10-Q 1 ads-20180930x10q.htm 10-Q ads_Current_Folio_10Q

 

 

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, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☑     No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer ☑     

Accelerated filer  ☐     

 

Non-accelerated filer ☐

Emerging growth company ☐

 

Smaller reporting company ☐

 

 

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

 

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

 

As of October 24, 2018, 54,473,522 shares of common stock were outstanding.

 

 

 

 


 

ALLIANCE DATA SYSTEMS CORPORATION

INDEX

 

    

 

    

Page
Number

 

 

Part I  FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

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

 

40

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

51

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

51

 

 

 

 

 

 

 

Part II  OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

52

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

52

 

 

 

 

 

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


 

PART I

Item 1.  Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(In millions, except per share amounts)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,600.9

 

$

4,190.0

Accounts receivable, net, less allowance for doubtful accounts ($6.1 and $6.7 at September 30, 2018 and December 31, 2017, respectively)

 

 

866.8

 

 

822.3

Credit card and loan receivables:

 

 

 

 

 

 

Credit card receivables – restricted for securitization investors

 

 

12,565.5

 

 

14,293.9

Other credit card and loan receivables

 

 

4,861.7

 

 

4,319.9

Total credit card and loan receivables

 

 

17,427.2

 

 

18,613.8

Allowance for loan loss

 

 

(1,114.6)

 

 

(1,119.3)

Credit card and loan receivables, net

 

 

16,312.6

 

 

17,494.5

Credit card and loan receivables held for sale

 

 

1,720.1

 

 

1,026.3

Inventories, net

 

 

265.9

 

 

234.1

Other current assets

 

 

601.8

 

 

348.9

Redemption settlement assets, restricted

 

 

587.7

 

 

589.5

Total current assets

 

 

23,955.8

 

 

24,705.6

Property and equipment, net

 

 

610.0

 

 

613.9

Deferred tax asset, net

 

 

65.3

 

 

28.1

Intangible assets, net

 

 

603.1

 

 

800.6

Goodwill

 

 

3,857.4

 

 

3,880.1

Other non-current assets

 

 

671.4

 

 

656.5

Total assets

 

$

29,763.0

 

$

30,684.8

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Accounts payable

 

$

606.2

 

$

651.2

Accrued expenses

 

 

364.9

 

 

442.8

Current portion of deposits

 

 

6,267.1

 

 

6,366.2

Current portion of non-recourse borrowings of consolidated securitization entities

 

 

1,456.8

 

 

1,339.9

Current portion of long-term and other debt

 

 

130.0

 

 

131.3

Other current liabilities

 

 

331.6

 

 

368.7

Deferred revenue

 

 

802.8

 

 

846.6

Total current liabilities

 

 

9,959.4

 

 

10,146.7

Deferred revenue

 

 

113.4

 

 

120.3

Deferred tax liability, net

 

 

223.9

 

 

211.2

Deposits

 

 

5,082.3

 

 

4,564.7

Non-recourse borrowings of consolidated securitization entities

 

 

6,014.1

 

 

7,467.4

Long-term and other debt

 

 

5,677.3

 

 

5,948.3

Other liabilities

 

 

401.4

 

 

370.9

Total liabilities

 

 

27,471.8

 

 

28,829.5

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.0 shares and 112.8 shares at September 30, 2018 and December 31, 2017, respectively

 

 

1.1

 

 

1.1

Additional paid-in capital

 

 

3,148.8

 

 

3,099.8

Treasury stock, at cost, 58.4 shares and 57.4 shares at September 30, 2018 and December 31, 2017, respectively

 

 

(5,474.2)

 

 

(5,272.5)

Retained earnings

 

 

4,758.6

 

 

4,167.1

Accumulated other comprehensive loss

 

 

(143.1)

 

 

(140.2)

Total stockholders’ equity

 

 

2,291.2

 

 

1,855.3

Total liabilities and stockholders' equity

 

$

29,763.0

 

$

30,684.8

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


 

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

 

 

(In millions, except per share amounts)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

586.0

 

$

650.3

 

$

1,790.7

 

$

1,888.3

Redemption, net

 

 

163.6

 

 

210.0

 

 

443.0

 

 

645.4

Finance charges, net

 

 

1,197.6

 

 

1,052.1

 

 

3,501.6

 

 

3,079.5

Total revenue

 

 

1,947.2

 

 

1,912.4

 

 

5,735.3

 

 

5,613.2

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,060.6

 

 

1,066.5

 

 

3,076.2

 

 

3,123.1

Provision for loan loss

 

 

196.8

 

 

204.7

 

 

846.3

 

 

807.9

General and administrative

 

 

45.3

 

 

38.0

 

 

126.5

 

 

124.9

Depreciation and other amortization

 

 

49.7

 

 

46.7

 

 

145.9

 

 

136.6

Amortization of purchased intangibles

 

 

72.8

 

 

77.6

 

 

220.3

 

 

237.9

Total operating expenses

 

 

1,425.2

 

 

1,433.5

 

 

4,415.2

 

 

4,430.4

Operating income

 

 

522.0

 

 

478.9

 

 

1,320.1

 

 

1,182.8

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Securitization funding costs

 

 

56.1

 

 

38.2

 

 

163.4

 

 

109.9

Interest expense on deposits

 

 

43.4

 

 

33.2

 

 

115.6

 

 

87.9

Interest expense on long-term and other debt, net

 

 

69.4

 

 

73.9

 

 

214.8

 

 

210.2

Total interest expense, net

 

 

168.9

 

 

145.3

 

 

493.8

 

 

408.0

Income before income taxes

 

 

353.1

 

 

333.6

 

 

826.3

 

 

774.8

Provision for income taxes

 

 

56.6

 

 

100.4

 

 

148.1

 

 

257.4

Net income

 

$

296.5

 

$

233.2

 

$

678.2

 

$

517.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (Note 3)

 

$

5.41

 

$

4.21

 

$

12.30

 

$

9.27

Diluted (Note 3)

 

$

5.39

 

$

4.20

 

$

12.25

 

$

9.23

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (Note 3)

 

 

54.8

 

 

55.4

 

 

55.2

 

 

55.8

Diluted (Note 3)

 

 

55.0

 

 

55.6

 

 

55.4

 

 

56.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share:

 

$

0.57

 

$

0.52

 

$

1.71

 

$

1.56

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

 

 

(In millions)

Net income

 

$

296.5

 

$

233.2

 

$

678.2

 

$

517.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities available-for-sale 

 

 

(3.8)

 

 

(3.0)

 

 

(9.1)

 

 

(5.0)

Tax benefit (expense)

 

 

0.6

 

 

(0.1)

 

 

1.9

 

 

(0.2)

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

 

 

(3.2)

 

 

(3.1)

 

 

(7.2)

 

 

(5.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on cash flow hedges

 

 

(0.9)

 

 

0.8

 

 

0.8

 

 

(0.4)

Tax benefit (expense)

 

 

0.2

 

 

(0.2)

 

 

(0.2)

 

 

0.1

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

 

 

(0.7)

 

 

0.6

 

 

0.6

 

 

(0.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on net investment hedges 

 

 

4.8

 

 

(19.4)

 

 

30.2

 

 

(63.1)

Tax benefit (expense)

 

 

(1.2)

 

 

7.4

 

 

(7.3)

 

 

23.7

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

 

 

3.6

 

 

(12.0)

 

 

22.9

 

 

(39.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(6.4)

 

 

15.9

 

 

(19.2)

 

 

55.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

(6.7)

 

 

1.4

 

 

(2.9)

 

 

10.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, net of tax

 

$

289.8

 

$

234.6

 

$

675.3

 

$

527.9

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2018

    

2017

 

 

(In millions)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

678.2

 

$

517.4

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

 

 

 

 

 

 

Depreciation and amortization

 

 

366.2

 

 

374.5

Deferred income taxes

 

 

(30.3)

 

 

(62.5)

Provision for loan loss

 

 

846.3

 

 

807.9

Non-cash stock compensation

 

 

64.2

 

 

63.5

Amortization of deferred financing costs

 

 

36.2

 

 

32.3

Change in deferred revenue

 

 

(26.2)

 

 

(35.5)

Change in other operating assets and liabilities

 

 

(195.3)

 

 

(41.5)

Originations of credit card and loan receivables held for sale

 

 

(4,799.0)

 

 

(6,012.8)

Sales of credit card and loan receivables held for sale

 

 

4,928.8

 

 

6,011.5

Other

 

 

156.3

 

 

104.0

Net cash provided by operating activities

 

 

2,025.4

 

 

1,758.8

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Change in redemption settlement assets

 

 

(37.4)

 

 

(213.6)

Change in credit card and loan receivables

 

 

(708.1)

 

 

(1,174.7)

Proceeds from sale of credit card portfolio

 

 

55.4

 

 

 —

Capital expenditures

 

 

(149.3)

 

 

(176.6)

Purchases of other investments

 

 

(72.6)

 

 

(80.2)

Maturities/sales of other investments

 

 

43.1

 

 

38.2

Other

 

 

8.2

 

 

(4.2)

Net cash used in investing activities

 

 

(860.7)

 

 

(1,611.1)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Borrowings under debt agreements

 

 

3,207.3

 

 

6,439.6

Repayments of borrowings

 

 

(3,466.0)

 

 

(5,903.8)

Non-recourse borrowings of consolidated securitization entities

 

 

2,577.3

 

 

2,455.0

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

 

 

(3,915.0)

 

 

(2,545.0)

Net increase in deposits

 

 

421.3

 

 

1,987.7

Payment of deferred financing costs

 

 

(21.3)

 

 

(53.4)

Dividends paid

 

 

(94.5)

 

 

(86.8)

Purchase of treasury shares

 

 

(197.0)

 

 

(553.7)

Other

 

 

(18.1)

 

 

(16.5)

Net cash (used in) provided by financing activities

 

 

(1,506.0)

 

 

1,723.1

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

 

 

(3.1)

 

 

8.4

Change in cash, cash equivalents and restricted cash

 

 

(344.4)

 

 

1,879.2

Cash, cash equivalents and restricted cash at beginning of period

 

 

4,314.7

 

 

1,968.5

Cash, cash equivalents and restricted cash at end of period

 

$

3,970.3

 

$

3,847.7

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

Interest paid

 

$

527.5

 

$

382.2

Income taxes paid, net

 

$

188.5

 

$

282.0

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 flows reclassifications were made for the adoption of Accounting Standards Update (“ASU”) 2016-18, “Restricted Cash.” The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated statements of cash flows:

 

 

 

 

 

 

 

 

    

September 30, 

    

September 30, 

 

 

2018

 

2017

 

 

(In millions)

Cash and cash equivalents

 

$

3,600.9

 

$

3,326.0

Restricted cash included within other current assets (1)

 

 

318.0

 

 

450.2

Restricted cash included within redemption settlement assets, restricted (2)

 

 

51.4

 

 

71.5

Total cash, cash equivalents and restricted cash

 

$

3,970.3

 

$

3,847.7


(1)

Includes $266.7 million and $415.6 million in principal accumulation at September 30, 2018 and 2017, respectively, for the repayment of non-recourse borrowings of consolidated securitized debt that matured in October 2018 and 2017, respectively.

(2)

See Note 8, “Redemption Settlement Assets,” for additional information regarding nature of restrictions.

 

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842),” that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statements of income. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption and various optional practical expedients permitted. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” that provides transition relief by removing certain comparative period requirements and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, which is January 1, 2019 for the Company. The new standard may be applied using this additional transition method or a modified retrospective approach. The Company continues to assess the impact of adoption of the new standard on its existing policies, processes, systems and controls in conjunction with its review of

7


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

existing lease agreements, but expects an increase in assets and liabilities on its consolidated balance sheets at adoption for the recording of right-of-use assets and corresponding lease liabilities. The Company plans to adopt the standard on January 1, 2019 using the transition relief provided by ASU 2018-11.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to utilize a financial instrument impairment model to establish an allowance based on expected losses over the life of the exposure rather than a model based on an incurred loss approach. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, ASU 2016-13 modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The Company has formed a cross-functional implementation team and is in the process of determining key accounting interpretations, data requirements and necessary changes to its credit loss estimation methods, processes and systems as well as 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 does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate 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 does not intend to reclassify the stranded tax effects to retained earnings pursuant to ASU 2018-02 as these amounts do not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements from Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact that adoption of ASU 2018-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 requires customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, “Intangibles—Goodwill and Other—Internal-Use Software,” to determine which implementation costs may be capitalized. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The amendments in ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact that adoption of ASU 2018-15 will have on its consolidated financial statements.

Recently Adopted Accounting Standards

In May 2014, 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.

8


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

 

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 ASC 605, “Revenue Recognition” and the 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:

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at

    

Adjustments

    

Balance at

 

 

December 31,

 

due to

 

January 1,

 

 

2017

 

ASC 606

 

2018

Consolidated Balance Sheet

    

 

    

(In millions)

    

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

822.3

 

$

22.4

 

$

844.7

Other current assets

 

 

348.9

 

 

(16.6)

 

 

332.3

Other non-current assets

 

 

656.5

 

 

(20.9)

 

 

635.6

 

 

 

1,827.7

 

 

(15.1)

 

 

1,812.6

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

442.8

 

 

3.2

 

 

446.0

Other current liabilities

 

 

368.7

 

 

(14.3)

 

 

354.4

Other liabilities

 

 

370.9

 

 

(13.6)

 

 

357.3

 

 

 

1,182.4

 

 

(24.7)

 

 

1,157.7

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

4,167.1

 

 

9.6

 

 

4,176.7

 

·

Further, ASC 606 impacted the presentation of revenue within the Company’s coalition loyalty program. Upon the adoption of ASC 606, for the fulfillment of certain rewards where the AIR MILES® Reward Program does not control the goods or services before they are transferred to the collector, revenue is recorded on a net basis.

 

·

ASC 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue transactions. See Note 2, “Revenue,” for the Company’s ASC 606 disclosures.

 

In January 2016, 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

9


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

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.

2. REVENUE

Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” applying the modified retrospective method to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. ASC 606 does not apply to financial instruments and other contractual rights or obligations.

Under ASC 606, revenue is recognized when 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 table presents revenue disaggregated by major source, as well as geographic region based on the location of the subsidiary that generally correlates with the location of the customer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate/

 

 

 

 

 

 

Three Months Ended September 30, 2018

    

LoyaltyOne

    

Epsilon

    

Card Services

    

Other

    

Eliminations

    

Total

 

 

(In millions)

Disaggregation of Revenue by Major Source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coalition loyalty program

 

$

83.8

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

83.8

Short-term loyalty programs

 

 

148.4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

148.4

Technology services

 

 

 —

 

 

255.9

 

 

 —

 

 

 —

 

 

(6.0)

 

 

249.9

Digital Media services

 

 

 —

 

 

195.2

 

 

 —

 

 

 —

 

 

(5.5)

 

 

189.7

Agency services

 

 

 —

 

 

86.5

 

 

 —

 

 

 —

 

 

(2.0)

 

 

84.5

Servicing fees, net

 

 

 —

 

 

 —

 

 

(34.7)

 

 

 —

 

 

 —

 

 

(34.7)

Other

 

 

25.1

 

 

 —

 

 

 —

 

 

0.2

 

 

(0.2)

 

 

25.1

Revenue from contracts with customers

 

$

257.3

 

$

537.6

 

$

(34.7)

 

$

0.2

 

$

(13.7)

 

$

746.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance charges, net

 

 

 —

 

 

 —

 

 

1,197.6

 

 

 —

 

 

 —

 

 

1,197.6

Investment income

 

 

2.9

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2.9

Total

 

$

260.2

 

$

537.6

 

$

1,162.9

 

$

0.2

 

$

(13.7)

 

$

1,947.2

 

 

 

 

 

10


 

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate/

 

 

 

 

 

 

Nine Months Ended September 30, 2018

    

LoyaltyOne

    

Epsilon

    

Card Services

    

Other

    

Eliminations

    

Total

 

 

(In millions)

Disaggregation of Revenue by Major Source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coalition loyalty program

 

$

266.2

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

266.2

Short-term loyalty programs

 

 

392.8

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

392.8

Technology services

 

 

 —

 

 

757.0

 

 

 —

 

 

 —

 

 

(17.7)

 

 

739.3

Digital Media services

 

 

 —

 

 

552.7

 

 

 —

 

 

 —

 

 

(7.0)

 

 

545.7

Agency services

 

 

 —

 

 

251.5

 

 

 —

 

 

 —

 

 

(3.0)

 

 

248.5

Servicing fees, net

 

 

 —

 

 

 —

 

 

(35.1)

 

 

 —

 

 

 —

 

 

(35.1)

Other

 

 

67.6

 

 

 —

 

 

 —

 

 

0.5

 

 

(0.3)

 

 

67.8

Revenue from contracts with customers

 

$

726.6

 

$

1,561.2

 

$

(35.1)

 

$

0.5

 

$

(28.0)

 

$

2,225.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance charges, net

 

 

 —

 

 

 —

 

 

3,501.6

 

 

 —

 

 

 —

 

 

3,501.6

Investment income

 

 

8.5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8.5

Total

 

$

735.1

 

$

1,561.2

 

$

3,466.5

 

$

0.5

 

$

(28.0)

 

$

5,735.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate/

 

 

 

 

 

 

Three Months Ended September 30, 2018

    

LoyaltyOne

    

Epsilon

    

Card Services

    

Other

    

Eliminations

    

Total

 

 

(In millions)

Disaggregation of Revenue by Geographic Region:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

4.7

 

$

516.1

 

$

1,162.9

 

$

0.2

 

$

(12.5)

 

$

1,671.4

Canada

 

 

102.4

 

 

4.1

 

 

 —

 

 

 —

 

 

 —

 

 

106.5

Europe, Middle East and Africa

 

 

107.1

 

 

14.3

 

 

 —

 

 

 —

 

 

(0.3)

 

 

121.1

Asia Pacific

 

 

32.0

 

 

3.1

 

 

 —

 

 

 —

 

 

(0.9)

 

 

34.2

Other

 

 

14.0

 

 

 —