(Mark One)
|
|
R
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2011
|
|
OR
|
|
£
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
|
Delaware
|
31-1429215
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification No.)
|
Large accelerated filer R
|
Accelerated filer £
|
|
Non-accelerated filer £ (Do not check if a smaller reporting company)
|
Smaller reporting company £
|
|
|
Page
Number
|
|
Part I: FINANCIAL INFORMATION
|
|||
Item 1.
|
Financial Statements (unaudited)
|
||
3
|
|||
4
|
|||
5
|
|||
6
|
|||
Item 2.
|
27
|
||
Item 3.
|
42
|
||
Item 4.
|
42
|
||
Part II: OTHER INFORMATION
|
|||
Item 1.
|
43
|
||
Item 1A.
|
43
|
||
Item 2.
|
43
|
||
Item 3.
|
43
|
||
Item 4.
|
43
|
||
Item 5.
|
43
|
||
Item 6.
|
44
|
||
46
|
Item 1. | Financial Statements. |
September 30,
2011
|
December 31,
2010
|
|||||||
(In thousands)
|
||||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$
|
239,570
|
$
|
139,114
|
||||
Trade receivables, less allowance for doubtful accounts ($3,835 and $4,350 at September 30, 2011 and
December 31, 2010, respectively)
|
265,156
|
260,945
|
||||||
Credit card receivables:
|
||||||||
Credit card receivables – restricted for securitization investors
|
4,342,167
|
4,795,753
|
||||||
Other credit card receivables
|
632,660
|
560,670
|
||||||
Total credit card receivables
|
4,974,827
|
5,356,423
|
||||||
Allowance for loan loss
|
(448,665
|
)
|
(518,069
|
)
|
||||
Credit card receivables, net
|
4,526,162
|
4,838,354
|
||||||
Deferred tax asset, net
|
251,820
|
279,752
|
||||||
Other current assets
|
166,125
|
127,022
|
||||||
Redemption settlement assets, restricted
|
448,634
|
472,428
|
||||||
Assets of discontinued operations
|
3,851
|
11,920
|
||||||
Total current assets
|
5,901,318
|
6,129,535
|
||||||
Property and equipment, net
|
182,069
|
170,627
|
||||||
Deferred tax asset, net
|
44,737
|
46,218
|
||||||
Cash collateral, restricted
|
654,705
|
185,754
|
||||||
Intangible assets, net
|
403,269
|
314,391
|
||||||
Goodwill
|
1,442,696
|
1,221,823
|
||||||
Other non-current assets
|
141,126
|
203,804
|
||||||
Total assets
|
$
|
8,769,920
|
$
|
8,272,152
|
||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Accounts payable
|
$
|
122,055
|
$
|
121,856
|
||||
Accrued expenses
|
223,449
|
168,578
|
||||||
Certificates of deposit
|
752,532
|
442,600
|
||||||
Asset-backed securities debt – owed to securitization investors
|
1,769,122
|
1,743,827
|
||||||
Current debt
|
19,834
|
255,679
|
||||||
Other current liabilities
|
99,836
|
85,179
|
||||||
Deferred revenue
|
995,122
|
1,044,469
|
||||||
Total current liabilities
|
3,981,950
|
3,862,188
|
||||||
Deferred revenue
|
179,195
|
176,773
|
||||||
Deferred tax liability, net
|
112,216
|
82,637
|
||||||
Certificates of deposit
|
616,473
|
416,500
|
||||||
Asset-backed securities debt – owed to securitization investors
|
1,314,165
|
1,916,315
|
||||||
Long-term and other debt
|
2,234,386
|
1,614,093
|
||||||
Other liabilities
|
185,520
|
180,552
|
||||||
Total liabilities
|
8,623,905
|
8,249,058
|
||||||
Commitments and contingencies (Note 17)
|
||||||||
Stockholders’ equity:
|
||||||||
Common stock, $0.01 par value; authorized, 200,000 shares; issued, 93,977 shares and 92,797 shares at September 30, 2011 and December 31, 2010, respectively
|
940
|
928
|
||||||
Additional paid-in capital
|
1,365,235
|
1,320,767
|
||||||
Treasury stock, at cost, 43,739 shares and 41,426 shares at September 30, 2011 and December 31, 2010, respectively
|
(2,267,553
|
)
|
(2,079,819
|
)
|
||||
Retained earnings
|
1,065,098
|
815,718
|
||||||
Accumulated other comprehensive loss
|
(17,705
|
)
|
(34,500
|
)
|
||||
Total stockholders’ equity
|
146,015
|
23,094
|
||||||
Total liabilities and stockholders’ equity
|
$
|
8,769,920
|
$
|
8,272,152
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands, except per share amounts)
|
|||||||||||||||
Revenues
|
|||||||||||||||
Transaction
|
$
|
74,712
|
$
|
68,150
|
$
|
221,352
|
$
|
214,092
|
|||||||
Redemption
|
141,152
|
120,424
|
424,254
|
386,810
|
|||||||||||
Finance charges, net
|
365,925
|
327,677
|
1,040,339
|
953,303
|
|||||||||||
Database marketing fees and direct marketing services
|
230,350
|
167,083
|
565,324
|
427,246
|
|||||||||||
Other revenue
|
32,705
|
19,109
|
74,469
|
54,247
|
|||||||||||
Total revenue
|
844,844
|
702,443
|
2,325,738
|
2,035,698
|
|||||||||||
Operating expenses
|
|||||||||||||||
Cost of operations
|
476,993
|
385,201
|
1,312,768
|
1,104,913
|
|||||||||||
Provision for loan loss
|
70,697
|
89,559
|
198,739
|
272,259
|
|||||||||||
General and administrative
|
26,242
|
19,767
|
68,202
|
63,440
|
|||||||||||
Depreciation and other amortization
|
20,304
|
17,196
|
53,908
|
50,101
|
|||||||||||
Amortization of purchased intangibles
|
22,929
|
20,711
|
60,743
|
56,398
|
|||||||||||
Total operating expenses
|
617,165
|
532,434
|
1,694,360
|
1,547,111
|
|||||||||||
Operating income
|
227,679
|
170,009
|
631,378
|
488,587
|
|||||||||||
Interest expense
|
|||||||||||||||
Securitization funding costs
|
30,233
|
43,026
|
96,281
|
128,251
|
|||||||||||
Interest expense on certificates of deposit
|
5,645
|
7,317
|
16,832
|
23,519
|
|||||||||||
Interest expense on long-term and other debt, net
|
38,478
|
33,776
|
111,496
|
98,903
|
|||||||||||
Total interest expense, net
|
74,356
|
84,119
|
224,609
|
250,673
|
|||||||||||
Income before income tax
|
$
|
153,323
|
$
|
85,890
|
$
|
406,769
|
$
|
237,914
|
|||||||
Provision for income taxes
|
59,342
|
32,831
|
157,389
|
90,881
|
|||||||||||
Net income
|
$
|
93,981
|
$
|
53,059
|
$
|
249,380
|
$
|
147,033
|
|||||||
Basic income per share
|
$
|
1.86
|
$
|
1.01
|
$
|
4.89
|
$
|
2.79
|
|||||||
Diluted income per share
|
$
|
1.60
|
$
|
0.96
|
$
|
4.35
|
$
|
2.63
|
|||||||
Weighted average shares
|
|||||||||||||||
Basic
|
50,644
|
52,584
|
50,948
|
52,743
|
|||||||||||
Diluted
|
58,579
|
55,218
|
57,377
|
55,820
|
|||||||||||
Nine Months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
(In thousands)
|
||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income
|
$
|
249,380
|
$
|
147,033
|
||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||
Depreciation and amortization
|
114,651
|
106,499
|
||||||
Deferred income taxes
|
(221
|
)
|
24,044
|
|||||
Provision for loan loss
|
198,739
|
272,259
|
||||||
Non-cash stock compensation
|
32,471
|
33,996
|
||||||
Fair value (gain) loss on interest-rate derivatives
|
(23,146
|
)
|
5,443
|
|||||
Amortization of discount on convertible senior notes
|
54,574
|
48,914
|
||||||
Change in operating assets and liabilities, net of acquisitions:
|
||||||||
Change in trade accounts receivable
|
1,188
|
(20,927
|
)
|
|||||
Change in other assets
|
43,402
|
36,975
|
||||||
Change in accounts payable and accrued expenses
|
44,739
|
33,220
|
||||||
Change in deferred revenue
|
15,869
|
9,079
|
||||||
Change in other liabilities
|
37,411
|
13,551
|
||||||
Excess tax benefits from stock-based compensation
|
(12,103
|
)
|
(12,713
|
)
|
||||
Other
|
5,546
|
(3,869
|
)
|
|||||
Net cash provided by operating activities
|
762,500
|
693,504
|
||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Change in redemption settlement assets
|
4,353
|
21,964
|
||||||
Payments for acquired businesses, net of cash
|
(359,076
|
)
|
(117,000
|
)
|
||||
Change in cash collateral, restricted
|
(468,690
|
)
|
12,530
|
|||||
Change in credit card receivables
|
160,592
|
273,925
|
||||||
Change in restricted cash
|
98,408
|
24,064
|
||||||
Purchase of credit card receivables
|
(42,696
|
)
|
—
|
|||||
Capital expenditures
|
(48,536
|
)
|
(48,296
|
)
|
||||
Investments in marketable securities, net
|
(68,191
|
)
|
(4,950
|
)
|
||||
Investments in the stock of investees
|
(17,974
|
)
|
—
|
|||||
Other
|
—
|
1,918
|
||||||
Net cash (used in) provided by investing activities
|
(741,810
|
)
|
164,155
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Borrowings under debt agreements
|
2,858,500
|
1,205,000
|
||||||
Repayments of borrowings
|
(2,524,729
|
)
|
(1,089,549
|
)
|
||||
Issuances of certificates of deposit
|
842,505
|
94,000
|
||||||
Repayments of certificates of deposit
|
(332,600
|
)
|
(592,200
|
)
|
||||
Borrowings from asset-backed securities
|
1,126,921
|
833,126
|
||||||
Repayments/maturities of asset-backed securities
|
(1,703,776
|
)
|
(1,157,235
|
)
|
||||
Payment of capital lease obligations
|
(3,920
|
)
|
(17,272
|
)
|
||||
Payment of deferred financing costs
|
(27,366
|
)
|
(3,025
|
)
|
||||
Excess tax benefits from stock-based compensation
|
12,103
|
12,713
|
||||||
Proceeds from issuance of common stock
|
22,942
|
31,848
|
||||||
Purchase of treasury shares
|
(186,320
|
)
|
(76,742
|
)
|
||||
Net cash provided by (used in) financing activities
|
84,260
|
(759,336
|
)
|
|||||
Effect of exchange rate changes on cash and cash equivalents
|
(4,494
|
)
|
(2,028
|
)
|
||||
Change in cash and cash equivalents
|
100,456
|
96,295
|
||||||
Cash effect on adoption of ASC 860 and ASC 810
|
—
|
81,553
|
||||||
Cash and cash equivalent at beginning of period
|
139,114
|
213,378
|
||||||
Cash and cash equivalents at end of period
|
$
|
239,570
|
$
|
391,226
|
||||
SUPPLEMENTAL CASH FLOW INFORMATION:
|
||||||||
Interest paid
|
$
|
177,301
|
$
|
176,335
|
||||
Income taxes paid, net
|
$
|
87,185
|
$
|
26,497
|
||||
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands, except per share amounts)
|
|||||||||||||||
Numerator:
|
|||||||||||||||
Net Income
|
$
|
93,981
|
$
|
53,059
|
$
|
249,380
|
$
|
147,033
|
|||||||
Denominator:
|
|||||||||||||||
Weighted average shares, basic
|
50,644
|
52,584
|
50,948
|
52,743
|
|||||||||||
Weighted average effect of dilutive securities:
|
|||||||||||||||
Shares from assumed conversion of convertible senior notes
|
5,138
|
1,454
|
4,195
|
1,785
|
|||||||||||
Shares from assumed conversion of convertible note warrants
|
1,750
|
—
|
1,306
|
—
|
|||||||||||
Net effect of dilutive stock options and unvested restricted stock
|
1,047
|
1,180
|
928
|
1,292
|
|||||||||||
Denominator for diluted calculations
|
58,579
|
55,218
|
57,377
|
55,820
|
|||||||||||
Basic net income per share
|
$
|
1.86
|
$
|
1.01
|
$
|
4.89
|
$
|
2.79
|
|||||||
Diluted net income per share
|
$
|
1.60
|
$
|
0.96
|
$
|
4.35
|
$
|
2.63
|
As of May 31, 2011
|
||||
(In thousands)
|
||||
Current assets
|
$
|
39,924
|
||
Property and equipment
|
4,829
|
|||
Other assets
|
1,600
|
|||
Capitalized software
|
24,000
|
|||
Intangible assets
|
140,000
|
|||
Goodwill
|
232,910
|
|||
Total assets acquired
|
443,263
|
|||
Current liabilities
|
30,099
|
|||
Other liabilities
|
3,904
|
|||
Deferred tax liabilities
|
50,184
|
|||
Total liabilities assumed
|
84,187
|
|||
Net assets acquired
|
$
|
359,076
|
September 30,
2011
|
December 31,
2010
|
|||||||
(In thousands)
|
||||||||
Principal receivables
|
$
|
4,741,569
|
$
|
5,116,111
|
||||
Billed and accrued finance charges
|
205,412
|
214,643
|
||||||
Other receivables
|
27,846
|
25,669
|
||||||
Total credit card receivables
|
4,974,827
|
5,356,423
|
||||||
Less credit card receivables – restricted for securitization investors
|
4,342,167
|
4,795,753
|
||||||
Other credit card receivables
|
$
|
632,660
|
$
|
560,670
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands)
|
|||||||||||||||
Balance at beginning of period
|
$
|
461,015
|
$
|
526,845
|
$
|
518,069
|
$
|
54,884
|
|||||||
Adoption of ASC 860 and ASC 810
|
—
|
—
|
—
|
523,950
|
|||||||||||
Provision for loan loss
|
70,697
|
89,559
|
198,739
|
272,259
|
|||||||||||
Change in estimate for uncollectible unpaid interest and fees
|
(5,000
|
)
|
—
|
(5,000
|
)
|
—
|
|||||||||
Recoveries
|
20,858
|
18,762
|
68,600
|
61,546
|
|||||||||||
Principal charge-offs
|
(93,905
|
)
|
(120,870
|
)
|
(326,743
|
)
|
(398,343
|
)
|
|||||||
Other
|
(5,000
|
)
|
—
|
(5,000
|
)
|
—
|
|||||||||
Balance at end of period
|
$
|
448,665
|
$
|
514,296
|
$
|
448,665
|
$
|
514,296
|
September 30,
2011
|
% of
Total
|
December 31,
2010
|
% of
Total
|
|||||||||||||
(In thousands, except percentages)
|
||||||||||||||||
Receivables outstanding – principal
|
$
|
4,741,569
|
100
|
%
|
$
|
5,116,111
|
100
|
%
|
||||||||
Principal receivables balances contractually delinquent:
|
||||||||||||||||
31 to 60 days
|
79,154
|
1.6
|
%
|
87,252
|
1.7
|
%
|
||||||||||
61 to 90 days
|
50,624
|
1.1
|
59,564
|
1.2
|
||||||||||||
91 or more days
|
103,230
|
2.2
|
130,538
|
2.5
|
||||||||||||
Total
|
$
|
233,008
|
4.9
|
%
|
$
|
277,354
|
5.4
|
%
|
Three Months Ended September 30, 2011
|
Nine Months Ended September 30, 2011
|
||||||||||||||||||||||||
Number of Restructurings
|
Pre-modification Outstanding Principal Balance
|
Post-modification Outstanding Principal Balance
|
Number of Restructurings
|
Pre-modification Outstanding Principal Balance
|
Post-modification Outstanding Principal Balance
|
||||||||||||||||||||
(Dollars in thousands)
|
|||||||||||||||||||||||||
Troubled debt restructurings – credit card receivables
|
36,576
|
$
|
32,665
|
$
|
31,398
|
119,614
|
$
|
104,483
|
$
|
101,019
|
|||||||||||||||
Three Months Ended September 30, 2011
|
Nine Months Ended September 30, 2011
|
|||||||||||||||
Number of Restructurings
|
Outstanding Balance
|
Number of Restructurings
|
Outstanding Balance
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Troubled debt restructurings that subsequently defaulted – credit card receivables(1)
|
12,627
|
$
|
11,413
|
20,899
|
$
|
18,953
|
||||||||||
(1)
|
Represents those troubled debt restructurings that occurred since January 1, 2011 that have defaulted during the reporting period.
|
Age Since Origination
|
Number of Active Accounts with Balances
|
Percentage of Active Accounts with Balances
|
Principal Receivables Outstanding
|
Percentage of Receivables Outstanding
|
||||||||||||
(Dollars in thousands)
|
||||||||||||||||
0-12 Months
|
2,883,748
|
24.8
|
%
|
$
|
929,383
|
19.6
|
%
|
|||||||||
13-24 Months
|
1,516,285
|
13.1
|
603,421
|
12.7
|
||||||||||||
25-36 Months
|
1,198,243
|
10.3
|
573,477
|
12.1
|
||||||||||||
37-48 Months
|
957,825
|
8.2
|
427,124
|
9.0
|
||||||||||||
49-60 Months
|
793,908
|
6.8
|
358,624
|
7.6
|
||||||||||||
Over 60 Months
|
4,269,538
|
36.8
|
1,849,540
|
39.0
|
||||||||||||
Total
|
11,619,547
|
100.0
|
%
|
$
|
4,741,569
|
100.0
|
%
|
Probability of an Account Becoming 90 or More Days Past Due or Becoming Charged off (within the next 12 months)
|
Total Principal Receivables Outstanding
|
Percentage of Principal Receivables Outstanding
|
||||||
(In thousands, except percentages)
|
||||||||
No Score
|
$
|
80,233
|
1.7
|
%
|
||||
27.1% and higher
|
274,486
|
5.8
|
||||||
17.1% - 27.0%
|
467,977
|
9.9
|
||||||
12.6% - 17.0%
|
561,270
|
11.8
|
||||||
3.7% - 12.5%
|
1,951,653
|
41.2
|
||||||
1.9% - 3.6%
|
916,800
|
19.3
|
||||||
Lower than 1.9%
|
489,150
|
10.3
|
||||||
Total
|
$
|
4,741,569
|
100.0
|
%
|
September 30,
2011
|
December 31,
2010
|
|||||||
(In thousands)
|
||||||||
Total credit card receivables – restricted for securitization investors
|
$
|
4,342,167
|
$
|
4,795,753
|
||||
Principal amount of credit card receivables – restricted for securitization investors, 90 days or more past due
|
$
|
93,820
|
$
|
117,594
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands)
|
|||||||||||||||
Net charge-offs of securitized principal
|
$
|
65,993
|
$
|
91,467
|
$
|
231,919
|
$
|
297,476
|
|||||||
September 30, 2011
|
December 31, 2010
|
|||||||||||||||||||||||||||||||
Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
|||||||||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||||||||||
Cash and cash equivalents
|
$
|
38,770
|
$
|
—
|
$
|
—
|
$
|
38,770
|
$
|
74,612
|
$
|
—
|
$
|
—
|
$
|
74,612
|
||||||||||||||||
Government bonds
|
4,858
|
178
|
—
|
5,036
|
15,235
|
161
|
(34
|
)
|
15,362
|
|||||||||||||||||||||||
Corporate bonds (1)
|
397,072
|
8,790
|
(1,034
|
)
|
404,828
|
380,605
|
3,212
|
(1,363
|
)
|
382,454
|
||||||||||||||||||||||
Total
|
$
|
440,700
|
$
|
8,968
|
$
|
(1,034
|
)
|
$
|
448,634
|
$
|
470,452
|
$
|
3,373
|
$
|
(1,397
|
)
|
$
|
472,428
|
||||||||||||||
(1)
|
As of September 30, 2011 and December 31, 2010, LoyaltyOne® had investments in retained interests in the WFN Trusts with a fair value of $64.9 million in each case. These amounts are eliminated and therefore not reflected in the unaudited condensed consolidated financial statements and notes thereof as of September 30, 2011 and December 31, 2010.
|
Less than 12 months
|
September 30, 2011
12 Months or Greater
|
Total
|
||||||||||||||||||||||
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Corporate bonds
|
$
|
10,753
|
$
|
(1,023
|
)
|
$
|
13,533
|
$
|
(11
|
)
|
$
|
24,286
|
$
|
(1,034
|
)
|
|||||||||
Total
|
$
|
10,753
|
$
|
(1,023
|
)
|
$
|
13,533
|
$
|
(11
|
)
|
$
|
24,286
|
$
|
(1,034
|
)
|
Less than 12 months
|
December 31, 2010
12 Months or Greater
|
Total
|
||||||||||||||||||||||
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Government bonds
|
$
|
10,119
|
$
|
(34
|
)
|
$
|
—
|
$
|
—
|
$
|
10,119
|
$
|
(34
|
)
|
||||||||||
Corporate bonds
|
128,349
|
(1,363
|
)
|
—
|
—
|
128,349
|
(1,363
|
)
|
||||||||||||||||
Total
|
$
|
138,468
|
$
|
(1,397
|
)
|
$
|
—
|
$
|
—
|
$
|
138,468
|
$
|
(1,397
|
)
|
Amortized
Cost
|
Estimated Fair Value
|
|||||||
(In thousands)
|
||||||||
Due in one year or less
|
$
|
65,546
|
$
|
65,151
|
||||
Due after one year through five years
|
375,154
|
383,483
|
||||||
Total
|
$
|
440,700
|
$
|
448,634
|
||||
September 30, 2011
|
|||||||||||||
Gross
Assets
|
Accumulated
Amortization
|
Net
|
Amortization Life and Method
|
||||||||||
(In thousands)
|
|||||||||||||
Finite Lived Assets
|
|||||||||||||
Customer contracts and lists
|
$
|
316,245
|
$
|
(134,361
|
)
|
$
|
181,884
|
3-12 years—straight line
|
|||||
Premium on purchased credit card portfolios
|
156,203
|
(78,087
|
)
|
78,116
|
3-10 years—straight line, accelerated
|
||||||||
Collector database
|
66,664
|
(59,020
|
)
|
7,644
|
30 years—15% declining balance
|
||||||||
Customer database
|
175,391
|
(91,281
|
)
|
84,110
|
4-10 years—straight line
|
||||||||
Noncompete agreements
|
1,024
|
(911
|
)
|
113
|
2-3 years—straight line
|
||||||||
Tradenames
|
38,141
|
(6,649
|
)
|
31,492
|
5-15 years—straight line
|
||||||||
Purchased data lists
|
23,119
|
(15,559
|
)
|
7,560
|
1-5 years—straight line, accelerated
|
||||||||
$
|
776,787
|
$
|
(385,868
|
)
|
$
|
390,919
|
|||||||
Indefinite Lived Assets
|
|||||||||||||
Tradenames
|
12,350
|
—
|
12,350
|
Indefinite life
|
|||||||||
Total intangible assets
|
$
|
789,137
|
$
|
(385,868
|
)
|
$
|
403,269
|
December 31, 2010
|
|||||||||||||
Gross
Assets
|
Accumulated
Amortization
|
Net
|
Amortization Life and Method
|
||||||||||
(In thousands)
|
|||||||||||||
Finite Lived Assets
|
|||||||||||||
Customer contracts and lists
|
$
|
211,413
|
$
|
(123,932
|
)
|
$
|
87,481
|
5-10 years—straight line
|
|||||
Premium on purchased credit card portfolios
|
151,430
|
(63,115
|
)
|
88,315
|
3-10 years—straight line, accelerated
|
||||||||
Collector database
|
70,211
|
(61,075
|
)
|
9,136
|
30 years—15% declining balance
|
||||||||
Customer database
|
175,397
|
(76,002
|
)
|
99,395
|
4-10 years—straight line
|
||||||||
Noncompete agreements
|
1,062
|
(668
|
)
|
394
|
2-3 years—straight line
|
||||||||
Tradenames
|
14,169
|
(5,070
|
)
|
9,099
|
5-10 years—straight line
|
||||||||
Purchased data lists
|
20,506
|
(12,285
|
)
|
8,221
|
1-5 years—straight line, accelerated
|
||||||||
$
|
644,188
|
$
|
(342,147
|
)
|
$
|
302,041
|
|||||||
Indefinite Lived Assets
|
|||||||||||||
Tradenames
|
12,350
|
—
|
12,350
|
Indefinite life
|
|||||||||
Total intangible assets
|
$
|
656,538
|
$
|
(342,147
|
)
|
$
|
314,391
|
LoyaltyOne
|
Epsilon
|
Private Label Services and Credit
|
Corporate/
Other
|
Total
|
||||||||||||||||
(In thousands)
|
||||||||||||||||||||
December 31, 2010
|
$
|
246,930
|
$
|
713,161
|
$
|
261,732
|
$
|
—
|
$
|
1,221,823
|
||||||||||
Effects of foreign currency translation
|
(11,902
|
)
|
(135
|
)
|
—
|
—
|
(12,037
|
)
|
||||||||||||
Goodwill acquired during the year
|
—
|
232,910
|
—
|
—
|
232,910
|
|||||||||||||||
September 30, 2011
|
$
|
235,028
|
$
|
945,936
|
$
|
261,732
|
$
|
—
|
$
|
1,442,696
|
Description
|
September 30,
2011
|
December 31,
2010
|
Maturity
|
Interest Rate
|
|||||||
(Dollars in thousands)
|
|||||||||||
Certificates of deposit:
|
|||||||||||
Certificates of deposit
|
$
|
1,369,005
|
$
|
859,100
|
Three months to five years
|
0.10% to 5.25%
|
|||||
Less: current portion
|
(752,532
|
)
|
(442,600
|
)
|
|||||||
Long-term portion
|
$
|
616,473
|
$
|
416,500
|
|||||||
Asset-backed securities debt – owed to securitization investors:
|
|||||||||||
Fixed rate asset-backed term note securities
|
$
|
1,772,815
|
$
|
1,772,815
|
Various - Nov 2011 – Jun 2015
|
3.79% to 7.00%
|
|||||
Floating rate asset-backed term note securities
|
703,500
|
1,153,500
|
Various - Apr 2012 – Apr 2013
|
(1)
|
|||||||
Conduit asset-backed securities
|
606,972
|
733,827
|
Various - Jun 2012 – Sept 2012
|
1.26% to 1.97%
|
|||||||
Total asset-backed securities – owed to securitization investors
|
3,083,287
|
3,660,142
|
|||||||||
Less: current portion
|
(1,769,122
|
)
|
(1,743,827
|
)
|
|||||||
Long-term portion
|
$
|
1,314,165
|
$
|
1,916,315
|
|||||||
Long-term and other debt:
|
|||||||||||
2011 credit facility
|
$
|
495,000
|
$
|
—
|
May 2016
|
(2)
|
|||||
2011 term loan
|
787,547
|
—
|
May 2016
|
(2)
|
|||||||
2006 credit facility
|
—
|
300,000
|
—
|
—
|
|||||||
Series B senior notes
|
—
|
250,000
|
—
|
—
|
|||||||
2009 term loan
|
—
|
161,000
|
—
|
—
|
|||||||
2010 term loan
|
—
|
236,000
|
—
|
—
|
|||||||
Convertible senior notes due 2013
|
697,977
|
659,371
|
August 2013
|
1.75%
|
|||||||
Convertible senior notes due 2014
|
273,655
|
257,687
|
May 2014
|
4.75%
|
|||||||
Capital lease obligations and other debt
|
41
|
5,714
|
July 2013(3)
|
7.10%(3)
|
|||||||
Total long-term and other debt
|
2,254,220
|
1,869,772
|
|||||||||
Less: current portion
|
(19,834
|
)
|
(255,679
|
)
|
|||||||
Long-term portion
|
$
|
2,234,386
|
$
|
1,614,093
|
|||||||
(1)
|
Interest rates include those for certain of the Company’s asset-backed securities – owed to securitization investors where floating rate debt is fixed through interest rate swap agreements. The interest rate for the floating rate debt is equal to the London Interbank Offered Rate (“LIBOR”) as defined in the respective agreements plus a margin of 0.1% to 2.5% as defined in the respective agreements. The weighted average interest rate of the fixed rate achieved through interest rate swap agreements is 5.75% at September 30, 2011.
|
(2)
|
At September 30, 2011, the weighted average interest rate for the 2011 Credit Facility and 2011 Term Loan was 2.51% and 2.49%, respectively.
|
(3)
|
The Company has other minor borrowings, primarily capital leases.
|
September 30,
2011
|
December 31,
2010
|
|||||||
(In thousands)
|
||||||||
Carrying amount of equity component
|
$
|
368,678
|
$
|
368,678
|
||||
Principal amount of liability component
|
$
|
1,150,000
|
$
|
1,150,000
|
||||
Unamortized discount
|
(178,368
|
)
|
(232,942
|
)
|
||||
Net carrying value of liability component
|
$
|
971,632
|
$
|
917,058
|
||||
If-converted value of common stock
|
$
|
1,623,007
|
$
|
1,243,605
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands, except percentages)
|
|||||||||||||||
Interest expense calculated on contractual interest rate
|
$
|
7,619
|
$
|
7,619
|
$
|
22,856
|
$
|
22,856
|
|||||||
Amortization of discount on liability component
|
18,692
|
16,752
|
54,574
|
48,914
|
|||||||||||
Total interest expense on convertible senior notes
|
$
|
26,311
|
$
|
24,371
|
$
|
77,430
|
$
|
71,770
|
|||||||
Effective interest rate (annualized)
|
11.0
|
%
|
11.0
|
%
|
11.0
|
%
|
11.0
|
%
|
September 30, 2011
|
December 31, 2010
|
|||||||||||||||
Notional Amount
|
Weighted Average Years to Maturity
|
Notional Amount
|
Weighted Average Years
to Maturity
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Interest rate contracts not designated as hedging instruments
|
$
|
703,500
|
1.63
|
$ |
1,153,500
|
1.72
|
||||||||||
September 30, 2011
|
December 31, 2010
|
||||||||||||||
Balance Sheet Location
|
Fair Value
|
Balance Sheet Location
|
Fair Value
|
||||||||||||
(In thousands)
|
|||||||||||||||
Interest rate contracts not designated as hedging instruments
|
Other current liabilities
|
$
|
—
|
Other current liabilities
|
$
|
4,574
|
|||||||||
Interest rate contracts not designated as hedging instruments
|
Other liabilities
|
$
|
46,685
|
Other liabilities
|
$
|
65,257
|
|||||||||
2011
|
2010
|
||||||||||||||
For the three months ended September 30,
|
Income Statement Location
|
Gain on Derivative Contracts
|
Income Statement Location
|
Loss on Derivative Contracts
|
|||||||||||
(In thousands)
|
|||||||||||||||
Interest rate contracts not designated as hedging instruments
|
Securitization funding costs
|
$
|
8,543
|
Securitization funding costs
|
$
|
59
|
|||||||||
For the nine months ended September 30,
|
|||||||||||||||
Interest rate contracts not designated as hedging instruments
|
Securitization funding costs
|
$
|
23,146
|
Securitization funding costs
|
$
|
5,443
|
|||||||||
|
·
|
Redemption element. The redemption element is the larger of the two components. Revenue related to the redemption element is based on the estimated fair value. For this component, revenue is recognized at the time an AIR MILES reward mile is redeemed, or for those AIR MILES reward miles that are estimated to go unredeemed by the collector base, known as “breakage,” over the estimated life of an AIR MILES reward mile. The Company’s estimate of breakage is 28%.
|
|
·
|
Service element. The service element consists of marketing and administrative services provided to sponsors. Revenue related to the service element has been determined in accordance with ASU 2009-13. It is initially deferred and then amortized pro rata over the estimated life of an AIR MILES reward mile. With the adoption of ASU 2009-13, the residual method will no longer be utilized for new sponsor agreements entered into on or after January 1, 2011 or existing sponsor agreements that are materially modified subsequent to that date; for these agreements, the Company will measure the service element at its estimated selling price.
|
Deferred Revenue
|
||||||||||||
Service
|
Redemption
|
Total
|
||||||||||
(In thousands)
|
||||||||||||
December 31, 2010
|
$
|
339,514
|
$
|
881,728
|
$
|
1,221,242
|
||||||
Cash proceeds
|
163,534
|
395,201
|
558,735
|
|||||||||
Revenue recognized
|
(144,610
|
)
|
(399,437
|
)
|
(544,047
|
)
|
||||||
Other
|
—
|
1,184
|
1,184
|
|||||||||
Effects of foreign currency translation
|
(18,461
|
)
|
(44,336
|
)
|
(62,797
|
)
|
||||||
September 30, 2011
|
$
|
339,977
|
$
|
834,340
|
$
|
1,174,317
|
||||||
Amounts recognized in the unaudited condensed consolidated balance sheets:
|
||||||||||||
Current liabilities
|
$
|
160,782
|
$
|
834,340
|
$
|
995,122
|
||||||
Non-current liabilities
|
$
|
179,195
|
$
|
—
|
$
|
179,195
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands)
|
|||||||||||||||
Cost of operations
|
$
|
7,762
|
$
|
6,598
|
$
|
19,672
|
$
|
18,801
|
|||||||
General and administrative
|
4,519
|
4,377
|
12,799
|
15,195
|
|||||||||||
Total
|
$
|
12,281
|
$
|
10,975
|
$
|
32,471
|
$
|
33,996
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Net income
|
$
|
93,981
|
$
|
53,059
|
$
|
249,380
|
$
|
147,033
|
||||||||
Adoption of ASC 860 and ASC 810 (1)
|
—
|
—
|
—
|
55,881
|
||||||||||||
Unrealized gain (loss) on securities available-for-sale
|
13,989
|
(1,535
|
)
|
13,045
|
(3,283
|
)
|
||||||||||
Foreign currency translation adjustments (2)
|
7,281
|
(3,909
|
)
|
3,750
|
(5,791
|
)
|
||||||||||
Total comprehensive income, net of tax
|
$
|
115,251
|
$
|
47,615
|
$
|
266,175
|
$
|
193,840
|
||||||||
(1)
|
These amounts related to retained interests in the WFN Trusts and the WFC Trust were previously reflected in accumulated other comprehensive income. Upon the adoption of ASC 860, “Transfers and Servicing,” and ASC 810, “Consolidation,” which was effective January 1, 2010, these interests and related accumulated other comprehensive income have been reclassified, derecognized or eliminated upon consolidation.
|
(2)
|
Primarily related to the impact of changes in the Canadian currency exchange rate.
|
September 30, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Financial assets
|
||||||||||||||||
Cash and cash equivalents
|
$
|
239,570
|
$
|
239,570
|
$
|
139,114
|
$
|
139,114
|
||||||||
Trade receivables, net
|
265,156
|
265,156
|
260,945
|
260,945
|
||||||||||||
Credit card receivables, net
|
4,526,162
|
4,526,162
|
4,838,354
|
4,838,354
|
||||||||||||
Redemption settlement assets, restricted
|
448,634
|
448,634
|
472,428
|
472,428
|
||||||||||||
Cash collateral, restricted
|
654,705
|
654,705
|
185,754
|
185,754
|
||||||||||||
Other investment securities
|
80,160
|
80,160
|
104,916
|
104,916
|
||||||||||||
Financial liabilities
|
||||||||||||||||
Accounts payable
|
122,055
|
122,055
|
121,856
|
121,856
|
||||||||||||
Certificates of deposit
|
1,369,005
|
1,390,828
|
859,100
|
883,405
|
||||||||||||
Asset-backed securities debt – owed to securitization investors
|
3,083,287
|
3,140,758
|
3,660,142
|
3,711,263
|
||||||||||||
Long-term and other debt
|
2,254,220
|
2,999,681
|
1,869,772
|
2,393,124
|
||||||||||||
Derivative financial instruments
|
46,685
|
46,685
|
69,831
|
69,831
|
|
·
|
Level 1, defined as observable inputs such as quoted prices in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
·
|
Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
Fair Value Measurements at
September 30, 2011 Using
|
||||||||||||||||
Balance at
September 30,
2011
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Government bonds (1)
|
$
|
5,036
|
$
|
—
|
$
|
5,036
|
$
|
—
|
||||||||
Corporate bonds (1)
|
404,828
|
20,680
|
384,148
|
—
|
||||||||||||
Cash collateral, restricted
|
654,705
|
—
|
496,991
|
157,714
|
||||||||||||
Other investment securities (2)
|
80,160
|
61,016
|
19,144
|
—
|
||||||||||||
Total assets measured at fair value
|
$
|
1,144,729
|
$
|
81,696
|
$
|
905,319
|
$
|
157,714
|
||||||||
Derivative financial instruments (3)
|
$
|
46,685
|
$
|
—
|
$
|
46,685
|
$
|
—
|
||||||||
Total liabilities measured at fair value
|
$
|
46,685
|
$
|
—
|
$
|
46,685
|
$
|
—
|
Fair Value Measurements at
December 31, 2010 Using
|
|||||||||||||||||
Balance at
December 31,
2010
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||
(In thousands)
|
|||||||||||||||||
Government bonds (1)
|
$
|
15,362
|
$
|
—
|
$
|
15,362
|
$
|
—
|
|||||||||
Corporate bonds (1)
|
382,454
|
164,706
|
217,748
|
—
|
|||||||||||||
Cash collateral, restricted
|
185,754
|
—
|
—
|
185,754
|
|||||||||||||
Other investment securities (2)
|
104,916
|
86,881
|
18,035
|
—
|
|||||||||||||
Total assets measured at fair value
|
$
|
688,486
|
$
|
251,587
|
$
|
251,145
|
$
|
185,754
|
|||||||||
Derivative financial instruments (3)
|
$
|
69,831
|
$
|
—
|
$
|
69,831
|
$
|
—
|
|||||||||
Total liabilities measured at fair value
|
$
|
69,831
|
$
|
—
|
$
|
69,831
|
$
|
—
|
|||||||||
(1)
|
Amounts are included in redemption settlement assets in the unaudited condensed consolidated balance sheets.
|
(2)
|
Amounts are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets.
|
(3)
|
Amounts are included in other current liabilities and other liabilities in the unaudited condensed consolidated balance sheets.
|
Cash Collateral, Restricted
|
||||
(In thousands)
|
||||
June 30, 2011
|
$
|
175,826
|
||
Total losses (realized or unrealized):
|
||||
Included in earnings
|
(311
|
)
|
||
Purchases
|
11,656
|
|||
Settlements
|
(29,457
|
)
|
||
Transfers in or out of Level 3
|
—
|
|||
September 30, 2011
|
$
|
157,714
|
||
Losses for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2011
|
$
|
(311
|
)
|
Cash Collateral, Restricted
|
||||
(In thousands)
|
||||
December 31, 2010
|
$
|
185,754
|
||
Total gains (realized or unrealized):
|
||||
Included in earnings
|
147
|
|||
Purchases
|
13,947
|
|||
Settlements
|
(42,134
|
)
|
||
Transfers in or out of Level 3
|
—
|
|||
September 30, 2011
|
$
|
157,714
|
||
Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2011
|
$
|
147
|
Cash Collateral, Restricted
|
||||
(In thousands)
|
||||
June 30, 2010
|
$
|
171,790
|
||
Total gains (realized or unrealized):
|
||||
Included in earnings
|
473
|
|||
Purchases, sales, issuances and settlements
|
(4,434
|
)
|
||
Transfers in or out of Level 3
|
—
|
|||
September 30, 2010
|
$
|
167,829
|
||
Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2010
|
$
|
473
|
Corporate
Bonds
|
Seller’s
Interest
|
Due from
Securitizations
|
Cash Collateral,
Restricted
|
|||||||||||||
(In thousands)
|
||||||||||||||||
December 31, 2009
|
$
|
73,866
|
$
|
297,108
|
$
|
775,570
|
$
|
206,678
|
||||||||
Adoption of ASC 860 and ASC 810
|
(73,866
|
)
|
(297,108
|
)
|
(775,570
|
)
|
—
|
|||||||||
Total gains (realized or unrealized):
|
||||||||||||||||
Included in earnings
|
—
|
—
|
—
|
143
|
||||||||||||
Purchases, sales, issuances and settlements
|
—
|
—
|
—
|
(38,992
|
)
|
|||||||||||
Transfers in or out of Level 3
|
—
|
—
|
—
|
—
|
||||||||||||
September 30, 2010
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
167,829
|
||||||||
Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2010
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
143
|
|
·
|
LoyaltyOne includes the Company’s Canadian AIR MILES Reward Program;
|
|
·
|
Epsilon provides integrated direct marketing solutions that combine database marketing technology and analytics with a broad range of direct marketing services; and
|
|
·
|
Private Label Services and Credit provides risk management solutions, account origination, funding, transaction processing, customer care and collections services for the Company’s private label retail credit card programs.
|
Three Months Ended September 30, 2011
|
LoyaltyOne
|
Epsilon
|
Private Label Services and Credit
|
Corporate/ Other
|
Eliminations
|
Total
|
||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Revenues
|
$
|
209,634
|
$
|
248,405
|
$
|
389,051
|
$
|
211
|
$
|
(2,457
|
)
|
$
|
844,844
|
|||||||||||
Adjusted EBITDA (1)
|
59,920
|
58,528
|
187,712
|
(21,513
|
)
|
(1,454
|
)
|
283,193
|
||||||||||||||||
Depreciation and amortization
|
5,130
|
24,899
|
8,950
|
4,254
|
—
|
43,233
|
||||||||||||||||||
Stock compensation expense
|
2,047
|
3,617
|
2,098
|
4,519
|
—
|
12,281
|
||||||||||||||||||
Operating income (loss)
|
52,743
|
30,012
|
176,664
|
(30,286
|
)
|
(1,454
|
)
|
227,679
|
||||||||||||||||
Interest expense, net
|
—
|
—
|
—
|
74,356
|
—
|
74,356
|
||||||||||||||||||
Income (loss) before income taxes
|
52,743
|
30,012
|
176,664
|
(104,642
|
)
|
(1,454
|
)
|
153,323
|
Three Months Ended September 30, 2010
|
LoyaltyOne
|
Epsilon
|
Private Label Services and Credit
|
Corporate/ Other
|
Eliminations
|
Total
|
||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Revenues
|
$
|
184,411
|
$
|
170,468
|
$
|
349,642
|
$
|
357
|
$
|
(2,435
|
)
|
$
|
702,443
|
|||||||||||
Adjusted EBITDA (1)
|
46,478
|
44,091
|
143,894
|
(13,988
|
)
|
(1,584
|
)
|
218,891
|
||||||||||||||||
Depreciation and amortization
|
5,827
|
21,473
|
8,892
|
1,715
|
—
|
37,907
|
||||||||||||||||||
Stock compensation expense
|
2,514
|
2,305
|
1,779
|
4,377
|
—
|
10,975
|
||||||||||||||||||
Operating income (loss)
|
38,137
|
20,313
|
133,223
|
(20,080
|
)
|
(1,584
|
)
|
170,009
|
||||||||||||||||
Interest expense, net
|
—
|
—
|
—
|
84,119
|
—
|
84,119
|
||||||||||||||||||
Income (loss) before income taxes
|
38,137
|
20,313
|
133,223
|
(104,199
|
)
|
(1,584
|
)
|
85,890
|
Nine Months Ended September 30, 2011
|
LoyaltyOne
|
Epsilon
|
Private Label Services and Credit
|
Corporate/ Other
|
Eliminations
|
Total
|
||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Revenues
|
$
|
630,470
|
$
|
592,545
|
$
|
1,108,679
|
$
|
924
|
$
|
(6,880
|
)
|
$
|
2,325,738
|
|||||||||||
Adjusted EBITDA (1)
|
171,114
|
131,518
|
534,713
|
(54,483
|
)
|
(4,362
|
)
|
778,500
|
||||||||||||||||
Depreciation and amortization
|
15,564
|
65,519
|
26,818
|
6,750
|
—
|
114,651
|
||||||||||||||||||
Stock compensation expense
|
5,379
|
8,765
|
5,528
|
12,799
|
—
|
32,471
|
||||||||||||||||||
Operating income (loss)
|
150,171
|
57,234
|
502,367
|
(74,032
|
)
|
(4,362
|
)
|
631,378
|
||||||||||||||||
Interest expense, net
|
—
|
—
|
—
|
224,609
|
—
|
224,609
|
||||||||||||||||||
Income (loss) before income taxes
|
150,171
|
57,234
|
502,367
|
(298,641
|
)
|
(4,362
|
)
|
406,769
|
Nine Months Ended September 30, 2010
|
LoyaltyOne
|
Epsilon
|
Private Label Services and Credit
|
Corporate/ Other
|
Eliminations
|
Total
|
||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Revenues
|
$
|
575,612
|
$
|
433,799
|
$
|
1,032,106
|
$
|
1,510
|
$
|
(7,329
|
)
|
$
|
2,035,698
|
|||||||||||
Adjusted EBITDA (1)
|
158,731
|
102,654
|
416,878
|
(44,171
|
)
|
(5,010
|
)
|
629,082
|
||||||||||||||||
Depreciation and amortization
|
18,111
|
57,565
|
25,913
|
4,910
|
—
|
106,499
|
||||||||||||||||||
Stock compensation expense
|
7,042
|
6,441
|
5,318
|
15,195
|
—
|
33,996
|
||||||||||||||||||
Operating income (loss)
|
133,578
|
38,648
|
385,647
|
(64,276
|
)
|
(5,010
|
)
|
488,587
|
||||||||||||||||
Interest expense, net
|
—
|
—
|
—
|
250,673
|
—
|
250,673
|
||||||||||||||||||
Income (loss) before income taxes
|
133,578
|
38,648
|
385,647
|
(314,949
|
)
|
(5,010
|
)
|
237,914
|
||||||||||||||||
(1)
|
Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most directly comparable GAAP financial measure, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization and amortization of purchased intangibles. Adjusted EBITDA is presented in accordance with ASC 280, “Segment Reporting,” as it is the primary performance metric by which senior management is evaluated.
|
September 30,
2011
|
December 31,
2010
|
|||||||
(In thousands)
|
||||||||
Assets:
|
||||||||
Credit card receivables, net
|
$
|
3,851
|
$
|
11,920
|
||||
Assets of discontinued operations
|
$
|
3,851
|
$
|
11,920
|
|
·
|
elimination of $74 million in redemption settlement assets for those interests retained in the WFN Trusts,
|
|
·
|
elimination of $775 million in retained interests classified in due from securitizations,
|
|
·
|
consolidation of $4.1 billion in credit card receivables, and
|
|
·
|
consolidation of $3.7 billion in asset-backed securities.
|
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Net income
|
$
|
93,981
|
$
|
53,059
|
$
|
249,380
|
$
|
147,033
|
||||||||
Stock compensation expense
|
12,281
|
10,975
|
32,471
|
33,996
|
||||||||||||
Provision for income taxes
|
59,342
|
32,831
|
157,389
|
90,881
|
||||||||||||
Interest expense, net
|
74,356
|
84,119
|
224,609
|
250,673
|
||||||||||||
Depreciation and other amortization
|
20,304
|
17,196
|
53,908
|
50,101
|
||||||||||||
Amortization of purchased intangibles
|
22,929
|
20,711
|
60,743
|
56,398
|
||||||||||||
Adjusted EBITDA
|
$
|
283,193
|
$
|
218,891
|
$
|
778,500
|
$
|
629,082
|
||||||||
Three Months Ended September 30,
|
Change
|
|||||||||||||||||||
2011
|
2010
|
$
|
%
|
|||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||
Revenue:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
209,634
|
$
|
184,411
|
$
|
25,223
|
13.7
|
%
|
||||||||||||
Epsilon
|
248,405
|
170,468
|
77,937
|
45.7
|
||||||||||||||||
Private Label Services and Credit
|
389,051
|
349,642
|
39,409
|
11.3
|
||||||||||||||||
Corporate/Other
|
211
|
357
|
(146
|
)
|
(40.9
|
)
|
||||||||||||||
Eliminations
|
(2,457
|
)
|
(2,435
|
)
|
(22
|
)
|
nm
|
*
|
||||||||||||
Total
|
$
|
844,844
|
$
|
702,443
|
$
|
142,401
|
20.3
|
%
|
||||||||||||
Adjusted EBITDA (1):
|
||||||||||||||||||||
LoyaltyOne
|
$
|
59,920
|
$
|
46,478
|
$
|
13,442
|
28.9
|
%
|
||||||||||||
Epsilon
|
58,528
|
44,091
|
14,437
|
32.7
|
||||||||||||||||
Private Label Services and Credit
|
187,712
|
143,894
|
43,818
|
30.5
|
||||||||||||||||
Corporate/Other
|
(21,513
|
)
|
(13,988
|
)
|
(7,525
|
)
|
53.8
|
|||||||||||||
Eliminations
|
(1,454
|
)
|
(1,584
|
)
|
130
|
nm
|
*
|
|||||||||||||
Total
|
$
|
283,193
|
$
|
218,891
|
$
|
64,302
|
29.4
|
%
|
||||||||||||
Stock compensation expense:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
2,047
|
$
|
2,514
|
$
|
(467
|
)
|
(18.6
|
)%
|
|||||||||||
Epsilon
|
3,617
|
2,305
|
1,312
|
56.9
|
||||||||||||||||
Private Label Services and Credit
|
2,098
|
1,779
|
319
|
17.9
|
||||||||||||||||
Corporate/Other
|
4,519
|
4,377
|
142
|
3.2
|
||||||||||||||||
Total
|
$
|
12,281
|
$
|
10,975
|
$
|
1,306
|
11.9
|
%
|
||||||||||||
Depreciation and amortization:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
5,130
|
$
|
5,827
|
$
|
(697
|
)
|
(12.0
|
)%
|
|||||||||||
Epsilon
|
24,899
|
21,473
|
3,426
|
16.0
|
||||||||||||||||
Private Label Services and Credit
|
8,950
|
8,892
|
58
|
0.7
|
||||||||||||||||
Corporate/Other
|
4,254
|
1,715
|
2,539
|
148.0
|
||||||||||||||||
Total
|
$
|
43,233
|
$
|
37,907
|
$
|
5,326
|
14.1
|
%
|
||||||||||||
Operating income:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
52,743
|
$
|
38,137
|
$
|
14,606
|
38.3
|
%
|
||||||||||||
Epsilon
|
30,012
|
20,313
|
9,699
|
47.7
|
||||||||||||||||
Private Label Services and Credit
|
176,664
|
133,223
|
43,441
|
32.6
|
||||||||||||||||
Corporate/Other
|
(30,286
|
)
|
(20,080
|
)
|
(10,206
|
)
|
50.8
|
|||||||||||||
Eliminations
|
(1,454
|
)
|
(1,584
|
)
|
130
|
nm
|
*
|
|||||||||||||
Total
|
$
|
227,679
|
$
|
170,009
|
$
|
57,670
|
33.9
|
%
|
||||||||||||
Adjusted EBITDA margin (2):
|
||||||||||||||||||||
LoyaltyOne
|
28.6
|
%
|
25.2
|
%
|
3.4
|
%
|
||||||||||||||
Epsilon
|
23.6
|
25.9
|
(2.3
|
)
|
||||||||||||||||
Private Label Services and Credit
|
48.2
|
41.2
|
7.0
|
|||||||||||||||||
Total
|
33.5
|
%
|
31.2
|
%
|
2.3
|
%
|
||||||||||||||
Segment operating data:
|
||||||||||||||||||||
Private label statements generated
|
35,286
|
34,827
|
459
|
1.3
|
%
|
|||||||||||||||
Credit sales
|
$
|
2,245,718
|
$
|
2,046,490
|
$
|
199,228
|
9.7
|
%
|
||||||||||||
Average credit card receivables
|
$
|
4,859,421
|
$
|
4,909,977
|
$
|
(50,556
|
)
|
(1.0
|
)%
|
|||||||||||
AIR MILES reward miles issued
|
1,222,633
|
1,124,363
|
98,270
|
8.7
|
%
|
|||||||||||||||
AIR MILES reward miles redeemed
|
869,802
|
844,509
|
25,293
|
3.0
|
%
|
|||||||||||||||
(1)
|
Adjusted EBITDA is equal to net income, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and amortization of purchased intangibles. For a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, see “Use of Non-GAAP Financial Measures” included in this report.
|
(2)
|
Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on operating expenses.
|
*
|
not meaningful
|
|
•
|
Transaction. Revenue increased $6.6 million, or 9.6%, to $74.7 million for the three months ended September 30, 2011 due to AIR MILES reward mile issuance fees, or service element revenue, which increased $5.9 million due in part to a favorable foreign currency exchange rate and recent increases in the number of AIR MILES reward miles issued. Our issuance fees, for which we provide marketing and administrative services, are recognized pro rata over the estimated life of an AIR MILES reward mile, or 42 months. There were no other significant changes in other transaction fees as small increases in other servicing fees were offset by minor declines in merchant fees.
|
|
•
|
Redemption. Revenue increased $20.7 million, or 17.2%, to $141.2 million for the three months ended September 30, 2011. In local currency (Canadian dollars, or CAD), revenue increased approximately CAD $13.0 million, or 10.4%, due to a 3.0% increase in AIR MILES reward miles redeemed and issuance growth over the past several quarters, which has increased revenue associated with breakage.
|
|
•
|
Finance charges, net. Revenue increased $38.2 million, or 11.7%, to $365.9 million for the three months ended September 30, 2011. This increase was driven by improvement in our gross yield of 340 basis points, offset in part by a 1.0% decline in average credit card receivables as a result of higher payment rates. The expansion in our gross yield resulted from changes in cardholder terms made throughout 2010.
|
|
•
|
Database marketing fees and direct marketing. Revenue increased $63.3 million, or 37.9%, to $230.4 million for the three months ended September 30, 2011. Strategic database continues to build from recent client signings and expansion of services to existing clients with revenue increasing $12.6 million, or 17.3%. The Aspen acquisition contributed $57.1 million to database marketing fees and direct marketing revenue. These increases were offset by a 3.3% decline in our targeting sector due to softness in the market and a decline in our production fulfillment due to lower volumes.
|
|
•
|
Other revenue. Revenue increased $13.6 million, or 71.1%, to $32.7 million for the three months ended September 30, 2011 due to the Aspen acquisition, which added $14.2 million in revenue associated with strategic consulting initiatives.
|
|
•
|
Within the Epsilon segment, cost of operations increased $64.8 million due to the Aspen acquisition, which added $58.7 million to cost of operations. Excluding Aspen, the increase was $6.1 million, which was related to payroll and benefits associated with the growth of the marketing technology sector.
|
|
•
|
Within the LoyaltyOne segment, cost of operations increased $11.3 million of which $8.2 million relates to the increase in the exchange rate to $1.02 from $0.96. The remainder of the increase was attributable to a 3.0% increase in the number of AIR MILES reward miles redeemed and an increase in the costs associated with our international initiatives.
|
|
•
|
Within the Private Label Services and Credit segment, cost of operations increased by $14.8 million from increases in payroll and benefits of $6.7 million resulting from growth and an increase in incentive compensation due to over-performance of the segment. Credit card expenses, including marketing, postage and collection fees, also increased $6.0 million due to increased volumes.
|
|
•
|
Securitization funding costs. Securitization funding costs decreased $12.8 million to $30.2 million as a result of changes in the valuation in our interest rate swaps. In the third quarter of 2011, we incurred a gain of $8.5 million in the valuation of our interest rate swaps as compared to a $0.1 million loss in the prior year quarter, which resulted in a net decrease of $8.6 million for the three months ended September 30, 2011 in the valuation of our interest rate swaps. Additionally, interest expense on asset-backed securities debt owed to securitization investors decreased $2.9 million due to lower average borrowings for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.
|
|
•
|
Interest expense on certificates of deposit. Interest on certificates of deposit decreased $1.7 million to $5.6 million due to lower interest rates for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.
|
|
•
|
Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net increased $4.7 million to $38.5 million due to a $1.9 million increase in the amortization of imputed interest associated with the convertible senior notes as compared to the same period in the prior year and interest expense associated with increased borrowings due in part to the Aspen acquisition.
|
|
•
|
LoyaltyOne. Revenue increased $25.2 million, or 13.7%, to $209.6 million for the three months ended September 30, 2011. Revenue benefited from a favorable foreign currency exchange rate, which represented $11.8 million of the increase. In local currency (CAD), revenue for the AIR MILES Reward Program increased CAD $14.1 million as a result of an increase in both redemption revenue and issuance fees, which increased CAD $13.0 million and CAD $3.2 million, respectively. This increase in redemption revenue was attributable to a 3.0% increase in the number of AIR MILES reward miles redeemed as well as growth in the number of AIR MILES reward miles issued over the past several quarters, which has increased revenue associated with breakage. The increase in issuance fees, for which we provide marketing and administrative services, also increased because of the growth in the number of AIR MILES reward miles issued. These increases were offset by a CAD $0.8 million decline in investment revenue due to lower interest earned on investments.
|
|
•
|
Epsilon. Revenue increased $77.9 million, or 45.7%, to $248.4 million for the three months ended September 30, 2011. Marketing technology revenue continues to build from client signings in 2010 and 2011 and the expansion of services to new and existing clients, growing $14.0 million, or 14.9%. Additionally, Aspen added $71.3 million to revenue. These increases were offset by a 3.3% decrease in revenue in our targeting sector due to lower volumes as clients reduced prospecting outlays over concerns with the macro economy as well as a decline in product fulfillment.
|
|
•
|
Private Label Services and Credit. Revenue increased $39.4 million, or 11.3%, to $389.1 million for the three months ended September 30, 2011. Finance charges and late fees increased by $38.2 million driven by an increase in our gross yield of 340 basis points, offset in part by a 1.0% decline in average credit card receivables. The expansion in our gross yield was due to changes in cardholder terms made throughout 2010, which positively impacted our gross yield in the third quarter of 2011. Servicing and other fees also increased $1.1 million.
|
|
•
|
Corporate/Other. Revenue decreased slightly to $0.2 million for the three months ended September 30, 2011 as we are currently earning a minimal amount of revenue related to sublease agreements.
|
|
•
|
LoyaltyOne. Adjusted EBITDA increased $13.4 million, or 28.9%, to $59.9 million for the three months ended September 30, 2011. A favorable foreign currency exchange rate contributed $3.6 million to adjusted EBITDA. Adjusted EBITDA in local currency (CAD) for the AIR MILES Reward Program increased CAD $11.6 million, or 22.8%, with adjusted EBITDA margin increasing to 28.6% from 25.2%. Adjusted EBITDA benefited from the growth in AIR MILES reward miles issued and increased margins on redemptions.
|
|
•
|
Epsilon. Adjusted EBITDA increased $14.4 million, or 32.7%, to $58.5 million for the three months ended September 30, 2011. Adjusted EDITDA was positively impacted by double digit revenue growth in our strategic database business and the Aspen acquisition, which added $11.8 million to adjusted EBITDA. Adjusted EBITDA margin decreased to 23.6% for the three months ended September 30, 2011 from 25.9% for the same period in the prior year due to a shift in revenue mix attributable to the Aspen acquisition.
|
|
•
|
Private Label Services and Credit. Adjusted EBITDA increased $43.8 million, or 30.5%, to $187.7 million for the three months ended September 30, 2011 and adjusted EBITDA margin increased to 48.2% for the three months ended September 30, 2011 compared to 41.2% for the same prior year period. Adjusted EBITDA was positively impacted by the increase in our gross yield as described above and a decline in the provision for loan loss. The net charge-off rate for the three months ended September 30, 2011 was 6.0% as compared to 8.3% in the same period in 2010. The decline in the net charge-off rate reflected the continued improvement in credit quality of the credit card receivables. Net charge-off rates continue to trend lower and delinquency rates, historically a good predictor of future losses, improved to 4.9% of principal credit card receivables at September 30, 2011 from 6.1% at September 30, 2010.
|
|
•
|
Corporate/Other. Adjusted EBITDA decreased $7.5 million to a loss of $21.5 million for the three months ended September 30, 2011 due to an increase of $3.9 million in payroll and benefit costs associated with higher medical and benefit costs, incentive compensation based on company performance and costs associated with the retirement of an executive. In addition, we incurred approximately $3 million in additional legal and consulting fees and non-income tax based costs.
|
Nine Months Ended September 30,
|
Change
|
|||||||||||||||||||
2011
|
2010
|
$
|
%
|
|||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||
Revenue:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
630,470
|
$
|
575,612
|
$
|
54,858
|
9.5
|
%
|
||||||||||||
Epsilon
|
592,545
|
433,799
|
158,746
|
36.6
|
||||||||||||||||
Private Label Services and Credit
|
1,108,679
|
1,032,106
|
76,573
|
7.4
|
||||||||||||||||
Corporate/Other
|
924
|
1,510
|
(586
|
)
|
(38.8
|
)
|
||||||||||||||
Eliminations
|
(6,880
|
)
|
(7,329
|
)
|
449
|
nm
|
*
|
|||||||||||||
Total
|
$
|
2,325,738
|
$
|
2,035,698
|
$
|
290,040
|
14.2
|
%
|
||||||||||||
Adjusted EBITDA (1):
|
||||||||||||||||||||
LoyaltyOne
|
$
|
171,114
|
$
|
158,731
|
$
|
12,383
|
7.8
|
%
|
||||||||||||
Epsilon
|
131,518
|
102,654
|
28,864
|
28.1
|
||||||||||||||||
Private Label Services and Credit
|
534,713
|
416,878
|
117,835
|
28.3
|
||||||||||||||||
Corporate/Other
|
(54,483
|
)
|
(44,171
|
)
|
(10,312
|
)
|
23.3
|
|||||||||||||
Eliminations
|
(4,362
|
)
|
(5,010
|
)
|
648
|
nm
|
*
|
|||||||||||||
Total
|
$
|
778,500
|
$
|
629,082
|
$
|
149,418
|
23.8
|
%
|
||||||||||||
Stock compensation expense:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
5,379
|
$
|
7,042
|
$
|
(1,663
|
)
|
(23.6
|
)%
|
|||||||||||
Epsilon
|
8,765
|
6,441
|
2,324
|
36.1
|
||||||||||||||||
Private Label Services and Credit
|
5,528
|
5,318
|
210
|
3.9
|
||||||||||||||||
Corporate/Other
|
12,799
|
15,195
|
(2,396
|
)
|
(15.8
|
)
|
||||||||||||||
Total
|
$
|
32,471
|
$
|
33,996
|
$
|
(1,525
|
)
|
(4.5
|
)%
|
|||||||||||
Depreciation and amortization:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
15,564
|
$
|
18,111
|
$
|
(2,547
|
)
|
(14.1
|
)%
|
|||||||||||
Epsilon
|
65,519
|
57,565
|
7,954
|
13.8
|
||||||||||||||||
Private Label Services and Credit
|
26,818
|
25,913
|
905
|
3.5
|
||||||||||||||||
Corporate/Other
|
6,750
|
4,910
|
1,840
|
37.5
|
||||||||||||||||
Total
|
$
|
114,651
|
$
|
106,499
|
$
|
8,152
|
7.7
|
%
|
||||||||||||
Operating income:
|
||||||||||||||||||||
LoyaltyOne
|
$
|
150,171
|
$
|
133,578
|
$
|
16,593
|
12.4
|
%
|
||||||||||||
Epsilon
|
57,234
|
38,648
|
18,586
|
48.1
|
||||||||||||||||
Private Label Services and Credit
|
502,367
|
385,647
|
116,720
|
30.3
|
||||||||||||||||
Corporate/Other
|
(74,032
|
)
|
(64,276
|
)
|
(9,756
|
)
|
15.2
|
|||||||||||||
Eliminations
|
(4,362
|
)
|
(5,010
|
)
|
648
|
nm
|
*
|
|||||||||||||
Total
|
$
|
631,378
|
$
|
488,587
|
$
|
142,791
|
29.2
|
%
|
||||||||||||
Adjusted EBITDA margin (2):
|
||||||||||||||||||||
LoyaltyOne
|
27.1
|
%
|
27.6
|
%
|
(0.5
|
)%
|
||||||||||||||
Epsilon
|
22.2
|
23.7
|
(1.5
|
)
|
||||||||||||||||
Private Label Services and Credit
|
48.2
|
40.4
|
7.8
|
|||||||||||||||||
Total
|
33.5
|
%
|
30.9
|
%
|
2.6
|
%
|
||||||||||||||
Segment operating data:
|
||||||||||||||||||||
Private label statements generated
|
104,832
|
106,627
|
(1,795
|
)
|
(1.7
|
)%
|
||||||||||||||
Credit sales
|
$
|
6,624,780
|
$
|
6,119,733
|
$
|
505,047
|
8.3
|
%
|
||||||||||||
Average credit card receivables
|
$
|
4,892,198
|
$
|
5,029,052
|
$
|
(136,854
|
)
|
(2.7
|
)%
|
|||||||||||
AIR MILES reward miles issued
|
3,552,866
|
3,327,131
|
225,735
|
6.8
|
%
|
|||||||||||||||
AIR MILES reward miles redeemed
|
2,675,374
|
2,538,773
|
136,601
|
5.4
|
%
|
|||||||||||||||
(1)
|
Adjusted EBITDA is equal to net income, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and amortization of purchased intangibles. For a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, see “Use of Non-GAAP Financial Measures” included in this report.
|
(2)
|
Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on operating expenses.
|
*
|
not meaningful
|
|
•
|
Transaction. Revenue increased $7.3 million, or 3.4%, to $221.4 million for the nine months ended September 30, 2011 due to AIR MILES reward mile issuance fees, or service element revenue, which increased $18.0 million attributable in part to a favorable foreign currency exchange rate and recent increases in the number of AIR MILES reward miles issued. Our issuance fees, for which we provide marketing and administrative services, are recognized pro rata over the estimated life of an AIR MILES reward mile, or 42 months. Other servicing fees charged to our credit cardholders also increased $5.8 million. These increases were offset in part by a decline in merchant fees of $16.5 million due to increased profit sharing and royalty payments to certain clients.
|
|
•
|
Redemption. Revenue increased $37.4 million, or 9.7%, to $424.3 million for the nine months ended September 30, 2011. A favorable foreign currency exchange rate contributed $23.5 million to the increase in revenue. In local currency (CAD), revenue increased approximately CAD $13.9 million, or 3.5%, due to increases in redemption revenue of CAD $16.3 million attributable to a 5.4% increase in AIR MILES reward miles redeemed, offset in part by the net decline in the amortization of deferred revenue related to the conversion of a certain split-fee to a non-split fee program.
|
|
•
|
Finance charges, net. Revenue increased $87.0 million, or 9.1%, to $1.0 billion for the nine months ended September 30, 2011. This increase was driven by improvement in our gross yield of 310 basis points, offset in part by a 2.7% decline in average credit card receivables as a result of higher payment rates. The expansion in our gross yield was in part due to changes in cardholder terms made throughout 2010.
|
|
•
|
Database marketing fees and direct marketing. Revenue increased $138.1 million, or 32.3%, to $565.3 million for the nine months ended September 30, 2011. The increase in revenue was driven by our acquisitions of the Direct Marketing Services and Database Marketing divisions of Equifax, Inc., collectively DMS, and Aspen as well as double digit growth in our marketing technology division. Strategic database continues to build from recent client signings and expansion of services to existing clients with revenue increasing $44.3 million, or 22.6%. Within our targeting sector, the DMS acquisition added $20.1 million to revenue. The Aspen acquisition contributed $76.8 million to database marketing fees and direct marketing revenue.
|
|
•
|
Other revenue. Revenue increased $20.2 million, or 37.3%, to $74.5 million for the nine months ended September 30, 2011, due to the Aspen acquisition, which added $18.2 million in revenue associated with strategic consulting initiatives.
|
|
•
|
Within the Epsilon segment, cost of operations increased $132.2 million due to the DMS and Aspen acquisitions, which added $16.0 million and $78.6 million to cost of operations, respectively. Excluding these acquisitions, cost of operations increased $37.6 million, which was associated with the growth of the marketing technology business where payroll related costs increased $35.6 million.
|
|
•
|
Within the LoyaltyOne segment, cost of operations increased $40.8 million, of which $24.9 million relates to the increase in the foreign currency exchange rate to $1.02 from $0.96. Excluding this foreign currency exchange rate impact, the cost of fulfillment for the AIR MILES Reward Program increased CAD $10.7 million as a result of a 5.4% increase in the number of AIR MILES reward miles redeemed. In addition, cost of operations increased due to increases in costs associated with our international initiatives and certain gains in securities realized in 2010 but not in 2011.
|
|
•
|
Within the Private Label Services and Credit segment, cost of operations increased by $32.5 million from increases in payroll and benefits of $14.8 million resulting from growth and an increase in incentive compensation due to over-performance of the segment. Credit card expenses, including marketing, postage and collection fees and other costs increased $7.6 million and $3.6 million, respectively, due to increased volumes.
|
|
•
|
Securitization funding costs. Securitization funding costs decreased $32.0 million to $96.3 million primarily as a result of changes in the valuation in our interest rate swaps. In the nine months ended September 30, 2011, we incurred a gain of $23.1 million in the valuation of our interest rate swaps as compared to a loss of $5.4 million in the same prior year period, which resulted in a net decrease of $28.5 million in the valuation of our interest rate swaps.
|
|
•
|
Interest expense on certificates of deposit. Interest on certificates of deposit decreased $6.7 million to $16.8 million due to lower average borrowings for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.
|
|
•
|
Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net increased $12.6 million to $111.5 million due to a $5.7 million increase in the amortization of imputed interest associated with the convertible senior notes as compared to the same period in the prior year, a $2.6 million write-off of unamortized debt costs associated with the early extinguishment of term loans and interest expense associated with borrowings to acquire Aspen.
|
|
•
|
LoyaltyOne. Revenue increased $54.9 million, or 9.5%, to $630.5 million for the nine months ended September 30, 2011. Revenue benefited from a favorable foreign currency exchange rate, which represented $34.7 million of the increase. Revenue for the AIR MILES Reward Program increased CAD $20.0 million, or 3.4%. Redemption revenue increased a net CAD $13.9 million, or 3.5%, due to a 5.4% increase in AIR MILES reward miles redeemed, which was offset in part by a net decrease in amortized revenue related to the conversion of a certain split-fee to non split-fee program. Revenue from issuance fees, for which we provide marketing and administrative services, increased CAD $10.1 million due to recent increases in the total number of AIR MILES reward miles issued. These increases were offset in part by a decline in investment revenue of CAD $3.2 million due to lower interest earned on investments.
|
|
•
|
Epsilon. Revenue increased $158.7 million, or 36.6%, to $592.5 million for the nine months ended September 30, 2011. Marketing technology revenue continues to build from client signings in 2010 and 2011 and the expansion of services to new and existing clients, growing $47.5 million, or 18.3%. Additionally, the Aspen and DMS acquisitions added $95.0 million and $20.1 million to revenue, respectively.
|
|
•
|
Private Label Services and Credit. Revenue increased $76.6 million, or 7.4%, to $1.1 billion for the nine months ended September 30, 2011. Finance charges and late fees increased by $87.0 million driven by an increase in our gross yield of 310 basis points, offset in part by a 2.7% decline in average credit card receivables. The expansion in our gross yield was in part due to changes in cardholder terms made throughout 2010, which positively impacted our gross yield for the nine months ended September 30, 2011. This increase was partially offset by a $10.5 million reduction in transaction revenue as a result of lower merchant fees.
|
|
•
|
Corporate/Other. Revenue decreased slightly to $0.9 million for the three months ended September 30, 2011 as we are currently earning a minimal amount of revenue related to sublease agreements.
|
|
•
|
LoyaltyOne. Adjusted EBITDA increased $12.4 million, or 7.8%, to $171.1 million for the nine months ended September 30, 2011. A favorable foreign currency exchange rate contributed $10.0 million to adjusted EBITDA. Adjusted EBITDA in local currency (CAD) for the AIR MILES Reward Program increased CAD $5.8 million, or 3.4%, with adjusted EBITDA margin decreasing to 27.1% from 27.6%. Adjusted EBITDA benefited from the growth in AIR MILES reward miles issued and increased margins on redemptions, but adjusted EBITDA margin was negatively impacted by the net decrease due to the runoff of amortized revenue.
|
|
•
|
Epsilon. Adjusted EBITDA increased $28.9 million, or 28.1%, to $131.5 million for the nine months ended September 30, 2011. Adjusted EDITDA was positively impacted by double digit growth in our strategic database business and the Aspen acquisition, which added $15.6 million to adjusted EBITDA. Adjusted EBITDA margin decreased to 22.2% for the nine months ended September 30, 2011 from 23.7% for the same period in the prior year due to a shift in revenue mix attributable to the Aspen acquisition.
|
|
•
|
Private Label Services and Credit. Adjusted EBITDA increased $117.8 million, or 28.3%, to $534.7 million for the nine months ended September 30, 2011 and adjusted EBITDA margin increased to 48.2% for the nine months ended September 30, 2011 compared to 40.4% for the same prior year period. Adjusted EBITDA was positively impacted by the increase in our gross yield as described above and a decline in the provision for loan loss. The net charge-off rate for the nine months ended September 30, 2011 was 7.0% as compared to 8.9% in the same period in 2010. The decline in the net charge-off rate reflected the continued improvement in credit quality of the credit card receivables. Net charge-off rates continue to trend lower and delinquency rates, historically a good predictor of future losses, improved to 4.9% of principal credit card receivables at September 30, 2011 from 6.1% at September 30, 2010.
|
|
•
|
Corporate/Other. Adjusted EBITDA decreased $10.3 million to a loss of $54.5 million for the nine months ended September 30, 2011 related to increases in medical and benefit costs, incentive compensation, legal and consulting costs and costs associated with the retirement of an executive.
|
September 30,
2011
|
% of
Total
|
December 31,
2010
|
% of
Total
|
|||||||||||||
(In thousands, except percentages)
|
||||||||||||||||
Receivables outstanding – principal
|
$
|
4,741,569
|
100
|
%
|
$
|
5,116,111
|
100
|
%
|
||||||||
Principal receivables balances contractually delinquent:
|
||||||||||||||||
31 to 60 days
|
79,154
|
1.6
|
%
|
87,252
|
1.7
|
%
|
||||||||||
61 to 90 days
|
50,624
|
1.1
|
59,564
|
1.2
|
||||||||||||
91 or more days
|
103,230
|
2.2
|
130,538
|
2.5
|
||||||||||||
Total
|
$
|
233,008
|
4.9
|
%
|
$
|
277,354
|
5.4
|
%
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In thousands, except percentages)
|
|||||||||||||||
Average credit card receivables
|
$
|
4,859,421
|
$
|
4,909,977
|
$
|
4,892,198
|
$
|
5,029,052
|
|||||||
Net charge-offs of principal receivables
|
73,047
|
102,108
|
258,143
|
336,797
|
|||||||||||
Net charge-offs as a percentage of average credit card receivables
|
6.0
|
%
|
8.3
|
%
|
7.0
|
%
|
8.9
|
%
|
|
•
|
Payments for Acquired Businesses, Net of Cash. Cash decreased $359.1 million due to the Aspen acquisition completed on May 31, 2011. In July 2010, $117.0 million in cash was utilized for the DMS acquisition.
|
|
•
|
Purchase of Credit Card Receivables. Cash decreased $42.7 million for the nine months ended September 30, 2011 due to the acquisition of an existing private label credit card portfolio from J.Jill. There were no purchases of credit card portfolios during the nine months ended September 30, 2010.
|
|
•
|
Cash Collateral, Restricted. Cash decreased $468.7 million for the nine months ended September 30, 2011, as compared to an increase of $12.5 million for the nine months ended September 30, 2010 due to an increase in excess funding deposits in 2011 and an increase in restricted cash associated with principal accumulation for the repayment of asset-backed securities debt maturing in November 2011.
|
|
•
|
Credit Card Receivables Funding. Cash flow from credit card receivables was $160.6 million for the nine months ended September 30, 2011 as compared to $273.9 million for the nine months ended September 30, 2010. Cash flow from credit card receivables increased in both periods due to the seasonal pay down of credit card receivables.
|
|
•
|
Capital Expenditures. Our capital expenditures for the nine months ended September 30, 2011 were $48.5 million compared to $48.3 million for the same period in 2010. We do not expect capital expenditures to exceed approximately 3% of annual revenue for the foreseeable future.
|
2011
|
2012
|
2013
|
2014
|
2015 & Thereafter
|
Total
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Term notes
|
$
|
560,000
|
$
|
700,226
|
$
|
822,339
|
$
|
—
|
$
|
393,750
|
$
|
2,476,315
|
||||||||||||
Conduit facilities (1)
|
—
|
1,805,000
|
—
|
—
|
—
|
1,805,000
|
||||||||||||||||||
Total (2)
|
$
|
560,000
|
$
|
2,505,226
|
$
|
822,339
|
$
|
—
|
$
|
393,750
|
$
|
4,281,315
|
||||||||||||
(1)
|
Amount represents borrowing capacity, not outstanding borrowings.
|
(2)
|
As of September 30, 2011, with the consolidation of the WFN Trusts and the WFC Trust effective January 1, 2010, $609.7 million of debt issued by the credit card securitization trusts and retained by us has been eliminated in the unaudited condensed consolidated financial statements.
|
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Item 4. | Controls and Procedures. |
Item 1. | Legal Proceedings. |
Item 1A. | Risk Factors. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Period
|
Total Number of Shares Purchased (1)
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
|
|||||||||||||
(In millions)
|
|||||||||||||||||
During 2011:
|
|||||||||||||||||
July 1-31
|
10,234
|
$
|
95.92
|
8,100
|
$
|
210.6
|
|||||||||||
August 1-31
|
614,005
|
86.91
|
608,637
|
157.7
|
|||||||||||||
September 1-30
|
192,946
|
91.16
|
191,089
|
140.3
|
|||||||||||||
Total
|
817,185
|
$
|
88.03
|
807,826
|
$
|
140.3
|
|||||||||||
(1)
|
During the period represented by the table, 9,359 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Saving Plan for the benefit of the employees who participated in that portion of the plan.
|
(2)
|
On September 13, 2010, our Board of Directors authorized a stock repurchase program to acquire up to $400.0 million of our outstanding common stock from September 13, 2010 through December 31, 2011, subject to any restrictions pursuant to the terms of our credit agreements or otherwise.
|
Item 3. | Defaults Upon Senior Securities. |
Item 4. | (Removed and Reserved). |
Item 5. | Other Information. |
Item 6. | Exhibits. |
Exhibit
No.
|
Description | |||||||||
3.1 | Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit No. 3.1 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623). | |||||||||
3.2
|
Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623).
|
|||||||||
3.3
|
First Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.3 to our Registration Statement on Form S-1 filed with the SEC on May 4, 2001, File No. 333-94623).
|
|||||||||
3.4
|
Second Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.4 to our Annual Report on Form 10-K, filed with the SEC on April 1, 2002, File No. 001-15749).
|
|||||||||
3.5
|
Third Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Current Report on Form 8-K, filed with the SEC on February 18, 2009, File No. 001-15749).
|
|||||||||
3.6
|
Fourth Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Current Report on Form 8-K, filed with the SEC on December 11, 2009, File No. 001-15749).
|
|||||||||
4
|
Specimen Certificate for shares of Common Stock of the Registrant (incorporated by reference to Exhibit No. 4 to our Quarterly Report on Form 10-Q, filed with the SEC on August 8, 2003, File No. 001-15749).
|
|||||||||
10.1
|
First Amendment to Credit Agreement, dated as of September 20, 2011, by and among Alliance Data Systems Corporation, as borrower, and certain subsidiaries parties thereto, as guarantors, SunTrust Bank and Bank of Montreal, as Co-Administrative Agents, and various other agents and lenders (incorporated by reference to Exhibit No. 10.1 to our Current Report on Form 8-K, filed with the SEC on September 23, 2011, File No. 001-15749).
|
|||||||||
Third Amendment to Series 2009-VFC1 Supplement, dated as of September 30, 2011, among WFN Credit Company, LLC, World Financial Network Bank, and Union Bank, N.A.
|
||||||||||
Fifth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of September 30, 2011, among WFN Credit Company, LLC, World Financial Network Bank, and Union Bank, N.A.
|
||||||||||
Third Amendment to Receivables Purchase Agreement, dated as of September 30, 2011, between World Financial Network Bank and WFN Credit Company, LLC.
|
Exhibit
No.
|
Description | |||||||||
Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
|
||||||||||
Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
|
||||||||||
Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
||||||||||
Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
||||||||||
**101.INS
|
XBRL Instance Document
|
|||||||||
**101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|||||||||
**101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|||||||||
**101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|||||||||
**101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|||||||||
**101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*
|
Filed herewith
|
|||
**
|
Furnished herewith
|
|||
+
|
Management contract, compensatory plan or arrangement
|
|||
ALLIANCE DATA SYSTEMS CORPORATION
|
By:
|
/s/ Edward J. Heffernan
|
||
Edward J. Heffernan
|
|||
President and Chief Executive Officer
|
By:
|
/s/ Charles L. Horn
|
||
Charles L. Horn
|
|||
Executive Vice President and Chief Financial Officer
|