What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-05 · 138 added, 137 removed, 189 unchanged (59% of the section changed)

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2021 Recent Developments

● For the six months ended June 30, 2021, as compared to the six months ended June 30, 2020:

● For the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020:

● Revenue decreased $215.0 million, or 6%, to $3,196.5 million.

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Planned Spinoff of our LoyaltyOne Segment

On May 12, 2021, we announced our intention to spin off our LoyaltyOne segment, comprised of our Canadian AIR MILES Reward Program and Netherlands-based BrandLoyalty business.

We expect the spinoff to be completed by the end of 2021.

The spinoff will be structured as a distribution of 81% of shares issued by a new entity holding the LoyaltyOne segment, or SpinCo, to the stockholders of Alliance Data Systems Corporation, or ADSC, which transaction is intended to qualify as a tax-free reorganization and a tax-free distribution to ADSC and its stockholders for U.S.

federal income tax purposes.

Immediately following the spinoff, ADSC’s stockholders will own shares of both ADSC and SpinCo.

At the time of the spinoff, SpinCo expects to complete a debt financing and pay a dividend to ADSC from the net proceeds of the debt issuance.

These net proceeds will be used for corporate debt reduction.

ADSC expects to retain a 19% interest in the shares of SpinCo at the time of the distribution, with the intent to monetize that stake as appropriate to provide for incremental corporate debt reduction at a future date.

The proposed spinoff is subject to customary conditions, including final approval by the Company’s board of directors, receipt of a favorable private letter ruling from the Internal Revenue Service, the filing with the SEC and effectiveness of a Form 10 registration statement, approval for listing of SpinCo’s common stock on a national securities exchange and completion of any necessary financings.

No assurance can be given regarding the form that a spinoff transaction may take or the specific terms or timing thereof, or that a spinoff will in fact occur.

On October 13, 2021, the Board of Directors of Alliance Data Systems Corporation, or ADSC, approved the previously announced separation (the “Separation”) of its LoyaltyOne segment, consisting of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc.

listed on Nasdaq under the symbol “LYLT” (“Loyalty Ventures”).

The Separation will be completed through the pro rata distribution of 81% of the outstanding shares of Loyalty Ventures to holders of ADSC’s common stock at the close of business on the record date of October 27, 2021, with ADSC retaining the remaining 19% of the outstanding shares of Loyalty Ventures.

ADSC stockholders of record at the close of business on October 27, 2021 will receive one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADSC common stock.

The distribution is expected to qualify as a tax-free reorganization and a tax-free distribution to ADSC and its stockholders for U.S.

federal income tax purposes and is expected to be completed on November 5, 2021.

The completion of the distribution is subject to a number of customary conditions, including ADSC’s receipt of an opinion from its tax advisor confirming that the distribution qualifies as tax-free for U.S.

federal income tax purposes for ADSC and its stockholders (except for cash received in lieu of fractional shares).

ADSC has received a private letter ruling from the Internal Revenue Service to this effect.

The ADSC Board reserves the right in its discretion to delay the distribution, change any of the terms relating to the distribution, or abandon the distribution.

COVID-19 Update

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Credit performance remained strong, attributable to our prudent risk management strategy changes, deliberate underwriting actions, and direct consumer stimulus payments resulting in greater customer liquidity and ability to pay.

For the six months ended June 30, 2021, our net loss rate was 5.0%, with a delinquency rate of 3.3% for the period ended June 30, 2021.

For the six months ended June 30, 2020, our net loss rate was 7.3%, with a delinquency rate of 4.3% for the period ended June 30, 2020.

As the impact of direct consumer stimulus payments tempers in the second half of 2021, we anticipate credit metrics and payment rates will begin to normalize.

In June 2021 credit sales returned to pre-pandemic levels, with credit sales for the second quarter of 2021 increasing 22% as compared to the first quarter of 2021 and 54% as compared to the second quarter of

The majority of the credit sales improvement can be attributed to in‐store sales, which have benefitted from increased consumer confidence and mobility.

AIR MILES Reward Program issuances and redemptions for the second quarter of 2021 increased 2% and 8%, respectively, as compared to the first quarter of 2021, and 8% and 32%, respectively, as compared to the second quarter of 2020.

These improved metrics reflect an increase in consumer discretionary spending as well as continuing strength in merchandise redemptions.

The AIR MILES Reward Program continues to emphasize more non‐travel options, driving higher merchandise redemptions.

In addition, the AIR MILES Reward Program is working with airline partners to plan for the increasing return of airline bookings and travel during the second half of 2021.

At BrandLoyalty, new program activity is increasing with consumers actively engaged in loyalty campaigns, with particular success in products focused on the home.

For the three months ended September 30, 2021, our net loss rate was 3.9%, with a delinquency rate of 3.8% for the period ended September 30, 2021.

For the three months ended September 30, 2020, our net loss rate was 5.8%, with a delinquency rate of 4.7% for the period ended September 30, 2020.

For the year ended December 31, 2021, we expect our credit sales to increase at a double-digit growth rate, and we expect a net loss rate in the high 4% range for the year.

We expect credit metrics and payment rates to continue to moderate into 2022 as government stimulus programs expire.

AIR MILES Reward Program issuances and redemptions for the third quarter of 2021 increased 1% and 12%, respectively, as compared to the second quarter of 2021, while issuance declined 7% but redemptions increased 30%, respectively, as compared to the third quarter of 2020.

The increase in redemptions can be attributed to the improvement in our travel-related categories.

Issuance for the third quarter of 2021 was down due to timing of promotional activity.

At BrandLoyalty, new program activity is increasing with consumers actively engaged in loyalty campaigns.

However, both the varying degrees of restrictions impacting the U.K.

and many Asian and European countries, as well as recent disruptions to port services in southern China amid COVID-19 resurgences exacerbating already challenged global supply chain conditions, could negatively impact our results of operations in the second half of 2021.

and many Asian and European countries, as well as recent disruptions to port services in southern China amid COVID-19 resurgences exacerbating already challenged global supply chain conditions, have impacted our third quarter results and could negatively impact our results of operations in the fourth quarter of 2021.

Despite the availability of vaccines, surges in COVID-19 cases, including variants of the strain, may adversely impact the economic recovery and our industry outlook.

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Consolidated Results of Operations

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions, except percentages)

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AIR MILES reward miles redeemed

Three months ended June 30, 2021 compared to the three months ended June 30, 2020

Total revenue increased $33.1 million, or 3%, to $1,012.4 million for the three months ended June 30, 2021 from $979.3 million for the three months ended June 30, 2020.

Three months ended September 30, 2021 compared to the three months ended September 30, 2020

Total revenue increased $48.8 million, or 5%, to $1,099.3 million for the three months ended September 30, 2021 from $1,050.5 million for the three months ended September 30, 2020.

The net increase was due to the following:

Revenue decreased $17.2 million, or 46%, to $20.7 million for the three months ended June 30 , 2021 due to a $17.2 million decrease in merchant fee revenue resulting from increased payments to our retailers as volumes increased from the prior year quarter.

Credit sales increased 54% for the three months ended June 30, 2021 as compared to the prior year quarter.

Revenue decreased $14.2 million, or 58%, to $10.5 million for the three months ended September 30 , 2021 due to a $9.2 million decrease in merchant fee revenue resulting from increased payments to our retailers as volumes increased from the prior year quarter.

Additionally, revenue associated with servicing certain third-

party credit card receivables decreased $4.4 million for the three months ended September 30, 2021 as compared to the prior year quarter due to lower volumes of these third-party credit card receivables.

● Redemption, net .

Revenue decreased $5.9 million, or 7%, to $78.8 million for the three months ended June 30, 2021, as redemption revenue from our short-term loyalty programs decreased $5.2 million due to delays in programs in market with the impact of COVID-19, offset in part by favorability in foreign currency exchange rates.

Revenue decreased $16.0 million, or 14%, to $97.1 million for the three months ended September 30, 2021, as redemption revenue from our short-term loyalty programs decreased $18.8 million due to the number and timing of programs in market due to the continuing impact of COVID-19.

● Finance charges, net .

Revenue increased $56.2 million, or 7%, to $912.9 million for the three months ended June 30, 2021 due to the negative impact on our revenue of the pandemic-related consumer relief programs we offered in the second quarter of 2020.

The increase in finance charge yield of approximately 275 basis points increased revenue by $105.0 million.

This increase was offset in part by a 6% decrease in average credit card and loan receivables including held for sale receivables, that decreased revenue by $48.8 million as payment rates continue to be elevated from consumer economic stimulus.

Revenue increased $79.0 million, or 9%, to $991.7 million for the three months ended September 30, 2021 due to the increase in finance charge yield of approximately 190 basis points, which increased revenue by $72.3 million, resulting from higher late fees as revenue in 2020 was impacted by consumer relief programs, and a decline in charge-offs for unpaid interest and fees of $51.6 million.

Additionally, a 1% increase in average credit card and loan receivables including held for sale receivables, increased revenue $6.7 million.

Cost of operations .

Cost of operations increased $1.7 million to $494.5 million for the three months ended June 30, 2021 as compared to $492.8 million for the three months ended June 30, 2020.

Cost of operations increased $6.5 million, or 1%, to $489.2 million for the three months ended September 30, 2021 as compared to $482.7 million for the three months ended September 30, 2020.

The net increase was due to the following:

● Within the LoyaltyOne segment, cost of operations increased $8.3 million due to a $6.3 million increase in payroll and benefits expense, including an increase in incentive compensation and exempt wages, and a $7.1 million increase in operating expenses across various expense categories such as associate engagement at BrandLoyalty and marketing for additional AIR MILES Reward Program promotions.

These increases were offset in part by a $5.1 million decrease in cost of redemptions due to the decline in redemption revenue discussed above.

● Within the Card Services segment, cost of operations decreased $6.6 million due to operating expense efficiencies, a reduction in fraud losses, and a reduction in asset impairment charges that were recorded in the prior year quarter.

These decreases were offset in part by an increase in operating expenses related to our Bread acquisition in December 2020, an increase in marketing expense as the prior year quarter was impacted by COVID-19, and an increase in operating expenses related to higher volumes such as data processing, credit card expenses and the Company’s transformative efforts, including the Fiserv core processing platform migration.

● Within the LoyaltyOne segment, cost of operations decreased $26.5 million (net of a gain on sale of an investment to an affiliate of the Company which was eliminated upon consolidation) due to a $22.7 million decrease in cost of redemptions resulting from the decline in redemption revenue discussed above and a $2.0 million decrease in payroll and benefits expense.

● Within the Card Services segment, cost of operations increased $33.1 million due to a $21.2 million increase in professional services expenses related to strategic initiatives, a $10.9 million increase in marketing expense as the prior year quarter was impacted by COVID-19 and an $8.2 million increase in data processing expense due to the processing platform migration.

These increases were offset in part by a $10.2 million gain recognized on the sale of a credit card portfolio in August 2021.

Provision for loan loss .

Provision for loan loss decreased $264.2 million, or 106%, to $(14.1) million for the three months ended June 30, 2021 as compared to $250.1 million for the three months ended June 30, 2020.

The decrease in the provision for loan loss in the current year quarter was due to improved credit performance, lower net charge-offs and improving macroeconomic indicators, which drove a net reserve release of $208.0 million for the three months ended June 30, 2021.

Provision for loan loss decreased $46.6 million, or 22%, to $161.1 million for the three months ended September 30, 2021 as compared to $207.7 million for the three months ended September 30, 2020.

The decrease in the provision for loan loss in the current year quarter was due to improved credit performance and lower net charge-offs.

General and administrative .

General and administrative expenses increased $6.8 million, or 34%, to $27.2 million for the three months ended June 30, 2021 as compared to $20.4 million for the three months ended June 30, 2020, due to a $5.8 million increase in payroll and benefits expense for higher medical claims and severance expense for an executive.

General and administrative expenses increased $5.5 million, or 19%, to $34.5 million for the three months ended September 30, 2021 as compared to $29.0 million for the three months ended September 30, 2020, due to a $3.3 million increase in payroll and benefits expense for higher medical claims and an increase in professional services expenses associated with the planned spinoff.

Depreciation and other amortization .

Depreciation and other amortization decreased $0.3 million, or 2%, to $20.0 million for the three months ended June 30, 2021 as compared to $20.3 million for the three months ended June 30, 2020, primarily due to a $2.5 million decrease in depreciation and amortization in our Card Services segment driven by the Company’s real estate optimization in 2020, offset in part by an increase in depreciation and amortization of $2.4 million in our LoyaltyOne segment driven by previous investments in digital technology.

Depreciation and other amortization increased $0.5 million, or 3%, to $18.9 million for the three months ended September 30, 2021 as compared to $18.4 million for the three months ended September 30, 2020, primarily due to an increase in amortization related to capitalized software, offset in part by a decrease in depreciation and amortization at our Card Services segment from the Company’s real estate optimization in 2020.

Amortization of purchased intangibles .

Amortization of purchased intangibles decreased $9.5 million, or 45%, to $11.5 million for the three months ended June 30, 2021, as compared to $21.0 million for the three months ended June

30, 2020, primarily due to certain fully amortized intangible assets, including BrandLoyalty customer contracts, offset in part by $5.4 million in amortization of purchased intangibles associated with the acquisition of Bread in December 2020.

Amortization of purchased intangibles decreased $8.9 million, or 41%, to $12.8 million for the three months ended September 30, 2021, as compared to $21.7 million for the three months ended September 30, 2020, primarily due to certain fully amortized intangible assets, including BrandLoyalty customer contracts, offset in part by $5.4 million in amortization of purchased intangibles associated with the acquisition of Bread in December 2020.

Interest expense, net .

Total interest expense, net decreased $26.0 million, or 20%, to $101.7 million for the three months ended June 30, 2021 as compared to $127.7 million for the three months ended June 30, 2020.

Total interest expense, net decreased $23.0 million, or 20%, to $92.1 million for the three months ended September 30, 2021 as compared to $115.1 million for the three months ended September 30, 2020.

The net decrease was due to the following:

● Securitization funding costs .

Securitization funding costs decreased $12.3 million due to lower average borrowings, which decreased funding costs by approximately $7.1 million, and lower average interest rates, which decreased funding costs by approximately $5.2 million.

Securitization funding costs decreased $11.5 million due to lower average borrowings, which decreased funding costs by approximately $11.6 million, offset in part by higher average interest rates, which increased funding costs by approximately $0.1 million.

● Interest expense on deposits .

Interest expense on deposits decreased $17.1 million due to lower average balances outstanding, which decreased funding costs by approximately $9.9 million, and lower average interest rates, which decreased funding costs by approximately $7.2 million.

Interest expense on deposits decreased $15.6 million due to lower average interest rates, which decreased funding costs by approximately $10.3 million, and lower average balances outstanding, which decreased funding costs by approximately $5.3 million.

● Interest expense on long-term and other debt, net .

Interest expense on long-term and other debt, net increased $3.4 million primarily due to an $8.8 million increase in interest expense associated with the issuance of senior notes in September 2020 and a $0.5 million increase in amortization of debt issuance costs.

This was offset in part by a $4.6 million decrease in interest expense on term debt and a $2.2 million decrease in interest expense on the revolving line of credit due to lower average borrowings.

Provision for income taxes increased $89.5 million to $98.1 million for the three months ended June 30, 2021 from $8.6 million for the three months ended June 30, 2020.

The effective tax rate for the three months ended June 30, 2021 was 26.4% as compared to 18.3% for the prior year quarter.

The increase in the effective tax rate for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was primarily due to a discrete tax benefit related to the expiration of a statute of limitations in the prior year.

Six months ended June 30, 2021 compared to the six months ended June 30, 2020

Total revenue decreased $263.8 million, or 11%, to $2,097.3 million for the six months ended June 30, 2021 from $2,361.1 million for the six months ended June 30, 2020.

Interest expense on long-term and other debt, net increased $4.1 million primarily due to an $7.9 million increase in interest expense driven by the issuance of senior notes in September 2020, offset in part by a $2.7 million decrease in interest expense on term debt and a $1.9 million decrease in interest expense on the revolving line of credit due to lower average borrowings.

Provision for income taxes increased $24.4 million to $67.0 million for the three months ended September 30, 2021 from $42.6 million for the three months ended September 30, 2020 due to an increase in income before income taxes.

The effective tax rate for the three months ended September 30, 2021 was 23.0% as compared to 24.2% for the prior year quarter.

The decrease in the effective tax rate for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to a discrete tax benefit related to a favorable settlement with a state tax authority in the third quarter of 2021.

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020

Total revenue decreased $215.0 million, or 6%, to $3,196.5 million for the nine months ended September 30, 2021 from $3,411.5 million for the nine months ended September 30, 2020.

The decrease was due to the following:

Revenue decreased $24.5 million, or 29%, to $60.0 million for the six months ended June 30 , 2021 due to a $13.5 million decrease in other servicing fees charged to cardholders, resulting from a decline in revenue from certain payment protection products and an $8.4 million decrease in merchant fee revenue due to increased payments to our retailers as volumes increased from the prior year.

Additionally, the sale of Precima in January 2020 resulted in a $1.9 million decrease in revenue for 2021 as compared to the prior year.

Revenue decreased $38.8 million, or 36%, to $70.4 million for the nine months ended September 30 , 2021 due to a $17.6 million decrease in merchant fee revenue due to increased payments to our retailers as volumes increased from the prior year and a $14.7 million decrease in other servicing fees charged to cardholders resulting from a decline in revenue from certain payment protection products.

● Redemption, net .

Revenue decreased $21.9 million, or 11%, to $183.7 million for the six months ended June 30, 2021 as redemption revenue from our short-term loyalty programs decreased $19.5 million due to delays in programs in market with the impact of COVID-19, offset in part by favorability in foreign currency exchange rates.

Revenue decreased $37.8 million, or 12%, to $280.8 million for the nine months ended September 30, 2021 as redemption revenue from our short-term loyalty programs decreased $38.3 million due to the number and timing of programs in market that continued to be impacted by COVID-19, offset in part by favorability in foreign currency exchange rates.

● Finance charges, net .

Revenue decreased $217.4 million, or 11%, to $1,853.6 million for the six months ended June 30, 2021.

The decline was due to an 11% decrease in average credit card and loan receivables including held for sale receivables, as payment rates continue to benefit from consumer economic stimulus, that decreased revenue by $219.9 million.

Revenue decreased $138.4 million, or 5%, to $2,845.3 million for the nine months ended September 30, 2021.

The decline was due to a 7% decrease in average credit card and loan receivables including held for sale receivables, as payment rates continue to benefit from consumer economic stimulus, that decreased revenue by $212.9 million.

This decrease was offset in part by the increase in finance charge yield of approximately 60 basis points, which increased revenue by $74.5 million.

Cost of operations .

Cost of operations decreased $0.1 million to $992.0 million for the six months ended June 30, 2021 as compared to $992.1 million for the six months ended June 30, 2020.

The net decrease was due to the following:

● Within the LoyaltyOne segment, cost of operations increased $10.7 million due to the gain on the sale of Precima in January 2020 that did not recur in the current year.

Additionally, a $5.8 million increase in payroll and benefits expense related to higher incentive compensation and a $2.2 million increase in marketing expense for additional AIR MILES Reward Program promotions were offset in part by a $12.6 million decrease in cost of redemptions due to the decline in redemption revenue discussed above.

● Within the Card Services segment, cost of operations decreased $10.8 million due to a $63.5 million reduction in fraud losses and a $34.2 million reduction in asset impairment charges that were recorded in the prior year.

These decreases were offset in part by a $33.3 million increase in payroll and benefits expense due to our Bread acquisition in December 2020 and an increase in incentive compensation, an increase in operating expenses related to the Company’s transformative efforts, including the Fiserv core processing platform migration, and a $20.4 million gain on the sale of a credit card portfolio recorded in the prior year.

Cost of operations increased $6.4 million to $1,481.1 million for the nine months ended September 30, 2021 as compared to $1,474.7 million for the nine months ended September 30, 2020.

The net increase was due to the following:

● Within the LoyaltyOne segment, cost of operations decreased $15.8 million (net of a gain on sale of an investment to an affiliate of the Company which was eliminated upon consolidation) due to a $35.3 million decrease in cost of redemptions due to the decline in redemption revenue discussed above.

This decrease was offset in part by the gain on the sale of Precima in January 2020 that did not recur in the current year and a $3.9 million increase in payroll and benefits expense related to higher incentive compensation.

● Within the Card Services segment, cost of operations increased $22.3 million due to a $47.6 million increase in professional services expenses related to strategic initiatives, a $38.8 million increase in payroll and benefits expense due to our Bread acquisition in December 2020 and an increase in incentive compensation, a $27.3 million increase in marketing expense as the prior year was impacted by COVID-19 and a $16.0 million increase in data processing expense due to the Fiserv core processing platform migration.

These increases were offset in part by a $71.2 million reduction in fraud losses and $34.2 million in asset impairment charges recorded in the second quarter of 2020 that did not recur in the current year.

Provision for loan loss .

Provision for loan loss decreased $886.7 million, or 98%, to $19.3 million for the six months ended June 30, 2021 as compared to $906.0 million for the six months ended June 30, 2020.

The decrease in the provision for loan loss in the current year was due to improved credit performance, lower net charge-offs and improving macroeconomic indicators.

For the six months ended June 30, 2020, there was a significant increase in the provision due to a reserve build in the allowance for loan loss associated with the deterioration of the global macroeconomic outlook as a result of the onset of COVID-19.

Provision for loan loss decreased $933.4 million, or 84%, to $180.3 million for the nine months ended September 30, 2021 as compared to $1,113.7 million for the nine months ended September 30, 2020.

The decrease in the provision for loan loss in the current year was due to improved credit performance, lower net charge-offs and improving macroeconomic variables.

For the nine months ended September 30, 2020, there was a significant increase in the provision due to a reserve build in the allowance for loan loss associated with the deterioration of the global macroeconomic outlook as a result of the onset of COVID-19.

General and administrative .

General and administrative expenses decreased $0.2 million to $44.1 million for the six months ended June 30, 2021 as compared to $44.3 million for the six months ended June 30, 2020, due to a decrease in payroll and benefits expense attributable to lower medical claims.

General and administrative expenses increased $5.4 million, or 7%, to $78.6 million for the nine months ended September 30, 2021 as compared to $73.2 million for the nine months ended September 30, 2020, due to higher data processing expenses and an increase in professional services expenses associated with the planned spinoff.

Depreciation and other amortization .

Depreciation and other amortization increased $5.1 million, or 14%, to $42.8 million for the six months ended June 30, 2021 as compared to $37.7 million for the six months ended June 30, 2020, primarily due to an increase in depreciation and amortization of $4.6 million in our LoyaltyOne segment driven by previous investments in digital technology.

Depreciation and other amortization increased $5.5 million, or 10%, to $61.7 million for the nine months ended September 30, 2021 as compared to $56.2 million for the nine months ended September 30, 2020, primarily due to an increase in depreciation and amortization of $5.5 million in our LoyaltyOne segment driven by previous investments in digital technology.

Amortization of purchased intangibles .

Amortization of purchased intangibles decreased $19.7 million, or 47%, to $22.7 million for the six months ended June 30, 2021, as compared to $42.4 million for the six months ended June 30, 2020, primarily due to certain fully amortized intangible assets, including BrandLoyalty customer contracts, offset in part by $10.8 million in amortization of purchased intangibles associated with the acquisition of Bread in December 2020.

Amortization of purchased intangibles decreased $28.6 million, or 45%, to $35.5 million for the nine months ended September 30, 2021, as compared to $64.1 million for the nine months ended September 30, 2020, primarily due to certain fully amortized intangible assets, including BrandLoyalty customer contracts, offset in part by $16.2 million in amortization of purchased intangibles associated with the acquisition of Bread in December 2020.

Interest expense, net .

Total interest expense, net decreased $55.9 million, or 21%, to $210.3 million for the six months ended June 30, 2021 as compared to $266.2 million for the six months ended June 30, 2020.

Total interest expense, net decreased $78.8 million, or 21%, to $302.5 million for the nine months ended September 30, 2021 as compared to $381.3 million for the nine months ended September 30, 2020.

The net decrease was due to the following:

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Interest expense on long-term and other debt, net increased $8.8 million primarily due to a $25.4 million increase in interest expense associated with the issuance of senior notes in September 2020, offset in part by a $16.2 million decrease in interest expense on term debt due to lower average borrowings.

Provision for income taxes increased $202.4 million to $206.4 million for the six months ended June 30, 2021 from $4.0 million for the six months ended June 30, 2020.

The effective tax rate for the six months ended June 30, 2021 was 26.9% as compared to 5.5% for the prior year.

The increase in the effective tax rate for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was due to discrete tax benefits related to the expiration of a statute of limitations and a favorable tax settlement recorded in the prior year.

Provision for income taxes increased $226.8 million to $273.4 million for the nine months ended September 30, 2021 from $46.6 million for the nine months ended September 30, 2020 due to an increase in income before income taxes.

The effective tax rate for the nine months ended September 30, 2021 was 25.9% as compared to 18.8% for the prior year.

The increase in the effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to greater discrete tax benefits recorded in the prior year, which included the expiration of statutes of limitation related to certain foreign tax matters, a favorable state tax settlement and a benefit related to the issuance of final regulations on the Global Intangible Low-Taxed Income, or GILTI, high tax exception.

Segment Revenue and Income (Loss) Before Income Taxes

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions, except percentages)

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Corporate/Other

Three months ended June 30, 2021 compared to the three months ended June 30, 2020

Total revenue increased $33.1 million, or 3%, to $1,012.4 million for the three months ended June 30, 2021 from $979.3 million for the three months ended June 30, 2020.

not meaningful

Three months ended September 30, 2021 compared to the three months ended September 30, 2020

Total revenue increased $48.8 million, or 5%, to $1,099.3 million for the three months ended September 30, 2021 from $1,050.5 million for the three months ended September 30, 2020.

The net increase was due to the following:

● LoyaltyOne .

Revenue decreased $0.2 million to $150.9 million for the three months ended June 30, 2021, as revenue from our short-term loyalty programs decreased $7.4 million due to the continued impact of the pandemic, offset in part by the favorable impact of foreign currency exchange rates.

Revenue decreased $15.5 million, or 8%, to $169.3 million for the three months ended September 30, 2021, as revenue from our short-term loyalty programs decreased $21.2 million due to the continued impact of the pandemic, offset in part by a $5.7 million increase in revenue from our coalition program driven by a 30% increase in AIR MILES reward miles redeemed.

● Card Services .

Revenue increased $33.3 million, or 4%, to $861.5 million for the three months ended June 30, 2021 , driven by a $56.2 million increase in finance charges, net primarily due to the negative impact on our revenue of pandemic-related consumer relief programs in the second quarter of 2020, offset in part by a $17.2 million decrease in merchant fee revenue due to increased payments to our retailers as both credit sales and volumes increased over the prior year quarter.

Revenue increased $64.3 million, or 7%, to $930.0 million for the three months ended September 30, 2021 , driven by a $79.0 million increase in finance charges, net primarily due to the increase in finance charge yield resulting from higher late fees as revenue in 2020 was impacted by consumer relief programs, and the decline in charge-offs for unpaid interest and fees by $51.6 million.

The increase in Card Services revenue was offset in part by a $9.2 million decrease in merchant fee revenue resulting from increased payments to our retailers as both credit sales and volumes increased from the prior year quarter.

Income Before Income Taxes .

Income before income taxes increased $324.6 million, or 691%, to $371.6 million for the three months ended June 30, 2021 from $47.0 million for the three months ended June 30, 2020.

Income before income taxes increased $114.8 million, or 65%, to $290.7 million for the three months ended September 30, 2021 from $175.9 million for the three months ended September 30, 2020.

The net increase was due to the following:

● LoyaltyOne .

Income before income taxes increased $0.5 million, or 2%, to $24.5 million for the three months ended June 30, 2021.

The increase in income before income taxes was due to an $11.4 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets, offset in part by higher payroll and benefits expense in the current year quarter.

Income before income taxes increased $26.2 million, or 143%, to $44.5 million for the three months ended September 30, 2021.

The increase in income before income taxes was due to a $12.1 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets, a $4.1 million gain on sale of an investment to an affiliate of the Company that was eliminated upon consolidation and net margin improvement from our short-term loyalty programs, offset in part by the decrease in revenue discussed above.

● Card Services .

Income before income taxes increased $334.2 million, or 475%, to $404.5 million for the three months ended June 30, 2021 resulting from a $264.2 million decrease in the provision for loan loss due to improved credit performance, a $29.4 million decrease in interest expense, net due to lower average balances and the increase in revenue discussed above.

Income before income taxes increased $102.1 million, or 48%, to $314.2 million for the three months ended September 30, 2021 resulting from a $46.6 million decrease in the provision for loan loss due to improved credit performance, a $27.1 million decrease in interest expense, net due to lower average balances and the increase in revenue discussed above.

● Corporate/Other .

Loss before income taxes increased $10.1 million for the three months ended June 30, 2021 due to an increase in payroll and benefits expense for higher medical claims and an increase in interest expense associated with the issuance of senior notes in September 2020.

Six months ended June 30, 2021 compared to the six months ended June 30, 2020

Total revenue decreased $263.8 million, or 11%, to $2,097.3 million for the six months ended June 30, 2021 from $2,361.1 million for the six months ended June 30, 2020.

Loss before income taxes increased $9.4 million for the three months ended September 30, 2021 due to an increase in payroll and benefits expense for higher medical claims and an increase in interest expense associated with the issuance of senior notes in September 2020.

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020

Total revenue decreased $215.0 million, or 6%, to $3,196.5 million for the nine months ended September 30, 2021 from $3,411.5 million for the nine months ended September 30, 2020.

The decrease was due to the following:

● LoyaltyOne .

Revenue decreased $21.7 million, or 6%, to $327.5 million for the six months ended June 30, 2021 as revenue from our short-term loyalty programs decreased $22.8 million due to a decline in programs in market across most regions with the impact of COVID-19.

This decrease was offset in part by favorability in foreign currency exchange rates.

Revenue decreased $37.2 million, or 7%, to $496.7 million for the nine months ended September 30, 2021 as revenue from our short-term loyalty programs decreased $44.0 million due to a decline in programs in market across most regions with the impact of COVID-19.

This decrease was offset in part by an increase of $6.8 million in revenue from our coalition program driven by a 6% increase in AIR MILES reward miles redeemed and favorability in foreign currency exchange rates.

● Card Services .

Revenue decreased $242.1 million, or 12%, to $1,769.8 million for the six months ended June 30, 2021 , driven by a $217.4 million decrease in finance charges, net due to a decline in credit card and loan receivables as payment rates continue to benefit from consumer economic stimulus, as well as the sale of a credit card portfolio in 2020.

Revenue decreased $177.7 million, or 6%, to $2,699.8 million for the nine months ended September 30, 2021 , driven by a $138.4 million decrease in finance charges, net due to a decline in credit card and loan receivables as payment rates continue to benefit from consumer economic stimulus, a $17.6 million decrease in merchant fee revenue due to increased payments to our retailers and a $14.7 million decrease in other servicing fees charged to cardholders, resulting from a decline in revenue from certain payment protection products.

Income Before Income Taxes .

Income before income taxes increased $693.7 million, or 958%, to $766.1 million for the six months ended June 30, 2021 from $72.4 million for the six months ended June 30, 2020.

Income before income taxes increased $808.5 million, or 326%, to $1,056.8 million for the nine months ended September 30, 2021 from $248.3 million for the nine months ended September 30, 2020.

The net increase was due to the following:

● LoyaltyOne .

Income before income taxes decreased $14.4 million, or 20%, to $56.2 million for the six months ended June 30, 2021.

The decline in income before income taxes was due to lost margin from the decline in revenue discussed above and the gain on sale of Precima in January 2020 that did not recur in the current year, offset in part by a $22.7 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets.

Income before income taxes increased $11.8 million, or 13%, to $100.7 million for the nine months ended September 30, 2021.

The increase in income before income taxes was due to a $34.9 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets, a $4.1 million gain on sale of an investment to an affiliate of the Company that was eliminated upon consolidation and net margin improvement from our short-term loyalty programs, offset in part by the decrease in revenue discussed above.

● Card Services .

Income before income taxes increased $711.9 million, or 695%, to $814.3 million for the six months ended June 30, 2021 due to an $886.7 million decrease in the provision for loan loss from improved credit performance, improvement in the macroeconomic environment and a decline in credit card and loan receivables.

Income before income taxes also benefitted from a $60.5 million decrease in interest expense, net from lower average balances, the effect of which was offset in part by lower revenue as discussed above.

Income before income taxes increased $814.0 million, or 259%, to $1,128.5 million for the nine months ended September 30, 2021 due to a $933.4 million decrease in the provision for loan loss from improved credit performance, improvement in the macroeconomic environment and a decline in credit card and loan receivables.

Income before income taxes also benefitted from an $87.6 million decrease in interest expense, net from lower average balances, the effect of which was offset in part by lower revenue as discussed above.

● Corporate/Other .

Loss before income taxes increased $3.8 million for the six months ended June 30, 2021 due to an increase in interest expense associated with the issuance of senior notes in September 2020.

Loss before income taxes increased $13.2 million for the nine months ended September 30, 2021 due to an increase in interest expense associated with the issuance of senior notes in September 2020.

Asset Quality

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

September 30,

(in millions, except percentages)

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Credit card 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.

Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due.

Credit card 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.

Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due, including in the case of customer bankruptcies or death.

Credit card 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions, except percentages)

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Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases and payments of 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, including the expenses associated with the proposed spinoff of our LoyaltyOne segment, for at least the next 12 months.

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, including the expenses associated with the planned spinoff of our LoyaltyOne segment, 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, increase our cost of capital or make capital unavailable on terms acceptable to us or at all.

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Operating Activities.

We generated cash flow from operating activities of $733.2 million and $1,067.5 million for the six months ended June 30, 2021 and 2020, respectively.

The year-over-year decrease in operating cash flows of $334.3 million was impacted by the provision for loan loss, offset in part by an increase in working capital.

We generated cash flow from operating activities of $1,208.0 million and $1,488.6 million for the nine months ended September 30, 2021 and 2020, respectively.

The year-over-year decrease in operating cash flows of $280.6 million was primarily due to a decline in profitability after adjusting net income for non-cash charges and an increase in working capital.

Investing Activities .

Cash provided by investing activities was $534.6 million and $3,340.0 million for the six months ended June 30, 2021 and 2020, respectively.

Significant components of investing activities are as follows:

Cash provided by investing activities was $380.7 million and $3,364.8 million for the nine months ended September 30, 2021 and 2020, respectively.

Significant components of investing activities were as follows:

● Credit card and loan receivables.

Cash increased $666.2 million for the six months ended June 30, 2021 due to a decrease in credit card and loan receivables from increases in payment rates that benefitted from government economic stimulus programs.

Cash increased $3,053.4 million for the six months ended June 30, 2020 due to a decrease in credit card and loan receivables as a result of the pandemic-related store closures.

Cash increased $87.9 million for the nine months ended September 30, 2021 due to a decrease in credit card and loan receivables from increases in payment rates that benefitted from government economic stimulus programs.

Cash increased $3,107.8 million for the nine months ended September 30, 2020 due to a decrease in credit card and loan receivables as a result of the pandemic-related store closures.

● Proceeds from sale of business.

During the six months ended June 30, 2020, we received cash consideration of $25.4 million from the sale of Precima.

During the nine months ended September 30, 2020, we received cash consideration of $26.7 million from the sale of Precima.

● Proceeds from sale of credit card portfolio.

During the six months ended June 30, 2020, we received cash consideration of $289.5 million from the sale of a credit card portfolio.

● Purchase of credit card portfolio.

During the six months ended June 30, 2021, we paid cash consideration of $31.5 million for the purchase of a credit card portfolio.

No portfolios were acquired for the six months ended June 30, 2020.

During the nine months ended September 30, 2021 and 2020, we received cash consideration of $512.2 million and $289.5 million, respectively, from the sale of a credit card portfolio in each period.

● Purchase of credit card portfolios.

During the nine months ended September 30, 2021, we paid cash consideration of $99.5 million for the purchase of three credit card portfolios.

No portfolios were acquired for the nine months ended September 30, 2020.

● Capital expenditures.

Cash paid for capital expenditures was $34.9 million and $26.1 million for the six months ended June 30, 2021 and 2020, respectively.

Cash paid for capital expenditures was $58.8 million and $37.9 million for the nine months ended September 30, 2021 and 2020, respectively.

The year-over-year increase was due to additional investments in internally developed software associated with digital tools.

Financing Activities .

Cash used in financing activities was $1,364.6 million and $2,911.6 million for the six months ended June 30, 2021 and 2020, respectively.

Cash used in financing activities was $1,157.1 million and $5,064.3 million for the nine months ended September 30, 2021 and 2020, respectively.

Significant components of financing activities are as follows:

Cash decreased $50.7 million for the six months ended June 30, 2021 due to net repayments of our term loans.

Cash increased $349.3 million for the six months ended June 30, 2020 due to net borrowings under the revolving line of credit.

Cash decreased $76.1 million and $44.5 million for the nine months ended September 30, 2021 and 2020, respectively, due to net repayments of our term loans.

In September 2020, we issued $500.0 million in senior notes and used the net proceeds of $493.8 million to make a prepayment of our term debt under our amended credit agreement.

● Non-recourse borrowings of consolidated securitization entities.

Cash decreased $1,107.9 million and $2,280.0 million for the six months ended June 30, 2021 and 2020, respectively, due to net repayments and maturities under the non-recourse borrowings of consolidated securitization entities and lower borrowings due to declines in credit card and loan receivables.

Cash decreased $176.0 million and $936.4 million for the six months ended June 30, 2021 and 2020, respectively, due to net maturities of deposits.

The volume of deposits as of June 30, 2021 and 2020 was lower as a result of lower liquidity requirements.

Cash paid for quarterly dividends and dividend equivalents was $21.1 million and $40.4 million for the six months ended June 30, 2021 and 2020, respectively.

Cash decreased $1,123.7 million and $2,945.0 million for the nine months ended September 30, 2021 and 2020, respectively, due to net repayments and maturities under the non-recourse borrowings of consolidated securitization entities and lower borrowings due to declines in credit card and loan receivables.

During the nine months ended September 30, 2021, cash increased $88.4 million due to net issuances of deposits.

During the nine months ended September 30, 2020, cash decreased $2,012.0 million due to net maturities of deposits.

The volume of deposits as of September 30, 2021 and 2020 was lower as a result of lower liquidity requirements.

Cash paid for quarterly dividends and dividend equivalents was $31.6 million and $50.5 million for the nine months ended September 30, 2021 and 2020, respectively.

The quarterly dividend was reduced in the second quarter of 2020 from $0.63 to $0.21 per share in response to COVID-19.

Credit Agreement

At June 30, 2021, we had $1,433.6 million in term loans outstanding and a $750.0 million revolving line of credit.

As of June 30, 2021, we had no amounts outstanding under our revolving line of credit and total availability of $750.0 million.

Our total leverage ratio, as defined in our credit agreement, was 1.6 to 1 at June 30, 2021, as compared to the maximum covenant ratio of 4.5 to 1.

As of June 30, 2021, we were in compliance with our debt covenants.

In July 2021, we amended our credit agreement to, among other things, (i) provide consent by the lenders to the spinoff or sale of our LoyaltyOne segment, (ii) extend the maturity date of the revolving loans and approximately 86% of the term loans from December 31, 2022 to July 1, 2024, (iii) revise the method of determining interest rates and commitment fees to be charged in connection with the loans, (iv) modify the financial and operational covenants and certain other provisions in the credit agreement to reflect our business and operations after giving effect to the LoyaltyOne spinoff or sale, (v) require a prepayment of certain of the loans in an amount equal to the net proceeds from the LoyaltyOne spinoff or sale, including any net proceeds from debt that is distributed to us and (vi) add Lon Inc.

and Lon Operations LLC as additional guarantors.

and Lon Operations LLC acquired in our acquisition of Bread as additional guarantors.

At September 30, 2021, we had $1,408.3 million in term loans outstanding and a $750.0 million revolving line of credit.

As of September 30, 2021, we had no amounts outstanding under our revolving line of credit and total availability of $750.0 million.

Our total leverage ratio, as defined in our credit agreement, was 1.5 to 1 at September 30, 2021, as compared to the maximum covenant ratio of 4.5 to 1.

As of September 30, 2021, we were in compliance with our debt covenants.

BrandLoyalty Credit Agreement

In the first quarter of 2021, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, amended its credit agreement to extend the maturity date by one year from April 3, 2023 to April 3, 2024.

As of June 30, 2021, we had no amounts outstanding under our BrandLoyalty Credit Agreement.

As of September 30, 2021, we had no amounts outstanding under our BrandLoyalty Credit Agreement.

Funding Sources

We utilize certificates of deposit and money market deposits 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, 2021, we had $5.2 billion in certificates of deposit outstanding with interest rates ranging from 0.15% to 3.75% and maturities ranging from July 2021 to June 2026.

As of September 30, 2021, we had $5.0 billion in certificates of deposit outstanding with interest rates ranging from 0.20% to 3.75% and maturities ranging from October 2021 to September 2026.

Certificate of deposit borrowings are subject to regulatory capital requirements.

As of June 30, 2021, we had $4.4 billion in money market deposits outstanding with interest rates ranging from 0.39% to 3.50%.

As of September 30, 2021, we had $4.9 billion in money market deposits outstanding with interest rates ranging from 0.37% to 3.50%.

Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

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Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.

During the six months ended June 30, 2021, $1.5 billion of asset-backed term notes matured and were repaid, of which $250.7 million were retained by us and eliminated from the consolidated balance sheets.

During the nine months ended September 30, 2021, $1.8 billion of asset-backed term notes matured and were repaid, of which $265.9 million were retained by us and eliminated from the consolidated balance sheets.

We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card and loan receivables through the trusts.

As of June 30, 2021, total capacity under the conduit facilities was $4.5 billion, of which $2.4 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.

As of September 30, 2021, total capacity under the conduit facilities was $4.5 billion, of which $2.7 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.

In June 2021, Master Trust I amended its 2009-VFN conduit facility, increasing the capacity from $1.0 billion to $2.75 billion and extending the maturity to October 2023.

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In June 2021, the WFC Trust amended its 2009-VFN conduit facility, extending the maturity to August 2022.

As of June 30, 2021, we had approximately $10.4 billion of securitized credit card and loan receivables.

As of September 30, 2021, we had approximately $10.1 billion of securitized credit card and loan 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 trusts and by the performance of the credit card and loan receivables in the trusts.

The following table shows the maturities of borrowing commitments as of June 30, 2021 for the trusts by year:

The following table shows the maturities of borrowing commitments as of September 30, 2021 for the trusts by year:

(in millions)

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Conduit facilities (1)

Secured loan facility

(1) Amount represents borrowing capacity, not outstanding borrowings.

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Comenity Bank and Comenity Capital Bank are considered well capitalized.

The actual capital ratios and minimum ratios as of June 30, 2021 are as follows:

The actual capital ratios and minimum ratios as of September 30, 2021 are as follows:

Minimum Ratio to be

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On April 29, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on May 14, 2021, resulting in an aggregate dividend payment of $10.4 million on June 18, 2021.

Additionally, we paid $0.2 million in cash related to dividend equivalent rights for the six months ended June 30, 2021.

On July 29, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on August 13, 2021 to stockholders of record at the close of business on September 17, 2021.

On July 29, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on August 13, 2021, resulting in an aggregate dividend payment of $10.4 million on September 17, 2021.

Additionally, we paid $0.2 million in cash related to dividend equivalent rights for the nine months ended September 30, 2021.

On October 28, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on December 17, 2021 to stockholders of record at the close of business on November 12, 2021.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis