UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended ~~September 30, 2017~~March 31, 2020

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period fromto

Commission File Number: 001-15749

ALLIANCE DATA SYSTEMS ~~CORPORATION~~CORPORATION

(Exact name of registrant as specified in its charter)

~~$\\teams.alliancedata.com@SSL\DavWWWRoot\sites\CorporateFinance\Financial-Reporting\SEC Filings\10-K\2016\Support Schedules\Cover Page\ADS logo.jpg$~~


Delaware	31-1429215
(State or other jurisdiction ofincorporation or organization)	(I.R.S. Employer Identification No.)

~~7500 Dallas Parkway, Suite 700~~3075 Loyalty Circle

~~Plano, Texas 75024~~Columbus, Ohio43219

(Address of principal executive office, including zip code)

~~(214) 494-3000~~(614) 729-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, par value $0.01 per share	ADS	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑þ No ☐◻

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of ~~Regulations~~Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☑þ No ☐◻

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


	Large accelerated filer ☑þ	Accelerated filer ☐◻
	Non-accelerated filer ☐	~~(Do not check if a smaller reporting company)~~
	Smaller reporting company ☐
		Emerging growth company ☐

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

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

As of ~~October 26, 2017, 55,248,667~~April 23, 2020, 47,627,962 shares of common stock were outstanding.

PART I

Item 1.Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

December 31,

2017

2016

(In millions, except per share amounts)
ASSETS

Cash and cash equivalents

$
3,326.0

$
1,859.2
Accounts receivable, net, less allowance for doubtful accounts ($9.0 and $4.5 at September 30, 2017 and December 31, 2016 respectively)

769.3

797.2
Credit card and loan receivables:

Credit card receivables – restricted for securitization investors

11,304.4

11,437.1
Other credit card and loan receivables

5,135.4

5,106.8
Total credit card and loan receivables

16,439.8

16,543.9
Allowance for loan loss

(1,033.8)

(948.0)
Credit card and loan receivables, net

15,406.0

15,595.9
Credit card and loan receivables held for sale

888.7

417.3
Inventories, net

257.1

271.3
Other current assets

746.0

324.0
Redemption settlement assets, restricted

576.2

324.4
Total current assets

21,969.3

19,589.3
Property and equipment, net

615.1

586.0
Deferred tax asset, net

22.9

20.1
Intangible assets, net

813.4

1,003.3
Goodwill

3,873.4

3,800.7
Other non-current assets

600.0

514.7
Total assets

$
27,894.1

$
25,514.1
LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable

$
529.8

$
568.3
Accrued expenses

335.4

346.8
Current portion of deposits

5,823.5

4,673.0
Current portion of non-recourse borrowings of consolidated securitization entities

1,933.5

1,639.0
Current portion of long-term and other debt

538.5

814.5
Other current liabilities

384.7

399.8
Deferred revenue

847.0

788.1
Total current liabilities

10,392.4

9,229.5
Deferred revenue

119.3

143.4
Deferred tax liability, net

254.8

334.8
Deposits

4,550.5

3,718.9
Non-recourse borrowings of consolidated securitization entities

4,932.6

5,316.4
Long-term and other debt

5,704.1

4,786.9
Other liabilities

346.8

326.0
Total liabilities

26,300.5

23,855.9
Commitments and contingencies

Stockholders’ equity:

Common stock, $0.01 par value; authorized, 200.0 shares; issued, 112.7 shares and 112.5 shares at September 30, 2017 and December 31, 2016, respectively

1.1

1.1
Additional paid-in capital

3,080.5

3,046.1
Treasury stock, at cost, 57.4 shares and 55.1 shares at September 30, 2017 and December 31, 2016, respectively

(5,272.5)

(4,733.1)
Retained earnings

3,924.7

3,494.8
Accumulated other comprehensive loss

(140.2)

(150.7)
Total stockholders’ equity

1,593.6

1,658.2
Total liabilities and stockholders' equity

$
27,894.1

$
25,514.1


	March 31,		December 31,
	2020		2019
	(in millions, except per share amounts)
ASSETS
Cash and cash equivalents	$	4,456.8	$	3,874.4
Accounts receivable, net, less allowance for doubtful accounts ($3.4 at each of March 31, 2020 and December 31, 2019, respectively)		359.4		451.1
Credit card and loan receivables:
Credit card receivables – restricted for securitization investors		12,033.4		13,504.2
Other credit card and loan receivables		5,698.5		5,958.9
Total credit card and loan receivables		17,731.9		19,463.1
Allowance for loan loss		(2,150.8)		(1,171.1)
Credit card and loan receivables, net		15,581.1		18,292.0
Credit card receivables held for sale		88.8		408.0
Inventories, net		189.1		218.0
Other current assets		461.1		268.4
Redemption settlement assets, restricted		568.0		600.8
Total current assets		21,704.3		24,112.7
Property and equipment, net		263.0		282.3
Right of use assets - operating		256.8		264.3
Deferred tax asset, net		282.9		45.2
Intangible assets, net		129.9		153.3
Goodwill		929.1		954.9
Other non-current assets		668.9		682.1
Total assets	$	24,234.9	$	26,494.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	203.0	$	300.8
Accrued expenses		407.4		327.8
Current operating lease liabilities		22.3		22.6
Current portion of deposits		6,521.5		6,942.4
Current portion of non-recourse borrowings of consolidated securitization entities		2,520.4		3,030.8
Current portion of long-term and other debt		101.4		101.4
Other current liabilities		228.1		338.3
Deferred revenue		748.3		807.9
Total current liabilities		10,752.4		11,872.0
Deferred revenue		103.6		114.1
Deferred tax liability, net		—		80.0
Long-term operating lease liabilities		282.6		291.7
Deposits		4,864.2		5,209.3
Non-recourse borrowings of consolidated securitization entities		3,840.3		4,253.2
Long-term and other debt		2,974.7		2,748.5
Other liabilities		329.4		337.7
Total liabilities		23,147.2		24,906.5
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 115.0 shares at each of March 31, 2020 and December 31, 2019, respectively		1.2		1.1
Additional paid-in capital		3,259.7		3,257.7
Treasury stock, at cost, 67.4 shares at each of March 31, 2020 and December 31, 2019, respectively		(6,733.9)		(6,733.9)
Retained earnings		4,678.8		5,163.3
Accumulated other comprehensive loss		(118.1)		(99.9)
Total stockholders’ equity		1,087.7		1,588.3
Total liabilities and stockholders’ equity	$	24,234.9	$	26,494.8

See accompanying notes to unaudited condensed consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(In millions, except per share amounts)
Revenues

Services

$
650.3

$
634.4

$
1,888.3

$
1,828.7
Redemption

210.0

296.3

645.4

836.6
Finance charges, net

1,052.1

954.9

3,079.5

2,645.2
Total revenue

1,912.4

1,885.6

5,613.2

5,310.5
Operating expenses

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

1,066.5

1,045.6

3,123.1

3,077.6
Provision for loan loss

204.7

251.3

807.9

651.0
General and administrative

38.0

41.0

124.9

111.4
Depreciation and other amortization

46.7

42.6

136.6

123.5
Amortization of purchased intangibles

77.6

84.1

237.9

261.2
Total operating expenses

1,433.5

1,464.6

4,430.4

4,224.7
Operating income

478.9

421.0

1,182.8

1,085.8
Interest expense

Securitization funding costs

38.2

31.1

109.9

91.5
Interest expense on deposits

33.2

22.6

87.9

60.0
Interest expense on long-term and other debt, net

73.9

54.6

210.2

159.3
Total interest expense, net

145.3

108.3

408.0

310.8
Income before income taxes

333.6

312.7

774.8

775.0
Provision for income taxes

100.4

105.2

257.4

268.0
Net income

$
233.2

$
207.5

$
517.4

$
507.0
Less: Net income attributable to non-controlling interest

—

—

—

1.8
Net income attributable to common stockholders

$
233.2

$
207.5

$
517.4

$
505.2

Net income attributable to common stockholders per share:

Basic (Note 2)

$
4.21

$
3.56

$
9.27

$
7.15
Diluted (Note 2)

$
4.20

$
3.55

$
9.23

$
7.12

Weighted average shares:

Basic (Note 2)

55.4

58.3

55.8

59.0
Diluted (Note 2)

55.6

58.4

56.0

59.2

Dividends declared per share:

$
0.52

$
—

$
1.56

$
—


	Three Months Ended
	March 31,
	2020		2019
	(in millions, except per share amounts)
Revenues
Services	$	46.6	$	73.3
Redemption, net		120.9		111.9
Finance charges, net		1,214.3		1,149.0
Total revenue		1,381.8		1,334.2
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		499.2		640.5
Provision for loan loss		655.9		252.1
General and administrative		23.9		38.3
Depreciation and other amortization		17.4		20.6
Amortization of purchased intangibles		21.4		25.8
Total operating expenses		1,217.8		977.3
Operating income		164.0		356.9
Interest expense
Securitization funding costs		49.9		57.3
Interest expense on deposits		60.3		48.7
Interest expense on long-term and other debt, net		28.4		37.9
Total interest expense, net		138.6		143.9
Income from continuing operations before income taxes		25.4		213.0
(Benefit) provision for income taxes		(4.6)		34.8
Income from continuing operations		30.0		178.2
Loss from discontinued operations, net of taxes		—		(29.1)
Net income	$	30.0	$	149.1

Basic income (loss) per share (Note 3):
Income from continuing operations	$	0.63	$	3.36
Loss from discontinued operations	$	—	$	(0.55)
Net income per share	$	0.63	$	2.81

Diluted income (loss) per share (Note 3):
Income from continuing operations	$	0.63	$	3.35
Loss from discontinued operations	$	—	$	(0.55)
Net income per share	$	0.63	$	2.80

Weighted average shares (Note 3):
Basic		47.6		53.0
Diluted		47.7		53.2

See accompanying notes to unaudited condensed consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(In millions)

Net income

$
233.2

$
207.5

$
517.4

$
507.0

Other comprehensive income (loss):

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

(3.0)

0.2

(5.0)

5.3
Tax benefit (expense)

(0.1)

—

(0.2)

(1.4)
Unrealized gain (loss) on securities available-for-sale, net of tax

(3.1)

0.2

(5.2)

3.9

Unrealized gain (loss) on cash flow hedges

0.8

(0.8)

(0.4)

(2.6)
Tax benefit (expense)

(0.2)

0.2

0.1

0.7
Unrealized gain (loss) on cash flow hedges, net of tax

0.6

(0.6)

(0.3)

(1.9)

Unrealized gain (loss) on net investment hedges

(19.4)

(4.1)

(63.1)

(11.4)
Tax benefit (expense)

7.4

—

23.7

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

(12.0)

(4.1)

(39.4)

(11.4)

Foreign currency translation adjustments

15.9

5.1

55.4

16.1

Other comprehensive income, net of tax

1.4

0.6

10.5

6.7

Total comprehensive income, net of tax

$
234.6

$
208.1

$
527.9

$
513.7
Less: Comprehensive income attributable to non-controlling interest

—

—

—

1.2
Comprehensive income attributable to common stockholders

$
234.6

$
208.1

$
527.9

$
512.5


	Three Months Ended
	March 31,
	2020		2019
	(in millions)
Net income	$	30.0	$	149.1

Other comprehensive income:
Unrealized gain on securities available-for-sale		2.7		10.0
Tax expense		(1.1)		(1.0)
Unrealized gain on securities available-for-sale, net of tax		1.6		9.0

Unrealized gain (loss) on cash flow hedges		0.4		(0.1)
Tax expense		(0.1)		—
Unrealized gain (loss) on cash flow hedges, net of tax		0.3		(0.1)

Unrealized gain on net investment hedge		—		16.1
Tax expense		—		(3.9)
Unrealized gain on net investment hedge, net of tax		—		12.2

Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million related to sale of a business for the three months ended March 31, 2020)		(20.1)		(10.9)

Other comprehensive (loss) income, net of tax		(18.2)		10.2

Total comprehensive income, net of tax	$	11.8	$	159.3

See accompanying notes to unaudited condensed consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended March 31, 2020	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
	(in millions)
Balance at December 31, 2019	115.0	$	1.1	$	3,257.7	$	(6,733.9)	$	5,163.3	$	(99.9)	$	1,588.3
Net income	—		—		—		—		30.0		—		30.0
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13	—		—		—		—		(485.0)		—		(485.0)
Other comprehensive loss	—		—		—		—		—		(18.2)		(18.2)
Stock-based compensation	—		—		4.7		—		—		—		4.7
Dividends and dividend equivalent rights declared ($0.63 per common share)	—		—		—		—		(29.5)		—		(29.5)
Other	—		0.1		(2.7)		—		—		—		(2.6)
Balance at March 31, 2020	115.0	$	1.2	$	3,259.7	$	(6,733.9)	$	4,678.8	$	(118.1)	$	1,087.7


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended March 31, 2019	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
	(in millions)
Balance at December 31, 2018	113.0	$	1.1	$	3,172.4	$	(5,715.7)	$	5,012.4	$	(138.1)	$	2,332.1
Net income	—		—		—		—		149.1		—		149.1
Other comprehensive income	—		—		—		—		—		10.2		10.2
Stock-based compensation	—		—		20.1		—		—		—		20.1
Repurchases of common stock	—		—		—		(222.8)		—		—		(222.8)
Dividends and dividend equivalent rights declared ($0.63 per common share)	—		—		—		—		(33.7)		—		(33.7)
Other	0.2		—		(15.5)		—		—		—		(15.5)
Balance at March 31, 2019	113.2	$	1.1	$	3,177.0	$	(5,938.5)	$	5,127.8	$	(127.9)	$	2,239.5

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 31,
	2020		2019
	(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	30.0	$	149.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		38.8		118.9
Deferred income taxes		(158.7)		(35.0)
Provision for loan loss		655.9		252.1
Non-cash stock compensation		4.7		21.1
Amortization of deferred financing costs		9.5		11.0
Change in other operating assets and liabilities, net of sale of business		8.6		8.7
Other		(16.3)		84.9
Net cash provided by operating activities		572.5		610.8

CASH FLOWS FROM INVESTING ACTIVITIES:
Change in redemption settlement assets		1.0		(0.1)
Change in credit card and loan receivables		1,446.7		758.2
Proceeds from sale of business		25.4		—
Proceeds from sale of credit card portfolios		289.5		—
Payments for acquired businesses, net of cash		—		(6.7)
Capital expenditures		(15.7)		(38.7)
Purchases of other investments		(14.0)		(5.0)
Maturities/sales of other investments		13.2		6.4
Other		0.2		3.4
Net cash provided by investing activities		1,746.3		717.5

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements		500.0		1,045.1
Repayments of borrowings		(275.4)		(870.9)
Non-recourse borrowings of consolidated securitization entities		350.0		1,122.2
Repayments/maturities of non-recourse borrowings of consolidated securitization entities		(1,275.0)		(1,997.5)
Net decrease in deposits		(769.4)		(502.6)
Payment of deferred financing costs		(0.6)		(5.4)
Dividends paid		(30.3)		(33.9)
Purchase of treasury shares		—		(222.8)
Other		(2.7)		(17.2)
Net cash used in financing activities		(1,503.4)		(1,483.0)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(7.6)		3.0

Change in cash, cash equivalents and restricted cash		807.8		(151.7)
Cash, cash equivalents and restricted cash at beginning of period		3,958.1		3,967.7
Cash, cash equivalents and restricted cash at end of period	$	4,765.9	$	3,816.0

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	138.3	$	206.7
Income taxes paid, net	$	44.6	$	20.4

The unaudited condensed consolidated statements of cash flows are presented with the combined cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category.

Nine Months Ended


September 30,


2017

2016

(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$
517.4

$
507.0
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

374.5

384.7
Deferred income taxes

(62.5)

(57.0)
Provision for loan loss

807.9

651.0
Non-cash stock compensation

63.5

59.5
Amortization of deferred financing costs

32.3

25.3
Change in deferred revenue

(35.5)

(114.1)
Change in other operating assets and liabilities, net of acquisitions

(20.7)

(212.2)
Originations of credit card and loan receivables held for sale

(6,012.8)

(5,182.7)
Sales of credit card and loan receivables held for sale

6,011.5

5,186.6
Other

104.0

106.7
Net cash provided by operating activities

1,779.6

1,354.8

CASH FLOWS FROM INVESTING ACTIVITIES:

Change in redemption settlement assets

(222.1)

55.4
Change in restricted cash

(418.5)

(126.8)
Change in credit card and loan receivables

(1,174.7)

(1,048.8)
Purchase of credit card portfolios

—

(903.4)
Proceeds from sale of credit card portfolios

—

5.9
Capital expenditures

(176.6)

(158.3)
Purchases of other investments

(80.2)

(13.6)
Maturities/sales of other investments

38.2

38.6
Other

(4.2)

(0.6)
Net cash used in investing activities

(2,038.1)

(2,151.6)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under debt agreements

6,439.6

3,086.5
Repayments of borrowings

(5,903.8)

(2,305.0)
Issuances of deposits

4,062.7

3,727.5
Repayments of deposits

(2,075.0)

(1,714.4)
Non-recourse borrowings of consolidated securitization entities

2,455.0

2,567.5
Repayments/maturities of non-recourse borrowings of consolidated securitization entities

(2,545.0)

(3,150.0)
Acquisition of non-controlling interest

—

(360.7)
Payment of deferred financing costs

(53.4)

(20.7)
Dividends paid

(86.8)

—
Purchase of treasury shares

(553.7)

(692.8)
Other

(16.5)

(13.1)
Net cash provided by financing activities

1,723.1

1,124.8

Effect of exchange rate changes on cash and cash equivalents

2.2

4.5
Change in cash and cash equivalents

1,466.8

332.5
Cash and cash equivalents at beginning of period

1,859.2

1,168.0
Cash and cash equivalents at end of period

$
3,326.0

$
1,500.5

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid

$
382.2

$
287.2
Income taxes paid, net

$
282.0

$
342.7

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared by Alliance Data Systems Corporation (“ADSC” or, including its consolidated subsidiaries and variable interest entities (“VIEs”), the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, filed with the SEC on February ~~27, 2017.~~28, 2020.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets; (2) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP. ~~Specifically, beginning~~Effective March 31, 2019, the Company’s divested Epsilon segment met the criteria set forth in ~~the first quarter~~Accounting Standards Codification (“ASC”) 205-20, “Presentation of ~~2017, the Company combined its transaction, marketing~~Financial Statements — Discontinued Operations,” and was subsequently sold on July 1, 2019. The Company’s products and services are reported under 2 segments—LoyaltyOne^®and other revenue to the financial statement line item caption “Services,” as all of these items represent revenue from services. These reclassifications had no effect on previously reported total revenue or net income.Card Services.

Recently Issued Accounting Standards

In ~~May 2014,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize~~2019-12, “Simplifying the ~~amount of revenue to which it expects to be entitled~~Accounting for the transfer of promised goods or services to customers. Companies may adopt ASU 2014-09 using a full retrospective approach or report the cumulative effect as of the date of adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and to permit early adoption of the standard, but not before the original effective date of December 15, 2016. ASU 2014-09 does not apply to financial instruments and other contractual rights or obligations (for example, interest income and late fees from credit card and loan receivables), and therefore, the Company’s finance charges, net will not be affected by the adoption of the standard. Management has substantially completed its initial evaluation of the impact of these updates on its consolidated financial statements and based on the evaluation of the Company's current contracts and the related revenue streams and performance obligations, most will be recorded consistently under both the current and new standard. Management is in the process of evaluating how best to apply the necessary changes, quantifying whether any of the changes have a material impact on the timing of revenue recognition, and analyzing changes to disclosure requirements. The assessment is expected to be completed by the end of 2017. The Company plans to adopt the standard on January 1, 2018 using a modified retrospective method.

~~In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.~~Income Taxes.” ASU 2016-01 requires that equity investments be measured at fair value with changes in fair value recognized in net income. For equity investments without readily determinable fair values, entities have the option2019-12 eliminates certain exceptions within ASC 740, “Income Taxes,” and clarifies certain aspects of ASC 740 to ~~either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. Additionally,~~promote consistency among reporting entities. ASU 2016-01 requires entities that elect the fair value option for financial liabilities to recognize changes in fair value related to instrument-specific credit risk in other comprehensive income. Finally, entities must assess valuation allowances for deferred tax assets related to available-for-sale debt securities in combination with their other

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~deferred tax assets. ASU 2016-01~~2019-12 is effective for interim and annual reporting periods beginning after December 15, ~~2017,~~2020, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. This ASU is elective and is effective upon issuance for all entities. The Company is evaluating the impact that adoption of ASU ~~2016-01~~2020-04 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is evaluating the impact that adoption of ASU 2016-02 will have on its consolidated financial statements and expects there will be an increase in assets and liabilities on its consolidated balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities.8

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial ~~Instruments.~~Instruments,” ~~ASU 2016-13 requires~~or ASC 326. This standard, referred to as Current Expected Credit Loss (“CECL”), required entities to utilize a financial instrument impairment model ~~that is~~to establish an allowance based on expected losses over the life of the exposure rather than a model based on an incurred loss ~~approach~~approach. Estimates of expected credit losses under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forward-looking forecasts regarding the collectability of the loan portfolio.

The Company adopted CECL on January 1, 2020 and recorded an increase in its allowance for loan loss at adoption of $644.0 million, which was recorded through a cumulative-effect adjustment to ~~establish an allowance. ASU 2016-13~~retained earnings, net of taxes. CECL also ~~expands~~expanded the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating its allowance for loan loss. See Note 6, “Credit Card and Loan Receivables,” for the ~~allowance.~~ Company’s CECL disclosures.

In addition, ~~ASU 2016-13 modifies~~CECL modified the impairment model for available-for-sale debt securities and ~~provides~~provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. CECL impacts the Company’s valuation of its accounts receivable and available-for-sale debt securities, with respect to which the Company’s adoption did not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU ~~2016-13~~2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements from Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption ~~permitted beginning after December 15, 2018.~~permitted. The ~~Company is evaluating the impact that~~Company’s adoption of ~~ASU 2016-13 will~~this standard on January 1, 2020 did not have a material impact on its consolidated financial statements.

In August ~~2016,~~2018, the FASB issued ASU ~~2016-15, “Classification of Certain Cash Receipts and Cash Payments.~~2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU ~~2016-15 will make eight targeted changes~~2018-15 requires customers in a cloud computing arrangement that is a service contract to ~~how certain cash receipts~~follow the internal-use software guidance in ASC 350-40, “Intangibles—Goodwill and ~~cash payments are presented and classified in the statement of cash flows.~~Other—Internal-Use Software,” to determine which implementation costs may be capitalized. ASU ~~2016-15~~2018-15 is effective for interim and annual reporting periods beginning after December 15, ~~2017,~~2019, with early adoption permitted. The amendments in ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company ~~does not expect~~adopted ASU 2018-15 on January 1, 2020 on a prospective basis and the adoption ~~of this standard to~~did not have a material impact on its consolidated ~~statements of cash flows.~~

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt this standard on January 1, 2018, resulting in changes to its consolidated statements of cash flows to include restricted cash amounts in the beginning-of-period and end-of-period cash and cash equivalents totals.

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expands and refines the hedge accounting model for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and makes certain targeted improvements ~~to simplify the application of hedge accounting guidance~~ related to the assessment of hedge effectiveness. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact that adoption of ASU 2017-12 will have on its consolidated financial statements.

~~Recently Adopted Accounting Standards~~

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company prospectively adopted this standard as of January 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

2. REVENUE

The Company’s products and services are reported under 2 segments—LoyaltyOne and Card Services, as shown below. The following tables present revenue disaggregated by major source:


					Corporate/
Three Months Ended March 31, 2020	LoyaltyOne		Card Services		Other		Total
	(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	71.3	$	—	$	—	$	71.3
Short-term loyalty programs		120.3		—		—		120.3
Servicing fees, net		—		(30.7)		—		(30.7)
Other		3.3		—		0.1		3.4
Revenue from contracts with customers	$	194.9	$	(30.7)	$	0.1	$	164.3

Finance charges, net		—		1,214.3		—		1,214.3
Investment income		3.2		—		—		3.2
Total	$	198.1	$	1,183.6	$	0.1	$	1,381.8

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)


					Corporate/
Three Months Ended March 31, 2019	LoyaltyOne		Card Services		Other		Total
	(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	71.4	$	—	$	—	$	71.4
Short-term loyalty programs		109.6		—		—		109.6
Servicing fees, net		—		(18.6)		—		(18.6)
Other		19.8		—		—		19.8
Revenue from contracts with customers	$	200.8	$	(18.6)	$	—	$	182.2

Finance charges, net		—		1,149.0		—		1,149.0
Investment income		3.0		—		—		3.0
Total	$	203.8	$	1,130.4	$	—	$	1,334.2

The following tables present revenue disaggregated by geographic region based on the location of the subsidiary that generally correlates with the location of the customer:


					Corporate/
Three Months Ended March 31, 2020	LoyaltyOne		Card Services		Other		Total
	(in millions)
Disaggregation of Revenue by Geographic Region:

United States	$	2.1	$	1,183.6	$	0.1	$	1,185.8
Canada		79.1		—		—		79.1
Europe, Middle East and Africa		68.6		—		—		68.6
Asia Pacific		37.0		—		—		37.0
Other		11.3		—		—		11.3
Total	$	198.1	$	1,183.6	$	0.1	$	1,381.8


					Corporate/
Three Months Ended March 31, 2019	LoyaltyOne		Card Services		Other		Total
	(in millions)
Disaggregation of Revenue by Geographic Region:

United States	$	6.4	$	1,130.4	$	—	$	1,136.8
Canada		89.0		—		—		89.0
Europe, Middle East and Africa		81.4		—		—		81.4
Asia Pacific		17.5		—		—		17.5
Other		9.5		—		—		9.5
Total	$	203.8	$	1,130.4	$	—	$	1,334.2

Contract Liabilities

The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES^® reward mile and the reward products for its short-term loyalty programs.

Index

~~In March 2016,~~ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(In millions except per share amounts)

Numerator:

Net income attributable to common stockholders

$
233.2

$
207.5

$
517.4

$
505.2

Less: Accretion of redeemable non-controlling interest

—

—

—

83.5

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

$
233.2

$
207.5

$
517.4

$
421.7

Denominator:

Weighted average shares, basic

55.4

58.3

55.8

59.0

Weighted average effect of dilutive securities:

Net effect of dilutive stock options and unvested restricted stock

0.2

0.1

0.2

0.2

Denominator for diluted calculation

55.6

58.4

56.0

59.2

Net income attributable to common stockholders per share:

Basic

$
4.21

$
3.56

$
9.27

$
7.15

Diluted

$
4.20

$
3.55

$
9.23

$
7.12

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Depreciation and amortization and capital expenditures from discontinued operations for the three months ended March 31, 2019 are as follows:


	Three Months Ended
	March 31, 2019
	(in millions)
Depreciation and amortization	$	72.5
Capital expenditures	$	6.8

6. CREDIT CARD AND LOAN RECEIVABLES

The Company’s credit card and loan receivables are the only portfolio segment or class of financing receivables. Quantitative information about the components of credit card and loan receivables is presented in the table below:

September 30,

December 31,


2017

2016

(In millions)
Principal receivables

$
15,581.6

$
15,754.0
Billed and accrued finance charges

785.9

708.6
Other

72.3

81.3
Total credit card and loan receivables

16,439.8

16,543.9
Less: Credit card receivables – restricted for securitization investors

11,304.4

11,437.1
Other credit card and loan receivables

$
5,135.4

$
5,106.8


	March 31,		December 31,
	2020		2019
	(in millions)
Principal receivables	$	16,725.4	$	18,413.1
Billed and accrued finance charges		933.5		977.3
Other		73.0		72.7
Total credit card and loan receivables		17,731.9		19,463.1
Less: Credit card receivables – restricted for securitization investors		12,033.4		13,504.2
Other credit card and loan receivables	$	5,698.5	$	5,958.9

Allowance for Loan Loss

~~The~~Effective January 1, 2020, the Company ~~maintains an~~adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine its allowance for loan ~~loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables.~~loss. The allowance for loan loss ~~covers forecasted~~is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for loan loss includes an estimate for uncollectible principal as well as unpaid interest and fees. ~~The allowance for loan loss is evaluated monthly for appropriateness.~~

~~In estimating~~Charge-offs of principal amounts, net of recoveries are deducted from the allowance for principal loan losses, management utilizes a migration analysis of delinquent and current credit card and loan receivables. Migration analysis is a technique used to estimate the likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off.allowance. The allowance is maintained through an adjustment to the provision for loan ~~loss. Charge-offs~~loss and is evaluated for appropriateness. Prior to January 1, 2020, the Company’s allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”

ASC 326 requires entities to use a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. As part of ~~principal amounts, net~~its CECL implementation, the Company evaluated multiple risk characteristics of ~~recoveries~~its credit card and loan receivables portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its allowance for loan loss, the Company segregates its credit card and loan receivables into four groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score. These risk characteristics are ~~deducted from~~evaluated at least on an annual basis, or more frequently as facts and circumstances warrant. The Company’s credit card and loan receivables do not have stated maturities and therefore prepayments are not factored into the ~~allowance.~~ determination of the estimated life of the credit card and loan receivables. In determining the estimated life of a credit card and loan receivable, payments were applied to the measurement date balance with no payments allocated to future purchase activity. The Company uses a combination of First In First Out (“FIFO”) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”) methodology to model balance paydown.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~The Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. Actual charge-offs~~Charge-offs for unpaid interest and fees were ~~$152.2~~$231.9 million and ~~$126.4~~$218.8 million for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively, and $469.6 million and $355.2 million for the nine months ended September 30, 2017 and 2016,~~2019, respectively.

Delinquencies

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

The following table presents the ~~delinquency trends~~amortized cost basis of the aging analysis of the Company’s credit card and loan receivables portfolio:

September 30,

% of

December 31,

% of


2017

Total

2016

Total

(In millions, except percentages)

Receivables outstanding - principal

$
15,581.6

100.0
%
$
15,754.0

100.0
%
Principal receivables balances contractually delinquent:

31 to 60 days

269.9

1.7
%

249.8

1.6
%
61 to 90 days

186.9

1.2

169.3

1.1

91 or more days

389.5

2.5

337.8

2.1

Total

$
846.3

5.4
%
$
756.9

4.8
%


	Aging Analysis of Delinquent Amortized Cost Credit Card and Loan Receivables
	31 to 60 days delinquent		61 to 90 days delinquent		91 or more days delinquent		Total delinquent		Current		Total
	(in millions)
As of March 31, 2020	$	347.6	$	273.8	$	667.1	$	1,288.5	$	16,072.5	$	17,361.0

As of December 31, 2019	$	399.1	$	293.9	$	698.4	$	1,391.4	$	17,656.4	$	19,047.8

Modified Credit Card Receivables

Forbearance Programs

In response to the COVID-19 pandemic, in March 2020 the Company began to offer forbearance programs to affected cardholders, which provide for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current as of their most recent billing cycle prior to April 2020. These programs are intended to provide temporary relief to affected cardholders and are not considered troubled debt restructurings. At March 31, 2020, the amount of credit card and loan receivables in forbearance programs was not material.

Troubled Debt Restructurings

The Company holds certain credit card receivables for which the terms have been modified. The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. These concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms.

Credit card receivables for which temporary hardship and permanent concessions were granted are each considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivable balance and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of Accounting Standards Codification (“ASC”) 450-20, “Loss Contingencies.” If the Company applied accounting under ASC 310-40, “Troubled Debt Restructurings by Creditors,” to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

The Company had ~~$242.7~~$332.6 million and ~~$216.5~~$308.7 million, respectively, as a recorded investment in impaired credit card receivables ~~with an associated allowance for loan loss of $54.5 million and $46.4 million, respectively,~~ as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016. These modified credit card receivables~~2019, respectively, which represented less than 2% of the Company’s

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

total credit card ~~receivables as of both September 30, 2017 and December 31, 2016.~~

receivables. The average recorded investment in impaired credit card receivables was ~~$233.6~~$314.7 million and ~~$196.1~~$297.7 million for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively, and $222.3 million and $185.8 million for the nine months ended September 30, 2017 and 2016,~~2019, respectively.

Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized ~~$5.0~~$5.5 million and ~~$4.8~~$5.7 million for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively, and $14.5 million and $13.9 million for the nine months ended September 30, 2017 and 2016,~~2019, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

The following ~~tables provide~~table provides information on credit card receivables that are considered troubled debt restructurings as described above, which entered into a modification program during the specified periods:

Three Months Ended September 30, 2017

Nine Months Ended September 30, 2017

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Outstanding

Number of

Outstanding

Outstanding

Restructurings

Balance

Balance

Restructurings

Balance

Balance

(Dollars in millions)
Troubled debt restructurings – credit card receivables

53,305

$
67.2

$
67.1

146,177

$
186.8

$
186.6

Three Months Ended September 30, 2016

Nine Months Ended September 30, 2016

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Outstanding

Number of

Outstanding

Outstanding

Restructurings

Balance

Balance

Restructurings

Balance

Balance

(Dollars in millions)
Troubled debt restructurings – credit card receivables

53,041

$
63.8

$
63.7

151,069

$
180.9

$
180.7

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Number of

Outstanding

Restructurings

Balance

Restructurings

Balance

(Dollars in millions)

Troubled debt restructurings – credit card receivables

75,065

112.8

112.7

70,294

104.3

104.1

The ~~tables~~table below ~~summarize~~summarizes troubled debt restructurings that have defaulted in the specified periods where the default occurred within 12 months of their modification date:

Three Months Ended

Nine Months Ended

September 30, 2017

September 30, 2017

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables

24,267

$
29.4

74,948

$
91.0


	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance
	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables	31,670	$	44.0	50,456	$	65.4

Three Months Ended

Nine Months Ended

September 30, 2016

September 30, 2016

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables

27,606

$
31.3

75,828

$
84.1

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Age of Credit Card and Loan Receivable Accounts~~

The following tables set forth, as of September 30, 2017 and December 31, 2016, the number of active credit card and loan receivable accounts with balances and the related principal balances outstanding, based upon the age of the active credit card and loan receivable accounts from origination:

September 30, 2017








Percentage of

Number of

Percentage of

Principal

Principal

Active Accounts

Active Accounts

Receivables

Receivables

Age of Accounts Since Origination

with Balances

with Balances

Outstanding

Outstanding

(In millions, except percentages)

0-12 Months

6.5

27.7
%
$
3,434.5

22.0
%
13-24 Months

3.8

16.4

2,572.5

16.5

25-36 Months

2.9

12.5

2,255.4

14.5

37-48 Months

2.0

8.4

1,553.0

10.0

49-60 Months

1.5

6.2

1,135.9

7.3

Over 60 Months

6.7

28.8

4,630.3

29.7

Total

23.4

100.0
%
$
15,581.6

100.0
%

December 31, 2016








Percentage of

Number of

Percentage of

Principal

Principal

Active Accounts

Active Accounts

Receivables

Receivables

Age of Accounts Since Origination

with Balances

with Balances

Outstanding

Outstanding

(In millions, except percentages)

0-12 Months

7.3

28.5
%
$
3,896.9

24.8
%
13-24 Months

4.1

15.8

2,618.2

16.6

25-36 Months

3.0

11.6

2,050.8

13.0

37-48 Months

2.0

8.0

1,436.8

9.1

49-60 Months

1.5

5.9

1,021.7

6.5

Over 60 Months

7.7

30.2

4,729.6

30.0

Total

25.6

100.0
%
$
15,754.0

100.0
%

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Credit Quality

The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. ~~The proprietary scoring models are based on historical data and require various assumptions about future performance.~~ Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 91 or more days past due at any time within the next 12 months. The following table reflects the composition of the Company’s credit card and loan receivables on an amortized cost basis by obligor credit quality as of March 31, 2020 and December 31, 2019:


	Amortized Cost Revolving Credit Card and Loan Receivables
	March 31, 2020				December 31, 2019
			Percentage of				Percentage of
			Amortized				Amortized
Probability of an Account Becoming 91 or More Days Past	Amortized		Cost Basis		Amortized		Cost Basis
Due or Becoming Charged-off (within the next 12 months)	Cost Basis		Outstanding		Cost Basis		Outstanding
	(in millions, except percentages)
No Score	$	217.5	1.3	%	$	298.4	1.6	%
27.1% and higher		1,580.7	9.1			1,648.8	8.7
17.1% - 27.0%		1,053.7	6.1			1,108.5	5.8
12.6% - 17.0%		1,123.5	6.5			1,171.7	6.2
3.7% - 12.5%		7,828.1	45.1			8,292.1	43.5
1.9% - 3.6%		2,944.8	17.0			3,375.3	17.7
Lower than 1.9%		2,612.7	14.9			3,153.0	16.5
Total	$	17,361.0	100.0	%	$	19,047.8	100.0	%

Note: The Company’s credit card and loan receivables are revolving receivables as they do not have stated maturities and are exempted from certain vintage disclosures required under ASC 326.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Obligor credit quality is monitored at least monthly during the life of an account. The ~~following table reflects composition~~effect of the ~~Company’s credit card and loan receivables by obligor credit quality as of September 30, 2017 and December 31, 2016:~~

September 30, 2017

December 31, 2016




Percentage of



Percentage of

Total Principal

Principal

Total Principal

Principal

Probability of an Account Becoming 91 or More Days Past

Receivables

Receivables

Receivables

Receivables

Due or Becoming Charged-off (within the next 12 months)

Outstanding

Outstanding

Outstanding

Outstanding

(In millions, except percentages)

No Score

$
120.2

0.8
%
$
183.8

1.2
%
27.1% and higher

1,296.3

8.3

1,168.0

7.4

17.1% - 27.0%

799.8

5.1

761.1

4.8

12.6% - 17.0%

1,052.3

6.7

820.9

5.2

3.7% - 12.5%

6,601.5

42.4

5,770.8

36.6

1.9% - 3.6%

2,741.3

17.6

3,444.9

21.9

Lower than 1.9%

2,970.2

19.1

3,604.5

22.9

Total

$
15,581.6

100.0
%
$
15,754.0

100.0
%

~~Transfer of Financial Assets~~

~~The Company originates loans under~~COVID-19 pandemic resulted in an agreement with one of its clients, and after origination, these loan receivables are sold to the client at par value plus accrued interest. These transfers qualify for sale treatment as they meet the conditions established in ASC 860-10, “Transfers and Servicing.” Following the sale, the client owns the loan receivables, bears the risk of lossincrease in the ~~event~~probability of loan defaults and is responsible for all servicing functions related to the loan receivables. The loan receivables originated by the Company that have not yet been sold to the client were $69.6 million and $67.6 million at September 30, 2017 and December 31, 2016, respectively, and are included in credit card and loan receivables held for sale in the Company’s unaudited condensed consolidated balance sheets and carried at the loweran account becoming 91 of ~~cost~~more days past due or fair value. The carrying value of these loan receivables approximates fair value due to the short duration between the date of origination and sale. Originations and sales of these loan receivables held for sale are reflected as operating activities in the Company’s unaudited condensed consolidated statements of cash flows.becoming charged-off.

Upon the client’s purchase of the originated loan receivables, the Company is obligated to purchase a participating interest in a pool of loan receivables that includes the loan receivables originated by the Company. Such interest participates on a pro rata basis in the cash flows of the underlying pool of loan receivables, including principal repayments, finance charges, losses and recoveries. The Company bears the risk of loss related to its participation interest in this pool.

~~During the nine months ended September 30, 2017 and 2016, the Company purchased $300.5 million and $259.2 million, respectively of loan receivables under these agreements.~~

The total outstanding balance of these loan receivables was $315.7 million and $282.6 million as of September 30, 2017 and December 31, 2016, respectively, and was included in other credit card and loan receivables in the Company’s unaudited condensed consolidated balance sheets.

Portfolios Held for Sale

The Company has certain credit card portfolios held for sale, which are carried at the lower of cost or fair value, of ~~$819.1~~$88.8 million and ~~$349.7~~$408.0 million as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

In the third quarter of 2017, the Company transferred five credit card portfolios totaling approximately $532.5 million into credit card and loan receivables held for sale. The portfolios were transferred at the net carrying amount, inclusive of the related reserves for losses of $20.6 million, as the fair value was estimated to be greater than the net carrying amount, and such amount will be the measurement basis until the sale of the portfolios.

~~Portfolio Acquisitions~~

During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2020, the Company ~~acquired four~~sold a credit card ~~portfolios~~portfolio for ~~approximately $903.4 million, which consisted~~preliminary cash consideration of approximately ~~$823.1~~$289.5 million, subject to customary sale price adjustments, and recognized a gain of ~~credit card receivables, $87.7~~approximately $20.4 million on the transaction, which was recorded in cost of ~~intangible assets~~operations in the Company’s unaudited condensed consolidated statements of income.

The Company recorded portfolio valuation adjustments, which are reflected in cost of operations in the Company’s unaudited condensed consolidated statements of income, of $4.2 million and ~~a rewards liability of $7.4 million.~~$59.9 million for the three months ended March 31, 2020 and 2019, respectively.

Securitized Credit Card Receivables

The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust (“Master Trust I”) and World Financial Network Credit Card Master Trust III (“Master Trust III”) (collectively, the “WFN Trusts”), and World Financial Capital Credit Card Master Note Trust (the “WFC Trust”). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore ~~are~~ not reflected in the Company’s unaudited condensed consolidated statements of income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019.

The WFN Trusts and the WFC Trust are VIEs and the assets of these consolidated VIEs include certain credit card receivables that are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include non-recourse secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.

The tables below present quantitative information about the components of total securitized credit card receivables, delinquencies and net charge-offs:


	March 31,		December 31,
	2020		2019
	(in millions)
Total credit card receivables – restricted for securitization investors	$	12,033.4	$	13,504.2
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due	$	302.5	$	321.8

September 30,

December 31,


2017

2016

(In millions)
Total credit card receivables – restricted for securitization investors

$
11,304.4

$
11,437.1
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due

$
268.7

$
236.5

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(In millions)

Net charge-offs of securitized principal

$
179.9

$
134.6

$
542.3

$
423.7

Index

4.ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

7. INVENTORIES, NET

Inventories, net of ~~$257.1~~$189.1 million and ~~$271.3~~$218.0 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories, net are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future market conditions and an analysis of historical experience.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

5.8. OTHER INVESTMENTS

Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets. Marketable securities include available-for-sale debt securities, mutual funds and domestic certificate of deposit investments. The principal components of other investments, which are carried at fair value, are as follows:

September 30, 2017

December 31, 2016


Amortized

Unrealized

Unrealized



Amortized

Unrealized

Unrealized



Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

(In millions)
Marketable securities

$
190.7

$
0.4

$
(1.8)

$
189.3

$
124.5

$
0.2

$
(2.4)

$
122.3
U.S. Treasury bonds

50.0

0.1

—

50.1

75.0

0.3

—

75.3
Total

$
240.7

$
0.5

$
(1.8)

$
239.4

$
199.5

$
0.5

$
(2.4)

$
197.6


	March 31, 2020								December 31, 2019
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
	(in millions)
Marketable securities	$	257.9	$	7.3	$	(0.1)	$	265.1	$	257.2	$	3.0	$	(0.4)	$	259.8
Total	$	257.9	$	7.3	$	(0.1)	$	265.1	$	257.2	$	3.0	$	(0.4)	$	259.8

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

September 30, 2017

Less than 12 months

12 Months or Greater

Total




Unrealized



Unrealized



Unrealized


Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In millions)
Marketable securities

$
111.1

$
(0.9)

$
41.2

$
(0.9)

$
152.3

$
(1.8)
Total

$
111.1

$
(0.9)

$
41.2

$
(0.9)

$
152.3

$
(1.8)


	December 31, 2016
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In millions)

													March 31, 2020
													Less than 12 months				12 Months or Greater				Total
															Unrealized				Unrealized				Unrealized
													Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
													(in millions)
Marketable securities	$	75.3	$	(2.0)	$	12.4	$	(0.4)	$	87.7	$	(2.4)	$	3.7	$	(0.1)	$	—	$	—	$	3.7	$	(0.1)
Total	$	75.3	$	(2.0)	$	12.4	$	(0.4)	$	87.7	$	(2.4)	$	3.7	$	(0.1)	$	—	$	—	$	3.7	$	(0.1)


	December 31, 2019
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(in millions)
Marketable securities	$	18.8	$	(0.2)	$	13.1	$	(0.2)	$	31.9	$	(0.4)
Total	$	18.8	$	(0.2)	$	13.1	$	(0.2)	$	31.9	$	(0.4)

The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at ~~September 30, 2017~~March 31, 2020 by contractual maturity are as follows:


	Amortized		Estimated
	Cost		Fair Value
	(in millions)
Due in one year or less	$	40.2	$	40.2
Due after one year through five years		1.4		1.4
Due after five years through ten years		—		—
Due after ten years		216.3		223.5
Total	$	257.9	$	265.1

Amortized



Cost

Fair Value

(In millions)
Due in one year or less

$
39.2

$
39.1
Due after one year through five years

28.0

28.1
Due after five years through ten years

—

—
Due after ten years

173.5

172.2
Total

$
240.7

$
239.4

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Market values were determined for each individual security in the investment portfolio. ~~When evaluating~~Effective January 1, 2020, the ~~investments for~~Company adopted ASC 326, which replaced the other-than-temporary impairment ~~the Company reviews factors such as the length of time and extent to~~model for available-for-sale debt securities. For available-for-sale debt securities in which fair value ~~has been below~~is less than cost, ~~basis, the financial condition of the security’s issuer,~~ASC 326 requires that credit-related impairment, if any, be recognized through an allowance for credit losses and ~~the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.~~adjusted each period for changes in credit risk. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until ~~maturity.~~maturity, and the Company performs an assessment each period for credit-related impairment. As of ~~September 30, 2017,~~March 31, 2020, the Company does not consider ~~the~~its investments to be ~~other-than-temporarily~~ impaired.

There were no0 realized gains or losses from the sale of investment securities for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and~~2016.~~ 2019.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

6.9. REDEMPTION SETTLEMENT ASSETS

Redemption settlement assets consist of restricted cash and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES® Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:


	September 30, 2017								December 31, 2016
		Amortized	Unrealized		Unrealized					Amortized	Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
	(In millions)

																	March 31, 2020								December 31, 2019
																		Amortized	Unrealized		Unrealized					Amortized	Unrealized		Unrealized
																	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
																	(in millions)
Restricted cash	$	71.5	$	—	$	—	$	71.5	$	58.1	$	—	$	—	$	58.1	$	55.9	$	—	$	—	$	55.9	$	39.3	$	—	$	—	$	39.3
Mutual funds		27.7		—		(0.2)		27.5		25.7		—		(0.2)		25.5		22.9		—		—		22.9		25.1		—		—		25.1
Corporate bonds		483.0		—		(5.8)		477.2		241.0		0.4		(0.6)		240.8		490.7		3.0		(4.5)		489.2		536.0		2.4		(2.0)		536.4
Total	$	582.2	$	—	$	(6.0)	$	576.2	$	324.8	$	0.4	$	(0.8)	$	324.4	$	569.5	$	3.0	$	(4.5)	$	568.0	$	600.4	$	2.4	$	(2.0)	$	600.8


	March 31, 2020
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(in millions)
Corporate bonds	$	171.8	$	(3.6)	$	116.8	$	(0.9)	$	288.6	$	(4.5)
Total	$	171.8	$	(3.6)	$	116.8	$	(0.9)	$	288.6	$	(4.5)


	December 31, 2019
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(in millions)
Corporate bonds	$	166.6	$	(1.3)	$	155.1	$	(0.7)	$	321.7	$	(2.0)
Total	$	166.6	$	(1.3)	$	155.1	$	(0.7)	$	321.7	$	(2.0)

September 30, 2017

Less than 12 months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized


Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In millions)
Mutual funds

$
27.5

$
(0.2)

$
—

$
—

$
27.5

$
(0.2)
Corporate bonds

454.2

(5.2)

19.8

(0.6)

474.0

(5.8)
Total

$
481.7

$
(5.4)

$
19.8

$
(0.6)

$
501.5

$
(6.0)

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

December 31, 2016

Less than 12 months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized


Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In millions)
Mutual funds

$
25.5

$
(0.2)

$
—

$
—

$
25.5

$
(0.2)
Corporate bonds

111.2

(0.6)

—

—

111.2

(0.6)
Total

$
136.7

$
(0.8)

$
—

$
—

$
136.7

$
(0.8)

Amortized

Estimated


Cost

Fair Value

(In millions)
Due in one year or less

$
97.7

$
97.4
Due after one year through five years

413.0

407.3
Total

$
510.7

$
504.7

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

There were no0 realized gains or losses from the sale of investment securities for the three months ended ~~September 30, 2017, and realized gains or losses from the sale of investment securities for the nine months ended September 30, 2017 were de minimis. There were no realized gains or~~March 31, 2020. Realized losses from the sale of investment securities for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2019 were de minimis.

10. LEASES

The Company has operating leases for general office properties, warehouses, data centers, call centers, automobiles and certain equipment. As of March 31, 2020, the Company’s leases have remaining lease terms of less than 1 year to 18 years, some of which may include renewal options. For leases in which the implicit rate is not readily determinable, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of the lease payments. The incremental borrowing rate is based on the Company’s specific rate of interest to borrow on a collateralized basis, over a similar term and in a similar economic environment as the lease.

Leases with an initial term of 12 months or less are not recognized on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and nonlease components as a single lease component for its identified asset classes.

The components of lease expense were as follows:


	Three Months Ended		Three Months Ended
	March 31, 2020		March 31, 2019
	(in millions)
Operating lease cost	$	10.2	$	10.3
Short-term lease cost		0.3		0.6
Variable lease cost		0.2		1.9
Total	$	10.7	$	12.8

Other information related to leases was as follows:


	March 31,
	2020
Weighted-average remaining lease term (in years):
Operating leases		11.3
Weighted-average discount rate:
Operating leases		5.2%

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Supplemental cash flow information related to leases was as follows:


	Three Months Ended		Three Months Ended
	March 31, 2020		March 31, 2019
	(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	14.4	$	15.3
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2.6	$	8.6

Maturities of the lease liabilities as of March 31, 2020 were as follows:


	Operating
Year	Leases
	(in millions)
2020 (excluding the three months ended March 31, 2020)	$	27.5
2021		39.5
2022		38.6
2023		36.7
2024		35.3
Thereafter		234.6
Total undiscounted lease liabilities		412.2
Less: Amount representing interest		(107.3)
Total present value of minimum lease payments	$	304.9

Amounts recognized in the March 31, 2020 consolidated balance sheet:
Current operating lease liabilities	$	22.3
Long-term operating lease liabilities		282.6
Total	$	304.9

11. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Intangible assets consist of the following:


	March 31, 2020
	Gross		Accumulated
	Assets		Amortization		Net		Amortization Life and Method
	(in millions)
Finite Lived Assets
Customer contracts and lists	$	319.9	$	(285.6)	$	34.3	7 years—straight line
Premium on purchased credit card portfolios		176.4		(87.8)		88.6	1-13 years—straight line
Collector database		49.8		(49.0)		0.8	5 years—straight line
Tradenames		31.3		(26.3)		5.0	8-15 years—straight line
	$	577.4	$	(448.7)	$	128.7
Indefinite Lived Assets
Tradename		1.2		—		1.2	Indefinite life
Total intangible assets	$	578.6	$	(448.7)	$	129.9

September 30, 2017


Gross

Accumulated





Assets

Amortization

Net

Amortization Life and Method

(In millions)

Finite Lived Assets

Customer contracts and lists

$
1,147.0

$
(590.7)

$
556.3

3-12 years—straight line
Premium on purchased credit card portfolios

271.8

(135.8)

136.0

3-13 years—straight line
Customer database

63.6

(59.6)

4.0

3 years—straight line
Collector database

56.1

(53.9)

2.2

5 years—straight line
Publisher networks

140.2

(77.5)

62.7

5-7 years—straight line
Tradenames

76.8

(45.2)

31.6

8-15 years—straight line
Purchased data lists

11.2

(6.1)

5.1

1-5 years—straight line, accelerated
Favorable lease

6.0

(2.9)

3.1

6-10 years—straight line

$
1,772.7

$
(971.7)

$
801.0

Indefinite Lived Assets

Tradenames

12.4

—

12.4

Indefinite life
Total intangible assets

$
1,785.1

$
(971.7)

$
813.4

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

December 31, 2016


Gross

Accumulated





Assets

Amortization

Net

Amortization Life and Method

(In millions)

Finite Lived Assets

Customer contracts and lists

$
1,108.6

$
(451.8)

$
656.8

3-12 years—straight line
Premium on purchased credit card portfolios

357.3

(172.3)

185.0

3-13 years—straight line
Customer databases

63.6

(43.7)

19.9

3 years—straight line
Collector database

52.1

(49.7)

2.4

30 years—15% declining balance
Publisher networks

140.2

(56.8)

83.4

5-7 years—straight line
Tradenames

83.5

(49.4)

34.1

3-15 years—straight line
Purchased data lists

11.6

(6.2)

5.4

1-5 years—straight line, accelerated
Favorable lease

6.9

(3.0)

3.9

3-10 years—straight line

$
1,823.8

$
(832.9)

$
990.9

Indefinite Lived Assets

Tradenames

12.4

—

12.4

Indefinite life
Total intangible assets

$
1,836.2

$
(832.9)

$
1,003.3

For the Years Ending

December 31,

(In millions)
2017 (excluding the nine months ended September 30, 2017)

$
65.9
2018

241.1
2019

192.6
2020

128.9
2021

76.6
Thereafter

95.9


	For the Years Ending
	December 31,
	(in millions)
2020 (excluding the three months ended March 31, 2020)	$	59.7
2021		22.2
2022		17.5
2023		12.8
2024		10.7
Thereafter		5.8

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Goodwill

The changes in the carrying amount of goodwill are as follows:

LoyaltyOne®

Epsilon®

Card Services

Corporate/ Other

Total

(In millions)
Balance at January 1, 2016

$
663.5

$
2,888.9

$
261.7

$
—

$
3,814.1
Goodwill acquired during year

—

—

—

—

—
Effects of foreign currency translation


(10.2)

(3.2)

—

—

(13.4)
Balance at December 31, 2016

$
653.3

$
2,885.7

$
261.7

$
—

$
3,800.7
Goodwill acquired during year

—

—

—

—

—
Effects of foreign currency translation

71.2

1.5

—

—

72.7
Balance at September 30, 2017

$
724.5

$
2,887.2

$
261.7

$
—

$
3,873.4



	LoyaltyOne		Card Services		Total
	(in millions)
Balance at January 1, 2020	$	690.9	$	264.0	$	954.9
Goodwill related to sale of Precima		(3.2)		—		(3.2)
Effects of foreign currency translation		(22.6)		—		(22.6)
Balance at March 31, 2020	$	665.1	$	264.0	$	929.1

Approximately $3.2 million of LoyaltyOne goodwill was allocated to Precima upon sale in January 2020, based on a relative fair value allocation of the businesses.

The Company tests goodwill for impairment annually, as of July 31, or when events and circumstances change that would indicate the carrying value may not be recoverable. As of March 31, 2020, the Company does not believe it is more likely than not that the fair value of its reporting units is less than its carrying amount. In light of the COVID-19 pandemic and current macroeconomic environment, should future deterioration result in a material adverse impact to our business, our goodwill may be impaired.

12. RESTRUCTURING AND OTHER CHARGES

In 2019, the Company, under the direction of the Board of Directors, evaluated the cost structure and executed on certain cost saving initiatives at each segment. These charges included restructuring and other exit activities related to reductions in force, terminations of certain product lines, reduction or closure of certain leased office space, asset impairments, changes in management structure and fundamental reorganizations that affect the nature and focus of operations. Restructuring and other charges incurred at the Corporate segment were recorded to general and administrative expense in the Company’s unaudited condensed consolidated statements of income, and restructuring and other charges incurred in the LoyaltyOne and Card Services segments were recorded to cost of operations in the Company’s unaudited condensed consolidated statements of income. These charges are not expected to continue in 2020.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Index

8.ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

⁽¹⁾

The interest rate is based upon ~~the London Interbank Offered Rate (“LIBOR”)~~LIBOR plus an applicable margin. At ~~September 30, 2017,~~March 31, 2020, the weighted average interest rate ~~was 3.23% and 3.24%~~ for the revolving line of credit ~~and~~was 2.64%.

(2)

The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 2.74% and 3.30% at March 31, 2020 and December 31, 2019, respectively.

⁽²⁾

(3)

The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. ~~At September 30, 2017, the weighted average interest rate was 1.10% and 1.65% for the BrandLoyalty revolving line of credit and term loans, respectively.~~

⁽³⁾

(4)

The interest rates are based on the Federal Funds rate plus an applicable margin. At ~~September 30, 2017,~~March 31, 2020, the interest rates ranged from ~~1.26%~~0.34% to ~~2.37%~~3.50%.

⁽⁴⁾

~~The interest rate is based upon LIBOR plus an applicable margin.~~ At ~~September 30, 2017,~~December 31, 2019, the interest ~~rate was 1.71%~~rates ranged from 1.84% to 3.50%.

⁽⁵⁾

The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At ~~September 30, 2017,~~March 31, 2020, the interest rates ranged from ~~2.26%~~2.10% to ~~2.46%~~2.49%.

At December 31, 2019, the interest rates ranged from 2.79% to 2.96%.

The Company’s credit agreement, as amended, provided for $2,028.8 million in term loans subject to certain principal repayments and a $750.0 million revolving line of credit. As of March 31, 2020, the Company had $2,003.4 million in term loans outstanding with $500.0 million total availability under the revolving line of credit.

20BrandLoyalty Credit Agreement

As of March 31, 2020, there were 0 amounts outstanding under the BrandLoyalty credit agreement.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Long-term~~On April 3, 2020, BrandLoyalty and ~~Other Debt~~

~~Credit Agreement~~

~~In June 2017, the Company,~~certain of its subsidiaries, as ~~borrower,~~borrowers and ADS Alliance Data Systems, Inc., ADS Foreign Holdings, Inc., Alliance Data Foreign Holdings, Inc., Aspen Marketing Services, LLC, Commission Junction LLC, Conversant LLC, Epsilon Data Management, LLC, Comenity LLCguarantors, terminated its existing facility and ~~Comenity Servicing LLC, as guarantors,~~ entered into a new credit agreement ~~with various agents and lenders dated June 14, 2017~~ (the ~~“2017~~“2020 BrandLoyalty Credit Agreement”) that provides for a committed revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), ~~replacing~~an uncommitted revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), and an accordion feature permitting BrandLoyalty to request an increase in ~~its entirety~~either the ~~Company’s~~committed or uncommitted line of credit ~~agreement dated July 10, 2013 (the “2013 Credit Agreement”), which was concurrently terminated, and amended the 2017 Credit Agreement on June 16, 2017~~up to ~~increase the total amount~~€80.0 million ($86.5 million as of April 3, 2020) in aggregate. Each of the ~~borrowings.~~

~~At September 30, 2017, the 2017 Credit Agreement, as amended, provided for a $3,052.6 million term loan (the “2017 Term Loan”),~~committed and uncommitted revolving line of credit are schedule to mature on April 3, 2023, subject to ~~certain principal repayments, and a $1,572.4 million revolving credit facility (the “2017 Credit Facility”) with a U.S. $65.0 million sublimit~~BrandLoyalty’s request to extend for ~~Canadian dollar borrowings and a $65.0 million sublimit for swing line loans. The 2017 Credit Agreement includes an uncommitted accordion feature~~2 additional one-year terms at the absolute discretion of ~~up to $750.0 million in~~ the ~~aggregate allowing for future incremental borrowings, subject to certain conditions.~~lenders at the time of such requests.

~~Total availability~~All advances under the ~~2017 Credit Facility at September 30, 2017 was $1,347.4 million.~~

~~The loans under the 2017~~2020 BrandLoyalty Credit Agreement are ~~scheduled~~denominated in Euros. The interest rate fluctuates and is equal to ~~mature on June 14, 2022. The 2017 Term Loan provides for aggregate principal payments of 2.5% of~~EURIBOR, as defined in the initial term loan amount in each of the first and second year and 5% of the initial term loan amount in each of the third, fourth, and fifth year, payable in equal quarterly installments beginning on September 30, 2017. The 20172020 BrandLoyalty Credit Agreement, ~~is unsecured.~~

plus an applicable margin based on BrandLoyalty’s senior net leverage ratio. The ~~2017~~2020 BrandLoyalty Credit Agreement contains ~~the~~financial covenants, including a senior net leverage ratio, as well as usual and customary negative covenants, ~~for transactions of this type, including, but not limited to, restrictions on the Company’s ability~~representations, general and in certain instances, its subsidiaries’ ability to consolidate or merge; substantially change the nature of its business; sell, lease, or otherwise transfer any substantial part of its assets; create or incur indebtedness; create liens;information undertakings and make acquisitions. The negative covenants are subject to certain exceptions as specified in the 2017 Credit Agreement. The 2017 Credit Agreement also requires the Company to satisfy certain financial covenants, including a maximum total leverage ratio and a minimum ratio of consolidated operating EBITDA to consolidated interest expense, each as determined in accordance with the 2017 Credit Agreement. The 2017 Credit Agreement also includes customary events of default.

~~BrandLoyalty Credit Agreement~~

As of September 30, 2017, amounts outstanding under the revolving lines of credit and the term loans under the BrandLoyalty Credit Agreement were €23.3 million and €152.5 million ($27.5 million and $180.2 million), respectively. The entire €23.3 million ($27.5 million) outstanding under the revolving lines of credit was uncommitted.

~~Senior Notes due 2022 (€400.0 million)~~

In March 2017, the Company issued and sold €400.0 million aggregate principal amount of 4.500% senior notes due March 15, 2022 (the “Notes”). Interest is payable semiannually in arrears, on March 15 and September 15 of each year, beginning on September 15, 2017.

The Notes are governed by an indenture dated as of March 14, 2017. The indenture incudes usual and customary negative covenants and events of default for transactions of these types. The Notes are unsecured and are guaranteed on a senior unsecured basis by certain of the Company’s existing and future domestic subsidiaries that guarantee the 2017 Credit Agreement.

The Company may redeem some or all of the Notes at any time at a redemption price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date and the applicable premium specified in the indenture. Prior to March 15, 2019, the applicable premium is a "make-whole" amount; on or after such date, the applicable premium is specified in a table in the indenture. In addition, upon the occurrence of certain kinds of changes of control, the Company must offer to purchase the Notes at 101% of their principal amount, plus accrued and unpaid interest to the date of purchase. In addition, at any time prior to March 15,

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

2019, the Company may, with an amount equal to the net cash proceeds of one or more qualified equity offerings, as defined in the indenture, redeem up to 35% of the aggregate principal amount of the outstanding Notes at a redemption price equal to 104.500% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date, provided that such redemption occurs within 90 days following the closing of such qualified equity offering.

Non-Recourse Borrowings of Consolidated Securitization Entities

Asset-Backed Term Notes

In May 2017, $389.6 million of Series 2015-C asset-backed term notes, $89.6 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.

In May 2017, Master Trust I issued $450.7 million of Series 2017-A asset-backed term notes, which mature in May 2020. The offering consisted of $400.0 million of Class A notes with a fixed interest rate of 2.12% per year and $50.7 million of notes that were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.

In July 2017, $433.3 million of Series 2012-B asset-backed term notes, $108.3 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.

In August 2017, Master Trust I issued $444.7 million of Series 2017-B asset-backed term notes, which mature in August 2019. The offering consisted of $400.0 million of Class A notes with a fixed interest rate of 1.98% per year and $44.7 million of notes that were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.

In October 2017, $427.6 million of Series 2014-C asset-backed term notes, $102.6 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid. As of ~~September 30, 2017,~~March 31, 2020, the Company collected ~~$415.6~~$225.3 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series ~~2014-C notes.~~2017-A notes, which mature in May 2020. The cash is restricted to the securitization investors and is reflected in other current assets in the Company’s unaudited condensed consolidated balance sheet as of ~~September 30, 2017.~~March 31, 2020.

Conduit Facilities

The Company has access to committed undrawn capacity through ~~three~~3 conduit facilities to support the funding of its credit card receivables through Master Trust I, Master Trust III and the WFC Trust.

~~In April 2017, Master Trust III renewed its 2009-VFC1 conduit facility, increasing the capacity from $900.0 million to $925.0 million and extending the maturity to April 2018.~~

As of ~~September 30, 2017,~~March 31, 2020, total capacity under the conduit facilities was ~~$2.9~~$4.7 billion, of which ~~$2.1~~$1.5 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

In April 2020, Master Trust I amended its 2009-VFN conduit facility, decreasing the capacity from $1.18 billion to $1.0 billion and extending the maturity to July 2021. In April 2020, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1.3 billion to $1.0 billion and extending the maturity to July 2021.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

9.14. DERIVATIVE INSTRUMENTS

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in interest rates and foreign currency exchange rates. ~~The Company was not a party to any interest rate derivative instruments at September 30, 2017 or December 31, 2016.~~

The Company limits its exposure on derivatives by entering into contracts with institutions that are established dealers who maintain certain minimum credit criteria established by the Company. At ~~September 30, 2017,~~March 31, 2020, the Company does not maintain any derivative instruments subject to master agreements that would require the Company to post collateral or that contain any credit-risk related contingent features.

The Company enters into foreign currency derivatives to reduce the volatility of the Company’s cash flows resulting from changes in foreign currency exchange rates associated with certain inventory transactions, some of which are designated as cash flow hedges. The Company generally hedges foreign currency exchange rate risks for periods of 12 months or less. As of ~~September 30, 2017,~~March 31, 2020, the maximum term over which the Company is hedging its exposure to the variability of future cash flows associated with certain inventory transactions is 1211 months.

Certain foreign currency exchange forward contracts are not designated as hedges as they do not meet the specific hedge accounting requirements of ASC 815, “Derivatives and Hedging.” Changes in the fair value of the derivative

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

instruments not designated as hedging instruments are recorded in the unaudited condensed consolidated statements of income as they occur. Gains and losses on derivatives not designated as hedging instruments are included in other operating activities in the unaudited condensed consolidated statements of cash flows for all periods presented.

The following tables present the fair values of the derivative instruments included within the Company’s unaudited condensed consolidated balance sheets as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016:~~2019:

September 30, 2017

Notional


Amount

Fair Value

Balance Sheet Location

Maturity

(In millions)
Designated as hedging instruments:

Foreign currency exchange hedges

$
11.3

$
0.4

Other current assets

November 2017 to September 2018
Foreign currency exchange hedges

$
13.4

$
0.5

Other current liabilities

October 2017 to March 2018

Not designated as hedging instruments:

Foreign currency exchange forward contracts

$
165.4

$
13.4

Other current assets

February 2018
Foreign currency exchange forward contract

$
66.4

$
4.1

Other current liabilities

March 2018

March 31, 2020

December 31, 2016

Notional

Amount

Fair Value

Balance Sheet Location

Maturity

(In millions)

Notional

Amount

Fair Value

Balance Sheet Location

Maturity

(in millions)

Designated as hedging instruments:

Foreign currency exchange hedges

34.4

1.2

Other current assets

January 2017 to August 2017

19.6

1.1

Other current assets

April 2020 to December 2020

Foreign currency exchange hedges

27.6

0.9

Other current liabilities

January 2017 to August 2017

9.5

0.3

Other current liabilities

April 2020 to February 2021


	December 31, 2019
	Notional
	Amount		Fair Value		Balance Sheet Location	Maturity
	(in millions)
Designated as hedging instruments:
Foreign currency exchange hedges	$	5.5	$	0.2	Other current assets	January 2020 to February 2020
Foreign currency exchange hedges	$	7.8	$	0.3	Other current liabilities	February 2020 to July 2020

Derivatives Designated as Hedging Instruments

Gains of ~~$0.6~~$0.3 million, net of tax, and losses of ~~$0.3~~$0.1 million, net of tax, were recognized in other comprehensive income for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020 and 2019, respectively, related to foreign currency exchange hedges designated as effective.

Changes in the fair value of these hedges ~~excluding any ineffective portion~~ are recorded in other comprehensive income ~~(loss)~~ until the hedged transactions affect net income. The ineffective portion of these cash flow hedges impacts net income when ineffectiveness occurs. For each of the three and nine months ended September 30, 2017, de minimis gains, net of tax, were reclassifiedReclassifications from accumulated other comprehensive ~~income~~loss into net income (cost of operations)~~, and a de minimis amount~~ for each of ~~ineffectiveness was recorded.~~the periods presented were not material. At ~~September 30, 2017, $0.1~~March 31, 2020, $0.2 million is expected to be reclassified from accumulated other comprehensive income into net income in the coming 12 months.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Losses of $0.6 million and $1.9 million, net of tax, were recognized in other comprehensive income for the three and nine months ended September 30, 2016, respectively, related to foreign currency exchange hedges designated as effective. For the three and nine months ended September 30, 2016, gains of $0.3 million and losses of $0.3 million, respectively, net of tax, were reclassified from accumulated other comprehensive income into net income (cost of operations) and $0.1 million of ineffectiveness was recorded for each of the three and nine months ended September 30, 2016.

Derivatives Not Designated as Hedging Instruments

As of March 31, 2020, the Company did not hold any derivatives not designated as hedging instruments, and there were 0 gains or losses related to derivatives not designated as hedging instruments for the three months ended March 31, 2020.

For the three ~~and nine~~ months ended ~~September 30, 2017, gains~~March 31, 2019, losses of ~~$2.9~~$1.2 million ~~and $9.3 million, respectively,~~ related to foreign currency exchange forward contracts not designated as hedging instruments were recognized in general and administrative expense in the Company’s unaudited condensed consolidated statements of income.

~~For~~15. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the ~~nine months ended September 30, 2016, losses~~Federal Deposit Insurance Corporation (“FDIC”) seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of ~~$0.1 million related to foreign currency exchange forward contracts not designated as hedging instruments were recognized in general~~Financial Institutions and ~~administrative expense in~~ the Company’s unaudited condensed consolidated statements of income. There were no gains or losses recognized on derivatives not designated as hedging instruments for the three months ended September 30, 2016.

~~Net Investment Hedges~~

~~In November 2015, the Company designated its Euro-denominated Senior Notes due 2023 (€300.0 million)~~ ~~as a net investment hedge of its investment in BrandLoyalty, which has a functional currency~~Delaware Office of the ~~Euro,~~State Bank Commissioner, respectively, in ~~order~~connection with the proposed merger. The merger application remains subject to ~~reduce the volatility in stockholders’ equity caused by the changes in foreign currency exchange rates of the Euro with respect~~regulatory review and approval and no guarantee can be provided as to the ~~U.S. dollar. Additionally, in March 2017, the Company designated~~ ~~€200.0 million~~outcome or timing of ~~its Euro-denominated Senior Notes due 2022 (€400.0 million)~~ as a net investment hedge of its investment in BrandLoyalty. The change in fair value of the net investment hedges due to remeasurement of the effective portion is recorded in other comprehensive income (loss). The ineffective portion of this hedging instrument impacts net income when the ineffectiveness occurs. For the three and nine months ended September 30, 2017, losses of $12.0 million and $39.4 million, net of tax, respectively, were recognized in other comprehensive income and no ineffectiveness was recorded on the net investment hedges. For the three and nine months ended September 30, 2016, losses of $4.1 million and $11.4 million, net of tax, respectively, were recognized in other comprehensive income and no ineffectiveness was recorded on the net investment hedges.

~~10. DEFERRED REVENUE~~

The AIR MILES Reward Program collects fees from its sponsors based on the number of AIR MILES reward miles issued and, in limited circumstances, the number of AIR MILES reward miles redeemed. Because management has determined that the earnings process is not complete at the time an AIR MILES reward mile is issued, the recognition of redemption and service revenue is deferred.

~~A reconciliation of deferred revenue for the AIR MILES Reward Program is as follows:~~

Deferred Revenue


Service

Redemption

Total

(In millions)
Balance at December 31, 2016

$
297.7

$
633.8

$
931.5
Cash proceeds

135.0

251.6

386.6
Revenue recognized

(170.2)

(253.1)

(423.3)
Other

—

1.1

1.1
Effects of foreign currency translation

21.4

49.0

70.4
Balance at September 30, 2017

$
283.9

$
682.4

$
966.3
Amounts recognized in the consolidated balance sheets:

Current liabilities

$
164.6

$
682.4

$
847.0
Non-current liabilities

$
119.3

$
—

$
119.3

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Indemnification

On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (“Publicis”). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a Department of Justice (“DOJ”) investigation. The DOJ investigation relates to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon has actively cooperated with the DOJ in connection with its ongoing investigation. The Company records a loss contingency when a loss is probable and an amount can be reasonably estimated. For the year ended December 31, 2019, the Company recorded a loss contingency of $32.9 million, net of tax, which was included in loss from discontinued operations. As these estimates are initially developed substantially earlier than when the ultimate loss is known, no assurance can be given that the investigation will be resolved on these, or other, terms. Therefore, this loss contingency may be refined each period as additional information becomes available. As of March 31, 2020, there was no change to the Company’s estimate of loss contingency.

~~11.~~16. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

~~On January 1, 2017,~~In July 2019, the Company’s Board of Directors authorized a new stock repurchase program to acquire up to ~~$500.0 million~~$1.1 billion of ~~the Company’s~~its outstanding common stock from ~~January 1, 2017~~July 5, 2019 through June 30, 2020. As of December 31, ~~2017. The~~2019, the Company had $347.8 million remaining under its authorized stock repurchase ~~program is subject to any restrictions pursuant to the terms of the Company’s credit agreements, indentures, and applicable securities laws or otherwise.~~

program. On ~~January 30, 2017, under the authorization of the existing 2017 repurchase program,~~April 23, 2020, the Company ~~entered into a $350.0 million fixed dollar accelerated share~~announced that it has suspended its stock repurchase ~~program agreement (“ASR Agreement”), with an investment bank counterparty. Pursuant to~~program.

For the ~~ASR Agreement,~~three months ended March 31, 2020, the Company ~~received an initial delivery of 1.4 million~~did not repurchase any shares of its common stock on February 6, 2017. The final settlement was based upon the volume weighted average price of its common stock, purchased by the counterparty during the period, less a specified discount, subject to a collar with a specified forward cap price and forward cap floor. The final settlement was on April 17, 2017 and resulted in the delivery of an additional 0.1 million shares. As a result of this transaction, the Company purchased a total of 1.5 million shares of its common stock at a settlement price per share of $238.34.

On July 25, 2017, the Company's Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2017 to acquire an additional $500.0 million of the Company’s outstanding common stock, ~~through July 31, 2018, for a total authorization of $1.0 billion.~~

~~For the~~ ~~nine months ended September 30, 2017, the Company acquired a total of 2.3 million shares of its common stock for $553.7 million, including those amounts under the ASR Agreement. As of September 30, 2017,~~and the Company had ~~$446.3~~$347.8 million remaining under ~~the~~its authorized stock repurchase program.

Stock Compensation Expense

~~Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for~~During the three ~~and nine~~ months ended ~~September 30, 2017 and 2016 is as follows:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(In millions)
Cost of operations

$
13.6

$
13.2

$
42.3

$
43.6
General and administrative

4.7

4.8

21.2

15.9
Total

$
18.3

$
18.0

$
63.5

$
59.5

~~During the~~ ~~nine months ended September 30, 2017~~,March 31, 2020, the Company awarded ~~106,015~~124,344 service-based restricted stock units with a weighted average grant date fair value per share of ~~$233.17~~$100.14 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant is employed by the Company on each such vesting date.

During the ~~nine~~three months ended ~~September 30, 2017~~,March 31, 2020, the Company awarded ~~267,171~~219,186 performance-based restricted stock units with a weighted average grant date fair value per share of ~~$230.57~~$100.50 as determined on the date of grant with pre-defined vesting criteria that permit a range from 0% to 150% to be earned. If the performance targets are met, the restrictions will lapse with respect to 33% of the award on February ~~15, 2018,~~18, 2021, an additional 33% of the award on February ~~15, 2019~~18, 2022 and the final 34% of the award on February 18, ~~2020,~~2023, provided that the participant is employed by the Company on each such vesting date.

~~Additionally during~~During the ~~nine~~three months ended ~~September 30, 2017~~, the Company awarded 15,140 performance-based restricted stock units with a weighted average grant date fair value per share of $230.57 as determined on the date of grant with pre-defined vesting criteria that permit a range from 0% to 150% to be earned. If the performance targets are met, the restrictions will lapse with respect to 50% of the award on February 15, 2018 and the remaining 50% of the award on February 15, 2019, provided that the participant is employed by the Company on each such vesting date.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~During the~~ ~~nine months ended September 30, 2017~~,March 31, 2020, the Company also awarded ~~28,172~~20,770 restricted stock units with a market-based condition subject to pre-defined vesting criteria that permit a range from 0% to 175% to be earned. The fair market value of these awards is ~~$199.19~~$78.92 and was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, ~~projected dividend yields,~~ expected volatility and risk-free rate over two-year time horizons matching the performance period. Upon determination of the market condition, the restrictions will lapse with respect to the entire award on February ~~15, 2019,~~18, 2022, provided that the participant is employed by the Company on such vesting date.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Net

Unrealized

Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Three Months Ended September 30, 2017

on Securities

Flow Hedges

Investment Hedges

Adjustments (1)

Income (Loss)

(In millions)
Balance at June 30, 2017

$
(3.7)

$
(0.5)

$
(23.3)

$
(114.1)

$
(141.6)
Changes in other comprehensive income (loss) before reclassifications

(3.1)

0.6

(12.0)

15.9

1.4
Amounts reclassified from other comprehensive income (loss)

—

—

—

—

—
Changes in other comprehensive income (loss)

(3.1)

0.6

(12.0)

15.9

1.4
Balance at September 30, 2017

$
(6.8)

$
0.1

$
(35.3)

$
(98.2)

$
(140.2)

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Net

Unrealized

Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Three Months Ended September 30, 2016

on Securities

Flow Hedges

Investment Hedge

Adjustments (1)

Income (Loss)

(In millions)
Balance at June 30, 2016

$
3.6

$
—

$
(11.1)

$
(123.7)

$
(131.2)
Changes in other comprehensive income (loss) before reclassifications

0.2

(0.7)

(4.1)

5.1

0.5
Amounts reclassified from other comprehensive income (loss)

—

0.1

—

—

0.1
Changes in other comprehensive income (loss)

0.2

(0.6)

(4.1)

5.1

0.6
Balance at September 30, 2016

$
3.8

$
(0.6)

$
(15.2)

$
(118.6)

$
(130.6)

Net

Unrealized

Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Nine Months Ended September 30, 2017

on Securities

Flow Hedges

Investment Hedges

Adjustments (1)

Income (Loss)

(In millions)
Balance at December 31, 2016

$
(1.6)

$
0.4

$
4.1

$
(153.6)

$
(150.7)
Changes in other comprehensive income (loss) before reclassifications

(5.2)

(0.3)

(39.4)

55.4

10.5
Amounts reclassified from other comprehensive income (loss)

—

—

—

—

—
Changes in other comprehensive income (loss)

(5.2)

(0.3)

(39.4)

55.4

10.5
Balance at September 30, 2017

$
(6.8)

$
0.1

$
(35.3)

$
(98.2)

$
(140.2)

Net

Unrealized

Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Nine Months Ended September 30, 2016

on Securities

Flow Hedges

Investment Hedge

Adjustments (1)

Income (Loss)

(In millions)
Balance at December 31, 2015

$
(0.1)

$
1.3

$
(3.8)

$
(134.7)

$
(137.3)
Changes in other comprehensive income (loss) before reclassifications

3.9

(2.6)

(11.4)

16.1

6.0
Amounts reclassified from other comprehensive income (loss)

—

0.7

—

—

0.7
Changes in other comprehensive income (loss)

3.9

(1.9)

(11.4)

16.1

6.7
Balance at September 30, 2016

$
3.8

$
(0.6)

$
(15.2)

$
(118.6)

$
(130.6)

⁽¹⁾

Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates.

~~13.~~In accordance with ASC 830, “Foreign Currency Matters,” upon the sale of Precima on January 10, 2020, $3.8 million of accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation of the gain on sale of Precima.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.

18. FINANCIAL INSTRUMENTS

In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Fair Value of Financial Instruments — The estimated fair values of the Company’s financial instruments are as follows:

September 30, 2017

December 31, 2016

Carrying

Fair

Carrying

Fair


Amount

Value

Amount

Value

(In millions)
Financial assets

Credit card and loan receivables, net

$
15,406.0

$
16,214.2

$
15,595.9

$
16,423.2
Credit card and loan receivables held for sale

888.7

959.5

417.3

428.7
Redemption settlement assets, restricted

576.2

576.2

324.4

324.4
Other investments

239.4

239.4

197.6

197.6
Derivative instruments

13.8

13.8

1.2

1.2
Financial liabilities

Derivative instruments

4.6

4.6

0.9

0.9
Deposits

10,374.0

10,415.9

8,391.9

8,432.2
Non-recourse borrowings of consolidated securitization entities

6,866.1

6,885.7

6,955.4

6,973.8
Long-term and other debt

6,242.6

6,392.0

5,601.4

5,641.0


	March 31, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in millions)
Financial assets
Credit card and loan receivables, net	$	15,581.1	$	16,432.6	$	18,292.0	$	19,126.0
Credit card receivables held for sale		88.8		91.5		408.0		436.2
Redemption settlement assets, restricted		568.0		568.0		600.8		600.8
Other investments		265.1		265.1		259.8		259.8
Derivative instruments		1.1		1.1		0.2		0.2
Financial liabilities
Derivative instruments		0.3		0.3		0.3		0.3
Deposits		11,385.7		11,575.1		12,151.7		12,303.6
Non-recourse borrowings of consolidated securitization entities		6,360.7		6,365.0		7,284.0		7,333.6
Long-term and other debt		3,076.1		2,903.3		2,849.9		2,878.8

The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Credit card and loan receivables, net — The Company utilizes a discounted cash flow model using unobservable inputs, including estimated yields (interest and fee income), loss rates, payment rates and discount rates to estimate the fair value measurement of the credit card and loan receivables.

Credit card ~~and loan~~ receivables held for sale — The ~~fair value of credit card portfolios held for sale is based on significant~~Company utilizes a discounted cash flow model using unobservable inputs, including forecasted yields and net ~~loss~~charge-off estimates. ~~Loan receivables~~ to estimate the fair value measurement of the credit card portfolios held for sale, ~~are recorded at the lower of cost or fair value, and their carrying amount approximates fair value due to the short duration of the holding period of the loan receivables prior to sale.~~as well as market data as applicable.

Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.

Other investments — Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.

Deposits — ~~The~~For money market deposits, carrying value approximates fair value due to the liquid nature of these deposits. For certificates of deposit, the fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.

Non-recourse borrowings of consolidated securitization entities — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Long-term and other debt — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.

Derivative instruments — The Company’s foreign currency cash flow hedges are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs. The fair value of the foreign currency forward contracts is estimated based on published quotations of spot foreign currency rates and forward points which are converted into implied foreign currency rates.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Financial Assets and Financial Liabilities Fair Value Hierarchy

ASC 820, “Fair Value Measurements and Disclosures,” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

~~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.~~

●

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.

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.

The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016:~~2019:

Fair Value Measurements at

September 30, 2017 Using


Balance at






September 30,


2017

Level 1

Level 2

Level 3

(In millions)
Mutual funds (1)

$
27.5

$
27.5

$
—

$
—
Corporate bonds (1)

477.2

—

477.2

—
Marketable securities (2)

189.3

10.1

179.2

—
U.S. Treasury bonds (2)

50.1

50.1

—

—
Derivative instruments (3)

13.8

—

13.8

—
Total assets measured at fair value

$
757.9

$
87.7

$
670.2

$
—

Derivative instruments (3)

$
4.6

$
—

$
4.6

$
—
Total liabilities measured at fair value

$
4.6

$
—

$
4.6

$
—


			Fair Value Measurements at
			December 31, 2016 Using
	Balance at
	December 31,
	2016		Level 1		Level 2		Level 3
	(In millions)

											Fair Value Measurements at
											March 31, 2020 Using
									Balance at
									March 31,
									2020		Level 1		Level 2		Level 3
									(in millions)
Mutual funds (1)	$	25.5	$	25.5	$	—	$		$	22.9	$	22.9	$	—	$	—
Corporate bonds (1)		240.8		—		240.8		—		489.2		—		489.2		—
Marketable securities (2)		122.3		5.0		117.3		—		265.1		34.2		230.9		—
U.S. Treasury bonds (2)		75.3		75.3		—		—
Derivative instruments (3)		1.2		—		1.2		—		1.1		—		1.1		—
Total assets measured at fair value	$	465.1	$	105.8	$	359.3	$	—	$	778.3	$	57.1	$	721.2	$	—


Derivative instruments (3)	$	0.9	$	—	$	0.9	$	—	$	0.3	$	—	$	0.3	$	—
Total liabilities measured at fair value	$	0.9	$	—	$	0.9	$	—	$	0.3	$	—	$	0.3	$	—

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

(2)

⁽²⁾

Amounts are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets.

(3)

⁽³⁾

Amounts are included in other current assets and other current liabilities in the unaudited condensed consolidated balance sheets.

~~There were no transfers between Levels 1 and 2 within the fair value hierarchy for the three and nine months ended September 30, 2017 and 2016, respectively.~~

Financial Instruments Disclosed but Not Carried at Fair Value

The following tables provide assets and liabilities disclosed but not carried at fair value as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016:~~

Fair Value Measurements at

September 30, 2017


Total

Level 1

Level 2

Level 3

(In millions)
Financial assets:

Credit card and loan receivables, net

$
16,214.2

$
—

$
—

$
16,214.2
Credit card and loan receivables held for sale

959.5

—

—

959.5
Total

$
17,173.7

$
—

$
—

$
17,173.7

Financial liabilities:

Deposits

$
10,415.9

$
—

$
10,415.9

$
—
Non-recourse borrowings of consolidated securitization entities

6,885.7

—

6,885.7

—
Long-term and other debt

6,392.0

—

6,392.0

—
Total

$
23,693.6

$
—

$
23,693.6

$
—

Fair Value Measurements at

December 31, 2016


Total

Level 1

Level 2

Level 3

(In millions)
Financial assets:

Credit card and loan receivables, net

$
16,423.2

$
—

$
—

$
16,423.2
Credit card and loan receivables held for sale

428.7

—

—

428.7
Total

$
16,851.9

$
—

$
—

$
16,851.9

Financial liabilities:

Deposits

$
8,432.2

$
—

$
8,432.2

$
—
Non-recourse borrowings of consolidated securitization entities

6,973.8

—

6,973.8

—
Long-term and other debt

5,641.0

—

5,641.0

—
Total

$
21,047.0

$
—

$
21,047.0

$
—

2019:


	Fair Value Measurements at
	March 31, 2020
	Total		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Credit card and loan receivables, net	$	16,432.6	$	—	$	—	$	16,432.6
Credit card receivables held for sale		91.5		—		—		91.5
Total	$	16,524.1	$	—	$	—	$	16,524.1

Financial liabilities:
Deposits	$	11,575.1	$	—	$	11,575.1	$	—
Non-recourse borrowings of consolidated securitization entities		6,365.0		—		6,365.0		—
Long-term and other debt		2,903.3		—		2,903.3		—
Total	$	20,843.4	$	—	$	20,843.4	$	—

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)


	Fair Value Measurements at
	December 31, 2019
	Total		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Credit card and loan receivables, net	$	19,126.0	$	—	$	—	$	19,126.0
Credit card receivables held for sale		436.2		—		—		436.2
Total	$	19,562.2	$	—	$	—	$	19,562.2

Financial liabilities:
Deposits	$	12,303.6	$	—	$	12,303.6	$	—
Non-recourse borrowings of consolidated securitization entities		7,333.6		—		7,333.6		—
Long-term and other debt		2,878.8		—		2,878.8		—
Total	$	22,516.0	$	—	$	22,516.0	$	—

~~14.~~

19. INCOME TAXES

For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020 and 2019, the Company utilized an effective tax rate of ~~30.1%~~(18.1)% and ~~33.2%~~16.3%, respectively, to calculate its provision for income taxes. ~~For the three and nine months ended September 30, 2016, the~~ ~~Company utilized an effective tax rate of 33.6% and 34.6%, respectively.~~ The negative effective tax rate for the ~~three~~first quarter of 2020 was the result of a discrete tax benefit and ~~nine months ended September 30, 2017 reflects additional stock-based compensation deductions and generation~~reduction of ~~foreign~~ tax ~~credits.~~reserves following a favorable settlement with a state tax authority.

~~15.~~20. SEGMENT INFORMATION

Operating segments are defined by ASC 280, “Segment Reporting,” as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The ~~Company’s chief operating decision maker is the President and Chief Executive Officer. The~~ operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different ~~products.~~products and services.

The Company operates in the ~~following reportable segments:~~ LoyaltyOne ~~Epsilon,~~ and Card ~~Services. Segment operations~~Services reportable segments, which consist of the following:

●

LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty;

and

●

Epsilon provides end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity and technology to help clients more effectively acquire, retain and grow relationships with their customers; and

Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company’s private label and co-brand credit card programs.

Corporate and other immaterial businesses are reported collectively as an “all other” category labeled “Corporate/Other.” Income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes and have also been included in “Corporate/Other.”

Corporate/

Three Months Ended September 30, 2017

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Revenues

$
305.2

$
558.7

$
1,055.4

$
—

$
(6.9)

$
1,912.4

Income (loss) before income taxes

$
35.7

$
38.6

$
371.4

$
(112.1)

$
—

$
333.6
Interest expense, net

1.7

0.1

71.4

72.1

—

145.3
Operating income (loss)

37.4

38.7

442.8

(40.0)

—

478.9
Depreciation and amortization

21.4

77.9

22.9

2.1

—

124.3
Stock compensation expense

2.2

8.4

3.0

4.7

—

18.3
Adjusted EBITDA (1)

61.0

125.0

468.7

(33.2)

—

621.5
Less: Securitization funding costs

—

—

38.2

—

—

38.2
Less: Interest expense on deposits

—

—

33.2

—

—

33.2
Less: Adjusted EBITDA attributable to non-controlling interest

—

—

—

—

—

—
Adjusted EBITDA, net (1)

$
61.0

$
125.0

$
397.3

$
(33.2)

$
—

$
550.1

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Corporate/

Three Months Ended September 30, 2016

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Revenues

$
383.8

$
543.2

$
965.8

$
0.1

$
(7.3)

$
1,885.6

Income (loss) before income taxes

$
56.4

$
48.2

$
304.4

$
(96.3)

$
—

$
312.7
Interest expense, net

1.3

—

53.7

53.3

—

108.3
Operating income (loss)

57.7

48.2

358.1

(43.0)

—

421.0
Depreciation and amortization

22.1

79.5

23.0

2.1

—

126.7
Stock compensation expense

2.5

7.1

3.5

4.9

—

18.0
Adjusted EBITDA (1)

82.3

134.8

384.6

(36.0)

—

565.7
Less: Securitization funding costs

—

—

31.1

—

—

31.1
Less: Interest expense on deposits

—

—

22.6

—

—

22.6
Less: Adjusted EBITDA attributable to non-controlling interest

—

—

—

—

—

—
Adjusted EBITDA, net (1)

$
82.3

$
134.8

$
330.9

$
(36.0)

$
—

$
512.0

Corporate/

Nine Months Ended September 30, 2017

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Revenues

$
918.3

$
1,631.8

$
3,083.6

$
—

$
(20.5)

$
5,613.2

Income (loss) before income taxes

$
105.6

$
56.9

$
949.3

$
(337.0)

$
—

$
774.8
Interest expense, net

3.8

0.2

197.8

206.2

—

408.0
Operating income (loss)

109.4

57.1

1,147.1

(130.8)

—

1,182.8
Depreciation and amortization

60.1

233.7

74.8

5.9

—

374.5
Stock compensation expense

6.9

26.0

9.4

21.2

—

63.5
Adjusted EBITDA (1)

176.4

316.8

1,231.3

(103.7)

—

1,620.8
Less: Securitization funding costs

—

—

109.9

—

—

109.9
Less: Interest expense on deposits

—

—

87.9

—

—

87.9
Less: Adjusted EBITDA attributable to non-controlling interest

—

—

—

—

—

—
Adjusted EBITDA, net (1)

$
176.4

$
316.8

$
1,033.5

$
(103.7)

$
—

$
1,423.0


					Corporate/
Three Months Ended March 31, 2020	LoyaltyOne		Card Services		Other		Total
	(in millions)
Revenues	$	198.1	$	1,183.6	$	0.1	$	1,381.8

Income (loss) before income taxes	$	46.7	$	32.1	$	(53.4)	$	25.4
Interest expense, net		(0.3)		110.2		28.7		138.6
Operating income (loss)		46.4		142.3		(24.7)		164.0
Depreciation and amortization		18.2		19.7		0.9		38.8
Stock compensation expense		1.0		1.7		2.0		4.7
Gain on sale of business, net of strategic transaction costs		(8.0)		—		—		(8.0)
Strategic transaction costs		0.1		—		0.6		0.7
Restructuring and other charges		0.1		(6.5)		(0.1)		(6.5)
Adjusted EBITDA ⁽¹⁾		57.8		157.2		(21.3)		193.7
Less: Securitization funding costs		—		49.9		—		49.9
Less: Interest expense on deposits		—		60.3		—		60.3
Adjusted EBITDA, net ⁽¹⁾	$	57.8	$	47.0	$	(21.3)	$	83.5


					Corporate/
Three Months Ended March 31, 2019	LoyaltyOne		Card Services		Other		Total
	(in millions)
Revenues	$	203.8	$	1,130.4	$	—	$	1,334.2

Income (loss) before income taxes	$	23.0	$	266.9	$	(76.9)	$	213.0
Interest expense, net		1.1		106.0		36.8		143.9
Operating income (loss)		24.1		372.9		(40.1)		356.9
Depreciation and amortization		20.1		24.3		2.0		46.4
Stock compensation expense		3.0		3.7		4.6		11.3
Restructuring charges		7.9		—		—		7.9
Adjusted EBITDA ⁽¹⁾		55.1		400.9		(33.5)		422.5
Less: Securitization funding costs		—		57.3		—		57.3
Less: Interest expense on deposits		—		48.7		—		48.7
Adjusted EBITDA, net ⁽¹⁾	$	55.1	$	294.9	$	(33.5)	$	316.5

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Corporate/

Nine Months Ended September 30, 2016

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Revenues

$
1,090.7

$
1,555.3

$
2,687.1

$
0.2

$
(22.8)

$
5,310.5

Income (loss) before income taxes

$
165.6

$
46.5

$
838.6

$
(275.7)

$
—

$
775.0
Interest expense, net

2.0

—

151.5

157.3

—

310.8
Operating income (loss)

167.6

46.5

990.1

(118.4)

—

1,085.8
Depreciation and amortization

65.5

246.6

65.4

7.2

—

384.7
Stock compensation expense

7.7

25.1

10.9

15.8

—

59.5
Adjusted EBITDA (1)

240.8

318.2

1,066.4

(95.4)

—

1,530.0
Less: Securitization funding costs

—

—

91.5

—

—

91.5
Less: Interest expense on deposits

—

—

60.0

—

—

60.0
Less: Adjusted EBITDA attributable to non-controlling interest

5.5

—

—

—

—

5.5
Adjusted EBITDA, net (1)

$
235.3

$
318.2

$
914.9

$
(95.4)

$
—

$
1,373.0

⁽¹⁾

Adjusted EBITDA is a non-GAAP financial measure equal to ~~net~~ income from continuing operations, the most directly comparable financial measure based on GAAP plus stock compensation expense, (benefit) provision for income taxes, interest expense, net, depreciation and other amortization and amortization of purchased intangibles. Adjusted EBITDA ~~net is~~ also ~~a non-GAAP financial measure equal to adjusted EBITDA less securitization funding~~excludes the gain on the sale of Precima, strategic transaction costs, ~~interest expense on deposits~~which represent costs for professional services associated with strategic initiatives, and ~~adjusted EBITDA attributable to the non-controlling interest.~~restructuring and other charges.

Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance with ASC 280 as they are the primary performance metrics utilized to assess performance ~~of the segments.~~

~~16. SUBSEQUENT EVENTS~~

~~In October 2017, Master Trust III renewed its 2009-VFC1 conduit facility, increasing the capacity from $925.0 million to $1,680.0 million and extending the maturity to January 2019.~~

In October 2017, the Company acquired credit card receivables and the associated accounts from Signet Jewelers Limited (“Signet”) for preliminary consideration of $960.2 million, subject to customary purchase price adjustments. The Company acquired a portion of Signet’s existing customer care operations in Ohio, including a facility sublease agreement and approximately 250 employees, as part of the transaction. In addition, the two companies entered into a long-term agreement under which Alliance Data became the primary issuer of private-label credit cards and related marketing services for Signet. The Company has not yet finalized the purchase price allocation for the acquisition.segments.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Caution Regarding Forward-Looking Statements

This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,” “likely,” “may,” “should” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding strategic initiatives, our expected operating results, future economic conditions including currency exchange rates, future dividend declarations and the guidance we give with respect to our anticipated financial performance. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:

●

continuing impacts related to COVID-19, including relief measures for impacted borrowers and depositors, labor shortages due to quarantine, reduction in demand from clients, supply chain disruption for our reward suppliers and disruptions in the airline or travel industries;

●

loss of, or reduction in demand for services from, significant clients;

●

increases in net charge-offs in credit card and loan ~~receivables;~~

receivables and increases in the allowance for loan loss that may result from the application of the current expected credit loss model;

●

failure to identify, complete or successfully integrate or disaggregate business acquisitions or divestitures;

●

continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;

●

failure to realize expected cost savings from restructuring plans;

●

increases in the cost of doing business, including market interest rates;

●

inability to access financial or capital markets, including the asset-backed securitization funding market or deposits market;

●

loss of active AIR MILES^®Reward Program collectors;

●

~~disruptions in the airline or travel industries;~~

~~failure to identify or successfully integrate business acquisitions;~~

increased redemptions by AIR MILES Reward Program collectors;

●

unfavorable fluctuations in foreign currency exchange rates;

●

limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy;

●

increases in ~~FDIC,~~Federal Deposit Insurance Corporation (“FDIC”), Delaware or Utah regulatory capital requirements for banks;

●

failure to maintain exemption from regulation under the Bank Holding Company Act;

●

loss or disruption, due to cyber attack or other service failures, of data center operations or capacity;

●

loss of consumer information due to compromised physical or cyber security; and

●

those factors set forth in the Risk Factors section in our Annual Report on Form 10-K for the most recently ended fiscal year as well as those factors discussed in Item 1A of Form 10-Q, elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Further risks and uncertainties include, but are not limited to, the impact of strategic initiatives on us or our business if any transactions are undertaken, and whether the anticipated benefits of such transactions can be realized.

Any forward-looking statements contained in this Form 10-Q speak only as of the date made, and we undertake no obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, subsequent events, anticipated or unanticipated circumstances or otherwise.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this quarterly report and the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, filed with the Securities and Exchange Commission, or SEC, on February ~~27, 2017.~~28, 2020.

~~2017 Highlights and~~2020 Recent Developments

●

Effective February 3, 2020, our Board of Directors appointed Ralph Andretta as Alliance Data’s President and Chief Executive Officer as well as a Director of the Company.

●

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, as compared to the ~~nine~~three months ended ~~September 30, 2016:~~

March 31, 2019:

●

Revenue increased 4% to $1.4 billion.

●

Net income decreased 80% to $30.0 million.

●

Earnings per share decreased 78% to $0.63.

●

Adjusted EBITDA, net decreased 74% to $83.5 million.

●

Effective January 1, 2020, we adopted Accounting Standards Codification, or ASC, 326, “Financial Instruments—Credit Losses,” and applied a current expected credit loss, or CECL, model to determine our allowance for loan loss. Estimates of expected credit losses under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forward-looking forecasts regarding the collectability of the loan portfolio. The impact of CECL is significantly influenced by the composition, characteristics and quality of our portfolio of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized.

●

In January 2020, we sold Precima, a provider of retail strategy and customer data applications and analytics, for total consideration of approximately $43.8 million, which includes contingent consideration with an estimated fair value of $6.5 million, upon the occurrence of specified events and performance of the business. Precima was included in our LoyaltyOne segment.

●

We paid dividends and dividend equivalent rights of $30.3 million for the three months ended March 31, 2020.

●

We sold one credit card portfolio for preliminary cash consideration of $289.5 million during the three months ended March 31, 2020.

~~Revenue increased 6%~~COVID-19 Update

On March 11, 2020, the World Health Organization, or WHO, declared the current coronavirus, or COVID-19, outbreak to ~~$5.6 billion.~~

~~Net income increased 2%~~be a global pandemic. Both prior to ~~$517.4 million.~~

~~Earnings per share increased 30%~~and in response to ~~$9.23. Excluding $83.5 million~~this declaration and the rapid spread of COVID-19 around the world and within the United States, international, federal, state and local governments have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in ~~accretion charges related~~an effort to slow the ~~acquisitions~~spread of the ~~remaining interests in BrandLoyalty in the prior year period, earnings per share increased 8%.~~

~~Adjusted EBITDA, net increased 4% to $1,423.0 million.~~

~~In January 2017, we entered into a $350.0 million fixed dollar accelerated share repurchase agreement with final settlement in April.~~illness. As a result, ~~of this transaction,~~COVID-19 restrictions have adversely impacted and continue to adversely impact our associates, our business partners, and our customers.

In response to the COVID-19 pandemic, first and foremost, we ~~purchased a total of 1.5 million shares~~have prioritized the health and safety of our ~~common stock~~associates. Effective teleworking protocols are in place for more than 95% of our associates. Cross-training programs have been completed at ~~a settlement price per share~~our Card Services business to ensure appropriate workforce coverage while managing higher cardholder-related call volumes resulting from forbearance programs introduced in response to the COVID-19 pandemic. These forbearance programs include the option to waive the next payment or enroll in short-term hardship programs for eligible accountholders. We are working closely with our partners across all of ~~$238.34.~~

~~In March 2017,~~our businesses to optimize their budgets, adjust marketing support accordingly and accommodate the rapid shift to ecommerce in light of retail-based store closings to reduce the spread of COVID-19. At LoyaltyOne, we ~~issued~~are adjusting the timing of significant coalition and ~~sold €400.0 million aggregate principal amount of 4.500% senior notes due March 15, 2022.~~

In June 2017, we entered into a new credit agreement with various agents and lenders, replacing our credit agreement dated July 10, 2013 in its entirety. The new credit agreement provides for a $3,052.6 million term loan and a $1,572.4 million revolving line of credit.

~~We paid three quarterly dividends of $0.52 per share each during the nine months ended September 30, 2017~~sponsor-specific promotions and marketing programs for ~~a total of $86.8 million.~~

~~2017 Outlook~~

~~Within~~ our LoyaltyOne segment, our AIR MILES Reward Program continued to be impacted by the change in the breakage rate from 26% to 20%. As LoyaltyOne implements program changes, our adjusted EBITDA margins have improvedcoalition loyalty program. Additionally, we are enhancing efforts on redemption categories that focus on high-demand, non-travel reward options, stay-at-home products and ~~are trending to a mid-20% range for the year. Sponsor and collector engagement has been steadily improving in 2017,~~services, and AIR MILES ~~reward miles issuance~~Cash redemptions. We are extending the length of certain short-term loyalty programs, allowing consumers a better opportunity to collect and redeem prior to program expiration.

Index

We continue to monitor the rapidly evolving situation and guidance from international, federal, state and local government and public health authorities. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows at this time. However, we expect COVID-19 to have an adverse impact on future revenue growth ~~is expected~~as well as overall profitability. In particular, our allowance for loan loss under the CECL model may be volatile due to changes in the ~~fourth quarter of 2017.~~macroeconomic environment. We expect the burn rate, measured in each period as AIR MILES reward miles redeemed divided by AIR MILES reward miles issued, to approximate 80% for 2017. With respect to BrandLoyalty, timing of programs in market can impact our quarterly financial results, and BrandLoyalty results have been soft for the nine months ended September 30, 2017. We expect major programs to launch in the fourth quarter of 2017 with double-digit revenue and adjusted EBITDA growth expected for the quarter, but we anticipate BrandLoyalty to have a negative impact on both our segment and consolidated operating results for the full year 2017.

~~Within our Epsilon segment, we~~ continue to ~~expect 4% growth~~evaluate and implement additional cost saving measures in ~~revenue~~procurement, marketing and adjusted EBITDA. In the third quarter of 2017, our technology platform, which represents approximately 25% of Epsilon’s revenue, returned to growth after four consecutive quarterly declines, which is expected to continue to positively impact the overall growth of the segment. operating expenses, while maintaining service levels and positioning for future growth.

Within our Card Services segment, for the full year 2017, we expect double-digit growth for revenue and adjusted EBITDA, net. We expect delinquencies to be at least flat to the prior year, with gross losses expected to improve in the fourth quarter. In the third quarter of 2017, our credit sales and gross yields were depressed due to recent hurricane activity, as we provided a two-month leniency period for affected cardholders in FEMA-designated disaster areas that we expect to continue into the fourth quarter. In October 2017, we acquired credit card receivables and the associated accounts from Signet Jewelers Limited for preliminary consideration of $960.2 million, subject to customary purchase price adjustments.

~~Index~~

Consolidated Results of Operations


	Three Months Ended March 31,
	2020		2019		% Change
	(in millions, except percentages)
Revenues
Services	$	46.6	$	73.3	(36)	%
Redemption, net		120.9		111.9	8
Finance charges, net		1,214.3		1,149.0	6
Total revenue		1,381.8		1,334.2	4
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		499.2		640.5	(22)
Provision for loan loss		655.9		252.1	160
General and administrative		23.9		38.3	(38)
Depreciation and other amortization		17.4		20.6	(16)
Amortization of purchased intangibles		21.4		25.8	(17)
Total operating expenses		1,217.8		977.3	25
Operating income		164.0		356.9	(54)
Interest expense
Securitization funding costs		49.9		57.3	(13)
Interest expense on deposits		60.3		48.7	24
Interest expense on long-term and other debt, net		28.4		37.9	(25)
Total interest expense, net		138.6		143.9	(4)
Income from continuing operations before income taxes		25.4		213.0	(88)
(Benefit) provision for income taxes		(4.6)		34.8	(113)
Income from continuing operations		30.0		178.2	(83)
Loss from discontinued operations, net of taxes		—		(29.1)	nm	*
Net income	$	30.0	$	149.1	(80)	%

Key Operating Metrics:
Credit card statements generated		67.4		72.7	(7)	%
Credit sales	$	6,099.1	$	6,315.4	(3)	%
Average credit card and loan receivables	$	18,294.4	$	16,850.2	9	%
AIR MILES reward miles issued		1,315.8		1,258.1	5	%
AIR MILES reward miles redeemed		994.0		1,088.5	(9)	%

Three Months Ended September 30,

Nine Months Ended September 30,


2017

2016

% Change

2017

2016

% Change

(in millions, except percentages)

Revenues

Services

$
650.3

$
634.4

3
%
$
1,888.3

$
1,828.7

3
%
Redemption

210.0

296.3

(29)

645.4

836.6

(23)

Finance charges, net

1,052.1

954.9

10

3,079.5

2,645.2

16

Total revenue

1,912.4

1,885.6

1

5,613.2

5,310.5

6

Operating expenses

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

1,066.5

1,045.6

2

3,123.1

3,077.6

1

Provision for loan loss

204.7

251.3

(19)

807.9

651.0

24

General and administrative

38.0

41.0

(7)

124.9

111.4

12

Depreciation and other amortization

46.7

42.6

9

136.6

123.5

11

Amortization of purchased intangibles

77.6

84.1

(8)

237.9

261.2

(9)

Total operating expenses

1,433.5

1,464.6

(2)

4,430.4

4,224.7

5

Operating income

478.9

421.0

14

1,182.8

1,085.8

9

Interest expense

Securitization funding costs

38.2

31.1

23

109.9

91.5

20

Interest expense on deposits

33.2

22.6

47

87.9

60.0

46

Interest expense on long-term and other debt, net

73.9

54.6

35

210.2

159.3

32

Total interest expense, net

145.3

108.3

34

408.0

310.8

31

Income before income tax

333.6

312.7

7

774.8

775.0

—

Provision for income taxes

100.4

105.2

(5)

257.4

268.0

(4)

Net income

$
233.2

$
207.5

12
%
$
517.4

$
507.0

2
%

Key Operating Metrics:

Credit card statements generated

74.2

69.0

8
%

217.8

204.2

7
%
Credit sales

$
7,352.4

$
6,985.6

5
%
$
21,447.0

$
20,262.6

6
%
Average credit card and loan receivables

$
15,949.8

$
13,995.1

14
%
$
15,791.7

$
13,679.0

15
%
AIR MILES reward miles issued

1,325.6

1,431.5

(7)
%

3,984.1

4,150.2

(4)
%
AIR MILES reward miles redeemed

1,062.7

1,851.2

(43)
%

3,365.5

4,367.3

(23)
%

*	not meaningful

Three months ended ~~September 30, 2017~~March 31, 2020 compared to the three months ended ~~September 30, 2016~~March 31, 2019

Revenue. Total revenue increased ~~$26.8~~$47.6 million, or 1%4%, to ~~$1,912.4~~$1,381.8 million for the three months ended ~~September 30, 2017~~ March 31, 2020 from ~~$1,885.6~~$1,334.2 million for the three months ended ~~September 30, 2016~~.March 31, 2019. The net increase was due to the following:

●

Services. Revenue decreased $26.7 million, or 36%, to $46.6 million for the three months ended March 31, 2020 primarily due to the sale of Precima in January 2020, which resulted in a $14.6 million decrease in revenue as compared to the prior year quarter, and an $11.4 million decrease in merchant fee revenue due to increased payments to our retailers, including new clients.

~~Services~~●

Redemption, net. Revenue increased ~~$15.9~~$9.0 million, or 3%8%, to ~~$650.3~~$120.9 million for the three months ended ~~September 30, 2017~~ March 31, 2020 as ~~a result~~redemption revenue from our short-term loyalty programs increased $8.4 million due to strong performance in Asia and Europe. However, in response to COVID-19, certain of our customers have delayed their short-term loyalty programs, which may negatively impact our redemption revenue in the second quarter of 2020.

Index

●

Finance charges, net. Revenue increased $65.3 million, or 6%, to $1,214.3 million for the three months ended March 31, 2020. The increase was driven by an approximate 170 basis point increase in ~~services provided to our Epsilon clients,~~ ~~driven~~finance charge yield, which increased revenue by ~~double-digit growth in the automotive vertical as a result of new client signings and strength in existing client relationships. This increase was~~$78.2 million, offset in part by a ~~$11.9 million decline~~1% decrease in ~~Card Services merchant~~normalized average receivables, which includes receivables held for sale, that decreased revenue by $12.9 million. The increase in finance charge yield was due primarily to higher late fees ~~as a result of increased royalty payments associated with higher volumes and new clients.~~

~~Redemption. Revenue decreased $86.3 million, or 29%,~~charged to ~~$210.0 million for the~~ ~~three months ended September 30, 2017 as our coalition loyalty program was~~cardholders per occurrence. We would expect finance charges, net to be negatively impacted by forbearance programs offered in response to COVID-19 as well as the ~~change in breakage~~recent interest rate ~~in December 2016 and a 43% decrease in AIR MILES reward miles redeemed due to greater redemptions in~~cuts by the ~~prior year period as a result of the then-planned expiration of AIR MILES reward miles on December 31, 2016. Additionally, revenue from our~~ ~~short-term loyalty programs decreased 5% due to the timing of programs in market.~~

Federal Reserve.

~~Finance charges, net~~. ~~Revenue increased $97.2 million, or 10%, to $1,052.1 million for the~~ three months ended September 30, 2017, driven by higher average credit card and loan receivables, which impacted revenue by $143.9 million through a combination of recent credit card portfolio acquisitions and a 5% increase in credit sales. This increase was offset in part by an approximate 110 basis point decline in yield, primarily due to providing a two-month leniency period for cardholders in FEMA-designated disaster areas impacted by recent hurricanes.

~~Index~~

Cost of operations. Cost of operations ~~increased $20.9~~decreased $141.3 million, or 2%22%, to ~~$1,066.5~~$499.2 million for the three months ended ~~September 30, 2017~~March 31, 2020 as compared to ~~$1,045.6~~$640.5 million for the three months ended ~~September 30, 2016~~.March 31, 2019. The ~~net increase~~decrease was due to the following:

●

Within the LoyaltyOne segment, cost of operations decreased ~~$57.5~~$26.0 million primarily due to the sale of Precima in January 2020, which resulted in a ~~$62.7~~$23.9 million decrease in cost of ~~redemptions associated with~~operations as compared to the ~~decrease in redemption revenue.~~

prior year quarter.

●

~~Within the Epsilon segment, cost of operations increased $26.6 million due to an increase in direct costs associated with the increase in revenue.~~

Within the Card Services segment, cost of operations ~~increased $51.5~~decreased $115.3 million primarily due to ~~higher~~a $55.7 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale as well as a $33.0 million decrease in payroll and ~~benefit expenses and higher credit card processing~~benefits costs due to ~~increases~~cost saving initiatives executed in ~~volume associated with growth in credit card and loan receivables.~~

the fourth quarter of 2019.

Provision for loan loss. Provision for loan loss ~~decreased $46.6~~increased $403.8 million, or ~~19%~~160%, to ~~$204.7~~$655.9 million for the three months ended ~~September 30, 2017~~March 31, 2020 as compared to ~~$251.3~~$252.1 million for the three months ended ~~September 30, 2016~~March 31, 2019, due to ~~a sequential decline~~the weaker macroeconomic environment and the impact of COVID-19, as well as the adoption of ASC 326 and the implementation of the CECL model on January 1, 2020. The CECL model is influenced by the prevailing economic conditions and forecast utilized; deterioration of those conditions may result in ~~principal loss rates.~~an increase in our provision for loan loss.

General and administrative. General and administrative expenses decreased ~~$3.0~~$14.4 million, or 7%38%, to ~~$38.0~~$23.9 million for the three months ended ~~September 30, 2017,~~March 31, 2020 as compared to ~~$41.0~~$38.3 million for the three months ended ~~September 30, 2016, due to lower payroll~~March 31, 2019, driven by cost saving initiatives implemented in the first half of 2019, which among other items included reduced headcount, office space, charitable contributions and ~~benefit~~overall corporate overhead costs.

~~Depreciation~~ Payroll and ~~other amortization. Depreciation and other amortization increased $4.1 million, or 9%, to $46.7~~benefits expense decreased $7.2 million for the three months ended ~~September 30, 2017,~~March 31, 2020 as compared to ~~$42.6~~the prior year quarter due to these cost saving initiatives.

Depreciation and other amortization. Depreciation and other amortization decreased $3.2 million, or 16%, to $17.4 million for the three months ended ~~September 30, 2016,~~March 31, 2020 as compared to $20.6 million for the three months ended March 31, 2019, primarily due to certain fully depreciated property and equipment at LoyaltyOne, offset in part by additional assets placed into service from recent capital expenditures.

Amortization of purchased intangibles. Amortization of purchased intangibles decreased ~~$6.5~~$4.4 million, or 8%17%, to ~~$77.6~~$21.4 million for the three months ended ~~September 30, 2017~~March 31, 2020, as compared to ~~$84.1~~$25.8 million for the three months ended ~~September 30, 2016. The decrease is driven by~~March 31, 2019, primarily due to certain fully amortized ~~tradenames, customer contracts and~~ intangible assets, ~~from~~including portfolio ~~acquisitions.~~premiums.

Interest expense, net. Total interest expense, net ~~increased $37.0~~decreased $5.3 million, or ~~34%~~4%, to ~~$145.3~~$138.6 million for the three months ended ~~September 30, 2017~~March 31, 2020 as compared to ~~$108.3~~$143.9 million for the three months ended ~~September 30, 2016.~~March 31, 2019. The ~~increase~~net decrease was due to the following:

●

Securitization funding costs. Securitization funding costs ~~increased $7.1~~decreased $7.4 million due to ~~higher~~lower average borrowings, which decreased funding costs by approximately $4.1 million, and ~~higher~~lower average interest ~~rates.~~

rates, which decreased funding costs by approximately $3.3 million.

●

Interest expense on deposits. Interest expense on deposits increased ~~$10.6~~$11.6 million due to higher average interest rates, which increased interest expense by approximately $12.0 million, offset in part by lower average borrowings, ~~and higher average~~which decreased interest ~~rates.~~

expense by approximately $0.4 million.

●

Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net ~~increased $19.3~~decreased $9.5 million primarily due to an $18.5 million decrease in interest expense on term debt and revolving line of credit due to lower average borrowings, offset in part by a $10.1 million increase in interest expense due to the issuance of ~~new~~ senior notes in October 2016 and March 2017, which increased interest expense by $12.6 million. Additionally, interest expense on term debt increased $6.6 million due to higher average borrowings and higher average interest rates due to increases in the LIBOR rate.

December 2019.

Index

Taxes. Income tax ~~expense decreased $4.8 million to $100.4~~benefit from continuing operations was $4.6 million for the three months ended ~~September 30, 2017 from $105.2~~March 31, 2020, and provision for income taxes was $34.8 million for the three months ended ~~September 30, 2016 due~~March 31, 2019. This change was primarily related to a ~~decrease in the effective tax rate as a result of additional stock-based compensation deductions and generation of foreign tax credits, offset in part by an increase~~$187.6 million reduction in taxable income. The effective tax rate for the ~~current year quarter~~three months ended March 31, 2020 was ~~30.1%~~(18.1)% as compared to ~~33.6%~~16.3% for the prior year quarter.

~~Index~~

~~Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016~~

~~Revenue~~. ~~Total revenue increased $302.7 million, or 6%, to $5,613.2 million for the~~ ~~nine months ended September 30, 2017~~ ~~from $5,310.5 million for the~~ ~~nine months ended September 30, 2016~~. The ~~net increase was due to the following:~~

~~Services. Revenue increased $59.6 million, or 3%, to $1,888.3 million for the~~ ~~nine months ended September 30, 2017~~ ~~as a result of an increase in services provided to our Epsilon clients,~~ driven by double-digit growth in the automotive, agency and CRM offerings as a result of new client signings and strength in existing client relationships. This increase was offset in part by a $32.8 million decline in Card Services merchant fees as a result of increased royalty payments associated with higher volumes and new clients.

~~Redemption. Revenue decreased $191.2 million, or 23%, to $645.4 million for the~~ nine months ended September 30, 2017 as our coalition loyalty program was negatively impacted by the change in breakage rate in December 2016 and a 23% decrease in AIR MILES reward miles redeemed due to greater redemptions in the prior year period as a result of the then-planned expiration of AIR MILES reward miles on December 31, 2016. Additionally, our ~~short-term loyalty programs were negatively impacted by the number and timing of programs in market.~~

~~Finance charges, net~~. ~~Revenue increased $434.3 million, or 16%, to $3,079.5 million for the~~ nine months ended September 30, 2017, driven by higher average credit card and loan receivables, which impacted revenue by $427.6 million. The increase in average credit card and loan receivables was a result of a combination of recent credit card portfolio acquisitions and a 6% increase in credit sales.

~~Cost of operations~~. ~~Cost of operations increased $45.5 million, or 1%, to $3,123.1 million for the~~ ~~nine months ended September 30, 2017~~ ~~as compared to $3,077.6 million for the~~ ~~nine months ended September 30, 2016. The net increase was due to the following:~~

~~Within the LoyaltyOne segment, cost of operations decreased $108.7 million due to a decrease in cost of redemptions associated with the decrease in redemption revenue.~~

Within the Epsilon segment, cost of operations increased $78.8 million due to a 9% increase in direct processing expenses associated with the increase in revenue as well as a 4% increase in payroll and benefit expenses.

Within the Card Services segment, cost of operations increased by $73.3 million. Payroll and benefit expenses increased $37.9 million due to an increase in the number of associates to support growth, and other operating expenses increased $35.4 million as a result of higher data processing expenses and credit card processing costs due to increases in volume associated with growth in credit card and loan receivables.

~~Provision for loan loss~~. Provision for loan loss increased $156.9 million, or 24%, to $807.9 million for the nine months ended September 30, 2017 as compared to $651.0 million for the nine months ended September 30, 2016. The increase in the provision for loan loss was driven by higher principal loss rates as well as an increase in credit card and loan receivables.

~~General and administrative~~. General and administrative expenses increased $13.5 million, or 12%, to $124.9 million for the nine months ended September 30, 2017, as compared to $111.4 million for the nine months ended September 30, 2016, due an increase in net foreign currency exchange losses recognized of $7.8 million and a 6% increase in payroll and benefit costs.

~~Depreciation and other amortization~~. Depreciation and other amortization increased $13.1 million, or 11%, to $136.6 million for the nine months ended September 30, 2017, as compared to $123.5 million for the nine months ended September 30, 2016, due to additional assets placed into service from recent capital expenditures.

~~Amortization of purchased intangibles~~. Amortization of purchased intangibles decreased $23.3 million, or 9%, to $237.9 million for the nine months ended September 30, 2017 as compared to $261.2 million for the nine months ended September 30, 2016, as the amortization associated with the intangible assets from recent portfolio acquisitions was more than offset by certain fully amortized intangible assets.

~~Index~~

~~Interest expense, net~~. Total interest expense, net increased $97.2 million, or 31%, to $408.0 million for the nine months ended September 30, 2017 as compared to $310.8 million for the nine months ended September 30, 2016. The increase was due to the following:

~~Securitization funding costs. Securitization funding costs increased $18.4 million due to higher average borrowings and higher average interest rates.~~

~~Interest expense on deposits. Interest expense on deposits increased $27.9 million due to higher average borrowings and higher average interest rates.~~

~~Interest expense on long-term and other debt, net~~. Interest expense on long-term and other debt, net increased $50.9 million primarily due to the issuance of new senior notes in October 2016 and March 2017, which increased interest expense by $33.2 million. Additionally, interest expense on term debt increased $12.4 million due to higher average borrowings and higher average interest rates due to increases in the LIBOR rate, and amortization of debt issuance costs increased $3.9 million.

~~Taxes.~~ Income tax expense decreased $10.6 million to $257.4 million for the nine months ended September 30, 2017 from $268.0 million for the nine months ended September 30, 2016 due to a decrease in the effective tax rate as a result of additional stock-based compensation deductions and generation of foreign tax credits. Thenegative effective tax rate for the ~~nine~~first quarter of 2020 was the result of a discrete tax benefit and reduction of tax reserves following a favorable settlement with a state tax authority.

Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes was $29.1 million for the three months ended ~~September 30, 2017 was 33.2% as compared~~March 31, 2019, which represents results of operations for our former Epsilon segment, direct costs identifiable to ~~34.6% for~~ the ~~nine months ended September 30, 2016.~~Epsilon segment and the allocation of interest expense on corporate debt.

~~Index~~

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure equal to ~~net~~ income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, (benefit) provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. Adjusted EBITDA excludes the gain on the sale of Precima, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, and restructuring and other charges.

Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on ~~deposits and adjusted EBITDA attributable to the non-controlling interest.~~deposits.

We use adjusted EBITDA and adjusted EBITDA, net as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management, and we believe it provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and adjusted EBITDA, net are each considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of intangible assets, including certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.

Adjusted EBITDA and adjusted EBITDA, net are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either operating income, income from continuing operations or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and adjusted EBITDA, net are not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The adjusted EBITDA and adjusted EBITDA, net measures presented in this Quarterly Report on Form ~~10‑Q~~10-Q may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(In millions)
Net income

$
233.2

$
207.5

$
517.4

$
507.0
Stock compensation expense

18.3

18.0

63.5

59.5
Provision for income taxes

100.4

105.2

257.4

268.0
Interest expense, net

145.3

108.3

408.0

310.8
Depreciation and other amortization

46.7

42.6

136.6

123.5
Amortization of purchased intangibles

77.6

84.1

237.9

261.2
Adjusted EBITDA

621.5

565.7

1,620.8

1,530.0
Less: Securitization funding costs

38.2

31.1

109.9

91.5
Less: Interest expense on deposits

33.2

22.6

87.9

60.0
Less: Adjusted EBITDA attributable to non-controlling interest

—

—

—

5.5
Adjusted EBITDA, net

$
550.1

$
512.0

$
1,423.0

$
1,373.0

Index


	Three Months Ended March 31,
	2020		2019
	(in millions)
Income from continuing operations	$	30.0	$	178.2
Stock compensation expense		4.7		11.3
(Benefit) provision for income taxes		(4.6)		34.8
Interest expense, net		138.6		143.9
Depreciation and other amortization		17.4		20.6
Amortization of purchased intangibles		21.4		25.8
Gain on sale of business, net of strategic transaction costs ⁽¹⁾		(8.0)		—
Strategic transaction costs ⁽²⁾		0.7		—
Restructuring and other charges ⁽³⁾		(6.5)		7.9
Adjusted EBITDA		193.7		422.5
Less: Securitization funding costs		49.9		57.3
Less: Interest expense on deposits		60.3		48.7
Adjusted EBITDA, net	$	83.5	$	316.5

(1)	Represents gain on sale of Precima in January 2020, net of strategic transaction costs. Precima was included in the Company’s LoyaltyOne segment. See Note 4, “Disposition,” of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.

(2)	Represents costs for professional services associated with strategic initiatives.

(3)	Represents costs associated with restructuring or other exit activities. See Note 12, “Restructuring and Other Charges,” of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.

Segment Revenue and Adjusted EBITDA, net


	Three Months Ended March 31,
	2020		2019		% Change
	(in millions, except percentages)
Revenue:
LoyaltyOne	$	198.1	$	203.8	(3)	%
Card Services		1,183.6		1,130.4	5
Corporate/Other		0.1		—	nm*
Total	$	1,381.8	$	1,334.2	4	%
Adjusted EBITDA, net:
LoyaltyOne	$	57.8	$	55.1	5	%
Card Services		47.0		294.9	(84)
Corporate/Other		(21.3)		(33.5)	(36)
Total	$	83.5	$	316.5	(74)	%

Three Months Ended September 30,

Nine Months Ended September 30,


2017

2016

% Change

2017

2016

% Change

(in millions, except percentages)

Revenue:

LoyaltyOne

$
305.2

$
383.8

(20)
%
$
918.3

$
1,090.7

(16)
%
Epsilon

558.7

543.2

3

1,631.8

1,555.3

5

Card Services

1,055.4

965.8

9

3,083.6

2,687.1

15

Corporate/Other

—

0.1

nm*

—

0.2

nm*

Eliminations

(6.9)

(7.3)

nm*

(20.5)

(22.8)

nm*

Total

$
1,912.4

$
1,885.6

1
%
$
5,613.2

$
5,310.5

6
%
Adjusted EBITDA, net (1):

LoyaltyOne

$
61.0

$
82.3

(26)
%
$
176.4

$
235.3

(25)
%
Epsilon

125.0

134.8

(7)

316.8

318.2

—

Card Services

397.3

330.9

20

1,033.5

914.9

13

Corporate/Other

(33.2)

(36.0)

(8)

(103.7)

(95.4)

9

Total

$
550.1

$
512.0

7
%
$
1,423.0

$
1,373.0

4
%

⁽¹⁾

~~For a definition of and reconciliation of adjusted EBITDA, net to net income, the most directly comparable GAAP financial measure, see “Use of Non-GAAP Financial Measures” included in this report.~~not meaningful

*not meaningful

Three months ended ~~September 30, 2017~~March 31, 2020 compared to the three months ended ~~September 30, 2016~~March 31, 2019

●

LoyaltyOne. Revenue decreased ~~$78.6~~$5.7 million, or ~~20%~~3%, to ~~$305.2~~$198.1 million for the three months ended ~~September 30, 2017~~March 31, 2020 due to the sale of Precima in January 2020, which resulted in a $14.6 million decrease in revenue as compared to the prior year quarter. This decrease was offset in part by an $8.8 million increase in revenue from our ~~coalition~~short-term loyalty ~~program declined $71.7~~programs due to strong performance in Asia and Europe. However, in response to COVID-19, certain of our customers have delayed their short-term loyalty programs, which may negatively impact our revenue in the second quarter of 2020.

●

Card Services. Revenue increased $53.2 million, or 5%, to $1,183.6 million for the three months ended March 31, 2020, driven by $65.3 million increase in finance charges, net due to an increase in yield driven by higher late fees. This increase was offset in part by an $11.4 million decrease in merchant fees as a result of increased payments to our retailers, including new clients. We would expect finance charges, net to be negatively

Index

impacted by forbearance programs offered in response to COVID-19 as well as the ~~change~~recent interest rate cuts by the Federal Reserve.

Adjusted EBITDA, net. Adjusted EBITDA, net decreased $233.0 million, or 74%, to $83.5 million for the three months ended March 31, 2020 from $316.5 million for the three months ended March 31, 2019. The net decrease was due to the following:

●

LoyaltyOne. Adjusted EBITDA, net increased $2.7 million, or 5%, to $57.8 million for the three months ended March 31, 2020, due to strong performance from our short-term loyalty programs, offset in ~~breakage rate~~part by the sale of Precima in ~~December 2016~~January 2020 and a ~~43%~~9% decrease in AIR MILES reward miles redeemed ~~due to greater redemptions in the prior year period~~ as a result of ~~the then-planned expiration of~~COVID-19. We expect AIR MILES reward miles redeemed to continue to be negatively impacted by COVID-19 in the second quarter of 2020. For the three months ended March 31, 2020, the $8.0 million gain on ~~December~~the sale of Precima, net of transaction costs was excluded from adjusted EBITDA, net. For the three months ended March 31, ~~2016. Additionally, revenue~~2019, $7.9 million of restructuring and other charges was excluded from ~~our short-term loyalty programs decreased $6.9 million related to~~ ~~the timing of programs in market~~.

adjusted EBITDA, net.

●

~~Epsilon~~Card Services. ~~Revenue increased $15.5~~Adjusted EBITDA, net decreased $247.9 million, or 3%84%, to ~~$558.7~~$47.0 million for the three months ended ~~September 30, 2017~~ ~~driven by double-digit growth~~March 31, 2020 primarily due to a $403.8 million increase in provision for loan loss due to the ~~automotive vertical from a combination~~weaker macroeconomic environment and the impact of ~~new clients and strength in existing client relationships,~~COVID-19, as well as ~~a return to technology platform revenue growth. These increases were offset in part by softness in our digital media and agency product offerings as compared to~~ the ~~prior year period.~~

~~Card Services~~. ~~Revenue increased $89.6 million, or 9%, to $1,055.4 million for~~implementation of the ~~three months ended September 30, 2017, driven by a $97.2 million increase in finance charges, net as a result of an increase in average credit card and loan receivables due to recent portfolio acquisitions and strong cardholder spending.~~CECL model. This ~~increase~~ was offset in part by a ~~$7.6~~$115.3 million decrease in ~~servicing fees due to lower merchant fees as a result~~cost of ~~increased royalty payments associated with higher volumes and new clients.~~

~~Adjusted EBITDA, net. Adjusted EBITDA, net~~ ~~increased $38.1 million, or 7%, to $550.1 million for the~~ ~~three months ended September 30, 2017~~ ~~from $512.0 million for the~~ ~~three months ended September 30, 2016. The net increase was due to the following:~~

~~LoyaltyOne~~. ~~Adjusted EBITDA, net decreased $21.3 million, or 26%, to $61.0 million for the~~ ~~three months ended September 30, 2017~~operations primarily due to ~~the~~a $55.7 million decrease in ~~revenue discussed above~~valuation adjustments to certain portfolios within credit card receivables held for sale as well as ~~an approximate 1%~~a decrease in ~~adjusted EBITDA margins.~~

~~Epsilon~~. ~~Adjusted EBITDA, net decreased $9.8 million, or 7%, to $125.0 million for the~~ ~~three months ended September 30, 2017~~payroll and benefits costs due to ~~an unfavorable revenue mix toward lower margin product offerings~~cost saving initiatives executed in the ~~current year~~fourth quarter ~~as compared to the prior year quarter.~~

of 2019.

~~Index~~

●

~~Card Services~~. ~~Adjusted EBITDA, net increased $66.4 million, or 20%, to $397.3 million for the~~ ~~three months ended September 30, 2017~~Corporate/Other. Adjusted EBITDA, net ~~was positively impacted by an increase in finance charges, net and a decrease in the provision for loan loss but offset in part by an increase in operating expenses due to higher volumes.~~

~~Corporate/Other~~. ~~Adjusted EBITDA, net increased $2.8~~improved $12.2 million to a loss of ~~$33.2~~$21.3 million for the three months ended ~~September 30, 2017~~March 31, 2020 due to ~~lower payroll and benefit costs.~~

~~Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016~~

~~LoyaltyOne. Revenue decreased $172.4 million, or 16%, to $918.3 million for the nine months ended September 30, 2017 as revenue from our coalition loyalty program declined $107.7 million due to~~ ~~the change~~cost saving initiatives implemented in breakage rate in December 2016 and a 23% decrease in AIR MILES reward miles redeemed due to greater redemptions in the prior year period as a result of the then-planned expiration of AIR MILES reward miles on December 31, 2016. ~~Additionally,~~ ~~our short-term loyalty programs decreased $64.7 million as a result of softness due to the number and timing of campaigns.~~

~~Epsilon. Revenue increased $76.5 million, or 5%, to $1,631.8 million for the nine months ended September 30, 2017 driven by~~ double-digit growth in the automotive, agency and CRM offerings from a combination of new clients and strength in existing client relationships, offset in part by a 3% decline in technology platform revenue as compared to the prior year period.

~~Card Services~~. ~~Revenue increased $396.5 million, or 15%, to $3,083.6 million for the~~ ~~nine months ended September 30, 2017, driven by a $434.3 million increase in f~~inance charges, net as a result of an increase in average credit card and loan receivables due to recent portfolio acquisitions and strong cardholder spending. Servicing fees decreased $37.8 million, as merchant fees declined $32.8 million due to increased royalty payments associated with higher volumes and new clients, and2019, which among other ~~servicing fees declined $5.0 million.~~

~~Adjusted EBITDA, net. Adjusted EBITDA, net increased $50.0 million, or 4%, to $1,423.0 million for the nine months ended September 30, 2017 from $1,373.0~~ m~~illion for the~~ ~~nine months ended September 30, 2016. The net increase was~~ ~~due to the following:~~

~~LoyaltyOne~~. ~~Adjusted EBITDA, net decreased $58.9 million, or 25%, to $176.4 million for the~~ nine months ended September 30, 2017 primarily due to the decrease in revenue discussed above, offset in part by the associated decrease in cost of redemptions. In the prior year period, adjusted EBITDA, net wasitems included reduced by $5.5 million of adjusted EBITDA attributable to the non-controlling interest. Effective April 1, 2016, we acquired the remaining 20% interest in BrandLoyalty to bring our ownership percentage to 100%.

~~Epsilon~~. ~~Adjusted EBITDA, net decreased $1.4 million to $316.8 million for the~~ ~~nine months ended September 30, 2017 as a result of a 1% decrease in adjusted EBITDA margin due to an unfavorable shift in product mix offsetting the revenue increases discussed above~~.

~~Card Services~~. ~~Adjusted EBITDA, net increased $118.6 million, or 13%, to $1,033.5 million for the~~ ~~nine months ended September 30, 2017~~. Adjusted EBITDA, net was positively impacted by an increase in finance charges, net, which was offset primarily by an increase in the provision for loan loss resulting from higher principal loss rates as well as an increase in credit card and loan receivables and an increase in operating expenses due to higher volumes.

~~Corporate/Other~~. ~~Adjusted EBITDA, net decreased $8.3 million to a loss of $103.7 million for the~~ ~~nine months ended September 30, 2017, due to higher payroll and benefit costs, an increase in~~headcount, office space, charitable contributions and ~~higher net foreign currency exchange losses recognized in the current year period.~~

overall corporate overhead costs.

~~Index~~

Asset Quality

Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our credit card and loan receivables, the success of our collection and recovery efforts, and general economic conditions.

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

The following table presents the delinquency trends of our credit card and loan receivables ~~portfolio:~~portfolio based on the principal balances of our credit card and loan receivables:


	September 30,		% of		December 31,		% of
	2017		Total		2016		Total
	(In millions, except percentages)

									March 31,		% of		December 31,		% of
									2020		Total		2019		Total
									(in millions, except percentages)
Receivables outstanding - principal	$	15,581.6	100.0	%	$	15,754.0	100.0	%	$	16,725.4	100.0	%	$	18,413.1	100.0	%
Principal receivables balances contractually delinquent:
31 to 60 days		269.9	1.7	%		249.8	1.6	%	$	295.2	1.8	%	$	337.4	1.8	%
61 to 90 days		186.9	1.2			169.3	1.1			219.4	1.3			233.6	1.3
91 or more days		389.5	2.5			337.8	2.1			481.1	2.9			496.5	2.7
Total	$	846.3	5.4	%	$	756.9	4.8	%	$	995.7	6.0	%	$	1,067.5	5.8	%

Net Charge-Offs. Our net charge-offs include the principal amount of losses from cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during

Index

which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.

The net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period. Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated. The following table presents our net charge-offs for the periods indicated:


	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2017			2016			2017			2016
	(In millions, except percentages)

													Three Months Ended
													March 31,
													2020			2019
													(in millions, except percentages)
Average credit card and loan receivables	$	15,949.8		$	13,995.1		$	15,791.7		$	13,679.0		$	18,294.4		$	16,850.2
Net charge-offs of principal receivables		219.6			164.5			711.5			513.2			320.2			269.3
Net charge-offs as a percentage of average credit card and loan receivables		5.5	%		4.7	%		6.0	%		5.0	%		7.0	%		6.4	%

See Note 3,6, “Credit Card and Loan Receivables,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information related to the securitization of our credit card receivables.

~~Index~~

Liquidity and Capital Resources

Cash Flow Activity

Operating Activities. We generated cash flow from operating activities of $572.5 million and $610.8 million for the three months ended March 31, 2020 and 2019, respectively. The year-over-year decrease in operating cash flows of $38.3 million was primarily due to lower profitability.

Investing Activities. Cash provided by investing activities was $1,746.3 million and $717.5 million for the three months ended March 31, 2020 and 2019, respectively. Significant components of investing activities are as follows:

●

Credit card and loan receivables. Cash increased $1,446.7 million and $758.2 million for the three months ended March 31, 2020 and 2019, respectively, due to seasonal paydown of credit card and loan receivables.

●

Proceeds from sale of business. During the three months ended March 31, 2020, we received cash consideration of $25.4 million from the sale of Precima.

●

Proceeds from sale of credit card portfolios. During the three months ended March 31, 2020, we received preliminary cash consideration of $289.5 million from the sale of a credit card portfolio.

●

Capital expenditures. Cash paid for capital expenditures was $15.7 million and $38.7 million for the three months ended March 31, 2020 and 2019, respectively. Capital expenditures for the three months ended March 31, 2019 included $6.8 million related to our divested Epsilon segment, which was presented as a discontinued operation in the prior year period.

Financing Activities. Cash used in financing activities was $1,503.4 million and $1,483.0 million for the three months ended March 31, 2020 and 2019, respectively. Significant components of financing activities are as follows:

●

Debt. Cash increased $224.6 million and $174.2 million for the three months ended March 31, 2020 and 2019, respectively, due to net borrowings under the revolving line of credit.

●

Non-recourse borrowings of consolidated securitization entities. Cash decreased $925.0 million and $875.3 million for the three months ended March 31, 2020 and 2019, respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities.

●

Deposits. Cash decreased $769.4 million and $502.6 million for the three months ended March 31, 2020 and 2019, respectively, as a result of net repayments of deposits due to timing of maturities.

●

Dividends. Cash paid for quarterly dividends and dividend equivalents was $30.3 million and $33.9 million for the three months ended March 31, 2020 and 2019, respectively.

Index

●

Treasury shares. Cash paid for treasury shares was $222.8 million for the three months ended March 31, 2019. We did not repurchase any treasury shares for the three months ended March 31, 2020.

Liquidity

Our primary sources of liquidity include cash generated from operating activities, our credit agreements and issuances of debt or equity securities, our credit card securitization program and deposits issued by Comenity Bank and Comenity Capital Bank. In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources. We introduced a consumer retail deposit platform in 2019, and retail deposits comprised approximately $1.2 billion of our $11.4 billion deposits outstanding at March 31, 2020.

Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets. As of September 30, 2017, Comenity Bank’s Common Equity Tier 1 capital ratio was 15.6%, Tier 1 capital ratio was 15.6%, total capital ratio was 16.9% and leverage ratio was 14.4%. As of September 30, 2017, Comenity Capital Bank’s Common Equity Tier 1 capital ratio was 13.9%, Tier 1 capital ratio was 13.9%, total capital ratio was 15.2% and leverage ratio was 12.9%. Comenity Bank and Comenity Capital Bank are considered well capitalized. The actual capital ratios and minimum ratios as of March 31, 2020 are as follows:


					Minimum Ratio to be
			Minimum Ratio for		Well Capitalized under
	Actual		Capital Adequacy		Prompt Corrective
	Ratio		Purposes		Action Provisions
Comenity Bank
Tier 1 capital to average assets	13.3	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	16.7		4.5		6.5
Tier 1 capital to risk-weighted assets	16.7		6.0		8.0
Total capital to risk-weighted assets	18.1		8.0		10.0

Comenity Capital Bank
Tier 1 capital to average assets	12.2	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	14.8		4.5		6.5
Tier 1 capital to risk-weighted assets	14.8		6.0		8.0
Total capital to risk-weighted assets	16.1		8.0		10.0

Comenity Bank and Comenity Capital Bank have elected to adopt the option provided by the interim final rule issued by joint federal bank regulatory agencies, which will largely delay the effects of CECL on its regulatory capital for the next two years, after which the effects will be phased-in over a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases and dividends.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months.

~~Cash Flow Activity~~

~~Operating Activities.We generated cash flow from operating activities of $1,779.6 million~~ However, continued volatility in the financial and $1,354.8 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in operating cash flows of $424.8 million during the nine months ended September 30, 2017 as compared to the prior year period wascapital markets due to anCOVID-19 may limit our access to or increase ~~in profitability as well as non-cash charges~~our cost of capital or make capital unavailable on terms acceptable to ~~income, including an increase in the provision for loan loss, as well as an increase in cash provided by working capital during the current year period as compared to the prior year period.~~us or at all.

~~Investing Activities~~. Cash used in investing activities was $2,038.1 million and $2,151.6 million for the nine months ended September 30, 2017 and 2016, respectively. Significant components of investing activities are as follows:

~~Redemption settlement assets. During the nine months ended September 30, 2017, cash decreased $222.1 million as we increased funding to the redemption settlement assets as a result of the breakage rate change in December 2016.~~

~~Restricted cash~~. During the nine months ended September 30, 2017 and 2016, we collected principal accumulation of $415.6 million and $126.1 million, respectively, for the repayment of non-recourse borrowings of consolidated securitized debt that was repaid in October 2017 and 2016, respectively.

~~Credit card and loan receivables, net.~~ Cash decreased $1,174.7 million and $1,048.8 million for the nine months ended September 30, 2017 and 2016, respectively, due to growth in credit card and loan receivables and strong cardholder spending in both periods.

~~Purchase of credit card portfolios.~~ ~~During the nine months ended September 30, 2016, we paid $903.4 million to acquire four credit card portfolios.~~

~~Financing Activities.~~ Cash provided by financing activities was $1,723.1 million and $1,124.8 million for the nine months ended September 30, 2017 and 2016, respectively. Significant components of financing activities are as follows:

~~Debt.~~ ~~Cash increased $535.8 million for the nine months ended September 30, 2017, primarily due to the issuance of €400.0 million senior notes due 2022 and~~ ~~net borrowings under the revolving line of credit.~~ ~~Cash increased $781.5 million for the nine months ended September 30, 2016, primarily driven by~~ ~~net borrowings under the revolving line of credit.~~

~~Index~~

~~Deposits.~~ ~~Cash provided by net issuances of deposits increased $1,987.7 million and $2,013.1 million for the nine months ended September 30, 2017 and 2016, respectively.~~

~~Non-recourse borrowings of consolidated securitization entities.~~ Cash decreased $90.0 million and $582.5 million for the nine months ended September 30, 2017 and 2016, respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities.

~~BrandLoyalty non-controlling interest.~~ ~~During the nine months ended September 30, 2016, we paid $360.7 million to acquire the remaining ownership interests in BrandLoyalty.~~

~~Dividends paid.~~ ~~During the nine months ended September 30, 2017, we paid a total of $86.8 million for three quarterly dividends on our common stock.~~

~~Treasury shares.~~ ~~Cash paid for treasury shares was $553.7 million and $692.8 million for the nine months ended September 30, 2017 and 2016, respectively.~~

Debt

Long-term and Other Debt

On June 14, 2017, we entered in a credit agreement with various agents and lenders, or the 2017 Credit Agreement. On June 16, 2017, we entered into a first amendment to the 2017 Credit Agreement to increase borrowings. The 2017 Credit Agreement replaced in its entirety our credit agreement dated July 10, 2013, or the 2013 Credit Agreement. The 2017 Credit Agreement includes an uncommitted accordion feature of up to $750.0 million in the aggregate allowing for future incremental borrowings, subject to certain conditions. These borrowings bear interest at the same rates as, and are generally subject to the same terms, as the 2013 Credit Agreement. The loans under the 2017 Credit Agreement are scheduled to mature on June 14, 2022. At September 30, 2017, the 2017 Credit Agreement, as amended, provided for a $3,052.6 million term loan, subject to certain repayments, and a $1,572.4 million revolving line of credit.

As of ~~September 30, 2017,~~March 31, 2020, we had ~~$225.0~~$250.0 million outstanding under our revolving line of credit and total availability of ~~$1,347.4~~$500.0 million. Our total leverage ratio, as defined in our credit agreement, was ~~2.9~~less than 2.0 to 1 at ~~September 30, 2017,~~March 31, 2020, as compared to the maximum covenant ratio of 3.5 to 1.

In March 2017, we issued and sold €400.0 million aggregate principal amount of 4.500% senior notes due March 15, 2022. Interest is payable semiannually in arrears, on March 15 and September 15 of each year, beginning on September 15, 2017.

As of ~~September 30, 2017,~~March 31, 2020, we were in compliance with our debt covenants.

As of March 31, 2020, we had no amounts outstanding under our BrandLoyalty Credit Agreement, which was set to terminate in June 2020. In April 2020, BrandLoyalty terminated its existing facility and entered into a new credit

Index

agreement to provide for a committed revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), an uncommitted revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), and an accordion feature permitting BrandLoyalty to request an increase in either the committed or uncommitted revolving line of credit up to €80.0 million ($86.5 million as of April 3, 2020) in aggregate. The revolving lines of credit mature in April 2023, subject to BrandLoyalty’s request to extend for two additional one-year terms at the discretion of the lenders.

Deposits

We utilize certificates of deposit and money market deposits ~~and certificates of deposit~~ to finance the operating activities, including funding for our non-securitized credit card receivables, and fund securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank.

As of ~~September 30, 2017,~~March 31, 2020, we had ~~$3.2~~$7.8 billion in certificates of deposit outstanding with interest rates ranging from 1.33% to 4.00% and maturities ranging from April 2020 to March 2025. Certificate of deposit borrowings are subject to regulatory capital requirements.

As of March 31, 2020, we had $3.6 billion in money market deposits outstanding with interest rates ranging from ~~1.26%~~0.34% to ~~2.37%~~3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

As of September 30, 2017, we had $7.2 billion in certificates of deposit outstanding with interest rates ranging from 0.88% to 2.80% and maturities ranging from October 2017 to October 2022. Certificate of deposit borrowings are subject to regulatory capital requirements.

~~Index~~

Securitization Program

We sell a majority of the credit card receivables originated by Comenity Bank to WFN Credit Company, LLC, which in turn sells them to World Financial Network Credit Card Master Trust, ~~or Master Trust I,~~ World Financial Network Credit Card Master Note Trust, or Master Trust I, and World Financial Network Credit Card Master Trust III, or Master Trust III, or collectively, the WFN Trusts, as part of our credit card securitization program, which has been in existence since January 1996. We also sell our credit card receivables originated by Comenity Capital Bank to World Financial Capital Credit Company, LLC, which in turn sells them to World Financial Capital Master Note Trust, or the WFC Trust. These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’s credit card receivables.

As of ~~September 30, 2017,~~March 31, 2020, the WFN Trusts and the WFC Trust had approximately ~~$11.3~~$12.0 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and the WFC Trust and by the performance of the credit card receivables in these credit card securitization trusts.

At ~~September 30, 2017,~~March 31, 2020, we had ~~$6.9~~$6.4 billion of non-recourse borrowings of consolidated securitization entities, of which ~~$1.9~~$2.5 billion is due within the next 12 months. As of ~~September 30, 2017,~~March 31, 2020, total capacity under the conduit facilities was ~~$2.9~~$4.7 billion, of which ~~$2.1~~$1.5 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

In April ~~2017,~~2020, Master Trust ~~III renewed~~I amended its ~~2009-VFC1~~2009-VFN conduit facility, ~~increasing~~decreasing the capacity from ~~$900.0 million~~$1.18 billion to ~~$925.0 million~~$1.0 billion and extending the maturity to July 2021. In April ~~2018.~~

In May 2017, Master Trust I issued $450.7 million of Series 2017-A asset-backed term notes, which mature in May 2020. The offering consisted of $400.0 million of Class A notes with a fixed interest rate of 2.12% per year and $50.7 million of notes that were retained by us and eliminated from the unaudited condensed consolidated balance sheets.

In May 2017, $389.6 million of Series 2015-C asset-backed term notes, $89.6 million of which were retained by us and eliminated from the unaudited condensed consolidated balance sheets, matured and were repaid.

In July 2017, $433.3 million of Series 2012-B asset-backed term notes, $108.3 million of which were retained by us and eliminated from the unaudited condensed consolidated balance sheets, matured and were repaid.

In August 2017, Master Trust I issued $444.7 million of Series 2017-B asset-backed term notes, which mature in August 2019. The offering consisted of $400.0 million of Class A notes with a fixed interest rate of 1.98% per year and $44.7 million of notes that were retained by us and eliminated from the unaudited condensed consolidated balance sheets.

In October 2017, $427.6 million of Series 2014-C asset-backed term notes, $102.6 million of which were retained by us and eliminated from the unaudited condensed consolidated balance sheets, matured and were repaid.

~~In October 2017,~~2020, Master Trust III ~~again renewed~~amended its ~~2009-VFC1~~2009-VFC conduit facility, ~~increasing~~decreasing the capacity from ~~$925.0 million~~$1.3 billion to ~~$1,680.0 million~~$1.0 billion and extending the maturity to ~~January 2019.~~July 2021.

The following table shows the maturities of borrowing commitments as of ~~September 30, 2017~~March 31, 2020 for the WFN Trusts and the WFC Trust by year:



	2020		2021		2022		2023		Thereafter		Total
	(in millions)
Term notes	$	1,467.2	$	1,852.1	$	1,571.7	$	—	$	—	$	4,891.0
Conduit facilities ⁽¹⁾		2,480.0		2,175.0		—		—		—		4,655.0
Total ⁽²⁾	$	3,947.2	$	4,027.1	$	1,571.7	$	—	$	—	$	9,546.0

2017

2018

2019

2020

Thereafter

Total

(In millions)
Term notes

$
325.0

$
1,341.0

$
1,574.0

$
875.0

$
682.5

$
4,797.5
Conduit facilities (1)

—

2,885.0

—

—

—

2,885.0
Total (2)

$
325.0

$
4,226.0

$
1,574.0

$
875.0

$
682.5

$
7,682.5

⁽¹⁾

Amount represents borrowing capacity, not outstanding borrowings.

⁽²⁾

Total amounts do not include ~~$2.0~~$1.1 billion of debt issued by the credit card securitization trusts that was retained by us and eliminated in the unaudited condensed consolidated financial ~~statements~~.

statements.

4644

Index

See Note 8,13, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt.

Stock Repurchase Programs

~~On January 1, 2017, our Board of Directors~~We had an authorized a stock repurchase program to acquire up to ~~$500.0 million~~$1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020. At December 31, ~~2017.~~

On January 30, 2017, under the authorization of the existing 2017 repurchase program, we entered into a $350.0 million fixed dollar accelerated share repurchase program agreement, or the ASR Agreement, with an investment bank counterparty. Pursuant to the ASR Agreement, we received an initial delivery of 1.4 million shares of our common stock on February 6, 2017. The final settlement was based upon the volume weighted average price of our common stock, purchased by the counterparty during the period, less a specified discount, subject to a collar with a specified forward cap price and forward cap floor. The final settlement was on April 17, 2017 and resulted in the delivery of an additional 0.1 million shares. As a result of this transaction, we purchased a total of 1.5 million shares of our common stock at a settlement price per share of $238.34.

On July 25, 2017, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2017 to acquire an additional $500.0 million of our outstanding common stock through July 31, 2018, for a total authorization of $1.0 billion.

~~For the~~ ~~nine months ended September 30, 2017, we acquired a total of 2.3 million shares of our common stock for $553.7 million, including those amounts under the ASR Agreement. As of September 30, 2017,~~2019 we had ~~$446.3~~$347.8 million remaining under the stock repurchase program. On April 23, 2020, we announced the suspension of our stock repurchase program.

For the three months ended March 31, 2020, we did not repurchase any shares of our outstanding common stock, and we had $347.8 million remaining under the stock repurchase program as of March 31, 2020.

Dividends

On January ~~26, 2017,~~30, 2020, our Board of Directors declared a quarterly cash dividend of ~~$0.52~~$0.63 per share on our common stock to stockholders of record at the close of business on February ~~15, 2017,~~14, 2020, resulting in a dividend payment of ~~$29.0~~$30.0 million on March ~~17, 2017.~~19, 2020. Additionally, we paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2020.

On April ~~20, 2017,~~23, 2020, our Board of Directors declared a quarterly cash dividend of ~~$0.52~~$0.21 per share on our common stock to stockholders of record at the close of business on May ~~15, 2017, resulting in a dividend payment of $29.0 million~~14, 2020 and payable on June ~~19, 2017.~~18, 2020.

On July 20, 2017, our Board of Directors declared a quarterly cash dividend of $0.52 per share on our common stock to stockholders of record at the close of business on August 14, 2017, resulting in a dividend payment of $28.8 million on September 19, 2017.

On October 19, 2017, our Board of Directors declared a quarterly cash dividend of $0.52 per share on our common stock, payable on December 19, 2017, to stockholders of record at the close of business on November 14, 2017.

Critical Accounting Policies and Estimates

~~There~~With the exception of the adoption of ASC 326, there have been no ~~material~~significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, ~~2016.~~2019. See “Recently Adopted Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the adoption of ASC 326 on January 1, 2020.

Recently Issued Pronouncements

See “Recently Issued Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards ~~that have been~~ recently issued.

~~Index~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risks include interest rate risk, credit risk, and foreign currency exchange rate risk.

~~There~~Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets and the risk factors described in Part II Item 1A included in this report, there has been no other material change from our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 related to our exposure to market risk from interest rate risk, credit risk, and foreign currency exchange rate risk.

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of ~~September 30, 2017,~~March 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2017~~March 31,

Index

2020 (the end of our ~~third~~first fiscal quarter), our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our ~~third~~first quarter ~~2017~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, except for the implementation of controls to account for the CECL allowance for loan loss as a result of ASC 326. The modified controls have been designed to address risks associated with accounting for the CECL allowance for loan loss under ASC 326.

PART II

Item 1. Legal Proceedings.

From time to time we are involved in various claims and lawsuits arising in the ordinary course of our business that we believe will not have a material adverse effect on our business or financial condition, including claims and lawsuits alleging breaches of our contractual obligations. See Indemnification in Note 15, “Commitments and Contingencies,” of the Notes to Unaudited Condensed Consolidated Financial Statements.

Item 1A. Risk Factors.

~~There~~Other than as set forth below, there have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019.

Impacts related to the COVID-19 pandemic are expected to continue to pose risks to our business for the foreseeable future, heighten many of our known risks and may have a material adverse impact on our results of operations, financial condition and liquidity.

On March 11, 2020, the WHO declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. Both prior to and in response to this declaration and the rapid spread of COVID-19 around the world and within the United States, international, federal, state and local government or other authorities have instituted certain preventative measures, including border closures, travel bans, prohibitions on group events and gatherings, shutdowns or other operational restrictions on certain businesses, curfews, shelter-in-place orders, quarantines and recommendations to practice social distancing. These restrictions are disrupting economic activity worldwide, resulting in volatility in the global capital markets, instability in the credit and financial markets, reduced commercial and consumer confidence and spending, widespread furloughs and layoffs, closure or restricted operating conditions for retail stores, labor shortages, regulatory recommendations to provide relief for impacted consumer borrowers and depositors, disruption in supply chains (including availability of raw materials, ability to manufacture goods and delivery of finished products to suppliers and retailers), and near complete cessation of many hospitality and travel industry operations.

Specific impacts on our ~~Quarterly~~operations and financial results include, but are not limited to, the following:

●

Short and long-term difficulties of our retail partners in consumer-based businesses due to restricted foot traffic, any inability to convert in-store sales to e-commerce, trouble maintaining supply chain integrity for both availability of desired products and delivery to end consumers, and reduced consumer confidence and spending may result in increased bankruptcy risk for our retail partners, decreased retail credit sales and decreases in our credit card accounts receivables balances.

●

Decreased retail credit sales reduces the usage of our private label and co-brand credit cards, which reduces our revenue from finance charges and other servicing fees.

●

Rising unemployment, the potential for rising consumer bankruptcies and the expectation that we will offer, for a temporary period of time, forbearance programs for impacted cardholders both reduces or delays our revenue

Index

from finance charges and other servicing fees and increases our exposure to rising delinquencies, net charge-offs in credit card and loan receivables and increases to our allowance for loan loss.

●

Deferral of short-term programs or the inability to source or deliver rewards for these programs across borders may reduce or defer revenue or increase our costs of operations.

●

Reduced demand for hospitality, airline and other travel-related rewards within our AIR MILES Reward Program due to the multiple COVID-19 restrictions noted negatively impacts redemption revenue as collectors both changed existing reward travel and are unable to schedule future reward travel with any certainty as to the duration of restrictions.

●

Volatility in the financial markets may increase our cost of capital and/or limit its availability, and prolonged periods of increased financial stress enhance the potential for a rating downgrade on our asset-backed debt, the occurrence of early amortization events as well as non-compliance with financial covenants or other events of default across our significant asset-backed and other indebtedness.

●

Increased operational risk, including impacts to our data and call center network integrity and availability in addition to heightened cybercriminal activity and other payment fraud risk in this environment of e-commerce and online banking reliance, may affect our ability to timely and effectively meet the needs of both our clients and cardholders across our lines of business.

●

Increased risks to the health and safety of our associates and that of our third-party vendors may impact our ability to maintain service levels for our partners.

To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and liquidity, many of the other risks described in the “Risk Factors” section of our Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~fiscal year ended ~~June 30, 2017.~~December 31, 2019 may also be heightened. The complete impact of COVID-19 on our business, results of operations, financial condition and liquidity remains dependent on future developments, including the duration, or any continued recurrence, of the pandemic and the related length and severity of its impact on the global economy, which cannot be predicted at this time.

~~Index~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of our common stock made during the three months ended ~~September 30, 2017:~~March 31, 2020:


				Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares that
				Part of Publicly	May Yet Be
	Total Number of	Average Price Paid		Announced Plans or	Purchased Under the
Period	Shares Purchased ⁽¹⁾	per Share		Programs	Plans or Programs ⁽²⁾
					(Dollars in millions)
During 2020:
January 1-31	2,956	$	111.40	—	$	347.8
February 1-29	4,110		97.99	—		347.8
March 1-31	35,750		38.13	—		347.8
Total	42,816	$	48.94	—	$	347.8

Total Number of

Approximate Dollar

Shares Purchased as

Value of Shares that

Part of Publicly

May Yet Be

Total Number of

Average Price Paid

Announced Plans or

Purchased Under the
Period

Shares Purchased (1)

per Share

Programs

Plans or Programs (2)

(Dollars in millions)
During 2017:

July 1-31

3,999

$
246.69

—

$
500.1
August 1-31

243,091

223.94

240,000

446.3
September 1-30

2,846

217.25

—

446.3
Total

249,936

$
224.23

240,000

$
446.3

⁽¹⁾

During the period represented by the table, ~~9,936~~42,816 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Savings Plan for the benefit of the employees who participated in that portion of the plan.

⁽²⁾

~~On January 1, 2017,~~In 2019, our Board of Directors authorized a new stock repurchase program to acquire up to ~~$500.0 million~~$1.1 billion of our outstanding common stock from ~~January 1, 2017~~July 5, 2019 through December 31, 2017. On July 25, 2017, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2017 to acquire an additional $500.0 million of our outstanding common stock through July 31, 2018, for a totalJune 30, 2020. Our authorization ~~of $1.0 billion. Both authorizations are~~is subject to any restrictions pursuant to the terms of our credit agreements ~~indentures,~~ and applicable securities laws or otherwise.

On April 23, 2020, we announced the suspension of our stock repurchase program and do not intend to make further purchases prior to its termination.

Item 3. Defaults Upon Senior Securities.

None

Index

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

(a) None

(b) None

Item 6. Exhibits.

(a)~~None~~Exhibits:

~~(b)None~~EXHIBIT INDEX


			Incorporated by Reference
Exhibit No.	Filer	Description	Form	Exhibit	Filing Date

3.1	(a)	Third Amended and Restated Certificate of Incorporation of the Registrant.	8-K	3.2	6/10/16

3.2	(a)	Certificate of Designations of Series A Preferred Non-Voting Convertible Preferred Stock of the Registrant.	8-K	3.1	4/29/19

3.3	(a)	Fifth Amended and Restated Bylaws of the Registrant.	8-K	3.1	2/1/16

4	(a)	Specimen Certificate for shares of Common Stock of the Registrant.	10-Q	4	8/8/03

+10.1	(a)	Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant EBT).	8-K	10.1	2/20/20

+10.2	(a)	Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant rTSR).	8-K	10.2	2/20/20

+10.3	(a)	Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant Strategic).	8-K	10.3	2/20/20

10.4	(b) (c) (d)	Amendment to Third Amended and Restated Service Agreement, dated as of February 20, 2020, between Comenity Servicing LLC and Comenity Bank.	8-K	99.1	2/25/20

10.5	(a)	Fifth Amendment to Amended and Restated Credit Agreement, dated as of February 13, 2020, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.	10-K	10.125	2/28/20

#10.6	(a)	Secured Facilities Agreement, dated as of April 3, 2020, by and among Brand Loyalty Group B.V. and certain subsidiaries parties thereto, as borrowers and guarantors, Deutsche Bank AG, Amsterdam Branch (as Arranger) and Coöperatieve Rabobank U.A. (as Arranger, Agent and Security Agent).	8-K	10.1	4/8/20

4948

Index

~~Item 6. Exhibits.~~

~~(a)~~ ~~Exhibits:~~

~~EXHIBIT INDEX~~

Incorporated by Reference
Exhibit
No.

Filer

Description

Form

Exhibit

Filing
Date

3.1

(a)

Third Amended and Restated Certificate of Incorporation of the Registrant.

8-K

3.2

6/10/16

3.2

(a)

Fifth Amended and Restated Bylaws of the Registrant.

8-K

3.1

2/1/16

4

(a)

Specimen Certificate for shares of Common Stock of the Registrant.

10-Q

4

8/8/03

10.1

(b)
(c)
(d)

Omnibus Amendment, dated as of July 10, 2017, among World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A

8-K

4.1

7/11/17

10.2

(a)

First Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of July 10, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.

10-Q

10.8

8/7/17

10.3

(b)
(c)
(d)

Series 2017-B Indenture Supplement, dated as of August 16, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.

8-K

4.1

8/22/17

*10.4

(a)

First Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of October 19, 2017, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).

*10.5

(a)

First Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of November 1, 2017, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).

31.1

(a)

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.

31.2

(a)

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.

~~Index~~

Exhibit No.	Filer	Description	Form		Exhibit	Filing Date

							Incorporated by Reference


Exhibit No.*31.1	~~Filer~~	~~Description~~	~~Form~~		~~Exhibit~~	Filing Date

~~32.1~~	(a)	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.

*31.2	(a)	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.

*32.1	(a)	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.

*32.2	(a)	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~~101	(a)	~~XBRL Instance Document~~The following financial information from Alliance Data Systems Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income (Loss), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

*~~101.SCH~~104	(a)	Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Schema Document~~and contained in Exhibit 101).

*	Filed herewith

+
*101.CAL	~~(a)~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~

*101.DEF	~~(a)~~	~~XBRL Taxonomy Extension Definition Linkbase Document~~

*101.LAB	~~(a)~~	~~XBRL Taxonomy Extension Label Linkbase Document~~

*101.PRE	~~(a)~~	~~XBRL Taxonomy Extension Presentation Linkbase Document~~	Management contract, compensatory plan or arrangement

*Filed herewith

~~+Management contract, compensatory plan~~# Pursuant to Item 601 (b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Registrant hereby undertakes to furnish supplementally an unredacted copy of the exhibit or ~~arrangement~~a copy of any omitted schedule upon request by the U.S. Securities and Exchange Commission.

(a)

Alliance Data Systems Corporation

(b)

WFN Credit Company

(c)

World Financial Network Credit Card Master Trust

(d)

World Financial Network Credit Card Master Note Trust

5149

Index

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ALLIANCE DATA SYSTEMS CORPORATION

	By:	/s/ ~~EDWARD J. HEFFERNAN~~TIMOTHY P. KING
		~~Edward J. Heffernan~~Timothy P. King
		~~President and Chief Executive Officer~~

~~Date: November 8, 2017~~
	~~By:~~	~~/s/ CHARLES L. HORN~~
		~~Charles L. Horn~~
		Executive Vice President and Chief Financial Officer

Date: ~~November 8, 2017~~May 6, 2020
	By:	/s/ LAURA SANTILLAN
		Laura Santillan
		Senior Vice President and Chief Accounting Officer

Date: May 6, 2020

5250


	Deferred Revenue
	Service		Redemption		Total
	(in millions)
Balance at January 1, 2020	$	258.6	$	663.4	$	922.0
Cash proceeds		44.8		73.4		118.2
Revenue recognized ⁽¹⁾		(48.6)		(69.2)		(117.8)
Effects of foreign currency translation		(19.6)		(50.9)		(70.5)
Balance at March 31, 2020	$	235.2	$	616.7	$	851.9
Amounts recognized in the consolidated balance sheets:
Deferred revenue (current)	$	131.6	$	616.7	$	748.3
Deferred revenue (non-current)	$	103.6	$	—	$	103.6


	Estimated Life
	(in months)
Group A (Current, risk score - high)		14
Group B (Current, risk score - low)		19
Group C (Delinquent, risk score - high)		17
Group D (Delinquent, risk score - low)		26

		Page Number
	Part I: FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019	3
		3

	Condensed Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	4
		4

	Condensed Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	5
		5

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019	6

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	6
		7

	Notes to Condensed Consolidated Financial Statements	7 8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35 36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48 45

Item 4.	Controls and Procedures	48
		45
	~~Part II~~ ~~OTHER INFORMATION~~
	Part II: OTHER INFORMATION

Item 1.	Legal Proceedings	48 46

Item 1A.	Risk Factors	48 46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49 47

Item 3.	Defaults Upon Senior Securities	49 47

Item 4.	Mine Safety Disclosures	49 48

Item 5.	Other Information	49 48

Item 6.	Exhibits	50 48

SIGNATURES		52 50


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In millions except per share amounts)
Numerator:
Net income attributable to common stockholders	$	233.2	$	207.5	$	517.4	$	505.2
Less: Accretion of redeemable non-controlling interest		—		—		—		83.5
Net income attributable to common stockholders after accretion of redeemable non-controlling interest	$	233.2	$	207.5	$	517.4	$	421.7

Denominator:
Weighted average shares, basic		55.4		58.3		55.8		59.0
Weighted average effect of dilutive securities:
Net effect of dilutive stock options and unvested restricted stock		0.2		0.1		0.2		0.2
Denominator for diluted calculation		55.6		58.4		56.0		59.2

Net income attributable to common stockholders per share:
Basic	$	4.21	$	3.56	$	9.27	$	7.15
Diluted	$	4.20	$	3.55	$	9.23	$	7.12


	January 10,
	2020
	(in millions)
Total consideration ⁽¹⁾	$	43.8
Net carrying value of assets and liabilities (including other comprehensive income)		26.8
Allocation of goodwill		3.2
Strategic transaction costs		5.8
Pre-tax gain on sale of business, net of strategic transaction costs	$	8.0


	Three Months Ended			Nine Months Ended
	September 30, 2016			September 30, 2016
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance
	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables	27,606	$	31.3	75,828	$	84.1


	September 30, 2017
						Percentage of
	Number of	Percentage of		Principal		Principal
	Active Accounts	Active Accounts		Receivables		Receivables
Age of Accounts Since Origination	with Balances	with Balances		Outstanding		Outstanding
	(In millions, except percentages)
0-12 Months	6.5	27.7	%	$	3,434.5	22.0	%
13-24 Months	3.8	16.4			2,572.5	16.5
25-36 Months	2.9	12.5			2,255.4	14.5
37-48 Months	2.0	8.4			1,553.0	10.0
49-60 Months	1.5	6.2			1,135.9	7.3
Over 60 Months	6.7	28.8			4,630.3	29.7
Total	23.4	100.0	%	$	15,581.6	100.0	%


	Amortized		Estimated
	Cost		Fair Value
	(In millions)
Due in one year or less	$	97.7	$	97.4
Due after one year through five years		413.0		407.3
Total	$	510.7	$	504.7


	September 30, 2017
	Gross		Accumulated
	Assets		Amortization		Net		Amortization Life and Method
	(In millions)
Finite Lived Assets
Customer contracts and lists	$	1,147.0	$	(590.7)	$	556.3	3-12 years—straight line
Premium on purchased credit card portfolios		271.8		(135.8)		136.0	3-13 years—straight line
Customer database		63.6		(59.6)		4.0	3 years—straight line
Collector database		56.1		(53.9)		2.2	5 years—straight line
Publisher networks		140.2		(77.5)		62.7	5-7 years—straight line
Tradenames		76.8		(45.2)		31.6	8-15 years—straight line
Purchased data lists		11.2		(6.1)		5.1	1-5 years—straight line, accelerated
Favorable lease		6.0		(2.9)		3.1	6-10 years—straight line
	$	1,772.7	$	(971.7)	$	801.0
Indefinite Lived Assets
Tradenames		12.4		—		12.4	Indefinite life
Total intangible assets	$	1,785.1	$	(971.7)	$	813.4


	For the Years Ending
	December 31,
	(In millions)
2017 (excluding the nine months ended September 30, 2017)	$	65.9
2018		241.1
2019		192.6
2020		128.9
2021		76.6
Thereafter		95.9



	LoyaltyOne®		Epsilon®		Card Services		Corporate/ Other		Total
	(In millions)
Balance at January 1, 2016	$	663.5	$	2,888.9	$	261.7	$	—	$	3,814.1
Goodwill acquired during year		—		—		—		—		—
Effects of foreign currency translation		(10.2)		(3.2)		—		—		(13.4)
Balance at December 31, 2016	$	653.3	$	2,885.7	$	261.7	$	—	$	3,800.7
Goodwill acquired during year		—		—		—		—		—
Effects of foreign currency translation		71.2		1.5		—		—		72.7
Balance at September 30, 2017	$	724.5	$	2,887.2	$	261.7	$	—	$	3,873.4


	Termination		Asset		Lease		Other
Three Months Ended March 31, 2020	Benefits ⁽¹⁾		Impairments		Termination Costs		Exit Costs		Total
	(in millions)
Corporate/Other	$	(0.1)	$	—	$	—	$	—	$	(0.1)
LoyaltyOne		0.1		—		—		—		0.1
Card Services		(6.5)		—		—		—		(6.5)
Total	$	(6.5)	$	—	$	—	$	—	$	(6.5)


	September 30,		December 31,
Description	2017		2016		Maturity	Interest Rate
	(Dollars in millions)
Long-term and other debt:
2017 revolving line of credit	$	225.0	$	—	June 2022	(1)
2017 term loans		3,033.5		—	June 2022	(1)
2013 revolving line of credit		—		235.0	—	—
2013 term loans		—		2,837.3	—	—
BrandLoyalty credit agreement		207.7		254.3	June 2020	(2)
Senior notes due 2017		400.0		400.0	December 2017	5.250%
Senior notes due 2020		500.0		500.0	April 2020	6.375%
Senior notes due 2021		500.0		500.0	November 2021	5.875%
Senior notes due 2022		600.0		600.0	August 2022	5.375%
Senior notes due 2022 (€400.0 million)		472.6		—	March 2022	4.500%
Senior notes due 2023 (€300.0 million)		354.4		315.5	November 2023	5.250%
Capital lease obligations and other debt		9.7		6.0	Various – January 2019 – June 2021	2.24% to 3.72%
Total long-term and other debt		6,302.9		5,648.1
Less: Unamortized discount and debt issuance costs		60.3		46.7
Less: Current portion		538.5		814.5
Long-term portion	$	5,704.1	$	4,786.9

Deposits:
Certificates of deposit	$	7,200.3	$	5,937.9	Various – Oct 2017 – Oct 2022	0.88% to 2.80%
Money market deposits		3,199.5		2,474.3	On demand	(3)
Total deposits		10,399.8		8,412.2
Less: Unamortized discount and debt issuance costs		25.8		20.3
Less: Current portion		5,823.5		4,673.0
Long-term portion	$	4,550.5	$	3,718.9

Non-recourse borrowings of consolidated securitization entities:
Fixed rate asset-backed term note securities	$	4,437.5	$	4,262.5	Various – Oct 2017 – June 2021	1.44% to 4.55%
Floating rate asset-backed term note securities		360.0		360.0	April 2018	(4)
Conduit asset-backed securities		2,080.0		2,345.0	Various – April 2018 – Nov 2018	(5)
Total non-recourse borrowings of consolidated securitization entities		6,877.5		6,967.5
Less: Unamortized discount and debt issuance costs		11.4		12.1
Less: Current portion		1,933.5		1,639.0
Long-term portion	$	4,932.6	$	5,316.4


	Deferred Revenue
	Service		Redemption		Total
	(In millions)
Balance at December 31, 2016	$	297.7	$	633.8	$	931.5
Cash proceeds		135.0		251.6		386.6
Revenue recognized		(170.2)		(253.1)		(423.3)
Other		—		1.1		1.1
Effects of foreign currency translation		21.4		49.0		70.4
Balance at September 30, 2017	$	283.9	$	682.4	$	966.3
Amounts recognized in the consolidated balance sheets:
Current liabilities	$	164.6	$	682.4	$	847.0
Non-current liabilities	$	119.3	$	—	$	119.3


	Net		Unrealized		Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended September 30, 2017	on Securities		Flow Hedges		Investment Hedges		Adjustments (1)		Income (Loss)
	(In millions)
Balance at June 30, 2017	$	(3.7)	$	(0.5)	$	(23.3)	$	(114.1)	$	(141.6)
Changes in other comprehensive income (loss) before reclassifications		(3.1)		0.6		(12.0)		15.9		1.4
Amounts reclassified from other comprehensive income (loss)		—		—		—		—		—
Changes in other comprehensive income (loss)		(3.1)		0.6		(12.0)		15.9		1.4
Balance at September 30, 2017	$	(6.8)	$	0.1	$	(35.3)	$	(98.2)	$	(140.2)


	Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended March 31, 2020	on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss
	(in millions)
Balance at December 31, 2019	$	2.5	$	(0.1)	$	(7.5)	$	(94.8)	$	(99.9)
Changes in other comprehensive income (loss)		1.6		0.3		—		(23.9)		(22.0)
Recognition resulting from the sale of Precima's foreign subsidiaries		—		—		—		3.8		3.8
Balance at March 31, 2020	$	4.1	$	0.2	$	(7.5)	$	(114.9)	$	(118.1)


	September 30, 2017				December 31, 2016
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In millions)
Financial assets
Credit card and loan receivables, net	$	15,406.0	$	16,214.2	$	15,595.9	$	16,423.2
Credit card and loan receivables held for sale		888.7		959.5		417.3		428.7
Redemption settlement assets, restricted		576.2		576.2		324.4		324.4
Other investments		239.4		239.4		197.6		197.6
Derivative instruments		13.8		13.8		1.2		1.2
Financial liabilities
Derivative instruments		4.6		4.6		0.9		0.9
Deposits		10,374.0		10,415.9		8,391.9		8,432.2
Non-recourse borrowings of consolidated securitization entities		6,866.1		6,885.7		6,955.4		6,973.8
Long-term and other debt		6,242.6		6,392.0		5,601.4		5,641.0


			Fair Value Measurements at
			September 30, 2017 Using
	Balance at
	September 30,
	2017		Level 1		Level 2		Level 3
	(In millions)
Mutual funds (1)	$	27.5	$	27.5	$	—	$	—
Corporate bonds (1)		477.2		—		477.2		—
Marketable securities (2)		189.3		10.1		179.2		—
U.S. Treasury bonds (2)		50.1		50.1		—		—
Derivative instruments (3)		13.8		—		13.8		—
Total assets measured at fair value	$	757.9	$	87.7	$	670.2	$	—

Derivative instruments (3)	$	4.6	$	—	$	4.6	$	—
Total liabilities measured at fair value	$	4.6	$	—	$	4.6	$	—


			Fair Value Measurements at
			December 31, 2019 Using
	Balance at
	December 31,
	2019		Level 1		Level 2		Level 3
	(in millions)
Mutual funds ⁽¹⁾	$	25.1	$	25.1	$	—	$	—
Corporate bonds ⁽¹⁾		536.4		—		536.4		—
Marketable securities ⁽²⁾		259.8		26.2		233.6		—
Derivative instruments ⁽³⁾		0.2		—		0.2		—
Total assets measured at fair value	$	821.5	$	51.3	$	770.2	$	—

Derivative instruments ⁽³⁾	$	0.3	$	—	$	0.3	$	—
Total liabilities measured at fair value	$	0.3	$	—	$	0.3	$	—


							Corporate/
Three Months Ended September 30, 2017	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
	(In millions)
Revenues	$	305.2	$	558.7	$	1,055.4	$	—	$	(6.9)	$	1,912.4

Income (loss) before income taxes	$	35.7	$	38.6	$	371.4	$	(112.1)	$	—	$	333.6
Interest expense, net		1.7		0.1		71.4		72.1		—		145.3
Operating income (loss)		37.4		38.7		442.8		(40.0)		—		478.9
Depreciation and amortization		21.4		77.9		22.9		2.1		—		124.3
Stock compensation expense		2.2		8.4		3.0		4.7		—		18.3
Adjusted EBITDA (1)		61.0		125.0		468.7		(33.2)		—		621.5
Less: Securitization funding costs		—		—		38.2		—		—		38.2
Less: Interest expense on deposits		—		—		33.2		—		—		33.2
Less: Adjusted EBITDA attributable to non-controlling interest		—		—		—		—		—		—
Adjusted EBITDA, net (1)	$	61.0	$	125.0	$	397.3	$	(33.2)	$	—	$	550.1


							Corporate/
Three Months Ended September 30, 2016	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
	(In millions)
Revenues	$	383.8	$	543.2	$	965.8	$	0.1	$	(7.3)	$	1,885.6

Income (loss) before income taxes	$	56.4	$	48.2	$	304.4	$	(96.3)	$	—	$	312.7
Interest expense, net		1.3		—		53.7		53.3		—		108.3
Operating income (loss)		57.7		48.2		358.1		(43.0)		—		421.0
Depreciation and amortization		22.1		79.5		23.0		2.1		—		126.7
Stock compensation expense		2.5		7.1		3.5		4.9		—		18.0
Adjusted EBITDA (1)		82.3		134.8		384.6		(36.0)		—		565.7
Less: Securitization funding costs		—		—		31.1		—		—		31.1
Less: Interest expense on deposits		—		—		22.6		—		—		22.6
Less: Adjusted EBITDA attributable to non-controlling interest		—		—		—		—		—		—
Adjusted EBITDA, net (1)	$	82.3	$	134.8	$	330.9	$	(36.0)	$	—	$	512.0


							Corporate/
Nine Months Ended September 30, 2017	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
	(In millions)
Revenues	$	918.3	$	1,631.8	$	3,083.6	$	—	$	(20.5)	$	5,613.2

Income (loss) before income taxes	$	105.6	$	56.9	$	949.3	$	(337.0)	$	—	$	774.8
Interest expense, net		3.8		0.2		197.8		206.2		—		408.0
Operating income (loss)		109.4		57.1		1,147.1		(130.8)		—		1,182.8
Depreciation and amortization		60.1		233.7		74.8		5.9		—		374.5
Stock compensation expense		6.9		26.0		9.4		21.2		—		63.5
Adjusted EBITDA (1)		176.4		316.8		1,231.3		(103.7)		—		1,620.8
Less: Securitization funding costs		—		—		109.9		—		—		109.9
Less: Interest expense on deposits		—		—		87.9		—		—		87.9
Less: Adjusted EBITDA attributable to non-controlling interest		—		—		—		—		—		—
Adjusted EBITDA, net (1)	$	176.4	$	316.8	$	1,033.5	$	(103.7)	$	—	$	1,423.0


							Corporate/
Nine Months Ended September 30, 2016	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
	(In millions)
Revenues	$	1,090.7	$	1,555.3	$	2,687.1	$	0.2	$	(22.8)	$	5,310.5

Income (loss) before income taxes	$	165.6	$	46.5	$	838.6	$	(275.7)	$	—	$	775.0
Interest expense, net		2.0		—		151.5		157.3		—		310.8
Operating income (loss)		167.6		46.5		990.1		(118.4)		—		1,085.8
Depreciation and amortization		65.5		246.6		65.4		7.2		—		384.7
Stock compensation expense		7.7		25.1		10.9		15.8		—		59.5
Adjusted EBITDA (1)		240.8		318.2		1,066.4		(95.4)		—		1,530.0
Less: Securitization funding costs		—		—		91.5		—		—		91.5
Less: Interest expense on deposits		—		—		60.0		—		—		60.0
Less: Adjusted EBITDA attributable to non-controlling interest		5.5		—		—		—		—		5.5
Adjusted EBITDA, net (1)	$	235.3	$	318.2	$	914.9	$	(95.4)	$	—	$	1,373.0


				Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares that
				Part of Publicly	May Yet Be
	Total Number of	Average Price Paid		Announced Plans or	Purchased Under the
Period	Shares Purchased (1)	per Share		Programs	Plans or Programs (2)
					(Dollars in millions)
During 2017:
July 1-31	3,999	$	246.69	—	$	500.1
August 1-31	243,091		223.94	240,000		446.3
September 1-30	2,846		217.25	—		446.3
Total	249,936	$	224.23	240,000	$	446.3


			Incorporated by Reference
Exhibit No.	Filer	Description	Form	Exhibit	Filing Date

3.1	(a)	Third Amended and Restated Certificate of Incorporation of the Registrant.	8-K	3.2	6/10/16

3.2	(a)	Fifth Amended and Restated Bylaws of the Registrant.	8-K	3.1	2/1/16

4	(a)	Specimen Certificate for shares of Common Stock of the Registrant.	10-Q	4	8/8/03

10.1	(b) (c) (d)	Omnibus Amendment, dated as of July 10, 2017, among World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A	8-K	4.1	7/11/17

10.2	(a)	First Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of July 10, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.	10-Q	10.8	8/7/17

10.3	(b) (c) (d)	Series 2017-B Indenture Supplement, dated as of August 16, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.	8-K	4.1	8/22/17

*10.4	(a)	First Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of October 19, 2017, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).

*10.5	(a)	First Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of November 1, 2017, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).

31.1	(a)	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.

31.2	(a)	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.

Three Months Ended

March 31,

(in millions)

Net charge-offs of securitized principal