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 ~~June 30, 2019~~March 31, 2020

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~~CORPORATION

(Exact name of registrant as specified in its charter)


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

3075 Loyalty Circle

Columbus, Ohio 43219

(Address of principal executive office, including zip code)

(614) 729-4000

(Registrant’s telephone number, including area code)

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


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

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

Indicate by check mark whether the registrant has submitted electronically 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 þ No ◻

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


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

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

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

~~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 ~~July 24, 2019, 51,097,609~~April 23, 2020, 47,627,962 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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	3

	Condensed Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	4

	Condensed Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	5

	Condensed Consolidated Statements of Stockholders’ Equity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6

	Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	87

	Notes to Condensed Consolidated Financial Statements	98

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4436

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5545

Item 4.	Controls and Procedures	5645

	Part II: OTHER INFORMATION

Item 1.	Legal Proceedings	5746

Item 1A.	Risk Factors	5746

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5747

Item 3.	Defaults Upon Senior Securities	5747

Item 4.	Mine Safety Disclosures	5748

Item 5.	Other Information	5748

Item 6.	Exhibits	5848

SIGNATURES		6050

Index

PART I

Item 1. Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(in millions, except per share amounts)				(in millions, except per share amounts)
ASSETS
Cash and cash equivalents	$	4,026.8	$	3,817.4	$	4,456.8	$	3,874.4
Accounts receivable, net, less allowance for doubtful accounts ($0.4 and $0.4 at June 30, 2019 and December 31, 2018, respectively)		427.1		404.0
Accounts receivable, net, less allowance for doubtful accounts ($3.4 at each of March 31, 2020 and December 31, 2019, respectively)						359.4		451.1
Credit card and loan receivables:
Credit card receivables – restricted for securitization investors		12,496.9		13,418.3		12,033.4		13,504.2
Other credit card and loan receivables		5,117.6		4,436.7		5,698.5		5,958.9
Total credit card and loan receivables		17,614.5		17,855.0		17,731.9		19,463.1
Allowance for loan loss		(1,010.9)		(1,038.3)		(2,150.8)		(1,171.1)
Credit card and loan receivables, net		16,603.6		16,816.7		15,581.1		18,292.0
Credit card receivables held for sale		1,834.3		1,951.6		88.8		408.0
Inventories, net		243.9		248.0		189.1		218.0
Other current assets		279.9		293.2		461.1		268.4
Redemption settlement assets, restricted		594.0		558.6		568.0		600.8
Current assets of discontinued operations		4,264.3		622.2
Total current assets		28,273.9		24,711.7		21,704.3		24,112.7
Property and equipment, net		285.3		288.2		263.0		282.3
Right of use assets - operating		268.4		—		256.8		264.3
Deferred tax asset, net		45.4		44.0		282.9		45.2
Intangible assets, net		195.8		217.4		129.9		153.3
Goodwill		960.3		954.8		929.1		954.9
Other non-current assets		710.6		636.4		668.9		682.1
Long-term assets of discontinued operations		—		3,535.2
Total assets	$	30,739.7	$	30,387.7	$	24,234.9	$	26,494.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	504.5	$	486.2	$	203.0	$	300.8
Accrued expenses		370.4		322.2		407.4		327.8
Current operating lease liabilities		22.7		—		22.3		22.6
Current portion of deposits		6,777.4		6,537.7		6,521.5		6,942.4
Current portion of non-recourse borrowings of consolidated securitization entities		1,170.8		2,717.6		2,520.4		3,030.8
Current portion of long-term and other debt		310.5		138.9		101.4		101.4
Other current liabilities		307.3		291.8		228.1		338.3
Deferred revenue		791.7		766.1		748.3		807.9
Current liabilities of discontinued operations		351.4		223.5
Total current liabilities		10,606.7		11,484.0		10,752.4		11,872.0
Deferred revenue		111.0		109.2		103.6		114.1
Deferred tax liability, net		217.7		256.5		—		80.0
Long-term operating lease liabilities		296.1		—		282.6		291.7
Deposits		5,757.3		5,256.0		4,864.2		5,209.3
Non-recourse borrowings of consolidated securitization entities		5,556.2		4,934.1		3,840.3		4,253.2
Long-term and other debt		5,515.1		5,586.5		2,974.7		2,748.5
Other liabilities		287.9		392.4		329.4		337.7
Long-term liabilities of discontinued operations		—		36.9
Total liabilities		28,348.0		28,055.6		23,147.2		24,906.5
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 113.3 shares and 113.0 shares at June 30, 2019 and December 31, 2018, respectively		1.1		1.1
Series A Non-Voting Convertible Preferred Stock, $0.01 par value; authorized, 0.3 shares; issued, 0.2 shares and 0.0 shares at June 30, 2019 and December 31, 2018, respectively		—		—
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 115.0 shares at each of March 31, 2020 and December 31, 2019, respectively						1.2		1.1
Additional paid-in capital		3,259.6		3,172.4		3,259.7		3,257.7
Treasury stock, at cost, 62.4 shares and 59.6 shares at June 30, 2019 and December 31, 2018, respectively		(5,980.6)		(5,715.7)
Treasury stock, at cost, 67.4 shares at each of March 31, 2020 and December 31, 2019, respectively						(6,733.9)		(6,733.9)
Retained earnings		5,233.3		5,012.4		4,678.8		5,163.3
Accumulated other comprehensive loss		(121.7)		(138.1)		(118.1)		(99.9)
Total stockholders’ equity		2,391.7		2,332.1		1,087.7		1,588.3
Total liabilities and stockholders' equity	$	30,739.7	$	30,387.7
Total liabilities and stockholders’ equity					$	24,234.9	$	26,494.8

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
	(in millions, except per share amounts)								(in millions, except per share amounts)
Revenues
Services	$	66.4	$	102.8	$	139.7	$	195.4	$	46.6	$	73.3
Redemption, net		153.7		147.5		265.5		279.4		120.9		111.9
Finance charges, net		1,128.4		1,146.9		2,277.5		2,304.1		1,214.3		1,149.0
Total revenue		1,348.5		1,397.2		2,682.7		2,778.9		1,381.8		1,334.2
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		654.8		593.6		1,295.3		1,185.2		499.2		640.5
Provision for loan loss		257.3		311.9		509.5		649.6		655.9		252.1
General and administrative		57.3		46.4		95.5		77.8		23.9		38.3
Depreciation and other amortization		19.3		19.8		39.9		39.1		17.4		20.6
Amortization of purchased intangibles		22.5		28.8		48.3		58.3		21.4		25.8
Total operating expenses		1,011.2		1,000.5		1,988.5		2,010.0		1,217.8		977.3
Operating income		337.3		396.7		694.2		768.9		164.0		356.9
Interest expense
Securitization funding costs		51.6		55.2		108.8		107.3		49.9		57.3
Interest expense on deposits		53.2		36.8		102.0		72.3		60.3		48.7
Interest expense on long-term and other debt, net		38.7		41.6		76.6		81.1		28.4		37.9
Total interest expense, net		143.5		133.6		287.4		260.7		138.6		143.9
Income from continuing operations before income taxes		193.8		263.1		406.8		508.2		25.4		213.0
Provision for income taxes		51.4		39.3		86.1		104.5
(Benefit) provision for income taxes										(4.6)		34.8
Income from continuing operations	$	142.4	$	223.8	$	320.7	$	403.7		30.0		178.2
Loss from discontinued operations, net of taxes		(3.4)		(6.0)		(32.6)		(21.9)		—		(29.1)
Net income	$	139.0	$	217.8	$	288.1	$	381.8	$	30.0	$	149.1

Basic income (loss) per share (Note 3):
Income from continuing operations	$	2.72	$	4.05	$	6.08	$	7.30	$	0.63	$	3.36
Loss from discontinued operations	$	(0.07)	$	(0.11)	$	(0.62)	$	(0.40)	$	—	$	(0.55)
Net income per share	$	2.65	$	3.94	$	5.46	$	6.90	$	0.63	$	2.81

Diluted income (loss) per share (Note 3):
Income from continuing operations	$	2.71	$	4.04	$	6.07	$	7.27	$	0.63	$	3.35
Loss from discontinued operations	$	(0.07)	$	(0.11)	$	(0.62)	$	(0.40)	$	—	$	(0.55)
Net income per share	$	2.64	$	3.93	$	5.45	$	6.87	$	0.63	$	2.80

Weighted average shares (Note 3):
Basic		51.3		55.2		52.1		55.3		47.6		53.0
Diluted		52.6		55.4		52.9		55.5		47.7		53.2

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
	(in millions)								(in millions)
Net income	$	139.0	$	217.8	$	288.1	$	381.8	$	30.0	$	149.1

Other comprehensive income (loss):
Unrealized gain (loss) on securities available-for-sale		6.2		(2.3)		16.2		(5.3)
Tax (expense) benefit		(0.8)		0.3		(1.8)		1.3
Unrealized gain (loss) on securities available-for-sale, net of tax		5.4		(2.0)		14.4		(4.0)
Other comprehensive income:
Unrealized gain on securities available-for-sale										2.7		10.0
Tax expense										(1.1)		(1.0)
Unrealized gain on securities available-for-sale, net of tax										1.6		9.0

Unrealized (loss) gain on cash flow hedges		(0.1)		1.8		(0.2)		1.7
Unrealized gain (loss) on cash flow hedges										0.4		(0.1)
Tax expense		—		(0.4)		—		(0.4)		(0.1)		—
Unrealized (loss) gain on cash flow hedges, net of tax		(0.1)		1.4		(0.2)		1.3
Unrealized gain (loss) on cash flow hedges, net of tax										0.3		(0.1)

Unrealized (loss) gain on net investment hedge		(9.6)		40.8		6.5		25.4
Tax benefit (expense)		2.3		(9.8)		(1.6)		(6.1)
Unrealized (loss) gain on net investment hedge, net of tax		(7.3)		31.0		4.9		19.3
Unrealized gain on net investment hedge										—		16.1
Tax expense										—		(3.9)
Unrealized gain on net investment hedge, net of tax										—		12.2

Foreign currency translation adjustments		8.2		(30.3)		(2.7)		(12.8)
Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million related to sale of a business for the three months ended March 31, 2020)										(20.1)		(10.9)

Other comprehensive income, net of tax		6.2		0.1		16.4		3.8
Other comprehensive (loss) income, net of tax										(18.2)		10.2

Total comprehensive income, net of tax	$	145.2	$	217.9	$	304.5	$	385.6	$	11.8	$	159.3

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


													Accumulated													Accumulated
							Additional						Other		Total					Additional						Other		Total
	Common Stock			Preferred Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’		Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended June 30, 2019	Shares	Amount		Shares	Amount		Capital		Stock		Earnings		Loss		Equity
Three Months Ended March 31, 2020																	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
	(in millions)																(in millions)
Balance at April 1, 2019	113.2	$	1.1	—	$	—	$	3,177.0	$	(5,938.5)	$	5,127.8	$	(127.9)	$	2,239.5
Balance at December 31, 2019																	115.0	$	1.1	$	3,257.7	$	(6,733.9)	$	5,163.3	$	(99.9)	$	1,588.3
Net income	—		—	—		—		—		—		139.0		—		139.0	—		—		—		—		30.0		—		30.0
Other comprehensive income	—		—	—		—		—		—		—		6.2		6.2
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13																	—		—		—		—		(485.0)		—		(485.0)
Other comprehensive loss																	—		—		—		—		—		(18.2)		(18.2)
Stock-based compensation	—		—	—		—		31.2		—		—		—		31.2	—		—		4.7		—		—		—		4.7
Issuance of preferred stock	—		—	0.2		—		42.1		(42.1)		—		—		—
Dividends and dividend equivalent rights declared ($0.63 per common share)	—		—	—		—		—		—		(33.5)		—		(33.5)	—		—		—		—		(29.5)		—		(29.5)
Other	0.1		—	—		—		9.3		—		—		—		9.3	—		0.1		(2.7)		—		—		—		(2.6)
Balance at June 30, 2019	113.3	$	1.1	0.2	$	—	$	3,259.6	$	(5,980.6)	$	5,233.3	$	(121.7)	$	2,391.7
Balance at March 31, 2020																	115.0	$	1.2	$	3,259.7	$	(6,733.9)	$	4,678.8	$	(118.1)	$	1,087.7

Accumulated

Additional

Other

Total

Common Stock

Preferred Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Three Months Ended June 30, 2018

Shares

Amount

Shares

Amount

Capital

Stock

Earnings

Loss

Equity

(in millions)
Balance at April 1, 2018

112.9

$
1.1

—

$
—

$
3,101.7

$
(5,272.5)

$
4,307.6

$
(136.5)

$
2,001.4
Net income

—

—

—

—

—

—

217.8

—

217.8
Other comprehensive income

—

—

—

—

—

—

—

0.1

0.1
Stock-based compensation

—

—

—

—

21.8

—

—

—

21.8
Repurchases of common stock

—

—

—

—

—

(99.2)

—

—

(99.2)
Dividends and dividend equivalent rights declared ($0.57 per common share)

—

—

—

—

—

—

(31.8)

—

(31.8)
Other

—

—

—

—

9.2

—

—

—

9.2
Balance at June 30, 2018

112.9

$
1.1

—

$
—

$
3,132.7

$
(5,371.7)

$
4,493.6

$
(136.4)

$
2,119.3

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – (CONTINUED)~~

Accumulated

Additional

Other

Total

Common Stock

Preferred Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Six Months Ended June 30, 2019

Shares

Amount

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

—

—

—

—

—

—

288.1

—

288.1
Other comprehensive income

—

—

—

—

—

—

—

16.4

16.4
Stock-based compensation

—

—

—

—

51.3

—

—

—

51.3
Issuance of preferred stock

—

—

0.2

—

42.1

(42.1)

—

—

—
Repurchases of common stock

—

—

—

—

—

(222.8)

—

—

(222.8)
Dividends and dividend equivalent rights declared ($0.63 per common share)

—

—

—

—

—

—

(67.2)

—

(67.2)
Other

0.3

—

—

—

(6.2)

—

—

—

(6.2)
Balance at June 30, 2019

113.3

$
1.1

0.2

$
—

$
3,259.6

$
(5,980.6)

$
5,233.3

$
(121.7)

$
2,391.7

Accumulated

Additional

Other

Total

Common Stock

Preferred Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Six Months Ended June 30, 2018

Shares

Amount

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

—

—

—

—

—

—

381.8

—

381.8
Other comprehensive income

—

—

—

—

—

—

3.8

3.8
Stock-based compensation

—

—

—

—

46.3

—

—

—

46.3
Repurchases of common stock

—

—

—

—

—

(99.2)

—

—

(99.2)
Dividends and dividend equivalent rights declared ($0.57 per common share)

—

—

—

—

—

—

(63.4)

—

(63.4)
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

—

—

—

(13.4)

—

—

—

(13.4)
Balance at June 30, 2018

112.9

$
1.1

—

$
—

$
3,132.7

$
(5,371.7)

$
4,493.6

$
(136.4)

$
2,119.3


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

See accompanying notes to unaudited condensed consolidated financial statements.

Index

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended				Three Months Ended
	June 30,				March 31,
	2019		2018		2020		2019
	(in millions)				(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	288.1	$	381.8	$	30.0	$	149.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		161.5		243.7		38.8		118.9
Deferred income taxes		(47.6)		(82.0)		(158.7)		(35.0)
Provision for loan loss		509.5		649.6		655.9		252.1
Non-cash stock compensation		51.3		46.3		4.7		21.1
Amortization of deferred financing costs		22.1		25.5		9.5		11.0
Change in deferred revenue		(8.9)		(26.0)
Change in other operating assets and liabilities		(29.4)		(61.1)
Originations of credit card and loan receivables held for sale		—		(4,743.4)
Sales of credit card and loan receivables held for sale		—		4,791.9
Change in other operating assets and liabilities, net of sale of business						8.6		8.7
Other		143.1		95.5		(16.3)		84.9
Net cash provided by operating activities		1,089.7		1,321.8		572.5		610.8

CASH FLOWS FROM INVESTING ACTIVITIES:
Change in redemption settlement assets		(2.0)		(39.7)		1.0		(0.1)
Change in credit card and loan receivables		(20.9)		(121.2)		1,446.7		758.2
Purchase of credit card portfolios		(936.5)		—
Proceeds from sale of business						25.4		—
Proceeds from sale of credit card portfolios		539.3		55.6		289.5		—
Payments for acquired businesses, net of cash		(6.7)		—		—		(6.7)
Capital expenditures		(92.2)		(98.5)		(15.7)		(38.7)
Purchases of other investments		(13.0)		(50.1)		(14.0)		(5.0)
Maturities/sales of other investments		11.2		10.6		13.2		6.4
Other		6.5		7.1		0.2		3.4
Net cash used in investing activities		(514.3)		(236.2)
Net cash provided by investing activities						1,746.3		717.5

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements		2,077.3		2,399.1		500.0		1,045.1
Repayments of borrowings		(1,974.8)		(2,678.5)		(275.4)		(870.9)
Non-recourse borrowings of consolidated securitization entities		2,193.3		1,475.0		350.0		1,122.2
Repayments/maturities of non-recourse borrowings of consolidated securitization entities		(3,117.2)		(2,510.0)		(1,275.0)		(1,997.5)
Net increase (decrease) in deposits		742.8		(373.2)
Net decrease in deposits						(769.4)		(502.6)
Payment of deferred financing costs		(18.8)		(7.8)		(0.6)		(5.4)
Dividends paid		(67.0)		(63.3)		(30.3)		(33.9)
Purchase of treasury shares		(222.8)		(94.5)		—		(222.8)
Other		(9.4)		(15.8)		(2.7)		(17.2)
Net cash used in financing activities		(396.6)		(1,869.0)		(1,503.4)		(1,483.0)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		8.2		(4.1)		(7.6)		3.0

Change in cash, cash equivalents and restricted cash		187.0		(787.5)		807.8		(151.7)
Cash, cash equivalents and restricted cash at beginning of period		3,967.7		4,314.7		3,958.1		3,967.7
Cash, cash equivalents and restricted cash at end of period	$	4,154.7	$	3,527.2	$	4,765.9	$	3,816.0

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	323.6	$	347.5	$	138.3	$	206.7
Income taxes paid, net	$	139.7	$	120.6	$	44.6	$	20.4

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, ~~2018,~~2019, filed with the SEC on February ~~26, 2019, as well as the consolidated financial statements and the notes thereto included in the Company’s Form 8-K, filed with the SEC on July 17, 2019, to reflect the presentation of its Epsilon~~^® ~~segment as a discontinued operation.~~28, 2020.

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

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

For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP. The Company’s unaudited condensed consolidated financial statements have been presented with its Epsilon segment as a discontinued operation. See Note 5, “Discontinued Operations,” for more information. ~~Subsequent to the issuance of the Company’s condensed consolidated financial statements for the three months ended~~Effective March 31, 2019, the ~~Company prepared~~Company’s divested Epsilon segment met the criteria set forth in Accounting Standards Codification (“ASC”) 205-20, “Presentation of Financial Statements — Discontinued Operations,” and ~~filed a Form 8-K~~was subsequently sold on July ~~17, 2019, which included the~~1, 2019. The Company’s Annual Report on Form 10-K that was recast to reflect the presentation of Epsilon as a discontinued operation in all periods presented. Through that process, the Company determined that certain income tax liabilities classified within the Epsilon segment should be continuing obligations of the Company. As such, for the balance sheet as of December 31, 2018 included in this Form 10-Q for the period ended June 30, 2019, the Company reclassified $45.3 million of liabilities from discontinued operations to accrued expensesproducts and ~~other liabilities of $42.9 million~~services are reported under 2 segments—LoyaltyOne^® and ~~$2.4 million, respectively, from the amounts in the December 31, 2018 condensed consolidated balance sheet included in the Form 10-Q for the period ended March 31, 2019.~~Card Services.

Recently Issued Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminates certain exceptions within ASC 740, “Income Taxes,” and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.

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

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Recently Adopted Accounting Standards

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

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

In addition, ~~ASU 2016-13 modifies~~CECL modified the impairment model for available-for-sale debt securities and ~~provides~~provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ~~ASU 2016-13 is effective for interim~~CECL impacts the Company’s valuation of its accounts receivable and ~~annual reporting periods beginning after December 15, 2019,~~available-for-sale debt securities, with ~~early~~respect to which the Company’s adoption ~~permitted beginning after December 15, 2018. The Company has formed~~did not have a cross-functional implementation team and is finalizing the development of loss forecasting models, technological solutions and processes to satisfy the requirements of ASU 2016-13. Management is assessing key accounting interpretations and continues to evaluate thematerial impact ~~of the new standard~~ on its consolidated financial statements. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings. The extent of the impact upon adoption will depend on the asset quality of the Company’s credit card and loan receivables portfolio, and economic conditions and forecasts at adoption.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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~~Company’s adoption of ~~ASU 2018-13 will~~this standard on January 1, 2020 did not have a material impact 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—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~~adopted ASU 2018-15 ~~will have on its consolidated financial statements.~~

~~Recently Adopted Accounting Standards~~

In February 2016, the FASB issued ASU 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 classification affecting the pattern of expense recognition in the statements of income. Companies were permitted to adopt ASC 842 using a modified retrospective 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 2018, the Company completed its evaluation of ASC 842, including the impact~~2020 on ~~its policies, processes, systems and controls. As~~ a result, the Company identified changes to and modified certain of its accounting policies and 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 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 elected the 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, 2019 balance sheet for the 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,prospective basis and the ~~accounting remained substantially unchanged, with capital lease assets totaling $13.0 million and capital lease liabilities totaling $12.6 million.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~The Company’s~~ adoption of 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 results of operations or cash flows in the periods after adoption.

~~ASC 842 also requires expanded qualitative and quantitative disclosure regarding the Company’s leasing activities. See Note 10, “Leases,” for the Company’s ASC 842 disclosures.~~

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” ASU 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 the financial statements, and made certain targeted improvements ~~to simplify the application of hedge accounting guidance~~ ~~related to the assessment of hedge effectiveness. The Company’s adoption of this standard on January 1, 2019 did not 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 allowed for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate as a result of H.R. 1, originally known as the Tax Cuts and 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 specific identification approach or the portfolio approach, based on the nature of the underlying item. The Company adopted this standard on January 1, 2019 using the portfolio approach and did not reclassify the stranded tax effects to retained earnings as these amounts did not have a material impact on its consolidated financial statements.

2. REVENUE

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, theThe Company’s products and services are reported under ~~two~~2 segments—LoyaltyOne^® and Card Services, as shown below.

The following tables present revenue disaggregated by major source:


					Corporate/								Corporate/
Three Months Ended June 30, 2019	LoyaltyOne		Card Services		Other		Total
Three Months Ended March 31, 2020									LoyaltyOne		Card Services		Other		Total
	(in millions)								(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	71.4	$	—	$	—	$	71.4	$	71.3	$	—	$	—	$	71.3
Short-term loyalty programs		153.1		—		—		153.1		120.3		—		—		120.3
Servicing fees, net		—		(31.5)		—		(31.5)		—		(30.7)		—		(30.7)
Other		23.9		—		0.1		24.0		3.3		—		0.1		3.4
Revenue from contracts with customers	$	248.4	$	(31.5)	$	0.1	$	217.0	$	194.9	$	(30.7)	$	0.1	$	164.3

Finance charges, net		—		1,128.4		—		1,128.4		—		1,214.3		—		1,214.3
Investment income		3.1		—		—		3.1		3.2		—		—		3.2
Total	$	251.5	$	1,096.9	$	0.1	$	1,348.5	$	198.1	$	1,183.6	$	0.1	$	1,381.8

119

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)


					Corporate/								Corporate/
Three Months Ended June 30, 2018	LoyaltyOne		Card Services		Other		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	$	92.5	$	—	$	—	$	92.5	$	71.4	$	—	$	—	$	71.4
Short-term loyalty programs		130.3		—		—		130.3		109.6		—		—		109.6
Servicing fees, net		—		1.6		—		1.6		—		(18.6)		—		(18.6)
Other		22.9		—		0.1		23.0		19.8		—		—		19.8
Revenue from contracts with customers	$	245.7	$	1.6	$	0.1	$	247.4	$	200.8	$	(18.6)	$	—	$	182.2

Finance charges, net		—		1,146.9		—		1,146.9		—		1,149.0		—		1,149.0
Investment income		2.9		—		—		2.9		3.0		—		—		3.0
Total	$	248.6	$	1,148.5	$	0.1	$	1,397.2	$	203.8	$	1,130.4	$	—	$	1,334.2

Corporate/

Six Months Ended June 30, 2019

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
142.8

$
—

$
—

$
142.8
Short-term loyalty programs

262.7

—

—

262.7
Servicing fees, net

—

(50.2)

—

(50.2)
Other

43.7

—

0.1

43.8
Revenue from contracts with customers

$
449.2

$
(50.2)

$
0.1

$
399.1

Finance charges, net

—

2,277.5

—

2,277.5
Investment income

6.1

—

—

6.1
Total

$
455.3

$
2,227.3

$
0.1

$
2,682.7

Corporate/

Six Months Ended June 30, 2018

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
182.4

$
—

$
—

$
182.4
Short-term loyalty programs

244.4

—

—

244.4
Servicing fees, net

—

(0.4)

—

(0.4)
Other

42.5

—

0.3

42.8
Revenue from contracts with customers

$
469.3

$
(0.4)

$
0.3

$
469.2

Finance charges, net

—

2,304.1

—

2,304.1
Investment income

5.6

—

—

5.6
Total

$
474.9

$
2,303.7

$
0.3

$
2,778.9

~~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/

Three Months Ended June 30, 2019

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
9.5

$
1,096.9

$
0.1

$
1,106.5
Canada

85.4

—

—

85.4
Europe, Middle East and Africa

117.6

—

—

117.6
Asia Pacific

24.2

—

—

24.2
Other

14.8

—

—

14.8
Total

$
251.5

$
1,096.9

$
0.1

$
1,348.5


						Corporate/									Corporate/
Three Months Ended June 30, 2018		LoyaltyOne		Card Services		Other		Total
Three Months Ended March 31, 2020											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		$	6.3	$	1,148.5	$	0.1	$	1,154.9		$	2.1	$	1,183.6	$	0.1	$	1,185.8
Canada			105.4		—		—		105.4			79.1		—		—		79.1
Europe, Middle East and Africa			91.1		—		—		91.1			68.6		—		—		68.6
Asia Pacific			28.9		—		—		28.9			37.0		—		—		37.0
Other			16.9		—		—		16.9			11.3		—		—		11.3
Total		$	248.6	$	1,148.5	$	0.1	$	1,397.2		$	198.1	$	1,183.6	$	0.1	$	1,381.8


						Corporate/									Corporate/
Six Months Ended June 30, 2019		LoyaltyOne		Card Services		Other		Total
Three Months Ended March 31, 2019											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		$	15.9	$	2,227.3	$	0.1	$	2,243.3		$	6.4	$	1,130.4	$	—	$	1,136.8
Canada			174.4		—		—		174.4			89.0		—		—		89.0
Europe, Middle East and Africa			199.0		—		—		199.0			81.4		—		—		81.4
Asia Pacific			41.7		—		—		41.7			17.5		—		—		17.5
Other			24.3		—		—		24.3			9.5		—		—		9.5
Total		$	455.3	$	2,227.3	$	0.1	$	2,682.7		$	203.8	$	1,130.4	$	—	$	1,334.2

Corporate/

Six Months Ended June 30, 2018

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
12.0

$
2,303.7

$
0.3

$
2,316.0
Canada

211.0

—

—

211.0
Europe, Middle East and Africa

188.1

—

—

188.1
Asia Pacific

45.5

—

—

45.5
Other

18.3

—

—

18.3
Total

$
474.9

$
2,303.7

$
0.3

$
2,778.9

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

Contract Liabilities

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

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 2019	$	248.0	$	627.3	$	875.3
Balance at January 1, 2020							$	258.6	$	663.4	$	922.0
Cash proceeds		90.0		147.2		237.2		44.8		73.4		118.2
Revenue recognized ⁽¹⁾		(96.6)		(150.0)		(246.6)		(48.6)		(69.2)		(117.8)
Other		—		0.4		0.4
Effects of foreign currency translation		10.2		26.2		36.4		(19.6)		(50.9)		(70.5)
Balance at June 30, 2019	$	251.6	$	651.1	$	902.7
Balance at March 31, 2020							$	235.2	$	616.7	$	851.9
Amounts recognized in the consolidated balance sheets:
Deferred revenue (current)	$	140.6	$	651.1	$	791.7	$	131.6	$	616.7	$	748.3
Deferred revenue (non-current)	$	111.0	$	—	$	111.0	$	103.6	$	—	$	103.6

(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 ~~$84.0~~$106.8 million in ~~2019, $101.4~~2020, $83.3 million in ~~2020, $55.0~~2021, $40.8 million in ~~2021,~~2022, and ~~$11.2~~$4.3 million in ~~2022.~~2023.

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, ~~2019~~2020 was ~~$110.2~~$122.8 million and the closing balance as of ~~June 30, 2019~~March 31, 2020 was ~~$103.8~~$79.0 million, with the change due to revenue recognized of approximately ~~$235.0~~$89.6 million during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, offset in part by cash payments received in advance of program performance.

~~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 of common stock:

Three Months Ended June 30,

Six Months Ended June 30,


2019

2018

2019

2018

(in millions, except per share amounts)
Basic income per share:

Numerator:

Income from continuing operations

$
142.4

$
223.8

$
320.7

$
403.7
Less: Dividends declared on preferred stock

0.9

—

0.9

—
Less: Allocation of undistributed earnings

2.4

—

2.7

—
Income from continuing operations - basic

139.1

223.8

317.1

403.7
Loss from discontinued operations, net of tax

(3.4)

(6.0)

(32.6)

(21.9)
Net income - basic

$
135.7

$
217.8

$
284.5

$
381.8

Denominator:

Weighted average shares, basic

51.3

55.2

52.1

55.3

Basic income (loss) attributable to common stockholders per share:

Income from continuing operations

$
2.72

$
4.05

$
6.08

$
7.30
Loss from discontinued operations

$
(0.07)

$
(0.11)

$
(0.62)

$
(0.40)
Net income per share

$
2.65

$
3.94

$
5.46

$
6.90

Diluted income per share ⁽¹⁾:

Numerator:

Income from continuing operations

$
142.4

$
223.8

$
320.7

$
403.7
Loss from discontinued operations, net of tax

(3.4)

(6.0)

(32.6)

(21.9)
Net income

$
139.0

$
217.8

$
288.1

$
381.8

Denominator:

Weighted average shares, basic

51.3

55.2

52.1

55.3
Weighted average effect of dilutive securities:

Shares from assumed conversion of preferred stock

1.1

—

0.6

—
Net effect of dilutive stock options and unvested restricted stock ⁽²⁾

0.2

0.2

0.2

0.2
Denominator for diluted calculation

52.6

55.4

52.9

55.5

Diluted income (loss) attributable to common stockholders per share:

Income from continuing operations

$
2.71

$
4.04

$
6.07

$
7.27
Loss from discontinued operations

$
(0.07)

$
(0.11)

$
(0.62)

$
(0.40)
Net income per share

$
2.64

$
3.93

$
5.45

$
6.87

~~(1)~~

~~Computed using the if-converted method, as the result was more dilutive.~~

~~(2)~~

For the three and six months ended June 30, 2019, 0.2 million and 0.3 million of restricted stock units, respectively, were excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive. For the three and six months ended June 30, 2018, excluded amounts were de minimis.

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 for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. See Note 15, “Stockholders’ Equity,” for more information. During the periods that included the Company’s preferred stock, basic and diluted earnings per share (“EPS”) were computed using the two-class method, which is an earnings allocation that determines EPS for each class of


	Three Months Ended March 31,
	2020		2019
	(in millions, except per share amounts)
Numerator:
Income from continuing operations	$	30.0	$	178.2
Loss from discontinued operations		—		(29.1)
Net income	$	30.0	$	149.1

Denominator:
Weighted average shares, basic		47.6		53.0
Weighted average effect of dilutive securities:
Net effect of dilutive stock options and unvested restricted stock		0.1		0.2
Denominator for diluted calculation		47.7		53.2

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

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

1511

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~common stock and participating securities according to dividends declared and participation rights in undistributed earnings.~~

~~4. ACQUISITION~~

~~On February 7,~~For each of the three months ended March 31, 2020 and 2019, 0.3 million of restricted stock units, respectively, were excluded from the ~~Company acquired certain assets as well~~calculation of weighted average dilutive common shares 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.

effect would have been anti-dilutive.

4. DISPOSITION

On January 10, 2020, the Company sold Precima^®, a provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for total consideration of $43.8 million. The purchase and sale agreement provides for $10.0 million in contingent consideration based upon the occurrence of specified events and performance of the business, with 2 earnout determination dates in September 2020 and September 2021, respectively. The Company estimated the fair value of the contingent purchase price at approximately $6.5 million, which is included in the total consideration below. Precima was included in the Company’s LoyaltyOne segment. The pre-tax gain was recorded in cost of operations in the Company’s unaudited condensed consolidated statements of income.


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

(1)	Consideration as defined included cash associated with the sold Precima entities, which was $10.8 million.

5. DISCONTINUED OPERATIONS

Effective ~~April 12,~~March 31, 2019, the ~~Company entered into a definitive agreement to sell its~~Company’s divested Epsilon ~~business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Beginning in the first quarter of 2019, Epsilon~~segment met the criteria set forth in ~~Accounting Standards Codification (“ASC”)~~ASC 205-20, “Presentation of Financial Statements — Discontinued Operations,” and ~~has been presented as a discontinued operation for all periods presented. The sale~~ was ~~completed~~subsequently sold on July 1, 2019.

At June 30, 2019, the assets and liabilities of discontinued operations are classified as current in the unaudited condensed consolidated balance sheets, as it was probable that the sale would occur and proceeds would be collected within one year. The following table presents a reconciliation of the assets and liabilities of discontinued operations to the unaudited condensed consolidated balance sheets for the periods presented:

June 30,

December 31,


2019

2018

(in millions)
Assets:

Cash and cash equivalents

$
42.2

$
45.7
Accounts receivable, net

464.7

519.9
Other current assets

65.4

56.6
Property and equipment, net

325.6

306.9
Right of use assets - operating

170.8

—
Intangible assets, net

286.1

322.3
Goodwill

2,886.1

2,886.2
Other assets

23.4

19.8
Total assets of discontinued operations

$
4,264.3

$
4,157.4

Liabilities:

Accounts payable

$
33.7

$
72.2
Accrued expenses

64.6

98.8
Current operating lease liabilities

43.3

—
Other current liabilities

45.4

52.5
Long-term operating lease liabilities

154.7

—
Other liabilities

9.7

36.9
Total liabilities of discontinued operations

$
351.4

$
260.4

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

The following table summarizes the ~~operating~~ results of discontinued ~~operations:~~operations for the three months ended March 31, 2019:


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended
	2019		2018		2019		2018		March 31, 2019
	(in millions)								(in millions)
Revenue	$	491.8	$	514.2	$	999.6	$	1,023.6	$	507.8
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		465.5		417.3		908.9		848.1		443.4
Depreciation and other amortization		0.7		28.7		29.7		57.1		29.0
Amortization of purchased intangibles		—		44.6		43.5		89.2		43.5
Interest expense ⁽¹⁾		32.0		32.2		64.1		64.1		32.1
Loss before benefit from income taxes		(6.4)		(8.6)		(46.6)		(34.9)		(40.2)
Benefit from income taxes		(3.0)		(2.6)		(14.0)		(13.0)
Loss from discontinued operations, net of taxes	$	(3.4)	$	(6.0)	$	(32.6)	$	(21.9)
Benefit from income taxes ⁽¹⁾										(11.1)
Loss from discontinued operations, net of taxes ⁽²⁾									$	(29.1)

(1)

On April 30, 2019, the Company amended its credit agreement, which among other items, provided that upon consummation of the sale of Epsilon, a mandatory payment of $500.0 million of the revolving credit facility ~~will be~~was required and all of the Company’s outstanding senior notes ~~will be~~were required to be redeemed. ~~As such, for~~The table above includes the ~~three and six months ended June 30, 2019,~~allocation of interest expense ~~has been allocated to discontinued operations on~~associated with the ~~basis of the Company’s~~ ~~$500.0~~$500.0 million mandatory repayment of ~~its~~the revolving ~~line~~credit facility, as well as the related income tax effect, which was not reflected in our historical results in our Quarterly Report on Form 10-Q for the period ended March 31, 2019. The impact was $5.6 million of ~~credit~~interest expense and ~~$1.9 billion in senior notes outstanding.~~an income tax benefit of $1.7 million.

(2)	Reflects the results of operations of the Company’s former Epsilon segment, direct costs identifiable to the Epsilon segment and the allocation of interest expense on corporate debt.

In the first quarter of 2019, interest expense was allocated to discontinued operations on the basis of the corporate debt, $1.9 billion in senior notes, expected to be repaid as a result of the disposal transaction for the three months ended March 31, 2019 and 2018.12

Index

ALLIANCE DATA SYSTEMS CORPORATION

~~Following the sale of Epsilon, Card Services has continued its existing contractual relationships with Epsilon for digital marketing services.~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended
	2019		2018		2019		2018		March 31, 2019
	(in millions)								(in millions)
Depreciation and amortization	$	0.7	$	73.3	$	73.2	$	146.3	$	72.5
Capital expenditures	$	49.0	$	42.9	$	55.8	$	54.0	$	6.8

6. CREDIT CARD AND LOAN RECEIVABLES

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


	June 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(in millions)				(in millions)
Principal receivables	$	16,670.2	$	16,869.9	$	16,725.4	$	18,413.1
Billed and accrued finance charges		889.5		898.3		933.5		977.3
Other		54.8		86.8		73.0		72.7
Total credit card and loan receivables		17,614.5		17,855.0		17,731.9		19,463.1
Less: Credit card receivables – restricted for securitization investors		12,496.9		13,418.3		12,033.4		13,504.2
Other credit card and loan receivables	$	5,117.6	$	4,436.7	$	5,698.5	$	5,958.9

Allowance for Loan Loss

Effective January 1, 2020, the Company adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine its allowance for loan loss. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for loan loss includes an estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. The allowance is maintained through an adjustment to the provision for loan loss and is evaluated for appropriateness. Prior to January 1, 2020, the Company’s allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”

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

1713

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The Company’s groups of pooled financial assets with similar risk characteristics and their estimated life is as follows:

~~Allowance for Loan Loss~~


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

~~The Company maintains an~~In estimating its allowance for loan loss, atfor each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. Management utilizes a ~~level~~third party service to analyze a number of scenarios, but uses one scenario to determine the macroeconomic variables over the forecast period. The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and loan receivables, with no reversion period. In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that ~~is appropriate~~may not be captured in the quantitatively derived results, or other relevant factors to ~~absorb probable losses inherent in~~ensure the allowance for loan loss reflects the Company’s best estimate of current expected credit losses. As permitted by ASC 326, the Company excludes unbilled finance charges from its amortized cost basis of credit card and loan receivables. ~~The estimate of the allowance for loan loss covers uncollectible principal as well as unpaid interest~~At March 31, 2020, unbilled finance charges were $262.9 million 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~~included in other credit card and loan ~~receivables. Migration analysis is a technique used to estimate~~receivables in 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.Company’s unaudited condensed consolidated balance sheet.

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


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
	(in millions)								(in millions)
Balance at beginning of period	$	1,021.1	$	1,169.3	$	1,038.3	$	1,119.3	$	1,171.1	$	1,038.3
Adoption of ASC 326 ⁽¹⁾										644.0		—
Provision for loan loss		257.3		311.9		509.5		649.6		655.9		252.1
Allowance associated with credit card receivables transferred to held for sale		—		(5.2)		—		(11.8)
Change in estimate for uncollectible unpaid interest and fees		(10.0)		(5.0)		(10.0)		10.0
Recoveries		56.7		48.8		116.5		80.1		67.9		59.8
Principal charge-offs		(314.2)		(330.8)		(643.4)		(658.2)		(388.1)		(329.1)
Balance at end of period	$	1,010.9	$	1,189.0	$	1,010.9	$	1,189.0	$	2,150.8	$	1,021.1

(1)

Recorded January 1, 2020 through a cumulative-effect adjustment to retained earnings, net of taxes.

For the three months ended March 31, 2020, the increase in the allowance for loan loss, in addition to the impact of the $644.0 million attributable to the adoption of ASC 326, was due to an increase in delinquent amounts and deterioration of the macroeconomic outlook due to COVID-19.

Net Charge-offs

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 a 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~~14

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Charge-offs for unpaid interest and fees were ~~$193.8~~$231.9 million and ~~$182.0~~$218.8 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $412.6 million and $381.5 million for the six months ended June 30, 2019 and 2018,~~ 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

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.

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

June 30,

% of

December 31,

% of


2019

Total

2018

Total

(in millions, except percentages)

Receivables outstanding - principal

$
16,670.2

100.0
%
$
16,869.9

100.0
%
Principal receivables balances contractually delinquent:

31 to 60 days

290.4

1.7
%

303.2

1.8
%
61 to 90 days

202.7

1.2

207.9

1.3

91 or more days

376.5

2.3

443.4

2.6

Total

$
869.6

5.2
%
$
954.5

5.7
%


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

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

Modified Credit Card Receivables

Forbearance Programs

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

Troubled Debt Restructurings

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

Credit card receivables for which temporary hardship and permanent concessions were granted are each considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivable balance and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of 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 ~~$288.8~~$332.6 million and ~~$292.4~~$308.7 million, respectively, as a recorded investment in impaired credit card receivables ~~with an associated allowance for loan loss of $99.1 million and $101.3 million, respectively,~~ as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018. These modified credit card receivables~~2019, respectively, which represented less than 2% of the Company’s ~~total credit card receivables as of both June 30, 2019 and December 31, 2018.~~

The average recorded investment in impaired credit card receivables was $290.5 million and $423.3 million for the three months ended June 30, 2019 and 2018, respectively, and $294.1 million and $359.8 million for the six months ended June 30, 2019 and 2018, 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 $6.0 million and $9.3 million for the three months ended June 30, 2019 and 2018, respectively, and $11.7 million and $15.3

1915

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

total credit card receivables. The average recorded investment in impaired credit card receivables was $314.7 million and $297.7 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, respectively.

Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized $5.5 million and ~~2018,~~$5.7 million for the three months ended March 31, 2020 and 2019, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

The following 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 June 30, 2019

Six Months Ended June 30, 2019

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

58,210

$
86.7

$
86.6

128,504

$
191.0

$
190.7

Three Months Ended June 30, 2018

Six Months Ended June 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

70,236

$
101.8

$
101.6

350,308

$
414.3

$
413.8

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Number of

Outstanding

Restructurings

Balance

Restructurings

Balance

(Dollars in millions)

Troubled debt restructurings – credit card receivables

75,065

112.8

112.7

70,294

104.3

104.1

The table below 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

Six Months Ended

June 30, 2019

June 30, 2019

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

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

29,439

$
39.9

79,895

$
105.3

Three Months Ended

Six Months Ended

June 30, 2018

June 30, 2018

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

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

174,835

$
192.5

203,595

$
227.5

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

The following tables set forth, as of June 30, 2019 and December 31, 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:

June 30, 2019








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

5.9

26.3
%
$
3,987.2

23.9
%
13-24 Months

3.8

16.7

2,705.6

16.2

25-36 Months

3.0

13.5

2,424.0

14.6

37-48 Months

2.0

9.1

1,703.7

10.2

49-60 Months

1.7

7.5

1,466.0

8.8

Over 60 Months

6.1

26.9

4,383.7

26.3

Total

22.5

100.0
%
$
16,670.2

100.0
%

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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
%


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

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 on an amortized cost basis by obligor credit quality as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


									Amortized Cost Revolving Credit Card and Loan Receivables
	June 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
			Percentage of				Percentage of				Percentage of				Percentage of
	Total Principal		Principal		Total Principal		Principal				Amortized				Amortized
Probability of an Account Becoming 91 or More Days Past	Receivables		Receivables		Receivables		Receivables		Amortized		Cost Basis		Amortized		Cost Basis
Due or Becoming Charged-off (within the next 12 months)	Outstanding		Outstanding		Outstanding		Outstanding		Cost Basis		Outstanding		Cost Basis		Outstanding
	(in millions, except percentages)								(in millions, except percentages)
No Score	$	203.4	1.2	%	$	249.0	1.5	%	$	217.5	1.3	%	$	298.4	1.6	%
27.1% and higher		1,398.3	8.4			1,394.0	8.2			1,580.7	9.1			1,648.8	8.7
17.1% - 27.0%		1,019.6	6.1			770.1	4.6			1,053.7	6.1			1,108.5	5.8
12.6% - 17.0%		1,046.2	6.3			1,047.6	6.2			1,123.5	6.5			1,171.7	6.2
3.7% - 12.5%		7,270.7	43.6			6,877.6	40.8			7,828.1	45.1			8,292.1	43.5
1.9% - 3.6%		2,860.7	17.2			3,060.7	18.1			2,944.8	17.0			3,375.3	17.7
Lower than 1.9%		2,871.3	17.2			3,470.9	20.6			2,612.7	14.9			3,153.0	16.5
Total	$	16,670.2	100.0	%	$	16,869.9	100.0	%	$	17,361.0	100.0	%	$	19,047.8	100.0	%

~~Transfer of Financial Assets~~

~~During 2018, the Company originated~~Note: The Company’s credit card and loan receivables ~~under one previous client agreement, and after origination, these loan~~are revolving 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~~do not have stated maturities and are exempted from certain vintage disclosures required under 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. Effective July 2, 2018, the Company no longer originates loan receivables for 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.

326.

2116

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Obligor credit quality is monitored at least monthly during the life of an account. The effect of the COVID-19 pandemic resulted in an increase in the probability of an account becoming 91 of more days past due or becoming charged-off.

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 ~~$1,834.3~~$88.8 million and ~~$1,951.6~~$408.0 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

InDuring the ~~second quarter of 2019,~~three months ended March 31, 2020, the Company sold ~~four~~a credit card ~~portfolios~~portfolio for preliminary cash consideration of approximately ~~$539.3~~$289.5 million, subject to customary sale price adjustments, and recognized a gain of approximately ~~$1.8~~$20.4 million ~~in net gains~~ on the ~~transactions.~~

~~Additionally,~~transaction, which was recorded in cost of operations in the ~~second quarter~~Company’s unaudited condensed consolidated statements of 2019, the Company transferred one credit card portfolio totaling approximately $510.3 million into credit card receivables held for sale. The portfolio was transferred at cost, and such amount will be the measurement basis until the sale of the portfolio.income.

The Company recorded portfolio valuation adjustments, which are reflected in cost of operations ~~expense,~~in the Company’s unaudited condensed consolidated statements of ~~$40.1~~income, of $4.2 million and ~~$14.2~~$59.9 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, and 2018, respectively, and $100.0 million and $35.9 million for the six months ended June 30, 2019 and 2018, respectively, to reduce the value of certain portfolios within credit card receivables held for sale.

~~Portfolio Acquisitions~~

In June 2019, the Company acquired four credit card portfolios for preliminary purchase prices totaling approximately $936.5 million, subject to customary purchase price adjustments. Due to the timing of the acquisition, the Company’s purchase price allocation as it relates to the fair value of the credit card receivables, intangible assets and other assets and liabilities associated with the acquisition of the portfolios was not complete as of June 30, 2019.respectively.

Securitized Credit Card Receivables

The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust (“Master Trust I”) and World Financial Network Credit Card Master Trust III (“Master Trust III”) (collectively, the “WFN Trusts”), and World Financial Capital Credit Card Master Note Trust (the “WFC Trust”). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore not reflected in the Company’s unaudited condensed consolidated statements of income for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

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

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


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

2217

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:~~

June 30,

December 31,


2019

2018

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

$
12,496.9

$
13,418.3
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due

$
247.9

$
301.6

Three Months Ended

Six Months Ended

June 30,

June 30,


2019

2018

2019

2018

(in millions)
Net charge-offs of securitized principal

$
224.6

$
240.3

$
464.1

$
485.3

7. INVENTORIES, NET

Inventories, net of ~~$243.9~~$189.1 million and ~~$248.0~~$218.0 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories, net are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future market conditions and an analysis of historical experience.

~~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:

June 30, 2019

December 31, 2018


Amortized

Unrealized

Unrealized



Amortized

Unrealized

Unrealized



Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

(in millions)
Marketable securities

$
274.5

$
1.7

$
(0.8)

$
275.4

$
272.8

$
0.1

$
(6.5)

$
266.4
U.S. Treasury bonds

25.0

—

—

25.0

25.0

—

(0.1)

24.9
Total

$
299.5

$
1.7

$
(0.8)

$
300.4

$
297.8

$
0.1

$
(6.6)

$
291.3

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

8. OTHER INVESTMENTS

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


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

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:


	June 30, 2019												March 31, 2020
	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	$	7.8	$	(0.1)	$	121.8	$	(0.7)	$	129.6	$	(0.8)	$	3.7	$	(0.1)	$	—	$	—	$	3.7	$	(0.1)
Total	$	7.8	$	(0.1)	$	121.8	$	(0.7)	$	129.6	$	(0.8)	$	3.7	$	(0.1)	$	—	$	—	$	3.7	$	(0.1)


	December 31, 2018												December 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	$	57.3	$	(0.5)	$	164.0	$	(6.0)	$	221.3	$	(6.5)	$	18.8	$	(0.2)	$	13.1	$	(0.2)	$	31.9	$	(0.4)
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)	$	18.8	$	(0.2)	$	13.1	$	(0.2)	$	31.9	$	(0.4)

The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at ~~June 30, 2019~~March 31, 2020 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	$	55.4	$	55.4	$	40.2	$	40.2
Due after one year through five years		1.9		1.9		1.4		1.4
Due after five years through ten years		—		—		—		—
Due after ten years		242.2		243.1		216.3		223.5
Total	$	299.5	$	300.4	$	257.9	$	265.1

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Market values were determined for each individual security in the investment portfolio. ~~When evaluating~~Effective January 1, 2020, the ~~investments for~~Company adopted ASC 326, which replaced the other-than-temporary impairment ~~the Company reviews factors such as the length of time and extent to~~model for available-for-sale debt securities. For available-for-sale debt securities in which fair value ~~has been below~~is less than cost, ~~basis, the financial condition of the security’s issuer,~~ASC 326 requires that credit-related impairment, if any, be recognized through an allowance for credit losses and ~~the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.~~adjusted each period for changes in credit risk. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until ~~maturity.~~maturity, and the Company performs an assessment each period for credit-related impairment. As of ~~June 30, 2019,~~March 31, 2020, the Company does not consider ~~the~~its investments to be ~~other-than-temporarily~~ impaired.

There were no0 realized gains or losses from the sale of investment securities for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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:


	June 30, 2019								December 31, 2018								March 31, 2020								December 31, 2019
		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	$	45.9	$	—	$	—	$	45.9	$	43.9	$	—	$	—	$	43.9	$	55.9	$	—	$	—	$	55.9	$	39.3	$	—	$	—	$	39.3
Mutual funds		24.9		—		—		24.9		23.2		—		—		23.2		22.9		—		—		22.9		25.1		—		—		25.1
Corporate bonds		520.4		3.9		(1.1)		523.2		497.5		0.1		(6.1)		491.5		490.7		3.0		(4.5)		489.2		536.0		2.4		(2.0)		536.4
Total	$	591.2	$	3.9	$	(1.1)	$	594.0	$	564.6	$	0.1	$	(6.1)	$	558.6	$	569.5	$	3.0	$	(4.5)	$	568.0	$	600.4	$	2.4	$	(2.0)	$	600.8


	June 30, 2019												March 31, 2020
	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	$	—	$	—	$	259.7	$	(1.1)	$	259.7	$	(1.1)	$	171.8	$	(3.6)	$	116.8	$	(0.9)	$	288.6	$	(4.5)
Total	$	—	$	—	$	259.7	$	(1.1)	$	259.7	$	(1.1)	$	171.8	$	(3.6)	$	116.8	$	(0.9)	$	288.6	$	(4.5)


	December 31, 2018												December 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	$	31.2	$	(0.1)	$	414.4	$	(6.0)	$	445.6	$	(6.1)	$	166.6	$	(1.3)	$	155.1	$	(0.7)	$	321.7	$	(2.0)
Total	$	31.2	$	(0.1)	$	414.4	$	(6.0)	$	445.6	$	(6.1)	$	166.6	$	(1.3)	$	155.1	$	(0.7)	$	321.7	$	(2.0)

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The amortized cost and estimated fair value of the securities at ~~June 30, 2019~~March 31, 2020 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	$	133.2	$	133.1	$	121.9	$	121.6
Due after one year through five years		392.9		395.9		384.4		383.3
Due after five year through ten years		19.2		19.1		7.3		7.2
Total	$	545.3	$	548.1	$	513.6	$	512.1

~~Realized~~There were 0 realized gains ~~and~~or losses from the sale of investment securities for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020. Realized losses from the sale of investment securities for the three months ended March 31, 2019 ~~and 2018~~ were de minimis.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

10. LEASES

The Company has operating leases for general office properties, warehouses, data centers, call centers, automobiles and certain equipment. As of ~~June 30, 2019,~~March 31, 2020, the Company’s leases have remaining lease terms of less than 1 year to 1918 years, some of which may include renewal options. For leases in which the implicit rate is not readily determinable, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of the lease payments. The incremental borrowing rate is based on the Company’s specific rate of interest to borrow on a collateralized basis, over a similar term and in a similar economic environment as the lease.

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

The components of lease expense were as follows:


	Three Months Ended		Six Months Ended		Three Months Ended		Three Months Ended
	June 30, 2019		June 30, 2019		March 31, 2020		March 31, 2019
	(in millions)				(in millions)
Operating lease cost	$	10.4	$	20.7	$	10.2	$	10.3
Short-term lease cost		0.6		1.2		0.3		0.6
Variable lease cost		1.7		3.6		0.2		1.9
Total	$	12.7	$	25.5	$	10.7	$	12.8

Other information related to leases was as follows:


	~~June 30,~~March 31,
	~~2019~~2020
Weighted-average remaining lease term (in years):
Operating leases		~~11.6~~11.3
Weighted-average discount rate:
Operating leases		5.2%

~~Supplemental cash flow information related to leases was as follows:~~

Three Months Ended

Six Months Ended

June 30, 2019

June 30, 2019

(in millions)
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$
10.3

$
25.6
Right-of-use assets obtained in exchange for lease obligations:

Operating leases

$
1.2

$
9.8

2620

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Supplemental cash flow information related to leases was as follows:


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

Maturities of the lease liabilities as of ~~June 30, 2019~~March 31, 2020 were as follows:


	Operating		Operating
Year	Leases		Leases
	(in millions)		(in millions)
2019 (excluding the six months ended June 30, 2019)	$	17.6
2020		41.5
2020 (excluding the three months ended March 31, 2020)			$	27.5
2021		39.2		39.5
2022		38.4		38.6
2023		36.9		36.7
2024				35.3
Thereafter		262.0		234.6
Total undiscounted lease liabilities		435.6		412.2
Less: Amount representing interest		(116.8)		(107.3)
Total present value of minimum lease payments	$	318.8	$	304.9

Amounts recognized in the June 30, 2019 consolidated balance sheet:
Amounts recognized in the March 31, 2020 consolidated balance sheet:
Current operating lease liabilities	$	22.7	$	22.3
Long-term operating lease liabilities		296.1		282.6
Total	$	318.8	$	304.9

11. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Intangible assets consist of the following:

June 30, 2019


Gross

Accumulated





Assets

Amortization

Net

Amortization Life and Method

(in millions)

Finite Lived Assets

Customer contracts and lists

$
329.7

$
(259.1)

$
70.6

7 years—straight line
Premium on purchased credit card portfolios

257.3

(140.6)

116.7

3-13 years—straight line
Collector database

53.5

(52.2)

1.3

5 years—straight line
Tradenames

32.3

(26.3)

6.0

8-15 years—straight line

$
672.8

$
(478.2)

$
194.6

Indefinite Lived Assets

Tradename

1.2

—

1.2

Indefinite life
Total intangible assets

$
674.0

$
(478.2)

$
195.8


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

2721

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)


	December 31, 2018							December 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	$	339.5	$	(244.4)	$	95.1	3-7 years—straight line	$	325.1	$	(278.7)	$	46.4	7 years—straight line
Premium on purchased credit card portfolios		286.0		(172.9)		113.1	3-13 years—straight line		192.6		(93.2)		99.4	1-13 years—straight line
Collector database		51.3		(49.9)		1.4	5 years—straight line		53.9		(52.9)		1.0	5 years—straight line
Tradenames		32.5		(25.9)		6.6	8-15 years—straight line		31.8		(26.5)		5.3	8-15 years—straight line
	$	709.3	$	(493.1)	$	216.2		$	603.4	$	(451.3)	$	152.1
Indefinite Lived Assets
Tradename		1.2		—		1.2	Indefinite life		1.2		—		1.2	Indefinite life
Total intangible assets	$	710.5	$	(493.1)	$	217.4		$	604.6	$	(451.3)	$	153.3

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)
2019 (excluding the six months ended June 30, 2019)	$	45.4
2020		80.9
2020 (excluding the three months ended March 31, 2020)			$	59.7
2021		21.4		22.2
2022		16.9		17.5
2023		13.1		12.8
2024				10.7
Thereafter		16.9		5.8

Goodwill

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



	LoyaltyOne		Card Services		Total		LoyaltyOne		Card Services		Total
	(in millions)						(in millions)
Balance at December 31, 2018	$	693.1	$	261.7	$	954.8
Goodwill acquired during the period		—		2.3		2.3
Balance at January 1, 2020							$	690.9	$	264.0	$	954.9
Goodwill related to sale of Precima								(3.2)		—		(3.2)
Effects of foreign currency translation		3.2		—		3.2		(22.6)		—		(22.6)
Balance at June 30, 2019	$	696.3	$	264.0	$	960.3
Balance at March 31, 2020							$	665.1	$	264.0	$	929.1

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

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

12. RESTRUCTURING AND OTHER CHARGES

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

2822

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following tables summarize the restructuring and other charges incurred by reportable segment for all restructuring activities for the periods presented.


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

(1)	For the three months ended March 31, 2020, restructuring and other charges consisted of adjustments to our liability.


	Termination		Asset		Lease		Other
Three Months Ended March 31, 2019	Benefits		Impairments		Termination Costs		Exit Costs		Total
	(in millions)
Corporate/Other	$	—	$	—	$	—	$	—	$	—
LoyaltyOne		1.2		4.6		—		2.1		7.9
Card Services		—		—		—		—		—
Total	$	1.2	$	4.6	$	—	$	2.1	$	7.9

The Company’s liability for restructuring and other charges is recognized in accrued expenses and other liabilities in its unaudited condensed consolidated balance sheets. The following table summarizes the activities related to the restructuring and other charges, as discussed above, for the three months ended March 31, 2020:


	Termination		Asset		Lease		Other
Three Months Ended March 31, 2020	Benefits		Impairments		Termination Costs		Exit Costs		Total
	(in millions)
Liability as of January 1, 2020	$	34.7	$	—	$	—	$	0.1	$	34.8
Adjustments for non-cash charges		(6.5)		—		—		—		(6.5)
Cash payments		(13.2)		—		—		(0.1)		(13.3)
Liability as of March 31, 2020	$	15.0	$	—	$	—	$	—	$	15.0

The Company’s outstanding liability related to restructuring and other charges is expected to be settled by the end of 2021, with the majority settled in 2020.

Index

~~12.~~ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

13. DEBT

Debt consists of the following:


	June 30,		December 31,				March 31,		December 31,
Description	2019		2018		Maturity	Interest Rate	2020		2019		Maturity	Interest Rate
	(Dollars in millions)						(Dollars in millions)
Long-term and other debt:
2017 revolving line of credit	$	905.0	$	740.0	June 2022	⁽¹⁾	$	250.0	$	—	December 2022	⁽¹⁾
2017 term loans		2,900.0		2,938.1	June 2022	⁽¹⁾		2,003.4		2,028.8	December 2022	⁽²⁾
BrandLoyalty credit agreement		157.9		183.7	June 2020	⁽²⁾		—		—	June 2020	⁽³⁾
Senior notes due 2021		500.0		500.0	November 2021	5.875%
Senior notes due 2022		600.0		600.0	August 2022	5.375%
Senior notes due 2022 (€400.0 million)		454.8		458.8	March 2022	4.500%
Senior notes due 2023 (€300.0 million)		341.1		344.1	November 2023	5.250%
Senior notes due 2024								850.0		850.0	December 2024	4.750%
Total long-term and other debt		5,858.8		5,764.7				3,103.4		2,878.8
Less: Unamortized debt issuance costs		33.2		39.3				27.3		28.9
Less: Current portion		310.5		138.9				101.4		101.4
Long-term portion	$	5,515.1	$	5,586.5			$	2,974.7	$	2,748.5

Deposits:
Certificates of deposit	$	9,158.2	$	8,395.1	Various – July 2019 – June 2024	1.28% to 4.00%	$	7,806.8	$	8,585.2	Various – Apr 2020 to Mar 2025	1.33% to 4.00%
Money market deposits		3,404.1		3,424.3	Non-maturity	⁽³⁾		3,598.8		3,589.8	Non-maturity	⁽⁴⁾
Total deposits		12,562.3		11,819.4				11,405.6		12,175.0
Less: Unamortized debt issuance costs		27.6		25.7				19.9		23.3
Less: Current portion		6,777.4		6,537.7				6,521.5		6,942.4
Long-term portion	$	5,757.3	$	5,256.0			$	4,864.2	$	5,209.3

Non-recourse borrowings of consolidated securitization entities:
Fixed rate asset-backed term note securities	$	5,009.5	$	4,893.3	Various – Aug 2019 – June 2022	1.72% to 3.95%	$	4,891.0	$	4,891.0	Various – May 2020 to Sep 2022	2.03% to 3.95%
Conduit asset-backed securities		1,730.0		2,770.0	Various – Sep 2020 – Apr 2021	⁽⁴⁾		1,480.0		2,405.0	Various – Sep 2020 to Apr 2021	⁽⁵⁾
Total non-recourse borrowings of consolidated securitization entities		6,739.5		7,663.3				6,371.0		7,296.0
Less: Unamortized debt issuance costs		12.5		11.6				10.3		12.0
Less: Current portion		1,170.8		2,717.6				2,520.4		3,030.8
Long-term portion	$	5,556.2	$	4,934.1			$	3,840.3	$	4,253.2

(1)

The interest rate is based upon ~~the London Interbank Offered Rate (“LIBOR”)~~LIBOR plus an applicable margin. At ~~June 30, 2019,~~March 31, 2020, the weighted average interest rate ~~was 4.51% and 4.15%~~ for the revolving line of credit ~~and~~was 2.64%.

(2)

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

~~(2)~~(3)

The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. ~~At June 30, 2019, the weighted average interest rate was 1.25% and 1.65% for the BrandLoyalty revolving line of credit and term loans, respectively.~~

~~(3)~~(4)

The interest rates are based on the Federal Funds rate plus an applicable margin. At ~~June 30,~~March 31, 2020, the interest rates ranged from 0.34% to 3.50%. At December 31, 2019, the interest rates ranged from ~~1.90%~~1.84% to 3.50%.

~~(4)~~(5)

The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At ~~June 30,~~March 31, 2020, the interest rates ranged from 2.10% to 2.49%. At December 31, 2019, the interest rates ranged from ~~3.41%~~2.79% to ~~3.50%~~2.96%.

At ~~June 30, 2019,~~March 31, 2020, the Company was in compliance with its financial covenants.

Long-term and Other Debt

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

BrandLoyalty Credit Agreement

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

2924

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Long-term and Other Debt~~

~~In February 2019, Alliance Data International LLC became an additional guarantor under the credit agreement.~~

On April ~~30, 2019, the Company amended~~3, 2020, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, terminated its existing facility and entered into a new credit agreement ~~to provide~~(the “2020 BrandLoyalty Credit Agreement”) 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,~~provides for 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 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.

~~As of June 30, 2019, the Company’s credit agreement, as amended, provided for $3,052.6 million in term loans subject to certain principal repayments and a $1,572.4 million~~committed revolving line of credit ~~with $667.4~~of €30.0 million ~~total availability.~~

~~In July 2019,~~($32.4 million as of April 3, 2020), an uncommitted revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), and an accordion feature permitting BrandLoyalty to request an increase in either the ~~Company made a mandatory payment~~committed or uncommitted line of ~~$500.0~~credit up to €80.0 million ($86.5 million as of April 3, 2020) in aggregate. Each of the committed and uncommitted revolving line of credit ~~facility, with~~are schedule to mature on April 3, 2023, subject to BrandLoyalty’s request to extend for 2 additional one-year terms at the aggregate revolving credit commitments reduced to $1,072.4 million, and extinguished all of its senior notes, which had an outstanding balance of $1.9 billion. The Company expects to incur a loss from the extinguishment of debt of approximately $71.3 million, resulting from the redemption price of eachabsolute discretion of the ~~notes~~lenders at the time of ~~$49.1 million~~such requests.

All advances under the 2020 BrandLoyalty Credit Agreement are denominated in Euros. The interest rate fluctuates and is equal to EURIBOR, as defined in the ~~write-off~~2020 BrandLoyalty Credit Agreement, plus an applicable margin based on BrandLoyalty’s senior net leverage ratio. The 2020 BrandLoyalty Credit Agreement contains financial covenants, including a senior net leverage ratio, as well as usual and customary negative covenants, representations, general and information undertakings and events of ~~deferred issuance costs of $22.2 million.~~default.

Non-Recourse Borrowings of Consolidated Securitization Entities

Asset-Backed Term Notes

~~In February 2019, Master Trust I issued $562.5~~As of March 31, 2020, the Company collected $225.3 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series ~~2019-A asset-backed term~~2017-A notes, which mature in ~~February 2022.~~May 2020. 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~~cash is restricted to the securitization investors and ~~$25.3~~ ~~million of notes that were retained by the Company and eliminated from~~is reflected in other current assets in the Company’s unaudited condensed consolidated balance ~~sheets.~~

Insheet as of March 2019, $550.0 million of Series 2012-A asset-backed term notes, $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.

In June 2019, Master Trust I issued $399.2 million of Series 2019-B asset-backed term notes, which mature in June 2022. The offering consisted of $350.0 million of Class A notes with a fixed interest rate of 2.49% per year, $31.2 million of Class M notes with a fixed interest rate of 3.04% per year and $18.0 ~~million of notes that were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets.~~

In June 2019, $466.7 million of Series 2012-D asset-backed term notes, $77.0 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.31, 2020.

Conduit Facilities

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

~~In May 2019, the WFC Trust amended its 2009-VFN conduit facility, increasing the capacity from $1,975.0 million to $2,175.0 million and extending the maturity to April 2021.~~

As of ~~June 30, 2019,~~March 31, 2020, total capacity under the conduit facilities was $4.7 billion, of which ~~$1.7~~$1.5 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

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

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~13.~~14. DERIVATIVE INSTRUMENTS

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in interest rates and foreign currency exchange rates.

The Company 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 ~~June 30, 2019,~~March 31, 2020, the Company does not maintain any derivative instruments subject to master agreements that would require the Company to post collateral or that contain any credit-risk related contingent features.

The Company enters into foreign currency derivatives to reduce the volatility of the Company’s cash flows resulting from changes in foreign currency exchange rates associated with certain inventory transactions, some of which are designated as cash flow hedges. The Company generally hedges foreign currency exchange rate risks for periods of 12 months or less. As of ~~June 30, 2019,~~March 31, 2020, the maximum term over which the Company is hedging its exposure to the variability of future cash flows associated with certain inventory transactions is 811 months.

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

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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

The following tables present the fair values of the derivative instruments included within the Company’s unaudited condensed consolidated balance sheets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	June 30, 2019						March 31, 2020
	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	$	19.9	$	0.1	Other current assets	July 2019 to February 2020	$	19.6	$	1.1	Other current assets	April 2020 to December 2020
Foreign currency exchange hedges	$	50.2	$	0.8	Other current liabilities	July 2019 to January 2020	$	9.5	$	0.3	Other current liabilities	April 2020 to February 2021

Not designated as hedging instruments:
Foreign currency exchange forward contract	$	63.3	$	0.5	Other current liabilities	July 2019


	December 31, 2018						December 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	$	5.2	$	0.3	Other current assets	January 2019 to April 2019	$	5.5	$	0.2	Other current assets	January 2020 to February 2020
Foreign currency exchange hedges	$	20.3	$	0.3	Other current liabilities	March 2019 to November 2019	$	7.8	$	0.3	Other current liabilities	February 2020 to July 2020

Not designated as hedging instruments:
Foreign currency exchange forward contract	$	61.6	$	3.5	Other current assets	January 2019 to February 2019

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

Derivatives Designated as Hedging Instruments

~~Losses~~Gains of ~~$0.1~~$0.3 million, net of tax, and ~~$0.2~~losses of $0.1 million, net of tax, were recognized in other comprehensive income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, respectively, related to foreign currency exchange hedges designated as effective. Gains of $1.4 million and $1.3 million, net of tax, were recognized in other comprehensive income for the three and six months ended June 30, 2018, respectively, related to foreign currency exchange hedges designated as effective.

Changes in the fair value of these hedges are recorded in other comprehensive income until the hedged transactions affect net income. Reclassifications from accumulated other comprehensive loss into net income (cost of operations) for each of the periods presented were not material. At ~~June 30, 2019, $0.4~~March 31, 2020, $0.2 million is expected to be reclassified from accumulated other comprehensive ~~loss~~income into net income in the coming 12 months.

Derivatives Not Designated as Hedging Instruments

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

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019, losses of $1.2 million ~~and $2.4 million, respectively,~~ related to foreign currency exchange forward contracts not designated as hedging instruments were recognized in general and administrative expense in the Company’s unaudited condensed consolidated statements of income.

~~For~~15. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the ~~three~~Federal Deposit Insurance Corporation (“FDIC”) seeking the FDIC’s approval to merge Comenity Bank with and ~~six months ended June 30, 2018, gains~~into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of ~~$1.2 million~~Financial Institutions and ~~$8.2 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 Hedge~~

The Company designated its Euro-denominated 5.250% senior notes due 2023 (€300.0 million) and €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 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 ratesDelaware Office of the ~~Euro~~State Bank Commissioner, respectively, in connection with ~~respect~~the proposed merger. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the ~~U.S. dollar. The change in fair value~~outcome or timing of the net investment hedge due to remeasurement is recorded in other comprehensive income. For the three and six months ended June 30, 2019, losses of $7.3 million and gains of $4.9 million, net of tax, respectively, were recognized in other comprehensive income and no ineffectiveness was recorded on the net investment hedge. For the three and six months ended June 30, 2018, gains of $31.0 million and $19.3 million, net of tax, respectively, were recognized in other comprehensive income and no ineffectiveness was recorded on the net investment hedge. With the repayment of the Euro-denominated senior notes in July 2019, the net investment hedge will be discontinued, and the unamortized amount will remain in accumulated other comprehensive income (loss) until the Company’s investment in its foreign subsidiary is disposed of or substantially liquidated.

~~14. RESTRUCTURING CHARGES~~

In the first quarter of 2019, BrandLoyalty incurred $7.9 million in restructuring charges associated with the wind-down of Merison, a retail marketing division included in the LoyaltyOne segment. The restructuring charges consisted of inventory impairment charges of $3.4 million, contract termination costs of $2.1 million, fixed asset impairment charges of $1.2 million and severance charges of $1.2 million. These charges were recorded to cost of operations in the Company’s unaudited condensed consolidated statements of income. No charges were recorded in the second quarter, and these charges are not expected to continue.

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. Due to the sale of Epsilon, the Company incurred restructuring charges in the Corporate segment as a result of efforts to realign the organization. For the three months ended June 30, 2019, the Company incurred severance charges of $11.3 million and asset impairment charges of $11.1 million related to assets primarily utilized to support the Epsilon segment. These restructuring charges were recognized as general and administrative expense in the Company’s unaudited condensed consolidated statements of income.

such review.

3226

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~As of June 30,~~Indemnification

On July 1, 2019, the ~~Company’s outstanding liability~~Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (“Publicis”). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to ~~corporate restructuring was $7.7 million~~a Department of Justice (“DOJ”) investigation. The DOJ investigation relates to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon has actively cooperated with the DOJ in connection with its ongoing investigation. The Company records a loss contingency when a loss is ~~recognized in accrued expenses in~~probable and an amount can be reasonably estimated. For the ~~unaudited condensed consolidated balance sheets. This liability is expected to be substantially settled by~~year ended December 31, 2019, ~~with~~ the ~~remainder~~Company recorded a loss contingency of $32.9 million, net of tax, which was included in loss from discontinued operations. As these estimates are initially developed substantially earlier than when the ultimate loss is known, no assurance can be given that the investigation will be resolved on these, or other, terms. Therefore, this loss contingency may be refined each period as additional information becomes available. As of March 31, 2020, there was no change to ~~be settled by June 2020.~~the Company’s estimate of loss contingency.

~~The Company may incur additional restructuring charges as it evaluates its current leased office space and the potential termination of contracts.~~

~~15.~~16. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

The Company had an authorized 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 six months ended June 30, 2019, the Company acquired a total of 1.3 million shares of its common stock for $222.8 million under its respective stock repurchase programs. As of June 30, 2019, the Company did not have any amounts remaining under its authorized stock repurchase program.

In July 2019, the Company’s Board of Directors authorized a new stock repurchase program to acquire up to $1.1 billion of its outstanding common stock from July 5, 2019 through June 30, 2020.

~~On July 19,~~ As of December 31, 2019, the Company ~~issued a press release announcing~~had $347.8 million remaining under its authorized stock repurchase program. On April 23, 2020, the ~~commencement~~Company announced that it has suspended its stock repurchase program.

For the three months ended March 31, 2020, the Company did not repurchase any shares of ~~a tender offer to acquire up to $750 million in aggregate purchase price of~~ its ~~issued and~~ outstanding common stock, ~~through a modified “dutch auction” tender offer at a price not greater than $162.00 nor less than $144.00 per share, to~~and the seller in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions described in the Offer to Purchase dated July 19, 2019 and in the related Letter of Transmittal (which together, as they may be amended or supplemented from time to time, constitute the “Offer”), is scheduled to expire one minute after 11:59 P.M. New York City Time, on Thursday, August 15, 2019, unless the Offer is extended.Company had $347.8 million remaining under its authorized stock repurchase program.

Stock Compensation Expense

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company awarded ~~137,339~~124,344 service-based restricted stock units with a weighted average grant date fair value per share of ~~$169.31~~$100.14 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant is employed by the Company on each such vesting date.

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company awarded ~~420,239~~219,186 performance-based restricted stock units with a weighted average grant date fair value per share of ~~$173.21~~$100.50 as determined on the date of grant with pre-defined vesting criteria that permit a range from 0% to 150% to be earned. If the performance targets are met, the restrictions will lapse with respect to 33% of the award on February ~~15, 2020,~~18, 2021, an additional 33% of the award on February ~~15, 2021~~18, 2022 and the final 34% of the award on February 18, ~~2022,~~2023, provided that the participant is employed by the Company on each such vesting date.

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company also awarded ~~37,878~~20,770 restricted stock units with a market-based condition subject to pre-defined vesting criteria that permit a range from 0% to 175% to be earned. The fair market value of these awards is ~~$129.15~~$78.92 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,~~18, 2022, provided that the participant is employed by the Company on such vesting date.

3327

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ is as follows:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
	(in millions)								(in millions)
Cost of operations	$	6.5	$	5.5	$	13.2	$	13.5	$	2.7	$	6.7
General and administrative		3.7		6.5		8.4		12.1		2.0		4.6
Total	$	10.2	$	12.0	$	21.6	$	25.6	$	4.7	$	11.3

~~Effective April 12,~~For the three months ended March 31, 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 agreement provided for certain unvested restricted stock units held by Epsilon employees to be modified, with original vesting conditions to be accelerated upon consummation of the sale of Epsilon. Additionally, the agreement provided for certain other awards held by Epsilon employees to be cancelled upon consummation of the sale of Epsilon. As a result, in April 2019 the Company recorded $19.4an additional $9.8 million of ~~incremental~~ stock-based compensation expense ~~in discontinued operations~~ related to associates from the ~~modifications, net of cancellations. Stock-based compensation expense included in loss from~~Company’s divested Epsilon segment was recorded to discontinued operations totaled $19.9 million and $29.7 million for the three and six months ended June 30, 2019, respectively, and $8.8 million and $20.7 million for the three and six months ended June 30, 2018, respectively.operations.

Dividends

On ~~February 7, 2019,~~January 30, 2020, 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,~~14, 2020, resulting in a dividend payment of ~~$33.4~~$30.0 million on March 19, ~~2019.~~

2020. Additionally, the Company paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2020.

On April ~~25, 2019,~~23, 2020, the Company’s Board of Directors declared a quarterly cash dividend of ~~$0.63~~$0.21 per share on the Company’s common stock ~~and $6.30 per share on the Company’s Series A Non-Voting Convertible Preferred Stock, each~~ to stockholders of record at the close of business on May 14, ~~2019, resulting in a dividend payment of $33.0 million~~2020 and payable on June 18, ~~2019.~~2020.

~~Additionally, the company paid $0.6 million in cash related to dividend equivalent rights for the six months ended June 30, 2019.~~

On July 18, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.63 per share on the Company’s common stock and $6.30 per share on the Company’s Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on September 4, 2019 and payable on September 26, 2019.

~~Preferred Stock~~

In April 2019, the Company’s Board of Directors 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 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 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

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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 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.

~~16.~~17. ACCUMULATED OTHER COMPREHENSIVE LOSS

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


	Net		Unrealized		Unrealized		Foreign		Accumulated		Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other		Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive		Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended June 30, 2019	on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss
Three Months Ended March 31, 2020											on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss
	(in millions)										(in millions)
Balance at March 31, 2019	$	(1.7)	$	(0.3)	$	(0.2)	$	(125.7)	$	(127.9)
Balance at December 31, 2019											$	2.5	$	(0.1)	$	(7.5)	$	(94.8)	$	(99.9)
Changes in other comprehensive income (loss)		5.4		(0.1)		(7.3)		8.2		6.2		1.6		0.3		—		(23.9)		(22.0)
Balance at June 30, 2019	$	3.7	$	(0.4)	$	(7.5)	$	(117.5)	$	(121.7)
Recognition resulting from the sale of Precima's foreign subsidiaries												—		—		—		3.8		3.8
Balance at March 31, 2020											$	4.1	$	0.2	$	(7.5)	$	(114.9)	$	(118.1)

Net

Unrealized

Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Three Months Ended June 30, 2018

on Securities

Flow Hedges

Investment Hedge

Adjustments ⁽¹⁾

Loss

(in millions)
Balance at March 31, 2018

$
(10.7)

$
(0.2)

$
(53.7)

$
(71.9)

$
(136.5)
Changes in other comprehensive income (loss)

(2.0)

1.4

31.0

(30.3)

0.1
Balance at June 30, 2018

$
(12.7)

$
1.2

$
(22.7)

$
(102.2)

$
(136.4)

Net

Unrealized

Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Six Months Ended June 30, 2019

on Securities

Flow Hedges

Investment Hedge

Adjustments ⁽¹⁾

Income (Loss)

(in millions)
Balance at December 31, 2018

$
(10.7)

$
(0.2)

$
(12.4)

$
(114.8)

$
(138.1)
Changes in other comprehensive income (loss)

14.4

(0.2)

4.9

(2.7)

16.4
Balance at June 30, 2019

$
3.7

$
(0.4)

$
(7.5)

$
(117.5)

$
(121.7)

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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


	Net		Unrealized		Unrealized		Foreign		Accumulated		Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other		Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive		Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Six Months Ended June 30, 2018	on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Income (Loss)
Three Months Ended March 31, 2019											on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss
	(in millions)										(in millions)
Balance at December 31, 2017	$	(8.7)	$	(0.1)	$	(42.0)	$	(89.4)	$	(140.2)
Balance at December 31, 2018											$	(10.7)	$	(0.2)	$	(12.4)	$	(114.8)	$	(138.1)
Changes in other comprehensive income (loss)		(4.0)		1.3		19.3		(12.8)		3.8		9.0		(0.1)		12.2		(10.9)		10.2
Balance at June 30, 2018	$	(12.7)	$	1.2	$	(22.7)	$	(102.2)	$	(136.4)
Balance at March 31, 2019											$	(1.7)	$	(0.3)	$	(0.2)	$	(125.7)	$	(127.9)

(1)

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

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

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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

~~17.~~18. FINANCIAL INSTRUMENTS

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

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


	June 30, 2019				December 31, 2018					March 31, 2020				December 31, 2019
	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	$	16,603.6	$	17,212.9	$	16,816.7		$	17,472.7	$	15,581.1	$	16,432.6	$	18,292.0	$	19,126.0
Credit card receivables held for sale		1,834.3		1,899.5		1,951.6			1,995.5		88.8		91.5		408.0		436.2
Redemption settlement assets, restricted		594.0		594.0		558.6			558.6		568.0		568.0		600.8		600.8
Other investments		300.4		300.4		291.3			291.3		265.1		265.1		259.8		259.8
Derivative instruments		0.1		0.1		3.8			3.8		1.1		1.1		0.2		0.2
Financial liabilities							��
Derivative instruments		1.3		1.3		0.3			0.3		0.3		0.3		0.3		0.3
Deposits		12,534.7		12,655.0		11,793.7			11,768.7		11,385.7		11,575.1		12,151.7		12,303.6
Non-recourse borrowings of consolidated securitization entities		6,727.0		6,773.9		7,651.7			7,626.9		6,360.7		6,365.0		7,284.0		7,333.6
Long-term and other debt		5,825.6		5,907.9		5,725.4			5,755.3		3,076.1		2,903.3		2,849.9		2,878.8

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

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

Credit card 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.~~sale, as well as market data as applicable.

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

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

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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

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

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.

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


			Fair Value Measurements at
			March 31, 2020 Using
	Balance at
	March 31,
	2020		Level 1		Level 2		Level 3
	(in millions)
Mutual funds ⁽¹⁾	$	22.9	$	22.9	$	—	$	—
Corporate bonds ⁽¹⁾		489.2		—		489.2		—
Marketable securities ⁽²⁾		265.1		34.2		230.9		—
Derivative instruments ⁽³⁾		1.1		—		1.1		—
Total assets measured at fair value	$	778.3	$	57.1	$	721.2	$	—

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

3730

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 June 30, 2019 and December 31, 2018:~~

Fair Value Measurements at

June 30, 2019 Using


Balance at






June 30,


2019

Level 1

Level 2

Level 3

(in millions)
Mutual funds ⁽¹⁾

$
24.9

$
24.9

$
—

$
—
Corporate bonds ⁽¹⁾

523.2

—

523.2

—
Marketable securities ⁽²⁾

275.4

25.9

249.5

—
U.S. Treasury bonds ⁽²⁾

25.0

25.0

—

—
Derivative instruments ⁽³⁾

0.1

—

0.1

—
Total assets measured at fair value

$
848.6

$
75.8

$
772.8

$
—

Derivative instruments ⁽³⁾

$
1.3

$
—

$
1.3

$
—
Total liabilities measured at fair value

$
1.3

$
—

$
1.3

$
—


			Fair Value Measurements at								Fair Value Measurements at
			December 31, 2018 Using								December 31, 2019 Using
	Balance at								Balance at
	December 31,								December 31,
	2018		Level 1		Level 2		Level 3		2019		Level 1		Level 2		Level 3
	(in millions)								(in millions)
Mutual funds ⁽¹⁾	$	23.2	$	23.2	$	—	$	—	$	25.1	$	25.1	$	—	$	—
Corporate bonds ⁽¹⁾		491.5		—		491.5		—		536.4		—		536.4		—
Marketable securities ⁽²⁾		266.4		25.0		241.4		—		259.8		26.2		233.6		—
U.S. Treasury bonds ⁽²⁾		24.9		24.9		—		—
Derivative instruments ⁽³⁾		3.8		—		3.8		—		0.2		—		0.2		—
Total assets measured at fair value	$	809.8	$	73.1	$	736.7	$	—	$	821.5	$	51.3	$	770.2	$	—

Derivative instruments ⁽³⁾	$	0.3	$	—	$	0.3	$	—	$	0.3	$	—	$	0.3	$	—
Total liabilities measured at fair value	$	0.3	$	—	$	0.3	$	—	$	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~~Financial Instruments Disclosed but Not Carried at Fair Value

The following tables provide assets and ~~2 within the~~liabilities disclosed but not carried at fair value ~~hierarchy for the three~~as of March 31, 2020 and ~~six months ended June 30, 2019 and 2018.~~December 31, 2019:


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

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

3831

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 June 30, 2019 and December 31, 2018:~~

Fair Value Measurements at

June 30, 2019


Total

Level 1

Level 2

Level 3

(in millions)
Financial assets:

Credit card and loan receivables, net

$
17,212.9

$
—

$
—

$
17,212.9
Credit card receivables held for sale

1,899.5

—

—

1,899.5
Total

$
19,112.4

$
—

$
—

$
19,112.4

Financial liabilities:

Deposits

$
12,655.0

$
—

$
12,655.0

$
—
Non-recourse borrowings of consolidated securitization entities

6,773.9

—

6,773.9

—
Long-term and other debt

5,907.9

—

5,907.9

—
Total

$
25,336.8

$
—

$
25,336.8

$
—


	Fair Value Measurements at								Fair Value Measurements at
	December 31, 2018								December 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	$	17,472.7	$	—	$	—	$	17,472.7	$	19,126.0	$	—	$	—	$	19,126.0
Credit card receivables held for sale		1,995.5		—		—		1,995.5		436.2		—		—		436.2
Total	$	19,468.2	$	—	$	—	$	19,468.2	$	19,562.2	$	—	$	—	$	19,562.2

Financial liabilities:
Deposits	$	11,768.7	$	—	$	11,768.7	$	—	$	12,303.6	$	—	$	12,303.6	$	—
Non-recourse borrowings of consolidated securitization entities		7,626.9		—		7,626.9		—		7,333.6		—		7,333.6		—
Long-term and other debt		5,755.3		—		5,755.3		—		2,878.8		—		2,878.8		—
Total	$	25,150.9	$	—	$	25,150.9	$	—	$	22,516.0	$	—	$	22,516.0	$	—

~~18.~~19. INCOME TAXES

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, the Company utilized an effective tax rate of ~~26.6%~~(18.1)% and ~~21.2%, respectively, to calculate its provision for income taxes. For the three and six months ended June 30, 2018, the Company utilized an effective tax rate of 14.9% and 20.6%~~16.3%, respectively, to calculate its provision for income taxes. The ~~increase in the~~negative effective tax rate for ~~three months ended June 30, 2019 as compared to~~ the ~~three months ended June 30, 2018~~first quarter of 2020 was ~~primarily due to~~the result of a discrete tax benefit ~~associated~~and reduction of tax reserves following a favorable settlement with ~~foreign restructuring, offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc. in the prior year quarter. It is reasonably possible that there could be~~ a ~~change in the amount of unrecognized~~state tax benefits within the next 12 months related to an ongoing Canadian tax audit. We estimate that this change in the unrecognized tax benefits within the next 12 months could be a decrease of up to approximately $35 million.

~~Index~~authority.

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~19.~~20. SEGMENT INFORMATION

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

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, theThe Company operates in the LoyaltyOne and Card Services reportable segments, which consist of the following:

●

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

●

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

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

Corporate/

Three Months Ended June 30, 2019

LoyaltyOne

Card Services

Other

Total

(in millions)
Revenues

$
251.5

$
1,096.9

$
0.1

$
1,348.5

Income (loss) before income taxes

$
27.5

$
262.8

$
(96.5)

$
193.8
Interest expense, net

0.8

104.8

37.9

143.5
Operating income (loss)

28.3

367.6

(58.6)

337.3
Depreciation and amortization

19.6

20.8

1.4

41.8
Stock compensation expense

2.9

3.6

3.7

10.2
Strategic transaction costs

0.2

—

2.5

2.7
Restructuring charges

—

—

22.4

22.4
Adjusted EBITDA ⁽¹⁾

51.0

392.0

(28.6)

414.4
Less: Securitization funding costs

—

51.6

—

51.6
Less: Interest expense on deposits

—

53.2

—

53.2
Adjusted EBITDA, net ⁽¹⁾

$
51.0

$
287.2

$
(28.6)

$
309.6

Corporate/

Three Months Ended June 30, 2018

LoyaltyOne

Card Services

Other

Total

(in millions)
Revenues

$
248.6

$
1,148.5

$
0.1

$
1,397.2

Income (loss) before income taxes

$
44.3

$
307.3

$
(88.5)

$
263.1
Interest expense, net

1.3

92.0

40.3

133.6
Operating income (loss)

45.6

399.3

(48.2)

396.7
Depreciation and amortization

21.5

25.3

1.8

48.6
Stock compensation expense

2.4

3.1

6.5

12.0
Adjusted EBITDA ⁽¹⁾

69.5

427.7

(39.9)

457.3
Less: Securitization funding costs

—

55.2

—

55.2
Less: Interest expense on deposits

—

36.8

—

36.8
Adjusted EBITDA, net ⁽¹⁾

$
69.5

$
335.7

$
(39.9)

$
365.3

4032

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Corporate/

Six Months Ended June 30, 2019

LoyaltyOne

Card Services

Other

Total

(in millions)
Revenues

$
455.3

$
2,227.3

$
0.1

$
2,682.7

Income (loss) before income taxes

$
50.5

$
529.7

$
(173.4)

$
406.8
Interest expense, net

1.9

210.8

74.7

287.4
Operating income (loss)

52.4

740.5

(98.7)

694.2
Depreciation and amortization

39.8

45.0

3.4

88.2
Stock compensation expense

5.8

7.4

8.4

21.6
Strategic transaction costs

0.2

—

2.5

2.7
Restructuring charges

7.9

—

22.4

30.3
Adjusted EBITDA ⁽¹⁾

106.1

792.9

(62.0)

837.0
Less: Securitization funding costs

—

108.8

—

108.8
Less: Interest expense on deposits

—

102.0

—

102.0
Adjusted EBITDA, net ⁽¹⁾

$
106.1

$
582.1

$
(62.0)

$
626.2


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

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


					Corporate/								Corporate/
Six Months Ended June 30, 2018	LoyaltyOne		Card Services		Other		Total
Three Months Ended March 31, 2019									LoyaltyOne		Card Services		Other		Total
	(in millions)								(in millions)
Revenues	$	474.9	$	2,303.7	$	0.3	$	2,778.9	$	203.8	$	1,130.4	$	—	$	1,334.2

Income (loss) before income taxes	$	71.4	$	596.6	$	(159.8)	$	508.2	$	23.0	$	266.9	$	(76.9)	$	213.0
Interest expense, net		2.6		179.6		78.5		260.7		1.1		106.0		36.8		143.9
Operating income (loss)		74.0		776.2		(81.3)		768.9		24.1		372.9		(40.1)		356.9
Depreciation and amortization		43.5		50.1		3.8		97.4		20.1		24.3		2.0		46.4
Stock compensation expense		5.9		7.6		12.1		25.6		3.0		3.7		4.6		11.3
Restructuring charges										7.9		—		—		7.9
Adjusted EBITDA ⁽¹⁾		123.4		833.9		(65.4)		891.9		55.1		400.9		(33.5)		422.5
Less: Securitization funding costs		—		107.3		—		107.3		—		57.3		—		57.3
Less: Interest expense on deposits		—		72.3		—		72.3		—		48.7		—		48.7
Adjusted EBITDA, net ⁽¹⁾	$	123.4	$	654.3	$	(65.4)	$	712.3	$	55.1	$	294.9	$	(33.5)	$	316.5

(1)

Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on GAAP plus stock compensation expense, (benefit) provision for income taxes, interest expense, net, depreciation and other amortization and amortization of purchased intangibles. ~~In 2019, adjusted~~Adjusted EBITDA also ~~excluded~~excludes the gain on the sale of Precima, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, ~~as well as the~~and restructuring ~~charges associated with the wind-down of a division within BrandLoyalty in the first quarter of 2019~~ and ~~a reorganization of Corporate, resulting from the sale of Epsilon.~~other charges.

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

4133

Index

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~20.~~21. 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:


	June 30,		June 30,		March 31,		March 31,
	2019		2018		2020		2019
	(in millions)				(in millions)
Cash and cash equivalents	$	4,069.0	$	3,449.2	$	4,456.8	$	3,725.1
Restricted cash included within other current assets ⁽¹⁾		39.8		33.8		253.2		47.6
Restricted cash included within redemption settlement assets, restricted⁽²⁾		45.9		44.2		55.9		43.3
Total cash, cash equivalents and restricted cash	$	4,154.7	$	3,527.2	$	4,765.9	$	3,816.0

(1)

Includes cash restricted for principal and interest repayments of non-recourse borrowings of consolidated securitized debt and other restricted cash within other current assets. At March 31, 2020, restricted cash included $225.3 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt that matures in May 2020.

(2)

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

Additionally, non-cash financing activities for the six months ended June 30, 2019 included 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 for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock. For more information, see Note 15, “Stockholders’ Equity.”

4234

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. Examples of forward-looking statements include, but are not limited to, statements we make regarding strategic initiatives, ~~the expected use of proceeds from the Epsilon transaction,~~ our expected operating results, future economic conditions including currency exchange rates, future dividend declarations and the guidance we give with respect to our anticipated financial performance. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:

●

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

●

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

●

increases in net charge-offs in credit card and loan ~~receivables;~~receivables and increases in the allowance for loan loss that may result from the application of the current expected credit loss model;

●

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

●

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

●

failure to realize expected cost savings from restructuring plans;

●

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

●

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

●

loss of active AIR MILES^®Reward Program collectors;

●

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

●

increased redemptions by AIR MILES Reward Program collectors;

●

unfavorable fluctuations in foreign currency exchange rates;

●

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

●

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

●

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

●

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

●

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

●

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

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

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

4335

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, ~~2018,~~2019, filed with the Securities and Exchange Commission, or SEC, on February 26, 2019, as well as the consolidated financial statements and the notes thereto included in our Form 8-K, filed with the SEC on July 17, 2019, to reflect the presentation of our Epsilon segment as a discontinued operation.28, 2020.

~~2019~~2020 Recent Developments

●

~~For the six months ended June 30, 2019, as compared to the six months ended June 30, 2018:~~

●

~~Revenue decreased 3% to $2.7 billion.~~

●

~~Net income decreased 25% to $288.1 million.~~

●

~~Earnings per share decreased 21% to $5.45.~~

●

~~Adjusted EBITDA, net decreased 12% to $626.2 million.~~

●

~~We repurchased approximately 1.3 million shares of~~Effective February 3, 2020, our ~~common stock for $222.8 million for the six months ended June 30, 2019.~~

●

~~We paid dividends of $67.0 million for the six months ended June 30, 2019.~~

●

~~In the first quarter of 2019, we incurred $7.9 million in restructuring charges associated with the wind-down of Merison, a retail marketing division within BrandLoyalty.~~

●

~~In the second quarter of 2019, we incurred $22.4 million in restructuring charges associated with the reorganization of Corporate, resulting from the sale of Epsilon.~~

●

~~We purchased four credit card portfolios for preliminary cash consideration of $936.5 million during the six months ended June 30, 2019.~~

●

~~We sold four credit card portfolios for preliminary cash consideration of $539.3 million during the six months ended June 30, 2019.~~

●

~~On June 5, 2019, the~~ Board of Directors ~~of Alliance Data~~ appointed ~~Melisa A. Miller, who led Alliance Data’s Card Services business,~~Ralph Andretta as Alliance Data’s ~~new~~ President and Chief Executive Officer as well as a Director of the Company. ~~She succeeds Ed Heffernan who announced his resignation~~

●

For the three months ended March 31, 2020, as ~~President~~compared to the three months ended March 31, 2019:

●

Revenue increased 4% to $1.4 billion.

●

Net income decreased 80% to $30.0 million.

●

Earnings per share decreased 78% to $0.63.

●

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

●

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

●

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

●

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

●

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

COVID-19 Update

On ~~July 1, 2019, we completed~~March 11, 2020, the ~~previously announced sale~~World Health Organization, or WHO, declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. Both prior to and in response to this declaration and the rapid spread of ~~our Epsilon business~~COVID-19 around the world and within the United States, international, federal, state and local governments have imposed varying degrees of restrictions on social and commercial activity to ~~Publicis Groupe, S.A. for $4.4 billion~~promote social distancing in ~~cash, subject~~an effort to ~~certain adjustments specified therein. In July 2019, proceeds from~~slow the sale were used to extinguish all of our outstanding senior notes of $1.9 billion and to make a mandatory payment of $500.0 million on our revolving credit facility. We expect to incur a loss from the extinguishment of debt of approximately $71.3 million, resulting from the redemption price of eachspread of the ~~notes of $49.1 million~~illness. As a result, COVID-19 restrictions have adversely impacted and ~~the write-off of deferred issuance costs of $22.2 million.~~

~~In July 2019,~~continue to adversely impact our ~~Board of Directors authorized a new stock repurchase program to acquire up to $1.1 billion of~~associates, our ~~outstanding common stock from July 5, 2019 through June 30, 2020.~~business partners, and our customers.

In response to the COVID-19 pandemic, first and foremost, we have prioritized the health and safety of our associates. Effective teleworking protocols are in place for more than 95% of our associates. Cross-training programs have been completed at our Card Services business to ensure appropriate workforce coverage while managing higher cardholder-related call volumes resulting from forbearance programs introduced in response to the COVID-19 pandemic. These forbearance programs include the option to waive the next payment or enroll in short-term hardship programs for eligible accountholders. We are working closely with our partners across all of our businesses to optimize their budgets, adjust marketing support accordingly and accommodate the rapid shift to ecommerce in light of retail-based store closings to reduce the spread of COVID-19. At LoyaltyOne, we are adjusting the timing of significant coalition and sponsor-specific promotions and marketing programs for our coalition loyalty program. Additionally, we are enhancing efforts on redemption categories that focus on high-demand, non-travel reward options, stay-at-home products and services, and AIR MILES Cash redemptions. We are extending the length of certain short-term loyalty programs, allowing consumers a better opportunity to collect and redeem prior to program expiration.

4436

Index

We continue to monitor the rapidly evolving situation and guidance from international, federal, state and local government and public health authorities. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows at this time. However, we expect COVID-19 to have an adverse impact on future revenue growth as well as overall profitability. In particular, our allowance for loan loss under the CECL model may be volatile due to changes in the macroeconomic environment. We continue to evaluate and implement additional cost saving measures in procurement, marketing and operating expenses, while maintaining service levels and positioning for future growth.

Consolidated Results of Operations


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019		2018		% Change		2019		2018		% Change		2020		2019		% Change
	(in millions, except percentages)												(in millions, except percentages)
Revenues
Services	$	66.4	$	102.8	(35)	%	$	139.7	$	195.4	(29)	%	$	46.6	$	73.3	(36)	%
Redemption, net		153.7		147.5	4			265.5		279.4	(5)			120.9		111.9	8
Finance charges, net		1,128.4		1,146.9	(2)			2,277.5		2,304.1	(1)			1,214.3		1,149.0	6
Total revenue		1,348.5		1,397.2	(3)			2,682.7		2,778.9	(3)			1,381.8		1,334.2	4
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		654.8		593.6	10			1,295.3		1,185.2	9			499.2		640.5	(22)
Provision for loan loss		257.3		311.9	(17)			509.5		649.6	(22)			655.9		252.1	160
General and administrative		57.3		46.4	23			95.5		77.8	23			23.9		38.3	(38)
Depreciation and other amortization		19.3		19.8	(3)			39.9		39.1	2			17.4		20.6	(16)
Amortization of purchased intangibles		22.5		28.8	(22)			48.3		58.3	(17)			21.4		25.8	(17)
Total operating expenses		1,011.2		1,000.5	1			1,988.5		2,010.0	(1)			1,217.8		977.3	25
Operating income		337.3		396.7	(15)			694.2		768.9	(10)			164.0		356.9	(54)
Interest expense
Securitization funding costs		51.6		55.2	(7)			108.8		107.3	1			49.9		57.3	(13)
Interest expense on deposits		53.2		36.8	45			102.0		72.3	41			60.3		48.7	24
Interest expense on long-term and other debt, net		38.7		41.6	(7)			76.6		81.1	(6)			28.4		37.9	(25)
Total interest expense, net		143.5		133.6	7			287.4		260.7	10			138.6		143.9	(4)
Income from continuing operations before income taxes		193.8		263.1	(26)			406.8		508.2	(20)			25.4		213.0	(88)
Provision for income taxes		51.4		39.3	31			86.1		104.5	(18)
(Benefit) provision for income taxes														(4.6)		34.8	(113)
Income from continuing operations		142.4		223.8	(36)			320.7		403.7	(21)			30.0		178.2	(83)
Loss from discontinued operations, net of taxes		(3.4)		(6.0)	(44)			(32.6)		(21.9)	48			—		(29.1)	nm	*
Net income	$	139.0	$	217.8	(36)	%	$	288.1	$	381.8	(25)	%	$	30.0	$	149.1	(80)	%

Key Operating Metrics:
Credit card statements generated		70.1		74.6	(6)	%		142.9		152.4	(6)	%		67.4		72.7	(7)	%
Credit sales	$	7,551.3	$	7,567.9	—	%	$	13,866.7	$	14,373.5	(4)	%	$	6,099.1	$	6,315.4	(3)	%
Average credit card and loan receivables	$	16,797.5	$	17,570.4	(4)	%	$	16,823.9	$	17,646.4	(5)	%	$	18,294.4	$	16,850.2	9	%
AIR MILES reward miles issued		1,422.5		1,444.7	(2)	%		2,680.7		2,671.0	—	%		1,315.8		1,258.1	5	%
AIR MILES reward miles redeemed		1,050.3		1,068.1	(2)	%		2,138.8		2,246.3	(5)	%		994.0		1,088.5	(9)	%

*	not meaningful

Three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018~~March 31, 2019

Revenue. Total revenue ~~decreased $48.7~~increased $47.6 million, or 3%4%, to ~~$1,348.5~~$1,381.8 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$1,397.2~~$1,334.2 million for the three months ended ~~June 30, 2018.~~March 31, 2019. The net ~~decrease~~increase was due to the following:

●

Services. Revenue decreased ~~$36.4~~$26.7 million, or ~~35%~~36%, to ~~$66.4~~$46.6 million for the three months ended ~~June 30, 2019~~March 31, 2020 primarily due to the sale of Precima in January 2020, which resulted in a $14.6 million decrease in revenue as ~~a result of a $36.5~~compared to the prior year quarter, and an $11.4 million decrease in merchant fee revenue due to increased ~~royalty~~ payments to our retailers, ~~associated with~~including new clients.

●

Redemption, net. Revenue increased ~~$6.2~~$9.0 million, or 4%8%, to ~~$153.7~~$120.9 million for the three months ended ~~June 30, 2019. Redemption~~March 31, 2020 as redemption revenue ~~related to~~from our short-term loyalty programs increased ~~17% primarily~~$8.4 million due to strong ~~program~~ performance in ~~Europe,~~ Asia and ~~Brazil. This increase was partially offset by~~Europe. However, in response to COVID-19, certain of our customers have delayed their short-term loyalty programs, which may negatively impact our redemption revenue in the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $9.1 million decrease in revenue. Redemption revenue was also negatively impacted $9.8 million by the outsourcingsecond quarter of ~~additional rewards inventory during the three months ended June 30, 2019. As we did not control these goods prior to transfer to the collector, the revenue is recorded on a net basis.~~2020.

Index

●

Finance charges, net. Revenue ~~decreased $18.5~~increased $65.3 million, or 2%6%, to ~~$1,128.4~~$1,214.3 million for the three months ended ~~June 30, 2019. This decrease~~March 31, 2020. The increase was ~~primarily~~ driven by an approximate 20170 basis point ~~decrease~~increase in finance charge yield, ~~due to~~which increased revenue by $78.2 million, offset in part by a ~~decline~~1% decrease in normalized average receivables, which includes receivables held for sale, that decreased revenue by $12.9 million. The increase in finance ~~charges and~~charge yield was due primarily to higher late fees ~~driven~~charged to cardholders per occurrence. We would expect finance charges, net to be negatively impacted by ~~new program launches and~~forbearance programs offered in response to COVID-19 as well as the ~~portfolios of credit card receivables sold.~~recent interest rate cuts by the Federal Reserve.

~~Index~~

Cost of operations. Cost of operations ~~increased $61.2~~decreased $141.3 million, or ~~10%~~22%, to ~~$654.8~~$499.2 million for the three months ended ~~June 30, 2019~~March 31, 2020 as compared to ~~$593.6~~$640.5 million for the three months ended ~~June 30, 2018.~~March 31, 2019. The ~~net increase~~decrease was due to the following:

●

Within the LoyaltyOne segment, cost of operations ~~increased $22.1~~decreased $26.0 million primarily due to ~~an increase~~the sale of Precima in ~~cost of redemptions, as cost of redemptions related to our short-term loyalty programs increased $21.5~~January 2020, which resulted in a $23.9 million ~~due to the increase in redemption revenue discussed above. Within our coalition loyalty program, cost of operations increased $1.9 million, as a~~ decrease in cost of ~~redemptions due in part~~operations as compared to the ~~outsourcing of additional rewards inventory during the three months ended June 30, 2019 was offset by an increase in other operating expenses.~~prior year quarter.

●

Within the Card Services segment, cost of operations ~~increased $39.1~~decreased $115.3 million primarily due to a ~~$25.9~~$55.7 million ~~increase~~decrease in valuation adjustments to certain portfolios within credit card receivables held for sale as well as a ~~$19.3 million increase in credit card processing costs. These increases were offset in part by a $6.2~~$33.0 million decrease in payroll and benefits costs due to ~~lower incentive compensation~~cost saving initiatives executed in the ~~current year period.~~fourth quarter of 2019.

Provision for loan loss. Provision for loan loss ~~decreased $54.6~~increased $403.8 million, or ~~17%~~160%, to ~~$257.3~~$655.9 million for the three months ended ~~June 30, 2019~~March 31, 2020 as compared to ~~$311.9~~$252.1 million for the three months ended ~~June 30, 2018,~~March 31, 2019, due ~~primarily~~ to ~~a decrease in net charge-offs~~the weaker macroeconomic environment and the impact of COVID-19, as well as ~~a decrease~~the adoption of ASC 326 and the implementation of the CECL model on January 1, 2020. The CECL model is influenced by the prevailing economic conditions and forecast utilized; deterioration of those conditions may result in ~~the change~~an increase in ~~credit card and~~our provision for loan ~~receivables in the current quarter as compared to the prior year quarter.~~loss.

General and administrative. General and administrative expenses ~~increased $10.9~~decreased $14.4 million, or ~~23%~~38%, to ~~$57.3~~$23.9 million for the three months ended ~~June 30, 2019~~March 31, 2020 as compared to ~~$46.4~~$38.3 million for the three months ended ~~June 30, 2018, primarily~~March 31, 2019, driven by cost saving initiatives implemented in the first half of 2019, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs. Payroll and benefits expense decreased $7.2 million for the three months ended March 31, 2020 as compared to the prior year quarter due to ~~$22.4 million in restructuring charges related to Corporate reorganization, offset in part by lower discretionary benefits.~~these cost saving initiatives.

Depreciation and other amortization. Depreciation and other amortization decreased ~~$0.5~~$3.2 million, or 3%16%, to ~~$19.3~~$17.4 million for the three months ended ~~June 30, 2019~~March 31, 2020 as compared to ~~$19.8~~$20.6 million for the three months ended ~~June 30, 2018,~~March 31, 2019, primarily due to certain fully depreciated property and equipment at ~~LoyaltyOne.~~LoyaltyOne, offset in part by additional assets placed into service from recent capital expenditures.

Amortization of purchased intangibles. Amortization of purchased intangibles decreased ~~$6.3~~$4.4 million, or ~~22%~~17%, to ~~$22.5~~$21.4 million for the three months ended ~~June 30, 2019,~~March 31, 2020, as compared to ~~$28.8~~$25.8 million for the three months ended ~~June 30, 2018,~~March 31, 2019, primarily due to certain fully amortized intangible assets, including portfolio ~~premiums and customer contracts.~~premiums.

Interest expense, net. Total interest expense, net ~~increased $9.9~~decreased $5.3 million, or 7%4%, to ~~$143.5~~$138.6 million for the three months ended ~~June 30, 2019~~March 31, 2020 as compared to ~~$133.6~~$143.9 million for the three months ended ~~June 30, 2018.~~March 31, 2019. The net ~~increase~~decrease was due to the following:

●

Securitization funding costs. Securitization funding costs decreased ~~$3.6~~$7.4 million due to lower average borrowings, which decreased funding costs by approximately ~~$9.6~~$4.1 million, ~~offset in part by higher~~and lower average interest rates, which ~~increased~~decreased funding costs by approximately ~~$6.0~~$3.3 million.

●

Interest expense on deposits. Interest expense on deposits increased ~~$16.4~~$11.6 million due to higher average interest rates, which increased interest expense by approximately ~~$14.0~~$12.0 million, ~~and higher~~offset in part by lower average borrowings, which ~~increased~~decreased interest expense by approximately ~~$2.4~~$0.4 million.

●

Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased ~~$2.9~~$9.5 million primarily due to ~~a $3.5~~an $18.5 million decrease ~~in amortization of debt issuance costs, offset in part by a $1.4 million increase~~ in interest expense on term debt and revolving line of credit due to ~~higher~~lower average borrowings, offset in part by a $10.1 million increase in interest ~~rates as a result~~expense due to the issuance of ~~increases~~senior notes in ~~the LIBOR rate.~~December 2019.

Index

Taxes. Income tax ~~expense related to~~benefit from continuing operations ~~increased $12.1 million to $51.4~~was $4.6 million for the three months ended ~~June 30, 2019 from $39.3~~March 31, 2020, and provision for income taxes was $34.8 million for the three months ended ~~June 30, 2018,~~March 31, 2019. This change was primarily related to a ~~lower~~$187.6 million reduction in taxable income. The effective tax rate for the three months ended ~~June 30, 2018 due~~March 31, 2020 was (18.1)% as compared to ~~a tax benefit associated with foreign restructuring, offset in part by the negative impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc. in~~16.3% for the prior year quarter. The negative effective tax rate for the ~~current~~first quarter of 2020 was ~~26.6% as compared to 14.9% for~~ the ~~prior year quarter.~~result of a discrete tax benefit and reduction of tax reserves following a favorable settlement with a state tax authority.

Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes was ~~$3.4~~$29.1 million for the three months ended ~~June 30,~~March 31, 2019, ~~as compared to $6.0 million for the three months ended June 30, 2018. Loss from discontinued operations, net of taxes~~which represents ~~Epsilon net income (loss) as well as certain direct costs identifiable~~

~~Index~~

to the Epsilon segment and allocations of interest expense on corporate debt. The decrease in the loss was due to the decline in depreciation and amortization due to held-for-sale classification in the current year, offset in part by transaction costs incurred directly attributable to the sale of Epsilon.

~~Six months ended June 30, 2019 compared to the six months ended June 30, 2018~~

~~Revenue~~. Total revenue decreased $96.2 million, or 3%, to $2,682.7 million for the six months ended June 30, 2019 from $2,778.9 million for the six months ended June 30, 2018. The decrease was due to the following:

●

~~Services~~. Revenue decreased $55.7 million, or 29%, to $139.7 million for the six months ended June 30, 2019 as a result of a $55.6 million decrease in merchant fee revenue due to increased royalty payments to our retailers associated with new clients.

●

~~Redemption, net~~. Revenue decreased $13.9 million, or 5%, to $265.5 million for the six months ended June 30, 2019. Redemption revenue from our coalition loyalty program decreased $26.1 million due to the net presentation of $18.6 million of revenue from the outsourcing of additional rewards inventory during the six months ended June 30, 2019. As we did not control these goods prior to transfer to the collector, the revenue is recorded on a net basis. Additionally, redemption revenue was negatively impacted by a 5% decrease in AIR MILES reward miles redeemed. These decreases were offset in part by a 5% increase in redemption revenue related to our short-term loyalty programs.

●

~~Finance charges, net~~. Revenue decreased $26.6 million, or 1%, to $2,277.5 million for the six months ended June 30, 2019. This decrease was primarily driven by an approximate 30 basis point decrease in finance charge yield due to a decline in finance charges and late fees.

~~Cost of operations~~~~. Cost~~results of operations ~~increased $110.1 million, or 9%, to $1,295.3 million~~ for ~~the six months ended June 30, 2019 as compared to $1,185.2 million for the six months ended June 30, 2018. The net increase was due to the following:~~

●

~~Within the LoyaltyOne~~our former Epsilon segment, cost of operations increased $5.6 million, primarily due to a $5.5 million increase in cost of redemptions, as a $25.0 million increase in cost of redemptions related to our short-term loyalty programs was offset in part by an $18.6 million decrease related to additional product outsourcing discussed above.

●

Within the Card Services segment, cost of operations increased $104.5 million due to a $64.1 million increase in valuation adjustments to certain portfolios within credit card receivables held for sale, as well as a $41.7 million increase in credit card processing costs.

~~Provision for loan loss~~. Provision for loan loss decreased $140.1 million, or 22%, to $509.5 million for the six months ended June 30, 2019 as compared to $649.6 million for the six months ended June 30, 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 the current quarter as compared to the prior year quarter.

~~General and administrative~~. General and administrative expenses increased $17.7 million, or 23%, to $95.5 million for the six months ended June 30, 2019 as compared to $77.8 million for the six months ended June 30, 2018, primarily due to $22.4 million in restructuring charges related to Corporate reorganization, resulting from the sale of Epsilon in July 2019, offset in part by lower discretionary benefits.

~~Depreciation and other amortization~~. Depreciation and other amortization increased $0.8 million, or 2%, to $39.9 million for the six months ended June 30, 2019 as compared to $39.1 million for the six months ended June 30, 2018, due to additional assets placed into service from recent capital expenditures, offset in part by certain fully depreciated property and equipment at LoyaltyOne.

~~Amortization of purchased intangibles~~. Amortization of purchased intangibles decreased $10.0 million, or 17%, to $48.3 million for the six months ended June 30, 2019, as compared to $58.3 million for the six months ended June 30, 2018, primarily due to certain fully amortized intangible assets, including portfolio premiums and customer contracts.

~~Index~~

~~Interest expense, net~~. Total interest expense, net increased $26.7 million, or 10%, to $287.4 million for the six months ended June 30, 2019 as compared to $260.7 million for the six months ended June 30, 2018. The net increase was due to the following:

●

~~Securitization funding costs~~. Securitization funding costs increased $1.5 million due to higher average interest rates, which increased funding costs by approximately $16.4 million, offset in part by lower average borrowings, which decreased funding costs by approximately $14.9 million.

●

~~Interest expense on deposits~~. Interest expense on deposits increased $29.7 million due to higher average interest rates, which increased interest expense by approximately $25.5 million, and higher average borrowings, which increased interest expense by approximately $4.2 million.

●

~~Interest expense on long-term and other debt, net~~. Interest expense on long-term and other debt, net decreased $4.5 million primarily due to an $8.1 million decrease in interest expense on senior notes, driven by the repayment of senior notes in April 2018, and a $4.1 million decrease in amortization of debt issuance costs. These decreases were offset in part by a $5.5 million increase in interest expense on term debt and a $3.0 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.

~~Taxes.~~ Income tax expense related to continuing operations decreased $18.4 million to $86.1 million for the six months ended June 30, 2019 from $104.5 million for the six months ended June 30, 2018, primarily related to a decrease in taxable income. The effective tax rate for the current year period was 21.2% as compared to 20.6% for the prior year period.

~~Loss from discontinued operations, net of taxes.~~ Loss from discontinued operations, net of taxes increased $10.7 million to a loss of $32.6 million for the six months ended June 30, 2019 as compared to a loss of $21.9 million for the six months ended June 30, 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~~the allocation of interest expense on corporate debt. The increase in the loss was primarily due to transaction costs incurred directly attributable to the sale of Epsilon and increases in other operating costs, offset in part by decreases in depreciation and amortization due to held-for-sale classification in the current year.

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, (benefit) provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. ~~In 2019, adjusted~~Adjusted EBITDA ~~also excluded~~excludes the gain on the sale of Precima, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, ~~as well as certain~~and restructuring ~~charges described in more detail in Note 14, “Restructuring Charges,” of the Notes to Unaudited Condensed Consolidated Financial Statements.~~and other charges.

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

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

Adjusted EBITDA and adjusted EBITDA, net are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either operating income, income from continuing operations or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and

~~Index~~

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 June 30,

Six Months Ended June 30,


2019

2018

2019

2018

(in millions)
Income from continuing operations

$
142.4

$
223.8

$
320.7

$
403.7
Stock compensation expense

10.2

12.0

21.6

25.6
Provision for income taxes

51.4

39.3

86.1

104.5
Interest expense, net

143.5

133.6

287.4

260.7
Depreciation and other amortization

19.3

19.8

39.9

39.1
Amortization of purchased intangibles

22.5

28.8

48.3

58.3
Strategic transaction costs ⁽¹⁾

2.7

—

2.7

—
Restructuring charges ⁽²⁾

22.4

—

30.3

—
Adjusted EBITDA

414.4

457.3

837.0

891.9
Less: Securitization funding costs

51.6

55.2

108.8

107.3
Less: Interest expense on deposits

53.2

36.8

102.0

72.3
Adjusted EBITDA, net

$
309.6

$
365.3

$
626.2

$
712.3

Index


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

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

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

~~(2)~~(3)

Represents costs associated with restructuring or other exit activities. See Note 12, “Restructuring and Other Charges,” of the ~~wind-down of Merison, a retail marketing division within BrandLoyalty, in the first quarter of 2019 and a reorganization of Corporate, resulting from the sale of Epsilon.~~Notes to Unaudited Condensed Consolidated Financial Statements for more information.

Segment Revenue and Adjusted EBITDA, net


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019		2018		% Change		2019		2018		% Change		2020		2019		% Change
	(in millions, except percentages)												(in millions, except percentages)
Revenue:
LoyaltyOne	$	251.5	$	248.6	1	%	$	455.3	$	474.9	(4)	%	$	198.1	$	203.8	(3)	%
Card Services		1,096.9		1,148.5	(4)			2,227.3		2,303.7	(3)			1,183.6		1,130.4	5
Corporate/Other		0.1		0.1	nm	*		0.1		0.3	nm*			0.1		—	nm*
Total	$	1,348.5	$	1,397.2	(3)	%	$	2,682.7	$	2,778.9	(3)	%	$	1,381.8	$	1,334.2	4	%
Adjusted EBITDA, net:
LoyaltyOne	$	51.0	$	69.5	(27)	%	$	106.1	$	123.4	(14)	%	$	57.8	$	55.1	5	%
Card Services		287.2		335.7	(14)			582.1		654.3	(11)			47.0		294.9	(84)
Corporate/Other		(28.6)		(39.9)	(28)			(62.0)		(65.4)	(5)			(21.3)		(33.5)	(36)
Total	$	309.6	$	365.3	(15)	%	$	626.2	$	712.3	(12)	%	$	83.5	$	316.5	(74)	%

*	not meaningful

Three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018~~March 31, 2019

●

LoyaltyOne. Revenue ~~increased $2.9~~decreased $5.7 million, or 1%3%, to ~~$251.5~~$198.1 million for the three months ended ~~June 30, 2019,~~March 31, 2020 due to the sale of Precima in January 2020, which resulted in a $14.6 million decrease in revenue as ~~increases in redemption revenue driven by strong short-term loyalty program performance in Europe, Asia and Brazil were~~compared to the prior year quarter. This decrease was offset in part by ~~the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $13.0~~an $8.8 million ~~decrease~~increase in revenue from our short-term loyalty programs due to strong performance in Asia and ~~a $9.8 million decrease~~Europe. However, in response to COVID-19, certain of our customers have delayed their short-term loyalty programs, which may negatively impact our revenue ~~related to~~in the ~~outsourcing~~second quarter of ~~additional rewards inventory recorded on a net basis.~~2020.

●

Card Services. Revenue ~~decreased $51.6~~increased $53.2 million, or 4%5%, to ~~$1,096.9~~$1,183.6 million for the three months ended ~~June 30, 2019,~~March 31, 2020, driven by ~~a $36.5~~$65.3 million increase in finance charges, net due to an increase in yield driven by higher late fees. This increase was offset in part by an $11.4 million decrease in merchant fees as a result of increased payments ~~associated with~~to our retailers, including new ~~clients, and an $18.5 million decrease in~~clients. We would expect finance charges, net ~~as a result of an approximate 20 basis point~~to be negatively

4940

Index

~~decrease~~impacted by forbearance programs offered in ~~finance charge yield due~~response to ~~a decline in finance charges and late fees, driven~~COVID-19 as well as the recent interest rate cuts by ~~new program launches and~~ the ~~portfolios of credit card receivables sold.~~Federal Reserve.

Adjusted EBITDA, net. Adjusted EBITDA, net decreased ~~$55.7~~$233.0 million, or ~~15%~~74%, to ~~$309.6~~$83.5 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$365.3~~$316.5 million for the three months ended ~~June 30, 2018.~~March 31, 2019. The net decrease was due to the following:

●

LoyaltyOne. Adjusted EBITDA, net ~~decreased $18.5~~increased $2.7 million, or ~~27%~~5%, to ~~$51.0~~$57.8 million for the three months ended ~~June 30, 2019, resulting from higher redemption costs related to product mix.~~

●

~~Card Services~~. Adjusted EBITDA, net decreased $48.5 million, or 14%, to $287.2 million for the three months ended June 30, 2019. Adjusted EBITDA, net was negatively impacted by a decline in merchant fee revenue and an increase in funding costs.

●

~~Corporate/Other~~~~. Adjusted EBITDA, net increased $11.3 million to a loss of $28.6 million for the three months ended June 30, 2019~~March 31, 2020, due to ~~lower discretionary benefits. Restructuring costs of $22.4 million and strategic transaction costs of $2.5 million during the three months ended June 30, 2019 were excluded~~strong performance from ~~adjusted EBITDA, net.~~

~~Six months ended June 30, 2019 compared to the six months ended June 30, 2018~~

●

~~LoyaltyOne~~. Revenue decreased $19.6 million, or 4%, to $455.3 million for the six months ended June 30, 2019, impacted by the decline in both the Euro and the Canadian dollar relative to the U.S. dollar, which resulted in a $27.4 million decrease in revenue, and an $18.6 million decrease in revenue related to the outsourcing of additional rewards inventory recorded on a net basis. These decreases wereour short-term loyalty programs, offset in part by ~~a 5% increase~~the sale of Precima in ~~redemption revenue related to our short-term loyalty programs.~~

●

~~Card Services~~. Revenue decreased $76.4 million, or 3%, to $2,227.3 million for the six months ended June 30, 2019, driven by a $55.6 million decrease in merchant fees as a result of increased payments associated with new clients,January 2020 and a $26.6 million decrease in finance charges, net as a result of an approximate 30 basis point decrease in finance charge yield due to a decline in finance charges and late fees, driven by new program launches and the portfolios of credit card receivables sold.

~~Adjusted EBITDA, net~~. Adjusted EBITDA, net decreased $86.1 million, or 12%, to $626.2 million for the six months ended June 30, 2019 from $712.3 million for the six months ended June 30, 2018. The net decrease was due to the following:

●

~~LoyaltyOne~~~~. Adjusted EBITDA, net decreased $17.3 million, or 14%, to $106.1 million for the six months ended June 30, 2019, resulting from a 5%~~9% decrease in AIR MILES reward miles redeemed ~~an increase~~as a result of COVID-19. We expect AIR MILES reward miles redeemed to continue to be negatively impacted by COVID-19 in ~~cost~~the second quarter of ~~redemptions and an unfavorable foreign exchange rate impact due to~~2020. For the ~~decline in both~~three months ended March 31, 2020, the ~~Euro and~~$8.0 million gain on the ~~Canadian dollar relative to the U.S. dollar, which resulted in a $5.3 million decrease in~~sale of Precima, net of transaction costs was excluded from adjusted EBITDA, net. ~~BrandLoyalty restructuring costs of~~For the three months ended March 31, 2019, $7.9 million ~~during the six months ended June 30, 2019 were~~of restructuring and other charges was excluded from adjusted EBITDA, net.

●

Card Services. Adjusted EBITDA, net decreased ~~$72.2~~$247.9 million, or ~~11%~~84%, to ~~$582.1~~$47.0 million for the ~~six~~three months ended ~~June 30, 2019. Adjusted EBITDA, net~~March 31, 2020 primarily due to a $403.8 million increase in provision for loan loss due to the weaker macroeconomic environment and the impact of COVID-19, as well as the implementation of the CECL model. This was ~~negatively impacted~~offset in part by a ~~decline~~$115.3 million decrease in ~~merchant fee revenue~~cost of operations primarily due to a $55.7 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale as well as a decrease in payroll and ~~an increase~~benefits costs due to cost saving initiatives executed in ~~funding costs.~~the fourth quarter of 2019.

●

Corporate/Other. Adjusted EBITDA, net ~~increased $3.4~~improved $12.2 million to a loss of ~~$62.0~~$21.3 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 due to ~~lower discretionary benefits. Restructuring costs of $22.4 million~~cost saving initiatives implemented in 2019, which among other items included reduced headcount, office space, charitable contributions and ~~strategic transaction costs of $2.5 million during the six months ended June 30, 2019 were excluded from adjusted EBITDA, net.~~overall corporate overhead costs.

~~Index~~

Asset Quality

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

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

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


	June 30,		% of		December 31,		% of		March 31,		% of		December 31,		% of
	2019		Total		2018		Total		2020		Total		2019		Total
	(in millions, except percentages)								(in millions, except percentages)
Receivables outstanding - principal	$	16,670.2	100.0	%	$	16,869.9	100.0	%	$	16,725.4	100.0	%	$	18,413.1	100.0	%
Principal receivables balances contractually delinquent:
31 to 60 days		290.4	1.7	%		303.2	1.8	%	$	295.2	1.8	%	$	337.4	1.8	%
61 to 90 days		202.7	1.2			207.9	1.3			219.4	1.3			233.6	1.3
91 or more days		376.5	2.3			443.4	2.6			481.1	2.9			496.5	2.7
Total	$	869.6	5.2	%	$	954.5	5.7	%	$	995.7	6.0	%	$	1,067.5	5.8	%

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

Index

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

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


	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
	2019			2018			2019			2018			2020			2019
	(in millions, except percentages)												(in millions, except percentages)
Average credit card and loan receivables	$	16,797.5		$	17,570.4		$	16,823.9		$	17,646.4		$	18,294.4		$	16,850.2
Net charge-offs of principal receivables		257.5			282.0			526.9			578.1			320.2			269.3
Net charge-offs as a percentage of average credit card and loan receivables		6.1	%		6.4	%		6.3	%		6.6	%		7.0	%		6.4	%

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

~~Index~~

Liquidity and Capital Resources

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.

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. Comenity Bank and Comenity Capital Bank are considered well capitalized. The actual capital ratios and minimum ratios as of June 30, 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

13.7
%

4.0
%

5.0
%
Common Equity Tier 1 capital to risk-weighted assets

15.3

4.5

6.5

Tier 1 capital to risk-weighted assets

15.3

6.0

8.0

Total capital to risk-weighted assets

16.6

8.0

10.0

Comenity Capital Bank

Tier 1 capital to average assets

13.6
%

4.0
%

5.0
%
Common Equity Tier 1 capital to risk-weighted assets

15.7

4.5

6.5

Tier 1 capital to risk-weighted assets

15.7

6.0

8.0

Total capital to risk-weighted assets

17.0

8.0

10.0

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

On July 1, 2019, we completed the previously announced sale of our Epsilon business to Publicis Groupe, S.A. for $4.4 billion in cash, subject to certain adjustments specified therein. Proceeds will be used for the repayment of corporate debt, to repurchase shares of our common stock, and taxes associated with the sale of Epsilon.

Cash Flow Activity

Operating Activities. We generated cash flow from operating activities of ~~$1,089.7~~$572.5 million and ~~$1,321.8~~$610.8 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The year-over-year decrease in operating cash flows of ~~$232.1~~$38.3 million was primarily due to a decrease in profitability and a decrease in non-cash charges to income, including the provision for loan loss due to a decrease in net charge-offs and depreciation and amortization due to the held-for-sale classification of Epsilon in the current year.lower profitability.

Investing Activities. Cash ~~used in~~provided by investing activities was ~~$514.3~~$1,746.3 million and ~~$236.2~~$717.5 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Significant components of investing activities are as follows:

●

Credit card and loan receivables. Cash ~~decreased $20.9~~increased $1,446.7 million and ~~$121.2~~$758.2 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, due to ~~growth in~~seasonal paydown of credit card and loan ~~receivables in each respective period.~~receivables.

●

~~Purchase~~Proceeds from sale of ~~credit card portfolios.~~business. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, we ~~paid preliminary~~received cash consideration of ~~$936.5~~$25.4 million ~~to acquire four credit card portfolios.~~from the sale of Precima.

●

Proceeds from sale of credit card portfolios. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, we received preliminary cash consideration of ~~$539.3~~$289.5 million from the sale of ~~four credit card portfolios. During the six~~

~~Index~~

~~months ended June 30, 2018, we received cash consideration of $55.6 million from the sale of one~~a credit card portfolio.

●

Capital expenditures. Cash paid for capital expenditures was ~~$92.2~~$15.7 million and ~~$98.5~~$38.7 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Capital expenditures for the three months ended March 31, 2019 included $6.8 million related to our divested Epsilon segment, which was presented as a discontinued operation in the prior year period.

Financing Activities. Cash used in financing activities was ~~$396.6~~$1,503.4 million and ~~$1,869.0~~$1,483.0 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Significant components of financing activities are as follows:

●

Debt. Cash increased ~~$102.5~~$224.6 million ~~in net borrowings~~and $174.2 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~primarily~~respectively, due to ~~the~~ net borrowings under the revolving line of credit. Cash decreased $279.4 million for the six months ended June 30, 2018, primarily due to the net change under the revolving line of credit as well as the early repayment of $500.0 million senior notes due in 2020.

●

Non-recourse borrowings of consolidated securitization entities. Cash decreased ~~$923.9~~$925.0 million and ~~$1,035.0~~$875.3 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities.

●

Deposits. Cash ~~increased $742.8~~decreased $769.4 million and ~~decreased $373.2~~$502.6 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, as a result of net repayments of deposits due to timing of maturities.

●

Dividends. Cash paid for quarterly dividends and dividend equivalents was ~~$67.0~~$30.3 million and ~~$63.3~~$33.9 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Index

●

Treasury shares. Cash paid for treasury shares was $222.8 million ~~and $94.5 million~~ for the ~~six~~three months ended ~~June 30, 2019 and 2018, respectively.~~March 31, 2019. We did not repurchase any treasury shares for the three months ended March 31, 2020.

Liquidity

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


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

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

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

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

We 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. However, continued volatility in the financial and capital markets due to COVID-19 may limit our access to or increase our cost of capital or make capital unavailable on terms acceptable to us or at all.

Debt

Long-term and Other Debt

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.

As of ~~June 30, 2019,~~March 31, 2020, we had ~~$905.0~~$250.0 million outstanding under our revolving line of credit and total availability of ~~$667.4~~$500.0 million. Our total leverage ratio, as defined in our credit agreement, was ~~2.45~~less than 2.0 to 1 at ~~June 30, 2019,~~March 31, 2020, as compared to the maximum covenant ratio of 3.5 to 1.

As of ~~June 30, 2019,~~March 31, 2020, we were in compliance with our debt covenants.

As of March 31, 2020, we had no amounts outstanding under our BrandLoyalty Credit Agreement, which was set to terminate in June 2020. In ~~July 2019, proceeds from~~April 2020, BrandLoyalty terminated its existing facility and entered into a new credit

Index

agreement to provide for a committed revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), an uncommitted revolving line of credit of €30.0 million ($32.4 million as of April 3, 2020), and an accordion feature permitting BrandLoyalty to request an increase in either the ~~sale~~committed or uncommitted revolving line of ~~Epsilon were used~~credit up to ~~extinguish all~~€80.0 million ($86.5 million as of ~~our outstanding senior notes~~April 3, 2020) in aggregate. The revolving lines of ~~$1.9 billion and~~credit mature in April 2023, subject to ~~make a mandatory payment~~BrandLoyalty’s request to extend for two additional one-year terms at the discretion of ~~$500.0 million on our revolving credit facility. In addition,~~ the ~~aggregate revolving credit commitments were reduced to $1,072.4 million.~~lenders.

Deposits

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

As of ~~June 30, 2019,~~March 31, 2020, we had ~~$3.4~~$7.8 billion in certificates of deposit outstanding with interest rates ranging from 1.33% to 4.00% and maturities ranging from April 2020 to March 2025. Certificate of deposit borrowings are subject to regulatory capital requirements.

As of March 31, 2020, we had $3.6 billion in money market deposits outstanding with interest rates ranging from ~~1.90%~~0.34% to 3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

As of June 30, 2019, we had $9.2 billion in certificates of deposit outstanding with interest rates ranging from 1.28% to 4.00% and maturities ranging from July 2019 to June 2024. Certificate of deposit borrowings are subject to regulatory capital requirements.

~~Index~~

Securitization Program

We sell a majority of the credit card receivables originated by Comenity Bank to WFN Credit Company, LLC, which in turn sells them to World Financial Network Credit Card Master Trust, 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 six months ended June 30, 2019, Master Trust I issued $961.7 million of asset-backed term notes with maturities in February 2022 and June 2022, of which $43.3 million were retained by us and eliminated from the unaudited condensed consolidated balance sheets. Additionally, $1.0 billion of asset-backed term notes matured and were repaid, of which $214.5 million were retained by us and eliminated from the unaudited condensed consolidated balance sheets.

As of ~~June 30, 2019,~~March 31, 2020, the WFN Trusts and the WFC Trust had approximately ~~$12.5~~$12.0 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and the WFC Trust and by the performance of the credit card receivables in these credit card securitization trusts.

At ~~June 30, 2019,~~March 31, 2020, we had ~~$6.7~~$6.4 billion of non-recourse borrowings of consolidated securitization entities, of which ~~$1.2~~$2.5 billion is due within the next 12 months. As of ~~June 30, 2019,~~March 31, 2020, total capacity under the conduit facilities was $4.7 billion, of which ~~$1.7~~$1.5 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

In ~~May 2019, the WFC~~April 2020, Master Trust I amended its 2009-VFN conduit facility, ~~increasing~~decreasing the capacity from ~~$1,975.0 million~~$1.18 billion to ~~$2,175.0 million~~$1.0 billion and extending the maturity to July 2021. In April 2020, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $1.3 billion to $1.0 billion and extending the maturity to July 2021.

The following table shows the maturities of borrowing commitments as of ~~June 30, 2019~~March 31, 2020 for the WFN Trusts and the WFC Trust by year:



	2019		2020		2021		2022		Thereafter		Total		2020		2021		2022		2023		Thereafter		Total
	(in millions)												(in millions)
Term notes	$	771.9	$	1,467.2	$	1,852.1	$	918.3	$	—	$	5,009.5	$	1,467.2	$	1,852.1	$	1,571.7	$	—	$	—	$	4,891.0
Conduit facilities ⁽¹⁾		—		2,480.0		2,175.0		—		—		4,655.0		2,480.0		2,175.0		—		—		—		4,655.0
Total ⁽²⁾	$	771.9	$	3,947.2	$	4,027.1	$	918.3	$	—	$	9,664.5	$	3,947.2	$	4,027.1	$	1,571.7	$	—	$	—	$	9,546.0

(1)

Amount represents borrowing capacity, not outstanding borrowings.

(2)

Total amounts do not include ~~$1.3~~$1.1 billion of debt issued by the credit card securitization trusts that was retained by us and eliminated in the unaudited condensed consolidated financial statements.

Index

See Note ~~12,~~13, “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 $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 six months ended June 30, 2019, we acquired a total of 1.3 million shares of our common stock for $222.8 million. At June 30, 2019, we did not have any amounts remaining under our authorization.

~~In July 2019, our Board of Directors authorized a new stock repurchase program to acquire up to~~ $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020.

~~Index~~

~~On July 19,~~ At December 31, 2019 we ~~issued a press release announcing~~had $347.8 million remaining under the ~~commencement of a tender offer to acquire up to $750 million in aggregate purchase price~~stock repurchase program. On April 23, 2020, we announced the suspension of our ~~issued and~~stock repurchase program.

For the three months ended March 31, 2020, we did not repurchase any shares of our outstanding common stock, ~~through a modified “dutch auction” tender offer at a price not greater than $162.00 nor less than $144.00 per share, to~~and we had $347.8 million remaining under the seller in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions described in the Offer to Purchase dated July 19, 2019 and in the related Letterstock repurchase program as of Transmittal (which together, as they may be amended or supplemented from time to time, constitute the “Offer”), is scheduled to expire one minute after 11:59 P.M. New York City Time, on Thursday, August 15, 2019, unless the Offer is extended.March 31, 2020.

Dividends

On ~~February 7, 2019,~~January 30, 2020, our Board of Directors declared a quarterly cash dividend of $0.63 per share on our common stock to stockholders of record at the close of business on February ~~21, 2019,~~14, 2020, resulting in a dividend payment of ~~$33.4~~$30.0 million on March 19, ~~2019.~~2020. Additionally, we paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2020.

On April ~~25, 2019,~~23, 2020, our Board of Directors declared a quarterly cash dividend of ~~$0.63~~$0.21 per share on our common stock ~~and $6.30 per share on our Series A Non-Voting Convertible Preferred Stock, each~~ to stockholders of record at the close of business on May 14, ~~2019, resulting in a dividend payment of $33.0 million~~2020 and payable on June 18, ~~2019.~~2020.

~~Additionally, we paid $0.6 million in cash related to dividend equivalent rights for the six months ended June 30, 2019.~~

On July 18, 2019, our Board of Directors declared a quarterly cash dividend of $0.63 per share on our common stock and $6.30 per share on our Series A Non-Voting Convertible Preferred Stock, each to stockholders of record at the close of business on September 4, 2019 and payable on September 26, 2019.

Critical Accounting Policies and Estimates

~~There~~With the exception of the adoption of ASC 326, 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, ~~2018.~~2019. See “Recently Adopted Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the adoption of ASC 326 on January 1, 2020.

Recently Issued Pronouncements

See “Recently Issued Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards 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~~Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets and the risk factors described in Part II Item 1A included in this report, there has been no other material change from our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 related to our exposure to market risk from interest rate risk, credit risk, and foreign currency exchange rate risk.

~~Index~~

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of ~~June 30, 2019,~~March 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~June 30, 2019~~March 31,

Index

2020 (the end of our ~~second~~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 ~~second~~first quarter ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, except for the implementation of controls to account for the CECL allowance for loan loss as a result of ASC 326. The modified controls have been designed to address risks associated with accounting for the CECL allowance for loan loss under ASC 326.

~~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. See Indemnification in Note 15, “Commitments and Contingencies,” of the Notes to Unaudited Condensed Consolidated Financial Statements.

Item 1A. Risk Factors.

~~There~~Other than as set forth below, there have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~ 2019.

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

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

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

●

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

●

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

●

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

Index

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

●

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

●

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

●

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

●

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

●

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

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

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 ~~June 30, 2019:~~March 31, 2020:


				Total Number of	Approximate Dollar					Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares that					Shares Purchased as	Value of Shares that
				Part of Publicly	May Yet Be					Part of Publicly	May Yet Be
	Total Number of	Average Price Paid		Announced Plans or	Purchased Under the		Total Number of	Average Price Paid		Announced Plans or	Purchased Under the
Period	Shares Purchased ⁽¹⁾	per Share		Programs	Plans or Programs ⁽²⁾		Shares Purchased ⁽¹⁾	per Share		Programs	Plans or Programs ⁽²⁾
					(Dollars in millions)						(Dollars in millions)
During 2019:
April 1-30	5,417	$	165.01	—	$	—
May 1-31	7,672		144.17	—		—
June 1-30	5,389		137.77	—		—
During 2020:
January 1-31							2,956	$	111.40	—	$	347.8
February 1-29							4,110		97.99	—		347.8
March 1-31							35,750		38.13	—		347.8
Total	18,478	$	148.41	—	$	—	42,816	$	48.94	—	$	347.8

(1)

During the period represented by the table, ~~18,478~~42,816 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Savings Plan for the benefit of the employees who participated in that portion of the plan.

(2)

In ~~2018,~~2019, our Board of Directors authorized a new stock repurchase program to acquire up to ~~$500.0 million~~$1.1 billion of our outstanding common stock from ~~August 1, 2018~~July 5, 2019 through ~~July 31, 2019. At December 31, 2018~~June 30, 2020. Our authorization is subject to any restrictions pursuant to the terms of our credit agreements and applicable securities laws or otherwise. On April 23, 2020, we ~~had $222.8 million remaining under~~announced the suspension of our stock repurchase ~~program. At June 30, 2019 we did~~program and do not ~~have any amounts remaining under our authorization.~~intend to make further purchases prior to its termination.

In July 2019, our Board of Directors authorized a new stock repurchase program to acquire up to $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020. Our authorization is subject to any restrictions pursuant to the terms of our credit agreements and applicable securities laws or otherwise.

Item 3. Defaults Upon Senior Securities.

None

Index

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

(a) None

(b) None

~~Index~~

Item 6. Exhibits.

(a) Exhibits:

EXHIBIT INDEX


			Incorporated by Reference					Incorporated by Reference
Exhibit No.	Filer	Description	Form	Exhibit	Filing Date	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	(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	(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	(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	(a)	Specimen Certificate for shares of Common Stock of the Registrant.	10-Q	4	8/8/03

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

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

10.3	(a)	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.	10-Q	10.7	5/6/19
+10.3						(a)	Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant Strategic).	8-K	10.3	2/20/20

#+10.4	(a)	Retirement Agreement, dated as of June 5, 2019, by and between Alliance Data Systems Corporation, ADS Alliance Data Systems, Inc. and Edward J. Heffernan.	8-K	10.1	6/7/19
10.4						(b) (c) (d)	Amendment to Third Amended and Restated Service Agreement, dated as of February 20, 2020, between Comenity Servicing LLC and Comenity Bank.	8-K	99.1	2/25/20

10.5	(b) (c) (d)	Series 2019-B Indenture Supplement, dated as of June 26, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.	8-K	4.1	6/28/19	(a)	Fifth Amendment to Amended and Restated Credit Agreement, dated as of February 13, 2020, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.	10-K	10.125	2/28/20

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

5848

Index


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


*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.

*~~101.INS~~101	(a)	~~XBRL Instance Document –~~The following financial information from Alliance Data Systems Corporation’s Quarterly Report on Form 10-Q for the ~~instance document does not appear~~quarter ended March 31, 2020, formatted in ~~the Interactive Data File because its XBRL tags are embedded within the~~ Inline ~~XBRL Document.~~XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income (Loss), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

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

*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~~and contained in Exhibit 101).

*	Filed herewith

+	Management contract, compensatory plan or arrangement

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

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

5949

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/ TIMOTHY P. KING
		Timothy P. King
		Executive Vice President and Chief Financial Officer

Date: ~~August~~May 6, ~~2019~~2020
	By:	/s/ LAURA SANTILLAN
		Laura Santillan
		Senior Vice President and Chief Accounting Officer

Date: ~~August~~May 6, ~~2019~~2020

6050


	Three Months Ended			Six Months Ended
	June 30, 2018			June 30, 2018
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance
	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables	174,835	$	192.5	203,595	$	227.5


			Fair Value Measurements at
			June 30, 2019 Using
	Balance at
	June 30,
	2019		Level 1		Level 2		Level 3
	(in millions)
Mutual funds ⁽¹⁾	$	24.9	$	24.9	$	—	$	—
Corporate bonds ⁽¹⁾		523.2		—		523.2		—
Marketable securities ⁽²⁾		275.4		25.9		249.5		—
U.S. Treasury bonds ⁽²⁾		25.0		25.0		—		—
Derivative instruments ⁽³⁾		0.1		—		0.1		—
Total assets measured at fair value	$	848.6	$	75.8	$	772.8	$	—

Derivative instruments ⁽³⁾	$	1.3	$	—	$	1.3	$	—
Total liabilities measured at fair value	$	1.3	$	—	$	1.3	$	—

Three Months Ended

March 31,

(in millions)

Net charge-offs of securitized principal