UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)

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

	For the quarterly period ended ~~September 30, 2018~~March 31, 2019

OR

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

	For the transition period from to

Commission File Number: 001-15749

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~(Exact name of registrant as specified in its charter)~~

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

~~7500 Dallas Parkway, Suite 700~~

~~Plano, Texas 75024~~

~~(Address of principal executive office, including zip code)~~

~~(214) 494-3000~~

~~(Registrant’s telephone number, including area code)~~

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

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

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


	~~Large accelerated filer ☑~~	~~Accelerated filer ☐~~
	~~Non-accelerated filer ☐~~	~~Emerging growth company ☐~~
	~~Smaller reporting company ☐~~

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

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

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

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~INDEX~~

		Page Number
	~~Part I~~ ~~FINANCIAL INFORMATION~~

~~Item 1.~~	~~Financial Statements (unaudited)~~

	~~Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017~~	3

	~~Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017~~	4

	~~Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017~~	5

	~~Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017~~	6

	~~Notes to Condensed Consolidated Financial Statements~~	7

~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	40

~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	51

~~Item 4.~~	~~Controls and Procedures~~	51

	~~Part II~~ ~~OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~	52

~~Item 1A.~~	~~Risk Factors~~	52

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	53

~~Item 3.~~	~~Defaults Upon Senior Securities~~	53

~~Item 4.~~	~~Mine Safety Disclosures~~	53

~~Item 5.~~	~~Other Information~~	53

~~Item 6.~~	~~Exhibits~~	54

~~SIGNATURES~~		56

~~Index~~

~~PART I~~

~~Item 1.Financial Statements.~~

ALLIANCE DATA SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)


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

7500 Dallas Parkway, Suite 700

Plano, Texas 75024

(Address of principal executive office, including zip code)

(214) 494-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 such files). Yes ☑ No ☐


	Large accelerated filer ☑	Accelerated filer ☐
	Non-accelerated filer ☐	Emerging growth company ☐
	Smaller reporting company ☐

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

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

As of April 24, 2019, 52,383,506 shares of common stock were outstanding.

Index

ALLIANCE DATA SYSTEMS CORPORATION

INDEX

		Page Number
	Part I FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3

	Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	5

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

	Part II OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

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

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	48

Item 6.	Exhibits	49

SIGNATURES		51

Index

PART I

Item 1.Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
	(In millions, except per share amounts)				(in millions, except per share amounts)
ASSETS
Cash and cash equivalents	$	3,600.9	$	4,190.0	$	3,685.0	$	3,817.4
Accounts receivable, net, less allowance for doubtful accounts ($6.1 and $6.7 at September 30, 2018 and December 31, 2017, respectively)		866.8		822.3
Accounts receivable, net, less allowance for doubtful accounts ($0.3 and $0.4 at March 31, 2019 and December 31, 2018, respectively)						354.2		404.0
Credit card and loan receivables:
Credit card receivables – restricted for securitization investors		12,565.5		14,293.9		12,550.5		13,418.3
Other credit card and loan receivables		4,861.7		4,319.9		4,300.0		4,436.7
Total credit card and loan receivables		17,427.2		18,613.8		16,850.5		17,855.0
Allowance for loan loss		(1,114.6)		(1,119.3)		(1,021.1)		(1,038.3)
Credit card and loan receivables, net		16,312.6		17,494.5		15,829.4		16,816.7
Credit card and loan receivables held for sale		1,720.1		1,026.3
Credit card receivables held for sale						1,848.9		1,951.6
Inventories, net		265.9		234.1		242.3		248.0
Other current assets		601.8		348.9		275.3		293.2
Redemption settlement assets, restricted		587.7		589.5		576.1		558.6
Current assets of discontinued operations						4,224.7		622.2
Total current assets		23,955.8		24,705.6		27,035.9		24,711.7
Property and equipment, net		610.0		613.9		289.8		288.2
Right of use assets - operating						271.2		—
Deferred tax asset, net		65.3		28.1		45.5		44.0
Intangible assets, net		603.1		800.6		189.6		217.4
Goodwill		3,857.4		3,880.1		950.0		954.8
Other non-current assets		671.4		656.5		651.1		636.4
Long-term assets of discontinued operations						—		3,535.2
Total assets	$	29,763.0	$	30,684.8	$	29,433.1	$	30,387.7
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	606.2	$	651.2	$	548.4	$	486.2
Accrued expenses		364.9		442.8		333.9		279.3
Current operating lease liabilities						21.4		—
Current portion of deposits		6,267.1		6,366.2		5,922.6		6,537.7
Current portion of non-recourse borrowings of consolidated securitization entities		1,456.8		1,339.9		2,185.6		2,717.6
Current portion of long-term and other debt		130.0		131.3		161.5		138.9
Other current liabilities		331.6		368.7		262.4		291.8
Deferred revenue		802.8		846.6		768.8		766.1
Current liabilities of discontinued operations						392.1		266.4
Total current liabilities		9,959.4		10,146.7		10,596.7		11,484.0
Deferred revenue		113.4		120.3		108.5		109.2
Deferred tax liability, net		223.9		211.2		230.5		256.5
Long-term operating lease liabilities						299.8		—
Deposits		5,082.3		4,564.7		5,369.4		5,256.0
Non-recourse borrowings of consolidated securitization entities		6,014.1		7,467.4		4,589.9		4,934.1
Long-term and other debt		5,677.3		5,948.3		5,720.0		5,586.5
Other liabilities		401.4		370.9		278.8		390.0
Long-term liabilities of discontinued operations						—		39.3
Total liabilities		27,471.8		28,829.5		27,193.6		28,055.6
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.0 shares and 112.8 shares at September 30, 2018 and December 31, 2017, respectively		1.1		1.1
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.2 shares and 113.0 shares at March 31, 2019 and December 31, 2018, respectively						1.1		1.1
Additional paid-in capital		3,148.8		3,099.8		3,177.0		3,172.4
Treasury stock, at cost, 58.4 shares and 57.4 shares at September 30, 2018 and December 31, 2017, respectively		(5,474.2)		(5,272.5)
Treasury stock, at cost, 60.9 shares and 59.6 shares at March 31, 2019 and December 31, 2018, respectively						(5,938.5)		(5,715.7)
Retained earnings		4,758.6		4,167.1		5,127.8		5,012.4
Accumulated other comprehensive loss		(143.1)		(140.2)		(127.9)		(138.1)
Total stockholders’ equity		2,291.2		1,855.3		2,239.5		2,332.1
Total liabilities and stockholders' equity	$	29,763.0	$	30,684.8	$	29,433.1	$	30,387.7

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
	(In millions, except per share amounts)								(in millions, except per share amounts)
Revenues
Services	$	586.0	$	650.3	$	1,790.7	$	1,888.3	$	73.3	$	92.6
Redemption, net		163.6		210.0		443.0		645.4		111.9		131.9
Finance charges, net		1,197.6		1,052.1		3,501.6		3,079.5		1,149.0		1,157.2
Total revenue		1,947.2		1,912.4		5,735.3		5,613.2		1,334.2		1,381.7
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		1,060.6		1,066.5		3,076.2		3,123.1		640.5		591.7
Provision for loan loss		196.8		204.7		846.3		807.9		252.1		337.7
General and administrative		45.3		38.0		126.5		124.9		38.3		31.3
Depreciation and other amortization		49.7		46.7		145.9		136.6		20.6		19.3
Amortization of purchased intangibles		72.8		77.6		220.3		237.9		25.8		29.4
Total operating expenses		1,425.2		1,433.5		4,415.2		4,430.4		977.3		1,009.4
Operating income		522.0		478.9		1,320.1		1,182.8		356.9		372.3
Interest expense
Securitization funding costs		56.1		38.2		163.4		109.9		57.3		52.1
Interest expense on deposits		43.4		33.2		115.6		87.9		48.7		35.5
Interest expense on long-term and other debt, net		69.4		73.9		214.8		210.2		43.5		44.2
Total interest expense, net		168.9		145.3		493.8		408.0		149.5		131.8
Income before income taxes		353.1		333.6		826.3		774.8
Income from continuing operations before income taxes										207.4		240.5
Provision for income taxes		56.6		100.4		148.1		257.4		33.1		64.0
Income from continuing operations									$	174.3	$	176.5
Loss from discontinued operations, net of taxes										(25.2)		(12.6)
Net income	$	296.5	$	233.2	$	678.2	$	517.4	$	149.1	$	163.9

Net income per share:
Basic (Note 3)	$	5.41	$	4.21	$	12.30	$	9.27
Diluted (Note 3)	$	5.39	$	4.20	$	12.25	$	9.23
Basic income (loss) per share (Note 3):
Income from continuing operations									$	3.29	$	3.19
Loss from discontinued operations									$	(0.48)	$	(0.23)
Net income per share									$	2.81	$	2.96

Weighted average shares:
Basic (Note 3)		54.8		55.4		55.2		55.8
Diluted (Note 3)		55.0		55.6		55.4		56.0
Diluted income (loss) per share (Note 3):
Income from continuing operations									$	3.28	$	3.17
Loss from discontinued operations									$	(0.48)	$	(0.22)
Net income per share									$	2.80	$	2.95

Dividends declared per share:	$	0.57	$	0.52	$	1.71	$	1.56
Weighted average shares (Note 3):
Basic										53.0		55.4
Diluted										53.2		55.7

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
	(In millions)								(in millions)
Net income	$	296.5	$	233.2	$	678.2	$	517.4	$	149.1	$	163.9

Other comprehensive income (loss):
Unrealized loss on securities available-for-sale		(3.8)		(3.0)		(9.1)		(5.0)
Unrealized gain (loss) on securities available-for-sale										10.0		(3.0)
Tax (expense) benefit										(1.0)		1.0
Unrealized gain (loss) on securities available-for-sale, net of tax										9.0		(2.0)

Unrealized loss on cash flow hedges										(0.1)		(0.1)
Tax benefit (expense)		0.6		(0.1)		1.9		(0.2)		—		—
Unrealized loss on securities available-for-sale, net of tax		(3.2)		(3.1)		(7.2)		(5.2)

Unrealized gain (loss) on cash flow hedges		(0.9)		0.8		0.8		(0.4)
Tax benefit (expense)		0.2		(0.2)		(0.2)		0.1
Unrealized gain (loss) on cash flow hedges, net of tax		(0.7)		0.6		0.6		(0.3)
Unrealized loss on cash flow hedges, net of tax										(0.1)		(0.1)

Unrealized gain (loss) on net investment hedges		4.8		(19.4)		30.2		(63.1)		16.1		(15.4)
Tax benefit (expense)		(1.2)		7.4		(7.3)		23.7
Tax (expense) benefit										(3.9)		3.7
Unrealized gain (loss) on net investment hedges, net of tax		3.6		(12.0)		22.9		(39.4)		12.2		(11.7)

Foreign currency translation adjustments		(6.4)		15.9		(19.2)		55.4		(10.9)		17.5

Other comprehensive income (loss), net of tax		(6.7)		1.4		(2.9)		10.5
Other comprehensive income, net of tax										10.2		3.7

Total comprehensive income, net of tax	$	289.8	$	234.6	$	675.3	$	527.9	$	159.3	$	167.6

See accompanying notes to unaudited condensed consolidated financial statements.

Index

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, 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 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


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended March 31, 2018	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
	(in millions)
Balance at December 31, 2017	112.8	$	1.1	$	3,099.8	$	(5,272.5)	$	4,167.1	$	(140.2)	$	1,855.3
Net income	—		—		—		—		163.9		—		163.9
Other comprehensive income	—		—		—		—		—		3.7		3.7
Stock-based compensation	—		—		24.5		—		—		—		24.5
Dividends and dividend equivalent rights declared ($0.57 per share)	—		—		—		—		(31.5)		—		(31.5)
Cumulative effect adjustment to retained earnings in accordance with ASC 606	—		—		—		—		9.6		—		9.6
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-01	—		—		—		—		(1.5)		—		(1.5)
Other	0.1		—		(22.6)		—		—		—		(22.6)
Balance at March 31, 2018	112.9	$	1.1	$	3,101.7	$	(5,272.5)	$	4,307.6	$	(136.5)	$	2,001.4

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2018		2017		2019		2018
	(In millions)				(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	678.2	$	517.4	$	149.1	$	163.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		366.2		374.5		118.9		121.7
Deferred income taxes		(30.3)		(62.5)		(35.0)		(16.2)
Provision for loan loss		846.3		807.9		252.1		337.7
Non-cash stock compensation		64.2		63.5		21.1		25.5
Amortization of deferred financing costs		36.2		32.3		11.0		11.4
Change in deferred revenue		(26.2)		(35.5)
Change in other operating assets and liabilities		(195.3)		(41.5)		8.7		(108.0)
Originations of credit card and loan receivables held for sale		(4,799.0)		(6,012.8)		—		(2,271.7)
Sales of credit card and loan receivables held for sale		4,928.8		6,011.5		—		2,312.8
Other		156.3		104.0		84.9		72.8
Net cash provided by operating activities		2,025.4		1,758.8		610.8		649.9

CASH FLOWS FROM INVESTING ACTIVITIES:
Change in redemption settlement assets		(37.4)		(213.6)		(0.1)		(14.5)
Change in credit card and loan receivables		(708.1)		(1,174.7)		758.2		470.5
Proceeds from sale of credit card portfolio		55.4		—
Payments for acquired businesses, net of cash						(6.7)		—
Capital expenditures		(149.3)		(176.6)		(38.7)		(44.7)
Purchases of other investments		(72.6)		(80.2)		(5.0)		(25.0)
Maturities/sales of other investments		43.1		38.2		6.4		6.0
Other		8.2		(4.2)		3.4		0.6
Net cash used in investing activities		(860.7)		(1,611.1)
Net cash provided by investing activities						717.5		392.9
					��
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements		3,207.3		6,439.6		1,045.1		685.0
Repayments of borrowings		(3,466.0)		(5,903.8)		(870.9)		(706.5)
Non-recourse borrowings of consolidated securitization entities		2,577.3		2,455.0		1,122.2		905.0
Repayments/maturities of non-recourse borrowings of consolidated securitization entities		(3,915.0)		(2,545.0)		(1,997.5)		(1,590.0)
Net increase in deposits		421.3		1,987.7
Net decrease in deposits						(502.6)		(448.4)
Payment of deferred financing costs		(21.3)		(53.4)		(5.4)		(3.5)
Dividends paid		(94.5)		(86.8)		(33.9)		(31.7)
Purchase of treasury shares		(197.0)		(553.7)		(222.8)		—
Other		(18.1)		(16.5)		(17.2)		(23.7)
Net cash (used in) provided by financing activities		(1,506.0)		1,723.1
Net cash used in financing activities						(1,483.0)		(1,213.8)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(3.1)		8.4		3.0		(1.7)
Change in cash, cash equivalents and restricted cash		(344.4)		1,879.2		(151.7)		(172.7)
Cash, cash equivalents and restricted cash at beginning of period		4,314.7		1,968.5
Cash, cash equivalents and restricted cash at end of period	$	3,970.3	$	3,847.7
Cash, cash equivalents and restricted cash at beginning of year						3,967.7		4,314.7
Cash, cash equivalents and restricted cash at end of year					$	3,816.0	$	4,142.0

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	527.5	$	382.2	$	206.7	$	159.2
Income taxes paid, net	$	188.5	$	282.0	$	20.4	$	56.7

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, ~~2017,~~2018, filed with the SEC on February ~~27, 2018.~~26, 2019.

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

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

For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP. ~~Specifically, certain statement of cash flows reclassifications were made for the adoption of Accounting Standards Update (“ASU”) 2016-18, “Restricted Cash.”~~ The ~~following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the~~Company’s unaudited condensed consolidated financial statements ~~of cash flows:~~have been presented with its Epsilon® segment as a discontinued operation. See Note 5, “Discontinued Operations,” for more information.

September 30,

September 30,

2018

2017

(In millions)
Cash and cash equivalents

$
3,600.9

$
3,326.0
Restricted cash included within other current assets (1)

318.0

450.2
Restricted cash included within redemption settlement assets, restricted (2)

51.4

71.5
Total cash, cash equivalents and restricted cash

$
3,970.3

$
3,847.7

⁽¹⁾

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

⁽²⁾

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

Recently Issued Accounting Standards

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

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to utilize a financial instrument impairment model to establish an allowance based on expected losses over the life of the exposure rather than a model based on an incurred loss approach. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, ASU 2016-13 modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The Company has formed a cross-functional implementation team and is infinalizing the ~~process~~development of ~~determining~~loss forecasting models, technological solutions and processes to satisfy the requirements of ASU 2016-13. Management is assessing key accounting interpretations ~~data requirements~~ and ~~necessary changes~~continues to ~~its credit loss estimation methods, processes and systems as well as evaluating~~evaluate the impact ~~that adoption~~ of ~~ASU 2016-13 will have~~the new standard on its consolidated financial statements.

~~In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements~~ Any adjustments to Accounting for Hedging Activities.” ASU 2017-12 expands and refines the hedge accounting model for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and makes certain targeted improvements ~~to simplify the application of hedge accounting guidance~~ related to the assessment of hedge effectiveness. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows for reclassification of stranded tax effects on items resulting from the change in the ~~corporate tax rate as~~allowance for loan loss at adoption would be recorded through a ~~result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income~~cumulative-effect adjustment to retained earnings. ~~Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using either~~The extent of the ~~specific identification approach or the portfolio approach, based~~impact upon adoption will depend on the ~~nature~~asset quality of the ~~underlying item. ASU 2018-02 is effective for interim~~Company’s credit card and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not intend to reclassify the stranded tax effects to retained earnings pursuant to ASU 2018-02 as these amounts do not have a material impact on its consolidated financial statements.loan receivables portfolio, and economic conditions and forecasts at adoption.

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

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 requires customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, “Intangibles—

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Goodwill and Other—Internal-Use Software,” to determine which implementation costs may be capitalized. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The amendments in ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact that adoption of ASU 2018-15 will have on its consolidated financial statements.

Recently Adopted Accounting Standards

In ~~May 2014,~~February 2016, the FASB issued ASU ~~2014-09, “Revenue from Contracts~~2016-02, “Leases,” ASC 842, that replaced previous lease guidance and required lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Companies continue to classify leases as either finance or operating, with ~~Customers,” Accounting Standards Codification (“ASC”) 606, which requires an entity~~classification affecting the pattern of expense recognition in the statements of income. Companies were permitted to ~~recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Companies may~~ adopt ASC ~~606~~842 using a ~~full retrospective or~~ modified retrospective ~~method.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

approach or transition relief provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that removed certain comparative period requirements and required a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the standard on January 1, 2019 using the transition relief provided by ASU 2018-11.

During ~~2017,~~2018, the Company completed its evaluation of ASC ~~606,~~842, including the impact on its policies, processes, systems and ~~controls, and differences in the timing and/or method of revenue recognition.~~controls. As a result, the Company identified changes to and modified certain of its accounting policies and ~~practices.~~practices, including the implementation of new lease accounting software. Although there were no significant changes to the Company’s accounting systems or controls upon adoption of ASC ~~606,~~842, the Company modified certain of its existing controls and added new controls to incorporate the revisions made to its accounting policies and practices.

The Company ~~adopted~~elected the ~~standard on~~transition practical expedients permitted under ASC 842-10-65-1 under which it was not required to reassess (i) whether expired or existing contracts were or contained leases as defined by ASC 842, (ii) the classification of such leases, and (iii) whether previously capitalized initial direct costs qualified for capitalization under ASC 842. The Company also elected the practical expedient to use hindsight in determining the lease term. Additionally, the Company made the accounting policy election to account for lease and nonlease components as a single lease component for its identified asset classes.

The cumulative effect of the changes made to the consolidated January 1, ~~2018 using~~2019 balance sheet for the ~~modified retrospective method.~~ adoption of ASC 842 established operating lease liabilities of approximately $324.5 million and corresponding right-of-use assets of approximately $269.9 million, based upon the operating lease liabilities adjusted for deferred rent and lease incentives, which resulted in the reclassification of approximately $54.6 million in liabilities to the right-of-use asset. There was no cumulative-effect adjustment to retained earnings as a result of the adoption of ASC 842.

Additionally, the cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of ASC 842 for the Epsilon segment, presented as a discontinued operation for the periods presented, established operating lease liabilities of approximately $208.7 million and corresponding right-of-use assets of approximately $181.1 million, based upon the operating lease liabilities adjusted for prepaid and deferred rent, unamortized initial direct costs, and lease incentives, which resulted in the reclassification of approximately $30.5 million in liabilities and $2.9 million in assets to the right-of-use asset. As part of the adoption of ASC 842, capital leases were recognized as finance leases at their existing carrying amounts effective January 1, 2019, and the accounting remained substantially unchanged, with capital lease assets totaling $13.0 million and capital lease liabilities totaling $12.6 million.

The Company’s adoption of ~~this standard did~~ASC 842 had no significant impact to our consolidated statements of income or consolidated statements of cash flows. Based on the evaluation of ASC 842, the Company does not expect it to have a material impact on its ~~consolidated~~ results of operations or cash ~~flows.~~ flows in the periods after adoption.

ASC ~~606 does not apply to financial instruments~~842 also requires expanded qualitative and ~~other contractual rights or obligations (for example, interest income and late fees from credit card and loan receivables), and therefore,~~quantitative disclosure regarding the Company’s ~~finance charges, net were not affected by~~leasing activities. See Note 10, “Leases,” for the ~~adoption of the standard. Most revenue streams are recorded consistently under both~~Company’s ASC ~~605, “Revenue Recognition” and the new standard; however, the Company noted the following impacts:~~

Upon the adoption of ASC 606, revenue associated with a database build was changed from recognizing revenue over the expected contract term upon client acceptance to over the build period in which the database is completed, because the Company’s performance does not create an asset with an alternative use and the Company has an enforceable right to payment for performance completed to date. The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of ASC 606 resulted in an increase in unbilled accounts receivable and accrued expenses, a reduction in deferred costs and deferred revenue and a net increase in retained earnings as follows:

Balance at

Adjustments

Balance at

December 31,

due to

January 1,

2017

ASC 606

2018
Consolidated Balance Sheet



(In millions)


Accounts receivable, net

$
822.3

$
22.4

$
844.7
Other current assets

348.9

(16.6)

332.3
Other non-current assets

656.5

(20.9)

635.6

1,827.7

(15.1)

1,812.6

Accrued expenses

442.8

3.2

446.0
Other current liabilities

368.7

(14.3)

354.4
Other liabilities

370.9

(13.6)

357.3

1,182.4

(24.7)

1,157.7

Retained earnings

4,167.1

9.6

4,176.7

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

~~ASC 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue transactions. See Note 2, “Revenue,” for the Company’s ASC 606~~842 disclosures.

In ~~January 2016,~~August 2017, the FASB issued ASU ~~2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.~~2017-12, “Targeted Improvements to Accounting for Hedging Activities.” ASU ~~2016-01 requires that equity investments be measured at fair value with changes~~2017-12 expanded and refined the hedge accounting model for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedged items in ~~fair value recognized in net income. For equity investments without readily determinable fair values, entities have~~ the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. Additionally, ASU 2016-01 requires entities that elect the fair value option for financial liabilities to recognize changes in fair value related to instrument-specific credit risk in other comprehensive income. Finally, entities must assess valuation allowances for deferred tax assets related to available-for-sale debt securities in combination with their other deferred tax assets. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017, with early

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~adoption permitted. The Company adopted this standard on January 1, 2018, resulting in a cumulative-effect adjustment~~statements, and made certain targeted improvements to simplify the application of ~~$1.5 million that was reclassified from accumulated other comprehensive loss~~hedge accounting guidance related to ~~retained earnings on~~ the ~~consolidated January 1, 2018 balance sheet.~~

~~In August 2016, the FASB issued ASU 2016-15, “Classification~~assessment of Certain Cash Receipts and Cash Payments.” ASU 2016-15 makes eight targeted changes to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.hedge effectiveness. The Company’s adoption of this standard on January 1, ~~2018~~2019 did not have a material impact on its consolidated ~~statements of cash flows.~~financial statements.

In ~~November 2016,~~February 2018, the FASB issued ASU ~~2016-18, “Restricted Cash.~~2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU ~~2016-18 requires entities to show~~2018-02 allowed for reclassification of stranded tax effects on items resulting from the ~~changes~~change in the ~~total~~corporate tax rate as a result of ~~cash, cash equivalents, restricted cash~~H.R. 1, originally known as the Tax Cuts and ~~restricted cash equivalents in~~Jobs Act of 2017, from accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 were permitted to be released from accumulated other comprehensive income using either the ~~statement~~specific identification approach or the portfolio approach, based on the nature of ~~cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.~~the underlying item. The Company adopted this standard on January 1, ~~2018. The effect of~~2019 using the ~~adoption of~~portfolio approach and did not reclassify the ~~standard was~~stranded tax effects to ~~include restricted cash and restricted cash equivalents at the beginning-of-period and end-of-period cash and cash equivalents totals.~~retained earnings as these amounts did not have a material impact on its consolidated financial statements.

2. REVENUE

~~Effective January 1, 2018,~~As discussed in Note 5, “Discontinued Operations,” in the ~~Company adopted ASC 606, “Revenue from Contracts with Customers,” applying~~first quarter of 2019, the ~~modified retrospective method to those contracts that were not completed~~Company’s Epsilon segment has been classified as ~~of January 1, 2018. Results for reporting periods~~a discontinued operation. As such, beginning ~~after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance~~ with the ~~Company’s historic accounting under ASC 605. ASC 606 does not apply to financial instruments and other contractual rights or obligations.~~

~~Under ASC 606, revenue is recognized when control~~first quarter of 2019, the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s contracts with its customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. Taxes assessed on revenue-producing transactions are excluded from revenues.

~~The~~ Company’s products and services are reported under ~~three~~two segments—LoyaltyOne ~~Epsilon~~® and Card Services, ~~and are listed~~as shown below.

The following ~~table presents~~tables present revenue disaggregated by major ~~source, as well as geographic region based on the location of the subsidiary that generally correlates with the location of the customer:~~source:


							Corporate/										Corporate/
Three Months Ended September 30, 2018	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
Three Months Ended March 31, 2019													LoyaltyOne		Card Services		Other		Total
	(In millions)												(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	83.8	$	—	$	—	$	—	$	—	$	83.8	$	71.4	$	—	$	—	$	71.4
Short-term loyalty programs		148.4		—		—		—		—		148.4		109.6		—		—		109.6
Technology services		—		255.9		—		—		(6.0)		249.9
Digital Media services		—		195.2		—		—		(5.5)		189.7
Agency services		—		86.5		—		—		(2.0)		84.5
Servicing fees, net		—		—		(34.7)		—		—		(34.7)		—		(18.6)		—		(18.6)
Other		25.1		—		—		0.2		(0.2)		25.1		19.8		—		—		19.8
Revenue from contracts with customers	$	257.3	$	537.6	$	(34.7)	$	0.2	$	(13.7)	$	746.7	$	200.8	$	(18.6)	$	—	$	182.2

Finance charges, net		—		—		1,197.6		—		—		1,197.6		—		1,149.0		—		1,149.0
Investment income		2.9		—		—		—		—		2.9		3.0		—		—		3.0
Total	$	260.2	$	537.6	$	1,162.9	$	0.2	$	(13.7)	$	1,947.2	$	203.8	$	1,130.4	$	—	$	1,334.2


					Corporate/
Three Months Ended March 31, 2018	LoyaltyOne		Card Services		Other		Total
	(in millions)
Disaggregation of Revenue by Major Source:
						��
Coalition loyalty program	$	89.9	$	—	$	—	$	89.9
Short-term loyalty programs		114.2		—		—		114.2
Servicing fees, net		—		(2.0)		—		(2.0)
Other		19.5		—		0.2		19.7
Revenue from contracts with customers	$	223.6	$	(2.0)	$	0.2	$	221.8

Finance charges, net		—		1,157.2		—		1,157.2
Investment income		2.7		—		—		2.7
Total	$	226.3	$	1,155.2	$	0.2	$	1,381.7

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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/

Nine Months Ended September 30, 2018

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
266.2

$
—

$
—

$
—

$
—

$
266.2
Short-term loyalty programs

392.8

—

—

—

—

392.8
Technology services

—

757.0

—

—

(17.7)

739.3
Digital Media services

—

552.7

—

—

(7.0)

545.7
Agency services

—

251.5

—

—

(3.0)

248.5
Servicing fees, net

—

—

(35.1)

—

—

(35.1)
Other

67.6

—

—

0.5

(0.3)

67.8
Revenue from contracts with customers

$
726.6

$
1,561.2

$
(35.1)

$
0.5

$
(28.0)

$
2,225.2

Finance charges, net

—

—

3,501.6

—

—

3,501.6
Investment income

8.5

—

—

—

—

8.5
Total

$
735.1

$
1,561.2

$
3,466.5

$
0.5

$
(28.0)

$
5,735.3


					Corporate/
Three Months Ended 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

Corporate/

Three Months Ended September 30, 2018

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Disaggregation of Revenue by Geographic Region:

United States

$
4.7

$
516.1

$
1,162.9

$
0.2

$
(12.5)

$
1,671.4
Canada

102.4

4.1

—

—

—

106.5
Europe, Middle East and Africa

107.1

14.3

—

—

(0.3)

121.1
Asia Pacific

32.0

3.1

—

—

(0.9)

34.2
Other

14.0

—

—

—

—

14.0
Total

$
260.2

$
537.6

$
1,162.9

$
0.2

$
(13.7)

$
1,947.2


								Corporate/											Corporate/
Nine Months Ended September 30, 2018		LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
Three Months Ended March 31, 2018															LoyaltyOne		Card Services		Other		Total
		(In millions)													(in millions)
Disaggregation of Revenue by Geographic Region:	Disaggregation of Revenue by Geographic Region:													Disaggregation of Revenue by Geographic Region:

United States		$	16.7	$	1,494.0	$	3,466.5	$	0.5	$	(26.6)	$	4,951.1		$	5.7	$	1,155.2	$	0.2	$	1,161.1
Canada			313.4		12.3		—		—		(0.1)		325.6			105.6		—		—		105.6
Europe, Middle East and Africa			295.2		47.3		—		—		(0.4)		342.1			97.0		—		—		97.0
Asia Pacific			77.5		7.6		—		—		(0.9)		84.2			16.6		—		—		16.6
Other			32.3		—		—		—		—		32.3			1.4		—		—		1.4
Total		$	735.1	$	1,561.2	$	3,466.5	$	0.5	$	(28.0)	$	5,735.3		$	226.3	$	1,155.2	$	0.2	$	1,381.7

~~LoyaltyOne~~

LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty. The AIR MILES Reward Program is a coalition loyalty program for sponsors, who pay LoyaltyOne a fee per AIR MILES reward mile issued, in return for which LoyaltyOne provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made short-term loyalty programs for grocers worldwide.

Total consideration from the issuance of AIR MILES reward miles is allocated to three performance obligations: redemption, service, and brand, based on a relative standalone selling price basis. The estimated standalone selling price for the redemption and the service performance obligations are based on cost plus a reasonable margin. The estimated standalone selling price of the brand performance obligation is determined using a relief from royalty approach. Accordingly, management determines the estimated standalone selling price by considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize. The number of AIR MILES reward miles issued and redeemed are factored into the estimates, as management

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

estimates the standalone selling prices and volumes over the term of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base.

Redemption revenue is recognized at a point in time, as the AIR MILES reward miles are redeemed. For the fulfillment of certain rewards where the AIR MILES Reward Program does not control the goods or services before they are transferred to the collector, revenue is recorded on a net basis. Service revenue is recognized over time using a time-elapsed output method, the estimated life of an AIR MILES reward mile. Revenue from the brand is recognized over time, using an output method, when an AIR MILES reward mile is issued. Revenue associated with both the service and brand is included in service revenue in the Company’s consolidated statements of income.

The amount of revenue recognized in a period is subject to the estimate of breakage and the estimated life of an AIR MILES reward mile. Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure. As of September 30, 2018, the breakage rate was 20% and the estimated life of an AIR MILES reward mile was 38 months.

The short-term loyalty programs typically last between 12 and 20 weeks, depending on the nature of the program, with contract terms usually less than one year in length. These programs are tailored for the specific retailer client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Revenue is recognized at the point in time control passes from BrandLoyalty to the retailer.Contract Liabilities

~~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.

A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:


	Deferred Revenue						Deferred Revenue
	Service		Redemption		Total		Service		Redemption		Total
	(In millions)						(in millions)
Balance at January 1, 2018	$	283.8	$	683.1	$	966.9
Balance at January 1, 2019							$	248.0	$	627.3	$	875.3
Cash proceeds		142.7		237.3		380.0		41.7		67.5		109.2
Revenue recognized (1)		(159.9)		(246.8)		(406.7)		(48.9)		(77.8)		(126.7)
Other		—		0.5		0.5		—		0.4		0.4
Effects of foreign currency translation		(7.2)		(17.3)		(24.5)		5.4		13.7		19.1
Balance at September 30, 2018	$	259.4	$	656.8	$	916.2
Balance at March 31, 2019							$	246.2	$	631.1	$	877.3
Amounts recognized in the consolidated balance sheets:
Deferred revenue (current)	$	146.0	$	656.8	$	802.8	$	137.7	$	631.1	$	768.8
Deferred revenue (non-current)	$	113.4	$	—	$	113.4	$	108.5	$	—	$	108.5

⁽¹⁾

Reported on a gross basis herein.

The deferred redemption obligation associated with the AIR MILES Reward Program is effectively due on demand from the collector base, thus the timing of revenue recognition is based on the redemption by the collector. Service revenue is amortized over the expected life of a mile, with the deferred revenue balance expected to be recognized into revenue in the amount of ~~$47.9 million in 2018, $122.5~~$111.7 million in 2019, ~~$67.7~~$87.5 million in 2020, ~~and $21.3~~$42.7 million in ~~2021.~~2021, and $4.3 million in 2022.

Additionally, contract liabilities for the Company’s short-term loyalty programs are recognized in other current liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance as of January 1, ~~2018~~

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

2019 was ~~$87.5~~$110.2 million and the closing balance as of ~~September 30, 2018~~March 31, 2019 was ~~$120.3~~$96.7 million, with the change due to revenue recognized of approximately $102.9 million during the three months ended March 31, 2019, offset in part by cash payments received in advance of program ~~performance revenue, offset in part by revenue recognized~~performance.

3. EARNINGS PER SHARE

The following table sets forth the computation of ~~approximately $301.8 million during~~basic and diluted net income per share for the ~~nine~~periods indicated:


	Three Months Ended March 31,
	2019		2018
	(in millions, except per share amounts)
Numerator:
Income from continuing operations	$	174.3	$	176.5
Loss from discontinued operations		(25.2)		(12.6)
Net income	$	149.1	$	163.9

Denominator:
Weighted average shares, basic		53.0		55.4
Weighted average effect of dilutive securities:
Net effect of dilutive stock options and unvested restricted stock		0.2		0.3
Denominator for diluted calculation		53.2		55.7

Basic income per share:
Income from continuing operations	$	3.29	$	3.19
Loss from discontinued operations	$	(0.48)	$	(0.23)
Net income per share	$	2.81	$	2.96

Diluted income per share:
Income from continuing operations	$	3.28	$	3.17
Loss from discontinued operations	$	(0.48)	$	(0.22)
Net income per share	$	2.80	$	2.95

For the three months ended ~~September 30, 2018.~~March 31, 2019 and 2018, 0.3 million and a de minimis amount of restricted stock units, respectively, were excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive.

4. ACQUISITION

On February 7, 2019, the Company acquired certain assets as well as the assembled workforce and related office lease agreements of blispay inc. (“Blispay”), a financial technology company, for cash consideration of $6.7 million, and a $1.0 million limited guarantee was issued by the Company as part of the transaction. The acquisition was determined to constitute a business combination under ASC 805, “Business Combinations.” Total assets acquired were $7.3 million, including $5.0 million of capitalized software and $2.3 million of goodwill, with the fair value of the guarantee determined to be approximately $0.6 million on the acquisition date.

5. DISCONTINUED OPERATIONS

In November 2018, the Company announced the exploration of strategic alternatives for Epsilon, including a potential sale of the business. In the first quarter of 2019, Epsilon met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations,” and has been presented as a discontinued operation for all periods presented.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. The transaction is expected to close in the third quarter of 2019, subject to satisfaction of customary closing conditions and receipt of regulatory approvals.

~~Epsilon~~

At March 31, 2019, the assets and liabilities of discontinued operations are classified as current in the unaudited condensed consolidated balance sheets, as it is probable that the sale will occur and proceeds will be collected within one year. The following table presents a ~~leading marketing services firm providing end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity~~reconciliation of the assets and ~~technology~~liabilities of discontinued operations to ~~help clients more effectively acquire, retain and grow relationships with their customers.~~the unaudited condensed consolidated balance sheets for the periods presented:


	March 31,		December 31,
	2019		2018
	(in millions)
Assets:
Cash and cash equivalents	$	40.1	$	45.7
Accounts receivable, net		466.5		519.9
Other current assets		56.2		56.6
Property and equipment, net		292.4		306.9
Right of use assets - operating		178.4		—
Intangible assets, net		285.6		322.3
Goodwill		2,886.6		2,886.2
Other assets		18.9		19.8
Total assets of discontinued operations	$	4,224.7	$	4,157.4

Liabilities:
Accounts payable	$	50.9	$	72.2
Accrued expenses		76.0		141.7
Current operating lease liabilities		38.7		—
Other current liabilities		46.6		52.5
Long-term operating lease liabilities		164.3		—
Other liabilities		15.6		39.3
Total liabilities of discontinued operations	$	392.1	$	305.7

The ~~Company assesses~~following table summarizes the goods and services promised in its contracts with customers and identifies a performance obligation for each good or service that is distinct. Epsilon’s product offerings and the associated performance obligations for each product are as follows: operating results of discontinued operations:


	Three Months Ended
	March 31,
	2019		2018
	(in millions)
Revenue	$	507.8	$	509.4
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		443.4		430.8
Depreciation and other amortization		29.0		28.4
Amortization of purchased intangibles		43.5		44.6
Interest expense (1)		26.5		27.4
Loss before benefit from income taxes		(34.6)		(21.8)
Benefit from income taxes		(9.4)		(9.2)
Loss from discontinued operations, net of taxes	$	(25.2)	$	(12.6)

~~Product~~	⁽¹⁾	~~Performance Obligation~~	~~Recognition~~	~~Basis of Revenue Recognition~~

~~Technology services~~		 ~~Professional services~~	~~Over time~~	~~Recognized over time as~~Interest expense has been allocated to discontinued operations on the ~~services are performed.~~
		 ~~Email deployment~~	~~Point in time~~	~~Recognized at deployment.~~
		 ~~Customer lifecycle marketing~~	~~Point in time~~	~~Recognized at delivery.~~

~~Digital Media services~~		 ~~Digital campaign advertisement~~	~~Over time~~	~~Recognized on an output measure~~basis of the ~~digital advertisement.~~
		 ~~Affiliate marketing advertisements~~	~~Point~~corporate debt, $1.9 billion in ~~time~~	~~Recognized at delivery.~~
		 ~~Data lists~~	~~Point in time~~	~~Recognized at delivery.~~

~~Agency services~~		 ~~Professional services~~	~~Over time~~	~~Recognized over time~~senior notes, expected to be repaid as a result of the ~~services are performed.~~disposal transaction.

Epsilon generally enters into multi-year agreements with its customers; however, these contracts provide for termination without penalty with prior written notice. Under ASC 606, this results in a contract term shorter than the stated contractual term.

The Company’s contracts with customers may include multiple performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. If the standalone selling price is not directly observable, the Company estimates the standalone selling price based on either the adjusted market assessment or cost plus a margin approach.

Certain of Epsilon’s contracts may provide for returns or cash consideration payable to its customers, which is accounted for as variable consideration. The Company estimates these amounts based on either the expected amount or most likely amount to be provided to the customer to determine the transaction price for the contract. The estimation method is consistent for contracts with similar terms and is applied consistently throughout each contract. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information that is reasonably available.

The Company generates revenue from commission fees for transactions occurring on the Company’s affiliate marketing networks. Commission fee revenue is recognized on a net basis as the Company acts as an agent.

~~Contract Liabilities.~~ The Company records a contract liability when cash payments are received or due in advance of its performance. Contract liabilities for Epsilon are recognized in other current liabilities and other liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance as of January 1, 2018 was $22.8 million and the closing balance as of September 30, 2018 was $13.7 million.

~~Contract Costs~~. The Company recognizes an asset for the direct costs incurred to fulfill its contracts with customers to the extent it expects to recover those costs in accordance with ASC 340-40, “Other Assets and Deferred Costs – Contracts with Customers.” As of September 30, 2018, the remaining unamortized contract costs were $5.6 million.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Contract fulfillment costs are generally deferred~~

Depreciation and ~~amortized on a straight-line basis through the period in which the future performance obligation is satisfied. No impairment was recognized during the periods presented.~~

~~Card Services~~

~~Card Services is a provider of branded credit card programs, both private label~~amortization and co-brand, which drives sales for its brand partners. For these private label and co-brand programs, Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services.

~~Finance charges, net~~. Finance charges, net represents revenue earned on customer accounts owned by the Company, and is recognized in the period in which it is earned. The Company recognizes earned finance charges, interest income and fees on credit card and loan receivables in accordance with the contractual provisions of the credit arrangements. Interest and fees continue to accrue 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. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to finance charges, net. Pursuant to ASC 310-20, “Receivables - Nonrefundable Fees and Other Costs,” direct loan origination costs on credit card and loan receivables are deferred and amortized on a straight-line basis over a one-year period and recorded as a reduction to finance charges, net.

~~Servicing fees, net. Servicing fees, net represents revenue earned~~capital expenditures from ~~retailers and cardholders from processing and servicing accounts, and is recognized as such services are performed.~~

Revenue earned from retailers primarily consists of merchant and interchange fees, which are transaction fees charged to the merchant for the processing of credit card transactions. Merchant and interchange fees are recognized at a point in time upon the cardholder purchase.

Our credit card program agreements may also provide for payments to the retailer based on purchased volume or if certain contractual incentives are met, such as if the economic performance of the program exceeds a contractually defined threshold. These amounts are recorded as a reduction of revenue.

Revenue earned from cardholders primarily consists of monthly fees from the purchase of certain payment protection products purchased by our cardholders. The fees are based on the average cardholder account balance, and these products can be cancelled at any time by the cardholder. Revenue is recognized over time using a time-elapsed output method.

~~Contract Costs.~~ The Company recognizes an asset for the incremental costs of obtaining or fulfilling a contract with the retailer for a credit card program agreement to the extent it expects to recover those costs, in accordance with ASC 340-40. As of September 30, 2018, the remaining unamortized contract costs were $388.1 million and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets. Contract costs are deferred and amortized on a straight-line basis over the respective term of the agreement, which represents the period of service. Depending on the nature of the contract costs, the amortization is recorded as a reduction to revenue, or costs ofdiscontinued operations in the Company’s unaudited condensed consolidated statements of income. Amortization of contract costs recorded as a reduction to revenue totaled $18.2 million and $50.8 million for the three and nine months ended September 30, 2018, respectively. Amortization of contract costs recorded to cost of operations expense totaled $3.0 million and $7.6 million for the three and nine months ended September 30, 2018, respectively. No impairment was recognized during the periods presented.

~~Practical Expedients~~

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which the Company has the right to invoice for services performed.

The Company has elected the practical expedient from ASC 340-40 with respect to contract costs, and expenses the incremental costs as incurred for those costs that would otherwise be recognized with an amortization period of one year or less. These costs are primarily related to sales commissions, and such expensed incremental costs are recorded to cost of operations expense in the Company’s unaudited condensed consolidated statements of income.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~3. EARNINGS PER SHARE~~

~~The following table sets forth the computation of basic and diluted net income per share~~ for the periods ~~indicated:~~

Three Months Ended September 30,

Nine Months Ended September 30,


2018

2017

2018

2017

(In millions except per share amounts)
Numerator:

Net income

$
296.5

$
233.2

$
678.2

$
517.4

Denominator:

Weighted average shares, basic

54.8

55.4

55.2

55.8
Weighted average effect of dilutive securities:

Net effect of dilutive stock options and unvested restricted stock

0.2

0.2

0.2

0.2
Denominator for diluted calculation

55.0

55.6

55.4

56.0

Basic net income per share

$
5.41

$
4.21

$
12.30

$
9.27
Diluted net income per share

$
5.39

$
4.20

$
12.25

$
9.23

~~For the three and nine months ended September 30, 2018 and 2017, a de minimis amount of restricted stock units was excluded from each calculation of weighted average dilutive common shares~~presented are as ~~the effect would have been anti-dilutive.~~

~~4. ACQUISITIONS~~

~~2017 Acquisitions:~~

On October 20, 2017, the Company acquired credit card receivables and the associated accounts and assumed a portion of an existing customer care operation, including a facility sublease agreement and approximately 250 employees, from Signet Jewelers Limited (“Signet”) for cash consideration of approximately $945.6 million. This acquisition increases the Company’s presence in the jewelry vertical. The Company determined these acquired activities and assets constituted a business under ASC 805, “Business Combinations,” based on the nature of the inputs, processes and outputs acquired from the transaction. In addition, the parties entered into a long-term agreement under which the Company became the primary issuer of private-label credit cards and related marketing services for Signet. The Company obtained control of the assets and assumed the liabilities on October 20, 2017, and the results of operations have been included since the date of acquisition in the Company’s Card Services segment.

The Company engaged a third party specialist to assist it in the measurement of the fair value of the assets acquired. The fair value of the assets acquired exceeded the cost of the acquisition. Consequently, the Company reassessed the recognition and measurement of the identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. The excess value of the net assets acquired over the purchase price of $7.9 million was recorded as a bargain purchase gain, which was included in cost of operations in the Company’s consolidated statement of income for the year ended December 31, 2017.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~The following table summarizes the fair values of the assets acquired and the liabilities assumed in the Signet acquisition as of October 20, 2017:~~

As of
October 20, 2017

(In millions)
Credit card receivables

$
906.3
Intangible assets

52.3
Total assets acquired

958.6

Other liabilities

0.2
Deferred tax liability

4.9
Total liabilities assumed

5.1

Net assets acquired

$
953.5
Total consideration paid

945.6
Gain on business combination

$
7.9


	Three Months Ended
	March 31,
	2019		2018
	(in millions)
Depreciation and amortization	$	72.5	$	73.0
Capital expenditures	$	6.8	$	11.1

5.6. 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,		March 31,		December 31,
	2018		2017		2019		2018
	(In millions)				(in millions)
Principal receivables	$	16,476.5	$	17,705.1	$	15,938.7	$	16,869.9
Billed and accrued finance charges		895.8		887.0		836.8		898.3
Other		54.9		21.7		75.0		86.8
Total credit card and loan receivables		17,427.2		18,613.8		16,850.5		17,855.0
Less: Credit card receivables – restricted for securitization investors		12,565.5		14,293.9		12,550.5		13,418.3
Other credit card and loan receivables	$	4,861.7	$	4,319.9	$	4,300.0	$	4,436.7

Allowance for Loan Loss

The Company maintains an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The estimate of the allowance for loan loss covers ~~forecasted~~ uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.

In estimating 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. The allowance is maintained through an adjustment to the provision for loan loss. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. In estimating the allowance for uncollectible unpaid interest and fees, the Company utilizes historical charge-off trends, analyzing actual charge-offs for the prior three months. The allowance is maintained through an adjustment to finance charges, net. In evaluating the allowance for loan loss for both principal and unpaid interest and fees, management also considers factors that may impact loan loss experience, including seasoning and growth, account collection strategies, economic conditions, bankruptcy filings, policy changes, payment rates and forecasting uncertainties.

1614

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table presents the Company’s allowance for loan loss for the periods indicated:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
	(In millions)								(in millions)
Balance at beginning of period	$	1,189.0	$	1,069.3	$	1,119.3	$	948.0	$	1,038.3	$	1,119.3
Provision for loan loss		196.8		204.7		846.3		807.9		252.1		337.7
Allowance associated with credit card and loan receivables transferred to held for sale		(18.3)		(20.6)		(30.0)		(20.6)
Allowance associated with credit card receivables transferred to held for sale										—		(6.6)
Change in estimate for uncollectible unpaid interest and fees		5.0		—		15.0		10.0		—		15.0
Recoveries		56.9		44.3		137.0		146.1		59.8		31.3
Principal charge-offs		(314.8)		(263.9)		(973.0)		(857.6)		(329.1)		(327.4)
Balance at end of period	$	1,114.6	$	1,033.8	$	1,114.6	$	1,033.8	$	1,021.1	$	1,169.3

Net charge-offs include the principal amount of losses from credit 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 ana cost of operations expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during 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 Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. Actual charge-offs for unpaid interest and fees were ~~$193.8~~$218.8 million and ~~$152.2~~$199.5 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $575.3 million and $469.6 million for the nine months ended September 30, 2018 and 2017,~~ 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 of the Company’s credit card and loan receivables portfolio:~~

September 30,

% of

December 31,

% of


2018

Total

2017

Total

(In millions, except percentages)

Receivables outstanding - principal

$
16,476.5

100.0
%
$
17,705.1

100.0
%
Principal receivables balances contractually delinquent:

31 to 60 days

306.2

1.8
%

301.5

1.7
%
61 to 90 days

210.8

1.3

191.3

1.1

91 or more days

439.4

2.7

409.6

2.3

Total

$
956.4

5.8
%
$
902.4

5.1
%

1715

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table presents the delinquency trends of the Company’s credit card and loan receivables portfolio:


	March 31,		% of		December 31,		% of
	2019		Total		2018		Total
	(in millions, except percentages)
Receivables outstanding - principal	$	15,938.7	100.0	%	$	16,869.9	100.0	%
Principal receivables balances contractually delinquent:
31 to 60 days		244.3	1.5	%		303.2	1.8	%
61 to 90 days		185.0	1.2			207.9	1.3
91 or more days		407.4	2.5			443.4	2.6
Total	$	836.7	5.2	%	$	954.5	5.7	%

Modified Credit Card Receivables

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 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.

The Company had ~~$325.9~~$298.2 million and ~~$260.2~~$292.4 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of ~~$118.6~~$104.3 million and ~~$56.1~~$101.3 million, respectively, as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. These modified credit card receivables represented less than 2% of the Company’s total credit card receivables as of both ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

The average recorded investment in impaired credit card receivables was ~~$338.9~~$297.7 million and ~~$233.6~~$296.3 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $352.8 million and $222.3 million for the nine months ended September 30, 2018 and 2017,~~ 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 ~~$6.7~~$5.7 million and ~~$5.0~~$6.0 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $22.0 million and $14.5 million for the nine months ended September 30, 2018 and 2017,~~ respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

1816

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 2018

Nine Months Ended September 30, 2018

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

79,317

$
106.6

$
106.5

429,625

$
520.9

$
520.3

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 March 31, 2019

Three Months Ended March 31, 2018

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

70,294

104.3

104.1

280,072

312.5

312.2

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, 2018

September 30, 2018

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

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

55,217

$
66.4

258,812

$
293.9

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, 2019			Three Months Ended March 31, 2018
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance
	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables	50,456	$	65.4	28,760	$	35.0

Age of Credit Card and Loan Receivable Accounts

The following tables set forth, as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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, 2018							March 31, 2019
						Percentage of							Percentage of
	Number of	Percentage of		Principal		Principal		Number of	Percentage of		Principal		Principal
	Active Accounts	Active Accounts		Receivables		Receivables		Active Accounts	Active Accounts		Receivables		Receivables
Age of Accounts Since Origination	with Balances	with Balances		Outstanding		Outstanding		with Balances	with Balances		Outstanding		Outstanding
	(In millions, except percentages)							(in millions, except percentages)
0-12 Months	6.1	26.6	%	$	3,782.2	23.0	%	5.5	26.1	%	$	3,812.1	23.9	%
13-24 Months	4.1	18.0			2,954.0	17.9		3.7	17.4			2,685.1	16.9
25-36 Months	2.9	12.6			2,261.8	13.7		2.9	13.6			2,362.1	14.8
37-48 Months	2.2	9.6			1,863.3	11.3		2.0	9.3			1,695.0	10.6
49-60 Months	1.5	6.6			1,229.0	7.5		1.6	7.3			1,364.4	8.6
Over 60 Months	6.0	26.6			4,386.2	26.6		5.6	26.3			4,020.0	25.2
Total	22.8	100.0	%	$	16,476.5	100.0	%	21.3	100.0	%	$	15,938.7	100.0	%


	December 31, 2018
						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	26.7	%	$	4,099.9	24.3	%
13-24 Months	4.2	17.1			2,887.8	17.1
25-36 Months	3.1	13.0			2,428.9	14.4
37-48 Months	2.2	9.1			1,795.0	10.7
49-60 Months	1.7	7.1			1,367.2	8.1
Over 60 Months	6.5	27.0			4,291.1	25.4
Total	24.2	100.0	%	$	16,869.9	100.0	%

1917

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

December 31, 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

7.4

27.3
%
$
4,110.0

23.2
%
13-24 Months

4.5

16.4

3,011.3

17.0

25-36 Months

3.2

11.7

2,357.1

13.3

37-48 Months

2.4

8.8

1,837.0

10.4

49-60 Months

1.7

6.3

1,280.8

7.2

Over 60 Months

8.1

29.5

5,108.9

28.9

Total

27.3

100.0
%
$
17,705.1

100.0
%

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, which the Company updates periodically. 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. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects the composition of the Company’s credit card and loan receivables by obligor credit quality as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	September 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
			Percentage of				Percentage of				Percentage of				Percentage of
	Total Principal		Principal		Total Principal		Principal		Total Principal		Principal		Total Principal		Principal
Probability of an Account Becoming 91 or More Days Past	Receivables		Receivables		Receivables		Receivables		Receivables		Receivables		Receivables		Receivables
Due or Becoming Charged-off (within the next 12 months)	Outstanding		Outstanding		Outstanding		Outstanding		Outstanding		Outstanding		Outstanding		Outstanding
	(In millions, except percentages)								(in millions, except percentages)
No Score	$	191.0	1.2	%	$	210.6	1.2	%	$	204.7	1.3	%	$	249.0	1.5	%
27.1% and higher		1,410.0	8.6			1,330.5	7.5			1,368.9	8.6			1,394.0	8.2
17.1% - 27.0%		792.5	4.8			850.5	4.8			962.5	6.0			770.1	4.6
12.6% - 17.0%		1,055.1	6.4			1,137.7	6.4			1,001.1	6.3			1,047.6	6.2
3.7% - 12.5%		6,762.1	41.0			7,449.7	42.1			6,947.8	43.6			6,877.6	40.8
1.9% - 3.6%		2,931.1	17.8			3,286.9	18.6			2,718.2	17.0			3,060.7	18.1
Lower than 1.9%		3,334.7	20.2			3,439.2	19.4			2,735.5	17.2			3,470.9	20.6
Total	$	16,476.5	100.0	%	$	17,705.1	100.0	%	$	15,938.7	100.0	%	$	16,869.9	100.0	%

Transfer of Financial Assets

~~Effective July 2, 2018, the~~The Company ~~no longer originates~~originated loan receivables under one previous client ~~agreement. After~~agreement, and after origination, these loan receivables were sold to the client at par value plus accrued interest. These transfers qualified for sale treatment as they met the conditions established in ASC 860-10, “Transfers and Servicing.” Following the sale, the client owned the loan receivables, assumed the risk of loss in the event of loan defaults and was responsible for all servicing functions related to the loan receivables. ~~The~~Effective July 2, 2018, the Company no longer originates loan receivables originated by the Company that had not yet been sold to the client were $0.0 million and $126.9 million at September 30, 2018 and December 31, 2017, 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 lower of cost or fair value. The carrying value of these loan receivables approximated fair value due to the short duration between the date of origination and sale.this client. Originations and sales of these loan receivables held for sale were reflected as operating activities in the Company’s unaudited condensed consolidated statements of cash flows.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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 ~~$1,720.1~~$1,848.9 million and ~~$899.4~~$1,951.6 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

~~During~~ For the ~~nine~~three months ended September 30, 2018, the Company transferred six portfolios to held for sale at the net carrying amount inclusive of the related reserves for losses, as the fair value was estimated to be greater than the net carrying amount,March 31, 2019 and ~~such amount was the measurement basis. The amounts were as follows:~~

~~In the first quarter of 2018, the Company transferred one credit card portfolio totaling approximately $90.1 million into credit card and loan receivables held for sale.~~

~~In the second quarter of 2018, the Company transferred one credit card portfolio totaling approximately $54.6 million into credit card and loan receivables held for sale.~~

~~In the third quarter of 2018, the Company transferred four credit card portfolios totaling approximately $836.9 million into credit card and loan receivables held for sale.~~

~~During the nine months ended September 30, 2018, the Company sold one portfolio for final cash consideration of approximately $55.4 million and recognized a de minimis gain on the transaction.~~

~~Additionally, for the three and nine months ended September 30,~~ 2018, the Company recorded valuation adjustments, which are reflected in cost of ~~$28.1~~operations expense, of $59.9 million and ~~$64.0~~$21.7 million, respectively, to reduce the value of certain portfolios within credit card ~~and loan~~ receivables held for sale. ~~The Company carries its credit card and loan receivables held for sale at the lower of cost or fair value.~~

In ~~October 2018,~~April 2019, the Company sold ~~two portfolios~~one portfolio at par for ~~preliminary cash consideration~~an estimated purchase price of ~~approximately $247.8~~$361.5 million, subject to ~~customary~~certain conditions as defined in the purchase and sale ~~price adjustments.~~agreement.

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

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 2018~~March 31, 2019 and ~~2017.~~2018.

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.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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


	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
	(In millions)				(in millions)
Total credit card receivables – restricted for securitization investors	$	12,565.5	$	14,293.9	$	12,550.5	$	13,418.3
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due	$	287.9	$	295.0	$	280.1	$	301.6

Three Months Ended

Nine Months Ended

September 30,

September 30,


2018

2017

2018

2017

(In millions)
Net charge-offs of securitized principal

$
235.2

$
179.9

$
720.5

$
542.3

6.7. INVENTORIES, NET

Inventories, net of ~~$265.9~~$242.3 million and ~~$234.1~~$248.0 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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.

7.8. 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. The principal components of other investments, which are carried at fair value, are as follows:


	September 30, 2018								December 31, 2017								March 31, 2019								December 31, 2018
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
	(In millions)																(in millions)
Marketable securities	$	260.4	$	—	$	(9.6)	$	250.8	$	207.3	$	0.2	$	(2.5)	$	205.0	$	271.4	$	0.7	$	(3.1)	$	269.0	$	272.8	$	0.1	$	(6.5)	$	266.4
U.S. Treasury bonds		25.0		—		(0.2)		24.8		50.0		—		(0.1)		49.9		25.0		—		(0.1)		24.9		25.0		—		(0.1)		24.9
Total	$	285.4	$	—	$	(9.8)	$	275.6	$	257.3	$	0.2	$	(2.6)	$	254.9	$	296.4	$	0.7	$	(3.2)	$	293.9	$	297.8	$	0.1	$	(6.6)	$	291.3

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

September 30, 2018

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

$
95.7

$
(2.9)

$
123.4

$
(6.7)

$
219.1
��
$
(9.6)
U.S. Treasury bonds

24.8

(0.2)

—

—

24.8

(0.2)
Total

$
120.5

$
(3.1)

$
123.4

$
(6.7)

$
243.9

$
(9.8)

2219

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)


	December 31, 2017												March 31, 2019
	Less than 12 months				12 Months or Greater				Total				Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In millions)												(in millions)
Marketable securities	$	104.5	$	(0.9)	$	67.3	$	(1.6)	$	171.8	$	(2.5)	$	—	$	—	$	173.7	$	(3.1)	$	173.7	$	(3.1)
U.S. Treasury bonds		49.9		(0.1)		—		—		49.9		(0.1)		—		—		24.9		(0.1)		24.9		(0.1)
Total	$	154.4	$	(1.0)	$	67.3	$	(1.6)	$	221.7	$	(2.6)	$	—	$	—	$	198.6	$	(3.2)	$	198.6	$	(3.2)


	December 31, 2018
	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	$	57.3	$	(0.5)	$	164.0	$	(6.0)	$	221.3	$	(6.5)
U.S. Treasury bonds		—		—		24.9		(0.1)		24.9		(0.1)
Total	$	57.3	$	(0.5)	$	188.9	$	(6.1)	$	246.2	$	(6.6)

The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at ~~September 30, 2018~~March 31, 2019 by contractual maturity are as follows:


	Amortized				Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(In millions)				(in millions)
Due in one year or less	$	54.3	$	54.0	$	55.0	$	55.0
Due after one year through five years		2.3		2.3		1.9		1.9
Due after five years through ten years		—		—		—		—
Due after ten years		228.8		219.3		239.5		237.0
Total	$	285.4	$	275.6	$	296.4	$	293.9

Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security’s issuer, 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. 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. As of ~~September 30, 2018,~~March 31, 2019, the Company does not consider the investments to be other-than-temporarily impaired.

There were no realized gains or losses from the sale of investment securities for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

8.9. 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, 2018								December 31, 2017								March 31, 2019								December 31, 2018
		Amortized	Unrealized		Unrealized					Amortized	Unrealized		Unrealized					Amortized	Unrealized		Unrealized					Amortized	Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
	(In millions)																(in millions)
Restricted cash	$	51.4	$	—	$	—	$	51.4	$	74.3	$	—	$	—	$	74.3	$	43.4	$	—	$	—	$	43.4	$	43.9	$	—	$	—	$	43.9
Mutual funds		24.6		—		—		24.6		27.3		—		(1.3)		26.0		24.2		—		—		24.2		23.2		—		—		23.2
Corporate bonds		520.5		—		(8.8)		511.7		495.0		—		(5.8)		489.2		508.5		2.3		(2.3)		508.5		497.5		0.1		(6.1)		491.5
Total	$	596.5	$	—	$	(8.8)	$	587.7	$	596.6	$	—	$	(7.1)	$	589.5	$	576.1	$	2.3	$	(2.3)	$	576.1	$	564.6	$	0.1	$	(6.1)	$	558.6

2320

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)


	September 30, 2018												March 31, 2019
	Less than 12 months				12 Months or Greater				Total				Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In millions)												(in millions)
Corporate bonds	$	131.2	$	(1.7)	$	380.5	$	(7.1)	$	511.7	$	(8.8)	$	—	$	—	$	323.3	$	(2.3)	$	323.3	$	(2.3)
Total	$	131.2	$	(1.7)	$	380.5	$	(7.1)	$	511.7	$	(8.8)	$	—	$	—	$	323.3	$	(2.3)	$	323.3	$	(2.3)


	December 31, 2017												December 31, 2018
	Less than 12 months				12 Months or Greater				Total				Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In millions)												(in millions)
Mutual funds	$	26.0	$	(1.3)	$	—	$	—	$	26.0	$	(1.3)
Corporate bonds		328.0		(3.7)		161.2		(2.1)		489.2		(5.8)	$	31.2	$	(0.1)	$	414.4	$	(6.0)	$	445.6	$	(6.1)
Total	$	354.0	$	(5.0)	$	161.2	$	(2.1)	$	515.2	$	(7.1)	$	31.2	$	(0.1)	$	414.4	$	(6.0)	$	445.6	$	(6.1)

The amortized cost and estimated fair value of the securities at ~~September 30, 2018~~March 31, 2019 by contractual maturity are as follows:


	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(In millions)				(in millions)
Due in one year or less	$	102.5	$	102.1	$	134.2	$	133.9
Due after one year through five years		442.6		434.2		398.5		398.8
Total	$	545.1	$	536.3	$	532.7	$	532.7

~~There were no realized~~Realized gains orand losses from the sale of investment securities for the three months ended ~~September 30,~~March 31, 2019 and 2018 were de minimis.

10. LEASES

The Company has operating leases for general office properties, warehouses, data centers, call centers, automobiles and ~~2017, and realized gains and losses~~certain equipment. As of March 31, 2019, the Company’s leases have remaining lease terms of less than 1 year to 19 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.

Leases with an initial term of 12 months or less are not recognized on the ~~sale of investment securities~~balance sheet; we recognize lease expense for ~~nine months ended September 30, 2018~~these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and ~~2017 were de minimis.~~

nonlease components as a single lease component for its identified asset classes.

2421

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

9.The components of lease expense were as follows:


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

Other information related to leases was as follows:


	March 31,
	2019
Weighted-average remaining lease term (in years):
Operating leases		11.9
Weighted-average discount rate:
Operating leases		5.3%

Supplemental cash flow information related to leases was as follows:


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

Maturities of the lease liabilities as of March 31, 2019 were as follows:


	Operating
Year	Leases
	(in millions)
2019 (excluding the three months ended March 31, 2019)	$	27.4
2020		40.8
2021		38.6
2022		37.8
2023		36.7
Thereafter		260.2
Total undiscounted lease liabilities		441.5
Less: Amount representing interest		(120.3)
Total present value of minimum lease payments	$	321.2

Amounts recognized in the March 31, 2019 consolidated balance sheet:
Current operating lease liabilities	$	21.4
Long-term operating lease liabilities		299.8
Total	$	321.2

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

11. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Intangible assets consist of the following:


	September 30, 2018							March 31, 2019
	Gross		Accumulated					Gross		Accumulated
	Assets		Amortization		Net		Amortization Life and Method	Assets		Amortization		Net		Amortization Life and Method
	(In millions)							(in millions)
Finite Lived Assets
Customer contracts and lists	$	1,130.5	$	(737.4)	$	393.1	3-12 years—straight line	$	325.3	$	(244.0)	$	81.3	7 years—straight line
Premium on purchased credit card portfolios		313.5		(186.3)		127.2	3-13 years—straight line		286.0		(186.5)		99.5	3-13 years—straight line
Collector database		54.2		(52.6)		1.6	5 years—straight line		52.5		(51.1)		1.4	5 years—straight line
Publisher networks		140.2		(105.1)		35.1	5-7 years—straight line
Tradenames		76.2		(49.5)		26.7	8-15 years—straight line		31.8		(25.6)		6.2	8-15 years—straight line
Purchased data lists		10.8		(6.1)		4.7	1-5 years—straight line, accelerated
Favorable lease		6.0		(3.7)		2.3	6-10 years—straight line
	$	1,731.4	$	(1,140.7)	$	590.7		$	695.6	$	(507.2)	$	188.4
Indefinite Lived Assets
Tradenames		12.4		—		12.4	Indefinite life
Tradename									1.2		—		1.2	Indefinite life
Total intangible assets	$	1,743.8	$	(1,140.7)	$	603.1		$	696.8	$	(507.2)	$	189.6


	December 31, 2017							December 31, 2018
	Gross		Accumulated					Gross		Accumulated
	Assets		Amortization		Net		Amortization Life and Method	Assets		Amortization		Net		Amortization Life and Method
	(In millions)							(in millions)
Finite Lived Assets
Customer contracts and lists	$	1,143.5	$	(625.5)	$	518.0	3-12 years—straight line	$	339.5	$	(244.4)	$	95.1	3-7 years—straight line
Premium on purchased credit card portfolios		321.6		(147.8)		173.8	3-13 years—straight line		286.0		(172.9)		113.1	3-13 years—straight line
Customer databases		63.6		(63.6)		—	3 years—straight line
Collector database		55.6		(53.5)		2.1	5 years—straight line		51.3		(49.9)		1.4	5 years—straight line
Publisher networks		140.2		(84.4)		55.8	5-7 years—straight line
Tradenames		77.3		(46.8)		30.5	8-15 years—straight line		32.5		(25.9)		6.6	8-15 years—straight line
Purchased data lists		11.3		(6.2)		5.1	1-5 years—straight line, accelerated
Favorable lease		6.0		(3.1)		2.9	6-10 years—straight line
	$	1,819.1	$	(1,030.9)	$	788.2		$	709.3	$	(493.1)	$	216.2
Indefinite Lived Assets
Tradenames		12.4		—		12.4	Indefinite life
Tradename									1.2		—		1.2	Indefinite life
Total intangible assets	$	1,831.5	$	(1,030.9)	$	800.6		$	710.5	$	(493.1)	$	217.4

2523

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:


	For the Years Ending		For the Years Ending
	December 31,		December 31,
	(In millions)		(in millions)
2018 (excluding the nine months ended September 30, 2018)	$	62.4
2019		205.2
2019 (excluding the three months ended March 31, 2019)			$	84.0
2020		142.2		57.4
2021		78.9		13.7
2022		69.6		11.3
2023				10.3
Thereafter		32.4		11.7

Goodwill

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

LoyaltyOne®

Epsilon®

Card Services

Corporate/ Other

Total

(In millions)
Balance at December 31, 2017

$
731.1

$
2,887.3

$
261.7

$
—

$
3,880.1
Effects of foreign currency translation

(22.0)

(0.7)

—

—

(22.7)
Balance at September 30, 2018

$
709.1

$
2,886.6

$
261.7

$
—

$
3,857.4



	LoyaltyOne		Card Services		Corporate/ Other		Total
	(in millions)
Balance at December 31, 2018	$	693.1	$	261.7	$	—	$	954.8
Goodwill acquired during the year		—		2.3		—		2.3
Effects of foreign currency translation		(7.1)		—		—		(7.1)
Balance at March 31, 2019	$	686.0	$	264.0	$	—	$	950.0

2624

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~10.~~12. DEBT

Debt consists of the following:


	September 30,		December 31,				March 31,		December 31,
Description	2018		2017		Maturity	Interest Rate	2019		2018		Maturity	Interest Rate
	(Dollars in millions)						(Dollars in millions)
Long-term and other debt:
2017 revolving line of credit	$	772.0	$	475.0	June 2022	(1)	$	945.0	$	740.0	June 2022	(1)
2017 term loans		2,957.2		3,014.4	June 2022	(1)		2,919.0		2,938.1	June 2022	(1)
BrandLoyalty credit agreement		193.9		198.0	June 2020	(2)		168.2		183.7	June 2020	(2)
Senior notes due 2020		—		500.0	—	—
Senior notes due 2021		500.0		500.0	November 2021	5.875%		500.0		500.0	November 2021	5.875%
Senior notes due 2022		600.0		600.0	August 2022	5.375%		600.0		600.0	August 2022	5.375%
Senior notes due 2022 (€400.0 million)		464.4		479.9	March 2022	4.500%		448.7		458.8	March 2022	4.500%
Senior notes due 2023 (€300.0 million)		348.3		359.9	November 2023	5.250%		336.5		344.1	November 2023	5.250%
Capital lease obligations and other debt		14.3		8.8	Various – Jan 2019 – Aug 2022	2.24% to 4.91%
Total long-term and other debt		5,850.1		6,136.0				5,917.4		5,764.7
Less: Unamortized discount and debt issuance costs		42.8		56.4
Less: Unamortized debt issuance costs								35.9		39.3
Less: Current portion		130.0		131.3				161.5		138.9
Long-term portion	$	5,677.3	$	5,948.3			$	5,720.0	$	5,586.5

Deposits:
Certificates of deposit	$	7,994.6	$	7,526.0	Various – Oct 2018 – Sept 2023	1.25% to 4.00%	$	8,278.5	$	8,395.1	Various – Apr 2019 – Mar 2024	1.28% to 4.00%
Money market deposits		3,382.0		3,429.4	Non-maturing	(3)		3,038.4		3,424.3	Non-maturity	(3)
Total deposits		11,376.6		10,955.4				11,316.9		11,819.4
Less: Unamortized discount and debt issuance costs		27.2		24.5
Less: Unamortized debt issuance costs								24.9		25.7
Less: Current portion		6,267.1		6,366.2				5,922.6		6,537.7
Long-term portion	$	5,082.3	$	4,564.7			$	5,369.4	$	5,256.0

Non-recourse borrowings of consolidated securitization entities:
Fixed rate asset-backed term note securities	$	4,827.0	$	4,704.7	Various – Oct 2018 – Sept 2021	1.72% to 4.55%	$	5,018.0	$	4,893.3	Various – June 2019 – Feb 2022	1.72% to 3.95%
Floating rate asset-backed term note securities		—		360.0	—	—
Conduit asset-backed securities		2,655.0		3,755.0	Various – Nov 2019 – Sept 2020	(4)		1,770.0		2,770.0	Various – Nov 2019 – Sept 2020	(4)
Total non-recourse borrowings of consolidated securitization entities		7,482.0		8,819.7				6,788.0		7,663.3
Less: Unamortized discount and debt issuance costs		11.1		12.4
Less: Unamortized debt issuance costs								12.5		11.6
Less: Current portion		1,456.8		1,339.9				2,185.6		2,717.6
Long-term portion	$	6,014.1	$	7,467.4			$	4,589.9	$	4,934.1

⁽¹⁾

The interest rate is based upon the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. At ~~September 30, 2018,~~March 31, 2019, the weighted average interest rate was ~~3.97%~~4.26% and ~~3.99%~~4.25% for the revolving line of credit and term loans, respectively.

⁽²⁾

The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. At ~~September 30, 2018,~~March 31, 2019, the weighted average interest rate was ~~1.21%~~1.20% and 1.65% for the BrandLoyalty revolving line of credit and term loans, respectively.

⁽³⁾

The interest rates are based on the Federal Funds rate plus an applicable margin. At ~~September 30, 2018,~~March 31, 2019, the interest rates ranged from 1.90% to ~~2.60%~~3.50%.

⁽⁴⁾

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, 2018,~~March 31, 2019, the interest rates ranged from ~~3.23%~~3.54% to ~~3.59%~~3.68%.

At ~~September 30, 2018,~~March 31, 2019, the Company was in compliance with its financial covenants.

2725

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Long-term and Other Debt

Credit Agreement

As of ~~September 30, 2018~~March 31, 2019, the Company’s credit agreement, as amended, provided for a $3,052.6 million in term loans subject to certain principal repayments and a $1,572.4 million revolving line of credit, with ~~$800.4~~$627.4 million total availability.

~~BrandLoyalty Credit Agreement~~

~~BrandLoyalty and certain of its subsidiaries, as borrower and guarantors, are parties to a credit agreement that provides for~~ In February 2019, Alliance Data International LLC became an A-1 term loan facility of €90.0 million and an A-2 term loan facility of €100.0 million, subject to certain principal repayments, a committed revolving line of credit of €62.5 million and an uncommitted revolving line of credit of €62.5 million, all of which mature in June 2020. The BrandLoyalty credit agreement provided for a reduction in commitment on each of the uncommitted and committed revolving lines of credit of €25.0 million in August 2018, for a committed revolving line of credit of €37.5 million and an uncommitted revolving line of credit of €37.5 million as of September 30, 2018.

~~As of September 30, 2018, amounts outstanding~~additional guarantor under the ~~revolving lines of~~ credit ~~and the term loans under the BrandLoyalty credit agreement were €40.8 million and €126.3 million ($47.3 million and $146.6 million), respectively.~~

~~Senior Notes due 2020~~agreement.

On April ~~2, 2018,~~30, 2019, the Company ~~redeemed~~amended its ~~$500.0~~credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement will be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reduced in the same amount (to $1,072.4 million), all of the Company’s outstanding ~~6.375%~~ senior notes ~~due April 1, 2020 at par plus accrued interest. The Company funded~~will be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the ~~redemption with borrowings under its revolving line of credit.~~credit agreement and certain other minor amendments.

Non-Recourse Borrowings of Consolidated Securitization Entities

Asset-Backed Term Notes

~~For the nine months ended September 30, 2018, the following~~In February 2019, Master Trust I issued $562.5 million of Series 2019-A asset-backed term notes, which mature in February 2022. The offering consisted of $500.0 million of Class A notes with a fixed interest rate of 3.14% per year, $37.2 million of Class M notes with a fixed interest rate of 3.61% per year and $25.3 million of notes that were ~~issued~~retained by ~~Master Trust I:~~

~~February 2018 - $591.5 million of Series 2018-A asset-backed term notes, which mature in February 2021.~~ ~~The offering consisted of $525.0 million of Class A notes with a fixed interest rate of 3.07% per year and $66.5 million of notes that were retained by~~ the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.

~~September 2018 - $337.5 million of Series 2018-B asset-backed term notes, which mature in September 2021.~~ The offering consisted of $300.0 million Class A notes with a fixed interest rate of 3.46% per year, $22.3 million of Class M notes with a fixed interest rate of 3.81% per year and $15.2 million of notes which were retained by the Company and eliminated from the Company’s consolidated balance sheets.

~~For the nine months ended September 30, 2018, the following~~In March 2019, $550.0 million of Series 2012-A asset-backed term notes, ~~issued by Master Trust I matured and were repaid:~~

~~February 2018 -~~ ~~$500.0 million of Series 2013-A asset-backed term notes, $125.0 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.~~

~~April 2018 -~~ ~~$500.0 million of Series 2015-A asset-backed term notes, $140.0 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets~~.

~~August 2018 -~~ ~~$460.5 million of Series 2016-B asset-backed term notes, $110.5 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets~~.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~In October 2018, $266.7 million of Series 2012-C asset-backed term notes, $10.7~~$137.5 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, 2018, the Company had collected $266.7 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series 2012-C notes. 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, 2018.

Conduit Facilities

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

~~In August 2018, Master Trust I amended its 2009-VFN conduit facility, increasing the capacity from $800.0 million to $1,180.0 million and extending the maturity to September 2020.~~

~~In August 2018, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1,680.0 million to $1,300.0 million and extending the maturity to September 2020.~~

As of ~~September 30, 2018,~~March 31, 2019, total capacity under the conduit facilities was $4.5 billion, of which ~~$2.7~~$1.8 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

~~11.~~13. 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 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, 2018,~~March 31, 2019, 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, 2018,~~March 31, 2019, the maximum term over which the Company is hedging its exposure to the variability of future cash flows associated with certain inventory transactions is 1011 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.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	September 30, 2018						March 31, 2019
	Notional						Notional
	Amount		Fair Value		Balance Sheet Location	Maturity	Amount		Fair Value		Balance Sheet Location	Maturity
	(In millions)						(in millions)
Designated as hedging instruments:
Foreign currency exchange hedges	$	36.5	$	1.7	Other current assets	October 2018 to April 2019	$	19.2	$	0.2	Other current assets	April 2019 to February 2020
Foreign currency exchange hedges	$	18.9	$	0.3	Other current liabilities	October 2018 to July 2019	$	19.6	$	0.7	Other current liabilities	April 2019 to November 2019

Not designated as hedging instruments:
Foreign currency exchange forward contract	$	64.2	$	—	Other current liabilities	January 2019	$	62.1	$	0.7	Other current assets	July 2019


	December 31, 2017						December 31, 2018
	Notional						Notional
	Amount		Fair Value		Balance Sheet Location	Maturity	Amount		Fair Value		Balance Sheet Location	Maturity
	(In millions)						(in millions)
Designated as hedging instruments:
Foreign currency exchange hedges	$	2.9	$	0.1	Other current assets	August 2018 to October 2018	$	5.2	$	0.3	Other current assets	January 2019 to April 2019
Foreign currency exchange hedges	$	19.3	$	0.3	Other current liabilities	January 2018 to October 2018	$	20.3	$	0.3	Other current liabilities	March 2019 to November 2019

Not designated as hedging instruments:
Foreign currency exchange forward contracts	$	168.0	$	15.9	Other current assets	February 2018
Foreign currency exchange forward contract	$	65.8	$	3.5	Other current liabilities	March 2018	$	61.6	$	3.5	Other current assets	January 2019 to February 2019

Derivatives Designated as Hedging Instruments

Losses of ~~$0.7 million and gains of $0.6~~$0.1 million, net of tax, were recognized in other comprehensive income for each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and March 31, 2018, respectively, related to foreign currency exchange hedges designated as effective. Gains of $0.6 million and losses of $0.3 million, net of tax, were recognized in other comprehensive income for the three and nine months ended September 30, 2017, 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 until the hedged transactions affect net income. The ineffective portion of these cash flow hedges impacts net income when ineffectiveness occurs. Reclassifications from accumulated other comprehensive loss into net income (cost of operations) for each of the periods presented were not material. At ~~September 30, 2018, $0.5~~March 31, 2019, $0.3 million is expected to be reclassified from accumulated other comprehensive loss into net income in the coming 12 months.

Derivatives Not Designated as Hedging Instruments

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and March 31, 2018, losses of ~~$1.1~~$1.2 million and gains of $7.1 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 the three and nine months ended September 30, 2017, gains of $2.9 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.

Net Investment Hedges

The Company designated its Euro-denominated 5.250% senior notes due 2023 (€300.0 million) and ~~€200.0~~€340.0 million of its Euro-denominated 4.500% senior notes due 2022 (€400.0 million) as a net investment hedge of its investment in BrandLoyalty on ~~a pre-tax~~an after-tax basis. The net investment hedge is intended to reduce the volatility in stockholders’ equity caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. dollar.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~In February 2018, the Company de-designated its~~ ~~€500.0 million~~ ~~net investment hedge and re-designated €640.0 million of Euro-denominated senior notes as a net investment hedge of its investment in BrandLoyalty on an after-tax basis.~~ The change in fair value of the net investment hedges due to remeasurement of the effective portion is recorded in other comprehensive income. The ineffective portion of this hedging instrument impacts net income when the ineffectiveness occurs. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and March 31, 2018, gains of ~~$3.6~~$12.2 million and ~~$22.9~~losses of $11.7 million, net of tax,

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 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.

~~12.~~14. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

~~In 2017, the Company’s Board of Directors~~The Company had an authorized ~~a stock repurchase program to acquire up to $1.0 billion of the Company’s outstanding common stock through July 31, 2018. At July 31, 2018, $280.3 million of this program expired unused.~~

~~On July 26, 2018, the Company’s Board of Directors authorized a new~~ stock repurchase program to acquire up to $500.0 million of the Company’s outstanding common stock from August 1, 2018 through July 31, 2019. At December 31, 2018 the Company had $222.8 million remaining under the stock repurchase program.

For the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, the Company acquired a total of ~~0.9~~1.3 million shares of its common stock for ~~$201.7~~$222.8 million under its respective stock repurchase programs. The Company acquired approximately 0.8 million shares of its common stock for $166.0 million under its previous stock repurchase program and acquired approximately 0.1 million shares of its common stock for $35.7 million under its current stock repurchase program. As of ~~September 30, 2018,~~March 31, 2019, the Company ~~had $464.3 million~~did not have any amounts remaining under its ~~current~~authorized stock repurchase program.

Stock Compensation Expense

~~Total stock-based~~Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ is as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
	(In millions)								(in millions)
Cost of operations	$	12.7	$	13.6	$	45.8	$	42.3	$	6.7	$	8.0
General and administrative		5.2		4.7		18.4		21.2		4.6		5.6
Total	$	17.9	$	18.3	$	64.2	$	63.5	$	11.3	$	13.6

Stock-based compensation expense included in loss from discontinued operations totaled $9.8 million and $11.9 million for the three months ended March 31, 2019 and 2018, respectively.

During the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, the Company awarded ~~100,397~~122,420 service-based restricted stock units with a weighted average grant date fair value per share of ~~$238.23~~$173.13 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, 2018~~March 31, 2019, the Company awarded ~~263,542~~420,239 performance-based restricted stock units with a weighted average grant date fair value per share of ~~$240.65~~$173.21 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, ~~2019,~~2020, an additional 33% of the award on February 15, ~~2020~~2021 and the final 34% of the award on February 18, ~~2021,~~2022, provided that the participant is employed by the Company on each such vesting date.

During the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, the Company also awarded ~~28,057~~37,878 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 ~~$220.56~~$129.15 and was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, 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, 2021, provided that the participant is employed by the Company on such vesting date.

Dividends

On February 7, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.63 per share on the Company’s common stock to stockholders of record at the close of business on February 21, 2019, resulting in a dividend payment of $33.4 million on March 19, 2019. Additionally, the Company paid $0.5 million in cash related to dividend equivalent rights for the three months ended March 31, 2019.

3128

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Upon determination of the market condition, the restrictions will lapse with respect to the entire award on February 15, 2020, provided that the participant is employed by the Company on such vesting date.

~~Dividends~~

On ~~January~~April 25, ~~2018,~~2019, the Company’s Board of Directors declared a quarterly cash dividend of ~~$0.57~~$0.63 per share on the Company’s common stock ~~to stockholders of record at the close of business on February 14, 2018, resulting in a dividend payment of $31.5 million on March 20, 2018.~~

~~On April 19, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.57~~and $6.30 per share on the Company’s ~~common stock, payable on June 19, 2018,~~Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on May 14, ~~2018, resulting in a dividend payment of $31.5 million~~2019 and payable on June ~~19, 2018.~~18, 2019.

~~On July 19, 2018,~~Preferred Stock

In April 2019, the Company’s Board of Directors ~~declared~~designated 300,000 shares of its authorized and unissued preferred stock as Series A Non-Voting Convertible Preferred Stock and the Company filed with the Delaware Secretary of State a ~~quarterly cash dividend~~Certificate of ~~$0.57 per~~Designations of Series A Non-Voting Convertible Preferred Stock to create the new Series A Non-Voting Convertible Preferred Stock, authorized 300,000 shares and designated the preferences, rights and limitations of the Series A Non-Voting Convertible Preferred Stock. Each share of Series A Non-Voting Convertible Preferred Stock will initially be convertible into ten shares of common stock (subject to adjustment and the other terms described in the Certificate of Designations) at the holder’s election or upon the Company’s written request, provided that upon such conversion the holder, together with its affiliates, will not own or control in the aggregate more than 9.9% of the Company’s outstanding common stock (or any class of the Company’s voting securities). Shares of Series A Non-Voting Convertible Preferred Stock will also be subject to automatic conversion if a holder transfers such shares pursuant to a transfer (a) to the Company, (b) in a widespread public distribution of common stock or Series A Non-Voting Convertible Preferred Stock, (c) in which no one transferee (or group of associated transferees) would receive 2% or more of any class of the Company’s voting securities then outstanding (including pursuant to a related series of such transfers), or (d) to a transferee that would control more than 50% of the Company voting securities (not including voting securities such person is acquiring from the transferor). Upon such a transaction, the transferred shares of Series A Non-Voting Convertible Preferred Stock will automatically be converted into shares of common stock on a ten-for-one basis (subject to adjustment as described in the Certificate of Designations).

The shares of Series A Non-Voting Convertible Preferred Stock have no voting rights, except as otherwise required by the General Corporation Law of the State of Delaware. The Series A Non-Voting Convertible Preferred Stock will, with respect to rights upon liquidation, winding up and dissolution, rank (i) subordinate and junior in right of payment to all other securities of the Company that, by their respective terms, are senior to the Series A Non-Voting Convertible Preferred Stock, and (ii) pari passu with the common stock.

On April 25, 2019, the Company entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock ~~payable on September 19, 2018,~~for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. The issuance to ~~stockholders~~ValueAct of ~~record at~~ the ~~close~~shares of ~~business on August 14, 2018, resulting~~Series A Non-Voting Convertible Preferred Stock was, and the issuance of the shares of common stock issuable upon conversion of the Series A Non-Voting Convertible Preferred Stock will be, made in ~~a dividend payment~~reliance upon the exemption from registration provided by Section 3(a)(9) of ~~$31.2 million on September 19, 2018.~~the Securities Act of 1933, as amended.

~~Additionally, the Company paid $0.3 million in cash related to dividend equivalent rights for the nine months ended September 30, 2018.~~

On October 18, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.57 per share on the Company’s common stock, payable on December 19, 2018, to stockholders of record at the close of business on November 14, 2018.

~~13.~~15. ACCUMULATED OTHER COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

The changes in each component of accumulated other comprehensive ~~income (loss),~~loss, net of tax effects, are as follows:

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, 2018

on Securities

Flow Hedges

Investment Hedges

Adjustments (1)

Income (Loss)

(In millions)
Balance at June 30, 2018

$
(12.7)

$
1.2

$
(22.7)

$
(102.2)

$
(136.4)
Changes in other comprehensive income (loss)

(3.2)

(0.7)

3.6

(6.4)

(6.7)
Balance at September 30, 2018

$
(15.9)

$
0.5

$
(19.1)

$
(108.6)

$
(143.1)


	Net		Unrealized		Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended March 31, 2019	on Securities		Flow Hedges		Investment Hedges		Adjustments (1)		Loss
	(in millions)
Balance at December 31, 2018	$	(10.7)	$	(0.2)	$	(12.4)	$	(114.8)	$	(138.1)
Changes in other comprehensive income (loss)		9.0		(0.1)		12.2		(10.9)		10.2
Balance at March 31, 2019	$	(1.7)	$	(0.3)	$	(0.2)	$	(125.7)	$	(127.9)

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)

(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)

3229

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
Nine Months Ended September 30, 2018

on Securities

Flow Hedges

Investment Hedges

Adjustments (1)

Income (Loss)

(In millions)
Balance at December 31, 2017

$
(8.7)

$
(0.1)

$
(42.0)

$
(89.4)

$
(140.2)
Changes in other comprehensive income (loss)

(7.2)

0.6

22.9

(19.2)

(2.9)
Balance at September 30, 2018

$
(15.9)

$
0.5

$
(19.1)

$
(108.6)

$
(143.1)

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)

(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
Three Months Ended March 31, 2018	on Securities		Flow Hedges		Investment Hedges		Adjustments (1)		Loss
	(in millions)
Balance at December 31, 2017	$	(8.7)	$	(0.1)	$	(42.0)	$	(89.4)	$	(140.2)
Changes in other comprehensive income (loss)		(2.0)		(0.1)		(11.7)		17.5		3.7
Balance at March 31, 2018	$	(10.7)	$	(0.2)	$	(53.7)	$	(71.9)	$	(136.5)

⁽¹⁾

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

Reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material. Additionally, as of January 1, 2018, a cumulative-effect adjustment of $1.5 million was reclassified from accumulated other comprehensive loss to retained earnings related to the adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ~~For more information, see Note 1, “Summary of Significant Accounting Policies.”~~

~~14.~~16. 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.

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


	September 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value		Amount		Value
	(In millions)								(in millions)
Financial assets
Credit card and loan receivables, net	$	16,312.6	$	17,116.5	$	17,494.5	$	18,427.8	$	15,829.4	$	16,390.2	$	16,816.7	$	17,472.7
Credit card and loan receivables held for sale		1,720.1		1,846.3		1,026.3		1,067.6
Credit card receivables held for sale										1,848.9		1,902.5		1,951.6		1,995.5
Redemption settlement assets, restricted		587.7		587.7		589.5		589.5		576.1		576.1		558.6		558.6
Other investments		275.6		275.6		254.9		254.9		293.9		293.9		291.3		291.3
Derivative instruments		1.7		1.7		16.0		16.0		0.9		0.9		3.8		3.8
Financial liabilities
Derivative instruments		0.3		0.3		3.8		3.8		0.7		0.7		0.3		0.3
Deposits		11,349.4		11,301.6		10,930.9		10,937.1		11,292.0		11,326.5		11,793.7		11,768.7
Non-recourse borrowings of consolidated securitization entities		7,470.9		7,424.3		8,807.3		8,805.3		6,775.5		6,784.5		7,651.7		7,626.9
Long-term and other debt		5,807.3		5,891.6		6,079.6		6,186.4		5,881.5		5,961.6		5,725.4		5,755.3

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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 Company utilizes a discounted cash flow model using unobservable inputs, including forecasted yields and net charge-off estimates to estimate the fair value measurement of the credit card portfolios held for sale. Loan receivables 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.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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 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.

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.

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.

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.

3431

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


			Fair Value Measurements at								Fair Value Measurements at
			September 30, 2018 Using								March 31, 2019 Using
	Balance at								Balance at
	September 30,								March 31,
	2018		Level 1		Level 2		Level 3		2019		Level 1		Level 2		Level 3
	(In millions)								(in millions)
Mutual funds (1)	$	24.6	$	24.6	$	—	$	—	$	24.2	$	24.2	$	—	$	—
Corporate bonds (1)		511.7		—		511.7		—		508.5		—		508.5		—
Marketable securities (2)		250.8		24.7		226.1		—		269.0		25.5		243.5		—
U.S. Treasury bonds (2)		24.8		24.8		—		—		24.9		24.9		—		—
Derivative instruments (3)		1.7		—		1.7		—		0.9		—		0.9		—
Total assets measured at fair value	$	813.6	$	74.1	$	739.5	$	—	$	827.5	$	74.6	$	752.9	$	—

Derivative instruments (3)	$	0.3	$	—	$	0.3	$	—	$	0.7	$	—	$	0.7	$	—
Total liabilities measured at fair value	$	0.3	$	—	$	0.3	$	—	$	0.7	$	—	$	0.7	$	—


			Fair Value Measurements at								Fair Value Measurements at
			December 31, 2017 Using								December 31, 2018 Using
	Balance at								Balance at
	December 31,								December 31,
	2017		Level 1		Level 2		Level 3		2018		Level 1		Level 2		Level 3
	(In millions)								(in millions)
Mutual funds (1)	$	26.0	$	26.0	$	—	$	—	$	23.2	$	23.2	$	—	$	—
Corporate bonds (1)		489.2		—		489.2		—		491.5		—		491.5		—
Marketable securities (2)		205.0		10.1		194.9		—		266.4		25.0		241.4		—
U.S. Treasury bonds (2)		49.9		49.9		—		—		24.9		24.9		—		—
Derivative instruments (3)		16.0		—		16.0		—		3.8		—		3.8		—
Total assets measured at fair value	$	786.1	$	86.0	$	700.1	$	—	$	809.8	$	73.1	$	736.7	$	—

Derivative instruments (3)	$	3.8	$	—	$	3.8	$	—	$	0.3	$	—	$	0.3	$	—
Total liabilities measured at fair value	$	3.8	$	—	$	3.8	$	—	$	0.3	$	—	$	0.3	$	—

⁽¹⁾

Amounts are included in redemption settlement assets in the unaudited condensed consolidated balance sheets.

⁽²⁾

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

⁽³⁾

Amounts are included in other current 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, 2018~~March 31, 2019 and ~~2017.~~2018.

3532

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	Fair Value Measurements at								Fair Value Measurements at
	September 30, 2018								March 31, 2019
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(In millions)								(in millions)
Financial assets:
Credit card and loan receivables, net	$	17,116.5	$	—	$	—	$	17,116.5	$	16,390.2	$	—	$	—	$	16,390.2
Credit card and loan receivables held for sale		1,846.3		—		—		1,846.3
Credit card receivables held for sale										1,902.5		—		—		1,902.5
Total	$	18,962.8	$	—	$	—	$	18,962.8	$	18,292.7	$	—	$	—	$	18,292.7

Financial liabilities:
Deposits	$	11,301.6	$	—	$	11,301.6	$	—	$	11,326.5	$	—	$	11,326.5	$	—
Non-recourse borrowings of consolidated securitization entities		7,424.3		—		7,424.3		—		6,784.5		—		6,784.5		—
Long-term and other debt		5,891.6		—		5,891.6		—		5,961.6		—		5,961.6		—
Total	$	24,617.5	$	—	$	24,617.5	$	—	$	24,072.6	$	—	$	24,072.6	$	—


	Fair Value Measurements at								Fair Value Measurements at
	December 31, 2017								December 31, 2018
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(In millions)								(in millions)
Financial assets:
Credit card and loan receivables, net	$	18,427.8	$	—	$	—	$	18,427.8	$	17,472.7	$	—	$	—	$	17,472.7
Credit card and loan receivables held for sale		1,067.6		—		—		1,067.6
Credit card receivables held for sale										1,995.5		—		—		1,995.5
Total	$	19,495.4	$	—	$	—	$	19,495.4	$	19,468.2	$	—	$	—	$	19,468.2

Financial liabilities:
Deposits	$	10,937.1	$	—	$	10,937.1	$	—	$	11,768.7	$	—	$	11,768.7	$	—
Non-recourse borrowings of consolidated securitization entities		8,805.3		—		8,805.3		—		7,626.9		—		7,626.9		—
Long-term and other debt		6,186.4		—		6,186.4		—		5,755.3		—		5,755.3		—
Total	$	25,928.8	$	—	$	25,928.8	$	—	$	25,150.9	$	—	$	25,150.9	$	—

~~15.~~17. INCOME TAXES

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and March 31, 2018, the Company utilized an effective tax rate of 16.0% and ~~17.9%~~26.6%, respectively, to calculate its provision for income taxes. ~~For each of the three and nine months ended September 30, 2017, the Company utilized an effective tax rate of 30.1% and 33.2%, respectively.~~

The decrease in the effective tax rate for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. This rate reduction led~~primarily related to a ~~tax benefit associated with accelerated deductions relating to software development costs and bad debts as well as the deferral of income relating to certain state tax refunds. The~~ decrease in ~~the effective~~ tax ~~rate~~reserves resulting from a change in accounting method for ~~the nine months ended September 30, 2018 was also positively impacted by a~~ tax ~~benefit associated with foreign restructuring in the current year, offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc.~~purposes.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~16.~~18. 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.

~~The~~

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

As discussed in Note 5, “Discontinued Operations,” in the first quarter of 2019, the Company’s Epsilon segment has been classified as a discontinued operation. As such, beginning with the first quarter of 2019, 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;

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/										Corporate/
Three Months Ended September 30, 2018	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
Three Months Ended March 31, 2019													LoyaltyOne		Card Services		Other		Total
	(In millions)												(in millions)
Revenues	$	260.2	$	537.6	$	1,162.9	$	0.2	$	(13.7)	$	1,947.2	$	203.8	$	1,130.4	$	—	$	1,334.2

Income (loss) before income taxes	$	38.6	$	43.8	$	385.5	$	(114.8)	$	—	$	353.1	$	23.0	$	266.9	$	(82.5)	$	207.4
Interest expense, net		1.7		0.1		99.4		67.7		—		168.9		1.1		106.0		42.4		149.5
Operating income (loss)		40.3		43.9		484.9		(47.1)		—		522.0		24.1		372.9		(40.1)		356.9
Depreciation and amortization		21.0		73.6		26.0		1.9		—		122.5		20.1		24.3		2.0		46.4
Stock compensation expense		2.1		7.7		2.9		5.2		—		17.9		3.0		3.7		4.6		11.3
Restructuring charges														7.9		—		—		7.9
Adjusted EBITDA (1)		63.4		125.2		513.8		(40.0)		—		662.4		55.1		400.9		(33.5)		422.5
Less: Securitization funding costs		—		—		56.1		—		—		56.1		—		57.3		—		57.3
Less: Interest expense on deposits		—		—		43.4		—		—		43.4		—		48.7		—		48.7
Adjusted EBITDA, net (1)	$	63.4	$	125.2	$	414.3	$	(40.0)	$	—	$	562.9	$	55.1	$	294.9	$	(33.5)	$	316.5

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
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/

Nine Months Ended September 30, 2018

LoyaltyOne

Epsilon

Card Services

Other

Eliminations

Total

(In millions)
Revenues

$
735.1

$
1,561.2

$
3,466.5

$
0.5

$
(28.0)

$
5,735.3

Income (loss) before income taxes

$
110.0

$
76.3

$
982.1

$
(342.1)

$
—

$
826.3
Interest expense, net

4.2

0.2

279.0

210.4

—

493.8
Operating income (loss)

114.2

76.5

1,261.1

(131.7)

—

1,320.1
Depreciation and amortization

64.5

220.0

76.0

5.7

—

366.2
Stock compensation expense

8.1

27.2

10.5

18.4

—

64.2
Adjusted EBITDA (1)

186.8

323.7

1,347.6

(107.6)

—

1,750.5
Less: Securitization funding costs

—

—

163.4

—

—

163.4
Less: Interest expense on deposits

—

—

115.6

—

—

115.6
Adjusted EBITDA, net (1)

$
186.8

$
323.7

$
1,068.6

$
(107.6)

$
—

$
1,471.5


							Corporate/										Corporate/
Nine Months Ended September 30, 2017	LoyaltyOne		Epsilon		Card Services		Other		Eliminations		Total
Three Months Ended March 31, 2018													LoyaltyOne		Card Services		Other		Total
	(In millions)												(in millions)
Revenues	$	918.3	$	1,631.8	$	3,083.6	$	—	$	(20.5)	$	5,613.2	$	226.3	$	1,155.2	$	0.2	$	1,381.7

Income (loss) before income taxes	$	105.6	$	56.9	$	949.3	$	(337.0)	$	—	$	774.8	$	27.1	$	289.4	$	(76.0)	$	240.5
Interest expense, net		3.8		0.2		197.8		206.2		—		408.0		1.2		87.6		43.0		131.8
Operating income (loss)		109.4		57.1		1,147.1		(130.8)		—		1,182.8		28.3		377.0		(33.0)		372.3
Depreciation and amortization		60.1		233.7		74.8		5.9		—		374.5		22.0		24.8		1.9		48.7
Stock compensation expense		6.9		26.0		9.4		21.2		—		63.5		3.6		4.4		5.6		13.6
Adjusted EBITDA (1)		176.4		316.8		1,231.3		(103.7)		—		1,620.8		53.9		406.2		(25.5)		434.6
Less: Securitization funding costs		—		—		109.9		—		—		109.9		—		52.1		—		52.1
Less: Interest expense on deposits		—		—		87.9		—		—		87.9		—		35.5		—		35.5
Adjusted EBITDA, net (1)	$	176.4	$	316.8	$	1,033.5	$	(103.7)	$	—	$	1,423.0	$	53.9	$	318.6	$	(25.5)	$	347.0

⁽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, 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~~In 2019, adjusted EBITDA ~~less securitization funding~~excluded costs ~~and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance~~associated with ~~ASC 280 as they are~~ the ~~primary performance metrics utilized to assess performance~~wind-down of ~~the segments.~~Merison, a retail marketing division within BrandLoyalty.

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.

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

19. SUPPLEMENTAL CASH FLOW INFORMATION

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. The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated statements of cash flows:


	March 31,		March 31,
	2019		2018
	(in millions)
Cash and cash equivalents	$	3,725.1	$	3,549.5
Restricted cash included within other current assets (1)		47.6		528.1
Restricted cash included within redemption settlement assets, restricted (2)		43.3		64.4
Total cash, cash equivalents and restricted cash	$	3,816.0	$	4,142.0

⁽¹⁾

Includes cash restricted for interest repayments of non-recourse borrowings of consolidated securitized debt and other restricted cash within other current assets. At March 31, 2018, restricted cash included $489.2 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt that matured in April 2018.

⁽²⁾

See Note 9, “Redemption Settlement Assets,” for additional information regarding the nature of restrictions on redemption settlement assets.

3835

Index

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. 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:

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

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

~~failure to identify or successfully integrate or disaggregate business acquisitions or divestitures;~~

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

~~inability to access the asset-backed securitization funding market;~~

~~loss of active AIR MILES Reward Program collectors;~~

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

~~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, 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~~

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

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

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

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

inability to access the asset-backed securitization funding market;

loss of active AIR MILES Reward Program collectors;

disruptions in the airline or travel industries;

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, 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 pending transaction involving Epsilon and whether such transaction will be completed in a timely manner or at all, the possibility that closing conditions may not be satisfied or waived, the impact of our continuing strategic evaluations and any potential transaction on us or our business, and whether the benefits of such transaction and further relationships can be achieved.

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.

3936

Index

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, ~~2017,~~2018, filed with the Securities and Exchange Commission, or SEC, on February ~~27, 2018.~~26, 2019.

~~2018 Highlights and~~2019 Recent Developments

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, as compared to the ~~nine~~three months ended ~~Semptember 30, 2017:~~March 31, 2018:

Revenue ~~increased 2%~~decreased 3% to $5.7 billion, and when adjusted for the presentation of certain redemption revenue of $214.0 million where we do not control the goods or services before they are transferred to the customer on a net basis, effective January 1, 2018 with the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue increased 6% to $5.9$1.3 billion.

Net income ~~increased 31%~~decreased 9% to ~~$678.2~~$149.1 million.

Earnings per share ~~increased 33%~~decreased 5% to ~~$12.25.~~$2.80.

Adjusted EBITDA, net ~~increased 3%~~decreased 9% to ~~$1,471.5~~$316.5 million.

We repurchased approximately ~~0.9~~1.3 million shares of our common stock for ~~$201.7~~$222.8 million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019.

We paid dividends of ~~$94.5~~$33.9 million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019.

~~In June 2018, we sold one credit card portfolio for cash consideration~~We incurred $7.9 million in restructuring charges associated with the wind-down of ~~approximately $55.4 million.~~Merison, a retail marketing division within BrandLoyalty. These costs are not expected to continue into the second quarter.

In November 2018, we announced the exploration of strategic alternatives for Epsilon, including a potential sale of the business. In the ~~exercise~~first quarter of ~~its~~2019, Epsilon met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations,” and has been presented as a discontinued operation for all periods presented.

Effective April 12, 2019, we entered into a definitive agreement to sell our Epsilon business ~~judgment, our board of directors has undertaken a strategic evaluation of our current portfolio of businesses as we believe our current stock price does not reflect~~to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Net cash proceeds, after tax obligations and fees associated with the intrinsic value of the entire enterprise. Therefore, we are further evaluating which assets may thrive under a different steward while also unlocking value for our stockholders. This could involve significant realignment of our businesses and we are actively evaluating that optimal strategy. The results of this evaluation and our determination of that strategytransaction, are expected to be ~~complete before year end. We will communicate those results when appropriate.~~used for the repayment of corporate debt and to repurchase shares of our common stock. The transaction is expected to close in the third quarter of 2019, subject to satisfaction of customary closing conditions and receipt of regulatory approvals.

Three Months Ended September 30,

Nine Months Ended September 30,


2018

2017

% Change

2018

2017

% Change

(in millions, except percentages)

Revenues

Services

$
586.0

$
650.3

(10)
%
$
1,790.7

$
1,888.3

(5)
%
Redemption, net

163.6

210.0

(22)

443.0

645.4

(31)

Finance charges, net

1,197.6

1,052.1

14

3,501.6

3,079.5

14

Total revenue

1,947.2

1,912.4

2

5,735.3

5,613.2

2

Operating expenses

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

1,060.6

1,066.5

(1)

3,076.2

3,123.1

(2)

Provision for loan loss

196.8

204.7

(4)

846.3

807.9

5

General and administrative

45.3

38.0

19

126.5

124.9

1

Depreciation and other amortization

49.7

46.7

6

145.9

136.6

7

Amortization of purchased intangibles

72.8

77.6

(6)

220.3

237.9

(7)

Total operating expenses

1,425.2

1,433.5

(1)

4,415.2

4,430.4

-

Operating income

522.0

478.9

9

1,320.1

1,182.8

12

Interest expense

Securitization funding costs

56.1

38.2

47

163.4

109.9

49

Interest expense on deposits

43.4

33.2

30

115.6

87.9

32

Interest expense on long-term and other debt, net

69.4

73.9

(6)

214.8

210.2

2

Total interest expense, net

168.9

145.3

16

493.8

408.0

21

Income before income tax

353.1

333.6

6

826.3

774.8

7

Provision for income taxes

56.6

100.4

(44)

148.1

257.4

(42)

Net income

$
296.5

$
233.2

27
%
$
678.2

$
517.4

31
%

Key Operating Metrics:

Credit card statements generated

73.2

74.2

(1)
%

225.5

217.8

4
%
Credit sales

$
7,375.5

$
7,352.4

-
%
$
21,749.0

$
21,447.0

1
%
Average credit card and loan receivables

$
17,580.2

$
15,949.8

10
%
$
17,624.3

$
15,791.7

12
%
AIR MILES reward miles issued

1,361.1

1,325.6

3
%

4,032.1

3,984.1

1
%
AIR MILES reward miles redeemed

1,076.0

1,062.7

1
%

3,322.2

3,365.5

(1)
%

4037

Index

Consolidated Results of Operations


	Three Months Ended March 31,
	2019		2018		% Change
	(in millions, except percentages)
Revenues
Services	$	73.3	$	92.6	(21)	%
Redemption, net		111.9		131.9	(15)
Finance charges, net		1,149.0		1,157.2	(1)
Total revenue		1,334.2		1,381.7	(3)
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		640.5		591.7	8
Provision for loan loss		252.1		337.7	(25)
General and administrative		38.3		31.3	22
Depreciation and other amortization		20.6		19.3	7
Amortization of purchased intangibles		25.8		29.4	(12)
Total operating expenses		977.3		1,009.4	(3)
Operating income		356.9		372.3	(4)
Interest expense
Securitization funding costs		57.3		52.1	10
Interest expense on deposits		48.7		35.5	37
Interest expense on long-term and other debt, net		43.5		44.2	(2)
Total interest expense, net		149.5		131.8	13
Income from continuing operations before income taxes		207.4		240.5	(14)
Provision for income taxes		33.1		64.0	(48)
Income from continuing operations		174.3		176.5	(1)
Loss from discontinued operations, net of taxes		(25.2)		(12.6)	101
Net income	$	149.1	$	163.9	(9)	%

Key Operating Metrics:
Credit card statements generated		72.7		77.8	(7)	%
Credit sales	$	6,315.4	$	6,805.6	(7)	%
Average credit card and loan receivables	$	16,850.2	$	17,722.4	(5)	%
AIR MILES reward miles issued		1,258.1		1,226.2	3	%
AIR MILES reward miles redeemed		1,088.5		1,178.2	(8)	%

Three months ended ~~September 30, 2018~~March 31, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018

Revenue. Total revenue ~~increased $34.8~~decreased $47.5 million, or 2%3%, to ~~$1,947.2~~$1,334.2 million for the three months ended ~~September 30, 2018~~March 31, 2019 from ~~$1,912.4~~$1,381.7 million for the three months ended ~~September 30, 2017~~March 31, 2018. The ~~net increase~~decrease was due to the following:

Services. Revenue decreased ~~$64.3~~$19.3 million, or ~~10%~~21%, to ~~$586.0~~$73.3 million for the three months ended ~~September 30, 2018~~March 31, 2019 as a result of a $29.8 million decrease in marketing services revenue primarily due to declines in lower margin pass-through agency and site-based display product offerings, a $19.7 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products, and a $17.5$19.0 million decrease in merchant ~~fees, which are transaction fees charged~~fee revenue due to ~~the retailer, as a result of~~ increased royalty payments to our retailers associated with new clients.

Redemption, net. Revenue decreased ~~$46.4~~$20.0 million, or ~~22%~~15%, to ~~$163.6~~$111.9 million for the three months ended ~~September 30, 2018. Upon adoption~~March 31, 2019. Redemption revenue was negatively impacted by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $9.0 million decrease in revenue. Redemption revenue was also negatively impacted $8.8 million by the outsourcing of ~~ASC 606, certain redemption revenue for which~~additional rewards inventory during the three months ended March 31, 2019. As we dodid not control ~~the good or service~~these goods prior to ~~transferring it~~transfer to the collector, the revenue is recorded on a net ~~basis, which reduced both~~basis. Additionally, redemption revenue ~~and cost of operations by $69.1 million for the three months ended September 30, 2018. This decrease~~ was ~~partially offset~~negatively impacted by an ~~increase of $27.6 million~~8% decrease in ~~redemption revenue from our~~ ~~short-term loyalty programs due to an increase in the number of active programs in market.~~AIR MILES reward miles redeemed.

Finance charges, net. Revenue ~~increased $145.5~~decreased $8.2 million, or ~~14%~~1%, to ~~$1,197.6~~$1,149.0 million for the three months ended ~~September 30, 2018,~~March 31, 2019. This decrease was primarily driven by ~~a 10% increase~~an approximate 40 basis point decrease in ~~average credit card and loan receivables due to recent credit card portfolio acquisitions and new client signings, which impacted revenue by $130.4 million, and a higher~~ finance charge yield ~~which impacted revenue by $15.1 million.~~due to a decline in late fees.

Cost of operations. Cost of operations ~~decreased $5.9~~increased $48.8 million, or 1%8%, to ~~$1,060.6~~$640.5 million for the three months ended ~~September 30, 2018~~March 31, 2019 as compared to ~~$1,066.5~~$591.7 million for the three months ended ~~September 30, 2017~~March 31, 2018. The net ~~decrease~~increase was due to the following:

Within the LoyaltyOne segment, cost of operations decreased ~~$47.5~~$16.5 million, ~~due~~impacted by the decline in both the Euro and Canadian dollar relative to ~~a $46.5~~the U.S. dollar, which resulted in an $11.6 million decrease in cost of ~~redemptions. This decrease in~~

Index

operations. Additionally, cost of ~~redemptions was driven by a $69.1~~operations decreased $8.8 million ~~decrease related~~due to ~~the adoption of ASC 606 as~~additional product outsourcing discussed ~~above,~~above. These decreases were offset in part by approximately $7.9 million of restructuring costs incurred with the ~~increase in cost~~wind-down of ~~redemptions related~~Merison during the three months ended March 31, 2019, as BrandLoyalty implemented certain initiatives to ~~our short-term loyalty programs due to the increase in revenue.~~

~~Within the Epsilon segment, cost of operations decreased $22.1 million, or 5%, due to a decrease in direct costs associated with a 4% decline in revenue.~~lower its fixed operating costs.

Within the Card Services segment, cost of operations increased ~~$70.3~~$65.3 million due to ~~an 18%~~a $38.2 million increase in ~~payroll and benefit expenses~~valuation adjustments to ~~support operational initiatives and in-house collections,~~certain portfolios within credit card receivables held for sale, as well as a 5%$22.4 million increase in ~~marketing expenses to drive credit sales and additional professional fees to support operational initiatives. Further, other operating expenses increased due to higher~~ credit card processing ~~costs attributable to increases in volume associated with growth in credit card and loan receivables.~~costs.

Provision for loan loss. Provision for loan loss decreased ~~$7.9~~$85.6 million, or 4%25%, to ~~$196.8~~$252.1 million for the three months ended ~~September 30, 2018~~March 31, 2019 as compared to ~~$204.7~~$337.7 million for the three months ended ~~September 30, 2017,~~March 31, 2018, due primarily to a decrease in net charge-offs as well as a decrease in the change in credit card and loan receivables in ~~each respective period, offset in part by an increase in net charge-offs.~~the current quarter as compared to the prior year quarter.

General and administrative. General and administrative expenses increased ~~$7.3~~$7.0 million, or ~~19%~~22%, to ~~$45.3~~$38.3 million for the three months ended ~~September 30, 2018~~March 31, 2019 as compared to ~~$38.0~~$31.3 million for the three months ended ~~September 30, 2017,~~March 31, 2018, primarily due to ~~an increase in general corporate expenses and~~ higher ~~payroll and benefit~~medical costs.

Depreciation and other amortization. Depreciation and other amortization increased ~~$3.0~~$1.3 million, or 6%7%, to ~~$49.7~~$20.6 million for the three months ended ~~September 30, 2018~~March 31, 2019 as compared to ~~$46.7~~$19.3 million for the three months ended ~~September 30, 2017,~~March 31, 2018, due to additional assets placed into service from recent capital expenditures.

Amortization of purchased intangibles. Amortization of purchased intangibles decreased ~~$4.8~~$3.6 million, or 6%12%, to ~~$72.8~~$25.8 million for the three months ended ~~September 30, 2018,~~March 31, 2019, as compared to ~~$77.6~~$29.4 million for the three months ended ~~September 30, 2017,~~March 31, 2018, primarily due to certain fully amortized intangible assets, including portfolio premiums and customer ~~databases.~~contracts.

~~Index~~

Interest expense, net. Total interest expense, net increased ~~$23.6~~$17.7 million, or ~~16%~~13%, to ~~$168.9~~$149.5 million for the three months ended ~~September 30, 2018~~March 31, 2019 as compared to ~~$145.3~~$131.8 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The net increase was due to the following:

Securitization funding costs. Securitization funding costs increased ~~$17.9~~$5.2 million due to ~~higher average borrowings, which increased funding costs by approximately $9.0 million, and~~ higher average interest rates, which increased funding costs by approximately ~~$8.9~~$10.9 million, offset in part by lower average borrowings, which decreased funding costs by approximately $5.7 million.

Interest expense on deposits. Interest expense on deposits increased ~~$10.2~~$13.2 million due to higher average interest rates, which increased interest expense by approximately ~~$5.3~~$11.5 million, and higher average borrowings, which increased interest expense by approximately ~~$4.9~~$1.7 million.

Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased ~~$4.5~~$0.7 million primarily due to ~~a $13.3~~an $8.0 million decrease in interest expense on senior notes primarily due to the repayment of senior notes in ~~December 2017~~April 2018 and ~~April 2018.~~a $0.6 million decrease in amortization of debt issuance costs. These decreases were offset in part by a ~~$5.7~~$4.2 million increase in interest expense on the revolving line of credit and a ~~$4.7~~$4.1 million increase in interest expense on term debt due to both higher average borrowings and higher average interest rates due to increases in the LIBOR rate.

Taxes. Income tax expense related to continuing operations decreased ~~$43.8~~$30.9 million to ~~$56.6~~$33.1 million for the three months ended ~~September 30, 2018~~March 31, 2019 from ~~$100.4~~$64.0 million for the three months ended ~~September 30, 2017, due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. This rate reduction led~~March 31, 2018, primarily related to a decrease in tax ~~benefit associated with accelerated deductions relating to software development costs and bad debts as well as the deferral of income relating to certain state~~reserves resulting from a change in accounting method for tax ~~refunds.~~purposes. The effective tax rate for the current quarter was 16.0% as compared to ~~30.1%~~26.6% for the prior year quarter.

~~Nine months ended September 30, 2018 compared~~Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes increased $12.6 million to ~~the nine months ended September 30, 2017~~

~~Revenue~~. ~~Total revenue increased $122.1 million, or 2%, to $5,735.3~~$25.2 million for the ~~nine~~three months ended ~~September 30, 2018~~ ~~from $5,613.2~~March 31, 2019 as compared to $12.6 million for the ~~nine~~three months ended ~~September 30, 2017~~.March 31, 2018. Loss from discontinued operations, net of taxes represents Epsilon net income (loss) as well as certain direct costs identifiable to the Epsilon segment and allocations of interest expense on corporate debt. The ~~net~~$12.6 million increase was primarily due to ~~the following:~~

~~Services. Revenue decreased $97.6 million, or 5%, to $1,790.7 million for the~~ nine months ended September 30, 2018 as a result of a $77.1 million decrease in marketing services revenue due to declines in lower margin pass‑through agency and site-based display product offerings, an $18.8 million decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients, and a $15.9 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products.

~~Redemption, net. Revenue decreased $202.4 million, or 31%, to $443.0 million for the~~ nine months ended September 30, 2018. Upon adoption of ASC 606, certain redemption revenue for which we do not control the good or service prior to transferring it to the collector is recorded on a net basis, which reduced both redemption revenue and cost of operations by $214.0 million for the nine months ended September 30, 2018. This decrease was partially offset by an increase of $16.4$5.0 million in ~~redemption revenue from our~~ ~~short-term loyalty programs due to an increase~~strategic transaction costs incurred during the current year quarter in connection with the ~~number of active programs~~Epsilon transaction as well as increases in ~~market.~~Epsilon’s operating costs.

~~Finance charges, net~~. ~~Revenue increased $422.1 million, or 14%, to $3,501.6 million for the~~ nine months ended September 30, 2018, driven by a 12% increase in average credit card and loan receivables, which impacted revenue by $447.3 million through a combination of recent credit card portfolio acquisitions and new client signings, offset in part by a decline in yield, which negatively impacted revenue by $25.2 million.

~~Cost of operations~~. ~~Cost of operations decreased $46.9 million, or 2%, to $3,076.2 million for the~~ ~~nine months ended September 30, 2018~~ ~~as compared to $3,123.1 million for the~~ ~~nine months ended September 30, 2017. The net decrease was due to the following:~~

Within the LoyaltyOne segment, cost of operations decreased $192.5 million due to a $194.2 million decrease in cost of redemptions. This decrease in cost of redemptions was driven by a $214.0 million decrease related to the adoption of ASC 606 as discussed above, offset in part by the increase in cost of redemptions related to our short-term loyalty programs due to the increase in revenue.

4239

Index

~~Within the Epsilon segment, cost of operations decreased $76.2 million, or 6%, due to a decrease in direct costs associated with a 4% decline in revenue.~~

Within the Card Services segment, cost of operations increased $229.2 million due to a 17% increase in payroll and benefit expenses to support in-house collections and operational initiatives, an 11% increase in marketing expenses to drive credit sales and additional professional fees to support operational initiatives. Further, other operating expenses increased due to higher credit card processing costs attributable to increases in volume associated with growth in credit card and loan receivables and valuation adjustments to certain portfolios within credit card and loan receivables held for sale.

~~Provision for loan loss~~. Provision for loan loss increased $38.4 million, or 5%, to $846.3 million for the nine months ended September 30, 2018 as compared to $807.9 million for the nine months ended September 30, 2017. The increase in the provision for loan loss was driven by an increase in net charge-offs in each respective period.

~~General and administrative~~. General and administrative expenses increased $1.6 million, or 1%, to $126.5 million for the nine months ended September 30, 2018 as compared to $124.9 million for the nine months ended September 30, 2017, due to an increase in general corporate expenses that were offset in part by a $7.7 million decrease in net foreign currency exchange losses realized and lower payroll and benefit costs.

~~Depreciation and other amortization~~. Depreciation and other amortization increased $9.3 million, or 7%, to $145.9 million for the nine months ended September 30, 2018 as compared to $136.6 million for the nine months ended September 30, 2017, due to additional assets placed into service from recent capital expenditures.

~~Amortization of purchased intangibles~~. Amortization of purchased intangibles decreased $17.6 million, or 7%, to $220.3 million for the nine months ended September 30, 2018, as compared to $237.9 million for the nine months ended September 30, 2017, primarily due to certain fully amortized intangible assets, including customer databases and portfolio premiums.

~~Interest expense, net~~. Total interest expense, net increased $85.8 million, or 21%, to $493.8 million for the nine months ended September 30, 2018 as compared to $408.0 million for the nine months ended September 30, 2017. The increase was due to the following:

~~Securitization funding costs~~. Securitization funding costs increased $53.5 million due to higher average borrowings, which increased funding costs by approximately $27.3 million, and higher average interest rates, which increased funding costs by approximately $26.2 million.

~~Interest expense on deposits~~. Interest expense on deposits increased $27.7 million due to higher average borrowings, which increased interest expense by approximately $18.9 million, and higher average interest rates, which increased interest expense by approximately $8.8 million.

~~Interest expense on long-term and other debt, net~~. Interest expense on long-term and other debt, net increased $4.6 million primarily due to a $21.3 million increase in interest expense on term debt and a $9.1 million increase in interest expense on the revolving line of credit due to higher average borrowings and higher average interest rates due to increases in the LIBOR rate. These increases were offset in part by a $25.7 million decrease in interest expense on senior notes primarily due to the repayment of senior notes in December 2017 and April 2018.

~~Taxes.~~ Income tax expense decreased $109.3 million to $148.1 million for the nine months ended September 30, 2018 from $257.4 million for the nine months ended September 30, 2017, due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. This rate reduction led to a tax benefit associated with accelerated deductions relating to software development costs and bad debts as well as the deferral of income relating to certain state tax refunds. Additionally, income tax expense in the current year period was positively impacted by a tax benefit associated with foreign restructuring in the current year. These benefits were offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc. The effective tax rate for the nine months ended September 30, 2018 was 17.9% as compared to 33.2% for the nine months ended September 30, 2017.

~~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, provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. In the first quarter of 2019, adjusted EBITDA also excluded the restructuring charges associated with the wind-down of Merison, a retail marketing division within BrandLoyalty.

Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on 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 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 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 September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
	(In millions)								(in millions)
Net income	$	296.5	$	233.2	$	678.2	$	517.4
Income from continuing operations									$	174.3	$	176.5
Stock compensation expense		17.9		18.3		64.2		63.5		11.3		13.6
Provision for income taxes		56.6		100.4		148.1		257.4		33.1		64.0
Interest expense, net		168.9		145.3		493.8		408.0		149.5		131.8
Depreciation and other amortization		49.7		46.7		145.9		136.6		20.6		19.3
Amortization of purchased intangibles		72.8		77.6		220.3		237.9		25.8		29.4
Restructuring charges (1)										7.9		—
Adjusted EBITDA		662.4		621.5		1,750.5		1,620.8		422.5		434.6
Less: Securitization funding costs		56.1		38.2		163.4		109.9		57.3		52.1
Less: Interest expense on deposits		43.4		33.2		115.6		87.9		48.7		35.5
Adjusted EBITDA, net	$	562.9	$	550.1	$	1,471.5	$	1,423.0	$	316.5	$	347.0

⁽¹⁾

Represents costs associated with the wind-down of Merison, a retail marketing division within BrandLoyalty.

4440

Index

Segment Revenue and Adjusted EBITDA, net


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018		2017		% Change		2018		2017		% Change		2019		2018		% Change
	(in millions, except percentages)												(in millions, except percentages)
Revenue:
LoyaltyOne	$	260.2	$	305.2	(15)	%	$	735.1	$	918.3	(20)	%	$	203.8	$	226.3	(10)	%
Epsilon		537.6		558.7	(4)			1,561.2		1,631.8	(4)
Card Services		1,162.9		1,055.4	10			3,466.5		3,083.6	12			1,130.4		1,155.2	(2)
Corporate/Other		0.2		—	nm*			0.5		—	nm*			—		0.2	nm	*
Eliminations		(13.7)		(6.9)	nm*			(28.0)		(20.5)	nm*
Total	$	1,947.2	$	1,912.4	2	%	$	5,735.3	$	5,613.2	2	%	$	1,334.2	$	1,381.7	(3)	%
Adjusted EBITDA, net:
LoyaltyOne	$	63.4	$	61.0	4	%	$	186.8	$	176.4	6	%	$	55.1	$	53.9	2	%
Epsilon		125.2		125.0	—			323.7		316.8	2
Card Services		414.3		397.3	4			1,068.6		1,033.5	3			294.9		318.6	(7)
Corporate/Other		(40.0)		(33.2)	20			(107.6)		(103.7)	4			(33.5)		(25.5)	(30)
Total	$	562.9	$	550.1	2	%	$	1,471.5	$	1,423.0	3	%	$	316.5	$	347.0	(9)	%

*not meaningful

Three months ended ~~September 30, 2018~~March 31, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018

LoyaltyOne. Revenue decreased ~~$45.0~~$22.5 million, or ~~15%~~10%, to ~~$260.2~~$203.8 million for the three months ended ~~September 30, 2018~~March 31, 2019, ~~primarily due~~impacted by the decline in both the Euro and the Canadian dollar relative to the ~~adoption of ASC 606,~~U.S. dollar, which ~~negatively impacted~~resulted in a $13.9 million decrease in revenue, ~~by $69.1 million. This decrease was offset~~as well as the 8% decline in ~~part by a $27.6 million increase in redemption~~AIR MILES reward miles redeemed. In local currency, revenue from our short-term loyalty programs increased 3% due to an increase in the number of active programs in market.

~~Epsilon. Revenue decreased $21.1 million, or 4%, to $537.6 million for the three months ended September 30, 2018,~~ ~~driven by declines in lower margin agency and site-based display product offerings as compared to the prior year period.~~

Card Services. Revenue ~~increased $107.5~~decreased $24.8 million, or ~~10%~~2%, to ~~$1,162.9~~$1,130.4 million for the three months ended ~~September 30, 2018,~~March 31, 2019, driven by a ~~$145.5~~$19.0 million ~~increase~~decrease in merchant fees as a result of increased payments associated with new clients, and an $8.2 million decrease in finance charges, net as a result of ~~a 10% increase in average credit card and loan receivables. This increase was offset in part by a $19.7 million~~an approximate 40 basis point decrease in ~~other servicing fees charged~~finance charge yield due to ~~cardholders due~~a decline in part to decreased purchases of certain payment protection products and a $17.5 million decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients.late fees.

Adjusted EBITDA, net. Adjusted EBITDA, net ~~increased $12.8~~decreased $30.5 million, or 2%9%, to ~~$562.9~~$316.5 million for the three months ended ~~September 30, 2018~~March 31, 2019 from ~~$550.1~~$347.0 million for the three months ended ~~September 30, 2017~~March 31, 2018. The net ~~increase~~decrease was due to the following:

LoyaltyOne. Adjusted EBITDA, net increased ~~$2.4~~$1.2 million, or 4%2%, to ~~$63.4~~$55.1 million for the three months ended ~~September 30, 2018 primarily due to the $27.6 million increase~~ ~~in redemption revenue~~March 31, 2019, resulting from ~~our short-term loyalty programs~~ ~~discussed above.~~

~~Epsilon~~. ~~Adjusted EBITDA, net was $125.2 million for the~~ ~~three months ended September 30, 2018 as compared to $125.0 million in the prior year quarter due to~~ a favorable revenue mix ~~toward higher margin product offerings, offset by~~and lower operating costs. BrandLoyalty restructuring costs of $7.9 million during the ~~decrease in revenue.~~three months ended March 31, 2019 were excluded from adjusted EBITDA, net.

Card Services. Adjusted EBITDA, net ~~increased $17.0~~decreased $23.7 million, or 4%7%, to ~~$414.3~~$294.9 million for the three months ended ~~September 30, 2018~~March 31, 2019. Adjusted EBITDA, net was ~~positively~~negatively impacted by an increase in funding costs, a decrease in finance charges, net ~~but was tempered by lower gross yields,~~and a ~~function of client mix and higher funding costs~~.

~~Index~~

~~Corporate/Other~~. ~~Adjusted EBITDA, net decreased $6.8 million to a loss of $40.0 million for the~~ ~~three months ended September 30, 2018 due to an increase in general corporate expenses and higher payroll and benefit costs.~~

~~Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017~~

~~Revenue~~. ~~Total revenue increased $122.1 million, or 2%, to $5,735.3 million for the~~ ~~nine months ended September 30, 2018~~ ~~from $5,613.2 million for the~~ ~~nine months ended September 30, 2017. The net increase was due to the following:~~

~~LoyaltyOne. Revenue decreased $183.2 million, or 20%, to $735.1 million for the nine months ended September 30, 2018~~ ~~primarily due to the adoption of ASC 606, which negatively impacted revenue by $214.0 million. This decrease was offset in part by an increase of $35.2 million in revenue from our~~ ~~short-term loyalty programs primarily due to an increase in the number of active programs in market.~~

~~Epsilon. Revenue decreased $70.6 million, or 4%, to $1,561.2 million for the nine months ended September 30, 2018 primarily due to~~ ~~declines in lower margin agency and site-based display product offerings as compared to the prior year period.~~

~~Card Services~~. ~~Revenue increased $382.9 million, or 12%, to $3,466.5 million for the~~ ~~nine months ended September 30, 2018, driven by a $422.1 million increase in finance charges, net as a result of a 12% increase in average credit card and loan receivables. This increase was offset in part by an $18.8 million~~ decrease in merchant fees, which are transaction fees charged to the retailer, as a result of increased payments to clients and a $15.9 million decrease in other servicing fees charged to cardholders due in part to decreased purchases of certain payment protection products.

~~Adjusted EBITDA, net. Adjusted EBITDA, net~~ ~~increased $48.5 million, or 3%, to $1,471.5 million for the~~ ~~nine months ended September 30, 2018~~ ~~from $1,423.0 million for the~~ ~~nine months ended September 30, 2017. The net increase was due to the following:~~

~~LoyaltyOne~~. ~~Adjusted EBITDA, net increased $10.4 million, or 6%, to $186.8 million for the~~ ~~nine months ended September 30, 2018, driven by increases in both our coalition and short-term loyalty programs.~~

~~Epsilon~~. ~~Adjusted EBITDA, net increased $6.9 million, or 2%, to $323.7 million for the~~ nine months ended September 30, 2018 due to a favorable revenue mix toward higher margin product offerings in the current year period as compared to the prior year period, offset in part by the decrease in revenue.

~~Card Services~~. ~~Adjusted EBITDA, net increased $35.1 million, or 3%, to $1,068.6 million for the~~ ~~nine months ended September 30, 2018~~. Adjusted EBITDA, net was positively impacted by an increase in finance charges, net. This increase was primarily offset by an increase in the provision for loan loss resulting from higher net charge-offs, an increase in payroll and benefit expenses to support in-house collections and operational initiatives, valuation adjustments to certain portfolios within credit card and loan receivables held for sale, and higher funding costs.gross yields.

Corporate/Other. Adjusted EBITDA, net decreased ~~$3.9~~$8.0 million to a loss of ~~$107.6~~$33.5 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 due to ~~an increase in general corporate expenses that were offset in part by lower~~higher payroll and benefit ~~costs and a decrease in net foreign currency exchange losses realized.~~costs.

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 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

Index

delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account

~~Index~~

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:


	September 30,		% of		December 31,		% of		March 31,		% of		December 31,		% of
	2018		Total		2017		Total		2019		Total		2018		Total
	(In millions, except percentages)								(in millions, except percentages)
Receivables outstanding - principal	$	16,476.5	100.0	%	$	17,705.1	100.0	%	$	15,938.7	100.0	%	$	16,869.9	100.0	%
Principal receivables balances contractually delinquent:
31 to 60 days		306.2	1.8	%		301.5	1.7	%		244.2	1.5	%		303.2	1.8	%
61 to 90 days		210.8	1.3			191.3	1.1			185.1	1.2			207.9	1.3
91 or more days		439.4	2.7			409.6	2.3			407.4	2.5			443.4	2.6
Total	$	956.4	5.8	%	$	902.4	5.1	%	$	836.7	5.2	%	$	954.5	5.7	%

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 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						Three Months Ended
	September 30,						September 30,						March 31,
	2018			2017			2018			2017			2019			2018
	(In millions, except percentages)												(in millions, except percentages)
Average credit card and loan receivables	$	17,580.2		$	15,949.8		$	17,624.3		$	15,791.7		$	16,850.2		$	17,722.4
Net charge-offs of principal receivables		257.9			219.6			836.0			711.5			269.3			296.1
Net charge-offs as a percentage of average credit card and loan receivables		5.9	%		5.5	%		6.3	%		6.0	%		6.4	%		6.7	%

See Note 5,6, “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.

Liquidity and Capital Resources

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. In April 2019, Comenity Capital Bank launched a consumer retail deposit platform, Comenity Direct™, to the public.

Index

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, 2018, Comenity Bank’s Common Equity Tier 1 capital ratio was 14.1%, Tier 1 capital ratio was 14.1%, total capital ratio was 15.4% and leverage ratio was 12.2%. As of September 30, 2018, Comenity Capital Bank’s Common Equity Tier 1 capital ratio was 15.3%, Tier 1 capital ratio was 15.3%, total capital ratio was 16.6% and leverage ratio was 13.6%. Comenity Bank and Comenity Capital Bank are considered well capitalized.

The actual capital ratios and minimum ratios as of March 31, 2019 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	13.2	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	16.3		4.5		6.5
Tier 1 capital to risk-weighted assets	16.3		6.0		8.0
Total capital to risk-weighted assets	17.6		8.0		10.0

Comenity Capital Bank
Tier 1 capital to average assets	13.4	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	15.6		4.5		6.5
Tier 1 capital to risk-weighted assets	15.6		6.0		8.0
Total capital to risk-weighted assets	16.9		8.0		10.0

~~Index~~

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.

Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Net cash proceeds are expected to be used for the repayment of corporate debt and to repurchase shares of our common stock. The transaction is expected to close in the third quarter of 2019, subject to satisfaction of customary closing conditions and receipt of regulatory approvals.

Cash Flow Activity

Operating Activities. We generated cash flow from operating activities of ~~$2,025.4~~$610.8 million and ~~$1,758.8~~$649.9 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The year-over-year ~~increase~~decrease in operating cash flows of ~~$266.6~~$39.1 million was primarily due to a decrease in profitability, offset in part by an increase in ~~profitability and a net increase in~~ cash ~~flows associated with credit card portfolios that were originated or purchased with the intent to sell.~~provided by working capital.

Investing Activities. Cash ~~used in~~provided by investing activities was ~~$860.7~~$717.5 million and ~~$1,611.1~~$392.9 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. Significant components of investing activities are as follows:

~~Redemption settlement assets.~~ Cash decreased $37.4 million for the nine months ended September 30, 2018 due to additional investments in corporate bonds within the redemption settlement assets. Cash decreased $213.6 million for the nine months ended September 30, 2017 as we increased funding to the redemption settlement assets as a result of the breakage rate change in December 2016.

Credit card and loan receivables. Cash ~~decreased $708.1~~increased $758.2 million and ~~$1,174.7~~$470.5 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, due to ~~growth in~~seasonal paydown of credit card and loan ~~receivables in each respective period.~~

~~Proceeds from sale of credit card portfolio.~~ ~~During the nine months ended September 30, 2018, we received cash consideration of $55.4 million from the sale of one credit card portfolio.~~receivables.

Capital expenditures. Cash paid for capital expenditures was ~~$149.3~~$38.7 million and ~~$176.6~~$44.7 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

Index

Financing Activities. Cash used in financing activities was ~~$1,506.0~~$1,483.0 million and $1,213.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019, and 2018, ~~and cash provided by financing activities was $1,723.1 million for the nine months ended September 30, 2017.~~respectively. Significant components of financing activities are as follows:

Debt. Cash ~~decreased $258.7~~increased $174.2 million in net ~~repayments~~borrowings for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, primarily due to the ~~early repayment of $500.0 million 6.375% senior notes due 2020.~~ ~~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 decreased $21.5 million for the three months ended March 31, 2018, primarily due to net repayments under the revolving line of credit.

Non-recourse borrowings of consolidated securitization entities. Cash decreased ~~$1,337.7~~$875.3 million and ~~$90.0~~$685.0 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities. ~~Net repayments under the conduit facilities were $1,100.0 million in the current year period as compared to $265.0 million in the prior year period.~~

Deposits. Cash ~~increased $421.3~~decreased $502.6 million and ~~$1,987.7~~$448.4 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, as a result of net repayments of deposits due to ~~new issuances, offset in part by~~ timing of maturities.

Dividends. Cash paid for quarterly dividends and dividend equivalents was ~~$94.5~~$33.9 million and ~~$86.8~~$31.7 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

Treasury shares. Cash paid for treasury shares was ~~$197.0 million and $553.7~~$222.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019. During the three months ended March 31, 2018, ~~and 2017, respectively.~~we did not repurchase any shares of our common stock.

~~Index~~

Debt

Long-term and Other Debt

On April 2, 2018, we redeemed our $500.0 million outstanding 6.375% senior notes due April 1, 2020 at par plus accrued interest. We funded the redemption with borrowings under our revolving line of credit.

As of ~~September 30, 2018,~~March 31, 2019, we had ~~$772.0~~$945.0 million outstanding under our revolving line of credit and total availability of ~~$800.4~~$627.4 million. Our total leverage ratio, as defined in our credit agreement, was 2.4 to 1 at ~~September 30, 2018,~~March 31, 2019, as compared to the maximum covenant ratio of 3.5 to 1.

The BrandLoyalty credit agreement, as amended in June 2016, provided for a reduction in commitment on each of the uncommitted and committed revolving lines of credit of €25.0 million in August 2018, reducing the total capacity from €125.0 million to €75.0 million. As of ~~September 30, 2018, we had €40.8 million ($47.3 million) outstanding under the revolving lines of credit in the BrandLoyalty credit agreement.~~

~~As of September 30, 2018,~~March 31, 2019, we were in compliance with our debt covenants.

On April 30, 2019, we amended our credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement will be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility will be required, the aggregate revolving credit commitments will be reduced in the same amount (to $1,072.4 million), all of our outstanding senior notes will be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the credit agreement and certain other minor amendments.

Deposits

We utilize money market deposits and certificates of deposit to finance the operating activities and fund securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank.

As of ~~September 30, 2018,~~March 31, 2019, we had ~~$3.4~~$3.0 billion in money market deposits outstanding with interest rates ranging from 1.90% to ~~2.60%~~3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

As of ~~September 30, 2018,~~March 31, 2019, we had ~~$8.0~~$8.3 billion in certificates of deposit outstanding with interest rates ranging from ~~1.25%~~1.28% to 4.00% and maturities ranging from ~~October 2018~~April 2019 to ~~September 2023.~~March 2024. Certificate of deposit borrowings are subject to regulatory capital requirements.

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, 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.

~~During the nine months ended September 30, 2018,~~

Index

In February 2019, Master Trust I issued ~~$929.0~~$562.5 million of Series 2019-A asset-backed term notes, which mature in February 2022. The offering consisted of $500.0 million of Class A notes with ~~February 2021~~a fixed interest rate of 3.14% per year, $37.2 million of Class M notes with a fixed interest rate of 3.61% per year and ~~September 2021 maturities,~~$25.3 million of ~~which $81.7 million~~notes that were retained by us and eliminated from the unaudited condensed consolidated balance sheets. ~~Additionally, $1.5 billion~~

In March 2019, $550.0 million of Series 2012-A asset-backed term notes, ~~matured and were repaid, of which $375.5 million were retained by us and eliminated from the consolidated balance sheets.~~

~~In October 2018, $266.7 million of Series 2012-C asset-backed term notes, $10.7~~$137.5 million of which were retained by us and eliminated from the unaudited condensed consolidated balance sheets, matured and were repaid.

As of ~~September 30, 2018,~~March 31, 2019, the WFN Trusts and the WFC Trust had approximately $12.6 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, 2018,~~March 31, 2019, we had ~~$7.5~~$6.8 billion of non-recourse borrowings of consolidated securitization entities, of which ~~$1.5~~$2.2 billion is due within the next 12 months. As of ~~September 30, 2018,~~March 31, 2019, total capacity under the conduit facilities

~~Index~~

was $4.5 billion, of which ~~$2.7~~$1.8 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

The following table shows the maturities of borrowing commitments as of ~~September 30, 2018~~March 31, 2019 for the WFN Trusts and the WFC Trust by year:



	2018		2019		2020		2021		Thereafter		Total		2019		2020		2021		2022		Thereafter		Total
	(In millions)												(in millions)
Term notes	$	256.0	$	1,574.0	$	1,467.2	$	1,529.8	$	—	$	4,827.0	$	1,161.5	$	1,467.2	$	1,852.1	$	537.2	$	—	$	5,018.0
Conduit facilities (1)		—		1,975.0		2,480.0		—		—		4,455.0		1,975.0		2,480.0		—		—		—		4,455.0
Total (2)	$	256.0	$	3,549.0	$	3,947.2	$	1,529.8	$	—	$	9,282.0	$	3,136.5	$	3,947.2	$	1,852.1	$	537.2	$	—	$	9,473.0

⁽¹⁾

Amount represents borrowing capacity, not outstanding borrowings.

⁽²⁾

Total amounts do not include ~~$1.7~~$1.3 billion of debt issued by the credit card securitization trusts that was retained by us and eliminated in the unaudited condensed consolidated financial statements.

See Note ~~10,~~12, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt.

Stock Repurchase Programs

We had an authorized stock repurchase program to acquire up to $1.0 billion of our outstanding common stock through July 31, 2018. At July 31, 2018, $280.3 million of this program expired unused. On July 26, 2018, our Board of Directors authorized a new stock repurchase program to acquire up to $500.0 million of our outstanding common stock from August 1, 2018 through July 31, 2019. At December 31, 2018 we had $222.8 million remaining under the stock repurchase program. For the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, we acquired a total of ~~0.9~~1.3 million shares of our common stock for ~~$201.7~~$222.8 million. ~~As of~~ ~~September 30, 2018~~,At March 31, 2019, we ~~had $464.3 million~~did not have any amounts remaining under ~~the new stock repurchase program.~~our authorization.

Dividends

On ~~January 25, 2018,~~February 7, 2019, our Board of Directors declared a quarterly cash dividend of ~~$0.57~~$0.63 per share on our common stock to stockholders of record at the close of business on February ~~14, 2018,~~21, 2019, resulting in a dividend payment of ~~$31.5~~$33.4 million on March ~~20, 2018.~~19, 2019. Additionally, we paid $0.5 million in cash related to dividend equivalent rights for the three months ended March 31, 2019.

On April ~~19, 2018,~~25, 2019, our Board of Directors declared a quarterly cash dividend of ~~$0.57~~$0.63 per share on our common stock ~~payable~~and $6.30 per share on ~~June 19, 2018,~~our Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on May 14, ~~2018, resulting in a dividend payment of $31.5 million~~2019 and payable on June ~~19, 2018.~~18, 2019.

On July 19, 2018, our Board of Directors declared a quarterly cash dividend of $0.57 per share on our common stock, payable on September 19, 2018, to stockholders of record at the close of business on August 14, 2018, resulting in a dividend payment of $31.2 million on September 19, 2018.Index

~~Additionally, we paid $0.3 million in cash related to dividend equivalent rights for the~~ ~~nine months ended September 30, 2018~~.

On October 18, 2018, our Board of Directors declared a quarterly cash dividend of $0.57 per share on our common stock, payable on December 19, 2018, to stockholders of record at the close of business on November 14, 2018.

Critical Accounting Policies and Estimates

With the exception of the adoption of ASC ~~606,~~842, there have been no 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, ~~2017.~~2018. 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 ~~606~~842 on January 1, ~~2018.~~

~~Index~~

2019.

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 recently issued.

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 has been no material change from our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 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, 2018,~~March 31, 2019, 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, 2018~~March 31, 2019 (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 ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

5146

Index

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.

Item 1A. Risk Factors.

~~Other than as set forth below, there~~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, ~~2017 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30,~~ 2018.

If we fail to identify suitable acquisitions, dispositions or new business opportunities, or to effectively integrate the businesses we acquire or disaggregate the businesses we divest, it could negatively affect our business.

Historically, we have engaged in a significant number of acquisitions, and those acquisitions have contributed to our growth in revenue and profitability. We believe that acquisitions and the identification and pursuit of new business opportunities will be a key component of our continued growth strategy. However, we may not be able to locate and secure future acquisition candidates or to identify and implement new business opportunities on terms and conditions that are acceptable to us. If we are unable to identify attractive acquisition candidates or successful new business opportunities, our growth could be impaired.

Similarly, we may evaluate the potential disposition of assets or businesses that no longer complement our long-term strategic objectives. When a determination is made to sell assets or businesses, we may encounter difficulty attaining buyers or effecting desired exit strategies in a timely manner or on acceptable terms and may be subject to market forces leading to a divestiture on less than optimal price or other terms.

~~In addition, there are numerous risks associated with acquisitions, dispositions and the implementation of new businesses, including, but not limited to:~~

~~the difficulty and expense that we incur in connection with the acquisition, disposition or new business opportunity;~~

~~the inability to satisfy pre-closing conditions preventing consummation of the acquisition, disposition or new business opportunity;~~

~~the potential for adverse consequences when conforming the acquired company’s accounting policies to ours;~~

~~the diversion of management’s attention from other business concerns;~~

~~the potential loss of customers or key employees of the acquired company;~~

~~the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations;~~

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

~~the assumption of unknown liabilities of the acquired company;~~

~~the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies;~~

~~the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of debt;~~

~~the requirement to provide transition services in connection with a disposition resulting in the diversion of resources and focus; and~~

~~the difficulty retaining and motivating key personnel from acquisitions or in connection with dispositions.~~

Furthermore, if the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or impair the value of some or all of the assets of the acquired or new business.

~~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, 2018:~~March 31, 2019:

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 2018:

July 1-31

294,377

$
229.31

291,545

$
280.3
August 1-31

67,661

233.09

65,000

484.8
September 1-30

87,246

242.22

85,000

464.3
Total

449,284

$
232.39

441,545

$
464.3


				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 2019:
January 1-31	274,083	$	176.22	267,856	$	175.5
February 1-28	708,657		172.68	702,893		54.1
March 1-31	322,710		170.04	318,415		—
Total	1,305,450	$	172.77	1,289,164	$	—

⁽¹⁾

During the period represented by the table, ~~7,739~~16,286 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⁾

In ~~2017,~~2018, our Board of Directors authorized a stock repurchase program to acquire up to ~~$1.0 billion~~$500.0 million of our outstanding common stock from August 1, 2018 through July 31, ~~2018.~~2019. At ~~July~~December 31, 2018 ~~$280.3~~we had $222.8 million ~~of this program expired unused.~~

~~On July 26, 2018, our Board of Directors authorized a new~~remaining under the stock repurchase program to acquire up to $500.0 million of our outstanding common stock from August 1, 2018 through July 31, 2019. At September 30, 2018, we had acquired approximately 0.1 million shares of our common stock for an aggregate amount of $35.7 million under this repurchase program. At March 31, 2019 we did not have any amounts remaining under our authorization. Our authorization is subject to any restrictions pursuant to the terms of our credit agreements, senior note indentures, and applicable securities laws or otherwise.

On April 25, 2019, we entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of our common stock for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. The issuance to ValueAct of the shares of Series A Non-Voting Convertible Preferred Stock was, and the issuance of the shares of common stock issuable upon conversion of the Series A Non-Voting Convertible Preferred Stock will be, made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable.

Index

Item 5. Other Information.

(a)~~None~~ In April 2019, the Board of Directors designated 300,000 shares of our authorized and unissued preferred stock as Series A Non-Voting Convertible Preferred Stock and we filed with the Delaware Secretary of State a Certificate of Designations of Series A Non-Voting Convertible Preferred Stock to create the new Series A Non-Voting Convertible Preferred Stock, authorized 300,000 shares and designated the preferences, rights and limitations of the Series A Non-Voting Convertible Preferred Stock. Each share of Series A Non-Voting Convertible Preferred Stock will initially be convertible into ten shares of common stock (subject to adjustment and the other terms described in the Certificate of Designations) at the holder’s election or upon our written request, provided that upon such conversion the holder, together with its affiliates, will not own or control in the aggregate more than 9.9% of our outstanding common stock (or any class of our voting securities). Shares of Series A Non-Voting Convertible Preferred Stock will also be subject to automatic conversion if a holder transfers such shares pursuant to a transfer (a) to us, (b) in a widespread public distribution of common stock or Series A Non-Voting Convertible Preferred Stock, (c) in which no one transferee (or group of associated transferees) would receive 2% or more of any class of our voting securities then outstanding (including pursuant to a related series of such transfers), or (d) to a transferee that would control more than 50% of our voting securities (not including voting securities such person is acquiring from the transferor). Upon such a transaction, the transferred shares of Series A Non-Voting Convertible Preferred Stock will automatically be converted into shares of common stock on a ten-for-one basis (subject to adjustment as described in the Certificate of Designations).

The shares of Series A Non-Voting Convertible Preferred Stock have no voting rights, except as otherwise required by the General Corporation Law of the State of Delaware. The Series A Non-Voting Convertible Preferred Stock will, with respect to rights upon liquidation, winding up and dissolution, rank (i) subordinate and junior in right of payment to all our other securities that, by their respective terms, are senior to the Series A Non-Voting Convertible Preferred Stock, and (ii) pari passu with the common stock.

(b)~~None~~ None.

5348

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

(a)

Second Amendment to Amended and Restated Credit Agreement, dated as of July 5, 2018, by and among Alliance Data Systems Corporation, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders.

10-Q

10.2

8/7/18

10.2

(b)
(c)
(d)

Series 2018-B Indenture Supplement, dated as of September 27, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.

8-K

4.1

9/28/18

*10.3

(a)

Second Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 28, 2018, 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.

*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.


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

#2.1	(a)	Securities Purchase Agreement, dated as of April 12, 2019, by and among Alliance Data Systems Corporation, the other sellers party thereto, Publicis Groupe, S.A. and certain subsidiaries thereof.	8-K	2.1	4/15/19

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 (2019 grant EBT).	8-K	10.1	2/20/19

+10.2	(a)	Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2019 grant rTSR). 3	8-K	10.2	2/20/19

10.3	(b) (c) (d)	Series 2019-A Indenture Supplement, dated as of February 20, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.	8-K	4.1	2/21/19

10.4	(a)	Fifth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of February 1, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.	10-K	10.112	2/26/19

10.5	(b) (c) (d)	Third Amended and Restated Service Agreement, dated as of April 23, 2019, between Comenity Servicing LLC and Comenity Bank.	8-K	99.1	4/23/19

10.6	(a)	Exchange Agreement, dated as of April 25, 2019, by and between the Registrant and ValueAct Holdings, L.P.	8-K	10.1	4/29/19

*10.7	(a)	Third Amendment to Amended and Restated Credit Agreement, dated as of April 30, 2019, by and among Registrant, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders.

*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.

5449

Index


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

*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	(a)	XBRL Instance Document

*101.SCH	(a)	XBRL Taxonomy Extension Schema Document

*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

*Filed herewith

+Management contract, compensatory plan or arrangement

#Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Alliance Data hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits 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

5550

Index

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
		Edward J. Heffernan
		President and Chief Executive Officer

Date: ~~November~~May 6, ~~2018~~2019
	By:	/s/ CHARLES L. HORN
		Charles L. Horn
		Executive Vice President and Chief Financial Officer

Date: ~~November~~May 6, ~~2018~~2019

5651


	Balance at		Adjustments		Balance at
	December 31,		due to		January 1,
	2017		ASC 606		2018
Consolidated Balance Sheet			(In millions)

Accounts receivable, net	$	822.3	$	22.4	$	844.7
Other current assets		348.9		(16.6)		332.3
Other non-current assets		656.5		(20.9)		635.6
		1,827.7		(15.1)		1,812.6

Accrued expenses		442.8		3.2		446.0
Other current liabilities		368.7		(14.3)		354.4
Other liabilities		370.9		(13.6)		357.3
		1,182.4		(24.7)		1,157.7

Retained earnings		4,167.1		9.6		4,176.7


	As of October 20, 2017
	(In millions)
Credit card receivables	$	906.3
Intangible assets		52.3
Total assets acquired		958.6

Other liabilities		0.2
Deferred tax liability		4.9
Total liabilities assumed		5.1

Net assets acquired	$	953.5
Total consideration paid		945.6
Gain on business combination	$	7.9


	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


	LoyaltyOne®		Epsilon®		Card Services		Corporate/ Other		Total
	(In millions)
Balance at December 31, 2017	$	731.1	$	2,887.3	$	261.7	$	—	$	3,880.1
Effects of foreign currency translation		(22.0)		(0.7)		—		—		(22.7)
Balance at September 30, 2018	$	709.1	$	2,886.6	$	261.7	$	—	$	3,857.4


							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
Adjusted EBITDA, net (1)	$	61.0	$	125.0	$	397.3	$	(33.2)	$	—	$	550.1

Three Months Ended

(in millions)

Net charge-offs of securitized principal