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 SeptemberJune 30, 20182019 |
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OR |
|
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period fromto |
Commission File Number: 001-15749
ALLIANCE DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
| |
Delaware
| 31-1429215
|
(State or other jurisdiction ofincorporation or organization)
| (I.R.S. Employer Identification No.)
|
7500 Dallas Parkway, Suite 700
Plano, Texas 75024
(Address of principal executive office, including zip code)
(214) 494-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations 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, 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 ☐
| Emerging growth company ☐
|
| Smaller reporting company ☐
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of October 24, 2018, 54,473,522 shares of common stock were outstanding.
ALLIANCE DATA SYSTEMS CORPORATION
INDEX
PART I
Item 1.Financial Statements.
ALLIANCE DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
| |
Delaware | 31-1429215 |
(State or other jurisdiction ofincorporation or organization) | (I.R.S. Employer Identification No.) |
3075 Loyalty Circle
Columbus, Ohio43219
(Address of principal executive office, including zip code)
(614) 729-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | |
| Large accelerated filer þ | Accelerated filer ◻ |
| Non-accelerated filer ◻ | Emerging growth company ☐ |
| Smaller reporting company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þ
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading symbol | Name of each exchange on which registered |
Common stock, par value $0.01 per share | ADS | New York Stock Exchange |
As of July 24, 2019, 51,097,609 shares of common stock were outstanding.
ALLIANCE DATA SYSTEMS CORPORATION
INDEX
PART I
Item 1.Financial Statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | September 30, | | December 31, |
| | 2018 | | 2017 |
| | (In millions, except per share amounts) |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 3,600.9 | | $ | 4,190.0 |
Accounts receivable, net, less allowance for doubtful accounts ($6.1 and $6.7 at September 30, 2018 and December 31, 2017, respectively) | | | 866.8 | | | 822.3 |
Credit card and loan receivables: | | | | | | |
Credit card receivables – restricted for securitization investors | | | 12,565.5 | | | 14,293.9 |
Other credit card and loan receivables | | | 4,861.7 | | | 4,319.9 |
Total credit card and loan receivables | | | 17,427.2 | | | 18,613.8 |
Allowance for loan loss | | | (1,114.6) | | | (1,119.3) |
Credit card and loan receivables, net | | | 16,312.6 | | | 17,494.5 |
Credit card and loan receivables held for sale | | | 1,720.1 | | | 1,026.3 |
Inventories, net | | | 265.9 | | | 234.1 |
Other current assets | | | 601.8 | | | 348.9 |
Redemption settlement assets, restricted | | | 587.7 | | | 589.5 |
Total current assets | | | 23,955.8 | | | 24,705.6 |
Property and equipment, net | | | 610.0 | | | 613.9 |
Deferred tax asset, net | | | 65.3 | | | 28.1 |
Intangible assets, net | | | 603.1 | | | 800.6 |
Goodwill | | | 3,857.4 | | | 3,880.1 |
Other non-current assets | | | 671.4 | | | 656.5 |
Total assets | | $ | 29,763.0 | | $ | 30,684.8 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Accounts payable | | $ | 606.2 | | $ | 651.2 |
Accrued expenses | | | 364.9 | | | 442.8 |
Current portion of deposits | | | 6,267.1 | | | 6,366.2 |
Current portion of non-recourse borrowings of consolidated securitization entities | | | 1,456.8 | | | 1,339.9 |
Current portion of long-term and other debt | | | 130.0 | | | 131.3 |
Other current liabilities | | | 331.6 | | | 368.7 |
Deferred revenue | | | 802.8 | | | 846.6 |
Total current liabilities | | | 9,959.4 | | | 10,146.7 |
Deferred revenue | | | 113.4 | | | 120.3 |
Deferred tax liability, net | | | 223.9 | | | 211.2 |
Deposits | | | 5,082.3 | | | 4,564.7 |
Non-recourse borrowings of consolidated securitization entities | | | 6,014.1 | | | 7,467.4 |
Long-term and other debt | | | 5,677.3 | | | 5,948.3 |
Other liabilities | | | 401.4 | | | 370.9 |
Total liabilities | | | 27,471.8 | | | 28,829.5 |
Commitments and contingencies | | | | | | |
Stockholders’ equity: | | | | | | |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.0 shares and 112.8 shares at September 30, 2018 and December 31, 2017, respectively | | | 1.1 | | | 1.1 |
Additional paid-in capital | | | 3,148.8 | | | 3,099.8 |
Treasury stock, at cost, 58.4 shares and 57.4 shares at September 30, 2018 and December 31, 2017, respectively | | | (5,474.2) | | | (5,272.5) |
Retained earnings | | | 4,758.6 | | | 4,167.1 |
Accumulated other comprehensive loss | | | (143.1) | | | (140.2) |
Total stockholders’ equity | | | 2,291.2 | | | 1,855.3 |
Total liabilities and stockholders' equity | | $ | 29,763.0 | | $ | 30,684.8 |
| | | | | | |
| | June 30, | | December 31, |
| | 2019 | | 2018 |
| | (in millions, except per share amounts) |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 4,026.8 | | $ | 3,817.4 |
Accounts receivable, net, less allowance for doubtful accounts ($0.4 and $0.4 at June 30, 2019 and December 31, 2018, respectively) | | | 427.1 | | | 404.0 |
Credit card and loan receivables: | | | | | | |
Credit card receivables – restricted for securitization investors | | | 12,496.9 | | | 13,418.3 |
Other credit card and loan receivables | | | 5,117.6 | | | 4,436.7 |
Total credit card and loan receivables | | | 17,614.5 | | | 17,855.0 |
Allowance for loan loss | | | (1,010.9) | | | (1,038.3) |
Credit card and loan receivables, net | | | 16,603.6 | | | 16,816.7 |
Credit card receivables held for sale | | | 1,834.3 | | | 1,951.6 |
Inventories, net | | | 243.9 | | | 248.0 |
Other current assets | | | 279.9 | | | 293.2 |
Redemption settlement assets, restricted | | | 594.0 | | | 558.6 |
Current assets of discontinued operations | | | 4,264.3 | | | 622.2 |
Total current assets | | | 28,273.9 | | | 24,711.7 |
Property and equipment, net | | | 285.3 | | | 288.2 |
Right of use assets - operating | | | 268.4 | | | — |
Deferred tax asset, net | | | 45.4 | | | 44.0 |
Intangible assets, net | | | 195.8 | | | 217.4 |
Goodwill | | | 960.3 | | | 954.8 |
Other non-current assets | | | 710.6 | | | 636.4 |
Long-term assets of discontinued operations | | | — | | | 3,535.2 |
Total assets | | $ | 30,739.7 | | $ | 30,387.7 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Accounts payable | | $ | 504.5 | | $ | 486.2 |
Accrued expenses | | | 370.4 | | | 322.2 |
Current operating lease liabilities | | | 22.7 | | | — |
Current portion of deposits | | | 6,777.4 | | | 6,537.7 |
Current portion of non-recourse borrowings of consolidated securitization entities | | | 1,170.8 | | | 2,717.6 |
Current portion of long-term and other debt | | | 310.5 | | | 138.9 |
Other current liabilities | | | 307.3 | | | 291.8 |
Deferred revenue | | | 791.7 | | | 766.1 |
Current liabilities of discontinued operations | | | 351.4 | | | 223.5 |
Total current liabilities | | | 10,606.7 | | | 11,484.0 |
Deferred revenue | | | 111.0 | | | 109.2 |
Deferred tax liability, net | | | 217.7 | | | 256.5 |
Long-term operating lease liabilities | | | 296.1 | | | — |
Deposits | | | 5,757.3 | | | 5,256.0 |
Non-recourse borrowings of consolidated securitization entities | | | 5,556.2 | | | 4,934.1 |
Long-term and other debt | | | 5,515.1 | | | 5,586.5 |
Other liabilities | | | 287.9 | | | 392.4 |
Long-term liabilities of discontinued operations | | | — | | | 36.9 |
Total liabilities | | | 28,348.0 | | | 28,055.6 |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.3 shares and 113.0 shares at June 30, 2019 and December 31, 2018, respectively | | | 1.1 | | | 1.1 |
Series A Non-Voting Convertible Preferred Stock, $0.01 par value; authorized, 0.3 shares; issued, 0.2 shares and 0.0 shares at June 30, 2019 and December 31, 2018, respectively | | | — | | | — |
Additional paid-in capital | | | 3,259.6 | | | 3,172.4 |
Treasury stock, at cost, 62.4 shares and 59.6 shares at June 30, 2019 and December 31, 2018, respectively | | | (5,980.6) | | | (5,715.7) |
Retained earnings | | | 5,233.3 | | | 5,012.4 |
Accumulated other comprehensive loss | | | (121.7) | | | (138.1) |
Total stockholders’ equity | | | 2,391.7 | | | 2,332.1 |
Total liabilities and stockholders' equity | | $ | 30,739.7 | | $ | 30,387.7 |
See accompanying notes to unaudited condensed consolidated financial statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions, except per share amounts) |
Revenues | | | | | | | | | | | | |
Services | | $ | 586.0 | | $ | 650.3 | | $ | 1,790.7 | | $ | 1,888.3 |
Redemption, net | | | 163.6 | | | 210.0 | | | 443.0 | | | 645.4 |
Finance charges, net | | | 1,197.6 | | | 1,052.1 | | | 3,501.6 | | | 3,079.5 |
Total revenue | | | 1,947.2 | | | 1,912.4 | | | 5,735.3 | | | 5,613.2 |
Operating expenses | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 1,060.6 | | | 1,066.5 | | | 3,076.2 | | | 3,123.1 |
Provision for loan loss | | | 196.8 | | | 204.7 | | | 846.3 | | | 807.9 |
General and administrative | | | 45.3 | | | 38.0 | | | 126.5 | | | 124.9 |
Depreciation and other amortization | | | 49.7 | | | 46.7 | | | 145.9 | | | 136.6 |
Amortization of purchased intangibles | | | 72.8 | | | 77.6 | | | 220.3 | | | 237.9 |
Total operating expenses | | | 1,425.2 | | | 1,433.5 | | | 4,415.2 | | | 4,430.4 |
Operating income | | | 522.0 | | | 478.9 | | | 1,320.1 | | | 1,182.8 |
Interest expense | | | | | | | | | | | | |
Securitization funding costs | | | 56.1 | | | 38.2 | | | 163.4 | | | 109.9 |
Interest expense on deposits | | | 43.4 | | | 33.2 | | | 115.6 | | | 87.9 |
Interest expense on long-term and other debt, net | | | 69.4 | | | 73.9 | | | 214.8 | | | 210.2 |
Total interest expense, net | | | 168.9 | | | 145.3 | | | 493.8 | | | 408.0 |
Income before income taxes | | | 353.1 | | | 333.6 | | | 826.3 | | | 774.8 |
Provision for income taxes | | | 56.6 | | | 100.4 | | | 148.1 | | | 257.4 |
Net income | | $ | 296.5 | | $ | 233.2 | | $ | 678.2 | | $ | 517.4 |
| | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | |
Basic (Note 3) | | $ | 5.41 | | $ | 4.21 | | $ | 12.30 | | $ | 9.27 |
Diluted (Note 3) | | $ | 5.39 | | $ | 4.20 | | $ | 12.25 | | $ | 9.23 |
| | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | |
Basic (Note 3) | | | 54.8 | | | 55.4 | | | 55.2 | | | 55.8 |
Diluted (Note 3) | | | 55.0 | | | 55.6 | | | 55.4 | | | 56.0 |
| | | | | | | | | | | | |
Dividends declared per share: | | $ | 0.57 | | $ | 0.52 | | $ | 1.71 | | $ | 1.56 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions, except per share amounts) |
Revenues | | | | | | | | | | | | |
Services | | $ | 66.4 | | $ | 102.8 | | $ | 139.7 | | $ | 195.4 |
Redemption, net | | | 153.7 | | | 147.5 | | | 265.5 | | | 279.4 |
Finance charges, net | | | 1,128.4 | | | 1,146.9 | | | 2,277.5 | | | 2,304.1 |
Total revenue | | | 1,348.5 | | | 1,397.2 | | | 2,682.7 | | | 2,778.9 |
Operating expenses | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 654.8 | | | 593.6 | | | 1,295.3 | | | 1,185.2 |
Provision for loan loss | | | 257.3 | | | 311.9 | | | 509.5 | | | 649.6 |
General and administrative | | | 57.3 | | | 46.4 | | | 95.5 | | | 77.8 |
Depreciation and other amortization | | | 19.3 | | | 19.8 | | | 39.9 | | | 39.1 |
Amortization of purchased intangibles | | | 22.5 | | | 28.8 | | | 48.3 | | | 58.3 |
Total operating expenses | | | 1,011.2 | | | 1,000.5 | | | 1,988.5 | | | 2,010.0 |
Operating income | | | 337.3 | | | 396.7 | | | 694.2 | | | 768.9 |
Interest expense | | | | | | | | | | | | |
Securitization funding costs | | | 51.6 | | | 55.2 | | | 108.8 | | | 107.3 |
Interest expense on deposits | | | 53.2 | | | 36.8 | | | 102.0 | | | 72.3 |
Interest expense on long-term and other debt, net | | | 38.7 | | | 41.6 | | | 76.6 | | | 81.1 |
Total interest expense, net | | | 143.5 | | | 133.6 | | | 287.4 | | | 260.7 |
Income from continuing operations before income taxes | | | 193.8 | | | 263.1 | | | 406.8 | | | 508.2 |
Provision for income taxes | | | 51.4 | | | 39.3 | | | 86.1 | | | 104.5 |
Income from continuing operations | | $ | 142.4 | | $ | 223.8 | | $ | 320.7 | | $ | 403.7 |
Loss from discontinued operations, net of taxes | | | (3.4) | | | (6.0) | | | (32.6) | | | (21.9) |
Net income | | $ | 139.0 | | $ | 217.8 | | $ | 288.1 | | $ | 381.8 |
| | | | | | | | | | | | |
Basic income (loss) per share (Note 3): | | | | | | | | | | | | |
Income from continuing operations | | $ | 2.72 | | $ | 4.05 | | $ | 6.08 | | $ | 7.30 |
Loss from discontinued operations | | $ | (0.07) | | $ | (0.11) | | $ | (0.62) | | $ | (0.40) |
Net income per share | | $ | 2.65 | | $ | 3.94 | | $ | 5.46 | | $ | 6.90 |
| | | | | | | | | | | | |
Diluted income (loss) per share (Note 3): | | | | | | | | | | | | |
Income from continuing operations | | $ | 2.71 | | $ | 4.04 | | $ | 6.07 | | $ | 7.27 |
Loss from discontinued operations | | $ | (0.07) | | $ | (0.11) | | $ | (0.62) | | $ | (0.40) |
Net income per share | | $ | 2.64 | | $ | 3.93 | | $ | 5.45 | | $ | 6.87 |
| | | | | | | | | | | | |
Weighted average shares (Note 3): | | | | | | | | | | | | |
Basic | | | 51.3 | | | 55.2 | | | 52.1 | | | 55.3 |
Diluted | | | 52.6 | | | 55.4 | | | 52.9 | | | 55.5 |
See accompanying notes to unaudited condensed consolidated financial statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions) |
Net income | | $ | 296.5 | | $ | 233.2 | | $ | 678.2 | | $ | 517.4 |
| | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Unrealized loss on securities available-for-sale | | | (3.8) | | | (3.0) | | | (9.1) | | | (5.0) |
Tax benefit (expense) | | | 0.6 | | | (0.1) | | | 1.9 | | | (0.2) |
Unrealized loss on securities available-for-sale, net of tax | | | (3.2) | | | (3.1) | | | (7.2) | | | (5.2) |
| | | | | | | | | | | | |
Unrealized gain (loss) on cash flow hedges | | | (0.9) | | | 0.8 | | | 0.8 | | | (0.4) |
Tax benefit (expense) | | | 0.2 | | | (0.2) | | | (0.2) | | | 0.1 |
Unrealized gain (loss) on cash flow hedges, net of tax | | | (0.7) | | | 0.6 | | | 0.6 | | | (0.3) |
| | | | | | | | | | | | |
Unrealized gain (loss) on net investment hedges | | | 4.8 | | | (19.4) | | | 30.2 | | | (63.1) |
Tax benefit (expense) | | | (1.2) | | | 7.4 | | | (7.3) | | | 23.7 |
Unrealized gain (loss) on net investment hedges, net of tax | | | 3.6 | | | (12.0) | | | 22.9 | | | (39.4) |
| | | | | | | | | | | | |
Foreign currency translation adjustments | | | (6.4) | | | 15.9 | | | (19.2) | | | 55.4 |
| | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | (6.7) | | | 1.4 | | | (2.9) | | | 10.5 |
| | | | | | | | | | | | |
Total comprehensive income, net of tax | | $ | 289.8 | | $ | 234.6 | | $ | 675.3 | | $ | 527.9 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Net income | | $ | 139.0 | | $ | 217.8 | | $ | 288.1 | | $ | 381.8 |
| | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Unrealized gain (loss) on securities available-for-sale | | | 6.2 | | | (2.3) | | | 16.2 | | | (5.3) |
Tax (expense) benefit | | | (0.8) | | | 0.3 | | | (1.8) | | | 1.3 |
Unrealized gain (loss) on securities available-for-sale, net of tax | | | 5.4 | | | (2.0) | | | 14.4 | | | (4.0) |
| | | | | | | | | | | | |
Unrealized (loss) gain on cash flow hedges | | | (0.1) | | | 1.8 | | | (0.2) | | | 1.7 |
Tax expense | | | — | | | (0.4) | | | — | | | (0.4) |
Unrealized (loss) gain on cash flow hedges, net of tax | | | (0.1) | | | 1.4 | | | (0.2) | | | 1.3 |
| | | | | | | | | | | | |
Unrealized (loss) gain on net investment hedge | | | (9.6) | | | 40.8 | | | 6.5 | | | 25.4 |
Tax benefit (expense) | | | 2.3 | | | (9.8) | | | (1.6) | | | (6.1) |
Unrealized (loss) gain on net investment hedge, net of tax | | | (7.3) | | | 31.0 | | | 4.9 | | | 19.3 |
| | | | | | | | | | | | |
Foreign currency translation adjustments | | | 8.2 | | | (30.3) | | | (2.7) | | | (12.8) |
| | | | | | | | | | | | |
Other comprehensive income, net of tax | | | 6.2 | | | 0.1 | | | 16.4 | | | 3.8 |
| | | | | | | | | | | | |
Total comprehensive income, net of tax | | $ | 145.2 | | $ | 217.9 | | $ | 304.5 | | $ | 385.6 |
See accompanying notes to unaudited condensed consolidated financial statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | Additional | | | | | | Other | | Total |
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ |
Three Months Ended June 30, 2019 | | Shares | | Amount | | Shares | | Amount | | Capital | | Stock | | Earnings | | Loss | | Equity |
| | (in millions) |
Balance at April 1, 2019 | | 113.2 | | $ | 1.1 | | — | | $ | — | | $ | 3,177.0 | | $ | (5,938.5) | | $ | 5,127.8 | | $ | (127.9) | | $ | 2,239.5 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 139.0 | | | — | | | 139.0 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 6.2 | | | 6.2 |
Stock-based compensation | | — | | | — | | — | | | — | | | 31.2 | | | — | | | — | | | — | | | 31.2 |
Issuance of preferred stock | | — | | | — | | 0.2 | | | — | | | 42.1 | | | (42.1) | | | — | | | — | | | — |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (33.5) | | | — | | | (33.5) |
Other | | 0.1 | | | — | | — | | | — | | | 9.3 | | | — | | | — | | | — | | | 9.3 |
Balance at June 30, 2019 | | 113.3 | | $ | 1.1 | | 0.2 | | $ | — | | $ | 3,259.6 | | $ | (5,980.6) | | $ | 5,233.3 | | $ | (121.7) | | $ | 2,391.7 |
| | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 678.2 | | $ | 517.4 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 366.2 | | | 374.5 |
Deferred income taxes | | | (30.3) | | | (62.5) |
Provision for loan loss | | | 846.3 | | | 807.9 |
Non-cash stock compensation | | | 64.2 | | | 63.5 |
Amortization of deferred financing costs | | | 36.2 | | | 32.3 |
Change in deferred revenue | | | (26.2) | | | (35.5) |
Change in other operating assets and liabilities | | | (195.3) | | | (41.5) |
Originations of credit card and loan receivables held for sale | | | (4,799.0) | | | (6,012.8) |
Sales of credit card and loan receivables held for sale | | | 4,928.8 | | | 6,011.5 |
Other | | | 156.3 | | | 104.0 |
Net cash provided by operating activities | | | 2,025.4 | | | 1,758.8 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Change in redemption settlement assets | | | (37.4) | | | (213.6) |
Change in credit card and loan receivables | | | (708.1) | | | (1,174.7) |
Proceeds from sale of credit card portfolio | | | 55.4 | | | — |
Capital expenditures | | | (149.3) | | | (176.6) |
Purchases of other investments | | | (72.6) | | | (80.2) |
Maturities/sales of other investments | | | 43.1 | | | 38.2 |
Other | | | 8.2 | | | (4.2) |
Net cash used in investing activities | | | (860.7) | | | (1,611.1) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Borrowings under debt agreements | | | 3,207.3 | | | 6,439.6 |
Repayments of borrowings | | | (3,466.0) | | | (5,903.8) |
Non-recourse borrowings of consolidated securitization entities | | | 2,577.3 | | | 2,455.0 |
Repayments/maturities of non-recourse borrowings of consolidated securitization entities | | | (3,915.0) | | | (2,545.0) |
Net increase in deposits | | | 421.3 | | | 1,987.7 |
Payment of deferred financing costs | | | (21.3) | | | (53.4) |
Dividends paid | | | (94.5) | | | (86.8) |
Purchase of treasury shares | | | (197.0) | | | (553.7) |
Other | | | (18.1) | | | (16.5) |
Net cash (used in) provided by financing activities | | | (1,506.0) | | | 1,723.1 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | (3.1) | | | 8.4 |
Change in cash, cash equivalents and restricted cash | | | (344.4) | | | 1,879.2 |
Cash, cash equivalents and restricted cash at beginning of period | | | 4,314.7 | | | 1,968.5 |
Cash, cash equivalents and restricted cash at end of period | | $ | 3,970.3 | | $ | 3,847.7 |
| | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | |
Interest paid | | $ | 527.5 | | $ | 382.2 |
Income taxes paid, net | | $ | 188.5 | | $ | 282.0 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | Additional | | | | | | Other | | Total |
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ |
Three Months Ended June 30, 2018 | | Shares | | Amount | | Shares | | Amount | | Capital | | Stock | | Earnings | | Loss | | Equity |
| | (in millions) |
Balance at April 1, 2018 | | 112.9 | | $ | 1.1 | | — | | $ | — | | $ | 3,101.7 | | $ | (5,272.5) | | $ | 4,307.6 | | $ | (136.5) | | $ | 2,001.4 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 217.8 | | | — | | | 217.8 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 0.1 | | | 0.1 |
Stock-based compensation | | — | | | — | | — | | | — | | | 21.8 | | | — | | | — | | | — | | | 21.8 |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (99.2) | | | — | | | — | | | (99.2) |
Dividends and dividend equivalent rights declared ($0.57 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (31.8) | | | — | | | (31.8) |
Other | | — | | | — | | — | | | — | | | 9.2 | | | — | | | — | | | — | | | 9.2 |
Balance at June 30, 2018 | | 112.9 | | $ | 1.1 | | — | | $ | — | | $ | 3,132.7 | | $ | (5,371.7) | | $ | 4,493.6 | | $ | (136.4) | | $ | 2,119.3 |
See accompanying notes to unaudited condensed consolidated financial statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | Additional | | | | | | Other | | Total |
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ |
Six Months Ended June 30, 2019 | | Shares | | Amount | | Shares | | Amount | | Capital | | Stock | | Earnings | | Loss | | Equity |
| | (in millions) |
Balance at December 31, 2018 | | 113.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,172.4 | | $ | (5,715.7) | | $ | 5,012.4 | | $ | (138.1) | | $ | 2,332.1 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 288.1 | | | — | | | 288.1 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 16.4 | | | 16.4 |
Stock-based compensation | | — | | | — | | — | | | — | | | 51.3 | | | — | | | — | | | — | | | 51.3 |
Issuance of preferred stock | | — | | | — | | 0.2 | | | — | | | 42.1 | | | (42.1) | | | — | | | — | | | — |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (222.8) | | | — | | | — | | | (222.8) |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (67.2) | | | — | | | (67.2) |
Other | | 0.3 | | | — | | — | | | — | | | (6.2) | | | — | | | — | | | — | | | (6.2) |
Balance at June 30, 2019 | | 113.3 | | $ | 1.1 | | 0.2 | | $ | — | | $ | 3,259.6 | | $ | (5,980.6) | | $ | 5,233.3 | | $ | (121.7) | | $ | 2,391.7 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | Additional | | | | | | Other | | Total |
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ |
Six Months Ended June 30, 2018 | | Shares | | Amount | | Shares | | Amount | | Capital | | Stock | | Earnings | | Loss | | Equity |
| | (in millions) |
Balance at December 31, 2017 | | 112.8 | | $ | 1.1 | | — | | $ | — | | $ | 3,099.8 | | $ | (5,272.5) | | $ | 4,167.1 | | $ | (140.2) | | $ | 1,855.3 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 381.8 | | | — | | | 381.8 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | | | | 3.8 | | | 3.8 |
Stock-based compensation | | — | | | — | | — | | | — | | | 46.3 | | | — | | | — | | | — | | | 46.3 |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (99.2) | | | — | | | — | | | (99.2) |
Dividends and dividend equivalent rights declared ($0.57 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (63.4) | | | — | | | (63.4) |
Cumulative effect adjustment to retained earnings in accordance with ASC 606 | | — | | | — | | — | | | — | | | — | | | — | | | 9.6 | | | — | | | 9.6 |
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-01 | | — | | | — | | — | | | — | | | — | | | — | | | (1.5) | | | — | | | (1.5) |
Other | | 0.1 | | | — | | — | | | — | | | (13.4) | | | — | | | — | | | — | | | (13.4) |
Balance at June 30, 2018 | | 112.9 | | $ | 1.1 | | — | | $ | — | | $ | 3,132.7 | | $ | (5,371.7) | | $ | 4,493.6 | | $ | (136.4) | | $ | 2,119.3 |
See accompanying notes to unaudited condensed consolidated financial statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2019 | | 2018 |
| | (in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 288.1 | | $ | 381.8 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 161.5 | | | 243.7 |
Deferred income taxes | | | (47.6) | | | (82.0) |
Provision for loan loss | | | 509.5 | | | 649.6 |
Non-cash stock compensation | | | 51.3 | | | 46.3 |
Amortization of deferred financing costs | | | 22.1 | | | 25.5 |
Change in deferred revenue | | | (8.9) | | | (26.0) |
Change in other operating assets and liabilities | | | (29.4) | | | (61.1) |
Originations of credit card and loan receivables held for sale | | | — | | | (4,743.4) |
Sales of credit card and loan receivables held for sale | | | — | | | 4,791.9 |
Other | | | 143.1 | | | 95.5 |
Net cash provided by operating activities | | | 1,089.7 | | | 1,321.8 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Change in redemption settlement assets | | | (2.0) | | | (39.7) |
Change in credit card and loan receivables | | | (20.9) | | | (121.2) |
Purchase of credit card portfolios | | | (936.5) | | | — |
Proceeds from sale of credit card portfolios | | | 539.3 | | | 55.6 |
Payments for acquired businesses, net of cash | | | (6.7) | | | — |
Capital expenditures | | | (92.2) | | | (98.5) |
Purchases of other investments | | | (13.0) | | | (50.1) |
Maturities/sales of other investments | | | 11.2 | | | 10.6 |
Other | | | 6.5 | | | 7.1 |
Net cash used in investing activities | | | (514.3) | | | (236.2) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Borrowings under debt agreements | | | 2,077.3 | | | 2,399.1 |
Repayments of borrowings | | | (1,974.8) | | | (2,678.5) |
Non-recourse borrowings of consolidated securitization entities | | | 2,193.3 | | | 1,475.0 |
Repayments/maturities of non-recourse borrowings of consolidated securitization entities | | | (3,117.2) | | | (2,510.0) |
Net increase (decrease) in deposits | | | 742.8 | | | (373.2) |
Payment of deferred financing costs | | | (18.8) | | | (7.8) |
Dividends paid | | | (67.0) | | | (63.3) |
Purchase of treasury shares | | | (222.8) | | | (94.5) |
Other | | | (9.4) | | | (15.8) |
Net cash used in financing activities | | | (396.6) | | | (1,869.0) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 8.2 | | | (4.1) |
Change in cash, cash equivalents and restricted cash | | | 187.0 | | | (787.5) |
Cash, cash equivalents and restricted cash at beginning of period | | | 3,967.7 | | | 4,314.7 |
Cash, cash equivalents and restricted cash at end of period | | $ | 4,154.7 | | $ | 3,527.2 |
| | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | |
Interest paid | | $ | 323.6 | | $ | 347.5 |
Income taxes paid, net | | $ | 139.7 | | $ | 120.6 |
The unaudited condensed consolidated statements of cash flows are presented with the combined cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category.
See accompanying notes to unaudited condensed consolidated financial statements.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by Alliance Data Systems Corporation (“ADSC” or, including its consolidated subsidiaries and variable interest entities (“VIEs”), the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on February 27, 2018.26, 2019, as well as the consolidated financial statements and the notes thereto included in the Company’s Form 8-K, filed with the SEC on July 17, 2019, to reflect the presentation of its Epsilon® segment as a discontinued operation.
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets; (2) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP. Specifically, certain statement of cash flows reclassifications were made for the adoption of Accounting Standards Update (“ASU”) 2016-18, “Restricted Cash.” The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in theCompany’s unaudited condensed consolidated financial statements have been presented with its Epsilon segment as a discontinued operation. See Note 5, “Discontinued Operations,” for more information. Subsequent to the issuance of cash flows:
| | | | | | |
| | September 30, | | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
Cash and cash equivalents | | $ | 3,600.9 | | $ | 3,326.0 |
Restricted cash included within other current assets (1) | | | 318.0 | | | 450.2 |
Restricted cash included within redemption settlement assets, restricted (2) | | | 51.4 | | | 71.5 |
Total cash, cash equivalents and restricted cash | | $ | 3,970.3 | | $ | 3,847.7 |
| (1)
| | Includes $266.7 million and $415.6 million in principal accumulation at September 30, 2018 and 2017, respectively, for the repayment of non-recourse borrowings of consolidated securitized debt that matured in October 2018 and 2017, respectively.
|
| (2)
| | See Note 8, “Redemption Settlement Assets,” for additional information regarding nature of restrictions.
|
the Company’s condensed consolidated financial statements for the three months ended March 31, 2019, the Company prepared and filed a Form 8-K on July 17, 2019, which included the Company’s Annual Report on Form 10-K that was recast to reflect the presentation of Epsilon as a discontinued operation in all periods presented. Through that process, the Company determined that certain income tax liabilities classified within the Epsilon segment should be continuing obligations of the Company. As such, for the balance sheet as of December 31, 2018 included in this Form 10-Q for the period ended June 30, 2019, the Company reclassified $45.3 million of liabilities from discontinued operations to accrued expenses and other liabilities of $42.9 million and $2.4 million, respectively, from the amounts in the December 31, 2018 condensed consolidated balance sheet included in the Form 10-Q for the period ended March 31, 2019.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842),” that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statements of income. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption and various optional practical expedients permitted. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” that provides transition relief by removing certain comparative period requirements and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, which is January 1, 2019 for the Company. The new standard may be applied using this additional transition method or a modified retrospective approach. The Company continues to assess the impact of adoption of the new standard on its existing policies, processes, systems and controls in conjunction with its review of
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
existing lease agreements, but expects an increase in assets and liabilities on its consolidated balance sheets at adoption for the recording of right-of-use assets and corresponding lease liabilities. The Company plans to adopt the standard on January 1, 2019 using the transition relief provided by ASU 2018-11.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to utilize a financial instrument impairment model to establish an allowance based on expected losses over the life of the exposure rather than a model based on an incurred loss approach. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, ASU 2016-13 modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The Company has formed a cross-functional implementation team and is infinalizing the processdevelopment of determiningloss forecasting models, technological solutions and processes to satisfy the requirements of ASU 2016-13. Management is assessing key accounting interpretations data requirements and necessary changescontinues to its credit loss estimation methods, processes and systems as well as evaluatingevaluate the impact that adoption of ASU 2016-13 will havethe new standard on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements Any adjustments to Accounting for Hedging Activities.” ASU 2017-12 expands and refines the hedge accounting model for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and makes certain targeted improvements to simplify the application of hedge accounting guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate asallowance for loan loss at adoption would be recorded through a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive incomecumulative-effect adjustment to retained earnings. Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using eitherThe extent of the specific identification approach or the portfolio approach, basedimpact upon adoption will depend on the natureasset quality of the underlying item. ASU 2018-02 is effective for interimCompany’s credit card and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not intend to reclassify the stranded tax effects to retained earnings pursuant to ASU 2018-02 as these amounts do not have a material impact on its consolidated financial statements.loan receivables portfolio, and economic conditions and forecasts at adoption.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements from Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact that adoption of ASU 2018-13 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 requires customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, “Intangibles—Goodwill and Other—Internal-Use Software,” to determine which implementation costs may be capitalized. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The amendments in ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact that adoption of ASU 2018-15 will have on its consolidated financial statements.
Recently Adopted Accounting Standards
In May 2014,February 2016, the FASB issued ASU 2014-09, “Revenue from Contracts2016-02, “Leases,” ASC 842, that replaced previous lease guidance and required lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Companies continue to classify leases as either finance or operating, with Customers,” Accounting Standards Codification (“ASC”) 606, which requires an entityclassification affecting the pattern of expense recognition in the statements of income. Companies were permitted to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Companies may adopt ASC 606842 using a full retrospective or modified retrospective method.approach or transition relief provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that removed certain comparative period requirements and required a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the standard on January 1, 2019 using the transition relief provided by ASU 2018-11.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
During 2017,2018, the Company completed its evaluation of ASC 606,842, including the impact on its policies, processes, systems and controls, and differences in the timing and/or method of revenue recognition.controls. As a result, the Company identified changes to and modified certain of its accounting policies and practices.practices, including the implementation of new lease accounting software. Although there were no significant changes to the Company’s accounting systems or controls upon adoption of ASC 606,842, the Company modified certain of its existing controls and added new controls to incorporate the revisions made to its accounting policies and practices.
The Company adoptedelected the standard ontransition practical expedients permitted under ASC 842-10-65-1 under which it was not required to reassess (i) whether expired or existing contracts were or contained leases as defined by ASC 842, (ii) the classification of such leases, and (iii) whether previously capitalized initial direct costs qualified for capitalization under ASC 842. The Company also elected the practical expedient to use hindsight in determining the lease term. Additionally, the Company made the accounting policy election to account for lease and nonlease components as a single lease component for its identified asset classes.
The cumulative effect of the changes made to the consolidated January 1, 2018 using2019 balance sheet for the modified retrospective method.adoption of ASC 842 established operating lease liabilities of approximately $324.5 million and corresponding right-of-use assets of approximately $269.9 million, based upon the operating lease liabilities adjusted for deferred rent and lease incentives, which resulted in the reclassification of approximately $54.6 million in liabilities to the right-of-use asset. There was no cumulative-effect adjustment to retained earnings as a result of the adoption of ASC 842.
Additionally, the cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of ASC 842 for the Epsilon segment, presented as a discontinued operation for the periods presented, established operating lease liabilities of approximately $208.7 million and corresponding right-of-use assets of approximately $181.1 million, based upon the operating lease liabilities adjusted for prepaid and deferred rent, unamortized initial direct costs, and lease incentives, which resulted in the reclassification of approximately $30.5 million in liabilities and $2.9 million in assets to the right-of-use asset. As part of the adoption of ASC 842, capital leases were recognized as finance leases at their existing carrying amounts effective January 1, 2019, and the accounting remained substantially unchanged, with capital lease assets totaling $13.0 million and capital lease liabilities totaling $12.6 million.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company’s adoption of ASC 842 had no significant impact to our consolidated statements of income or consolidated statements of cash flows. Based on the evaluation of ASC 842, the Company does not expect it to have a material impact on its results of operations or cash flows in the periods after adoption.
ASC 842 also requires expanded qualitative and quantitative disclosure regarding the Company’s leasing activities. See Note 10, “Leases,” for the Company’s ASC 842 disclosures.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expanded and refined the hedge accounting model for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and made certain targeted improvements to simplify the application of hedge accounting guidance related to the assessment of hedge effectiveness. The Company’s adoption of this standard on January 1, 2019 did not have a material impact on its consolidated results of operations or cash flows. ASC 606 does not apply to financial instruments and other contractual rights or obligations (for example, interest income and late fees from credit card and loan receivables), and therefore, the Company’s finance charges, net were not affected by the adoption of the standard. Most revenue streams are recorded consistently under both ASC 605, “Revenue Recognition” and the new standard; however, the Company noted the following impacts:statements.
| ·
| | Upon the adoption of ASC 606, revenue associated with a database build was changed from recognizing revenue over the expected contract term upon client acceptance to over the build period in which the database is completed, because the Company’s performance does not create an asset with an alternative use and the Company has an enforceable right to payment for performance completed to date. The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of ASC 606 resulted in an increase in unbilled accounts receivable and accrued expenses, a reduction in deferred costs and deferred revenue and a net increase in retained earnings as follows:
|
| | | | | | | | | |
| | Balance at | | Adjustments | | Balance at |
| | December 31, | | due to | | January 1, |
| | 2017 | | ASC 606 | | 2018 |
Consolidated Balance Sheet | | | | (In millions) | | |
| | | | | | | | | |
Accounts receivable, net | | $ | 822.3 | | $ | 22.4 | | $ | 844.7 |
Other current assets | | | 348.9 | | | (16.6) | | | 332.3 |
Other non-current assets | | | 656.5 | | | (20.9) | | | 635.6 |
| | | 1,827.7 | | | (15.1) | | | 1,812.6 |
| | | | | | | | | |
Accrued expenses | | | 442.8 | | | 3.2 | | | 446.0 |
Other current liabilities | | | 368.7 | | | (14.3) | | | 354.4 |
Other liabilities | | | 370.9 | | | (13.6) | | | 357.3 |
| | | 1,182.4 | | | (24.7) | | | 1,157.7 |
| | | | | | | | | |
Retained earnings | | | 4,167.1 | | | 9.6 | | | 4,176.7 |
| ·
| | Further, ASC 606 impacted the presentation of revenue within the Company’s coalition loyalty program. Upon the adoption of ASC 606, for the fulfillment of certain rewards where the AIR MILES® Reward Program does not control the goods or services before they are transferred to the collector, revenue is recorded on a net basis.
|
| ·
| | ASC 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue transactions. See Note 2, “Revenue,” for the Company’s ASC 606 disclosures.
|
In January 2016,February 2018, the FASB issued ASU 2016-01, “Recognition and Measurement2018-02, “Reclassification of Financial Assets and Financial Liabilities.Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2016-01 requires that equity investments be measured at fair value with changes2018-02 allowed for reclassification of stranded tax effects on items resulting from the change in fair value recognized in net income. For equity investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. Additionally, ASU 2016-01 requires entities that electcorporate tax rate as a result of H.R. 1, originally known as the fair value option for financial liabilities to recognize changes in fair value related to instrument-specific credit risk inTax Cuts and Jobs Act of 2017, from accumulated other comprehensive income. Finally, entities must assess valuation allowances for deferred tax assets relatedincome to available-for-sale debt securities in combination with theirretained earnings. Tax effects unrelated to H.R. 1 were permitted to be released from accumulated other deferred tax assets. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017, with early
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
adoption permitted.comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. The Company adopted this standard on January 1, 2018, resulting in a cumulative-effect adjustment of $1.5 million that was reclassified from accumulated other comprehensive loss2019 using the portfolio approach and did not reclassify the stranded tax effects to retained earnings on the consolidated January 1, 2018 balance sheet.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 makes eight targeted changes to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company’s adoption of this standard on January 1, 2018as these amounts did not have a material impact on its consolidated statements of cash flows.financial statements.
2. REVENUE
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.As discussed in Note 5, “Discontinued Operations,” ASU 2016-18 requires entities to show the changes in the totalfirst quarter of cash, cash equivalents, restricted cash and restricted cash equivalents in2019 the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periodsCompany’s Epsilon segment has been classified as a discontinued operation. As such, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on January 1, 2018. The effect of the adoption of the standard was to include restricted cash and restricted cash equivalents at the beginning-of-period and end-of-period cash and cash equivalents totals.
2. REVENUE
Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” applying the modified retrospective method to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. ASC 606 does not apply to financial instruments and other contractual rights or obligations.
Under ASC 606, revenue is recognized when controlfirst quarter of 2019, the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s contracts with its customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. Taxes assessed on revenue-producing transactions are excluded from revenues.
The Company’s products and services are reported under threetwo segments—LoyaltyOne Epsilon® and Card Services, and are listedas shown below.
The following table presentstables present revenue disaggregated by major source, as well assource:
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Three Months Ended June 30, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 71.4 | | $ | — | | $ | — | | $ | 71.4 |
Short-term loyalty programs | | | 153.1 | | | — | | | — | | | 153.1 |
Servicing fees, net | | | — | | | (31.5) | | | — | | | (31.5) |
Other | | | 23.9 | | | — | | | 0.1 | | | 24.0 |
Revenue from contracts with customers | | $ | 248.4 | | $ | (31.5) | | $ | 0.1 | | $ | 217.0 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 1,128.4 | | | — | | | 1,128.4 |
Investment income | | | 3.1 | | | — | | | — | | | 3.1 |
Total | | $ | 251.5 | | $ | 1,096.9 | | $ | 0.1 | | $ | 1,348.5 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Three Months Ended June 30, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 92.5 | | $ | — | | $ | — | | $ | 92.5 |
Short-term loyalty programs | | | 130.3 | | | — | | | — | | | 130.3 |
Servicing fees, net | | | — | | | 1.6 | | | — | | | 1.6 |
Other | | | 22.9 | | | — | | | 0.1 | | | 23.0 |
Revenue from contracts with customers | | $ | 245.7 | | $ | 1.6 | | $ | 0.1 | | $ | 247.4 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 1,146.9 | | | — | | | 1,146.9 |
Investment income | | | 2.9 | | | — | | | — | | | 2.9 |
Total | | $ | 248.6 | | $ | 1,148.5 | | $ | 0.1 | | $ | 1,397.2 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Six Months Ended June 30, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 142.8 | | $ | — | | $ | — | | $ | 142.8 |
Short-term loyalty programs | | | 262.7 | | | — | | | — | | | 262.7 |
Servicing fees, net | | | — | | | (50.2) | | | — | | | (50.2) |
Other | | | 43.7 | | | — | | | 0.1 | | | 43.8 |
Revenue from contracts with customers | | $ | 449.2 | | $ | (50.2) | | $ | 0.1 | | $ | 399.1 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 2,277.5 | | | — | | | 2,277.5 |
Investment income | | | 6.1 | | | — | | | — | | | 6.1 |
Total | | $ | 455.3 | | $ | 2,227.3 | | $ | 0.1 | | $ | 2,682.7 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Six Months Ended June 30, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 182.4 | | $ | — | | $ | — | | $ | 182.4 |
Short-term loyalty programs | | | 244.4 | | | — | | | — | | | 244.4 |
Servicing fees, net | | | — | | | (0.4) | | | — | | | (0.4) |
Other | | | 42.5 | | | — | | | 0.3 | | | 42.8 |
Revenue from contracts with customers | | $ | 469.3 | | $ | (0.4) | | $ | 0.3 | | $ | 469.2 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 2,304.1 | | | — | | | 2,304.1 |
Investment income | | | 5.6 | | | — | | | — | | | 5.6 |
Total | | $ | 474.9 | | $ | 2,303.7 | | $ | 0.3 | | $ | 2,778.9 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables present revenue disaggregated by geographic region based on the location of the subsidiary that generally correlates with the location of the customer:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Corporate/ | | | | | | |
Three Months Ended September 30, 2018 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total |
| | (In millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Coalition loyalty program | | $ | 83.8 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 83.8 |
Short-term loyalty programs | | | 148.4 | | | — | | | — | | | — | | | — | | | 148.4 |
Technology services | | | — | | | 255.9 | | | — | | | — | | | (6.0) | | | 249.9 |
Digital Media services | | | — | | | 195.2 | | | — | | | — | | | (5.5) | | | 189.7 |
Agency services | | | — | | | 86.5 | | | — | | | — | | | (2.0) | | | 84.5 |
Servicing fees, net | | | — | | | — | | | (34.7) | | | — | | | — | | | (34.7) |
Other | | | 25.1 | | | — | | | — | | | 0.2 | | | (0.2) | | | 25.1 |
Revenue from contracts with customers | | $ | 257.3 | | $ | 537.6 | | $ | (34.7) | | $ | 0.2 | | $ | (13.7) | | $ | 746.7 |
| | | | | | | | | | | | | | | | | | |
Finance charges, net | | | — | | | — | | | 1,197.6 | | | — | | | — | | | 1,197.6 |
Investment income | | | 2.9 | | | — | | | — | | | — | | | — | | | 2.9 |
Total | | $ | 260.2 | | $ | 537.6 | | $ | 1,162.9 | | $ | 0.2 | | $ | (13.7) | | $ | 1,947.2 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Three Months Ended June 30, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 9.5 | | $ | 1,096.9 | | $ | 0.1 | | $ | 1,106.5 |
Canada | | | 85.4 | | | — | | | — | | | 85.4 |
Europe, Middle East and Africa | | | 117.6 | | | — | | | — | | | 117.6 |
Asia Pacific | | | 24.2 | | | — | | | — | | | 24.2 |
Other | | | 14.8 | | | — | | | — | | | 14.8 |
Total | | $ | 251.5 | | $ | 1,096.9 | | $ | 0.1 | | $ | 1,348.5 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Three Months Ended June 30, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 6.3 | | $ | 1,148.5 | | $ | 0.1 | | $ | 1,154.9 |
Canada | | | 105.4 | | | — | | | — | | | 105.4 |
Europe, Middle East and Africa | | | 91.1 | | | — | | | — | | | 91.1 |
Asia Pacific | | | 28.9 | | | — | | | — | | | 28.9 |
Other | | | 16.9 | | | — | | | — | | | 16.9 |
Total | | $ | 248.6 | | $ | 1,148.5 | | $ | 0.1 | | $ | 1,397.2 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Six Months Ended June 30, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 15.9 | | $ | 2,227.3 | | $ | 0.1 | | $ | 2,243.3 |
Canada | | | 174.4 | | | — | | | — | | | 174.4 |
Europe, Middle East and Africa | | | 199.0 | | | — | | | — | | | 199.0 |
Asia Pacific | | | 41.7 | | | — | | | — | | | 41.7 |
Other | | | 24.3 | | | — | | | — | | | 24.3 |
Total | | $ | 455.3 | | $ | 2,227.3 | | $ | 0.1 | | $ | 2,682.7 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Six Months Ended June 30, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 12.0 | | $ | 2,303.7 | | $ | 0.3 | | $ | 2,316.0 |
Canada | | | 211.0 | | | — | | | — | | | 211.0 |
Europe, Middle East and Africa | | | 188.1 | | | — | | | — | | | 188.1 |
Asia Pacific | | | 45.5 | | | — | | | — | | | 45.5 |
Other | | | 18.3 | | | — | | | — | | | 18.3 |
Total | | $ | 474.9 | | $ | 2,303.7 | | $ | 0.3 | | $ | 2,778.9 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Corporate/ | | | | | | |
Nine Months Ended September 30, 2018 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total |
| | (In millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Coalition loyalty program | | $ | 266.2 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 266.2 |
Short-term loyalty programs | | | 392.8 | | | — | | | — | | | — | | | — | | | 392.8 |
Technology services | | | — | | | 757.0 | | | — | | | — | | | (17.7) | | | 739.3 |
Digital Media services | | | — | | | 552.7 | | | — | | | — | | | (7.0) | | | 545.7 |
Agency services | | | — | | | 251.5 | | | — | | | — | | | (3.0) | | | 248.5 |
Servicing fees, net | | | — | | | — | | | (35.1) | | | — | | | — | | | (35.1) |
Other | | | 67.6 | | | — | | | — | | | 0.5 | | | (0.3) | | | 67.8 |
Revenue from contracts with customers | | $ | 726.6 | | $ | 1,561.2 | | $ | (35.1) | | $ | 0.5 | | $ | (28.0) | | $ | 2,225.2 |
| | | | | | | | | | | | | | | | | | |
Finance charges, net | | | — | | | — | | | 3,501.6 | | | — | | | — | | | 3,501.6 |
Investment income | | | 8.5 | | | — | | | — | | | — | | | — | | | 8.5 |
Total | | $ | 735.1 | | $ | 1,561.2 | | $ | 3,466.5 | | $ | 0.5 | | $ | (28.0) | | $ | 5,735.3 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Corporate/ | | | | | | |
Three Months Ended September 30, 2018 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total |
| | (In millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
United States | | $ | 4.7 | | $ | 516.1 | | $ | 1,162.9 | | $ | 0.2 | | $ | (12.5) | | $ | 1,671.4 |
Canada | | | 102.4 | | | 4.1 | | | — | | | — | | | — | | | 106.5 |
Europe, Middle East and Africa | | | 107.1 | | | 14.3 | | | — | | | — | | | (0.3) | | | 121.1 |
Asia Pacific | | | 32.0 | | | 3.1 | | | — | | | — | | | (0.9) | | | 34.2 |
Other | | | 14.0 | | | — | | | — | | | — | | | — | | | 14.0 |
Total | | $ | 260.2 | | $ | 537.6 | | $ | 1,162.9 | | $ | 0.2 | | $ | (13.7) | | $ | 1,947.2 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Corporate/ | | | | | | |
Nine Months Ended September 30, 2018 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total |
| | (In millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
United States | | $ | 16.7 | | $ | 1,494.0 | | $ | 3,466.5 | | $ | 0.5 | | $ | (26.6) | | $ | 4,951.1 |
Canada | | | 313.4 | | | 12.3 | | | — | | | — | | | (0.1) | | | 325.6 |
Europe, Middle East and Africa | | | 295.2 | | | 47.3 | | | — | | | — | | | (0.4) | | | 342.1 |
Asia Pacific | | | 77.5 | | | 7.6 | | | — | | | — | | | (0.9) | | | 84.2 |
Other | | | 32.3 | | | — | | | — | | | — | | | — | | | 32.3 |
Total | | $ | 735.1 | | $ | 1,561.2 | | $ | 3,466.5 | | $ | 0.5 | | $ | (28.0) | | $ | 5,735.3 |
LoyaltyOne
LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty. The AIR MILES Reward Program is a coalition loyalty program for sponsors, who pay LoyaltyOne a fee per AIR MILES reward mile issued, in return for which LoyaltyOne provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made short-term loyalty programs for grocers worldwide.
Total consideration from the issuance of AIR MILES reward miles is allocated to three performance obligations: redemption, service, and brand, based on a relative standalone selling price basis. The estimated standalone selling price for the redemption and the service performance obligations are based on cost plus a reasonable margin. The estimated standalone selling price of the brand performance obligation is determined using a relief from royalty approach. Accordingly, management determines the estimated standalone selling price by considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize. The number of AIR MILES reward miles issued and redeemed are factored into the estimates, as management
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
estimates the standalone selling prices and volumes over the term of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base.
Redemption revenue is recognized at a point in time, as the AIR MILES reward miles are redeemed. For the fulfillment of certain rewards where the AIR MILES Reward Program does not control the goods or services before they are transferred to the collector, revenue is recorded on a net basis. Service revenue is recognized over time using a time-elapsed output method, the estimated life of an AIR MILES reward mile. Revenue from the brand is recognized over time, using an output method, when an AIR MILES reward mile is issued. Revenue associated with both the service and brand is included in service revenue in the Company’s consolidated statements of income.
The amount of revenue recognized in a period is subject to the estimate of breakage and the estimated life of an AIR MILES reward mile. Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure. As of September 30, 2018, the breakage rate was 20% and the estimated life of an AIR MILES reward mile was 38 months.
The short-term loyalty programs typically last between 12 and 20 weeks, depending on the nature of the program, with contract terms usually less than one year in length. These programs are tailored for the specific retailer client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Revenue is recognized at the point in time control passes from BrandLoyalty to the retailer.
Contract Liabilities.
The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES® reward mile and the reward products for its short-term loyalty programs.
A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:
| | | | | | | | | |
| | Deferred Revenue |
| | Service | | Redemption | | Total |
| | (in millions) |
Balance at January 1, 2019 | | $ | 248.0 | | $ | 627.3 | | $ | 875.3 |
Cash proceeds | | | 90.0 | | | 147.2 | | | 237.2 |
Revenue recognized (1) | | | (96.6) | | | (150.0) | | | (246.6) |
Other | | | — | | | 0.4 | | | 0.4 |
Effects of foreign currency translation | | | 10.2 | | | 26.2 | | | 36.4 |
Balance at June 30, 2019 | | $ | 251.6 | | $ | 651.1 | | $ | 902.7 |
Amounts recognized in the consolidated balance sheets: | | | | | | | | | |
Deferred revenue (current) | | $ | 140.6 | | $ | 651.1 | | $ | 791.7 |
Deferred revenue (non-current) | | $ | 111.0 | | $ | — | | $ | 111.0 |
| | | | | | | | | |
| | Deferred Revenue |
| | Service | | Redemption | | Total |
| | (In millions) |
Balance at January 1, 2018 | | $ | 283.8 | | $ | 683.1 | | $ | 966.9 |
Cash proceeds | | | 142.7 | | | 237.3 | | | 380.0 |
Revenue recognized (1) | | | (159.9) | | | (246.8) | | | (406.7) |
Other | | | — | | | 0.5 | | | 0.5 |
Effects of foreign currency translation | | | (7.2) | | | (17.3) | | | (24.5) |
Balance at September 30, 2018 | | $ | 259.4 | | $ | 656.8 | | $ | 916.2 |
Amounts recognized in the consolidated balance sheets: | | | | | | | | | |
Deferred revenue (current) | | $ | 146.0 | | $ | 656.8 | | $ | 802.8 |
Deferred revenue (non-current) | | $ | 113.4 | | $ | — | | $ | 113.4 |
| (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 $47.9 million in 2018, $122.5$84.0 million in 2019, $67.7$101.4 million in 2020, and $21.3$55.0 million in 2021.2021, and $11.2 million in 2022.
Additionally, contract liabilities for the Company’s short-term loyalty programs are recognized in other current liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance as of January 1, 20182019 was $87.5$110.2 million and the closing balance as of SeptemberJune 30, 20182019 was $120.3$103.8 million, with the change due to revenue recognized of approximately $235.0 million during the six months ended June 30, 2019, offset in part by cash payments received in advance of program performance revenue, offset in part by revenue recognized of approximately $301.8 million during the nine months ended September 30, 2018.performance.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Epsilon
Epsilon is a leading marketing services firm providing end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity and technology to help clients more effectively acquire, retain and grow relationships with their customers.
The Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each good or service that is distinct. Epsilon’s product offerings and the associated performance obligations for each product are as follows:
Product
| | Performance Obligation
| | Recognition
| | Basis of Revenue Recognition
|
| | | | | | |
Technology services
| | Professional services
| | Over time
| | Recognized over time as the services are performed.
|
| | Email deployment
| | Point in time
| | Recognized at deployment.
|
| | Customer lifecycle marketing
| | Point in time
| | Recognized at delivery.
|
| | | | | | |
Digital Media services
| | Digital campaign advertisement
| | Over time
| | Recognized on an output measure of the digital advertisement.
|
| | Affiliate marketing advertisements
| | Point in time
| | Recognized at delivery.
|
| | Data lists
| | Point in time
| | Recognized at delivery.
|
| | | | | | |
Agency services
| | Professional services
| | Over time
| | Recognized over time as the services are performed.
|
Epsilon generally enters into multi-year agreements with its customers; however, these contracts provide for termination without penalty with prior written notice. Under ASC 606, this results in a contract term shorter than the stated contractual term.
The Company’s contracts with customers may include multiple performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. If the standalone selling price is not directly observable, the Company estimates the standalone selling price based on either the adjusted market assessment or cost plus a margin approach.
Certain of Epsilon’s contracts may provide for returns or cash consideration payable to its customers, which is accounted for as variable consideration. The Company estimates these amounts based on either the expected amount or most likely amount to be provided to the customer to determine the transaction price for the contract. The estimation method is consistent for contracts with similar terms and is applied consistently throughout each contract. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information that is reasonably available.
The Company generates revenue from commission fees for transactions occurring on the Company’s affiliate marketing networks. Commission fee revenue is recognized on a net basis as the Company acts as an agent.
Contract Liabilities. The Company records a contract liability when cash payments are received or due in advance of its performance. Contract liabilities for Epsilon are recognized in other current liabilities and other liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance as of January 1, 2018 was $22.8 million and the closing balance as of September 30, 2018 was $13.7 million.
Contract Costs. The Company recognizes an asset for the direct costs incurred to fulfill its contracts with customers to the extent it expects to recover those costs in accordance with ASC 340-40, “Other Assets and Deferred Costs – Contracts with Customers.” As of September 30, 2018, the remaining unamortized contract costs were $5.6 million.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Contract fulfillment costs are generally deferred and amortized on a straight-line basis through the period in which the future performance obligation is satisfied. No impairment was recognized during the periods presented.
Card Services
Card Services is a provider of branded credit card programs, both private label and co-brand, which drives sales for its brand partners. For these private label and co-brand programs, Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services.
Finance charges, net. Finance charges, net represents revenue earned on customer accounts owned by the Company, and is recognized in the period in which it is earned. The Company recognizes earned finance charges, interest income and fees on credit card and loan receivables in accordance with the contractual provisions of the credit arrangements. Interest and fees continue to accrue on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to finance charges, net. Pursuant to ASC 310-20, “Receivables - Nonrefundable Fees and Other Costs,” direct loan origination costs on credit card and loan receivables are deferred and amortized on a straight-line basis over a one-year period and recorded as a reduction to finance charges, net.
Servicing fees, net. Servicing fees, net represents revenue earned from retailers and cardholders from processing and servicing accounts, and is recognized as such services are performed.
Revenue earned from retailers primarily consists of merchant and interchange fees, which are transaction fees charged to the merchant for the processing of credit card transactions. Merchant and interchange fees are recognized at a point in time upon the cardholder purchase.
Our credit card program agreements may also provide for payments to the retailer based on purchased volume or if certain contractual incentives are met, such as if the economic performance of the program exceeds a contractually defined threshold. These amounts are recorded as a reduction of revenue.
Revenue earned from cardholders primarily consists of monthly fees from the purchase of certain payment protection products purchased by our cardholders. The fees are based on the average cardholder account balance, and these products can be cancelled at any time by the cardholder. Revenue is recognized over time using a time-elapsed output method.
Contract Costs. The Company recognizes an asset for the incremental costs of obtaining or fulfilling a contract with the retailer for a credit card program agreement to the extent it expects to recover those costs, in accordance with ASC 340-40. As of September 30, 2018, the remaining unamortized contract costs were $388.1 million and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets. Contract costs are deferred and amortized on a straight-line basis over the respective term of the agreement, which represents the period of service. Depending on the nature of the contract costs, the amortization is recorded as a reduction to revenue, or costs of operations, in the Company’s unaudited condensed consolidated statements of income. Amortization of contract costs recorded as a reduction to revenue totaled $18.2 million and $50.8 million for the three and nine months ended September 30, 2018, respectively. Amortization of contract costs recorded to cost of operations expense totaled $3.0 million and $7.6 million for the three and nine months ended September 30, 2018, respectively. No impairment was recognized during the periods presented.
Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which the Company has the right to invoice for services performed.
The Company has elected the practical expedient from ASC 340-40 with respect to contract costs, and expenses the incremental costs as incurred for those costs that would otherwise be recognized with an amortization period of one year or less. These costs are primarily related to sales commissions, and such expensed incremental costs are recorded to cost of operations expense in the Company’s unaudited condensed consolidated statements of income.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share of common stock:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions, except per share amounts) |
Basic income per share: | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Income from continuing operations | | $ | 142.4 | | $ | 223.8 | | $ | 320.7 | | $ | 403.7 |
Less: Dividends declared on preferred stock | | | 0.9 | | | — | | | 0.9 | | | — |
Less: Allocation of undistributed earnings | | | 2.4 | | | — | | | 2.7 | | | — |
Income from continuing operations - basic | | | 139.1 | | | 223.8 | | | 317.1 | | | 403.7 |
Loss from discontinued operations, net of tax | | | (3.4) | | | (6.0) | | | (32.6) | | | (21.9) |
Net income - basic | | $ | 135.7 | | $ | 217.8 | | $ | 284.5 | | $ | 381.8 |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average shares, basic | | | 51.3 | | | 55.2 | | | 52.1 | | | 55.3 |
| | | | | | | | | | | | |
Basic income (loss) attributable to common stockholders per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 2.72 | | $ | 4.05 | | $ | 6.08 | | $ | 7.30 |
Loss from discontinued operations | | $ | (0.07) | | $ | (0.11) | | $ | (0.62) | | $ | (0.40) |
Net income per share | | $ | 2.65 | | $ | 3.94 | | $ | 5.46 | | $ | 6.90 |
| | | | | | | | | | | | |
Diluted income per share (1): | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Income from continuing operations | | $ | 142.4 | | $ | 223.8 | | $ | 320.7 | | $ | 403.7 |
Loss from discontinued operations, net of tax | | | (3.4) | | | (6.0) | | | (32.6) | | | (21.9) |
Net income | | $ | 139.0 | | $ | 217.8 | | $ | 288.1 | | $ | 381.8 |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average shares, basic | | | 51.3 | | | 55.2 | | | 52.1 | | | 55.3 |
Weighted average effect of dilutive securities: | | | | | | | | | | | | |
Shares from assumed conversion of preferred stock | | | 1.1 | | | — | | | 0.6 | | | — |
Net effect of dilutive stock options and unvested restricted stock (2) | | | 0.2 | | | 0.2 | | | 0.2 | | | 0.2 |
Denominator for diluted calculation | | | 52.6 | | | 55.4 | | | 52.9 | | | 55.5 |
| | | | | | | | | | | | |
Diluted income (loss) attributable to common stockholders per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 2.71 | | $ | 4.04 | | $ | 6.07 | | $ | 7.27 |
Loss from discontinued operations | | $ | (0.07) | | $ | (0.11) | | $ | (0.62) | | $ | (0.40) |
Net income per share | | $ | 2.64 | | $ | 3.93 | | $ | 5.45 | | $ | 6.87 |
| (1) | Computed using the if-converted method, as the result was more dilutive. |
| (2) | For the three and six months ended June 30, 2019, 0.2 million and 0.3 million of restricted stock units, respectively, were excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive. For the three and six months ended June 30, 2018, excluded amounts were de minimis. |
On April 25, 2019, the Company entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. See Note 15, “Stockholders’ Equity,” for more information. During the periods indicated:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions except per share amounts) |
Numerator: | | | | | | | | | | | | |
Net income | | $ | 296.5 | | $ | 233.2 | | $ | 678.2 | | $ | 517.4 |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average shares, basic | | | 54.8 | | | 55.4 | | | 55.2 | | | 55.8 |
Weighted average effect of dilutive securities: | | | | | | | | | | | | |
Net effect of dilutive stock options and unvested restricted stock | | | 0.2 | | | 0.2 | | | 0.2 | | | 0.2 |
Denominator for diluted calculation | | | 55.0 | | | 55.6 | | | 55.4 | | | 56.0 |
| | | | | | | | | | | | |
Basic net income per share | | $ | 5.41 | | $ | 4.21 | | $ | 12.30 | | $ | 9.27 |
Diluted net income per share | | $ | 5.39 | | $ | 4.20 | | $ | 12.25 | | $ | 9.23 |
For the three and nine months ended September 30, 2018 and 2017, a de minimis amount of restricted stock units was excluded from each calculation of weighted average dilutive common shares as the effect would have been anti-dilutive.
4. ACQUISITIONS
2017 Acquisitions:
On October 20, 2017, the Company acquired credit card receivables and the associated accounts and assumed a portion of an existing customer care operation, including a facility sublease agreement and approximately 250 employees, from Signet Jewelers Limited (“Signet”) for cash consideration of approximately $945.6 million. This acquisition increasesthat included the Company’s presence inpreferred stock, basic and diluted earnings per share (“EPS”) were computed using the jewelry vertical. The Company determined these acquired activities and assets constituted a business under ASC 805, “Business Combinations,” based on the naturetwo-class method, which is an earnings allocation that determines EPS for each class of the inputs, processes and outputs acquired from the transaction. In addition, the parties entered into a long-term agreement under which the Company became the primary issuer of private-label credit cards and related marketing services for Signet. The Company obtained control of the assets and assumed the liabilities on October 20, 2017, and the results of operations have been included since the date of acquisition in the Company’s Card Services segment.
The Company engaged a third party specialist to assist it in the measurement of the fair value of the assets acquired. The fair value of the assets acquired exceeded the cost of the acquisition. Consequently, the Company reassessed the recognition and measurement of the identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. The excess value of the net assets acquired over the purchase price of $7.9 million was recorded as a bargain purchase gain, which was included in cost of operations in the Company’s consolidated statement of income for the year ended December 31, 2017.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
4. ACQUISITION
On February 7, 2019, the Company acquired certain assets as well as the assembled workforce and related office lease agreements of blispay inc. (“Blispay”), a financial technology company, for cash consideration of $6.7 million, and a $1.0 million limited guarantee was issued by the Company as part of the transaction. The acquisition was determined to constitute a business combination under ASC 805, “Business Combinations.” Total assets acquired were $7.3 million, including $5.0 million of capitalized software and $2.3 million of goodwill, with the fair value of the guarantee determined to be approximately $0.6 million on the acquisition date.
5. DISCONTINUED OPERATIONS
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Beginning in the first quarter of 2019, Epsilon met the criteria set forth in Accounting Standards Codification (“ASC”) 205-20, “Presentation of Financial Statements — Discontinued Operations,” and has been presented as a discontinued operation for all periods presented. The sale was completed on July 1, 2019.
At June 30, 2019, the assets and liabilities of discontinued operations are classified as current in the unaudited condensed consolidated balance sheets, as it was probable that the sale would occur and proceeds would be collected within one year. The following table presents a reconciliation of the assets and liabilities of discontinued operations to the unaudited condensed consolidated balance sheets for the periods presented:
| | | | | | |
| | June 30, | | December 31, |
| | 2019 | | 2018 |
| | (in millions) |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 42.2 | | $ | 45.7 |
Accounts receivable, net | | | 464.7 | | | 519.9 |
Other current assets | | | 65.4 | | | 56.6 |
Property and equipment, net | | | 325.6 | | | 306.9 |
Right of use assets - operating | | | 170.8 | | | — |
Intangible assets, net | | | 286.1 | | | 322.3 |
Goodwill | | | 2,886.1 | | | 2,886.2 |
Other assets | | | 23.4 | | | 19.8 |
Total assets of discontinued operations | | $ | 4,264.3 | | $ | 4,157.4 |
| | | | | | |
Liabilities: | | | | | | |
Accounts payable | | $ | 33.7 | | $ | 72.2 |
Accrued expenses | | | 64.6 | | | 98.8 |
Current operating lease liabilities | | | 43.3 | | | — |
Other current liabilities | | | 45.4 | | | 52.5 |
Long-term operating lease liabilities | | | 154.7 | | | — |
Other liabilities | | | 9.7 | | | 36.9 |
Total liabilities of discontinued operations | | $ | 351.4 | | $ | 260.4 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table summarizes the fair valuesoperating results of discontinued operations:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Revenue | | $ | 491.8 | | $ | 514.2 | | $ | 999.6 | | $ | 1,023.6 |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 465.5 | | | 417.3 | | | 908.9 | | | 848.1 |
Depreciation and other amortization | | | 0.7 | | | 28.7 | | | 29.7 | | | 57.1 |
Amortization of purchased intangibles | | | — | | | 44.6 | | | 43.5 | | | 89.2 |
Interest expense (1) | | | 32.0 | | | 32.2 | | | 64.1 | | | 64.1 |
Loss before benefit from income taxes | | | (6.4) | | | (8.6) | | | (46.6) | | | (34.9) |
Benefit from income taxes | | | (3.0) | | | (2.6) | | | (14.0) | | | (13.0) |
Loss from discontinued operations, net of taxes | | $ | (3.4) | | $ | (6.0) | | $ | (32.6) | | $ | (21.9) |
| (1) | On April 30, 2019, the Company amended its credit agreement, which among other items, provided that upon consummation of the sale of Epsilon, a mandatory payment of $500.0 million of the revolving credit facility will be required and all of the Company’s outstanding senior notes will be required to be redeemed. As such, for the three and six months ended June 30, 2019, interest expense has been allocated to discontinued operations on the basis of the Company’s $500.0 million mandatory repayment of its revolving line of credit and $1.9 billion in senior notes outstanding. |
In the first quarter of 2019, interest expense was allocated to discontinued operations on the basis of the assets acquiredcorporate debt, $1.9 billion in senior notes, expected to be repaid as a result of the disposal transaction for the three months ended March 31, 2019 and 2018.
Following the liabilities assumed insale of Epsilon, Card Services has continued its existing contractual relationships with Epsilon for digital marketing services.
Depreciation and amortization and capital expenditures from discontinued operations for the Signet acquisitionperiods presented are as of October 20, 2017:
| | | |
| | As of
October 20, 2017 |
| | (In millions) |
Credit card receivables | | $ | 906.3 |
Intangible assets | | | 52.3 |
Total assets acquired | | | 958.6 |
| | | |
Other liabilities | | | 0.2 |
Deferred tax liability | | | 4.9 |
Total liabilities assumed | | | 5.1 |
| | | |
Net assets acquired | | $ | 953.5 |
Total consideration paid | | | 945.6 |
Gain on business combination | | $ | 7.9 |
follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Depreciation and amortization | | $ | 0.7 | | $ | 73.3 | | $ | 73.2 | | $ | 146.3 |
Capital expenditures | | $ | 49.0 | | $ | 42.9 | | $ | 55.8 | | $ | 54.0 |
5.
6. CREDIT CARD AND LOAN RECEIVABLES
The Company’s credit card and loan receivables are the only portfolio segment or class of financing receivables. Quantitative information about the components of credit card and loan receivables is presented in the table below:
| | | | | | |
| | June 30, | | December 31, |
| | 2019 | | 2018 |
| | (in millions) |
Principal receivables | | $ | 16,670.2 | | $ | 16,869.9 |
Billed and accrued finance charges | | | 889.5 | | | 898.3 |
Other | | | 54.8 | | | 86.8 |
Total credit card and loan receivables | | | 17,614.5 | | | 17,855.0 |
Less: Credit card receivables – restricted for securitization investors | | | 12,496.9 | | | 13,418.3 |
Other credit card and loan receivables | | $ | 5,117.6 | | $ | 4,436.7 |
| | | | | | |
| | September 30, | | December 31, |
| | 2018 | | 2017 |
| | (In millions) |
Principal receivables | | $ | 16,476.5 | | $ | 17,705.1 |
Billed and accrued finance charges | | | 895.8 | | | 887.0 |
Other | | | 54.9 | | | 21.7 |
Total credit card and loan receivables | | | 17,427.2 | | | 18,613.8 |
Less: Credit card receivables – restricted for securitization investors | | | 12,565.5 | | | 14,293.9 |
Other credit card and loan receivables | | $ | 4,861.7 | | $ | 4,319.9 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Allowance for Loan Loss
The Company maintains an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The estimate of the allowance for loan loss covers forecasted uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.
In estimating the allowance for principal loan losses, management utilizes a migration analysis of delinquent and current credit card and loan receivables. Migration analysis is a technique used to estimate the likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off. The allowance is maintained through an adjustment to the provision for loan loss. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. In estimating the allowance for uncollectible unpaid interest and fees, the Company utilizes historical charge-off trends, analyzing actual charge-offs for the prior three months. The allowance is maintained through an adjustment to finance charges, net. In evaluating the allowance for loan loss for both principal and unpaid interest and fees, management also considers factors that may impact loan loss experience, including seasoning and growth, account collection strategies, economic conditions, bankruptcy filings, policy changes, payment rates and forecasting uncertainties.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table presents the Company’s allowance for loan loss for the periods indicated:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions) |
Balance at beginning of period | | $ | 1,189.0 | | $ | 1,069.3 | | $ | 1,119.3 | | $ | 948.0 |
Provision for loan loss | | | 196.8 | | | 204.7 | | | 846.3 | | | 807.9 |
Allowance associated with credit card and loan receivables transferred to held for sale | | | (18.3) | | | (20.6) | | | (30.0) | | | (20.6) |
Change in estimate for uncollectible unpaid interest and fees | | | 5.0 | | | — | | | 15.0 | | | 10.0 |
Recoveries | | | 56.9 | | | 44.3 | | | 137.0 | | | 146.1 |
Principal charge-offs | | | (314.8) | | | (263.9) | | | (973.0) | | | (857.6) |
Balance at end of period | | $ | 1,114.6 | | $ | 1,033.8 | | $ | 1,114.6 | | $ | 1,033.8 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Balance at beginning of period | | $ | 1,021.1 | | $ | 1,169.3 | | $ | 1,038.3 | | $ | 1,119.3 |
Provision for loan loss | | | 257.3 | | | 311.9 | | | 509.5 | | | 649.6 |
Allowance associated with credit card receivables transferred
to held for sale | | | — | | | (5.2) | | | — | | | (11.8) |
Change in estimate for uncollectible unpaid interest and fees | | | (10.0) | | | (5.0) | | | (10.0) | | | 10.0 |
Recoveries | | | 56.7 | | | 48.8 | | | 116.5 | | | 80.1 |
Principal charge-offs | | | (314.2) | | | (330.8) | | | (643.4) | | | (658.2) |
Balance at end of period | | $ | 1,010.9 | | $ | 1,189.0 | | $ | 1,010.9 | | $ | 1,189.0 |
Net charge-offs include the principal amount of losses from credit cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged‑offCharged-off interest and fees reduce finance charges, net while fraud losses are recorded as ana cost of operations expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.
The Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. Actual charge-offs for unpaid interest and fees were $193.8 million and $152.2$182.0 million for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $575.3$412.6 million and $469.6$381.5 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
Delinquencies
A credit card account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder’s statement. It is the Company’s policy to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.
The following table presents the delinquency trends of the Company’s credit card and loan receivables portfolio:
| | | | | | | | | | | |
| | September 30, | | % of | | December 31, | | % of | |
| | 2018 | | Total | | 2017 | | Total | |
| | (In millions, except percentages) | |
Receivables outstanding - principal | | $ | 16,476.5 | | 100.0 | % | $ | 17,705.1 | | 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | |
31 to 60 days | | | 306.2 | | 1.8 | % | | 301.5 | | 1.7 | % |
61 to 90 days | | | 210.8 | | 1.3 | | | 191.3 | | 1.1 | |
91 or more days | | | 439.4 | | 2.7 | | | 409.6 | | 2.3 | |
Total | | $ | 956.4 | | 5.8 | % | $ | 902.4 | | 5.1 | % |
| | | | | | | | | | | |
| | June 30, | | % of | | December 31, | | % of | |
| | 2019 | | Total | | 2018 | | Total | |
| | (in millions, except percentages) | |
Receivables outstanding - principal | | $ | 16,670.2 | | 100.0 | % | $ | 16,869.9 | | 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | |
31 to 60 days | | | 290.4 | | 1.7 | % | | 303.2 | | 1.8 | % |
61 to 90 days | | | 202.7 | | 1.2 | | | 207.9 | | 1.3 | |
91 or more days | | | 376.5 | | 2.3 | | | 443.4 | | 2.6 | |
Total | | $ | 869.6 | | 5.2 | % | $ | 954.5 | | 5.7 | % |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Modified Credit Card Receivables
The Company holds certain credit card receivables for which the terms have been modified. The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. These concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms.
Credit card receivables for which temporary hardship and permanent concessions were granted are each considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivable balance and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of ASC 450-20, “Loss Contingencies.” If the Company applied accounting under ASC 310-40, “Troubled Debt Restructurings by Creditors,” to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.
The Company had $325.9$288.8 million and $260.2$292.4 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $118.6$99.1 million and $56.1$101.3 million, respectively, as of SeptemberJune 30, 20182019 and December 31, 2017.2018. These modified credit card receivables represented less than 2% of the Company’s total credit card receivables as of both SeptemberJune 30, 20182019 and December 31, 2017.2018.
The average recorded investment in impaired credit card receivables was $338.9$290.5 million and $233.6$423.3 million for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $352.8$294.1 million and $222.3$359.8 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized $6.7$6.0 million and $5.0$9.3 million for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $22.0$11.7 million and $14.5 $15.3
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables providetable provides information on credit card receivables that are considered troubled debt restructurings as described above, which entered into a modification program during the specified periods:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification |
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding |
| | Restructurings | | Balance | | Balance | | Restructurings | | Balance | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings – credit card receivables | | 79,317 | | $ | 106.6 | | $ | 106.5 | | 429,625 | | $ | 520.9 | | $ | 520.3 |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification |
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding |
| | Restructurings | | Balance | | Balance | | Restructurings | | Balance | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings – credit card receivables | | 53,305 | | $ | 67.2 | | $ | 67.1 | | 146,177 | | $ | 186.8 | | $ | 186.6 |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification |
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding |
| | Restructurings | | Balance | | Balance | | Restructurings | | Balance | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings – credit card receivables | | 58,210 | | $ | 86.7 | | $ | 86.6 | | 128,504 | | $ | 191.0 | | $ | 190.7 |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| | | | Pre-modification | | Post-modification | | | | Pre-modification | | Post-modification |
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding |
| | Restructurings | | Balance | | Balance | | Restructurings | | Balance | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings – credit card receivables | | 70,236 | | $ | 101.8 | | $ | 101.6 | | 350,308 | | $ | 414.3 | | $ | 413.8 |
The tablestable below summarizesummarizes troubled debt restructurings that have defaulted in the specified periods where the default occurred within 12 months of their modification date:
| | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2018 | | September 30, 2018 |
| | Number of | | Outstanding | | Number of | | Outstanding |
| | Restructurings | | Balance | | Restructurings | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings that subsequently defaulted – credit card receivables | | 55,217 | | $ | 66.4 | | 258,812 | | $ | 293.9 |
| | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| | Number of | | Outstanding | | Number of | | Outstanding |
| | Restructurings | | Balance | | Restructurings | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings that subsequently defaulted – credit card receivables | | 29,439 | | $ | 39.9 | | 79,895 | | $ | 105.3 |
| | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2017 |
| | Number of | | Outstanding | | Number of | | Outstanding |
| | Restructurings | | Balance | | Restructurings | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings that subsequently defaulted – credit card receivables | | 24,267 | | $ | 29.4 | | 74,948 | | $ | 91.0 |
| | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2018 | | June 30, 2018 |
| | Number of | | Outstanding | | Number of | | Outstanding |
| | Restructurings | | Balance | | Restructurings | | Balance |
| | (Dollars in millions) |
Troubled debt restructurings that subsequently defaulted – credit card receivables | | 174,835 | | $ | 192.5 | | 203,595 | | $ | 227.5 |
Age of Credit Card and Loan Receivable Accounts
The following tables set forth, as of SeptemberJune 30, 20182019 and December 31, 2017,2018, the number of active credit card and loan receivable accounts with balances and the related principal balances outstanding, based upon the age of the active credit card and loan receivable accounts from origination:
| | | | | | | | | | |
| | September 30, 2018 | |
| | | | | | | | | Percentage of | |
| | Number of | | Percentage of | | Principal | | Principal | |
| | Active Accounts | | Active Accounts | | Receivables | | Receivables | |
Age of Accounts Since Origination | | with Balances | | with Balances | | Outstanding | | Outstanding | |
| | (In millions, except percentages) | |
0-12 Months | | 6.1 | | 26.6 | % | $ | 3,782.2 | | 23.0 | % |
13-24 Months | | 4.1 | | 18.0 | | | 2,954.0 | | 17.9 | |
25-36 Months | | 2.9 | | 12.6 | | | 2,261.8 | | 13.7 | |
37-48 Months | | 2.2 | | 9.6 | | | 1,863.3 | | 11.3 | |
49-60 Months | | 1.5 | | 6.6 | | | 1,229.0 | | 7.5 | |
Over 60 Months | | 6.0 | | 26.6 | | | 4,386.2 | | 26.6 | |
Total | | 22.8 | | 100.0 | % | $ | 16,476.5 | | 100.0 | % |
| | | | | | | | | | |
| | June 30, 2019 | |
| | | | | | | | | Percentage of | |
| | Number of | | Percentage of | | Principal | | Principal | |
| | Active Accounts | | Active Accounts | | Receivables | | Receivables | |
Age of Accounts Since Origination | | with Balances | | with Balances | | Outstanding | | Outstanding | |
| | (in millions, except percentages) | |
0-12 Months | | 5.9 | | 26.3 | % | $ | 3,987.2 | | 23.9 | % |
13-24 Months | | 3.8 | | 16.7 | | | 2,705.6 | | 16.2 | |
25-36 Months | | 3.0 | | 13.5 | | | 2,424.0 | | 14.6 | |
37-48 Months | | 2.0 | | 9.1 | | | 1,703.7 | | 10.2 | |
49-60 Months | | 1.7 | | 7.5 | | | 1,466.0 | | 8.8 | |
Over 60 Months | | 6.1 | | 26.9 | | | 4,383.7 | | 26.3 | |
Total | | 22.5 | | 100.0 | % | $ | 16,670.2 | | 100.0 | % |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | |
| | December 31, 2017 | |
| | | | | | | | | Percentage of | |
| | Number of | | Percentage of | | Principal | | Principal | |
| | Active Accounts | | Active Accounts | | Receivables | | Receivables | |
Age of Accounts Since Origination | | with Balances | | with Balances | | Outstanding | | Outstanding | |
| | (In millions, except percentages) | |
0-12 Months | | 7.4 | | 27.3 | % | $ | 4,110.0 | | 23.2 | % |
13-24 Months | | 4.5 | | 16.4 | | | 3,011.3 | | 17.0 | |
25-36 Months | | 3.2 | | 11.7 | | | 2,357.1 | | 13.3 | |
37-48 Months | | 2.4 | | 8.8 | | | 1,837.0 | | 10.4 | |
49-60 Months | | 1.7 | | 6.3 | | | 1,280.8 | | 7.2 | |
Over 60 Months | | 8.1 | | 29.5 | | | 5,108.9 | | 28.9 | |
Total | | 27.3 | | 100.0 | % | $ | 17,705.1 | | 100.0 | % |
| | | | | | | | | | |
| | December 31, 2018 | |
| | | | | | | | | Percentage of | |
| | Number of | | Percentage of | | Principal | | Principal | |
| | Active Accounts | | Active Accounts | | Receivables | | Receivables | |
Age of Accounts Since Origination | | with Balances | | with Balances | | Outstanding | | Outstanding | |
| | (in millions, except percentages) | |
0-12 Months | | 6.5 | | 26.7 | % | $ | 4,099.9 | | 24.3 | % |
13-24 Months | | 4.2 | | 17.1 | | | 2,887.8 | | 17.1 | |
25-36 Months | | 3.1 | | 13.0 | | | 2,428.9 | | 14.4 | |
37-48 Months | | 2.2 | | 9.1 | | | 1,795.0 | | 10.7 | |
49-60 Months | | 1.7 | | 7.1 | | | 1,367.2 | | 8.1 | |
Over 60 Months | | 6.5 | | 27.0 | | | 4,291.1 | | 25.4 | |
Total | | 24.2 | | 100.0 | % | $ | 16,869.9 | | 100.0 | % |
Credit Quality
The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 91 or more days past due at any time within the next 12 months. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects the composition of the Company’s credit card and loan receivables by obligor credit quality as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
| | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 | |
| | | | | Percentage of | | | | | Percentage of | |
| | Total Principal | | Principal | | Total Principal | | Principal | |
Probability of an Account Becoming 91 or More Days Past | | Receivables | | Receivables | | Receivables | | Receivables | |
Due or Becoming Charged-off (within the next 12 months) | | Outstanding | | Outstanding | | Outstanding | | Outstanding | |
| | (In millions, except percentages) | |
No Score | | $ | 191.0 | | 1.2 | % | $ | 210.6 | | 1.2 | % |
27.1% and higher | | | 1,410.0 | | 8.6 | | | 1,330.5 | | 7.5 | |
17.1% - 27.0% | | | 792.5 | | 4.8 | | | 850.5 | | 4.8 | |
12.6% - 17.0% | | | 1,055.1 | | 6.4 | | | 1,137.7 | | 6.4 | |
3.7% - 12.5% | | | 6,762.1 | | 41.0 | | | 7,449.7 | | 42.1 | |
1.9% - 3.6% | | | 2,931.1 | | 17.8 | | | 3,286.9 | | 18.6 | |
Lower than 1.9% | | | 3,334.7 | | 20.2 | | | 3,439.2 | | 19.4 | |
Total | | $ | 16,476.5 | | 100.0 | % | $ | 17,705.1 | | 100.0 | % |
| | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 | |
| | | | | Percentage of | | | | | Percentage of | |
| | Total Principal | | Principal | | Total Principal | | Principal | |
Probability of an Account Becoming 91 or More Days Past | | Receivables | | Receivables | | Receivables | | Receivables | |
Due or Becoming Charged-off (within the next 12 months) | | Outstanding | | Outstanding | | Outstanding | | Outstanding | |
| | (in millions, except percentages) | |
No Score | | $ | 203.4 | | 1.2 | % | $ | 249.0 | | 1.5 | % |
27.1% and higher | | | 1,398.3 | | 8.4 | | | 1,394.0 | | 8.2 | |
17.1% - 27.0% | | | 1,019.6 | | 6.1 | | | 770.1 | | 4.6 | |
12.6% - 17.0% | | | 1,046.2 | | 6.3 | | | 1,047.6 | | 6.2 | |
3.7% - 12.5% | | | 7,270.7 | | 43.6 | | | 6,877.6 | | 40.8 | |
1.9% - 3.6% | | | 2,860.7 | | 17.2 | | | 3,060.7 | | 18.1 | |
Lower than 1.9% | | | 2,871.3 | | 17.2 | | | 3,470.9 | | 20.6 | |
Total | | $ | 16,670.2 | | 100.0 | % | $ | 16,869.9 | | 100.0 | % |
Transfer of Financial Assets
Effective July 2,During 2018, the Company no longer originatesoriginated loan receivables under one previous client agreement. Afteragreement, and after origination, these loan receivables were sold to the client at par value plus accrued interest. These transfers qualified for sale treatment as they met the conditions established in ASC 860-10, “Transfers and Servicing.” Following the sale, the client owned the loan receivables, assumed the risk of loss in the event of loan defaults and was responsible for all servicing functions related to the loan receivables. TheEffective July 2, 2018, the Company no longer originates loan receivables originated by the Company that had not yet been sold to the client were $0.0 million and $126.9 million at September 30, 2018 and December 31, 2017, respectively, and are included in credit card and loan receivables held for sale in the Company’s unaudited condensed consolidated balance sheets and carried at the lower of cost or fair value. The carrying value of these loan receivables approximated fair value due to the short duration between the date of origination and sale.this client. Originations and sales of these loan receivables held for sale were reflected as operating activities in the Company’s unaudited condensed consolidated statements of cash flows.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Portfolios Held for Sale
The Company has certain credit card portfolios held for sale, which are carried at the lower of cost or fair value, of $1,720.1$1,834.3 million and $899.4$1,951.6 million as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.
DuringIn the nine months ended September 30, 2018, the Company transferred six portfolios to held for sale at the net carrying amount inclusivesecond quarter of the related reserves for losses, as the fair value was estimated to be greater than the net carrying amount, and such amount was the measurement basis. The amounts were as follows:
| ·
| | In the first quarter of 2018, the Company transferred one credit card portfolio totaling approximately $90.1 million into credit card and loan receivables held for sale.
|
| ·
| | In the second quarter of 2018, the Company transferred one credit card portfolio totaling approximately $54.6 million into credit card and loan receivables held for sale.
|
| ·
| | In the third quarter of 2018, the Company transferred four credit card portfolios totaling approximately $836.9 million into credit card and loan receivables held for sale.
|
During the nine months ended September 30, 2018,2019, the Company sold one portfoliofour credit card portfolios for finalpreliminary cash consideration of approximately $55.4$539.3 million, subject to customary sale price adjustments, and recognized a de minimis gainapproximately $1.8 million in net gains on the transaction.transactions.
Additionally, in the second quarter of 2019, the Company transferred one credit card portfolio totaling approximately $510.3 million into credit card receivables held for sale. The portfolio was transferred at cost, and such amount will be the three and nine months ended September 30, 2018,measurement basis until the sale of the portfolio.
The Company recorded valuation adjustments, which are reflected in cost of $28.1operations expense, of $40.1 million and $64.0$14.2 million for the three months ended June 30, 2019 and 2018, respectively, and $100.0 million and $35.9 million for the six months ended June 30, 2019 and 2018, respectively, to reduce the value of certain portfolios within credit card and loan receivables held for sale. The Company carries its credit card and loan receivables held for sale at the lower of cost or fair value.
Portfolio Acquisitions
In October 2018,June 2019, the Company sold twoacquired four credit card portfolios for preliminary cash consideration ofpurchase prices totaling approximately $247.8$936.5 million, subject to customary salepurchase price adjustments. Due to the timing of the acquisition, the Company’s purchase price allocation as it relates to the fair value of the credit card receivables, intangible assets and other assets and liabilities associated with the acquisition of the portfolios was not complete as of June 30, 2019.
Securitized Credit Card Receivables
The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust (“Master Trust I”) and World Financial Network Credit Card Master Trust III (“Master Trust III”) (collectively, the “WFN Trusts”), and World Financial Capital Credit Card Master Note Trust (the “WFC Trust”). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore are not reflected in the Company’s unaudited condensed consolidated statements of income for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.
The WFN Trusts and the WFC Trust are VIEs and the assets of these consolidated VIEs include certain credit card receivables that are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include non-recourse secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The tables below present quantitative information about the components of total securitized credit card receivables, delinquencies and net charge-offs:
| | | | | | |
| | September 30, | | December 31, |
| | 2018 | | 2017 |
| | (In millions) |
Total credit card receivables – restricted for securitization investors | | $ | 12,565.5 | | $ | 14,293.9 |
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due | | $ | 287.9 | | $ | 295.0 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions) |
Net charge-offs of securitized principal | | $ | 235.2 | | $ | 179.9 | | $ | 720.5 | | $ | 542.3 |
| | | | | | |
| | June 30, | | December 31, |
| | 2019 | | 2018 |
| | (in millions) |
Total credit card receivables – restricted for securitization investors | | $ | 12,496.9 | | $ | 13,418.3 |
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due | | $ | 247.9 | | $ | 301.6 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Net charge-offs of securitized principal | | $ | 224.6 | | $ | 240.3 | | $ | 464.1 | | $ | 485.3 |
6.7. INVENTORIES, NET
Inventories, net of $265.9$243.9 million and $234.1$248.0 million at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories, net are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future market conditions and an analysis of historical experience.
7.8. OTHER INVESTMENTS
Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets. The principal components of other investments, which are carried at fair value, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Amortized | | Unrealized | | Unrealized | | | | | Amortized | | Unrealized | | Unrealized | | | |
| | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
| | (in millions) |
Marketable securities | | $ | 274.5 | | $ | 1.7 | | $ | (0.8) | | $ | 275.4 | | $ | 272.8 | | $ | 0.1 | | $ | (6.5) | | $ | 266.4 |
U.S. Treasury bonds | | | 25.0 | | | — | | | — | | | 25.0 | | | 25.0 | | | — | | | (0.1) | | | 24.9 |
Total | | $ | 299.5 | | $ | 1.7 | | $ | (0.8) | | $ | 300.4 | | $ | 297.8 | | $ | 0.1 | | $ | (6.6) | | $ | 291.3 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | Amortized | | Unrealized | | Unrealized | | | | | Amortized | | Unrealized | | Unrealized | | | |
| | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
| | (In millions) |
Marketable securities | | $ | 260.4 | | $ | — | | $ | (9.6) | | $ | 250.8 | | $ | 207.3 | | $ | 0.2 | | $ | (2.5) | | $ | 205.0 |
U.S. Treasury bonds | | | 25.0 | | | — | | | (0.2) | | | 24.8 | | | 50.0 | | | — | | | (0.1) | | | 49.9 |
Total | | $ | 285.4 | | $ | — | | $ | (9.8) | | $ | 275.6 | | $ | 257.3 | | $ | 0.2 | | $ | (2.6) | | $ | 254.9 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of SeptemberJune 30, 20182019 and December 31, 2017,2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2018 |
| | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (In millions) |
Marketable securities | | $ | 95.7 | | $ | (2.9) | | $ | 123.4 | | $ | (6.7) | | $ | 219.1 | �� | $ | (9.6) |
U.S. Treasury bonds | | | 24.8 | | | (0.2) | | | — | | | — | | | 24.8 | | | (0.2) |
Total | | $ | 120.5 | | $ | (3.1) | | $ | 123.4 | | $ | (6.7) | | $ | 243.9 | | $ | (9.8) |
| | | | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (in millions) |
Marketable securities | | $ | 7.8 | | $ | (0.1) | | $ | 121.8 | | $ | (0.7) | | $ | 129.6 | | $ | (0.8) |
Total | | $ | 7.8 | | $ | (0.1) | | $ | 121.8 | | $ | (0.7) | | $ | 129.6 | | $ | (0.8) |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (in millions) |
Marketable securities | | $ | 57.3 | | $ | (0.5) | | $ | 164.0 | | $ | (6.0) | | $ | 221.3 | | $ | (6.5) |
U.S. Treasury bonds | | | — | | | — | | | 24.9 | | | (0.1) | | | 24.9 | | | (0.1) |
Total | | $ | 57.3 | | $ | (0.5) | | $ | 188.9 | | $ | (6.1) | | $ | 246.2 | | $ | (6.6) |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (In millions) |
Marketable securities | | $ | 104.5 | | $ | (0.9) | | $ | 67.3 | | $ | (1.6) | | $ | 171.8 | | $ | (2.5) |
U.S. Treasury bonds | | | 49.9 | | | (0.1) | | | — | | | — | | | 49.9 | | | (0.1) |
Total | | $ | 154.4 | | $ | (1.0) | | $ | 67.3 | | $ | (1.6) | | $ | 221.7 | | $ | (2.6) |
The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at SeptemberJune 30, 20182019 by contractual maturity are as follows:
| | | | | | |
| | Amortized | | |
| | Cost | | Fair Value |
| | (In millions) |
Due in one year or less | | $ | 54.3 | | $ | 54.0 |
Due after one year through five years | | | 2.3 | | | 2.3 |
Due after five years through ten years | | | — | | | — |
Due after ten years | | | 228.8 | | | 219.3 |
Total | | $ | 285.4 | | $ | 275.6 |
| | | | | | |
| | Amortized | | Estimated |
| | Cost | | Fair Value |
| | (in millions) |
Due in one year or less | | $ | 55.4 | | $ | 55.4 |
Due after one year through five years | | | 1.9 | | | 1.9 |
Due after five years through ten years | | | — | | | — |
Due after ten years | | | 242.2 | | | 243.1 |
Total | | $ | 299.5 | | $ | 300.4 |
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security’s issuer, and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of SeptemberJune 30, 2018,2019, the Company does not consider the investments to be other-than-temporarily impaired.
There were no realized gains or losses from the sale of investment securities for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.
8.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
9. REDEMPTION SETTLEMENT ASSETS
Redemption settlement assets consist of restricted cash and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 | |
| | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | | | |
| | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value | |
| | (In millions) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| | | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | | |
| | | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
| | | (in millions) |
Restricted cash | | $ | 51.4 | | $ | — | | $ | — | | $ | 51.4 | | $ | 74.3 | | $ | — | | $ | — | | $ | 74.3 | | $ | 45.9 | | $ | — | | $ | — | | $ | 45.9 | | $ | 43.9 | | $ | — | | $ | — | | $ | 43.9 |
Mutual funds | | | 24.6 | | | — | | | — | | | 24.6 | | | 27.3 | | | — | | | (1.3) | | | 26.0 | | | 24.9 | | | — | | | — | | | 24.9 | | | 23.2 | | | — | | | — | | | 23.2 |
Corporate bonds | | | 520.5 | | | — | | | (8.8) | | | 511.7 | | | 495.0 | | | — | | | (5.8) | | | 489.2 | | | 520.4 | | | 3.9 | | | (1.1) | | | 523.2 | | | 497.5 | | | 0.1 | | | (6.1) | | | 491.5 |
Total | | $ | 596.5 | | $ | — | | $ | (8.8) | | $ | 587.7 | | $ | 596.6 | | $ | — | | $ | (7.1) | | $ | 589.5 | | $ | 591.2 | | $ | 3.9 | | $ | (1.1) | | $ | 594.0 | | $ | 564.6 | | $ | 0.1 | | $ | (6.1) | | $ | 558.6 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of SeptemberJune 30, 20182019 and December 31, 2017,2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2018 |
| | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (In millions) |
Corporate bonds | | $ | 131.2 | | $ | (1.7) | | $ | 380.5 | | $ | (7.1) | | $ | 511.7 | | $ | (8.8) |
Total | | $ | 131.2 | | $ | (1.7) | | $ | 380.5 | | $ | (7.1) | | $ | 511.7 | | $ | (8.8) |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | |
| | Less than 12 months | | 12 Months or Greater | | Total | |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | |
| | (In millions) | |
Mutual funds | | $ | 26.0 | | $ | (1.3) | | $ | — | | $ | — | | $ | 26.0 | | $ | (1.3) | |
| | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 |
| | | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | | (in millions) |
Corporate bonds | | | 328.0 | | | (3.7) | | | 161.2 | | | (2.1) | | | 489.2 | | | (5.8) | | $ | — | | $ | — | | $ | 259.7 | | $ | (1.1) | | $ | 259.7 | | $ | (1.1) |
Total | | $ | 354.0 | | $ | (5.0) | | $ | 161.2 | | $ | (2.1) | | $ | 515.2 | | $ | (7.1) | | $ | — | | $ | — | | $ | 259.7 | | $ | (1.1) | | $ | 259.7 | | $ | (1.1) |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less than 12 months | | 12 Months or Greater | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized |
| | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (in millions) |
Corporate bonds | | $ | 31.2 | | $ | (0.1) | | $ | 414.4 | | $ | (6.0) | | $ | 445.6 | | $ | (6.1) |
Total | | $ | 31.2 | | $ | (0.1) | | $ | 414.4 | | $ | (6.0) | | $ | 445.6 | | $ | (6.1) |
The amortized cost and estimated fair value of the securities at SeptemberJune 30, 20182019 by contractual maturity are as follows:
| | | | | | |
| | Amortized | | Estimated |
| | Cost | | Fair Value |
| | (In millions) |
Due in one year or less | | $ | 102.5 | | $ | 102.1 |
Due after one year through five years | | | 442.6 | | | 434.2 |
Total | | $ | 545.1 | | $ | 536.3 |
| | | | | | |
| | Amortized | | Estimated |
| | Cost | | Fair Value |
| | (in millions) |
Due in one year or less | | $ | 133.2 | | $ | 133.1 |
Due after one year through five years | | | 392.9 | | | 395.9 |
Due after five year through ten years | | | 19.2 | | | 19.1 |
Total | | $ | 545.3 | | $ | 548.1 |
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security’s issuer, and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of SeptemberJune 30, 2018,2019, the Company does not consider the investments to be other-than-temporarily impaired.
There were no realizedRealized gains orand losses from the sale of investment securities for the three and six months ended SeptemberJune 30, 20182019 and 2017, and realized gains and losses on the sale of investment securities for nine months ended September 30, 2018 and 2017 were de minimis.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
10. LEASES
9. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consistThe Company has operating leases for general office properties, warehouses, data centers, call centers, automobiles and certain equipment. As of June 30, 2019, the Company’s leases have remaining lease terms of less than 1 year to 19 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 following:
| | | | | | | | | | | |
| | September 30, 2018 | | |
| | Gross | | Accumulated | | | | | |
| | Assets | | Amortization | | Net | | Amortization Life and Method |
| | (In millions) | | |
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 1,130.5 | | $ | (737.4) | | $ | 393.1 | | 3-12 years—straight line |
Premium on purchased credit card portfolios | | | 313.5 | | | (186.3) | | | 127.2 | | 3-13 years—straight line |
Collector database | | | 54.2 | | | (52.6) | | | 1.6 | | 5 years—straight line |
Publisher networks | | | 140.2 | | | (105.1) | | | 35.1 | | 5-7 years—straight line |
Tradenames | | | 76.2 | | | (49.5) | | | 26.7 | | 8-15 years—straight line |
Purchased data lists | | | 10.8 | | | (6.1) | | | 4.7 | | 1-5 years—straight line, accelerated |
Favorable lease | | | 6.0 | | | (3.7) | | | 2.3 | | 6-10 years—straight line |
| | $ | 1,731.4 | | $ | (1,140.7) | | $ | 590.7 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradenames | | | 12.4 | | | — | | | 12.4 | | Indefinite life |
Total intangible assets | | $ | 1,743.8 | | $ | (1,140.7) | | $ | 603.1 | | |
| | | | | | | | | | | |
| | December 31, 2017 | | |
| | Gross | | Accumulated | | | | | |
| | Assets | | Amortization | | Net | | Amortization Life and Method |
| | (In millions) | | |
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 1,143.5 | | $ | (625.5) | | $ | 518.0 | | 3-12 years—straight line |
Premium on purchased credit card portfolios | | | 321.6 | | | (147.8) | | | 173.8 | | 3-13 years—straight line |
Customer databases | | | 63.6 | | | (63.6) | | | — | | 3 years—straight line |
Collector database | | | 55.6 | | | (53.5) | | | 2.1 | | 5 years—straight line |
Publisher networks | | | 140.2 | | | (84.4) | | | 55.8 | | 5-7 years—straight line |
Tradenames | | | 77.3 | | | (46.8) | | | 30.5 | | 8-15 years—straight line |
Purchased data lists | | | 11.3 | | | (6.2) | | | 5.1 | | 1-5 years—straight line, accelerated |
Favorable lease | | | 6.0 | | | (3.1) | | | 2.9 | | 6-10 years—straight line |
| | $ | 1,819.1 | | $ | (1,030.9) | | $ | 788.2 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradenames | | | 12.4 | | | — | | | 12.4 | | Indefinite life |
Total intangible assets | | $ | 1,831.5 | | $ | (1,030.9) | | $ | 800.6 | | |
lease commencement date to determine the present value of the lease payments.
Leases with an initial term of 12 months or less are not recognized on the balance sheet; we recognize 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 | | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| | (in millions) |
Operating lease cost | | $ | 10.4 | | $ | 20.7 |
Short-term lease cost | | | 0.6 | | | 1.2 |
Variable lease cost | | | 1.7 | | | 3.6 |
Total | | $ | 12.7 | | $ | 25.5 |
25Other information related to leases was as follows:
| | | |
| | June 30, |
|
| 2019 |
Weighted-average remaining lease term (in years): | | | |
Operating leases | | | 11.6 |
Weighted-average discount rate: | | | |
Operating leases | | | 5.2% |
Supplemental cash flow information related to leases was as follows:
| | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| | (in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 10.3 | | $ | 25.6 |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
Operating leases | | $ | 1.2 | | $ | 9.8 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Maturities of the lease liabilities as of June 30, 2019 were as follows:
| | | |
| | Operating |
Year | | Leases |
| | (in millions) |
2019 (excluding the six months ended June 30, 2019) | | $ | 17.6 |
2020 | | | 41.5 |
2021 | | | 39.2 |
2022 | | | 38.4 |
2023 | | | 36.9 |
Thereafter | | | 262.0 |
Total undiscounted lease liabilities | | | 435.6 |
Less: Amount representing interest | | | (116.8) |
Total present value of minimum lease payments | | $ | 318.8 |
| | | |
Amounts recognized in the June 30, 2019 consolidated balance sheet: | | | |
Current operating lease liabilities | | $ | 22.7 |
Long-term operating lease liabilities | | | 296.1 |
Total | | $ | 318.8 |
11. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | |
| | June 30, 2019 | | |
| | Gross | | Accumulated | | | | | |
| | Assets | | Amortization | | Net | | Amortization Life and Method |
| | (in millions) | | |
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 329.7 | | $ | (259.1) | | $ | 70.6 | | 7 years—straight line |
Premium on purchased credit card portfolios | | | 257.3 | | | (140.6) | | | 116.7 | | 3-13 years—straight line |
Collector database | | | 53.5 | | | (52.2) | | | 1.3 | | 5 years—straight line |
Tradenames | | | 32.3 | | | (26.3) | | | 6.0 | | 8-15 years—straight line |
| | $ | 672.8 | | $ | (478.2) | | $ | 194.6 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | | | 1.2 | | | — | | | 1.2 | | Indefinite life |
Total intangible assets | | $ | 674.0 | | $ | (478.2) | | $ | 195.8 | | |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | |
| | December 31, 2018 | | |
| | Gross | | Accumulated | | | | | |
| | Assets | | Amortization | | Net | | Amortization Life and Method |
| | (in millions) | | |
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 339.5 | | $ | (244.4) | | $ | 95.1 | | 3-7 years—straight line |
Premium on purchased credit card portfolios | | | 286.0 | | | (172.9) | | | 113.1 | | 3-13 years—straight line |
Collector database | | | 51.3 | | | (49.9) | | | 1.4 | | 5 years—straight line |
Tradenames | | | 32.5 | | | (25.9) | | | 6.6 | | 8-15 years—straight line |
| | $ | 709.3 | | $ | (493.1) | | $ | 216.2 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | | | 1.2 | | | — | | | 1.2 | | Indefinite life |
Total intangible assets | | $ | 710.5 | | $ | (493.1) | | $ | 217.4 | | |
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
| | | |
| | For the Years Ending |
| | December 31, |
| | (In millions) |
2018 (excluding the nine months ended September 30, 2018) | | $ | 62.4 |
2019 | | | 205.2 |
2020 | | | 142.2 |
2021 | | | 78.9 |
2022 | | | 69.6 |
Thereafter | | | 32.4 |
| | | |
| | For the Years Ending |
| | December 31, |
| | (in millions) |
2019 (excluding the six months ended June 30, 2019) | | $ | 45.4 |
2020 | | | 80.9 |
2021 | | | 21.4 |
2022 | | | 16.9 |
2023 | | | 13.1 |
Thereafter | | | 16.9 |
Goodwill
The changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | |
| | LoyaltyOne® | | Epsilon® | | Card Services | | Corporate/ Other | | Total |
| | (In millions) |
Balance at December 31, 2017 | | $ | 731.1 | | $ | 2,887.3 | | $ | 261.7 | | $ | — | | $ | 3,880.1 |
Effects of foreign currency translation | | | (22.0) | | | (0.7) | | | — | | | — | | | (22.7) |
Balance at September 30, 2018 | | $ | 709.1 | | $ | 2,886.6 | | $ | 261.7 | | $ | — | | $ | 3,857.4 |
| | | | | | | | | |
| | | | | | | | |
| | LoyaltyOne | | Card Services | | Total |
| | (in millions) |
Balance at December 31, 2018 | | $ | 693.1 | | $ | 261.7 | | $ | 954.8 |
Goodwill acquired during the period | | | — | | | 2.3 | | | 2.3 |
Effects of foreign currency translation | | | 3.2 | | | — | | | 3.2 |
Balance at June 30, 2019 | | $ | 696.3 | | $ | 264.0 | | $ | 960.3 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
10.12. DEBT
Debt consists of the following:
| | | | | | | | | | |
| | June 30, | | December 31, | | | | |
Description | | 2019 | | 2018 | | Maturity | | Interest Rate |
| | (Dollars in millions) | | | | |
Long-term and other debt: | | | | | | | | | | |
2017 revolving line of credit | | $ | 905.0 | | $ | 740.0 | | June 2022 | | (1) |
2017 term loans | | | 2,900.0 | | | 2,938.1 | | June 2022 | | (1) |
BrandLoyalty credit agreement | | | 157.9 | | | 183.7 | | June 2020 | | (2) |
Senior notes due 2021 | | | 500.0 | | | 500.0 | | November 2021 | | 5.875% |
Senior notes due 2022 | | | 600.0 | | | 600.0 | | August 2022 | | 5.375% |
Senior notes due 2022 (€400.0 million) | | | 454.8 | | | 458.8 | | March 2022 | | 4.500% |
Senior notes due 2023 (€300.0 million) | | | 341.1 | | | 344.1 | | November 2023 | | 5.250% |
Total long-term and other debt | | | 5,858.8 | | | 5,764.7 | | | | |
Less: Unamortized debt issuance costs | | | 33.2 | | | 39.3 | | | | |
Less: Current portion | | | 310.5 | | | 138.9 | | | | |
Long-term portion | | $ | 5,515.1 | | $ | 5,586.5 | | | | |
| | | | | | | | | | |
Deposits: | | | | | | | | | | |
Certificates of deposit | | $ | 9,158.2 | | $ | 8,395.1 | | Various – July 2019 – June 2024 | | 1.28% to 4.00% |
Money market deposits | | | 3,404.1 | | | 3,424.3 | | Non-maturity | | (3) |
Total deposits | | | 12,562.3 | | | 11,819.4 | | | | |
Less: Unamortized debt issuance costs | | | 27.6 | | | 25.7 | | | | |
Less: Current portion | | | 6,777.4 | | | 6,537.7 | | | | |
Long-term portion | | $ | 5,757.3 | | $ | 5,256.0 | | | | |
| | | | | | | | | | |
Non-recourse borrowings of consolidated securitization entities: | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 5,009.5 | | $ | 4,893.3 | | Various – Aug 2019 – June 2022 | | 1.72% to 3.95% |
Conduit asset-backed securities | | | 1,730.0 | | | 2,770.0 | | Various – Sep 2020 – Apr 2021 | | (4) |
Total non-recourse borrowings of consolidated securitization entities | | | 6,739.5 | | | 7,663.3 | | | | |
Less: Unamortized debt issuance costs | | | 12.5 | | | 11.6 | | | | |
Less: Current portion | | | 1,170.8 | | | 2,717.6 | | | | |
Long-term portion | | $ | 5,556.2 | | $ | 4,934.1 | | | | |
| | | | | | | | | | |
| | September 30, | | December 31, | | | | |
Description | | 2018 | | 2017 | | Maturity | | Interest Rate |
| | (Dollars in millions) | | | | |
Long-term and other debt: | | | | | | | | | | |
2017 revolving line of credit | | $ | 772.0 | | $ | 475.0 | | June 2022 | | (1) |
2017 term loans | | | 2,957.2 | | | 3,014.4 | | June 2022 | | (1) |
BrandLoyalty credit agreement | | | 193.9 | | | 198.0 | | June 2020 | | (2) |
Senior notes due 2020 | | | — | | | 500.0 | | — | | — |
Senior notes due 2021 | | | 500.0 | | | 500.0 | | November 2021 | | 5.875% |
Senior notes due 2022 | | | 600.0 | | | 600.0 | | August 2022 | | 5.375% |
Senior notes due 2022 (€400.0 million) | | | 464.4 | | | 479.9 | | March 2022 | | 4.500% |
Senior notes due 2023 (€300.0 million) | | | 348.3 | | | 359.9 | | November 2023 | | 5.250% |
Capital lease obligations and other debt | | | 14.3 | | | 8.8 | | Various – Jan 2019 – Aug 2022 | | 2.24% to 4.91% |
Total long-term and other debt | | | 5,850.1 | | | 6,136.0 | | | | |
Less: Unamortized discount and debt issuance costs | | | 42.8 | | | 56.4 | | | | |
Less: Current portion | | | 130.0 | | | 131.3 | | | | |
Long-term portion | | $ | 5,677.3 | | $ | 5,948.3 | | | | |
| | | | | | | | | | |
Deposits: | | | | | | | | | | |
Certificates of deposit | | $ | 7,994.6 | | $ | 7,526.0 | | Various – Oct 2018 – Sept 2023 | | 1.25% to 4.00% |
Money market deposits | | | 3,382.0 | | | 3,429.4 | | Non-maturing | | (3) |
Total deposits | | | 11,376.6 | | | 10,955.4 | | | | |
Less: Unamortized discount and debt issuance costs | | | 27.2 | | | 24.5 | | | | |
Less: Current portion | | | 6,267.1 | | | 6,366.2 | | | | |
Long-term portion | | $ | 5,082.3 | | $ | 4,564.7 | | | | |
| | | | | | | | | | |
Non-recourse borrowings of consolidated securitization entities: | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 4,827.0 | | $ | 4,704.7 | | Various – Oct 2018 – Sept 2021 | | 1.72% to 4.55% |
Floating rate asset-backed term note securities | | | — | | | 360.0 | | — | | — |
Conduit asset-backed securities | | | 2,655.0 | | | 3,755.0 | | Various – Nov 2019 – Sept 2020 | | (4) |
Total non-recourse borrowings of consolidated securitization entities | | | 7,482.0 | | | 8,819.7 | | | | |
Less: Unamortized discount and debt issuance costs | | | 11.1 | | | 12.4 | | | | |
Less: Current portion | | | 1,456.8 | | | 1,339.9 | | | | |
Long-term portion | | $ | 6,014.1 | | $ | 7,467.4 | | | | |
| (1) | | The interest rate is based upon the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. At SeptemberJune 30, 2018,2019, the weighted average interest rate was 3.97%4.51% and 3.99%4.15% for the revolving line of credit and term loans, respectively. |
| (2) | | The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. At SeptemberJune 30, 2018,2019, the weighted average interest rate was 1.21%1.25% and 1.65% for the BrandLoyalty revolving line of credit and term loans, respectively. |
| (3) | | The interest rates are based on the Federal Funds rate plus an applicable margin. At SeptemberJune 30, 2018,2019, the interest rates ranged from 1.90% to 2.60%3.50%. |
| (4) | | The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At SeptemberJune 30, 2018,2019, the interest rates ranged from 3.23%3.41% to 3.59%3.50%. |
At SeptemberJune 30, 2018,2019, the Company was in compliance with its financial covenants.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Long-term and Other Debt
Credit AgreementIn February 2019, Alliance Data International LLC became an additional guarantor under the credit agreement.
On April 30, 2019, the Company amended its credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement will be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reduced in the same amount (to $1,072.4 million), all of the Company’s outstanding senior notes will be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the credit agreement and certain other minor amendments.
As of SeptemberJune 30, 2018,2019, the Company’s credit agreement, as amended, provided for a $3,052.6 million in term loans subject to certain principal repayments and a $1,572.4 million revolving line of credit, with $800.4$667.4 million total availability.
BrandLoyalty Credit Agreement
BrandLoyaltyIn July 2019, the Company made a mandatory payment of $500.0 million of the revolving credit facility, with the aggregate revolving credit commitments reduced to $1,072.4 million, and certainextinguished all of its subsidiaries, as borrower and guarantors, are partiessenior notes, which had an outstanding balance of $1.9 billion. The Company expects to incur a credit agreement that provides for an A-1 term loan facilityloss from the extinguishment of €90.0debt of approximately $71.3 million, and an A-2 term loan facilityresulting from the redemption price of €100.0 million, subject to certain principal repayments, a committed revolving line of credit of €62.5 million and an uncommitted revolving line of credit of €62.5 million, all of which mature in June 2020. The BrandLoyalty credit agreement provided for a reduction in commitment on each of the uncommitted and committed revolving linesnotes of credit of €25.0 million in August 2018, for a committed revolving line of credit of €37.5$49.1 million and an uncommitted revolving linethe write-off of creditdeferred issuance costs of €37.5 million as of September 30, 2018.$22.2 million.
As of September 30, 2018, amounts outstanding under the revolving lines of credit and the term loans under the BrandLoyalty credit agreement were €40.8 million and €126.3 million ($47.3 million and $146.6 million), respectively.
Senior Notes due 2020
On April 2, 2018, the Company redeemed its $500.0 million outstanding 6.375% senior notes due April 1, 2020 at par plus accrued interest. The Company funded the redemption with borrowings under its revolving line of credit.
Non-Recourse Borrowings of Consolidated Securitization Entities
Asset-Backed Term Notes
For the nine months ended September 30, 2018, the followingIn February 2019, Master Trust I issued $562.5 million of Series 2019-A asset-backed term notes, which mature in February 2022. The offering consisted of $500.0 million of Class A notes with a fixed interest rate of 3.14% per year, $37.2 million of Class M notes with a fixed interest rate of 3.61% per year and $25.3 million of notes that were issuedretained by Master Trust I:
| ·
| | February 2018 - $591.5 million of Series 2018-A asset-backed term notes, which mature in February 2021. The offering consisted of $525.0 million of Class A notes with a fixed interest rate of 3.07% per year and $66.5 million of notes that were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.
|
| ·
| | September 2018 - $337.5 million of Series 2018-B asset-backed term notes, which mature in September 2021. The offering consisted of $300.0 million Class A notes with a fixed interest rate of 3.46% per year, $22.3 million of Class M notes with a fixed interest rate of 3.81% per year and $15.2 million of notes which were retained by the Company and eliminated from the Company’s consolidated balance sheets.
|
the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.
For the nine months ended September 30, 2018, the followingIn March 2019, $550.0 million of Series 2012-A asset-backed term notes, issued by Master Trust I matured and were repaid:
| ·
| | February 2018 - $500.0 million of Series 2013-A asset-backed term notes, $125.0 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.
|
| ·
| | April 2018 - $500.0 million of Series 2015-A asset-backed term notes, $140.0 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.
|
| ·
| | August 2018 - $460.5 million of Series 2016-B asset-backed term notes, $110.5 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.
|
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
In October 2018, $266.7 million of Series 2012-C asset-backed term notes, $10.7$137.5 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid. As
In June 2019, Master Trust I issued $399.2 million of September 30, 2018,Series 2019-B asset-backed term notes, which mature in June 2022. The offering consisted of $350.0 million of Class A notes with a fixed interest rate of 2.49% per year, $31.2 million of Class M notes with a fixed interest rate of 3.04% per year and $18.0 million of notes that were retained by the Company had collected $266.7 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series 2012-C notes. The cash is restricted to the securitization investors and is reflected in other current assets ineliminated from the Company’s unaudited condensed consolidated balance sheet assheets.
In June 2019, $466.7 million of September 30, 2018.Series 2012-D asset-backed term notes, $77.0 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.
Conduit Facilities
The Company has access to committed undrawn capacity through three conduit facilities to support the funding of its credit card receivables through Master Trust I, Master Trust III and the WFC Trust.
In August 2018, MasterMay 2019, the WFC Trust I amended its 2009-VFN conduit facility, increasing the capacity from $800.0$1,975.0 million to $1,180.0$2,175.0 million and extending the maturity to September 2020.
In August 2018, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1,680.0 million to $1,300.0 million and extending the maturity to September 2020.
April 2021.
As of SeptemberJune 30, 2018,2019, total capacity under the conduit facilities was $4.5$4.7 billion, of which $2.7$1.7 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.
Index
11.ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
13. DERIVATIVE INSTRUMENTS
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in interest rates and foreign currency exchange rates.
The Company limits its exposure on derivatives by entering into contracts with institutions that are established dealers who maintain certain minimum credit criteria established by the Company. At SeptemberJune 30, 2018,2019, the Company does not maintain any derivative instruments subject to master agreements that would require the Company to post collateral or that contain any credit-risk related contingent features.
The Company enters into foreign currency derivatives to reduce the volatility of the Company’s cash flows resulting from changes in foreign currency exchange rates associated with certain inventory transactions, some of which are designated as cash flow hedges. The Company generally hedges foreign currency exchange rate risks for periods of 12 months or less. As of SeptemberJune 30, 2018,2019, the maximum term over which the Company is hedging its exposure to the variability of future cash flows associated with certain inventory transactions is 108 months.
Certain foreign currency exchange forward contracts are not designated as hedges as they do not meet the specific hedge accounting requirements of ASC 815, “Derivatives and Hedging.” Changes in the fair value of the derivative instruments not designated as hedging instruments are recorded in the unaudited condensed consolidated statements of income as they occur. Gains and losses on derivatives not designated as hedging instruments are included in other operating activities in the unaudited condensed consolidated statements of cash flows for all periods presented.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables present the fair values of the derivative instruments included within the Company’s unaudited condensed consolidated balance sheets as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
| | | | | | | | | | |
| | June 30, 2019 |
| | Notional | | | | | | |
| | Amount | | Fair Value | | Balance Sheet Location | | Maturity |
| | (in millions) |
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges | | $ | 19.9 | | $ | 0.1 | | Other current assets | | July 2019 to February 2020 |
Foreign currency exchange hedges | | $ | 50.2 | | $ | 0.8 | | Other current liabilities | | July 2019 to January 2020 |
| | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contract | | $ | 63.3 | | $ | 0.5 | | Other current liabilities | | July 2019 |
| | | | | | | | | | |
| | December 31, 2018 |
| | Notional | | | | | | | |
| | Amount | | Fair Value | | Balance Sheet Location | | Maturity |
| | (in millions) |
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges | | $ | 5.2 | | $ | 0.3 | | Other current assets | | January 2019 to April 2019 |
Foreign currency exchange hedges | | $ | 20.3 | | $ | 0.3 | | Other current liabilities | | March 2019 to November 2019 |
| | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contract | | $ | 61.6 | | $ | 3.5 | | Other current assets | | January 2019 to February 2019 |
| | | | | | | | | | |
| | September 30, 2018 |
| | Notional | | | | | | |
| | Amount | | Fair Value | | Balance Sheet Location | | Maturity |
| | (In millions) |
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges | | $ | 36.5 | | $ | 1.7 | | Other current assets | | October 2018 to April 2019 |
Foreign currency exchange hedges | | $ | 18.9 | | $ | 0.3 | | Other current liabilities | | October 2018 to July 2019 |
| | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contract | | $ | 64.2 | | $ | — | | Other current liabilities | | January 2019 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | |
| | December 31, 2017 |
| | Notional | | | | | | | |
| | Amount | | Fair Value | | Balance Sheet Location | | Maturity |
| | (In millions) |
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges | | $ | 2.9 | | $ | 0.1 | | Other current assets | | August 2018 to October 2018 |
Foreign currency exchange hedges | | $ | 19.3 | | $ | 0.3 | | Other current liabilities | | January 2018 to October 2018 |
| | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contracts | | $ | 168.0 | | $ | 15.9 | | Other current assets | | February 2018 |
Foreign currency exchange forward contract | | $ | 65.8 | | $ | 3.5 | | Other current liabilities | | March 2018 |
Derivatives Designated as Hedging Instruments
Losses of $0.7$0.1 million and gains of $0.6$0.2 million, net of tax, were recognized in other comprehensive income for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, related to foreign currency exchange hedges designated as effective. Gains of $0.6$1.4 million and losses of $0.3$1.3 million, net of tax, were recognized in other comprehensive income for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, related to foreign currency exchange hedges designated as effective.
Changes in the fair value of these hedges excluding any ineffective portion are recorded in other comprehensive income until the hedged transactions affect net income. The ineffective portion of these cash flow hedges impacts net income when ineffectiveness occurs. Reclassifications from accumulated other comprehensive loss into net income (cost of operations) for each of the periods presented were not material. At SeptemberJune 30, 2018, $0.52019, $0.4 million is expected to be reclassified from accumulated other comprehensive loss into net income in the coming 12 months.
Derivatives Not Designated as Hedging Instruments
For the three and ninesix months ended SeptemberJune 30, 2018,2019, losses of $1.1$1.2 million and gains of $7.1$2.4 million, respectively, related to foreign currency exchange forward contracts not designated as hedging instruments were recognized in general and administrative expense in the Company’s unaudited condensed consolidated statements of income.
For the three and ninesix months ended SeptemberJune 30, 2017,2018, gains of $2.9$1.2 million and $9.3$8.2 million, respectively, related to foreign currency exchange forward contracts not designated as hedging instruments were recognized in general and administrative expense in the Company’s unaudited condensed consolidated statements of income.
Net Investment HedgesHedge
The Company designated its Euro-denominated 5.250% senior notes due 2023 (€(€300.0 million) and €200.0€340.0 million of its Euro-denominated 4.500% senior notes due 2022 (€400.0 million) as a net investment hedge of its investment in BrandLoyalty on a pre-taxan after-tax basis. The net investment hedge is intended to reduce the volatility in stockholders’ equity caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. dollar.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
In February 2018, the Company de-designated its €500.0 million net investment hedge and re-designated €640.0 million of Euro-denominated senior notes as a net investment hedge of its investment in BrandLoyalty on an after-tax basis. The change in fair value of the net investment hedgeshedge due to remeasurement of the effective portion is recorded in other comprehensive income. The ineffective portion of this hedging instrument impacts net income when the ineffectiveness occurs. For the three and ninesix months ended SeptemberJune 30, 2018,2019, losses of $7.3 million and gains of $3.6 million and $22.9$4.9 million, net of tax, respectively, were recognized in other comprehensive income and no ineffectiveness was recorded on the net investment hedges.hedge. For the three and ninesix months ended SeptemberJune 30, 2017, losses2018, gains of $12.0$31.0 million and $39.4$19.3 million, net of tax, respectively, were recognized in other comprehensive income and no ineffectiveness was recorded on the net investment hedges.hedge. With the repayment of the Euro-denominated senior notes in July 2019, the net investment hedge will be discontinued, and the unamortized amount will remain in accumulated other comprehensive income (loss) until the Company’s investment in its foreign subsidiary is disposed of or substantially liquidated.
12. STOCKHOLDERS’ EQUITY14. RESTRUCTURING CHARGES
Stock Repurchase Program
In 2017,the first quarter of 2019, BrandLoyalty incurred $7.9 million in restructuring charges associated with the wind-down of Merison, a retail marketing division included in the LoyaltyOne segment. The restructuring charges consisted of inventory impairment charges of $3.4 million, contract termination costs of $2.1 million, fixed asset impairment charges of $1.2 million and severance charges of $1.2 million. These charges were recorded to cost of operations in the Company’s Boardunaudited condensed consolidated statements of Directors authorizedincome. No charges were recorded in the second quarter, and these charges are not expected to continue.
Effective April 12, 2019, the Company entered into a stock repurchase programdefinitive agreement to acquire upsell its Epsilon business to $1.0Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Due to the sale of Epsilon, the Company incurred restructuring charges in the Corporate segment as a result of efforts to realign the organization. For the three months ended June 30, 2019, the Company incurred severance charges of $11.3 million and asset impairment charges of $11.1 million related to assets primarily utilized to support the Epsilon segment. These restructuring charges were recognized as general and administrative expense in the Company’s unaudited condensed consolidated statements of income.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
As of June 30, 2019, the Company’s outstanding common stock through Julyliability related to corporate restructuring was $7.7 million and is recognized in accrued expenses in the unaudited condensed consolidated balance sheets. This liability is expected to be substantially settled by December 31, 2018. At July 31, 2018, $280.3 million2019, with the remainder to be settled by June 2020.
The Company may incur additional restructuring charges as it evaluates its current leased office space and the potential termination of this program expired unused.contracts.
On July 26, 2018, the Company’s Board of Directors
15. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
The Company had an authorized a new stock repurchase program to acquire up to $500.0 million of the Company’s outstanding common stock from August 1, 2018 through July 31, 2019. At December 31, 2018 the Company had $222.8 million remaining under the stock repurchase program.
For the ninesix months ended SeptemberJune 30, 2018,2019, the Company acquired a total of 0.91.3 million shares of its common stock for $201.7$222.8 million under its respective stock repurchase programs. TheAs of June 30, 2019, the Company acquired approximately 0.8 million shares of its common stock for $166.0 milliondid not have any amounts remaining under its previousauthorized stock repurchase program.
In July 2019, the Company’s Board of Directors authorized a new stock repurchase program and acquired approximately 0.1 million sharesto acquire up to $1.1 billion of its outstanding common stock for $35.7 million under its current stock repurchase program. As of Septemberfrom July 5, 2019 through June 30, 2018,2020.
On July 19, 2019, the Company had $464.3issued a press release announcing the commencement of a tender offer to acquire up to $750 million remaining underin aggregate purchase price of its currentissued and outstanding common stock repurchase program.through a modified “dutch auction” tender offer at a price not greater than $162.00 nor less than $144.00 per share, to the seller in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions described in the Offer to Purchase dated July 19, 2019 and in the related Letter of Transmittal (which together, as they may be amended or supplemented from time to time, constitute the “Offer”), is scheduled to expire one minute after 11:59 P.M. New York City Time, on Thursday, August 15, 2019, unless the Offer is extended.
Stock Compensation Expense
Total stock-based compensation expense recognized inDuring the Company’s unaudited condensed consolidated statements of income for the three and ninesix months ended SeptemberJune 30, 2018 and 2017 is as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions) |
Cost of operations | | $ | 12.7 | | $ | 13.6 | | $ | 45.8 | | $ | 42.3 |
General and administrative | | | 5.2 | | | 4.7 | | | 18.4 | | | 21.2 |
Total | | $ | 17.9 | | $ | 18.3 | | $ | 64.2 | | $ | 63.5 |
During the nine months ended September 30, 2018,2019, the Company awarded 100,397137,339 service-based restricted stock units with a weighted average grant date fair value per share of $238.23$169.31 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant is employed by the Company on each such vesting date.
During the ninesix months ended SeptemberJune 30, 2018,2019, the Company awarded 263,542420,239 performance-based restricted stock units with a weighted average grant date fair value per share of $240.65$173.21 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, 2019,2020, an additional 33% of the award on February 15, 20202021 and the final 34% of the award on February 18, 2021,2022, provided that the participant is employed by the Company on each such vesting date.
During the ninesix months ended SeptemberJune 30, 2018,2019, the Company also awarded 28,05737,878 restricted stock units with a market-based condition subject to pre-defined vesting criteria that permit a range from 0% to 175% to be earned. The fair market value of these awards is $220.56$129.15 and was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, expected volatility and risk-free rate over two-year time horizons matching the performance period.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Upon determination of the market condition, the restrictions will lapse with respect to the entire award on February 15, 2020,2021, provided that the participant is employed by the Company on such vesting date.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for the three and six months ended June 30, 2019 and 2018 is as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Cost of operations | | $ | 6.5 | | $ | 5.5 | | $ | 13.2 | | $ | 13.5 |
General and administrative | | | 3.7 | | | 6.5 | | | 8.4 | | | 12.1 |
Total | | $ | 10.2 | | $ | 12.0 | | $ | 21.6 | | $ | 25.6 |
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. The agreement provided for certain unvested restricted stock units held by Epsilon employees to be modified, with original vesting conditions to be accelerated upon consummation of the sale of Epsilon. Additionally, the agreement provided for certain other awards held by Epsilon employees to be cancelled upon consummation of the sale of Epsilon. As a result, in April 2019 the Company recorded $19.4 million of incremental stock-based compensation expense in discontinued operations related to the modifications, net of cancellations. Stock-based compensation expense included in loss from discontinued operations totaled $19.9 million and $29.7 million for the three and six months ended June 30, 2019, respectively, and $8.8 million and $20.7 million for the three and six months ended June 30, 2018, respectively.
Dividends
On January 25, 2018,February 7, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.57$0.63 per share on the Company’s common stock to stockholders of record at the close of business on February 14, 2018,21, 2019, resulting in a dividend payment of $31.5$33.4 million on March 20, 2018.19, 2019.
On April 19, 2018,25, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.57$0.63 per share on the Company’s common stock payableand $6.30 per share on June 19, 2018,the Company’s Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on May 14, 2018,2019, resulting in a dividend payment of $31.5$33.0 million on June 19, 2018.18, 2019.
Additionally, the company paid $0.6 million in cash related to dividend equivalent rights for the six months ended June 30, 2019.
On July 19, 2018,18, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.57$0.63 per share on the Company’s common stock payableand $6.30 per share on September 19, 2018,the Company’s Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on August 14, 2018, resulting in a dividend payment of $31.2 millionSeptember 4, 2019 and payable on September 19, 2018.26, 2019.
Preferred Stock
Additionally, the Company paid $0.3 million in cash related to dividend equivalent rights for the nine months ended September 30, 2018.
On October 18, 2018,In April 2019, the Company’s Board of Directors declareddesignated 300,000 shares of its authorized and unissued preferred stock as Series A Non-Voting Convertible Preferred Stock and the Company filed with the Delaware Secretary of State a quarterly cash dividendCertificate of $0.57 perDesignations of Series A Non-Voting Convertible Preferred Stock to create the new Series A Non-Voting Convertible Preferred Stock, authorized 300,000 shares and designated the preferences, rights and limitations of the Series A Non-Voting Convertible Preferred Stock. Each share of Series A Non-Voting Convertible Preferred Stock will initially be convertible into ten shares of common stock (subject to adjustment and the other terms described in the Certificate of Designations) at the holder’s election or upon the Company’s written request, provided that upon such conversion the holder, together with its affiliates, will not own or control in the aggregate more than 9.9% of the Company’s outstanding common stock (or any class of the Company’s voting securities). Shares of Series A Non-Voting Convertible Preferred Stock will also be subject to automatic conversion if a holder transfers such shares pursuant to a transfer (a) to the Company, (b) in a widespread public distribution of common stock or Series A Non-Voting Convertible Preferred Stock, (c) in which no one transferee (or group of associated transferees) would receive 2% or more of any class of the Company’s voting securities then outstanding (including pursuant to a related series of such transfers), or (d) to a transferee that would control more than 50% of the Company voting securities (not including voting securities such
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
person is acquiring from the transferor). Upon such a transaction, the transferred shares of Series A Non-Voting Convertible Preferred Stock will automatically be converted into shares of common stock on a ten-for-one basis (subject to adjustment as described in the Certificate of Designations).
The shares of Series A Non-Voting Convertible Preferred Stock have no voting rights, except as otherwise required by the General Corporation Law of the State of Delaware. The Series A Non-Voting Convertible Preferred Stock will, with respect to rights upon liquidation, winding up and dissolution, rank (i) subordinate and junior in right of payment to all other securities of the Company that, by their respective terms, are senior to the Series A Non-Voting Convertible Preferred Stock, and (ii) pari passu with the common stock.
On April 25, 2019, the Company entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock payable on December 19, 2018,for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. The issuance to stockholdersValueAct of record at the closeshares of business on November 14, 2018.Series A Non-Voting Convertible Preferred Stock was, and the issuance of the shares of common stock issuable upon conversion of the Series A Non-Voting Convertible Preferred Stock will be, made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
13.16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)LOSS
The changes in each component of accumulated other comprehensive income (loss),loss, net of tax effects, are as follows:
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Three Months Ended September 30, 2018 | | on Securities | | Flow Hedges | | Investment Hedges | | Adjustments (1) | | Income (Loss) |
| | (In millions) |
Balance at June 30, 2018 | | $ | (12.7) | | $ | 1.2 | | $ | (22.7) | | $ | (102.2) | | $ | (136.4) |
Changes in other comprehensive income (loss) | | | (3.2) | | | (0.7) | | | 3.6 | | | (6.4) | | | (6.7) |
Balance at September 30, 2018 | | $ | (15.9) | | $ | 0.5 | | $ | (19.1) | | $ | (108.6) | | $ | (143.1) |
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Three Months Ended September 30, 2017 | | on Securities | | Flow Hedges | | Investment Hedges | | Adjustments (1) | | Income (Loss) |
| | (In millions) |
Balance at June 30, 2017 | | $ | (3.7) | | $ | (0.5) | | $ | (23.3) | | $ | (114.1) | | $ | (141.6) |
Changes in other comprehensive income (loss) | | | (3.1) | | | 0.6 | | | (12.0) | | | 15.9 | | | 1.4 |
Balance at September 30, 2017 | | $ | (6.8) | | $ | 0.1 | | $ | (35.3) | | $ | (98.2) | | $ | (140.2) |
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Three Months Ended June 30, 2019 | | on Securities | | Flow Hedges | | Investment Hedge | | Adjustments (1) | | Loss |
| | (in millions) |
Balance at March 31, 2019 | | $ | (1.7) | | $ | (0.3) | | $ | (0.2) | | $ | (125.7) | | $ | (127.9) |
Changes in other comprehensive income (loss) | | | 5.4 | | | (0.1) | | | (7.3) | | | 8.2 | | | 6.2 |
Balance at June 30, 2019 | | $ | 3.7 | | $ | (0.4) | | $ | (7.5) | | $ | (117.5) | | $ | (121.7) |
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Three Months Ended June 30, 2018 | | on Securities | | Flow Hedges | | Investment Hedge | | Adjustments (1) | | Loss |
| | (in millions) |
Balance at March 31, 2018 | | $ | (10.7) | | $ | (0.2) | | $ | (53.7) | | $ | (71.9) | | $ | (136.5) |
Changes in other comprehensive income (loss) | | | (2.0) | | | 1.4 | | | 31.0 | | | (30.3) | | | 0.1 |
Balance at June 30, 2018 | | $ | (12.7) | | $ | 1.2 | | $ | (22.7) | | $ | (102.2) | | $ | (136.4) |
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Six Months Ended June 30, 2019 | | on Securities | | Flow Hedges | | Investment Hedge | | Adjustments (1) | | Income (Loss) |
| | (in millions) |
Balance at December 31, 2018 | | $ | (10.7) | | $ | (0.2) | | $ | (12.4) | | $ | (114.8) | | $ | (138.1) |
Changes in other comprehensive income (loss) | | | 14.4 | | | (0.2) | | | 4.9 | | | (2.7) | | | 16.4 |
Balance at June 30, 2019 | | $ | 3.7 | | $ | (0.4) | | $ | (7.5) | | $ | (117.5) | | $ | (121.7) |
32
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Six Months Ended June 30, 2018 | | on Securities | | Flow Hedges | | Investment Hedge | | Adjustments (1) | | Income (Loss) |
| | (in millions) |
Balance at December 31, 2017 | | $ | (8.7) | | $ | (0.1) | | $ | (42.0) | | $ | (89.4) | | $ | (140.2) |
Changes in other comprehensive income (loss) | | | (4.0) | | | 1.3 | | | 19.3 | | | (12.8) | | | 3.8 |
Balance at June 30, 2018 | | $ | (12.7) | | $ | 1.2 | | $ | (22.7) | | $ | (102.2) | | $ | (136.4) |
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Nine Months Ended September 30, 2018 | | on Securities | | Flow Hedges | | Investment Hedges | | Adjustments (1) | | Income (Loss) |
| | (In millions) |
Balance at December 31, 2017 | | $ | (8.7) | | $ | (0.1) | | $ | (42.0) | | $ | (89.4) | | $ | (140.2) |
Changes in other comprehensive income (loss) | | | (7.2) | | | 0.6 | | | 22.9 | | | (19.2) | | | (2.9) |
Balance at September 30, 2018 | | $ | (15.9) | | $ | 0.5 | | $ | (19.1) | | $ | (108.6) | | $ | (143.1) |
| | | | | | | | | | | | | | | |
| | Net | | Unrealized | | Unrealized | | Foreign | | Accumulated |
| | Unrealized | | Gains (Losses) | | Gains (Losses) | | Currency | | Other |
| | Gains (Losses) | | on Cash | | on Net | | Translation | | Comprehensive |
Nine Months Ended September 30, 2017 | | on Securities | | Flow Hedges | | Investment Hedges | | Adjustments (1) | | Income (Loss) |
| | (In millions) |
Balance at December 31, 2016 | | $ | (1.6) | | $ | 0.4 | | $ | 4.1 | | $ | (153.6) | | $ | (150.7) |
Changes in other comprehensive income (loss) | | | (5.2) | | | (0.3) | | | (39.4) | | | 55.4 | | | 10.5 |
Balance at September 30, 2017 | | $ | (6.8) | | $ | 0.1 | | $ | (35.3) | | $ | (98.2) | | $ | (140.2) |
| (1) | | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates. |
Reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material. Additionally, as of January 1, 2018, a cumulative-effect adjustment of $1.5 million was reclassified from accumulated other comprehensive loss to retained earnings related to the adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” For more information, see Note 1, “Summary of Significant Accounting Policies.”
14.17. 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, 2018 | | December 31, 2017 | |
| | Carrying | | Fair | | Carrying | | Fair | |
| | Amount | | Value | | Amount | | Value | |
| | (In millions) | |
| | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| | | Carrying | | Fair | | Carrying | | Fair |
| | | Amount | | Value | | Amount | | Value |
| | | (in millions) |
Financial assets | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 16,312.6 | | $ | 17,116.5 | | $ | 17,494.5 | | $ | 18,427.8 | | $ | 16,603.6 | | $ | 17,212.9 | | $ | 16,816.7 | | $ | 17,472.7 |
Credit card and loan receivables held for sale | | | 1,720.1 | | | 1,846.3 | | | 1,026.3 | | | 1,067.6 | |
Credit card receivables held for sale | | | | 1,834.3 | | | 1,899.5 | | | 1,951.6 | | | 1,995.5 |
Redemption settlement assets, restricted | | | 587.7 | | | 587.7 | | | 589.5 | | | 589.5 | | | 594.0 | | | 594.0 | | | 558.6 | | | 558.6 |
Other investments | | | 275.6 | | | 275.6 | | | 254.9 | | | 254.9 | | | 300.4 | | | 300.4 | | | 291.3 | | | 291.3 |
Derivative instruments | | | 1.7 | | | 1.7 | | | 16.0 | | | 16.0 | | | 0.1 | | | 0.1 | | | 3.8 | | | 3.8 |
Financial liabilities | | | | | | | | | | | | | | | | | | | | | | �� | | |
Derivative instruments | | | 0.3 | | | 0.3 | | | 3.8 | | | 3.8 | | | 1.3 | | | 1.3 | | | 0.3 | | | 0.3 |
Deposits | | | 11,349.4 | | | 11,301.6 | | | 10,930.9 | | | 10,937.1 | | | 12,534.7 | | | 12,655.0 | | | 11,793.7 | | | 11,768.7 |
Non-recourse borrowings of consolidated securitization entities | | | 7,470.9 | | | 7,424.3 | | | 8,807.3 | | | 8,805.3 | | | 6,727.0 | | | 6,773.9 | | | 7,651.7 | | | 7,626.9 |
Long-term and other debt | | | 5,807.3 | | | 5,891.6 | | | 6,079.6 | | | 6,186.4 | | | 5,825.6 | | | 5,907.9 | | | 5,725.4 | | | 5,755.3 |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Credit card and loan receivables, net — The Company utilizes a discounted cash flow model using unobservable inputs, including estimated yields (interest and fee income), loss rates, payment rates and discount rates to estimate the fair value measurement of the credit card and loan receivables.
Credit card and loan receivables held for sale — The Company utilizes a discounted cash flow model using unobservable inputs, including forecasted yields and net charge-off estimates to estimate the fair value measurement of the credit card portfolios held for sale. Loan receivables held for sale are recorded at the lower of cost or fair value, and their carrying amount approximates fair value due to the short duration of the holding period of the loan receivables prior to sale.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.
Other investments — Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.
Deposits — TheFor money market deposits, carrying value approximates fair value due to the liquid nature of these deposits. For certificates of deposit, the fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.
Non-recourse borrowings of consolidated securitization entities — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.
Long-term and other debt — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.
Derivative instruments — The Company’s foreign currency cash flow hedges are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs. The fair value of the foreign currency forward contracts is estimated based on published quotations of spot foreign currency rates and forward points which are converted into implied foreign currency rates.
Financial Assets and Financial Liabilities Fair Value Hierarchy
ASC 820, “Fair Value Measurements and Disclosures,” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.
| ● | Level 1, defined as observable inputs such as quoted prices in active markets; |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| ● | Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions. |
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
| | | | | | | | | | | | | |
| | | | | Fair Value Measurements at | |
| | | | | September 30, 2018 Using | |
| | Balance at | | | | | | | | | | |
| | September 30, | | | | | | | | | | |
| | 2018 | | Level 1 | | Level 2 | | Level 3 | |
| | (In millions) | |
| | | | | | | | | | | | | |
| | | | | | Fair Value Measurements at |
| | | | | | June 30, 2019 Using |
| | | Balance at | | | | | | | | | |
| | | June 30, | | | | | | | | | |
| | | 2019 | | Level 1 | | Level 2 | | Level 3 |
| | | (in millions) |
Mutual funds (1) | | $ | 24.6 | | $ | 24.6 | | $ | — | | $ | — | | $ | 24.9 | | $ | 24.9 | | $ | — | | $ | — |
Corporate bonds (1) | | | 511.7 | | | — | | | 511.7 | | | — | | | 523.2 | | | — | | | 523.2 | | | — |
Marketable securities (2) | | | 250.8 | | | 24.7 | | | 226.1 | | | — | | | 275.4 | | | 25.9 | | | 249.5 | | | — |
U.S. Treasury bonds (2) | | | 24.8 | | | 24.8 | | | — | | | — | | | 25.0 | | | 25.0 | | | — | | | — |
Derivative instruments (3) | | | 1.7 | | | — | | | 1.7 | | | — | | | 0.1 | | | — | | | 0.1 | | | — |
Total assets measured at fair value | | $ | 813.6 | | $ | 74.1 | | $ | 739.5 | | $ | — | | $ | 848.6 | | $ | 75.8 | | $ | 772.8 | | $ | — |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — | | $ | 1.3 | | $ | — | | $ | 1.3 | | $ | — |
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — | | $ | 1.3 | | $ | — | | $ | 1.3 | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| | | | | December 31, 2018 Using |
| | Balance at | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2018 | | Level 1 | | Level 2 | | Level 3 |
| | (in millions) |
Mutual funds (1) | | $ | 23.2 | | $ | 23.2 | | $ | — | | $ | — |
Corporate bonds (1) | | | 491.5 | | | — | | | 491.5 | | | — |
Marketable securities (2) | | | 266.4 | | | 25.0 | | | 241.4 | | | — |
U.S. Treasury bonds (2) | | | 24.9 | | | 24.9 | | | — | | | — |
Derivative instruments (3) | | | 3.8 | | | — | | | 3.8 | | | — |
Total assets measured at fair value | | $ | 809.8 | | $ | 73.1 | | $ | 736.7 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| | | | | December 31, 2017 Using |
| | Balance at | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2017 | | Level 1 | | Level 2 | | Level 3 |
| | (In millions) |
Mutual funds (1) | | $ | 26.0 | | $ | 26.0 | | $ | — | | $ | — |
Corporate bonds (1) | | | 489.2 | | | — | | | 489.2 | | | — |
Marketable securities (2) | | | 205.0 | | | 10.1 | | | 194.9 | | | — |
U.S. Treasury bonds (2) | | | 49.9 | | | 49.9 | | | — | | | — |
Derivative instruments (3) | | | 16.0 | | | — | | | 16.0 | | | — |
Total assets measured at fair value | | $ | 786.1 | | $ | 86.0 | | $ | 700.1 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 3.8 | | $ | — | | $ | 3.8 | | $ | — |
Total liabilities measured at fair value | | $ | 3.8 | | $ | — | | $ | 3.8 | | $ | — |
| (1) | (1)
| | Amounts are included in redemption settlement assets in the unaudited condensed consolidated balance sheets. |
| (2) | (2)
| | Amounts are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. |
| (3) | (3)
| | Amounts are included in other current assets and other current liabilities in the unaudited condensed consolidated balance sheets. |
There were no transfers between Levels 1 and 2 within the fair value hierarchy for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Financial Instruments Disclosed but Not Carried at Fair Value
The following tables provide assets and liabilities disclosed but not carried at fair value as of SeptemberJune 30, 20182019 and December 31, 2017:
| | | | | | | | | | | | |
| | Fair Value Measurements at |
| | September 30, 2018 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In millions) |
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 17,116.5 | | $ | — | | $ | — | | $ | 17,116.5 |
Credit card and loan receivables held for sale | | | 1,846.3 | | | — | | | — | | | 1,846.3 |
Total | | $ | 18,962.8 | | $ | — | | $ | — | | $ | 18,962.8 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 11,301.6 | | $ | — | | $ | 11,301.6 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | | | 7,424.3 | | | — | | | 7,424.3 | | | — |
Long-term and other debt | | | 5,891.6 | | | — | | | 5,891.6 | | | — |
Total | | $ | 24,617.5 | | $ | — | | $ | 24,617.5 | | $ | — |
| | | | | | | | | | | | |
| | Fair Value Measurements at |
| | December 31, 2017 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In millions) |
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 18,427.8 | | $ | — | | $ | — | | $ | 18,427.8 |
Credit card and loan receivables held for sale | | | 1,067.6 | | | — | | | — | | | 1,067.6 |
Total | | $ | 19,495.4 | | $ | — | | $ | — | | $ | 19,495.4 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 10,937.1 | | $ | — | | $ | 10,937.1 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | | | 8,805.3 | | | — | | | 8,805.3 | | | — |
Long-term and other debt | | | 6,186.4 | | | — | | | 6,186.4 | | | — |
Total | | $ | 25,928.8 | | $ | — | | $ | 25,928.8 | | $ | — |
2018:
| | | | | | | | | | | | |
| | Fair Value Measurements at |
| | June 30, 2019 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (in millions) |
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 17,212.9 | | $ | — | | $ | — | | $ | 17,212.9 |
Credit card receivables held for sale | | | 1,899.5 | | | — | | | — | | | 1,899.5 |
Total | | $ | 19,112.4 | | $ | — | | $ | — | | $ | 19,112.4 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 12,655.0 | | $ | — | | $ | 12,655.0 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | | | 6,773.9 | | | — | | | 6,773.9 | | | — |
Long-term and other debt | | | 5,907.9 | | | — | | | 5,907.9 | | | — |
Total | | $ | 25,336.8 | | $ | — | | $ | 25,336.8 | | $ | — |
| | | | | | | | | | | | |
| | Fair Value Measurements at |
| | December 31, 2018 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (in millions) |
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 17,472.7 | | $ | — | | $ | — | | $ | 17,472.7 |
Credit card receivables held for sale | | | 1,995.5 | | | — | | | — | | | 1,995.5 |
Total | | $ | 19,468.2 | | $ | — | | $ | — | | $ | 19,468.2 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 11,768.7 | | $ | — | | $ | 11,768.7 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | | | 7,626.9 | | | — | | | 7,626.9 | | | — |
Long-term and other debt | | | 5,755.3 | | | — | | | 5,755.3 | | | — |
Total | | $ | 25,150.9 | | $ | — | | $ | 25,150.9 | | $ | — |
15.
18. INCOME TAXES
For the three and ninesix months ended SeptemberJune 30, 2019, the Company utilized an effective tax rate of 26.6% and 21.2%, respectively, to calculate its provision for income taxes. For the three and six months ended June 30, 2018, the Company utilized an effective tax rate of 16.0%14.9% and 17.9%20.6%, respectively, to calculate its provision for income taxes. For each of the three and nine months ended September 30, 2017, the Company utilized an effective tax rate of 30.1% and 33.2%, respectively.
The decreaseincrease in the effective tax rate for three months ended June 30, 2019 as compared to the three months ended SeptemberJune 30, 2018 was primarily due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. This rate reduction led to a tax benefit associated with accelerated deductions relating to software development costs and bad debts as well as the deferral of income relating to certain state tax refunds. The decrease in the effective tax rate for the nine months ended September 30, 2018 was also positively impacted by a tax benefit associated with foreign restructuring, in the current year, offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc. in the prior year quarter. It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months related to an ongoing Canadian tax audit. We estimate that this change in the unrecognized tax benefits within the next 12 months could be a decrease of up to approximately $35 million.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
16.19. SEGMENT INFORMATION
Operating segments are defined by ASC 280, “Segment Reporting,” as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the President and Chief Executive Officer. The operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different products.products and services.
TheAs discussed in Note 5, “Discontinued Operations,” in the first quarter of 2019 the Company’s Epsilon segment has been classified as a discontinued operation. As such, beginning with the first quarter of 2019, the Company operates in the following reportable segments: LoyaltyOne Epsilon, and Card Services. Segment operationsServices reportable segments, which consist of the following:
LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty;
Epsilon provides end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity and technology to help clients more effectively acquire, retain and grow relationships with their customers; and
Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company’s private label and co-brand credit card programs.
| ● | LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty; and |
| ● | Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company’s private label and co-brand credit card programs. |
Corporate and other immaterial businesses are reported collectively as an “all other” category labeled “Corporate/Other.” Income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes and have also been included in “Corporate/Other.”
| | | | | | | | | | | | | | | |
| | | | | | | | | | Corporate/ | | | | | |
Three Months Ended September 30, 2018 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total | |
| | (In millions) | |
| | | | | | | | | | |
| | | | | | | | Corporate/ | | |
Three Months Ended June 30, 2019 | | | LoyaltyOne | | Card Services | | Other | | Total |
| | | (in millions) |
Revenues | | $ | 260.2 | | $ | 537.6 | | $ | 1,162.9 | | $ | 0.2 | | $ | (13.7) | | $ | 1,947.2 | | $ | 251.5 | | $ | 1,096.9 | | $ | 0.1 | | $ | 1,348.5 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
Income (loss) before income taxes | | $ | 38.6 | | $ | 43.8 | | $ | 385.5 | | $ | (114.8) | | $ | — | | $ | 353.1 | | $ | 27.5 | | $ | 262.8 | | $ | (96.5) | | $ | 193.8 |
Interest expense, net | | | 1.7 | | | 0.1 | | | 99.4 | | | 67.7 | | | — | | | 168.9 | | | 0.8 | | | 104.8 | | | 37.9 | | | 143.5 |
Operating income (loss) | | | 40.3 | | | 43.9 | | 484.9 | | (47.1) | | — | | 522.0 | | | 28.3 | | | 367.6 | | | (58.6) | | | 337.3 |
Depreciation and amortization | | | 21.0 | | | 73.6 | | 26.0 | | 1.9 | | — | | 122.5 | | | 19.6 | | | 20.8 | | | 1.4 | | | 41.8 |
Stock compensation expense | | | 2.1 | | | 7.7 | | | 2.9 | | | 5.2 | | | — | | | 17.9 | | | 2.9 | | | 3.6 | | | 3.7 | | | 10.2 |
Strategic transaction costs | | | | 0.2 | | | — | | | 2.5 | | | 2.7 |
Restructuring charges | | | | — | | | — | | | 22.4 | | | 22.4 |
Adjusted EBITDA (1) | | | 63.4 | | | 125.2 | | 513.8 | | (40.0) | | — | | 662.4 | | | 51.0 | | | 392.0 | | | (28.6) | | | 414.4 |
Less: Securitization funding costs | | | — | | | — | | 56.1 | | — | | — | | 56.1 | | | — | | 51.6 | | — | | 51.6 |
Less: Interest expense on deposits | | | — | | | — | | | 43.4 | | | — | | | — | | | 43.4 | | | — | | | 53.2 | | | — | | | 53.2 |
Adjusted EBITDA, net (1) | | $ | 63.4 | | $ | 125.2 | | $ | 414.3 | | $ | (40.0) | | $ | — | | $ | 562.9 | | $ | 51.0 | | $ | 287.2 | | $ | (28.6) | | $ | 309.6 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Corporate/ | | | | | | | |
Three Months Ended September 30, 2017 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total | |
| | (In millions) | |
| | | | | | | | | | |
| | | | | | | | Corporate/ | | |
Three Months Ended June 30, 2018 | | | LoyaltyOne | | Card Services | | Other | | Total |
| | | (in millions) |
Revenues | | $ | 305.2 | | $ | 558.7 | | $ | 1,055.4 | | $ | — | | $ | (6.9) | | $ | 1,912.4 | | $ | 248.6 | | $ | 1,148.5 | | $ | 0.1 | | $ | 1,397.2 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Income (loss) before income taxes | | $ | 35.7 | | $ | 38.6 | | $ | 371.4 | | $ | (112.1) | | $ | — | | $ | 333.6 | | $ | 44.3 | | $ | 307.3 | | $ | (88.5) | | $ | 263.1 |
Interest expense, net | | | 1.7 | | | 0.1 | | | 71.4 | | | 72.1 | | | — | | | 145.3 | | | 1.3 | | | 92.0 | | | 40.3 | | | 133.6 |
Operating income (loss) | | | 37.4 | | | 38.7 | | | 442.8 | | | (40.0) | | | — | | | 478.9 | | | 45.6 | | | 399.3 | | | (48.2) | | | 396.7 |
Depreciation and amortization | | | 21.4 | | | 77.9 | | | 22.9 | | | 2.1 | | | — | | | 124.3 | | | 21.5 | | | 25.3 | | | 1.8 | | | 48.6 |
Stock compensation expense | | | 2.2 | | | 8.4 | | | 3.0 | | | 4.7 | | | — | | | 18.3 | | | 2.4 | | | 3.1 | | | 6.5 | | | 12.0 |
Adjusted EBITDA (1) | | | 61.0 | | | 125.0 | | | 468.7 | | | (33.2) | | | — | | | 621.5 | | | 69.5 | | | 427.7 | | | (39.9) | | | 457.3 |
Less: Securitization funding costs | | | — | | | — | | | 38.2 | | | — | | | — | | | 38.2 | | | — | | 55.2 | | — | | 55.2 |
Less: Interest expense on deposits | | | — | | | — | | | 33.2 | | | — | | | — | | | 33.2 | | | — | | | 36.8 | | | — | | | 36.8 |
Adjusted EBITDA, net (1) | | $ | 61.0 | | $ | 125.0 | | $ | 397.3 | | $ | (33.2) | | $ | — | | $ | 550.1 | | $ | 69.5 | | $ | 335.7 | | $ | (39.9) | | $ | 365.3 |
| | | | | | | | | | | | | | | | | | | |
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | |
Six Months Ended June 30, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Revenues | | $ | 455.3 | | $ | 2,227.3 | | $ | 0.1 | | $ | 2,682.7 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 50.5 | | $ | 529.7 | | $ | (173.4) | | $ | 406.8 |
Interest expense, net | | | 1.9 | | | 210.8 | | | 74.7 | | | 287.4 |
Operating income (loss) | | | 52.4 | | | 740.5 | | | (98.7) | | | 694.2 |
Depreciation and amortization | | | 39.8 | | | 45.0 | | | 3.4 | | | 88.2 |
Stock compensation expense | | | 5.8 | | | 7.4 | | | 8.4 | | | 21.6 |
Strategic transaction costs | | | 0.2 | | | — | | | 2.5 | | | 2.7 |
Restructuring charges | | | 7.9 | | | — | | | 22.4 | | | 30.3 |
Adjusted EBITDA (1) | | | 106.1 | | | 792.9 | | | (62.0) | | | 837.0 |
Less: Securitization funding costs | | | — | | | 108.8 | | | — | | | 108.8 |
Less: Interest expense on deposits | | | — | | | 102.0 | | | — | | | 102.0 |
Adjusted EBITDA, net (1) | | $ | 106.1 | | $ | 582.1 | | $ | (62.0) | | $ | 626.2 |
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | |
Six Months Ended June 30, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
| | (in millions) |
Revenues | | $ | 474.9 | | $ | 2,303.7 | | $ | 0.3 | | $ | 2,778.9 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 71.4 | | $ | 596.6 | | $ | (159.8) | | $ | 508.2 |
Interest expense, net | | | 2.6 | | | 179.6 | | | 78.5 | | | 260.7 |
Operating income (loss) | | | 74.0 | | | 776.2 | | | (81.3) | | | 768.9 |
Depreciation and amortization | | | 43.5 | | | 50.1 | | | 3.8 | | | 97.4 |
Stock compensation expense | | | 5.9 | | | 7.6 | | | 12.1 | | | 25.6 |
Adjusted EBITDA (1) | | | 123.4 | | | 833.9 | | | (65.4) | | | 891.9 |
Less: Securitization funding costs | | | — | | | 107.3 | | | — | | | 107.3 |
Less: Interest expense on deposits | | | — | | | 72.3 | | | — | | | 72.3 |
Adjusted EBITDA, net (1) | | $ | 123.4 | | $ | 654.3 | | $ | (65.4) | | $ | 712.3 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Corporate/ | | | | | | |
Nine Months Ended September 30, 2018 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total |
| | (In millions) |
Revenues | | $ | 735.1 | | $ | 1,561.2 | | $ | 3,466.5 | | $ | 0.5 | | $ | (28.0) | | $ | 5,735.3 |
| | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 110.0 | | $ | 76.3 | | $ | 982.1 | | $ | (342.1) | | $ | — | | $ | 826.3 |
Interest expense, net | | | 4.2 | | | 0.2 | | | 279.0 | | | 210.4 | | | — | | | 493.8 |
Operating income (loss) | | | 114.2 | | | 76.5 | | | 1,261.1 | | | (131.7) | | | — | | | 1,320.1 |
Depreciation and amortization | | | 64.5 | | | 220.0 | | | 76.0 | | | 5.7 | | | — | | | 366.2 |
Stock compensation expense | | | 8.1 | | | 27.2 | | | 10.5 | | | 18.4 | | | — | | | 64.2 |
Adjusted EBITDA (1) | | | 186.8 | | | 323.7 | | | 1,347.6 | | | (107.6) | | | — | | | 1,750.5 |
Less: Securitization funding costs | | | — | | | — | | | 163.4 | | | — | | | — | | | 163.4 |
Less: Interest expense on deposits | | | — | | | — | | | 115.6 | | | — | | | — | | | 115.6 |
Adjusted EBITDA, net (1) | | $ | 186.8 | | $ | 323.7 | | $ | 1,068.6 | | $ | (107.6) | | $ | — | | $ | 1,471.5 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Corporate/ | | | | | | |
Nine Months Ended September 30, 2017 | | LoyaltyOne | | Epsilon | | Card Services | | Other | | Eliminations | | Total |
| | (In millions) |
Revenues | | $ | 918.3 | | $ | 1,631.8 | | $ | 3,083.6 | | $ | — | | $ | (20.5) | | $ | 5,613.2 |
| | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 105.6 | | $ | 56.9 | | $ | 949.3 | | $ | (337.0) | | $ | — | | $ | 774.8 |
Interest expense, net | | | 3.8 | | | 0.2 | | | 197.8 | | | 206.2 | | | — | | | 408.0 |
Operating income (loss) | | | 109.4 | | | 57.1 | | | 1,147.1 | | | (130.8) | | | — | | | 1,182.8 |
Depreciation and amortization | | | 60.1 | | | 233.7 | | | 74.8 | | | 5.9 | | | — | | | 374.5 |
Stock compensation expense | | | 6.9 | | | 26.0 | | | 9.4 | | | 21.2 | | | — | | | 63.5 |
Adjusted EBITDA (1) | | | 176.4 | | | 316.8 | | | 1,231.3 | | | (103.7) | | | — | | | 1,620.8 |
Less: Securitization funding costs | | | — | | | — | | | 109.9 | | | — | | | — | | | 109.9 |
Less: Interest expense on deposits | | | — | | | — | | | 87.9 | | | — | | | — | | | 87.9 |
Adjusted EBITDA, net (1) | | $ | 176.4 | | $ | 316.8 | | $ | 1,033.5 | | $ | (103.7) | | $ | — | | $ | 1,423.0 |
| (1) | | Adjusted EBITDA is a non-GAAP financial measure equal to net income from continuing operations, the most directly comparable financial measure based on GAAP plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization and amortization of purchased intangibles. Adjusted EBITDA, net is also a non-GAAP financial measure equal toIn 2019, adjusted EBITDA less securitization fundingalso excluded costs for professional services associated with strategic initiatives, as well as the restructuring charges associated with the wind-down of a division within BrandLoyalty in the first quarter of 2019 and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance with ASC 280 as they area reorganization of Corporate, resulting from the primary performance metrics utilized to assess performancesale of the segments. Epsilon. |
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance with ASC 280 as they are the primary performance metrics utilized to assess performance of the segments.
Index
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
20. SUPPLEMENTAL CASH FLOW INFORMATION
The unaudited condensed consolidated statements of cash flows are presented with the combined cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category. The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated statements of cash flows:
| | | | | | |
| | June 30, | | June 30, |
| | 2019 | | 2018 |
| | (in millions) |
Cash and cash equivalents | | $ | 4,069.0 | | $ | 3,449.2 |
Restricted cash included within other current assets (1) | | | 39.8 | | | 33.8 |
Restricted cash included within redemption settlement assets, restricted (2) | | | 45.9 | | | 44.2 |
Total cash, cash equivalents and restricted cash | | $ | 4,154.7 | | $ | 3,527.2 |
| (1) | Includes cash restricted for interest repayments of non-recourse borrowings of consolidated securitized debt and other restricted cash within other current assets. |
| (2) | See Note 9, “Redemption Settlement Assets,” for additional information regarding the nature of restrictions on redemption settlement assets. |
Additionally, non-cash financing activities for the six months ended June 30, 2019 included an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. For more information, see Note 15, “Stockholders’ Equity.”
Caution Regarding Forward-Looking Statements
This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,” “likely,” “may,” “should” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding strategic initiatives, the expected use of proceeds from the Epsilon transaction, our expected operating results, future economic conditions including currency exchange rates, future dividend declarations and the guidance we give with respect to our anticipated financial performance. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:
| ● | loss of, or reduction in demand for services from, significant clients; |
| ● | increases in net charge-offs in credit card and loan receivables; |
| ● | failure to identify or successfully integrate or disaggregate business acquisitions or divestitures; |
| ● | increases in the cost of doing business, including market interest rates; |
| ● | inability to access the asset-backed securitization funding market; |
| ● | loss of active AIR MILES Reward Program collectors; |
| ● | disruptions in the airline or travel industries; |
| ● | increased redemptions by AIR MILES Reward Program collectors; |
| ● | unfavorable fluctuations in foreign currency exchange rates; |
| ● | limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy; |
| ● | increases in FDIC, Delaware or Utah regulatory capital requirements for banks; |
| ● | failure to maintain exemption from regulation under the Bank Holding Company Act; |
| ● | loss or disruption, due to cyber attack or other service failures, of data center operations or capacity; |
| ● | loss of consumer information due to compromised physical or cyber security; and |
| ● | those factors set forth in the Risk Factors section in our Annual Report on Form 10-K for the most recently ended fiscal year as well as those factors discussed in Item 1A of Form 10-Q, elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q. |
loss of, or reduction in demand for services from, significant clients;
increases in net charge-offs in credit card and loan receivables;
failure to identify or successfully integrate or disaggregate business acquisitions or divestitures;
increases in the cost of doing business, including market interest rates;
inability to access the asset-backed securitization funding market;
loss of active AIR MILES Reward Program collectors;
disruptions in the airline or travel industries;
increased redemptions by AIR MILES Reward Program collectors;
unfavorable fluctuations in foreign currency exchange rates;
limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy;
increases in FDIC, Delaware or Utah regulatory capital requirements for banks;
failure to maintain exemption from regulation under the Bank Holding Company Act;
loss or disruption, due to cyber attack or other service failures, of data center operations or capacity;
loss of consumer information due to compromised physical or cyber security; and
those factors set forth in the Risk Factors section in our Annual Report on Form 10-K for the most recently ended fiscal year as well as those factors discussed in Item 1A of Form 10-Q, elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Further risks and uncertainties include, but are not limited to, the impact of strategic initiatives on us or our business if any transactions are undertaken, and whether the anticipated benefits of such transactions can be realized.
Any forward-looking statements contained in this Form 10-Q speak only as of the date made, and we undertake no obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, subsequent events, anticipated or unanticipated circumstances or otherwise.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this quarterly report and the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission, or SEC, on February 27, 2018.26, 2019, as well as the consolidated financial statements and the notes thereto included in our Form 8-K, filed with the SEC on July 17, 2019, to reflect the presentation of our Epsilon segment as a discontinued operation.
2018 Highlights and2019 Recent Developments
| ·
● | | For the ninesix months ended SeptemberJune 30, 2018,2019, as compared to the ninesix months ended SemptemberJune 30, 2017: 2018: |
| ·
● | | Revenue increased 2%decreased 3% to $5.7 billion, and when adjusted for the presentation of certain redemption revenue of $214.0 million where we do not control the goods or services before they are transferred to the customer on a net basis, effective January 1, 2018 with the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue increased 6% to $5.9$2.7 billion. |
| ·
● | | Net income increased 31%decreased 25% to $678.2$288.1 million. |
| ·
● | | Earnings per share increased 33%decreased 21% to $12.25. $5.45. |
| ·
● | | Adjusted EBITDA, net increased 3%decreased 12% to $1,471.5$626.2 million. |
| ·
● | | We repurchased approximately 0.91.3 million shares of our common stock for $201.7$222.8 million for the ninesix months ended SeptemberJune 30, 2018. 2019. |
| ·
● | | We paid dividends of $94.5$67.0 million for the ninesix months ended SeptemberJune 30, 2018. 2019. |
| ·
● | In the first quarter of 2019, we incurred $7.9 million in restructuring charges associated with the wind-down of Merison, a retail marketing division within BrandLoyalty. |
| ● | In June 2018,the second quarter of 2019, we sold oneincurred $22.4 million in restructuring charges associated with the reorganization of Corporate, resulting from the sale of Epsilon. |
| ● | We purchased four credit card portfolioportfolios for preliminary cash consideration of approximately $55.4 million.$936.5 million during the six months ended June 30, 2019. |
| ● | We sold four credit card portfolios for preliminary cash consideration of $539.3 million during the six months ended June 30, 2019. |
| ● | On June 5, 2019, the Board of Directors of Alliance Data appointed Melisa A. Miller, who led Alliance Data’s Card Services business, as Alliance Data’s new President and Chief Executive Officer as well as a Director of the Company. She succeeds Ed Heffernan who announced his resignation as President and Chief Executive Officer and as a Director of the Company. |
In
On July 1, 2019, we completed the exercise of its business judgment, our board of directors has undertaken a strategic evaluationpreviously announced sale of our current portfolioEpsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. In July 2019, proceeds from the sale were used to extinguish all of businesses as we believe our current stockoutstanding senior notes of $1.9 billion and to make a mandatory payment of $500.0 million on our revolving credit facility. We expect to incur a loss from the extinguishment of debt of approximately $71.3 million, resulting from the redemption price does not reflect the intrinsic valueof each of the entire enterprise. Therefore, we are further evaluating which assets may thrive undernotes of $49.1 million and the write-off of deferred issuance costs of $22.2 million.
In July 2019, our Board of Directors authorized a different steward while also unlocking value for our stockholders. This could involve significant realignmentnew stock repurchase program to acquire up to $1.1 billion of our businesses and we are actively evaluating that optimal strategy. The results of this evaluation and our determination of that strategy are expected to be complete before year end. We will communicate those results when appropriate.outstanding common stock from July 5, 2019 through June 30, 2020.
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | |
| | (in millions, except percentages) | |
Revenues | | | | | | | | | | | | | | | | | |
Services | | $ | 586.0 | | $ | 650.3 | | (10) | % | $ | 1,790.7 | | $ | 1,888.3 | | (5) | % |
Redemption, net | | | 163.6 | | | 210.0 | | (22) | | | 443.0 | | | 645.4 | | (31) | |
Finance charges, net | | | 1,197.6 | | | 1,052.1 | | 14 | | | 3,501.6 | | | 3,079.5 | | 14 | |
Total revenue | | | 1,947.2 | | | 1,912.4 | | 2 | | | 5,735.3 | | | 5,613.2 | | 2 | |
Operating expenses | | | | | | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 1,060.6 | | | 1,066.5 | | (1) | | | 3,076.2 | | | 3,123.1 | | (2) | |
Provision for loan loss | | | 196.8 | | | 204.7 | | (4) | | | 846.3 | | | 807.9 | | 5 | |
General and administrative | | | 45.3 | | | 38.0 | | 19 | | | 126.5 | | | 124.9 | | 1 | |
Depreciation and other amortization | | | 49.7 | | | 46.7 | | 6 | | | 145.9 | | | 136.6 | | 7 | |
Amortization of purchased intangibles | | | 72.8 | | | 77.6 | | (6) | | | 220.3 | | | 237.9 | | (7) | |
Total operating expenses | | | 1,425.2 | | | 1,433.5 | | (1) | | | 4,415.2 | | | 4,430.4 | | - | |
Operating income | | | 522.0 | | | 478.9 | | 9 | | | 1,320.1 | | | 1,182.8 | | 12 | |
Interest expense | | | | | | | | | | | | | | | | | |
Securitization funding costs | | | 56.1 | | | 38.2 | | 47 | | | 163.4 | | | 109.9 | | 49 | |
Interest expense on deposits | | | 43.4 | | | 33.2 | | 30 | | | 115.6 | | | 87.9 | | 32 | |
Interest expense on long-term and other debt, net | | | 69.4 | | | 73.9 | | (6) | | | 214.8 | | | 210.2 | | 2 | |
Total interest expense, net | | | 168.9 | | | 145.3 | | 16 | | | 493.8 | | | 408.0 | | 21 | |
Income before income tax | | | 353.1 | | | 333.6 | | 6 | | | 826.3 | | | 774.8 | | 7 | |
Provision for income taxes | | | 56.6 | | | 100.4 | | (44) | | | 148.1 | | | 257.4 | | (42) | |
Net income | | $ | 296.5 | | $ | 233.2 | | 27 | % | $ | 678.2 | | $ | 517.4 | | 31 | % |
| | | | | | | | | | | | | | | | | |
Key Operating Metrics: | | | | | | | | | | | | | | | | | |
Credit card statements generated | | | 73.2 | | | 74.2 | | (1) | % | | 225.5 | | | 217.8 | | 4 | % |
Credit sales | | $ | 7,375.5 | | $ | 7,352.4 | | - | % | $ | 21,749.0 | | $ | 21,447.0 | | 1 | % |
Average credit card and loan receivables | | $ | 17,580.2 | | $ | 15,949.8 | | 10 | % | $ | 17,624.3 | | $ | 15,791.7 | | 12 | % |
AIR MILES reward miles issued | | | 1,361.1 | | | 1,325.6 | | 3 | % | | 4,032.1 | | | 3,984.1 | | 1 | % |
AIR MILES reward miles redeemed | | | 1,076.0 | | | 1,062.7 | | 1 | % | | 3,322.2 | | | 3,365.5 | | (1) | % |
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2019 | | 2018 | | % Change | | | 2019 | | 2018 | | % Change | |
| | (in millions, except percentages) | |
Revenues | | | | | | | | | | | | | | | | | | |
Services | | $ | 66.4 | | $ | 102.8 | | (35) | % | | $ | 139.7 | | $ | 195.4 | | (29) | % |
Redemption, net | | | 153.7 | | | 147.5 | | 4 | | | | 265.5 | | | 279.4 | | (5) | |
Finance charges, net | | | 1,128.4 | | | 1,146.9 | | (2) | | | | 2,277.5 | | | 2,304.1 | | (1) | |
Total revenue | | | 1,348.5 | | | 1,397.2 | | (3) | | | | 2,682.7 | | | 2,778.9 | | (3) | |
Operating expenses | | | | | | | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 654.8 | | | 593.6 | | 10 | | | | 1,295.3 | | | 1,185.2 | | 9 | |
Provision for loan loss | | | 257.3 | | | 311.9 | | (17) | | | | 509.5 | | | 649.6 | | (22) | |
General and administrative | | | 57.3 | | | 46.4 | | 23 | | | | 95.5 | | | 77.8 | | 23 | |
Depreciation and other amortization | | | 19.3 | | | 19.8 | | (3) | | | | 39.9 | | | 39.1 | | 2 | |
Amortization of purchased intangibles | | | 22.5 | | | 28.8 | | (22) | | | | 48.3 | | | 58.3 | | (17) | |
Total operating expenses | | | 1,011.2 | | | 1,000.5 | | 1 | | | | 1,988.5 | | | 2,010.0 | | (1) | |
Operating income | | | 337.3 | | | 396.7 | | (15) | | | | 694.2 | | | 768.9 | | (10) | |
Interest expense | | | | | | | | | | | | | | | | | | |
Securitization funding costs | | | 51.6 | | | 55.2 | | (7) | | | | 108.8 | | | 107.3 | | 1 | |
Interest expense on deposits | | | 53.2 | | | 36.8 | | 45 | | | | 102.0 | | | 72.3 | | 41 | |
Interest expense on long-term and other debt, net | | | 38.7 | | | 41.6 | | (7) | | | | 76.6 | | | 81.1 | | (6) | |
Total interest expense, net | | | 143.5 | | | 133.6 | | 7 | | | | 287.4 | | | 260.7 | | 10 | |
Income from continuing operations before income taxes | | | 193.8 | | | 263.1 | | (26) | | | | 406.8 | | | 508.2 | | (20) | |
Provision for income taxes | | | 51.4 | | | 39.3 | | 31 | | | | 86.1 | | | 104.5 | | (18) | |
Income from continuing operations | | | 142.4 | | | 223.8 | | (36) | | | | 320.7 | | | 403.7 | | (21) | |
Loss from discontinued operations, net of taxes | | | (3.4) | | | (6.0) | | (44) | | | | (32.6) | | | (21.9) | | 48 | |
Net income | | $ | 139.0 | | $ | 217.8 | | (36) | % | | $ | 288.1 | | $ | 381.8 | | (25) | % |
| | | | | | | | | | | | | | | | | | |
Key Operating Metrics: | | | | | | | | | | | | | | | | | | |
Credit card statements generated | | | 70.1 | | | 74.6 | | (6) | % | | | 142.9 | | | 152.4 | | (6) | % |
Credit sales | | $ | 7,551.3 | | $ | 7,567.9 | | — | % | | $ | 13,866.7 | | $ | 14,373.5 | | (4) | % |
Average credit card and loan receivables | | $ | 16,797.5 | | $ | 17,570.4 | | (4) | % | | $ | 16,823.9 | | $ | 17,646.4 | | (5) | % |
AIR MILES reward miles issued | | | 1,422.5 | | | 1,444.7 | | (2) | % | | | 2,680.7 | | | 2,671.0 | | — | % |
AIR MILES reward miles redeemed | | | 1,050.3 | | | 1,068.1 | | (2) | % | | | 2,138.8 | | | 2,246.3 | | (5) | % |
Three months ended SeptemberJune 30, 20182019 compared to the three months ended SeptemberJune 30, 20172018
Revenue. Total revenue increased $34.8decreased $48.7 million, or 2%3%, to $1,947.2$1,348.5 million for the three months ended SeptemberJune 30, 2018 2019 from $1,912.4$1,397.2 million for the three months ended SeptemberJune 30, 20172018. The net decrease was due to the following:
| ● | Services. Revenue decreased $36.4 million, or 35%, to $66.4 million for the three months ended June 30, 2019 as a result of a $36.5 million decrease in merchant fee revenue due to increased royalty payments to our retailers associated with new clients. |
| ● | Redemption, net. Revenue increased $6.2 million, or 4%, to $153.7 million for the three months ended June 30, 2019. Redemption revenue related to our short-term loyalty programs increased 17% primarily due to strong program performance in Europe, Asia and Brazil. This increase was partially offset by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $9.1 million decrease in revenue. Redemption revenue was also negatively impacted $9.8 million by the outsourcing of additional rewards inventory during the three months ended June 30, 2019. As we did not control these goods prior to transfer to the collector, the revenue is recorded on a net basis. |
| ● | Finance charges, net. Revenue decreased $18.5 million, or 2%, to $1,128.4 million for the three months ended June 30, 2019. This decrease was primarily driven by an approximate 20 basis point decrease in finance charge yield due to a decline in finance charges and late fees, driven by new program launches and the portfolios of credit card receivables sold. |
Cost of operations. Cost of operations increased $61.2 million, or 10%, to $654.8 million for the three months ended June 30, 2019 as compared to $593.6 million for the three months ended June 30, 2018. The net increase was due to the following:
| ● | Within the LoyaltyOne segment, cost of operations increased $22.1 million primarily due to an increase in cost of redemptions, as cost of redemptions related to our short-term loyalty programs increased $21.5 million due to the increase in redemption revenue discussed above. Within our coalition loyalty program, cost of operations increased $1.9 million, as a decrease in cost of redemptions due in part to the outsourcing of additional rewards inventory during the three months ended June 30, 2019 was offset by an increase in other operating expenses. |
| ● | Within the Card Services segment, cost of operations increased $39.1 million due to a $25.9 million increase in valuation adjustments to certain portfolios within credit card receivables held for sale, as well as a $19.3 million increase in credit card processing costs. These increases were offset in part by a $6.2 million decrease in payroll and benefits costs due to lower incentive compensation in the current year period. |
ServicesProvision for loan loss. RevenueProvision for loan loss decreased $64.3$54.6 million, or 10%17%, to $586.0 million for the three months ended September 30, 2018 as a result of a $29.8 million decrease in marketing services revenue primarily due to declines in lower margin pass-through agency and site-based display product offerings, a $19.7 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products, and a $17.5 million decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients.
Redemption, net. Revenue decreased $46.4 million, or 22%, to $163.6 million for the three months ended September 30, 2018. Upon adoption of ASC 606, certain redemption revenue for which we do not control the good or service prior to transferring it to the collector is recorded on a net basis, which reduced both redemption revenue and cost of operations by $69.1$257.3 million for the three months ended SeptemberJune 30, 2018. This decrease was partially offset by an increase of $27.6 million in redemption revenue from our short-term loyalty programs due to an increase in the number of active programs in market.
Finance charges, net. Revenue increased $145.5 million, or 14%, to $1,197.6 million for the three months ended September 30, 2018, driven by a 10% increase in average credit card and loan receivables due to recent credit card portfolio acquisitions and new client signings, which impacted revenue by $130.4 million, and a higher finance charge yield, which impacted revenue by $15.1 million.
Cost of operations. Cost of operations decreased $5.9 million, or 1%, to $1,060.6 million for the three months ended September 30, 20182019 as compared to $1,066.5 million for the three months ended September 30, 2017. The net decrease was due to the following:
Within the LoyaltyOne segment, cost of operations decreased $47.5 million due to a $46.5 million decrease in cost of redemptions. This decrease in cost of redemptions was driven by a $69.1 million decrease related to the adoption of ASC 606 as discussed above, offset in part by the increase in cost of redemptions related to our short-term loyalty programs due to the increase in revenue.
Within the Epsilon segment, cost of operations decreased $22.1 million, or 5%, due to a decrease in direct costs associated with a 4% decline in revenue.
Within the Card Services segment, cost of operations increased $70.3 million due to an 18% increase in payroll and benefit expenses to support operational initiatives and in-house collections, a 5% increase in marketing expenses to drive credit sales and additional professional fees to support operational initiatives. Further, other operating expenses increased due to higher credit card processing costs attributable to increases in volume associated with growth in credit card and loan receivables.
Provision for loan loss. Provision for loan loss decreased $7.9 million, or 4%, to $196.8$311.9 million for the three months ended SeptemberJune 30, 2018, due primarily to a decrease in net charge-offs as well as a decrease in the change in credit card and loan receivables in the current quarter as compared to $204.7the prior year quarter.
General and administrative. General and administrative expenses increased $10.9 million, or 23%, to $57.3 million for the three months ended SeptemberJune 30, 2017, due2019 as compared to the change in credit card and loan receivables in each respective period, offset in part by an increase in net charge-offs.
General and administrative. General and administrative expenses increased $7.3 million, or 19%, to $45.3$46.4 million for the three months ended SeptemberJune 30, 2018, as comparedprimarily due to $38.0$22.4 million in restructuring charges related to Corporate reorganization, offset in part by lower discretionary benefits.
Depreciation and other amortization. Depreciation and other amortization decreased $0.5 million, or 3%, to $19.3 million for the three months ended SeptemberJune 30, 2017, due2019 as compared to an increase in general corporate expenses and higher payroll and benefit costs.
Depreciation and other amortization. Depreciation and other amortization increased $3.0 million, or 6%, to $49.7$19.8 million for the three months ended SeptemberJune 30, 2018, as comparedprimarily due to $46.7certain fully depreciated property and equipment at LoyaltyOne.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $6.3 million, or 22%, to $22.5 million for the three months ended SeptemberJune 30, 2017, due2019, as compared to additional assets placed into service from recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $4.8 million, or 6%, to $72.8$28.8 million for the three months ended SeptemberJune 30, 2018, as compared to $77.6 million for the three months ended September 30, 2017, primarily due to certain fully amortized intangible assets, including portfolio premiums and customer databases.contracts.
Interest expense, net. Total interest expense, net increased $23.6$9.9 million, or 16%7%, to $168.9$143.5 million for the three months ended SeptemberJune 30, 20182019 as compared to $145.3$133.6 million for the three months ended SeptemberJune 30, 2017.2018. The net increase was due to the following:
| ·
● | | Securitization funding costs. Securitization funding costs increased $17.9decreased $3.6 million due to higherlower average borrowings, which increaseddecreased funding costs by approximately $9.0$9.6 million, andoffset in part by higher average interest rates, which increased funding costs by approximately $8.9$6.0 million. |
| ·
● | | Interest expense on deposits. Interest expense on deposits increased $10.2$16.4 million due to higher average interest rates, which increased interest expense by approximately $5.3$14.0 million, and higher average borrowings, which increased interest expense by approximately $4.9$2.4 million. |
| ·
● | | Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased $2.9 million primarily due to a $3.5 million decrease in amortization of debt issuance costs, offset in part by a $1.4 million increase in interest expense on term debt due to higher average interest rates as a result of increases in the LIBOR rate. |
Taxes. Income tax expense related to continuing operations increased $12.1 million to $51.4 million for the three months ended June 30, 2019 from $39.3 million for the three months ended June 30, 2018, primarily related to a lower effective tax rate for the three months ended June 30, 2018 due to a tax benefit associated with foreign restructuring, offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc. in the prior year quarter. The effective tax rate for the current quarter was 26.6% as compared to 14.9% for the prior year quarter.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes was $3.4 million for the three months ended June 30, 2019 as compared to $6.0 million for the three months ended June 30, 2018. Loss from discontinued operations, net of taxes represents Epsilon net income (loss) as well as certain direct costs identifiable
to the Epsilon segment and allocations of interest expense on corporate debt. The decrease in the loss was due to the decline in depreciation and amortization due to held-for-sale classification in the current year, offset in part by transaction costs incurred directly attributable to the sale of Epsilon.
Six months ended June 30, 2019 compared to the six months ended June 30, 2018
Revenue. Total revenue decreased $96.2 million, or 3%, to $2,682.7 million for the six months ended June 30, 2019 from $2,778.9 million for the six months ended June 30, 2018. The decrease was due to the following:
| ● | Services. Revenue decreased $55.7 million, or 29%, to $139.7 million for the six months ended June 30, 2019 as a result of a $55.6 million decrease in merchant fee revenue due to increased royalty payments to our retailers associated with new clients. |
| ● | Redemption, net. Revenue decreased $13.9 million, or 5%, to $265.5 million for the six months ended June 30, 2019. Redemption revenue from our coalition loyalty program decreased $26.1 million due to the net presentation of $18.6 million of revenue from the outsourcing of additional rewards inventory during the six months ended June 30, 2019. As we did not control these goods prior to transfer to the collector, the revenue is recorded on a net basis. Additionally, redemption revenue was negatively impacted by a 5% decrease in AIR MILES reward miles redeemed. These decreases were offset in part by a 5% increase in redemption revenue related to our short-term loyalty programs. |
| ● | Finance charges, net. Revenue decreased $26.6 million, or 1%, to $2,277.5 million for the six months ended June 30, 2019. This decrease was primarily driven by an approximate 30 basis point decrease in finance charge yield due to a decline in finance charges and late fees. |
Cost of operations. Cost of operations increased $110.1 million, or 9%, to $1,295.3 million for the six months ended June 30, 2019 as compared to $1,185.2 million for the six months ended June 30, 2018. The net increase was due to the following:
| ● | Within the LoyaltyOne segment, cost of operations increased $5.6 million, primarily due to a $5.5 million increase in cost of redemptions, as a $25.0 million increase in cost of redemptions related to our short-term loyalty programs was offset in part by an $18.6 million decrease related to additional product outsourcing discussed above. |
| ● | Within the Card Services segment, cost of operations increased $104.5 million due to a $64.1 million increase in valuation adjustments to certain portfolios within credit card receivables held for sale, as well as a $41.7 million increase in credit card processing costs. |
Provision for loan loss. Provision for loan loss decreased $140.1 million, or 22%, to $509.5 million for the six months ended June 30, 2019 as compared to $649.6 million for the six months ended June 30, 2018, due primarily to a decrease in net charge-offs as well as a decrease in the change in credit card and loan receivables in the current quarter as compared to the prior year quarter.
General and administrative. General and administrative expenses increased $17.7 million, or 23%, to $95.5 million for the six months ended June 30, 2019 as compared to $77.8 million for the six months ended June 30, 2018, primarily due to $22.4 million in restructuring charges related to Corporate reorganization, resulting from the sale of Epsilon in July 2019, offset in part by lower discretionary benefits.
Depreciation and other amortization. Depreciation and other amortization increased $0.8 million, or 2%, to $39.9 million for the six months ended June 30, 2019 as compared to $39.1 million for the six months ended June 30, 2018, due to additional assets placed into service from recent capital expenditures, offset in part by certain fully depreciated property and equipment at LoyaltyOne.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $10.0 million, or 17%, to $48.3 million for the six months ended June 30, 2019, as compared to $58.3 million for the six months ended June 30, 2018, primarily due to certain fully amortized intangible assets, including portfolio premiums and customer contracts.
Interest expense, net. Total interest expense, net increased $26.7 million, or 10%, to $287.4 million for the six months ended June 30, 2019 as compared to $260.7 million for the six months ended June 30, 2018. The net increase was due to the following:
| ● | Securitization funding costs. Securitization funding costs increased $1.5 million due to higher average interest rates, which increased funding costs by approximately $16.4 million, offset in part by lower average borrowings, which decreased funding costs by approximately $14.9 million. |
| ● | Interest expense on deposits. Interest expense on deposits increased $29.7 million due to higher average interest rates, which increased interest expense by approximately $25.5 million, and higher average borrowings, which increased interest expense by approximately $4.2 million. |
| ● | Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased $4.5 million primarily due to a $13.3an $8.1 million decrease in interest expense on senior notes, primarily due todriven by the repayment of senior notes in December 2017April 2018, and April 2018.a $4.1 million decrease in amortization of debt issuance costs. These decreases were offset in part by a $5.7 million increase in interest expense on the revolving line of credit and a $4.7 million increase in interest expense on term debt due to higher average borrowings and higher average interest rates due to increases in the LIBOR rate. |
Taxes. Income tax expense decreased $43.8 million to $56.6 million for the three months ended September 30, 2018 from $100.4 million for the three months ended September 30, 2017, due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. This rate reduction led to a tax benefit associated with accelerated deductions relating to software development costs and bad debts as well as the deferral of income relating to certain state tax refunds. The effective tax rate for the current quarter was 16.0% as compared to 30.1% for the prior year quarter.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Revenue. Total revenue increased $122.1 million, or 2%, to $5,735.3 million for the nine months ended September 30, 2018 from $5,613.2 million for the nine months ended September 30, 2017. The net increase was due to the following:
Services. Revenue decreased $97.6 million, or 5%, to $1,790.7 million for the nine months ended September 30, 2018 as a result of a $77.1 million decrease in marketing services revenue due to declines in lower margin pass‑through agency and site-based display product offerings, an $18.8 million decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients, and a $15.9 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products.
Redemption, net. Revenue decreased $202.4 million, or 31%, to $443.0 million for the nine months ended September 30, 2018. Upon adoption of ASC 606, certain redemption revenue for which we do not control the good or service prior to transferring it to the collector is recorded on a net basis, which reduced both redemption revenue and cost of operations by $214.0 million for the nine months ended September 30, 2018. This decrease was partially offset by an increase of $16.4 million in redemption revenue from our short-term loyalty programs due to an increase in the number of active programs in market.
Finance charges, net. Revenue increased $422.1 million, or 14%, to $3,501.6 million for the nine months ended September 30, 2018, driven by a 12% increase in average credit card and loan receivables, which impacted revenue by $447.3 million through a combination of recent credit card portfolio acquisitions and new client signings, offset in part by a decline in yield, which negatively impacted revenue by $25.2 million.
Cost of operations. Cost of operations decreased $46.9 million, or 2%, to $3,076.2 million for the nine months ended September 30, 2018 as compared to $3,123.1 million for the nine months ended September 30, 2017. The net decrease was due to the following:
Within the LoyaltyOne segment, cost of operations decreased $192.5 million due to a $194.2 million decrease in cost of redemptions. This decrease in cost of redemptions was driven by a $214.0 million decrease related to the adoption of ASC 606 as discussed above, offset in part by the increase in cost of redemptions related to our short-term loyalty programs due to the increase in revenue.
Within the Epsilon segment, cost of operations decreased $76.2 million, or 6%, due to a decrease in direct costs associated with a 4% decline in revenue.
Within the Card Services segment, cost of operations increased $229.2 million due to a 17% increase in payroll and benefit expenses to support in-house collections and operational initiatives, an 11% increase in marketing expenses to drive credit sales and additional professional fees to support operational initiatives. Further, other operating expenses increased due to higher credit card processing costs attributable to increases in volume associated with growth in credit card and loan receivables and valuation adjustments to certain portfolios within credit card and loan receivables held for sale.
Provision for loan loss. Provision for loan loss increased $38.4 million, or 5%, to $846.3 million for the nine months ended September 30, 2018 as compared to $807.9 million for the nine months ended September 30, 2017. The increase in the provision for loan loss was driven by an increase in net charge-offs in each respective period.
General and administrative. General and administrative expenses increased $1.6 million, or 1%, to $126.5 million for the nine months ended September 30, 2018 as compared to $124.9 million for the nine months ended September 30, 2017, due to an increase in general corporate expenses that were offset in part by a $7.7 million decrease in net foreign currency exchange losses realized and lower payroll and benefit costs.
Depreciation and other amortization. Depreciation and other amortization increased $9.3 million, or 7%, to $145.9 million for the nine months ended September 30, 2018 as compared to $136.6 million for the nine months ended September 30, 2017, due to additional assets placed into service from recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $17.6 million, or 7%, to $220.3 million for the nine months ended September 30, 2018, as compared to $237.9 million for the nine months ended September 30, 2017, primarily due to certain fully amortized intangible assets, including customer databases and portfolio premiums.
Interest expense, net. Total interest expense, net increased $85.8 million, or 21%, to $493.8 million for the nine months ended September 30, 2018 as compared to $408.0 million for the nine months ended September 30, 2017. The increase was due to the following:
| ·
| | Securitization funding costs. Securitization funding costs increased $53.5 million due to higher average borrowings, which increased funding costs by approximately $27.3 million, and higher average interest rates, which increased funding costs by approximately $26.2 million.
|
| ·
| | Interest expense on deposits. Interest expense on deposits increased $27.7 million due to higher average borrowings, which increased interest expense by approximately $18.9 million, and higher average interest rates, which increased interest expense by approximately $8.8 million.
|
| ·
| | Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net increased $4.6 million primarily due to a $21.3$5.5 million increase in interest expense on term debt and a $9.1$3.0 million increase in interest expense on the revolving line of credit due to higher average borrowings and higher average interest rates due to increases in the LIBOR rate. These increases were offset in part by a $25.7 million decrease in interest expense on senior notes primarily due to the repayment of senior notes in December 2017 and April 2018.
|
Taxes. Income tax expense related to continuing operations decreased $109.3$18.4 million to $148.1$86.1 million for the ninesix months ended SeptemberJune 30, 20182019 from $257.4$104.5 million for the ninesix months ended SeptemberJune 30, 2017, due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. This rate reduction led2018, primarily related to a tax benefit associated with accelerated deductions relating to software development costs and bad debts as well as the deferral of income relating to certain state tax refunds. Additionally, income tax expensedecrease in the current year period was positively impacted by a tax benefit associated with foreign restructuring in the current year. These benefits were offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc.taxable income. The effective tax rate for the nine months ended September 30, 2018current year period was 17.9%21.2% as compared to 33.2%20.6% for the nineprior year period.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes increased $10.7 million to a loss of $32.6 million for the six months ended SeptemberJune 30, 2017.2019 as compared to a loss of $21.9 million for the six months ended June 30, 2018. Loss from discontinued operations, net of taxes represents Epsilon net income (loss) as well as certain direct costs identifiable to the Epsilon segment and allocations of interest expense on corporate debt. The increase in the loss was primarily due to transaction costs incurred directly attributable to the sale of Epsilon and increases in other operating costs, offset in part by decreases in depreciation and amortization due to held-for-sale classification in the current year.
Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure equal to net income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. In 2019, adjusted EBITDA also excluded costs for professional services associated with strategic initiatives, as well as certain restructuring charges described in more detail in Note 14, “Restructuring Charges,” of the Notes to Unaudited Condensed Consolidated Financial Statements.
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on deposits.
We use adjusted EBITDA and adjusted EBITDA, net as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management, and we believe it provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and adjusted EBITDA, net are each considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of intangible assets, including certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.
Adjusted EBITDA and adjusted EBITDA, net are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either operating income or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and
adjusted EBITDA, net are not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The adjusted EBITDA and adjusted EBITDA, net measures presented in this Quarterly Report on Form 10‑Q10-Q may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in millions) |
Income from continuing operations | | $ | 142.4 | | $ | 223.8 | | $ | 320.7 | | $ | 403.7 |
Stock compensation expense | | | 10.2 | | | 12.0 | | | 21.6 | | | 25.6 |
Provision for income taxes | | | 51.4 | | | 39.3 | | | 86.1 | | | 104.5 |
Interest expense, net | | | 143.5 | | | 133.6 | | | 287.4 | | | 260.7 |
Depreciation and other amortization | | | 19.3 | | | 19.8 | | | 39.9 | | | 39.1 |
Amortization of purchased intangibles | | | 22.5 | | | 28.8 | | | 48.3 | | | 58.3 |
Strategic transaction costs (1) | | | 2.7 | | | — | | | 2.7 | | | — |
Restructuring charges (2) | | | 22.4 | | | — | | | 30.3 | | | — |
Adjusted EBITDA | | | 414.4 | | | 457.3 | | | 837.0 | | | 891.9 |
Less: Securitization funding costs | | | 51.6 | | | 55.2 | | | 108.8 | | | 107.3 |
Less: Interest expense on deposits | | | 53.2 | | | 36.8 | | | 102.0 | | | 72.3 |
Adjusted EBITDA, net | | $ | 309.6 | | $ | 365.3 | | $ | 626.2 | | $ | 712.3 |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions) |
Net income | | $ | 296.5 | | $ | 233.2 | | $ | 678.2 | | $ | 517.4 |
Stock compensation expense | | | 17.9 | | | 18.3 | | | 64.2 | | | 63.5 |
Provision for income taxes | | | 56.6 | | | 100.4 | | | 148.1 | | | 257.4 |
Interest expense, net | | | 168.9 | | | 145.3 | | | 493.8 | | | 408.0 |
Depreciation and other amortization | | | 49.7 | | | 46.7 | | | 145.9 | | | 136.6 |
Amortization of purchased intangibles | | | 72.8 | | | 77.6 | | | 220.3 | | | 237.9 |
Adjusted EBITDA | | | 662.4 | | | 621.5 | | | 1,750.5 | | | 1,620.8 |
Less: Securitization funding costs | | | 56.1 | | | 38.2 | | | 163.4 | | | 109.9 |
Less: Interest expense on deposits | | | 43.4 | | | 33.2 | | | 115.6 | | | 87.9 |
Adjusted EBITDA, net | | $ | 562.9 | | $ | 550.1 | | $ | 1,471.5 | | $ | 1,423.0 |
| (1) | Represents costs for professional services associated with strategic initiatives. |
| (2) | Represents costs associated with the wind-down of Merison, a retail marketing division within BrandLoyalty, in the first quarter of 2019 and a reorganization of Corporate, resulting from the sale of Epsilon. |
Segment Revenue and Adjusted EBITDA, net
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2019 | | 2018 | | % Change | | | 2019 | | 2018 | | % Change | |
| | (in millions, except percentages) | |
Revenue: | | | | | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 251.5 | | $ | 248.6 | | 1 | % | | $ | 455.3 | | $ | 474.9 | | (4) | % |
Card Services | | | 1,096.9 | | | 1,148.5 | | (4) | | | | 2,227.3 | | | 2,303.7 | | (3) | |
Corporate/Other | | | 0.1 | | | 0.1 | | nm | * | | | 0.1 | | | 0.3 | | nm* | |
Total | | $ | 1,348.5 | | $ | 1,397.2 | | (3) | % | | $ | 2,682.7 | | $ | 2,778.9 | | (3) | % |
Adjusted EBITDA, net: | | | | | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 51.0 | | $ | 69.5 | | (27) | % | | $ | 106.1 | | $ | 123.4 | | (14) | % |
Card Services | | | 287.2 | | | 335.7 | | (14) | | | | 582.1 | | | 654.3 | | (11) | |
Corporate/Other | | | (28.6) | | | (39.9) | | (28) | | | | (62.0) | | | (65.4) | | (5) | |
Total | | $ | 309.6 | | $ | 365.3 | | (15) | % | | $ | 626.2 | | $ | 712.3 | | (12) | % |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | |
| | (in millions, except percentages) | |
Revenue: | | | | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 260.2 | | $ | 305.2 | | (15) | % | $ | 735.1 | | $ | 918.3 | | (20) | % |
Epsilon | | | 537.6 | | | 558.7 | | (4) | | | 1,561.2 | | | 1,631.8 | | (4) | |
Card Services | | | 1,162.9 | | | 1,055.4 | | 10 | | | 3,466.5 | | | 3,083.6 | | 12 | |
Corporate/Other | | | 0.2 | | | — | | nm* | | | 0.5 | | | — | | nm* | |
Eliminations | | | (13.7) | | | (6.9) | | nm* | | | (28.0) | | | (20.5) | | nm* | |
Total | | $ | 1,947.2 | | $ | 1,912.4 | | 2 | % | $ | 5,735.3 | | $ | 5,613.2 | | 2 | % |
Adjusted EBITDA, net: | | | | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 63.4 | | $ | 61.0 | | 4 | % | $ | 186.8 | | $ | 176.4 | | 6 | % |
Epsilon | | | 125.2 | | | 125.0 | | — | | | 323.7 | | | 316.8 | | 2 | |
Card Services | | | 414.3 | | | 397.3 | | 4 | | | 1,068.6 | | | 1,033.5 | | 3 | |
Corporate/Other | | | (40.0) | | | (33.2) | | 20 | | | (107.6) | | | (103.7) | | 4 | |
Total | | $ | 562.9 | | $ | 550.1 | | 2 | % | $ | 1,471.5 | | $ | 1,423.0 | | 3 | % |
*not meaningful
Three months ended SeptemberJune 30, 20182019 compared to the three months ended SeptemberJune 30, 20172018
Revenue. Total revenue increased $34.8decreased $48.7 million, or 2%3%, to $1,947.2 million for the three months ended September 30, 2018 from $1,912.4 million for the three months ended September 30, 2017. The net increase was due to the following:
LoyaltyOne. Revenue decreased $45.0 million, or 15%, to $260.2$1,348.5 million for the three months ended SeptemberJune 30, 2018 primarily due to the adoption of ASC 606, which negatively impacted revenue by $69.1 million. This decrease was offset in part by a $27.6 million increase in redemption revenue2019 from our short-term loyalty programs due to an increase in the number of active programs in market.
Epsilon. Revenue decreased $21.1 million, or 4%, to $537.6$1,397.2 million for the three months ended SeptemberJune 30, 2018, driven by declines in lower margin agency and site-based display product offerings as compared to the prior year period.
Card Services. Revenue increased $107.5 million, or 10%, to $1,162.9 million for the three months ended September 30, 2018, driven by a $145.5 million increase in finance charges, net as a result of a 10% increase in average credit card and loan receivables. This increase was offset in part by a $19.7 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products and a $17.5 million decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients.
Adjusted EBITDA, net. Adjusted EBITDA, net increased $12.8 million, or 2%, to $562.9 million for the three months ended September 30, 2018 from $550.1 million for the three months ended September 30, 2017.2018. The net increasedecrease was due to the following:
| ● | LoyaltyOne. Revenue increased $2.9 million, or 1%, to $251.5 million for the three months ended June 30, 2019, as increases in redemption revenue driven by strong short-term loyalty program performance in Europe, Asia and Brazil were offset in part by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $13.0 million decrease in revenue, and a $9.8 million decrease in revenue related to the outsourcing of additional rewards inventory recorded on a net basis. |
| ● | Card Services. Revenue decreased $51.6 million, or 4%, to $1,096.9 million for the three months ended June 30, 2019, driven by a $36.5 million decrease in merchant fees as a result of increased payments associated with new clients, and an $18.5 million decrease in finance charges, net as a result of an approximate 20 basis point |
| | decrease in finance charge yield due to a decline in finance charges and late fees, driven by new program launches and the portfolios of credit card receivables sold. |
Adjusted EBITDA, net increased $2.4 million, or 4%, to $63.4 million for the three months ended September 30, 2018 primarily due to the $27.6 million increase in redemption revenue from our short-term loyalty programs discussed above.
Epsilon. Adjusted EBITDA, net was $125.2 million for the three months ended September 30, 2018 as compared to $125.0 million in the prior year quarter due to a favorable revenue mix toward higher margin product offerings, offset by the decrease in revenue.
Card Services. Adjusted EBITDA, net increased $17.0 million, or 4%, to $414.3 million for the three months ended September 30, 2018. Adjusted EBITDA, net was positively impacted by an increase in finance charges, net but was tempered by lower gross yields, a function of client mix and higher funding costs.
Corporate/Other. Adjusted EBITDA, net decreased $6.8$55.7 million, or 15%, to a loss of $40.0$309.6 million for the three months ended SeptemberJune 30, 2018 due to an increase in general corporate expenses and higher payroll and benefit costs.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Revenue. Total revenue increased $122.1 million, or 2%, to $5,735.32019 from $365.3 million for the ninethree months ended SeptemberJune 30, 2018 from $5,613.2 million for the nine months ended September 30, 2017.2018. The net increasedecrease was due to the following:
| ● | LoyaltyOne. Adjusted EBITDA, net decreased $18.5 million, or 27%, to $51.0 million for the three months ended June 30, 2019, resulting from higher redemption costs related to product mix. |
| ● | Card Services. Adjusted EBITDA, net decreased $48.5 million, or 14%, to $287.2 million for the three months ended June 30, 2019. Adjusted EBITDA, net was negatively impacted by a decline in merchant fee revenue and an increase in funding costs. |
| ● | Corporate/Other. Adjusted EBITDA, net increased $11.3 million to a loss of $28.6 million for the three months ended June 30, 2019 due to lower discretionary benefits. Restructuring costs of $22.4 million and strategic transaction costs of $2.5 million during the three months ended June 30, 2019 were excluded from adjusted EBITDA, net. |
Six months ended June 30, 2019 compared to the six months ended June 30, 2018
LoyaltyOneRevenue. RevenueTotal revenue decreased $183.2$96.2 million, or 20%3%, to $735.1$2,682.7 million for the ninesix months ended SeptemberJune 30, 2018 primarily2019 from $2,778.9 million for the six months ended June 30, 2018. The decrease was due to the adoption of ASC 606, which negatively impacted revenue by $214.0 million. This decrease was offset in part by an increase of $35.2 million in revenue from our short-term loyalty programs primarily due to an increase in the number of active programs in market.following:
| ● | LoyaltyOne. Revenue decreased $19.6 million, or 4%, to $455.3 million for the six months ended June 30, 2019, impacted by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $27.4 million decrease in revenue, and an $18.6 million decrease in revenue related to the outsourcing of additional rewards inventory recorded on a net basis. These decreases were offset in part by a 5% increase in redemption revenue related to our short-term loyalty programs. |
| ● | Card Services. Revenue decreased $76.4 million, or 3%, to $2,227.3 million for the six months ended June 30, 2019, driven by a $55.6 million decrease in merchant fees as a result of increased payments associated with new clients, and a $26.6 million decrease in finance charges, net as a result of an approximate 30 basis point decrease in finance charge yield due to a decline in finance charges and late fees, driven by new program launches and the portfolios of credit card receivables sold. |
EpsilonAdjusted EBITDA, net. RevenueAdjusted EBITDA, net decreased $70.6 million, or 4%, to $1,561.2 million for the nine months ended September 30, 2018 primarily due to declines in lower margin agency and site-based display product offerings as compared to the prior year period.
Card Services. Revenue increased $382.9$86.1 million, or 12%, to $3,466.5$626.2 million for the ninesix months ended SeptemberJune 30, 2018, driven by a $422.1 million increase in finance charges, net as a result of a 12% increase in average credit card and loan receivables. This increase was offset in part by an $18.8 million decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients and a $15.9 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products.
Adjusted EBITDA, net. Adjusted EBITDA, net increased $48.5 million, or 3%, to $1,471.52019 from $712.3 million for the ninesix months ended SeptemberJune 30, 2018 from $1,423.0 million for the nine months ended September 30, 2017.2018. The net increasedecrease was due to the following:
| ● | LoyaltyOne. Adjusted EBITDA, net decreased $17.3 million, or 14%, to $106.1 million for the six months ended June 30, 2019, resulting from a 5% decrease in AIR MILES reward miles redeemed, an increase in cost of redemptions and an unfavorable foreign exchange rate impact due to the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $5.3 million decrease in adjusted EBITDA, net. BrandLoyalty restructuring costs of $7.9 million during the six months ended June 30, 2019 were excluded from adjusted EBITDA, net. |
| ● | Card Services. Adjusted EBITDA, net decreased $72.2 million, or 11%, to $582.1 million for the six months ended June 30, 2019. Adjusted EBITDA, net was negatively impacted by a decline in merchant fee revenue and an increase in funding costs. |
| ● | Corporate/Other. Adjusted EBITDA, net increased $3.4 million to a loss of $62.0 million for the six months ended June 30, 2019 due to lower discretionary benefits. Restructuring costs of $22.4 million and strategic transaction costs of $2.5 million during the six months ended June 30, 2019 were excluded from adjusted EBITDA, net. |
LoyaltyOne. Adjusted EBITDA, net increased $10.4 million, or 6%, to $186.8 million for the nine months ended September 30, 2018, driven by increases in both our coalition and short-term loyalty programs.
Epsilon. Adjusted EBITDA, net increased $6.9 million, or 2%, to $323.7 million for the nine months ended September 30, 2018 due to a favorable revenue mix toward higher margin product offerings in the current year period as compared to the prior year period, offset in part by the decrease in revenue.50
Card Services. Adjusted EBITDA, net increased $35.1 million, or 3%, to $1,068.6 million for the nine months ended September 30, 2018. Adjusted EBITDA, net was positively impacted by an increase in finance charges, net. This increase was primarily offset by an increase in the provision for loan loss resulting from higher net charge-offs, an increase in payroll and benefit expenses to support in-house collections and operational initiatives, valuation adjustments to certain portfolios within credit card and loan receivables held for sale, and higher funding costs.Index
Corporate/Other. Adjusted EBITDA, net decreased $3.9 million to a loss of $107.6 million for the nine months ended September 30, 2018 due to an increase in general corporate expenses that were offset in part by lower payroll and benefit costs and a decrease in net foreign currency exchange losses realized.
Asset Quality
Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our credit card and loan receivables, the success of our collection and recovery efforts, and general economic conditions.
Delinquencies. A credit card account is contractually delinquent when we do not receive the minimum payment by the specified due date on the cardholder’s statement. Our policy is to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account
becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.
The following table presents the delinquency trends of our credit card and loan receivables portfolio:
| | | | | | | | | | | | |
| | September 30, | | % of | | December 31, | | % of | | |
| | 2018 | | Total | | 2017 | | Total | | |
| | (In millions, except percentages) | | |
| | | | | | | | | | | | |
| | | June 30, | | % of | | December 31, | | % of | |
| | | 2019 | | Total | | 2018 | | Total | |
| | | (in millions, except percentages) | |
Receivables outstanding - principal | | $ | 16,476.5 | | 100.0 | % | $ | 17,705.1 | | 100.0 | % | | $ | 16,670.2 | | 100.0 | % | $ | 16,869.9 | | 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | | | | | | | | | | | | |
31 to 60 days | | | 306.2 | | 1.8 | % | | 301.5 | | 1.7 | % | | | 290.4 | | 1.7 | % | | 303.2 | | 1.8 | % |
61 to 90 days | | | 210.8 | | 1.3 | | | 191.3 | | 1.1 | | | | 202.7 | | 1.2 | | | 207.9 | | 1.3 | |
91 or more days | | | 439.4 | | 2.7 | | | 409.6 | | 2.3 | | | | 376.5 | | 2.3 | | | 443.4 | | 2.6 | |
Total | | $ | 956.4 | | 5.8 | % | $ | 902.4 | | 5.1 | % | | $ | 869.6 | | 5.2 | % | $ | 954.5 | | 5.7 | % |
Net Charge-Offs. Our net charge-offs include the principal amount of losses from cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.
The net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period. Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated. The following table presents our net charge-offs for the periods indicated:
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | |
| | September 30, | | September 30, | | |
| | 2018 | | 2017 | | 2018 | | 2017 | | |
| | (In millions, except percentages) | | |
| | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | |
| | | (in millions, except percentages) | |
Average credit card and loan receivables | | $ | 17,580.2 | | $ | 15,949.8 | | $ | 17,624.3 | | $ | 15,791.7 | | | $ | 16,797.5 | | $ | 17,570.4 | | $ | 16,823.9 | | $ | 17,646.4 | |
Net charge-offs of principal receivables | | | 257.9 | | | 219.6 | | | 836.0 | | | 711.5 | | | | 257.5 | | | 282.0 | | | 526.9 | | | 578.1 | |
Net charge-offs as a percentage of average credit card and loan receivables | | | 5.9 | % | | 5.5 | % | | 6.3 | % | | 6.0 | % | | | 6.1 | % | | 6.4 | % | | 6.3 | % | | 6.6 | % |
See Note 5,6, “Credit Card and Loan Receivables,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information related to the securitization of our credit card receivables.
Liquidity and Capital Resources
Our primary sources of liquidity include cash generated from operating activities, our credit agreements and issuances of debt or equity securities, our credit card securitization program and deposits issued by Comenity Bank and Comenity Capital Bank. In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources. In April 2019, Comenity Capital Bank launched a consumer retail deposit platform, Comenity Direct™, to the public.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets. As of September 30, 2018, Comenity Bank’s Common Equity Tier 1 capital ratio was 14.1%, Tier 1 capital ratio was 14.1%, total capital ratio was 15.4% and leverage ratio was 12.2%. As of September 30, 2018, Comenity Capital Bank’s Common Equity Tier 1 capital ratio was 15.3%, Tier 1 capital ratio was 15.3%, total capital ratio was 16.6% and leverage ratio was 13.6%. Comenity Bank and Comenity Capital Bank are considered well capitalized. The actual capital ratios and minimum ratios as of June 30, 2019 are as follows:
| | | | | | | | | |
| | | | | | Minimum Ratio to be |
| | | | Minimum Ratio for | | Well Capitalized under |
| | Actual | | Capital Adequacy | | Prompt Corrective |
| | Ratio | | Purposes | | Action Provisions |
Comenity Bank | | | | | | | | | |
Tier 1 capital to average assets | | 13.7 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 15.3 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 15.3 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 16.6 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 13.6 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 15.7 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 15.7 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 17.0 | | | 8.0 | | | 10.0 | |
Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases and dividends.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months.
On July 1, 2019, we completed the previously announced sale of our Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Proceeds will be used for the repayment of corporate debt, to repurchase shares of our common stock, and taxes associated with the sale of Epsilon.
Cash Flow Activity
Operating Activities.We generated cash flow from operating activities of $2,025.4$1,089.7 million and $1,758.8$1,321.8 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The year-over-year increasedecrease in operating cash flows of $266.6$232.1 million was primarily due to an increasea decrease in profitability and a decrease in non-cash charges to income, including the provision for loan loss due to a decrease in net increasecharge-offs and depreciation and amortization due to the held-for-sale classification of Epsilon in cash flows associated with credit card portfolios that were originated or purchased with the intent to sell.current year.
Investing Activities. Cash used in investing activities was $860.7$514.3 million and $1,611.1$236.2 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Significant components of investing activities are as follows:
| ·
● | | Redemption settlement assets. Cash decreased $37.4 million for the nine months ended September 30, 2018 due to additional investments in corporate bonds within the redemption settlement assets. Cash decreased $213.6 million for the nine months ended September 30, 2017 as we increased funding to the redemption settlement assets as a result of the breakage rate change in December 2016.
|
| ·
| | Credit card and loan receivables. Cash decreased $708.1$20.9 million and $1,174.7$121.2 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, due to growth in credit card and loan receivables in each respective period. |
| ·
● | Purchase of credit card portfolios. During the six months ended June 30, 2019, we paid preliminary cash consideration of $936.5 million to acquire four credit card portfolios. |
| ● | Proceeds from sale of credit card portfolio.portfolios. During the ninesix months ended SeptemberJune 30, 2019, we received preliminary cash consideration of $539.3 million from the sale of four credit card portfolios. During the six |
| | months ended June 30, 2018, we received cash consideration of $55.4$55.6 million from the sale of one credit card portfolio. |
| ·
● | | Capital expenditures. Cash paid for capital expenditures was $149.3$92.2 million and $176.6$98.5 million for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. |
Financing Activities. Cash used in financing activities was $1,506.0$396.6 million and $1,869.0 million for the ninesix months ended SeptemberJune 30, 2019, and 2018, and cash provided by financing activities was $1,723.1 million for the nine months ended September 30, 2017.respectively. Significant components of financing activities are as follows:
| ·
● | | Debt. Cash decreased $258.7increased $102.5 million in net repaymentsborrowings for the ninesix months ended SeptemberJune 30, 2018,2019, primarily due to the early repayment of $500.0 million 6.375% senior notes due 2020. Cash increased $535.8 million for the nine months ended September 30, 2017, primarily due to the issuance of €400.0 million senior notes due 2022 and net borrowings under the revolving line of credit. Cash decreased $279.4 million for the six months ended June 30, 2018, primarily due to the net change under the revolving line of credit as well as the early repayment of $500.0 million senior notes due in 2020. |
| ·
● | | Non-recourse borrowings of consolidated securitization entities. Cash decreased $1,337.7$923.9 million and $90.0$1,035.0 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities. Net repayments under the conduit facilities were $1,100.0 million in the current year period as compared to $265.0 million in the prior year period. |
| ·
● | | Deposits. Cash increased $421.3$742.8 million and $1,987.7decreased $373.2 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, due to new issuances, offset in part by timing of maturities. |
| ·
● | | Dividends. Cash paid for quarterly dividends and dividend equivalents was $94.5$67.0 million and $86.8$63.3 million for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. |
| ·
● | | Treasury shares. Cash paid for treasury shares was $197.0$222.8 million and $553.7$94.5 million for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. |
Debt
Debt
Long-term and Other Debt
On April 2, 2018,30, 2019, we redeemedamended our $500.0credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement will be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reduced in the same amount (to $1,072.4 million), all of our outstanding 6.375% senior notes due April 1, 2020 at par plus accrued interest. We fundedwill be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the redemption with borrowings under our revolving line of credit.credit agreement and certain other minor amendments.
As of SeptemberJune 30, 2018,2019, we had $772.0$905.0 million outstanding under our revolving line of credit and total availability of $800.4$667.4 million. Our total leverage ratio, as defined in our credit agreement, was 2.42.45 to 1 at SeptemberJune 30, 2018,2019, as compared to the maximum covenant ratio of 3.5 to 1.
The BrandLoyalty credit agreement, as amended in June 2016, provided for a reduction in commitment on each of the uncommitted and committed revolving lines of credit of €25.0 million in August 2018, reducing the total capacity from €125.0 million to €75.0 million. As of SeptemberJune 30, 2018, we had €40.8 million ($47.3 million) outstanding under the revolving lines of credit in the BrandLoyalty credit agreement.
As of September 30, 2018,2019, we were in compliance with our debt covenants.
In July 2019, proceeds from the sale of Epsilon were used to extinguish all of our outstanding senior notes of $1.9 billion and to make a mandatory payment of $500.0 million on our revolving credit facility. In addition, the aggregate revolving credit commitments were reduced to $1,072.4 million.
Deposits
We utilize money market deposits and certificates of deposit to finance the operating activities and fund securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank.
As of SeptemberJune 30, 2018,2019, we had $3.4 billion in money market deposits outstanding with interest rates ranging from 1.90% to 2.60%3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.
As of SeptemberJune 30, 2018,2019, we had $8.0$9.2 billion in certificates of deposit outstanding with interest rates ranging from 1.25%1.28% to 4.00% and maturities ranging from October 2018July 2019 to September 2023.June 2024. Certificate of deposit borrowings are subject to regulatory capital requirements.
Securitization Program
We sell a majority of the credit card receivables originated by Comenity Bank to WFN Credit Company, LLC, which in turn sells them to World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust, or Master Trust I, and World Financial Network Credit Card Master Trust III, or Master Trust III, or collectively, the WFN Trusts, as part of our credit card securitization program, which has been in existence since January 1996. We also sell our credit card receivables originated by Comenity Capital Bank to World Financial Capital Credit Company, LLC, which in turn sells them to World Financial Capital Master Note Trust, or the WFC Trust. These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’s credit card receivables.
During the ninesix months ended SeptemberJune 30, 2018,2019, Master Trust I issued $929.0$961.7 million of asset-backed term notes with maturities in February 20212022 and September 2021 maturities,June 2022, of which $81.7$43.3 million were retained by us and eliminated from the consolidated balance sheets. Additionally, $1.5 billion of asset-backed term notes matured and were repaid, of which $375.5 million were retained by us and eliminated from the consolidated balance sheets.
In October 2018, $266.7 million of Series 2012-C asset-backed term notes, $10.7 million of which were retained by us and eliminated from the unaudited condensed consolidated balance sheets,sheets. Additionally, $1.0 billion of asset-backed term notes matured and were repaid.repaid, of which $214.5 million were retained by us and eliminated from the unaudited condensed consolidated balance sheets.
As of SeptemberJune 30, 2018,2019, the WFN Trusts and the WFC Trust had approximately $12.6$12.5 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and the WFC Trust and by the performance of the credit card receivables in these credit card securitization trusts.
At SeptemberJune 30, 2018,2019, we had $7.5$6.7 billion of non-recourse borrowings of consolidated securitization entities, of which $1.5$1.2 billion is due within the next 12 months. As of SeptemberJune 30, 2018,2019, total capacity under the conduit facilities
was $4.5$4.7 billion, of which $2.7$1.7 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.
In May 2019, the WFC Trust amended its 2009-VFN conduit facility, increasing the capacity from $1,975.0 million to $2,175.0 million and extending the maturity to April 2021.
The following table shows the maturities of borrowing commitments as of SeptemberJune 30, 20182019 for the WFN Trusts and the WFC Trust by year:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| | (in millions) |
Term notes | | $ | 771.9 | | $ | 1,467.2 | | $ | 1,852.1 | | $ | 918.3 | | $ | — | | $ | 5,009.5 |
Conduit facilities (1) | | | — | | | 2,480.0 | | | 2,175.0 | | | — | | | — | | | 4,655.0 |
Total (2) | | $ | 771.9 | | $ | 3,947.2 | | $ | 4,027.1 | | $ | 918.3 | | $ | — | | $ | 9,664.5 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total |
| | (In millions) |
Term notes | | $ | 256.0 | | $ | 1,574.0 | | $ | 1,467.2 | | $ | 1,529.8 | | $ | — | | $ | 4,827.0 |
Conduit facilities (1) | | | — | | | 1,975.0 | | | 2,480.0 | | | — | | | — | | | 4,455.0 |
Total (2) | | $ | 256.0 | | $ | 3,549.0 | | $ | 3,947.2 | | $ | 1,529.8 | | $ | — | | $ | 9,282.0 |
| (1) | | Amount represents borrowing capacity, not outstanding borrowings. |
| (2) | | Total amounts do not include $1.7$1.3 billion of debt issued by the credit card securitization trusts that was retained by us and eliminated in the unaudited condensed consolidated financial statements. statements. |
See Note 10,12, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt.
Stock Repurchase Programs
We had an authorized stock repurchase program to acquire up to $1.0 billion of our outstanding common stock through July 31, 2018. At July 31, 2018, $280.3 million of this program expired unused. On July 26, 2018, our Board of Directors authorized a new stock repurchase program to acquire up to $500.0 million of our outstanding common stock from August 1, 2018 through July 31, 2019. At December 31, 2018 we had $222.8 million remaining under the stock repurchase program. For the ninesix months ended SeptemberJune 30, 2018,2019, we acquired a total of 0.91.3 million shares of our common stock for $201.7$222.8 million. As of SeptemberAt June 30, 2018,2019, we had $464.3 milliondid not have any amounts remaining under theour authorization.
In July 2019, our Board of Directors authorized a new stock repurchase program.program to acquire up to $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020.
On July 19, 2019, we issued a press release announcing the commencement of a tender offer to acquire up to $750 million in aggregate purchase price of our issued and outstanding common stock through a modified “dutch auction” tender offer at a price not greater than $162.00 nor less than $144.00 per share, to the seller in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions described in the Offer to Purchase dated July 19, 2019 and in the related Letter of Transmittal (which together, as they may be amended or supplemented from time to time, constitute the “Offer”), is scheduled to expire one minute after 11:59 P.M. New York City Time, on Thursday, August 15, 2019, unless the Offer is extended.
Dividends
On January 25, 2018,February 7, 2019, our Board of Directors declared a quarterly cash dividend of $0.57$0.63 per share on our common stock to stockholders of record at the close of business on February 14, 2018,21, 2019, resulting in a dividend payment of $31.5$33.4 million on March 20, 2018.19, 2019.
On April 19, 2018,25, 2019, our Board of Directors declared a quarterly cash dividend of $0.57$0.63 per share on our common stock payableand $6.30 per share on June 19, 2018,our Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on May 14, 2018,2019, resulting in a dividend payment of $31.5$33.0 million on June 19, 2018.18, 2019.
Additionally, we paid $0.6 million in cash related to dividend equivalent rights for the six months ended June 30, 2019.
On July 19, 2018,18, 2019, our Board of Directors declared a quarterly cash dividend of $0.57$0.63 per share on our common stock payableand $6.30 per share on September 19, 2018,our Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on August 14, 2018, resulting in a dividend payment of $31.2 millionSeptember 4, 2019 and payable on September 19, 2018.26, 2019.
Additionally, we paid $0.3 million in cash related to dividend equivalent rights for the nine months ended September 30, 2018.
On October 18, 2018, our Board of Directors declared a quarterly cash dividend of $0.57 per share on our common stock, payable on December 19, 2018, to stockholders of record at the close of business on November 14, 2018.
Critical Accounting Policies and Estimates
With the exception of the adoption of ASC 606, thereThere have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2017. See “Recently Adopted Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the adoption of ASC 606 on January 1, 2018.
Recently Issued Pronouncements
See “Recently Issued Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards recently issued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risks include interest rate risk, credit risk, and foreign currency exchange rate risk.
There has been no material change from our Annual Report on Form 10-K for the year ended December 31, 20172018 related to our exposure to market risk from interest rate risk, credit risk, and foreign currency exchange rate risk.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of SeptemberJune 30, 2018,2019, 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 SeptemberJune 30, 20182019 (the end of our thirdsecond fiscal quarter), our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our thirdsecond quarter 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
From time to time we are involved in various claims and lawsuits arising in the ordinary course of our business that we believe will not have a material adverse effect on our business or financial condition, including claims and lawsuits alleging breaches of our contractual obligations.
Item 1A. Risk Factors.
Other than as set forth below, thereThere have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.
If we fail to identify suitable acquisitions, dispositions or new business opportunities, or to effectively integrate the businesses we acquire or disaggregate the businesses we divest, it could negatively affect our business.
Historically, we have engaged in a significant number of acquisitions, and those acquisitions have contributed to our growth in revenue and profitability. We believe that acquisitions and the identification and pursuit of new business opportunities will be a key component of our continued growth strategy. However, we may not be able to locate and secure future acquisition candidates or to identify and implement new business opportunities on terms and conditions that are acceptable to us. If we are unable to identify attractive acquisition candidates or successful new business opportunities, our growth could be impaired.
Similarly, we may evaluate the potential disposition of assets or businesses that no longer complement our long-term strategic objectives. When a determination is made to sell assets or businesses, we may encounter difficulty attaining buyers or effecting desired exit strategies in a timely manner or on acceptable terms and may be subject to market forces leading to a divestiture on less than optimal price or other terms.
In addition, there are numerous risks associated with acquisitions, dispositions and the implementation of new businesses, including, but not limited to:
| ·
| | the difficulty and expense that we incur in connection with the acquisition, disposition or new business opportunity;
|
| ·
| | the inability to satisfy pre-closing conditions preventing consummation of the acquisition, disposition or new business opportunity;
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| ·
| | the potential for adverse consequences when conforming the acquired company’s accounting policies to ours;
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| ·
| | the diversion of management’s attention from other business concerns;
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| ·
| | the potential loss of customers or key employees of the acquired company;
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| ·
| | the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations;
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| | the acceptance of continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;
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| | the assumption of unknown liabilities of the acquired company;
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| ·
| | the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies;
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| ·
| | the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of debt;
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| ·
| | the requirement to provide transition services in connection with a disposition resulting in the diversion of resources and focus; and
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| ·
| | the difficulty retaining and motivating key personnel from acquisitions or in connection with dispositions.
|
Furthermore, if the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or impair the value of some or all of the assets of the acquired or new business.
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 SeptemberJune 30, 2018:2019:
| | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar |
| | | | | | | Shares Purchased as | | Value of Shares that |
| | | | | | | Part of Publicly | | May Yet Be |
| | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the |
Period | | Shares Purchased (1) | | per Share | | Programs | | Plans or Programs (2) |
| | | | | | | | | (Dollars in millions) |
During 2019: | | | | | | | | | | |
April 1-30 | | 5,417 | | $ | 165.01 | | — | | $ | — |
May 1-31 | | 7,672 | | | 144.17 | | — | | | — |
June 1-30 | | 5,389 | | | 137.77 | | — | | | — |
Total | | 18,478 | | $ | 148.41 | | — | | $ | — |
| | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar |
| | | | | | | Shares Purchased as | | Value of Shares that |
| | | | | | | Part of Publicly | | May Yet Be |
| | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the |
Period | | Shares Purchased (1) | | per Share | | Programs | | Plans or Programs (2) |
| | | | | | | | | (Dollars in millions) |
During 2018: | | | | | | | | | | |
July 1-31 | | 294,377 | | $ | 229.31 | | 291,545 | | $ | 280.3 |
August 1-31 | | 67,661 | | | 233.09 | | 65,000 | | | 484.8 |
September 1-30 | | 87,246 | | | 242.22 | | 85,000 | | | 464.3 |
Total | | 449,284 | | $ | 232.39 | | 441,545 | | $ | 464.3 |
| (1) | | During the period represented by the table, 7,73918,478 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Savings Plan for the benefit of the employees who participated in that portion of the plan. |
| (2) | (2)
| | In 2017,2018, our Board of Directors authorized a stock repurchase program to acquire up to $1.0 billion$500.0 million of our outstanding common stock from August 1, 2018 through July 31, 2018.2019. At JulyDecember 31, 2018 $280.3we had $222.8 million of this program expired unused. remaining under the stock repurchase program. At June 30, 2019 we did not have any amounts remaining under our authorization. |
OnIn July 26, 2018,2019, our Board of Directors authorized a new stock repurchase program to acquire up to $500.0 million$1.1 billion of our outstanding common stock from August 1, 2018July 5, 2019 through July 31, 2019. At SeptemberJune 30, 2018, we had acquired approximately 0.1 million shares of our common stock for an aggregate amount of $35.7 million under this repurchase program.2020. Our authorization is subject to any restrictions pursuant to the terms of our credit agreements senior note indentures, and applicable securities laws or otherwise.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) None
(b) None
(a)None
(b)None
Item 6. Exhibits.
(a) Exhibits:
EXHIBIT INDEX
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit
No. | | Filer | | Description | | Form | | Exhibit | | Filing
Date |
|---|
| | | | | | | | | | |
|---|
#2.1 | | (a) | | Securities Purchase Agreement, dated as of April 12, 2019, by and among Alliance Data Systems Corporation, the other sellers party thereto, Publicis Groupe, S.A. and certain subsidiaries thereof. | | 8-K | | 2.1 | | 4/15/19 |
| | | | | | | | | | |
3.1 | | (a) | | Third Amended and Restated Certificate of Incorporation of the Registrant. | | 8-K | | 3.2 | | 6/10/16 |
| | | | | | | | | | |
3.2 | | (a) | | Certificate of Designations of Series A Preferred Non-Voting Convertible Preferred Stock of the Registrant. | | 8-K | | 3.1 | | 4/29/19 |
| | | | �� | | | | | | |
3.3 | | (a) | | Fifth Amended and Restated Bylaws of the Registrant. | | 8-K | | 3.1 | | 2/1/16 |
| | | | | | | | | | |
4 | | (a) | | Specimen Certificate for shares of Common Stock of the Registrant. | | 10-Q | | 4 | | 8/8/03 |
| | | | | | | | | | |
10.1 | | (b) (c) (d) | | Third Amended and Restated Service Agreement, dated as of April 23, 2019, between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.1 | | 4/23/19 |
| | | | | | | | | | |
10.2 | | (a) | | Exchange Agreement, dated as of April 25, 2019, by and between the Registrant and ValueAct Holdings, L.P. | | 8-K | | 10.1 | | 4/29/19 |
| | | | | | | | | | |
10.3 | | (a) | | Third Amendment to Amended and Restated Credit Agreement, dated as of April 30, 2019, by and among Registrant, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 10-Q | | 10.7 | | 5/6/19 |
| | | | | | | | | | |
#+10.4 | | (a) | | Retirement Agreement, dated as of June 5, 2019, by and between Alliance Data Systems Corporation, ADS Alliance Data Systems, Inc. and Edward J. Heffernan. | | 8-K | | 10.1 | | 6/7/19 |
| | | | | | | | | | |
10.5 | | (b) (c) (d) | | Series 2019-B Indenture Supplement, dated as of June 26, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 6/28/19 |
| | | | | | | | | | |
*31.1 | | (a) | | Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | | | | | | |
| | | | | | | | | | |
*31.2 | | (a) | | Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | | | | | | |
| | | | | | | | | | |
*32.1 | | (a) | | Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the | | | | | | |
| | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
No. | | Filer | | Description | | Form | | Exhibit | | Filing
Date |
| | | | | | | | | | |
3.1 | | (a) | | Third Amended and Restated Certificate of Incorporation of the Registrant. | | 8-K | | 3.2 | | 6/10/16 |
| | | | | | | | | | |
3.2 | | (a) | | Fifth Amended and Restated Bylaws of the Registrant. | | 8-K | | 3.1 | | 2/1/16 |
| | | | | | | | | | |
4 | | (a) | | Specimen Certificate for shares of Common Stock of the Registrant. | | 10-Q | | 4 | | 8/8/03 |
| | | | | | | | | | |
10.1 | | (a) | | Second Amendment to Amended and Restated Credit Agreement, dated as of July 5, 2018, by and among Alliance Data Systems Corporation, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 10-Q | | 10.2 | | 8/7/18 |
| | | | | | | | | | |
10.2 | | (b) (c) (d) | | Series 2018-B Indenture Supplement, dated as of September 27, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 9/28/18 |
| | | | | | | | | | |
*10.3 | | (a) | | Second Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 28, 2018, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | | | | | |
| | | | | | | | | | |
*31.1 | | (a) | | Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | | | | | | |
| | | | | | | | | | |
*31.2 | | (a) | | Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | | | | | | |
| | | | | | | | | | |
*32.1 | | (a) | | Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | | | | | | |
| | | | | | | | | | |
*32.2 | | (a) | | Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | | | | | | |
| | | | | | | | | | |
+ | Management contract, compensatory plan or arrangement |
# | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Alliance Data hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission. |
(a) | Alliance Data Systems Corporation |
(c) | World Financial Network Credit Card Master Trust |
(d) | World Financial Network Credit Card Master Note Trust |
*Filed herewith
+Management contract, compensatory plan or arrangement
(a)Alliance Data Systems Corporation
(b)WFN Credit Company
(c)World Financial Network Credit Card Master Trust
(d)World Financial Network Credit Card Master Note Trust
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ALLIANCE DATA SYSTEMS CORPORATION |
| | |
| | By: | /s/ EDWARD J. HEFFERNANTIMOTHY P. KING |
| | | Edward J. HeffernanTimothy P. King
|
| | | President and Chief Executive Officer
|
| | | |
Date: November 6, 2018
| | | |
| | By:
| /s/ CHARLES L. HORN
|
| | | Charles L. Horn
|
| | | Executive Vice President and Chief Financial Officer |
| | | |
Date: NovemberAugust 6, 20182019 | | | |
| | By: | /s/ LAURA SANTILLAN |
| | | Laura Santillan |
| | | Senior Vice President and Chief Accounting Officer |
| | | |
Date: August 6, 2019 | | | |