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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2018

 

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from          to          

 

Commission File Number: 001-15749


ALLIANCE DATA SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

 

\\teams.alliancedata.com@SSL\DavWWWRoot\sites\CorporateFinance\Financial-Reporting\SEC Filings\10-K\2016\Support Schedules\Cover Page\ADS logo.jpg

 

 

 

Delaware

31-1429215

(State or other jurisdiction of incorporation 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☐

(Do not check if a smaller reporting company)

 

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐     No ☑

 

As of April 25, 2018, 55,399,753 shares of common stock were outstanding.

 

 

 


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

INDEX

 

    

 

    

Page
Number

 

 

Part I  FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

36

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

44

 

 

 

 

 

 

 

Part II  OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

45

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

45

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

45

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

45

 

 

 

 

 

Item 5. 

 

Other Information

 

45

 

 

 

 

 

Item 6. 

 

Exhibits

 

46

 

 

 

 

 

SIGNATURES 

 

48

 

2


 

Index

PART I

Item 1.  Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2018

    

2017

 

 

(In millions, except per share amounts)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,549.5

 

$

4,190.0

Accounts receivable, net, less allowance for doubtful accounts ($9.4 and $6.7 at March 31, 2018 and December 31, 2017 respectively)

 

 

699.4

 

 

822.3

Credit card and loan receivables:

 

 

 

 

 

 

Credit card receivables – restricted for securitization investors

 

 

13,578.8

 

 

14,293.9

Other credit card and loan receivables

 

 

4,240.3

 

 

4,319.9

Total credit card and loan receivables

 

 

17,819.1

 

 

18,613.8

Allowance for loan loss

 

 

(1,169.3)

 

 

(1,119.3)

Credit card and loan receivables, net

 

 

16,649.8

 

 

17,494.5

Credit card and loan receivables held for sale

 

 

950.3

 

 

1,026.3

Inventories, net

 

 

256.3

 

 

234.1

Other current assets

 

 

783.5

 

 

348.9

Redemption settlement assets, restricted

 

 

581.7

 

 

589.5

Total current assets

 

 

23,470.5

 

 

24,705.6

Property and equipment, net

 

 

614.1

 

 

613.9

Deferred tax asset, net

 

 

26.3

 

 

28.1

Intangible assets, net

 

 

739.8

 

 

800.6

Goodwill

 

 

3,890.6

 

 

3,880.1

Other non-current assets

 

 

651.6

 

 

656.5

Total assets

 

$

29,392.9

 

$

30,684.8

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Accounts payable

 

$

593.5

 

$

651.2

Accrued expenses

 

 

303.1

 

 

442.8

Current portion of deposits

 

 

6,125.1

 

 

6,366.2

Current portion of non-recourse borrowings of consolidated securitization entities

 

 

2,732.5

 

 

1,339.9

Current portion of long-term and other debt

 

 

116.1

 

 

131.3

Other current liabilities

 

 

310.8

 

 

368.7

Deferred revenue

 

 

804.4

 

 

846.6

Total current liabilities

 

 

10,985.5

 

 

10,146.7

Deferred revenue

 

 

113.6

 

 

120.3

Deferred tax liability, net

 

 

189.8

 

 

211.2

Deposits

 

 

4,359.9

 

 

4,564.7

Non-recourse borrowings of consolidated securitization entities

 

 

5,389.0

 

 

7,467.4

Long-term and other debt

 

 

5,973.1

 

 

5,948.3

Other liabilities

 

 

380.6

 

 

370.9

Total liabilities

 

 

27,391.5

 

 

28,829.5

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value; authorized, 200.0 shares; issued, 112.9 shares and 112.8 shares at March 31, 2018 and December 31, 2017, respectively

 

 

1.1

 

 

1.1

Additional paid-in capital

 

 

3,101.7

 

 

3,099.8

Treasury stock, at cost, 57.4 shares and 57.4 shares at March 31, 2018 and December 31, 2017, respectively

 

 

(5,272.5)

 

 

(5,272.5)

Retained earnings

 

 

4,307.6

 

 

4,167.1

Accumulated other comprehensive loss

 

 

(136.5)

 

 

(140.2)

Total stockholders’ equity

 

 

2,001.4

 

 

1,855.3

Total liabilities and stockholders' equity

 

$

29,392.9

 

$

30,684.8

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

    

2017

 

 

(In millions, except per share amounts)

Revenues

 

 

 

 

 

 

Services

 

$

595.1

 

$

611.6

Redemption

 

 

131.9

 

 

250.9

Finance charges, net

 

 

1,157.2

 

 

1,016.5

Total revenue

 

 

1,884.2

 

 

1,879.0

Operating expenses

 

 

 

 

 

 

Cost of operations (exclusive of depreciation and amortization disclosed separately below)

 

 

1,013.9

 

 

1,042.1

Provision for loan loss

 

 

337.7

 

 

315.1

General and administrative

 

 

33.1

 

 

44.6

Depreciation and other amortization

 

 

47.7

 

 

44.7

Amortization of purchased intangibles

 

 

74.0

 

 

80.1

Total operating expenses

 

 

1,506.4

 

 

1,526.6

Operating income

 

 

377.8

 

 

352.4

Interest expense

 

 

 

 

 

 

Securitization funding costs

 

 

52.1

 

 

35.2

Interest expense on deposits

 

 

35.5

 

 

26.0

Interest expense on long-term and other debt, net

 

 

71.6

 

 

64.0

Total interest expense, net

 

 

159.2

 

 

125.2

Income before income taxes

 

 

218.6

 

 

227.2

Provision for income taxes

 

 

54.7

 

 

80.8

Net income

 

$

163.9

 

$

146.4

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

Basic (Note 3)

 

$

2.96

 

$

2.60

Diluted (Note 3)

 

$

2.95

 

$

2.58

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

Basic (Note 3)

 

 

55.4

 

 

56.4

Diluted (Note 3)

 

 

55.7

 

 

56.7

 

 

 

 

 

 

 

Dividends declared per share:

 

$

0.57

 

$

0.52

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

    

2017

 

 

(In millions)

Net income

 

$

163.9

 

$

146.4

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

Unrealized gain (loss) on securities available-for-sale 

 

 

(3.0)

 

 

0.7

Tax benefit

 

 

1.0

 

 

 —

Unrealized gain (loss) on securities available-for-sale, net of tax 

 

 

(2.0)

 

 

0.7

 

 

 

 

 

 

 

Unrealized gain (loss) on cash flow hedges

 

 

(0.1)

 

 

(0.4)

Tax benefit

 

 

 —

 

 

0.1

Unrealized gain (loss) on cash flow hedges, net of tax

 

 

(0.1)

 

 

(0.3)

 

 

 

 

 

 

 

Unrealized gain (loss) on net investment hedges 

 

 

(15.4)

 

 

(5.1)

Tax benefit

 

 

3.7

 

 

1.5

Unrealized gain (loss) on net investment hedges, net of tax

 

 

(11.7)

 

 

(3.6)

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

17.5

 

 

5.0

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

3.7

 

 

1.8

 

 

 

 

 

 

 

Total comprehensive income, net of tax

 

$

167.6

 

$

148.2

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

    

2017

 

 

(In millions)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

163.9

 

$

146.4

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

121.7

 

 

124.8

Deferred income taxes

 

 

(16.2)

 

 

(12.2)

Provision for loan loss

 

 

337.7

 

 

315.1

Non-cash stock compensation

 

 

25.5

 

 

23.5

Amortization of deferred financing costs

 

 

11.4

 

 

9.5

Change in deferred revenue

 

 

(25.7)

 

 

(23.0)

Change in other operating assets and liabilities

 

 

(82.3)

 

 

(143.1)

Originations of credit card and loan receivables held for sale

 

 

(2,271.7)

 

 

(1,852.2)

Sales of credit card and loan receivables held for sale

 

 

2,312.8

 

 

1,847.9

Other

 

 

72.8

 

 

35.4

Net cash provided by operating activities

 

 

649.9

 

 

472.1

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Change in redemption settlement assets

 

 

(14.5)

 

 

(137.0)

Change in credit card and loan receivables

 

 

470.5

 

 

523.5

Capital expenditures

 

 

(44.7)

 

 

(46.6)

Purchases of other investments

 

 

(25.0)

 

 

(0.1)

Maturities/sales of other investments

 

 

6.0

 

 

5.9

Other

 

 

0.6

 

 

(4.3)

Net cash provided by investing activities

 

 

392.9

 

 

341.4

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Borrowings under debt agreements

 

 

685.0

 

 

1,763.2

Repayments of borrowings

 

 

(706.5)

 

 

(1,098.9)

Non-recourse borrowings of consolidated securitization entities

 

 

905.0

 

 

180.0

Repayments/maturities of non-recourse borrowings of consolidated securitization entities

 

 

(1,590.0)

 

 

(945.0)

Net decrease in deposits

 

 

(448.4)

 

 

(188.7)

Payment of deferred financing costs

 

 

(3.5)

 

 

(7.4)

Dividends paid

 

 

(31.7)

 

 

(29.0)

Purchase of treasury shares

 

 

 —

 

 

(415.0)

Other

 

 

(23.7)

 

 

(22.1)

Net cash used in financing activities

 

 

(1,213.8)

 

 

(762.9)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(1.7)

 

 

2.4

Change in cash, cash equivalents and restricted cash

 

 

(172.7)

 

 

53.0

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

 

$

4,142.0

 

$

2,021.5

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

Interest paid

 

$

159.2

 

$

105.0

Income taxes paid, net

 

$

56.7

 

$

17.5

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 

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, filed with the SEC on February 27, 2018.

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 flow 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 the unaudited condensed consolidated statements of cash flows:

 

 

 

 

 

 

 

 

    

March 31, 2018

    

March 31, 2017

 

 

(In millions)

Cash and cash equivalents

 

$

3,549.5

 

$

1,866.8

Restricted cash included within other current assets (1)

 

 

528.1

 

 

47.0

Restricted cash included within redemption settlement assets, restricted

 

 

64.4

 

 

107.7

Total cash, cash equivalents and restricted cash

 

$

4,142.0

 

$

2,021.5


(1)

Includes $489.2 million in principal accumulation at March 31, 2018 for the repayment of non-recourse borrowings of consolidated securitized debt that matured in April 2018.

 

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 permitted. Currently, the new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. However, in January 2018, the FASB issued an Exposure Draft which provides for 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 Company is evaluating the impact that adoption of ASU 2016-02 will have on its consolidated financial statements, 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.

7


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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 is evaluating the impact that adoption of ASU 2016-13 will have on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements 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 is evaluating the impact that adoption of ASU 2017-12 will have 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 as a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact that adoption of ASU 2018-02 will have on its consolidated financial statements.

Recently Adopted Accounting Standards

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” Accounting Standards Codification (“ASC”) 606, which requires an entity 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 606 using a full retrospective or modified retrospective method.

 

During 2017, the Company completed its evaluation of ASC 606, including the impact on its processes and controls, and differences in the timing and/or method of revenue recognition. As a result, the Company identified changes to and modified certain of its accounting policies and practices. Although there were no significant changes to the Company’s accounting systems or controls upon adoption of ASC 606, the Company modified certain of its existing controls to incorporate the revisions made to its accounting policies and practices.

 

The Company adopted the standard on January 1, 2018 using the modified retrospective method. The Company’s adoption of this standard 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 the current and new standard; however, the Company noted the following impacts:

 

·

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:

 

8


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

 

    

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

Total Assets:

 

 

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

Total Liabilities:

 

 

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, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires that equity investments be measured at fair value with changes 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 elect the fair value option for financial liabilities to recognize changes in fair value related to instrument-specific credit risk in other comprehensive income. Finally, entities must assess valuation allowances for deferred tax assets related to available-for-sale debt securities in combination with their other deferred tax assets. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. 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 loss 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, 2018 did not have a material impact on its consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods 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.

9


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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, “Revenue Recognition.” ASC 606 does not apply to financial instruments and other contractual rights or obligations.

Under ASC 606, revenue is recognized when control of 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 three segments—LoyaltyOne, Epsilon and Card Services, and are listed below. The following presents revenue disaggregated by major source, as well as geographic region which is based on the location of the subsidiary that generally correlates with the location of the customer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate/

 

 

 

 

 

 

Three months ended March 31, 2018

    

LoyaltyOne

    

Epsilon

    

Card Services

    

Other

    

Eliminations

    

Total

 

 

(In millions)

Disaggregation of Revenue by Major Source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coalition loyalty program

 

$

89.9

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

89.9

Short-term loyalty programs

 

 

114.2

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

114.2

Technology services

 

 

 —

 

 

246.0

 

 

 —

 

 

 —

 

 

(6.4)

 

 

239.6

Digital Media services

 

 

 —

 

 

178.2

 

 

 —

 

 

 —

 

 

(0.3)

 

 

177.9

Agency services

 

 

 —

 

 

85.2

 

 

 —

 

 

 —

 

 

(0.1)

 

 

85.1

Servicing fees, net

 

 

 —

 

 

 —

 

 

(2.0)

 

 

 —

 

 

 —

 

 

(2.0)

Other

 

 

19.5

 

 

 —

 

 

 —

 

 

0.2

 

 

(0.1)

 

 

19.6

Revenue from contracts with customers

 

$

223.6

 

$

509.4

 

$

(2.0)

 

$

0.2

 

$

(6.9)

 

$

724.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance charges, net

 

 

 —

 

 

 —

 

 

1,157.2

 

 

 —

 

 

 —

 

 

1,157.2

Investment income

 

 

2.7

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2.7

Total

 

$

226.3

 

$

509.4

 

$

1,155.2

 

$

0.2

 

$

(6.9)

 

$

1,884.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate/

 

 

 

 

 

 

Three months ended March 31, 2018

    

LoyaltyOne

    

Epsilon

    

Card Services

    

Other

    

Eliminations

    

Total

 

 

(In millions)

Disaggregation of Revenue by Geographic Region:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

5.7

 

$

486.5

 

$

1,155.2

 

$

0.2

 

$

(6.9)

 

$

1,640.7

Canada

 

 

105.6

 

 

3.7

 

 

 —

 

 

 —

 

 

 —

 

 

109.3

Europe, Middle East and Africa

 

 

97.0

 

 

16.8

 

 

 —

 

 

 —

 

 

 —

 

 

113.8

Asia Pacific

 

 

16.6

 

 

2.4

 

 

 —

 

 

 —

 

 

 —

 

 

19.0

Other

 

 

1.4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1.4

Total

 

$

226.3

 

$

509.4

 

$

1,155.2

 

$

0.2

 

$

(6.9)

 

$

1,884.2

 

10


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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 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 March 31, 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.

11


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

Contract Liabilities. The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES reward mile and the reward products for its short-term loyalty programs. A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Revenue

 

    

Service

    

Redemption

    

Total

 

 

(In millions)

Balance at January 1, 2018

 

$

283.8

 

$

683.1

 

$

966.9

Cash proceeds

 

 

44.3

 

 

74.3

 

 

118.6

Revenue recognized (1)

 

 

(54.4)

 

 

(90.3)

 

 

(144.7)

Other

 

 

 —

 

 

0.3

 

 

0.3

Effects of foreign currency translation

 

 

(6.7)

 

 

(16.4)

 

 

(23.1)

Balance at March 31, 2018

 

$

267.0

 

$

651.0

 

$

918.0

Amounts recognized in the consolidated balance sheets:

 

 

  

 

 

  

 

 

  

Deferred revenue (current)

 

$

153.4

 

$

651.0

 

$

804.4

Deferred revenue (non-current)

 

$

113.6

 

$

 —

 

$

113.6


(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 $125.2 million in 2018, $93.2 million in 2019, $44.0 million in 2020, and $4.6 million in 2021.

 

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, 2018 was $87.5 million and the closing balance as of March 31, 2018 was $99.2 million, with the change due to cash payments received in advance of program performance, offset in part by revenue recognized of approximately $89.6 million during the three months ended March 31, 2018.

 

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

 

     Professional services

 

Over time

 

Recognized over time as the services are performed.

services

 

     Email deployment

 

Point in time

 

Recognized at deployment.

 

 

     Customer lifecycle marketing

 

Point in time

 

Recognized at delivery.

 

 

 

 

 

 

 

Digital Media services

 

     Digital campaign advertisement

     Affiliate marketing advertisements

 

Over time

 

Point in time

 

Recognized on an output measure of the digital advertisement.

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.

 

12


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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 March 31, 2018 was $19.9 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 March 31, 2018, the remaining unamortized contract costs were $6.3 million. 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.

13


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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 March 31, 2018, the remaining unamortized contract costs were $365.3 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 $17.2 million for the three months ended March 31, 2018. Amortization of contract costs recorded to cost of operations expense totaled $2.5 million for the three months ended March 31, 2018. 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.

3. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2018

    

2017

 

 

(In millions except per share amounts)

Numerator:

 

 

 

 

 

 

Net income

 

$

163.9

 

$

146.4

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average shares, basic

 

 

55.4

 

 

56.4

Weighted average effect of dilutive securities:

 

 

 

 

 

 

Net effect of dilutive stock options and unvested restricted stock

 

 

0.3

 

 

0.3

Denominator for diluted calculation

 

 

55.7

 

 

56.7

 

 

 

 

 

 

 

Basic net income per share

 

$

2.96

 

$

2.60

Diluted net income per share

 

$

2.95

 

$

2.58

 

For the three months ended March 31, 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.

14


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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 increases the Company’s presence in the jewelry vertical. The Company determined these acquired activities and assets constituted a business under ASC 805, “Business Combinations,” based on the nature 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.

The following table summarizes the fair values of the assets acquired and the liabilities assumed in the Signet acquisition 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

 

5. CREDIT CARD AND LOAN RECEIVABLES

The Company’s credit card and loan receivables are the only portfolio segment or class of financing receivables. Quantitative information about the components of credit card and loan receivables is presented in the table below:

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2018

    

2017

 

 

(In millions)

Principal receivables

 

$

16,940.1

 

$

17,705.1

Billed and accrued finance charges

 

 

851.6

 

 

887.0

Other

 

 

27.4

 

 

21.7

Total credit card and loan receivables

 

 

17,819.1

 

 

18,613.8

Less: Credit card receivables – restricted for securitization investors

 

 

13,578.8

 

 

14,293.9

Other credit card and loan receivables

 

$

4,240.3

 

$

4,319.9

15


 

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 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.

The following table presents the Company’s allowance for loan loss for the periods indicated:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

    

2017

 

 

(In millions)

Balance at beginning of period

 

$

1,119.3

 

$

948.0

Provision for loan loss

 

 

337.7

 

 

315.1

Allowance associated with credit card and loan receivables transferred to held for sale

 

 

(6.6)

 

 

 —

Change in estimate for uncollectible unpaid interest and fees

 

 

15.0

 

 

5.0

Recoveries

 

 

31.3

 

 

47.9

Principal charge-offs

 

 

(327.4)

 

 

(295.8)

Balance at end of period

 

$

1,169.3

 

$

1,020.2

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‑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 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 $199.5 million and $156.7 million for the three months ended March 31, 2018 and 2017, respectively.

Delinquencies

A credit card account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder’s statement. It is the Company’s policy to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the

16


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

% of

 

December 31, 

 

% of

 

 

    

2018

    

Total

    

2017

    

Total

 

 

 

(In millions, except percentages)

 

Receivables outstanding - principal

 

$

16,940.1

 

100.0

%  

$

17,705.1

 

100.0

%

Principal receivables balances contractually delinquent:

 

 

 

 

 

 

 

 

 

 

 

31 to 60 days

 

 

283.9

 

1.7

%  

 

301.5

 

1.7

%

61 to 90 days

 

 

203.0

 

1.2

 

 

191.3

 

1.1

 

91 or more days