Alliance Data Systems(BFH) - 2021 Q3 - Quarterly Report

Part I: FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The company presents its unaudited condensed consolidated financial statements for the third quarter of 2021 Condensed Consolidated Balance Sheets Total assets slightly decreased while stockholders' equity significantly increased due to strong net income Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $22,257.3 | $22,547.1 | | Credit card and loan receivables, net | $14,045.1 | $14,776.4 | | Cash and cash equivalents | $3,172.2 | $3,081.5 | | Total Liabilities | $20,011.7 | $21,025.5 | | Deposits | $9,885.5 | $9,792.6 | | Non-recourse borrowings | $4,588.7 | $5,709.9 | | Total Stockholders' Equity | $2,245.6 | $1,521.6 | Condensed Consolidated Statements of Income Net income surged year-over-year, driven by a substantial reduction in the provision for loan loss Consolidated Income Statement Highlights (in millions, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,099.3 | $1,050.5 | $3,196.5 | $3,411.5 | | Provision for loan loss | $161.1 | $207.7 | $180.3 | $1,113.7 | | Operating Income | $382.8 | $291.0 | $1,359.3 | $629.6 | | Net Income | $223.7 | $133.3 | $783.4 | $201.7 | | Diluted EPS | $4.47 | $2.79 | $15.68 | $4.23 | Condensed Consolidated Statements of Comprehensive Income Total comprehensive income grew significantly, reflecting strong net income performance Comprehensive Income (in millions) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $223.7 | $133.3 | $783.4 | $201.7 | | Other comprehensive (loss) income, net of tax | $(23.1) | $39.8 | $(51.2) | $52.2 | | Total comprehensive income, net of tax | $200.6 | $173.1 | $732.2 | $253.9 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity grew substantially, driven by net income and a major treasury stock retirement - Total stockholders' equity increased to $2,245.6 million at September 30, 2021, from $1,521.6 million at December 31, 2020[16] - In Q3 2021, the company retired 67.4 million shares of treasury stock, which had a cost of $6,733.9 million, with no impact on total stockholders' equity[13][124] Condensed Consolidated Statements of Cash Flows The company generated positive cash flow from operations and investing, offset by financing outflows Cash Flow Summary for the Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,208.0 | $1,488.6 | | Net cash provided by investing activities | $380.7 | $3,364.8 | | Net cash used in financing activities | $(1,157.1) | $(5,064.3) | | Change in cash, cash equivalents and restricted cash | $427.4 | $(207.2) | Notes to Condensed Consolidated Financial Statements Disclosures detail the LoyaltyOne spinoff, segment performance, credit quality, and legal contingencies - The company's Board of Directors approved the separation of its LoyaltyOne segment into an independent, publicly traded company, Loyalty Ventures Inc, expected to be completed on November 5, 2021[24] - For Q3 2021, the LoyaltyOne segment generated $169.3 million in revenue, while the Card Services segment generated $930.0 million in revenue[28][147] - The allowance for loan loss decreased to $1,644.8 million from $2,008.0 million at year-end 2020 due to improved credit performance and macroeconomic variables[54][55] - The company recorded a $150.0 million liability related to an indemnification obligation to Publicis Groupe S.A. for a DOJ investigation concerning Epsilon[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes strong net income growth, the LoyaltyOne spinoff, and improved credit performance - The planned spinoff of the LoyaltyOne segment into Loyalty Ventures Inc was approved by the Board on October 13, 2021, with an expected completion date of November 5, 2021[157] - Credit performance remained strong, with the net loss rate improving to 3.9% in Q3 2021 from 5.8% in Q3 2020, and the delinquency rate falling to 3.8% from 4.7%[161][209] - The company's bank subsidiaries, Comenity Bank and Comenity Capital Bank, remain well capitalized, with all capital ratios significantly exceeding minimum requirements[229] Nine-Month Performance Comparison (2021 vs 2020) | Metric | 9 Months 2021 | 9 Months 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $3,196.5M | $3,411.5M | (6)% | | Provision for loan loss | $180.3M | $1,113.7M | (84)% | | Income before income taxes | $1,056.8M | $248.3M | 326% | | Net Income | $783.4M | $201.7M | 288% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its primary market risks since the 2020 year-end - The company's primary market risks are identified as interest rate risk, credit risk, and foreign currency exchange rate risk[236] - There has been no material change in the company's exposure to these market risks since the 2020 year-end report[236] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and internal controls over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the third fiscal quarter, September 30, 2021[238] - There were no material changes to the company's internal control over financial reporting during the third quarter of 2021[237] Part II: OTHER INFORMATION Item 1. Legal Proceedings The company faces ordinary course legal claims not expected to have a material adverse effect - The company is involved in ordinary course claims and lawsuits that are not expected to be materially adverse[239] - A key legal matter mentioned is the indemnification related to the DOJ investigation, as detailed in Note 14 of the financial statements[116][239] Item 1A. Risk Factors New risk factors are disclosed related to the planned spinoff of the LoyaltyOne segment - A new risk factor is introduced concerning the planned spinoff of the LoyaltyOne segment, which may not be completed on the contemplated terms or timeline, or at all[240] - Risks associated with the spinoff include potential business disruption, failure to realize expected benefits, loss of synergies, and the possibility that the transaction may not be tax-free[243] - Following the spinoff, the trading price of ADSC common stock is expected to be lower and may fluctuate significantly[244][246] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details common stock purchases made for its employee 401(k) and savings plan - The shares purchased were for the company's 401(k) and Retirement Savings Plan and were not part of any publicly announced repurchase programs[247][248] Common Stock Purchases (Q3 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1-31 | 1,907 | $98.08 | | August 1-31 | 6,391 | $93.35 | | September 1-30 | 2,326 | $101.57 | | Total | 10,624 | $96.00 | Item 6. Exhibits This section lists all exhibits filed with the report, including credit agreements and certifications - Key exhibits filed include the Seventh Amendment to the Amended and Restated Credit Agreement and First Supplemental Indentures related to existing debt[250][251] - Certifications by the Chief Executive Officer and Chief Financial Officer as required by Rule 13a-14(a) and Rule 13a-14(b) are included as exhibits[251][253]