PROG Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless 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 company Four Technologies in June 2021; Four was not a reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $650.4 (+6.4%) | $611.3 | $2,031.4 (+8.1%) | $1,878.9 |
| Operating profit | $78.3 | $95.6 | $276.7 | $205.2 |
| Earnings before tax | $77.9 | $95.6 | $275.3 | $205.2 |
| Net earnings from continuing operations | $57.4 | $74.6 | $205.7 | $191.3 |
| Diluted EPS from continuing operations | $0.86 | $1.10 | $3.06 | $2.82 |
| Operating margin | 12.0% | 15.6% | 13.6% | 10.9% |
- Q3 lease revenues and fees were $635.0 million, up 5.6%; loan interest and fees were $15.4 million, up 50.3%. Q3 operating profit fell 18.1% and continuing-operations earnings fell 23.1% year over year.
- Nine-month operating profit rose 34.8% and continuing-operations earnings rose 7.5%. The prior-year comparison includes a $34.2 million CARES Act tax benefit; 2020’s effective tax rate was 6.8%, versus 25.3% in 2021.
- Q3 lease merchandise write-off provision increased $21.6 million to $34.2 million; as a share of lease revenue it rose to 5.4% from 2.1%. Lease merchandise depreciation was $435.9 million, or 68.6% of lease revenue versus 67.4% a year earlier.
- Q3 gross merchandise volume (GMV) increased 12.0% to $545.0 million: Progressive Leasing rose 9.9% and Vive 29.6%. E-commerce contributed 14.5% of Progressive Leasing GMV, versus 5.5% a year earlier. Active customers totaled 1.031 million, up from 948,000.
Financial position, cash flow and capital
- At September 30, cash was $128.8 million, debt was $50.0 million, and the $350.0 million revolving facility had $300.0 million available. The company reported compliance with debt covenants; the facility matures in November 2025.
- Total assets were $1,454.3 million and shareholders’ equity was $1,076.5 million. Net loans receivable increased to $112.8 million from $79.1 million at year-end; lease merchandise, net, declined to $588.7 million from $610.3 million.
- Nine-month operating cash flow was $294.9 million, investing cash outflow $72.5 million, and financing cash outflow $130.2 million. Operating cash flow was down from $551.8 million in 2020, but that comparison includes $281.7 million of operating cash flow from the Aaron’s Business, spun off in November 2020. Continuing-operations cash flow also reflects the timing of the 2020 FTC payment and increased lease merchandise purchases.
- The company repurchased $128.2 million of shares in the first nine months. On November 3, 2021, it announced a new $1 billion repurchase authorization, replacing the existing $300 million program.
Changes, outlook and risks
- Q3 revenue growth reflected higher GMV and continued partner and e-commerce growth. Profit declined as customer delinquencies moved higher toward pre-pandemic levels, lifting lease write-off provisions; operating expenses also increased. Management reported that supply constraints continued to affect partner product availability.
- For the first nine months, improved payment performance and lower lease write-offs supported profit growth. Vive’s loan-loss provision also declined, reflecting allowance releases and improved forecasts, partly offset by portfolio growth.
- The filing provides no quantified earnings or revenue guidance. Management expects capital needs to include lease merchandise, loan funding, software, potential acquisitions and share repurchases.
- COVID-19 effects remain uncertain. Management noted higher Q3 Progressive Leasing delinquencies, less favorable Vive delinquencies than in the first half, and potential customer-payment pressure from the end of enhanced unemployment benefits and continuing inflation. Supply disruptions could constrain originations and revenue.
- The FTC settlement of $175.0 million was paid in 2020. In 2021 the company concluded it was deductible for tax purposes but did not recognize the benefit because the position did not meet the more-likely-than-not standard. It reported an $18.9 million income tax receivable and $48.8 million of uncertain tax positions, including accrued interest.
- Risks include a California Department of Financial Protection and Innovation inquiry into consumer-protection compliance and a pending securities lawsuit alleging misleading statements. The company intends to defend these matters; it reported only an immaterial accrual for pending legal and regulatory matters.
- Vive had $434.1 million of unconditionally cancellable unused credit commitments. These are not expected to be fully drawn and do not represent an estimate of future cash requirements.
Important facts for investors to verify
- Whether Progressive Leasing delinquencies, uncollectible renewal payments and merchandise write-offs continue rising, and how allowance estimates compare with actual losses.
- Whether partner supply constraints, e-commerce growth and GMV translate into sustainable revenue and earnings growth.
- Resolution and potential tax and cash consequences of the FTC settlement deduction position, California inquiry and securities litigation.
- Cash generation after lease merchandise and loan funding needs, and the effect of the expanded share repurchase authorization on liquidity and share count.
- Credit performance at Vive, including delinquency trends and the adequacy of its loan-loss allowance as economic conditions change.