PROG Holdings, Inc. quarterly report, Q2 FY2021

PROG Holdings, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. PROG Holdings operates Progressive Leasing, a lease-to-own business, and Vive Financial, a second-look revolving-credit business. It acquired buy-now-pay-later provider Four Technologies on June 25, 2021. The Aaron’s Business was spun off in November 2020, so 2020 comparisons include discontinued operations in certain reported totals.

Financial performance

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Revenue	$660.0	$599.2	$1,381.0	$1,267.6
Operating profit	$92.3	$59.8	$198.4	$109.6
Pre-tax earnings from continuing operations	$91.9	$59.8	$197.5	$109.6
Net earnings from continuing operations	$68.8	$59.0	$148.3	$116.7
Diluted EPS from continuing operations	$1.02	$0.87	$2.19	$1.72
Operating margin	14.0%	10.0%	14.4%	8.6%

Q2 revenue increased 10.1%; pre-tax earnings rose 53.7% and continuing-operations net earnings rose 16.7%. Lease revenue grew 9.5%, while Vive interest and fee revenue grew 47.9%.
First-half revenue increased 8.9%; operating profit rose 81.1% and continuing-operations net earnings rose 27.1%. First-half 2020 total net loss of $211.6 million included a $328.3 million after-tax loss from discontinued operations, including a large Aaron’s Business goodwill impairment.
Q2 diluted EPS was $1.02 versus $0.87; first-half diluted EPS was $2.19 versus $1.72, both for continuing operations.

Cash flow, balance sheet, and capital

Six-month operating cash flow was $238.8 million versus $360.8 million in 2020. The comparison is affected by the Aaron’s Business, which contributed $222.6 million of 2020 operating cash flow, and by a $175 million FTC settlement payment in 2020. Management said continuing-operations operating cash flow increased $100.7 million year over year.
Cash rose $100.9 million from year-end to $137.5 million. Investing activities used $58.7 million, including $22.7 million net cash paid for Four and increased lending investment; financing activities used $79.3 million, largely reflecting $77.2 million of share repurchases.
At June 30, 2021, debt was $50.0 million under a $350 million unsecured revolver, with $300 million available. The company reported covenant compliance. Cash plus undrawn revolver availability totaled $437.5 million.
Total assets were $1.426 billion and shareholders’ equity was $1.063 billion. Net loans receivable were $103.1 million after allowances and unamortized fees; the allowance for loan losses was $45.2 million.
The board’s $300 million repurchase authorization had $222.8 million remaining at June 30. The company repurchased 1.5 million shares for $77.2 million during the first half.

Material changes and management commentary

Q2 gross merchandise volume (GMV) increased to $557.7 million from $425.6 million. Progressive Leasing GMV was $506.0 million; Vive GMV was $51.7 million. E-commerce generated 13.0% of Progressive Leasing GMV versus 4.3% a year earlier.
Active customers totaled 986,000, up from 951,000, driven principally by Vive growth. Progressive Leasing had 905,000 active customers and Vive had 81,000.
Management attributed growth to national retail partners, e-commerce penetration, higher originations, and strong customer payment activity. Supply-chain disruptions and product shortages continued to constrain some retail partners.
Lower lease merchandise write-off provisions and releases of previously established COVID-19 allowances supported earnings. In Q2, the company released $5.3 million of incremental lease merchandise and accounts-receivable allowances and $2.9 million of loan-loss allowances. Remaining incremental COVID-19 allowances at June 30 included $4.4 million for lease merchandise and $2.0 million for accounts receivable.
Operating expenses increased 17.2% in Q2, including higher personnel, advertising, and professional-services costs. First-half provision for lease merchandise write-offs fell 45.7% year over year.
Four was acquired for an estimated $23.5 million, including cash acquired. Its preliminary purchase accounting included $17.8 million of goodwill and $5.2 million of identifiable intangible assets. Four’s post-acquisition results were immaterial for the quarter; purchase accounting remained subject to finalization.

Outlook, risks, contingencies, and unusual items

The filing provides no quantitative earnings or revenue guidance. Management identifies merchandise investment, potential acquisitions, and share repurchases as expected capital uses.
Management cautioned that future customer payment behavior may weaken as government stimulus and supplemental unemployment benefits end. Continued inflation could also pressure customers’ ability to pay; stimulus may alter spending, originations, or early lease buyouts.
COVID-19 effects remain uncertain, including possible outbreaks, supply disruptions, changing customer behavior, and impacts on partners and employees. Allowance estimates depend on assumptions about payment trends, economic conditions, and future stimulus; actual losses could differ materially.
The California Department of Financial Protection and Innovation subpoenaed the company in January 2021 regarding compliance with state consumer-protection laws. The inquiry could lead to enforcement action, fines, penalties, remediation costs, or legal expense. The company also disclosed a pending securities class action; its motion to dismiss had not been decided.
Recorded legal and regulatory accruals were $0.1 million; the estimated reasonably possible loss above accruals for probable matters ranged from zero to $0.2 million. The filing warns that outcomes remain uncertain.
Vive had $393.4 million of unconditionally cancellable unfunded lending commitments. The company does not expect all available credit lines to be drawn, and the amount is not necessarily a future cash requirement.
After quarter-end, effective July 29, 2021, the company amended its executive severance plan and entered change-in-control agreements with four executives, providing specified salary, bonus, benefit, and equity-vesting terms.

Important facts for investors to verify

Whether customer payment strength and low write-offs persist after stimulus support, and whether any COVID-related allowance releases recur.
How supply constraints, inflation, and changing customer behavior affect GMV, lease buyouts, revenue, and margins.
The quality and growth of Vive’s loan portfolio, loss allowance, delinquency trends, and potential utilization of unfunded credit commitments.
Four’s finalized purchase accounting, integration progress, and contribution to revenue, earnings, and cash flow.
The status and potential consequences of the California regulatory inquiry and pending securities litigation.
Cash-flow comparability: reported first-half 2020 cash flow includes the spun-off Aaron’s Business, while 2020 earnings also include discontinued-operation and impairment effects.