UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
(Mark One) | |
| |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the quarterly period ended March 31, |
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OR | |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period fromto |
Commission File Number: 001-15749
ALLIANCE DATA SYSTEMS CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
| |
Delaware | 31-1429215 |
(State or other jurisdiction ofincorporation or organization) | (I.R.S. Employer Identification No.) |
7500 Dallas Parkway, Suite 7003075 Loyalty Circle
Plano, Texas 75024Columbus, Ohio43219
(Address of principal executive office, including zip code)
(214) 494-3000(614) 729-4000
(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 |
Common stock, par value $0.01 per share | ADS | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☑þ No ☐◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑þ No ☐◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | |
| Large accelerated filer | Accelerated filer |
| Non-accelerated filer ☐ | 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 13(a) of the Exchange Act. ☐◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑þ
Securities registered pursuant to Section 12(b) of the Act:
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As of April 24, 2019, 52,383,50623, 2020, 47,627,962 shares of common stock were outstanding.
ALLIANCE DATA SYSTEMS CORPORATION
INDEX
| | Page | ||
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| | | | |
| | | ||
| | | | |
| | Condensed Consolidated Balance Sheets as of March 31, | ||
| 3 | |||
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| 4 | |||
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| 5 | |||
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| 6 | |||
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| 7 | |||
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| | | 8 | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 36 | |
| | | | |
| | 45 | ||
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| 45 | |||
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| | 46 | ||
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| | 46 | ||
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| | 48 | ||
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| | 48 | ||
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| 50 |
2
PART I
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (in millions, except per share amounts) | ||||
ASSETS |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 3,685.0 |
| $ | 3,817.4 |
Accounts receivable, net, less allowance for doubtful accounts ($0.3 and $0.4 at March 31, 2019 and December 31, 2018, respectively) |
|
| 354.2 |
|
| 404.0 |
Credit card and loan receivables: |
|
|
|
|
|
|
Credit card receivables – restricted for securitization investors |
|
| 12,550.5 |
|
| 13,418.3 |
Other credit card and loan receivables |
|
| 4,300.0 |
|
| 4,436.7 |
Total credit card and loan receivables |
|
| 16,850.5 |
|
| 17,855.0 |
Allowance for loan loss |
|
| (1,021.1) |
|
| (1,038.3) |
Credit card and loan receivables, net |
|
| 15,829.4 |
|
| 16,816.7 |
Credit card receivables held for sale |
|
| 1,848.9 |
|
| 1,951.6 |
Inventories, net |
|
| 242.3 |
|
| 248.0 |
Other current assets |
|
| 275.3 |
|
| 293.2 |
Redemption settlement assets, restricted |
|
| 576.1 |
|
| 558.6 |
Current assets of discontinued operations |
|
| 4,224.7 |
|
| 622.2 |
Total current assets |
|
| 27,035.9 |
|
| 24,711.7 |
Property and equipment, net |
|
| 289.8 |
|
| 288.2 |
Right of use assets - operating |
|
| 271.2 |
|
| — |
Deferred tax asset, net |
|
| 45.5 |
|
| 44.0 |
Intangible assets, net |
|
| 189.6 |
|
| 217.4 |
Goodwill |
|
| 950.0 |
|
| 954.8 |
Other non-current assets |
|
| 651.1 |
|
| 636.4 |
Long-term assets of discontinued operations |
|
| — |
|
| 3,535.2 |
Total assets |
| $ | 29,433.1 |
| $ | 30,387.7 |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
Accounts payable |
| $ | 548.4 |
| $ | 486.2 |
Accrued expenses |
|
| 333.9 |
|
| 279.3 |
Current operating lease liabilities |
|
| 21.4 |
|
| — |
Current portion of deposits |
|
| 5,922.6 |
|
| 6,537.7 |
Current portion of non-recourse borrowings of consolidated securitization entities |
|
| 2,185.6 |
|
| 2,717.6 |
Current portion of long-term and other debt |
|
| 161.5 |
|
| 138.9 |
Other current liabilities |
|
| 262.4 |
|
| 291.8 |
Deferred revenue |
|
| 768.8 |
|
| 766.1 |
Current liabilities of discontinued operations |
|
| 392.1 |
|
| 266.4 |
Total current liabilities |
|
| 10,596.7 |
|
| 11,484.0 |
Deferred revenue |
|
| 108.5 |
|
| 109.2 |
Deferred tax liability, net |
|
| 230.5 |
|
| 256.5 |
Long-term operating lease liabilities |
|
| 299.8 |
|
| — |
Deposits |
|
| 5,369.4 |
|
| 5,256.0 |
Non-recourse borrowings of consolidated securitization entities |
|
| 4,589.9 |
|
| 4,934.1 |
Long-term and other debt |
|
| 5,720.0 |
|
| 5,586.5 |
Other liabilities |
|
| 278.8 |
|
| 390.0 |
Long-term liabilities of discontinued operations |
|
| — |
|
| 39.3 |
Total liabilities |
|
| 27,193.6 |
|
| 28,055.6 |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.2 shares and 113.0 shares at March 31, 2019 and December 31, 2018, respectively |
|
| 1.1 |
|
| 1.1 |
Additional paid-in capital |
|
| 3,177.0 |
|
| 3,172.4 |
Treasury stock, at cost, 60.9 shares and 59.6 shares at March 31, 2019 and December 31, 2018, respectively |
|
| (5,938.5) |
|
| (5,715.7) |
Retained earnings |
|
| 5,127.8 |
|
| 5,012.4 |
Accumulated other comprehensive loss |
|
| (127.9) |
|
| (138.1) |
Total stockholders’ equity |
|
| 2,239.5 |
|
| 2,332.1 |
Total liabilities and stockholders' equity |
| $ | 29,433.1 |
| $ | 30,387.7 |
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2020 |
| 2019 | ||
| | (in millions, except per share amounts) | ||||
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 4,456.8 | | $ | 3,874.4 |
Accounts receivable, net, less allowance for doubtful accounts ($3.4 at each of March 31, 2020 and December 31, 2019, respectively) | |
| 359.4 | |
| 451.1 |
Credit card and loan receivables: | | | | | | |
Credit card receivables – restricted for securitization investors | |
| 12,033.4 | |
| 13,504.2 |
Other credit card and loan receivables | |
| 5,698.5 | |
| 5,958.9 |
Total credit card and loan receivables | |
| 17,731.9 | |
| 19,463.1 |
Allowance for loan loss | |
| (2,150.8) | |
| (1,171.1) |
Credit card and loan receivables, net | |
| 15,581.1 | |
| 18,292.0 |
Credit card receivables held for sale | | | 88.8 | | | 408.0 |
Inventories, net | | | 189.1 | | | 218.0 |
Other current assets | |
| 461.1 | |
| 268.4 |
Redemption settlement assets, restricted | |
| 568.0 | |
| 600.8 |
Total current assets | |
| 21,704.3 | |
| 24,112.7 |
Property and equipment, net | |
| 263.0 | |
| 282.3 |
Right of use assets - operating | | | 256.8 | | | 264.3 |
Deferred tax asset, net | |
| 282.9 | |
| 45.2 |
Intangible assets, net | |
| 129.9 | |
| 153.3 |
Goodwill | |
| 929.1 | |
| 954.9 |
Other non-current assets | |
| 668.9 | |
| 682.1 |
Total assets | | $ | 24,234.9 | | $ | 26,494.8 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Accounts payable | | $ | 203.0 | | $ | 300.8 |
Accrued expenses | |
| 407.4 | |
| 327.8 |
Current operating lease liabilities | | | 22.3 | | | 22.6 |
Current portion of deposits | |
| 6,521.5 | |
| 6,942.4 |
Current portion of non-recourse borrowings of consolidated securitization entities | |
| 2,520.4 | |
| 3,030.8 |
Current portion of long-term and other debt | |
| 101.4 | |
| 101.4 |
Other current liabilities | |
| 228.1 | |
| 338.3 |
Deferred revenue | |
| 748.3 | |
| 807.9 |
Total current liabilities | |
| 10,752.4 | |
| 11,872.0 |
Deferred revenue | |
| 103.6 | |
| 114.1 |
Deferred tax liability, net | |
| — | |
| 80.0 |
Long-term operating lease liabilities | | | 282.6 | | | 291.7 |
Deposits | |
| 4,864.2 | |
| 5,209.3 |
Non-recourse borrowings of consolidated securitization entities | |
| 3,840.3 | |
| 4,253.2 |
Long-term and other debt | |
| 2,974.7 | |
| 2,748.5 |
Other liabilities | |
| 329.4 | |
| 337.7 |
Total liabilities | |
| 23,147.2 | |
| 24,906.5 |
Commitments and contingencies (Note 15) | | | | | | |
Stockholders’ equity: | | | | | | |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 115.0 shares at each of March 31, 2020 and December 31, 2019, respectively | |
| 1.2 | |
| 1.1 |
Additional paid-in capital | |
| 3,259.7 | |
| 3,257.7 |
Treasury stock, at cost, 67.4 shares at each of March 31, 2020 and December 31, 2019, respectively | |
| (6,733.9) | |
| (6,733.9) |
Retained earnings | |
| 4,678.8 | |
| 5,163.3 |
Accumulated other comprehensive loss | |
| (118.1) | |
| (99.9) |
Total stockholders’ equity | |
| 1,087.7 | |
| 1,588.3 |
Total liabilities and stockholders’ equity | | $ | 24,234.9 | | $ | 26,494.8 |
See accompanying notes to unaudited condensed consolidated financial statements.
3
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
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|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions, except per share amounts) | ||||
Revenues |
|
|
|
|
|
|
Services |
| $ | 73.3 |
| $ | 92.6 |
Redemption, net |
|
| 111.9 |
|
| 131.9 |
Finance charges, net |
|
| 1,149.0 |
|
| 1,157.2 |
Total revenue |
|
| 1,334.2 |
|
| 1,381.7 |
Operating expenses |
|
|
|
|
|
|
Cost of operations (exclusive of depreciation and amortization disclosed separately below) |
|
| 640.5 |
|
| 591.7 |
Provision for loan loss |
|
| 252.1 |
|
| 337.7 |
General and administrative |
|
| 38.3 |
|
| 31.3 |
Depreciation and other amortization |
|
| 20.6 |
|
| 19.3 |
Amortization of purchased intangibles |
|
| 25.8 |
|
| 29.4 |
Total operating expenses |
|
| 977.3 |
|
| 1,009.4 |
Operating income |
|
| 356.9 |
|
| 372.3 |
Interest expense |
|
|
|
|
|
|
Securitization funding costs |
|
| 57.3 |
|
| 52.1 |
Interest expense on deposits |
|
| 48.7 |
|
| 35.5 |
Interest expense on long-term and other debt, net |
|
| 43.5 |
|
| 44.2 |
Total interest expense, net |
|
| 149.5 |
|
| 131.8 |
Income from continuing operations before income taxes |
|
| 207.4 |
|
| 240.5 |
Provision for income taxes |
|
| 33.1 |
|
| 64.0 |
Income from continuing operations |
| $ | 174.3 |
| $ | 176.5 |
Loss from discontinued operations, net of taxes |
|
| (25.2) |
|
| (12.6) |
Net income |
| $ | 149.1 |
| $ | 163.9 |
|
|
|
|
|
|
|
Basic income (loss) per share (Note 3): |
|
|
|
|
|
|
Income from continuing operations |
| $ | 3.29 |
| $ | 3.19 |
Loss from discontinued operations |
| $ | (0.48) |
| $ | (0.23) |
Net income per share |
| $ | 2.81 |
| $ | 2.96 |
|
|
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|
|
Diluted income (loss) per share (Note 3): |
|
|
|
|
|
|
Income from continuing operations |
| $ | 3.28 |
| $ | 3.17 |
Loss from discontinued operations |
| $ | (0.48) |
| $ | (0.22) |
Net income per share |
| $ | 2.80 |
| $ | 2.95 |
|
|
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|
|
Weighted average shares (Note 3): |
|
|
|
|
|
|
Basic |
|
| 53.0 |
|
| 55.4 |
Diluted |
|
| 53.2 |
|
| 55.7 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions, except per share amounts) | ||||
Revenues | | | | | | |
Services | | $ | 46.6 | | $ | 73.3 |
Redemption, net | |
| 120.9 | |
| 111.9 |
Finance charges, net | |
| 1,214.3 | |
| 1,149.0 |
Total revenue | |
| 1,381.8 | |
| 1,334.2 |
Operating expenses | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 499.2 | |
| 640.5 |
Provision for loan loss | | | 655.9 | | | 252.1 |
General and administrative | |
| 23.9 | |
| 38.3 |
Depreciation and other amortization | |
| 17.4 | |
| 20.6 |
Amortization of purchased intangibles | |
| 21.4 | |
| 25.8 |
Total operating expenses | |
| 1,217.8 | |
| 977.3 |
Operating income | |
| 164.0 | |
| 356.9 |
Interest expense | | | | | | |
Securitization funding costs | |
| 49.9 | |
| 57.3 |
Interest expense on deposits | |
| 60.3 | |
| 48.7 |
Interest expense on long-term and other debt, net | |
| 28.4 | |
| 37.9 |
Total interest expense, net | |
| 138.6 | |
| 143.9 |
Income from continuing operations before income taxes | | | 25.4 | | | 213.0 |
(Benefit) provision for income taxes | |
| (4.6) | |
| 34.8 |
Income from continuing operations | | | 30.0 | | | 178.2 |
Loss from discontinued operations, net of taxes | |
| — | |
| (29.1) |
Net income | | $ | 30.0 | | $ | 149.1 |
| | | | | | |
Basic income (loss) per share (Note 3): | | | | | | |
Income from continuing operations | | $ | 0.63 | | $ | 3.36 |
Loss from discontinued operations | | $ | — | | $ | (0.55) |
Net income per share | | $ | 0.63 | | $ | 2.81 |
| | | | | | |
Diluted income (loss) per share (Note 3): | | | | | | |
Income from continuing operations | | $ | 0.63 | | $ | 3.35 |
Loss from discontinued operations | | $ | — | | $ | (0.55) |
Net income per share | | $ | 0.63 | | $ | 2.80 |
| | | | | | |
Weighted average shares (Note 3): | | | | | | |
Basic | |
| 47.6 | |
| 53.0 |
Diluted | |
| 47.7 | |
| 53.2 |
See accompanying notes to unaudited condensed consolidated financial statements.
4
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Net income |
| $ | 149.1 |
| $ | 163.9 |
|
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Other comprehensive income (loss): |
|
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|
|
Unrealized gain (loss) on securities available-for-sale |
|
| 10.0 |
|
| (3.0) |
Tax (expense) benefit |
|
| (1.0) |
|
| 1.0 |
Unrealized gain (loss) on securities available-for-sale, net of tax |
|
| 9.0 |
|
| (2.0) |
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges |
|
| (0.1) |
|
| (0.1) |
Tax benefit (expense) |
|
| — |
|
| — |
Unrealized loss on cash flow hedges, net of tax |
|
| (0.1) |
|
| (0.1) |
|
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Unrealized gain (loss) on net investment hedges |
|
| 16.1 |
|
| (15.4) |
Tax (expense) benefit |
|
| (3.9) |
|
| 3.7 |
Unrealized gain (loss) on net investment hedges, net of tax |
|
| 12.2 |
|
| (11.7) |
|
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Foreign currency translation adjustments |
|
| (10.9) |
|
| 17.5 |
|
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|
|
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Other comprehensive income, net of tax |
|
| 10.2 |
|
| 3.7 |
|
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|
Total comprehensive income, net of tax |
| $ | 159.3 |
| $ | 167.6 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Net income | | $ | 30.0 | | $ | 149.1 |
| | | | | | |
Other comprehensive income: | | | | | | |
Unrealized gain on securities available-for-sale | | | 2.7 | | | 10.0 |
Tax expense | | | (1.1) | | | (1.0) |
Unrealized gain on securities available-for-sale, net of tax | |
| 1.6 | |
| 9.0 |
| | | | | | |
Unrealized gain (loss) on cash flow hedges | | | 0.4 | | | (0.1) |
Tax expense | | | (0.1) | | | — |
Unrealized gain (loss) on cash flow hedges, net of tax | | | 0.3 | | | (0.1) |
| | | | | | |
Unrealized gain on net investment hedge | | | — | | | 16.1 |
Tax expense | | | — | | | (3.9) |
Unrealized gain on net investment hedge, net of tax | | | — | | | 12.2 |
| | | | | | |
Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million related to sale of a business for the three months ended March 31, 2020) | |
| (20.1) | |
| (10.9) |
| | | | | | |
Other comprehensive (loss) income, net of tax | |
| (18.2) | |
| 10.2 |
| | | | | | |
Total comprehensive income, net of tax | | $ | 11.8 | | $ | 159.3 |
See accompanying notes to unaudited condensed consolidated financial statements.
5
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | |||||
| | | | | | | Additional | | | | | | Other | | Total | |||||
| | Common Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | ||||||||
Three Months Ended March 31, 2020 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
| | (in millions) | ||||||||||||||||||
Balance at December 31, 2019 |
| 115.0 | | $ | 1.1 | | $ | 3,257.7 | | $ | (6,733.9) | | $ | 5,163.3 | | $ | (99.9) | | $ | 1,588.3 |
Net income |
| — | | | — | | | — | | | — | | | 30.0 | | | — | |
| 30.0 |
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13 |
| — | | | — | | | — | | | — | | | (485.0) | | | — | | | (485.0) |
Other comprehensive loss |
| — | | | — | | | — | | | — | | | — | | | (18.2) | | | (18.2) |
Stock-based compensation |
| — | | | — | | | 4.7 | | | — | | | — | | | — | | | 4.7 |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | | — | | | — | | | (29.5) | | | — | | | (29.5) |
Other |
| — | | | 0.1 | | | (2.7) | | | — | | | — | | | — | | | (2.6) |
Balance at March 31, 2020 |
| 115.0 | | $ | 1.2 | | $ | 3,259.7 | | $ | (6,733.9) | | $ | 4,678.8 | | $ | (118.1) | | $ | 1,087.7 |
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| Accumulated |
|
| |||||
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
| Total | |||||
|
| Common Stock |
| Paid-In |
| Treasury |
| Retained |
| Comprehensive |
| Stockholders’ | ||||||||
Three Months Ended March 31, 2019 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
|
| (in millions) | ||||||||||||||||||
Balance at December 31, 2018 |
| 113.0 |
| $ | 1.1 |
| $ | 3,172.4 |
| $ | (5,715.7) |
| $ | 5,012.4 |
| $ | (138.1) |
| $ | 2,332.1 |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| 149.1 |
|
| — |
|
| 149.1 |
Other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10.2 |
|
| 10.2 |
Stock-based compensation |
| — |
|
| — |
|
| 20.1 |
|
| — |
|
| — |
|
| — |
|
| 20.1 |
Repurchases of common stock |
| — |
|
| — |
|
| — |
|
| (222.8) |
|
| — |
|
| — |
|
| (222.8) |
Dividends and dividend equivalent rights declared ($0.63 per share) |
| — |
|
| — |
|
| — |
|
| — |
|
| (33.7) |
|
| — |
|
| (33.7) |
Other |
| 0.2 |
|
| — |
|
| (15.5) |
|
| — |
|
| — |
|
| — |
|
| (15.5) |
Balance at March 31, 2019 |
| 113.2 |
| $ | 1.1 |
| $ | 3,177.0 |
| $ | (5,938.5) |
| $ | 5,127.8 |
| $ | (127.9) |
| $ | 2,239.5 |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | |||||
| | | | | | | Additional | | | | | | Other | | Total | |||||
| | Common Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | ||||||||
Three Months Ended March 31, 2019 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
| | (in millions) | ||||||||||||||||||
Balance at December 31, 2018 |
| 113.0 | | $ | 1.1 | | $ | 3,172.4 | | $ | (5,715.7) | | $ | 5,012.4 | | $ | (138.1) | | $ | 2,332.1 |
Net income |
| — | |
| — | |
| — | |
| — | |
| 149.1 | |
| — | |
| 149.1 |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 10.2 | | | 10.2 |
Stock-based compensation | | — | | | — | | | 20.1 | | | — | | | — | | | — | | | 20.1 |
Repurchases of common stock |
| — | | | — | | | — | | | (222.8) | | | — | | | — | | | (222.8) |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | | — | | | — | | | (33.7) | | | — | | | (33.7) |
Other | | 0.2 | | | — | | | (15.5) | | | — | | | — | | | — | | | (15.5) |
Balance at March 31, 2019 | | 113.2 | | $ | 1.1 | | $ | 3,177.0 | | $ | (5,938.5) | | $ | 5,127.8 | | $ | (127.9) | | $ | 2,239.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
| |||||
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
| Total | |||||
|
| Common Stock |
| Paid-In |
| Treasury |
| Retained |
| Comprehensive |
| Stockholders’ | ||||||||
Three Months Ended March 31, 2018 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
|
| (in millions) | ||||||||||||||||||
Balance at December 31, 2017 |
| 112.8 |
| $ | 1.1 |
| $ | 3,099.8 |
| $ | (5,272.5) |
| $ | 4,167.1 |
| $ | (140.2) |
| $ | 1,855.3 |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| 163.9 |
|
| — |
|
| 163.9 |
Other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3.7 |
|
| 3.7 |
Stock-based compensation |
| — |
|
| — |
|
| 24.5 |
|
| — |
|
| — |
|
| — |
|
| 24.5 |
Dividends and dividend equivalent rights declared ($0.57 per share) |
| — |
|
| — |
|
| — |
|
| — |
|
| (31.5) |
|
| — |
|
| (31.5) |
Cumulative effect adjustment to retained earnings in accordance with ASC 606 |
| — |
|
| — |
|
| — |
|
| — |
|
| 9.6 |
|
| — |
|
| 9.6 |
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-01 |
| — |
|
| — |
|
| — |
|
| — |
|
| (1.5) |
|
| — |
|
| (1.5) |
Other |
| 0.1 |
|
| — |
|
| (22.6) |
|
| — |
|
| — |
|
| — |
|
| (22.6) |
Balance at March 31, 2018 |
| 112.9 |
| $ | 1.1 |
| $ | 3,101.7 |
| $ | (5,272.5) |
| $ | 4,307.6 |
| $ | (136.5) |
| $ | 2,001.4 |
See accompanying notes to unaudited condensed consolidated financial statements.
6
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net income |
| $ | 149.1 |
| $ | 163.9 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 118.9 |
|
| 121.7 |
Deferred income taxes |
|
| (35.0) |
|
| (16.2) |
Provision for loan loss |
|
| 252.1 |
|
| 337.7 |
Non-cash stock compensation |
|
| 21.1 |
|
| 25.5 |
Amortization of deferred financing costs |
|
| 11.0 |
|
| 11.4 |
Change in other operating assets and liabilities |
|
| 8.7 |
|
| (108.0) |
Originations of credit card and loan receivables held for sale |
|
| — |
|
| (2,271.7) |
Sales of credit card and loan receivables held for sale |
|
| — |
|
| 2,312.8 |
Other |
|
| 84.9 |
|
| 72.8 |
Net cash provided by operating activities |
|
| 610.8 |
|
| 649.9 |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Change in redemption settlement assets |
|
| (0.1) |
|
| (14.5) |
Change in credit card and loan receivables |
|
| 758.2 |
|
| 470.5 |
Payments for acquired businesses, net of cash |
|
| (6.7) |
|
| — |
Capital expenditures |
|
| (38.7) |
|
| (44.7) |
Purchases of other investments |
|
| (5.0) |
|
| (25.0) |
Maturities/sales of other investments |
|
| 6.4 |
|
| 6.0 |
Other |
|
| 3.4 |
|
| 0.6 |
Net cash provided by investing activities |
|
| 717.5 |
|
| 392.9 |
|
| �� |
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Borrowings under debt agreements |
|
| 1,045.1 |
|
| 685.0 |
Repayments of borrowings |
|
| (870.9) |
|
| (706.5) |
Non-recourse borrowings of consolidated securitization entities |
|
| 1,122.2 |
|
| 905.0 |
Repayments/maturities of non-recourse borrowings of consolidated securitization entities |
|
| (1,997.5) |
|
| (1,590.0) |
Net decrease in deposits |
|
| (502.6) |
|
| (448.4) |
Payment of deferred financing costs |
|
| (5.4) |
|
| (3.5) |
Dividends paid |
|
| (33.9) |
|
| (31.7) |
Purchase of treasury shares |
|
| (222.8) |
|
| — |
Other |
|
| (17.2) |
|
| (23.7) |
Net cash used in financing activities |
|
| (1,483.0) |
|
| (1,213.8) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| 3.0 |
|
| (1.7) |
Change in cash, cash equivalents and restricted cash |
|
| (151.7) |
|
| (172.7) |
Cash, cash equivalents and restricted cash at beginning of year |
|
| 3,967.7 |
|
| 4,314.7 |
Cash, cash equivalents and restricted cash at end of year |
| $ | 3,816.0 |
| $ | 4,142.0 |
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
Interest paid |
| $ | 206.7 |
| $ | 159.2 |
Income taxes paid, net |
| $ | 20.4 |
| $ | 56.7 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 30.0 | | $ | 149.1 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 38.8 | |
| 118.9 |
Deferred income taxes | |
| (158.7) | |
| (35.0) |
Provision for loan loss | |
| 655.9 | |
| 252.1 |
Non-cash stock compensation | |
| 4.7 | |
| 21.1 |
Amortization of deferred financing costs | |
| 9.5 | |
| 11.0 |
Change in other operating assets and liabilities, net of sale of business | | | 8.6 | | | 8.7 |
Other | |
| (16.3) | |
| 84.9 |
Net cash provided by operating activities | |
| 572.5 | |
| 610.8 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Change in redemption settlement assets | |
| 1.0 | |
| (0.1) |
Change in credit card and loan receivables | |
| 1,446.7 | |
| 758.2 |
Proceeds from sale of business | |
| 25.4 | |
| — |
Proceeds from sale of credit card portfolios | |
| 289.5 | | | — |
Payments for acquired businesses, net of cash | | | — | | | (6.7) |
Capital expenditures | |
| (15.7) | |
| (38.7) |
Purchases of other investments | |
| (14.0) | |
| (5.0) |
Maturities/sales of other investments | |
| 13.2 | |
| 6.4 |
Other | |
| 0.2 | |
| 3.4 |
Net cash provided by investing activities | |
| 1,746.3 | |
| 717.5 |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Borrowings under debt agreements | |
| 500.0 | |
| 1,045.1 |
Repayments of borrowings | |
| (275.4) | |
| (870.9) |
Non-recourse borrowings of consolidated securitization entities | |
| 350.0 | |
| 1,122.2 |
Repayments/maturities of non-recourse borrowings of consolidated securitization entities | |
| (1,275.0) | |
| (1,997.5) |
Net decrease in deposits | | | (769.4) | | | (502.6) |
Payment of deferred financing costs | |
| (0.6) | |
| (5.4) |
Dividends paid | |
| (30.3) | |
| (33.9) |
Purchase of treasury shares | |
| — | |
| (222.8) |
Other | |
| (2.7) | |
| (17.2) |
Net cash used in financing activities | |
| (1,503.4) | |
| (1,483.0) |
| | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (7.6) | |
| 3.0 |
| | | | | | |
Change in cash, cash equivalents and restricted cash | |
| 807.8 | |
| (151.7) |
Cash, cash equivalents and restricted cash at beginning of period | |
| 3,958.1 | |
| 3,967.7 |
Cash, cash equivalents and restricted cash at end of period | | $ | 4,765.9 | | $ | 3,816.0 |
| | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | |
Interest paid | | $ | 138.3 | | $ | 206.7 |
Income taxes paid, net | | $ | 44.6 | | $ | 20.4 |
The unaudited condensed consolidated statements of cash flows are presented with the combined cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category.
See accompanying notes to unaudited condensed consolidated financial statements.
7
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by Alliance Data Systems Corporation (“ADSC” or, including its consolidated subsidiaries and variable interest entities (“VIEs”), the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on February 26, 2019.28, 2020.
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets; (2) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP. Effective March 31, 2019, the Company’s divested Epsilon segment met the criteria set forth in Accounting Standards Codification (“ASC”) 205-20, “Presentation of Financial Statements — Discontinued Operations,” and was subsequently sold on July 1, 2019. The Company’s unaudited condensed consolidated financial statements have been presented with its Epsilonproducts and services are reported under 2 segments—LoyaltyOne® segment as a discontinued operation. See Note 5, “Discontinued Operations,” for more information. and Card Services.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminates certain exceptions within ASC 740, “Income Taxes,” and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. This ASU is elective and is effective upon issuance for all entities. The Company is evaluating the impact that adoption of ASU 2020-04 will have on its consolidated financial statements.
8
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.Instruments,” ASU 2016-13 requiresor ASC 326. This standard, referred to as Current Expected Credit Loss (“CECL”), required entities to utilize a financial instrument impairment model to establish an allowance based on expected losses over the life of the exposure rather than a model based on an incurred loss approach. ASU 2016-13Estimates of expected credit losses under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forward-looking forecasts regarding the collectability of the loan portfolio.
The Company adopted CECL on January 1, 2020 and recorded an increase in its allowance for loan loss at adoption of $644.0 million, which was recorded through a cumulative-effect adjustment to retained earnings, net of taxes. CECL also expandsexpanded the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating its allowance for loan loss. See Note 6, “Credit Card and Loan Receivables,” for the allowance. Company’s CECL disclosures.
In addition, ASU 2016-13 modifiesCECL modified the impairment model for available-for-sale debt securities and providesprovided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for interimCECL impacts the Company’s valuation of its accounts receivable and annual reporting periods beginning after December 15, 2019,available-for-sale debt securities, with earlyrespect to which the Company’s adoption permitted beginning after December 15, 2018. The Company has formeddid not have a cross-functional implementation team and is finalizing the development of loss forecasting models, technological solutions and processes to satisfy the requirements of ASU 2016-13. Management is assessing key accounting interpretations and continues to evaluate thematerial impact of the new standard on its consolidated financial statements. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings. The extent of the impact upon adoption will depend on the asset quality of the Company’s credit card and loan receivables portfolio, and economic conditions and forecasts at adoption.
In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements from Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact thatCompany’s adoption of ASU 2018-13 willthis standard on January 1, 2020 did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 requires customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, “Intangibles—
8
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Goodwill and Other—Internal-Use Software,” to determine which implementation costs may be capitalized. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The amendments in ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact that adoption ofadopted ASU 2018-15 will have on its consolidated financial statements.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases,” ASC 842, that replaced previous lease guidance and required lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Companies continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statements of income. Companies were permitted to adopt ASC 842 using a modified retrospective approach or transition relief provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that removed certain comparative period requirements and required a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the standard on January 1, 2019 using the transition relief provided by ASU 2018-11.
During 2018, the Company completed its evaluation of ASC 842, including the impact2020 on its policies, processes, systems and controls. As a result, the Company identified changes to and modified certain of its accounting policies and practices, including the implementation of new lease accounting software. Although there were no significant changes to the Company’s accounting systems or controls upon adoption of ASC 842, the Company modified certain of its existing controls and added new controls to incorporate the revisions made to its accounting policies and practices.
The Company elected the transition practical expedients permitted under ASC 842-10-65-1 under which it was not required to reassess (i) whether expired or existing contracts were or contained leases as defined by ASC 842, (ii) the classification of such leases, and (iii) whether previously capitalized initial direct costs qualified for capitalization under ASC 842. The Company also elected the practical expedient to use hindsight in determining the lease term. Additionally, the Company made the accounting policy election to account for lease and nonlease components as a single lease component for its identified asset classes.
The cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of ASC 842 established operating lease liabilities of approximately $324.5 million and corresponding right-of-use assets of approximately $269.9 million, based upon the operating lease liabilities adjusted for deferred rent and lease incentives, which resulted in the reclassification of approximately $54.6 million in liabilities to the right-of-use asset. There was no cumulative-effect adjustment to retained earnings as a result of the adoption of ASC 842.
Additionally, the cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of ASC 842 for the Epsilon segment, presented as a discontinued operation for the periods presented, established operating lease liabilities of approximately $208.7 million and corresponding right-of-use assets of approximately $181.1 million, based upon the operating lease liabilities adjusted for prepaid and deferred rent, unamortized initial direct costs, and lease incentives, which resulted in the reclassification of approximately $30.5 million in liabilities and $2.9 million in assets to the right-of-use asset. As part of the adoption of ASC 842, capital leases were recognized as finance leases at their existing carrying amounts effective January 1, 2019,prospective basis and the accounting remained substantially unchanged, with capital lease assets totaling $13.0 million and capital lease liabilities totaling $12.6 million.
The Company’s adoption of ASC 842 had no significant impact to our consolidated statements of income or consolidated statements of cash flows. Based on the evaluation of ASC 842, the Company does not expect it to have a material impact on its results of operations or cash flows in the periods after adoption.
ASC 842 also requires expanded qualitative and quantitative disclosure regarding the Company’s leasing activities. See Note 10, “Leases,” for the Company’s ASC 842 disclosures.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expanded and refined the hedge accounting model for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedged items in the financial
9
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
statements, and made certain targeted improvements to simplify the application of hedge accounting guidance related to the assessment of hedge effectiveness. The Company’s adoption of this standard on January 1, 2019 did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allowed for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate as a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 were permitted to be released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. The Company adopted this standard on January 1, 2019 using the portfolio approach and did not reclassify the stranded tax effects to retained earnings as these amounts did not have a material impact on its consolidated financial statements.
2. REVENUE
As discussed in Note 5, “Discontinued Operations,” in the first quarter of 2019, the Company’s Epsilon segment has been classified as a discontinued operation. As such, beginning with the first quarter of 2019, theThe Company’s products and services are reported under two2 segments—LoyaltyOne® and Card Services, as shown below.
The following tables present revenue disaggregated by major source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate/ |
|
|
| |
Three Months Ended March 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
|
| (in millions) | ||||||||||
Disaggregation of Revenue by Major Source: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coalition loyalty program |
| $ | 71.4 |
| $ | — |
| $ | — |
| $ | 71.4 |
Short-term loyalty programs |
|
| 109.6 |
|
| — |
|
| — |
|
| 109.6 |
Servicing fees, net |
|
| — |
|
| (18.6) |
|
| — |
|
| (18.6) |
Other |
|
| 19.8 |
|
| — |
|
| — |
|
| 19.8 |
Revenue from contracts with customers |
| $ | 200.8 |
| $ | (18.6) |
| $ | — |
| $ | 182.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charges, net |
|
| — |
|
| 1,149.0 |
|
| — |
|
| 1,149.0 |
Investment income |
|
| 3.0 |
|
| — |
|
| — |
|
| 3.0 |
Total |
| $ | 203.8 |
| $ | 1,130.4 |
| $ | — |
| $ | 1,334.2 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
| Corporate/ |
|
|
| |||||||||||||
Three Months Ended March 31, 2018 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||||||||||||||
|
| (in millions) | ||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | | | | | | | Corporate/ | | | | |||||||||||||
Three Months Ended March 31, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||||||||||||||
| | (in millions) | ||||||||||||||||||||||
Disaggregation of Revenue by Major Source: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
|
|
|
|
|
|
|
|
| �� |
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Coalition loyalty program |
| $ | 89.9 |
| $ | — |
| $ | — |
| $ | 89.9 | | $ | 71.3 | | $ | — | | $ | — | | $ | 71.3 |
Short-term loyalty programs |
|
| 114.2 |
|
| — |
|
| — |
|
| 114.2 | |
| 120.3 | |
| — | |
| — | |
| 120.3 |
Servicing fees, net |
|
| — |
|
| (2.0) |
|
| — |
|
| (2.0) | |
| — | |
| (30.7) | |
| — | |
| (30.7) |
Other |
|
| 19.5 |
|
| — |
|
| 0.2 |
|
| 19.7 | |
| 3.3 | |
| — | |
| 0.1 | |
| 3.4 |
Revenue from contracts with customers |
| $ | 223.6 |
| $ | (2.0) |
| $ | 0.2 |
| $ | 221.8 | | $ | 194.9 | | $ | (30.7) | | $ | 0.1 | | $ | 164.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Finance charges, net |
|
| — |
|
| 1,157.2 |
|
| — |
|
| 1,157.2 | |
| — | |
| 1,214.3 | |
| — | |
| 1,214.3 |
Investment income |
|
| 2.7 |
|
| — |
|
| — |
|
| 2.7 | |
| 3.2 | |
| — | |
| — | |
| 3.2 |
Total |
| $ | 226.3 |
| $ | 1,155.2 |
| $ | 0.2 |
| $ | 1,381.7 | | $ | 198.1 | | $ | 1,183.6 | | $ | 0.1 | | $ | 1,381.8 |
10
9
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Three Months Ended March 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 71.4 | | $ | — | | $ | — | | $ | 71.4 |
Short-term loyalty programs | |
| 109.6 | |
| — | |
| — | |
| 109.6 |
Servicing fees, net | |
| — | |
| (18.6) | |
| — | |
| (18.6) |
Other | |
| 19.8 | |
| — | |
| — | |
| 19.8 |
Revenue from contracts with customers | | $ | 200.8 | | $ | (18.6) | | $ | — | | $ | 182.2 |
| | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 1,149.0 | |
| — | |
| 1,149.0 |
Investment income | |
| 3.0 | |
| — | |
| — | |
| 3.0 |
Total | | $ | 203.8 | | $ | 1,130.4 | | $ | — | | $ | 1,334.2 |
The following tables present revenue disaggregated by geographic region based on the location of the subsidiary that generally correlates with the location of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate/ |
|
|
| |
Three Months Ended March 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
|
| (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 6.4 |
| $ | 1,130.4 |
| $ | — |
| $ | 1,136.8 |
Canada |
|
| 89.0 |
|
| — |
|
| — |
|
| 89.0 |
Europe, Middle East and Africa |
|
| 81.4 |
|
| — |
|
| — |
|
| 81.4 |
Asia Pacific |
|
| 17.5 |
|
| — |
|
| — |
|
| 17.5 |
Other |
|
| 9.5 |
|
| — |
|
| — |
|
| 9.5 |
Total |
| $ | 203.8 |
| $ | 1,130.4 |
| $ | — |
| $ | 1,334.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate/ |
|
|
| |
Three Months Ended March 31, 2018 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
|
| (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 5.7 |
| $ | 1,155.2 |
| $ | 0.2 |
| $ | 1,161.1 |
Canada |
|
| 105.6 |
|
| — |
|
| — |
|
| 105.6 |
Europe, Middle East and Africa |
|
| 97.0 |
|
| — |
|
| — |
|
| 97.0 |
Asia Pacific |
|
| 16.6 |
|
| — |
|
| — |
|
| 16.6 |
Other |
|
| 1.4 |
|
| — |
|
| — |
|
| 1.4 |
Total |
| $ | 226.3 |
| $ | 1,155.2 |
| $ | 0.2 |
| $ | 1,381.7 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Three Months Ended March 31, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 2.1 | | $ | 1,183.6 | | $ | 0.1 | | $ | 1,185.8 |
Canada | |
| 79.1 | |
| — | |
| — | |
| 79.1 |
Europe, Middle East and Africa | |
| 68.6 | |
| — | |
| — | |
| 68.6 |
Asia Pacific | |
| 37.0 | |
| — | |
| — | |
| 37.0 |
Other | |
| 11.3 | |
| — | |
| — | |
| 11.3 |
Total | | $ | 198.1 | | $ | 1,183.6 | | $ | 0.1 | | $ | 1,381.8 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Three Months Ended March 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 6.4 | | $ | 1,130.4 | | $ | — | | $ | 1,136.8 |
Canada | |
| 89.0 | |
| — | |
| — | |
| 89.0 |
Europe, Middle East and Africa | |
| 81.4 | |
| — | |
| — | |
| 81.4 |
Asia Pacific | |
| 17.5 | |
| — | |
| — | |
| 17.5 |
Other | |
| 9.5 | |
| — | |
| — | |
| 9.5 |
Total | | $ | 203.8 | | $ | 1,130.4 | | $ | — | | $ | 1,334.2 |
Contract Liabilities
The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES® reward mile and the reward products for its short-term loyalty programs.
10
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:
| | | | | | | | | |
| | Deferred Revenue | |||||||
|
| Service |
| Redemption |
| Total | |||
| | (in millions) | |||||||
Balance at January 1, 2020 | | $ | 258.6 | | $ | 663.4 | | $ | 922.0 |
Cash proceeds | |
| 44.8 | |
| 73.4 | |
| 118.2 |
Revenue recognized (1) | |
| (48.6) | |
| (69.2) | |
| (117.8) |
Effects of foreign currency translation | |
| (19.6) | |
| (50.9) | |
| (70.5) |
Balance at March 31, 2020 | | $ | 235.2 | | $ | 616.7 | | $ | 851.9 |
Amounts recognized in the consolidated balance sheets: | |
|
| |
|
| |
|
|
Deferred revenue (current) | | $ | 131.6 | | $ | 616.7 | | $ | 748.3 |
Deferred revenue (non-current) | | $ | 103.6 | | $ | — | | $ | 103.6 |
|
|
|
|
|
|
|
|
|
|
|
| Deferred Revenue | |||||||
|
| Service |
| Redemption |
| Total | |||
|
| (in millions) | |||||||
Balance at January 1, 2019 |
| $ | 248.0 |
| $ | 627.3 |
| $ | 875.3 |
Cash proceeds |
|
| 41.7 |
|
| 67.5 |
|
| 109.2 |
Revenue recognized (1) |
|
| (48.9) |
|
| (77.8) |
|
| (126.7) |
Other |
|
| — |
|
| 0.4 |
|
| 0.4 |
Effects of foreign currency translation |
|
| 5.4 |
|
| 13.7 |
|
| 19.1 |
Balance at March 31, 2019 |
| $ | 246.2 |
| $ | 631.1 |
| $ | 877.3 |
Amounts recognized in the consolidated balance sheets: |
|
|
|
|
|
|
|
|
|
Deferred revenue (current) |
| $ | 137.7 |
| $ | 631.1 |
| $ | 768.8 |
Deferred revenue (non-current) |
| $ | 108.5 |
| $ | — |
| $ | 108.5 |
(1) | Reported on a gross basis herein. |
The deferred redemption obligation associated with the AIR MILES Reward Program is effectively due on demand from the collector base, thus the timing of revenue recognition is based on the redemption by the collector. Service revenue is amortized over the expected life of a mile, with the deferred revenue balance expected to be recognized into revenue in the amount of $111.7$106.8 million in 2019, $87.52020, $83.3 million in 2020, $42.72021, $40.8 million in 2021,2022, and $4.3 million in 2022.2023.
Additionally, contract liabilities for the Company’s short-term loyalty programs are recognized in other current liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance as of January 1,
11
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
2019 2020 was $110.2$122.8 million and the closing balance as of March 31, 20192020 was $96.7$79.0 million, with the change due to revenue recognized of approximately $102.9$89.6 million during the three months ended March 31, 2019,2020, offset in part by cash payments received in advance of program performance.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:of common stock:
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions, except per share amounts) | ||||
Numerator: | | | | | | |
Income from continuing operations | | $ | 30.0 | | $ | 178.2 |
Loss from discontinued operations | | | — | | | (29.1) |
Net income | | $ | 30.0 | | $ | 149.1 |
| | | | | | |
Denominator: | | | | | | |
Weighted average shares, basic | |
| 47.6 | |
| 53.0 |
Weighted average effect of dilutive securities: | | | | | | |
Net effect of dilutive stock options and unvested restricted stock | |
| 0.1 | |
| 0.2 |
Denominator for diluted calculation | |
| 47.7 | |
| 53.2 |
| | | | | | |
Basic income per share: | | | | | | |
Income from continuing operations | | $ | 0.63 | | $ | 3.36 |
Loss from discontinued operations | | $ | — | | $ | (0.55) |
Net income per share | | $ | 0.63 | | $ | 2.81 |
| | | | | | |
Diluted income per share: | | | | | | |
Income from continuing operations | | $ | 0.63 | | $ | 3.35 |
Loss from discontinued operations | | $ | — | | $ | (0.55) |
Net income per share | | $ | 0.63 | | $ | 2.80 |
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions, except per share amounts) | ||||
Numerator: |
|
|
|
|
|
|
Income from continuing operations |
| $ | 174.3 |
| $ | 176.5 |
Loss from discontinued operations |
|
| (25.2) |
|
| (12.6) |
Net income |
| $ | 149.1 |
| $ | 163.9 |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
Weighted average shares, basic |
|
| 53.0 |
|
| 55.4 |
Weighted average effect of dilutive securities: |
|
|
|
|
|
|
Net effect of dilutive stock options and unvested restricted stock |
|
| 0.2 |
|
| 0.3 |
Denominator for diluted calculation |
|
| 53.2 |
|
| 55.7 |
|
|
|
|
|
|
|
Basic income per share: |
|
|
|
|
|
|
Income from continuing operations |
| $ | 3.29 |
| $ | 3.19 |
Loss from discontinued operations |
| $ | (0.48) |
| $ | (0.23) |
Net income per share |
| $ | 2.81 |
| $ | 2.96 |
|
|
|
|
|
|
|
Diluted income per share: |
|
|
|
|
|
|
Income from continuing operations |
| $ | 3.28 |
| $ | 3.17 |
Loss from discontinued operations |
| $ | (0.48) |
| $ | (0.22) |
Net income per share |
| $ | 2.80 |
| $ | 2.95 |
11
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
For each of the three months ended March 31, 20192020 and 2018,2019, 0.3 million and a de minimis amount of restricted stock units, respectively, were excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive.
4. ACQUISITIONDISPOSITION
On February 7, 2019,January 10, 2020, the Company acquired certain assets as well as the assembled workforce and related office lease agreements of blispay inc. (“Blispay”)sold Precima®, a financial technology company,provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for cashtotal consideration of $6.7$43.8 million. The purchase and sale agreement provides for $10.0 million in contingent consideration based upon the occurrence of specified events and a $1.0 million limited guarantee was issued by the Company as partperformance of the transaction.business, with 2 earnout determination dates in September 2020 and September 2021, respectively. The acquisition was determined to constitute a business combination under ASC 805, “Business Combinations.” Total assets acquired were $7.3 million, including $5.0 million of capitalized software and $2.3 million of goodwill, withCompany estimated the fair value of the guarantee determined to becontingent purchase price at approximately $0.6$6.5 million, onwhich is included in the acquisition date.total consideration below. Precima was included in the Company’s LoyaltyOne segment. The pre-tax gain was recorded in cost of operations in the Company’s unaudited condensed consolidated statements of income.
| | | |
|
| January 10, | |
|
| 2020 | |
| | (in millions) | |
Total consideration (1) | | $ | 43.8 |
Net carrying value of assets and liabilities (including other comprehensive income) | |
| 26.8 |
Allocation of goodwill | |
| 3.2 |
Strategic transaction costs | |
| 5.8 |
Pre-tax gain on sale of business, net of strategic transaction costs | | $ | 8.0 |
(1) | Consideration as defined included cash associated with the sold Precima entities, which was $10.8 million. |
5. DISCONTINUED OPERATIONS
In November 2018,Effective March 31, 2019, the Company announced the exploration of strategic alternatives forCompany’s divested Epsilon including a potential sale of the business. In the first quarter of 2019, Epsilonsegment met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations,” and has been presented as awas subsequently sold on July 1, 2019.
The following table summarizes the results of discontinued operationoperations for all periods presented.the three months ended March 31, 2019:
| | | |
| | Three Months Ended | |
| | March 31, 2019 | |
| | (in millions) | |
Revenue | | $ | 507.8 |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 443.4 |
Depreciation and other amortization | | | 29.0 |
Amortization of purchased intangibles | | | 43.5 |
Interest expense (1) | | | 32.1 |
Loss before benefit from income taxes | | | (40.2) |
Benefit from income taxes (1) | | | (11.1) |
Loss from discontinued operations, net of taxes (2) | | $ | (29.1) |
(1) | On April 30, 2019, the Company amended its credit agreement, which among other items, provided that upon consummation of the sale of Epsilon, a mandatory payment of $500.0 million of the revolving credit facility was required and all of the Company’s outstanding senior notes were required to be redeemed. The table above includes the allocation of interest expense associated with the $500.0 million mandatory repayment of the revolving credit facility, as well as the related income tax effect, which was not reflected in our historical results in our Quarterly Report on Form 10-Q for the period ended March 31, 2019. The impact was $5.6 million of interest expense and an income tax benefit of $1.7 million. |
(2) | Reflects the results of operations of the Company’s former Epsilon segment, direct costs identifiable to the Epsilon segment and the allocation of interest expense on corporate debt. |
12
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. The transaction is expected to close in the third quarter of 2019, subject to satisfaction of customary closing conditions and receipt of regulatory approvals.
At March 31, 2019, the assets and liabilities of discontinued operations are classified as current in the unaudited condensed consolidated balance sheets, as it is probable that the sale will occur and proceeds will be collected within one year. The following table presents a reconciliation of the assets and liabilities of discontinued operations to the unaudited condensed consolidated balance sheets for the periods presented:
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 40.1 |
| $ | 45.7 |
Accounts receivable, net |
|
| 466.5 |
|
| 519.9 |
Other current assets |
|
| 56.2 |
|
| 56.6 |
Property and equipment, net |
|
| 292.4 |
|
| 306.9 |
Right of use assets - operating |
|
| 178.4 |
|
| — |
Intangible assets, net |
|
| 285.6 |
|
| 322.3 |
Goodwill |
|
| 2,886.6 |
|
| 2,886.2 |
Other assets |
|
| 18.9 |
|
| 19.8 |
Total assets of discontinued operations |
| $ | 4,224.7 |
| $ | 4,157.4 |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | 50.9 |
| $ | 72.2 |
Accrued expenses |
|
| 76.0 |
|
| 141.7 |
Current operating lease liabilities |
|
| 38.7 |
|
| — |
Other current liabilities |
|
| 46.6 |
|
| 52.5 |
Long-term operating lease liabilities |
|
| 164.3 |
|
| — |
Other liabilities |
|
| 15.6 |
|
| 39.3 |
Total liabilities of discontinued operations |
| $ | 392.1 |
| $ | 305.7 |
The following table summarizes the operating results of discontinued operations:
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Revenue |
| $ | 507.8 |
| $ | 509.4 |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) |
|
| 443.4 |
|
| 430.8 |
Depreciation and other amortization |
|
| 29.0 |
|
| 28.4 |
Amortization of purchased intangibles |
|
| 43.5 |
|
| 44.6 |
Interest expense (1) |
|
| 26.5 |
|
| 27.4 |
Loss before benefit from income taxes |
|
| (34.6) |
|
| (21.8) |
Benefit from income taxes |
|
| (9.4) |
|
| (9.2) |
Loss from discontinued operations, net of taxes |
| $ | (25.2) |
| $ | (12.6) |
|
|
13
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Depreciation and amortization and capital expenditures from discontinued operations for the periods presentedthree months ended March 31, 2019 are as follows:
|
|
|
|
|
|
| |||
|
| Three Months Ended | |||||||
|
| March 31, | |||||||
|
| 2019 |
| 2018 | |||||
|
| (in millions) | |||||||
| | | | ||||||
| | Three Months Ended | |||||||
| | March 31, 2019 | |||||||
|
| (in millions) | |||||||
Depreciation and amortization |
| $ | 72.5 |
| $ | 73.0 | | $ | 72.5 |
Capital expenditures |
| $ | 6.8 |
| $ | 11.1 | | $ | 6.8 |
6. CREDIT CARD AND LOAN RECEIVABLES
The Company’s credit card and loan receivables are the only portfolio segment or class of financing receivables. Quantitative information about the components of credit card and loan receivables is presented in the table below:
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Principal receivables |
| $ | 15,938.7 |
| $ | 16,869.9 |
Billed and accrued finance charges |
|
| 836.8 |
|
| 898.3 |
Other |
|
| 75.0 |
|
| 86.8 |
Total credit card and loan receivables |
|
| 16,850.5 |
|
| 17,855.0 |
Less: Credit card receivables – restricted for securitization investors |
|
| 12,550.5 |
|
| 13,418.3 |
Other credit card and loan receivables |
| $ | 4,300.0 |
| $ | 4,436.7 |
| | | | | | |
|
| March 31, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Principal receivables | | $ | 16,725.4 | | $ | 18,413.1 |
Billed and accrued finance charges | |
| 933.5 | |
| 977.3 |
Other | |
| 73.0 | |
| 72.7 |
Total credit card and loan receivables | |
| 17,731.9 | |
| 19,463.1 |
Less: Credit card receivables – restricted for securitization investors | |
| 12,033.4 | |
| 13,504.2 |
Other credit card and loan receivables | | $ | 5,698.5 | | $ | 5,958.9 |
Allowance for Loan Loss
TheEffective January 1, 2020, the Company maintains anadopted ASC 326 on a modified retrospective approach and applied a CECL model to determine its allowance for loan loss. The allowance for loan loss at a level that is appropriate to absorb probablean estimate of expected credit losses, inherent inmeasured over the estimated life of its credit card and loan receivables.receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for loan loss coversincludes an estimate for uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.
In estimatingCharge-offs of principal amounts, net of recoveries are deducted from the allowance for principal loan losses, management utilizes a migration analysis of delinquent and current credit card and loan receivables. Migration analysis is a technique used to estimate the likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off.allowance. The allowance is maintained through an adjustment to the provision for loan loss. Charge-offs of principal amounts, net of recoveries are deducted fromloss and is evaluated for appropriateness. Prior to January 1, 2020, the allowance. In estimating the allowance for uncollectible unpaid interest and fees, the Company utilizes historical charge-off trends, analyzing actual charge-offs for the prior three months. The allowance is maintained through an adjustment to finance charges, net. In evaluating theCompany’s allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”
ASC 326 requires entities to use a “pooled” approach to estimate expected credit losses for both principalfinancial assets with similar risk characteristics. As part of its CECL implementation, the Company evaluated multiple risk characteristics of its credit card and unpaid interestloan receivables portfolio, and fees, management also considers factors that may impactdetermined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its allowance for loan loss, experience, including seasoningthe Company segregates its credit card and growth, account collection strategies, economic conditions, bankruptcy filings, policy changes, payment ratesloan receivables into four groups with similar risk characteristics, on the basis of delinquency status and forecasting uncertainties.credit quality risk score. These risk characteristics are evaluated at least on an annual basis, or more frequently as facts and circumstances warrant. The Company’s credit card and loan receivables do not have stated maturities and therefore prepayments are not factored into the determination of the estimated life of the credit card and loan receivables. In determining the estimated life of a credit card and loan receivable, payments were applied to the measurement date balance with no payments allocated to future purchase activity. The Company uses a combination of First In First Out (“FIFO”) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”) methodology to model balance paydown.
14
13
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | |
| | Estimated Life | |
| | (in months) | |
Group A (Current, risk score - high) | | | 14 |
Group B (Current, risk score - low) | | | 19 |
Group C (Delinquent, risk score - high) | | | 17 |
Group D (Delinquent, risk score - low) | | | 26 |
In estimating its allowance for loan loss, for each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. Management utilizes a third party service to analyze a number of scenarios, but uses one scenario to determine the macroeconomic variables over the forecast period. The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and loan receivables, with no reversion period. In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for loan loss reflects the Company’s best estimate of current expected credit losses. As permitted by ASC 326, the Company excludes unbilled finance charges from its amortized cost basis of credit card and loan receivables. At March 31, 2020, unbilled finance charges were $262.9 million and included in other credit card and loan receivables in the Company’s unaudited condensed consolidated balance sheet.
The following table presents the Company’s allowance for loan loss for the periods indicated:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Balance at beginning of period | | $ | 1,171.1 | | $ | 1,038.3 |
Adoption of ASC 326 (1) | | | 644.0 | | | — |
Provision for loan loss | |
| 655.9 | |
| 252.1 |
Recoveries | |
| 67.9 | |
| 59.8 |
Principal charge-offs | |
| (388.1) | |
| (329.1) |
Balance at end of period | | $ | 2,150.8 | | $ | 1,021.1 |
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Balance at beginning of period |
| $ | 1,038.3 |
| $ | 1,119.3 |
Provision for loan loss |
|
| 252.1 |
|
| 337.7 |
Allowance associated with credit card receivables transferred |
|
| — |
|
| (6.6) |
Change in estimate for uncollectible unpaid interest and fees |
|
| — |
|
| 15.0 |
Recoveries |
|
| 59.8 |
|
| 31.3 |
Principal charge-offs |
|
| (329.1) |
|
| (327.4) |
Balance at end of period |
| $ | 1,021.1 |
| $ | 1,169.3 |
(1) | Recorded January 1, 2020 through a cumulative-effect adjustment to retained earnings, net of taxes. |
For the three months ended March 31, 2020, the increase in the allowance for loan loss, in addition to the impact of the $644.0 million attributable to the adoption of ASC 326, was due to an increase in delinquent amounts and deterioration of the macroeconomic outlook due to COVID-19.
Net Charge-offs
Net charge-offs include the principal amount of losses from credit cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged‑offCharged-off interest and fees reduce finance charges, net while fraud losses are recorded as a cost of operations expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.
The Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. Actual charge-offs14
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Charge-offs for unpaid interest and fees were $218.8$231.9 million and $199.5$218.8 million for the three months ended March 31, 20192020 and 2018,2019, respectively.
Delinquencies
A credit card account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder’s statement. It is the Company’s policy to continue to accrue interest and fee income on all credit card accounts, beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.
15
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table presents the delinquency trendsamortized cost basis of the aging analysis of the Company’s credit card and loan receivables portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| % of |
| December 31, |
| % of |
| ||
|
| 2019 |
| Total |
| 2018 |
| Total |
| ||
|
| (in millions, except percentages) |
| ||||||||
Receivables outstanding - principal |
| $ | 15,938.7 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
Principal receivables balances contractually delinquent: |
|
|
|
|
|
|
|
|
|
|
|
31 to 60 days |
|
| 244.3 |
| 1.5 | % |
| 303.2 |
| 1.8 | % |
61 to 90 days |
|
| 185.0 |
| 1.2 |
|
| 207.9 |
| 1.3 |
|
91 or more days |
|
| 407.4 |
| 2.5 |
|
| 443.4 |
| 2.6 |
|
Total |
| $ | 836.7 |
| 5.2 | % | $ | 954.5 |
| 5.7 | % |
| | | | | | | | | | | | | | | | | | |
| | Aging Analysis of Delinquent Amortized Cost | | | | | | | ||||||||||
|
| 31 to 60 days |
| 61 to 90 days |
| 91 or more days delinquent |
| Total |
| Current |
| Total | ||||||
| | (in millions) | ||||||||||||||||
As of March 31, 2020 | | $ | 347.6 | | $ | 273.8 | | $ | 667.1 | | $ | 1,288.5 | | $ | 16,072.5 | | $ | 17,361.0 |
| | | | | | | | | | | | | | | | | | |
As of December 31, 2019 | | $ | 399.1 |
| $ | 293.9 |
| $ | 698.4 |
| $ | 1,391.4 |
| $ | 17,656.4 |
| $ | 19,047.8 |
Modified Credit Card Receivables
Forbearance Programs
In response to the COVID-19 pandemic, in March 2020 the Company began to offer forbearance programs to affected cardholders, which provide for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current as of their most recent billing cycle prior to April 2020. These programs are intended to provide temporary relief to affected cardholders and are not considered troubled debt restructurings. At March 31, 2020, the amount of credit card and loan receivables in forbearance programs was not material.
Troubled Debt Restructurings
The Company holds certain credit card receivables for which the terms have been modified. The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. These concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms.
Credit card receivables for which temporary hardship and permanent concessions were granted are each considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivable balance and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of ASC 450-20, “Loss Contingencies.” If the Company applied accounting under ASC 310-40, “Troubled Debt Restructurings by Creditors,” to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.
The Company had $298.2$332.6 million and $292.4$308.7 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $104.3 million and $101.3 million, respectively, as of March 31, 20192020 and December 31, 2018. These modified credit card receivables2019, respectively, which represented less than 2% of the Company’s
15
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
total credit card receivables as of both March 31, 2019 and December 31, 2018.
receivables. The average recorded investment in impaired credit card receivables was $297.7$314.7 million and $296.3$297.7 million for the three months ended March 31, 2020 and 2019, and 2018, respectively.
Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized $5.7$5.5 million and $6.0$5.7 million for the three months ended March 31, 20192020 and 2018,2019, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.
16
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table provides information on credit card receivables that are considered troubled debt restructurings as described above, which entered into a modification program during the specified periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2019 |
| Three Months Ended March 31, 2018 | ||||||||||||
|
|
|
| Pre-modification |
| Post-modification |
|
|
| Pre-modification |
| Post-modification | ||||
|
| Number of |
| Outstanding |
| Outstanding |
| Number of |
| Outstanding |
| Outstanding | ||||
|
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance | ||||
|
| (Dollars in millions) | ||||||||||||||
Troubled debt restructurings – credit card receivables |
| 70,294 |
| $ | 104.3 |
| $ | 104.1 |
| 280,072 |
| $ | 312.5 |
| $ | 312.2 |
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | ||||||||||||
| | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification | ||||
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding | ||||
|
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance | ||||
| | (Dollars in millions) | ||||||||||||||
Troubled debt restructurings – credit card receivables | | 75,065 |
| $ | 112.8 |
| $ | 112.7 | | 70,294 |
| $ | 104.3 |
| $ | 104.1 |
The table below summarizes troubled debt restructurings that have defaulted in the specified periods where the default occurred within 12 months of their modification date:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2019 |
| Three Months Ended March 31, 2018 | ||||||
|
| Number of |
| Outstanding |
| Number of |
| Outstanding | ||
|
| Restructurings |
| Balance |
| Restructurings |
| Balance | ||
|
| (Dollars in millions) | ||||||||
Troubled debt restructurings that subsequently defaulted – credit card receivables |
| 50,456 |
| $ | 65.4 |
| 28,760 |
| $ | 35.0 |
| | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | ||||||
| | Number of | | Outstanding |
| Number of | | Outstanding | ||
|
| Restructurings |
| Balance |
| Restructurings |
| Balance | ||
| | (Dollars in millions) | ||||||||
Troubled debt restructurings that subsequently defaulted – credit card receivables |
| 31,670 | | $ | 44.0 | | 50,456 | | $ | 65.4 |
Age of Credit Card and Loan Receivable Accounts
The following tables set forth, as of March 31, 2019 and December 31, 2018, the number of active credit card and loan receivable accounts with balances and the related principal balances outstanding, based upon the age of the active credit card and loan receivable accounts from origination:
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2019 |
| |||||||
|
|
|
|
|
|
|
|
| Percentage of |
|
|
| Number of |
| Percentage of |
| Principal |
| Principal |
| |
|
| Active Accounts |
| Active Accounts |
| Receivables |
| Receivables |
| |
Age of Accounts Since Origination |
| with Balances |
| with Balances |
| Outstanding |
| Outstanding |
| |
|
| (in millions, except percentages) |
| |||||||
0-12 Months |
| 5.5 |
| 26.1 | % | $ | 3,812.1 |
| 23.9 | % |
13-24 Months |
| 3.7 |
| 17.4 |
|
| 2,685.1 |
| 16.9 |
|
25-36 Months |
| 2.9 |
| 13.6 |
|
| 2,362.1 |
| 14.8 |
|
37-48 Months |
| 2.0 |
| 9.3 |
|
| 1,695.0 |
| 10.6 |
|
49-60 Months |
| 1.6 |
| 7.3 |
|
| 1,364.4 |
| 8.6 |
|
Over 60 Months |
| 5.6 |
| 26.3 |
|
| 4,020.0 |
| 25.2 |
|
Total |
| 21.3 |
| 100.0 | % | $ | 15,938.7 |
| 100.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 |
| |||||||
|
|
|
|
|
|
|
|
| Percentage of |
|
|
| Number of |
| Percentage of |
| Principal |
| Principal |
| |
|
| Active Accounts |
| Active Accounts |
| Receivables |
| Receivables |
| |
Age of Accounts Since Origination |
| with Balances |
| with Balances |
| Outstanding |
| Outstanding |
| |
|
| (in millions, except percentages) |
| |||||||
0-12 Months |
| 6.5 |
| 26.7 | % | $ | 4,099.9 |
| 24.3 | % |
13-24 Months |
| 4.2 |
| 17.1 |
|
| 2,887.8 |
| 17.1 |
|
25-36 Months |
| 3.1 |
| 13.0 |
|
| 2,428.9 |
| 14.4 |
|
37-48 Months |
| 2.2 |
| 9.1 |
|
| 1,795.0 |
| 10.7 |
|
49-60 Months |
| 1.7 |
| 7.1 |
|
| 1,367.2 |
| 8.1 |
|
Over 60 Months |
| 6.5 |
| 27.0 |
|
| 4,291.1 |
| 25.4 |
|
Total |
| 24.2 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
17
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Credit Quality
The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 91 or more days past due at any time within the next 12 months. The following table reflects the composition of the Company’s credit card and loan receivables on an amortized cost basis by obligor credit quality as of March 31, 2020 and December 31, 2019:
| | | | | | | | | | | | |
| | Amortized Cost Revolving Credit Card and Loan Receivables | | |||||||||
| | March 31, 2020 | | | December 31, 2019 | | ||||||
|
| | |
| Percentage of |
|
| | |
| Percentage of |
|
| | | | Amortized | | | | | Amortized |
| ||
Probability of an Account Becoming 91 or More Days Past | | Amortized | | Cost Basis | | | Amortized | | Cost Basis |
| ||
Due or Becoming Charged-off (within the next 12 months) |
| Cost Basis |
| Outstanding |
|
| Cost Basis |
| Outstanding |
| ||
| | (in millions, except percentages) | | |||||||||
No Score | | $ | 217.5 |
| 1.3 | % |
| $ | 298.4 |
| 1.6 | % |
27.1% and higher | |
| 1,580.7 |
| 9.1 | |
|
| 1,648.8 |
| 8.7 | |
17.1% - 27.0% | |
| 1,053.7 |
| 6.1 | |
|
| 1,108.5 |
| 5.8 | |
12.6% - 17.0% | |
| 1,123.5 |
| 6.5 | |
|
| 1,171.7 |
| 6.2 | |
3.7% - 12.5% | |
| 7,828.1 |
| 45.1 | |
|
| 8,292.1 |
| 43.5 | |
1.9% - 3.6% | |
| 2,944.8 |
| 17.0 | |
|
| 3,375.3 |
| 17.7 | |
Lower than 1.9% | |
| 2,612.7 |
| 14.9 | |
|
| 3,153.0 |
| 16.5 | |
Total | | $ | 17,361.0 |
| 100.0 | % |
| $ | 19,047.8 |
| 100.0 | % |
Note: The Company’s credit card and loan receivables are revolving receivables as they do not have stated maturities and are exempted from certain vintage disclosures required under ASC 326.
16
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects the compositioneffect of the Company’s credit card and loan receivables by obligor credit quality as of March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 |
| ||||||
|
|
|
|
| Percentage of |
|
|
|
| Percentage of |
|
|
| Total Principal |
| Principal |
| Total Principal |
| Principal |
| ||
Probability of an Account Becoming 91 or More Days Past |
| Receivables |
| Receivables |
| Receivables |
| Receivables |
| ||
Due or Becoming Charged-off (within the next 12 months) |
| Outstanding |
| Outstanding |
| Outstanding |
| Outstanding |
| ||
|
| (in millions, except percentages) |
| ||||||||
No Score |
| $ | 204.7 |
| 1.3 | % | $ | 249.0 |
| 1.5 | % |
27.1% and higher |
|
| 1,368.9 |
| 8.6 |
|
| 1,394.0 |
| 8.2 |
|
17.1% - 27.0% |
|
| 962.5 |
| 6.0 |
|
| 770.1 |
| 4.6 |
|
12.6% - 17.0% |
|
| 1,001.1 |
| 6.3 |
|
| 1,047.6 |
| 6.2 |
|
3.7% - 12.5% |
|
| 6,947.8 |
| 43.6 |
|
| 6,877.6 |
| 40.8 |
|
1.9% - 3.6% |
|
| 2,718.2 |
| 17.0 |
|
| 3,060.7 |
| 18.1 |
|
Lower than 1.9% |
|
| 2,735.5 |
| 17.2 |
|
| 3,470.9 |
| 20.6 |
|
Total |
| $ | 15,938.7 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
Transfer of Financial Assets
The Company originated loan receivables under one previous client agreement, and after origination, these loan receivables were sold to the client at par value plus accrued interest. These transfers qualified for sale treatment as they met the conditions establishedCOVID-19 pandemic resulted in ASC 860-10, “Transfers and Servicing.” Following the sale, the client owned the loan receivables, assumed the risk of lossan increase in the eventprobability of loan defaults and was responsible for all servicing functions related to the loan receivables. Effective July 2, 2018, the Company no longer originates loan receivables for this client. Originations and salesan account becoming 91 of these loan receivables held for sale were reflected as operating activities in the Company’s unaudited condensed consolidated statements of cash flows.more days past due or becoming charged-off.
Portfolios Held for Sale
The Company has certain credit card portfolios held for sale, which are carried at the lower of cost or fair value, of $1,848.9$88.8 million and $1,951.6$408.0 million as of March 31, 20192020 and December 31, 2018,2019, respectively. For
During the three months ended March 31, 2019 and 2018,2020, the Company sold a credit card portfolio for preliminary cash consideration of approximately $289.5 million, subject to customary sale price adjustments, and recognized a gain of approximately $20.4 million on the transaction, which was recorded in cost of operations in the Company’s unaudited condensed consolidated statements of income.
The Company recorded portfolio valuation adjustments, which are reflected in cost of operations expense,in the Company’s unaudited condensed consolidated statements of income, of $4.2 million and $59.9 million for the three months ended March 31, 2020 and $21.7 million, respectively, to reduce the value of certain portfolios within credit card receivables held for sale.2019, respectively.
In April 2019, the Company sold one portfolio at par for an estimated purchase price of $361.5 million, subject to certain conditions as defined in the purchase and sale agreement.
Securitized Credit Card Receivables
The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust (“Master Trust I”) and World Financial Network Credit Card Master Trust III (“Master Trust III”) (collectively, the “WFN Trusts”), and World Financial Capital Credit Card Master Note Trust (the “WFC Trust”). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer
18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore not reflected in the Company’s unaudited condensed consolidated statements of income for the three months ended March 31, 20192020 and 2018.2019.
The WFN Trusts and the WFC Trust are VIEs and the assets of these consolidated VIEs include certain credit card receivables that are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include non-recourse secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.
The tables below present quantitative information about the components of total securitized credit card receivables, delinquencies and net charge-offs:
| | | | | | |
|
| March 31, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Total credit card receivables – restricted for securitization investors | | $ | 12,033.4 | | $ | 13,504.2 |
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due | | $ | 302.5 | | $ | 321.8 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Net charge-offs of securitized principal | | $ | 239.5 | | $ | 239.5 |
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Total credit card receivables – restricted for securitization investors |
| $ | 12,550.5 |
| $ | 13,418.3 |
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due |
| $ | 280.1 |
| $ | 301.6 |
17
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Net charge-offs of securitized principal |
| $ | 239.5 |
| $ | 245.0 |
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
7. INVENTORIES, NET
Inventories, net of $242.3$189.1 million and $248.0$218.0 million at March 31, 20192020 and December 31, 2018,2019, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories, net are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future market conditions and an analysis of historical experience.
8. OTHER INVESTMENTS
Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets. Marketable securities include available-for-sale debt securities, mutual funds and domestic certificate of deposit investments. The principal components of other investments, which are carried at fair value, are as follows:
|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 | ||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| ||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
|
| (in millions) | ||||||||||||||||||||||
Marketable securities |
| $ | 271.4 |
| $ | 0.7 |
| $ | (3.1) |
| $ | 269.0 |
| $ | 272.8 |
| $ | 0.1 |
| $ | (6.5) |
| $ | 266.4 |
U.S. Treasury bonds |
|
| 25.0 |
|
| — |
|
| (0.1) |
|
| 24.9 |
|
| 25.0 |
|
| — |
|
| (0.1) |
|
| 24.9 |
Total |
| $ | 296.4 |
| $ | 0.7 |
| $ | (3.2) |
| $ | 293.9 |
| $ | 297.8 |
| $ | 0.1 |
| $ | (6.6) |
| $ | 291.3 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 | ||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| | |
| Amortized |
| Unrealized |
| Unrealized |
| | | ||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
| | (in millions) | ||||||||||||||||||||||
Marketable securities | | $ | 257.9 | | $ | 7.3 | | $ | (0.1) | | $ | 265.1 | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 |
Total | | $ | 257.9 | | $ | 7.3 | | $ | (0.1) | | $ | 265.1 | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 |
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of March 31, 20192020 and December 31, 2018,2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
|
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Marketable securities | | $ | 3.7 | | $ | (0.1) | | $ | — | | $ | — | | $ | 3.7 | | $ | (0.1) |
Total | | $ | 3.7 | | $ | (0.1) | | $ | — | | $ | — | | $ | 3.7 | | $ | (0.1) |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
|
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Marketable securities | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) |
Total | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) |
19
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
|
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|
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|
|
|
|
|
|
|
|
| March 31, 2019 | ||||||||||||||||
|
| Less than 12 months |
| 12 Months or Greater |
| Total | ||||||||||||
|
|
|
|
| Unrealized |
|
|
|
| Unrealized |
|
|
|
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
|
| (in millions) | ||||||||||||||||
Marketable securities |
| $ | — |
| $ | — |
| $ | 173.7 |
| $ | (3.1) |
| $ | 173.7 |
| $ | (3.1) |
U.S. Treasury bonds |
|
| — |
|
| — |
|
| 24.9 |
|
| (0.1) |
|
| 24.9 |
|
| (0.1) |
Total |
| $ | — |
| $ | — |
| $ | 198.6 |
| $ | (3.2) |
| $ | 198.6 |
| $ | (3.2) |
|
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|
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|
|
|
|
|
| December 31, 2018 | ||||||||||||||||
|
| Less than 12 months |
| 12 Months or Greater |
| Total | ||||||||||||
|
|
|
|
| Unrealized |
|
|
|
| Unrealized |
|
|
|
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
|
| (in millions) | ||||||||||||||||
Marketable securities |
| $ | 57.3 |
| $ | (0.5) |
| $ | 164.0 |
| $ | (6.0) |
| $ | 221.3 |
| $ | (6.5) |
U.S. Treasury bonds |
|
| — |
|
| — |
|
| 24.9 |
|
| (0.1) |
|
| 24.9 |
|
| (0.1) |
Total |
| $ | 57.3 |
| $ | (0.5) |
| $ | 188.9 |
| $ | (6.1) |
| $ | 246.2 |
| $ | (6.6) |
The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at March 31, 20192020 by contractual maturity are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less | | $ | 40.2 | | $ | 40.2 |
Due after one year through five years | | | 1.4 | | | 1.4 |
Due after five years through ten years | |
| — | |
| — |
Due after ten years | |
| 216.3 | |
| 223.5 |
Total | | $ | 257.9 | | $ | 265.1 |
|
|
|
|
|
|
|
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
|
| (in millions) | ||||
Due in one year or less |
| $ | 55.0 |
| $ | 55.0 |
Due after one year through five years |
|
| 1.9 |
|
| 1.9 |
Due after five years through ten years |
|
| — |
|
| — |
Due after ten years |
|
| 239.5 |
|
| 237.0 |
Total |
| $ | 296.4 |
| $ | 293.9 |
18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Market values were determined for each individual security in the investment portfolio. When evaluatingEffective January 1, 2020, the investments forCompany adopted ASC 326, which replaced the other-than-temporary impairment the Company reviews factors such as the length of time and extent tomodel for available-for-sale debt securities. For available-for-sale debt securities in which fair value has been belowis less than cost, basis, the financial condition of the security’s issuer,ASC 326 requires that credit-related impairment, if any, be recognized through an allowance for credit losses and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.adjusted each period for changes in credit risk. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity.maturity, and the Company performs an assessment each period for credit-related impairment. As of March 31, 2019,2020, the Company does not consider theits investments to be other-than-temporarily impaired.
There were no0 realized gains or losses from the sale of investment securities for the three months ended March 31, 20192020 and 2018.2019.
9. REDEMPTION SETTLEMENT ASSETS
Redemption settlement assets consist of restricted cash and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:
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| ||||||||||||||||||||||||
|
| March 31, 2019 |
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
|
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| ||||||||||||||||||||||||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||||||||||||||||||||||||||
|
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | March 31, 2020 | | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | |
| ||||||||||||||||||||||||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||||||||||||||||||||||||||
| | (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted cash |
| $ | 43.4 |
| $ | — |
| $ | — |
| $ | 43.4 |
| $ | 43.9 |
| $ | — |
| $ | — |
| $ | 43.9 |
| $ | 55.9 |
| $ | — |
| $ | — |
| $ | 55.9 |
| $ | 39.3 |
| $ | — |
| $ | — |
| $ | 39.3 |
Mutual funds |
|
| 24.2 |
|
| — |
|
| — |
|
| 24.2 |
|
| 23.2 |
|
| — |
|
| — |
|
| 23.2 | | | 22.9 | | | — | | | — | | | 22.9 | | | 25.1 | | | — | | | — | | | 25.1 |
Corporate bonds |
|
| 508.5 |
|
| 2.3 |
|
| (2.3) |
|
| 508.5 |
|
| 497.5 |
|
| 0.1 |
|
| (6.1) |
|
| 491.5 | | | 490.7 | | | 3.0 | | | (4.5) | | | 489.2 | | | 536.0 | | | 2.4 | | | (2.0) | | | 536.4 |
Total |
| $ | 576.1 |
| $ | 2.3 |
| $ | (2.3) |
| $ | 576.1 |
| $ | 564.6 |
| $ | 0.1 |
| $ | (6.1) |
| $ | 558.6 |
| $ | 569.5 |
| $ | 3.0 |
| $ | (4.5) |
| $ | 568.0 |
| $ | 600.4 |
| $ | 2.4 |
| $ | (2.0) |
| $ | 600.8 |
20
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of March 31, 20192020 and December 31, 2018,2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Corporate bonds | | $ | 171.8 | | $ | (3.6) | | $ | 116.8 | | $ | (0.9) | | $ | 288.6 | | $ | (4.5) |
Total |
| $ | 171.8 |
| $ | (3.6) |
| $ | 116.8 |
| $ | (0.9) |
| $ | 288.6 |
| $ | (4.5) |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Corporate bonds | | $ | 166.6 | | $ | (1.3) | | $ | 155.1 | | $ | (0.7) | | $ | 321.7 |
| $ | (2.0) |
Total | | $ | 166.6 | | $ | (1.3) | | $ | 155.1 | | $ | (0.7) | | $ | 321.7 | | $ | (2.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2019 | ||||||||||||||||
|
| Less than 12 months |
| 12 Months or Greater |
| Total | ||||||||||||
|
|
|
|
| Unrealized |
|
|
|
| Unrealized |
|
|
|
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
|
| (in millions) | ||||||||||||||||
Corporate bonds |
| $ | — |
| $ | — |
| $ | 323.3 |
| $ | (2.3) |
| $ | 323.3 |
| $ | (2.3) |
Total |
| $ | — |
| $ | — |
| $ | 323.3 |
| $ | (2.3) |
| $ | 323.3 |
| $ | (2.3) |
19
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||||||||
|
| Less than 12 months |
| 12 Months or Greater |
| Total | ||||||||||||
|
|
|
|
| Unrealized |
|
|
|
| Unrealized |
|
|
|
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
|
| (in millions) | ||||||||||||||||
Corporate bonds |
| $ | 31.2 |
| $ | (0.1) |
| $ | 414.4 |
| $ | (6.0) |
| $ | 445.6 |
| $ | (6.1) |
Total |
| $ | 31.2 |
| $ | (0.1) |
| $ | 414.4 |
| $ | (6.0) |
| $ | 445.6 |
| $ | (6.1) |
The amortized cost and estimated fair value of the securities at March 31, 20192020 by contractual maturity are as follows:
|
|
|
|
|
|
|
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
|
| (in millions) | ||||
Due in one year or less |
| $ | 134.2 |
| $ | 133.9 |
Due after one year through five years |
|
| 398.5 |
|
| 398.8 |
Total |
| $ | 532.7 |
| $ | 532.7 |
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less | | $ | 121.9 | | $ | 121.6 |
Due after one year through five years | |
| 384.4 | |
| 383.3 |
Due after five year through ten years | | | 7.3 | | | 7.2 |
Total | | $ | 513.6 | | $ | 512.1 |
Market values were determined for each individual security in the investment portfolio. When evaluatingEffective January 1, 2020, the investments forCompany adopted ASC 326, which replaced the other-than-temporary impairment the Company reviews factors such as the length of time and extent tomodel for available-for-sale debt securities. For available-for-sale debt securities in which fair value has been belowis less than cost, basis, the financial condition of the security’s issuer,ASC 326 requires that credit-related impairment, if any, be recognized through an allowance for credit losses and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.adjusted each period for changes in credit risk. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity.maturity, and the Company performs an assessment each period for credit-related impairment. As of March 31, 2019,2020, the Company does not consider theits investments to be other-than-temporarily impaired.
RealizedThere were 0 realized gains andor losses from the sale of investment securities for the three months ended March 31, 2020. Realized losses from the sale of investment securities for the three months ended March 31, 2019 and 2018 were de minimis.
10. LEASES
The Company has operating leases for general office properties, warehouses, data centers, call centers, automobiles and certain equipment. As of March 31, 2019,2020, the Company’s leases have remaining lease terms of less than 1 year to 1918 years, some of which may include renewal options. For leases in which the implicit rate is not readily determinable, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of the lease payments. The incremental borrowing rate is based on the Company’s specific rate of interest to borrow on a collateralized basis, over a similar term and in a similar economic environment as the lease.
Leases with an initial term of 12 months or less are not recognized on the balance sheet; we recognizethe Company recognizes lease expense for these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and nonlease components as a single lease component for its identified asset classes.
21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The components of lease expense were as follows:
|
|
|
| ||||||
|
| Three Months Ended | |||||||
|
| March 31, 2019 | |||||||
|
| (in millions) | |||||||
| | | | | | ||||
| | Three Months Ended | | Three Months Ended | |||||
|
| March 31, 2020 | | March 31, 2019 | |||||
| | (in millions) | |||||||
Operating lease cost |
| $ | 10.3 |
| $ | 10.2 | | $ | 10.3 |
Short-term lease cost |
|
| 0.6 | | | 0.3 | | 0.6 | |
Variable lease cost |
|
| 1.9 | | | 0.2 | | | 1.9 |
Total |
| $ | 12.8 | | $ | 10.7 | | $ | 12.8 |
Other information related to leases was as follows:
| | | | |
| | March 31, | ||
|
| |||
| ||||
Weighted-average remaining lease term (in years): | | | | |
Operating leases | | |
| |
Weighted-average discount rate: | | | | |
Operating leases | | | 5.2% |
20
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Supplemental cash flow information related to leases was as follows:
|
|
|
| ||||||
|
| Three Months Ended | |||||||
|
| March 31, 2019 | |||||||
|
| (in millions) | |||||||
| | | | | | ||||
| | Three Months Ended | | Three Months Ended | |||||
|
| March 31, 2020 | | March 31, 2019 | |||||
| | (in millions) | |||||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
| | | | | |
Operating cash flows from operating leases |
| $ | 15.3 | | $ | 14.4 | | $ | 15.3 |
Right-of-use assets obtained in exchange for lease obligations: |
|
|
| | | | | | |
Operating leases |
| $ | 8.6 | | $ | 2.6 | | $ | 8.6 |
Maturities of the lease liabilities as of March 31, 20192020 were as follows:
|
|
|
| |||
|
| Operating | ||||
| | | | |||
| | Operating | ||||
Year |
| Leases | | Leases | ||
|
| (in millions) | ||||
2019 (excluding the three months ended March 31, 2019) |
| $ | 27.4 | |||
2020 |
|
| 40.8 | |||
|
| (in millions) | ||||
2020 (excluding the three months ended March 31, 2020) | | $ | 27.5 | |||
2021 |
|
| 38.6 | |
| 39.5 |
2022 |
|
| 37.8 | |
| 38.6 |
2023 |
|
| 36.7 | |
| 36.7 |
2024 | |
| 35.3 | |||
Thereafter |
|
| 260.2 | |
| 234.6 |
Total undiscounted lease liabilities |
|
| 441.5 | | | 412.2 |
Less: Amount representing interest |
|
| (120.3) | | | (107.3) |
Total present value of minimum lease payments |
| $ | 321.2 | | $ | 304.9 |
|
|
|
| |||
Amounts recognized in the March 31, 2019 consolidated balance sheet: |
|
|
| |||
| | | | |||
Amounts recognized in the March 31, 2020 consolidated balance sheet: | | | | |||
Current operating lease liabilities |
| $ | 21.4 | | $ | 22.3 |
Long-term operating lease liabilities |
|
| 299.8 | | | 282.6 |
Total |
| $ | 321.2 | | $ | 304.9 |
11. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | |
| | March 31, 2020 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 319.9 | | $ | (285.6) | | $ | 34.3 |
| 7 years—straight line |
Premium on purchased credit card portfolios | |
| 176.4 | |
| (87.8) | |
| 88.6 |
| 1-13 years—straight line |
Collector database | |
| 49.8 | |
| (49.0) | |
| 0.8 |
| 5 years—straight line |
Tradenames | |
| 31.3 | |
| (26.3) | |
| 5.0 |
| 8-15 years—straight line |
| | $ | 577.4 | | $ | (448.7) | | $ | 128.7 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | |
| — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 578.6 | | $ | (448.7) | | $ | 129.9 | | |
22
21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
11. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2019 |
|
| |||||||
|
| Gross |
| Accumulated |
|
|
|
|
| ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
|
| (in millions) |
|
| |||||||
Finite Lived Assets |
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and lists |
| $ | 325.3 |
| $ | (244.0) |
| $ | 81.3 |
| 7 years—straight line |
Premium on purchased credit card portfolios |
|
| 286.0 |
|
| (186.5) |
|
| 99.5 |
| 3-13 years—straight line |
Collector database |
|
| 52.5 |
|
| (51.1) |
|
| 1.4 |
| 5 years—straight line |
Tradenames |
|
| 31.8 |
|
| (25.6) |
|
| 6.2 |
| 8-15 years—straight line |
|
| $ | 695.6 |
| $ | (507.2) |
| $ | 188.4 |
|
|
Indefinite Lived Assets |
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
| 1.2 |
|
| — |
|
| 1.2 |
| Indefinite life |
Total intangible assets |
| $ | 696.8 |
| $ | (507.2) |
| $ | 189.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 |
|
| |||||||
|
| Gross |
| Accumulated |
|
|
|
|
| ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
|
| (in millions) |
|
| |||||||
Finite Lived Assets |
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and lists |
| $ | 339.5 |
| $ | (244.4) |
| $ | 95.1 |
| 3-7 years—straight line |
Premium on purchased credit card portfolios |
|
| 286.0 |
|
| (172.9) |
|
| 113.1 |
| 3-13 years—straight line |
Collector database |
|
| 51.3 |
|
| (49.9) |
|
| 1.4 |
| 5 years—straight line |
Tradenames |
|
| 32.5 |
|
| (25.9) |
|
| 6.6 |
| 8-15 years—straight line |
|
| $ | 709.3 |
| $ | (493.1) |
| $ | 216.2 |
|
|
Indefinite Lived Assets |
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
| 1.2 |
|
| — |
|
| 1.2 |
| Indefinite life |
Total intangible assets |
| $ | 710.5 |
| $ | (493.1) |
| $ | 217.4 |
|
|
| | | | | | | | | | | |
| | December 31, 2019 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 325.1 | | $ | (278.7) | | $ | 46.4 |
| 7 years—straight line |
Premium on purchased credit card portfolios | |
| 192.6 | |
| (93.2) | |
| 99.4 |
| 1-13 years—straight line |
Collector database | |
| 53.9 | |
| (52.9) | |
| 1.0 |
| 5 years—straight line |
Tradenames | |
| 31.8 | | | (26.5) | | | 5.3 |
| 8-15 years—straight line |
| | $ | 603.4 | | $ | (451.3) | | $ | 152.1 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | |
| — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 604.6 | | $ | (451.3) | | $ | 153.3 | | |
23
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
|
|
|
|
|
| For the Years Ending | |
|
| December 31, | |
|
| (in millions) | |
2019 (excluding the three months ended March 31, 2019) |
| $ | 84.0 |
2020 |
|
| 57.4 |
2021 |
|
| 13.7 |
2022 |
|
| 11.3 |
2023 |
|
| 10.3 |
Thereafter |
|
| 11.7 |
| | | |
|
| For the Years Ending | |
|
| December 31, | |
| | (in millions) | |
2020 (excluding the three months ended March 31, 2020) | | $ | 59.7 |
2021 | |
| 22.2 |
2022 | |
| 17.5 |
2023 | |
| 12.8 |
2024 | |
| 10.7 |
Thereafter | |
| 5.8 |
Goodwill
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| LoyaltyOne |
| Card Services |
| Corporate/ Other |
| Total | ||||
|
| (in millions) | ||||||||||
Balance at December 31, 2018 |
| $ | 693.1 |
| $ | 261.7 |
| $ | — |
| $ | 954.8 |
Goodwill acquired during the year |
|
| — |
|
| 2.3 |
|
| — |
|
| 2.3 |
Effects of foreign currency translation |
|
| (7.1) |
|
| — |
|
| — |
|
| (7.1) |
Balance at March 31, 2019 |
| $ | 686.0 |
| $ | 264.0 |
| $ | — |
| $ | 950.0 |
| | | | | | | | | | |
| | | | | | | | |
| |
|
| LoyaltyOne |
| Card Services |
| Total |
| |||
| | (in millions) |
| |||||||
Balance at January 1, 2020 | | $ | 690.9 | | $ | 264.0 | | $ | 954.9 | |
Goodwill related to sale of Precima | | | (3.2) | | | — | | | (3.2) | |
Effects of foreign currency translation |
|
| (22.6) | |
| — | |
| (22.6) | |
Balance at March 31, 2020 | | $ | 665.1 | | $ | 264.0 | | $ | 929.1 | |
Approximately $3.2 million of LoyaltyOne goodwill was allocated to Precima upon sale in January 2020, based on a relative fair value allocation of the businesses.
The Company tests goodwill for impairment annually, as of July 31, or when events and circumstances change that would indicate the carrying value may not be recoverable. As of March 31, 2020, the Company does not believe it is more likely than not that the fair value of its reporting units is less than its carrying amount. In light of the COVID-19 pandemic and current macroeconomic environment, should future deterioration result in a material adverse impact to our business, our goodwill may be impaired.
2412. RESTRUCTURING AND OTHER CHARGES
In 2019, the Company, under the direction of the Board of Directors, evaluated the cost structure and executed on certain cost saving initiatives at each segment. These charges included restructuring and other exit activities related to reductions in force, terminations of certain product lines, reduction or closure of certain leased office space, asset impairments, changes in management structure and fundamental reorganizations that affect the nature and focus of operations. Restructuring and other charges incurred at the Corporate segment were recorded to general and administrative expense in the Company’s unaudited condensed consolidated statements of income, and restructuring and other charges incurred in the LoyaltyOne and Card Services segments were recorded to cost of operations in the Company’s unaudited condensed consolidated statements of income. These charges are not expected to continue in 2020.
22
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables summarize the restructuring and other charges incurred by reportable segment for all restructuring activities for the periods presented.
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Three Months Ended March 31, 2020 |
| Benefits (1) |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Corporate/Other | | $ | (0.1) | | $ | — | | $ | — | | $ | — | | $ | (0.1) |
LoyaltyOne | |
| 0.1 | |
| — | |
| — | |
| — | | | 0.1 |
Card Services | | | (6.5) | | | — | | | — | | | — | | | (6.5) |
Total | | $ | (6.5) | | $ | — | | $ | — | | $ | — | | $ | (6.5) |
(1) | For the three months ended March 31, 2020, restructuring and other charges consisted of adjustments to our liability. |
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Three Months Ended March 31, 2019 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Corporate/Other | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
LoyaltyOne | |
| 1.2 | |
| 4.6 | |
| — | |
| 2.1 | | | 7.9 |
Card Services | | | — | | | — | | | — | | | — | | | — |
Total | | $ | 1.2 | | $ | 4.6 | | $ | — | | $ | 2.1 | | $ | 7.9 |
The Company’s liability for restructuring and other charges is recognized in accrued expenses and other liabilities in its unaudited condensed consolidated balance sheets. The following table summarizes the activities related to the restructuring and other charges, as discussed above, for the three months ended March 31, 2020:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Three Months Ended March 31, 2020 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Liability as of January 1, 2020 | | $ | 34.7 | | $ | — | | $ | — | | $ | 0.1 | | $ | 34.8 |
Adjustments for non-cash charges | |
| (6.5) | |
| — | |
| — | |
| — | | | (6.5) |
Cash payments | |
| (13.2) | |
| — | |
| — | |
| (0.1) | | | (13.3) |
Liability as of March 31, 2020 | | $ | 15.0 | | $ | — | | $ | — | | $ | — | | $ | 15.0 |
The Company’s outstanding liability related to restructuring and other charges is expected to be settled by the end of 2021, with the majority settled in 2020.
23
12.ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
13. DEBT
Debt consists of the following:
| | | | | | | | | | |
|
| March 31, |
| December 31, |
| |
| | ||
Description |
| 2020 |
| 2019 |
| Maturity |
| Interest Rate | ||
| | (Dollars in millions) | | | | | ||||
Long-term and other debt: | | | | | | | | | | |
2017 revolving line of credit | | $ | 250.0 | | $ | — |
| December 2022 |
| (1) |
2017 term loans | |
| 2,003.4 | |
| 2,028.8 |
| December 2022 |
| (2) |
BrandLoyalty credit agreement | |
| — | |
| — |
| June 2020 |
| (3) |
Senior notes due 2024 | | | 850.0 | | | 850.0 | | December 2024 | | 4.750% |
Total long-term and other debt | |
| 3,103.4 | |
| 2,878.8 | | | | |
Less: Unamortized debt issuance costs | | | 27.3 | | | 28.9 | | | | |
Less: Current portion | |
| 101.4 | |
| 101.4 | | | | |
Long-term portion | | $ | 2,974.7 | | $ | 2,748.5 | | | | |
| | | | | | | | | | |
Deposits: | | | | | | | | | | |
Certificates of deposit | | $ | 7,806.8 | | $ | 8,585.2 |
| Various – Apr 2020 to Mar 2025 |
| 1.33% to 4.00% |
Money market deposits | |
| 3,598.8 | |
| 3,589.8 |
| Non-maturity |
| (4) |
Total deposits | |
| 11,405.6 | |
| 12,175.0 | | | | |
Less: Unamortized debt issuance costs | | | 19.9 | | | 23.3 | | | | |
Less: Current portion | |
| 6,521.5 | |
| 6,942.4 | | | | |
Long-term portion | | $ | 4,864.2 | | $ | 5,209.3 | | | | |
| | | | | | | | | | |
Non-recourse borrowings of consolidated securitization entities: | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 4,891.0 | | $ | 4,891.0 |
| Various – May 2020 to Sep 2022 |
| 2.03% to 3.95% |
Conduit asset-backed securities | |
| 1,480.0 | |
| 2,405.0 |
| Various – Sep 2020 to Apr 2021 |
| (5) |
Total non-recourse borrowings of consolidated securitization entities | |
| 6,371.0 | |
| 7,296.0 | | | | |
Less: Unamortized debt issuance costs | | | 10.3 | | | 12.0 | | | | |
Less: Current portion | |
| 2,520.4 | |
| 3,030.8 | | | | |
Long-term portion | | $ | 3,840.3 | | $ | 4,253.2 | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
| ||
Description |
| 2019 |
| 2018 |
| Maturity |
| Interest Rate | ||
|
| (Dollars in millions) |
|
|
|
| ||||
Long-term and other debt: |
|
|
|
|
|
|
|
|
|
|
2017 revolving line of credit |
| $ | 945.0 |
| $ | 740.0 |
| June 2022 |
| (1) |
2017 term loans |
|
| 2,919.0 |
|
| 2,938.1 |
| June 2022 |
| (1) |
BrandLoyalty credit agreement |
|
| 168.2 |
|
| 183.7 |
| June 2020 |
| (2) |
Senior notes due 2021 |
|
| 500.0 |
|
| 500.0 |
| November 2021 |
| 5.875% |
Senior notes due 2022 |
|
| 600.0 |
|
| 600.0 |
| August 2022 |
| 5.375% |
Senior notes due 2022 (€400.0 million) |
|
| 448.7 |
|
| 458.8 |
| March 2022 |
| 4.500% |
Senior notes due 2023 (€300.0 million) |
|
| 336.5 |
|
| 344.1 |
| November 2023 |
| 5.250% |
Total long-term and other debt |
|
| 5,917.4 |
|
| 5,764.7 |
|
|
|
|
Less: Unamortized debt issuance costs |
|
| 35.9 |
|
| 39.3 |
|
|
|
|
Less: Current portion |
|
| 161.5 |
|
| 138.9 |
|
|
|
|
Long-term portion |
| $ | 5,720.0 |
| $ | 5,586.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
| $ | 8,278.5 |
| $ | 8,395.1 |
| Various – Apr 2019 – Mar 2024 |
| 1.28% to 4.00% |
Money market deposits |
|
| 3,038.4 |
|
| 3,424.3 |
| Non-maturity |
| (3) |
Total deposits |
|
| 11,316.9 |
|
| 11,819.4 |
|
|
|
|
Less: Unamortized debt issuance costs |
|
| 24.9 |
|
| 25.7 |
|
|
|
|
Less: Current portion |
|
| 5,922.6 |
|
| 6,537.7 |
|
|
|
|
Long-term portion |
| $ | 5,369.4 |
| $ | 5,256.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse borrowings of consolidated securitization entities: |
|
|
|
|
|
|
|
|
|
|
Fixed rate asset-backed term note securities |
| $ | 5,018.0 |
| $ | 4,893.3 |
| Various – June 2019 – Feb 2022 |
| 1.72% to 3.95% |
Conduit asset-backed securities |
|
| 1,770.0 |
|
| 2,770.0 |
| Various – Nov 2019 – Sept 2020 |
| (4) |
Total non-recourse borrowings of consolidated securitization entities |
|
| 6,788.0 |
|
| 7,663.3 |
|
|
|
|
Less: Unamortized debt issuance costs |
|
| 12.5 |
|
| 11.6 |
|
|
|
|
Less: Current portion |
|
| 2,185.6 |
|
| 2,717.6 |
|
|
|
|
Long-term portion |
| $ | 4,589.9 |
| $ | 4,934.1 |
|
|
|
|
(1) | The interest rate is based upon |
(2) | The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 2.74% and 3.30% at March 31, 2020 and December 31, 2019, respectively. |
| The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. |
| The interest rates are based on the Federal Funds rate plus an applicable margin. At March 31, 2020, the interest rates ranged from 0.34% to 3.50%. At December 31, 2019, the interest rates ranged from |
| The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At March 31, 2020, the interest rates ranged from 2.10% to 2.49%. At December 31, 2019, the interest rates ranged from |
At March 31, 2019,2020, the Company was in compliance with its financial covenants.
25
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Long-term and Other Debt
Credit Agreement
As of March 31, 2019, theThe Company’s credit agreement, as amended, provided for $3,052.6$2,028.8 million in term loans subject to certain principal repayments and a $1,572.4$750.0 million revolving line of credit,credit. As of March 31, 2020, the Company had $2,003.4 million in term loans outstanding with $627.4$500.0 million total availability. In February 2019, Alliance Data International LLC became an additional guarantoravailability under the revolving line of credit.
BrandLoyalty Credit Agreement
As of March 31, 2020, there were 0 amounts outstanding under the BrandLoyalty credit agreement.
24
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
On April 30, 2019, the Company amended3, 2020, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, terminated its existing facility and entered into a new credit agreement (the “2020 BrandLoyalty Credit Agreement”) that provides for a committed revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), an uncommitted revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), and an accordion feature permitting BrandLoyalty to provide that, upon consummationrequest an increase in either the committed or uncommitted line of credit up to €80.0 million ($86.5 million as of April 3, 2020) in aggregate. Each of the salecommitted and uncommitted revolving line of Epsilon,credit are schedule to mature on April 3, 2023, subject to BrandLoyalty’s request to extend for 2 additional one-year terms at the maturity dateabsolute discretion of the credit agreement will be reduced by one year from June 14, 2022lenders at the time of such requests.
All advances under the 2020 BrandLoyalty Credit Agreement are denominated in Euros. The interest rate fluctuates and is equal to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reducedEURIBOR, as defined in the same amount (to $1,072.4 million), all2020 BrandLoyalty Credit Agreement, plus an applicable margin based on BrandLoyalty’s senior net leverage ratio. The 2020 BrandLoyalty Credit Agreement contains financial covenants, including a senior net leverage ratio, as well as usual and customary negative covenants, representations, general and information undertakings and events of the Company’s outstanding senior notes will be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the credit agreement and certain other minor amendments.default.
Non-Recourse Borrowings of Consolidated Securitization Entities
Asset-Backed Term Notes
In February 2019, Master Trust I issued $562.5As of March 31, 2020, the Company collected $225.3 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series 2019-A asset-backed term2017-A notes, which mature in February 2022.May 2020. The offering consisted of $500.0 million of Class A notes with a fixed interest rate of 3.14% per year, $37.2 million of Class M notes with a fixed interest rate of 3.61% per yearcash is restricted to the securitization investors and $25.3 million of notes that were retained by the Company and eliminated fromis reflected in other current assets in the Company’s unaudited condensed consolidated balance sheets. sheet as of March 31, 2020.
In March 2019, $550.0 million of Series 2012-A asset-backed term notes, $137.5 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.
Conduit Facilities
The Company has access to committed undrawn capacity through three3 conduit facilities to support the funding of its credit card receivables through Master Trust I, Master Trust III and the WFC Trust.
As of March 31, 2019,2020, total capacity under the conduit facilities was $4.5$4.7 billion, of which $1.8$1.5 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.
13.In April 2020, Master Trust I amended its 2009-VFN conduit facility, decreasing the capacity from $1.18 billion to $1.0 billion and extending the maturity to July 2021. In April 2020, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1.3 billion to $1.0 billion and extending the maturity to July 2021.
14. DERIVATIVE INSTRUMENTS
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in interest rates and foreign currency exchange rates.
The Company limits its exposure on derivatives by entering into contracts with institutions that are established dealers who maintain certain minimum credit criteria established by the Company. At March 31, 2019,2020, the Company does not maintain any derivative instruments subject to master agreements that would require the Company to post collateral or that contain any credit-risk related contingent features.
The Company enters into foreign currency derivatives to reduce the volatility of the Company’s cash flows resulting from changes in foreign currency exchange rates associated with certain inventory transactions, some of which are designated as cash flow hedges. The Company generally hedges foreign currency exchange rate risks for periods of 12 months or less. As of March 31, 2019,2020, the maximum term over which the Company is hedging its exposure to the variability of future cash flows associated with certain inventory transactions is 11 months.
Certain foreign currency exchange forward contracts are not designated as hedges as they do not meet the specific hedge accounting requirements of ASC 815, “Derivatives and Hedging.” Changes in the fair value of the derivative
2625
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
instruments not designated as hedging instruments are recorded in the unaudited condensed consolidated statements of income as they occur. Gains and losses on derivatives not designated as hedging instruments are included in other operating activities in the unaudited condensed consolidated statements of cash flows for all periods presented.
The following tables present the fair values of the derivative instruments included within the Company’s unaudited condensed consolidated balance sheets as of March 31, 20192020 and December 31, 2018:2019:
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| March 31, 2019 | ||||||||
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| Notional |
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| ||
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| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||
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| (in millions) | ||||||||
Designated as hedging instruments: |
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Foreign currency exchange hedges |
| $ | 19.2 |
| $ | 0.2 |
| Other current assets |
| April 2019 to February 2020 |
Foreign currency exchange hedges |
| $ | 19.6 |
| $ | 0.7 |
| Other current liabilities |
| April 2019 to November 2019 |
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Not designated as hedging instruments: |
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Foreign currency exchange forward contract |
| $ | 62.1 |
| $ | 0.7 |
| Other current assets |
| July 2019 |
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| | March 31, 2020 | ||||||||
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| December 31, 2018 | ||||||||||||||||||
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| Notional |
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| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||||||||||||
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| (in millions) | ||||||||||||||||||
| | Notional | | | | | | | ||||||||||||
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| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||||||||||||
| | (in millions) | ||||||||||||||||||
Designated as hedging instruments: |
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| | | | | | | | | | |
Foreign currency exchange hedges |
| $ | 5.2 |
| $ | 0.3 |
| Other current assets |
| January 2019 to April 2019 |
| $ | 19.6 |
| $ | 1.1 |
| Other current assets |
| April 2020 to December 2020 |
Foreign currency exchange hedges |
| $ | 20.3 |
| $ | 0.3 |
| Other current liabilities |
| March 2019 to November 2019 |
| $ | 9.5 |
| $ | 0.3 |
| Other current liabilities |
| April 2020 to February 2021 |
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Not designated as hedging instruments: |
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| ||||||||||
Foreign currency exchange forward contract |
| $ | 61.6 |
| $ | 3.5 |
| Other current assets |
| January 2019 to February 2019 |
| | | | | | | | | | |
| | December 31, 2019 | ||||||||
| | Notional | | | | | | | | |
|
| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||
| | (in millions) | ||||||||
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges |
| $ | 5.5 |
| $ | 0.2 | | Other current assets | | January 2020 to February 2020 |
Foreign currency exchange hedges | | $ | 7.8 |
| $ | 0.3 | | Other current liabilities |
| February 2020 to July 2020 |
Derivatives Designated as Hedging Instruments
Losses
Gains of $0.3 million, net of tax, and losses of $0.1 million, net of tax, were recognized in other comprehensive income for each of the three months ended March 31, 20192020 and March 31, 2018,2019, respectively, related to foreign currency exchange hedges designated as effective.
Changes in the fair value of these hedges excluding any ineffective portion are recorded in other comprehensive income until the hedged transactions affect net income. The ineffective portion of these cash flow hedges impacts net income when ineffectiveness occurs. Reclassifications from accumulated other comprehensive loss into net income (cost of operations) for each of the periods presented were not material. At March 31, 2019, $0.32020, $0.2 million is expected to be reclassified from accumulated other comprehensive lossincome into net income in the coming 12 months.
Derivatives Not Designated as Hedging Instruments
As of March 31, 2020, the Company did not hold any derivatives not designated as hedging instruments, and there were 0 gains or losses related to derivatives not designated as hedging instruments for the three months ended March 31, 2020.
For the three months ended March 31, 2019, and March 31, 2018, losses of $1.2 million and gains of $7.1 million, respectively, related to foreign currency exchange forward contracts not designated as hedging instruments were recognized in general and administrative expense in the Company’s unaudited condensed consolidated statements of income.
Net Investment Hedges15. COMMITMENTS AND CONTINGENCIES
The Company designated its Euro-denominated 5.250% senior notes due 2023 (€300.0 million)Regulatory Matters
On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the Federal Deposit Insurance Corporation (“FDIC”) seeking the FDIC’s approval to merge Comenity Bank with and €340.0 millioninto Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of its Euro-denominated 4.500% senior notes due 2022 (€400.0 million) as a net investment hedge of its investment in BrandLoyalty on an after-tax basis. The net investment hedge is intended to reduceFinancial Institutions and the volatility in stockholders’ equity caused by the changes in foreign currency exchange ratesDelaware Office of the EuroState Bank Commissioner, respectively, in connection with respectthe proposed merger. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the U.S. dollar. The change in fair valueoutcome or timing of the net investment hedges due to remeasurement of the effective portion is recorded in other comprehensive income. The ineffective portion of this hedging instrument impacts net income when the ineffectiveness occurs. For the three months ended March 31, 2019 and March 31, 2018, gains of $12.2 million and losses of $11.7 million, net of tax,
27
such review.
26
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
respectively, were recognizedIndemnification
On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (“Publicis”). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a Department of Justice (“DOJ”) investigation. The DOJ investigation relates to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon has actively cooperated with the DOJ in connection with its ongoing investigation. The Company records a loss contingency when a loss is probable and an amount can be reasonably estimated. For the year ended December 31, 2019, the Company recorded a loss contingency of $32.9 million, net of tax, which was included in loss from discontinued operations. As these estimates are initially developed substantially earlier than when the ultimate loss is known, no assurance can be given that the investigation will be resolved on these, or other, comprehensive income andterms. Therefore, this loss contingency may be refined each period as additional information becomes available. As of March 31, 2020, there was no ineffectiveness was recorded onchange to the net investment hedges.Company’s estimate of loss contingency.
14.16. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
The Company had anIn July 2019, the Company’s Board of Directors authorized a new stock repurchase program to acquire up to $500.0 million$1.1 billion of the Company’sits outstanding common stock from August 1, 2018July 5, 2019 through July 31, 2019. At December 31, 2018 the Company had $222.8 million remaining under the stock repurchase program.
For the three months ended March 31, 2019, the Company acquired a total of 1.3 million shares of its common stock for $222.8 million under its respective stock repurchase programs.June 30, 2020. As of MarchDecember 31, 2019, the Company did not have any amountshad $347.8 million remaining under its authorized stock repurchase program. On April 23, 2020, the Company announced that it has suspended its stock repurchase program.
Stock Compensation Expense
Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income forFor the three months ended March 31, 20192020, the Company did not repurchase any shares of its outstanding common stock, and 2018 is as follows:
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|
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| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Cost of operations |
| $ | 6.7 |
| $ | 8.0 |
General and administrative |
|
| 4.6 |
|
| 5.6 |
Total |
| $ | 11.3 |
| $ | 13.6 |
Stock-based compensation expense included in loss from discontinued operations totaled $9.8the Company had $347.8 million and $11.9 million forremaining under its authorized stock repurchase program.
Stock Compensation Expense
During the three months ended March 31, 2019 and 2018, respectively.
During the three months ended March 31, 2019,2020, the Company awarded 122,420124,344 service-based restricted stock units with a weighted average grant date fair value per share of $173.13$100.14 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant is employed by the Company on each such vesting date.
During the three months ended March 31, 2019,2020, the Company awarded 420,239219,186 performance-based restricted stock units with a weighted average grant date fair value per share of $173.21$100.50 as determined on the date of grant with pre-defined vesting criteria that permit a range from 0% to 150% to be earned. If the performance targets are met, the restrictions will lapse with respect to 33% of the award on February 15, 2020,18, 2021, an additional 33% of the award on February 15, 202118, 2022 and the final 34% of the award on February 18, 2022,2023, provided that the participant is employed by the Company on each such vesting date.
During the three months ended March 31, 2019,2020, the Company also awarded 37,87820,770 restricted stock units with a market-based condition subject to pre-defined vesting criteria that permit a range from 0% to 175% to be earned. The fair market value of these awards is $129.15$78.92 and was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, expected volatility and risk-free rate over two-year time horizons matching the performance period. Upon determination of the market condition, the restrictions will lapse with respect to the entire award on February 15, 2021,18, 2022, provided that the participant is employed by the Company on such vesting date.
27
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for the three months ended March 31, 2020 and 2019 is as follows:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Cost of operations | | $ | 2.7 | | $ | 6.7 |
General and administrative | |
| 2.0 | |
| 4.6 |
Total | | $ | 4.7 | | $ | 11.3 |
For the three months ended March 31, 2019, an additional $9.8 million of stock-based compensation expense related to associates from the Company’s divested Epsilon segment was recorded to discontinued operations.
Dividends
On February 7, 2019,January 30, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.63 per share on the Company’s common stock to stockholders of record at the close of business on February 21, 2019,14, 2020, resulting in a dividend payment of $33.4$30.0 million on March 19, 2019.2020. Additionally, the Company paid $0.5$0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2019.
28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
2020.
On April 25, 2019,23, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.63$0.21 per share on the Company’s common stock and $6.30 per share on the Company’s Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on May 14, 20192020 and payable on June 18, 2019.2020.
Preferred Stock
In April 2019, the Company’s Board of Directors designated 300,000 shares of its authorized and unissued preferred stock as Series A Non-Voting Convertible Preferred Stock and the Company filed with the Delaware Secretary of State a Certificate of Designations of Series A Non-Voting Convertible Preferred Stock to create the new Series A Non-Voting Convertible Preferred Stock, authorized 300,000 shares and designated the preferences, rights and limitations of the Series A Non-Voting Convertible Preferred Stock. Each share of Series A Non-Voting Convertible Preferred Stock will initially be convertible into ten shares of common stock (subject to adjustment and the other terms described in the Certificate of Designations) at the holder’s election or upon the Company’s written request, provided that upon such conversion the holder, together with its affiliates, will not own or control in the aggregate more than 9.9% of the Company’s outstanding common stock (or any class of the Company’s voting securities). Shares of Series A Non-Voting Convertible Preferred Stock will also be subject to automatic conversion if a holder transfers such shares pursuant to a transfer (a) to the Company, (b) in a widespread public distribution of common stock or Series A Non-Voting Convertible Preferred Stock, (c) in which no one transferee (or group of associated transferees) would receive 2% or more of any class of the Company’s voting securities then outstanding (including pursuant to a related series of such transfers), or (d) to a transferee that would control more than 50% of the Company voting securities (not including voting securities such person is acquiring from the transferor). Upon such a transaction, the transferred shares of Series A Non-Voting Convertible Preferred Stock will automatically be converted into shares of common stock on a ten-for-one basis (subject to adjustment as described in the Certificate of Designations).
The shares of Series A Non-Voting Convertible Preferred Stock have no voting rights, except as otherwise required by the General Corporation Law of the State of Delaware. The Series A Non-Voting Convertible Preferred Stock will, with respect to rights upon liquidation, winding up and dissolution, rank (i) subordinate and junior in right of payment to all other securities of the Company that, by their respective terms, are senior to the Series A Non-Voting Convertible Preferred Stock, and (ii) pari passu with the common stock.
On April 25, 2019, the Company entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. The issuance to ValueAct of the shares of Series A Non-Voting Convertible Preferred Stock was, and the issuance of the shares of common stock issuable upon conversion of the Series A Non-Voting Convertible Preferred Stock will be, made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
15.17. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:
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|
| Net |
| Unrealized |
| Unrealized |
| Foreign |
| Accumulated | |||||
|
| Unrealized |
| Gains (Losses) |
| Gains (Losses) |
| Currency |
| Other | |||||
|
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive | |||||
Three Months Ended March 31, 2019 |
| on Securities |
| Flow Hedges |
| Investment Hedges |
| Adjustments (1) |
| Loss | |||||
|
| (in millions) | |||||||||||||
Balance at December 31, 2018 |
| $ | (10.7) |
| $ | (0.2) |
| $ | (12.4) |
| $ | (114.8) |
| $ | (138.1) |
Changes in other comprehensive income (loss) |
|
| 9.0 |
|
| (0.1) |
|
| 12.2 |
|
| (10.9) |
|
| 10.2 |
Balance at March 31, 2019 |
| $ | (1.7) |
| $ | (0.3) |
| $ | (0.2) |
| $ | (125.7) |
| $ | (127.9) |
| | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | |||||
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | |||||
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive | |||||
Three Months Ended March 31, 2020 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | |||||
|
| (in millions) | |||||||||||||
Balance at December 31, 2019 |
| $ | 2.5 |
| $ | (0.1) |
| $ | (7.5) |
| $ | (94.8) |
| $ | (99.9) |
Changes in other comprehensive income (loss) | | | 1.6 | | | 0.3 | | | — | | | (23.9) | | | (22.0) |
Recognition resulting from the sale of Precima's foreign subsidiaries | | | — | | | — | | | — | | | 3.8 | | | 3.8 |
Balance at March 31, 2020 |
| $ | 4.1 |
| $ | 0.2 |
| $ | (7.5) |
| $ | (114.9) |
| $ | (118.1) |
| | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | |||||
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | |||||
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive | |||||
Three Months Ended March 31, 2019 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | |||||
|
| (in millions) | |||||||||||||
Balance at December 31, 2018 |
| $ | (10.7) |
| $ | (0.2) |
| $ | (12.4) |
| $ | (114.8) |
| $ | (138.1) |
Changes in other comprehensive income (loss) | | | 9.0 | | | (0.1) | | | 12.2 | | | (10.9) | | | 10.2 |
Balance at March 31, 2019 |
| $ | (1.7) |
| $ | (0.3) |
| $ | (0.2) |
| $ | (125.7) |
| $ | (127.9) |
29
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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|
| Net |
| Unrealized |
| Unrealized |
| Foreign |
| Accumulated | |||||
|
| Unrealized |
| Gains (Losses) |
| Gains (Losses) |
| Currency |
| Other | |||||
|
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive | |||||
Three Months Ended March 31, 2018 |
| on Securities |
| Flow Hedges |
| Investment Hedges |
| Adjustments (1) |
| Loss | |||||
|
| (in millions) | |||||||||||||
Balance at December 31, 2017 |
| $ | (8.7) |
| $ | (0.1) |
| $ | (42.0) |
| $ | (89.4) |
| $ | (140.2) |
Changes in other comprehensive income (loss) |
|
| (2.0) |
|
| (0.1) |
|
| (11.7) |
|
| 17.5 |
|
| 3.7 |
Balance at March 31, 2018 |
| $ | (10.7) |
| $ | (0.2) |
| $ | (53.7) |
| $ | (71.9) |
| $ | (136.5) |
(1) | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates. |
ReclassificationsIn accordance with ASC 830, “Foreign Currency Matters,” upon the sale of Precima on January 10, 2020, $3.8 million of accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation of the gain on sale of Precima.
28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material. Additionally, as of January 1, 2018, a cumulative-effect adjustment of $1.5 million was reclassified from accumulated other comprehensive loss to retained earnings related to the adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”
16.18. FINANCIAL INSTRUMENTS
In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.
Fair Value of Financial Instruments — The estimated fair values of the Company’s financial instruments are as follows:
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| ||||||||||||
|
| March 31, 2019 |
| December 31, 2018 | ||||||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair | ||||||||||||||||
|
| Amount |
| Value |
| Amount |
| Value | ||||||||||||||||
|
| (in millions) | ||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | March 31, 2020 | | December 31, 2019 | ||||||||||||||||||||
| | Carrying | | Fair | | Carrying | | Fair | ||||||||||||||||
|
| Amount |
| Value |
| Amount |
| Value | ||||||||||||||||
| | (in millions) | ||||||||||||||||||||||
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Credit card and loan receivables, net |
| $ | 15,829.4 |
| $ | 16,390.2 |
| $ | 16,816.7 |
| $ | 17,472.7 | | $ | 15,581.1 | | $ | 16,432.6 | | $ | 18,292.0 | | $ | 19,126.0 |
Credit card receivables held for sale |
|
| 1,848.9 |
|
| 1,902.5 |
|
| 1,951.6 |
|
| 1,995.5 | | | 88.8 | | | 91.5 | | | 408.0 | | | 436.2 |
Redemption settlement assets, restricted |
|
| 576.1 |
|
| 576.1 |
|
| 558.6 |
|
| 558.6 | |
| 568.0 | |
| 568.0 | |
| 600.8 | |
| 600.8 |
Other investments |
|
| 293.9 |
|
| 293.9 |
|
| 291.3 |
|
| 291.3 | |
| 265.1 | |
| 265.1 | |
| 259.8 | |
| 259.8 |
Derivative instruments |
|
| 0.9 |
|
| 0.9 |
|
| 3.8 |
|
| 3.8 | |
| 1.1 | |
| 1.1 | |
| 0.2 | |
| 0.2 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Derivative instruments |
|
| 0.7 |
|
| 0.7 |
|
| 0.3 |
|
| 0.3 | | | 0.3 | | | 0.3 | | | 0.3 | | | 0.3 |
Deposits |
|
| 11,292.0 |
|
| 11,326.5 |
|
| 11,793.7 |
|
| 11,768.7 | |
| 11,385.7 | |
| 11,575.1 | |
| 12,151.7 | |
| 12,303.6 |
Non-recourse borrowings of consolidated securitization entities |
|
| 6,775.5 |
|
| 6,784.5 |
|
| 7,651.7 |
|
| 7,626.9 | |
| 6,360.7 | |
| 6,365.0 | |
| 7,284.0 | |
| 7,333.6 |
Long-term and other debt |
|
| 5,881.5 |
|
| 5,961.6 |
|
| 5,725.4 |
|
| 5,755.3 | |
| 3,076.1 | |
| 2,903.3 | |
| 2,849.9 | |
| 2,878.8 |
The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Credit card and loan receivables, net — The Company utilizes a discounted cash flow model using unobservable inputs, including estimated yields (interest and fee income), loss rates, payment rates and discount rates to estimate the fair value measurement of the credit card and loan receivables.
Credit card receivables held for sale — The Company utilizes a discounted cash flow model using unobservable inputs, including forecasted yields and net charge-off estimates to estimate the fair value measurement of the credit card portfolios held for sale.sale, as well as market data as applicable.
30
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.
Other investments — Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.
Deposits — TheFor money market deposits, carrying value approximates fair value due to the liquid nature of these deposits. For certificates of deposit, the fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.
Non-recourse borrowings of consolidated securitization entities — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.
29
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Long-term and other debt — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.
Derivative instruments — The Company’s foreign currency cash flow hedges are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs. The fair value of the foreign currency forward contracts is estimated based on published quotations of spot foreign currency rates and forward points which are converted into implied foreign currency rates.
Financial Assets and Financial Liabilities Fair Value Hierarchy
ASC 820, “Fair Value Measurements and Disclosures,” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.
● | Level 1, defined as observable inputs such as quoted prices in active markets; |
● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
● | Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions. |
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.
31
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at | |||||||
| | | | | March 31, 2020 Using | |||||||
|
| Balance at |
| | |
| | |
| | | |
| | March 31, | | | | | | | | | | |
|
| 2020 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Mutual funds (1) | | $ | 22.9 | | $ | 22.9 | | $ | — | | $ | — |
Corporate bonds (1) | | | 489.2 | | | — | | | 489.2 | | | — |
Marketable securities (2) | | | 265.1 | | | 34.2 | | | 230.9 | | | — |
Derivative instruments (3) | | | 1.1 | | | — | | | 1.1 | | | — |
Total assets measured at fair value | | $ | 778.3 | | $ | 57.1 | | $ | 721.2 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at | |||||||
|
|
|
|
| March 31, 2019 Using | |||||||
|
| Balance at |
|
|
|
|
|
|
|
|
| |
|
| March 31, |
|
|
|
|
|
|
|
|
| |
|
| 2019 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
|
| (in millions) | ||||||||||
Mutual funds (1) |
| $ | 24.2 |
| $ | 24.2 |
| $ | — |
| $ | — |
Corporate bonds (1) |
|
| 508.5 |
|
| — |
|
| 508.5 |
|
| — |
Marketable securities (2) |
|
| 269.0 |
|
| 25.5 |
|
| 243.5 |
|
| — |
U.S. Treasury bonds (2) |
|
| 24.9 |
|
| 24.9 |
|
| — |
|
| — |
Derivative instruments (3) |
|
| 0.9 |
|
| — |
|
| 0.9 |
|
| — |
Total assets measured at fair value |
| $ | 827.5 |
| $ | 74.6 |
| $ | 752.9 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (3) |
| $ | 0.7 |
| $ | — |
| $ | 0.7 |
| $ | — |
Total liabilities measured at fair value |
| $ | 0.7 |
| $ | — |
| $ | 0.7 |
| $ | — |
30
ALLIANCE DATA SYSTEMS CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at | |||||||
|
|
|
|
| December 31, 2018 Using | |||||||
|
| Balance at |
|
|
|
|
|
|
|
|
| |
|
| December 31, |
|
|
|
|
|
|
|
|
| |
|
| 2018 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
|
| (in millions) | ||||||||||
Mutual funds (1) |
| $ | 23.2 |
| $ | 23.2 |
| $ | — |
| $ | — |
Corporate bonds (1) |
|
| 491.5 |
|
| — |
|
| 491.5 |
|
| — |
Marketable securities (2) |
|
| 266.4 |
|
| 25.0 |
|
| 241.4 |
|
| — |
U.S. Treasury bonds (2) |
|
| 24.9 |
|
| 24.9 |
|
| — |
|
| — |
Derivative instruments (3) |
|
| 3.8 |
|
| — |
|
| 3.8 |
|
| — |
Total assets measured at fair value |
| $ | 809.8 |
| $ | 73.1 |
| $ | 736.7 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (3) |
| $ | 0.3 |
| $ | — |
| $ | 0.3 |
| $ | — |
Total liabilities measured at fair value |
| $ | 0.3 |
| $ | — |
| $ | 0.3 |
| $ | — |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at | |||||||
| | | | | December 31, 2019 Using | |||||||
|
| Balance at |
| | |
| | |
| | | |
| | December 31, | | | | | | | | | | |
|
| 2019 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Mutual funds (1) | | $ | 25.1 | | $ | 25.1 | | $ | — | | $ | — |
Corporate bonds (1) | | | 536.4 | | | — | | | 536.4 | | | — |
Marketable securities (2) | | | 259.8 | | | 26.2 | | | 233.6 | | | — |
Derivative instruments (3) | | | 0.2 | | | — | | | 0.2 | | | — |
Total assets measured at fair value | | $ | 821.5 | | $ | 51.3 | | $ | 770.2 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
(1) |
| Amounts are included in redemption settlement assets in the unaudited condensed consolidated balance sheets. |
(2) |
| Amounts are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. |
(3) |
| Amounts are included in other current assets and other current liabilities in the unaudited condensed consolidated balance sheets. |
There were no transfers between Levels 1 and 2 within the fair value hierarchy for the three months ended March 31, 2019 and 2018.
32
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Financial Instruments Disclosed but Not Carried at Fair Value
The following tables provide assets and liabilities disclosed but not carried at fair value as of March 31, 20192020 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at | ||||||||||
|
| March 31, 2019 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
|
| (in millions) | ||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card and loan receivables, net |
| $ | 16,390.2 |
| $ | — |
| $ | — |
| $ | 16,390.2 |
Credit card receivables held for sale |
|
| 1,902.5 |
|
| — |
|
| — |
|
| 1,902.5 |
Total |
| $ | 18,292.7 |
| $ | — |
| $ | — |
| $ | 18,292.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 11,326.5 |
| $ | — |
| $ | 11,326.5 |
| $ | — |
Non-recourse borrowings of consolidated securitization entities |
|
| 6,784.5 |
|
| — |
|
| 6,784.5 |
|
| — |
Long-term and other debt |
|
| 5,961.6 |
|
| — |
|
| 5,961.6 |
|
| — |
Total |
| $ | 24,072.6 |
| $ | — |
| $ | 24,072.6 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at | ||||||||||
|
| December 31, 2018 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
|
| (in millions) | ||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card and loan receivables, net |
| $ | 17,472.7 |
| $ | — |
| $ | — |
| $ | 17,472.7 |
Credit card receivables held for sale |
|
| 1,995.5 |
|
| — |
|
| — |
|
| 1,995.5 |
Total |
| $ | 19,468.2 |
| $ | — |
| $ | — |
| $ | 19,468.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 11,768.7 |
| $ | — |
| $ | 11,768.7 |
| $ | — |
Non-recourse borrowings of consolidated securitization entities |
|
| 7,626.9 |
|
| — |
|
| 7,626.9 |
|
| — |
Long-term and other debt |
|
| 5,755.3 |
|
| — |
|
| 5,755.3 |
|
| — |
Total |
| $ | 25,150.9 |
| $ | — |
| $ | 25,150.9 |
| $ | — |
2019:
| | | | | | | | | | | | |
| | Fair Value Measurements at | ||||||||||
| | March 31, 2020 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 16,432.6 | | $ | — | | $ | — | | $ | 16,432.6 |
Credit card receivables held for sale | | | 91.5 | | | — | | | — | | | 91.5 |
Total | | $ | 16,524.1 | | $ | — | | $ | — | | $ | 16,524.1 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 11,575.1 | | $ | — | | $ | 11,575.1 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | |
| 6,365.0 | |
| — | |
| 6,365.0 | |
| — |
Long-term and other debt | |
| 2,903.3 | |
| — | |
| 2,903.3 | |
| — |
Total | | $ | 20,843.4 | | $ | — | | $ | 20,843.4 | | $ | — |
31
ALLIANCE DATA SYSTEMS CORPORATION
17.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | Fair Value Measurements at | ||||||||||
| | December 31, 2019 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 19,126.0 | | $ | — | | $ | — | | $ | 19,126.0 |
Credit card receivables held for sale | |
| 436.2 | | | — | | | — | | | 436.2 |
Total | | $ | 19,562.2 | | $ | — | | $ | — | | $ | 19,562.2 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 12,303.6 | | $ | — | | $ | 12,303.6 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | |
| 7,333.6 | |
| — | |
| 7,333.6 | |
| — |
Long-term and other debt | |
| 2,878.8 | |
| — | |
| 2,878.8 | |
| — |
Total | | $ | 22,516.0 | | $ | — | | $ | 22,516.0 | | $ | — |
19. INCOME TAXES
For the three months ended March 31, 20192020 and March 31, 2018,2019, the Company utilized an effective tax rate of 16.0%(18.1)% and 26.6%16.3%, respectively, to calculate its provision for income taxes. The decrease in thenegative effective tax rate for the three months ended March 31, 2019first quarter of 2020 was primarily related tothe result of a decrease indiscrete tax benefit and reduction of tax reserves resulting fromfollowing a change in accounting method forfavorable settlement with a state tax purposes.authority.
18.20. SEGMENT INFORMATION
Operating segments are defined by ASC 280, “Segment Reporting,” as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the President and Chief Executive Officer. The operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different products.products and services.
33
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
As discussed in Note 5, “Discontinued Operations,” in the first quarter of 2019, the Company’s Epsilon segment has been classified as a discontinued operation. As such, beginning with the first quarter of 2019, theThe Company operates in the LoyaltyOne and Card Services reportable segments, which consist of the following:
LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty; and
Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company’s private label and co-brand credit card programs.
● | LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty; and |
● | Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company’s private label and co-brand credit card programs. |
Corporate and other immaterial businesses are reported collectively as an “all other” category labeled “Corporate/Other.” Income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes and have also been included in “Corporate/Other.”
32
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Three Months Ended March 31, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 198.1 | | $ | 1,183.6 | | $ | 0.1 | | $ | 1,381.8 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 46.7 | | $ | 32.1 | | $ | (53.4) | | $ | 25.4 |
Interest expense, net | |
| (0.3) | | | 110.2 | | | 28.7 | |
| 138.6 |
Operating income (loss) | |
| 46.4 | |
| 142.3 | |
| (24.7) | |
| 164.0 |
Depreciation and amortization | |
| 18.2 | |
| 19.7 | |
| 0.9 | |
| 38.8 |
Stock compensation expense | |
| 1.0 | |
| 1.7 | |
| 2.0 | |
| 4.7 |
Gain on sale of business, net of strategic transaction costs | |
| (8.0) | |
| — | |
| — | |
| (8.0) |
Strategic transaction costs | |
| 0.1 | |
| — | |
| 0.6 | |
| 0.7 |
Restructuring and other charges | |
| 0.1 | |
| (6.5) | |
| (0.1) | |
| (6.5) |
Adjusted EBITDA (1) | |
| 57.8 | |
| 157.2 | |
| (21.3) | |
| 193.7 |
Less: Securitization funding costs | | | — | | | 49.9 | | | — | | | 49.9 |
Less: Interest expense on deposits | | | — | | | 60.3 | | | — | | | 60.3 |
Adjusted EBITDA, net (1) | | $ | 57.8 | | $ | 47.0 | | $ | (21.3) | | $ | 83.5 |
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Three Months Ended March 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 203.8 | | $ | 1,130.4 | | $ | — | | $ | 1,334.2 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 23.0 | | $ | 266.9 | | $ | (76.9) | | $ | 213.0 |
Interest expense, net | |
| 1.1 | |
| 106.0 | |
| 36.8 | |
| 143.9 |
Operating income (loss) | |
| 24.1 | |
| 372.9 | |
| (40.1) | |
| 356.9 |
Depreciation and amortization | |
| 20.1 | |
| 24.3 | |
| 2.0 | |
| 46.4 |
Stock compensation expense | | | 3.0 | | | 3.7 | | | 4.6 | | | 11.3 |
Restructuring charges | |
| 7.9 | |
| — | |
| — | |
| 7.9 |
Adjusted EBITDA (1) | |
| 55.1 | |
| 400.9 | |
| (33.5) | |
| 422.5 |
Less: Securitization funding costs | | | — | | | 57.3 | | | — | | | 57.3 |
Less: Interest expense on deposits | | | — | | | 48.7 | | | — | | | 48.7 |
Adjusted EBITDA, net (1) | | $ | 55.1 | | $ | 294.9 | | $ | (33.5) | | $ | 316.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate/ |
|
|
| ||
Three Months Ended March 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
|
| (in millions) | ||||||||||
Revenues |
| $ | 203.8 |
| $ | 1,130.4 |
| $ | — |
| $ | 1,334.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
| $ | 23.0 |
| $ | 266.9 |
| $ | (82.5) |
| $ | 207.4 |
Interest expense, net |
|
| 1.1 |
|
| 106.0 |
|
| 42.4 |
|
| 149.5 |
Operating income (loss) |
|
| 24.1 |
|
| 372.9 |
|
| (40.1) |
|
| 356.9 |
Depreciation and amortization |
|
| 20.1 |
|
| 24.3 |
|
| 2.0 |
|
| 46.4 |
Stock compensation expense |
|
| 3.0 |
|
| 3.7 |
|
| 4.6 |
|
| 11.3 |
Restructuring charges |
|
| 7.9 |
|
| — |
|
| — |
|
| 7.9 |
Adjusted EBITDA (1) |
|
| 55.1 |
|
| 400.9 |
|
| (33.5) |
|
| 422.5 |
Less: Securitization funding costs |
|
| — |
|
| 57.3 |
|
| — |
|
| 57.3 |
Less: Interest expense on deposits |
|
| — |
|
| 48.7 |
|
| — |
|
| 48.7 |
Adjusted EBITDA, net (1) |
| $ | 55.1 |
| $ | 294.9 |
| $ | (33.5) |
| $ | 316.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate/ |
|
|
| ||
Three Months Ended March 31, 2018 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
|
| (in millions) | ||||||||||
Revenues |
| $ | 226.3 |
| $ | 1,155.2 |
| $ | 0.2 |
| $ | 1,381.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
| $ | 27.1 |
| $ | 289.4 |
| $ | (76.0) |
| $ | 240.5 |
Interest expense, net |
|
| 1.2 |
|
| 87.6 |
|
| 43.0 |
|
| 131.8 |
Operating income (loss) |
|
| 28.3 |
|
| 377.0 |
|
| (33.0) |
|
| 372.3 |
Depreciation and amortization |
|
| 22.0 |
|
| 24.8 |
|
| 1.9 |
|
| 48.7 |
Stock compensation expense |
|
| 3.6 |
|
| 4.4 |
|
| 5.6 |
|
| 13.6 |
Adjusted EBITDA (1) |
|
| 53.9 |
|
| 406.2 |
|
| (25.5) |
|
| 434.6 |
Less: Securitization funding costs |
|
| — |
|
| 52.1 |
|
| — |
|
| 52.1 |
Less: Interest expense on deposits |
|
| — |
|
| 35.5 |
|
| — |
|
| 35.5 |
Adjusted EBITDA, net (1) |
| $ | 53.9 |
| $ | 318.6 |
| $ | (25.5) |
| $ | 347.0 |
(1) | Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on GAAP plus stock compensation expense, (benefit) provision for income taxes, interest expense, net, depreciation and other amortization and amortization of purchased intangibles. |
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance with ASC 280 as they are the primary performance metrics utilized to assess performance of the segments.
34
33
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
19.21. SUPPLEMENTAL CASH FLOW INFORMATION
The unaudited condensed consolidated statements of cash flows are presented with the combined cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category. The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated statements of cash flows:
| | | | | | |
|
| March 31, | | March 31, | ||
| | 2020 | | 2019 | ||
| | (in millions) | ||||
Cash and cash equivalents | | $ | 4,456.8 | | $ | 3,725.1 |
Restricted cash included within other current assets (1) | | | 253.2 | | | 47.6 |
Restricted cash included within redemption settlement assets, restricted (2) | | | 55.9 | | | 43.3 |
Total cash, cash equivalents and restricted cash | | $ | 4,765.9 | | $ | 3,816.0 |
|
|
|
|
|
|
|
|
| March 31, |
| March 31, | ||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Cash and cash equivalents |
| $ | 3,725.1 |
| $ | 3,549.5 |
Restricted cash included within other current assets (1) |
|
| 47.6 |
|
| 528.1 |
Restricted cash included within redemption settlement assets, restricted (2) |
|
| 43.3 |
|
| 64.4 |
Total cash, cash equivalents and restricted cash |
| $ | 3,816.0 |
| $ | 4,142.0 |
(1) | Includes cash restricted for principal and interest repayments of non-recourse borrowings of consolidated securitized debt and other restricted cash within other current assets. At March 31, |
(2) | See Note 9, “Redemption Settlement Assets,” for additional information regarding the nature of restrictions on redemption settlement assets. |
3534
Caution Regarding Forward-Looking Statements
This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,” “likely,” “may,” “should” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding strategic initiatives, our expected operating results, future economic conditions including currency exchange rates, future dividend declarations and the guidance we give with respect to our anticipated financial performance. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:
| continuing impacts related to COVID-19, including relief measures for impacted borrowers and depositors, labor shortages due to quarantine, reduction in demand from clients, supply chain disruption for our reward suppliers and disruptions in the airline or travel industries; |
● | loss of, or reduction in demand for services from, significant clients; |
| increases in net charge-offs in credit card and loan |
| failure to identify, complete or successfully integrate or disaggregate business acquisitions or divestitures; |
| continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations; |
● | failure to realize expected cost savings from restructuring plans; |
● | increases in the cost of doing business, including market interest rates; |
| inability to access financial or capital markets, including the asset-backed securitization funding market or deposits market; |
| loss of active AIR MILES® Reward Program collectors; |
|
|
| increased redemptions by AIR MILES Reward Program collectors; |
| unfavorable fluctuations in foreign currency exchange rates; |
| limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy; |
| increases in |
| failure to maintain exemption from regulation under the Bank Holding Company Act; |
| loss or disruption, due to cyber attack or other service failures, of data center operations or capacity; |
| loss of consumer information due to compromised physical or cyber security; and |
● | those factors set forth in the Risk Factors section in our Annual Report on Form 10-K for the most recently ended fiscal year as well as those factors discussed in Item 1A of Form 10-Q, elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q. |
those factors set forth in the Risk Factors section in our Annual Report on Form 10-K for the most recently ended fiscal year as well as those factors discussed in Item 1A of Form 10-Q, elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Further risks and uncertainties include, but are not limited to, the pending transaction involving Epsilon and whether such transaction will be completed in a timely manner or at all, the possibility that closing conditions may not be satisfied or waived, the impact of our continuing strategic evaluations and any potential transactioninitiatives on us or our business if any transactions are undertaken, and whether the anticipated benefits of such transaction and further relationshipstransactions can be achieved.realized.
Any forward-looking statements contained in this Form 10-Q speak only as of the date made, and we undertake no obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, subsequent events, anticipated or unanticipated circumstances or otherwise.
36
35
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this quarterly report and the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission, or SEC, on February 26, 2019.28, 2020.
20192020 Recent Developments
| Effective February 3, 2020, our Board of Directors appointed Ralph Andretta as Alliance Data’s President and Chief Executive Officer as well as a Director of the Company. |
● | For the three months ended March 31, |
| Revenue |
| Net income decreased |
| Earnings per share decreased |
| Adjusted EBITDA, net decreased |
|
|
● | In January 2020, we sold Precima, a provider of retail strategy and customer data applications and analytics, for |
● | We paid dividends and dividend equivalent rights of $30.3 million for the three months ended March 31, |
● | We sold one credit card portfolio for preliminary cash consideration of $289.5 million during the three months ended March 31, 2020. |
COVID-19 Update
On March 11, 2020, the World Health Organization, or WHO, declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. Both prior to and in response to this declaration and the rapid spread of COVID-19 around the world and within the United States, international, federal, state and local governments have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. As a result, COVID-19 restrictions have adversely impacted and continue to adversely impact our associates, our business partners, and our customers.
In response to the COVID-19 pandemic, first and foremost, we have prioritized the health and safety of our associates. Effective teleworking protocols are in place for more than 95% of our associates. Cross-training programs have been completed at our Card Services business to ensure appropriate workforce coverage while managing higher cardholder-related call volumes resulting from forbearance programs introduced in response to the COVID-19 pandemic. These forbearance programs include the option to waive the next payment or enroll in short-term hardship programs for eligible accountholders. We are working closely with our partners across all of our businesses to optimize their budgets, adjust marketing support accordingly and accommodate the rapid shift to ecommerce in light of retail-based store closings to reduce the spread of COVID-19. At LoyaltyOne, we are adjusting the timing of significant coalition and sponsor-specific promotions and marketing programs for our coalition loyalty program. Additionally, we are enhancing efforts on redemption categories that focus on high-demand, non-travel reward options, stay-at-home products and services, and AIR MILES Cash redemptions. We are extending the length of certain short-term loyalty programs, allowing consumers a better opportunity to collect and redeem prior to program expiration.
36
We continue to monitor the rapidly evolving situation and guidance from international, federal, state and local government and public health authorities. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows at this time. However, we expect COVID-19 to have an adverse impact on future revenue growth as well as overall profitability. In particular, our allowance for loan loss under the CECL model may be volatile due to changes in the macroeconomic environment. We continue to evaluate and implement additional cost saving measures in procurement, marketing and operating expenses, while maintaining service levels and positioning for future growth.
Consolidated Results of Operations
| | | | | | | | | |
| | Three Months Ended March 31, | | ||||||
|
| 2020 |
| 2019 | | % Change | | ||
| | (in millions, except percentages) | | ||||||
Revenues | | | | | | | | | |
Services | | $ | 46.6 | | $ | 73.3 | | (36) | % |
Redemption, net | |
| 120.9 | |
| 111.9 | | 8 | |
Finance charges, net | |
| 1,214.3 | |
| 1,149.0 | | 6 | |
Total revenue | |
| 1,381.8 | |
| 1,334.2 | | 4 | |
Operating expenses | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 499.2 | |
| 640.5 | | (22) | |
Provision for loan loss | |
| 655.9 | |
| 252.1 | | 160 | |
General and administrative | |
| 23.9 | |
| 38.3 | | (38) | |
Depreciation and other amortization | |
| 17.4 | |
| 20.6 | | (16) | |
Amortization of purchased intangibles | |
| 21.4 | |
| 25.8 | | (17) | |
Total operating expenses | |
| 1,217.8 | |
| 977.3 | | 25 | |
Operating income | |
| 164.0 | |
| 356.9 | | (54) | |
Interest expense | | | | | | | | | |
Securitization funding costs | |
| 49.9 | |
| 57.3 | | (13) | |
Interest expense on deposits | |
| 60.3 | |
| 48.7 | | 24 | |
Interest expense on long-term and other debt, net | |
| 28.4 | |
| 37.9 | | (25) | |
Total interest expense, net | |
| 138.6 | |
| 143.9 | | (4) | |
Income from continuing operations before income taxes | | | 25.4 | | | 213.0 | | (88) | |
(Benefit) provision for income taxes | |
| (4.6) | |
| 34.8 | | (113) | |
Income from continuing operations | | | 30.0 | | | 178.2 | | (83) | |
Loss from discontinued operations, net of taxes | | | — | | | (29.1) | | nm | * |
Net income | | $ | 30.0 | | $ | 149.1 | | (80) | % |
| | | | | | | | | |
Key Operating Metrics: | | | | | | | | | |
Credit card statements generated | |
| 67.4 | |
| 72.7 | | (7) | % |
Credit sales | | $ | 6,099.1 | | $ | 6,315.4 | | (3) | % |
Average credit card and loan receivables | | $ | 18,294.4 | | $ | 16,850.2 | | 9 | % |
AIR MILES reward miles issued | |
| 1,315.8 | |
| 1,258.1 | | 5 | % |
AIR MILES reward miles redeemed | |
| 994.0 | |
| 1,088.5 | | (9) | % |
* | not meaningful |
Three months ended March 31, 2020 compared to the three months ended March 31, 2019
Revenue. Total revenue increased $47.6 million, or 4%, to $1,381.8 million for the three months ended March 31, 2020 from $1,334.2 million for the three months ended March 31, 2019. The net increase was due to the following:
|
|
● | Redemption, net. Revenue increased $9.0 million, or 8%, to $120.9 million for the three months ended March 31, 2020 as redemption revenue from our short-term loyalty programs increased $8.4 million due to strong performance in Asia and Europe. However, in response to COVID-19, certain of our customers have delayed their short-term loyalty programs, which may negatively impact our redemption revenue in the second quarter of 2020. |
|
|
In November 2018, we announced the exploration of strategic alternatives for Epsilon, including a potential sale of the business. In the first quarter of 2019, Epsilon met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations,” and has been presented as a discontinued operation for all periods presented.
Effective April 12, 2019, we entered into a definitive agreement to sell our Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Net cash proceeds, after tax obligations and fees associated with the transaction, are expected to be used for the repayment of corporate debt and to repurchase shares of our common stock. The transaction is expected to close in the third quarter of 2019, subject to satisfaction of customary closing conditions and receipt of regulatory approvals.
37
● | Finance charges, net. Revenue increased $65.3 million, or 6%, to $1,214.3 million for the three months ended March 31, 2020. The increase was driven by an approximate 170 basis point increase in finance charge yield, which increased revenue by $78.2 million, offset in part by a 1% decrease in normalized average receivables, which includes receivables held for sale, that decreased revenue by $12.9 million. The increase in finance charge yield was due primarily to higher late fees charged to cardholders per occurrence. We would expect finance charges, net to be negatively impacted by forbearance programs offered in response to COVID-19 as well as the recent interest rate cuts by the Federal Reserve. |
Consolidated ResultsCost of Operations
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| ||||||
|
| 2019 |
| 2018 |
| % Change |
| ||
|
| (in millions, except percentages) | |||||||
Revenues |
|
|
|
|
|
|
|
|
|
Services |
| $ | 73.3 |
| $ | 92.6 |
| (21) | % |
Redemption, net |
|
| 111.9 |
|
| 131.9 |
| (15) |
|
Finance charges, net |
|
| 1,149.0 |
|
| 1,157.2 |
| (1) |
|
Total revenue |
|
| 1,334.2 |
|
| 1,381.7 |
| (3) |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
Cost of operations (exclusive of depreciation and amortization disclosed separately below) |
|
| 640.5 |
|
| 591.7 |
| 8 |
|
Provision for loan loss |
|
| 252.1 |
|
| 337.7 |
| (25) |
|
General and administrative |
|
| 38.3 |
|
| 31.3 |
| 22 |
|
Depreciation and other amortization |
|
| 20.6 |
|
| 19.3 |
| 7 |
|
Amortization of purchased intangibles |
|
| 25.8 |
|
| 29.4 |
| (12) |
|
Total operating expenses |
|
| 977.3 |
|
| 1,009.4 |
| (3) |
|
Operating income |
|
| 356.9 |
|
| 372.3 |
| (4) |
|
Interest expense |
|
|
|
|
|
|
|
|
|
Securitization funding costs |
|
| 57.3 |
|
| 52.1 |
| 10 |
|
Interest expense on deposits |
|
| 48.7 |
|
| 35.5 |
| 37 |
|
Interest expense on long-term and other debt, net |
|
| 43.5 |
|
| 44.2 |
| (2) |
|
Total interest expense, net |
|
| 149.5 |
|
| 131.8 |
| 13 |
|
Income from continuing operations before income taxes |
|
| 207.4 |
|
| 240.5 |
| (14) |
|
Provision for income taxes |
|
| 33.1 |
|
| 64.0 |
| (48) |
|
Income from continuing operations |
|
| 174.3 |
|
| 176.5 |
| (1) |
|
Loss from discontinued operations, net of taxes |
|
| (25.2) |
|
| (12.6) |
| 101 |
|
Net income |
| $ | 149.1 |
| $ | 163.9 |
| (9) | % |
|
|
|
|
|
|
|
|
|
|
Key Operating Metrics: |
|
|
|
|
|
|
|
|
|
Credit card statements generated |
|
| 72.7 |
|
| 77.8 |
| (7) | % |
Credit sales |
| $ | 6,315.4 |
| $ | 6,805.6 |
| (7) | % |
Average credit card and loan receivables |
| $ | 16,850.2 |
| $ | 17,722.4 |
| (5) | % |
AIR MILES reward miles issued |
|
| 1,258.1 |
|
| 1,226.2 |
| 3 | % |
AIR MILES reward miles redeemed |
|
| 1,088.5 |
|
| 1,178.2 |
| (8) | % |
Three months ended March 31, 2019 comparedoperations. Cost of operations decreased $141.3 million, or 22%, to $499.2 million for the three months ended March 31, 2018
Revenue. Total revenue decreased $47.52020 as compared to $640.5 million or 3%, to $1,334.2 million for the three months ended March 31, 2019 from $1,381.7 million for the three months ended March 31, 2018. The decrease was due to the following:
Services. Revenue decreased $19.3 million, or 21%, to $73.3 million for the three months ended March 31, 2019 as a result of a $19.0 million decrease in merchant fee revenue due to increased royalty payments to our retailers associated with new clients.
Redemption, net. Revenue decreased $20.0 million, or 15%, to $111.9 million for the three months ended March 31, 2019. Redemption revenue was negatively impacted by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $9.0 million decrease in revenue. Redemption revenue was also negatively impacted $8.8 million by the outsourcing of additional rewards inventory during the three months ended March 31, 2019. As we did not control these goods prior to transfer to the collector, the revenue is recorded on a net basis. Additionally, redemption revenue was negatively impacted by an 8%The decrease in AIR MILES reward miles redeemed.
Finance charges, net. Revenue decreased $8.2 million, or 1%, to $1,149.0 million for the three months ended March 31, 2019. This decrease was primarily driven by an approximate 40 basis point decrease in finance charge yield due to a decline in late fees.
Cost of operations. Cost of operations increased $48.8 million, or 8%, to $640.5 million for the three months ended March 31, 2019 as compared to $591.7 million for the three months ended March 31, 2018. The net increase was due to the following:
● | Within the LoyaltyOne segment, cost of operations decreased $26.0 million primarily due to the sale of Precima in January 2020, which resulted in a $23.9 million decrease in cost of operations as compared to the prior year quarter. |
● | Within the Card Services segment, cost of operations decreased $115.3 million primarily due to a $55.7 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale as well as a $33.0 million decrease in payroll and benefits costs due to cost saving initiatives executed in the fourth quarter of 2019. |
Within the LoyaltyOne segment, cost of operations decreased $16.5Provision for loan loss. Provision for loan loss increased $403.8 million, impacted by the decline in both the Euro and Canadian dollar relativeor 160%, to the U.S. dollar, which resulted in an $11.6$655.9 million decrease in cost of
38
operations. Additionally, cost of operations decreased $8.8 million due to additional product outsourcing discussed above. These decreases were offset in part by approximately $7.9 million of restructuring costs incurred with the wind-down of Merison duringfor the three months ended March 31, 2019,2020 as BrandLoyalty implemented certain initiatives to lower its fixed operating costs.
Within the Card Services segment, cost of operations increased $65.3 million due to a $38.2 million increase in valuation adjustments to certain portfolios within credit card receivables held for sale, as well as a $22.4 million increase in credit card processing costs.
Provision for loan loss. Provision for loan loss decreased $85.6 million, or 25%,compared to $252.1 million for the three months ended March 31, 2019, due to the weaker macroeconomic environment and the impact of COVID-19, as comparedwell as the adoption of ASC 326 and the implementation of the CECL model on January 1, 2020. The CECL model is influenced by the prevailing economic conditions and forecast utilized; deterioration of those conditions may result in an increase in our provision for loan loss.
General and administrative. General and administrative expenses decreased $14.4 million, or 38%, to $337.7$23.9 million for the three months ended March 31, 2018, due primarily to a decrease in net charge-offs2020 as well as a decrease in the change in credit card and loan receivables in the current quarter as compared to the prior year quarter.
General and administrative. General and administrative expenses increased $7.0 million, or 22%, to $38.3 million for the three months ended March 31, 2019, as compared to $31.3driven by cost saving initiatives implemented in the first half of 2019, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs. Payroll and benefits expense decreased $7.2 million for the three months ended March 31, 2018, primarily2020 as compared to the prior year quarter due to higher medical costs.these cost saving initiatives.
Depreciation and other amortization. Depreciation and other amortization increased $1.3decreased $3.2 million, or 7%16%, to $17.4 million for the three months ended March 31, 2020 as compared to $20.6 million for the three months ended March 31, 2019, as comparedprimarily due to $19.3certain fully depreciated property and equipment at LoyaltyOne, offset in part by additional assets placed into service from recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $4.4 million, or 17%, to $21.4 million for the three months ended March 31, 2018, due to additional assets placed into service from recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $3.6 million, or 12%,2020, as compared to $25.8 million for the three months ended March 31, 2019, as compared to $29.4 million for the three months ended March 31, 2018, primarily due to certain fully amortized intangible assets, including portfolio premiums and customer contracts.premiums.
Interest expense, net. Total interest expense, net increased $17.7decreased $5.3 million, or 13%4%, to $149.5$138.6 million for the three months ended March 31, 20192020 as compared to $131.8$143.9 million for the three months ended March 31, 2018.2019. The net increasedecrease was due to the following:
| Securitization funding costs. Securitization funding costs |
| Interest expense on deposits. Interest expense on deposits increased |
| Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased |
38
Taxes. Income tax expense related tobenefit from continuing operations decreased $30.9 million to $33.1 million for the three months ended March 31, 2019 from $64.0was $4.6 million for the three months ended March 31, 2018,2020, and provision for income taxes was $34.8 million for the three months ended March 31, 2019. This change was primarily related to a decrease$187.6 million reduction in tax reserves resulting from a change in accounting method for tax purposes.taxable income. The effective tax rate for the current quarterthree months ended March 31, 2020 was 16.0%(18.1)% as compared to 26.6%16.3% for the prior year quarter. The negative effective tax rate for the first quarter of 2020 was the result of a discrete tax benefit and reduction of tax reserves following a favorable settlement with a state tax authority.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes increased $12.6 million to $25.2was $29.1 million for the three months ended March 31, 2019, as compared to $12.6 millionwhich represents results of operations for the three months ended March 31, 2018. Loss from discontinued operations, net of taxes representsour former Epsilon net income (loss) as well as certainsegment, direct costs identifiable to the Epsilon segment and allocationsthe allocation of interest expense on corporate debt. The $12.6 million increase was primarily due to $5.0 million in strategic transaction costs incurred during the current year quarter in connection with the Epsilon transaction as well as increases in Epsilon’s operating costs.
39
Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, (benefit) provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. InAdjusted EBITDA excludes the first quartergain on the sale of 2019, adjusted EBITDA also excluded the restructuring chargesPrecima, strategic transaction costs, which represent costs for professional services associated with the wind-down of Merison, a retail marketing division within BrandLoyalty.strategic initiatives, and restructuring and other charges.
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on deposits.
We use adjusted EBITDA and adjusted EBITDA, net as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management, and we believe it provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and adjusted EBITDA, net are each considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of intangible assets, including certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.
Adjusted EBITDA and adjusted EBITDA, net are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either operating income, income from continuing operations or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and adjusted EBITDA, net are not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The adjusted EBITDA and adjusted EBITDA, net measures presented in this Quarterly Report on Form 10‑Q10-Q may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (in millions) | ||||
Income from continuing operations |
| $ | 174.3 |
| $ | 176.5 |
Stock compensation expense |
|
| 11.3 |
|
| 13.6 |
Provision for income taxes |
|
| 33.1 |
|
| 64.0 |
Interest expense, net |
|
| 149.5 |
|
| 131.8 |
Depreciation and other amortization |
|
| 20.6 |
|
| 19.3 |
Amortization of purchased intangibles |
|
| 25.8 |
|
| 29.4 |
Restructuring charges (1) |
|
| 7.9 |
|
| — |
Adjusted EBITDA |
|
| 422.5 |
|
| 434.6 |
Less: Securitization funding costs |
|
| 57.3 |
|
| 52.1 |
Less: Interest expense on deposits |
|
| 48.7 |
|
| 35.5 |
Adjusted EBITDA, net |
| $ | 316.5 |
| $ | 347.0 |
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| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in millions) | ||||
Income from continuing operations | | $ | 30.0 | | $ | 178.2 |
Stock compensation expense | |
| 4.7 | |
| 11.3 |
(Benefit) provision for income taxes | |
| (4.6) | |
| 34.8 |
Interest expense, net | |
| 138.6 | |
| 143.9 |
Depreciation and other amortization | |
| 17.4 | |
| 20.6 |
Amortization of purchased intangibles | |
| 21.4 | |
| 25.8 |
Gain on sale of business, net of strategic transaction costs (1) | | | (8.0) | |
| — |
Strategic transaction costs (2) | | | 0.7 | |
| — |
Restructuring and other charges (3) | | | (6.5) | |
| 7.9 |
Adjusted EBITDA | | | 193.7 | | | 422.5 |
Less: Securitization funding costs | |
| 49.9 | |
| 57.3 |
Less: Interest expense on deposits | |
| 60.3 | |
| 48.7 |
Adjusted EBITDA, net | | $ | 83.5 | | $ | 316.5 |
(1) |
|
(2) | Represents costs for professional services associated with strategic initiatives. |
(3) | Represents costs associated with restructuring or other exit activities. See Note 12, “Restructuring and Other Charges,” of the |
40
Segment Revenue and Adjusted EBITDA, net
| | | | | | | | | |
| | Three Months Ended March 31, | | ||||||
|
| 2020 |
| 2019 |
| % Change |
| ||
| | (in millions, except percentages) | | | | ||||
Revenue: | | | | | | | | | |
LoyaltyOne | | $ | 198.1 | | $ | 203.8 | | (3) | % |
Card Services | |
| 1,183.6 | |
| 1,130.4 | | 5 | |
Corporate/Other | |
| 0.1 | |
| — | | nm* | |
Total | | $ | 1,381.8 | | $ | 1,334.2 | | 4 | % |
Adjusted EBITDA, net: | | | | | | | | | |
LoyaltyOne | | $ | 57.8 | | $ | 55.1 | | 5 | % |
Card Services | |
| 47.0 | |
| 294.9 | | (84) | |
Corporate/Other | |
| (21.3) | |
| (33.5) | | (36) | |
Total | | $ | 83.5 | | $ | 316.5 | | (74) | % |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| ||||||
|
| 2019 |
| 2018 |
| % Change |
| ||
|
| (in millions, except percentages) | |||||||
Revenue: |
|
|
|
|
|
|
|
|
|
LoyaltyOne |
| $ | 203.8 |
| $ | 226.3 |
| (10) | % |
Card Services |
|
| 1,130.4 |
|
| 1,155.2 |
| (2) |
|
Corporate/Other |
|
| — |
|
| 0.2 |
| nm | * |
Total |
| $ | 1,334.2 |
| $ | 1,381.7 |
| (3) | % |
Adjusted EBITDA, net: |
|
|
|
|
|
|
|
|
|
LoyaltyOne |
| $ | 55.1 |
| $ | 53.9 |
| 2 | % |
Card Services |
|
| 294.9 |
|
| 318.6 |
| (7) |
|
Corporate/Other |
|
| (33.5) |
|
| (25.5) |
| (30) |
|
Total |
| $ | 316.5 |
| $ | 347.0 |
| (9) | % |
* | not meaningful |
*not meaningful
Three months ended March 31, 20192020 compared to the three months ended March 31, 20182019
Revenue. Total revenue decreased $47.5increased $47.6 million, or 3%4%, to $1,334.2 million for the three months ended March 31, 2019 from $1,381.7 million for the three months ended March 31, 2018. The decrease was due to the following:
LoyaltyOne. Revenue decreased $22.5 million, or 10%, to $203.8$1,381.8 million for the three months ended March 31, 2019, impacted by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $13.9 million decrease in revenue, as well as the 8% decline in AIR MILES reward miles redeemed. In local currency, revenue2020 from our short-term loyalty programs increased 3% due to an increase in the number of active programs in market.
Card Services. Revenue decreased $24.8 million, or 2%, to $1,130.4$1,334.2 million for the three months ended March 31, 2019, driven by a $19.0 million decrease in merchant fees as a result of increased payments associated with new clients, and an $8.2 million decrease in finance charges,2019. The net as a result of an approximate 40 basis point decrease in finance charge yieldincrease was due to a decline in late fees.the following:
● | LoyaltyOne. Revenue decreased $5.7 million, or 3%, to $198.1 million for the three months ended March 31, 2020 due to the sale of Precima in January 2020, which resulted in a $14.6 million decrease in revenue as compared to the prior year quarter. This decrease was offset in part by an $8.8 million increase in revenue from our short-term loyalty programs due to strong performance in Asia and Europe. However, in response to COVID-19, certain of our customers have delayed their short-term loyalty programs, which may negatively impact our revenue in the second quarter of 2020. |
● | Card Services. Revenue increased $53.2 million, or 5%, to $1,183.6 million for the three months ended March 31, 2020, driven by $65.3 million increase in finance charges, net due to an increase in yield driven by higher late fees. This increase was offset in part by an $11.4 million decrease in merchant fees as a result of increased payments to our retailers, including new clients. We would expect finance charges, net to be negatively |
40
impacted by forbearance programs offered in response to COVID-19 as well as the recent interest rate cuts by the Federal Reserve. |
Adjusted EBITDA, net. Adjusted EBITDA, net decreased $30.5$233.0 million, or 9%74%, to $316.5$83.5 million for the three months ended March 31, 2019 2020 from $347.0$316.5 million for the three months ended March 31, 2018.2019. The net decrease was due to the following:
● | LoyaltyOne. Adjusted EBITDA, net increased $2.7 million, or 5%, to $57.8 million for the three months ended March 31, 2020, due to strong performance from our short-term loyalty programs, offset in part by the sale of Precima in January 2020 and a 9% decrease in AIR MILES reward miles redeemed as a result of COVID-19. We expect AIR MILES reward miles redeemed to continue to be negatively impacted by COVID-19 in the second quarter of 2020. For the three months ended March 31, 2020, the $8.0 million gain on the sale of Precima, net of transaction costs was excluded from adjusted EBITDA, net. For the three months ended March 31, 2019, $7.9 million of restructuring and other charges was excluded from adjusted EBITDA, net. |
● | Card Services. Adjusted EBITDA, net decreased $247.9 million, or 84%, to $47.0 million for the three months ended March 31, 2020 primarily due to a $403.8 million increase in provision for loan loss due to the weaker macroeconomic environment and the impact of COVID-19, as well as the implementation of the CECL model. This was offset in part by a $115.3 million decrease in cost of operations primarily due to a $55.7 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale as well as a decrease in payroll and benefits costs due to cost saving initiatives executed in the fourth quarter of 2019. |
● | Corporate/Other. Adjusted EBITDA, net improved $12.2 million to a loss of $21.3 million for the three months ended March 31, 2020 due to cost saving initiatives implemented in 2019, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs. |
LoyaltyOne. Adjusted EBITDA, net increased $1.2 million, or 2%, to $55.1 million for the three months ended March 31, 2019, resulting from a favorable revenue mix and lower operating costs. BrandLoyalty restructuring costs of $7.9 million during the three months ended March 31, 2019 were excluded from adjusted EBITDA, net.
Card Services. Adjusted EBITDA, net decreased $23.7 million, or 7%, to $294.9 million for the three months ended March 31, 2019. Adjusted EBITDA, net was negatively impacted by an increase in funding costs, a decrease in finance charges, net and a decrease in gross yields.
Corporate/Other. Adjusted EBITDA, net decreased $8.0 million to a loss of $33.5 million for the three months ended March 31, 2019 due to higher payroll and benefit costs.
Asset Quality
Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our credit card and loan receivables, the success of our collection and recovery efforts, and general economic conditions.
Delinquencies. A credit card account is contractually delinquent whenif we do not receive the minimum payment by the specified due date on the cardholder’s statement. Our policy is to continue to accrue interest and fee income on all credit card accounts, beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes
41
delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.
The following table presents the delinquency trends of our credit card and loan receivables portfolio:portfolio based on the principal balances of our credit card and loan receivables:
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| March 31, |
| % of |
| December 31, |
| % of |
| |||||||||||||
|
| 2019 |
| Total |
| 2018 |
| Total |
| |||||||||||||
|
| (in millions, except percentages) |
| |||||||||||||||||||
| | | | | | | | | | | | |||||||||||
| | March 31, | | % of | | December 31, | | % of |
| |||||||||||||
|
| 2020 |
| Total |
| 2019 |
| Total |
| |||||||||||||
| | (in millions, except percentages) |
| |||||||||||||||||||
Receivables outstanding - principal |
| $ | 15,938.7 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % | | $ | 16,725.4 |
| 100.0 | % | $ | 18,413.1 |
| 100.0 | % |
Principal receivables balances contractually delinquent: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
31 to 60 days |
|
| 244.2 |
| 1.5 | % |
| 303.2 |
| 1.8 | % | | $ | 295.2 | | 1.8 | % | $ | 337.4 |
| 1.8 | % |
61 to 90 days |
|
| 185.1 |
| 1.2 |
|
| 207.9 |
| 1.3 |
| |
| 219.4 |
| 1.3 | |
| 233.6 |
| 1.3 | |
91 or more days |
|
| 407.4 |
| 2.5 |
|
| 443.4 |
| 2.6 |
| |
| 481.1 |
| 2.9 | |
| 496.5 |
| 2.7 | |
Total |
| $ | 836.7 |
| 5.2 | % | $ | 954.5 |
| 5.7 | % | | $ | 995.7 |
| 6.0 | % | $ | 1,067.5 |
| 5.8 | % |
Net Charge-Offs. Our net charge-offs include the principal amount of losses from cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during
41
which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.
The net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period. Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated. The following table presents our net charge-offs for the periods indicated:
|
|
|
|
|
|
|
| |||||||
|
| Three Months Ended |
| |||||||||||
|
| March 31, |
| |||||||||||
|
| 2019 |
| 2018 |
| |||||||||
|
| (in millions, except percentages) | ||||||||||||
| | | | | | | | |||||||
| | Three Months Ended | | |||||||||||
| | March 31, | | |||||||||||
|
| 2020 |
| 2019 |
| |||||||||
| | (in millions, except percentages) | | |||||||||||
Average credit card and loan receivables |
| $ | 16,850.2 |
| $ | 17,722.4 |
| | $ | 18,294.4 | | $ | 16,850.2 | |
Net charge-offs of principal receivables |
|
| 269.3 |
|
| 296.1 |
| |
| 320.2 | |
| 269.3 | |
Net charge-offs as a percentage of average credit card and loan receivables |
|
| 6.4 | % |
| 6.7 | % | |
| 7.0 | % |
| 6.4 | % |
See Note 6, “Credit Card and Loan Receivables,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information related to the securitization of our credit card receivables.
Liquidity and Capital Resources
Cash Flow Activity
Operating Activities. We generated cash flow from operating activities of $572.5 million and $610.8 million for the three months ended March 31, 2020 and 2019, respectively. The year-over-year decrease in operating cash flows of $38.3 million was primarily due to lower profitability.
Investing Activities. Cash provided by investing activities was $1,746.3 million and $717.5 million for the three months ended March 31, 2020 and 2019, respectively. Significant components of investing activities are as follows:
● | Credit card and loan receivables. Cash increased $1,446.7 million and $758.2 million for the three months ended March 31, 2020 and 2019, respectively, due to seasonal paydown of credit card and loan receivables. |
● | Proceeds from sale of business. During the three months ended March 31, 2020, we received cash consideration of $25.4 million from the sale of Precima. |
● | Proceeds from sale of credit card portfolios. During the three months ended March 31, 2020, we received preliminary cash consideration of $289.5 million from the sale of a credit card portfolio. |
● | Capital expenditures. Cash paid for capital expenditures was $15.7 million and $38.7 million for the three months ended March 31, 2020 and 2019, respectively. Capital expenditures for the three months ended March 31, 2019 included $6.8 million related to our divested Epsilon segment, which was presented as a discontinued operation in the prior year period. |
Financing Activities. Cash used in financing activities was $1,503.4 million and $1,483.0 million for the three months ended March 31, 2020 and 2019, respectively. Significant components of financing activities are as follows:
● | Debt. Cash increased $224.6 million and $174.2 million for the three months ended March 31, 2020 and 2019, respectively, due to net borrowings under the revolving line of credit. |
● | Non-recourse borrowings of consolidated securitization entities. Cash decreased $925.0 million and $875.3 million for the three months ended March 31, 2020 and 2019, respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities. |
● | Deposits. Cash decreased $769.4 million and $502.6 million for the three months ended March 31, 2020 and 2019, respectively, as a result of net repayments of deposits due to timing of maturities. |
● | Dividends. Cash paid for quarterly dividends and dividend equivalents was $30.3 million and $33.9 million for the three months ended March 31, 2020 and 2019, respectively. |
42
● | Treasury shares. Cash paid for treasury shares was $222.8 million for the three months ended March 31, 2019. We did not repurchase any treasury shares for the three months ended March 31, 2020. |
Liquidity
Our primary sources of liquidity include cash generated from operating activities, our credit agreements and issuances of debt or equity securities, our credit card securitization program and deposits issued by Comenity Bank and Comenity Capital Bank. In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources. In April 2019, Comenity Capital Bank launchedWe introduced a consumer retail deposit platform Comenity Direct™, to the public.
42
in 2019, and retail deposits comprised approximately $1.2 billion of our $11.4 billion deposits outstanding at March 31, 2020.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets. Comenity Bank and Comenity Capital Bank are considered well capitalized. The actual capital ratios and minimum ratios as of March 31, 20192020 are as follows:
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|
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| |||||||||
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|
|
| Minimum Ratio to be | ||||||||||||
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|
|
| Minimum Ratio for |
| Well Capitalized under | ||||||||||||
|
| Actual |
| Capital Adequacy |
| Prompt Corrective | ||||||||||||
|
| Ratio |
| Purposes |
| Action Provisions | ||||||||||||
| | | | | | | | | | |||||||||
| | | | | | Minimum Ratio to be | ||||||||||||
|
| | | Minimum Ratio for | | Well Capitalized under | ||||||||||||
|
| Actual | | Capital Adequacy | | Prompt Corrective | ||||||||||||
|
| Ratio | | Purposes | | Action Provisions | ||||||||||||
Comenity Bank |
|
|
|
|
|
|
|
|
| | | | | | | | | |
Tier 1 capital to average assets |
| 13.2 | % |
| 4.0 | % |
| 5.0 | % | | 13.3 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets |
| 16.3 |
|
| 4.5 |
|
| 6.5 |
| | 16.7 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets |
| 16.3 |
|
| 6.0 |
|
| 8.0 |
| | 16.7 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets |
| 17.6 |
|
| 8.0 |
|
| 10.0 |
| | 18.1 | | | 8.0 | | | 10.0 | |
|
|
|
|
|
|
|
|
|
| |||||||||
| | | | | | | | | | |||||||||
Comenity Capital Bank |
|
|
|
|
|
|
|
|
| | | | | | | | | |
Tier 1 capital to average assets |
| 13.4 | % |
| 4.0 | % |
| 5.0 | % | | 12.2 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets |
| 15.6 |
|
| 4.5 |
|
| 6.5 |
| | 14.8 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets |
| 15.6 |
|
| 6.0 |
|
| 8.0 |
| | 14.8 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets |
| 16.9 |
|
| 8.0 |
|
| 10.0 |
| | 16.1 | | | 8.0 | | | 10.0 | |
Comenity Bank and Comenity Capital Bank have elected to adopt the option provided by the interim final rule issued by joint federal bank regulatory agencies, which will largely delay the effects of CECL on its regulatory capital for the next two years, after which the effects will be phased-in over a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.
Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases and dividends.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months.
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Net cash proceeds are expected to be used for the repayment of corporate debt and to repurchase shares of our common stock. The transaction is expected to close However, continued volatility in the third quarter of 2019, subject to satisfaction of customary closing conditionsfinancial and receipt of regulatory approvals.
Cash Flow Activity
Operating Activities.We generated cash flow from operating activities of $610.8 million and $649.9 million for the three months ended March 31, 2019 and 2018, respectively. The year-over-year decrease in operating cash flows of $39.1 million was primarilycapital markets due to a decrease in profitability, offset in part by anCOVID-19 may limit our access to or increase in cash provided by working capital.our cost of capital or make capital unavailable on terms acceptable to us or at all.
Investing Activities. Cash provided by investing activities was $717.5 million and $392.9 million for the three months ended March 31, 2019 and 2018, respectively. Significant components of investing activities are as follows:
|
|
|
|
Debt
43
Financing Activities. Cash used in financing activities was $1,483.0 million and $1,213.8 million for the three months ended March 31, 2019, and 2018, respectively. Significant components of financing activities are as follows:
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|
|
|
|
|
|
|
|
|
Debt
Long-term and Other Debt
As of March 31, 2019,2020, we had $945.0$250.0 million outstanding under our revolving line of credit and total availability of $627.4$500.0 million. Our total leverage ratio, as defined in our credit agreement, was 2.4less than 2.0 to 1 at March 31, 2019,2020, as compared to the maximum covenant ratio of 3.5 to 1.
As of March 31, 2019,2020, we were in compliance with our debt covenants.
OnAs of March 31, 2020, we had no amounts outstanding under our BrandLoyalty Credit Agreement, which was set to terminate in June 2020. In April 30, 2019, we amended our2020, BrandLoyalty terminated its existing facility and entered into a new credit
43
agreement to provide that, upon consummationfor a committed revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), an uncommitted revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), and an accordion feature permitting BrandLoyalty to request an increase in either the committed or uncommitted revolving line of credit up to €80.0 million ($86.5 million as of April 3, 2020) in aggregate. The revolving lines of credit mature in April 2023, subject to BrandLoyalty’s request to extend for two additional one-year terms at the discretion of the sale of Epsilon, the maturity date of the credit agreement will be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reduced in the same amount (to $1,072.4 million), all of our outstanding senior notes will be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the credit agreement and certain other minor amendments.lenders.
Deposits
We utilize certificates of deposit and money market deposits and certificates of deposit to finance the operating activities, including funding for our non-securitized credit card receivables, and fund securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank.
As of March 31, 2019,2020, we had $3.0$7.8 billion in certificates of deposit outstanding with interest rates ranging from 1.33% to 4.00% and maturities ranging from April 2020 to March 2025. Certificate of deposit borrowings are subject to regulatory capital requirements.
As of March 31, 2020, we had $3.6 billion in money market deposits outstanding with interest rates ranging from 1.90%0.34% to 3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.
As of March 31, 2019, we had $8.3 billion in certificates of deposit outstanding with interest rates ranging from 1.28% to 4.00% and maturities ranging from April 2019 to March 2024. Certificate of deposit borrowings are subject to regulatory capital requirements.
Securitization Program
We sell a majority of the credit card receivables originated by Comenity Bank to WFN Credit Company, LLC, which in turn sells them to World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust, or Master Trust I, and World Financial Network Credit Card Master Trust III, or Master Trust III, or collectively, the WFN Trusts, as part of our credit card securitization program, which has been in existence since January 1996. We also sell our credit card receivables originated by Comenity Capital Bank to World Financial Capital Credit Company, LLC, which in turn sells them to World Financial Capital Master Note Trust, or the WFC Trust. These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’s credit card receivables.
44
In February 2019, Master Trust I issued $562.5 million of Series 2019-A asset-backed term notes, which mature in February 2022. The offering consisted of $500.0 million of Class A notes with a fixed interest rate of 3.14% per year, $37.2 million of Class M notes with a fixed interest rate of 3.61% per year and $25.3 million of notes that were retained by us and eliminated from the unaudited condensed consolidated balance sheets.
In March 2019, $550.0 million of Series 2012-A asset-backed term notes, $137.5 million of which were retained by us and eliminated from the unaudited condensed consolidated balance sheets, matured and were repaid.
As of March 31, 2019,2020, the WFN Trusts and the WFC Trust had approximately $12.6$12.0 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and the WFC Trust and by the performance of the credit card receivables in these credit card securitization trusts.
At March 31, 2019,2020, we had $6.8$6.4 billion of non-recourse borrowings of consolidated securitization entities, of which $2.2$2.5 billion is due within the next 12 months. As of March 31, 2019,2020, total capacity under the conduit facilities was $4.5$4.7 billion, of which $1.8$1.5 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.
In April 2020, Master Trust I amended its 2009-VFN conduit facility, decreasing the capacity from $1.18 billion to $1.0 billion and extending the maturity to July 2021. In April 2020, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1.3 billion to $1.0 billion and extending the maturity to July 2021.
The following table shows the maturities of borrowing commitments as of March 31, 20192020 for the WFN Trusts and the WFC Trust by year:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
|
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | ||||||
| | (in millions) | ||||||||||||||||
Term notes | | $ | 1,467.2 | | $ | 1,852.1 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | 4,891.0 |
Conduit facilities (1) | |
| 2,480.0 | |
| 2,175.0 | |
| — | |
| — | |
| — | |
| 4,655.0 |
Total (2) | | $ | 3,947.2 | | $ | 4,027.1 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | 9,546.0 |
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| |
|
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| Total | ||||||
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| (in millions) | ||||||||||||||||
Term notes |
| $ | 1,161.5 |
| $ | 1,467.2 |
| $ | 1,852.1 |
| $ | 537.2 |
| $ | — |
| $ | 5,018.0 |
Conduit facilities (1) |
|
| 1,975.0 |
|
| 2,480.0 |
|
| — |
|
| — |
|
| — |
|
| 4,455.0 |
Total (2) |
| $ | 3,136.5 |
| $ | 3,947.2 |
| $ | 1,852.1 |
| $ | 537.2 |
| $ | — |
| $ | 9,473.0 |
(1) | Amount represents borrowing capacity, not outstanding borrowings. |
(2) | Total amounts do not include |
44
See Note 12,13, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt.
Stock Repurchase Programs
We had an authorized stock repurchase program to acquire up to $500.0 million$1.1 billion of our outstanding common stock from August 1, 2018July 5, 2019 through July 31, 2019.June 30, 2020. At December 31, 20182019 we had $222.8$347.8 million remaining under the stock repurchase program. On April 23, 2020, we announced the suspension of our stock repurchase program.
For the three months ended March 31, 2019,2020, we acquired a total of 1.3 milliondid not repurchase any shares of our outstanding common stock, for $222.8 million. Atand we had $347.8 million remaining under the stock repurchase program as of March 31, 2019, we did not have any amounts remaining under our authorization.2020.
Dividends
On February 7, 2019,January 30, 2020, our Board of Directors declared a quarterly cash dividend of $0.63 per share on our common stock to stockholders of record at the close of business on February 21, 2019,14, 2020, resulting in a dividend payment of $33.4$30.0 million on March 19, 2019.2020. Additionally, we paid $0.5$0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2019.2020.
On April 25, 2019,23, 2020, our Board of Directors declared a quarterly cash dividend of $0.63$0.21 per share on our common stock and $6.30 per share on our Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on May 14, 20192020 and payable on June 18, 2019.2020.
45
Critical Accounting Policies and Estimates
With the exception of the adoption of ASC 842,326, there have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2018.2019. See “Recently Adopted Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the adoption of ASC 842326 on January 1, 2019.2020.
Recently Issued Pronouncements
See “Recently Issued Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards recently issued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risks include interest rate risk, credit risk, and foreign currency exchange rate risk.
ThereExcept for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets and the risk factors described in Part II Item 1A included in this report, there has been no other material change from our Annual Report on Form 10-K for the year ended December 31, 20182019 related to our exposure to market risk from interest rate risk, credit risk, and foreign currency exchange rate risk.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of March 31, 2019,2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2019
45
2020 (the end of our first fiscal quarter), our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our first quarter 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting, except for the implementation of controls to account for the CECL allowance for loan loss as a result of ASC 326. The modified controls have been designed to address risks associated with accounting for the CECL allowance for loan loss under ASC 326.
46
PART II
From time to time we are involved in various claims and lawsuits arising in the ordinary course of our business that we believe will not have a material adverse effect on our business or financial condition, including claims and lawsuits alleging breaches of our contractual obligations. See Indemnification in Note 15, “Commitments and Contingencies,” of the Notes to Unaudited Condensed Consolidated Financial Statements.
ThereOther than as set forth below, there have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Impacts related to the COVID-19 pandemic are expected to continue to pose risks to our business for the foreseeable future, heighten many of our known risks and may have a material adverse impact on our results of operations, financial condition and liquidity.
On March 11, 2020, the WHO declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. Both prior to and in response to this declaration and the rapid spread of COVID-19 around the world and within the United States, international, federal, state and local government or other authorities have instituted certain preventative measures, including border closures, travel bans, prohibitions on group events and gatherings, shutdowns or other operational restrictions on certain businesses, curfews, shelter-in-place orders, quarantines and recommendations to practice social distancing. These restrictions are disrupting economic activity worldwide, resulting in volatility in the global capital markets, instability in the credit and financial markets, reduced commercial and consumer confidence and spending, widespread furloughs and layoffs, closure or restricted operating conditions for retail stores, labor shortages, regulatory recommendations to provide relief for impacted consumer borrowers and depositors, disruption in supply chains (including availability of raw materials, ability to manufacture goods and delivery of finished products to suppliers and retailers), and near complete cessation of many hospitality and travel industry operations.
Specific impacts on our operations and financial results include, but are not limited to, the following:
● | Short and long-term difficulties of our retail partners in consumer-based businesses due to restricted foot traffic, any inability to convert in-store sales to e-commerce, trouble maintaining supply chain integrity for both availability of desired products and delivery to end consumers, and reduced consumer confidence and spending may result in increased bankruptcy risk for our retail partners, decreased retail credit sales and decreases in our credit card accounts receivables balances. |
● | Decreased retail credit sales reduces the usage of our private label and co-brand credit cards, which reduces our revenue from finance charges and other servicing fees. |
● | Rising unemployment, the potential for rising consumer bankruptcies and the expectation that we will offer, for a temporary period of time, forbearance programs for impacted cardholders both reduces or delays our revenue |
46
from finance charges and other servicing fees and increases our exposure to rising delinquencies, net charge-offs in credit card and loan receivables and increases to our allowance for loan loss. |
● | Deferral of short-term programs or the inability to source or deliver rewards for these programs across borders may reduce or defer revenue or increase our costs of operations. |
● | Reduced demand for hospitality, airline and other travel-related rewards within our AIR MILES Reward Program due to the multiple COVID-19 restrictions noted negatively impacts redemption revenue as collectors both changed existing reward travel and are unable to schedule future reward travel with any certainty as to the duration of restrictions. |
● | Volatility in the financial markets may increase our cost of capital and/or limit its availability, and prolonged periods of increased financial stress enhance the potential for a rating downgrade on our asset-backed debt, the occurrence of early amortization events as well as non-compliance with financial covenants or other events of default across our significant asset-backed and other indebtedness. |
● | Increased operational risk, including impacts to our data and call center network integrity and availability in addition to heightened cybercriminal activity and other payment fraud risk in this environment of e-commerce and online banking reliance, may affect our ability to timely and effectively meet the needs of both our clients and cardholders across our lines of business. |
● | Increased risks to the health and safety of our associates and that of our third-party vendors may impact our ability to maintain service levels for our partners. |
To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and liquidity, many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 may also be heightened. The complete impact of COVID-19 on our business, results of operations, financial condition and liquidity remains dependent on future developments, including the duration, or any continued recurrence, of the pandemic and the related length and severity of its impact on the global economy, which cannot be predicted at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents information with respect to purchases of our common stock made during the three months ended March 31, 2019:2020:
| | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar | |
| | | | | | | Shares Purchased as | | Value of Shares that | |
| | | | | | | Part of Publicly | | May Yet Be | |
| | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the | ||
Period |
| Shares Purchased (1) |
| per Share |
| Programs |
| Plans or Programs (2) | ||
| | | | | | | | | (Dollars in millions) | |
During 2020: | | | | | | | | | | |
January 1-31 |
| 2,956 | | $ | 111.40 | | — | | $ | 347.8 |
February 1-29 |
| 4,110 | |
| 97.99 |
| — | |
| 347.8 |
March 1-31 | | 35,750 | | | 38.13 | | — | | | 347.8 |
Total |
| 42,816 | | $ | 48.94 | | — | | $ | 347.8 |
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| Total Number of |
| Approximate Dollar | |
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| Shares Purchased as |
| Value of Shares that | |
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| Part of Publicly |
| May Yet Be | |
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| Total Number of |
| Average Price Paid |
| Announced Plans or |
| Purchased Under the | ||
Period |
| Shares Purchased (1) |
| per Share |
| Programs |
| Plans or Programs (2) | ||
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| (Dollars in millions) | |
During 2019: |
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January 1-31 |
| 274,083 |
| $ | 176.22 |
| 267,856 |
| $ | 175.5 |
February 1-28 |
| 708,657 |
|
| 172.68 |
| 702,893 |
|
| 54.1 |
March 1-31 |
| 322,710 |
|
| 170.04 |
| 318,415 |
|
| — |
Total |
| 1,305,450 |
| $ | 172.77 |
| 1,289,164 |
| $ | — |
(1) | During the period represented by the table, |
(2) | In |
On April 25, 2019, we entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of our common stock for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. The issuance to ValueAct of the shares of Series A Non-Voting Convertible Preferred Stock was, and the issuance of the shares of common stock issuable upon conversion of the Series A Non-Voting Convertible Preferred Stock will be, made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
None
47
47
Item 5. Other Information.
(a) None
(b) None
Item 6. Exhibits.
(a) In April 2019, the Board of Directors designated 300,000 shares of our authorized and unissued preferred stock as Series A Non-Voting Convertible Preferred Stock and we filed with the Delaware Secretary of State a Certificate of Designations of Series A Non-Voting Convertible Preferred Stock to create the new Series A Non-Voting Convertible Preferred Stock, authorized 300,000 shares and designated the preferences, rights and limitations of the Series A Non-Voting Convertible Preferred Stock. Each share of Series A Non-Voting Convertible Preferred Stock will initially be convertible into ten shares of common stock (subject to adjustment and the other terms described in the Certificate of Designations) at the holder’s election or upon our written request, provided that upon such conversion the holder, together with its affiliates, will not own or control in the aggregate more than 9.9% of our outstanding common stock (or any class of our voting securities). Shares of Series A Non-Voting Convertible Preferred Stock will also be subject to automatic conversion if a holder transfers such shares pursuant to a transfer (a) to us, (b) in a widespread public distribution of common stock or Series A Non-Voting Convertible Preferred Stock, (c) in which no one transferee (or group of associated transferees) would receive 2% or more of any class of our voting securities then outstanding (including pursuant to a related series of such transfers), or (d) to a transferee that would control more than 50% of our voting securities (not including voting securities such person is acquiring from the transferor). Upon such a transaction, the transferred shares of Series A Non-Voting Convertible Preferred Stock will automatically be converted into shares of common stock on a ten-for-one basis (subject to adjustment as described in the Certificate of Designations).Exhibits:
EXHIBIT INDEX
The shares of Series A Non-Voting Convertible Preferred Stock have no voting rights, except as otherwise required by the General Corporation Law of the State of Delaware. The Series A Non-Voting Convertible Preferred Stock will, with respect to rights upon liquidation, winding up and dissolution, rank (i) subordinate and junior in right of payment to all our other securities that, by their respective terms, are senior to the Series A Non-Voting Convertible Preferred Stock, and (ii) pari passu with the common stock.
On April 30, 2019, we amended our credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement will be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reduced in the same amount (to $1,072.4 million), all of our outstanding senior notes will be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the credit agreement and certain other minor amendments.
(b) None.
| | | | | | Incorporated by Reference | ||||
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Exhibit |
| Filer |
| Description |
| Form |
| Exhibit |
| Filing |
| | | | | | | | | | |
3.1 | | (a) | | Third Amended and Restated Certificate of Incorporation of the Registrant. | | 8-K | | 3.2 | | 6/10/16 |
| | | | | | | | | | |
3.2 | | (a) | | | 8-K | | 3.1 | | 4/29/19 | |
| | | | | | | | | | |
3.3 | | (a) | | | 8-K | | 3.1 | | 2/1/16 | |
| | | | | | | | | | |
4 | | (a) | | Specimen Certificate for shares of Common Stock of the Registrant. | | 10-Q | | 4 | | 8/8/03 |
| | | | | | | | | | |
+10.1 | | (a) | | Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant EBT). | | 8-K | | 10.1 | | 2/20/20 |
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+10.2 | | (a) | | | 8-K | | 10.2 | | 2/20/20 | |
| | | | | | | | | | |
+10.3 | | (a) | | | 8-K | | 10.3 | | 2/20/20 | |
| | | | | | | | | | |
10.4 | | (b) (c) (d) | | | 8-K | | 99.1 | | 2/25/20 | |
| | | | | | | | | | |
10.5 | | (a) | | | 10-K | | 10.125 | | 2/28/20 | |
| | | | | | | | | | |
#10.6 | | (a) | | | 8-K | | 10.1 | | 4/8/20 |
48
(a) Exhibits:
EXHIBIT INDEX
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Exhibit |
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#2.1 |
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| 2.1 |
| 4/15/19 |
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3.1 |
| (a) |
| Third Amended and Restated Certificate of Incorporation of the Registrant.
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| 3.2 |
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3.2 |
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3.3 |
| (a) |
| Fifth Amended and Restated Bylaws of the Registrant.
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| 3.1 |
| 2/1/16 |
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4 |
| (a) |
| Specimen Certificate for shares of Common Stock of the Registrant.
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| 4 |
| 8/8/03 |
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+10.1 |
| (a)
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| 2/20/19 |
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+10.2 |
| (a)
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| 8-K |
| 10.2 |
| 2/20/19 |
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10.3 |
| (b) (c) (d) |
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| 4.1 |
| 2/21/19 |
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10.4 |
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| 10.112 |
| 2/26/19 |
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10.5 |
| (b) (c) (d) |
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| 99.1 |
| 4/23/19 |
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| | | | | | Incorporated by Reference | ||||
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Exhibit | Filer | Description | Form | Exhibit | Filing | |||||
| | | | | | | | | | |
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*31.1 | | (a) | | |
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*31.2 | | (a) | | | | | | | | |
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*32.1 | | (a) | | | | | | | | |
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*32.2 | | (a) | | | | | | | | |
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* | | (a) | |
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* | | (a) | | Cover Page Interactive Data File (formatted as Inline XBRL | | | | | | |
* | Filed herewith |
+ | ||||||||||
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*Filed herewith
+Management contract, compensatory plan or arrangement
#Schedules# Pursuant to Item 601 (b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and exhibitswould likely cause competitive harm to the registrant if publicly disclosed. Schedules have been omitted pursuant to Item 601(b)(2)601(a)(5) of Regulation S-K. Alliance DataRegistrant hereby undertakes to furnish supplementally copiesan unredacted copy of the exhibit or a copy of any of the omitted schedules and exhibitsschedule upon request by the U.S. Securities and Exchange Commission.
(a) | Alliance Data Systems Corporation |
(b) | WFN Credit Company |
(c) | World Financial Network Credit Card Master Trust |
(d) | World Financial Network Credit Card Master Note Trust |
(a)Alliance Data Systems Corporation
(b)WFN Credit Company
(c)World Financial Network Credit Card Master Trust
(d)World Financial Network Credit Card Master Note Trust
5049
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| ALLIANCE DATA SYSTEMS CORPORATION | |
| | | |
| | By: | /s/ |
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Executive Vice President and Chief Financial Officer | |||
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Date: May 6, | | | |
| | By: | /s/ LAURA SANTILLAN |
| | | Laura Santillan |
| | | Senior Vice President and Chief Accounting Officer |
| | | |
Date: May 6, 2020 | | | |
5150