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 endedDecember 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 six months endedJune 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 OverviewPROG 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. OurProgressive Leasing segment provides consumers with lease-purchase solutions through its point-of-sale partner locations and e-commerce website partners inthe 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 offerswho 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. OnJune 25, 2021 , the Company completed the acquisition ofFour 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 expandPROG 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 acrossthe United States . Four is not expected to be a reportable segment in 2022 as its revenues, loss before income taxes, and assets are not expected to be material to the Company's consolidated financial results in 2022.
Current Business Environment and Outlook
The Company continues to operate in a challenging macro environment as inflation levels inthe 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 ourProgressive Leasing segment during the first half of 2022 were higher than projected, and exceeded levels experienced during recent pre-pandemic periods. In response to increasing customer delinquencies and higher write-offs, the Company has tightened its lease decisioning, resulting in fewer lease approvals and an adverse impact on GMV production. 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. 21 -------------------------------------------------------------------------------- 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 quarter of 2022 to drive efficiencies and right-size variable costs, while attempting to minimize the negative impact on growth-related initiatives. The Company anticipates a challenging and volatile macro environment for the remainder of 2022, which may result in continued customer payment delinquencies and associated write-offs at levels higher than typical pre-pandemic levels. The relatively high levels of customer payment delinquencies and related write-offs experienced during the second quarter of 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. OnMarch 11, 2020 , theWorld 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 the quarter, and also resulted in increases in employee absenteeism and declines in customer traffic for many of our POS partners, all of which unfavorably impactedProgressive Leasing's GMV. In addition, other pandemic-related factors continue to unfavorably impact many of our POS partners, 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 emergence of the BA.5 Omicron subvariant or other subvariants, may have an unfavorable impact onProgressive 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, such as the BA.5 Omicron subvariant, 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 the first half of 2021. We believe a significant portion of ourProgressive Leasing and Vive customers received stimulus payments and/or federally supplemented unemployment payments during 2020 and the first half of 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. The 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 second quarter of 2022 as compared to the same period in 2021. 22 --------------------------------------------------------------------------------
Highlights
The following summarizes significant financial highlights from the three months
ended
•We reported revenues of$649.4 million , a decrease of 1.6% compared to the second quarter of 2021. The decrease in revenues was primarily due to an increase in customer payment delinquencies and uncollectible renewal payments, as well as a decrease in customers exercising early lease buyout options, as compared to the stronger customer payment activity and low delinquencies we experienced during the second quarter of 2021. •GMV decreased by$12.0 million forProgressive Leasing and$4.7 million for Vive in the second quarter of 2022, compared to the same period in the prior year. We believe these decreases were due to our tighter lease decisioning, resulting in fewer lease approvals; 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 the first half of 2021. These negative impacts were partially offset by increased penetration in e-commerce. In the second quarter of 2022, GMV generated through e-commerce platforms represented 15.6% ofProgressive Leasing's total GMV, compared to 13.0% in the second quarter of 2021. •Earnings before income taxes decreased to$27.3 million compared to$91.9 million in the same period in 2021. In addition to lower revenues, the decrease was primarily driven by an increase of$30.5 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 second quarter of 2021. The decrease was also driven by a$14.9 million increase in operating expenses, as compared to the second quarter of 2021, and an additional$9.2 million of interest expense related to the Senior Notes issued inNovember 2021 . Key Operating Metrics Gross Merchandise Volume. We believe GMV is a key performance indicator of ourProgressive 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 byProgressive Leasing , which it then expects to lease to its customers. Vive GMV is defined as gross loan originations. The following table presents our GMV for the Company for the periods presented: Three Months Ended June 30, Change (Unaudited and In Thousands) 2022 2021 $ % Progressive Leasing$ 494,003 $ 505,971 $ (11,968) (2.4) % Vive 47,003 51,701 (4,698) (9.1) Other 11,394 - 11,394 nmf Total GMV$ 552,400 $ 557,672 $ (5,272) (0.9) %
nmf-Calculation is not meaningful
We believe the decrease inProgressive Leasing's and Vive's GMV was primarily due to our tighter lease decisioning to address the unfavorable economic conditions that were present in the second quarter of 2022, resulting in fewer lease 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; the absence of government stimulus payments and enhanced unemployment benefits and child tax credits, which we believe benefited many of our customers in the first half of 2021, and the lingering effects of the COVID-19 pandemic, including supply chain disruptions for many of our POS partners, all of which have unfavorably impacted the generation of new leases and loans. The decrease inProgressive Leasing's GMV from those factors was partially offset by continued growth from e-commerce channels. E-commerce channels generated 15.6% ofProgressive Leasing's GMV in the second quarter of 2022 compared to 13.0% in the second quarter of 2021. 23 -------------------------------------------------------------------------------- Active Customer Count. Our active customer count represents the total number of customers that have an active lease agreement with ourProgressive Leasing segment or an active loan with our Vive segment. 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 June 30 (Unaudited) 2022 2021 Active Customer Count: Progressive Leasing 965,000 905,000 Vive 90,000 81,000 Other 22,000 - Total Active Customer Count 1,077,000 986,000 The increase in the number ofProgressive Leasing customers was primarily due to a large number of customers electing to exercise early lease buyouts in the second quarter of 2021, which reduced our active customer count for the three months endedJune 30, 2021 . The increase in the number of Vive customers was primarily driven by strong GMV growth in 2021.
Key Components of Earnings Before Income Taxes
In this MD&A section, we review our condensed consolidated results. For the three and six months endedJune 30, 2022 and the comparable prior year period, some of the key revenue, cost and expense items that effected 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 ourProgressive 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
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.
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.
24 --------------------------------------------------------------------------------
Results of Operations - Three months ended
Three Months Ended June 30, Change (In Thousands) 2022 2021 $ % REVENUES: Lease Revenues and Fees$ 631,344 $ 646,048 $ (14,704) (2.3) % Interest and Fees on Loans Receivable 18,100 13,923
4,177 30.0
649,444 659,971 (10,527) (1.6) COSTS AND EXPENSES: Depreciation of Lease Merchandise 439,113 439,658 (545) (0.1) Provision for Lease Merchandise Write-Offs 61,788 31,258 30,530 97.7 Operating Expenses 111,606 96,745 14,861 15.4 612,507 567,661 44,846 7.9 OPERATING PROFIT 36,937 92,310 (55,373) (60.0) Interest Expense (9,608) (436) (9,172) nmf EARNINGS BEFORE INCOME TAX EXPENSE 27,329 91,874 (64,545) (70.3) INCOME TAX EXPENSE 7,845 23,037 (15,192) (65.9) NET EARNINGS$ 19,484 $ 68,837 $ (49,353) (71.7) %
nmf-Calculation is not meaningful
Revenues
Information about our revenues by source and reportable segment is as follows: Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Progressive (In Thousands) Leasing Vive Other Total Progressive Leasing Vive Other Total Lease Revenues and Fees$ 631,344 $ - $ -$ 631,344 $ 646,048 $ - $ -$ 646,048 Interest and Fees on Loans Receivable - 17,518 582 18,100 - 13,923 - 13,923 Total$ 631,344 $ 17,518 $ 582 $ 649,444 $ 646,048 $ 13,923 $ -$ 659,971 The decrease inProgressive 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 second quarter of 2021. The provision for uncollectible renewal payments, which is recorded as a reduction to lease revenues and fees, was$97.0 million in the second quarter of 2022 compared to$39.8 million in the second quarter of 2021. Lease revenues and fees were also lower as a result of fewer customers electing to exercise early lease buyouts in the second quarter of 2022, as compared to the second quarter of 2021, and a 2.4% decrease in GMV. These declines were partially offset by growth in the lease portfolio and an increase in GMV generated through e-commerce platforms, which represented 15.6% of total Progressive Leasing GMV in the second quarter of 2022, compared to 13.0% in the second quarter of 2021. The increase in Vive revenues was primarily due to higher loans receivable driven by strong GMV growth in 2021. 25 --------------------------------------------------------------------------------
Operating Expenses
Information about certain significant components of operating expenses for the second quarter of 2022 as compared to the second quarter of 2021 is as follows: Three Months EndedJune 30 , Change
(In Thousands) 2022 2021 $ % Personnel Costs1$ 49,282 $ 45,844 $ 3,438 7.5 % Stock-Based Compensation 2,417 3,973 (1,556) (39.2) Occupancy Costs 1,740 1,432 308 21.5 Advertising 3,543 4,728 (1,185) (25.1) Professional Services 6,343 7,115 (772) (10.9) Sales Acquisition Expense2 7,495 5,600 1,895 33.8 Computer Software Expense3 6,522 4,684 1,838 39.2 Other Sales, General and Administrative Expense 12,619 10,948 1,671 15.3 Sales, General and Administrative Expense4 89,961 84,324 5,637 6.7 Provision for Loan Losses 8,778 4,388 4,390 100.0 Depreciation and Amortization 8,539 8,033 506 6.3 Restructuring Expense 4,328 - 4,328 nmf Operating Expenses$ 111,606 $ 96,745 $ 14,861 15.4 %
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
The increase in personnel costs of$3.4 million was driven by an increase of$1.5 million and$0.5 million atProgressive Leasing and Vive, respectively, resulting from wage increases and promotions, partially offset by a reduction in short-term incentive expense atProgressive Leasing . An additional$1.4 million in personnel costs was attributable to the acquisition and growth of Four, and other strategic initiatives started by the Company in 2021. Stock-based compensation decreased$1.6 million due to a tranche of 2021 performance units that were determined to no longer be probable of achievement being forfeited in the second quarter of 2022, a reduction of the estimated payout of performance units granted in 2022, and other stock-based compensation forfeitures in the second quarter of 2022 related to the Company's restructuring program initiated during the period. These decreases were partially offset by an increased number of awards granted to personnel hired to support the Company's growth and new business initiatives.
Sales acquisition expense increased
Computer software expense increased$1.8 million compared to the prior year quarter primarily due to an increase in non-capitalizable software project costs atProgressive Leasing , new strategic initiatives started by the Company in 2021 that continued incurring costs in the second quarter of 2022, and increased software licensing costs. The provision for loan losses increased$4.4 million compared to the prior year quarter due to the unfavorable economic conditions present in the second quarter of 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 second quarter of 2021, resulting in Vive's delinquencies returning to pre-pandemic levels, and also due to an increase in the Company's overall loan portfolio resulting from growth in GMV at Vive in 2021 and the acquisition of Four inJune 2021 . The provision for loan losses as a percentage of interest and fees revenue increased to 48.5% in the second quarter of 2022 compared to 31.5% 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$4.3 million is the result of a number of restructuring activities initiated by the Company in the second quarter of 2022 intended to reduce expenses, consolidate certain segment corporate headquarters, 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 inProgressive Leasing's workforce and operating lease right-of-use asset impairment charges related to the relocation of the Vive corporate headquarters to the Company's corporate office building. 26 --------------------------------------------------------------------------------
Other Costs and Expenses
Depreciation of lease merchandise. Depreciation of lease merchandise remained relatively flat, decreasing by 0.1% compared to the second quarter of 2021. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 69.6% from 68.1% 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$30.5 million due to higher customer payment delinquencies and write-offs in the second quarter of 2022, compared to the strong customer payment activity and lower lease merchandise write-offsProgressive Leasing experienced during the second quarter of 2021. Given the significant economic uncertainty resulting from the rate of the increase in inflation in recent months to levels not seen in more than forty years; 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 the first half of 2021, the ongoing impacts of the COVID-19 pandemic, and the potential effects of such developments onProgressive Leasing's POS partners, customers, and business going forward, a high level of estimation was involved in determining the allowance as ofJune 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 9.8% in the second quarter of 2022 from 4.8% in the same period in 2021, as a result of higher customer payment delinquencies and write-offs in 2022 as compared to the strong customer payment activity and low lease merchandise write-offs we experienced in 2021.
Earnings Before Income Tax Expense
Information about our earnings before income tax expense by reportable segment is as follows: Three Months Ended June 30, Change (In Thousands) 2022 2021 $ %
EARNINGS BEFORE INCOME TAX EXPENSE:
Progressive Leasing$ 27,383 $ 87,521 $ (60,138) (68.7) % Vive 3,355 4,353 (998) (22.9) Other (3,409) - (3,409) nmf
Total Earnings Before Income Tax Expense
nmf-Calculation is not meaningful
The$3.4 million loss before income tax expense within "Other" primarily relates to our Four operations. Factors impacting the change in earnings before income taxes include a$14.7 million reduction in Lease Revenue and Fees, a$30.5 million increase in the provision for lease merchandise write-offs, a$14.9 million increase in operating expense, and a$9.2 million increase in interest expense, all as compared to the first quarter of 2021.
Income Tax Expense
Income tax expense decreased to$7.8 million for the three months endedJune 30, 2022 compared to$23.0 million in the prior year comparable period due to lower earnings before income taxes. The effective income tax rate for the three months endedJune 30, 2022 was 28.7% compared to 25.1% for the same period in the prior year. The increase in the effective tax rate was primarily driven by discrete income tax expense related to interest on the Company's uncertain tax position liabilities. 27 --------------------------------------------------------------------------------
Results of Operations - Six months ended
Six Months Ended June 30, Change (In Thousands) 2022 2021 $ % REVENUES: Lease Revenues and Fees$ 1,324,258 $ 1,354,030 $ (29,772) (2.2) % Interest and Fees on Loans Receivable 35,650 26,942 8,708 32.3 1,359,908 1,380,972 (21,064) (1.5) COSTS AND EXPENSES: Depreciation of Lease Merchandise 936,124 944,715 (8,591) (0.9) Provision for Lease Merchandise Write-Offs 112,118 49,898 62,220 124.7 Operating Expenses 225,264 187,941 37,323 19.9 1,273,506 1,182,554 90,952 7.7 OPERATING PROFIT 86,402 198,418 (112,016) (56.5) Interest Expense (19,237) (948) (18,289) nmf EARNINGS BEFORE INCOME TAX EXPENSE 67,165 197,470 (130,305) (66.0) INCOME TAX EXPENSE 20,546 49,145 (28,599) (58.2) NET EARNINGS$ 46,619 $ 148,325 $ (101,706) (68.6) %
nmf-Calculation is not meaningful
Revenues
Information about our revenues by source and reportable segment is as follows: Six Months Ended June 30, 2022 Six Months Ended June 30, 2021 Progressive Progressive (In Thousands) Leasing Vive Other
Total Leasing Vive Other Total
Lease Revenues and Fees
- 34,634 1,016 35,650 - 26,942 - 26,942 Total Revenues$ 1,324,258 $ 34,634 $ 1,016 $
1,359,908
The decrease inProgressive Leasing revenues was primarily due to an increase in customer payment delinquencies and uncollectible renewal payments forProgressive Leasing , as compared to the strong customer payment activity and low delinquencies it experienced during the six months endedJune 30, 2021 . The provision for uncollectible renewal payments, which is recorded as a reduction to lease revenues and fees, was$185.5 million for the six months endedJune 30, 2022 compared to$76.3 million in the same period in 2021. Lease revenues and fees was also lower as a result of fewer customers electing to exercise early lease buyouts in the first half of 2022, as compared to the same period in 2021, and a 1.7% decline inProgressive Leasing's GMV in the first half of 2022, as compared to the same period in 2021. 28 --------------------------------------------------------------------------------
Operating Expenses
Information about certain significant components of operating expenses for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 is as follows: Six Months Ended June 30, Change (In Thousands) 2022 2021 $ % Personnel Costs1$ 102,867 $ 90,061 $ 12,806 14.2 % Stock-Based Compensation 9,040 8,136 904 11.1 Occupancy Costs 3,344 2,814 530 18.8 Advertising 8,047 7,648 399 5.2 Professional Services 11,783 11,462 321 2.8 Sales Acquisition Expense2 13,329 10,502 2,827 26.9 Computer Software Expense3 13,118 8,794 4,324 49.2 Other Sales, General and Administrative Expense 25,927 21,815 4,112 18.8 Sales, General and Administrative Expense4 187,455 161,232 26,223 16.3 Provision for Loan losses 16,460 10,856 5,604 51.6 Depreciation and Amortization 17,021 15,853 1,168 7.4 Restructuring Expense 4,328 - 4,328 nmf Operating Expenses$ 225,264 $ 187,941 $ 37,323 19.9 %
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
The increase in personnel costs of$12.8 million was driven by an increase of$8.9 million and$1.0 million atProgressive Leasing and Vive, respectively, resulting from wage increases and promotions, partially offset by a reduction in short-term incentive expense atProgressive Leasing . An additional$2.9 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 the first half of 2022.
Sales acquisition expense increased
Computer software expense increased$4.3 million primarily due to an increase in non-capitalizable costs for software implementation projects byProgressive Leasing during the first six months of 2022, new strategic initiatives started by the Company in 2021 that continued incurring costs in the first half of 2022, and increased software and licensing costs. Other sales, general and administrative expense increased$4.1 million primarily due to additional administrative costs withinProgressive Leasing and Vive during 2022, as well as an increase of$0.8 million due to the acquisition and growth of Four, and other strategic initiatives started by the Company in 2021 that continued incurring costs during the first half of 2022. Provision for loan losses increased$5.6 million due to an increase in the Company's overall loan portfolio, resulting from growth in GMV at Vive during 2021 and the acquisition of Four inJune 2021 , and also due to higher delinquencies at Vive during the six months endedJune 30, 2022 as compared to the strong customer payment activity during the same period in 2021. The provision for loan losses as a percentage of interest and fees revenue increased to 46.2% for the six months endedJune 30, 2022 compared to 40.3% in the same period in 2021, due to higher write-offs within our Four operations and delinquencies at Vive returning to pre-pandemic levels. Restructuring expense of$4.3 million is the result of a number of restructuring activities initiated by the Company in the second quarter of 2022 intended to reduce expenses, consolidate certain segment corporate headquarters, 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 inProgressive Leasing's workforce and operating lease right-of-use asset impairment charges related to the relocation of the Vive corporate headquarters to the Company's corporate office building. 29 --------------------------------------------------------------------------------
Other Costs and Expenses
Depreciation of lease merchandise. Depreciation of lease merchandise decreased by 0.9% due to fewer customers exercising 90-day and other early lease buyout elections in the first six months of 2022 when compared to the same period in 2021. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 70.7% from 69.8% in the prior year period, primarily due to an increase in uncollectible renewal payments in the first six months of 2022 compared to the same period in 2021. Provision for lease merchandise write-offs. The provision for lease merchandise write-offs increased$62.2 million due to higher customer payment delinquencies and write-offs in the first six months of 2022, compared to the strong customer payment activity and lower lease merchandise write-offs we experienced during the first six months of 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 the first half of 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 ofJune 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 8.5% for the six months endedJune 30, 2022 from 3.7% for the same period in 2021 due to higher customer payment delinquencies and write-offs, and changes in estimates on the allowance as discussed above.
Earnings Before Income Taxes
Information about our earnings before income taxes by reportable segment is as follows: Six Months Ended June 30, Change (In Thousands) 2022 2021 $ % EARNINGS BEFORE INCOME TAXES: Progressive Leasing$ 69,464 $ 191,693 $
(122,229) (63.8) % Vive 7,778 5,777 2,001 34.6 Other (10,077) - (10,077) nmf
Total Earnings Before Income Taxes
nmf-Calculation is not meaningful
The
Income Tax Expense
Income tax expense decreased to$20.5 million for the six months endedJune 30, 2022 compared to$49.1 million in the prior year comparable period. The effective tax rate was 30.6% during the six months endedJune 30, 2022 compared to 24.9% in the same period in the prior year. The increase in the effective tax rate is primarily driven by discrete income tax expense related to the Company's uncertain tax position liabilities and the employee stock-based compensation vesting event that occurred in the first quarter of 2022. There are no material adjustments between the Company's effective tax rate of 24.9% for the six months endedJune 30, 2021 and the Company's statutory income tax rate. 30 --------------------------------------------------------------------------------
Overview of Financial Position
The major changes in the condensed consolidated balance sheet from
•Cash and cash equivalents decreased
•Lease merchandise, net of accumulated depreciation and allowances, decreased$98.8 million due primarily to an increase of$45.7 million in accumulated depreciation and allowance on lease merchandise and a decrease inProgressive Leasing's GMV of 22.2% for the second quarter of 2022 as compared to the fourth quarter of 2021. 31 --------------------------------------------------------------------------------
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 ofProgressive Leasing . Because we believeProgressive 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
Cash Provided by Operating Activities
Cash provided by operating activities was$155.7 million and$238.8 million during the six months endedJune 30, 2022 and 2021, respectively. The$83.1 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 and fewer customers exercising early lease buyout options in the first six months of 2022 as compared to the same period in 2021. The decrease in cash provided by operating activities is also a result of$17.1 million of interest paid on the Company's Senior Notes and changes in certain working capital accounts, including a decrease of$33.4 million in accounts payable and accrued expenses. The change was partially offset by a$22.5 million decrease in purchases of lease merchandise byProgressive Leasing during the six months endedJune 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 six months endedJune 30, 2022 .
Cash Used in Investing Activities
Cash used in investing activities was$22.0 million and$58.7 million during the six months endedJune 30, 2022 and 2021, respectively. The$36.7 million decrease in investing cash outflows in the six months endedJune 30, 2022 as compared to the same period in 2021 was primarily due to the$22.7 million of cash paid for the acquisition of Four inJune 2021 . Additionally, proceeds from loans receivable increased$13.3 million and cash outflows for investments in loans receivables decreased$1.4 million as compared to the same period in 2021.
Cash Used in Financing Activities
Cash used in financing activities was$176.6 million during the six months endedJune 30, 2022 compared to$79.3 million during the same period in 2021. Cash used in financing activities in the six months endedJune 30, 2022 was primarily used for the Company's repurchase of$176.5 million of its common stock, compared to$77.2 million of share repurchases in the same period in the prior year. 32 --------------------------------------------------------------------------------
Share Repurchases
We purchase our stock in the market from time to time as authorized by our Board of Directors. OnNovember 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 6,099,866 shares for$176.5 million during the six months endedJune 30, 2022 . As ofJune 30, 2022 , we had the authority to purchase additional shares up to our remaining authorization limit of$384.4 million .
As of
Debt Financing
OnNovember 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 onNovember 24, 2025 . As ofJune 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 ofJune 30, 2022 , the Company exceeded the 1.25 total net debt to EBITDA ratio and the Revolving Facility became fully secured. AtJune 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. OnNovember 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 atJune 30, 2022 and believe that we will continue to be in compliance in the future.
Commitments
Income Taxes
During the six months ended
Deferred income tax liabilities as ofJune 30, 2022 were$145.6 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. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading because this scheduling would not necessarily relate to liquidity needs. 33 --------------------------------------------------------------------------------
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 ofJune 30, 2022 .
On
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$522.7 million and$467.6 million as ofJune 30, 2022 andDecember 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.
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