Alliance Data Systems(BFH) - 2021 Q1 - Quarterly Report

Part I: FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The unaudited financial statements show net income surged to $286.2 million, driven by a 95% decrease in loan loss provision, while total assets decreased to $21.2 billion Condensed Consolidated Balance Sheets Total assets decreased to $21.16 billion from $22.55 billion, primarily due to reduced credit card and loan receivables, while stockholders' equity increased Condensed Consolidated Balance Sheet Highlights (in millions) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,858.6 | $3,081.5 | | Credit card and loan receivables, net | $13,693.3 | $14,776.4 | | Total assets | $21,162.9 | $22,547.1 | | Liabilities & Equity | | | | Deposits | $9,956.9 | $9,792.6 | | Non-recourse borrowings | $3,845.8 | $5,709.9 | | Long-term and other debt | $2,782.9 | $2,805.7 | | Total liabilities | $19,398.6 | $21,025.5 | | Total stockholders' equity | $1,764.3 | $1,521.6 | Condensed Consolidated Statements of Income Net income significantly increased to $286.2 million from $30.0 million, primarily due to a substantial reduction in the provision for loan loss Consolidated Statements of Income (in millions, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total revenue | $1,084.9 | $1,381.8 | | Provision for loan loss | $33.4 | $655.9 | | Total operating expenses | $581.8 | $1,217.8 | | Operating income | $503.1 | $164.0 | | Net income | $286.2 | $30.0 | | Diluted net income per share | $5.74 | $0.63 | Condensed Consolidated Statements of Cash Flows Operating cash flow remained strong at $517.2 million, while net cash used in financing activities led to a net decrease in cash and equivalents Cash Flow Summary (in millions) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $517.2 | $572.5 | | Net cash provided by investing activities | $1,009.0 | $1,746.3 | | Net cash used in financing activities | $(1,740.8) | $(1,503.4) | | Change in cash, cash equivalents and restricted cash | $(216.3) | $807.8 | Notes to Condensed Consolidated Financial Statements Detailed disclosures cover accounting policies, revenue, credit receivables, debt, and segment performance, highlighting Card Services' profitability recovery Note 2. REVENUE Total revenue for Q1 2021 was $1.08 billion, primarily from Card Services, with the United States as the largest geographical contributor Revenue by Segment (in millions) | Segment | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | LoyaltyOne | $176.6 | $198.1 | | Card Services | $908.3 | $1,183.6 | | Corporate/Other | $0.0 | $0.1 | | Total | $1,084.9 | $1,381.8 | Revenue by Geography (in millions, Q1 2021) | Region | Revenue | | :--- | :--- | | United States | $909.2 | | Canada | $80.0 | | Europe, Middle East and Africa | $79.4 | | Asia Pacific | $14.9 | | Other | $1.4 | | Total | $1,084.9 | Note 6. CREDIT CARD AND LOAN RECEIVABLES Credit card and loan receivables decreased to $15.54 billion, with the allowance for loan loss and delinquency rates also improving Allowance for Loan Loss Rollforward (in millions) | Description | Three Months Ended March 31, 2021 | | :--- | :--- | | Balance at beginning of period | $2,008.0 | | Provision for loan loss | $33.4 | | Principal charge-offs | $(249.0) | | Recoveries | $50.9 | | Balance at end of period | $1,843.3 | - The decrease in the allowance for loan loss was attributed to a decline in receivables, an improved macroeconomic outlook, and lower principal charge-offs[44] Delinquency Aging (Amortized Cost Basis, in millions) | Delinquency Status | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Current | $14,545.4 | $15,578.8 | | 31 to 60 days delinquent | $193.5 | $272.5 | | 61 to 90 days delinquent | $149.3 | $203.3 | | 91 days or more delinquent | $384.8 | $439.8 | | Total Delinquent | $727.6 | $915.6 | Note 12. DEBT Total debt obligations included $2.8 billion in long-term debt and $3.9 billion in non-recourse borrowings, with the company in compliance with all financial covenants Debt Composition (in millions) | Debt Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Long-term and other debt | $2,809.0 | $2,834.3 | | Deposits | $9,967.3 | $9,805.1 | | Non-recourse borrowings of consolidated securitization entities | $3,851.1 | $5,715.2 | - In February 2021, $591.5 million of Series 2018-A asset-backed term notes matured and were repaid[90] - The company was in compliance with its financial covenants as of March 31, 2021[87] Note 14. COMMITMENTS AND CONTINGENCIES A $150.0 million liability was recorded for a DOJ investigation related to the former Epsilon segment, with $75.0 million paid and the remainder accrued - The company agreed to indemnify Publicis Groupe S.A. for losses related to a DOJ investigation concerning Epsilon's data practice[96] - Epsilon entered into a deferred prosecution agreement with the DOJ, agreeing to pay $150.0 million; the company paid the first $75.0 million installment in January 2021 and has the remaining $75.0 million recorded in accrued expenses[96] Note 19. SEGMENT INFORMATION Card Services' income before taxes dramatically increased to $409.9 million, while LoyaltyOne's decreased, reflecting a change in segment operating profit measure - Effective Q1 2021, the company changed its measure of segment operating profit from adjusted EBITDA to income before income taxes[120] Segment Results (in millions) | Metric | LoyaltyOne | Card Services | Corporate/Other | Total | | :--- | :--- | :--- | :--- | :--- | | Q1 2021 Revenues | $176.6 | $908.3 | $— | $1,084.9 | | Q1 2021 Income (Loss) Before Taxes | $31.7 | $409.9 | $(47.2) | $394.4 | | Q1 2020 Revenues | $198.1 | $1,183.6 | $0.1 | $1,381.8 | | Q1 2020 Income (Loss) Before Taxes | $46.7 | $32.1 | $(53.4) | $25.4 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue decline to lower finance charges, while profitability surged due to a 95% decrease in loan loss provision and improved asset quality Consolidated Results of Operations Total revenue decreased 21% due to lower finance charges, but operating income surged to $503.1 million due to a 95% reduction in loan loss provision - Finance charges revenue decreased by $273.7 million (23%) due to a 15% decrease in average credit card and loan receivables and an approximate 230 basis point decrease in finance charge yield[136] - The provision for loan loss decreased by $622.5 million (95%) due to improved credit performance, lower net charge-offs, and improving macroeconomic indicators, compared to a significant reserve build in Q1 2020 due to COVID-19[141] Asset Quality Asset quality significantly improved, with the total delinquency rate falling to 3.8% and the annualized net charge-off rate decreasing to 5.0% Delinquency Rate | Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Delinquent Principal Receivables | $564.4M | $707.9M | | % of Total Receivables | 3.8% | 4.4% | Net Charge-Off Rate | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net charge-offs as a % of average receivables | 5.0% | 7.0% | Liquidity and Capital Resources The company maintains strong liquidity through operations, credit facilities, and deposits, with both bank subsidiaries considered well capitalized - Primary liquidity sources include cash from operations, credit agreements, debt/equity issuances, credit card securitization, and deposits from its two bank subsidiaries[161] - As of March 31, 2021, the company had $10.0 billion in deposits and $750.0 million in total availability under its revolving line of credit[161][168] Bank Capital Ratios (as of March 31, 2021) | Ratio | Comenity Bank | Comenity Capital Bank | Minimum to be Well Capitalized | | :--- | :--- | :--- | :--- | | Tier 1 capital to average assets | 20.3% | 15.0% | 5.0% | | Common Equity Tier 1 capital to risk-weighted assets | 24.5% | 17.1% | 6.5% | | Total capital to risk-weighted assets | 25.8% | 18.4% | 10.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks, including interest rate, credit, and foreign currency exchange rate risks, have occurred since the 2020 Annual Report - There has been no material change from the Annual Report on Form 10-K for the year ended December 31, 2020, related to exposure to market risk from interest rate risk, credit risk, and foreign currency exchange rate risk[183] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting - Based on an evaluation as of March 31, 2021, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective[184] - No changes in internal control over financial reporting occurred during the first quarter of 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[185] Part II: OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal matters not expected to be materially adverse, with reference to the DOJ investigation indemnification - The company is involved in various claims and lawsuits arising in the ordinary course of business that are not expected to be materially adverse. The report refers to the indemnification disclosure in Note 14 regarding the DOJ investigation[186] Item 1A. Risk Factors No material changes to the Risk Factors previously disclosed in the company's 2020 Annual Report on Form 10-K were reported - No material changes to the Risk Factors from the 2020 Annual Report on Form 10-K were reported[187] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2021, 15,987 shares of common stock were purchased for employee benefit plans, with no shares repurchased under publicly announced programs Common Stock Purchases (Q1 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 1-31 | 3,705 | $71.12 | | Feb 1-28 | 5,829 | $85.76 | | Mar 1-31 | 6,453 | $107.63 | | Total | 15,987 | $91.19 | - The shares were purchased by the administrator of the company's 401(k) and Retirement Savings Plan for employee benefit[188] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and certifications