequent events or circumstances after the filing date of this
Quarterly Report.
The following discussion should be read in conjunction with the
condensed consolidated financial statements as of and for the three
and nine months ended September 30, 2022 and 2021, including
the notes to those statements, appearing elsewhere in this
report. We also suggest that management’s discussion and
analysis appearing in this report be read in conjunction with the
management’s discussion and analysis and consolidated financial
statements included in our 2021 Annual Report.
Business Overview
PROG Holdings, Inc. ("we," "our," "us," the "Company," or "PROG
Holdings") is a financial technology holding company that provides
leading financial solutions to empower consumers and retailers.
PROG Holdings has two reportable segments: (i) Progressive Leasing,
an e-commerce, app-based, and in-store point-of-sale lease-to-own
solutions provider; and (ii) Vive Financial ("Vive"), an
omnichannel provider of second-look revolving credit
products.
Our Progressive Leasing segment provides consumers with
lease-purchase solutions through its point-of-sale partner
locations and e-commerce website partners in the United States
(collectively, "POS partners"). It does so by purchasing the
merchandise desired by customers from the POS partners and, in
turn, leasing that merchandise to the customers through a
cancellable lease-to-own transaction. Progressive Leasing has no
stores of its own, but rather offers lease-purchase solutions to
the customers of traditional and e-commerce retailers.
Our Vive segment primarily serves customers that may not qualify
for traditional prime lending offers who desire to purchase goods
and services from participating merchants. Vive offers customized
programs with services that include revolving loans through private
label and Vive-branded credit cards. Vive's current network of POS
partner locations and e-commerce websites includes furniture,
mattresses, home exercise equipment, and home improvement
retailers, as well as medical and dental service
providers.
On June 25, 2021, the Company completed the acquisition of Four
Technologies, Inc. ("Four"), an innovative Buy Now, Pay Later
company that allows shoppers to pay for merchandise through four
interest-free installments. Four’s proprietary platform
capabilities and its base of customers and retailers expand PROG
Holdings’ ecosystem of financial technology offerings by
introducing a payment solution that further diversifies the
Company's consumer fintech offerings. Shoppers use Four to purchase
furniture, clothing, electronics, health and beauty products,
footwear, jewelry, and other consumer goods from retailers across
the United States. Four is not expected to be a reportable segment
in 2022 as its financial results are not expected to be material to
the Company's consolidated financial results in 2022. The Company
recorded an impairment loss of $10.2 million to partially
write-off the goodwill balance of the Four reporting unit during
the three months ended September 30, 2022.
Current Business Environment and Outlook
The Company continues to operate in a challenging macro environment
as inflation levels in the United States, particularly in gas,
food, and housing costs, are putting significant pressure on our
customers, resulting in an unfavorable impact on our lease
portfolio performance and Gross Merchandise Volume ("GMV")
production. Customer payment delinquencies and uncollectible
renewal payments experienced within our Progressive Leasing segment
during the first nine months of 2022 were higher than projected and
exceeded levels experienced during pre-pandemic periods. In
response to increasing customer delinquencies and higher
write-offs, the Company tightened its lease decisioning, resulting
in fewer lease approvals and an adverse impact on GMV production.
Customer payment delinquencies and uncollectible renewal payments
for leases originated after the Company further tightened its lease
decisioning in mid-2022 are consistent with pre-pandemic
delinquency trends. The significant increase in inflation levels
has also resulted in a decrease in demand from our customer base at
key national and regional POS partners.
In light of these macro environment challenges and to align the
cost structure of the business with our near-term revenue outlook,
the Company executed on a number of cost reduction initiatives
during the second and third quarters of 2022 to drive efficiencies
and right-size variable costs, while attempting to minimize the
negative impact on growth-related initiatives.
The current challenging and volatile macro environment may result
in customer payment delinquencies and associated write-offs in
future periods reaching levels higher than typical pre-pandemic
levels, despite the steps we have taken to tighten our lease and
Vive loan decisioning. The relatively high levels of customer
payment delinquencies and related write-offs experienced during the
nine months ended September 30, 2022 related to leases originated
prior to the Company's further tightening of its lease decisioning
in mid-2022 may continue for an extended period of time, and/or may
increase to even higher levels, which would have an unfavorable
impact on our performance.
COVID-19 Pandemic.
On March 11, 2020, the World Health Organization declared the
outbreak of COVID-19 a pandemic. Since then, the COVID-19 pandemic
has negatively impacted the global economy, disrupted global supply
chains and, at times, increased unemployment levels. Although the
temporary showroom and/or store closures or reduced hours and scope
of operations that many of our POS partners experienced during
portions of 2020 and 2021 generally have eased, the significant
increase in COVID-19 cases from the Omicron variant during the
first quarter of 2022 resulted in many of our POS partners
temporarily resuming such measures during the first half of that
quarter of 2022, and also resulted in increases in employee
absenteeism and declines in customer traffic for many of our POS
partners, all of which unfavorably impacted Progressive Leasing's
GMV. In addition, other pandemic-related factors continued to
unfavorably impact many of our POS partners during the first nine
months of 2022, including supply chain disruptions resulting in
shortages of available products at certain POS partners, primarily
in the appliance, electronics and furniture categories. These
pandemic-related developments, as well as the possible emergence of
various COVID-19 subvariants, may have an unfavorable impact on
Progressive Leasing’s generation of new lease agreements, Vive's
generation of new loans, and on our revenues and earnings, in
future periods.
The COVID-19 pandemic may adversely impact our business, results of
operations, financial condition, liquidity and/or cash flow in
future periods. The extent of any such adverse impacts will depend
on future developments, which are highly uncertain and cannot be
predicted, including (i) the length and severity of the pandemic,
including, for example, the emergence of contagious and harmful
variants of COVID-19, and localized outbreaks or additional waves
of COVID-19 cases; (ii) the impact of any such outbreaks on our
customers, POS partners, and employees; (iii) the nature of any
government orders issued in response to such outbreaks, and/or
self-imposed restrictions on operations being implemented by our
POS partners; (iv) the effectiveness, availability and level of use
of vaccines; and (v) whether there is any additional government
stimulus in response to the pandemic, as well as the nature, timing
and amount of such stimulus payments.
In response to the unfavorable economic impacts arising out of the
COVID-19 pandemic, the United States government enacted certain
fiscal stimulus measures in several phases during 2020 and 2021 to
assist in counteracting the economic disruptions caused by the
pandemic. We believe all of those government stimulus measures
provided economic support to many of our customers, resulting in an
increase in payment activity and early lease buyouts, as well as
lease merchandise, accounts receivable, and loan receivable
write-offs trending lower during 2020 and 2021. We believe a
significant portion of our Progressive Leasing and Vive customers
received stimulus payments and/or federally supplemented
unemployment payments during 2020 and 2021, which enabled them to
continue making payments to us under their lease-to-own or credit
card agreements, despite the economically challenging times
resulting from the COVID-19 pandemic. We believe expiration of the
government stimulus payments, enhanced unemployment benefits and
child tax credits that were implemented in response to the COVID-19
pandemic, and other adverse economic impacts arising out of the
pandemic also contributed to unfavorable results of operations in
the third quarter of 2022 as compared to the same period in
2021.
Highlights
The following summarizes significant financial highlights from the
three months ended September 30, 2022:
•We
reported revenues of $625.8 million, a decrease of 3.8%
compared to the third quarter of 2021. The decrease in revenues was
primarily due to an increase in customer payment delinquencies and
uncollectible renewal payments, further tightening of lease
decisioning beginning in mid-2022 resulting in fewer lease
originations, and a decrease in customers exercising early lease
buyout options, as compared to the stronger customer payment
activity and low delinquencies we experienced during the third
quarter of 2021.
•GMV
decreased by $55.9 million for Progressive Leasing and
$1.1 million for Vive in the third quarter of 2022, compared
to the same period in the prior year. We believe these decreases
were due to tighter lease and loan decisioning, resulting in fewer
lease and loan originations; the rapid increase in the rate of
inflation eroding customers' disposable incomes and reducing their
demand for many of the goods sold by our POS partners; and the
absence of government stimulus payments and enhanced unemployment
benefits and child tax credits, which we believe benefited many of
our customers in 2021. These negative impacts were partially offset
by a $0.5 million increase in GMV generated through e-commerce
platforms. In the third quarter of 2022, e-commerce GMV represented
16.5% of Progressive Leasing's total GMV, compared to 14.5% in the
third quarter of 2021. Additionally, GMV from our other operations
increased by $13.1 million primarily due to an increase in
Four loan originations compared to the third quarter of
2021.
•Earnings
before income taxes decreased to $27.3 million compared to
$77.9 million in the same period in 2021. In addition to lower
revenues, the decrease was primarily driven by a $10.7 million
increase in operating expenses, as compared to the third quarter of
2021, mainly due to expenses associated with growing our strategic
initiatives and the restructuring activities we undertook in 2022.
The decrease was also driven by an increase of $9.4 million in
the provision for lease merchandise write-offs, as a result of
higher customer payment delinquencies and write-offs, as compared
to the strong customer payment activity and low lease merchandise
charge-offs we experienced during the third quarter of 2021. Other
factors contributing to the decrease were a $9.0 million
increase in interest expense related to the Senior Notes issued in
November 2021 and the $10.2 million goodwill impairment loss
related to Four in the third quarter of 2022.
Key Operating Metrics
Gross Merchandise Volume.
We believe GMV is a key performance indicator of our Progressive
Leasing and Vive segments, as it provides the total value of new
lease and loan originations written into our portfolio over a
specified time period. GMV does not represent revenues earned by
the Company, but rather is a leading indicator we use in
forecasting revenues the Company may earn in the short-term.
Progressive Leasing's GMV is defined as the retail price of
merchandise acquired by Progressive Leasing, which it then expects
to lease to its customers. GMV for Vive and Other are defined as
gross loan originations.
The following table presents our GMV for the Company for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Change |
|
(Unaudited and In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
Progressive Leasing |
$ |
437,417 |
|
|
$ |
493,277 |
|
|
$ |
(55,860) |
|
|
(11.3) |
% |
|
Vive |
47,967 |
|
|
49,085 |
|
|
(1,118) |
|
|
(2.3) |
|
|
Other |
15,786 |
|
|
2,655 |
|
|
13,131 |
|
|
nmf |
|
Total GMV |
$ |
501,170 |
|
|
$ |
545,017 |
|
|
$ |
(43,847) |
|
|
(8.0) |
% |
nmf—Calculation is not meaningful
We believe the decrease in Progressive Leasing's and Vive's GMV was
primarily due to our tighter lease and loan decisioning to address
the unfavorable economic conditions that were present in the second
and third quarters of 2022, resulting in fewer lease and loan
approvals; the rapid increase in the rate of inflation to levels
not seen in more than forty years, which eroded customers'
disposable incomes and their demand for many of the goods sold by
our POS partners; and the absence of government stimulus payments
and enhanced unemployment benefits and child tax credits, which we
believe benefited many of our customers in 2021. We believe all of
these factors have unfavorably impacted the generation of new
leases and loans. The decrease in Progressive Leasing's GMV from
those factors was partially offset by a $0.5 million increase
in GMV generated through e-commerce platforms. E-commerce channels
generated 16.5% of Progressive Leasing's GMV in the third quarter
of 2022 compared to 14.5% in the third quarter of 2021. The
decrease in total GMV was also partially offset by an increase in
GMV from our other operations, primarily due to an increase in Four
loan originations from new and existing retail
partners.
Active Customer Count.
Our active customer count represents the total number of customers
that have an active lease agreement with our Progressive Leasing
segment or an active loan with our Vive segment or with Four. The
following table presents our consolidated active customer count,
which includes an immaterial number of customers that have both an
active lease agreement and loan agreement, for the Company for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30 (Unaudited) |
2022 |
|
2021 |
|
Active Customer Count: |
|
|
|
|
Progressive Leasing |
915,000 |
|
|
936,000 |
|
|
Vive |
92,000 |
|
|
87,000 |
|
|
Other |
27,000 |
|
|
8,000 |
|
|
Total Active Customer Count |
1,034,000 |
|
|
1,031,000 |
|
|
|
|
|
The decrease in the number of Progressive Leasing customers was
primarily due to a decrease in customer demand for the types of
merchandise typically purchased through our lease-to-own solutions
and also due to our tighter lease decisioning to address the
unfavorable economic conditions that were present in the second and
third quarters of 2022. The increase in the number of Four
customers was primarily driven by an increase in loan originations
from new and existing retail partners.
Key Components of Earnings Before Income Taxes
In this MD&A section, we review our condensed consolidated
results. For the three and nine months ended September 30,
2022 and the comparable prior year period, some of the key revenue,
cost and expense items that affected earnings before income taxes
were as follows:
Revenues.
We separate our total revenues into two components: (i) lease
revenues and fees and (ii) interest and fees on loans receivable.
Lease revenues and fees include all revenues derived from lease
agreements from our Progressive Leasing segment. Lease revenues are
recorded net of a provision for uncollectible renewal payments.
Interest and fees on loans receivable represents merchant fees,
finance charges and annual and other fees earned on outstanding
loans in our Vive segment and, to a lesser extent, from
Four.
Depreciation of Lease Merchandise.
Depreciation of lease merchandise primarily reflects the expense
associated with depreciating merchandise leased to customers by
Progressive Leasing.
Provision for Lease Merchandise Write-offs.
The provision for lease merchandise write-offs represents the
estimated merchandise losses incurred but not yet identified by
management and adjustments for changes in estimates for the
allowance for lease merchandise write-offs.
Operating Expenses.
Operating expenses include personnel costs, stock-based
compensation expense, occupancy costs, advertising, professional
services expense, sales acquisition expense, computer software
expense, the provision for loan losses, fixed asset depreciation
expense, intangible asset amortization, and restructuring, among
other expenses.
Impairment of Goodwill.
Impairment of goodwill is the partial write-off of the goodwill
balance at the Four reporting unit. Refer to Note 1 of these
condensed consolidated financial statements for further discussion
of the interim goodwill impairment assessment and resulting
impairment charge.
Interest Expense.
Interest expense consists of interest incurred on the Company's
senior secured revolving credit facility (the "Revolving Facility")
and on the Company's Senior Notes.
Results of Operations – Three months ended September 30, 2022
and 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Change |
|
(In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
REVENUES: |
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
$ |
606,585 |
|
|
$ |
635,025 |
|
|
$ |
(28,440) |
|
|
(4.5) |
% |
|
Interest and Fees on Loans Receivable |
19,236 |
|
|
15,380 |
|
|
3,856 |
|
|
25.1 |
|
|
|
625,821 |
|
|
650,405 |
|
|
(24,584) |
|
|
(3.8) |
|
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
Depreciation of Lease Merchandise |
422,589 |
|
|
435,857 |
|
|
(13,268) |
|
|
(3.0) |
|
|
Provision for Lease Merchandise Write-Offs |
43,537 |
|
|
34,174 |
|
|
9,363 |
|
|
27.4 |
|
|
Operating Expenses |
112,733 |
|
|
102,053 |
|
|
10,680 |
|
|
10.5 |
|
|
Impairment of Goodwill |
10,151 |
|
|
— |
|
|
10,151 |
|
|
nmf |
|
|
589,010 |
|
|
572,084 |
|
|
16,926 |
|
|
3.0 |
|
|
OPERATING PROFIT |
36,811 |
|
|
78,321 |
|
|
(41,510) |
|
|
(53.0) |
|
|
Interest Expense |
(9,463) |
|
|
(444) |
|
|
(9,019) |
|
|
nmf |
|
EARNINGS BEFORE INCOME TAX EXPENSE |
27,348 |
|
|
77,877 |
|
|
(50,529) |
|
|
(64.9) |
|
|
INCOME TAX EXPENSE |
11,343 |
|
|
20,464 |
|
|
(9,121) |
|
|
(44.6) |
|
|
NET EARNINGS |
$ |
16,005 |
|
|
$ |
57,413 |
|
|
$ |
(41,408) |
|
|
(72.1) |
% |
nmf—Calculation is not meaningful
Revenues
Information about our revenues by source and reportable segment is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|
|
|
|
|
(In Thousands) |
Progressive Leasing |
Vive |
Other |
Total |
Progressive Leasing |
Vive |
Other |
Total |
|
|
|
|
|
Lease Revenues and Fees |
$ |
606,585 |
|
$ |
— |
|
$ |
— |
|
$ |
606,585 |
|
$ |
635,025 |
|
$ |
— |
|
$ |
— |
|
$ |
635,025 |
|
|
|
|
|
|
Interest and Fees on Loans Receivable
|
— |
|
18,392 |
|
844 |
|
19,236 |
|
— |
|
15,212 |
|
168 |
|
15,380 |
|
|
|
|
|
|
Total |
$ |
606,585 |
|
$ |
18,392 |
|
$ |
844 |
|
$ |
625,821 |
|
$ |
635,025 |
|
$ |
15,212 |
|
$ |
168 |
|
$ |
650,405 |
|
|
|
|
|
The decrease in Progressive Leasing revenues was primarily due to
an increase in customer payment delinquencies and uncollectible
renewal payments, as compared to the strong customer payment
activity and low delinquencies it experienced during the third
quarter of 2021. The provision for uncollectible renewal payments,
which is recorded as a reduction to lease revenues and fees, was
$104.3 million in the third quarter of 2022 compared to $61.5
million in the third quarter of 2021. Lease revenues and fees were
also lower as a result of our tighter lease decisioning beginning
in mid-2022, fewer customers electing to exercise early lease
buyouts in the third quarter of 2022, as compared to the third
quarter of 2021, and an 11.3% decrease in GMV. The increase in Vive
revenues was primarily due to higher loans receivable driven by
strong GMV growth in 2021.
Operating Expenses
Information about certain significant components of operating
expenses for the third quarter of 2022 as compared to the third
quarter of 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Change |
|
(In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
Personnel Costs1
|
$ |
47,432 |
|
|
$ |
47,302 |
|
|
$ |
130 |
|
|
0.3 |
% |
|
Stock-Based Compensation |
4,890 |
|
|
6,667 |
|
|
(1,777) |
|
|
(26.7) |
|
|
Occupancy Costs |
1,657 |
|
|
1,688 |
|
|
(31) |
|
|
(1.8) |
|
|
Advertising |
2,497 |
|
|
4,291 |
|
|
(1,794) |
|
|
(41.8) |
|
|
Professional Services |
4,225 |
|
|
6,460 |
|
|
(2,235) |
|
|
(34.6) |
|
|
Sales Acquisition Expense2
|
7,720 |
|
|
5,871 |
|
|
1,849 |
|
|
31.5 |
|
|
Computer Software Expense3
|
6,829 |
|
|
5,683 |
|
|
1,146 |
|
|
20.2 |
|
|
Other Sales, General and Administrative Expense |
12,354 |
|
|
11,620 |
|
|
734 |
|
|
6.3 |
|
|
Sales, General and Administrative Expense4
|
87,604 |
|
|
89,582 |
|
|
(1,978) |
|
|
(2.2) |
|
|
Provision for Loan Losses |
12,031 |
|
|
3,868 |
|
|
8,163 |
|
|
211.0 |
|
|
Depreciation and Amortization |
8,425 |
|
|
8,603 |
|
|
(178) |
|
|
(2.1) |
|
|
Restructuring Expense |
4,673 |
|
|
— |
|
|
4,673 |
|
|
nmf |
|
Operating Expenses |
$ |
112,733 |
|
|
$ |
102,053 |
|
|
$ |
10,680 |
|
|
10.5 |
% |
1
Personnel costs excludes stock-based compensation expense, which is
reported separately in the operating expense table.
2
Sales acquisition expense includes vendor incentives and rebates to
POS partners, external sales commissions, amortization of initial
direct costs and amounts paid to various POS partners to be their
exclusive provider of lease-to-own solutions.
3
Computer software expense consists primarily of software
subscription fees, licensing fees and non-capitalizable software
implementation costs.
4
Progressive Leasing's sales, general and administrative expense was
$75.2 million and $80.2 million during the three months
ended September 30, 2022 and 2021, respectively.
The provision for loan losses increased $8.2 million compared
to the prior year quarter due to the unfavorable economic
conditions present
during the three months ended September 30, 2022, including a rapid
increase in inflation and the absence of government stimulus
payments and enhanced unemployment benefits and child tax credits,
as compared to the same period in 2021, resulting in Vive's
delinquencies returning to pre-pandemic levels. The provision for
loan losses also increased due to growth in GMV at Four since it
was acquired in June 2021.
The provision for loan losses as a percentage of interest and fees
revenue increased to 62.5%
for the three months ended September 30, 2022
compared to 25.1% in the same period in 2021 due to delinquencies
at Vive returning to pre-pandemic levels and higher write-offs
within our Four operations.
Restructuring expense of $4.7 million
is the result of a number of restructuring activities which were
initiated by the Company
in the second quarter of
2022,
and which continued in the third quarter.
Those activities are intended to reduce expenses, consolidate
certain segment corporate headquarters and other office locations,
and align the cost structure of the business with our near-term
revenue outlook.
The restructuring expense was
primarily comprised of severance costs associated with Progressive
Leasing employees and operating lease right-of-use asset impairment
charges related to a reduction in call center office
space.
Other Costs and Expenses
Depreciation of lease merchandise.
Depreciation of lease merchandise decreased by 3.0% during the
three months ended September 30, 2022 compared to the same period
in 2021. As a percentage of total lease revenues and fees,
depreciation of lease merchandise increased to 69.7% from 68.6% in
the prior year quarter, primarily due to an increase in
uncollectible renewal payments, which is recorded as a reduction to
lease revenues and fees.
Provision for lease merchandise write-offs.
The provision for lease merchandise write-offs increased
$9.4 million due to higher customer payment delinquencies and
write-offs during the three months ended September 30, 2022,
compared to the strong customer payment activity and lower lease
merchandise write-offs Progressive Leasing experienced during the
same period in 2021. Given the significant economic uncertainty
resulting from the rate of the increase in inflation in recent
months, the absence of government stimulus payments and enhanced
unemployment benefits and child tax credits in 2022, which we
believe benefited many of our customers in 2021, the ongoing
impacts of the COVID-19 pandemic, and the potential effects of such
developments on Progressive Leasing's POS partners, customers, and
business going forward, a high level of estimation was involved in
determining the allowance as of September 30, 2022. Actual
lease merchandise write-offs could differ materially from the
allowance for those write-offs.
The provision for lease merchandise write-offs as a percentage of
lease revenues increased to 7.2% during the three months ended
September 30, 2022 from 5.4% in the same period in 2021. The
increase in the provision was a result of higher customer payment
delinquencies and write-offs on leases originated prior to the
Company tightening its lease decisioning in mid-2022 to address the
unfavorable economic conditions, as compared to the strong customer
payment activity and low lease merchandise write-offs we
experienced in 2021.
Impairment of Goodwill.
The Company recorded a loss of $10.2 million to partially
write-off the goodwill balance of the Four reporting unit during
the three months ended September 30, 2022. Refer to Note 1 of these
condensed consolidated financial statements for further discussion
of the interim goodwill impairment assessment and resulting
impairment charge.
Earnings Before Income Tax Expense
Information about our earnings before income tax expense by
reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Change |
|
(In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
EARNINGS BEFORE INCOME TAX EXPENSE: |
|
|
|
|
|
|
|
|
Progressive Leasing |
$ |
43,492 |
|
|
$ |
76,435 |
|
|
$ |
(32,943) |
|
|
(43.1) |
% |
|
Vive |
1,376 |
|
|
6,354 |
|
|
(4,978) |
|
|
(78.3) |
|
|
Other |
(17,520) |
|
|
(4,912) |
|
|
(12,608) |
|
|
nmf |
|
Total Earnings Before Income Tax Expense |
$ |
27,348 |
|
|
$ |
77,877 |
|
|
$ |
(50,529) |
|
|
(64.9) |
% |
nmf—Calculation is not meaningful
The $17.5 million loss before income tax expense within
"Other" primarily relates to our Four operations and includes a
$10.2 million impairment loss related to the partial
impairment of Four's goodwill. Other factors impacting the change
in earnings before income taxes are discussed above.
Income Tax Expense
Income tax expense decreased to $11.3 million for the three
months ended September 30, 2022 compared to $20.5 million in
the prior year comparable period due to lower earnings before
income taxes. The effective income tax rate for the three months
ended September 30, 2022 was 41.5% compared to 26.3% for the same
period in 2021. The increase in the effective tax rate was
primarily driven by discrete income tax expenses related to the
non-deductible goodwill impairment loss for Four of
$10.2 million, interest on the Company's uncertain tax
position liabilities, and a permanent adjustment for employee
stock-based compensation vesting.
Results of Operations – Nine Months Ended September 30, 2022 and
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, |
|
Change |
|
(In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
REVENUES: |
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
$ |
1,930,843 |
|
|
$ |
1,989,055 |
|
|
$ |
(58,212) |
|
|
(2.9) |
% |
|
Interest and Fees on Loans Receivable |
54,886 |
|
|
42,322 |
|
|
12,564 |
|
|
29.7 |
|
|
|
1,985,729 |
|
|
2,031,377 |
|
|
(45,648) |
|
|
(2.2) |
|
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
Depreciation of Lease Merchandise |
1,358,713 |
|
|
1,380,572 |
|
|
(21,859) |
|
|
(1.6) |
|
|
Provision for Lease Merchandise Write-Offs |
155,655 |
|
|
84,072 |
|
|
71,583 |
|
|
85.1 |
|
|
Operating Expenses |
337,997 |
|
|
289,994 |
|
|
48,003 |
|
|
16.6 |
|
|
Impairment of Goodwill |
10,151 |
|
|
— |
|
|
10,151 |
|
|
nmf |
|
|
1,862,516 |
|
|
1,754,638 |
|
|
107,878 |
|
|
6.1 |
|
|
OPERATING PROFIT |
123,213 |
|
|
276,739 |
|
|
(153,526) |
|
|
(55.5) |
|
|
Interest Expense |
(28,700) |
|
|
(1,392) |
|
|
(27,308) |
|
|
nmf |
|
EARNINGS BEFORE INCOME TAX EXPENSE |
94,513 |
|
|
275,347 |
|
|
(180,834) |
|
|
(65.7) |
|
|
INCOME TAX EXPENSE |
31,889 |
|
|
69,609 |
|
|
(37,720) |
|
|
(54.2) |
|
|
NET EARNINGS |
$ |
62,624 |
|
|
$ |
205,738 |
|
|
$ |
(143,114) |
|
|
(69.6) |
% |
nmf—Calculation is not meaningful
Revenues
Information about our revenues by source and reportable segment is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|
(In Thousands) |
Progressive Leasing |
Vive |
Other |
Total |
Progressive Leasing |
Vive |
Other |
Total |
|
Lease Revenues and Fees |
$ |
1,930,843 |
|
$ |
— |
|
$ |
— |
|
$ |
1,930,843 |
|
$ |
1,989,055 |
|
$ |
— |
|
$ |
— |
|
$ |
1,989,055 |
|
|
Interest and Fees on Loans Receivable
|
— |
|
53,026 |
|
1,860 |
|
54,886 |
|
— |
|
42,154 |
|
168 |
|
42,322 |
|
|
Total Revenues |
$ |
1,930,843 |
|
$ |
53,026 |
|
$ |
1,860 |
|
$ |
1,985,729 |
|
$ |
1,989,055 |
|
$ |
42,154 |
|
$ |
168,000 |
|
$ |
2,031,377 |
|
The decrease in Progressive Leasing revenues was primarily due to
an increase in customer payment delinquencies and uncollectible
renewal payments for Progressive Leasing, as compared to the strong
customer payment activity and low delinquencies it experienced
during the nine months ended September 30, 2021. The provision for
uncollectible renewal payments, which is recorded as a reduction to
lease revenues and fees, was $289.8 million for the nine
months ended September 30, 2022 compared to $137.8 million in the
same period in 2021. Lease revenues and fees were also lower as a
result of fewer customers electing to exercise early lease buyouts
during the nine months ended September 30, 2022, as compared to the
same period in 2021, and a 4.9% decline in Progressive Leasing's
GMV in the nine months ended September 30, 2022, as compared to the
same period in 2021.
Operating Expenses
Information about certain significant components of operating
expenses for the nine months ended September 30, 2022 as compared
to the nine months ended September 30, 2021 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Change |
|
(In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
Personnel Costs1
|
$ |
150,413 |
|
|
$ |
137,363 |
|
|
$ |
13,050 |
|
|
9.5 |
% |
|
Stock-Based Compensation |
13,930 |
|
|
14,803 |
|
|
(873) |
|
|
(5.9) |
|
|
Occupancy Costs |
5,001 |
|
|
4,881 |
|
|
120 |
|
|
2.5 |
|
|
Advertising |
10,544 |
|
|
11,944 |
|
|
(1,400) |
|
|
(11.7) |
|
|
Professional Services |
16,008 |
|
|
18,135 |
|
|
(2,127) |
|
|
(11.7) |
|
|
Sales Acquisition Expense2
|
21,609 |
|
|
17,121 |
|
|
4,488 |
|
|
26.2 |
|
|
Computer Software Expense3
|
19,947 |
|
|
14,477 |
|
|
5,470 |
|
|
37.8 |
|
Other Sales, General and Administrative Expense |
37,607 |
|
|
32,090 |
|
|
5,517 |
|
|
17.2 |
|
|
Sales, General and Administrative Expense4
|
275,059 |
|
|
250,814 |
|
|
24,245 |
|
|
9.7 |
|
Provision for Loan losses |
28,491 |
|
|
14,724 |
|
|
13,767 |
|
|
93.5 |
|
|
Depreciation and Amortization |
25,446 |
|
|
24,456 |
|
|
990 |
|
|
4.0 |
|
|
Restructuring Expense |
9,001 |
|
|
— |
|
|
9,001 |
|
|
nmf |
|
Operating Expenses |
$ |
337,997 |
|
|
$ |
289,994 |
|
|
$ |
48,003 |
|
|
16.6 |
% |
1
Personnel costs excludes stock-based compensation expense, which is
reported separately in the operating expense table.
2
Sales acquisition expense includes vendor incentives and rebates to
POS partners, external sales commissions, amortization of initial
direct costs and amounts paid to various POS partners to be their
exclusive provider of lease-to-own solutions.
3
Computer software expense consists primarily of software
subscription fees, licensing fees and non-capitalizable software
implementation costs.
4
Progressive Leasing's sales, general and administrative expense was
$243.1 million and $231.7 million during the nine months
ended September 30, 2022 and 2021, respectively.
The increase in personnel costs of $13.1 million was driven by
an increase of $6.7 million and $2.0 million at
Progressive Leasing and Vive, respectively, resulting from wage
increases and promotions, partially offset by a reduction in
short-term incentive expense at Progressive Leasing. An additional
$4.4 million in personnel costs was attributable to the
acquisition and growth of Four, and other strategic initiatives
started by the Company in 2021 that continued incurring costs
during 2022.
Sales acquisition expense increased $4.5 million compared to
the prior year period primarily due to increased incentives, sales
commissions, and other expenses at Progressive Leasing to promote
lease originations with its POS partners.
Computer software expense increased $5.5 million primarily due
to an increase in non-capitalizable costs for software
implementation projects by Progressive Leasing during the nine
months ended September 30, 2022, new strategic initiatives started
by the Company in 2021 that continued incurring costs in 2022, and
increased software and licensing costs.
Other sales, general and administrative expense increased
$5.5 million primarily due to additional administrative costs
within Progressive Leasing during the nine months ended September
30, 2022, in addition to an increase of $1.1 million due to
the acquisition and growth of Four, and other strategic initiatives
started by the Company in 2021 that continued incurring costs
during 2022.
Provision for loan losses increased $13.8 million compared to
the same period in 2021 due to unfavorable economic conditions
present during the nine months ended September 30, 2022, including
a rapid increase in inflation and the absence of government
stimulus payments and enhanced unemployment benefits and child tax
credits, as compared to the same period in 2021, resulting in
Vive's delinquencies returning to pre-pandemic levels. The
provision for loan losses also increased due to growth in GMV at
Four since it was acquired in June 2021.
The
provision for loan losses as a percentage of interest and fees
revenue increased to 51.9% for the nine months ended September 30,
2022 compared
to 34.8% in the same period in
2021,
due to delinquencies at Vive returning to pre-pandemic levels and
higher write-offs within our Four operations.
Restructuring expense of $9.0 million
is the result of a number of restructuring activities initiated by
the Company during the nine months ended September 30, 2022
intended to reduce expenses, consolidate certain segment corporate
headquarters and other office locations, and align the cost
structure of the business with our near-term revenue
outlook.
The restructuring expense
was primarily comprised of severance costs associated with a
reduction in Progressive Leasing's workforce and operating lease
right-of-use asset impairment charges related to a reduction in
call center office space and the relocation of the Vive corporate
headquarters to the Company's corporate office
building.
Other Costs and Expenses
Depreciation of lease merchandise.
Depreciation of lease merchandise decreased by 1.6% due to fewer
customers exercising early lease buyout elections during the nine
months ended September 30, 2022 compared to the same period in
2021. As a percentage of total lease revenues and fees,
depreciation of lease merchandise increased to 70.4% from 69.4% in
the prior year period, primarily due to an increase in
uncollectible renewal payments during the nine months ended
September 30, 2022 compared to the same period in
2021.
Provision for lease merchandise write-offs.
The provision for lease merchandise write-offs increased
$71.6 million due to higher customer payment delinquencies and
write-offs during the nine months ended September 30, 2022,
compared to the strong customer payment activity and lower lease
merchandise write-offs we experienced during the same period in
2021. Given the significant economic uncertainty resulting from the
rate of the increase in inflation experienced in recent months, the
absence of government stimulus payments and enhanced unemployment
benefits and child tax credits, which we believe benefited many of
our customers in 2021, and the ongoing impacts of the COVID-19
pandemic and the potential effects of such developments on our POS
partners, customers, and business going forward, a high level of
estimation was involved in determining the allowance as of
September 30, 2022. Actual lease merchandise write-offs could
differ materially from the allowance.
The provision for lease merchandise write-offs as a percentage of
lease revenues increased to 8.1% for the nine months ended
September 30, 2022 from 4.2% for the same period in 2021. The
increase in the provision was due to higher customer payment
delinquencies and write-offs on leases originated in the first half
of 2022, prior to the Company further tightening its lease
decisioning in mid-2022 to address the unfavorable economic
conditions, and changes in estimates on the allowance as discussed
above.
Impairment of Goodwill.
The Company recorded a loss of $10.2 million to partially
write-off the goodwill balance of the Four reporting unit during
the nine months ended September 30, 2022. Refer to Note 1 of these
condensed consolidated financial statements for further discussion
of the interim goodwill impairment assessment and resulting
impairment charge.
Earnings Before Income Taxes
Information about our earnings before income taxes by reportable
segment is as follows:
|
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Nine Months Ended
September 30, |
|
Change |
|
(In Thousands) |
2022 |
|
2021 |
|
$ |
|
% |
|
EARNINGS BEFORE INCOME TAXES: |
|
|
|
|
|
|
|
|
Progressive Leasing |
$ |
112,956 |
|
|
$ |
268,128 |
|
|
$ |
(155,172) |
|
|
(57.9) |
% |
|
Vive |
9,154 |
|
|
12,131 |
|
|
(2,977) |
|
|
(24.5) |
|
|
Other |
(27,597) |
|
|
(4,912) |
|
|
(22,685) |
|
|
nmf |
|
Total Earnings Before Income Taxes |
$ |
94,513 |
|
|
$ |
275,347 |
|
|
$ |
(180,834) |
|
|
(65.7) |
% |
nmf—Calculation is not meaningful
The $27.6 million loss before income tax expense within
"Other" primarily relates to our Four operations and includes a
$10.2 million impairment loss related to the partial
impairment of Four's goodwill. Other factors impacting the change
in earnings before income taxes are discussed above.
Income Tax Expense
Income tax expense decreased to $31.9 million for the nine
months ended September 30, 2022 compared to $69.6 million in the
prior year comparable period due to lower earnings before income
taxes. The effective tax rate was 33.7% during the nine months
ended September 30, 2022 compared to 25.3% in the same period in
2021. The increase in the effective tax rate was primarily driven
by discrete income tax expenses related to the non-deductible
goodwill impairment loss for Four of $10.2 million, interest
on the Company's uncertain tax position liabilities, and a
permanent adjustment for employee stock-based compensation
vesting.
Overview of Financial Position
The major changes in the condensed consolidated balance sheet from
December 31, 2021 to September 30, 2022
include:
•Cash
and cash equivalents increased $51.7 million to
$221.9 million during the nine months ended September 30,
2022. For additional information, refer to the "Liquidity and
Capital Resources" section below.
•Lease
merchandise, net of accumulated depreciation and allowances,
decreased $147.9 million due primarily to an increase of
$46.3 million in accumulated depreciation and allowance on
lease merchandise and a decrease in Progressive Leasing's GMV of
31.1% for the third quarter of 2022 as compared to the fourth
quarter of 2021.
Liquidity and Capital Resources
General
We expect that our primary capital requirements will consist
of:
•Reinvesting
in our business, including buying merchandise for the operations of
Progressive Leasing. Because we believe Progressive Leasing will
continue to grow over the long-term, we expect that the need for
additional lease merchandise will remain a major capital
requirement;
•Making
merger and acquisition investment(s) to further broaden our product
offerings; and
•Returning
excess cash to shareholders through periodically repurchasing
stock.
Other capital requirements include (i) expenditures related to
software development; (ii) expenditures related to our corporate
operating activities; (iii) personnel expenditures; (iv) income tax
payments; (v) funding of loans receivable for Vive; and (vi)
servicing our outstanding debt obligation.
Our capital requirements have been financed through:
•cash
flows from operations;
•private
debt offerings;
•bank
debt; and
•stock
offerings.
As of September 30, 2022, the Company had $221.9 million
of cash, $350.0 million of availability under the Revolving
Facility, and $600.0 million of indebtedness.
Cash Provided by Operating Activities
Cash provided by operating activities was $283.2 million and
$294.9 million during the nine months ended September 30, 2022
and 2021, respectively. The $11.7 million decrease in
operating cash flows was driven by a reduction in customer payment
activity compared to the prior year period, primarily due to
increased customer payment delinquencies prior to the Company
further tightening its lease decisioning in mid-2022 and fewer
customers exercising early lease buyout options during the nine
months ended September 30, 2022 as compared to the same period in
2021. The decrease in cash provided by operating activities is also
a result of $17.3 million of interest paid on the Company's
Senior Notes. The decrease in operating cash flows was partially
offset by a $76.7 million decrease in purchases of lease
merchandise by Progressive Leasing during the nine months ended
September 30, 2022 compared to the same period in 2021. Other
changes in cash provided by operating activities are discussed
above in our discussion of results for the nine months ended
September 30, 2022.
Cash Used in Investing Activities
Cash used in investing activities was $39.9 million and $72.5
million during the nine months ended September 30, 2022 and 2021,
respectively. The $32.6 million decrease in investing cash
outflows in the nine months ended September 30, 2022 as compared to
the same period in 2021 was primarily due to the $22.9 million of
cash paid for the acquisition of Four in June 2021. Additionally,
proceeds from loans receivable increased $18.1 million
compared to the same period in 2021. These changes were partially
offset by a $7.7 million increase in cash outflows for
investments in loans receivables as compared to the same period in
2021.
Cash Used in Financing Activities
Cash used in financing activities was $191.5 million during the
nine months ended September 30, 2022 compared to $130.2 million
during the same period in 2021. Cash used in financing activities
in the nine months ended September 30, 2022 was primarily used for
the Company's repurchase of $187.4 million of its common stock,
compared to $128.2 million of share repurchases in the same period
in the prior year.
Share Repurchases
We purchase our stock in the market from time to time as authorized
by our Board of Directors. On November 3, 2021, the Company
announced that its Board of Directors had authorized a new
$1 billion share repurchase program that replaced the previous
$300 million repurchase program. The Company repurchased
6,687,618 shares for $187.4 million during the nine months
ended September 30, 2022. As of September 30, 2022, we
had the authority to purchase additional shares up to our
remaining authorization limit of $373.5 million.
Debt Financing
On November 24, 2020, the Company entered into a credit
agreement with a consortium of lenders providing for a
$350.0 million senior revolving credit facility, under which
revolving borrowings became available on the date of the completion
of the separation and distribution transaction pursuant to which
our former Aaron's Business segment was spun-off into a separate
publicly-traded company, and under which all borrowings and
commitments will mature or terminate on November 24,
2025.
As of September 30, 2022, the Company had no outstanding
balance and $350.0 million remaining available for borrowings
on the Revolving Facility. The Revolving Facility includes an
uncommitted incremental facility increase option ("Incremental
Facilities") which, subject to certain terms and conditions,
permits the Company at any time prior to the maturity date to
request an increase in extensions of credit available thereunder by
an aggregate additional principal amount of up to $300.0
million.
Our Revolving Facility contains certain financial covenants, which
include requirements that the Company maintain ratios of (i) total
net debt to EBITDA of no more than 2.50:1.00 and (ii) consolidated
interest coverage of no less than 3.00:1.00. The Company will be in
default under the Revolving Facility if it fails to comply with
these covenants, and all borrowings outstanding may become due
immediately. Additionally, under the Revolving Facility, if the
total net debt to EBITDA, as defined by the Revolving Facility,
exceeds 1.25, the revolver becomes fully secured for the remaining
duration of the Revolving Facility term. As of June 30, 2022, the
Company exceeded the 1.25 total net debt to EBITDA ratio and the
Revolving Facility became fully secured. At September 30,
2022, we were in compliance with the financial covenants set forth
in the Revolving Facility and believe that we will continue to be
in compliance in the future.
On November 26, 2021, the Company entered into an indenture in
connection with its offering of $600 million aggregate
principal amount of its senior unsecured notes due 2029 (the
"Senior Notes"). The Senior Notes were issued at 100.0% of their
par value with a stated fixed annual interest rate of 6.00%.
Interest accrues on the outstanding balance and is payable
semi-annually. The Senior Notes are general unsecured obligations
of the Company and are guaranteed by certain of the Company's
existing and future domestic subsidiaries.
The indenture discussed above contains various other covenants and
obligations to which the Company and its subsidiaries are subject
while the Senior Notes are outstanding. The covenants in the
indenture may limit the extent to which, or the ability of the
Company and its subsidiaries to, among other things: (i) incur
additional debt and guarantee debt; (ii) pay dividends or make
other distributions or repurchase or redeem capital stock; (iii)
prepay, redeem or repurchase certain debt; (iv) issue certain
preferred stock or similar equity securities; (v) make loans and
investments; (vi) sell assets; (vii) incur liens; (viii) enter into
transactions with affiliates; (ix) enter into agreements
restricting the ability of the Company’s subsidiaries to pay
dividends; and (x) consolidate, merge or sell all or substantially
all of the Company’s assets. The indenture also contains customary
events of default for transactions of this type and amount. We were
in compliance with these covenants at September 30, 2022 and
believe that we will continue to be in compliance in the
future.
Commitments
Income Taxes
During the nine months ended September 30, 2022, we made net tax
payments of $31.1 million. Within the next three months,
we anticipate making estimated tax payments of $19.3 million
for United States federal income taxes and state income
taxes.
Deferred income tax liabilities as of September 30, 2022
were
$140.5 million.
Deferred income tax liabilities are calculated based on temporary
differences between the tax basis of assets and liabilities and
their respective book basis, which will result in taxable amounts
in future years when the liabilities are settled at their reported
financial statement amounts. The results of these calculations do
not have a direct connection with the amount of cash taxes to be
paid in any future periods.
Leases
We lease management and information technology space for corporate
functions as well as call center space and storage space for our
hub facilities under operating leases expiring at various times
through 2027. Our corporate and call center leases contain renewal
options for additional periods ranging from three to five years. We
also lease transportation vehicles under operating leases which
generally expire during the next three years. We expect that most
leases will be renewed or replaced by other leases in the normal
course of business.
Contractual Obligations and Commitments
Future interest payments on the Company's variable-rate debt are
based on a rate per annum equal to, at our option, (i) the London
Interbank Overnight ("LIBO") rate plus a margin within the range of
1.5% to 2.5% for revolving loans, based on total leverage, or (ii)
the administrative agent's base rate plus a margin ranging from
0.5% to 1.5%, as specified in the agreement. Future interest
payments related to our Revolving Facility are based on the
borrowings outstanding at that time. Future interest payments may
be different depending on future borrowing activity and interest
rates. The Company had no outstanding borrowings under the
Revolving Facility as of September 30, 2022.
On November 26, 2021, the Company issued $600 million
aggregate principal amount of Senior Notes that bear a fixed annual
interest rate of 6.00%. Interest accrues on the outstanding balance
and is payable semi-annually. The Senior Notes will mature on
November 15, 2029.
The Company has no long-term commitments to purchase merchandise
nor does it have significant purchase agreements that specify
minimum quantities or set prices that exceed our expected
requirements for three months.
Unfunded Lending Commitments
The Company, through its Vive business, had unconditionally
cancellable unfunded lending commitments totaling approximately
$505.8 million and $467.6 million as of
September 30, 2022 and December 31, 2021, 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
represented 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.
Critical Accounting Policies
Refer to the 2021 Annual Report.
Recent Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements
for a discussion of recently issued accounting pronouncements,
including pronouncements that were adopted in the current
year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As of September 30, 2022, we had no outstanding borrowings
under our Revolving Facility. Borrowings under the Revolving
Facility are indexed to the LIBO rate or the prime rate, which
exposes us to the risk of increased interest costs if interest
rates rise. Based on the fact that the Company had no variable-rate
debt outstanding as of September 30, 2022, a hypothetical 1.0%
increase or decrease in interest rates would not affect interest
expense.
We do not use any significant market risk sensitive instruments to
hedge commodity, foreign currency or other risks, and hold no
market risk sensitive instruments for trading or speculative
purposes.
ITEM 4.CONTROLS
AND PROCEDURES
Disclosure Controls and Procedures.
An evaluation of the Company’s disclosure controls and procedures,
as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended, was carried out by management, with the
participation of the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), as of the end of the period covered by
this Quarterly Report on Form 10-Q.
This evaluation is performed to determine if our disclosure
controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the Company
in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated
to management, including our CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosures and are effective
to provide reasonable assurance that such information is recorded,
processed, summarized and reported within the time periods
specified by the SEC’s rules and forms. No system of controls, no
matter how well designed and operated, can provide absolute
assurance that the objectives of the system of controls are met,
and no evaluation of controls can provide absolute assurance that
the system of controls has operated effectively in all cases. Our
disclosure controls and procedures, however, are designed to
provide reasonable assurance that the objectives of disclosure
controls and procedures are met.
Based on management’s evaluation, the CEO and CFO concluded that
the Company’s disclosure controls and procedures were effective as
of the date of the evaluation to provide reasonable assurance that
the objectives of disclosure controls and procedures are
met.
Changes in Internal Control Over Financial Reporting.
There were no changes in the Company’s internal control over
financial reporting, as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, during the three and nine months
ended September 30, 2022 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.LEGAL
PROCEEDINGS
From time to time, we are party to various legal proceedings
arising in the ordinary course of business. While any proceeding
contains an element of uncertainty, we do not currently believe
that any of the outstanding legal proceedings to which we are a
party will have a material adverse impact on our business,
financial position or results of operations. However, an adverse
resolution of a number of these items may have a material adverse
impact on our business, financial position or results of
operations. For further information, see Note 4 in the accompanying
condensed consolidated financial statements under the heading
"Legal and Regulatory Proceedings," which discussion is
incorporated by reference in response to this Item 1.
ITEM 1A.RISK
FACTORS
The Company does not have any updates to its risk factors
disclosure from that previously reported in the 2021 Annual
Report.
ITEM 2.UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents our share repurchase activity for the
three months ended September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
1
|
|
July 1, 2022 through July 31, 2022 |
97,203 |
|
$ |
16.51 |
|
97,203 |
|
$ |
382,794,227 |
|
|
August 1, 2022 through August 31, 2022 |
290,549 |
|
18.97 |
|
290,549 |
|
377,283,747 |
|
|
September 1, 2022 through September 30, 2022 |
200,000 |
|
18.85 |
|
200,000 |
|
373,513,523 |
|
|
Total |
587,752 |
|
|
587,752 |
|
|
1
Share repurchases are conducted under authorizations made from time
to time by the Company’s Board of Directors. The authorization
effective November 3, 2021, provided the Company with the ability
to repurchase shares up to a maximum amount of $1 billion.
Subject to the terms of the Board's authorization and applicable
law, repurchases may be made at such times and in such amounts as
the Company deems appropriate. Repurchases may be discontinued at
any time.
ITEM 3.