UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
For the quarterly period ended | |
or | |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-40776
Loyalty Ventures Inc.
(Exact name of registrant as specified in its charter)
| |
Delaware | 87-1353472 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
c/o Alliance Data Systems Corporation8235 Douglas Avenue, Suite 1200
7500 Dallas Parkway, Suite 700
Plano, Texas 7502475225
(Address of Principal Executive Offices)principal executive offices, including zip code)
(972) 338-5170
(Registrant’s telephone number)number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading symbol | Name of Exchange on which registered | ||
Common stock, par value $0.01 per share | | LYLT | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 ☐☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | | |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
|
| ||
|
|
|
|
|
As of November 19, 2021, 24,585,237May 2, 2022, 24,611,546 shares of common stock were outstanding.
LOYALTY VENTURES INC.
INDEX
|
| |
| Page |
---|---|---|---|---|
| | | | |
| | 3 | ||
| | | | |
| | 3 | ||
| | | | |
| | | 3 | |
| | | | |
| | | 4 | |
| | | | |
| | | 5 | |
| | | | |
| | | 6 | |
| | | | |
| | | 7 | |
| | | | |
| | Notes to Condensed Consolidated and Combined Financial Statements | | 8 |
| | | | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| |
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| |
| ||
| | | | |
| | |
|
2
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
LOYALTY VENTURES INC.
UNAUDITED CONDENSED COMBINEDCONSOLIDATED BALANCE SHEETS
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 198,865 | | $ | 278,841 |
Accounts receivable, net, less allowance for doubtful accounts ($4.7 million and $4.0 million at September 30, 2021 and December 31, 2020, respectively) | |
| 290,652 | |
| 270,559 |
Inventories | |
| 192,277 | |
| 164,306 |
Redemption settlement assets, restricted | |
| 733,952 | |
| 693,461 |
Other current assets | |
| 20,505 | |
| 23,000 |
Total current assets | |
| 1,436,251 | |
| 1,430,167 |
Property and equipment, net | |
| 83,720 | |
| 97,916 |
Right of use assets - operating | |
| 103,060 | |
| 113,870 |
Deferred tax asset, net | |
| 71,677 | |
| 70,137 |
Intangible assets, net | |
| 3,580 | |
| 5,097 |
Goodwill | |
| 709,006 | |
| 735,898 |
Investment in unconsolidated subsidiary – related party | |
| — | |
| 854 |
Other non-current assets | |
| 3,157 | |
| 4,125 |
Total assets | | $ | 2,410,451 | | $ | 2,458,064 |
LIABILITIES AND EQUITY | |
|
| |
|
|
Accounts payable | | $ | 74,584 | | $ | 74,818 |
Accrued expenses | |
| 49,612 | |
| 67,056 |
Deferred revenue | |
| 924,295 | |
| 898,475 |
Current operating lease liabilities | |
| 9,626 | |
| 9,942 |
Other current liabilities | |
| 131,601 | |
| 64,990 |
Total current liabilities | |
| 1,189,718 | |
| 1,115,281 |
Deferred revenue | |
| 96,605 | |
| 105,544 |
Long-term operating lease liabilities | |
| 106,675 | |
| 117,648 |
Other liabilities | |
| 23,877 | |
| 25,290 |
Total liabilities | |
| 1,416,875 | |
| 1,363,763 |
Commitments and contingencies | |
|
| |
|
|
Parent’s net investment | |
| 1,042,072 | |
| 1,093,920 |
Accumulated other comprehensive (loss) income | |
| (48,496) | |
| 381 |
Total equity | |
| 993,576 | |
| 1,094,301 |
Total liabilities and equity | | $ | 2,410,451 | | $ | 2,458,064 |
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands, except per share amounts) | ||||
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 139,724 | | $ | 167,601 |
Accounts receivable, net, less allowance for doubtful accounts ($3.9 million and $4.7 million at March 31, 2022 and December 31, 2021, respectively) | |
| 271,084 | |
| 288,251 |
Inventories, net | |
| 213,183 | |
| 188,577 |
Redemption settlement assets, restricted | |
| 699,531 | |
| 735,131 |
Other current assets | |
| 28,653 | |
| 28,627 |
Total current assets | |
| 1,352,175 | |
| 1,408,187 |
Property and equipment, net | |
| 74,563 | |
| 79,959 |
Right of use assets - operating | |
| 96,459 | |
| 99,515 |
Deferred tax asset, net | |
| 58,363 | |
| 58,128 |
Intangible assets, net | |
| 2,729 | |
| 3,095 |
Goodwill | |
| 639,947 | |
| 649,958 |
Other non-current assets | |
| 24,739 | |
| 24,885 |
Total assets | | $ | 2,248,975 | | $ | 2,323,727 |
LIABILITIES AND EQUITY | |
|
| |
|
|
Accounts payable | | $ | 81,149 | | $ | 103,482 |
Accrued expenses | |
| 136,660 | |
| 144,997 |
Deferred revenue | |
| 916,679 | |
| 924,789 |
Current operating lease liabilities | |
| 9,414 | |
| 10,055 |
Current debt | | | 50,625 | | | 50,625 |
Other current liabilities | |
| 133,527 | |
| 118,444 |
Total current liabilities | |
| 1,328,054 | |
| 1,352,392 |
Deferred revenue | |
| 95,443 | |
| 97,167 |
Long-term operating lease liabilities | |
| 100,422 | |
| 103,242 |
Long-term debt | | | 591,714 | | | 603,488 |
Other liabilities | |
| 20,676 | |
| 20,874 |
Total liabilities | |
| 2,136,309 | |
| 2,177,163 |
Commitments and contingencies | |
|
| |
|
|
Common stock, $0.01 par value; authorized, 200,000 shares; issued, 24,612 shares and 24,585 shares at March 31, 2022 and December 31, 2021, respectively | | | 246 | | | 246 |
Additional paid-in-capital | | | 269,847 | | | 266,775 |
Accumulated deficit | | | (54,365) | | | (55,383) |
Accumulated other comprehensive loss | |
| (103,062) | |
| (65,074) |
Total equity | |
| 112,666 | |
| 146,564 |
Total liabilities and equity | | $ | 2,248,975 | | $ | 2,323,727 |
See accompanying notes to unaudited condensed consolidated and combined financial statements.
3
LOYALTY VENTURES INC.
UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | | 2022 | | 2021 | ||||||
| (in thousands, except per share amounts) |
| (in thousands, except per share amounts) | |||||||||||||||
Revenues |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Redemption, net | | $ | 97,149 | | $ | 113,073 | | $ | 280,844 | | $ | 318,620 | | $ | 84,976 | | $ | 104,864 |
Services | |
| 65,806 | |
| 63,629 | |
| 199,244 | |
| 193,856 | |
| 63,783 | |
| 66,223 |
Other | |
| 6,302 | |
| 8,054 | |
| 16,628 | |
| 21,456 | |
| 6,186 | |
| 5,467 |
Total revenue | |
| 169,257 | |
| 184,756 | |
| 496,716 | |
| 533,932 | |
| 154,945 | |
| 176,554 |
Operating expenses | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 119,882 | | | 146,358 | | | 372,820 | | | 399,519 | |
| 127,878 | | | 135,846 |
General and administrative | |
| 4,018 | | | 3,630 | | | 11,608 | | | 10,794 | |
| 6,209 | | | 3,685 |
Depreciation and other amortization | |
| 8,665 | | | 7,735 | | | 26,237 | | | 20,690 | |
| 9,125 | | | 8,595 |
Amortization of purchased intangibles | |
| 433 | | | 12,538 | | | 1,316 | | | 36,168 | |
| 288 | | | 439 |
Total operating expenses | |
| 132,998 | |
| 170,261 | |
| 411,981 | |
| 467,171 | |
| 143,500 | |
| 148,565 |
Operating income | |
| 36,259 | | | 14,495 | |
| 84,735 | |
| 66,761 | |
| 11,445 | | | 27,989 |
Gain on sale of a business | |
| — | | | — | | | — | | | (10,876) | ||||||
Interest income, net | |
| (136) | | | (167) | | | (318) | | | (516) | ||||||
Income before income taxes and (income) loss from investment in unconsolidated subsidiary | |
| 36,395 | |
| 14,662 | |
| 85,053 | |
| 78,153 | ||||||
Interest expense (income), net | |
| 9,052 | | | (69) | ||||||||||||
Income before income taxes and loss from investment in unconsolidated subsidiary | |
| 2,393 | |
| 28,058 | ||||||||||||
Provision for income taxes | |
| 16,542 | | | 3,534 | | | 31,616 | | | 17,382 | |
| 1,375 | | | 8,984 |
(Income) loss from investment in unconsolidated subsidiary – related party, net of tax | |
| (4,108) | | | 148 | | | (4,067) | | | 205 | ||||||
Loss from investment in unconsolidated subsidiary – related party, net of tax | |
| — | | | 36 | ||||||||||||
Net income | | $ | 23,961 | | $ | 10,980 | | $ | 57,504 | | $ | 60,566 | | $ | 1,018 | | $ | 19,038 |
| | | | | | | | | | | | | | | | | | |
Net income per share - Basic and Diluted (Note 3) | | $ | 0.97 | | $ | 0.45 | | $ | 2.34 | | $ | 2.46 | ||||||
Net income per share (Note 3): | | | | | | | ||||||||||||
Basic | | $ | 0.04 | | $ | 0.77 | ||||||||||||
Diluted | | $ | 0.04 | | $ | 0.77 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Number of Basic and Diluted Shares Outstanding (Note 3) | | | 24,585 | | | 24,585 | | | 24,585 | | | 24,585 | ||||||
Weighted average shares (Note 3): | | | | | | | ||||||||||||
Basic | | | 24,598 | | | 24,585 | ||||||||||||
Diluted | | | 24,626 | | | 24,585 |
See accompanying notes to unaudited condensed consolidated and combined financial statements.
4
LOYALTY VENTURES INC.
UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOMELOSS
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2022 | | 2021 | ||
| | (in thousands) | ||||
Net income | | $ | 1,018 | | $ | 19,038 |
| | | | | | |
Other comprehensive income (loss): | |
|
| |
|
|
Unrealized loss on securities available-for-sale | |
| (20,801) | | | (6,400) |
Tax benefit | |
| — | | | — |
Unrealized loss on securities available-for-sale, net of tax | |
| (20,801) | |
| (6,400) |
| | | | | | |
Unrealized gain on cash flow hedges | |
| 2 | | | 1,121 |
Tax benefit (expense) | |
| 34 | | | (204) |
Unrealized gain on cash flow hedges, net of tax | |
| 36 | |
| 917 |
| | | | | | |
Foreign currency translation adjustments | |
| (17,223) | | | (29,699) |
| | | | | | |
Other comprehensive loss, net of tax | |
| (37,988) | |
| (35,182) |
| | | | | | |
Total comprehensive loss, net of tax | | $ | (36,970) | | $ | (16,144) |
See accompanying notes to unaudited condensed consolidated and combined financial statements.
5
LOYALTY VENTURES INC.
UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Net income | | $ | 23,961 | | $ | 10,980 | | $ | 57,504 | | $ | 60,566 |
| | | | | | | | | | | | |
Other comprehensive income (loss): | |
|
| |
|
| |
|
| |
|
|
Unrealized (loss) gain on securities available-for-sale | |
| (2,769) | | | 4,386 | | | (11,245) | | | 15,913 |
Tax benefit | |
| — | | | — | | | 693 | | | — |
Unrealized (loss) gain on securities available-for-sale, net of tax | |
| (2,769) | |
| 4,386 | |
| (10,552) | |
| 15,913 |
| | | | | | | | | | | | |
Unrealized gain (loss) on cash flow hedges | |
| 1,206 | | | 690 | | | 2,134 | | | (1) |
Tax expense | |
| (298) | | | (212) | | | (454) | | | (41) |
Unrealized gain (loss) on cash flow hedges, net of tax | |
| 908 | |
| 478 | |
| 1,680 | |
| (42) |
| | | | | | | | | | | | |
Foreign currency translation adjustments | |
| (21,064) | | | 35,495 | | | (40,005) | | | 32,733 |
| | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | |
| (22,925) | |
| 40,359 | |
| (48,877) | |
| 48,604 |
| | | | | | | | | | | | |
Total comprehensive income, net of tax | | $ | 1,036 | | $ | 51,339 | | $ | 8,627 | | $ | 109,170 |
See accompanying notes to unaudited condensed combined financial statements.
5
LOYALTY VENTURES INC.
UNAUDITED CONDENSED COMBINED STATEMENTS OF EQUITY
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| |
| | |
| | |
| Accumulated |
| | | ||
| | | | | | | Additional | | | | | Former | | Other | | | ||||
| | Common Stock | | Paid-In | | Accumulated | | Parent's Net | | Comprehensive | | Total | ||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Investment |
| Loss |
| Equity | ||||||
| | (in thousands) | ||||||||||||||||||
Balance as of January 1, 2022 | | 24,585 | | $ | 246 | | $ | 266,775 | | $ | (55,383) | | $ | — | | $ | (65,074) | | $ | 146,564 |
Net income | | — | | | — | | | — | | | 1,018 | | | — | | | — | |
| 1,018 |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (37,988) | |
| (37,988) |
Net transfers from former Parent for Separation-related transactions | | — | | | — | | | 1,354 | | | — | | | — | | | — | | | 1,354 |
Stock-based compensation | | — | | | — | | | 2,328 | | | — | | | — | | | — | | | 2,328 |
Other | | 27 | | | — | | | (610) | | | — | | | — | | | — | | | (610) |
Balance as of March 31, 2022 | | 24,612 | | $ | 246 | | $ | 269,847 | | $ | (54,365) | | $ | — | | $ | (103,062) | | $ | 112,666 |
| | | |
Three Months Ended September 30, 2021 | | | |
|
| (in thousands) | |
Balance at July 1, 2021 | | $ | 987,015 |
Net income | |
| 23,961 |
Other comprehensive loss | |
| (22,925) |
Change in Parent’s net investment | |
| 5,525 |
Balance at September 30, 2021 | | $ | 993,576 |
| | | |
Three Months Ended September 30, 2020 |
| | |
|
| (in thousands) | |
Balance at July 1, 2020 | | $ | 978,008 |
Net income | |
| 10,980 |
Other comprehensive income | |
| 40,359 |
Change in Parent’s net investment | |
| 3,364 |
Balance at September 30, 2020 | | $ | 1,032,711 |
| | | |
Nine Months Ended September 30, 2021 |
| | |
|
| (in thousands) | |
Balance at December 31, 2020 | | $ | 1,094,301 |
Net income | |
| 57,504 |
Other comprehensive loss | |
| (48,877) |
Change in Parent’s net investment | |
| (109,352) |
Balance at September 30, 2021 | | $ | 993,576 |
| | | |
Nine Months Ended September 30, 2020 |
| | |
|
| (in thousands) | |
Balance at December 31, 2019 | | $ | 947,559 |
Net income | |
| 60,566 |
Other comprehensive income | |
| 48,604 |
Change in Parent’s net investment | |
| (24,018) |
Balance at September 30, 2020 | | $ | 1,032,711 |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| |
| | |
| | |
| Accumulated |
| | | ||
| | | | | | | Additional | | | | | Former | | Other | | | ||||
| | Common Stock | | Paid-In | | Accumulated | | Parent's Net | | Comprehensive | | Total | ||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Investment |
| Income (Loss) |
| Equity | ||||||
| | (in thousands) | ||||||||||||||||||
Balance as of January 1, 2021 | | — | | $ | — | | $ | — | | $ | — | | $ | 1,093,920 | | $ | 381 | | $ | 1,094,301 |
Net income | | — | | | — | | | — | | | — | | | 19,038 | | | — | |
| 19,038 |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (35,182) | |
| (35,182) |
Change in former Parent’s net investment | | — | | | — | | | — | | | — | | | (119,731) | | | — | |
| (119,731) |
Balance as of March 31, 2021 | | — | | $ | — | | $ | — | | $ | — | | $ | 993,227 | | $ | (34,801) | | $ | 958,426 |
See accompanying notes to unaudited condensed consolidated and combined financial statements.
6
LOYALTY VENTURES INC.
UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
|
| |
|
Net income | | $ | 57,504 | | $ | 60,566 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Depreciation and amortization | |
| 27,553 | |
| 56,858 |
Deferred income taxes | |
| (3,594) | |
| 3,610 |
Non-cash stock compensation | |
| 6,322 | |
| 5,184 |
Gain on sale of a business | |
| — | |
| (10,876) |
Gain on sale of investment in unconsolidated subsidiary – related party | | | (4,110) | | | — |
Change in other operating assets and liabilities, net of sale of business: | |
| | |
| |
Change in deferred revenue | |
| 12,775 | |
| 37,648 |
Change in accounts receivable | |
| (14,201) | |
| 29,546 |
Change in accounts payable and accrued expenses | |
| (12,496) | |
| (45,718) |
Change in other assets | |
| (28,982) | |
| 23,961 |
Change in other liabilities | |
| 62,415 | |
| (34,414) |
Other | |
| 10,539 | |
| (4,686) |
Net cash provided by operating activities | |
| 113,725 | |
| 121,679 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
|
| |
|
|
Change in redemption settlement assets, restricted | |
| (47,312) | | | (31,277) |
Capital expenditures | |
| (13,137) | | | (18,605) |
Investments in unconsolidated subsidiary – related party | | | — | | | (736) |
Distributions from investment in unconsolidated subsidiary – related party | |
| 795 | | | — |
Sale of investment in unconsolidated subsidiary – related party | | | 4,055 | | | — |
Net cash used in investing activities | |
| (55,599) | |
| (50,618) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
|
| |
|
|
Dividends paid to Parent | |
| (120,000) | | | — |
Net transfers to Parent | |
| (9,278) | | | (1,511) |
Net cash used in financing activities | |
| (129,278) | |
| (1,511) |
| | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (4,000) | | | 3,604 |
| | | | | | |
Change in cash, cash equivalents and restricted cash | |
| (75,152) | |
| 73,154 |
Cash, cash equivalents and restricted cash at beginning of year | |
| 337,525 | | | 175,132 |
Cash, cash equivalents and restricted cash at end of year | | $ | 262,373 | | $ | 248,286 |
| | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | |
|
| |
|
|
Interest paid | | $ | 200 | | $ | 209 |
Income taxes paid, net | | $ | 30,781 | | $ | 61,684 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
|
| |
|
Net income | | $ | 1,018 | | $ | 19,038 |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |
| | |
| |
Depreciation and amortization | |
| 9,413 | |
| 9,034 |
Deferred income tax benefit | |
| (1,054) | |
| (478) |
Non-cash stock compensation | |
| 2,328 | |
| 1,853 |
Change in other operating assets and liabilities: | |
| | |
| |
Change in deferred revenue | |
| (20,700) | |
| 4,433 |
Change in accounts receivable | |
| 16,800 | |
| 16,518 |
Change in accounts payable and accrued expenses | |
| (28,551) | |
| (23,778) |
Change in other assets | |
| (25,778) | |
| 15,913 |
Change in other liabilities | |
| 14,440 | |
| 49,402 |
Other | |
| 3,366 | |
| 4,922 |
Net cash (used in) provided by operating activities | |
| (28,718) | |
| 96,857 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
|
| |
|
|
Change in redemption settlement assets, restricted | |
| (8,324) | | | (13,109) |
Capital expenditures | |
| (3,698) | | | (4,548) |
Distributions from investment in unconsolidated subsidiary – related party | |
| — | | | 795 |
Net cash used in investing activities | |
| (12,022) | |
| (16,862) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
|
| |
|
|
Borrowings under debt agreements | | | 1,000 | | | — |
Repayments of borrowings | | | (13,656) | | | — |
Dividends paid to former Parent | |
| — | | | (120,000) |
Net transfers to former Parent | |
| — | | | (3,514) |
Net transfers from former Parent for Separation-related transactions | | | 1,569 | | | — |
Other | | | (579) | | | — |
Net cash used in financing activities | |
| (11,666) | |
| (123,514) |
| | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (662) | | | (1,571) |
| | | | | | |
Change in cash, cash equivalents and restricted cash | |
| (53,068) | |
| (45,090) |
Cash, cash equivalents and restricted cash at beginning of year | |
| 232,602 | | | 337,525 |
Cash, cash equivalents and restricted cash at end of year | | $ | 179,534 | | $ | 292,435 |
| | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | |
|
| |
|
|
Interest paid | | $ | 8,280 | | $ | 92 |
Income taxes paid, net | | $ | 8,535 | | $ | 15,769 |
See accompanying notes to unaudited condensed consolidated and combined financial statements.
7
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS SPINOFF AND BASIS OF PRESENTATION
Description of the Business
On November 5, 2021, Bread Financial Holdings, Inc., previously named Alliance Data Systems Corporation (“former Parent”), completed the spinoff of its LoyaltyOne reportable segment (the “Separation”) into an independent, publicly traded company, Loyalty Ventures Inc. (the “Company” or “Loyalty Ventures”).
Loyalty Ventures provides coalition and campaign-based loyalty solutions through the Canadian AIR MILES®MILES® Reward Program and BrandLoyalty Group B.V. (“BrandLoyalty”). The AIR MILES Reward Program is a full servicefull-service outsourced coalition loyalty program for its sponsors who pay a fee per AIR MILES reward mile issued, in return for which the AIR MILES Reward Program provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for high frequency retailers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered across Europe and Asia, as well as around the world. The business represents
Basis of Presentation
Prior to the LoyaltyOne reportable segment previously owned by Alliance Data Systems Corporation (“ADS” or “Parent”) that was spun off into Loyalty Ventures Inc. on November 5, 2021.
Spinoff ofSeparation, the LoyaltyOne Segment
On October 13, 2021, the Board of Directors of ADS approved the previously announced separation (the “Separation”) of its LoyaltyOne segment, into an independent, publicly traded company, Loyalty Ventures Inc. The Separation was completed on November 5, 2021 through the pro rata distribution of 81% of the outstanding shares of Loyalty Ventures to holders of ADS common stock at the close of business on the record date of October 27, 2021, with ADS retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADS stockholders of record at the close of business on October 27, 2021 received one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADS common stock. Additionally, Loyalty Ventures made a cash distribution of $750.0 million to ADS on November 3, 2021Company had operated as part of the Separation. The distribution qualified as a tax-free reorganization and a tax-free distribution to ADS and its stockholders for U.S. federal income tax purposes. On November 8, 2021, “regular-way” trading of Loyalty Ventures’ common stock began on the Nasdaq Stock Market under the symbol “LYLT”.
In connection with the Separation, Loyalty Ventures entered into several agreements with ADS, including on November 3, 2021 the Separation and Distribution Agreement and on November 5, 2021 the remaining agreements described below, that, among other things, effect the Separation and provide a framework for its relationship with ADS after the Separation:
Separation and Distribution Agreement. Governs the overall terms of the Separation. Generally, the Separation and Distribution Agreement includes ADS’ and Loyalty Ventures’ agreements relating to the restructuring steps taken to complete the Separation, including the assets and rights transferred, liabilities assumed and related matters. The Separation and Distribution Agreement provides for ADS and Loyalty Ventures to transfer specified assets between the companies that operate the LoyaltyOne segment after the Distribution, on the one hand, and ADS’ remaining businesses, on the other hand.
Tax Matters Agreement. Governs ADS’ and Loyalty Ventures’ respective rights, responsibilities and obligations with respect to taxes, including taxes arising in the ordinary course of business, and taxes, if any, incurred as a result of the failure of the Distribution (and certain related transactions) to qualify for tax-free treatment for U.S. federal income tax purposes. The Tax Matters Agreement also sets forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters. Under the Tax Matters Agreement, ADS generally is responsible for all of the pre-Separation taxes of Loyalty Ventures and its subsidiaries (“Loyalty Ventures Group”) and is entitled to all the Loyalty Ventures Group’s pre-Separation refunds, and Loyalty Ventures is generally responsible for all post-Separation taxes with respect to the Loyalty Ventures Group.
8
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)
Transition Services Agreement. Sets forth the terms on which each of Loyalty Ventures and ADS will provide certain historically shared services to the other, on a transitional basis. Transition services will include various corporate, administrative and information technology services. Both parties are obligated, subject to certain customary exceptions, to provide such services in substantially the same manner as such services have been provided during the 12-month period prior to the distribution.
Employee Matters Agreement. Governs each company’s respective compensation and benefit obligations with respect to current and former employees, directors and consultants. The Employee Matters Agreement sets forth general principles relating to employee matters in connection with the Separation, such as the assignment of employees, the assumption and retention of liabilities and related assets, expense reimbursements, workers’ compensation, leaves of absence, the provision of comparable benefits, employee service credit, the sharing of employee information and duplication or acceleration of benefits.
Registration Rights Agreement. Provides ADS with certain customary demand registration, shelf takedown and piggyback registration rights with respect to its shares of Loyalty Ventures’ common stock, subject to certain customary limitations.
Basis of Presentation
The Company has historically operated as part of ADSParent and not as a standalone company. The unaudited condensed combined financial statements for the three months ended March 31, 2021 have been derived from ADS’the former Parent’s historical accounting records and are presented on a carve-out“carve-out” basis. All revenues and expenses as well as assets and liabilities directly associated with the business activity of the Company are included in the unaudited condensed combined financial statements. The unaudited condensed combined financial statements for the three months ended March 31, 2021 also include allocations of certain general and administrative expenses from ADS.the former Parent that directly or indirectly benefited Loyalty Ventures’ business. However, amounts recognized by the Company are not necessarily representative of the amounts that would have been reflected in the unaudited condensed combined financial statements had the Company operated independently of ADS. Related-party allocations are discussed further in Note 18, “Related Party Transactions.”independently. The cash and cash equivalents held by ADS at the corporate level are not specifically identifiable and therefore have not been reflected in the combined balance sheets. ADS’former Parent’s third-party long-term debt and the related interest expense havewas not been allocated for any of the periods presentedthree months ended March 31, 2021 as the Company was not athe legal obligor of such debt.
The former Parent’s net investment represents ADS’its interest in the recorded net assets of the Company. All significant transactions between the Company and its former Parent have been included in the accompanying unaudited condensed combined financial statements. Transactions with the former Parent as contributions to the carve-out entity or distributions from the carve-out entity are reflected in the accompanying unaudited condensed combined statements of equity as “Changes“Change in former Parent’s net investment”investment.”
The unaudited consolidated financial statements for the three months ended March 31, 2022 were based on the reported results of Loyalty Ventures as a standalone company and in the accompanying unaudited condensed combined balance sheets within “Parent’s net investment.”prepared on a consolidated basis.
All significant intercompany accounts and transactions between the businesses comprising the Company have been eliminated in the accompanying unaudited condensed consolidated and combined financial statements.
The Company’s unaudited condensed consolidated and combined financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s unaudited condensed consolidated and combined financial statements and accompanying notes are presented in U.S. Dollars (“USD”), the Company’s reporting currency.
The unaudited condensed consolidated and combined 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
98
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
indicative of the operating results to be expected for any subsequent interim period or for the fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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 and combined financial statements should be read in conjunction with the consolidated and combined financial statements and the notes thereto for the year ended December 31, 20202021 included in our registration statementthe Company’s Annual Report on Form 10,10-K, filed with the Securities and Exchange Commission (“SEC”) on October 13, 2021.February 28, 2022.
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 combinedconsolidated financial statements.
Recently Adopted Accounting Standards
In December 2019,October 2021, the FASB issued ASU 2019-12, “Simplifying the2021-08, “Business Combinations (Topic 805): Accounting for Income Taxes.Contract Assets and Contract Liabilities from Contracts with Customers,” which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification (“ASC”) 606. ASU 2019-12 eliminated certain exceptions within ASC 740, “Income Taxes,”2021-08 is effective for fiscal years beginning after December 15, 2022 and clarified certain aspects of ASC 740 to promote consistency among reporting entities. Most amendments withinearly adoption is permitted. The Company is evaluating the standard were required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company’simpact that adoption of this standard on January 1, 2021 did notASU 2021-08 will have a material impact on its unaudited condensed combinedconsolidated financial statements.
2. REVENUE
The Company’s products and services are reported under 2 segments—AIR MILES Reward Program and BrandLoyalty, as shown below. The following tables present revenue disaggregated by major source, as well as geographic region based on the location of the subsidiary that generally correlates with the location of the customer:
| | | | | | | | | | | | | | | | | | | | | |
|
| AIR MILES |
| | |
| | |
| AIR MILES |
| | |
|
| | | | | ||
Three Months Ended September 30, 2021 | | Reward Program | | BrandLoyalty | | Total | |||||||||||||||
Three Months Ended March 31, 2022 | | Reward Program | | BrandLoyalty | | Eliminations | | Total | |||||||||||||
| | (in thousands) | | (in thousands) | |||||||||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Coalition loyalty program | | $ | 68,580 | | $ | — | | $ | 68,580 | | $ | 62,401 | | $ | — | | $ | — | | $ | 62,401 |
Campaign-based loyalty solutions | |
| — | |
| 95,799 | |
| 95,799 | ||||||||||||
Campaign-based loyalty programs | |
| — | |
| 87,600 | | | — | |
| 87,600 | |||||||||
Other | |
| 10 | |
| 1,530 | |
| 1,540 | |
| 41 | |
| 1,681 | | | (44) | |
| 1,678 |
Revenue from contracts with customers | | $ | 68,590 | | $ | 97,329 | | $ | 165,919 | | $ | 62,442 | | $ | 89,281 | | $ | (44) | | $ | 151,679 |
| | | | | | | | | | | | | | | | | | | | | |
Investment income | |
| 3,338 | | | — | |
| 3,338 | |
| 3,266 | |
| — | | | — | |
| 3,266 |
Total | | $ | 71,928 | | $ | 97,329 | | $ | 169,257 | | $ | 65,708 | | $ | 89,281 | | $ | (44) | | $ | 154,945 |
109
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Three Months Ended September 30, 2020 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | |
| | | | | | | | | |
Coalition loyalty program | | $ | 62,938 | | $ | — | | $ | 62,938 |
Campaign-based loyalty solutions | |
| — | |
| 117,435 | |
| 117,435 |
Other | |
| (17) | |
| 1,123 | |
| 1,106 |
Revenue from contracts with customers | | $ | 62,921 | | $ | 118,558 | | $ | 181,479 |
| | | | | | | | | |
Investment income | |
| 3,277 | |
| — | |
| 3,277 |
Total | | $ | 66,198 | | $ | 118,558 | | $ | 184,756 |
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Nine Months Ended September 30, 2021 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | |
| | | | | | | | | |
Coalition loyalty program | | $ | 203,870 | | $ | — | | $ | 203,870 |
Campaign-based loyalty solutions | |
| — | |
| 278,726 | |
| 278,726 |
Other | |
| 12 | |
| 3,867 | |
| 3,879 |
Revenue from contracts with customers | | $ | 203,882 | | $ | 282,593 | | $ | 486,475 |
| | | | | | | | | |
Investment income | |
| 10,241 | |
| — | |
| 10,241 |
Total | | $ | 214,123 | | $ | 282,593 | | $ | 496,716 |
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Nine Months Ended September 30, 2020 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | |
| | | | | | | | | |
Coalition loyalty program | | $ | 195,870 | | $ | — | | $ | 195,870 |
Campaign-based loyalty solutions | |
| — | |
| 322,504 | |
| 322,504 |
Other | |
| 1,903 | (1) |
| 4,077 | |
| 5,980 |
Revenue from contracts with customers | | $ | 197,773 | | $ | 326,581 | | $ | 524,354 |
| | | | | | | | | |
Investment income | |
| 9,578 | |
| — | |
| 9,578 |
Total | | $ | 207,351 | | $ | 326,581 | | $ | 533,932 |
11
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSEDCONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Three Months Ended September 30, 2021 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | |
United States | | $ | — | | $ | 95 | | $ | 95 |
Canada | |
| 71,928 | |
| 3,894 | |
| 75,822 |
Europe, Middle East and Africa | |
| — | |
| 68,168 | |
| 68,168 |
Asia Pacific | |
| — | |
| 22,967 | |
| 22,967 |
Other | |
| — | |
| 2,205 | |
| 2,205 |
Total | | $ | 71,928 | | $ | 97,329 | | $ | 169,257 |
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Three Months Ended September 30, 2020 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | |
United States | | $ | — | | $ | 3,316 | | $ | 3,316 |
Canada | |
| 66,198 | |
| 4,132 | |
| 70,330 |
Europe, Middle East and Africa | |
| — | |
| 76,876 | |
| 76,876 |
Asia Pacific | |
| — | |
| 12,549 | |
| 12,549 |
Other | |
| — | |
| 21,685 | |
| 21,685 |
Total | | $ | 66,198 | | $ | 118,558 | | $ | 184,756 |
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Nine Months Ended September 30, 2021 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | |
United States | | $ | — | | $ | 2,637 | | $ | 2,637 |
Canada | |
| 214,123 | |
| 15,163 | |
| 229,286 |
Europe, Middle East and Africa | |
| — | |
| 200,022 | |
| 200,022 |
Asia Pacific | |
| — | |
| 57,690 | |
| 57,690 |
Other | |
| — | |
| 7,081 | |
| 7,081 |
Total | | $ | 214,123 | | $ | 282,593 | | $ | 496,716 |
| | | | | | | | | |
|
| AIR MILES |
| | |
| | | |
Nine Months Ended September 30, 2020 | | Reward Program | | BrandLoyalty | | Total | |||
| | (in thousands) | |||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | |
United States | | $ | 1,028 | | $ | 8,562 | | $ | 9,590 |
Canada | |
| 206,055 | |
| 8,065 | |
| 214,120 |
Europe, Middle East and Africa | |
| 268 | |
| 195,884 | |
| 196,152 |
Asia Pacific | |
| — | |
| 62,960 | |
| 62,960 |
Other | |
| — | |
| 51,110 | |
| 51,110 |
Total | | $ | 207,351 | | $ | 326,581 | | $ | 533,932 |
12
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
|
| AIR MILES |
| | |
|
| |
| | | |
Three Months Ended March 31, 2021 | | Reward Program | | BrandLoyalty | | Eliminations | | Total | ||||
| | (in thousands) | ||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 66,745 | | $ | — | | $ | — | | $ | 66,745 |
Campaign-based loyalty programs | |
| — | |
| 106,297 | | | — | |
| 106,297 |
Other | |
| — | |
| — | | | — | |
| — |
Revenue from contracts with customers | | $ | 66,745 | | $ | 106,297 | | $ | — | | $ | 173,042 |
| | | | | | | | | | | | |
Investment income | |
| 3,512 | |
| — | | | — | |
| 3,512 |
Total | | $ | 70,257 | | $ | 106,297 | | $ | — | | $ | 176,554 |
| | | | | | | | | | | | |
|
| AIR MILES |
| | |
| | |
| | | |
Three Months Ended March 31, 2022 | | Reward Program | | BrandLoyalty | | Eliminations | | Total | ||||
| | (in thousands) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | — | | $ | — | | $ | — | | $ | — |
Canada | |
| 65,708 | |
| 6,020 | | | (44) | |
| 71,684 |
Europe, Middle East and Africa | |
| — | |
| 62,689 | | | — | |
| 62,689 |
Asia Pacific | |
| — | |
| 18,278 | | | — | |
| 18,278 |
Other | |
| — | |
| 2,294 | | | — | |
| 2,294 |
Total | | $ | 65,708 | | $ | 89,281 | | $ | (44) | | $ | 154,945 |
| | | | | | | | | | | | |
|
| AIR MILES |
| | |
| | |
| | | |
Three Months Ended March 31, 2021 | | Reward Program | | BrandLoyalty | | Eliminations | | Total | ||||
| | (in thousands) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | — | | $ | 1,045 | | $ | — | | $ | 1,045 |
Canada | |
| 70,257 | |
| 9,685 | | | — | |
| 79,942 |
Europe, Middle East and Africa | |
| — | |
| 79,414 | | | — | |
| 79,414 |
Asia Pacific | |
| — | |
| 14,919 | | | — | |
| 14,919 |
Other | |
| — | |
| 1,234 | | | — | |
| 1,234 |
Total | | $ | 70,257 | | $ | 106,297 | | $ | — | | $ | 176,554 |
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 campaign-based loyalty solutions.programs.
10
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
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 thousands) | | (in thousands) | ||||||||||||||
Balance at January 1, 2021 | | $ | 247,186 | | $ | 756,833 | | $ | 1,004,019 | |||||||||
Balance at January 1, 2022 | | $ | 230,492 | | $ | 791,464 | | $ | 1,021,956 | |||||||||
Cash proceeds | |
| 128,988 | | | 206,715 | |
| 335,703 | |
| 40,352 | | | 62,538 | |
| 102,890 |
Revenue recognized (1) | |
| (148,373) | | | (175,696) | |
| (324,069) | |
| (47,220) | | | (76,573) | |
| (123,793) |
Other | |
| — | | | 1,182 | |
| 1,182 | |
| — | | | 306 | |
| 306 |
Effects of foreign currency translation | |
| 1,290 | | | 2,775 | |
| 4,065 | |
| 2,399 | | | 8,364 | |
| 10,763 |
Balance at September 30, 2021 | | $ | 229,091 | | $ | 791,809 | | $ | 1,020,900 | |||||||||
Amounts recognized in the combined balance sheets: | |
|
| |
|
| |
|
| |||||||||
Balance at March 31, 2022 | | $ | 226,023 | | $ | 786,099 | | $ | 1,012,122 | |||||||||
Amounts recognized in the consolidated balance sheets: | |
|
| |
|
| |
|
| |||||||||
Deferred revenue (current) | | $ | 132,486 | | $ | 791,809 | | $ | 924,295 | | $ | 130,580 | | $ | 786,099 | | $ | 916,679 |
Deferred revenue (non-current) | | $ | 96,605 | | $ | — | | $ | 96,605 | | $ | 95,443 | | $ | — | | $ | 95,443 |
(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 $44.5 million in 2021, $109.5$107.1 million in 2022, $57.6$77.9 million in 2023, and $17.5$37.2 million in 2024, and $3.8 million in 2025.
The contract liabilities for BrandLoyalty’s campaign-based loyalty solutionsprograms are recognized in other current liabilities in the Company’s unaudited condensed combinedconsolidated balance sheets. The beginning balance as of January 1, 20212022 was $66.9$85.4 million and the closing balance as of September 30, 2021March 31, 2022 was $107.2$100.7 million, with the change due to cash payments received in advance of program performance, offset in part by revenue recognized of approximately $226.9$66.7 million during the ninethree months ended September 30, 2021.March 31, 2022.
3. EARNINGS PER SHARE
On November 5, 2021, the date of the Separation, 81% of the outstanding shares of Loyalty Ventures were distributed pro rata based on the outstanding shares of ADS common stock at the close of business on the record date of October 27, 2021, with ADS retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADS stockholders of record that did not sell their rights to receive Loyalty Ventures stock before the close of business on November 5, 2021 received one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADS common stock, which resulted in aA total of 24,585,237 shares of Loyalty Ventures common stock were outstanding at November 5, 2021, the timedate of the Separation. ThisSeparation, and this share amount iswas utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation. For the three and nine months ended September 30,March 31, 2021, and 2020, these shares are treated as issued and outstanding for purposes of calculating historical basic and diluted earnings per share.
For all periods presented prior to the Separation, there are 0three months ended March 31, 2022, the calculation of basic and diluted earnings per share is based on the weighted average number of common shares outstanding. The dilutive equity instruments as there were 0effect of equity awards of Loyalty Ventures outstanding priorgranted subsequent to the Separation.Separation is included in the diluted calculation.
1311
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
The following table sets forth the computation of basic and diluted earnings per share of common stock:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| (in thousands, except per share amounts) | |||||||||||
Numerator: | | | | | | | | | | | | |
Net income | | $ | 23,961 | | $ | 10,980 | | $ | 57,504 | | $ | 60,566 |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Number of Basic and Diluted Shares Outstanding | | | 24,585 | | | 24,585 | | | 24,585 | | | 24,585 |
| | | | | | | | | | | | |
Net income per share - Basic and Diluted | | $ | 0.97 | | $ | 0.45 | | $ | 2.34 | | $ | 2.46 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands, except per share amounts) | ||||
Numerator: | | | | | | |
Net income | | $ | 1,018 | | $ | 19,038 |
| | | | | | |
Denominator: | | | | | | |
Weighted average shares, basic | | | 24,598 | | | 24,585 |
Weighted average effect of dilutive securities: | | | | | | |
Net effect of dilutive unvested restricted stock(1) | | | 28 | | | — |
Denominator for diluted calculation | | | 24,626 | | | 24,585 |
| | | | | | |
Basic net income per share: | | $ | 0.04 | | $ | 0.77 |
Diluted net income per share: | | $ | 0.04 | | $ | 0.77 |
(1) | For the three months ended March 31, 2022, there were 0.2 million restricted stock units that were anti-dilutive. For the three months ended March 31, 2021, there are 0 dilutive equity instruments as there were 0 equity awards of Loyalty Ventures outstanding prior to the Separation. |
4. DISPOSITIONS
On January 10, 2020, the Parent sold Precima, a provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for total consideration to the Parent of $43.8 million. The purchase and sale agreement provided for contingent consideration based upon the occurrence of specified events and performance of the business, of which $5.0 million was achieved in 2020. The assets and liabilities of Precima were included in the Company’s AIR MILES Reward Program segment. As a result of the transaction, the Company recorded a pre-tax gain of $10.9 million in January 2020. The Company incurred $3.1 million in transaction costs associated with the disposition.
5. INVENTORIES, NET
Inventories, net of $192.3$213.2 million and $164.3$188.6 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories 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.
6.5. REDEMPTION SETTLEMENT ASSETS, RESTRICTED
Redemption settlement assets consist of restricted cash, mutual funds, 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, | | December 31, | | March 31, | | December 31, | ||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
|
| Fair Value |
| Fair Value |
| Fair Value |
| Fair Value | ||||
| | (in thousands) | | (in thousands) | ||||||||
Restricted cash | | $ | 58,196 | | $ | 55,427 | | $ | 29,256 | | $ | 58,752 |
Mutual funds | |
| 26,220 | |
| 26,850 | |
| 24,955 | |
| 25,990 |
Corporate bonds | |
| 649,536 | |
| 611,184 | |
| 645,320 | |
| 650,389 |
Total | | $ | 733,952 | | $ | 693,461 | | $ | 699,531 | | $ | 735,131 |
1412
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
The following table shows the amortized cost, unrealized gains and losses, and fair value of securities available-for-sale as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| | 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 thousands) | | | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | | $ | 641,820 | | $ | 10,257 | | $ | (2,541) | | $ | 649,536 | | $ | 592,247 | | $ | 19,110 | | $ | (173) | | $ | 611,184 | | | $ | 663,980 | | $ | 783 | | $ | (19,443) | | $ | 645,320 | | $ | 648,248 | | $ | 6,389 | | $ | (4,248) | | $ | 650,389 |
Total | | $ | 641,820 | | $ | 10,257 | | $ | (2,541) | | $ | 649,536 | | $ | 592,247 | | $ | 19,110 | | $ | (173) | | $ | 611,184 | | | $ | 663,980 | | $ | 783 | | $ | (19,443) | | $ | 645,320 | | $ | 648,248 | | $ | 6,389 | | $ | (4,248) | | $ | 650,389 |
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | March 31, 2022 | ||||||||||||||||||||||||||||||||
| | 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 thousands) | | (in thousands) | ||||||||||||||||||||||||||||||||
Corporate bonds | | $ | 178,215 | | $ | (2,367) | | $ | 14,224 | | $ | (174) | | $ | 192,439 | | $ | (2,541) |
| $ | 347,095 | | $ | (11,395) | | $ | 112,652 | | $ | (8,048) | | $ | 459,747 | | $ | (19,443) |
Total | | $ | 178,215 | | $ | (2,367) | | $ | 14,224 | | $ | (174) | | $ | 192,439 | | $ | (2,541) | | $ | 347,095 | | $ | (11,395) | | $ | 112,652 | | $ | (8,048) | | $ | 459,747 | | $ | (19,443) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 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 thousands) | | (in thousands) | ||||||||||||||||||||||||||||||||
Corporate bonds |
| $ | 46,190 |
| $ | (86) |
| $ | 10,316 |
| $ | (87) |
| $ | 56,506 |
| $ | (173) |
| $ | 104,052 | | $ | (1,341) | | $ | 123,382 | | $ | (2,907) |
| $ | 227,434 |
| $ | (4,248) |
Total | | $ | 46,190 | | $ | (86) | | $ | 10,316 | | $ | (87) | | $ | 56,506 | | $ | (173) | | $ | 104,052 | | $ | (1,341) | | $ | 123,382 | | $ | (2,907) | | $ | 227,434 | | $ | (4,248) |
The amortized cost and estimated fair value of the securities available-for-sale at September 30, 2021March 31, 2022 by contractual maturity are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
| | Cost | | Fair Value | ||
| | (in thousands) | ||||
Due in one year or less | | $ | 131,884 | | $ | 132,984 |
Due after one year through five years | |
| 505,989 | |
| 512,567 |
Due after five years through ten years | |
| 3,947 | |
| 3,985 |
Total | | $ | 641,820 | | $ | 649,536 |
| | | | | | |
|
| Amortized |
| Estimated | ||
| | Cost | | Fair Value | ||
| | (in thousands) | ||||
Due in one year or less | | $ | 131,903 | | $ | 132,384 |
Due after one year through five years | |
| 515,585 | |
| 497,130 |
Due after five years through ten years | |
| 16,492 | |
| 15,806 |
Total | | $ | 663,980 | | $ | 645,320 |
Market values were determined for each individual security in the investment portfolio. The Company recorded losses associated with the change in fair value of mutual funds of $1.3 million and $0.6 million for the nine months ended September 30, 2021. Losses associated with the change in fair value of mutual funds for the three months ended September 30,March 31, 2022 and 2021, were de minimis. The Company recorded gains associated with the change in fair value of mutual funds of $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively.
For available-for-sale debt securities in which fair value is less than cost, ASC 326, “Financial Instruments – Credit Losses,” requires that credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk. The Company typically invests in highly-ratedhighly 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, 2021,March 31, 2022, the Company does not consider its investments to be impaired.
1513
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
LossesGains from the sale of investment securities were $0.2 millionde minimis for the ninethree months ended September 30, 2021.March 31, 2022. There were 0 realized gains or losses from the sale of investment securities for the three months ended September 30, 2021 and the three and nine months ended September 30, 2020.March 31, 2021.
7.6. LEASES
The Company has operating leases for general office properties, warehouses, data centers, customer care centers, automobiles and certain equipment. As of September 30, 2021,March 31, 2022, the Company’s leases have remaining lease terms of less than 1 year to 12 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 | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Operating lease cost | | $ | 3,923 | | $ | 3,898 | | $ | 11,929 | | $ | 11,624 | | $ | 3,742 | | $ | 3,991 |
Short-term lease cost | |
| 84 | |
| 107 | |
| 255 | |
| 354 | |
| 70 | |
| 84 |
Variable lease cost | |
| 922 | |
| 949 | |
| 3,134 | |
| 3,143 | |
| 1,134 | |
| 1,131 |
Total | | $ | 4,929 | | $ | 4,954 | | $ | 15,318 | | $ | 15,121 | | $ | 4,946 | | $ | 5,206 |
Sublease income was $0.9 million and $0.5 million for the three months ended March 31, 2022 and 2021, respectively, and is presented net of lease expense.
Other information related to leases was as follows:
| | | | | | | | | | |
| | September 30, | | September 30, |
| | March 31, | | March 31, |
|
|
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
|
Weighted-average remaining lease term (in years): |
|
|
|
| |
|
|
|
| |
Operating leases |
| 10.9 |
| 11.6 | |
| 10.5 |
| 11.2 | |
Weighted-average discount rate: |
|
|
|
| |
| |
|
| |
Operating leases |
| 4.7 | % | 4.6 | % |
| 4.7 | % | 4.6 | % |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | ||||||||||||
| | September 30, | | September 30, | | March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| | |
| |
|
| |
|
| |
|
| |
|
Operating cash flows from operating leases | | $ | 4,062 | | $ | 5,441 | | $ | 13,871 | | $ | 13,527 | | $ | 3,969 | | $ | 4,164 |
Right of use assets obtained in exchange for lease obligations: | |
|
| |
|
| |
|
| |
|
| ||||||
Right-of-use assets obtained in exchange for lease obligations: | |
|
| |
|
| ||||||||||||
Operating leases | | $ | 16 | | $ | 462 | | $ | 200 | | $ | 3,021 | | $ | 852 | | $ | 7 |
1614
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
Maturities of the lease liabilities as of September 30, 2021March 31, 2022 were as follows:
| | | | | | |
| | Operating | | Operating | ||
Year |
| Leases |
| Leases | ||
| | (in thousands) | | (in thousands) | ||
2021 (excluding the nine months ended September 30, 2021) | | $ | 2,798 | |||
2022 | |
| 15,782 | |||
2022 (excluding the three months ended March 31, 2022) | | $ | 10,683 | |||
2023 | |
| 14,375 | |
| 14,122 |
2024 | |
| 13,472 | |
| 13,262 |
2025 | |
| 12,935 | |
| 12,909 |
2026 | |
| 12,540 | |||
Thereafter | |
| 90,545 | |
| 77,013 |
Total undiscounted lease liabilities | |
| 149,907 | |
| 140,529 |
Less: Amount representing interest | |
| (33,606) | |
| (30,693) |
Total present value of minimum lease payments | | $ | 116,301 | | $ | 109,836 |
| | | | | | |
Amounts recognized in the September 30, 2021 combined balance sheet: | |
|
| |||
Amounts recognized in the March 31, 2022 consolidated balance sheet: | |
|
| |||
Current operating lease liabilities | | $ | 9,626 | | $ | 9,414 |
Long-term operating lease liabilities | |
| 106,675 | |
| 100,422 |
Total | | $ | 116,301 | | $ | 109,836 |
8.7. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | |
| | March 31, 2022 | |
| ||||||||||||||
| | Gross | | Accumulated | | | | |
| | Gross | | Accumulated | | | | |
| ||||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method |
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | ||||||
| | (in thousands) | |
| | (in thousands) | |
| ||||||||||||||
Tradenames | | $ | 32,895 | | $ | (29,445) | | $ | 3,450 |
| 8‑15 years—straight line |
| $ | 31,430 | | $ | (28,701) | | $ | 2,729 |
| 8‑15 years—straight line |
Collector database | |
| 55,205 | |
| (55,075) | |
| 130 |
| 5 years—straight line | |||||||||||
Total intangible assets | | $ | 88,100 | | $ | (84,520) | | $ | 3,580 | | | | $ | 31,430 | | $ | (28,701) | | $ | 2,729 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | | December 31, 2021 |
| | ||||||||||||||
| | Gross | | Accumulated | | | |
| | | Gross | | Accumulated | | | |
| | ||||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method |
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | ||||||
| | (in thousands) | |
| | (in thousands) | |
| ||||||||||||||
Customer contracts |
| $ | 354,242 |
| $ | (354,242) |
| $ | — | | 7 years—straight line | |||||||||||
Tradenames | | | 34,691 | | | (30,112) | | | 4,579 | | 8‑15 years—straight line | | $ | 32,289 | | $ | (29,194) | | $ | 3,095 | | 8‑15 years—straight line |
Collector database | | | 54,973 | | | (54,455) | | | 518 | | 5 years—straight line | | | 55,397 | |
| (55,397) | | | — | | 5 years—straight line |
Total intangible assets |
| $ | 443,906 | | $ | (438,809) | | $ | 5,097 | | |
| $ | 87,686 | | $ | (84,591) | | $ | 3,095 | | |
1715
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
| | | | | | |
| | For the Years Ending | | For the Years Ending | ||
|
| December 31, |
| December 31, | ||
| | (in thousands) | | (in thousands) | ||
2021 (excluding the nine months ended September 30, 2021) | | $ | 427 | |||
2022 | |
| 1,189 | |||
2022 (excluding the three months ended March 31, 2022) | | $ | 852 | |||
2023 | |
| 1,189 | |
| 1,136 |
2024 | |
| 610 | |
| 583 |
2025 | |
| 31 | |
| 30 |
2026 | |
| 30 | |||
Thereafter | |
| 134 | |
| 98 |
Goodwill
The changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | | |
| | AIR MILES | | | | | | | | AIR MILES | | | | | | | ||
|
| Reward Program |
| BrandLoyalty |
| Total |
| Reward Program |
| BrandLoyalty (1) |
| Total | ||||||
|
| (in thousands) |
| (in thousands) | ||||||||||||||
Balance at January 1, 2021 | | $ | 193,276 | | $ | 542,622 | | $ | 735,898 | |||||||||
Balance at January 1, 2022 | | $ | 194,767 | | $ | 455,191 | | $ | 649,958 | |||||||||
Effects of foreign currency translation | |
| 815 | |
| (27,707) | |
| (26,892) | |
| 2,103 | | | (12,114) | |
| (10,011) |
Balance at September 30, 2021 | | $ | 194,091 | | $ | 514,915 | | $ | 709,006 | |||||||||
Balance at March 31, 2022 | | $ | 196,870 | | $ | 443,077 | | $ | 639,947 |
(1) | Amount of goodwill as of March 31, 2022 and December 31, 2021 is net of an accumulated goodwill impairment charge of $50.0 million within the BrandLoyalty segment incurred as of December 31, 2021. As of December 31, 2021, Management’s estimated fair value of its BrandLoyalty reporting unit exceeded its carrying value by less than 10%. |
The ParentCompany tests goodwill for impairment annually, as of July 1, or when events and circumstances change that would indicate the carrying value may not be recoverable. As of September 30, 2021,March 31, 2022, 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, with the COVID-19 pandemic and current uncertainty in the macroeconomic environment, future deterioration in the economy, changes in profitability and cash flows, or changes in sales trends or customer demand could adversely impact the Company’s reporting unitsunits. In addition, while Russia does not constitute a material portion of the Company’s business, a significant escalation of the conflict’s current scope or expansion of economic disruption to a portion or all of the global economy could further disrupt the Company’s supply chain, broaden inflationary costs, and have a material adverse effect on its results of operations and result in aan additional goodwill impairment.
9.8. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY – RELATED PARTY
At December 31, 2020, theThe Company previously owned a 99.9% interest in Comenity Canada L.P., a limited partnership, which is a consolidated subsidiary of the former Parent, and iswas accounted for using the equity method of accounting, as the Company exercisesexercised significant influence but doesdid not control the entity. The investment iswas included in the AIR MILES Reward Program segment. At December 31, 2020, the Company’s investment in Comenity Canada L.P. was $0.9 million. For the nine months ended September 30, 2020, the Company made capital contributions to Comenity Canada L.P. of $0.7 million.
Under the equity method, the Company’s share of its investee’s earnings or loss is recognized in the combined statements of income. The Company recognized income from investment in unconsolidated related party subsidiary of $4.1 million for each of the three and nine months ended September 30, 2021, respectively. Losses from investment in unconsolidated related party subsidiary were de minimis for the three and nine months ended September 30, 2020, respectively.
In March 2021, the Company received a partnership distribution from Comenity Canada L.P. of $0.8 million, and the Company’s ownership interest declined from 99.9% to 98.0%.
Under the equity method, the Company’s share of its investee’s earnings or loss is recognized in the consolidated and combined statements of income. The Company recognized a di minimis amount of loss from investment in unconsolidated related party subsidiary for the three months ended March 31, 2021. In August 2021, the Company’s investment in Comenity Canada L.P. was sold to an affiliate of ADS for $4.1 million and a gain on sale of investment in unconsolidated related party subsidiary of $4.1 million was recorded in (income) loss from investment in unconsolidated subsidiary within the Company’s unaudited condensed combined statements of income.former Parent.
1816
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
10.9. DEBT
BrandLoyalty Credit Agreement
In the first quarter of 2021, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, amended its credit agreement to extend the maturity date by one year from April 3, 2023 to April 3, 2024.
As of September 30, 2021 and December 31, 2020, there were 0 amounts outstanding under the BrandLoyalty Credit Agreement.
In November 2021, the BrandLoyalty Credit Agreement was terminated in connection with the executionDebt consists of the Company’s senior secured credit agreement, as described more fully below.following:
| | | | | | | | |
| | March 31, | | December 31, |
| | ||
Description |
| 2022 |
| 2021 |
| Maturity | ||
| | (in thousands) |
| | ||||
Revolving credit facility (1) | | $ | — | | $ | — | | November 2026 |
Term loan A | |
| 171,719 | |
| 175,000 | | November 2026 |
Term loan B | |
| 490,625 | |
| 500,000 | | November 2027 |
Total long-term debt | | $ | 662,344 | | $ | 675,000 | | |
Less: unamortized debt issuance costs | | | 20,005 | | | 20,887 | | |
Less: current portion | | | 50,625 | | | 50,625 | | |
Long-term portion | | $ | 591,714 | | $ | 603,488 | | |
(1) | As of March 31, 2022, availability under the revolving credit facility was $133.9 million as a result of $16.1 million in letters of credit outstanding under the Credit Agreement. As of December 31, 2021, availability under the revolving credit facility was $137.5 million as a result of $12.5 million in letters of credit outstanding under the Credit Agreement. |
Credit Agreement
On November 3, 2021, theThe Company entered intohas a senior secured credit agreement (the “Credit Agreement”) with certain subsidiaries as additional borrowers and certain other subsidiaries as guarantors, Bank of America, N.A., as administrative agent and collateral agent, and the additional lenders party thereto. The Credit Agreementwhich provides for a $175.0 million term loan A facility, a $500.0 million term loan B facility, which was issued at 98.0% of the aggregate principal amount, and a revolving credit facility in the maximum amount of $150.0 million. The term loan A and revolving credit facility will mature November 3, 2026. The term loan B will maturematures November 3, 2027. The proceeds
In the first quarter of the term loans were used to finance a portion of the $750.0 million distribution by2022, the Company made its quarterly principal amortization payments of $12.7 million applicable to ADS in connection with the Separation.
The outstanding U.S. Dollar borrowings under the term loan A bear interestand term loan B.
As of March 31, 2022, the Company was in compliance with its financial covenants.
Uncommitted Overdraft Facility
The Company has an uncommitted overdraft facility with Deutsche Bank AG that provides overdraft protection in several currencies, up to a maximum amount of €10.0 million ($11.1 million as of March 31, 2022). Interest is calculated on debit balances at a rate elected by the relevant borrower that is based on (i) the Base Rate, subject to a floor of 1.00%3.5% per annum plus an applicable margin that ranges from 2.00% per annum to 2.75% per annum depending ona relevant benchmark, due and payable at the Consolidated Total Leverage Ratio or (ii) the Eurocurrency Rate, subject to a floorend of 0.00% per annum, plus an applicable margin that ranges from 3.00% per annum to 3.75% per annum depending on the Consolidated Total Leverage Ratio. Theeach quarter. There were 0 amounts outstanding U.S. Dollar borrowings under the term loan B bear interest at a rate elected by the relevant borrower that is based on (i) the Base Rate, subject to a flooruncommitted overdraft facility as of 1.50% per annum, plus an applicable margin of 3.50% per annum or (ii) the Eurocurrency Rate, subject to a floor of 0.50% per annum, plus an applicable margin of 4.50% per annum. The Company is obligated to pay a commitment fee quarterly, which ranges from 0.40% to 0.50% per annum of the unused portion of the aggregate revolving commitment, which fee is also dependent on the Consolidated Total Leverage Ratio, as such terms are defined in the Credit Agreement.
The Company will be required to make quarterly principal amortization payments in equal installments in an aggregate amount of 7.5% per annum of the initial aggregate principal amount of each of the term loan AMarch 31, 2022 and term loan B. Commencing with the fiscal year ending December 31, 2022, the Credit Agreement requires, on an annual basis, the prepayment of the term loan B with either 0%, 25% or 50% of Excess Cash Flow, depending on the Consolidated Secured Leverage Ratio, as defined in the Credit Agreement.2021, respectively.
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, distributions and other restricted payments, and transactions with affiliates.
11.10. DERIVATIVE INSTRUMENTS
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in foreign currency exchange rates. Certain derivatives used to manage the Company’s exposure to foreign currency exchange rate movements are not designated as hedges and do not qualify for
19
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)
hedge accounting. The fair value of the Company’s derivative instruments as of September 30, 2021March 31, 2022 was $1.9$3.0 million included in other current assets and $0.8 million included in other current liabilities in the Company’s unaudited condensed combinedconsolidated balance sheets. The fair value of the Company’s derivative instruments as of December 31, 20202021 was $0.4$2.5 million included in other current assets and $1.5$0.5 million included in other current liabilities in the Company’s unaudited condensed combinedconsolidated balance sheets.
12. SHARE-BASED PAYMENTS
Prior to the Separation, certain employees participated in share-based compensation plans of ADS. Under these plans, shares are reserved for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants performing services for ADS or its affiliates. Terms of all awards are determined by ADS board of directors or the compensation committee of ADS board of directors or its designee at the time of award.
During the nine months ended September 30, 2021, ADS awarded both service-based and performance-based restricted stock units. For the service-based awards, the fair value of the restricted stock units is estimated using ADS closing share price on the date of grant and typically vest ratably over a three-year period. The performance-based awards contain pre-defined vesting criteria that permit a range from 0% to 170% to be earned, subject to a market-based condition. The fair market value of these awards is $92.62 and was estimated utilizing Monte Carlo simulations of ADS’ stock price correlation, expected volatility and risk-free rate over a three-year time horizon matching the performance period. If the performance targets are met, the restrictions will lapse with respect to the entire award on February 16, 2024, provided that the participant is employed by ADS on the vesting date.
In connection with the Separation and pursuant to the Employee Matters Agreement with ADS, service-based awards granted to Loyalty Ventures employees more than a year prior to the Separation were accelerated and vested on October 22, 2021. Service-based awards and performance-based awards granted to Loyalty Ventures employees less than one year prior to the Separation were forfeited at the time of the Separation and will be replaced with a combination of Loyalty Ventures service-based restricted stock awards and long-term cash incentive awards, to be determined by the Loyalty Ventures Compensation Committee, and a cash payment to be paid by ADS.
Stock-based compensation expense recognized in the Company’s unaudited condensed combined statements of income for the three and nine months ended September 30, 2021 and 2020 is as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Cost of operations | | $ | 1,725 | | $ | 1,482 | | $ | 5,009 | | $ | 3,993 |
General and administrative | |
| 418 | |
| 344 | |
| 1,313 | |
| 1,191 |
Total | | $ | 2,143 | | $ | 1,826 | | $ | 6,322 | | $ | 5,184 |
2017
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
11. SHARE-BASED PAYMENTS
Stock Compensation Expense
During the three months ended March 31, 2022, the Company awarded 511,855 service-based restricted stock units with a weighted average grant date fair value per share of $24.19 as determined on the date of grant. Service-based restricted stock unit awards typically vest ratably over a three-year period provided that the participant is employed by the Company on each such vesting date.
The Company also awarded 88,033 performance-based restricted stock units with a weighted average grant date fair value per share of $24.19 as determined on the date of grant with pre-defined vesting criteria that permit a range from 0% to 150% to be earned. If the performance targets are met, the restrictions will lapse with respect to 33% of the award on February 15, 2023, an additional 33% of the award on February 15, 2024 and the final 34% of the award on February 15, 2025, provided that the participant is employed by the Company on each such vesting date.
Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated and combined statements of income for the three months ended March 31, 2022 and 2021 is as follows:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Cost of operations | | $ | 1,499 | | $ | 1,448 |
General and administrative | |
| 829 | |
| 405 |
Total | | $ | 2,328 | | $ | 1,853 |
13.12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in each component of accumulated other comprehensive income (loss), net of tax effects, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Foreign | | Accumulated | | Net | | Net Unrealized | | Foreign | | Accumulated | ||||||||
| | Unrealized | | Gains (Losses) | | Currency | | Other | | Unrealized | | Gains (Losses) | | Currency | | Other | ||||||||
| | Gains (Losses) | | on Cash | | Translation | | Comprehensive | | Gains (Losses) | | on Cash | | Translation | | Comprehensive | ||||||||
Three Months Ended September 30, 2021 |
| on Securities |
| Flow Hedges |
| Adjustments (1) |
| Loss | ||||||||||||||||
Three Months Ended March 31, 2022 |
| on Securities |
| Flow Hedges |
| Adjustments (1) |
| Loss | ||||||||||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Balance at June 30, 2021 | | $ | 10,484 | | $ | 72 | | $ | (36,127) | | $ | (25,571) | ||||||||||||
Balance at January 1, 2022 | | $ | 2,141 | | $ | 1,270 | | $ | (68,485) | | $ | (65,074) | ||||||||||||
Changes in other comprehensive income (loss) | |
| (2,769) | |
| 908 | |
| (21,064) | |
| (22,925) | |
| (20,801) | |
| 36 | |
| (17,223) | |
| (37,988) |
Balance at September 30, 2021 | | $ | 7,715 | | $ | 980 | | $ | (57,191) | | $ | (48,496) | ||||||||||||
Balance at March 31, 2022 | | $ | (18,660) | | $ | 1,306 | | $ | (85,708) | | $ | (103,062) |
| | | | | | | | | | | | |
| | Net | | Net Unrealized | | Foreign | | Accumulated | ||||
| | Unrealized | | Gains (Losses) | | Currency | | Other | ||||
| | Gains (Losses) | | on Cash | | Translation | | Comprehensive | ||||
Three Months Ended September 30, 2020 |
| on Securities |
| Flow Hedges |
| Adjustments (1) |
| Loss | ||||
| | (in thousands) | ||||||||||
Balance at June 30, 2020 | | $ | 11,913 | | $ | (653) | | $ | (95,081) | | $ | (83,821) |
Changes in other comprehensive income (loss) | |
| 4,386 | |
| 478 | |
| 35,495 | |
| 40,359 |
Balance at September 30, 2020 | | $ | 16,299 | | $ | (175) | | $ | (59,586) | | $ | (43,462) |
| | | | | | | | | | | | |
| | Net | | Net Unrealized | | Foreign | | Accumulated | ||||
| | Unrealized | | Gains (Losses) | | Currency | | Other | ||||
| | Gains (Losses) | | on Cash | | Translation | | Comprehensive | ||||
Nine Months Ended September 30, 2021 |
| on Securities |
| Flow Hedges |
| Adjustments (1) |
| Loss | ||||
| | (in thousands) | ||||||||||
Balance at December 31, 2020 | | $ | 18,267 | | $ | (700) | | $ | (17,186) | | $ | 381 |
Changes in other comprehensive income (loss) | |
| (10,552) | |
| 1,680 | |
| (40,005) | |
| (48,877) |
Balance at September 30, 2021 | | $ | 7,715 | | $ | 980 | | $ | (57,191) | | $ | (48,496) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Net | | Net Unrealized | | Foreign | | Accumulated | | Net | | Net Unrealized | | Foreign | | Accumulated | ||||||||
| | Unrealized | | Gains (Losses) | | Currency | | Other | | Unrealized | | Gains (Losses) | | Currency | | Other | ||||||||
| | Gains (Losses) | | on Cash | | Translation | | Comprehensive | | Gains (Losses) | | on Cash | | Translation | | Comprehensive | ||||||||
Nine Months Ended September 30, 2020 |
| on Securities |
| Flow Hedges |
| Adjustments (1) |
| Loss | ||||||||||||||||
Three Months Ended March 31, 2021 |
| on Securities |
| Flow Hedges |
| Adjustments (1) |
| Income (Loss) | ||||||||||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Balance at December 31, 2019 | | $ | 386 | | $ | (133) | | $ | (92,319) | | $ | (92,066) | ||||||||||||
Balance at January 1, 2021 | | $ | 18,267 | | $ | (700) | | $ | (17,186) | | $ | 381 | ||||||||||||
Changes in other comprehensive income (loss) | |
| 15,913 | |
| (42) | |
| 28,846 | |
| 44,717 | |
| (6,400) | |
| 917 | |
| (29,699) | |
| (35,182) |
Recognition resulting from the sale of Precima’s foreign subsidiaries | |
| — | |
| — | |
| 3,887 | (2) |
| 3,887 | ||||||||||||
Balance at September 30, 2020 | | $ | 16,299 | | $ | (175) | | $ | (59,586) | | $ | (43,462) | ||||||||||||
Balance at March 31, 2021 | | $ | 11,867 | | $ | 217 | | $ | (46,885) | | $ | (34,801) |
(1) | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates. |
18
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
Other reclassifications from accumulated other comprehensive income (loss) into net income for each of the periods presented were not material.
21
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)
14.13. INCOME TAXES
For the three months ended September 30,March 31, 2022 and 2021, and 2020, the Company utilized an effective tax rate of 40.8%57.5% and 24.1%32.0%, respectively, to calculate its provision for income taxes. The increase in the effective tax rate for the three months ended September 30, 2021March 31, 2022 as compared to the respective prior year period was a result of the Company’s increased U.S. corporate expenses. The Company does not believe these expenses will be deductible; therefore, a deferred tax asset has been established with an unfavorable adjustment in the current period related to a settlement of a foreign tax position.
For the nine months ended September 30, 2021 and 2020, the Company utilized an effective tax rate of 35.5% and 22.2%, respectively, to calculate its provision for income taxes. The increase in the effective tax rate for the nine months ended September 30, 2021 as compared to the respective prior year period was a result of an increase in the current year related to additional withholding taxes as well as an unfavorable adjustment related to a settlement of a foreign tax position. Additionally, the effective tax rate for the nine months ending September 30, 2020 included discrete tax benefits related to the expiration of statutes of limitation and the resolution of tax audits in various foreign jurisdictions.associated valuation allowance.
15.14. 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, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 | ||||||||||||||||
| | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | ||||||||
|
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Financial assets | | | | | | | | | | | | | | | | | | | | | | | | |
Redemption settlement assets, restricted | | $ | 733,952 | | $ | 733,952 | | $ | 693,461 | | $ | 693,461 | | $ | 699,531 | | $ | 699,531 | | $ | 735,131 | | $ | 735,131 |
Other investments | |
| 254 | |
| 254 | |
| 253 | |
| 253 | |
| 476 | |
| 476 | |
| 471 | |
| 471 |
Derivative instruments | |
| 1,890 | |
| 1,890 | |
| 353 | |
| 353 | |
| 3,023 | |
| 3,023 | |
| 2,465 | |
| 2,465 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities | |
| | |
| | |
|
| |
|
| |
| | |
| | |
|
| |
|
|
Derivative instruments | |
| 847 | |
| 847 | |
| 1,505 | |
| 1,505 | |
| 755 | |
| 755 | |
| 487 | |
| 487 |
Long-term debt | | | 642,339 | | | 642,339 | | | 654,113 | | | 654,113 |
The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
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 are included in other current assets in the combinedconsolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.
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
2219
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs.
Long-term debt —The fair value of the Company’s variable rate long-term debt is based upon the current market rates for debt with similar credit risk and maturity, which approximated its carrying value, as interest is based upon the LIBOR plus an applicable margin.
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.
2320
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at | | Fair Value Measurements at | | Balance at | | Fair Value Measurements at | ||||||||||||||||
| | September 30, | | September 30, 2021 Using | | March 31, | | March 31, 2022 Using | ||||||||||||||||
|
| 2021 |
| Level 1 |
| Level 2 |
| Level 3 |
| 2022 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Mutual funds (1) | | $ | 26,220 | | $ | 26,220 | | $ | — | | $ | — | | $ | 24,955 | | $ | 24,955 | | $ | — | | $ | — |
Corporate bonds (1) | | | 649,536 | | | — | | | 649,536 | | | — | | | 645,320 | | | — | | | 645,320 | | | — |
Marketable securities (2) |
| | 254 |
| | 254 |
| | — |
| | — |
| | 476 |
| | 476 |
| | — |
| | — |
Derivative instruments (3) |
| | 1,890 |
| | — |
| | 1,890 |
| | — |
| | 3,023 |
| | — |
| | 3,023 |
| | — |
Total assets measured at fair value | | $ | 677,900 | | $ | 26,474 | | $ | 651,426 | | $ | — | | $ | 673,774 | | $ | 25,431 | | $ | 648,343 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments (3) | | $ | 847 | | $ | — | | $ | 847 | | $ | — | | $ | 755 | | $ | — | | $ | 755 | | $ | — |
Total liabilities measured at fair value | | $ | 847 | | $ | — | | $ | 847 | | $ | — | | $ | 755 | | $ | — | | $ | 755 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at | | Fair Value Measurements at | | Balance at | | Fair Value Measurements at | ||||||||||||||||
| | December 31, | | December 31, 2020 Using | | December 31, | | December 31, 2021 Using | ||||||||||||||||
|
| 2020 |
| Level 1 |
| Level 2 |
| Level 3 |
| 2021 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Mutual funds (1) | | $ | 26,850 | | $ | 26,850 | | $ | — | | $ | — | | $ | 25,990 | | $ | 25,990 | | $ | — | | $ | — |
Corporate bonds (1) | | | 611,184 | | | — | | | 611,184 | | | — | | | 650,389 | | | — | | | 650,389 | | | — |
Marketable securities (2) |
| | 253 |
| | 253 |
| | — |
| | — |
| | 471 |
| | 471 |
| | — |
| | — |
Derivative instruments (3) |
| | 353 |
| | — |
| | 353 |
| | — |
| | 2,465 |
| | — |
| | 2,465 |
| | — |
Total assets measured at fair value | | $ | 638,640 | | $ | 27,103 | | $ | 611,537 | | $ | — | | $ | 679,315 | | $ | 26,461 | | $ | 652,854 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments (3) | | $ | 1,505 | | $ | — | | $ | 1,505 | | $ | — | | $ | 487 | | $ | — | | $ | 487 | | $ | — |
Total liabilities measured at fair value | | $ | 1,505 | | $ | — | | $ | 1,505 | | $ | — | | $ | 487 | | $ | — | | $ | 487 | | $ | — |
(1) | Amounts are included in redemption settlement assets, restricted in the unaudited condensed |
(2) | Amounts are included in other current assets in the unaudited condensed |
(3) | Amounts are included in other current assets and other current liabilities in the unaudited condensed |
16.Financial Instruments Disclosed but Not Carried at Fair Value
The following table provides assets and liabilities disclosed but not carried at fair value as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | |
| | Balance at | | Fair Value Measurements at | ||||||||
| | March 31, | | March 31, 2022 Using | ||||||||
|
| 2022 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in thousands) | ||||||||||
Long-term debt | | $ | 642,339 | | $ | — | | $ | 642,339 | | $ | — |
Total liabilities measured at fair value | | $ | 642,339 | | $ | — | | $ | 642,339 | | $ | — |
21
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | Balance at | | Fair Value Measurements at | ||||||||
| | December 31, | | December 31, 2021 Using | ||||||||
|
| 2021 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in thousands) | ||||||||||
Long-term debt | | $ | 654,113 | | $ | — | | $ | 654,113 | | $ | — |
Total liabilities measured at fair value | | $ | 654,113 | | $ | — | | $ | 654,113 | | $ | — |
15. 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 AIR MILES Reward Program is a |
● | BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for grocers and other high-frequency retailers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered through leading grocers across Europe and Asia, as well as around the world. |
● | Corporate and other consists of corporate overhead not allocated to any of the Company’s segments. |
Income taxes and equity in earnings (losses) from related party investments accounted for under the equity method are not included in the computation of segment operating profit for internal evaluation purposes.
| | | | | | | | | | | | | | | |
|
| AIR MILES |
| | |
| Corporate/ |
| | |
| | | ||
Three Months Ended March 31, 2022 | | Reward Program | | BrandLoyalty | | Other | | Eliminations | | Total | |||||
| | (in thousands) | |||||||||||||
Revenues | | $ | 65,708 | | $ | 89,281 | | $ | — | | $ | (44) | | $ | 154,945 |
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 21,722 | | $ | (3,979) | | $ | (15,350) | | $ | — | | $ | 2,393 |
Interest (income) expense, net | |
| (136) | |
| 47 | |
| 9,141 | | | — | |
| 9,052 |
Depreciation and amortization | |
| 6,813 | |
| 2,600 | |
| — | | | — | |
| 9,413 |
Stock compensation expense | |
| 707 | |
| 792 | |
| 829 | | | — | |
| 2,328 |
Strategic transaction costs | | | 299 | | | 776 | | | 438 | | | — | | | 1,513 |
Adjusted EBITDA (1) | | $ | 29,405 | | $ | 236 | | $ | (4,942) | | $ | — | | $ | 24,699 |
2422
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
Income taxes and equity in earnings (losses) from related party investments accounted for under the equity method are not included in the computation of segment operating profit for internal evaluation purposes.
| | | | | | | | | | | | |
|
| AIR MILES |
| | |
| Corporate/ |
| | | ||
Three Months Ended September 30, 2021 | | Reward Program | | BrandLoyalty | | Other | | Total | ||||
| | (in thousands) | ||||||||||
Revenues | | $ | 71,928 | | $ | 97,329 | | $ | — | | $ | 169,257 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 33,889 | | $ | 6,524 | | $ | (4,018) | | $ | 36,395 |
Interest (income) expense, net | |
| (206) | |
| 70 | |
| — | |
| (136) |
Depreciation and amortization | |
| 6,018 | |
| 3,080 | |
| — | |
| 9,098 |
Stock compensation expense | |
| 777 | |
| 948 | |
| 418 | |
| 2,143 |
Adjusted EBITDA (1) | | $ | 40,478 | | $ | 10,622 | | $ | (3,600) | | $ | 47,500 |
| | | | | | | | | | | | |
|
| AIR MILES |
| | |
| Corporate/ |
| | | ||
Three Months Ended September 30, 2020 | | Reward Program | | BrandLoyalty | | Other | | Total | ||||
| | (in thousands) | ||||||||||
Revenues | | $ | 66,198 | | $ | 118,558 | | $ | — | | $ | 184,756 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 28,376 | | $ | (10,084) | | $ | (3,630) | | $ | 14,662 |
Interest (income) expense, net | |
| (223) | |
| 56 | |
| — | |
| (167) |
Depreciation and amortization | |
| 4,730 | |
| 15,543 | |
| — | |
| 20,273 |
Stock compensation expense | |
| 562 | |
| 920 | |
| 344 | |
| 1,826 |
Gain on sale of business, net of strategic transaction costs | | | 178 | | | — | | | — | | | 178 |
Strategic transaction costs | |
| 66 | |
| — | |
| — | |
| 66 |
Restructuring and other charges | |
| (5) | |
| — | |
| — | |
| (5) |
Adjusted EBITDA (1) | | $ | 33,684 | | $ | 6,435 | | $ | (3,286) | | $ | 36,833 |
| | | | | | | | | | | | |
|
| AIR MILES |
| | |
| Corporate/ |
| | | ||
Nine Months Ended September 30, 2021 | | Reward Program | | BrandLoyalty | | Other | | Total | ||||
| | (in thousands) | ||||||||||
Revenues | | $ | 214,123 | | $ | 282,593 | | $ | — | | $ | 496,716 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 94,214 | | $ | 2,447 | | $ | (11,608) | | $ | 85,053 |
Interest (income) expense, net | |
| (582) | |
| 264 | |
| — | |
| (318) |
Depreciation and amortization | |
| 17,927 | |
| 9,626 | |
| — | |
| 27,553 |
Stock compensation expense | |
| 2,126 | |
| 2,883 | |
| 1,313 | |
| 6,322 |
Adjusted EBITDA (1) | | $ | 113,685 | | $ | 15,220 | | $ | (10,295) | | $ | 118,610 |
25
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| AIR MILES |
| | |
| Corporate/ |
| | |
| AIR MILES |
| | |
| Corporate/ |
| | |
| | | ||||
Nine Months Ended September 30, 2020 | | Reward Program | | BrandLoyalty | | Other | | Total | |||||||||||||||||||
Three Months Ended March 31, 2021 | | Reward Program | | BrandLoyalty | | Other | | Eliminations | | Total | |||||||||||||||||
| | (in thousands) | | (in thousands) | |||||||||||||||||||||||
Revenues | | $ | 207,351 | | $ | 326,581 | | $ | — | | $ | 533,932 | | $ | 70,257 | | $ | 106,297 | | $ | — | | $ | — | | $ | 176,554 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 107,509 | | $ | (18,562) | | $ | (10,794) | | $ | 78,153 | | $ | 30,162 | | $ | 1,582 | | $ | (3,686) | | $ | — | | $ | 28,058 |
Interest (income) expense, net | |
| (826) | |
| 310 | |
| — | |
| (516) | |
| (182) | |
| 113 | |
| — | | | — | |
| (69) |
Depreciation and amortization | |
| 13,136 | |
| 43,722 | |
| — | |
| 56,858 | |
| 5,784 | |
| 3,250 | |
| — | | | — | |
| 9,034 |
Stock compensation expense | |
| 1,515 | |
| 2,478 | |
| 1,191 | |
| 5,184 | |
| 687 | |
| 761 | |
| 405 | | | — | |
| 1,853 |
Gain on sale of business, net of strategic transaction costs | |
| (7,791) | |
| — | |
| — | |
| (7,791) | |||||||||||||||
Strategic transaction costs | |
| 229 | |
| — | |
| — | |
| 229 | |||||||||||||||
Restructuring and other charges | |
| 174 | |
| (50) | |
| — | |
| 124 | |||||||||||||||
Adjusted EBITDA (1) | | $ | 113,946 | | $ | 27,898 | | $ | (9,603) | | $ | 132,241 | | $ | 36,451 | | $ | 5,706 | | $ | (3,281) | | $ | — | | $ | 38,876 |
(1) | Adjusted EBITDA is presented in accordance with ASC 280 as it is the primary performance metric utilized to assess performance of the segments and to determine the allocation of resources. Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most directly comparable financial measure based on GAAP, plus |
17.16. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated and combined statements of cash flows:
| | | | | | | | | | | | |
| | September 30, | | September 30, | | March 31, | | March 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Cash and cash equivalents | | $ | 198,865 | | $ | 198,761 | | $ | 139,724 | | $ | 217,708 |
Restricted cash included within other current assets (1) | |
| 5,312 | |
| 4,154 | |
| 10,554 | |
| 2,877 |
Restricted cash included within redemption settlement assets, restricted (2) | |
| 58,196 | |
| 45,371 | |
| 29,256 | |
| 71,850 |
Total cash, cash equivalents and restricted cash | | $ | 262,373 | | $ | 248,286 | | $ | 179,534 | | $ | 292,435 |
(1) | Includes cash restricted for travel deposits within the AIR MILES Reward Program. |
(2) | See Note |
18.17. RELATED PARTY TRANSACTIONS
TransactionsPrior to the Separation, transactions between the Company and ADSits former Parent were considered to be effectively settled at the time the transaction was recorded. The net effect of the settlement of these intercompany transactions is reflected in the unaudited condensed combined statements of cash flowsflow as a financing activity as net transfers to the former Parent and infor the unaudited condensed combined balance sheets as Parent’s net investment.three months ended March 31, 2021. In January 2021, the Company paid cash dividends to the former Parent of $124.2 million, of which $4.2 million was withheld for taxes.
ADSThe former Parent allocated $4.0 million and $3.6$3.7 million for the three months ended September 30,March 31, 2021 and 2020, respectively, and $11.6 million and $10.8 million for the nine months ended September 30, 2021 and 2020, respectively, of corporate overhead costs that directly or indirectly benefit the Company that areis included in general and administrative expense within the Company’s unaudited condensed combined statements of income. These assessments relate to information technology, finance, accounting, and tax services provided, as well as human resources, and other functional support. These allocations were determined based on management estimates on the number of employees and non-employee costs associated with the use of these functions by the Company and may not be indicative of the costs that the Company would otherwise incur on a standalone basis.
2623
LOYALTY VENTURES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)
In addition, the Company had an investment in unconsolidated subsidiary that was a consolidated subsidiary of the former Parent. See Note 9,8, “Investment in Unconsolidated Subsidiary - Related Party,” for additional information.
In January 2021,As part of the Separation, the Company paid cash dividends to ADS of $124.2entered into certain agreements with its former Parent, including a Transition Services Agreement, Employee Matters Agreement, and Tax Matters Agreement.
For the three months ended March 31, 2022, the Company incurred $0.6 million of which $4.2expenses in connection with the Transition Services Agreement for various corporate, administrative and information technology services provided by its former Parent and have been included in general and administrative expenses in the Company’s unaudited condensed consolidated statement of income.
Pursuant to the terms of the Employee Matters Agreement, the Company received a net cash payment of $1.6 million was withheld for taxes.as final settlement of the estimated prorated bonus amounts established at the time of the Separation.
Additionally, the Company has certain assets and liabilities associated with the Tax Matters Agreement. The Company has $20.1 million of accounts receivable as of March 31, 2022 and December 31, 2021, accrued expenses of $80.3 million and $80.0 million as of March 31, 2022 and December 31, 2021, respectively and $1.0 million of other liabilities as of March 31, 2022 and December 31, 2021 included in the Company’s consolidated balance sheets.
2724
Caution Regarding Forward-Looking Statements
This Quarterly Report on 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. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking statements. 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”“might,” “should,” “would” 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 the spinoff of the LoyaltyOne segment, our expected operating results, future economic conditions including currency exchange rates, future stockholder returns 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 for a variety of reasons, including, among others, continuing impacts related to COVID-19, including variants, reductions in government economic stimulus, labor shortages, reduction in demand from clients, supply chain disruption for our reward suppliers and disruptions in the projections, anticipated resultsairline or other expectations expressedtravel industries; changes in this report,geopolitical conditions, including the Russian invasion of Ukraine; loss of, or reduction in demand for services from, significant clients; loss of active AIR MILES® Reward Program collectors or greater than expected redemptions by the same; unfavorable resolution of pending or future litigation matters; disruption to operations due to the separation from our former parent or failure of the separation to be tax-free; our high level of indebtedness; increases in market interest rates; fluctuation in foreign exchange rates; new regulatory limitations related to consumer protection or data privacy limiting our services; and no assurances can be given that our expectations will proveloss of consumer information due to have been correct.compromised physical or cyber security. These risks and uncertainties, include, but are not limited to, the following:
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, butthat could cause our actual results or outcomes to differ significantly from management’s expectations, are not limited to,described in greater detail in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the impact of strategic initiativesmost recently ended fiscal year as well as those factors discussed in Item 1A and elsewhere in this Quarterly Report on us or our business if any transactions are undertaken,Form 10-Q and whetherin the anticipated benefits of such transactions can be realized.
documents incorporated by reference in this Form 10-Q. Any forward-looking statements contained in this Quarterly Report on 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.
28
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 and combined financial statements and related notes thereto presented in this quarterly report and the consolidated and combined financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 included2021, filed with the Securities and Exchange Commission, or SEC, on February 28, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in our registration statementthese forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10,10-Q. See “Caution Regarding Forward-Looking Statements” and “Risk Factors” in this Quarterly Report on Form 10-Q, and the “Risk Factors” in Part 1, Item 1A, "Risk Factors" of our Annual Report on Form 10-K filed with the SEC on October 13, 2021.February 28, 2022.
SpinoffBasis of the LoyaltyOne SegmentPresentation
On October 13,November 5, 2021, our former Parent completed the Board of Directors of Alliance Data Systems Corporation (“ADS” or “Parent”) approved the previously announced separation (the “Separation”)spinoff of its LoyaltyOne segment, or Separation, consisting of itsthe Canadian AIR MILES®MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc. (“Loyalty Ventures”Ventures,” “we,” or “our”). On November 5,
Prior to the Separation and for the three months ended March 31, 2021, the date of the Separation, 81% of the outstanding shares of Loyalty Ventures were distributed pro rata based on the outstanding shares of ADS common stock at the close of business on the record date of October 27, 2021, with ADS retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADS stockholders of record that did not sell their rights to receive Loyalty Ventures stock before the close of business on November 5, 2021 received one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADS common stock. Additionally, Loyalty Ventures made a cash distribution of $750.0 million to ADS on November 3, 2021 as part of the Separation. The distribution qualified as a tax-free reorganization and a tax-free distribution to ADS and its stockholders for U.S. federal income tax purposes. On November 8, 2021, “regular-way” trading of Loyalty Ventures’ common stock began trading on the Nasdaq Stock Market under the symbol “LYLT”.
Basis of Presentation
We have historically operated as part of ADS and not as a standalone company, and we were a reportable segment of ADS. Combinedunaudited combined financial statements representingreflected the historicalfinancial position, results of operations, of Loyalty Ventures’ business have beenand cash flows which were derived from the historicalconsolidated financial statements and accounting records of ADS and are presented on a carve-out basis. Our combined financial statements and accompanying notes have been preparedthe former Parent in accordance with accounting principles generally accepted in the United States, of America (“GAAP”).
The preparation of financial statements in conformity with U.S.or GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.were prepared on a “carve-out” basis. The combined financial statements mayalso include allocations of certain general and administrative expenses from the former Parent. These allocations relate to information technology, finance, accounting, tax services, human resources, and other functional support and were determined based on management estimates on the number of employees and non-employee costs associated with the use of these functions by us. We were allocated $3.7 million for the three months ended March 31, 2021, for such corporate expenses, which were included within general and administrative expenses in the combined statement of income. The former Parent’s third-party long-term debt and the related interest expense were not be indicativeallocated for the three months ended
25
March 31, 2021, as Loyalty Ventures was not the legal obligor of such debt. The combined financial statements for the three months ended March 31, 2021, do not necessarily reflect what the financial position, results of operations, and cash flows would have been had we operated as an independent, publicly traded company during the periods presented, particularly because of changes we expect to experience in the future as a result of the Separation, including changes in the financing, cash management, operations, cost structure and personnel needs of our business.
company. The combined financial statements also include allocations of certain general and administrative expenses from ADS. ADS allocated $4.0 million and $3.6 million of corporate overhead costs that directly or indirectly benefit Loyalty Ventures’ business for the three months ended September 30, 2021March 31, 2022, represent the unaudited consolidated financial statements of Loyalty Ventures.
Overview
Loyalty Ventures is a leading provider of tech-enabled, data-driven consumer loyalty solutions. Our solutions are focused on helping partners achieve their strategic and 2020, respectively,financial objectives, from increased consumer basket size, shopper traffic and $11.6 millionfrequency and $10.8 milliondigital reach to enhanced program reporting and analytics. We help financial services providers, retailers and other consumer-facing businesses create and increase customer loyalty across multiple touch points from traditional to digital to mobile and emerging technologies. We manage our business in two segments, the AIR MILES® Reward Program and BrandLoyalty.
The AIR MILES Reward Program operates as a full-service coalition loyalty program for our sponsors. We provide marketing, customer service, rewards and redemption management for our sponsors. Recently, the AIR MILES Rewards Program introduced a series of improvements to the program as part of its commitment to providing collectors with an enhanced loyalty program that offers more choice, flexibility and value that will continue throughout 2022. The increase in value proposition for our AIR MILES reward miles will have an impact on our redemption revenue, as the cost of redemptions is netted against redemption revenue in accordance with ASC 606, Revenue from Contracts with Customers. We observed an increase in redemptions of 43% for the ninethree months ended September 30, 2021 and 2020, respectively,March 31, 2022 as compared to the same period in the prior year, due to the rebound of corporate overhead costs that directly or indirectly benefit Loyalty Ventures’ business that are included in general and administrative expense within our combined statements of income. These assessments relate to information technology, finance, accounting, tax services, human resources, and other functional support. These allocations were determined based on management estimates on the number of employees and nonemployee costs associatedtravel along with the uselaunch of these functions by usour new travel platform that provides more choices for collectors. However, redemption revenue for our AIR MILES Reward Program declined due to our investments providing greater value to the collector. AIR MILES reward miles issued decreased 4% year over year as a result of lower promotional activity from our grocery partners and may not be indicativethe exiting of the costs that we would otherwise incur on a standalone basis or had we operated independently of ADS.
COVID-19 Update
Following the declaration by the WHOcertain partners in the first quarter of 20202021 that impacted current issuance relative to prior year.
BrandLoyalty is a leading global provider of campaign-based loyalty solutions for grocers and other high-frequency retailers. Revenue is significantly impacted by the number, type, and timing of programs in market, which can vary significantly year over year. During 2021, we experienced pressure in our supply chain due to strained transportation capacity, labor shortages associated with COVID-19, and the impact of the continued elevated demand. In response to these supply-chain pressures, we have taken actions to build capacity as well as increase our supply chain related resources. However, we expect these pressures to continue throughout 2022. The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. As announced on March 14, 2022, we have taken steps to pause business in Russia, but will honor our commitments to current programs with Russian grocery chain clients in fulfillment of contractual obligations. Further, we do not plan to offer new loyalty campaigns in Russia for the time being. The vast majority of products we use for our campaign-based loyalty solutions in Russian grocery stores are sourced internationally, and none of the rewards for loyalty campaigns outside of Russia are sourced from Russian suppliers. For the full year 2022, we project that our decision to pause loyalty campaigns for Russian grocery chains will result in lost revenues of approximately $16 million (€15 million). While Russia does not constitute a material portion of our business, a significant escalation of the conflict’s current scope or related expansion of economic disruption to a portion of all or the global economy could further disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations.
While we expect the impacts of COVID-19 as a globalon our business to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, the severity and duration of the rapid spreadpandemic, the continued availability and effectiveness of vaccines and actions taken by government authorities, including restrictions, laws or regulations, and other third parties in response to the pandemic. We continue to actively monitor the impact of COVID-19 international, provincial, federal, state and local government or other authorities have imposedon all aspects of our business.
2926
varying degrees of restrictions on socialConsolidated and commercial activity in an effort to improve health and safety. As the global COVID-19 pandemic has continued to evolve, our priority has been and continues to be, the health and safety of our employees, with the vast majority of our employees continuing to work from home.
We continue to see sequential improvement in business conditions. AIR MILES Reward Program issuances and redemptions for the third quarter of 2021 increased 1% and 12%, respectively, as compared to the second quarter of 2021; however, issuance declined 7% but redemptions increased 30%, respectively, as compared to the third quarter of 2020. The increase in redemptions can be attributed to the improvement in our travel-related categories. Issuance for the quarter was down due to timing of promotional activity. At BrandLoyalty, new program activity is increasing with consumers actively engaged in loyalty campaigns. However, both the varying degrees of restrictions impacting the U.K. and many Asian and European countries, as well as recent disruptions to port services in southern China amid COVID-19 resurgences exacerbating already challenged global supply chain conditions, have impacted our third quarter results and could negatively impact our results of operations in the fourth quarter of 2021.
Despite the availability of vaccines, surges in COVID-19 cases, including variants of the strain, may adversely impact the economic recovery and our industry outlook. 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 future results of operations or cash flows at this time.
30
Combined Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Three Months Ended March 31, | | ||||||||||||||||||
|
| 2021 |
| 2020 |
| % Change |
| 2021 |
| 2020 |
| % Change |
|
| 2022 |
| 2021 |
| % Change |
| ||||||
| | (in thousands, except percentages) |
| | (in thousands, except percentages) | |||||||||||||||||||||
Revenues |
| |
|
| |
|
|
|
| |
|
| |
|
|
| |
| |
|
| |
|
|
|
|
Redemption, net | | $ | 97,149 | | $ | 113,073 |
| (14) | % | $ | 280,844 | | $ | 318,620 |
| (12) | % | | $ | 84,976 | | $ | 104,864 |
| (19) | % |
Services | |
| 65,806 | |
| 63,629 |
| 3 | |
| 199,244 | |
| 193,856 |
| 3 | | |
| 63,783 | |
| 66,223 |
| (4) | |
Other | |
| 6,302 | |
| 8,054 |
| (22) | |
| 16,628 | |
| 21,456 |
| (23) | | |
| 6,186 | |
| 5,467 |
| 13 | |
Total revenue | |
| 169,257 | |
| 184,756 |
| (8) | |
| 496,716 | |
| 533,932 |
| (7) | | |
| 154,945 | |
| 176,554 |
| (12) | |
Operating expenses | |
|
| |
|
|
|
| |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 119,882 | |
| 146,358 |
| (18) | |
| 372,820 | |
| 399,519 |
| (7) | | |
| 127,878 | |
| 135,846 |
| (6) | |
General and administrative | |
| 4,018 | |
| 3,630 |
| 11 | |
| 11,608 | |
| 10,794 |
| 8 | | |
| 6,209 | |
| 3,685 |
| 68 | |
Depreciation and other amortization | |
| 8,665 | |
| 7,735 |
| 12 | |
| 26,237 | |
| 20,690 |
| 27 | | |
| 9,125 | |
| 8,595 |
| 6 | |
Amortization of purchased intangibles | |
| 433 | |
| 12,538 |
| (97) | |
| 1,316 | |
| 36,168 |
| (96) | | |
| 288 | |
| 439 |
| (34) | |
Total operating expenses | |
| 132,998 | |
| 170,261 |
| (22) | |
| 411,981 | |
| 467,171 |
| (12) | | |
| 143,500 | |
| 148,565 |
| (3) | |
Operating income | |
| 36,259 | |
| 14,495 |
| 150 | |
| 84,735 | |
| 66,761 |
| 27 | | |
| 11,445 | |
| 27,989 |
| (59) | |
Gain on sale of a business | |
| — | |
| — |
| — | |
| — | |
| (10,876) |
| (100) | | |||||||||
Interest income, net | |
| (136) | |
| (167) |
| (19) | |
| (318) | |
| (516) |
| (38) | | |||||||||
Income before income taxes and (income) loss from investment in unconsolidated subsidiary | |
| 36,395 | |
| 14,662 |
| 148 | |
| 85,053 | |
| 78,153 |
| 9 | | |||||||||
Interest expense (income), net | |
| 9,052 | |
| (69) |
| nm | * | |||||||||||||||||
Income before income taxes and loss from investment in unconsolidated subsidiary | |
| 2,393 | |
| 28,058 |
| (91) | | |||||||||||||||||
Provision for income taxes | |
| 16,542 | |
| 3,534 |
| 368 | |
| 31,616 | |
| 17,382 |
| 82 | | |
| 1,375 | |
| 8,984 |
| (85) | |
(Income) loss from investment in unconsolidated subsidiary – related party, net of tax | |
| (4,108) | |
| 148 |
| (2,876) | |
| (4,067) | |
| 205 |
| (2,084) | | |||||||||
Loss from investment in unconsolidated subsidiary – related party, net of tax | |
| — | |
| 36 |
| nm | * | |||||||||||||||||
Net income | | $ | 23,961 | | $ | 10,980 |
| 118 | % | $ | 57,504 | | $ | 60,566 |
| (5) | % | | $ | 1,018 | | $ | 19,038 |
| (95) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Key Operating Metrics (in millions): | |
|
| |
|
|
|
| |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
AIR MILES reward miles issued | |
| 1,155.2 | | | 1,239.7 |
| (7) | % |
| 3,406.1 | | | 3,608.6 |
| (6) | % | |
| 1,064.7 | | | 1,111.6 |
| (4) | % |
AIR MILES reward miles redeemed | |
| 895.8 | | | 687.2 |
| 30 | % |
| 2,435.5 | | | 2,289.4 |
| 6 | % | |
| 1,057.1 | | | 739.4 |
| 43 | % |
Supplemental information: | |
| | | | |
|
| |
| | | | |
|
| | |
| | | | |
|
| |
Average CAD to USD foreign currency exchange rate | |
| 0.79 | | | 0.75 |
| 5 | % |
| 0.80 | | | 0.74 |
| 8 | % | |
| 0.79 | | | 0.79 |
| — | % |
Average EUR to USD foreign currency exchange rate | |
| 1.18 | | | 1.17 |
| 1 | % |
| 1.20 | | | 1.12 |
| 7 | % | |
| 1.12 | | | 1.21 |
| (7) | % |
* not meaningful
Three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020March 31, 2021
Revenue. Total revenue decreased $15.5$21.6 million to $169.3$154.9 million, or 8%12%, for the three months ended September 30, 2021March 31, 2022 as compared to $184.8$176.6 million for the three months ended September 30, 2020.March 31, 2021. The net decrease was due to the following:
● | Redemption, net. |
● | Services. |
● | Other revenue. Other revenue |
3127
Cost of operations. Cost of operations decreased $26.5$8.0 million, or 18%6%, to $119.9$127.9 million for the three months ended March 31, 2022 as compared to $146.4$135.8 million for the three months ended March 31, 2021 due to a $22.7an $8.4 million decrease in cost of redemptions due to the decline in redemption revenue discussed above and a $4.5 million decrease in incentive compensation.associated with our campaign-based loyalty programs within our BrandLoyalty segment.
General and administrative. General and administrative expenses increased $0.4$2.5 million, or 11%68%, to $4.0$6.2 million for the three months ended September 30, 2021March 31, 2022 as compared to $3.6$3.7 million for the three months ended September 30, 2020,March 31, 2021, due to an increase in payroll and benefits expense.expense, including stock compensation and other amounts associated with the Employee Matters Agreement as well as additional consulting expenses.
Depreciation and other amortization. Depreciation and other amortization increased $0.9$0.5 million, or 12%6%, to $8.7$9.1 million for the three months ended September 30, 2021March 31, 2022 as compared to $7.7$8.6 million for the three months ended September 30, 2020, primarilyMarch 31, 2021 due in part to the acceleration of amortization associated with previous investments in digital technology within our AIR MILES Reward Program segment.certain leasehold improvements.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $12.1$0.2 million, or 97%34%, to $0.3 million for the three months ended March 31, 2022, as compared to $0.4 million for the three months ended September 30,March 31, 2021, as compareda result of the decline in foreign currency exchange rates.
Interest expense (income), net. Total interest expense (income), net increased $9.1 million due the interest expense associated with our senior secured credit agreement entered in connection with the Separation in November 2021.
Taxes. Provision for income taxes decreased $7.6 million to $12.5$1.4 million for the three months ended September 30, 2020, due to the fully amortized customer contracts in our BrandLoyalty segment.
Interest income, net. Total interest income, net decreased $0.1 million, or 19%, to $0.1March 31, 2022 from $9.0 million for the three months ended September 30,March 31, 2021 as compared to $0.2 million for the three months ended September 30, 2020, due to lower interest rates.
Taxes. Provision for income taxes increased $13.0 million to $16.5 million for the three months ended September 30, 2021 from $3.5 million for the three months ended September 30, 2020. The effective tax rate for the three months ended September 30, 2021 was 40.8% as compared to 24.1% for the prior year.decrease in earnings. The increase in the effective tax rate to 57.5% for the three months ended September 30, 2021March 31, 2022 as compared to the three months ended September 30, 2020 was primarily due to an unfavorable adjustment32.0% in the currentprior year period related towas a settlementresult of a foreign tax position.increased U.S. corporate expenses, which we do not believe will be deductible.
(Income) lossLoss from investment in unconsolidated subsidiary – related party, net of tax. IncomeLoss from unconsolidated subsidiary – related party was $4.1 million in 2021 represented our allocable share of the three months ended September 30, 2021 as compared to a loss of $0.1 million in the three months ended September 30, 2020. Ourfrom our investment in our unconsolidated subsidiary, Comenity Canada, L.P., which was sold to an affiliate of ADSour former Parent in August 2021 for $4.1 million and we recognized a gain on sale of unconsolidated subsidiary of $4.1 million.2021.
Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020
Revenue. Total revenue decreased $37.2 million, or 7%, to $496.7 million for the nine months ended September 30, 2021 from $533.9 million for the nine months ended September 30, 2020. The net decrease was due to the following:
Cost of operations. Cost of operations decreased $26.7 million, or 7%, to $372.8 million for the nine months ended September 30, 2021 as compared to $399.5 million for the nine months ended September 30, 2020, as a $35.3 million decrease in cost of redemptions due to the decline in redemption revenue was offset by an increase of $3.9 million in payroll and benefits expense and an increase of $2.0 million in marketing expense.
32
General and administrative. General and administrative expenses increased $0.8 million, or 8%, to $11.6 million for the nine months ended September 30, 2021 as compared to $10.8 million for the nine months ended September 30, 2020, due to an increase in payroll and benefits expense.
Depreciation and other amortization. Depreciation and other amortization increased $5.5 million, or 27%, to $26.2 million for the nine months ended September 30, 2021 as compared to $20.7 million for the nine months ended September 30, 2020, primarily due to additional capitalized software assets placed into service for digital investments for the AIR MILES Reward Program segment.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $34.9 million, or 96%, to $1.3 million for the nine months ended September 30, 2021, as compared to $36.2 million for the nine months ended September 30, 2020, due to the fully amortized customer contracts in our BrandLoyalty segment.
Gain on sale of a business. In January 2020, ADS sold Precima, a provider of retail strategy and customer data applications, resulting in a pre-tax gain of $10.9 million.
Interest income, net. Total interest income, net decreased $0.2 million, or 38%, to $0.3 million for the nine months ended September 30, 2021 as compared to $0.5 million for the nine months ended September 30, 2020, due to lower interest rates.
Taxes. Provision for income taxes increased $14.2 million to $31.6 million for the nine months ended September 30, 2021 from $17.4 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was 35.5% as compared to 22.2% for the prior year. The increase in the effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to an increase in the current year related to additional withholding taxes as well as an unfavorable adjustment related to a settlement of a foreign tax position. Additionally, the effective tax rate for the nine months ending September 30, 2020 included discrete tax benefits related to the expiration of statutes of limitation and the resolution of tax audits in various foreign jurisdictions.
(Income) loss from investment in unconsolidated subsidiary – related party, net of tax. The income from unconsolidated subsidiary – related party was $4.1 million in the nine months ended September 30, 2021 as compared to a loss of $0.2 million in the nine months ended September 30, 2020. Our investment in our unconsolidated subsidiary, Comenity Canada, L.P., was sold to an affiliate of ADS in August 2021 for $4.1 million and we recognized a gain on sale of unconsolidated subsidiary of $4.1 million.
Use of Non-GAAP financial measures
Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus (income) loss from investment in unconsolidated subsidiary – related party, provision for income taxes, interest income,expense (income), net, depreciation and other amortization, the amortization of purchased intangibles, and stock compensation expense. Adjusted EBITDA also excludes the gain on the sale of business, strategic transaction costs, which represent costs for professional serviceswere comprised of amounts associated with strategic initiatives, and restructuring and other charges.the Employee Matters agreement entered into as part of the Separation. These costs, as well as stock compensation expense,items were not included in the measurement of segment adjusted EBITDA as the chief operating decision maker did not factor these expenses for purposes of assessing segment performance and decision making with respect to resource allocations.
We use adjusted EBITDA 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 is 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
33
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 is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, net income as an indicator of operating performance or to cash flows from operating activities as a
28
measure of liquidity. In addition, adjusted EBITDA is 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.
Adjusted EBITDA presented herein may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| Three Months Ended March 31, | ||||||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Net income | | $ | 23,961 | | $ | 10,980 | | $ | 57,504 | | $ | 60,566 | | $ | 1,018 | | $ | 19,038 |
(Income) loss from investment in unconsolidated subsidiary – related party, net of tax | |
| (4,108) | |
| 148 | |
| (4,067) | |
| 205 | ||||||
Loss from investment in unconsolidated subsidiary – related party, net of tax | |
| — | |
| 36 | ||||||||||||
Provision for income taxes | |
| 16,542 | |
| 3,534 | |
| 31,616 | |
| 17,382 | |
| 1,375 | |
| 8,984 |
Interest income, net | |
| (136) | |
| (167) | |
| (318) | |
| (516) | ||||||
Interest expense (income), net | |
| 9,052 | |
| (69) | ||||||||||||
Depreciation and other amortization | |
| 8,665 | |
| 7,735 | |
| 26,237 | |
| 20,690 | |
| 9,125 | |
| 8,595 |
Amortization of purchased intangibles | |
| 433 | |
| 12,538 | |
| 1,316 | |
| 36,168 | |
| 288 | |
| 439 |
Stock compensation expense | |
| 2,143 | |
| 1,826 | |
| 6,322 | |
| 5,184 | |
| 2,328 | |
| 1,853 |
Gain on sale of a business, net of strategic transaction costs (1) | |
| — | |
| 178 | |
| — | |
| (7,791) | ||||||
Strategic transaction costs (2) | |
| — | |
| 66 | |
| — | |
| 229 | ||||||
Restructuring and other charges | |
| — | |
| (5) | |
| — | |
| 124 | ||||||
Strategic transaction costs (1) | |
| 1,513 | |
| — | ||||||||||||
Adjusted EBITDA | | $ | 47,500 | | $ | 36,833 | | $ | 118,610 | | $ | 132,241 | | $ | 24,699 | | $ | 38,876 |
(1) | Represents |
Segment Revenue and Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Three Months Ended March 31, | | ||||||||||||||||||
|
| 2021 |
| 2020 |
| % Change |
| 2021 |
| 2020 |
| % Change |
|
| 2022 |
| 2021 |
| % Change |
| ||||||
|
| (in thousands, except percentages) | | |||||||||||||||||||||||
�� |
| (in thousands, except percentages) | | |||||||||||||||||||||||
Revenue: |
| |
|
| |
|
|
|
| |
|
| |
|
|
| |
| |
|
| |
|
|
|
|
AIR MILES Reward Program | | $ | 71,928 | | $ | 66,198 |
| 9 | % | $ | 214,123 | | $ | 207,351 |
| 3 | % | | $ | 65,708 | | $ | 70,257 |
| (6) | % |
BrandLoyalty | |
| 97,329 | |
| 118,558 |
| (18) | |
| 282,593 | |
| 326,581 |
| (13) | | |
| 89,281 | |
| 106,297 |
| (16) | |
Corporate/Other | |
| — | |
| — |
| — | |
| — | |
| — |
| — | | |
| — | |
| — |
| — | |
Eliminations | | | (44) | | | — | | nm | * | |||||||||||||||||
Total | | $ | 169,257 | | $ | 184,756 |
| (8) | % | $ | 496,716 | | $ | 533,932 |
| (7) | % | | $ | 154,945 | | $ | 176,554 |
| (12) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | |
|
| |
|
|
|
| |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
AIR MILES Reward Program | | $ | 40,478 | | $ | 33,684 |
| 20 | % | $ | 113,685 | | $ | 113,946 |
| — | % | | $ | 29,405 | | $ | 36,451 |
| (19) | % |
BrandLoyalty | |
| 10,622 | |
| 6,435 |
| 65 | |
| 15,220 | |
| 27,898 |
| (45) | | |
| 236 | |
| 5,706 |
| (96) | |
Corporate/Other | |
| (3,600) | |
| (3,286) |
| 10 | |
| (10,295) | |
| (9,603) |
| 7 | | |
| (4,942) | |
| (3,281) |
| 51 | |
Total | | $ | 47,500 | | $ | 36,833 |
| 29 | % | $ | 118,610 | | $ | 132,241 |
| (10) | % | | $ | 24,699 | | $ | 38,876 |
| (36) | % |
34
Three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020March 31, 2021
Revenue. Total revenue decreased $15.5$21.6 million, or 8%12%, to $169.3$154.9 million for the three months ended September 30, 2021March 31, 2022 from $184.8$176.6 million for the three months ended September 30, 2020.March 31, 2021. The net decrease was due to the following:
● | AIR MILES Reward Program. Revenue |
● | BrandLoyalty. Revenue decreased |
29
Adjusted EBITDA. Adjusted EBITDA increased $10.7 million, or 29%, to $47.5 million for the three months ended September 30, 2021 from $36.8 million for the three months ended September 30, 2020. The net increase was due to the following:Table of Contents
Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020
Revenue. Total revenue decreased $37.2 million, or 7%, to $496.7 million for the nine months ended September 30, 2021 from $533.9 million for the nine months ended September 30, 2020. The net decrease was due to the following:
Adjusted EBITDA. Adjusted EBITDA decreased $13.6$14.2 million, or 10%36%, to $118.6$24.7 million for the ninethree months ended September 30, 2021March 31, 2022 from $132.2$38.9 million for the ninethree months ended September 30, 2020.March 31, 2021. The decrease was due to the following:
● | AIR MILES Reward Program. Adjusted EBITDA decreased |
● | BrandLoyalty. Adjusted EBITDA decreased |
35
● | Corporate/Other. Adjusted EBITDA decreased |
Liquidity and Capital Resources
Historically, our primary source of liquidity has been cash generated from operating activities. We expanded this source with our new credit facility and may expand these sources with future issuances of debt or equity securities. Our primary uses of cash are for ongoing business operations, repayment of our debt, capital expenditures and investments.
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. We believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances and available borrowings through the issuance of third-party debt. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future. In addition, the continued volatility in the financial and capital markets due to COVID-19, or the ongoing invasion by Russia of Ukraine, may limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all.
Our ability to fund our operating needs will depend on our future ability to continue to generate positive cash flow from operations and obtain debt or equity financing on acceptable terms.
Cash Flow Activity
Operating Activities. We generatedused cash flow from operating activities of $113.7 million and $121.7$28.7 million for the ninethree months ended September 30,March 31, 2022 as compared to cash flow generated from operating activities of $96.9 million for the three months ended March 31, 2021, primarily as a result of a decline in net income and 2020, respectively. The year-over-year decreasechanges in operating cash flows was primarily due to lower profitability in part due to the continued impact of COVID-19.working capital.
Investing Activities. Cash used in investing activities was $55.6$12.0 million and $50.6$16.9 million for the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, respectively. Significant components of investing activities are as follows:
● | Redemption settlement assets, restricted. The cash used in redemption settlement assets, restricted was |
● | Capital expenditures. Cash paid for capital expenditures was |
Financing Activities. Cash used in financing activities was $129.3 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively. In 2021, the Company paid a dividend to the Parent of $124.2 million, of which $4.2 million was withheld for taxes.
Debt
BrandLoyalty Credit Agreement
In the first quarter of 2021, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, amended its credit agreement to extend the maturity date by one year from April 3, 2023 to April 3, 2024. As of September 30, 2021,
3630
● | Financing Activities. Cash used in financing activities was $11.7 million and $123.5 million for the three months ended March 31, 2022 and 2021, respectively. In 2022, the cash used for financing was primarily attributable to principal payments on our term loans. In 2021, the Company paid a dividend to our former Parent of $124.2 million, of which $4.2 million was withheld for taxes. |
Debt
Credit Agreement
At March 31, 2022, we had $662.3 million in term loans outstanding and a $150.0 million revolving line of credit. As of March 31, 2022, we had no amounts outstanding under our BrandLoyalty Credit Agreement. The BrandLoyaltyrevolving line of credit agreement was terminated in connection with the company entering intobut a total availability of $133.9 million due to letters of credit outstanding under the senior secured credit agreement described more fully below.
Credit Agreement
On November 3, 2021, Loyalty Ventures entered into a senior secured credit agreement (the “Credit Agreement”) that provides a $175.0 million term loan A facility, a $500.0 million term loan B facility, which was issued at 98.0% of the aggregate principal amount, and a revolving credit facility in the maximum amount of $150.0 million. The term loan A and revolving credit facility will mature November 3, 2026. The term loan B will mature November 3, 2027.The proceeds of the term loans were used to finance a portion of the $750.0 million distribution by Loyalty Ventures on November 3, 2021 to ADS in connection with the Separation.
Loyalty Ventures will be required to make quarterly principal amortization payments in equal installments in an aggregate amount of 7.5% per annum of the initial aggregate principal amount of each of the term loan A and term loan B. Commencing with the fiscal year ending December 31, 2022, the Credit Agreement requires, on an annual basis, the prepayment of the term loan B with either 0%, 25% or 50% of Excess Cash Flow, depending on the Consolidated Secured Leverage Ratio,agreement. Our total leverage ratio, as defined in our credit agreement, was 4.1 to 1 at March 31, 2022, as compared to the Credit Agreement.maximum covenant ratio of 5.0 to 1.
The Credit Agreement contains customary representations and warranties and affirmative and negativeAs of March 31, 2022, we were in compliance with our debt covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, distributions and other restricted payments, and transactions with affiliates.
See Note 10,9, “Debt,” of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements for additional information regarding our debt.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 2,7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our registration statementAnnual Report filed on Form 10, filed with SEC on October 13,10-K for the fiscal year ended December 31, 2021.
Recently Issued Accounting Pronouncements
See “Recently Issued Accounting Standards” under Note 1, “Description of Business Spinoff and Basis of Presentation,” of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements for a discussion of certain accounting standards recently issued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risk includesrisks include foreign currency exchange rate risk and interest rate risk.
There have been no material changes from our registration statementAnnual Report on Form 10, filed with10-K for the SEC on October 13,year ended December 31, 2021 related to our exposure to market risk from foreign currency exchange rate risk and interest rate risk.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of September 30, 2021,March 31, 2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that as of September 30,
37
2021March 31, 2022 (the end of our thirdfirst fiscal quarter), our disclosure controls and procedures arewere 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
31
we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our thirdfirst quarter 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are involved, from time to time, in litigation, other legal claims, regulatory actions or other proceedings or actions by governmental authorities involving matters associated with or incidental to our business in the ordinary course, including, among other things, matters involving customer or vendor disputes, breaches of contractual obligations, class actions or purported class actions, trademark and other intellectual property protection and licensing disputes, import/export regulations, taxation, and employment matters. We believe the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our business or financial condition. However, our current assessment of these matters may change upon discovery of facts not presently known or determinations by judges, juries, or other finders of fact not in accord with management’s evaluation of the possible outcome or liability resulting therefrom.
Item 1A. Risk Factors
ThereOther than as set forth below, there have been no material changes to the Risk Factors previously disclosed in our registration statementAnnual Report on Form 10, filed10-K for the year ended December 31, 2021.
The invasion by Russia of Ukraine and the related global disruptions may negatively impact our results of operations.
As a result of the invasion by Russia of Ukraine, the U.S. and certain other countries have imposed sanctions on conducting business with or in Russia and could impose further sanctions that could damage or disrupt international commerce and the SECglobal economy. It is not possible to predict the broader or longer-term consequences of this conflict or the sanctions imposed to date, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on October 13,macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geopolitical instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions that could increase the costs, risks and adverse impacts from additional supply chain and logistics challenges. We may also be the subject of increased cyber-attacks. The potential effects of the invasion by Russia of Ukraine also could impact many of the other risk factors described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021. These potential effects could include but are not limited to variations in the level of our profitability, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, and potential impairment of the carrying value of goodwill. Given the evolving nature of this conflict, the related sanctions, potential governmental actions and global economic fallout, such potential impacts remain uncertain. While Russia does not constitute a material portion of our business, a significant escalation of the conflict’s current scope or related expansion of economic disruption to a portion or all of the global economy could have a material adverse effect on our results of operations.
32
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, 2021:March 31, 2022:
| | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||
| | | | | | | | | (Dollars in thousands) | |
During | | | | | | | | | | |
| | — | | $ | — | | — | | $ | — |
| | — | | | — | | — | | | — |
| | — | | | — | | — | | | — |
Total | | — | | $ | — | | — | | $ | — |
38
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a) None
(b) None
3933
Item 6. Exhibits
(a) Exhibits:
EXHIBIT INDEX
| Description | | | | | | ||
| | | | Incorporated by Reference | ||||
Exhibit |
| Description |
| Form |
| Exhibit |
| Filing Date |
| | | | | | | | |
2.1% | | | 8-K | | 2.1 | | 11/8/2021 | |
| | | | | | | | |
3.1 | | Amended and Restated Certificate of Incorporation of Loyalty Ventures Inc. | | 8-K | | 3.1 | | 11/8/2021 |
| | | | | | | | |
3.2 | | | 8-K | | 3.2 | | 11/8/2021 | |
| | | | | | | | |
10.1% | | | 8-K | | 10.1 | | 11/8/2021 | |
| | | | | | | | |
10.2% | | | 8-K | | 10.2 | | 11/8/2021 | |
| | | | | | | | |
10.3% | | | 8-K | | 10.3 | | 11/8/2021 | |
| | | | | | | | |
10.4 | | | 8-K | | 10.4 | | 11/8/2021 | |
| | | | | | | | |
10.5% | | | 8-K | | 10.1 | | 11/4/2021 | |
| | | | | | | | |
10.6% | | | 8-K | | 10.2 | | 11/4/2021 | |
| | | | | | | | |
10.7% | | | 8-K | | 10.3 | | 11/4/2021 | |
| | | | | | | | |
40
10.8+ | | | Form 10 | | 10.8 | | 9/24/2021 | |
| | | | | | | | |
10.9 | | | Form S-8 | | 99.1 | | 11/9/2021 | |
| | | | | | | | |
10.10 | | | Form S-8 | | 99.2 | | 11/9/2021 | |
| | | | | | | | |
10.11 | | Form of Indemnification Agreement for Officers and Directors. | | Form 10 | | 10.5 | | 9/1/2021 |
| | | | | | | | |
31.1* | | | | | | | | |
| | | | | | | | |
31.2* | | | | | | | | |
| | | | | | | | |
32.1** | | | | | | | | |
| | | | | | | | |
32.2** | | | | | | | | |
| | | | | | | | |
101* | | The following financial information from Loyalty Ventures Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Combined Balance Sheets, (ii) Condensed Combined Statements of Income, (iii) Condensed Combined Statements of Comprehensive Income, (iv) Condensed Combined Statements of Equity, (v) Condensed Combined Statements of Cash Flows and (vi) Notes to Condensed Combined Financial Statements. | | | | | | |
| | | | | | | | |
104* | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | | | | | | |
| | | | | | | |
| Description | | | | | | ||
| | | | Incorporated by Reference | ||||
Exhibit | Description | Form | Exhibit | Filing Date | ||||
| | | | | | | | |
10.1%* | | | | | | | | |
| | | | | | | | |
31.1* | | | | | | | | |
| | | | | | | | |
31.2* | | | | | | | | |
| | | | | | | | |
32.1** | | | | | | | | |
| | | | | | | | |
32.2** | | | | | | | | |
| | | | | | | | |
101* | | The following financial information from Loyalty Ventures Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated and Combined Statements of Income, (iii) Condensed Consolidated and Combined Statements of Comprehensive Loss, (iv) Condensed Consolidated and Combined Statements of Equity, (v) Condensed Consolidated and Combined Statements of Cash Flows and (vi) Notes to Condensed Consolidated and Combined Financial Statements. | | | | | | |
| | | | | | | | |
104* | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | | | | | | |
| | | | | | | |
*Filed herewith
**Furnished herewith
+ | Pursuant to Item 601(b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit. |
% | Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Loyalty Ventures hereby undertakes to furnish supplementally copies of any of the omitted exhibits and schedules upon request by the U.S. Securities and Exchange Commission. |
4134
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, duly authorized.
| | |
| LOYALTY VENTURES INC. | |
| | |
| By: | /s/ CHARLES L. HORN |
| | Charles L. Horn |
| | President and Chief Executive Officer |
Date: | | |
| | |
| By: | /s/ JOHN J. CHESNUT |
| | John J. Chesnut |
| | Executive Vice President and Chief Financial Officer |
Date: | | |
| | |
4235