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Index

 

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 September 30, 2016

 

 

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)

 

 

 

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, or a smaller reporting company.   See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☐

 

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 26, 2016, 57,759,199 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 September 30, 2016 and December 31, 2015

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

 

Item 2. 

 

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

 

37 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

50 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

50 

 

 

 

 

 

 

 

Part II  OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

51 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

51 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

53 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

53 

 

 

 

 

 

Item 5. 

 

Other Information

 

53 

 

 

 

 

 

Item 6. 

 

Exhibits

 

54 

 

 

 

 

 

SIGNATURES 

 

56 

 

2


 

Index

PART I

Item 1.  Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

    

2016

    

2015

 

 

 

 

(In millions, except per share amounts)

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,500.5

 

$

1,168.0

 

 

Trade receivables, less allowance for doubtful accounts ($7.3 and $4.0 at September 30, 2016 and December 31, 2015, respectively)

 

 

687.0

 

 

706.5

 

 

Credit card and loan receivables:

 

 

 

 

 

 

 

 

Credit card receivables – restricted for securitization investors

 

 

9,928.1

 

 

10,592.4

 

 

Other credit card and loan receivables

 

 

4,687.7

 

 

3,207.1

 

 

Total credit card and loan receivables

 

 

14,615.8

 

 

13,799.5

 

 

Allowance for loan loss

 

 

(874.4)

 

 

(741.6)

 

 

Credit card and loan receivables, net

 

 

13,741.4

 

 

13,057.9

 

 

Credit card and loan receivables held for sale

 

 

525.1

 

 

95.5

 

 

Deferred tax asset, net

 

 

 —

 

 

288.1

 

 

Inventories, net

 

 

278.0

 

 

228.0

 

 

Other current assets

 

 

441.1

 

 

249.8

 

 

Redemption settlement assets, restricted

 

 

428.7

 

 

456.6

 

 

Total current assets

 

 

17,601.8

 

 

16,250.4

 

 

Property and equipment, net

 

 

583.4

 

 

576.7

 

 

Deferred tax asset, net

 

 

4.6

 

 

0.6

 

 

Intangible assets, net

 

 

1,077.0

 

 

1,203.7

 

 

Goodwill

 

 

3,837.8

 

 

3,814.1

 

 

Other non-current assets

 

 

535.2

 

 

504.4

 

 

Total assets

 

$

23,639.8

 

$

22,349.9

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

429.7

 

$

442.4

 

 

Accrued expenses

 

 

344.9

 

 

566.5

 

 

Current portion of deposits

 

 

3,911.6

 

 

2,980.3

 

 

Current portion of non-recourse borrowings of consolidated securitization entities

 

 

1,324.1

 

 

1,049.3

 

 

Current portion of long-term and other debt

 

 

421.7

 

 

369.4

 

 

Other current liabilities

 

 

379.4

 

 

294.5

 

 

Deferred revenue

 

 

628.8

 

 

699.0

 

 

Deferred tax liability, net

 

 

 —

 

 

1.7

 

 

Total current liabilities

 

 

7,440.2

 

 

6,403.1

 

 

Deferred revenue

 

 

147.1

 

 

145.9

 

 

Deferred tax liability, net

 

 

294.9

 

 

631.5

 

 

Deposits

 

 

3,702.4

 

 

2,625.6

 

 

Non-recourse borrowings of consolidated securitization entities

 

 

4,575.2

 

 

5,433.4

 

 

Long-term and other debt

 

 

5,404.3

 

 

4,648.0

 

 

Other liabilities

 

 

291.9

 

 

285.0

 

 

Total liabilities

 

 

21,856.0

 

 

20,172.5

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 —

 

 

167.4

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; authorized, 200.0 shares; issued, 112.4 shares and 112.1 shares at September 30, 2016 and December 31, 2015, respectively

 

 

1.1

 

 

1.1

 

 

Additional paid-in capital

 

 

3,019.2

 

 

2,981.0

 

 

Treasury stock, at cost, 54.6 shares and 51.3 shares at September 30, 2016 and December 31, 2015, respectively

 

 

(4,620.1)

 

 

(3,927.3)

 

 

Retained earnings

 

 

3,514.2

 

 

3,092.5

 

 

Accumulated other comprehensive loss

 

 

(130.6)

 

 

(137.3)

 

 

Total stockholders’ equity

 

 

1,783.8

 

 

2,010.0

 

 

Total liabilities and equity

 

$

23,639.8

 

$

22,349.9

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(In millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction

 

$

72.4

 

$

83.1

 

$

223.8

 

$

263.2

 

Redemption

 

 

296.3

 

 

220.9

 

 

836.6

 

 

747.2

 

Finance charges, net

 

 

954.9

 

 

737.9

 

 

2,645.2

 

 

2,101.4

 

Marketing services

 

 

516.3

 

 

499.0

 

 

1,437.4

 

 

1,435.5

 

Other revenue

 

 

45.7

 

 

48.2

 

 

167.5

 

 

143.6

 

Total revenue

 

 

1,885.6

 

 

1,589.1

 

 

5,310.5

 

 

4,690.9

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,045.6

 

 

901.0

 

 

3,077.6

 

 

2,787.5

 

Provision for loan loss

 

 

251.3

 

 

171.7

 

 

651.0

 

 

461.9

 

General and administrative

 

 

41.0

 

 

40.9

 

 

111.4

 

 

112.0

 

Regulatory settlement

 

 

 —

 

 

64.6

 

 

 —

 

 

64.6

 

Depreciation and other amortization

 

 

42.6

 

 

36.5

 

 

123.5

 

 

105.0

 

Amortization of purchased intangibles

 

 

84.1

 

 

86.9

 

 

261.2

 

 

262.1

 

Total operating expenses

 

 

1,464.6

 

 

1,301.6

 

 

4,224.7

 

 

3,793.1

 

Operating income

 

 

421.0

 

 

287.5

 

 

1,085.8

 

 

897.8

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitization funding costs

 

 

31.1

 

 

23.1

 

 

91.5

 

 

71.5

 

Interest expense on deposits

 

 

22.6

 

 

13.7

 

 

60.0

 

 

37.1

 

Interest expense on long-term and other debt, net

 

 

54.6

 

 

45.3

 

 

159.3

 

 

132.2

 

Total interest expense, net

 

 

108.3

 

 

82.1

 

 

310.8

 

 

240.8

 

Income before income taxes

 

$

312.7

 

$

205.4

 

$

775.0

 

$

657.0

 

Provision for income taxes

 

 

105.2

 

 

75.0

 

 

268.0

 

 

231.7

 

Net income

 

$

207.5

 

$

130.4

 

$

507.0

 

$

425.3

 

Less: Net income attributable to non-controlling interest

 

 

 —

 

 

2.0

 

 

1.8

 

 

3.0

 

Net income attributable to common stockholders

 

$

207.5

 

$

128.4

 

$

505.2

 

$

422.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (Note 2)

 

$

3.56

 

$

2.09

 

$

7.15

 

$

6.55

 

Diluted (Note 2)

 

$

3.55

 

$

2.08

 

$

7.12

 

$

6.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (Note 2)

 

 

58.3

 

 

61.4

 

 

59.0

 

 

62.1

 

Diluted (Note 2)

 

 

58.4

 

 

61.8

 

 

59.2

 

 

62.6

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

207.5

 

$

130.4

 

$

507.0

 

$

425.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

0.2

 

 

1.1

 

 

5.3

 

 

(0.5)

 

Tax benefit (expense)

 

 

 —

 

 

(0.7)

 

 

(1.4)

 

 

(0.6)

 

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

 

 

0.2

 

 

0.4

 

 

3.9

 

 

(1.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on cash flow hedges

 

 

(0.8)

 

 

1.9

 

 

(2.6)

 

 

(1.9)

 

Tax benefit (expense)

 

 

0.2

 

 

(0.4)

 

 

0.7

 

 

0.5

 

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

 

 

(0.6)

 

 

1.5

 

 

(1.9)

 

 

(1.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on net investment hedge 

 

 

(4.1)

 

 

 —

 

 

(11.4)

 

 

 —

 

Tax benefit (expense)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Unrealized loss on net investment hedge, net of tax

 

 

(4.1)

 

 

 —

 

 

(11.4)

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

5.1

 

 

4.6

 

 

16.1

 

 

(39.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

0.6

 

 

6.5

 

 

6.7

 

 

(42.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, net of tax

 

$

208.1

 

$

136.9

 

$

513.7

 

$

382.9

 

Less: Comprehensive income attributable to non-controlling interest

 

 

 —

 

 

2.4

 

 

1.2

 

 

3.4

 

Comprehensive income attributable to common stockholders

 

$

208.1

 

$

134.5

 

$

512.5

 

$

379.5

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 30, 

    

 

    

2016

    

2015

 

 

 

(In millions)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

507.0

 

$

425.3

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

384.7

 

 

367.1

 

Deferred income taxes

 

 

(57.0)

 

 

(62.8)

 

Provision for loan loss

 

 

651.0

 

 

461.9

 

Non-cash stock compensation

 

 

59.5

 

 

73.3

 

Amortization of deferred financing costs

 

 

25.3

 

 

23.5

 

Change in deferred revenue

 

 

(114.1)

 

 

(34.2)

 

Change in contingent liability

 

 

 —

 

 

(99.6)

 

Change in other operating assets and liabilities, net of acquisitions

 

 

(238.0)

 

 

(83.0)

 

Originations of credit card and loan receivables held for sale

 

 

(5,182.7)

 

 

(4,569.8)

 

Sales of credit card and loan receivables held for sale

 

 

5,186.6

 

 

4,556.3

 

Other

 

 

106.7

 

 

(26.8)

 

Net cash provided by operating activities

 

 

1,329.0

 

 

1,031.2

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Change in redemption settlement assets

 

 

55.4

 

 

(16.4)

 

Change in cash collateral, restricted

 

 

2.3

 

 

18.0

 

Change in restricted cash

 

 

(126.8)

 

 

(0.4)

 

Change in credit card and loan receivables

 

 

(1,048.8)

 

 

(913.8)

 

Purchase of credit card portfolios

 

 

(903.4)

 

 

 —

 

Proceeds from sale of credit card portfolios

 

 

5.9

 

 

26.9

 

Payments for acquired businesses, net of cash

 

 

 —

 

 

(45.4)

 

Capital expenditures

 

 

(158.3)

 

 

(140.1)

 

Purchases of other investments

 

 

(13.6)

 

 

(38.8)

 

Maturities/sales of other investments

 

 

38.6

 

 

8.0

 

Other

 

 

(2.9)

 

 

(1.0)

 

Net cash used in investing activities

 

 

(2,151.6)

 

 

(1,103.0)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings under debt agreements

 

 

3,086.5

 

 

2,426.4

 

Repayments of borrowings

 

 

(2,305.0)

 

 

(1,528.9)

 

Payment of acquisition-related contingent consideration

 

 

 —

 

 

(205.9)

 

Acquisition of non-controlling interest

 

 

(360.7)

 

 

(87.4)

 

Issuances of deposits

 

 

3,727.5

 

 

2,191.9

 

Repayments of deposits

 

 

(1,714.4)

 

 

(1,743.0)

 

Non-recourse borrowings of consolidated securitization entities

 

 

2,567.5

 

 

2,570.0

 

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

 

 

(3,150.0)

 

 

(2,788.8)

 

Payment of deferred financing costs

 

 

(20.7)

 

 

(16.4)

 

Purchase of treasury shares

 

 

(692.8)

 

 

(856.9)

 

Other

 

 

12.7

 

 

31.8

 

Net cash provided by (used in) financing activities

 

 

1,150.6

 

 

(7.2)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

4.5

 

 

(20.9)

 

Change in cash and cash equivalents

 

 

332.5

 

 

(99.9)

 

Cash and cash equivalents at beginning of period

 

 

1,168.0

 

 

1,077.2

 

Cash and cash equivalents at end of period

 

$

1,500.5

 

$

977.3

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Interest paid

 

$

287.2

 

$

223.7

 

Income taxes paid, net

 

$

342.7

 

$

225.9

 

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, 2015, filed with the SEC on February 25, 2016.

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.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” 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 ASU 2014-09 using a full retrospective approach or report the cumulative effect as of the date of adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and to permit early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is evaluating the impact that adoption of ASU 2014-09 will have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory." ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.

In January 2016, the FASB issued ASU No. 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 is evaluating the impact that adoption of ASU 2016-01 will have on its consolidated financial statements.

7


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

In February 2016, the FASB issued ASU No. 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 statement of income. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is evaluating the impact that adoption of ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies certain aspects of share-based transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact that adoption of ASU 2016-09 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to utilize a financial instrument impairment model that is based on expected losses over the life of the exposure rather than a model based on an incurred loss approach to establish an allowance. 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 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 will make eight targeted changes on 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 is evaluating the impact that adoption of ASU 2016-15 will have on its consolidated financial statements.

Recently Adopted Accounting Standards

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis,” which amended the consolidation requirements in Accounting Standards Codification (“ASC”) 810, “Consolidation.” ASU 2015-02 makes targeted amendments to the current consolidation guidance for VIEs. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015, with retrospective or modified retrospective application allowed. The Company adopted this standard as of January 1, 2016 with modified retrospective application. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Subsequently, in August 2015, the FASB issued ASU 2015-15, “Imputation of Interest,” which adds SEC staff guidance on the presentation of debt issuance costs related to line-of-credit arrangements, allowing for the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company maintained the deferral and presentation of these line-of-credit debt issuance costs as an asset. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with retrospective application required. The Company adopted this standard as of January 1, 2016 with retrospective application. Under ASU 2015-03 and ASU 2015-15, unamortized debt issuance costs of $72.0 million were reclassified from other non-current assets to a reduction of debt as of December 31, 2015 in the consolidated balance sheets.

8


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 provides guidance about whether a cloud computing arrangement includes a software license and is effective for interim and annual reporting periods beginning after December 15, 2015, with retrospective or prospective application allowed. The Company adopted this standard as of January 1, 2016 with prospective application. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for interim and annual periods beginning after December 15, 2016, with retrospective or prospective application allowed and early adoption permitted. The Company’s prospective adoption of this standard resulted in a reduction in current deferred tax assets of $288.1 million, a reduction in current deferred tax liabilities of $1.7 million, an increase in non-current deferred tax assets of $0.2 million and a reduction in non-current deferred tax liabilities of $286.2 million as of January 1, 2016. Prior period amounts were not restated.

2. 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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(In millions except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

207.5

 

$

128.4

 

$

505.2

 

$

422.3

 

Less: Accretion of redeemable non-controlling interest

 

 

 —

 

 

 —

 

 

83.5

 

 

15.2

 

Net income attributable to common stockholders after accretion of redeemable non-controlling interest

 

$

207.5

 

$

128.4

 

$

421.7

 

$

407.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares, basic

 

 

58.3

 

 

61.4

 

 

59.0

 

 

62.1

 

Weighted average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net effect of dilutive stock options and unvested restricted stock

 

 

0.1

 

 

0.4

 

 

0.2

 

 

0.5

 

Denominator for diluted calculation

 

 

58.4

 

 

61.8

 

 

59.2

 

 

62.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.56

 

$

2.09

 

$

7.15

 

$

6.55

 

Diluted

 

$

3.55

 

$

2.08

 

$

7.12

 

$

6.51

 

See Note 12, “Redeemable Non-Controlling Interest,” for additional information regarding accretion of the redeemable non-controlling interest.

For each of the three and nine months ended September 30, 2016, approximately 0.2 million restricted stock units were excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive. There were no anti-dilutive shares excluded from the calculation of weighted average dilutive common shares for each of the three months and nine months ended September 30, 2015.

 

9


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

3. 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:

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

    

2016

    

2015

 

 

 

(In millions)

 

Principal receivables

 

$

13,898.1

 

$

13,196.4

 

Billed and accrued finance charges

 

 

651.5

 

 

537.8

 

Other credit card receivables

 

 

66.2

 

 

65.3

 

Total credit card and loan receivables

 

 

14,615.8

 

 

13,799.5

 

Less: Credit card receivables – restricted for securitization investors

 

 

9,928.1

 

 

10,592.4

 

Other credit card and loan receivables

 

$

4,687.7

 

$

3,207.1

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(In millions)

 

Balance at beginning of period

 

$

782.6

 

$

623.3

 

$

741.6

 

$

570.2

 

Provision for loan loss

 

 

251.3

 

 

171.7

 

 

651.0

 

 

461.9

 

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

 

 

 —

 

 

 —

 

 

(15.0)

 

 

 —

 

Change in estimate for uncollectible unpaid interest and fees

 

 

5.0

 

 

 —

 

 

10.0

 

 

4.5

 

Recoveries

 

 

73.6

 

 

48.8

 

 

183.5

 

 

129.6

 

Principal charge-offs

 

 

(238.1)

 

 

(172.6)

 

 

(696.7)

 

 

(495.0)

 

Balance at end of period

 

$

874.4

 

$

671.2

 

$

874.4

 

$

671.2

 

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.

10


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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 $126.4 million and $88.9 million for the three months ended September 30, 2016 and 2015, respectively, and $355.2 million and $258.2 million for the nine months ended September 30, 2016 and 2015, respectively.

Delinquencies

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

The following table presents the delinquency trends of the Company’s credit card and loan receivables portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

% of

    

December 31, 

    

% of

 

 

    

2016

    

Total

    

2015

    

Total

 

 

 

(In millions, except percentages)

 

Receivables outstanding - principal

 

$

13,898.1

 

100.0

%

$

13,196.4

 

100.0

%

Principal receivables balances contractually delinquent:

 

 

 

 

 

 

 

 

 

 

 

31 to 60 days

 

 

226.1

 

1.6

%

 

178.5

 

1.4

%

61 to 90 days

 

 

156.9

 

1.1

 

 

124.1

 

0.9

 

91 or more days

 

 

315.5

 

2.3

 

 

257.0

 

1.9

 

Total

 

$

698.5

 

5.0

%

$

559.6

 

4.2

%

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.

11


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

The Company had $204.4 million and $169.2 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $46.3 million and $36.7 million, respectively, as of September 30, 2016 and December 31, 2015. These modified credit card receivables represented less than 2% of the Company’s total credit card receivables as of both September 30, 2016 and December 31, 2015.

The average recorded investment in impaired credit card receivables was $196.1 million and $149.2 million for the three months ended September 30, 2016 and 2015, respectively, and $185.8 million and $141.5 million for the nine months ended September 30, 2016 and 2015, 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 $4.8 million and $3.8 million for the three months ended September 30, 2016 and 2015, respectively, and $13.9 million and $10.7 million for the nine months ended September 30, 2016 and 2015, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

The following tables provide 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, 2016

 

Nine Months Ended September 30, 2016

 

 

 

 

 

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

 

53,041

 

$

63.8

 

$

63.7

 

151,069

 

$

180.9

 

$

180.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

 

 

 

 

 

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

 

44,955

 

$

48.1

 

$

48.0

 

120,074

 

$

129.8

 

$

129.7

 

 

The tables below summarize 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, 2016

 

September 30, 2016

 

 

 

Number of

 

Outstanding

 

Number of

 

Outstanding

 

 

    

Restructurings

    

Balance

    

Restructurings

    

Balance

 

 

 

(Dollars in millions)

 

Troubled debt restructurings that subsequently defaulted – credit card receivables

 

27,606

 

$

31.3

 

75,828

 

$

84.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2015

 

September 30, 2015

 

 

 

Number of

 

Outstanding

 

Number of

 

Outstanding

 

 

    

Restructurings

    

Balance

    

Restructurings

    

Balance