UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) | |
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
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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 from to |
Commission File Number: 001-15749
ALLIANCE DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
| |
Delaware | 31-1429215 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3075 Loyalty Circle
Columbus, Ohio 43219
(Address of principal executive office, including zip code)
(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 þ | 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
As of OctoberApril 22, 2020, 47,721,7842021, 49,723,638 shares of common stock were outstanding.
ALLIANCE DATA SYSTEMS CORPORATION
INDEX
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
PART I
Item 1. Financial Statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | |
| | September 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
| | (in millions, except per share amounts) | | (in millions, except per share amounts) | ||||||||
ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,078.4 | | $ | 3,874.4 | | $ | 2,858.6 | | $ | 3,081.5 |
Accounts receivable, net, less allowance for doubtful accounts ($3.9 and $3.4 at September 30, 2020 and December 31, 2019, respectively) | |
| 376.9 | |
| 451.1 | ||||||
Accounts receivable, net, less allowance for doubtful accounts ($5.3 million and $4.0 million at March 31, 2021 and December 31, 2020, respectively) | |
| 351.9 | |
| 383.8 | ||||||
Credit card and loan receivables: | | | | | | | | | | | | |
Credit card receivables – restricted for securitization investors | |
| 10,536.2 | |
| 13,504.2 | ||||||
Credit card and loan receivables – restricted for securitization investors | |
| 10,221.3 | |
| 11,208.5 | ||||||
Other credit card and loan receivables | |
| 5,062.5 | |
| 5,958.9 | |
| 5,315.3 | |
| 5,575.9 |
Total credit card and loan receivables | |
| 15,598.7 | |
| 19,463.1 | |
| 15,536.6 | |
| 16,784.4 |
Allowance for loan loss | |
| (2,080.9) | |
| (1,171.1) | |
| (1,843.3) | |
| (2,008.0) |
Credit card and loan receivables, net | |
| 13,517.8 | |
| 18,292.0 | |
| 13,693.3 | |
| 14,776.4 |
Credit card receivables held for sale | | | — | | | 408.0 | ||||||
Inventories, net | | | 202.8 | | | 218.0 | | | 146.0 | | | 164.3 |
Other current assets | |
| 843.7 | |
| 268.4 | |
| 519.9 | |
| 534.9 |
Redemption settlement assets, restricted | |
| 641.7 | |
| 600.8 | |
| 725.7 | |
| 693.5 |
Total current assets | |
| 18,661.3 | |
| 24,112.7 | |
| 18,295.4 | |
| 19,634.4 |
Property and equipment, net | |
| 251.7 | |
| 282.3 | |
| 296.4 | |
| 310.9 |
Right of use assets - operating | | | 247.2 | | | 264.3 | | | 218.1 | | | 233.2 |
Deferred tax asset, net | |
| 285.1 | |
| 45.2 | |
| 383.5 | |
| 359.2 |
Intangible assets, net | |
| 89.3 | |
| 153.3 | |
| 74.9 | |
| 81.7 |
Goodwill | |
| 969.4 | |
| 954.9 | |
| 1,351.1 | |
| 1,369.6 |
Other non-current assets | |
| 608.9 | |
| 682.1 | |
| 543.5 | |
| 558.1 |
Total assets | | $ | 21,112.9 | | $ | 26,494.8 | | $ | 21,162.9 | | $ | 22,547.1 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | |
Accounts payable | | $ | 276.7 | | $ | 300.8 | | $ | 331.9 | | $ | 328.2 |
Accrued expenses | |
| 401.2 | |
| 327.8 | |
| 447.1 | |
| 444.7 |
Current operating lease liabilities | | | 21.9 | | | 22.6 | | | 22.7 | | | 23.6 |
Current portion of deposits | |
| 6,753.5 | |
| 6,942.4 | |
| 6,787.4 | |
| 6,553.9 |
Current portion of non-recourse borrowings of consolidated securitization entities | |
| 2,120.4 | |
| 3,030.8 | |
| 1,862.6 | |
| 1,850.7 |
Current portion of long-term and other debt | |
| 76.0 | �� |
| 101.4 | |
| 101.4 | |
| 101.4 |
Other current liabilities | |
| 255.7 | |
| 338.3 | |
| 266.6 | |
| 220.9 |
Deferred revenue | |
| 835.7 | |
| 807.9 | |
| 920.4 | |
| 898.5 |
Total current liabilities | |
| 10,741.1 | |
| 11,872.0 | |
| 10,740.1 | |
| 10,421.9 |
Deferred revenue | |
| 101.4 | |
| 114.1 | |
| 102.2 | |
| 105.5 |
Deferred tax liability, net | |
| — | |
| 80.0 | ||||||
Long-term operating lease liabilities | | | 275.8 | | | 291.7 | | | 262.5 | | | 276.4 |
Deposits | |
| 3,395.0 | |
| 5,209.3 | |
| 3,169.5 | |
| 3,238.7 |
Non-recourse borrowings of consolidated securitization entities | |
| 2,223.9 | |
| 4,253.2 | |
| 1,983.2 | |
| 3,859.2 |
Long-term and other debt | |
| 2,727.2 | |
| 2,748.5 | |
| 2,681.5 | |
| 2,704.3 |
Other liabilities | |
| 325.9 | |
| 337.7 | |
| 459.6 | |
| 419.5 |
Total liabilities | |
| 19,790.3 | |
| 24,906.5 | |
| 19,398.6 | |
| 21,025.5 |
Commitments and contingencies (Note 15) | | | | | | | ||||||
Commitments and contingencies (Note 14) | | | | | | | ||||||
Stockholders’ equity: | | | | | | | | | | | | |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 115.1 and 115.0 shares at September 30, 2020 and December 31, 2019, respectively | |
| 1.2 | |
| 1.1 | ||||||
Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 117.1 million shares at each of March 31, 2021 and December 31, 2020 | |
| 1.2 | |
| 1.2 | ||||||
Additional paid-in capital | |
| 3,272.7 | |
| 3,257.7 | |
| 3,431.3 | |
| 3,427.2 |
Treasury stock, at cost, 67.4 shares at each of September 30, 2020 and December 31, 2019, respectively | |
| (6,733.9) | |
| (6,733.9) | ||||||
Treasury stock, at cost, 67.4 million shares at each of March 31, 2021 and December 31, 2020 | |
| (6,733.9) | |
| (6,733.9) | ||||||
Retained earnings | |
| 4,830.3 | |
| 5,163.3 | |
| 5,108.0 | |
| 4,832.1 |
Accumulated other comprehensive loss | |
| (47.7) | |
| (99.9) | |
| (42.3) | |
| (5.0) |
Total stockholders’ equity | |
| 1,322.6 | |
| 1,588.3 | |
| 1,764.3 | |
| 1,521.6 |
Total liabilities and stockholders’ equity | | $ | 21,112.9 | | $ | 26,494.8 | | $ | 21,162.9 | | $ | 22,547.1 |
See accompanying notes to unaudited condensed consolidated financial statements.
3
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
| | (in millions, except per share amounts) | | (in millions, except per share amounts) | ||||||||||||||
Revenues | | | | | | | | | | | | | | | | | | |
Services | | $ | 24.7 | | $ | 57.9 | | $ | 109.2 | | $ | 197.6 | | $ | 39.4 | | $ | 46.6 |
Redemption, net | |
| 113.1 | |
| 143.9 | |
| 318.6 | |
| 409.5 | |
| 104.9 | |
| 120.9 |
Finance charges, net | |
| 912.7 | |
| 1,235.8 | |
| 2,983.7 | |
| 3,513.2 | |
| 940.6 | |
| 1,214.3 |
Total revenue | |
| 1,050.5 | |
| 1,437.6 | |
| 3,411.5 | |
| 4,120.3 | |
| 1,084.9 | |
| 1,381.8 |
Operating expenses | | | | | | | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 482.7 | |
| 687.5 | |
| 1,474.7 | |
| 1,982.6 | |
| 497.5 | |
| 499.2 |
Provision for loan loss | | | 207.7 | | | 297.3 | | | 1,113.7 | | | 806.8 | | | 33.4 | | | 655.9 |
General and administrative | |
| 29.0 | |
| 31.8 | |
| 73.2 | |
| 127.4 | |
| 16.9 | |
| 23.9 |
Depreciation and other amortization | |
| 18.4 | |
| 19.9 | |
| 56.2 | |
| 59.8 | |
| 22.9 | |
| 17.4 |
Amortization of purchased intangibles | |
| 21.7 | |
| 25.0 | |
| 64.1 | |
| 73.4 | |
| 11.1 | |
| 21.4 |
Loss on extinguishment of debt | |
| — | |
| 71.9 | |
| — | |
| 71.9 | ||||||
Total operating expenses | |
| 759.5 | |
| 1,133.4 | |
| 2,781.9 | |
| 3,121.9 | |
| 581.8 | |
| 1,217.8 |
Operating income | |
| 291.0 | |
| 304.2 | |
| 629.6 | |
| 998.4 | |
| 503.1 | |
| 164.0 |
Interest expense | | | | | | | | | | | | | | | | | | |
Securitization funding costs | |
| 37.5 | |
| 51.4 | |
| 130.1 | |
| 160.3 | |
| 33.6 | |
| 49.9 |
Interest expense on deposits | |
| 52.9 | |
| 62.5 | |
| 172.1 | |
| 164.4 | |
| 45.5 | |
| 60.3 |
Interest expense on long-term and other debt, net | |
| 24.7 | |
| 26.1 | |
| 79.1 | |
| 102.7 | |
| 29.6 | |
| 28.4 |
Total interest expense, net | |
| 115.1 | |
| 140.0 | |
| 381.3 | |
| 427.4 | |
| 108.7 | |
| 138.6 |
Income from continuing operations before income taxes | | | 175.9 | | | 164.2 | | | 248.3 | | | 571.0 | ||||||
Provision for income taxes | |
| 42.6 | |
| 42.6 | |
| 46.6 | |
| 128.8 | ||||||
Income from continuing operations | | $ | 133.3 | | $ | 121.6 | | $ | 201.7 | | $ | 442.2 | ||||||
Loss from discontinued operations, net of taxes | |
| — | |
| (229.2) | |
| — | |
| (261.7) | ||||||
Net income (loss) | | $ | 133.3 | | $ | (107.6) | | $ | 201.7 | | $ | 180.5 | ||||||
Income before income taxes | | | 394.4 | | | 25.4 | ||||||||||||
Provision (benefit) for income taxes | |
| 108.2 | |
| (4.6) | ||||||||||||
Net income | | $ | 286.2 | | $ | 30.0 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Basic income (loss) per share (Note 3): | | | | | | | | | | | | | ||||||
Income from continuing operations | | $ | 2.79 | | $ | 2.47 | | $ | 4.23 | | $ | 8.49 | ||||||
Loss from discontinued operations | | $ | — | | $ | (4.69) | | $ | — | | $ | (5.12) | ||||||
Net income (loss) per share | | $ | 2.79 | | $ | (2.22) | | $ | 4.23 | | $ | 3.37 | ||||||
| | | | | | | | | | | | | ||||||
Diluted income (loss) per share (Note 3): | | | | | | | | | | | | | ||||||
Income from continuing operations | | $ | 2.79 | | $ | 2.41 | | $ | 4.23 | | $ | 8.50 | ||||||
Loss from discontinued operations | | $ | — | | $ | (4.54) | | $ | — | | $ | (5.03) | ||||||
Net income (loss) per share | | $ | 2.79 | | $ | (2.13) | | $ | 4.23 | | $ | 3.47 | ||||||
Net income per share (Note 3): | | | | | | | ||||||||||||
Basic | | $ | 5.76 | | $ | 0.63 | ||||||||||||
Diluted | | $ | 5.74 | | $ | 0.63 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Weighted average shares (Note 3): | | | | | | | | | | | | | | | | | | |
Basic | |
| 47.7 | |
| 48.8 | |
| 47.7 | |
| 51.1 | |
| 49.7 | |
| 47.6 |
Diluted | |
| 47.8 | |
| 50.4 | |
| 47.7 | |
| 52.1 | |
| 49.8 | |
| 47.7 |
See accompanying notes to unaudited condensed consolidated financial statements.
4
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
| | (in millions) | | (in millions) | ||||||||||||||
Net income (loss) | | $ | 133.3 | | $ | (107.6) | | $ | 201.7 | | $ | 180.5 | ||||||
Net income | | $ | 286.2 | | $ | 30.0 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | ||||||
Unrealized gain on securities available-for-sale | | | 3.9 | | | 0.3 | | | 20.1 | | | 16.5 | ||||||
Other comprehensive loss: | | | | | | | ||||||||||||
Unrealized (loss) gain on securities available-for-sale | | | (9.0) | | | 2.7 | ||||||||||||
Tax benefit (expense) | | | 0.1 | | | (0.5) | | | (1.1) | | | (2.3) | | | 0.7 | | | (1.1) |
Unrealized gain (loss) on securities available-for-sale, net of tax | |
| 4.0 | |
| (0.2) | |
| 19.0 | |
| 14.2 | ||||||
Unrealized (loss) gain on securities available-for-sale, net of tax | |
| (8.3) | |
| 1.6 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Unrealized gain on cash flow hedges | | | 0.7 | | | 0.9 | | | — | | | 0.7 | | | 1.1 | | | 0.4 |
Tax expense | | | (0.2) | | | (0.2) | | | — | | | (0.2) | | | (0.2) | | | (0.1) |
Unrealized gain on cash flow hedges, net of tax | | | 0.5 | | | 0.7 | | | — | | | 0.5 | | | 0.9 | | | 0.3 |
| | | | | | | | | | | | | | | | | | |
Unrealized gain on net investment hedge | | | — | | | — | | | — | | | 6.5 | ||||||
Tax expense | | | — | | | — | | | — | | | (1.6) | ||||||
Unrealized gain on net investment hedge, net of tax | | | — | | | — | | | — | | | 4.9 | ||||||
Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million for the three months ended March 31, 2020 related to the sale of a business) | |
| (29.9) | |
| (20.1) | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments (inclusive of deconsolidation of $26.8 million for the three and nine months ended September 30, 2019 and $3.8 million for the nine months ended September 30, 2020 related to sale of a business) | |
| 35.3 | |
| (0.8) | |
| 33.2 | |
| (3.5) | ||||||
Other comprehensive loss, net of tax | |
| (37.3) | |
| (18.2) | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | |
| 39.8 | |
| (0.3) | |
| 52.2 | |
| 16.1 | ||||||
| | | | | | | | | | | | | ||||||
Total comprehensive income (loss), net of tax | | $ | 173.1 | | $ | (107.9) | | $ | 253.9 | | $ | 196.6 | ||||||
Total comprehensive income, net of tax | | $ | 248.9 | | $ | 11.8 |
See accompanying notes to unaudited condensed consolidated financial statements.
5
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | Accumulated | | | ||||||||||
| | | | | | | | | | | | Additional | | | | | | Other | | Total | | | | | | | Additional | | | | | | Other | | Total | ||||||||||
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | | Common Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | |||||||||||||||||||
Three Months Ended September 30, 2020 |
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||||||||||||||||||||||
Three Months Ended March 31, 2021 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||||||||||||||||||||||||||
| | (in millions) | | (in millions) | |||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2020 |
| 115.1 | | $ | 1.2 | | — | | $ | — | | $ | 3,267.7 | | $ | (6,733.9) | | $ | 4,707.1 | | $ | (87.5) | | $ | 1,154.6 | ||||||||||||||||||||
Balance at December 31, 2020 |
| 117.1 | | $ | 1.2 | | $ | 3,427.2 | | $ | (6,733.9) | | $ | 4,832.1 | | $ | (5.0) | | $ | 1,521.6 | |||||||||||||||||||||||||
Net income |
| — | | | — | | — | | | — | | | — | | | — | | | 133.3 | | | — | |
| 133.3 |
| — | | | — | | | — | | | — | | | 286.2 | | | — | |
| 286.2 |
Other comprehensive income |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | 39.8 | | | 39.8 | ||||||||||||||||||||
Other comprehensive loss |
| — | | | — | | | — | | | — | | | — | | | (37.3) | | | (37.3) | |||||||||||||||||||||||||
Stock-based compensation |
| — | | | — | | — | | | — | | | 5.3 | | | — | | | — | | | — | | | 5.3 |
| — | | | — | | | 6.8 | | | — | | | — | | | — | | | 6.8 |
Dividends and dividend equivalent rights declared ($0.21 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (10.1) | | | — | | | (10.1) | | — | | | — | | | — | | | — | | | (10.3) | | | — | | | (10.3) |
Other |
| — | | | — | | — | | | — | | | (0.3) | | | — | | | — | | | — | | | (0.3) |
| — | | | — | | | (2.7) | | | — | | | — | | | — | | | (2.7) |
Balance at September 30, 2020 |
| 115.1 | | $ | 1.2 | | — | | $ | — | | $ | 3,272.7 | | $ | (6,733.9) | | $ | 4,830.3 | | $ | (47.7) | | $ | 1,322.6 | ||||||||||||||||||||
Balance at March 31, 2021 |
| 117.1 | | $ | 1.2 | | $ | 3,431.3 | | $ | (6,733.9) | | $ | 5,108.0 | | $ | (42.3) | | $ | 1,764.3 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | Accumulated | | | ||||||||||
| | | | | | | | | | | | Additional | | | | | | Other | | Total | | | | | | | Additional | | | | | | Other | | Total | ||||||||||
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | | Common Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | |||||||||||||||||||
Three Months Ended September 30, 2019 |
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||||||||||||||||||||||
Three Months Ended March 31, 2020 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||||||||||||||||||||||||||
| | (in millions) | | (in millions) | |||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2019 |
| 113.3 | | $ | 1.1 | | 0.2 | | $ | — | | $ | 3,259.6 | | $ | (5,980.6) | | $ | 5,233.3 | | $ | (121.7) | | $ | 2,391.7 | ||||||||||||||||||||
Net loss |
| — | |
| — | | — | |
| — | |
| — | |
| — | |
| (107.6) | |
| — | |
| (107.6) | ||||||||||||||||||||
Recognition of foreign currency translation adjustments upon sale of business | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 26.8 | | | 26.8 | ||||||||||||||||||||
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 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (27.1) | | | (27.1) | | — | | | — | | | — | | | — | | | — | | | (18.2) | | | (18.2) |
Stock-based compensation | | — | | | — | | — | | | — | | | 2.7 | | | — | | | — | | | — | | | 2.7 | | — | | | — | | | 4.7 | | | — | | | — | | | — | | | 4.7 |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (753.1) | | | — | | | — | | | (753.1) | ||||||||||||||||||||
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (29.8) | | | — | | | (29.8) | | — | | | — | | | — | | | — | | | (29.5) | | | — | | | (29.5) |
Other | | 0.2 | | | — | | — | | | — | | | (6.7) | | | — | | | — | | | — | | | (6.7) | | — | | | 0.1 | | | (2.7) | | | — | | | — | | | — | | | (2.6) |
Balance at September 30, 2019 | | 113.5 | | $ | 1.1 | | 0.2 | | $ | — | | $ | 3,255.6 | | $ | (6,733.7) | | $ | 5,095.9 | | $ | (122.0) | | $ | 1,496.9 | ||||||||||||||||||||
Balance at March 31, 2020 | | 115.0 | | $ | 1.2 | | $ | 3,259.7 | | $ | (6,733.9) | | $ | 4,678.8 | | $ | (118.1) | | $ | 1,087.7 |
See accompanying notes to unaudited condensed consolidated financial statements.
6
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | |||||
| | | | | | | | | | | | Additional | | | | | | Other | | Total | |||||
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | |||||||||||
Nine Months Ended September 30, 2020 |
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Stock |
| Earnings | �� | Loss |
| Equity | |||||||
| | (in millions) | |||||||||||||||||||||||
Balance at January 1, 2020 |
| 115.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,257.7 | | $ | (6,733.9) | | $ | 5,163.3 | | $ | (99.9) | | $ | 1,588.3 |
Net income |
| — | | | — | | — | | | — | | | — | | | — | | | 201.7 | | | — | |
| 201.7 |
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13 |
| — | | | — | | — | | | — | | | — | | | — | | | (485.0) | | | — | | | (485.0) |
Recognition of foreign currency translation adjustments upon sale of business | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 3.8 | | | 3.8 |
Other comprehensive income |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | 48.4 | | | 48.4 |
Stock-based compensation |
| — | | | — | | — | | | — | | | 16.2 | | | — | | | — | | | — | | | 16.2 |
Dividends and dividend equivalent rights declared ($0.63 per common share for the three months ended March 31, 2020 and $0.21 per common share for both the three months ended June 30, 2020 and September 30, 2020) | | — | | | — | | — | | | — | | | — | | | — | | | (49.7) | | | — | | | (49.7) |
Other |
| 0.1 | | | 0.1 | | — | | | — | | | (1.2) | | | — | | | — | | | — | | | (1.1) |
Balance at September 30, 2020 |
| 115.1 | | $ | 1.2 | | — | | $ | — | | $ | 3,272.7 | | $ | (6,733.9) | | $ | 4,830.3 | | $ | (47.7) | | $ | 1,322.6 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | |||||
| | | | | | | | | | | | Additional | | | | | | Other | | Total | |||||
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | |||||||||||
Nine Months Ended September 30, 2019 |
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||
| | (in millions) | |||||||||||||||||||||||
Balance at January 1, 2019 |
| 113.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,172.4 | | $ | (5,715.7) | | $ | 5,012.4 | | $ | (138.1) | | $ | 2,332.1 |
Net income |
| — | |
| — | | — | |
| — | |
| — | |
| — | |
| 180.5 | |
| — | |
| 180.5 |
Recognition of foreign currency translation adjustments upon sale of business | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 26.8 | | | 26.8 |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (10.7) | | | (10.7) |
Stock-based compensation | | — | | | — | | — | | | — | | | 54.0 | | | — | | | — | | | — | | | 54.0 |
Issuance of preferred stock | | — | | | — | | 0.2 | | | — | | | 42.1 | | | (42.1) | | | — | | | — | | | — |
Repurchases of common stock |
| — | | | — | | — | | | — | | | — | | | (975.9) | | | — | | | — | | | (975.9) |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (97.0) | | | — | | | (97.0) |
Other | | 0.5 | | | — | | — | | | — | | | (12.9) | | | — | | | — | | | — | | | (12.9) |
Balance at September 30, 2019 | | 113.5 | | $ | 1.1 | | 0.2 | | $ | — | | $ | 3,255.6 | | $ | (6,733.7) | | $ | 5,095.9 | | $ | (122.0) | | $ | 1,496.9 |
See accompanying notes to unaudited condensed consolidated financial statements.
76
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | Nine Months Ended | | Three Months Ended | ||||||||
| | September 30, | | March 31, | ||||||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
| | (in millions) | | (in millions) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income | | $ | 201.7 | | $ | 180.5 | | $ | 286.2 | | $ | 30.0 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | |
| 120.3 | |
| 206.4 | |
| 34.0 | |
| 38.8 |
Deferred income taxes | |
| (157.7) | |
| (187.0) | |
| (25.8) | |
| (158.7) |
Provision for loan loss | |
| 1,113.7 | |
| 806.8 | |
| 33.4 | |
| 655.9 |
Non-cash stock compensation | |
| 16.2 | |
| 54.3 | |
| 6.8 | |
| 4.7 |
Amortization of deferred financing costs | |
| 26.6 | |
| 32.6 | |
| 8.5 | |
| 9.5 |
Gain on sale of business | |
| (13.7) | |
| (512.2) | ||||||
Loss on extinguishment of debt | |
| — | |
| 71.9 | ||||||
Asset impairment charges | |
| 34.2 | |
| 49.3 | ||||||
Change in operating assets and liabilities, net of sale of business | | | 121.6 | | | 611.8 | ||||||
Change in other operating assets and liabilities, net of sale of business | | | 154.9 | | | 8.6 | ||||||
Other | |
| 25.7 | |
| 215.8 | |
| 19.2 | |
| (16.3) |
Net cash provided by operating activities | |
| 1,488.6 | |
| 1,530.2 | |
| 517.2 | |
| 572.5 |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Change in redemption settlement assets | |
| (31.3) | |
| (7.0) | |
| (13.1) | |
| 1.0 |
Change in credit card and loan receivables | |
| 3,107.8 | |
| (678.2) | |
| 1,034.6 | |
| 1,446.7 |
Proceeds from sale of business | |
| 26.7 | |
| 4,369.6 | |
| — | |
| 25.4 |
Proceeds from sale of credit card portfolios | |
| 289.5 | | | 980.0 | ||||||
Purchase of credit card portfolios | |
| — | |
| (924.8) | ||||||
Payments for acquired businesses, net of cash | | | — | | | (6.7) | ||||||
Proceeds from sale of credit card portfolio | |
| — | | | 289.5 | ||||||
Capital expenditures | |
| (37.9) | |
| (119.2) | |
| (12.2) | |
| (15.7) |
Purchases of other investments | |
| (22.5) | |
| (13.8) | |
| (22.3) | |
| (14.0) |
Maturities/sales of other investments | |
| 57.5 | |
| 46.7 | |
| 22.1 | |
| 13.2 |
Other | |
| (25.0) | |
| 3.9 | |
| (0.1) | |
| 0.2 |
Net cash provided by investing activities | |
| 3,364.8 | |
| 3,650.5 | |
| 1,009.0 | |
| 1,746.3 |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Borrowings under debt agreements | |
| 1,150.0 | |
| 2,092.3 | |
| — | |
| 500.0 |
Repayments of borrowings | |
| (1,194.5) | |
| (4,979.8) | |
| (25.4) | |
| (275.4) |
Non-recourse borrowings of consolidated securitization entities | |
| 435.0 | |
| 3,576.8 | |
| 175.0 | |
| 350.0 |
Repayments/maturities of non-recourse borrowings of consolidated securitization entities | |
| (3,380.0) | |
| (4,332.2) | |
| (2,039.1) | |
| (1,275.0) |
Net (decrease) increase in deposits | | | (2,012.0) | | | 709.4 | ||||||
Payment of debt extinguishment costs | |
| — | |
| (46.1) | ||||||
Net increase (decrease) in deposits | | | 162.2 | | | (769.4) | ||||||
Payment of deferred financing costs | |
| (16.2) | |
| (27.1) | |
| (0.2) | |
| (0.6) |
Dividends paid | |
| (50.5) | |
| (97.4) | |
| (10.7) | |
| (30.3) |
Purchase of treasury shares | |
| — | |
| (975.9) | ||||||
Other | |
| 3.9 | |
| (16.1) | |
| (2.6) | |
| (2.7) |
Net cash used in financing activities | |
| (5,064.3) | |
| (4,096.1) | |
| (1,740.8) | |
| (1,503.4) |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| 3.7 | |
| (0.6) | |
| (1.7) | |
| (7.6) |
| | | | | | | | | | | | |
Change in cash, cash equivalents and restricted cash | |
| (207.2) | |
| 1,084.0 | |
| (216.3) | |
| 807.8 |
Cash, cash equivalents and restricted cash at beginning of period | |
| 3,958.1 | |
| 3,967.7 | |
| 3,463.2 | |
| 3,958.1 |
Cash, cash equivalents and restricted cash at end of period | | $ | 3,750.9 | | $ | 5,051.7 | | $ | 3,246.9 | | $ | 4,765.9 |
| | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | |
Interest paid | | $ | 379.5 | | $ | 519.1 | | $ | 103.4 | | $ | 138.3 |
Income taxes paid, net | | $ | 108.4 | | $ | 224.0 | | $ | 20.5 | | $ | 44.6 |
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.statements.
87
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, 2019,2020, filed with the SEC on February 28, 2020.26, 2021.
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. 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 products and services are reported under 2 segments—LoyaltyOne® and Card Services.
Recently Issued Accounting Standards
In December 2019,March 2020, 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.
9
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Recently Adopted Accounting Standards
In June 2016,December 2019, the FASB issued ASU 2016-13, “Measurement2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminated certain exceptions within Accounting Standards Codification (“ASC”) 740, “Income Taxes,” and clarified certain aspects of Credit LossesASC 740 to promote consistency among reporting entities. Most amendments within the standard were required to be applied on Financial Instruments,”a prospective basis, while certain amendments must be applied on a retrospective or ASC 326. Thismodified retrospective basis. The Company’s adoption of 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. Estimates 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 expanded 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 Company’s CECL disclosures.
In addition, CECL modified the impairment model for available-for-sale debt securities and provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. CECL impacts the Company’s valuation of its accounts receivable and available-for-sale debt securities, with respect to which the Company’s adoption2021 did not have a material impact on its consolidated financial statements.
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.” The Company’s adoption of this 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—Goodwill and Other—Internal-Use Software,” to determine which implementation costs may be capitalized. 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 adopted ASU 2018-15 on January 1, 2020 on a prospective basis and the adoption did not have a material impact on its consolidated financial statements.
2. REVENUE
The Company’s products and services are reported under 2 segments—LoyaltyOne and Card Services, as shown below. The following tables present revenue disaggregated by major source:
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Three Months Ended September 30, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 63.0 | | $ | — | | $ | — | | $ | 63.0 |
Short-term loyalty programs | |
| 117.4 | |
| — | |
| — | |
| 117.4 |
Servicing fees, net | |
| — | |
| (47.0) | |
| — | |
| (47.0) |
Other | |
| 1.1 | |
| — | |
| — | |
| 1.1 |
Revenue from contracts with customers | | $ | 181.5 | | $ | (47.0) | | $ | — | | $ | 134.5 |
| | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 912.7 | |
| — | |
| 912.7 |
Investment income | |
| 3.3 | |
| — | |
| — | |
| 3.3 |
Total | | $ | 184.8 | | $ | 865.7 | | $ | — | | $ | 1,050.5 |
108
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Three Months Ended September 30, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 72.0 | | $ | — | | $ | — | | $ | 72.0 |
Short-term loyalty programs | |
| 144.2 | |
| — | |
| — | |
| 144.2 |
Servicing fees, net | |
| — | |
| (43.8) | |
| — | |
| (43.8) |
Other | |
| 26.1 | |
| — | |
| 0.1 | |
| 26.2 |
Revenue from contracts with customers | | $ | 242.3 | | $ | (43.8) | | $ | 0.1 | | $ | 198.6 |
| | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 1,235.8 | |
| — | |
| 1,235.8 |
Investment income | |
| 3.2 | |
| — | |
| — | |
| 3.2 |
Total | | $ | 245.5 | | $ | 1,192.0 | | $ | 0.1 | | $ | 1,437.6 |
2. REVENUE
The Company’s products and services are reported under 2 segments—LoyaltyOne and Card Services, as shown below. The following tables present revenue disaggregated by major source:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | | | | | | | | Corporate/ | | | | ||
Nine Months Ended September 30, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||||||||||||||
Three Months Ended March 31, 2021 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Coalition loyalty program | | $ | 195.9 | | $ | — | | $ | — | | $ | 195.9 | | $ | 66.8 | | $ | — | | $ | — | | $ | 66.8 |
Short-term loyalty programs | |
| 322.5 | |
| — | |
| — | |
| 322.5 | |
| 106.3 | |
| — | |
| — | |
| 106.3 |
Servicing fees, net | |
| — | |
| (106.2) | |
| — | |
| (106.2) | |
| — | |
| (32.3) | |
| — | |
| (32.3) |
Other | |
| 5.9 | |
| — | |
| 0.1 | |
| 6.0 | ||||||||||||
Revenue from contracts with customers | | $ | 524.3 | | $ | (106.2) | | $ | 0.1 | | $ | 418.2 | | $ | 173.1 | | $ | (32.3) | | $ | — | | $ | 140.8 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 2,983.7 | |
| — | |
| 2,983.7 | |
| — | |
| 940.6 | |
| — | |
| 940.6 |
Investment income | |
| 9.6 | |
| — | |
| — | |
| 9.6 | |
| 3.5 | |
| — | |
| — | |
| 3.5 |
Total | | $ | 533.9 | | $ | 2,877.5 | | $ | 0.1 | | $ | 3,411.5 | | $ | 176.6 | | $ | 908.3 | | $ | — | | $ | 1,084.9 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | | | | | | | | Corporate/ | | | | ||
Nine Months Ended September 30, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||||||||||||||
Three Months Ended March 31, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Coalition loyalty program | | $ | 214.8 | | $ | — | | $ | — | | $ | 214.8 | | $ | 71.3 | | $ | — | | $ | — | | $ | 71.3 |
Short-term loyalty programs | |
| 406.9 | |
| — | |
| — | |
| 406.9 | |
| 120.3 | |
| — | |
| — | |
| 120.3 |
Servicing fees, net | |
| — | |
| (93.9) | |
| — | |
| (93.9) | |
| — | |
| (30.7) | |
| — | |
| (30.7) |
Other | |
| 69.7 | |
| — | |
| 0.3 | |
| 70.0 | |
| 3.3 | |
| — | |
| 0.1 | |
| 3.4 |
Revenue from contracts with customers | | $ | 691.4 | | $ | (93.9) | | $ | 0.3 | | $ | 597.8 | | $ | 194.9 | | $ | (30.7) | | $ | 0.1 | | $ | 164.3 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 3,513.2 | |
| — | |
| 3,513.2 | |
| — | |
| 1,214.3 | |
| — | |
| 1,214.3 |
Investment income | |
| 9.3 | |
| — | |
| — | |
| 9.3 | |
| 3.2 | |
| — | |
| — | |
| 3.2 |
Total | | $ | 700.7 | | $ | 3,419.3 | | $ | 0.3 | | $ | 4,120.3 | | $ | 198.1 | | $ | 1,183.6 | | $ | 0.1 | | $ | 1,381.8 |
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, 2021 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 1.0 | | $ | 908.2 | | $ | — | | $ | 909.2 |
Canada | |
| 79.9 | |
| 0.1 | |
| — | |
| 80.0 |
Europe, Middle East and Africa | |
| 79.4 | |
| — | |
| — | |
| 79.4 |
Asia Pacific | |
| 14.9 | |
| — | |
| — | |
| 14.9 |
Other | |
| 1.4 | |
| — | |
| — | |
| 1.4 |
Total | | $ | 176.6 | | $ | 908.3 | | $ | — | | $ | 1,084.9 |
| | | | | | | | | | | | |
119
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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, 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 September 30, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 3.3 | | $ | 865.7 | | $ | — | | $ | 869.0 |
Canada | |
| 70.3 | |
| — | |
| — | |
| 70.3 |
Europe, Middle East and Africa | |
| 76.9 | |
| — | |
| — | |
| 76.9 |
Asia Pacific | |
| 12.6 | |
| — | |
| — | |
| 12.6 |
Other | |
| 21.7 | |
| — | |
| — | |
| 21.7 |
Total | | $ | 184.8 | | $ | 865.7 | | $ | — | | $ | 1,050.5 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Three Months Ended September 30, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 12.3 | | $ | 1,192.0 | | $ | 0.1 | | $ | 1,204.4 |
Canada | |
| 88.9 | |
| — | |
| — | |
| 88.9 |
Europe, Middle East and Africa | |
| 77.0 | |
| — | |
| — | |
| 77.0 |
Asia Pacific | |
| 40.0 | |
| — | |
| — | |
| 40.0 |
Other | |
| 27.3 | |
| — | |
| — | |
| 27.3 |
Total | | $ | 245.5 | | $ | 1,192.0 | | $ | 0.1 | | $ | 1,437.6 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Nine Months Ended September 30, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 9.6 | | $ | 2,877.5 | | $ | 0.1 | | $ | 2,887.2 |
Canada | |
| 214.1 | |
| — | |
| — | |
| 214.1 |
Europe, Middle East and Africa | |
| 196.2 | |
| — | |
| — | |
| 196.2 |
Asia Pacific | |
| 63.0 | |
| — | |
| — | |
| 63.0 |
Other | |
| 51.0 | |
| — | |
| — | |
| 51.0 |
Total | | $ | 533.9 | | $ | 2,877.5 | | $ | 0.1 | | $ | 3,411.5 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Nine Months Ended September 30, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 28.2 | | $ | 3,419.3 | | $ | 0.3 | | $ | 3,447.8 |
Canada | |
| 263.3 | |
| — | |
| — | |
| 263.3 |
Europe, Middle East and Africa | |
| 276.0 | |
| — | |
| — | |
| 276.0 |
Asia Pacific | |
| 81.6 | |
| — | |
| — | |
| 81.6 |
Other | |
| 51.6 | |
| — | |
| — | |
| 51.6 |
Total | | $ | 700.7 | | $ | 3,419.3 | | $ | 0.3 | | $ | 4,120.3 |
12
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:
| | | | | | | | | | | | | | | | | | |
| | Deferred Revenue | | Deferred Revenue | ||||||||||||||
|
| Service |
| Redemption |
| Total |
| Service |
| Redemption |
| Total | ||||||
| | (in millions) | | (in millions) | ||||||||||||||
Balance at January 1, 2020 | | $ | 258.6 | | $ | 663.4 | | $ | 922.0 | |||||||||
Balance at January 1, 2021 | | $ | 247.2 | | $ | 756.8 | | $ | 1,004.0 | |||||||||
Cash proceeds | |
| 124.7 | |
| 206.7 | |
| 331.4 | |
| 40.6 | |
| 65.9 | |
| 106.5 |
Revenue recognized (1) | |
| (140.8) | |
| (153.6) | |
| (294.4) | |
| (49.9) | |
| (52.2) | |
| (102.1) |
Other | |
| — | |
| 0.5 | |
| 0.5 | |
| — | |
| 0.3 | |
| 0.3 |
Effects of foreign currency translation | |
| (6.8) | |
| (15.6) | |
| (22.4) | |
| 3.3 | |
| 10.6 | |
| 13.9 |
Balance at September 30, 2020 | | $ | 235.7 | | $ | 701.4 | | $ | 937.1 | |||||||||
Balance at March 31, 2021 | | $ | 241.2 | | $ | 781.4 | | $ | 1,022.6 | |||||||||
Amounts recognized in the consolidated balance sheets: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Deferred revenue (current) | | $ | 134.3 | | $ | 701.4 | | $ | 835.7 | | $ | 139.0 | | $ | 781.4 | | $ | 920.4 |
Deferred revenue (non-current) | | $ | 101.4 | | $ | — | | $ | 101.4 | | $ | 102.2 | | $ | — | | $ | 102.2 |
(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 $44.2 million in 2020, $112.4$113.4 million in 2021, $61.3$85.1 million in 2022, and $17.8$38.8 million in 2023, and $3.9 million in 2024.
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, 20202021 was $122.8$66.9 million and the closing balance as of September 30, 2020March 31, 2021 was $95.6$71.1 million, with the change due to revenue recognized of approximately $234.9 million during the nine months ended September 30, 2020, offset in part by cash payments received in advance of program performance.performance, offset in part by revenue recognized of approximately $83.2 million during the three months ended March 31, 2021.
Contract Costs
The Company recognizes an asset for the incremental costs of obtaining or fulfilling a contract with the retailer for a credit card program agreement to the extent it expects to recover those costs, in accordance with ASC 340-40, “Other Assets and Deferred Costs.” Contract costs are deferred and amortized on a straight-line basis overthat is consistent with the respectivetransfer of services, which is generally the term of the agreement, which represents the period of service.contract. Depending on the nature of the contract costs, the amortization is recorded as a reduction to revenue, or costs of operations, in the Company’s unaudited condensed consolidated statements of income. As of March 31, 2021 and December 31, 2019, the remaining unamortized contract costs were $406.8 million and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets.
The Company performs an impairment assessment when events or changes in circumstances indicate that the carrying amount of contract costs may not be recoverable. Due to deteriorated economic conditions from COVID-19 resulting in retail store closures and a significant decline in credit sales, the Company’s impairment assessment for certain of its deferred contract costs resulted in an asset impairment charge within its Card Services segment of $31.1 million in the second quarter of 2020 that is included in cost of operations in its unaudited condensed consolidated statements of income for the nine months ended September 30, 2020. As of September 30, 2020, the remaining unamortized contract costs were $332.3 million and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets.
1310
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
costs were $296.9 million and $311.1 million, respectively, and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share of common stock:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in millions, except per share amounts) | ||||||||||
Basic income per share: | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Income from continuing operations | | $ | 133.3 | | $ | 121.6 | | $ | 201.7 | | $ | 442.2 |
Less: Dividends declared on preferred stock | | | — | | | 0.9 | | | — | | | 2.8 |
Less: Allocation of undistributed earnings (1) | | | — | | | — | | | — | | | 5.8 |
Income from continuing operations - basic | | | 133.3 | | | 120.7 | | | 201.7 | | | 433.6 |
Loss from discontinued operations, net of tax | | | — | | | (229.2) | | | — | | | (261.7) |
Net income (loss) - basic | | $ | 133.3 | | $ | (108.5) | | $ | 201.7 | | $ | 171.9 |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average shares, basic | |
| 47.7 | |
| 48.8 | |
| 47.7 | |
| 51.1 |
| | | | | | | | | | | | |
Basic income (loss) attributable to common stockholders per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 2.79 | | $ | 2.47 | | $ | 4.23 | | $ | 8.49 |
Loss from discontinued operations | | $ | — | | $ | (4.69) | | $ | — | | $ | (5.12) |
Net income (loss) per share | | $ | 2.79 | | $ | (2.22) | | $ | 4.23 | | $ | 3.37 |
| | | | | | | | | | | | |
Diluted income per share (2): | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Income from continuing operations | | $ | 133.3 | | $ | 121.6 | | $ | 201.7 | | $ | 442.2 |
Loss from discontinued operations, net of tax | | | — | | | (229.2) | | | — | | | (261.7) |
Net income (loss) | | $ | 133.3 | | $ | (107.6) | | $ | 201.7 | | $ | 180.5 |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average shares, basic | |
| 47.7 | |
| 48.8 | |
| 47.7 | |
| 51.1 |
Weighted average effect of dilutive securities: | | | | | | | | | | | | |
Shares from assumed conversion of preferred stock | |
| — | |
| 1.5 | |
| — | |
| 0.9 |
Net effect of dilutive stock options and unvested restricted stock (3) | |
| 0.1 | |
| 0.1 | |
| — | |
| 0.1 |
Denominator for diluted calculation | |
| 47.8 | |
| 50.4 | |
| 47.7 | |
| 52.1 |
| | | | | | | | | | | | |
Diluted income (loss) attributable to common stockholders per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 2.79 | | $ | 2.41 | | $ | 4.23 | | $ | 8.50 |
Loss from discontinued operations | | $ | — | | $ | (4.54) | | $ | — | | $ | (5.03) |
Net income (loss) per share | | $ | 2.79 | | $ | (2.13) | | $ | 4.23 | | $ | 3.47 |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in millions, except per share amounts) | ||||
Numerator: | | | | | | |
Net income | | $ | 286.2 | | $ | 30.0 |
| | | | | | |
Denominator: | | | | | | |
Weighted average shares, basic | |
| 49.7 | |
| 47.6 |
Weighted average effect of dilutive securities: | | | | | | |
Net effect of dilutive unvested restricted stock (1) | |
| 0.1 | |
| 0.1 |
Denominator for diluted calculation | |
| 49.8 | |
| 47.7 |
| | | | | | |
Basic net income per share: | | $ | 5.76 | | $ | 0.63 |
Diluted net income per share: | | $ | 5.74 | | $ | 0.63 |
(1) |
For |
4. ACQUISITION
On April 25, 2019,September 28, 2020, the Company entered intoacquired 3.5 million preferred Series D Shares of Lon Inc., a Delaware corporation (“Bread”), for approximately $25.0 million, which represented an exchange agreementapproximate 6% ownership interest in Bread. Bread is a technology-driven digital payments company, offering an omnichannel solution for retailers and platform capabilities to bank partners. On December 3, 2020, the Company acquired the remaining interest in Bread. In accordance with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregateASC 805, the Company’s approximate 6% interest was remeasured at fair value when control of 1,500,000Bread was obtained on December 3, 2020; 0 gain or loss was recognized on the remeasurement.
Consideration for the 100% ownership of Bread consisted of cash of $275.0 million, equity of $149.2 million with the issuance of 1.9 million shares of the Company’s common stock, for an aggregateand deferred cash consideration of $75.0 million due December 2021, subject to customary closing purchase price adjustments. Consideration, net of cash and restricted cash acquired, was $491.0 million.
1411
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
150,000 sharesThe following table summarizes the allocation of Series A Non-Voting Convertible Preferred Stock (“preferred stock”). In October 2019, ValueAct exchanged all 150,000 sharesthe consideration and the respective fair values of preferred stock back to common stock.the assets acquired and liabilities assumed in the Bread transaction as of the acquisition date, net of cash acquired:
For the three and nine months ended September 30, 2019, the Company’s calculation of basic and diluted EPS was computed using the two-class method for those periods in which participating securities were outstanding. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
| | | |
|
| As of | |
| | (in millions) | |
Installment loan receivables | | $ | 111.7 |
Accounts receivable | | | 0.2 |
Other current assets | | | 0.6 |
Property and equipment | | | 0.3 |
Developed technology | | | 90.7 |
Right of use assets - operating | | | 3.6 |
Deferred tax asset, net | | | 7.0 |
Intangible assets | | | 11.3 |
Goodwill | | | 369.6 |
Total assets acquired | |
| 595.0 |
| | | |
Accounts payable | |
| 2.0 |
Accrued expenses | |
| 2.9 |
Operating lease liabilities | |
| 3.5 |
Non-recourse borrowings of consolidated securitization entities | |
| 95.6 |
Total liabilities assumed | |
| 104.0 |
| | | |
Net assets acquired, net of cash and restricted cash | | $ | 491.0 |
4.5. DISPOSITION
On January 10, 2020, the Company sold Precima®, a provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for total consideration of $43.8 million. The purchase and sale agreement provided for $10.0 million in contingent consideration based upon the occurrence of specified events and performance of the business, with 2 earnout determination datesdeterminations in September 2020 and September 2021, respectively. In September 2020, the Company received cash of $5.0 million upon the earnout determination date. At September 30, 2020,March 31, 2021, the Company estimated the fair value of the remaining contingent purchase price at approximately $1.5 million, which is included in the 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.income for the three months ended March 31, 2020.
| | | |
|
| 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 |
5. DISCONTINUED OPERATIONS
Effective March 31, 2019, the Company’s divested Epsilon segment met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations,” and was subsequently sold on July 1, 2019.
The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2019:
| | | | | | |
| | Three Months Ended | | Nine Months Ended | ||
| | September 30, 2019 | | September 30, 2019 | ||
| | (in millions) | | | (in millions) | |
Revenue | | $ | — | | $ | 999.6 |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 45.1 | | | 953.9 |
Depreciation and other amortization | | | — | | | 29.7 |
Amortization of purchased intangibles | | | — | | | 43.5 |
Interest expense (1) | | | — | | | 64.1 |
Gain on sale of Epsilon | | | (512.2) | | | (512.2) |
Income before provision for income taxes | | | 467.1 | | | 420.6 |
Provision for income taxes | | | 696.3 | | | 682.3 |
Loss from discontinued operations, net of taxes | | $ | (229.2) | | $ | (261.7) |
1512
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Depreciation and amortization and capital expenditures from discontinued operations for the three and nine months ended September 30, 2019 are as follows:
| | | | | | |
| | Three Months Ended | | Nine Months Ended | ||
| | September 30, 2019 | | September 30, 2019 | ||
|
| (in millions) | | | (in millions) | |
Depreciation and amortization | | $ | — | | $ | 73.2 |
Capital expenditures | | $ | — | | $ | 55.8 |
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 the Company’s credit card and loan receivables is presented in the table below:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
| | (in millions) | | (in millions) | ||||||||
Principal receivables | | $ | 14,806.8 | | $ | 18,413.1 | ||||||
Billed and accrued finance charges | |
| 730.0 | |
| 977.3 | ||||||
Credit card receivables | | $ | 15,142.0 | | $ | 16,376.4 | ||||||
Installment loan receivables | | | 131.0 | | | 118.0 | ||||||
Other | |
| 61.9 | |
| 72.7 | |
| 263.6 | |
| 290.0 |
Total credit card and loan receivables | |
| 15,598.7 | |
| 19,463.1 | |
| 15,536.6 | |
| 16,784.4 |
Less: Credit card receivables – restricted for securitization investors | |
| 10,536.2 | |
| 13,504.2 | ||||||
Less: Credit card and loan receivables – restricted for securitization investors | |
| 10,221.3 | |
| 11,208.5 | ||||||
Other credit card and loan receivables | | $ | 5,062.5 | | $ | 5,958.9 | | $ | 5,315.3 | | $ | 5,575.9 |
Allowance for Loan Loss
Effective January 1, 2020, the Company adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine its allowance for loan loss. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECLcurrent expected credit loss (“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 includes an estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. The allowance is maintained through an adjustment to the provision for loan loss and is evaluated for appropriateness. Prior to January 1, 2020, the Company’s allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”
Credit Card Receivables
ASC 326, “Financial Instruments—Credit Losses,” requires entities to use a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. As part of its CECL implementation, the Company evaluated multiple risk characteristics of its credit card and loan receivables portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its allowance for loan loss, the Company segregates its credit card and loan receivables into 4 groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score.score, which were determined by the Company to be the most significant characteristics for estimating expected credit losses. These risk characteristics are evaluated on at least 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 0 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.
16
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company’s groups of pooled financial assets with similar risk characteristics and their estimated life is as follows:
| | | |
| | 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. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. 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.
13
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 September 30,As of March 31, 2021 and December 31, 2020, unbilled finance charges were $221.0$201.8 million and $219.4 million, respectively, and are included in other credit card and loan receivables in the Company’s unaudited condensed consolidated balance sheet.sheets.
Installment Loan Receivables
The allowance for loan loss for installment loan receivables utilizes a migration model over the remaining life of the loans. The model segments accounts based on three attributes: delinquency, risk score and remaining term. As of March 31, 2021 and December 31, 2020, the allowance for loan loss related to installment loan receivables was $6.5 million and $5.7 million, respectively.
Allowance for Loan Loss Rollforward
The following table presents the Company’s allowance for loan loss for its credit card and loan receivables for the periods indicated:
| | | | | | | | | | | | | ||||||
| | Three Months Ended | | Nine Months Ended | | | | | | | ||||||||
| | September 30, | | September 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 (1) |
| 2020 | ||||||
| | (in millions) | | (in millions) | ||||||||||||||
Balance at beginning of period | | $ | 2,096.3 | | $ | 1,010.9 | | $ | 1,171.1 | | $ | 1,038.3 | | $ | 2,008.0 | | $ | 1,171.1 |
Adoption of ASC 326 (1) | | | — | | | — | | | 644.0 | | | — | ||||||
Adoption of ASC 326 (2) | | | — | | | 644.0 | ||||||||||||
Provision for loan loss | |
| 207.7 | |
| 297.3 | |
| 1,113.7 | |
| 806.8 | |
| 33.4 | |
| 655.9 |
Change in estimate for uncollectible unpaid interest and fees | |
| — | |
| — | |
| — | |
| (10.0) | ||||||
Recoveries | |
| 45.5 | |
| 53.4 | |
| 170.3 | |
| 169.9 | |
| 50.9 | |
| 67.9 |
Principal charge-offs | |
| (268.6) | |
| (296.1) | |
| (1,018.2) | |
| (939.5) | |
| (249.0) | |
| (388.1) |
Balance at end of period | | $ | 2,080.9 | | $ | 1,065.5 | | $ | 2,080.9 | | $ | 1,065.5 | | $ | 1,843.3 | | $ | 2,150.8 |
(1) | With the acquisition of Bread in December 2020, the Company acquired certain installment loans which represented a separate portfolio segment. As the amount of the allowance for loan loss was immaterial, the amounts were included in the above table. |
(2) | Recorded January 1, 2020 through a cumulative-effect adjustment to retained earnings, net of taxes. |
DuringFor the three months ended September 30, 2020, there was not a significant change inMarch 31, 2021, the allowance for loan loss, as the allowance for loan loss as a percentage of end of period credit card and loan receivables remained constant at 13.3% from June 30, 2020 to September 30, 2020. During the nine months ended September 30, 2020, the increasedecrease in the allowance for loan loss was due to a decline in credit card and loan receivables due to the pandemic, improvement in the macroeconomic outlook and lower principal charge-offs. 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 cumulative-effect adjustment forattributable to the adoption of ASC 326, as well aswas due to an increase in delinquent amounts and deterioration of the macroeconomic outlook due to COVID-19. Additionally, the worsening macroeconomic environment also increased the principal charge-offs for the nine months ended September 30, 2020 as compared to the prior year.
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,that are deemed uncollectible, 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 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. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due. Credit card 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. For the three months ended March 31, 2021 and 2020, principal charge-offs, net of recoveries, were $198.1 million and $320.2 million, respectively. Charge-offs for unpaid interest and fees were $130.5 million and $231.9 million for the three months ended March 31, 2021 and 2020, respectively.
1714
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
Charge-offs for unpaid interest and fees were $142.3 million and $173.6 million for the three months ended September 30, 2020 and 2019, respectively, and $571.9 million and $586.2 million for the nine months ended September 30, 2020 and 2019, respectively.
Delinquencies
A credit cardAn account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder’s statement.date. It is the Company’s policy to continue to accrue interest and fee income on all credit card accounts, 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 thefor credit cardholder’s billing statement requesting payment.card receivables and 120 days delinquent for installment loan receivables. 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.
The following table presents the amortized cost basis of the aging analysis of the Company’s credit card and loan receivables portfolio:
| | | | | | | | | | | | | | | | | | |
| | 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 September 30, 2020 | | $ | 262.3 | | $ | 185.8 | | $ | 451.7 | | $ | 899.8 | | $ | 14,401.0 | | $ | 15,300.8 |
| | | | | | | | | | | | | | | | | | |
As of December 31, 2019 | | $ | 399.1 |
| $ | 293.9 |
| $ | 698.4 |
| $ | 1,391.4 |
| $ | 17,656.4 |
| $ | 19,047.8 |
| | | | | | | | | | | | | | | | | | |
| | 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, 2021 | $ | 193.5 | | $ | 149.3 | | $ | 384.8 | | $ | 727.6 | | $ | 14,545.4 | | $ | 15,273.0 | |
| | | | | | | | | | | | | | | | | | |
As of December 31, 2020 | $ | 272.5 | | $ | 203.3 | | $ | 439.8 | | $ | 915.6 | | $ | 15,578.8 | | $ | 16,494.4 |
(1) | As the amount of the installment loans and associated delinquencies were immaterial, the amounts were included in the above table for both the period ended March 31, 2021 and December 31, 2020. |
Modified Credit Card Receivables
Forbearance Programs
In response to the COVID-19 pandemic, the Company offered forbearance programs, to affected cardholders, which provideprovided for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current with their payments prior to any relief. Specifically, the Company provided for late fee waivers and payment deferrals for up to two months for approximately $2.0 billion of credit card and loan receivables, based on the balance in the month of enrollment, through September 30, 2020 and the extension of certain promotional plans of approximately $89.0 million for up to three months. As of September 30,March 31, 2021 and December 31, 2020, the credit card and loan receivables in these deferral forbearance programs waswere approximately $202.9 million.$115.2 million and $157.4 million, respectively. Additionally, the Company instituted 2 short-term programs with durations of three and six months, which provide concessions consisting primarily of a reduced minimum payment and an interest rate reduction, the balancebalances of which was $71.2were $41.8 million and $67.3 million as of September 30, 2020.March 31, 2021 and December 31, 2020, respectively.
As these short-term modifications were made in response to COVID-19 to borrowers who were current prior to any relief, these are not considered troubled debt restructurings under the Interagency Statement guidance on certain loan modifications and an interpretation of ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors.”
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
18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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. Additionally, the Company instituted 2 temporary hardship programs with durations of three and six months with similar terms to our short-term forbearance programs, for borrowers who were not current as of their most recent billing cycle prior to April 2020.programs. As of September 30,March 31, 2021 and December 31, 2020, the outstanding balance of credit card and loan receivables in these 2 short-term temporary hardship programs treated as troubled debt restructurings totaled approximately $36.6 million.$31.1 million and $39.9 million, respectively.
15
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Troubled debt restructuring 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 hardship 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.
The Company had $480.1$460.6 million and $308.7$489.8 million, respectively, as a recorded investment in impaired credit card receivables as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which represented less than 4%approximately 3% of the Company’s total credit card receivables.receivables as of March 31, 2021 and December 31, 2020, respectively. The average recorded investment in impaired credit card receivables was $459.7$481.7 million and $289.5$314.7 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $387.3 million and $292.6 million for the nine months ended September 30, 2020 and 2019, 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 $8.5$8.8 million and $5.4$5.5 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $21.0 million and $17.1 million for the nine months ended September 30, 2020 and 2019, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.
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 September 30, 2020 | | Nine Months Ended September 30, 2020 | | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
| | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification | ||||||||
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding | ||||||||
|
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance | ||||||||
| | (Dollars in millions) | | (Dollars in millions) | ||||||||||||||||||||||||||||
Troubled debt restructurings – credit card receivables | | 131,919 |
| $ | 170.3 |
| $ | 169.0 | | 302,438 |
| $ | 439.3 |
| $ | 437.6 | | 63,628 |
| $ | 93.2 |
| $ | 93.0 | | 75,065 |
| $ | 112.8 |
| $ | 112.7 |
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | Three Months Ended September 30, 2019 |
| Nine Months Ended September 30, 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 | | 65,819 |
| $ | 94.1 |
| $ | 94.0 | | 194,323 |
| $ | 285.1 |
| $ | 284.7 |
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 |
| Nine Months Ended | | | | | | | | | | | ||||||
| | September 30, 2020 | | September 30, 2020 | | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 | ||||||||||||
| | Number of | | Outstanding |
| Number of | | Outstanding | | Number of | | Outstanding |
| Number of | | Outstanding | ||||
|
| Restructurings |
| Balance |
| Restructurings |
| Balance |
| Restructurings |
| Balance |
| Restructurings |
| Balance | ||||
| | (Dollars in millions) | | (Dollars in millions) | ||||||||||||||||
Troubled debt restructurings that subsequently defaulted – credit card receivables |
| 28,724 | | $ | 37.8 | | 82,000 | | $ | 113.1 |
| 51,009 | | $ | 67.0 | | 31,670 | | $ | 44.0 |
|
|
|
|
|
|
|
|
|
|
|
1916
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | Three Months Ended |
| Nine Months Ended | ||||||
| | September 30, 2019 | | September 30, 2019 | ||||||
| | Number of | | Outstanding |
| Number of | | Outstanding | ||
|
| Restructurings |
| Balance |
| Restructurings |
| Balance | ||
| | (Dollars in millions) | ||||||||
Troubled debt restructurings that subsequently defaulted – credit card receivables |
| 25,815 | | $ | 36.0 | | 105,710 | | $ | 141.3 |
Credit Quality
Credit Card Receivables
The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality.quality for its credit card receivables. 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. Obligor credit quality is monitored at least monthly during the life of an account. 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 September 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Revolving Credit Card and Loan Receivables | | | Amortized Cost Revolving Credit Card Receivables | | ||||||||||||||||||
| | September 30, 2020 | | | December 31, 2019 | | | March 31, 2021 | | | December 31, 2020 | | ||||||||||||
|
| | |
| Percentage of |
|
| | |
| Percentage of |
|
| | |
| Percentage of |
|
| | |
| Percentage of |
|
| | | | Amortized | | | | | Amortized |
| | | | Amortized | | | | | Amortized |
| ||||
Probability of an Account Becoming 91 or More Days Past | | Amortized | | Cost Basis | | | Amortized | | Cost Basis |
| | Amortized | | Cost Basis | | | Amortized | | Cost Basis |
| ||||
Due or Becoming Charged-off (within the next 12 months) |
| Cost Basis |
| Outstanding |
|
| Cost Basis |
| Outstanding |
|
| Cost Basis |
| Outstanding |
|
| Cost Basis |
| Outstanding |
| ||||
| | (in millions, except percentages) | | | (in millions, except percentages) | | ||||||||||||||||||
No Score | | $ | 178.1 |
| 1.2 | % |
| $ | 298.4 |
| 1.6 | % | | $ | 182.4 |
| 1.2 | % |
| $ | 204.1 |
| 1.2 | % |
27.1% and higher | |
| 1,395.0 |
| 9.1 | |
|
| 1,648.8 |
| 8.7 | | |
| 1,208.3 |
| 8.0 | |
|
| 1,390.4 |
| 8.5 | |
17.1% - 27.0% | |
| 833.5 |
| 5.4 | |
|
| 1,108.5 |
| 5.8 | | |
| 780.6 |
| 5.2 | |
|
| 848.8 |
| 5.2 | |
12.6% - 17.0% | |
| 888.4 |
| 5.8 | |
|
| 1,171.7 |
| 6.2 | | |
| 841.1 |
| 5.6 | |
|
| 937.0 |
| 5.7 | |
3.7% - 12.5% | |
| 6,687.0 |
| 43.7 | |
|
| 8,292.1 |
| 43.5 | | |
| 6,633.1 |
| 43.8 | |
|
| 7,305.5 |
| 44.6 | |
1.9% - 3.6% | |
| 2,688.4 |
| 17.6 | |
|
| 3,375.3 |
| 17.7 | | |
| 2,633.0 |
| 17.4 | |
|
| 2,939.5 |
| 17.9 | |
Lower than 1.9% | |
| 2,630.4 |
| 17.2 | |
|
| 3,153.0 |
| 16.5 | | |
| 2,863.5 |
| 18.8 | |
|
| 2,751.1 |
| 16.9 | |
Total | | $ | 15,300.8 |
| 100.0 | % |
| $ | 19,047.8 |
| 100.0 | % | | $ | 15,142.0 |
| 100.0 | % |
| $ | 16,376.4 |
| 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.
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.
Installment Loan Receivables
The amortized cost basis of the Company’s installment loan receivables totaled $131.0 million and $118.0 million as of March 31, 2021 and December 31, 2020, respectively. Approximately 86%Portfolios Held of these loans were originated by customers with Fair Isaac Corporation (“FICO”) scores of 660 or above, and approximately 14% of these loans were originated by customers with FICO scores below 660 for Saleeach of the periods ended March 31, 2021 and December 31, 2020, respectively.
Securitized Credit Card Receivables
The Company had certainregularly securitizes its credit card portfolios held for sale, which are carried atand loan receivables through its trusts. The Company continues to own and service the lower of cost or fair value, of $408.0 million as of December 31, 2019. As of September 30, 2020, there were 0accounts that generate credit card portfoliosand loan receivables held for sale.
Duringby the nine months ended September 30, 2020,trusts. In its capacity as a servicer, each of the Company sold respective entities earns a fee from the trusts to service and administer the credit card portfolio for cash consideration of approximately $289.5 million and recognized a gain of approximately $20.4 million on the transaction, which was recorded in cost of operationsloan receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore are not reflected in the Company’s unaudited condensed consolidated statements of income. In September 2020, 1 ofincome for the Company’s credit card portfolios totaling approximately $81.9 million was transferred from held for sale to held for investment and was included in total credit card and loan receivables at September 30, 2020.
During the ninethree months ended September 30, 2019, the Company sold 6 credit card portfolios for cash consideration of approximately $980.0 millionMarch 31, 2021 and recognized approximately $21.1 million in net gains on the transactions, which were recorded in cost of operations in the Company’s unaudited condensed consolidated statements of income. Additionally, during the nine months ended September 30, 2019, the Company transferred 1 credit card portfolio totaling approximately $510.3 million into credit card receivables held for sale.2020.
2017
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company recorded portfolio valuation adjustments, which are reflected in cost of operations in the Company’s unaudited condensed consolidated statements of income, of $1.2 million and $61.2 million for the three months ended September 30, 2020 and 2019, respectively, and $7.5 million and $161.1 million for the nine months ended September 30, 2020 and 2019, respectively.
Portfolio Acquisitions
During the nine months ended September 30, 2019, the Company acquired 4 credit card portfolios for purchase prices totaling approximately $924.8 million. NaN portfolio acquisitions were made during the nine months ended September 30, 2020.
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 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 and nine months ended September 30, 2020 and 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:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
| | (in millions) | | (in millions) | ||||||||
Total credit card receivables – restricted for securitization investors | | $ | 10,536.2 | | $ | 13,504.2 | ||||||
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due | | $ | 202.3 | | $ | 321.8 | ||||||
Total credit card and loan receivables – restricted for securitization investors | | $ | 10,221.3 | | $ | 11,208.5 | ||||||
Principal amount of credit card and loan receivables – restricted for securitization investors, 91 days or more past due | | $ | 174.7 | | $ | 200.8 |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
| | (in millions) | | (in millions) | ||||||||||||||
Net charge-offs of securitized principal | | $ | 148.1 | | $ | 206.0 | | $ | 602.7 | | $ | 670.1 | | $ | 131.1 | | $ | 239.5 |
7. INVENTORIES, NET
Inventories, net of $202.8$146.0 million and $218.0$164.3 million at September 30, 2020March 31, 2021 and December 31, 2019,2020, 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.
21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| | |
| Amortized |
| Unrealized |
| Unrealized |
| | |
| Amortized |
| Unrealized |
| Unrealized |
| | |
| Amortized |
| Unrealized |
| Unrealized |
| | | ||||||||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Marketable securities | | $ | 221.3 | | $ | 6.8 | | $ | — | | $ | 228.1 | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 | | $ | 218.2 | | $ | 5.5 | | $ | (1.7) | | $ | 222.0 | | $ | 219.0 | | $ | 6.4 | | $ | — | | $ | 225.4 |
Total | | $ | 221.3 | | $ | 6.8 | | $ | — | | $ | 228.1 | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 | | $ | 218.2 | | $ | 5.5 | | $ | (1.7) | | $ | 222.0 | | $ | 219.0 | | $ | 6.4 | | $ | — | | $ | 225.4 |
There were 0 unrealized losses at September 30, 2020, and theThe following table shows the unrealized losses and fair value for those investments that were in an unrealized loss position as of DecemberMarch 31, 2019,2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:position. Unrealized losses as of December 31, 2020 were de minimis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | March 31, 2021 | ||||||||||||||||||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||||||||||||||
|
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized | ||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||||
Marketable securities | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) | | $ | 41.7 | | $ | (1.7) | | $ | — | | $ | — | | $ | 41.7 | | $ | (1.7) |
Total | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) | | $ | 41.7 | | $ | (1.7) | | $ | — | | $ | — | | $ | 41.7 | | $ | (1.7) |
18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at September 30, 2020March 31, 2021 by contractual maturity are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less | | $ | 43.7 | | $ | 43.7 |
Due after one year through five years | | | 1.1 | | | 1.1 |
Due after five years through ten years | |
| — | |
| — |
Due after ten years | |
| 176.5 | |
| 183.3 |
Total | | $ | 221.3 | | $ | 228.1 |
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less (1) | | $ | 45.7 | | $ | 45.7 |
Due after one year through five years | | | 0.7 | | | 0.7 |
Due after five years through ten years | |
| — | |
| — |
Due after ten years | |
| 171.8 | |
| 175.6 |
Total | | $ | 218.2 | | $ | 222.0 |
(1) | Includes mutual funds, which do not have a stated maturity. |
Market values were determined for each individual security in the investment portfolio. Effective January 1, 2020, the Company adopted ASC 326, which replaced the other-than-temporary impairment model for available-for-sale debt securities. For available-for-sale debt securities in which fair value is less than cost, ASC 326 requires that credit-related impairment, if any, beis recognized through an allowance for credit losses and 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, and the Company performs an assessment each period for credit-related impairment. As of September 30, 2020,March 31, 2021, the Company does not consider its investments to be impaired.
There were 0 realized gains or losses from the sale of investment securities for the three or nine months ended September 30, 2020March 31, 2021 and 2019.2020.
22
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | |
| | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | |
| ||||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Restricted cash |
| $ | 45.4 |
| $ | — |
| $ | — |
| $ | 45.4 |
| $ | 39.3 |
| $ | — |
| $ | — |
| $ | 39.3 |
| $ | 71.8 |
| $ | — |
| $ | — |
| $ | 71.8 |
| $ | 55.4 |
| $ | — |
| $ | — |
| $ | 55.4 |
Mutual funds | | | 25.4 | | | — | | | — | | | 25.4 | | | 25.1 | | | — | | | — | | | 25.1 | | | 26.5 | | | — | | | — | | | 26.5 | | | 26.9 | | | — | | | — | | | 26.9 |
Corporate bonds | | | 554.6 | | | 16.5 | | | (0.2) | | | 570.9 | | | 536.0 | | | 2.4 | | | (2.0) | | | 536.4 | | | 614.9 | | | 14.6 | | | (2.1) | | | 627.4 | | | 592.3 | | | 19.1 | | | (0.2) | | | 611.2 |
Total |
| $ | 625.4 |
| $ | 16.5 |
| $ | (0.2) |
| $ | 641.7 |
| $ | 600.4 |
| $ | 2.4 |
| $ | (2.0) |
| $ | 600.8 |
| $ | 713.2 |
| $ | 14.6 |
| $ | (2.1) |
| $ | 725.7 |
| $ | 674.6 |
| $ | 19.1 |
| $ | (0.2) |
| $ | 693.5 |
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2020March 31, 2021 and December 31, 2019,2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2021 | ||||||||||||||||||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||||||||||||||
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | ||||||
|
| Fair Value | �� | Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||||
Corporate bonds | | $ | 15.3 | | $ | (0.1) | | $ | 9.9 | | $ | (0.1) | | $ | 25.2 | | $ | (0.2) | | $ | 124.5 | | $ | (2.0) | | $ | 10.5 | | $ | (0.1) | | $ | 135.0 | | $ | (2.1) |
Total |
| $ | 15.3 |
| $ | (0.1) |
| $ | 9.9 |
| $ | (0.1) |
| $ | 25.2 |
| $ | (0.2) |
| $ | 124.5 |
| $ | (2.0) |
| $ | 10.5 |
| $ | (0.1) |
| $ | 135.0 |
| $ | (2.1) |
| | | | | | | | | | | | | | | | | | |
| | 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) | ||||||||||||||||
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) |
19
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | |
| | December 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 | | $ | 46.2 | | $ | (0.1) | | $ | 10.3 | | $ | (0.1) | | $ | 56.5 |
| $ | (0.2) |
Total | | $ | 46.2 | | $ | (0.1) | | $ | 10.3 | | $ | (0.1) | | $ | 56.5 | | $ | (0.2) |
The amortized cost and estimated fair value of the securities at September 30, 2020March 31, 2021 by contractual maturity are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less | | $ | 114.7 | | $ | 115.3 |
Due after one year through five years | |
| 453.5 | |
| 469.1 |
Due after five year through ten years | | | 11.8 | | | 11.9 |
Total | | $ | 580.0 | | $ | 596.3 |
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less (1) | | $ | 139.9 | | $ | 140.6 |
Due after one year through five years | |
| 469.7 | |
| 482.2 |
Due after five year through ten years | | | 31.8 | | | 31.1 |
Total | | $ | 641.4 | | $ | 653.9 |
(1) | Includes mutual funds, which do not have a stated maturity. |
Market values were determined for each individual security in the investment portfolio. Effective January 1, 2020, the Company adopted ASC 326, which replaced the other-than-temporary impairment model for available-for-sale debt securities. For available-for-sale debt securities in which fair value is less than cost, ASC 326 requires that credit-related impairment, if any, beis recognized through an allowance for credit losses and 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, and the Company performs an assessment each period for credit-related impairment. As of September 30, 2020,March 31, 2021, the Company does not consider its investments to be impaired.
23
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
There were 0 realized gains or losses from the sale of investment securities for the three and nine months ended September 30,March 31, 2021 and 2020. Realized losses from the sale of investment securities for the three and nine months ended September 30, 2019 were de minimis.
10. LEASES
The Company has operating leases for general office properties, warehouses, data centers, callcustomer care centers, automobiles and certain equipment. As of September 30, 2020,March 31, 2021, the Company’s leases have remaining lease terms of less than 1 year to 1817 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; the 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.
The components of lease expense were as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 | | 2019 | | 2020 | | 2019 | ||||
| | (in millions) | ||||||||||
Operating lease cost |
| $ | 10.0 | | $ | 10.2 | | $ | 30.2 | | $ | 30.9 |
Short-term lease cost | | | 0.2 | | | 0.7 | | | 0.7 | | | 1.9 |
Variable lease cost | | | 1.3 | | | 2.0 | | | 4.4 | | | 5.6 |
Total | | $ | 11.5 | | $ | 12.9 | | $ | 35.3 | | $ | 38.4 |
Other information related to leases was as follows:
| | | | | | |
| | September 30, | | September 30, | ||
|
| 2020 | | 2019 | ||
Weighted-average remaining lease term (in years): | | | | | | |
Operating leases | | | 11.0 | | | 11.5 |
Weighted-average discount rate: | | | | | | |
Operating leases | | | 5.2% | | | 5.2% |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 | | 2019 | | 2020 | | 2019 | ||||
| | (in millions) | ||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | ||||||
Operating cash flows from operating leases | | $ | 10.0 | | $ | 9.0 | | $ | 35.7 | | $ | 34.6 |
Right of use assets obtained in exchange for lease obligations: | | | | | | | ||||||
Operating leases | | $ | 0.5 | | $ | 4.0 | | $ | 3.3 | | $ | 13.8 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 | | 2020 | ||
| | (in millions) | ||||
Operating lease cost |
| $ | 11.1 | | $ | 10.2 |
Short-term lease cost | | | 0.2 | | | 0.3 |
Variable lease cost | | | 1.6 | | | 0.2 |
Total | | $ | 12.9 | | $ | 10.7 |
24
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Maturities of the lease liabilities as of September 30, 2020 were as follows:
| | | |
| | Operating | |
Year | | Leases | |
|
| (in millions) | |
2020 (excluding the nine months ended September 30, 2020) | | $ | 6.6 |
2021 | |
| 40.3 |
2022 | |
| 39.2 |
2023 | |
| 37.4 |
2024 | |
| 35.3 |
Thereafter | |
| 240.0 |
Total undiscounted lease liabilities | | | 398.8 |
Less: Amount representing interest | | | (101.1) |
Total present value of minimum lease payments | | $ | 297.7 |
| | | |
Amounts recognized in the September 30, 2020 consolidated balance sheet: | | | |
Current operating lease liabilities | | $ | 21.9 |
Long-term operating lease liabilities | | | 275.8 |
Total | | $ | 297.7 |
The Company evaluates its right of use assets for impairment in accordance with ASC 360, “Property, Plant and Equipment,” when events or changes in circumstances indicate that a right of use asset’s carrying amount may not be recoverable. The Company performed an impairment assessment for the right of use asset associated with one of its locations where it ceased use with the intent to sublease. As a result, the Company recorded an asset impairment charge within its Card Services segment of $3.1 million in the second quarter of 2020, which is included in cost of operations in its unaudited condensed consolidated statements of income for the nine months ended September 30, 2020. As a result of COVID-19 and expense management measures in 2020, the Company is evaluating potential office consolidations or closures, which could result in circumstances whereby the asset’s carrying amount may not be recoverable.
11. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | |
| | September 30, 2020 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 339.9 | | $ | (327.7) | | $ | 12.2 |
| 7 years—straight line |
Premium on purchased credit card portfolios | |
| 176.4 | | | (105.7) | |
| 70.7 |
| 1-13 years—straight line |
Collector database | |
| 52.4 | | | (51.9) | |
| 0.5 |
| 5 years—straight line |
Tradenames | |
| 33.3 | | | (28.6) | |
| 4.7 |
| 8-15 years—straight line |
| | $ | 602.0 | | $ | (513.9) | | $ | 88.1 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | | | — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 603.2 | | $ | (513.9) | | $ | 89.3 | | |
2520
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | |
| | 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 | | |
The estimated amortization expenseOther information related to intangible assets for the next five years and thereafter isleases was as follows:
| | | |
|
| For the Years Ending | |
|
| December 31, | |
| | (in millions) | |
2020 (excluding the nine months ended September 30, 2020) | | $ | 18.9 |
2021 | |
| 22.3 |
2022 | |
| 17.5 |
2023 | |
| 12.9 |
2024 | |
| 10.7 |
Thereafter | |
| 5.8 |
| | | | | | |
| | March 31, | | March 31, | ||
|
| 2021 | | 2020 | ||
Weighted-average remaining lease term (in years): | | | | | | |
Operating leases | | | 10.7 | | | 11.3 |
Weighted-average discount rate: | | | | | | |
Operating leases | | | 5.3% | | | 5.2% |
Goodwill
The changes in the carrying amount of goodwill areSupplemental cash flow information related to leases was as follows:
| | | | | | |||||||||||
| | | | | | | | | | | | Three Months Ended | ||||
| | | | | | | | |
| | March 31, | |||||
|
| LoyaltyOne |
| Card Services |
| Total |
|
| 2021 | | 2020 | |||||
| | (in millions) |
| | (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 |
|
| 17.7 | |
| — | |
| 17.7 | | ||||||
Balance at September 30, 2020 | | $ | 705.4 | | $ | 264.0 | | $ | 969.4 | | ||||||
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||
Operating cash flows from operating leases | | $ | 14.3 | | $ | 14.4 | ||||||||||
Right of use assets obtained in exchange for lease obligations: | Right of use assets obtained in exchange for lease obligations: | |||||||||||||||
Operating leases | | $ | 1.7 | | $ | 2.6 |
Approximately $3.2 million of LoyaltyOne goodwill was allocated to Precima upon sale in January 2020, based on a relative fair value allocationMaturities of the businesses.lease liabilities as of March 31, 2021 were as follows:
The Company tests goodwill for impairment annually, or when events and circumstances change that would indicate the carrying value may not be recoverable. On July 1, 2020, the Company voluntarily changed its annual goodwill impairment testing date from July 31 to July 1 to allow additional time for testing due to the COVID-19 pandemic and current uncertainty in the macroeconomic environment. Accordingly, management determined that the change in accounting principle is preferable under the circumstance. This change has been applied prospectively from July 1, 2020, as retrospective application is deemed impracticable due to the inability to objectively determine the assumptions and significant estimates used in earlier periods without the benefit of hindsight. This change was not material to the Company’s consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge. As of September 30, 2020, the Company does not believe it is more likely than not that the fair value of any reporting unit is less than its carrying amount. However, due to the COVID-19 pandemic and continuing uncertainty in the macroeconomic environment, future deterioration in the economy could adversely impact the Company’s reporting units and result in a goodwill impairment.
| | | |
| | Operating | |
Year | | Leases | |
|
| (in millions) | |
2021 (excluding the three months ended March 31, 2021) | | $ | 27.0 |
2022 | |
| 39.9 |
2023 | |
| 37.0 |
2024 | |
| 34.7 |
2025 | |
| 33.8 |
Thereafter | |
| 206.7 |
Total undiscounted lease liabilities | | | 379.1 |
Less: Amount representing interest | | | (93.9) |
Total present value of minimum lease payments | | $ | 285.2 |
| | | |
Amounts recognized in the March 31, 2021 consolidated balance sheet: | | | |
Current operating lease liabilities | | $ | 22.7 |
Long-term operating lease liabilities | | | 262.5 |
Total | | $ | 285.2 |
2621
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
12. RESTRUCTURING11. INTANGIBLE ASSETS AND OTHER CHARGESGOODWILL
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | |
| | March 31, 2021 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Definite-Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 348.9 | | $ | (341.1) | | $ | 7.8 |
| 3 years—straight line |
Premium on purchased credit card portfolios | |
| 137.2 | | | (78.1) | |
| 59.1 |
| 3-13 years—straight line |
Collector database | |
| 55.7 | | | (55.3) | |
| 0.4 |
| 5 years—straight line |
Tradenames | |
| 33.6 | | | (29.2) | |
| 4.4 |
| 4-15 years—straight line |
Non-compete agreements | |
| 2.2 | | | (0.2) | | | 2.0 |
| 5 years—straight line |
| | $ | 577.6 | | $ | (503.9) | | $ | 73.7 | | |
Indefinite-Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | | | — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 578.8 | | $ | (503.9) | | $ | 74.9 | | |
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 related to actions taken in 2019 are not expected to continue in 2020. The restructuring and other charges incurred in 2020 relate to changes in the Company’s original estimate and consisted of adjustments to the Company’s liability.
| | | | | | | | | | | |
| | December 31, 2020 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Definite-Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 363.0 | | $ | (354.5) | | $ | 8.5 |
| 3-7 years—straight line |
Premium on purchased credit card portfolios | |
| 137.2 | | | (72.8) | |
| 64.4 |
| 3-13 years—straight line |
Collector database | |
| 55.0 | | | (54.5) | |
| 0.5 |
| 5 years—straight line |
Tradenames | |
| 35.0 | | | (30.1) | |
| 4.9 |
| 4-15 years—straight line |
Non-compete agreements | |
| 2.2 | | | — | | | 2.2 |
| 5 years—straight line |
| | $ | 592.4 | | $ | (511.9) | | $ | 80.5 | | |
Indefinite-Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | |
| — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 593.6 | | $ | (511.9) | | $ | 81.7 | | |
The following tables summarize the restructuring and other charges incurred by reportable segment for all restructuring activitiesestimated amortization expense related to intangible assets for the periods presented; however, there were no restructuringnext five years and other charges incurred for the three months ended September 30, 2020.thereafter is as follows:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Three Months Ended September 30, 2019 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Corporate/Other | | $ | 3.3 | | $ | — | | $ | 6.8 | | $ | 0.7 | | $ | 10.8 |
LoyaltyOne | |
| 8.1 | |
| 33.5 | |
| 0.2 | |
| 0.2 | | | 42.0 |
Card Services | | | — | | | 0.2 | | | 1.9 | | | — | | | 2.1 |
Total | | $ | 11.4 | | $ | 33.7 | | $ | 8.9 | | $ | 0.9 | | $ | 54.9 |
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Nine Months Ended September 30, 2020 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Corporate/Other | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
LoyaltyOne | |
| 0.1 | |
| — | |
| — | |
| — | | | 0.1 |
Card Services | | | (7.8) | | | — | | | — | | | — | | | (7.8) |
Total | | $ | (7.7) | | $ | — | | $ | — | | $ | — | | $ | (7.7) |
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Nine Months Ended September 30, 2019 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Corporate/Other | | $ | 14.5 | | $ | 11.1 | | $ | 6.8 | | $ | 0.7 | | $ | 33.1 |
LoyaltyOne | |
| 9.4 | |
| 38.0 | |
| 0.2 | |
| 2.3 | | | 49.9 |
Card Services | | | — | | | 0.2 | | | 1.9 | | | — | | | 2.1 |
Total | | $ | 23.9 | | $ | 49.3 | | $ | 8.9 | | $ | 3.0 | | $ | 85.1 |
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 and nine months ended September 30, 2020:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Three Months Ended September 30, 2020 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Liability as of June 30, 2020 | | $ | 9.3 | | $ | — | | $ | — | | $ | — | | $ | 9.3 |
Adjustments for non-cash charges | |
| — | |
| — | |
| — | |
| — | | | — |
Cash payments | |
| (4.3) | |
| — | |
| — | |
| — | | | (4.3) |
Liability as of September 30, 2020 | | $ | 5.0 | | $ | — | | $ | — | | $ | — | | $ | 5.0 |
| | | |
|
| For the Years Ending | |
|
| December 31, | |
| | (in millions) | |
2021 (excluding the three months ended March 31, 2021) | | $ | 19.2 |
2022 | |
| 21.0 |
2023 | |
| 16.1 |
2024 | |
| 11.2 |
2025 | |
| 2.4 |
Thereafter | |
| 3.8 |
2722
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Nine Months Ended September 30, 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 | |
| (7.7) | |
| — | |
| — | |
| — | | | (7.7) |
Cash payments | |
| (22.0) | |
| — | |
| — | |
| (0.1) | | | (22.1) |
Liability as of September 30, 2020 | | $ | 5.0 | | $ | — | | $ | — | | $ | — | | $ | 5.0 |
Goodwill
The changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | |
| | | | | | | | |
| |
|
| LoyaltyOne |
| Card Services |
| Total |
| |||
| | (in millions) |
| |||||||
Balance at January 1, 2021 | | $ | 736.0 | | $ | 633.6 | | $ | 1,369.6 | |
Effects of foreign currency translation | |
| (18.5) | |
| — | |
| (18.5) | |
Balance at March 31, 2021 | | $ | 717.5 | | $ | 633.6 | | $ | 1,351.1 | |
The Company’s outstanding liability related to restructuringCompany tests goodwill for impairment annually, or when events and other chargescircumstances change that would indicate the carrying value may not be recoverable. As of March 31, 2021, the Company does not believe it is expected tomore likely than not that the fair value of any reporting unit is less than its carrying amount. No further testing of goodwill impairments will be settled by the end ofperformed until July 1, 2021, with the majority settled in 2020.unless events occur or circumstances indicate an impairment is probable.
13.12. DEBT
Debt consists of the following:
| | | | | | | | | | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| |
| |
| March 31, |
| December 31, |
| |
| | ||||
Description |
| 2020 |
| 2019 |
| Maturity |
| Interest Rate |
| 2021 |
| 2020 |
| Maturity |
| Interest Rate | ||||
| | (Dollars in millions) | | | | | | (Dollars in millions) | | | | | ||||||||
Long-term and other debt: | | | | | | | | | | | | | | | | | | | | |
2017 revolving line of credit | | $ | 0 | | $ | — |
| December 2022 |
| (1) | | $ | 0 | | $ | — |
| December 2022 |
| (1) |
2017 term loans | |
| 1,484.3 | |
| 2,028.8 |
| December 2022 |
| (2) | |
| 1,459.0 | |
| 1,484.3 |
| December 2022 |
| (2) |
BrandLoyalty credit agreement | |
| 0 | |
| — |
| April 2023 |
| (3) | |
| 0 | |
| — |
| April 2024 |
| (3) |
Senior notes due 2024 | | | 850.0 | | | 850.0 | | December 2024 | | 4.750% | | | 850.0 | | | 850.0 | | December 2024 | | 4.750% |
Senior notes due 2026 | | | 500.0 | | | — | | January 2026 | | 7.000% | | | 500.0 | | | 500.0 | | January 2026 | | 7.000% |
Total long-term and other debt | |
| 2,834.3 | |
| 2,878.8 | | | | | |
| 2,809.0 | |
| 2,834.3 | | | | |
Less: Unamortized debt issuance costs | | | 31.1 | | | 28.9 | | | | | | | 26.1 | | | 28.6 | | | | |
Less: Current portion | |
| 76.0 | |
| 101.4 | | | | | |
| 101.4 | |
| 101.4 | | | | |
Long-term portion | | $ | 2,727.2 | | $ | 2,748.5 | | | | | | $ | 2,681.5 | | $ | 2,704.3 | | | | |
| | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | $ | 6,257.4 | | $ | 8,585.2 |
| Various – Oct 2020 to Sep 2025 |
| 0.60% to 4.00% | | $ | 5,732.7 | | $ | 6,014.9 |
| Various – Apr 2021 to Mar 2026 |
| 0.15% to 3.75% |
Money market deposits | |
| 3,905.6 | |
| 3,589.8 |
| Non-maturity |
| (4) | |
| 4,234.6 | |
| 3,790.2 |
| Non-maturity |
| (4) |
Total deposits | |
| 10,163.0 | |
| 12,175.0 | | | | | |
| 9,967.3 | |
| 9,805.1 | | | | |
Less: Unamortized debt issuance costs | | | 14.5 | | | 23.3 | | | | | | | 10.4 | | | 12.5 | | | | |
Less: Current portion | |
| 6,753.5 | |
| 6,942.4 | | | | | |
| 6,787.4 | |
| 6,553.9 | | | | |
Long-term portion | | $ | 3,395.0 | | $ | 5,209.3 | | | | | | $ | 3,169.5 | | $ | 3,238.7 | | | | |
| | | | | | | | | | | | | | | | | | | | |
Non-recourse borrowings of consolidated securitization entities: | | | | | | | | | | | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 4,016.0 | | $ | 4,891.0 |
| Various – Oct 2020 to Sep 2022 |
| 2.03% to 3.95% | | $ | 2,898.9 | | $ | 3,423.8 |
| Various – Jun 2021 to Sep 2022 |
| 2.03% to 3.95% |
Conduit asset-backed securities | |
| 335.0 | |
| 2,405.0 |
| Various – Apr 2022 to Oct 2022 |
| (5) | |
| 900.0 | |
| 2,205.1 |
| Various – Apr 2022 to Oct 2022 |
| (5) |
Secured loan facility | | | 52.2 | | | 86.3 | | November 2022 | | (6) | ||||||||||
Total non-recourse borrowings of consolidated securitization entities | |
| 4,351.0 | |
| 7,296.0 | | | | | |
| 3,851.1 | |
| 5,715.2 | | | | |
Less: Unamortized debt issuance costs | | | 6.7 | | | 12.0 | | | | | | | 5.3 | | | 5.3 | | | | |
Less: Current portion | |
| 2,120.4 | |
| 3,030.8 | | | | | |
| 1,862.6 | |
| 1,850.7 | | | | |
Long-term portion | | $ | 2,223.9 | | $ | 4,253.2 | | | | | | $ | 1,983.2 | | $ | 3,859.2 | | | | |
(1) | The interest rate is based upon LIBOR plus an applicable margin. |
(2) | The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 1.86% and 1.90% |
(3) | The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. |
23
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(4) | The interest rates are based on the Federal Funds rate plus an applicable margin. At |
(5) | The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At |
(6) | The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the secured loan facility was 3.90% at each of March 31, 2021 and December 31, |
28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
At September 30, 2020,March 31, 2021, the Company was in compliance with its financial covenants.
Long-term and Other Debt
Senior Notes
In September 2020, the Company issued and sold $500.0 million aggregate principal amount of 7.000% senior notes due January 15, 2026 (the “Senior Notes due 2026”). The Senior Notes due 2026 accrue interest on the principal amount at the rate of 7.000% per annum from September 22, 2020, payable semi-annually in arrears, on March 15 and September 15 of each year, beginning on March 15, 2021. The Senior Notes due 2026 will mature on January 15, 2026, subject to earlier repurchase or redemption.
The Senior Notes due 2026 are governed by an indenture that includes usual and customary negative covenants and events of default. The Senior Notes due 2026 are guaranteed on a senior unsecured basis by each of the Company’s existing and future domestic restricted subsidiaries that incurs or in any other manner becomes liable for any debt under the Company’s domestic credit facilities, including the credit agreement.
Credit Agreement
In September 2020, the Company amended its credit agreement to (a) increase the maximum total leverage ratio, (b) decrease the minimum interest coverage ratio, and (c) increase the maximum permitted average delinquency ratios, for the periods endingAs of March 31, 2021, through June 30, 2022, and to make certain other amendments.
The amendment also required the Company to prepay the term loans upon consummation of the offering of the Senior Notes due 2026 with a prepayment in an amount equal to the net proceeds from the offering, which obligation was satisfied in full with a prepayment of $493.8 million.
As of September 30, 2020, the Company had $1,484.3$1,459.0 million in term loans outstanding with $750.0 million total availability under the revolving line of credit.
BrandLoyalty Credit Agreement
In April 2020,the first quarter of 2021, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, terminatedamended 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 ($35.2 million as of September 30, 2020), an uncommitted revolving line of credit of €30.0 million ($35.2 million as of September 30, 2020), and an accordion feature permitting BrandLoyalty to request an increase in eitherextend the committed or uncommitted line of credit up to €80.0 million ($93.8 million as of September 30, 2020) in aggregate. Each of the committed and uncommitted revolving line of credit are scheduled to mature onmaturity date by one year from April 3, 2023 subject to BrandLoyalty’s request to extend for 2 additional one-year terms at the absolute discretion of the lenders 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 EURIBOR, as defined in the 2020 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 default.April 3, 2024.
As of September 30, 2020,March 31, 2021, there were 0 amounts outstanding under the 2020 BrandLoyalty Credit Agreement.
29
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Non-Recourse Borrowings of Consolidated Securitization Entities
Asset-Backed Term Notes
In May 2020, $450.7February 2021, $591.5 million of Series 2017-A2018-A asset-backed term notes, $50.7 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.
In August 2020, $625.0 million of Series 2015-B asset-backed term notes, $150.0$66.5 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.
As of September 30, 2020,March 31, 2021, the Company collected $603.1$294.4 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series 2017-C2016-A notes, which matured in October 2020.mature June 15, 2021. The cash is restricted to the securitization investors and is reflected in other current assets in the Company’s unaudited condensed consolidated balance sheet as of September 30, 2020.March 31, 2021.
Conduit Facilities
The Company has access to committed undrawn capacity through 3 conduit facilities to support the funding of its credit card receivables through Master Trust I, Master Trust III and the WFC Trust.
In April 2020, Master Trust I amendedfor certain of 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.
In September 2020, Master Trust I amended its 2009-VFN conduit facility, extending the maturity to October 2022. In September 2020, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1.0 billion to $700.0 million and extending the maturity to April 2022. In September 2020, the WFC Trust amended its 2009-VFN conduit facility, decreasing the capacity from $2.2 billion to $1.5 billion and extending the maturity to April 2022.trusts.
As of September 30, 2020,March 31, 2021, total capacity under the conduit facilities was $3.2 billion, of which $335.0$900.0 million had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.
14.13. 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 Certain derivatives by entering into contracts with institutions that are established dealers who maintain certain minimum credit criteria established by the Company. At September 30, 2020, the Company does not maintain any derivative instruments subjectused 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 ofmanage 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 hedgesexposure to foreign currency exchange rate risks for periods of 12 months or less. As of September 30, 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 12 months.
Certain foreign currency exchange forward contractsmovements are not designated as hedges as theyand do not meet the specificqualify for hedge accounting requirements of ASC 815, “Derivatives and Hedging.” Changes in theaccounting. The fair value of the Company’s derivative instruments not designated as hedging instruments are recordedof March 31, 2021 was $0.8 million included in other current assets and $1.2 million included in other current liabilities in the Company’s unaudited condensed consolidated statementsbalance sheets. The fair value of the Company’s derivative instruments as of December 31, 2020 was $0.4
3024
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
income as they occur. Gains and losses on derivatives not designated as hedging instruments aremillion included in other operating activitiescurrent assets and $1.5 million included 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 withinother current liabilities in the Company’s unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | |
| | September 30, 2020 | ||||||||
| | Notional | | | | | | | ||
|
| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||
| | (in millions) | ||||||||
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges |
| $ | 47.8 |
| $ | 1.4 |
| Other current assets |
| October 2020 - September 2021 |
Foreign currency exchange hedges |
| $ | 28.5 |
| $ | 1.4 |
| Other current liabilities |
| October 2020 - July 2021 |
| | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contracts |
| $ | 10.1 |
| $ | 0.2 |
| Other current assets |
| October 2020 - September 2021 |
Foreign currency exchange forward contracts | | $ | 2.2 |
| $ | 0.1 | | Other current liabilities | | October 2020 - September 2021 |
| | | | | | | | | | |
| | 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 |
sheets.
Derivatives Designated as Hedging Instruments
Gains of $0.5 million and de minimis, net of tax, were recognized in other comprehensive income for the three and nine months ended September 30, 2020, respectively, and gains of $0.7 million and $0.5 million, net of tax, were recognized in other comprehensive income for the three and nine months ended September 30, 2019, respectively, related to foreign currency exchange hedges designated as effective.
Changes in the fair value of these hedges are recorded in other comprehensive income until the hedged transactions affect net income. Reclassifications from accumulated other comprehensive loss into net income (cost of operations) for each of the periods presented were not material. At September 30, 2020, $0.1 million is expected to be reclassified from accumulated other comprehensive income into net income in the coming 12 months.
Derivatives Not Designated as Hedging Instruments
For the three and nine months ended September 30, 2020, gains and losses related to foreign currency exchange forward contracts not designated as hedging instruments were de minimis.
For the three and nine months ended September 30, 2019, gains of $1.0 million and losses of $1.4 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.
15.14. COMMITMENTS AND CONTINGENCIES
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 into 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 Financial Institutions and the Delaware Office of the
31
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
State Bank Commissioner, respectively, in connection with the proposed merger. TheOn April 20, 2021, Comenity Capital Bank withdrew its bank merger application remains subject to regulatory reviewwith the FDIC. On May 3, 2021, each of Comenity Capital Bank and approvalComenity Bank similarly withdrew their counterpart bank merger applications in Utah and no guarantee can be provided as to the outcome or timing of such review.Delaware, respectively.
Indemnification
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 United States Department of Justice (“DOJ”) investigation. The DOJ investigation relatesrelated 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 ongoingthe investigation. TheOn January 19, 2021, Epsilon entered into a deferred prosecution agreement (“DPA”) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $150.0 million, to be paid in 2 equal installments, the first in January 2021 and the second in January 2022. In accordance with ASC 450, “Contingencies,” 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, terms. Therefore, this loss contingency may be refined each periodestimated, and therefore as additional information becomes available. As of September 30, 2020, there was no change to the Company’s estimate of loss contingency.
16. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
In July 2019, the Company’s Board of Directors authorized a new stock repurchase program to acquire up to $1.1 billion of its outstanding common stock from July 5, 2019 through June 30, 2020. As of December 31, 2019,2020, a $150.0 million liability was recorded. The Company paid $75.0 million to Publicis pursuant to its contractual indemnification obligation in January 2021. As of March 31, 2021, the Company had $347.8has $75.0 million remaining underincluded in accrued expenses in its authorized stock repurchase program. On April 23, 2020, the Company announced that it has suspended its stock repurchase program. The stock repurchase program expired on June 30, 2020, and $347.8 million of this program expired unused. During 2020, the Company did not repurchase any shares of its outstanding common stock under its authorized stock repurchase program.unaudited condensed consolidated balance sheets.
15. STOCKHOLDERS’ EQUITY
Stock Compensation Expense
During the ninethree months ended September 30, 2020,March 31, 2021, the Company awarded 180,017611,312 service-based restricted stock units with a weighted average grant date fair value per share of $83.08$86.89 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 ninethree months ended September 30, 2020,March 31, 2021, the Company awarded 219,18695,762 performance-based restricted stock units with a weighted average grant date fair value per share of $100.50 as determined on the date of grant with pre-defined vesting criteria that typically 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 18, 2021, an additional 33% of the award on February 18, 2022 and the final 34% of the award on February 18, 2023, provided that the participant is employed by the Company on each such vesting date. As of September 30, 2020, the Company believes the probable achievement is 0%, and therefore has not recognized any expense related to these awards for the three and nine months ended September 30, 2020.
During the nine months ended September 30, 2020, the Company also awarded 20,770 restricted stock units with a market-based condition subject to pre-defined vesting criteria that permit a range from 0% to 175%170% to be earned.earned, subject to a market-based condition. The fair market value of these awards is $78.92$92.62 and was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, expected volatility and risk-free rate over two-yeara three-year time horizonshorizon matching the performance period. Upon determination ofIf the market condition,performance targets are met, the restrictions will lapse with respect to the the entire award award on February 18, 2022,16, 2024, provided that the participant is employed by the Company on suchthe vesting date.
3225
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 and nine months ended September 30,March 31, 2021 and 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
| | (in millions) | | (in millions) | ||||||||||||||
Cost of operations | | $ | 3.4 | | $ | 3.1 | | $ | 9.4 | | $ | 16.2 | | $ | 4.0 | | $ | 2.7 |
General and administrative | |
| 1.9 | |
| (0.1) | |
| 6.8 | |
| 8.4 | |
| 2.8 | |
| 2.0 |
Total | | $ | 5.3 | | $ | 3.0 | | $ | 16.2 | | $ | 24.6 | | $ | 6.8 | | $ | 4.7 |
NaN stock-based compensation expense was recorded to discontinued operations for the three months ended September 30, 2019. For the nine months ended September 30, 2019, an additional $29.7 million of stock-based compensation expense related to associates from the Company’s divested Epsilon segment was recorded to discontinued operations.
Dividends
On January 30, 2020,28, 2021, the Company’s Boardboard 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 14, 2020, resulting in a dividend payment of $30.0 million on March 19, 2020.
On April 23, 2020, the Company’s Board of Directorsdirectors declared a quarterly cash dividend of $0.21 per share on the Company’s common stock to stockholders of record at the close of business on May 14, 2020,February 12, 2021, resulting in a dividend payment of $10.0$10.4 million on JuneMarch 18, 2020.2021. Additionally, the Company paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2021.
On July 23, 2020,April 29, 2021, the Company’s Boardboard of Directorsdirectors declared a quarterly cash dividend of $0.21 per share on the Company’s common stock, payable on June 18, 2021 to stockholders of record at the close of business on AugustMay 14, 2020, resulting in a dividend payment of $10.0 million on September 18, 2020.2021.
On October 29, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share on the Company’s common stock to stockholders of record at the close of business on November 13, 2020, with a dividend payment date of December 18, 2020.
Additionally, the Company paid $0.5 million in cash related to dividend equivalent rights for the nine months ended September 30, 2020.
33
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
17.16. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | ||||||||||
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | ||||||||||
|
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive |
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive | ||||||||||
Three Months Ended September 30, 2020 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | ||||||||||||||||||||
Three Months Ended March 31, 2021 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | ||||||||||||||||||||
|
| (in millions) |
| (in millions) | ||||||||||||||||||||||||||
Balance at June 30, 2020 |
| $ | 17.5 |
| $ | (0.6) |
| $ | (7.5) |
| $ | (96.9) |
| $ | (87.5) | |||||||||||||||
Balance at December 31, 2020 |
| $ | 23.2 |
| $ | (0.7) |
| $ | (7.5) |
| $ | (20.0) |
| $ | (5.0) | |||||||||||||||
Changes in other comprehensive income (loss) | | | 4.0 | | | 0.5 | | | — | | | 35.3 | | | 39.8 | | | (8.3) | | | 0.9 | | | — | | | (29.9) | | | (37.3) |
Balance at September 30, 2020 |
| $ | 21.5 |
| $ | (0.1) |
| $ | (7.5) |
| $ | (61.6) |
| $ | (47.7) | |||||||||||||||
Balance at March 31, 2021 |
| $ | 14.9 |
| $ | 0.2 |
| $ | (7.5) |
| $ | (49.9) |
| $ | (42.3) |
| | | | | | | | | | | | | | | |
| | 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 September 30, 2019 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | |||||
|
| (in millions) | |||||||||||||
Balance at June 30, 2019 |
| $ | 3.7 |
| $ | (0.4) |
| $ | (7.5) |
| $ | (117.5) |
| $ | (121.7) |
Recognition resulting from the sale of Epsilon's foreign subsidiaries | | | — | | | — | | | — | | | 26.8 | | | 26.8 |
Changes in other comprehensive income (loss) | | | (0.2) | | | 0.7 | | | — | | | (27.6) | | | (27.1) |
Balance at September 30, 2019 |
| $ | 3.5 |
| $ | 0.3 |
| $ | (7.5) |
| $ | (118.3) |
| $ | (122.0) |
| | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | |||||
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | |||||
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive | |||||
Nine Months Ended September 30, 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) |
Recognition resulting from the sale of Precima's foreign subsidiaries | | | — | | | — | | | — | | | 3.8 | | | 3.8 |
Changes in other comprehensive income (loss) | | | 19.0 | | | — | | | — | | | 29.4 | | | 48.4 |
Balance at September 30, 2020 |
| $ | 21.5 |
| $ | (0.1) |
| $ | (7.5) |
| $ | (61.6) |
| $ | (47.7) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | | Net | | Net Unrealized | | Net Unrealized | | Foreign | | Accumulated | ||||||||||
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other | ||||||||||
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive | ||||||||||
Nine Months Ended September 30, 2019 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | ||||||||||||||||||||
Three Months Ended March 31, 2020 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | ||||||||||||||||||||
|
| (in millions) |
| (in millions) | ||||||||||||||||||||||||||
Balance at December 31, 2018 |
| $ | (10.7) |
| $ | (0.2) |
| $ | (12.4) |
| $ | (114.8) |
| $ | (138.1) | |||||||||||||||
Recognition resulting from the sale of Epsilon's foreign subsidiaries | | | — | | | — | | | — | | | 26.8 | | | 26.8 | |||||||||||||||
Balance at December 31, 2019 |
| $ | 2.5 |
| $ | (0.1) |
| $ | (7.5) |
| $ | (94.8) |
| $ | (99.9) | |||||||||||||||
Changes in other comprehensive income (loss) | | | 14.2 | | | 0.5 | | | 4.9 | | | (30.3) | | | (10.7) | | | 1.6 | | | 0.3 | | | — | | | (23.9) | | | (22.0) |
Balance at September 30, 2019 |
| $ | 3.5 |
| $ | 0.3 |
| $ | (7.5) |
| $ | (118.3) |
| $ | (122.0) | |||||||||||||||
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) |
(1) | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates. |
In 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. UponOther reclassifications from accumulated other comprehensive loss into net income for each of the sale of Epsilon on July 1, 2019, $26.8 million of accumulated foreign currency translation adjustmentsperiods presented were not material.
3426
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
attributable to Epsilon’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation of the gain/loss on sale of the Epsilon segment. Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.
18. FAIR VALUE MEASUREMENTS17. 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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 | ||||||||||||||||
| | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | ||||||||
|
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value | ||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
Financial assets | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 13,517.8 | | $ | 16,081.6 | | $ | 18,292.0 | | $ | 19,126.0 | | $ | 13,693.3 | | $ | 15,977.1 | | $ | 14,776.4 | | $ | 17,301.2 |
Credit card receivables held for sale | | | — | | | — | | | 408.0 | | | 436.2 | ||||||||||||
Redemption settlement assets, restricted | |
| 641.7 | |
| 641.7 | |
| 600.8 | |
| 600.8 | |
| 725.7 | |
| 725.7 | |
| 693.5 | |
| 693.5 |
Other investments | |
| 228.1 | |
| 228.1 | |
| 259.8 | |
| 259.8 | |
| 222.0 | |
| 222.0 | |
| 225.4 | |
| 225.4 |
Derivative instruments | |
| 1.6 | |
| 1.6 | |
| 0.2 | |
| 0.2 | |
| 0.8 | |
| 0.8 | |
| 0.4 | |
| 0.4 |
Financial liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments | | | 1.5 | | | 1.5 | | | 0.3 | | | 0.3 | | | 1.2 | | | 1.2 | | | 1.5 | | | 1.5 |
Deposits | |
| 10,148.5 | |
| 10,404.4 | |
| 12,151.7 | |
| 12,303.6 | |
| 9,956.9 | |
| 10,146.1 | |
| 9,792.6 | |
| 10,015.9 |
Non-recourse borrowings of consolidated securitization entities | |
| 4,344.3 | |
| 4,427.2 | |
| 7,284.0 | |
| 7,333.6 | |
| 3,845.8 | |
| 3,903.1 | |
| 5,709.9 | |
| 5,783.4 |
Long-term and other debt | |
| 2,803.2 | |
| 2,778.7 | |
| 2,849.9 | |
| 2,878.8 | |
| 2,782.9 | |
| 2,870.4 | |
| 2,805.7 | |
| 2,875.1 |
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, as well as market data as applicable.
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 — For 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.
35
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
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 and foreign currency exchange forward contracts 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.
27
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Financial Assets and Financial Liabilities Fair Value Hierarchy
ASC 820, “Fair Value Measurement,” 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. |
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.
The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at | | | | | Fair Value Measurements at | ||||||||||||||
| | | | | September 30, 2020 Using | | | | | March 31, 2021 Using | ||||||||||||||
|
| Balance at |
| | |
| | |
| | |
| Balance at |
| | |
| | |
| | | ||
| | September 30, | | | | | | | | | | | March 31, | | | | | | | | | | ||
|
| 2020 |
| Level 1 |
| Level 2 |
| Level 3 |
| 2021 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
Mutual funds (1) | | $ | 25.4 | | $ | 25.4 | | $ | — | | $ | — | | $ | 26.5 | | $ | 26.5 | | $ | — | | $ | — |
Corporate bonds (1) | | | 570.9 | | | — | | | 570.9 | | | — | | | 627.4 | | | — | | | 627.4 | | | — |
Marketable securities (2) | | | 228.1 | | | 34.1 | | | 194.0 | | | — | | | 222.0 | | | 33.8 | | | 188.2 | | | — |
Derivative instruments (3) | | | 1.6 | | | — | | | 1.6 | | | — | | | 0.8 | | | — | | | 0.8 | | | — |
Total assets measured at fair value | | $ | 826.0 | | $ | 59.5 | | $ | 766.5 | | $ | — | | $ | 876.7 | | $ | 60.3 | | $ | 816.4 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments (3) | | $ | 1.5 | | $ | — | | $ | 1.5 | | $ | — | | $ | 1.2 | | $ | — | | $ | 1.2 | | $ | — |
Total liabilities measured at fair value | | $ | 1.5 | | $ | — | | $ | 1.5 | | $ | — | | $ | 1.2 | | $ | — | | $ | 1.2 | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at | |||||||
| | | | | December 31, 2020 Using | |||||||
|
| Balance at |
| | |
| | |
| | | |
| | December 31, | | | | | | | | | | |
|
| 2020 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Mutual funds (1) | | $ | 26.9 | | $ | 26.9 | | $ | — | | $ | — |
Corporate bonds (1) | | | 611.2 | | | — | | | 611.2 | | | — |
Marketable securities (2) | | | 225.4 | | | 34.2 | | | 191.2 | | | — |
Derivative instruments (3) | | | 0.4 | | | — | | | 0.4 | | | — |
Total assets measured at fair value | | $ | 863.9 | | $ | 61.1 | | $ | 802.8 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 1.5 | | $ | — | | $ | 1.5 | | $ | — |
Total liabilities measured at fair value | | $ | 1.5 | | $ | — | | $ | 1.5 | | $ | — |
(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. |
3628
ALLIANCE DATA SYSTEMS CORPORATION
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 | | $ | — |
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 September 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at | | Fair Value Measurements at | ||||||||||||||||||||
| | September 30, 2020 | | March 31, 2021 | ||||||||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 16,081.6 | | $ | — | | $ | — | | $ | 16,081.6 | | $ | 15,977.1 | | $ | — | | $ | — | | $ | 15,977.1 |
Total | | $ | 16,081.6 | | $ | — | | $ | — | | $ | 16,081.6 | | $ | 15,977.1 | | $ | — | | $ | — | | $ | 15,977.1 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 10,404.4 | | $ | — | | $ | 10,404.4 | | $ | — | | $ | 10,146.1 | | $ | — | | $ | 10,146.1 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | |
| 4,427.2 | |
| — | |
| 4,427.2 | |
| — | |
| 3,903.1 | |
| — | |
| 3,903.1 | |
| — |
Long-term and other debt | |
| 2,778.7 | |
| — | |
| 2,778.7 | |
| — | |
| 2,870.4 | |
| — | |
| 2,870.4 | |
| — |
Total | | $ | 17,610.3 | | $ | — | | $ | 17,610.3 | | $ | — | | $ | 16,919.6 | | $ | — | | $ | 16,919.6 | | $ | — |
37
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at | | Fair Value Measurements at | ||||||||||||||||||||
| | December 31, 2019 | | December 31, 2020 | ||||||||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 19,126.0 | | $ | — | | $ | — | | $ | 19,126.0 | | $ | 17,301.2 | | $ | — | | $ | — | | $ | 17,301.2 |
Credit card receivables held for sale | |
| 436.2 | | | — | | | — | | | 436.2 | ||||||||||||
Total | | $ | 19,562.2 | | $ | — | | $ | — | | $ | 19,562.2 | | $ | 17,301.2 | | $ | — | | $ | — | | $ | 17,301.2 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 12,303.6 | | $ | — | | $ | 12,303.6 | | $ | — | | $ | 10,015.9 | | $ | — | | $ | 10,015.9 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | |
| 7,333.6 | |
| — | |
| 7,333.6 | |
| — | |
| 5,783.4 | |
| — | |
| 5,783.4 | |
| — |
Long-term and other debt | |
| 2,878.8 | |
| — | |
| 2,878.8 | |
| — | |
| 2,875.1 | |
| — | |
| 2,875.1 | |
| — |
Total | | $ | 22,516.0 | | $ | — | | $ | 22,516.0 | | $ | — | | $ | 18,674.4 | | $ | — | | $ | 18,674.4 | | $ | — |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property and equipment, right of use assets, deferred contract assets, goodwill, and intangible assets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, including when there is evidence of impairment. For the nine months ended September 30, 2020, the Company recorded asset impairment charges of $34.2 million related to deferred contract costs and certain right of use assets. The fair value was determined utilizing discounted cash flow models over the estimated life of each asset. The principal assumptions used in the Company’s impairment analysis were forecasted future cash flows and the discount rate, which are considered Level 3 inputs. See Note 2, “Revenue,” and Note 10, “Leases,” for more information regarding asset impairments. For the three and nine months ended September 30, 2019, as part of restructuring and other charges, the Company recorded asset impairments of $33.7 million and $49.3 million, respectively. See Note 12, “Restructuring and Other Charges,” for more information.
19.18. INCOME TAXES
For the three months ended September 30,March 31, 2021 and 2020, and 2019, the Company utilized an effective tax rate of 24.2%27.4% and 26.0%(18.1)%, respectively, to calculate its provision for income taxes. For the nine months ended September 30, 2020 and 2019, the Company utilized anThe negative effective tax rate of 18.8% and 22.6%, respectively, to calculate its provision for income taxes.
The decrease in the effective tax rate for the three months ended September 30,first quarter of 2020 as compared to the three months ended September 30, 2019 resultedwas primarily from final regulations addressing the high tax exception related to Global Intangible Low-Taxed Income (“GILTI”). The decrease in the effective tax rate for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 resulted primarily froma discrete tax benefits from abenefit and reduction of tax reserves related to the statute of limitations expiration in the second quarter of 2020 as well asfollowing a favorable settlement with a state tax authority in the first quarter of 2020.
38
Indexauthority.
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
20.19. 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 operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different products and services.
The 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 |
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.”
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Three Months Ended September 30, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 184.8 | | $ | 865.7 | | $ | — | | $ | 1,050.5 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 18.3 | | $ | 212.1 | | $ | (54.5) | | $ | 175.9 |
Interest expense, net | |
| (0.2) | | | 90.4 | | | 24.9 | |
| 115.1 |
Operating income (loss) | |
| 18.1 | |
| 302.5 | |
| (29.6) | |
| 291.0 |
Depreciation and amortization | |
| 20.3 | |
| 19.2 | |
| 0.6 | |
| 40.1 |
Stock compensation expense | |
| 1.6 | |
| 1.8 | |
| 1.9 | |
| 5.3 |
Strategic transaction costs | |
| 0.1 | |
| — | |
| 3.4 | |
| 3.5 |
Adjusted EBITDA (1) | |
| 40.1 | |
| 323.5 | |
| (23.7) | |
| 339.9 |
Less: Securitization funding costs | | | — | | | 37.5 | | | — | | | 37.5 |
Less: Interest expense on deposits | | | — | | | 52.9 | | | — | | | 52.9 |
Adjusted EBITDA, net (1) | | $ | 40.1 | | $ | 233.1 | | $ | (23.7) | | $ | 249.5 |
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Three Months Ended September 30, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 245.5 | | $ | 1,192.0 | | $ | 0.1 | | $ | 1,437.6 |
| | | | | | | | | | | | |
(Loss) income before income taxes | | $ | (5.2) | | $ | 300.0 | | $ | (130.6) | | $ | 164.2 |
Interest expense, net | |
| 0.8 | |
| 113.9 | |
| 25.3 | |
| 140.0 |
Operating (loss) income | |
| (4.4) | |
| 413.9 | |
| (105.3) | |
| 304.2 |
Depreciation and amortization | |
| 19.8 | |
| 23.5 | |
| 1.6 | |
| 44.9 |
Stock compensation expense | | | 0.7 | | | 2.4 | | | (0.1) | | | 3.0 |
Strategic transaction costs | | | 0.1 | | | — | | | 2.2 | | | 2.3 |
Restructuring and other charges | |
| 42.0 | |
| 2.1 | |
| 10.8 | |
| 54.9 |
Loss on extinguishment of debt | | | — | | | — | | | 71.9 | | | 71.9 |
Adjusted EBITDA (1) | |
| 58.2 | |
| 441.9 | |
| (18.9) | |
| 481.2 |
Less: Securitization funding costs | | | — | | | 51.4 | | | — | | | 51.4 |
Less: Interest expense on deposits | | | — | | | 62.5 | | | — | | | 62.5 |
Adjusted EBITDA, net (1) | | $ | 58.2 | | $ | 328.0 | | $ | (18.9) | | $ | 367.3 |
3929
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Nine Months Ended September 30, 2020 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 533.9 | | $ | 2,877.5 | | $ | 0.1 | | $ | 3,411.5 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 88.9 | | $ | 314.5 | | $ | (155.1) | | $ | 248.3 |
Interest expense, net | |
| (0.5) | |
| 302.2 | |
| 79.6 | |
| 381.3 |
Operating income (loss) | |
| 88.4 | |
| 616.7 | |
| (75.5) | |
| 629.6 |
Depreciation and amortization | |
| 56.9 | |
| 61.0 | |
| 2.4 | |
| 120.3 |
Stock compensation expense | |
| 4.1 | | | 5.3 | |
| 6.8 | |
| 16.2 |
Gain on sale of business, net of strategic transaction costs | | | (8.0) | | | — | | | — | | | (8.0) |
Strategic transaction costs | | | 0.3 | | | — | | | 6.5 | | | 6.8 |
Asset impairments | |
| — | |
| 34.2 | |
| — | |
| 34.2 |
Restructuring and other charges | | | 0.1 | | | (7.8) | | | — | | | (7.7) |
Adjusted EBITDA (1) | |
| 141.8 | |
| 709.4 | |
| (59.8) | |
| 791.4 |
Less: Securitization funding costs | | | — | | | 130.1 | | | — | | | 130.1 |
Less: Interest expense on deposits | | | — | | | 172.1 | | | — | | | 172.1 |
Adjusted EBITDA, net (1) | | $ | 141.8 | | $ | 407.2 | | $ | (59.8) | | $ | 489.2 |
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Nine Months Ended September 30, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 700.7 | | $ | 3,419.3 | | $ | 0.3 | | $ | 4,120.3 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 45.2 | | $ | 829.8 | | $ | (304.0) | | $ | 571.0 |
Interest expense, net | |
| 2.7 | |
| 324.7 | |
| 100.0 | |
| 427.4 |
Operating income (loss) | |
| 47.9 | |
| 1,154.5 | |
| (204.0) | |
| 998.4 |
Depreciation and amortization | |
| 59.7 | |
| 68.5 | |
| 5.0 | |
| 133.2 |
Stock compensation expense | | | 6.5 | | | 9.7 | | | 8.4 | | | 24.6 |
Strategic transaction costs | | | 0.3 | | | — | | | 4.7 | | | 5.0 |
Restructuring and other charges | | | 49.9 | | | 2.1 | | | 33.1 | | | 85.1 |
Loss on extinguishment of debt | |
| — | |
| — | |
| 71.9 | |
| 71.9 |
Adjusted EBITDA (1) | |
| 164.3 | |
| 1,234.8 | |
| (80.9) | |
| 1,318.2 |
Less: Securitization funding costs | | | — | | | 160.3 | | | — | | | 160.3 |
Less: Interest expense on deposits | | | — | | | 164.4 | | | — | | | 164.4 |
Adjusted EBITDA, net (1) | | $ | 164.3 | | $ | 910.1 | | $ | (80.9) | | $ | 993.5 |
Adjusted EBITDA, net is also a non-GAAP financialCorporate and other consists of corporate overhead not allocated to either of the Company’s segments.
Effective with the first quarter of 2021, the Company changed its measure equal toof segment operating profit from adjusted EBITDA less securitization funding costs and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance with ASC 280to income before income taxes, as they areincome before income taxes is now the primary performance metricsmetric utilized by the chief operating decision maker to allocate resources and assess performance of the segments. Income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes. Segment operating results for the three months ended March 31, 2020 have been presented to align with the current year presentation. This change had no impact on previously reported financial information.
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Three Months Ended March 31, 2021 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 176.6 | | $ | 908.3 | | $ | — | | $ | 1,084.9 |
Other operating expenses | | | 135.9 | | | 361.5 | | | 17.0 | | | 514.4 |
Provision for loan loss | | | — | | | 33.4 | | | — | | | 33.4 |
Depreciation and amortization | |
| 9.0 | |
| 24.4 | |
| 0.6 | |
| 34.0 |
Operating income (loss) | |
| 31.7 | |
| 489.0 | |
| (17.6) | |
| 503.1 |
Interest expense, net | | | — | | | 79.1 | | | 29.6 | | | 108.7 |
Income (loss) before income taxes | | $ | 31.7 | | $ | 409.9 | | $ | (47.2) | | $ | 394.4 |
40
| | | | | | | | | | | | |
| | | | | | | 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 |
Other operating expenses | | | 133.5 | | | 365.7 | | | 23.9 | | | 523.1 |
Provision for loan loss | | | — | | | 655.9 | | | — | | | 655.9 |
Depreciation and amortization | |
| 18.2 | | | 19.7 | | | 0.9 | | | 38.8 |
Operating income (loss) | |
| 46.4 | |
| 142.3 | |
| (24.7) | |
| 164.0 |
Interest expense, net | |
| (0.3) | | | 110.2 | | | 28.7 | | | 138.6 |
Income (loss) before income taxes | | $ | 46.7 | | $ | 32.1 | | $ | (53.4) | | $ | 25.4 |
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
21.20. 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:
| | | | | | | | | | | | |
|
| September 30, | | September 30, |
| March 31, | | March 31, | ||||
| | 2020 | | 2019 | | 2021 | | 2020 | ||||
| | (in millions) | | (in millions) | ||||||||
Cash and cash equivalents | | $ | 3,078.4 | | $ | 4,512.5 | | $ | 2,858.6 | | $ | 4,456.8 |
Restricted cash included within other current assets (1) | | | 627.1 | | 493.8 | | | 316.5 | | | 253.2 | |
Restricted cash included within redemption settlement assets, restricted (2) | | | 45.4 | | | 45.4 | | | 71.8 | | | 55.9 |
Total cash, cash equivalents and restricted cash | | $ | 3,750.9 | | $ | 5,051.7 | | $ | 3,246.9 | | $ | 4,765.9 |
(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 |
(2) | See Note 9, “Redemption Settlement Assets,” for additional information regarding the nature of restrictions on redemption settlement assets. |
There were no significant non-cash investing or financing activities for the nine months ended September 30, 2020.
Non-cash investing activities for the nine months ended September 30, 2019 included a $40.1 million receivable from Publicis Groupe S.A. related to customary post-closing adjustments, as provided for in the Epsilon purchase agreement. The receivable was collected in full in October 2019. Non-cash financing activities for the nine months ended September 30, 2019 included 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 preferred stock. For more information, see Note 3, “Earnings Per Share.”
22. SUBSEQUENT EVENT
In October 2020, the Company entered into a definitive merger agreement with Lon Inc. (“Bread”) to acquire Bread in its entirety. Bread provides technology solutions for merchants to provide digital purchase financing options to customers in the form of installment credit as well as credit and debit multi-pay solutions. The transaction is subject to regulatory approval and satisfaction or waiver of other customary closing conditions. The Company will acquire Bread for an estimated purchase price of $450.0 million, subject to customary purchase price adjustments, with consideration consisting of cash, stock and a deferred payment.
4130
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 government economic stimulus, 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 fraudulent activity, net charge-offs in credit card and loan receivables |
● | 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; |
● |
increases in the cost of doing business, including market interest rates; |
● | inability to access financial or capital markets, including |
● | 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 Federal Deposit Insurance Corporation, Delaware or Utah regulatory capital requirements or other support for our banks; |
● | 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 |
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 impact of strategic initiatives on us or our business if any transactions are undertaken, and whether the anticipated benefits of such transactions can be 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.
4231
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, 2019,2020, filed with the Securities and Exchange Commission, or SEC, on February 28, 2020.26, 2021.
2020 Recent Developments2021 First Quarter Financial Highlights
Results of operations for the first quarter of 2021 continued to be impacted by the COVID-19 pandemic; however, we continue to see improvement in key credit metrics and continued sequential improvement in business conditions. Financial highlights for the first quarter of 2021 as compared to the corresponding prior year period are as follows:
● | For the |
● | Revenue decreased |
● | Provision for loan loss decreased $622.5 million, or 95%, to $33.4 million |
● | Income before income taxes increased $369.0 million, or 1,452%, to $394.4 million. |
● | Net income increased |
● | We paid dividends and dividend equivalent rights of |
● |
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 inIn response to this declaration and the rapid spread of COVID-19, around the world and within the United States, international, provincial, federal, state and local governmentsgovernment or other authorities have imposed varying degrees of restrictions on social and commercial activity in an effort to slowimprove health and safety. As the spread of the illness. In response to theglobal COVID-19 pandemic firsthas continued to evolve, our priority has been and foremost, we have prioritizedcontinues to be, the health and safety of our associates. Effective teleworking protocols are in place for more than 95%employees, with the vast majority of our associates.employees continuing to work from home.
The effects of the COVID-19 restrictions have also adversely impacted and continue to adversely impact our associates, our business partners, and our customers, which has negativelypandemic impacted our financial performance. However,results and year-over-year comparisons; however, credit metrics have remained resilient, with a net loss rate of 5.0% for the three months ended March 31, 2021, and a delinquency rate of 3.8% for the period ended March 31, 2021. Improvement in the third quarternet loss rate is a result of
43
2020, we began to see sequential improvement in certain key metrics. Specifically, our third quarter financial results demonstrated a recovery in Card Services prudent risk management strategy changes, deliberate underwriting actions, and direct consumer stimulus payments. Credit sales year-over-year performance strengthened versus the previous quarter. The majority of the credit sales improvement can be attributed to in‐store sales, which have benefitted from increased 28% sequentially overconsumer confidence and mobility. However, redemptions in our AIR MILES Reward Program declined 26% largely due to the downturn in the travel market as a result of the pandemic and related restrictions such as border closures repressing travel-related redemptions. The AIR MILES Reward Program continues to pivot the rewards portfolio to emphasize more non‐travel options, driving higher merchandise redemptions. In addition, the AIR MILES Reward Program is working with airline partners to plan for the eventual return of airline travel with optimism for the second quarterhalf of 2020; further, credit metrics remained resilient, reflecting strong payment trends across our cardholder base. Additionally, LoyaltyOne’s revenue improved from second quarter levels, reflecting better business conditions and improved AIR MILES reward miles activity. On a sequential basis, AIR MILES reward miles issued and redeemed improved 18% and 13%, respectively, over the second quarteryear. At BrandLoyalty, uncertainty remains with many European countries still in lockdown; however, new program activity is increasing with consumers actively engaged in loyalty campaigns, with particular success in products focused on the home.
Despite the emergence of 2020. We continue to drive company-wide expense reductions from ongoing efficiency programs that have reduced our cost to serve and enabled additional investment in areas of strategic priority.
We continue to monitor the evolving situation and guidance from international, federal, state and local government and public health authorities. In addition,vaccines, surges in COVID-19 cases, such as those recently experienced in Europe andincluding variants of the United States,strain, may cause people to self-quarantine or governments to shut down nonessential businesses again. GivenThe broad availability of COVID-19 vaccines and the willingness of individuals to be vaccinated are difficult to predict. The pace and shape of the COVID-19 recovery as well as the impact and extent of potential resurgences is not presently known. We continue to evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and current and potential impact on our business and financial position. However, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition,future results of operations or cash flows at this time. We expect COVID-19 to have an adverse impact on future revenue growth as well as overall profitability.
32
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | ||
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | | ||||||||||||||||||
|
| 2020 |
| 2019 | | % Change |
| | 2020 |
| 2019 | | % Change | |
| 2021 |
| 2020 | | % Change |
| ||||||
| | (in millions, except percentages) | | | (in millions, except percentages) | ||||||||||||||||||||||
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Services | | $ | 24.7 | | $ | 57.9 | | (57) | % | | $ | 109.2 | | $ | 197.6 | | (45) | % | | $ | 39.4 | | $ | 46.6 | | (15) | % |
Redemption, net | |
| 113.1 | |
| 143.9 | | (21) | | |
| 318.6 | |
| 409.5 | | (22) | | |
| 104.9 | |
| 120.9 | | (13) | |
Finance charges, net | |
| 912.7 | |
| 1,235.8 | | (26) | | |
| 2,983.7 | |
| 3,513.2 | | (15) | | |
| 940.6 | |
| 1,214.3 | | (23) | |
Total revenue | |
| 1,050.5 | |
| 1,437.6 | | (27) | | |
| 3,411.5 | |
| 4,120.3 | | (17) | | |
| 1,084.9 | |
| 1,381.8 | | (21) | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 482.7 | |
| 687.5 | | (30) | | |
| 1,474.7 | |
| 1,982.6 | | (26) | | |
| 497.5 | |
| 499.2 | | — | |
Provision for loan loss | |
| 207.7 | |
| 297.3 | | (30) | | |
| 1,113.7 | |
| 806.8 | | 38 | | |
| 33.4 | |
| 655.9 | | (95) | |
General and administrative | |
| 29.0 | |
| 31.8 | | (9) | | |
| 73.2 | |
| 127.4 | | (43) | | |
| 16.9 | |
| 23.9 | | (29) | |
Depreciation and other amortization | |
| 18.4 | |
| 19.9 | | (7) | | |
| 56.2 | |
| 59.8 | | (6) | | |
| 22.9 | |
| 17.4 | | 31 | |
Amortization of purchased intangibles | |
| 21.7 | |
| 25.0 | | (13) | | |
| 64.1 | |
| 73.4 | | (13) | | |
| 11.1 | |
| 21.4 | | (48) | |
Loss on extinguishment of debt | | | — | | | 71.9 | | (100) | | | | — | | | 71.9 | | (100) | | |||||||||
Total operating expenses | |
| 759.5 | |
| 1,133.4 | | (33) | | |
| 2,781.9 | |
| 3,121.9 | | (11) | | |
| 581.8 | |
| 1,217.8 | | (52) | |
Operating income | |
| 291.0 | |
| 304.2 | | (4) | | |
| 629.6 | |
| 998.4 | | (37) | | |
| 503.1 | |
| 164.0 | | 207 | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Securitization funding costs | |
| 37.5 | |
| 51.4 | | (27) | | |
| 130.1 | |
| 160.3 | | (19) | | |
| 33.6 | |
| 49.9 | | (33) | |
Interest expense on deposits | |
| 52.9 | |
| 62.5 | | (15) | | |
| 172.1 | |
| 164.4 | | 5 | | |
| 45.5 | |
| 60.3 | | (25) | |
Interest expense on long-term and other debt, net | |
| 24.7 | |
| 26.1 | | (6) | | |
| 79.1 | |
| 102.7 | | (23) | | |
| 29.6 | |
| 28.4 | | 5 | |
Total interest expense, net | |
| 115.1 | |
| 140.0 | | (18) | | |
| 381.3 | |
| 427.4 | | (11) | | |
| 108.7 | |
| 138.6 | | (22) | |
Income from continuing operations before income taxes | | | 175.9 | |
| 164.2 | | 7 | | | 248.3 | | | 571.0 | | (57) | | ||||||||||
Provision for income taxes | | | 42.6 | |
| 42.6 | | — | | |
| 46.6 | |
| 128.8 | | (64) | | |||||||||
Income from continuing operations | | | 133.3 | |
| 121.6 | | 10 | | | 201.7 | | | 442.2 | | (54) | | ||||||||||
Loss from discontinued operations, net of taxes | | | — | |
| (229.2) | | nm | * | | | — | | | (261.7) | | nm | * | |||||||||
Income before income taxes | | 394.4 | |
| 25.4 | | 1,452 | | |||||||||||||||||||
Provision (benefit) for income taxes | | | 108.2 | |
| (4.6) | | nm | * | ||||||||||||||||||
Net income | | $ | 133.3 | | $ | (107.6) | | (224) | % | | $ | 201.7 | | $ | 180.5 | | 12 | % | | $ | 286.2 | | $ | 30.0 | | 854 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | ||
Key Operating Metrics: | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Credit card statements generated | |
| 54.7 | |
| 69.0 | | (21) | % | |
| 177.0 | |
| 211.9 | | (16) | % | |||||||||
Credit sales | | $ | 6,151.7 | | $ | 7,823.6 | | (21) | % | | $ | 17,050.1 | | $ | 21,690.3 | | (21) | % | | $ | 6,043.3 | | $ | 6,099.1 | | (1) | % |
Average credit card and loan receivables | | $ | 15,299.6 | | $ | 17,448.8 | | (12) | % | | $ | 16,570.1 | | $ | 17,032.2 | | (3) | % | | $ | 15,785.0 | | $ | 18,294.4 | | (14) | % |
AIR MILES reward miles issued | |
| 1,239.7 | |
| 1,344.2 | | (8) | % | |
| 3,608.6 | |
| 4,024.8 | | (10) | % | | 1,111.6 | |
| 1,315.8 | | (16) | % | |
AIR MILES reward miles redeemed | |
| 687.2 | |
| 1,078.2 | | (36) | % | |
| 2,289.4 | |
| 3,217.0 | | (29) | % | |
| 739.4 | |
| 994.0 | | (26) | % |
* | not meaningful |
Three months ended September 30, 2020March 31, 2021 compared to the three months ended September 30, 2019March 31, 2020
Revenue. Total revenue decreased $387.1$296.9 million, or 27%21%, to $1,050.5$1,084.9 million for the three months ended September 30, 2020March 31, 2021 from $1,437.6$1,381.8 million for the three months ended September 30, 2019.March 31, 2020. The decrease was due to the following:
● | Services. Revenue decreased |
44
Cost of operations. Cost of operations decreased $204.8 million, or 30%, to $482.7 million for the three months ended September 30, 2020 as compared to $687.5 million for the three months ended September 30, 2019. The decrease was due to the following:
Provision for loan loss. Provision for loan loss decreased $89.6 million, or 30%, to $207.7 million for the three months ended September 30, 2020 as compared to $297.3 million for the three months ended September 30, 2019, due to the decline in credit card and loan receivables and lower net charge-offs.
General and administrative. General and administrative expenses decreased $2.8 million, or 9%, to $29.0 million for the three months ended September 30, 2020 as compared to $31.8 million for the three months ended September 30, 2019, as the prior year quarter was impacted by $10.8 million in restructuring charges incurred related to our Corporate reorganization. This decrease was offset in part by a $3.0 million increase in tax reserve related to an audit and higher discretionary benefits for the three months ended September 30, 2020.
Depreciation and other amortization. Depreciation and other amortization decreased $1.5 million, or 7%, to $18.4 million for the three months ended September 30, 2020 as compared to $19.9 million for the three months ended September 30, 2019, primarily due to certain fully amortized capitalized software, offset in part by additional assets placed into service from recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $3.3 million, or 13%, to $21.7 million for the three months ended September 30, 2020, as compared to $25.0 million for the three months ended September 30, 2019, primarily due to certain fully amortized intangible assets, including portfolio premiums.
Loss on extinguishment of debt. For the three months ended September 30, 2019, we recorded a $71.9 million loss on extinguishment of debt resulting from the $49.9 million redemption price of the senior notes and the write-off of $22.0 million deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion of outstanding senior notes and an amendment to the credit agreement that was effective upon the consummation of the sale of Epsilon.
45
Interest expense, net. Total interest expense, net decreased $24.9 million, or 18%, to $115.1 million for the three months ended September 30, 2020 as compared to $140.0 million for the three months ended September 30, 2019. The decrease was due to the following:
Taxes. Income tax expense related to continuing operations was flat at $42.6 million for each of the three months ended September 30, 2020 and 2019, respectively. The effective tax rate for the three months ended September 30, 2020 was 24.2% as compared to 26.0% for the prior year quarter, primarily resulting from final regulations addressing the high tax exception related to GILTI.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes was $229.2 million for the three months ended September 30, 2019, due primarily to the after-tax loss on the sale of Epsilon on July 1, 2019.
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
Revenue. Total revenue decreased $708.8 million, or 17%, to $3,411.5 million for the nine months ended September 30, 2020 from $4,120.3 million for the nine months ended September 30, 2019. The decrease was due to the following:
● | Redemption, net. Revenue decreased |
● | Finance charges, net. Revenue decreased |
4633
Cost of operations. Cost of operations decreased $507.9$1.7 million or 26%, to $1,474.7$497.5 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $1,982.6$499.2 million for the ninethree months ended September 30, 2019.March 31, 2020. The net decrease was due to the following:
● | Within the LoyaltyOne segment, cost of operations |
● | Within the Card Services segment, cost of operations decreased |
Provision for loan loss. Provision for loan loss increased $306.9decreased $622.5 million, or 38%95%, to $1,113.7$33.4 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $806.8$655.9 million for the ninethree months ended September 30, 2019,March 31, 2020. The decrease in the provision for loan loss in the current year quarter was due to improved credit performance, lower net-charge-offs and improving macroeconomic indicators. In the first quarter of 2020 there was a significant increase in the provision due to a higherreserve build in the allowance for loan loss relateddue to estimated lifetime losses under the CECL model includingdeterioration of the projected impactsglobal macroeconomic outlook as a result of the onset of COVID-19. The CECL model is influenced by the prevailing economic conditions and forecast utilized, which can create volatility in our provision for loan loss.
General and administrative. General and administrative expenses decreased $54.2$7.0 million, or 43%29%, to $73.2$16.9 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $127.4$23.9 million for the ninethree months ended September 30, 2019, driven by cost saving initiatives implementedMarch 31, 2020, due to a decrease in 2019, which among other items included reduced headcount, office space, charitable contributionspayroll and overall corporate overhead costs. In addition, the nine months ended September 30, 2019 was impacted by $33.1 million in restructuring charges incurred relatedbenefits expense due to our Corporate reorganization.lower medical claims.
Depreciation and other amortization. Depreciation and other amortization decreased $3.6increased $5.5 million, or 6%31%, to $56.2$22.9 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $59.8$17.4 million for the ninethree months ended September 30, 2019,March 31, 2020, primarily due to certain fully amortized capitalized software, offset$4.9 million in part by additionalaccelerated depreciation expense of fixed assets placed into serviceresulting from recent capital expenditures.the Company’s real estate optimization plans.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $9.3$10.3 million, or 13%48%, to $64.1$11.1 million for the ninethree months ended September 30, 2020,March 31, 2021, as compared to $73.4$21.4 million for the ninethree months ended September 30, 2019,March 31, 2020, primarily due to certain fully amortized intangible assets, including portfolio premiums.
Loss on extinguishmentBrandLoyalty customer contracts, offset in part by $5.4 million in amortization of debt. Forpurchased intangibles associated with the nine months ended September 30, 2019, we recorded a $71.9 million loss on extinguishmentacquisition of debt resulting from the $49.9 million redemption price of the senior notes and the write-off of $22.0 million deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion of outstanding senior notes and an amendment to the credit agreement that was effective upon the consummation of the sale of Epsilon.Bread in December 2020.
Interest expense, net. Total interest expense, net decreased $46.1$29.9 million, or 11%22%, to $381.3$108.7 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $427.4$138.6 million for the ninethree months ended September 30, 2019.March 31, 2020. The net decrease was due to the following:
● | Securitization funding costs. Securitization funding costs decreased |
● | Interest expense on deposits. Interest expense on deposits |
47
● | Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net |
Taxes. Income tax expense related to continuing operations decreased $82.2 million to $46.6Provision for income taxes was $108.2 million for the ninethree months ended September 30, 2020 from $128.8March 31, 2021, while the income tax benefit was $4.6 million for the ninethree months ended September 30, 2019, primarily related to a $322.7 million reduction in earnings before taxes.March 31, 2020. The effective tax rate for the ninethree months ended September 30, 2020March 31, 2021 was 18.8%27.4% as compared to 22.6%(18.1)% for the prior year period primarily due to discretequarter. The increase in tax benefits resulting from a reduction of tax reserves related to a statute of limitations expiration in the second quarter of 2020 as well as a favorable settlement with a state tax authorityexpense in the first quarter of 2020.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes2021 was $261.7 million for the nine months ended September 30, 2019, due primarily related to the after-tax loss on the sale of Epsilon on July 1, 2019.
Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure equal toan increase in taxable income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United Statesfirst quarter of America, or GAAP, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. Adjusted EBITDA excludes the gain on the sale of Precima, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, asset impairments, and restructuring and other charges. In 2019, adjusted EBITDA also excluded loss related to the extinguishment of debt in July 2019.
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.2021. 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-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.
the
4834
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in millions) | ||||||||||
Income from continuing operations | | $ | 133.3 | | $ | 121.6 | | $ | 201.7 | | $ | 442.2 |
Stock compensation expense | |
| 5.3 | |
| 3.0 | |
| 16.2 | |
| 24.6 |
Provision for income taxes | |
| 42.6 | |
| 42.6 | |
| 46.6 | |
| 128.8 |
Interest expense, net | |
| 115.1 | |
| 140.0 | |
| 381.3 | |
| 427.4 |
Depreciation and other amortization | |
| 18.4 | |
| 19.9 | |
| 56.2 | |
| 59.8 |
Amortization of purchased intangibles | |
| 21.7 | |
| 25.0 | |
| 64.1 | |
| 73.4 |
Gain on sale of business, net of strategic transaction costs (1) | | | — | | | — | | | (8.0) | |
| — |
Strategic transaction costs (2) | | | 3.5 | | | 2.3 | | | 6.8 | |
| 5.0 |
Asset impairments (3) | | | — | | | — | | | 34.2 | |
| — |
Restructuring and other charges (4) | | | — | | | 54.9 | | | (7.7) | |
| 85.1 |
Loss on extinguishment of debt (5) | | | — | | | 71.9 | | | — | | | 71.9 |
Adjusted EBITDA | | | 339.9 | | | 481.2 | | | 791.4 | | | 1,318.2 |
Less: Securitization funding costs | |
| 37.5 | |
| 51.4 | |
| 130.1 | |
| 160.3 |
Less: Interest expense on deposits | |
| 52.9 | |
| 62.5 | |
| 172.1 | |
| 164.4 |
Adjusted EBITDA, net | | $ | 249.5 | | $ | 367.3 | | $ | 489.2 | | $ | 993.5 |
effective tax rate for the first quarter of 2020 was impacted by a discrete tax benefit and reduction of tax reserves following a favorable settlement with a state tax authority.
Segment Revenue and Adjusted EBITDA, netIncome (Loss) Before Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | | |||||||||||||||||||
|
| 2020 |
| 2019 |
| % Change |
| | 2020 |
| 2019 |
| % Change |
|
| 2021 |
| 2020 |
| % Change |
| ||||||
| | (in millions, except percentages) | | | (in millions, except percentages) | ||||||||||||||||||||||
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 184.8 | | $ | 245.5 | | (25) | % | | $ | 533.9 | | $ | 700.7 | | (24) | % | | $ | 176.6 | | $ | 198.1 | | (11) | % |
Card Services | |
| 865.7 | |
| 1,192.0 | | (27) | |
| 2,877.5 | |
| 3,419.3 | | (16) | | |
| 908.3 | |
| 1,183.6 | | (23) | | |
Corporate/Other | |
| — | |
| 0.1 | | nm | * | |
| 0.1 | |
| 0.3 | | nm | * | |
| — | |
| 0.1 | | nm | * |
Total | | $ | 1,050.5 | | $ | 1,437.6 | | (27) | % | | $ | 3,411.5 | | $ | 4,120.3 | | (17) | % | | $ | 1,084.9 | | $ | 1,381.8 | | (21) | % |
Adjusted EBITDA, net: | | | | | | | | | | | | | | | | | | ||||||||||
| | | | | | | | | | ||||||||||||||||||
Income (Loss) Before Income Taxes | | | | | | | | | | ||||||||||||||||||
LoyaltyOne | | $ | 40.1 | | $ | 58.2 | | (31) | % | | $ | 141.8 | | $ | 164.3 | | (14) | % | | $ | 31.7 | | $ | 46.7 | | (32) | % |
Card Services | |
| 233.1 | |
| 328.0 | | (29) | |
| 407.2 | |
| 910.1 | | (55) | | | | 409.9 | | | 32.1 | | 1,179 | | |
Corporate/Other | |
| (23.7) | |
| (18.9) | | 25 | |
| (59.8) | |
| (80.9) | | (26) | | | | (47.2) | | | (53.4) | | (12) | | |
Total | | $ | 249.5 | | $ | 367.3 | | (32) | % | | $ | 489.2 | | $ | 993.5 | | (51) | % | | $ | 394.4 | | $ | 25.4 | | 1,452 | % |
* | not meaningful |
Three months ended September 30, 2020March 31, 2021 compared to the three months ended September 30, 2019March 31, 2020
Revenue. Total revenue decreased $387.1$296.9 million, or 27%21%, to $1,050.5$1,084.9 million for the three months ended September 30, 2020March 31, 2021 from $1,437.6$1,381.8 million for the three months ended September 30, 2019.March 31, 2020. The decrease was due to the following:
● | LoyaltyOne. Revenue decreased |
49
● | Card Services. Revenue decreased |
Adjusted EBITDA, netIncome Before Income Taxes. Adjusted EBITDA, net decreased $117.8Income before income taxes increased $369.0 million, or 32%1,452%, to $249.5$394.4 million for the three months ended September 30, 2020March 31, 2021 from $367.3$25.4 million for the three months ended September 30, 2019.March 31, 2020. The decreasenet increase was due to the following:
● | LoyaltyOne. |
● | Card Services. |
● | Corporate/Other. |
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
Revenue. Total revenue decreased $708.8 million, or 17%, to $3,411.5 million for the nine months ended September 30, 2020 from $4,120.3 million for the nine months ended September 30, 2019. The decrease was due to the following:
Adjusted EBITDA, net. Adjusted EBITDA, net decreased $504.3 million, or 51%, to $489.2 million for the nine months ended September 30, 2020 from $993.5 million for the nine months ended September 30, 2019. The net decrease was due to the following:
5035
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 cardAn account is contractually delinquent if we do not receive the minimum payment by the specified due date on the cardholder’s statement.date. Our policy is to continue to accrue interest and fee income on all credit card accounts, 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 thefor credit cardholder’s billing statement requesting payment.card receivables and 120 days delinquent for installment loan receivables. 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 based on the principal balances of our credit card and loan receivables:
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | % of | | December 31, | | % of |
| | March 31, | | % of | | December 31, | | % of |
| ||||
|
| 2020 |
| Total |
| 2019 |
| Total |
|
| 2021 |
| Total |
| 2020 |
| Total |
| ||||
| | (in millions, except percentages) |
| | (in millions, except percentages) |
| ||||||||||||||||
Receivables outstanding ─ principal | | $ | 14,806.8 |
| 100.0 | % | $ | 18,413.1 |
| 100.0 | % | | $ | 14,805.4 |
| 100.0 | % | $ | 15,963.3 |
| 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | | | | | | | | | | | | |
31 to 60 days | | $ | 221.3 | | 1.5 | % | $ | 337.4 |
| 1.8 | % | | $ | 164.1 | | 1.1 | % | $ | 229.9 |
| 1.4 | % |
61 to 90 days | |
| 147.9 |
| 1.0 | |
| 233.6 |
| 1.3 | | |
| 120.3 |
| 0.8 | |
| 162.8 |
| 1.0 | |
91 or more days | |
| 328.0 |
| 2.2 | |
| 496.5 |
| 2.7 | | |
| 280.0 |
| 1.9 | |
| 315.2 |
| 2.0 | |
Total | | $ | 697.2 |
| 4.7 | % | $ | 1,067.5 |
| 5.8 | % | | $ | 564.4 |
| 3.8 | % | $ | 707.9 |
| 4.4 | % |
In response to the COVID-19 pandemic, we have offered 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 the announcement of the forbearance programs. Those accounts receiving forbearance relief may not advance to the next delinquency cycle, including eventually to charge-off, in the same timeframe that would have occurred had the forbearance relief not been granted.
51
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,that are deemed uncollectible, 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 which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due. 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 | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | September 30, | | September 30, | | | March 31, | | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||||
| | (in millions, except percentages) | | | (in millions, except percentages) | |||||||||||||||
Average credit card and loan receivables | | $ | 15,299.6 | | $ | 17,448.8 | | $ | 16,570.1 | | $ | 17,032.2 | | | $ | 15,785.0 | | $ | 18,294.4 | |
Net charge-offs of principal receivables | |
| 223.1 | |
| 242.8 | |
| 847.9 | |
| 769.6 | | |
| 198.1 | |
| 320.2 | |
Net charge-offs as a percentage of average credit card and loan receivables | |
| 5.8 | % |
| 5.6 | % |
| 6.8 | % |
| 6.0 | % | |
| 5.0 | % |
| 7.0 | % |
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.
36
Liquidity and Capital Resources
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. We introduced a consumer retail deposit platform in 2019, and retail deposits comprised approximately $2.2 billion of our $10.0 billion in deposits outstanding at March 31, 2021.
Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases and payments of dividends.
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. However, continued volatility in the financial and capital markets due to COVID-19 may limit our access to or increase our cost of capital or make capital unavailable on terms acceptable to us or at all.
Cash Flow Activity
Operating Activities. We generated cash flow from operating activities of $1,488.6$517.2 million and $1,530.2$572.5 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. The year-over-year decrease in operating cash flows of $41.6$55.3 million was due to a decreaseimpacted by the provision for loan loss, offset in part by an increase in working capital and the impact of the sale of Epsilon.capital.
Investing Activities. Cash provided by investing activities was $3,364.8$1,009.0 million and $3,650.5$1,746.3 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. Significant components of investing activities are as follows:
● | Credit card and loan receivables. Cash increased |
● | Proceeds from sale of business. During the |
● | Proceeds from sale of credit card |
● | Capital expenditures. Cash paid for capital expenditures was |
52
Financing Activities. Cash used in financing activities was $5,064.3$1,740.8 million and $4,096.1$1,503.4 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. Significant components of financing activities are as follows:
● | Debt. Cash decreased |
● | Non-recourse borrowings of consolidated securitization entities. Cash decreased |
● | Deposits. |
● | Dividends. Cash paid for quarterly dividends and dividend equivalents was |
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. We introduced a consumer retail deposit platform in 2019, and retail deposits comprised approximately $1.7 billion of our $10.2 billion in deposits outstanding at September 30, 2020.
Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases and dividends.
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. However, continued volatility in the financial and capital markets due to COVID-19 may limit our access to or increase our cost of capital or make capital unavailable on terms acceptable to us or at all.
Debt
Senior Notes
In September 2020, we issued and sold $500.0 million aggregate principal amount of 7.000% senior notes due January 15, 2026. The Senior Notes due 2026 accrue interest on the principal amount at the rate of 7.000% per annum from September 22, 2020, payable semi-annually in arrears, on March 15 and September 15 of each year, beginning on March 15, 2021. The Senior Notes due 2026 will mature on January 15, 2026, subject to earlier repurchase or redemption.
Credit Agreement
In September 2020, we amended our credit agreement to (a) increase the maximum total leverage ratio, (b) decrease the minimum interest coverage ratio, and (c) increase the maximum permitted average delinquency ratios for Comenity Bank, and to make certain other amendments. The amendment also required us to prepay the term loans upon consummation of the offering of the Senior Notes due 2026 with a prepayment in an amount equal to the net proceeds from the offering, which obligation was satisfied in full with a prepayment of $493.8 million. See Note 13, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
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Debt
Credit Agreement
At March 31, 2021, we had $1,459.0 million in term loans outstanding and a $750.0 million revolving line of credit. As of September 30, 2020,March 31, 2021, we had no amounts outstanding under our revolving line of credit and total availability of $750.0 million. Our total leverage ratio, as defined in our credit agreement, was 2.31.9 to 1 at September 30, 2020,March 31, 2021, as compared to the maximum covenant ratio of 3.54.5 to 1.
As of September 30, 2020,March 31, 2021, we were in compliance with our debt covenants.
BrandLoyalty Credit Agreement
In April 2020,the first quarter of 2021, BrandLoyalty terminatedand certain of its existing facilitysubsidiaries, as borrowers and entered into a newguarantors, amended its credit agreement to provide for a committed revolving line of credit of €30.0 million ($35.2 million as of September 30, 2020), an uncommitted revolving line of credit of €30.0 million ($35.2 million as of September 30, 2020), and an accordion feature permitting BrandLoyaltyextend the maturity date by one year from April 3, 2023 to request an increase in either the committed or uncommitted revolving line of credit up to €80.0 million ($93.8 million as of September 30, 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 lenders.3, 2024. As of September 30, 2020,March 31, 2021, we had no amounts outstanding under our BrandLoyalty Credit Agreement.
Funding Sources
Deposits
We utilize certificates of deposit and money market deposits 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 September 30, 2020,March 31, 2021, we had $6.3$5.7 billion in certificates of deposit outstanding with interest rates ranging from 0.60%0.15% to 4.00%3.75% and maturities ranging from October 2020April 2021 to September 2025.March 2026. Certificate of deposit borrowings are subject to regulatory capital requirements.
As of September 30, 2020,March 31, 2021, we had $3.9$4.2 billion in money market deposits outstanding with interest rates ranging from 0.34%0.36% to 3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.
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.certain master trusts. These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’s credit card receivables. Historically, we have used both public and private term asset-backed securitization transactions as well as private conduit facilities as sources of funding for our securitized credit card receivables. Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.
During the three months ended March 31, 2021, $591.5 million of asset-backed term notes matured and were repaid, of which $66.5 million were retained by us and eliminated from the consolidated balance sheets.
We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card and loan receivables through the trusts. As of March 31, 2021, total capacity under the conduit facilities was $3.2 billion, of which $900.0 million had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.
As of September 30, 2020, the WFN Trusts and the WFC TrustMarch 31, 2021, we had approximately $10.5$10.2 billion of securitized credit card and loan 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 Trusttrusts and by the performance of the credit card and loan receivables in these credit card securitizationthe trusts.
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.
In September 2020, Master Trust I amended its 2009-VFN conduit facility, extending the maturity to October 2022. In September 2020, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1.0 billion to $700.0 million and extending the maturity to April 2022. In September 2020, the WFC Trust amended its 2009-VFN conduit facility, decreasing the capacity from $2.2 billion to $1.5 billion and extending the maturity to April 2022.
5438
At September 30, 2020, we had $4.4 billion of non-recourse borrowings of consolidated securitization entities, of which $2.1 billion is due within the next 12 months. As of September 30, 2020, total capacity under the conduit facilities was $3.2 billion, of which $335.0 million had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.
The following table shows the maturities of borrowing commitments as of September 30, 2020March 31, 2021 for the WFN Trusts and the WFC Trusttrusts by year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
|
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total | ||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||||||||||||||
Term notes | | $ | 592.2 | | $ | 1,852.1 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | 4,016.0 | ||||||||||||||||||
Fixed rate asset-backed term note securities | | $ | 1,327.2 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | — | | $ | 2,898.9 | ||||||||||||||||||
Conduit facilities (1) | |
| — | |
| — | |
| 3,200.0 | |
| — | |
| — | |
| 3,200.0 | |
| — | |
| 3,200.0 | |
| — | |
| — | |
| — | |
| 3,200.0 |
Secured loan facility | | | — | | | 52.2 | | | — | | | — | | | — | | | 52.2 | ||||||||||||||||||
Total (2) | | $ | 592.2 | | $ | 1,852.1 | | $ | 4,771.7 | | $ | — | | $ | — | | $ | 7,216.0 | | $ | 1,327.2 | | $ | 4,823.9 | | $ | — | | $ | — | | $ | — | | $ | 6,151.1 |
(1) | Amount represents borrowing capacity, not outstanding borrowings. |
(2) | Total amounts do not include |
See Note 13,12, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt.
Regulatory Matters
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 September 30, 2020March 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | Minimum Ratio to be | | | | | | Minimum Ratio to be | ||||||
|
| | | Minimum Ratio for | | Well Capitalized under |
| | | Minimum Ratio for | | Well Capitalized under | ||||||
|
| Actual | | Capital Adequacy | | Prompt Corrective |
| Actual | | Capital Adequacy | | Prompt Corrective | ||||||
|
| Ratio | | Purposes | | Action Provisions |
| Ratio | | Purposes | | Action Provisions | ||||||
Comenity Bank | | | | | | | | | | | | | | | | | | |
Tier 1 capital to average assets | | 17.6 | % | | 4.0 | % | | 5.0 | % | | 20.3 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 20.4 | | | 4.5 | | | 6.5 | | | 24.5 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 20.4 | | | 6.0 | | | 8.0 | | | 24.5 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 21.7 | | | 8.0 | | | 10.0 | | | 25.8 | | | 8.0 | | | 10.0 | |
| | | | | | | | | | | | | | | | | | |
Comenity Capital Bank | | | | | | | | | | | | | | | | | | |
Tier 1 capital to average assets | | 14.1 | % | | 4.0 | % | | 5.0 | % | | 15.0 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 16.7 | | | 4.5 | | | 6.5 | | | 17.1 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 16.7 | | | 6.0 | | | 8.0 | | | 17.1 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 18.0 | | | 8.0 | | | 10.0 | | | 18.4 | | | 8.0 | | | 10.0 | |
Comenity Bank and Comenity Capital Bank have adopted the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delays 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.
Stock Repurchase Programs
We had an authorized stock repurchase program to acquire up to $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020. At December 31, 2019 we had $347.8 million remaining under the stock repurchase program. On April 23, 2020, we announced the suspension of our stock repurchase program. The stock repurchase program expired on June 30, 2020, and $347.8 million of this program expired unused. During 2020, the Company did not repurchase any shares of its outstanding common stock under its authorized stock repurchase program.
55
Dividends
On January 30, 2020,28, 2021, our Boardboard 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 14, 2020, resulting in a dividend payment of $30.0 million on March 19, 2020.
On April 23, 2020, our Board of Directorsdirectors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on May 14, 2020,February 12, 2021, resulting in a dividend payment of $10.0$10.4 million on JuneMarch 18, 2020.2021. Additionally, we paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2021.
On July 23, 2020,April 29, 2021, our Boardboard of Directorsdirectors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on June 18, 2021 to stockholders of record at the close of business on AugustMay 14, 2020, resulting in a dividend payment of $10.0 million on September 18, 2020.2021.
On October 29, 2020, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on November 13, 2020, with a dividend payment date of December 18, 2020.39
Additionally, we paid $0.5 million in cash related to dividend equivalent rights for the nine months ended September 30, 2020.Index
Critical Accounting Policies and Estimates
With the exception of the adoption of ASC 326, thereThere 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, 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 326 on January 1, 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.
Except for the broad, continuing negative impacts of the COVID-19 pandemic on the global economy and major financial markets and the risk factors described in Part II Item 1A included in this report, thereThere has been no other material change from our Annual Report on Form 10-K for the year ended December 31, 2019 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 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 September 30, 2020,March 31, 2021, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, 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, or persons performing similar functions, concluded that as of September 30,
56
2020March 31, 2021 (the end of our thirdfirst 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, or persons performing similar functions, 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 thirdfirst quarter 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
PART II
Item 1. Legal Proceedings.
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 15,14, “Commitments and Contingencies,” of the Notes to Unaudited Condensed Consolidated Financial Statements.
Item 1A. Risk Factors.
Other than as set forth below, thereThere 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, 2019 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
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. Certain jurisdictions have begun reopening only to return to more stringent restrictions where increases in COVID-19 cases occur. These restrictions have continued to disrupt 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. Even as governmental restrictions are lifted and economies gradually reopen, the ongoing economic impacts, including government economic stimulus and health concerns associated with the pandemic may continue to affect consumer behavior, spending levels and retail preferences.
Specific impacts on our operations and financial results include, but are not limited to, the following:
57
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 September 30, 2020:March 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar | | | | | | | Total Number of | | Approximate Dollar | ||
| | | | | | | Shares Purchased as | | Value of Shares that | | | | | | | Shares Purchased as | | Value of Shares that | ||
| | | | | | | Part of Publicly | | May Yet Be | | | | | | | Part of Publicly | | May Yet Be | ||
| | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the | | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the | ||||
Period |
| Shares Purchased (1) |
| per Share |
| Programs |
| Plans or Programs (2) |
| Shares Purchased (1) |
| per Share |
| Programs |
| Plans or Programs | ||||
| | | | | | | | | (Dollars in millions) | | | | | | | | | (Dollars in millions) | ||
During 2020: | | | | | | | | | | | ||||||||||
July 1-31 |
| 4,343 | | $ | 41.91 | | — | | $ | — | ||||||||||
August 1-31 |
| 4,449 | |
| 45.72 |
| — | |
| — | ||||||||||
September 1-30 | | 4,398 | | | 45.13 | | — | | | — | ||||||||||
During 2021: | | | | | | | | | | | ||||||||||
January 1-31 |
| 3,705 | | $ | 71.12 | | — | | $ | — | ||||||||||
February 1-28: |
| 5,829 | |
| 85.76 |
| — | |
| — | ||||||||||
March 1-31 | | 6,453 | | | 107.63 | | — | | | — | ||||||||||
Total |
| 13,190 | | $ | 44.27 | | — | | $ | — |
| 15,987 | | $ | 91.19 | | — | | $ | — |
(1) | During the period represented by the table, |
58
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) None
(b) None
41
Item 6. Exhibits.
(a) Exhibits:
EXHIBIT INDEX
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit |
| Filer |
| Description |
| Form |
| Exhibit |
| Filing |
| 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 | | (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 | | (a) | | | 8-K | | 3.1 | | 4/29/19 | ||
| | | | | | | | | | | | | | | | | | | | |
3.3 | | (a) | | | 8-K | | 3.1 | | 2/1/16 | | (a) | | | 8-K | | 3.1 | | 2/1/16 | ||
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4 | | (a) | | Specimen Certificate for shares of Common Stock of the Registrant. | | 10-Q | | 4 | | 8/8/03 | | (a) | | Specimen Certificate for shares of Common Stock of the Registrant. | | 10-Q | | 4 | | 8/8/03 |
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10.1 | | (b) (c) (d) | | | 10-D | | 99.2 | | 9/14/20 | | (b) (c) (d) | | | 8-K | | 99.1 | | 1/29/21 | ||
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#10.2 | | (a) | | | 8-K | | 4.1 | | 9/23/20 | |||||||||||
+10.2 | | (a) | | | 8-K | | 10.1 | | 2/18/21 | |||||||||||
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10.3 | | (a) | | | 8-K | | 10.2 | | 9/23/20 | |||||||||||
Ù+10.3 | | (a) | | | 8-K | | 10.2 | | 2/18/21 | |||||||||||
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*˄10.4 | | (a) | | | | | | | | |||||||||||
10.4 | | (b) (c) (d) | | | 8-K | | 99.1 | | 4/2/21 | |||||||||||
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*#10.5 | | (a) | | | | | | | | |||||||||||
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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) | | | | | | | |
5942
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*101 | | (a) | | The following financial information from Alliance Data Systems Corporation’s Quarterly Report on Form 10-Q for the quarter ended | | | | | | |
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*104 | | (a) | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | |
* | Filed herewith |
+ | Management contract, compensatory plan or arrangement |
Ù# Certain exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Alliance Data hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the U.S. Securities and Exchange Commission.
# 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 would likely cause competitive harm to the registrant if publicly disclosed. Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Registrant hereby undertakes to furnish supplementally an unredacted copy of the exhibit or a copy of any omitted schedule upon request by the U.S. Securities and Exchange Commission. |
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(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 |
6043
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 | |
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| | By: | /s/ |
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Date: | | | |
| | By: | /s/ LAURA SANTILLAN |
| | | Laura Santillan |
| | | Senior Vice President and Chief Accounting Officer |
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Date: | | | |
6144