UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
OR
| 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
________________________________
(Exact name of registrant as specified in its charter)
_________________________________
| (State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(385 ) 351-1369
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
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):
| ☒ | Accelerated Filer | ☐ | |||||||||||||||||||||
| Non-Accelerated Filer | ☐ | (Do not check if a smaller reporting company) | Smaller Reporting Company | ||||||||||||||||||||
| Emerging Growth Company | |||||||||||||||||||||||
| 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 | ☐ | ||||||||||||||||||||||
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.
| Title of Each Class | Shares Outstanding as of October 29, 2021 | |||||||
| Common Stock, $0.50 Par Value | ||||||||
1
PROG HOLDINGS, INC.
INDEX
2
PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| (Unaudited) | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (In Thousands, Except Share Data) | |||||||||||
| ASSETS: | |||||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
Accounts Receivable (net of allowances of $ | |||||||||||
Lease Merchandise (net of accumulated depreciation and allowances of $ | |||||||||||
Loans Receivable (net of allowances and unamortized fees of $ | |||||||||||
| Property, Plant and Equipment, Net | |||||||||||
| Operating Lease Right-of-Use Assets | |||||||||||
| Goodwill | |||||||||||
| Other Intangibles, Net | |||||||||||
| Income Tax Receivable | |||||||||||
| Prepaid Expenses and Other Assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES & SHAREHOLDERS’ EQUITY: | |||||||||||
| Accounts Payable and Accrued Expenses | $ | $ | |||||||||
| Deferred Income Tax Liability | |||||||||||
| Customer Deposits and Advance Payments | |||||||||||
| Operating Lease Liabilities | |||||||||||
| Debt | |||||||||||
| Total Liabilities | $ | $ | |||||||||
| Commitments and Contingencies (Note 6) | |||||||||||
| SHAREHOLDERS' EQUITY: | |||||||||||
Common Stock, Par Value $ | |||||||||||
| Additional Paid-in Capital | |||||||||||
| Retained Earnings | |||||||||||
| Less: Treasury Shares at Cost | |||||||||||
Common Stock: | ( | ( | |||||||||
| Total Shareholders’ Equity | |||||||||||
| Total Liabilities & Shareholders’ Equity | $ | $ | |||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| (In Thousands, Except Per Share Data) | ||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||
| Lease Revenues and Fees | $ | $ | $ | $ | ||||||||||||||||
| Interest and Fees on Loans Receivable | ||||||||||||||||||||
| COSTS AND EXPENSES: | ||||||||||||||||||||
| Depreciation of Lease Merchandise | ||||||||||||||||||||
| Provision for Lease Merchandise Write-offs | ||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||
| Separation Related Charges | ||||||||||||||||||||
| OPERATING PROFIT | ||||||||||||||||||||
| Interest Expense | ( | ( | ||||||||||||||||||
| EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAX | ||||||||||||||||||||
| INCOME TAX EXPENSE | ||||||||||||||||||||
| NET EARNINGS FROM CONTINUING OPERATIONS | ||||||||||||||||||||
| EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX | ( | |||||||||||||||||||
| NET EARNINGS (LOSS) | $ | $ | $ | $ | ( | |||||||||||||||
| BASIC EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||
| Continuing Operations | $ | $ | $ | $ | ||||||||||||||||
| Discontinued Operations | ( | |||||||||||||||||||
| TOTAL BASIC EARNINGS (LOSS) PER SHARE | $ | $ | $ | $ | ( | |||||||||||||||
| DILUTED EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||
| Continuing Operations | $ | $ | $ | $ | ||||||||||||||||
| Discontinued Operations | ( | |||||||||||||||||||
| TOTAL DILUTED EARNINGS (LOSS) PER SHARE | $ | $ | $ | $ | ( | |||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Assuming Dilution | ||||||||||||||||||||
4
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (In Thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
| Net Earnings (Loss) | $ | $ | $ | $ | ( | |||||||||||||||
| Other Comprehensive Income (Loss): | ||||||||||||||||||||
| Foreign Currency Translation Adjustment | ( | |||||||||||||||||||
| Total Other Comprehensive Income (Loss) | ( | |||||||||||||||||||
| Comprehensive Income (Loss) | $ | $ | $ | $ | ( | |||||||||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
PROG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In Thousands) | |||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net Earnings (Loss) | $ | $ | ( | ||||||||
| Adjustments to Reconcile Net Earnings (Loss) to Cash Provided by Operating Activities: | |||||||||||
| Depreciation of Lease Merchandise | |||||||||||
| Other Depreciation and Amortization | |||||||||||
| Provisions for Accounts Receivable and Loan Losses | |||||||||||
| Stock-Based Compensation | |||||||||||
| Deferred Income Taxes | ( | ||||||||||
| Impairment of Goodwill and Other Assets | |||||||||||
| Non-Cash Lease Expense | |||||||||||
| Other Changes, Net | ( | ||||||||||
| Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions: | |||||||||||
| Additions to Lease Merchandise | ( | ( | |||||||||
| Book Value of Lease Merchandise Sold or Disposed | |||||||||||
| Accounts Receivable | ( | ( | |||||||||
| Prepaid Expenses and Other Assets | ( | ( | |||||||||
| Income Tax Receivable | ( | ||||||||||
| Operating Lease Right-of-Use Assets and Liabilities | ( | ( | |||||||||
| Accounts Payable and Accrued Expenses | |||||||||||
| Accrued Regulatory Expense | ( | ||||||||||
| Customer Deposits and Advance Payments | ( | ( | |||||||||
| Cash Provided by Operating Activities | |||||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Investments in Loans Receivable | ( | ( | |||||||||
| Proceeds from Loans Receivable | |||||||||||
| Outflows on Purchases of Property, Plant and Equipment | ( | ( | |||||||||
| Proceeds from Disposition of Property, Plant and Equipment | |||||||||||
| Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired | ( | ( | |||||||||
| Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed | |||||||||||
| Cash Used in Investing Activities | ( | ( | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Proceeds from Debt | |||||||||||
| Repayments on Debt | ( | ||||||||||
| Dividends Paid | ( | ||||||||||
| Acquisition of Treasury Stock | ( | ||||||||||
| Issuance of Stock Under Stock Option Plans | |||||||||||
| Shares Withheld for Tax Payments | ( | ( | |||||||||
| Debt Issuance Costs | ( | ||||||||||
| Cash Used in Financing Activities | ( | ( | |||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | ( | ||||||||||
| Increase in Cash and Cash Equivalents | |||||||||||
| Cash and Cash Equivalents at Beginning of Period | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
| Net Cash Paid (Received) During the Period: | |||||||||||
| Interest | $ | $ | |||||||||
| Income Taxes | $ | $ | ( | ||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
6
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 has led to significant market disruption and has impacted many aspects of our operations, directly and indirectly. Throughout these notes to the condensed consolidated financial statements, the impacts of the COVID-19 pandemic on the financial results for the three and nine months ended September 30, 2021 have been identified under the respective sections. For a discussion of significant estimates made by management regarding allowances for lease merchandise, accounts receivable, and loans receivable, as well as operational measures taken as a result of the COVID-19 pandemic, 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 with two
Our Progressive Leasing segment provides consumers with lease-purchase solutions through its point-of-sale partner locations and through its 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, footwear, jewelry, and other consumer goods from retailers across the United States. Four is not a reportable segment for the nine months ended September 30, 2021 as its revenues, loss before income taxes, and assets are not material to the Company's condensed consolidated financial results. See Note 3 for further discussion on the acquisition.
On November 30, 2020, PROG Holdings (previously Aaron's Holdings Company, Inc.) completed the separation of its Aaron's Business segment from its Progressive Leasing and Vive segments. The separation was effected through a tax-free distribution of all outstanding shares of common stock of The Aaron's Company, Inc. ("The Aaron's Company") to the PROG Holdings shareholders of record as of the close of business on November 27, 2020 (referred to as the "separation and distribution transaction"). All direct revenues and expenses of the Aaron's Business are presented as discontinued operations for all periods through the separation and distribution date of November 30, 2020. The cash flows related to the Aaron's Business have not been segregated and are included in the condensed consolidated statements of cash flows for the nine months ended September 30, 2020. With the exception of Note 2, the notes to the condensed consolidated financial statements reflect the continuing operations of PROG Holdings. See Note 2 below for additional information regarding discontinued operations.
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.
7
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 2020 Annual Report for an expanded discussion of accounting policies and estimates.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Shares In Thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
| Weighted Average Shares Outstanding | ||||||||||||||||||||
| Dilutive Effect of Share-Based Awards | ||||||||||||||||||||
| Weighted Average Shares Outstanding Assuming Dilution | ||||||||||||||||||||
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.
Approximately 524,000 and 957,000 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, 2020, respectively, as the awards would have been anti-dilutive for the periods presented.
Revenue Recognition
Lease Revenues and Fees
Our Progressive Leasing segment 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.
Progressive Leasing's lease revenues 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. 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. Progressive Leasing lease revenues are recorded net of a provision for uncollectible renewal payments.
8
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 , 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 , 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 revenue in the billing period in which they are assessed if collectibility is reasonably assured. Annual fees and other fees discussed 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 $67.4 million and $61.3 million, net of allowances, as of September 30, 2021 and December 31, 2020, respectively.
9
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table shows the components of the accounts receivable allowance:
| Nine Months Ended September 30, | |||||||||||
| (In Thousands) | 2021 | 2020 | |||||||||
| Beginning Balance | $ | $ | |||||||||
| Accounts Written Off, Net of Recoveries | ( | ( | |||||||||
Accounts Receivable Provision1 | |||||||||||
| Ending Balance | $ | $ | |||||||||
1 Substantially all of the Accounts Receivable Provision is recorded as a reduction of lease revenues and fees within the condensed consolidated statements of earnings (loss).
Lease Merchandise
Progressive Leasing's merchandise consists primarily of furniture, appliances, electronics, jewelry, mobile phones and accessories, mattresses, 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 are considered in estimating the allowance, such as current and forecasted business trends including, but not limited to, the potential unfavorable impacts of the COVID-19 pandemic on our business. We believe government stimulus measures in 2020 and the first half of 2021 contributed to the favorable payment trends we experienced following those measures. We believe any additional government stimulus measures may positively influence future payment trends as well. Given the significant uncertainty regarding the impacts of the COVID-19 pandemic on our business, including the existence and/or extent of any future government stimulus measures, a high level of estimation was involved in determining the allowance as of September 30, 2021. Actual future lease merchandise write-offs could differ materially from the allowance as of September 30, 2021.
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:
| Nine Months Ended September 30, | |||||||||||
| (In Thousands) | 2021 | 2020 | |||||||||
| Beginning Balance | $ | $ | |||||||||
| Merchandise Written off, Net of Recoveries | ( | ( | |||||||||
| Provision for Write-offs | |||||||||||
| Ending Balance | $ | $ | |||||||||
10
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $3.9 million and $13.5 million during the three and nine months ended September 30, 2021, respectively, compared to $3.4 million and $10.2 million during the three and nine months ended September 30, 2020, respectively. 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. As of September 30, 2021, gross loans receivable also includes outstanding receivables from customers of Four.
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.
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 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, 2021, management considered other qualitative factors such as the beneficial impact of government stimulus measures to our customer base that were not fully factored into the macroeconomic forecasted data. We believe those stimulus measures have contributed to the recent favorable cardholder payment trends we are experiencing at Vive, and we believe that any additional government stimulus measures may positively influence future cardholder payment trends as well. We considered the uncertain nature and extent of any future government stimulus programs and the potential impact, if any, these programs may have on the ability of Vive's cardholders to make payments as they come due. We also considered the impact of the existing government stimulus measures coming to an end in September 2021, and the possible negative impact that the end of the enhanced unemployment benefits may have on future cardholder payment trends. Additionally, if the recent increase in inflation continues in future periods, such a development may adversely impact our customers continuing to make payments to us. 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. To the extent that actual results differ from estimates of uncollectible loans receivable, including the significant uncertainties caused by the COVID-19 pandemic, the Company's results of operations and liquidity could be materially affected.
11
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| FICO Score Category | September 30, 2021 | December 31, 2020 | |||||||||
| 600 or Less | % | % | |||||||||
| Between 600 and 700 | % | % | |||||||||
| 700 or Greater | % | % | |||||||||
| No score identified | % | % | |||||||||
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
| (In Thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Prepaid Expenses | $ | $ | |||||||||
| Unamortized Initial Direct Costs on Lease Agreement Originations | |||||||||||
| Prepaid Insurance | |||||||||||
| Other Assets | |||||||||||
| Prepaid Expenses and Other Assets | $ | $ | |||||||||
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
| (In Thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Accounts Payable | $ | $ | |||||||||
| Accrued Salaries and Benefits | |||||||||||
| Accrued Sales and Personal Property Taxes | |||||||||||
| Income Taxes Payable | |||||||||||
| Uncertain Tax Positions | |||||||||||
| Other Accrued Expenses and Liabilities | |||||||||||
| Accounts Payable and Accrued Expenses | $ | $ | |||||||||
Uncertain Tax Positions
As of September 30, 2021, and December 31, 2020, uncertain tax positions were $48.8 million and $2.7 million, respectively. The increase is primarily driven by the Company’s tax treatment of its settlement with the Federal Trade Commission ("FTC").
In December 2019, Progressive Leasing reached an agreement in principle with the staff of the FTC with respect to a tentative settlement to resolve the FTC inquiry received by the Company in July 2018. Progressive Leasing agreed to make a lump-sum payment of $175.0 million. At the time of the agreement, the Company treated the tentative settlement as a non-deductible regulatory charge for tax purposes and recognized tax expense.
12
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The $175.0 million settlement was finalized and paid to the FTC in 2020. Prior to filing the Company’s 2020 income tax return, it was determined there is a reasonable basis for deducting the settlement amount on the return. However, the tax position does not meet the more-likely-than-not recognition standard and no tax benefit has been recognized in the current period. As a result, the Company has reclassified $44.7 million from taxes payable, previously recognized in December 2019, to an uncertain tax position as of September 30, 2021. Additionally, $1.0 million of accrued interest related to the uncertain tax position has been recognized as a component of income tax expense in accordance with the Company's accounting policy.
Debt
On November 24, 2020, the Company entered into a credit agreement with a consortium of lenders providing for a $350.0 million senior unsecured revolving credit facility (the "Revolving Facility"), under which revolving borrowings became available at the completion of the separation and distribution transaction, 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. The Company had $50.0 million of outstanding borrowings and $300.0 million total available credit under the Revolving Facility as of September 30, 2021.
At September 30, 2021, the Company was in compliance with all covenants related to its outstanding debt. See Note 8 to the consolidated financial statements in the 2020 Annual Report for further information regarding the Company's indebtedness.
Share Repurchase Authorization
On November 3, 2021, the Company announced a new $1 billion share repurchase program authorized by the Company's Board of Directors. The authorization replaces the Company's existing $300 million repurchase program.
13
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Shareholders' Equity
Changes in shareholders' equity for the nine months ended September 30, 2021 and 2020 are as follows:
| Treasury Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (In Thousands) | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | ( | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-Based Compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Reissued Shares | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Repurchased Shares | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | ( | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-Based Compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Reissued Shares | — | — | |||||||||||||||||||||||||||||||||
| Repurchased Shares | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | ( | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-Based Compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Reissued Shares | — | ( | — | ||||||||||||||||||||||||||||||||
| Repurchased Shares | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | ( | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Treasury Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||
| (In Thousands, Except Per Share) | Shares | Amount | ||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | ( | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Opening Balance Sheet Adjustment - ASU 2016-13, net of taxes | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||
Cash Dividends, $ | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Stock-Based Compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Reissued Shares | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | ( | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Cash Dividends, $ | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Stock-Based Compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Reissued Shares | — | — | — | |||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | ( | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Cash Dividends, $ | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Stock-Based Compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Reissued Shares | — | ( | — | — | ||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | ( | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
14
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-based Compensation
The Company issued 519,977 restricted stock units or restricted stock awards (collectively, "restricted stock") during the nine months ended September 30, 2021 to employees and directors, which vest over to three-year periods. The weighted average fair value of the awards was $47.82 , which was based on the fair market value of the Company’s common stock on the date of grants. The restricted stock grants are settled in common stock and are subject to continued employment to be earned. The Company will recognize the grant date fair value of the restricted stock as stock-based compensation expense over the requisite service period of to three years .
The Company issued 568,168 performance share units during the nine months ended September 30, 2021 to certain employees, which vest over 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 units was $48.74 , which was based on the fair market value of the Company’s common stock on the date of grants. The performance share unit grants are settled in common stock and are subject to continued employment and achievement of specified performance conditions to be earned. The performance criteria vary by agreement and includes the following performance conditions: (i) adjusted pre-tax profit, (ii) return on investment capital, (iii) consolidated revenues, (iv) segment or business unit revenues, and/or (v) certain business development and technology initiatives. The number of performance share units that are ultimately issued are subject to payout percentages ranging from 0 % up to a maximum of 100 %, 200 %, or 260 % depending on the specified terms and conditions of the performance periods contained in each agreement. 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.
During the three months ended June 30, 2021, the Company issued 267,503 restricted stock units or restricted stock awards and 421,318 performance share units, a significant portion of which were issued to key employees of Four on the June 25, 2021 acquisition date. These awards were excluded from the preliminary purchase price of Four and are recognized separate from the acquisition of assets and assumption of liabilities since all awards require post-acquisition employment with the Company as a condition for vesting. See further discussion on the acquisition in Note 3.
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 are only available until December 31, 2022, 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
15
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. DISCONTINUED OPERATIONS
As discussed in Note 1 above, on November 30, 2020, PROG Holdings completed the separation and distribution of its Aaron's Business segment, and the requirements for the presentation of Aaron's Business as a discontinued operation were met on that date. Accordingly, all direct revenues and expenses of the Aaron's Business operations have been classified within discontinued operations, net of income tax, within our condensed consolidated statements of earnings for all periods through the separation and distribution date of November 30, 2020. Corporate overhead costs previously reported as expenses of the Aaron’s Business segment did not qualify for classification within discontinued operations and have been classified as expenses within continuing operations for all periods presented through the separation and distribution date of November 30, 2020. The following table summarizes the major classes of line items constituting the earnings (loss) of our Aaron's Business segment, which are included within the earnings (loss) from discontinued operations, net of income tax, in the condensed consolidated statements of earnings and the operating and investing cash flows of the discontinued operations.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| (In Thousands) | 2020 | 2020 | ||||||||||||
| Revenues | $ | $ | ||||||||||||
| Operating Profit (Loss) | ( | |||||||||||||
Earnings (Loss) from Discontinued Operations Before Income Tax1 | ( | |||||||||||||
| Income Tax (Expense) Benefit from Discontinued Operations | ( | |||||||||||||
| Earnings (Loss) from Discontinued Operations, Net of Income Tax | $ | $ | ( | |||||||||||
| Cash Flows: | ||||||||||||||
| Cash Provided by Operating Activities - Discontinued Operations | $ | $ | ||||||||||||
| Cash Used in Investing Activities - Discontinued Operations | $ | ( | $ | ( | ||||||||||
1 Loss from Discontinued Operations Before Income Tax during the nine months ended September 30, 2020 reflects a $446.9 million goodwill impairment loss related to the Aaron's Business segment and $14.1 million related to an early termination fee for a sales and marketing contract.
In order to facilitate an effective separation and distribution, the Company entered into several agreements with The Aaron's Company, which govern the nature of the relationship between and responsibilities of the two companies following the separation. For more detailed information concerning the agreements, see Note 2 to the Company's Annual Report for the year ended December 31, 2020. No changes have been made to any of the agreements as of September 30, 2021. Payments and expense reimbursements for transition services were not material during the three and nine months ended September 30, 2021 and are not expected to be material in future periods.
16
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. ACQUISITION
On June 25, 2021, the Company acquired 100 % of the capital stock of Four Technologies, Inc. ("Four") for an estimated purchase price of $22.7 million in cash, inclusive of cash acquired. The estimated purchase price of $23.5 million on the acquisition date decreased by $0.8 million during the three months ended September 30, 2021 due to a preliminary working capital adjustment.
Four is 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, footwear, jewelry, and other consumer goods from retailers across the United States.
The amounts of revenue and loss before income taxes of Four included in our condensed consolidated statements of earnings from the acquisition date of June 25, 2021 through September 30, 2021 were not material to the Company's consolidated financial results. Additionally, the pro forma impacts on the Company's revenues and earnings as if the acquisition occurred on January 1, 2020 were immaterial.
The purchase price of Four was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The following table provides the preliminary and adjusted fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date.
| (In Thousands) | Amounts Recognized as of Acquisition Date (June 25, 2021)1 | Acquisition Accounting Adjustments2 | Amounts Recognized as of Acquisition Date (as adjusted) | ||||||||||||||
| Aggregate Purchase Price | $ | $ | ( | $ | |||||||||||||
| Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed | |||||||||||||||||
| Cash and Cash Equivalents | ( | ||||||||||||||||
Loans Receivable3 | ( | ||||||||||||||||
| Property, Plant and Equipment | ( | ||||||||||||||||
| Other Intangibles | |||||||||||||||||
| Prepaid Expenses and Other Assets | ( | ||||||||||||||||
| Total Identifiable Assets Acquired | ( | ||||||||||||||||
| Accounts Payable and Accrued Expenses | ( | ( | ( | ||||||||||||||
| Deferred Income Tax Liability | ( | ( | |||||||||||||||
| Total Liabilities Assumed | ( | ( | ( | ||||||||||||||
| Goodwill | |||||||||||||||||
| Net Assets Acquired | $ | $ | ( | $ | |||||||||||||
1 As previously reported in the notes to the condensed consolidated financial statements as of June 30, 2021.
2 The acquisition accounting adjustments are based on information obtained during the three months ended September 30, 2021 about conditions that existed as of the acquisition date regarding changes in working capital accounts.
3 The gross contractual unpaid principal of acquired loans receivable was $1.1 million and we expect to collect $0.6 million.
The intangible assets attributable to the acquisition are comprised of the following:
| Fair Value (In Thousands) | Weighted Average Life (In Years) | ||||||||||
| Acquired technology | $ | ||||||||||
| Tradename | |||||||||||
| Merchant relationships | |||||||||||
Total Acquired Intangible Assets1 | $ | ||||||||||
1 Acquired definite-lived intangible assets have a total weighted average life of 4.7 years.
17
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value measurements for acquired intangible assets were primarily based on significant unobservable inputs (level 3) developed using company-specific information. Goodwill consists of the excess of the estimated purchase price over the fair value of the net assets acquired and represents the Company's ability to provide a Buy Now, Pay Later product to PROG Holdings' existing base of retailers, merchants, and customers. The value of goodwill is not tax deductible.
The values above reflect our preliminary purchase price allocation and may change as we finalize our assessments of the acquired assets and liabilities during the measurement period. Additional adjustments to the purchase price allocation may result from finalization of working capital adjustments and our assessment of the tax impacts of the assets and liabilities acquired, including potential acquired net operating loss carryforwards.
NOTE 4. 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, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||
| Deferred Compensation Liability | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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 on the condensed consolidated balance sheet as of September 30, 2021 approximated fair value based on a discounted cash flow methodology.
The following table summarizes the fair value of loans receivable held by Vive and Four:
| (In Thousands) | September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||
| Loans Receivable, Net | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
18
PROG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LOANS RECEIVABLE
The following is a summary of the Company’s loans receivable, net:
| (In Thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Loans Receivable, Gross | $ | $ | |||||||||
| Unamortized Fees | ( | ( | |||||||||
| Loans Receivable, Amortized Cost | |||||||||||
| Allowance for Loan Losses | ( | ( | |||||||||
| Loans Receivable, Net of Allowances and Unamortized Fees | $ | $ | |||||||||
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, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
| FICO Score Category: | |||||||||||||||||||||||||||||||||||||||||
| 600 or Less | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Between 600 and 700 | |||||||||||||||||||||||||||||||||||||||||