UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31 2019, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15749
ALLIANCE DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | | 31-1429215 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
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| | 43219 |
Columbus, Ohio | | (Zip Code) |
(Address of principal executive offices) | | |
(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 |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻ No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧ Accelerated filer ◻ Non-accelerated filer (Do not check if a smaller reporting company) ◻ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧
As of June 30, 2019,2021, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $7.0$4.1 billion, based upon the closing price of $140.13$83.15 per share on the New York Stock Exchange on June 28, 2019,30, 2021, which was the last business day of the registrant’s most recently completed second fiscal quarter.
As of February 20, 2020, 47,627,61118, 2022, 49,948,146 shares of common stock were outstanding.
Documents Incorporated By Reference
Certain information called for by Part III is incorporated by reference to certain sections of the Proxy Statement for the 20192022 Annual Meeting of our stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.2021.
ALLIANCE DATA SYSTEMS CORPORATION
INDEX
This report includes trademarks, such as Bread®, which are protected under applicable intellectual property laws and are the property of Alliance Data or its subsidiaries. This report also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.
Throughout this report, unless stated or the context implies otherwise, the terms “Alliance Data,” the “Company,” “we,” “our” or “us” refer to Alliance Data Systems Corporation and its subsidiaries on a consolidated basis, after giving effect to the spinoff of the LoyaltyOne segment into a separate, publicly-traded entity, Loyalty Ventures Inc. (NASDAQ: LYLT). References to “ADSC” refer to Alliance Data Systems Corporation on a parent-only standalone basis. In this report, we refer to the retailers and other companies with whom we do business as our “partners” or “clients”; provided that the use of the term “partner” or “partnering” does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of Alliance Data’s relationship with any third parties.
Caution Regarding Forward-Looking Statements
This Form 10-K 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 initiation or completion of strategic initiatives including our ability to realize the intended benefits of the spinoff of our LoyaltyOne® segment, our expected operating results, future financial performance and outlook, 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 government economic stimulus, relief measures for impacted borrowers and depositors, labor shortages, any government-imposed vaccine mandates and reduction in demand from partners; |
● | loss of, or reduction in demand for services from, significant |
● | increases in fraudulent activity, net charge-offs in credit card and |
● | failure to identify, complete or successfully integrate or disaggregate business acquisitions or |
● | continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations; |
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● | increases in the cost of doing business, including market interest rates; |
● | inability to access |
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● | limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy; |
● | increases in |
● | 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 discussed in Item 1A of this Form 10-K, elsewhere in this Form 10-K and in the documents incorporated by reference in this Form 10-K. |
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-K 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.
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PART I
Item 1.Business.
We are a leading global provider of data-driven marketingtech-forward payment and loyaltylending solutions, serving large,customers and consumer-based industries. We createindustries in North America. Through omnichannel touch points and deploy customizeda comprehensive product suite that includes credit card products and Bread® digital payment solutions, enhancing the critical customer marketing experience and measurably changing consumer behavior while driving businesswe help our partners drive revenue growth and profitability for some of today’s most recognizable brands. We help our clients create and increase customer loyalty, while giving customers greater payment choices. We also offer credit and savings products directly to consumers through solutions that engage millions of customers each day across multiple touch points using traditional, digital, mobile and emerging technologies. Our LoyaltyOne® business owns and operates the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of tailor-made loyalty programs for grocers. Our Card Services business is a provider of market-leading private label, co-brand, and business credit card programs.our proprietary products, including our Comenity-branded financial services.
Our clientpartner base of more than 400600 companies and online merchants consists primarily of large consumer-based businesses, including well-known brands such as Victoria’s Secret, Signet, IKEA, Ulta, Caesars Entertainment, Sephora, Bank of Montreal, Amex Bank of Canada, Sobeys Inc., Shell Canada Products, ReweToyota, Petco and Albert Heijn.Big Lots, as well as small- and medium-sized businesses (SMBs). Our clientpartner base is diversified across a broad range of end-markets,verticals, including financial services, specialty retail, grocerysports, beauty, jewelry, home goods and drugstore chains, petroleum retail, home furnishings and hardware, beauty and jewelry, hospitality and travel and telecommunications.hospitality. We believe our comprehensive suite of payment, lending and saving solutions, along with our related marketing solutionsand data & analytics, offers us a significant competitive advantage as many of our competitors offer a more limited range of services. We believe thewith products relevant across customer segments (Gen Z, Millennial, Gen X). The breadth and quality of our service offerings have enabled us to establish and maintain long-standing clientpartner relationships.
On November 5, 2021, we completed the spinoff of our LoyaltyOne® segment, consisting of the Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company. The entity we created to hold these businesses, Loyalty Ventures Inc., is now listed on Nasdaq under the symbol “LYLT.” The spinoff was completed through the pro rata distribution of 81% of the outstanding shares of Loyalty Ventures Inc. common stock to holders of our common stock at the close of business on the record date of October 27, 2021, with Alliance Data retaining the remaining 19% of the outstanding shares of Loyalty Ventures Inc. common stock. Our stockholders of record received one share of Loyalty Ventures Inc. common stock for every two and one-half shares of Alliance Data common stock held on the record date.
Unless otherwise noted, all discussion below, including amounts and percentages for all periods, reflect the results of operations and financial condition of Alliance Data’s continuing operations. As such, the LoyaltyOne segment, which was classified as discontinued operations as of November 5, 2021, has been excluded. Prior to the spinoff of the LoyaltyOne segment, we had two reportable operating segments (Card Services and LoyaltyOne). We now operate as a single segment that includes all of our continuing operations.
SegmentsBusiness Strategy
Beginning in 2018, our Board of Directors undertook a series of strategic initiatives based on an evaluation of the portfolio of businesses that constituted our company. Subsequently, we completed the sale of Epsilon in July 2019, the sale of our Precima® business (which was part of the LoyaltyOne segment) in January 2020, and the spinoff of our LoyaltyOne segment in November 2021. Through these transactions and other initiatives, we have simplified our business model as a leading provider of tech-forward payment and lending solutions, while also reducing debt and improving leverage and capital ratios. As we have transformed the business, we have made strategic investments in assets with the first quarter of 2019,highest growth potential, focused on expanding our productsproduct suite, diversifying our customer base, developing key strategic relationships, enhancing our core technology, and services are reported under two segments—LoyaltyOnemodernizing and Card Services, and are listed below. Effective March 31, 2019,advancing our former Epsilon segment was treated as a discontinued operation, and was subsequently sold on July 1, 2019. Financial information about our segments and geographic areas appears in Note 25, “Segment Information,” of the Notes to Consolidated Financial Statements.digital capabilities.
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We continue to make strategic investments in technology, people, data management tools and digital capabilities to further improve our competitive position and drive future growth. These investments further our objective to grow sales through the origination of credit card and other loans, making it easier for consumers to finance purchases and make payments wherever they occur— online, in store and in-app. By offering consumer choice, we provide relevant products across consumer segments, including Gen Z and Millennials who are attracted to cash flow management products such as split-pay and installment lending, while Gen X and Baby Boomers gravitate towards rewards and the convenience of a private label or co-brand card. With our broad suite of products, including private label and co-brand credit cards, buy now, pay later (BNPL) options (installment loans and split-pay), together with digital, analytical and servicing capabilities to support those products, we drive incremental sales for our partners’ businesses. We also intend to continue rebalancing our portfolio, prioritizing and investing in profitable, strong performing partners, targeting core and new verticals, improving our cost base and becoming a more cost-efficient provider of financial products and services. In addition, we continue to expand our direct-to-consumer lending and payment products for new and existing customers,
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LoyaltyOneincluding debt consolidation products and proprietary credit cards for growth and value retention. Through our digital payments business, which operates under the trademark Bread, we offer an omnichannel solution for retailers and merchants and platform capabilities to bank partners. Bread’s offerings and on-boarding capabilities enhance the growth prospects of our verticals and increase the addressable market of SMB. Bread also offers our existing co-brand and private label credit card partners a broader digital product suite and additional white-label product solutions.
Our LoyaltyOne clients are focused on acquiringProducts and retaining loyal and profitable customers. We use the information gathered through our loyalty programs to help our clients design and implement effective marketing programs. Our clients within this segment include financial services providers, grocers, drug stores, petroleum retailers and specialty retailers. LoyaltyOne operates the AIR MILES Reward Program and BrandLoyalty.
The AIR MILES Reward Program is a full service outsourced coalition loyalty program for our sponsors, who pay us a fee per AIR MILES reward mile issued, in return for which we provide all marketing, customer service, rewards and redemption management. We typically grant participating sponsors exclusivity in their market category, enabling them to realize incremental sales and increase market share as a result of their participation in the AIR MILES Reward Program coalition.
The AIR MILES Reward Program enables consumers, referred to as collectors, to earn AIR MILES reward miles as they shop across a broad range of retailers and other sponsors participating in the AIR MILES Reward Program. These AIR MILES reward miles can be redeemed by our collectors for travel or other rewards. Through our AIR MILES Cash program option, collectors can also instantly redeem their AIR MILES reward miles collected in the AIR MILES Cash program option toward in-store purchases at participating sponsors. Approximately two-thirds of Canadian households actively participate in the AIR MILES Reward Program, and it has been named a “most influential” Canadian brand in Canada’s Ipsos Influence Index.
The three primary parties involved in our AIR MILES Reward Program are: sponsors, collectors and suppliers, each of which is described below.
Sponsors. Approximately 140 brand name sponsors participate in our AIR MILES Reward Program, including Shell Canada Products, Jean Coutu, RONA, Amex Bank of Canada, Sobeys Inc. and Bank of Montreal.
Collectors. Collectors earn AIR MILES reward miles at thousands of retail and service locations, typically including any online presence the sponsor may have. Collectors can also earn AIR MILES reward miles at the many locations where collectors can use certain credit cards issued by Bank of Montreal and Amex Bank of Canada. This enables collectors to rapidly accumulate AIR MILES reward miles across a significant portion of their everyday spend. The AIR MILES Reward Program offers a reward structure that provides a quick, easy and free way for collectors to earn a broad selection of travel, entertainment and other lifestyle rewards through their day-to-day shopping at participating sponsors.
Suppliers. We enter into agreements with airlines, manufacturers of consumer electronics, supplier platforms and other providers to supply rewards for the AIR MILES Reward Program. The broad range of rewards that can be redeemed is one of the reasons the AIR MILES Reward Program remains popular with collectors. Hundreds of brands use the AIR MILES Reward Program as an additional distribution channel for these products. Suppliers include well-recognized companies in diverse industries, including travel, hospitality, electronics and entertainment.
BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for grocers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered through leading grocers across Europe and Asia, as well as around the world. These short-term loyalty programs are designed to drive traffic by attracting new customers and motivating existing customers to spend more because the reward is instant, topical and newsworthy. These programs are tailored for the specific client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Rewards for these programs are sourced from, and in some cases produced by, key suppliers in advance of the programs being offered based on expected demand. Following the completion of each program, BrandLoyalty analyzes spending data to determine the grocer’s lift in market share and the program’s return on investment.
3
Card Services
Our Card Services segment assistsWe assist some of the best knownbest-known brands and retailers in extending their brand with adriving sales and loyalty through an expanding suite of lending and payment solutions, including private label and/orand co-brand credit card account that can be used by their customers in the store, or through online or catalog purchases.programs, and BNPL options (installment lending and split-pay). Our partners benefit from customer insights and analytics, with each of our credit card branded programs tailored to our partner’s brand and their unique customers. In addition, we continue to expand our direct-to-consumer lending and payment products and our digital payments platform. These products are supported and maximized by our digital, analytical and servicing capabilities. Our products and services are discussed in more detail below under the headings (i) credit card members.and other loans financing, (ii) loan processing and servicing, (iii) marketing and data & analytics and (iv) digital offerings.
ReceivablesCredit Card and Other Loans Financing. Our Card Services segment providesWe provide risk management solutions, account origination and funding services for our more than 160approximately 130 private label and co-brand credit card programs. Through theseprograms, as well as through Bread partnerships, with over 500 SMB merchants. In 2020, we launched our Comenity-branded general purpose cash-back credit card, programs, asan important new product for us to serve and retain our cardholders and capture incremental spend. As of December 31, 2019,2021, we had $18.4$16.6 billion in principal receivablesloans from 40.5approximately 36 million active accounts, with an average balance for the year ended December 31, 20192021 of approximately $811$828 for accounts with outstanding balances. L Brands and its retail affiliates accounted for approximately 10% of our average credit card and loan receivables for the year ended December 31, 2019.
We process millions of credit card applications each year using automated proprietary scoring technology and verification procedures to make responsible risk-based origination decisions when approving new credit card accountholdersaccounts and establishing their credit limits. Credit quality is monitored at least monthly during the life of an account. We augment these procedures withon a regular and consistent basis, utilizing internal algorithms and external credit bureau risk scores provided by credit bureaus.scores. This information helps us segment prospects into narrower risk ranges, allowing us to better evaluate individual credit risk.
Our accountholder base consists primarily of middle- to upper-income individuals, including women who use our credit cards primarily as brand affinity tools. These accounts generally have lower average balances compared to balances onLoan Processing and Servicing. We manage and service the loans we originate for private label, co-brand and general purpose credit cards. We focuscard programs and Bread BNPL (installment loans, split-pay) products. In 2022, we expect to complete the transition of our sales efforts on prime borrowerscredit card processing services to Fiserv, a leading global provider of payments and do not target sub-prime borrowers.financial services technology solutions. With the migration of our core processing to Fiserv, we expect to improve our speed to market, including the ability to quickly and seamlessly add new products and capabilities that benefit our partners and cardholders. The platform enables efficient integration of digital technology, while supporting our data and analytics capabilities and improving operational efficiencies.
We use securitization and deposit programs as principal funding vehicles for our credit card receivables. Securitizations involve the packaging and selling of both current and future receivable balances of credit card accounts to a master trust, which is a variable interest entity, or VIE. We have three master trusts that are consolidated in our financial statements.
Processing Services. We perform processing services and provide service and maintenance for private label and co-brand credit card programs. We use automated technology for bill preparation, printing and mailing, and also offer consumers the ability to view, print and pay their bills online. By doing so, we improve the funds availability for both our clients and for those private label and co-brand credit card receivables that we own or securitize. We also provide collection activities on delinquent accounts to support our private label and co-brand credit card programs. Our customer care operations are influenced by our retail heritage and we view every customer touch point as an opportunity to generate or reinforce a sale.provide an exceptional experience. Our call centers are equipped to handle a variety of inquiry types,customer care operations offer omnichannel servicing, including phone, mail, fax, email, text and web. We provide focused training programs in all areas to achieve the highest possible customer service standards and monitor our performance by conducting surveys with our clientspartners and theirour customers. In 2019,2021, for the fourteenthsixteenth time since 2003, we were certified as a Center of Excellence for the quality of our operations, the most prestigious ranking attainable, by BenchmarkPortal. Founded by Purdue University in 1995, BenchmarkPortal is a global leader of best practices for callcustomer care centers.
Marketing Servicesand Data & Analytics. Our private label and co-brand credit card programs are designed specifically for retailers and have the flexibility to be customized to accommodate our clients’ specific needs. Through our integrated marketing services, we design and implement strategies that assist our clientspartners in acquiring, retaining and managing valuable repeat customers.expanding customer engagement to drive a more loyal, frequent shopper that increases customer lifetime value. Our credit card programs capture transaction data that we analyze to better understand consumer behavior and use to increase the effectiveness of our clients’partners’ marketing activities. Through our data and analytics capabilities, including machine learning and artificial intelligence, we focus on data insights that drive actionable strategies and enhance revenue growth and customer retention. We use multi-channel marketing communication tools, including in-store, web, permission-based email, permission-based mobile messaging and direct mail to reach our clients’ customers.engage customers in the channel of their choice.
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Digital Offerings. Through our Enhanced Digital Suite, a group of marketing and credit application features, we help our brand partners capitalize on online trends, by bringing through more qualified applicants, a higher average purchase value, and a higher credit sales conversion rate. Enhanced Digital Suite includes a unified software development kit (SDK) that provides access to our broad suite of products, and promotes relevant credit payment options earlier in the shopping experience. The application is simple and easy, offers prefilled fields and pre-screens customers in real-time, allowing for immediate credit approval without leaving the brand partner’s site.
Through Bread, our digital payments business acquired in 2020, we offer a flexible platform and robust suite of application programming interfaces (APIs) that allow merchants and partners to seamlessly integrate online point-of-sale financing and other digital payment products, including installment and split-pay solutions.These digital payment offerings and on-boarding capabilities enhance the growth prospects of our verticals and increase the addressable market of SMB. At the same time, we can now offer our existing partners a broader digital product suite and additional white-label product solutions. As our Bread business has grown, it has expanded our ability to leverage our digital offerings to build both strategic technology platform partnerships and more traditional brand partnership sales and loans.
For additional information relating to our business, business strategy and products and services, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Year in Review – Business Environment.”
Disaster and Contingency Planning
We operate, either internally or through third-party service providers, multiple data processing centers to process and store our customer transaction data. Given the significant amount of data that we or our third-party service providers manage, much of which is real-time data to support our clients’partners’ commerce initiatives, we have established redundant capabilities for our data centers. We have a number of safeguards in place that are designed to protect us from data-related risks and in the event of a disaster, to restore our data centers’ systems. For additional information, see “Item 1A. Risk Factors – Risk Management – Operational Risk.”
Protection of Intellectual Property and Other Proprietary Rights
We rely on a combination of patents, copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and technology used in each segment of our business. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technology, documentation and other proprietary information. Despite the efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain the use of our products or technology that we consider proprietary and third parties may attempt to develop similar technology independently. We have a number of domestic and foreign patents and pending patent applications. We pursue registration and protection of our trademarks primarily in the United States, and Canada, although we also have either registered trademarks or applications pending for certain marks in other countries. No individual patent or license is material to us or our segments other than that we are the exclusive Canadian licensee of the AIR MILES family of trademarks pursuant to a perpetual license agreement with Diversified Royalty Corp., for which we pay a royalty fee. We believe that the AIR MILES family of trademarks and our other trademarks are important for our branding, corporate identification and marketing of our services in each business segment.business.
Competition
The markets for our products and services are highly competitive.competitive, continuously changing, highly innovative, and subject to regulatory scrutiny and oversight. We compete with marketing services companiesa wide range of businesses, including financial institutions, fintechs and credit card issuers, as well as with the in-house staffspayment networks. Some of our current and potential clients.competitors may be larger than we are, have larger customer bases, greater brand recognition, longer operating histories, a dominant or more secure position, broader geographic scope, volume, scale, resources, and market share than we do, or offer products and services that we do not offer. Other competitors are smaller or younger companies that may be more agile in responding quickly to regulatory and technological changes. Many of the areas in which we compete evolve rapidly with innovative and disruptive technologies, emerging competitors, business alliances, shifting consumer habits and user needs, price sensitivity on the part of merchants and consumers, and frequent introductions of new products and services.
LoyaltyOne. As a providerIn competing to acquire and retain the business of marketing services,brand partners, our LoyaltyOne segment generally competesprimary competition is with advertising and other promotional and loyalty programs, both traditional and online, for a portion of a client’s total marketing budget. In addition, we compete against internally developed products and services created by our existing and potential clients. We expect competition to intensify as more competitors enter our market. Competitors may target our sponsors, clients and collectors as well as draw rewards from our rewards suppliers. Our ability to generate significant revenue from clients and loyalty partners will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our loyalty and rewards programs to consumers. The continued attractiveness of our loyalty and rewards programs will also depend on our ability to remain affiliated with sponsors and suppliers that are desirable to consumers and to offer rewards that are both attainable and attractive to consumers.
Card Services. Our Card Services segment competes primarily with financial institutions whose marketing focus has been on developing credit card programs with large revolving balances. These competitors further drive their businesses by cross-selling their other financial products to their cardholders. We also compete for partners on the basis of a number of factors, including program financial and other terms, underwriting
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standards, marketing expertise, service levels, the breadth of our product and service offerings, digital, technological and integration capabilities, brand recognition and reputation. Our focus has primarily beenis on targeting specialty retailers and other brand partners that understand the competitive advantage of developing loyal customers. Typically, these retailers seek customers that make more frequent but smaller transactions at their retail locations. As a result, we are able to analyze card-basedfocus on analyzing transaction data we obtain through partner loyalty programs and managing our credit cardlending programs, including customer specific transaction data and overall consumer spending patterns, to develop and implement successful marketing strategies for our clients.partners. The consumer credit and payments industry is highly competitive and we face an increasingly dynamic industry as emerging technologies enter the marketplace. As an issuera form of private label retail credit cards and co-brand Visa®, MasterCard® and Discover® credit cards, we alsopayment, our products compete with cash, checks, electronic bank transfers, debit cards, general purpose credit cards issued by(including Visa and MasterCard, American Express and Discover Card), various forms of consumer installment loans and split-pay products, other financial institutions, as well as cash, checksprivate label card brands, prepaid cards, digital wallets and debit cards.mobile payment solutions, and other tools that simplify and personalize shopping experiences for consumers and merchants. As the payments industry continues to evolve, in the future we expect increasing competition with emerging payment technologies from financial technology firms and payment networks. Moreover, some of our competitors, including new and emerging competitors in the digital and mobile payments space, are not subject to the same regulatory requirements or legislative scrutiny to which we are subject, which could place us at a competitive disadvantage.
Supervision and Regulation
We operate primarily through our insured depository institution subsidiaries, Comenity Bank and Comenity Capital Bank, which together are referred to herein as the “Banks.” Federal and state laws and regulations extensively regulate the operations of the Banks. This regulatory framework is intended to protect individual consumers, depositors, the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC) and the U.S. banking system as a whole rather than for the protection of shareholders and creditors. Set forth below is a summary of the significant laws and regulations applicable to each of Comenity Bank and Comenity Capital Bank. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress, state legislatures, and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to Comenity Bank and Comenity Capital Bank, or in the leadership or direction of our regulators, could have a material effect on the results of Alliance Data. Further, the scope of regulation and the intensity of supervision will likely remain higher under the Biden Administration.
Comenity Bank is a Delaware-chartered bank operating as a credit card bank under Competitive Equality Banking Act (CEBA) exemptions in the Bank Holding Company Act (BHC Act). To maintain its status as a CEBA credit card bank, Comenity Bank must continue to comply with the following requirements:
● | engage only in credit card operations; |
● | do not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties; |
● | do not accept any savings or time deposits of less than $100,000, except for deposits pledged as collateral for its extensions of credit; |
● | maintain only one office that accepts deposits; and |
● | do not engage in the business of making commercial loans (except small business loans). |
Comenity Bank is subject to prudential regulation, supervision and examination by the Delaware Office of the State Bank Commissioner, as its chartering authority, and the FDIC as its primary federal regulator. Comenity Bank’s deposits are insured by the DIF of the FDIC up to the applicable deposit insurance limits in accordance with applicable law and FDIC regulations. Comenity Bank is not a member of the Federal Reserve System.
Comenity Capital Bank is a Utah-chartered industrial bank. As an industrial bank, Comenity Capital Bank is exempt from the definition of “bank” under the BHC Act. Comenity Capital Bank is subject to prudential regulation, supervision and examination by the Utah Department of Financial Institutions, as its chartering authority, and the FDIC as its primary federal regulator. Comenity Capital Bank’s deposits are insured by the DIF of the FDIC up to the applicable deposit insurance limits in accordance with applicable law and FDIC regulations. Comenity Capital Bank is not a member of the Federal Reserve System.
The Consumer Financial Protection Bureau (CFPB) promulgates regulations for the federal consumer financial protection laws. Banks in a multi-bank organization, such Comenity Bank and Comenity Capital Bank, are subject to
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Regulation
Federalsupervision and stateexamination by the CFPB with respect to the federal consumer financial protection laws and regulations extensively regulate the operations of ourif at least one bank subsidiaries, Comenity Bank and Comenity Capital Bank. Many of these laws and regulations are intended to maintain the safety and soundness ofreports total assets over $10 billion for four consecutive quarters. While Comenity Bank and Comenity Capital Bank were previously subject to such supervision and they impose significant restraintsexamination by the CFPB, neither have reported total assets over $10 billion for the last consecutive four quarters and both are now subject to which other non-regulated companies are not subject. Becausesupervision and examination with respect to the federal consumer financial protection laws by the FDIC. If and when either Comenity Bank is deemed a credit card bankor Comenity Capital Bank report total assets over $10 billion for four consecutive quarters, such supervision and examination will revert back to the CFPB.
Regulation of Alliance Data
Because neither Comenity Bank nor Comenity Capital Bank is an industrial bankconsidered a “bank” within the meaning of the Bank Holding CompanyBHC Act, we areAlliance Data is not a bank holding company subject to regulation as a bank holding company.thereunder. If we wereany of our entities became subject to regulation as a bank holding company, weamong other things, Alliance Data and its nonbank subsidiaries would be constrained insubject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (Federal Reserve Board) and our operations would be limited to a limited number ofcertain activities that are closely related to banking or financial services in nature. As a state bank, Comenity Bank is subject to overlapping supervision by the FDIC and the State of Delaware; as an industrial bank, Comenity Capital Bank is subject to overlapping supervision by the FDIC and the State of Utah. Both Comenity Bank and Comenity Capital Bank are under the supervision of the Consumer Financial Protection Bureau, or CFPB—a federal consumer protection regulator with authority to make further changes to the federal consumer protection laws and regulations—who may, from time to time, conduct reviews of their practices.
Comenity BankRegulation of the Banks
Federal and Comenity Capital Bankstate banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, minimum amountsthe loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and acquisitions, management practices, and numerous other aspects of banking operations.
Source of Strength Doctrine
Under Section 616 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), any company that directly or indirectly controls an insured depository institution is required to serve as a source of financial strength to its subsidiary institution and may not conduct its operations in an unsafe or unsound manner. This doctrine is commonly known as the "source of strength" doctrine. As such a company, this means that Alliance Data must stand ready to use available resources to provide adequate capital funds to the Banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting the Banks. This support may be required at times when Alliance Data might otherwise determine not to provide it or when doing so is not otherwise in the interests of Alliance Data or its stockholders or creditors. Alliance Data’s failure to meet its obligation to serve as a source of strength to the Banks would generally be considered to be an unsafe and unsound banking practice.
Regulatory Capital Requirements
The Banks are subject to certain risk-based capital and leverage ratio requirements under the U.S. Basel III capital rules adopted by the FDIC. These rules implement the Basel III international regulatory capital including maintenance of certain capital ratios, paid-in capital minimums, and an appropriate allowance for loan loss,standards in the United States, as well as meeting specific guidelinescertain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the FDIC may determine that involve measuresa bank, based on its size, complexity, or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner.
Under the U.S. Basel III capital rules, the Banks’ assets, exposures, and certain off-balance sheet items are subject to risk weights used to determine the institutions’ risk-weighted assets, which then are used to determine the minimum capital that the Banks should keep as a reserve to reduce the risk of insolvency. These risk-weighted assets are used to calculate the following minimum capital ratios for the Banks:
● | Common Equity Tier 1 (CET1) Risk-Based Capital Ratio, which is the ratio of CET1 capital to risk-weighted assets. CET1 capital primarily includes common stockholders’ equity subject to certain regulatory adjustments and deductions, including goodwill, intangible assets, certain deferred tax assets, and AOCI. |
● | Tier 1 Risk-Based Capital Ratio, which is the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily comprised of CET1 capital, perpetual preferred stock, and certain qualifying capital instruments. |
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● | Total Risk-Based Capital Ratio, which is the ratio of total capital, including CET1 capital, Tier 1 capital, and Tier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying Allowance for credit losses. |
● | Tier 1 Leverage Ratio, which is the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other intangible assets, and certain other deductions). |
Failure to be well-capitalized or Comenity Capital Bank does notto meet theseminimum capital requirements their respectivecould result in certain mandatory and possible additional discretionary actions by regulators have broad discretion to institute a number of corrective actions that, if undertaken, could have a direct material adverse effect on our operations or financial statements. condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Banks’ ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.
The U.S. Basel III capital rules require a minimum CET1 Risk-Based Capital Ratio of 4.5%, a minimum Tier 1 Risk-Based Capital Ratio of 6.0%, and a minimum Total Risk-Based Capital Ratio of 8.0%. In addition to meeting the minimum capital requirements, under the U.S. Basel III capital rules, the Banks must also maintain the required 2.5% Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The Capital Conservation Buffer is calculated as a ratio of CET1 capital to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. As a result, the Banks must maintain a CET1 Risk-Based Capital Ratio of at least 7%, a Tier 1 Risk-Based Capital Ratio of at least 8.5% and a Total Risk-Based Capital Ratio of at least 10.5% to avoid being subject to restrictions on capital distributions and discretionary bonus payments to its executive management. The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a bank may be considered well-capitalized while remaining out of compliance with the Capital Conservation Buffer. The required minimum Tier 1 Leverage Ratio for all banks and bank holding companies is 4%.
To be well-capitalized, the Banks must maintain the following capital ratios:
● | CET1 Risk-Based Capital Ratio of 6.5% or greater; |
● | Tier 1 Risk-Based Capital Ratio of 8.0% or greater; |
● | Total Risk-Based Capital Ratio of 10.0% or greater; and |
● | Tier 1 Leverage Ratio of 5.0% or greater. |
At December 31, 2021, the Banks’ regulatory capital ratios were above the well-capitalized standards and met the Capital Conservation Buffer. The Banks seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer.
Dividends
Alliance Data is a legal entity separate and distinct from the Banks. Declaration and payment of cash dividends depends upon cash dividend payments to Alliance Data by the Banks, which are our primary source of revenue and cash flow. As state-chartered banks, the Banks are subject to regulatory restrictions on the payment and amounts of dividends under Delaware or Utah law, as applicable. Further, the ability of the Banks to pay dividends to Alliance Data is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements, and any dividend, Comenity Banksuch dividends are also subject to the approval of the Board of Directors of the applicable Bank.
The payment of dividends by the Banks and Comenity Capital Bank mustAlliance Data may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.requirements. The federal banking agencies have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. A bank may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal banking agencies have issued policy statements that provide that banks should generally only pay dividends out of current operating earnings. The federal banking agencies have the authority to prohibit banks from paying a dividend if it is deemed such payment would be an unsafe or unsound practice.
WePrompt Corrective Action and Safety and Soundness
Under applicable "prompt corrective action" ("PCA") statutes and regulations, insured depository institutions, such as the Banks, are limitedplaced into one of five capital categories, ranging from "well capitalized" to "critically
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undercapitalized." The PCA statute and regulations provide for progressively more stringent supervisory measures as an institution’s capital category declines. An institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. An undercapitalized institution must submit an acceptable restoration plan to the appropriate federal banking agency. One requisite element of such a plan is that the institution’s parent holding company guarantee the institution’s compliance with the plan, subject to certain limitations. At December 31, 2021, the Banks qualified as "well capitalized" under applicable regulatory capital standards.
Insured depository institutions may also be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency, or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution affiliated parties; the termination of the institution’s deposit insurance; the appointment of a conservator or receiver for the institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the FDIC, as receiver, would be harmed if such equitable relief was not granted.
Reserve Requirements
Federal Reserve Board regulations require insured depository institutions to maintain cash reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. The required cash reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required cash reserves, in the form of a balance maintained with Federal Reserve Banks. The regulations require that the Banks maintain cash reserves against aggregate transaction accounts in excess of the exempt amount. The Federal Reserve Board generally makes annual adjustments to the tiered cash reserve requirements; however, effective March 26, 2020, the reserve requirement was reset to zero to address liquidity concerns due to the global COVID-19 pandemic and maintained at zero effective March 2021 and March 2022. The reserve requirement remains subject to annual adjustment as conditions warrant.
Restrictions on Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act inlimit the extent to which we can borrow or otherwise obtain credit from or engage in other “covered transactions”covered transactions with Comenity Bank or Comenity Capital Bank,either of the Banks, which may have the effect of limiting the extent to which Comenity Bank or Comenity Capitaleither Bank can finance or otherwise supply funds to us. “Covered transactions” include loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright bar on engaging in “coveredcovered transactions,” they do require that we engage in “covered transactions” with Comenity Bank or Comenity Capitaleither Bank only on terms and under circumstances that are substantially the same, or at least as favorable to Comenity Bank or Comenity Capitalthe Bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, with certain exceptions, each loan or extension of credit by Comenity Bank or Comenity Capitaleither Bank to us or our other affiliates must be secured by collateral with a market value ranging from 100% to 130% of the amount of the loan or extension of credit, depending on the type of collateral.
We are required to monitor and report unusual or suspicious account activity as well as transactions involving amounts in excess of prescribed limits under the Bank Secrecy Act, Internal Revenue Service, or IRS, rules, and other regulations. Congress, the IRS and the bank regulators have focused their attention on banks’ monitoring and reporting of suspicious activities. Additionally, Congress and the bank regulators have proposed, adopted or passed a number of new laws and regulations that may increase reporting obligations of banks. WeThe Banks are also subject to numerous lawsSections 22(g) and regulations that are intended22(h) of the Federal Reserve Act, and the implementing Regulation O as applied to protect consumers, including state laws, the Truth in Lending Act, as amendedBanks. These provisions impose limitations on loans and extensions of credit by the Credit Card Accountability, ResponsibilityBanks to their executive officers, directors and Disclosureprincipal shareholders and their related interests, as well as those of the Banks’ affiliates. The limitations restrict the terms and aggregate amount of such transactions. Regulation O also imposes certain recordkeeping and reporting requirements. Restrictions on transactions with affiliates and insiders under Federal Reserve Act Sections 23A, 23B, 22(g) and 22(h), as well as the requirements of 2009, orRegulation O, are monitored for compliance by our internal audit department.
Federal Deposit Insurance
The deposits of the CARD Act, Equal Credit Opportunity Act and Fair Credit Reporting Act. These laws and regulations mandate various disclosure requirements and regulateBanks are insured up to applicable limits by the mannerDIF of the FDIC. The standard maximum deposit insurance amount is $250,000 per depositor, per insured depository institution, per ownership category, in which we may interactaccordance with consumers. These and other laws also limit finance charges or other fees or charges earned in our lending activities. We conduct our operations in a manner that we believe excludes us from regulation as a consumer reporting agency under the Fair Credit Reporting Act. If we were deemed a consumer reporting agency, however, we would be subject to a number of additional complex regulatory requirements and restrictions.applicable FDIC regulations.
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The FDIC uses a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account an institution’s capital level and supervisory rating. The base for insurance assessments is the average consolidated total assets less tangible equity capital of an institution. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.
Under the Federal Deposit Insurance Act (the FDIA), the FDIC may terminate an institution’s deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe and unsound condition or has violated any applicable law, regulation, order or condition imposed by the FDIC.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent company or otherwise bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Alliance Data and the Banks, from: (i) engaging in proprietary trading and (ii) investing in or sponsoring certain covered funds, subject to certain limited exceptions. Under the Volcker Rule, the term covered funds is defined as any issuer that would be an investment company under the Investment Company Act but for the exemption in section 3(c)(1) or 3(c)(7) of that Act, which includes collateralized loan obligation securities (CLO) and collateralized debt obligation securities. There are also several exemptions from the definition of covered funds, including, among other things, loan securitization, joint ventures, certain types of foreign funds, entities issuing asset-backed commercial paper, and registered investment companies. We do not engage in these restricted activities, including in proprietary trading.
Incentive Compensation
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Banks, that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, the manner in which executive compensation is structured will be restricted.
The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called "golden parachute" payments in connection with approvals of mergers and acquisitions.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign "shell banks" and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any
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application submitted by the financial institution under the Bank Merger Act. The Banks have in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engage in very few transactions of any kind with foreign financial institutions or foreign persons.
Office of Foreign Assets Control Regulations
The United States government has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control. The Office of Foreign Assets Control-administered sanctions targeting countries take many different forms. Generally, OFAC sanctions contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from the Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences.
Identity Theft
The SEC and the Commodity Futures Trading Commission (CFTC) jointly issued final rules and guidelines implementing the provisions of the Dodd-Frank Act which require certain regulated entities to establish programs to address risks of identity theft. The rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy these requirements. In addition, the rules establish special requirements for any credit and debit card issuers that are subject to the jurisdiction of the SEC or the CFTC to assess the validity of notifications of changes of address under certain circumstances. The Banks implemented an ID Theft Prevention Program, approved by their Boards of Directors, in compliance with these requirements.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) is intended to encourage banks to help meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and sound business practices. The relevant federal banking agency, the FDIC in the Banks’ case, examines each bank and assigns it a public CRA rating. A bank’s record of fair lending compliance is part of the resulting CRA examination report. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. The Banks each received a CRA rating of "Outstanding" at their most recent CRA examinations.
Consumer Protection Regulation and Supervision
We currently are subject to regulation by the FDIC with respect to the federal consumer protection laws. We are also subject to certain state consumer protection laws and state attorneys general and other state officials are empowered to enforce certain federal consumer protection laws and regulations. State authorities have increased their focus on and enforcement of consumer protection rules. These federal and state consumer protection laws apply to a broad range of our activities and to various aspects of our business and include laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the use and provision of information to consumer reporting agencies, and the prohibition of unfair, deceptive, or abusive acts or practices in connection with the offer, sale, or provision of consumer financial products and services.
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Privacy and Data Protection Regulation
Data protection and consumer privacy laws and regulations continue to evolve. These laws and regulations place manyevolve, increasing restrictions on our ability to collect and disseminate customer information. In addition, the enactment of new or amended legislation or industry regulations pertaining to consumer, public or private sector privacy issues may impact our marketing services, including placing restrictions upon the collection, sharing and use of information that is currently legally available. There are also a number of specific laws and regulations governing the collection, sharing and use of certain types of consumer data primarily in connection with financial services transactions that are relevant to our various businesses and services. In the United States, federal laws such as the Gramm-Leach-Bliley Act, or GLBA, and the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, as well as similar and applicable state laws, make it more difficult to collect, share and use information that has previously been legally available and may increase our costs of collecting some data. These laws give bank customers, including cardholders and depositors, the ability to “opt out” of having certain information generated by their applicable financial services transactions shared with other affiliated and unaffiliated parties or the public. Our ability to gather, share and utilize this data will be adversely affected if a significant percentage of the consumers whose purchasing behavior we track elect to “opt out,” thereby precluding us and our affiliates from using their data.
In the United States, theThe federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with prospective and existing customers. Similar measures were implemented in Canada beginning September 1, 2008. Regulations in both the United States and CanadaThe regulations give consumers the ability to “opt out,” through a national do-not-call registry and state do-not-call registries, of having telephone solicitations placed to them by companies that do not have an existing business relationship with the consumer. In addition, regulations require companies to maintain an internal do-not-call list for those who do not want the companies to solicit them through telemarketing. These regulations could limit our ability to provide services and information to our clients.partners. Failure to comply with these regulations could have a negative impact on our reputation and subject us to significant penalties. Further, the Federal Communications Commission has approved interpretations of rules related to the Telephone Consumer Protection Act defining robo-calls broadly, which may affect our ability to contact customers and may increase our litigation exposure.
In the United States, theThe federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 restricts our ability to send commercial electronic mail messages, the primary purpose of which is advertising or promoting a commercial product or service, to our customers and prospective customers. The act requires that a commercial electronic mail message provide the customers with an opportunity to opt-out from receiving future commercial electronic mail messages from the sender.
InAt the United States,state level, California enacted the California Consumer Privacy Act, or CCPA, which went into effect on January 1, 2020. The CCPA creates newprovides individual privacy rights for California consumers and places increased privacy and security obligations on entities handling certain personal data of consumers and households. The CCPA includes new and expanded disclosure requirementsrequires disclosures to consumers about companies’ data collection, use and sharing practices; provides consumers new ways to opt-out of certain sales or transfers of personal information; and provides consumers with additional causes of action. The CCPA prohibits companies from discriminating against consumers who have opted out of the sale of their personal information, subject to a narrow exception. The CCPA provides for certain monetary penalties and for enforcement of the statute by the California Attorney General or by consumers whose rights under the law are not observed. It also provides for damages, as well as injunctive or declaratory relief, if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA. It remains unclear what, if any, modifications will be made to the CCPA or how it will be interpreted.
In November 2020, California voters passed Proposition 24, known as the California Privacy Rights Act or CPRA. CPRA, which will amend existing CCPA requirements effective January 2023 with a one-year lookback period, includes limitations on the sharing of personal information for cross-context behavioral advertising and the use of “sensitive” personal information; the creation of a new correction right; and the establishment of a new agency to enforce California privacy law.
Additionally, legislative and regulatory measures, such as mandatory breach notification provisions, often impose, among other elements, strict requirements on reporting time frames and providing notice to individuals. For example, at the federal level, the FDIC announced in November 2021 the implementation of a new Rule (12 CFR Part 304) which requires notification of our primary regulator within 36 hours in the event of a “Computer-security incident” that rises to the level of a “notification incident.” All 50 U.S. states and the District of Columbia also have enacted data breach
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notification laws. Further, many otherthere continues to be an increased interest in privacy, data protection and information security laws and regulations at the federal and state governmentslevels where legislators are reviewing or proposing the need for greater regulation of the collection, processing, sharing, use and useother processing of consumer datainformation for marketing purposes or otherwise. This may result in new laws or regulations imposing additional compliance requirements.
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In Canada, the Personal Information Protection and Electronic Documents Act, or PIPEDA, requires an organization to obtain a consumer’s consent to collect, use or disclose personal information. Under this act, consumer personal information may be used only for the purposes for which it was collected. We allow our customers to voluntarily “opt out” from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail. Heightened consumer awareness of, and concern about, privacy may result in customers “opting out” at higher rates than they have historically. This would mean that a reduced number of customers would receive bonus and promotional offers and therefore those customers may collect fewer AIR MILES reward miles.
Canada’s Anti-Spam Legislation, or CASL, may restrict our ability to send “commercial electronic messages,” defined to include text, sound, voice and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and prospective customers. CASL requires, in part, that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender.
On May 25, 2018, The General Data Protection Regulation, or GDPR, a European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights came into force. The GDPR replaced the European Union Directive 95/46/EC and applies to and binds the 27 EU Member States. The GDPR details greater compliance obligations on organizations, including the implementation of a number of processes and policies around data collection and use. These, and other terms of the GDPR, could limit our ability to provide services and information to our customers. In addition, the GDPR includes significant new penalties for non-compliance.
In general, GDPR, and other European Union and Member State specific privacy and data governance laws, could also lead to adaptation of our technologies or practices to satisfy local privacy requirements and standards that may be more stringent than in the U.S. Similarly, it is possible that in the future, U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our advertising services, such as the FTC’s proposed “Do-Not-Track” standard or other legislation or regulations similar to EU Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” which directs EU Member States to ensure that accessing information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. On January 31, 2020, the United Kingdom left the European Union and entered into a Brexit transition period. During this period, which runs until the end of December 2020, the GDPR will continue to apply to the United Kingdom. It is not yet known what the data protection landscape will look like at the end of the transition period.
There ishas also been rapid development of new privacy laws and regulations elsewhere around the globe, including amendments of existing data protection laws, to the scope of such laws and penalties for noncompliance. Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation and subject us to significant penalties.
While all 50 U.S. statesCompliance with current or future privacy, data protection and the District of Columbia have enactedinformation security laws and regulations (including those regarding data breach notification and consumer privacy) affecting customer, employee or other data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services (such as products or services that involve us sharing information with third parties or storing sensitive credit card information), which could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws there is no such U.S. federal law generally applicableand regulations could result in potentially significant regulatory investigations and government actions, litigation, fines or sanctions, consumer or partner actions, decreases in the use of our cards and damage to our businesses. Data breach notification legislationreputation and regulations relating to mandatory reporting came into force in Canadaour brand, all of which could have a material adverse effect on November 1, 2018. Data breach notification laws have been proposed widelyour business, results of operations and exist in other specific countries and jurisdictions in which we conduct business. Legislative and regulatory measures, such as mandatory breach notification provisions, impose, among other elements, strict requirements on reporting time frames and providing notice to individuals.financial condition.
We also have systems and processes to complyHuman Capital
As of December 31, 2021, we employed approximately 6,000 associates worldwide, with the USA PATRIOT ACT of 2001, which is designed to deter and punish terrorist actsmajority concentrated in the United StatesStates. As a core component of our broader Environmental, Social and aroundCorporate Governance (ESG) and sustainability efforts, our key human capital management objectives are to attract, develop and retain top talent. To support these objectives, we take a holistic approach to our associates’ experiences as employees, recognizing that an engaged workforce drives our long-term growth and sustainability. Our Board of Directors and designated Board committees provide the world,important oversight of our human capital management strategy, including diversity, equity and inclusion, or DE&I, efforts, which are led by our head of diversity and inclusion and our Chief Diversity Officer, both appointed in 2021. In May 2021, our Board of Directors expanded the compensation committee’s responsibilities and duties to enhance law enforcement investigatory tools,more specifically include oversight of our management of human capital and, forin connection with these changes, the committee’s name was formally changed to the “Compensation & Human Capital Committee.” Our Compensation & Human Capital Committee, along with our Board of Directors, receive regular updates from senior management and third-party consultants on human capital trends and developments and other purposes.key human capital matters that drive our ongoing success and performance.
Ontario’s Protecting Rewards Points Act (Consumer Protection Amendment), 2016,Associate Wellbeing
With the ongoing impact of the global COVID-19 pandemic, approximately 95% of our total workforce continues to successfully work from home, and additional related regulations effective January 2018, prohibit suppliers from entering into or amending consumer agreementswith minimal business disruption. We have continued initiatives designed to connect, recognize and engage our workforce in a virtual work environment, including providing the necessary technology, support and lines of communication for our associates to be successful in their roles in this unique environment. Associate wellbeing remained a top priority in 2021, and we continued to provide timely reminders and access to numerous existing and new resources and support, including a particular focus on mental health awareness and counselling support. Other associate wellbeing resources include financial education and wellness courses, a variety of online fitness and meditation classes, a fitness cost reimbursement program and other benefits to promote mental and physical health and overall wellbeing. We surveyed our associates on our return-to-office plans and their work environment preferences, and we anticipate the majority of our workforce will continue to work remotely or on a hybrid basis for the expiryforeseeable future. For those associates who worked in the office during the year, or plan to return, our COVID taskforce has been focused on taking appropriate health and safety measures in our office space. We implemented a COVID testing solution beginning in 2022 to ensure those associates who are not vaccinated have the option to work in the office, while protecting the safety of rewards points dueall associates.
Additionally during 2021, we further improved the competitiveness of our associate benefit offerings, including implementing new paid time off and flex time off policies to provide additional flexibility for our associates, adding a new paid holiday (bringing the passage of time alone, while permitting the expiry of rewards points if the underlying consumer agreement is terminatedtotal to nine) and that agreement provides that reward points expire upon termination. Similar legislation pertaining to the expiry of rewards points due to the passage of time alone was passed in Quebec in 2017, with regulations taking effect in 2018 and 2019.offering new virtual benefit fairs, among other initiatives.
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Employees
Associate Engagement
Despite various challenges associated with the pandemic, we maintained high levels of associate engagement and retention and were successful with talent acquisition, hiring several top industry leaders in key positions that further supported our transformation initiatives and business priorities. For 2021, we recorded a new associate acquisition rate of approximately 21%, calculated as total external hires divided by average associate headcount, with voluntary turnover at approximately 17%, calculated as total voluntary terminations divided by average associate headcount, across both professional and Care Center operations, as compared to 10% and 13%, respectively, in 2020. As discussed below, in 2021 we focused on developing our internal talent to increase lateral movement across the organization, with nearly a third of the 1,200 new jobs posted in 2021 being ultimately filled by internal candidates. We continue to listen to and act on feedback from our associates, including through our annual Associate Survey and other more frequent surveys and communications. Our core associate experience scores improved in 2021 compared to the previous year, reflective of favorable associate feedback received from conducting our annual Associate Survey.
Workforce Readiness, Development and Advancement
As part of our broader multi-year business transformation, our “future workforce” steering committee, comprising senior human resources, technology and operations management, continued to develop and execute human capital-intensive strategies to ensure our workforce readiness, development and advancement. During the year we launched our inaugural six-month apprenticeship program, which created a feeder pipeline from roles in our Care Centers to other non-Care Center opportunities across the organization, with 21 associates transitioning to new roles at the conclusion of their apprenticeships. Robust training and development remains central to our human capital strategy, and in 2021 we expanded our training programs to include more content focused on developing effective leadership competencies and behaviors. In addition to career-oriented training and development, we require annual associate training to ensure ongoing adherence to responsible business practices and ethical conduct, and all associates must certify annually that they have read and will adhere to our Code of Ethics. We believe that these efforts resonated with our associates, as we saw a 7% improvement in associates’ perceptions of the professional growth and development initiatives taken by us, reflected in our 2021 annual Associate Survey.
Given the significant amount of change and transformation in our business, in 2021 we created a “change network” comprising more than 200 associates from across the Company. This network provides a formal forum for developing and activating change management strategies, which enables us to respond, as necessary, in real-time with enhanced communication or other support. We also cascaded change management training throughout all leaders of our organization, including our executive management team.
Diversity, Equity and Inclusion
In 2020, we undertook significant steps to improve our commitment to DE&I, starting with a formal process initiated by our President and Chief Executive Officer. Specific actions taken have included executive leadership involvement and accountability; and formation of a DE&I steering committee with clear objectives, including identifying and engaging a third-party, minority-owned DE&I consulting firm to guide our development of a comprehensive, integrated DE&I strategy and measurement framework. Significant progress made over the second half of 2020 included associate surveys, focus groups and numerous associate “listening sessions” to provide important input on our approach to improving our long-term DE&I commitments in 2021. Our entire executive leadership team underwent unconscious bias awareness training, and new tools were introduced in our recruiting and hiring practices to further improve our processes in this area. As of December 31, 2019,2020, approximately 62% of our total work force and 44% of our senior leaders were female, while approximately 43% of our total work force and 16% of our senior leaders were minorities.
In 2021, we had over 8,500 employees.continued the evolution and advancement of our DE&I strategy and objectives, an ongoing business imperative. We believecontinued expanding our relations withDE&I team and leadership, through the hiring of a new head of diversity and inclusion, the creation of the office of Chief Diversity Officer (reporting to our employees are good.President and Chief Executive Officer), and the creation of a company-wide council on DE&I matters. We have no collective bargaining agreements withmore formally identified our employees.DE&I strategy and priorities, re-chartered our existing business resource groups (BRGs) as well as identified new BRGs based on associate feedback and interests. We expanded our foundational training around conscious inclusion for all associates and leaders, and evaluated metrics of success to ensure we hold ourselves accountable to our progress on DE&I matters. As of
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December 31, 2021, approximately 60% of our total work force and 43% of our senior leaders were female, while approximately 41% of our total work force and 17% of our senior leaders were minorities.
Other Information
Our corporate headquarters are located at 30753095 Loyalty Circle, Columbus, Ohio 43219, where our telephone number is 614-729-4000.
We file or furnish annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public at the SEC’s website at www.sec.gov. You may also obtain copies of our annual, quarterly and current reports, proxy statements and certain other information filed or furnished with the SEC, as well as amendments thereto, free of charge from our website, www.AllianceData.com. No information from this website is incorporated by reference herein. These documents are posted to our website as soon as reasonably practicable after we have filed or furnished these documents with the SEC. We post our audit committee, compensation committeeAudit Committee, Risk Committee, Compensation & Human Capital Committee and nominatingNominating and corporate governance committeeCorporate Governance Committee charters, our corporate governance guidelines, and our code of ethics, code of ethics for Senior Financial Officers,senior financial officers, and code of ethics for Board Membersmembers on our website. These documents are available free of charge to any stockholder upon request.
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Item 1A. | Risk Factors. |
RISK FACTORS
This section should be carefully reviewed, in addition to the other information appearing in this Form 10-K, including the sections entitled “Risk Management” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, for important information regarding risks and uncertainties that affect us. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.
Summary
This risk factor summary is qualified in its entirety by reference to the complete description of our risk factors set forth immediately below.
Risks related to our strategic, business and competitive environment include:
● | The impact of the global COVID-19 pandemic and responsive measures; |
● | Our ten largest partners represented over half of our consolidated Total net interest and non-interest income (revenue) in 2021, and a decrease in business from, or the loss of, any of these partners, could have an adverse effect on our business. |
● | Our business is heavily concentrated in U.S. consumer credit, and therefore our results are more susceptible to fluctuations in the U.S. consumer credit market than a more diversified company. |
● | The amount of our Allowance for credit losses could adversely affect our business and may be insufficient to cover actual losses on our loans. |
● | Competition in our industry is intense. |
● | Our results of operations and growth depend on our ability to retain existing partners and attract new partners, and our results are impacted, to a significant extent, on the active and effective promotion and support of our products by our partners and on the financial performance of our partners. |
● | We rely extensively on models in managing many aspects of our business, and if they are not accurate or are misinterpreted, such factors could have a material adverse effect on our business and results of operations. |
● | Underwriting performance of acquired or new lending programs may not be consistent with existing experience. |
● | Unsecured consumer and business lending leads to losses from bankruptcies and inability to collect from borrowers. |
Risks related to our liquidity, market and credit risk include:
● | Adverse financial market conditions or our inability to effectively manage our funding and liquidity risk could have a material adverse effect on our business, liquidity and ability to meet our debt service requirements and other obligations. |
● | Our inability to effectively access the securitization or other capital markets could limit our funding opportunities for loans and other business opportunities. |
● | Competition for deposits and regulatory restrictions on deposit products can impact availability and cost of funds. |
● | Our level of indebtedness may restrict our ability to compete and grow our business. |
● | Our market valuation has been volatile, and returns to stockholders have been impacted by a lower dividend rate, cessation of share repurchase programs and issuance of shares for acquisitions. |
● | We are a holding company and depend on dividends and other payments from our Banks, which are subject to various legal and regulatory restrictions. |
Risks related to our legal, regulatory and compliance environment include:
● | We face various risks related to the comprehensive government regulation and supervision of our business, including by the FDIC and other federal and state authorities. |
● | Legislation, regulatory matters and litigation may have a significant impact on our business, financial condition and results of operations. |
● | Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities. |
● | Financial institution capital requirements may limit cash available for business operations, growth and returns to stockholders. |
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Risks related to cybersecurity, technology and third-party vendors include:
● | Reliance on third-party vendors and current efforts to transition to multiple strategic outsourcing partners may result in service failures outside our control. |
● | Failures in data protection, cybersecurity and information security, as well as business interruptions to our data centers and other systems, could critically impair our products, services and ability to conduct business. |
● | Our industry is subject to rapid and significant technological changes, and we may be unable to successfully develop and commercialize new or enhanced products and services. |
Strategic, Business Risk and Competitive EnvironmentRisks
Impacts related to the global 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.
The ongoing effects of the global COVID-19 pandemic remain difficult to predict due to numerous uncertainties, including the transmissibility, severity, duration and resurgence of the virus; the emergence of new variants of the virus; the uptake and effectiveness of health and safety measures or actions that are voluntarily adopted by the public or required by governments or public health authorities; the effectiveness of vaccines and treatments; the speed and strength of an economic recovery, including the reopening of borders and the resumption of international travel; increased logistics costs; an increasingly competitive labor market; and the impact of the global COVID-19 pandemic on our employees, our operations, and the business of our partners and suppliers. 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 and other loans balances. |
● | Decreased retail credit sales reduces the usage of our credit cards and other credit products, which reduces our revenue from finance charges and other servicing fees. |
● | The potential for consumer bankruptcies and any forbearance programs we may offer for impacted cardholders to reduce or delay our revenue from finance charges and other servicing fees and increase our exposure to rising delinquencies, net charge-offs in Credit card and other loans and increase our Allowance for credit losses. |
● | 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, customer care center, digital and installment lending platform and other 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 our partners, cardholders or other consumers. |
● | 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. |
● | Increased privacy-related risks due to processing of employee health-related personal information. |
● | Workforce impacts, such as difficulty recruiting, retaining, training, motivating and developing employees due to evolving health and safety protocols; changing worker expectations and talent marketplace variability regarding flexible work models; restrictions on immigration, travel and employee mobility; and the challenges of maintaining our strong corporate culture, which values communication, collaboration and connections, despite a majority of employees working from home. |
Despite the availability of vaccines and treatments, surges in COVID-19 cases, including variants of the strain, such as the delta and omicron variants, may cause people to self-quarantine or governments to shut down nonessential businesses again. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our future results of operations or cash flows at this time. To the extent the global COVID-19 pandemic continues to
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adversely affect our business, results of operations, financial condition and liquidity, many of the other risks described in the “Risk Factors” section of this Annual Report may also be heightened.
Changes and instability in the macroeconomic environment, consumer confidence and customer behavior may adversely affect our business.
We offer an array of financial products and services to consumers, and a prolonged period of economic volatility, slow growth, or a significant deterioration in economic conditions could have a material adverse effect on our financial condition and results of operations as customers default on their loans, maintain lower deposit levels or, in the case of credit card accounts, carry lower balances and reduce credit card purchase activity.
Some of the risks we face in connection with adverse changes and instability in the macroeconomic environment, including changes in consumer confidence levels and behavior, include the following:
● | Changes in payment patterns, increases in delinquencies and default rates, decreased consumer spending, lower demand for credit and shifts in consumer payment behavior towards avoiding late fees, finance charges and other fees; |
● | Increases in our charge-off rate caused by bankruptcies and reduced ability to recover debt that we have previously charged-off; and |
● | Decreased reliability of the process and models we use to estimate our allowance for credit losses, particularly if unexpected variations in key inputs and assumptions cause actual losses to diverge from the projections of our models and our estimates become increasingly subject to management’s judgment. See “Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.” |
Business generated through our relationships with our 10 largest clientspartners represented 44%59% and 41%65%, respectively, of our consolidatedTotal net interest and non-interest income, or revenue, for the years ended December 31, 20192021 and 2018,2020, and a decrease in business from, or the loss of, any of these clientspartners could cause a significant drop in our revenue.
We depend on a limited number of large clientspartner relationships for a significant portion of our consolidated revenue. OurThe business generated through our 10 largest clientspartners represented approximately 44%59% and 41%65%, respectively, of our consolidated revenueTotal net interest and non-interest income during the years ended December 31, 20192021 and 2018. L Brands2020. Business generated through our relationship with Victoria’s Secret & Co. and its retail affiliates represented approximately 11%13% and 14% of our consolidated revenueTotal net interest and non-interest income during both of these same respective periods. A decrease in revenuebusiness from, or the loss of, any of our significant clientspartners for any reason, including a decrease in pricing or activity, or a decision either to utilize another service provider or to no longer outsource some or all of the services we provide, could have a material adverse effect on our consolidated revenue. For example,business. We previously announced the contract for onenon-renewal of our 10 largest clients, representing approximately 3% of our consolidated revenue forcontract with BJ’s Wholesale Club (BJ’s). For the year ended December 31, 2019, is effective through September 20202021, BJ’s branded co-brand accounts generated approximately 8% of our Total net interest and is not expected to renew.non-interest income. As of December 31, 2021, BJ’s branded co-brand accounts were responsible for approximately 11% of our Total credit card and other loans.
Card Services. Card Services represents 81% ofOur business is heavily concentrated in U.S. consumer credit, and therefore our consolidated revenue for both of the years ended December 31, 2019 and 2018, respectively. Our 10 largest clientsresults are more susceptible to fluctuations in this segment represented approximately 54% and 49%, respectively, of our Card Services revenue for the years ended December 31, 2019 and 2018. L Brands and its retail affiliates represented approximately 13% of this segment’s revenue for both of the years ended December 31, 2019 and 2018, respectively. Our contract with L Brands and its retail affiliates expires in 2026, subject to contract terms.that market than a more diversified company.
LoyaltyOneOur business is heavily concentrated in U.S. consumer credit. As a result, we are more susceptible to fluctuations and risks particular to U.S. consumer credit than a more diversified company. For example, our business is particularly sensitive to macroeconomic conditions that affect the U.S. economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we offer (including promotional financing). LoyaltyOne represents 19%Our business concentration could have an adverse effect on our results of our consolidated revenue for both of the years ended December 31, 2019 and 2018, respectively. Our 10 largest clients in this segment represented approximately 54% and 56%, respectively, of our LoyaltyOne revenue on a gross basis for the years ended December 31, 2019 and 2018. Bank of Montreal represented approximately 19% of this segment’s revenue on a gross basis for both of the years ended December 31, 2019 and 2018, respectively. Sobeys Inc. and its retail affiliates represented approximately 12% of this segment’s revenue on a gross basis for both of the years ended December 31, 2019 and 2018, respectively. Our contract with Bank of Montreal expires in 2023, subject to further automatic renewals. Our contract with Sobeys Inc. and its retail affiliates expires in 2024, subject to contract terms.operations.
We expect growth in our Card Services segment to result, in part, from new and acquired credit card and other installment lending or BNPL programs whose credit card receivablesand other loans performance could result in increased portfolio losses and negatively impact our profitability.
We expect an important source of growth in our credit card operationsgrowth to come from the acquisition of existing credit card programs and initiating credit card and other installment lending or BNPL programs with retailers and othersother merchants who either do
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not currently offer a private label or co-brand credit card.card or are initiating or transitioning from another installment lending or BNPL platform. Although we believe our pricing and models for determining credit risk are designed to evaluate the credit risk of existing programs and the credit risk we are willing to assume for acquired and start-up programs, we cannot be assured that the loss experience on acquired and start-up programs will be consistent with our more established programs. The failure to successfully underwrite these new or acquired credit card or installment lending programs may result in defaults greater than our expectations and could have a material adverse impact on us and our profitability. See “Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.”
Increases in net charge-offs could have a negative impact on our net income and profitability.
The primary risk associated with unsecured consumer lending is the risk of default or bankruptcy of the borrower, resulting in the borrower’s balance being charged-off as uncollectible. We rely principally on the customer’sborrower’s creditworthiness for repayment of the loan and therefore have no other recourse for collection. We may not be able to successfully identify and evaluate the creditworthiness of cardholdersborrowers to minimize delinquencies and losses. The models and approaches we use to manage our credit risk, including our automated proprietary scoring technology and verification procedures for new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing, may not accurately predict future charge-offs for various reasons discussed elsewhere in these Risk Factors, including see “Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted” below.An increase in defaults or net charge-offs could result in a reduction in netNet income. General economic factors, such as the rate of inflation, unemployment levels and interest rates, may result in greater delinquencies that lead to greater credit losses. In addition to being affected by general economic conditions and the success of our collection and recovery efforts, the stability of our delinquency and net charge-off rates are affected by the credit risk of our creditCredit card and loan receivablesother loans and the average age of our various credit card account portfolios. Further, our pricing strategy may not offset the negative impact on profitability caused by increases in delinquencies and losses, thus any material increases in delinquencies and losses beyond our current estimates could have a material adverse impact on us. For 2019,2021, our net charge-off rate was 4.6%, compared to 6.6% and 6.1% for 2020 and 2019, respectively. Delinquency rates were 3.9% of principal Credit card and other loans at December 31, 2021, compared to 4.4% and 5.8% at December 31, 2020 and 2019, respectively.
Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.
Our risk management framework that seeks to identify and mitigate current or future risks and appropriately balance risk and return may not be comprehensive or fully effective. As regulations and competition continue to evolve, our risk management framework may not always keep sufficient pace with those changes. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
We rely extensively on models in managing many aspects of our business, including liquidity and capital planning (including stress testing), customer selection, credit and other risk management, pricing, reserving and collections management. The models may prove in practice to be less predictive than we expect for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including failures to update assumptions appropriately or in a timely manner). Our assumptions may be inaccurate for many reasons including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions and their impact on partner and customer behaviors) and they often involve complex interactions between a number of dependent and independent variables, factors and other assumptions. The errors or inaccuracies in our models may be material, and could lead us to make poor or sub-optimal decisions in managing our business, and this could have a material adverse effect on our business, results of operations and financial condition.
Fraudulent activity associated with our products and services could negatively impact our operating results, brand and reputation and cause the use of our products and services to decrease and our fraud losses to increase.
We are subject to the risk of fraudulent activity associated with retailers, partners, other merchant parties or third-party service providers handling consumer information. Our fraud-related operational losses were $71 million, $141 million and $195 million for the years ended December 31, 2021, 2020 and 2019, respectively. Our products are susceptible to application fraud, because among other things, we provide immediate access to credit at the time of
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charge-off rate was 6.1%, comparedapproval. In addition, digital sales on the internet and through mobile channels are becoming a larger part of our business and fraudulent activity is higher as a percentage of sales in those channels than in stores. The different financial products that we offer, including deposit products, are susceptible to 6.1%different types of fraud, and, 6.0%depending on our product mix and channel mix, we may continue to experience variations in, or levels of, fraud-related expense that are different from or higher than that experienced by some of our competitors or the industry generally. The risk of fraud continues to increase for 2018the financial services industry, and 2017, respectively. Delinquency rates were 5.8% of principal credit card and loan receivables at December 31, 2019, compareddeposit fraud, identity theft and related crimes are likely to 5.7%continue to be prevalent, with perpetrators increasingly sophisticated. Our resources, technologies and 5.1% at December 31, 2018fraud prevention tools may be insufficient to accurately detect and 2017, respectively.
A new accounting standard will require usprevent fraud. High profile fraudulent activity could also negatively impact our brand and reputation, which could negatively impact the use of our services, leading to increase our allowance for loan loss and may have a material adverse effect on our financial condition and results of operations. In addition, significant increases in fraudulent activity could lead to regulatory intervention, including, but not limited to, additional consumer notification requirements, increasing our costs and negatively impacting our operating results, net income and profitability.
The amount of our Allowance for credit losses could adversely affect our business and may prove to be insufficient to cover actual losses on our loans.
The Financial Accounting Standards Board has adopted a newBoard’s accounting standard that became effective for us January 1, 2020. This standard, referredrelating to as Current Expected Credit Loss, or CECL, became effective for us on January 1, 2020 and requires us to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. In addition, for portfolios we may acquire when we enter into new partner program agreements, we are required to establish at acquisition an allowance for expected credit losses for the life of the acquired loan loss. The adoptionportfolio. Any subsequent deterioration in the performance of this standard resultedthe purchased portfolios after acquisition results in incremental credit loss reserves. Growth in our loan portfolio generally would also lead to an increase in our Allowance for credit losses.
The process for establishing an allowance for loan losscredit losses is critical to our results of $644.0 million. For additional information regarding the impactoperations and financial condition, and requires complex models and judgments, including forecasts of the adoption of CECL, see “Recently Issued Accounting Standards” under Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.economic conditions. The ongoing impact of CECL will be significantly influenced by the composition, characteristics and quality of our creditCredit card and loan portfolio,other loans, as well as the prevailing economic conditions and forecasts utilized. For additional information regarding the adoption of CECL and its impact, see Note 4, “Allowance for Credit Losses,” to our Consolidated Financial Statements included as part of this Annual Report.
The CECL model may create more volatility in the level of our allowanceAllowance for loan loss.credit losses. If we are required (as a result of any review, update, regulatory guidance or otherwise) to materially increase our level of allowanceAllowance for loan loss,credit losses, such increase could adversely affect or our business, financial condition, and results of operations.operations and opportunity to pursue new business. Moreover, we may underestimate our expected losses, and we cannot assure you that our credit loss reserves will be sufficient to cover actual losses.
If we fail to identify suitableWe may not be successful in realizing the benefits associated with our acquisitions, dispositions or newand strategic investments, and our business opportunities, or to effectively integrate the businesses we acquire or disaggregate the businesses we divest, itand reputation could negatively affect our business.be materially adversely affected.
Historically, weWe have engaged inacquired a significant number of acquisitions,businesses, including Bread, and those acquisitions have contributedmade a number of strategic investments, and continue to our growth in revenue and profitability. We believeevaluate potential transactions. There is no assurance that acquisitions and the identification and pursuit of new business opportunitieswe will be a key component of our continued growth strategy. However, we may not be able to locatesuccessfully identify suitable candidates, value potential investment or acquisition opportunities accurately, negotiate acceptable terms for those opportunities, or complete proposed acquisitions and secure future acquisition candidates or to identify and implement new business opportunities on terms and conditions that are acceptable to us.investments. If we are unable to identify attractive acquisition candidates or successfulaccretive new business opportunities, our growth could be impaired.limited.
Similarly, we may evaluate the potential disposition of, or elect to divest, assets or businessesportfolios that no longer complement our long-term strategic objectives.objectives, as we did in November 2021, when we completed the spinoff of our LoyaltyOne segment. When a determination is made to selldivest assets or businesses,portfolios, we may encounter difficulty attaining buyers or effecting desired exit strategies in a timely manner or on acceptable terms and may be subject to market forces leading to a divestiture on less than optimal price or other terms.
In addition, there are numerous risks associated with acquisitions, dispositions and the implementation of new businesses,business opportunities, including, but not limited to:
● | the difficulty and expense that we incur in connection with the acquisition, disposition or new business opportunity; |
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● | the inability to satisfy pre-closing conditions preventing consummation of the acquisition, disposition or new business opportunity; |
● | the potential for adverse consequences when conforming the acquired company’s accounting policies to ours; |
● | the diversion of management’s attention from other business concerns; |
● | the potential loss of customers or key employees of the acquired company; |
● | the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations; |
● | the acceptance of continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations; |
● | the assumption of unknown liabilities of the acquired company; |
● | the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies; |
● | the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of additional debt; |
● | the requirement to provide transition services in connection with a disposition resulting in the diversion of resources and focus; and |
● | the difficulty retaining and motivating key personnel from acquisitions or in connection with dispositions. |
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For example, upon the saledisposition of the Epsilon segment in July 2019, we have agreed to indemnify Publicis Groupe S.A. for the matter included in Note 18,15, “Commitments and Contingencies,” ofto the Notes to Consolidated Financial Statements. If adversely determined,Statements, which has resulted in a $150.0 million charge associated with Epsilon’s deferred prosecution agreement with the financial impactUnited States Department of our indemnification obligation may be substantial.Justice requiring two $75.0 million payments in January 2021 and January 2022, respectively.
Furthermore, if the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or to impair the value of some or all of the assets of the acquired or new business.
If actual redemptions by AIR MILES Reward Program collectors are greater than expected, or if the costs related to redemption of AIR MILES reward miles increase, our profitability could be adversely affected.
A portion of our revenue is based on our estimate of the number of AIR MILES reward miles that will go unused by the collector base. The percentage of AIR MILES reward miles not expected to be redeemed is known as “breakage.”
Breakage is based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure, the introduction of new program options and changes to rewards offered. Any significant change in or failure by management to reasonably estimate breakage, or if actual redemptions are greater than our estimates, our profitability could be adversely affected.
Our AIR MILES Reward Program also exposes us to risks arising from potentially increasing reward costs. Our profitability could be adversely affected if costs related to redemption of AIR MILES reward miles increase. A 10% increase in the cost of redemptions would have resulted in a decrease in pre-tax income of $31.6 million for the year ended December 31, 2019.
The loss of our most active AIR MILES Reward Program collectors could adversely affect our growth and profitability.
Our most active AIR MILES Reward Program collectors drive a disproportionately large percentage of our AIR MILES Reward Program revenue. The loss of a significant portion of these collectors, for any reason, could impact our ability to generate significant revenue from sponsors. The continued attractiveness of our loyalty and rewards programs will depend in large part on our ability to remain affiliated with sponsors that are desirable to collectors and to offer rewards that are both attainable and attractive.
Airline or travel industry disruptions, such as an airline insolvency, could negatively affect the AIR MILES Reward Program, our revenues and profitability.
Air travel is one of the appeals of the AIR MILES Reward Program to collectors. If one of our existing airline suppliers sharply reduces its fleet capacity and route network, we may not be able to satisfy our collectors’ demands for airline tickets. Tickets or other travel arrangements, if available, could be more expensive than a comparable airline ticket under our current supply agreements with existing suppliers, and the routes offered by other airlines or travel services may be inadequate, inconvenient or undesirable to the redeeming collectors. As a result, we may experience higher air travel redemption costs, and collector satisfaction with the AIR MILES Reward Program might be adversely affected.
As a result of airline or travel industry disruptions, including, but not limited to, the current impacts of COVID-19, political instability, terrorist acts or war, some collectors could determine that air travel is too dangerous or burdensome. Consequently, collectors might forego redeeming AIR MILES reward miles for air travel and therefore might not participate in the AIR MILES Reward Program to the extent they previously did, which could adversely affect our revenue from the program.
The markets for the services that we offer may contract or fail to expand and competition in our industries is intense, each of which could negatively impact our growth and profitability.
The markets for our products and services are highly competitive, and we expect this competition to intensify. Our growth and continued profitability depend on continued acceptance or adoption of the products and services that we offer. We compete with a wide range of businesses, and some of our current competitors have longer operating histories, stronger brand names and greater financial, technical, marketing and other resources than we do. In seeking to acquire and retain business with brand partners, we compete with these competitors on the basis of a number of factors, including program financial and other terms, underwriting standards, marketing expertise, service levels, product and service offerings, technological capabilities and integration, brand and reputation. See “Our clientsresults of operations and growth depend on our ability to retain existing partners and attract new partners” below. Our partners may not continue to use the loyaltyfinancial products and targeted marketing strategies andservices, or loyalty programs, that we offer. Moreover, the consumer credit and payments industry is highly competitive and we face an increasingly dynamic industry as emerging technologies enter the marketplace. As a form of payment, our products compete with cash, checks, debit cards, general purpose credit cards (including Visa and MasterCard, American Express and Discover Card), various forms of consumer installment loans and BNPL products, other private label card brands, prepaid cards, digital wallets and mobile payment solutions, and other tools that simplify and personalize shopping experiences for consumers and merchants. Changes in technology may
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enable merchants and retail companies to directly process transactions in a cost-efficient manner without the use of our services. In addition, some of our competitors, including new and existing competitors in the digital and mobile payments space, are not subject to the same regulatory requirements or legislative scrutiny to which we are subject. Non-bank providers of pay-over-time solutions, such as Affirm, Afterpay and others, extend consumer credit-like offerings but do not face the same restrictions as banks, such as capital requirements and other regulatory requirements, which also could place us at a competitive disadvantage. See “Item 1. Business—Competition” of this Form 10-K for further discussion of the competitive environment in the markets where we operate. Additionally, downturns in the economy or the performance of retailersour retail or other partners, including the impact of the global COVID-19 pandemic, may result in a decrease in the demand for our marketing strategies.products and services. Our ability to generate significant revenue from partners and consumers will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our programs to consumers. If we are not able to differentiate our products and services from those of
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our competitors, drive value for our partners and their customers, or effectively and efficiently align our resources with our goals and objectives, we may not be able to compete effectively in the market. Any decrease in the demand for our products and services for the reasons discussed above or any other reasons could have a material adverse effect on our growth, revenue and operating results.
We may be unableOur results of operations and growth depend on our ability to realize some or all of the anticipated benefits of restructuring initiativesretain existing partners and restructuring may adversely affect our business.attract new partners.
In responseFollowing the disposition of our Epsilon business and the spinoff of our LoyaltyOne segment, the majority of our revenue is generated from the credit products we provide to changes in industry and market conditions,customers of our partners pursuant to program agreements that we may undertake restructuring, reorganization, or other strategic initiatives to realign our resourcesenter into with our partners. As a result, our results of operations and growth strategies, operate more efficiently,depend on our ability to retain existing partners and control costs. The successful implementationattract new partners. Historically, there has been turnover in our partners, and we expect this will continue in the future. See also, “Business generated through our relationships with our 10 largest partners represented 59% and 65%, respectively, of our total net interest and non-interest income, or revenue, for the years ended December 31, 2021 and 2020, and a decrease in business from, or the loss of, any of these initiatives may require us to effect business and asset dispositions, workforce reductions, management restructurings, decisions to limit investmentspartners could cause a significant drop in or otherwise exit businesses, office consolidations and closures, and other actions, each of which depend on a number of factors that may not be within our control.revenue.”
Any such effort to realign the organization may result in the recording of restructuring or other charges, such as asset impairment charges, contract and lease termination costs, inventory write-offs, exit costs, termination benefits,Program agreements with our retail and other restructuring costs. Further,brand partners typically are for multi-year terms. These program agreements generally permit our partner to terminate the agreement prior to its scheduled termination date for various reasons, including, in some cases, if we fail to meet certain service levels or change certain key cardholder terms or our credit criteria, we fail to achieve certain targets with respect to approvals of new customers as a result of restructuring initiatives,the credit criteria we may experienceuse, we elect not to increase the program size when the outstanding loans under the program reach certain thresholds or we are not adequately capitalized, or certain force majeure events or changes in our ownership occur or a loss of continuity, loss of accumulated knowledge and/or inefficiency,material adverse effects on employee morale, loss of key employees and/or other retention issues during transitional periods. Reorganization and restructuring can impact a significant amount of management and other employees’ time and focus, which may divert attention from operating and growingchange in our business.financial condition occurs.
WeThere is significant competition for our existing partners, and our failure to retain our existing larger partner relationships upon the expiration of a contractual arrangement or our earlier loss of a relationship upon the exercise of a partner’s early termination rights, or the expiration or termination of a substantial number of smaller partner contracts or relationships, could have undertaken,a material adverse effect on our results of operations (including growth rates) and may undertake infinancial condition to the future, restructuring initiatives to simplifyextent we do not acquire new partners of similar size and profitability or otherwise grow our business structure as well as focus capital on the highest earning and growth assets. The implementation of any restructuring initiativesbusiness. In addition, existing relationships may be costlyrenewed with less favorable terms to us in response to increased competition for such relationships. The competition for new partners is also significant, and disruptiveour failure to our business, and following their completion, our business may not be more efficient or effective than prior to implementation of the plan. Although designed to deliver long-term sustainable growth, our restructuring activities, including any related charges,attract new partners could present significant potential risks that may impairadversely affect our ability to achieve anticipated operating enhancementsgrow.
Our results depend, to a significant extent, on the active and effective promotion and support of our products by our brand partners.
Our partners generally accept most major credit cards and various other forms of payment; therefore our success depends on their active and effective promotion of our products to their customers. We depend on our partners to integrate the use of our credit products into their operations, including into their in-store and online shopping experiences and loyalty programs. We rely on our partners to train their sales and call center associates about our products and to have their associates encourage customers to apply for, and use, our products and otherwise effectively marketing our products. If our partners do not effectively promote and support our products, or cost reductions, or otherwiseif they make changes in their business models that negatively impact card usage, these actions could have a material adverse effect on our business competitive position, operatingand results of operations. Partners may also implement or fail to implement changes in their systems and financial condition. For more information abouttechnologies that may disrupt the integration between their systems and technologies and ours, which could disrupt the use of our restructuring initiatives takenproducts. In addition, if our partners engage in 2019, see Note 14, “Restructuringimproper business practices, do not adhere to the terms of our program agreements or other contractual arrangements or standards, or otherwise diminish the value of our brand, we may suffer reputational damage and Other Charges”customers may be less likely to use our products, which could have a material adverse effect on our business and results of the Notes to Consolidated Financial Statements.operations.
Competition inOur results are impacted, to a significant extent, by the financial performance of our industries is intense and we expect it to intensify.partners.
The markets for our productsOur ability to originate new credit card accounts, generate new loans, and services are highly competitiveearn interest and we expect competition to intensify in each of those markets. Some of our current competitors have longer operating histories, stronger brand names and greater financial, technical, marketingfees and other resources than we do. Certainincome is dependent, in part, upon sales of our segments also compete against in-house staffs of our current clients and others or internally developed productsmerchandise and services by our current clientspartners. The retail and others.other industries in which our partners operate are intensely competitive. Our abilitypartners’ sales may decrease or may not increase as we anticipate for various reasons, some of which are in the partners’ control and some of which are not. For example, partner sales may be adversely affected by the global COVID-19 pandemic or other macroeconomic conditions having a national, regional or
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more local effect on consumer spending, business conditions affecting the general retail environment or a particular partner or industry, or natural disasters or other catastrophes affecting broad or more discrete geographic areas. If our partners’ sales decline for any reason, it generally results in lower credit sales, and therefore lower loan volume and associated interest and fees and other income for us from their customers. In addition, if a partner closes some or all of its stores or becomes subject to generatea voluntary or involuntary bankruptcy proceeding (or if there is a perception that it may become subject to a bankruptcy proceeding), its customers who have used our financing products may have less incentive to pay their outstanding balances to us, which could result in higher charge-off rates than anticipated and our costs for servicing its customers’ accounts may increase. This risk is particularly acute with respect to our largest partners that account for a significant amount of our interest and fees on loans. See “Business generated through our relationships with our 10 largest partners represented 59% and 65%, respectively, of our Total net interest and non-interest income, or revenue, for the years ended December 31, 2021 and 2020, and a decrease in business from, clients andor the loss of, any of these partners will dependcould cause a significant drop in our revenue.” Moreover, if the financial condition of a partner deteriorates significantly or a partner becomes subject to a bankruptcy proceeding, we may not be able to recover for customer returns, customer payments made in partner stores or other amounts due to us from the partner. A decrease in sales by our partners for any reason or a bankruptcy proceeding involving any of them could have a material adverse impact on our abilitybusiness and results of operations.
We may not be successful in our efforts to differentiate ourselves throughpromote usage of our proprietary cards, or to effectively control the productscosts associated with such promotion, both of which may materially impact our profitability.
We have been investing in promoting the usage of our proprietary cards, but there can be no assurance that our investments to acquire cardholders, provide differentiated features and services we provide and the attractivenessincrease usage of our programsproprietary cards will be effective, particularly with increasing competition from other card issuers and fintechs as well as changing consumer and business behaviors as a result of the global COVID-19 pandemic. In addition, if we develop new products or offers that attract customers looking for short-term incentives rather than incentivize long-term loyalty, cardholder attrition and costs could increase. Moreover, we may not be able to consumers. cost-effectively manage and expand cardholder benefits, including containing the growth of marketing, promotion, rewards and cardholder services expenses in the future.
Reductions in interchange fees may reduce the competitive advantages our private label credit card products currently have by virtue of not charging interchange fees and would reduce our income from those fees.
Interchange is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure and payment facilitation, and which are paid to credit card issuers to compensate them for the risk they bear in lending money to customers. We earn interchange fees on co-brand and general purpose credit card transactions but we typically do not charge or earn interchange fees from our partners or customers on our private label credit card products.
Merchants, trying to decrease their operating expenses, have sought to, and have had some success at, lowering interchange rates. Several recent events and actions indicate a continuing increase in focus on interchange by both regulators and merchants. Beyond pursuing litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing costs. To the extent interchange fees are reduced, one of our current competitive advantages with our partners—that we typically do not charge interchange fees when our private label credit card products are used to purchase our partners’ goods and services—may be reduced. Moreover, to the extent interchange fees are reduced, our income from those fees will be lower. As a result, a reduction in interchange fees could have a material adverse effect on our business and results of operations. In addition, for our co-brand and general purpose credit cards, we are subject to the operating regulations and procedures set forth by the interchange network, and our failure to comply with these operating regulations, which may change from time to time, could subject us to various penalties or fees, or the termination of our license to use the interchange network, all of which could have a material adverse effect on our business and results of operations.
We may not be able to retain and/or attract and hire a highly qualified and diverse workforce, or maintain our corporate culture, which could impact our ability to grow effectively.
Our performance largely depends on the talents and efforts of our employees, particularly our key personnel and senior management. We may be unable to retain or to attract highly qualified employees. The market for key personnel is highly competitive, particularly in technology and other skill areas significant to our business. Moreover, as a result of
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the global COVID-19 pandemic, a significant portion of our workforce is working in a mostly remote environment. This remote environment may continue after the pandemic due to compete successfully againstpotential resulting trends, and could impact the quality of our currentcorporate culture. Failure to attract, hire, develop, motivate and potential competitors.retain highly qualified and diverse employee talent, or to maintain a corporate culture that fosters innovation, creativity and teamwork could harm our overall business and results of operations. We rely on key personnel to lead with integrity and decency. To the extent our leaders behave in a manner that is not consistent with our values, we could experience significant impact to our brand and reputation, as well as to our corporate culture.
Damage to our reputation could damage our business.
In recent years, financial services companies have experienced increased reputational risk as consumers protest and regulators scrutinize business and compliance practices of such companies. Maintaining a positive reputation is critical to attracting and retaining partners, customers, investors and employees. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct; a breach of our or our service providers’ cybersecurity defenses; litigation or regulatory outcomes; failing to deliver minimum standards of service and quality; compliance failures; and the activities of customers, business partners and counterparties. Social media also can cause harm to our reputation. By its very nature, social media can reach a wide audience in a very short amount of time, which presents unique challenges for corporate communications. Negative or otherwise undesirable publicity generated through unexpected social media coverage can damage our reputation and brand. Negative publicity regarding us, whether or not true, may result in customer attrition and other harm to our business prospects. There has also been increased focus on topics related to environmental, social and corporate governance policies, and criticism of our policies in these areas could also harm our reputation and/or potentially limit our access to some forms of capital or liquidity.
Liquidity, Market and Credit RiskRisks
Adverse financial market conditions or our inability to effectively manage our funding and liquidity risk could have a material adverse effect on our business, liquidity and ability to meet our debt service requirements and other obligations.
We need to effectively manage our funding and liquidity in order to meet our cash requirements such as day-to-day operating expenses, extensions of credit to our customers, investments to grow our business, payments of principal and interest on our borrowings and payments on our other obligations. Our primary sources of funding and liquidity are collections from our customers, deposits, funds from securitized financings and proceeds from unsecured borrowings, including our credit facility and outstanding notes. If we do not have sufficient liquidity, we may not be able to meet our debt service requirements and other obligations, particularly during a liquidity stress event. If we maintain or are required to maintain too much liquidity, it could be costly and reduce our financial flexibility.
We will need additional financing in the future to refinance any existing debt and finance growth of our business. The availability of additional financing will depend on a variety of factors such as financial market conditions generally, including the availability of credit to the financial services industry, consumers’ willingness to place money on deposit with us, our performance and credit ratings and the performance of our securitized portfolios. Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the uncertainty and volatility experienced in the capital and credit markets during periods of financial stress and other economic and political conditions in the global markets and concerning the level of U.S. government debt and fiscal measures that may be taken over the longer term to address these matters, may limit our ability to obtain additional financing or refinance maturing liabilities on desired terms (including funding costs) in a timely manner or at all. As a result, we may be forced to delay obtaining funding or be forced to issue or raise funding on undesirable terms, which could significantly reduce our financial flexibility and cause us to contract or not grow our business, all of which could have a material adverse effect on our results of operations and financial conditions.
While financial market conditions are generally stable at the present time, there can be no assurance that significant disruptions, uncertainties and volatility will not occur in the future. If we are unable to continue to finance our business, access capital markets and attract deposits on favorable terms and in a timely manner, or if we experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our results of operations and financial condition may be materially adversely affected.
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If we are unable to securitize our credit card receivablesloans due to changes in the market or other circumstances or events, we may not be able to fund new credit card receivables,loans, which would have a negative impactmaterial adverse effect on our operations and profitability.
We use the securitization of credit card loans, which involves the transfer of credit card loans to a trust, and the issuance by the trust of notes to third-party investors collateralized by the beneficial interest in the transferred credit card loans, as a significant source of funding. A number of factors affect our ability to fund our receivablescredit card and other loans in the securitization market, some of which are beyond our control, including:
● | conditions in the securities markets in general and the asset-backed securitization market in particular; |
● | availability of loans for securitization; |
● | conformity in the quality of our credit card |
● | costs of securitizing our credit card loans; |
● | ability to fund required overcollateralizations or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing |
● | the legal, regulatory, accounting or tax rules affecting securitization transactions and asset-backed securities, generally. |
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In addition, on August 27, 2014, the SEC adopted a number of rules that will change the disclosure, reporting and offering process for publicly registered offerings of asset-backed securities, including those offered under our credit card securitization program. The adopted rules finalize rules that were originally proposed on April 7, 2010 and re-proposed on July 26, 2011. A number of rules proposed by the SEC in 2010 and 2011, suchMoreover, as requiring group-level data for the underlying assets in credit card securitizations, were not adopted in the final rulemaking but may be adopted by the SEC in the future with or without further modifications. The adoption of further rules affecting disclosure, reporting and the offering process for publicly registered offerings of asset-backed securities may impact our ability or desire to issue asset-backed securities in the future.
Regulations adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandate a minimum five percent risk retention requirement for securitizations issued on and after December 24, 2016. Such risk retention requirements may limit our liquidity by restricting the amount of asset-backed securities we are able to issue or affecting the timing of future issuances of asset-backed securities; we intend to satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.
Early amortization events may occur as a result of certain adverse events specified for each asset-backed securitization transaction, including, among others, deteriorating asset performance or material servicing defaults. In addition, certain series of funding notes issued by our securitization trusts are subject to early amortization based on triggers relating to the bankruptcy of one or more retailers. Deteriorating economic conditions and increased competition in the retail industry, among other factors, may lead to an increase in bankruptcies among retailers who have entered into credit card programs with us. The bankruptcy of one or more retailers could lead to a decline in the amount of new receivables and could lead to increased delinquencies and defaults on the associated receivables. Any of these effects of a retailer bankruptcy could result in the commencement of an early amortization for one or more series of such funding securities, particularly if such an event were to occur with respect to a retailer relating to a large percentage of such securitization trust’s assets. The occurrence of an early amortization event may significantly limit our ability to securitize additional receivables.
As a result of Basel III, which refers generally to a set of regulatory reforms adopted in the U.S. and internationally that are meant to address issues that arose in the banking sector during the recent2008-2010 financial crisis, banks are becominghave become subject to more stringent capital, liquidity and leverage requirements. In response to Basel III, investorscertain lenders of private placement commitments within our securitization trusts’ funding securitiestrusts have sought and obtained amendments to their respective transaction documents permitting them to delay disbursement of funding increases by up to 35 days. Although funding may be requested from other investorslenders who have not delayed their funding, access to financing could be disrupted if all of the investorslenders implement such delays or if the lending capacities of those who did not do so were insufficient to make up the shortfall. In addition, excess spread may be affected if the issuing entity’s borrowing costs increase as a result of Basel III. Such cost increases may result, for example, because the investors are entitled to indemnification for increased costs resulting from such regulatory changes.
The inability to securitize credit card receivablesloans due to changes in the market, regulatory proposals, the unavailability of credit enhancements, or any other circumstance or event would have a material adverse effect on our operations, cost of funds and profitability.overall financial condition.
The occurrence of events that result in the early amortization of our existing credit card securitization transactions or an inability to delay the accumulation of principal collections for our existing credit card securitization transactions would materially adversely affect our liquidity.
Our liquidity and cost of funds would be materially adversely affected by the occurrence of events that could result in the early amortization of our existing credit card securitization transactions. Early amortization events may occur as a result of certain adverse events specified for each asset-backed securitization transaction, including, among others, deteriorating asset performance or material servicing defaults. In addition, certain series of funding securities issued by our securitization trusts are subject to early amortization based on triggers relating to the bankruptcy of one or more retailers or other partners. Deteriorating economic conditions and increased competition in the retail industry, among other factors, may lead to an increase in bankruptcies among retailers who have entered into credit card programs with us. The bankruptcy of one or more retailers or other partners could lead to a decline in the amount of new loans and could lead to increased delinquencies and defaults on the associated loans. Any of these effects of a partner bankruptcy could result in the commencement of an early amortization for one or more series of such funding securities, particularly if such an event were to occur with respect to a retailer or other partner relating to a large percentage of such securitization trust’s assets. The occurrence of an early amortization event may significantly limit our ability to securitize additional loans and materially adversely affect our liquidity.
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Lower payment rates on our securitized credit card loans could materially adversely affect our liquidity and financial condition.
Certain collections from our securitized credit card loans come back to us through our subsidiaries, and we use these collections to fund our purchase of newly originated loans to collateralize our securitized financings. If payment rates on our securitized credit card loans are lower than they have historically been, fewer collections will be remitted to us on an ongoing basis. Further, certain series of our asset-backed securities include a requirement that we accumulate principal collections in a restricted account for a specified number of months prior to the applicable security’s maturity date. We are required under the program documents to lengthen this accumulation period to the extent we expect the payment rates to be low enough that the current length of the accumulation period is inadequate to fully fund the restricted account by the applicable security’s maturity date. Lower payment rates, and in particular, payment rates that are low enough that we are required to lengthen our accumulation periods, could materially adversely affect our liquidity and financial condition.
Inability to grow our deposits in the future could have a material adverse effect on our liquidity, ability to grow our business and profitability.
A significant source of our funds is customer deposits, primarily in the form of certificates of deposit and other savings products. We obtain deposits directly from retail and commercial customers or through brokerage firms that offer our deposit products to their customers. Our funding strategy includes continued growth of our liquidity through deposits. The deposit business is highly competitive, withcontinues to experience intense competition in attracting and retaining deposits. We compete on the basis of the rates we pay on deposits, the quality of our customer service and the competitiveness of our digital banking capabilities. Our ability to originateattract and maintain retail deposits is alsoremains highly dependent on the strength of our bank subsidiaries andBanks, the perceptions of consumers and othersreputability of our business practices and our financial health. Adverse perceptions regarding our lending practices, regulatory compliance, protection of customer information or sales and marketing practices, or actions taken by regulators or others with respect to our bank subsidiaries,Banks, could impede our competitive position in the deposits market.
The demand for the deposit products we offer may also be reduced due to a variety of factors, including changes in consumers’ preferences, demographics or discretionary income, regulatory actions that decrease consumer access to
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particular products or the development or availability of competing products. Competition from other financial services firms and others that use deposit funding products may affect deposit renewal rates, costs or availability. Adjustments we make to the rates offered on our deposit products to remain competitive may adversely affect eitherconversely our liquidity or our profitability.
The Federal Deposit Insurance Act, or FDIA prohibits an insured bank from accepting brokered deposits or offering interest rates on any deposits that significantly higher than theexceed rates in its prevailing rate in the bank’s normal market, area or nationally (depending upon where the deposits are solicited), unless it is “well capitalized,capitalized.” or it is “adequately capitalized” and receives a waiver from the FDIC. A bank that is “adequatelyless than “well capitalized” and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. There are no such restrictions under the FDIA on a bank that is “well capitalized” and at December 31, 2019,2021, each of our bank subsidiariesBanks met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA. However, there can be no assurance that our bank subsidiariesBanks will continue to meet those requirements. Any limitation on the interest rates our Banks can pay on deposits may competitively disadvantage us in attracting and retaining deposits, resulting in a material adverse effect on our business.
The FDIA also prohibits an insured bank from accepting brokered deposits, unless it is “well capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC. Limitations on our bank subsidiaries’Banks’ ability to accept brokered deposits for any reason (including regulatory limitations on the amount of brokered deposits in total or as a percentage of total assets) in the future could materially adversely impact our liquidity, funding costs and profitability. In December 2020, the FDIC updated its regulations that implement Section 29 of the FDIA to establish a new framework for analyzing whether certain deposit arrangements qualify as brokered deposits. The new brokered deposit rule establishes bright-line standards for determining whether an entity meets the statutory definition of “deposit broker,” and a consistent process for application of the primary purpose exception. At December 31, 2021, each of our Banks met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA. Also, all deposits on the Consolidated Balance Sheets of our Banks categorized as non-brokered under the updated regulations mentioned above comply with all application requirements of said regulations. Any limitation on the interest ratesability of our bank subsidiaries can pay onBanks to participate in the gathering of brokered deposits may competitively disadvantage us in attractingmeeting our funding goals and retaining deposits, resultingresult in a material adverse effect on our business.
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At December 31, 2019,2021, we had $12.2$11.0 billion in deposits, with approximately $3.6$5.6 billion in money marketnon-maturity savings deposits that are redeemable on demand and approximately $8.6$5.4 billion in certificates of deposit.
Our level of indebtedness could materially adversely affect our ability to generate sufficient cash to repay our outstanding debt, our ability to react to changes in our business and our ability to incurincurrence of additional indebtedness to fund future needs.needs could exacerbate these risks.
We have a highOur level of indebtedness which requires a high level of interest and principal payments. Subject to the limits contained in our credit agreement, the indentures governing our senior notes and our other debt instruments, we may be able to incur substantial additional indebtedness from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of indebtedness could intensify. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our higher level of indebtedness, combined with our other financial obligations and contractual commitments, could:
● | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under our credit agreement, the indentures governing our senior notes and the agreements governing our other indebtedness; |
● | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions or other new business and other corporate purposes; |
● | increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive |
● | limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; |
● | limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other new business and other corporate purposes; |
● | delay or abandon investments and capital expenditures; |
● | cause any refinancing of our indebtedness to be at higher interest rates and require us to comply with more onerous covenants, which could further restrict our business operations; and |
● | prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control. |
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Restrictions imposed by the indentureindentures governing our senior notes, our credit agreement and our other outstanding or future indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.
The terms of the indentureindentures governing our senior notes, our credit agreement and agreements governing our other debt instruments limit us and our subsidiaries from engaging in specified types of transactions. These covenants limit our and our subsidiaries’ ability, among other things, to:
● | incur additional debt; |
● | declare or pay dividends, redeem stock or make other distributions to stockholders; |
● | make investments; |
● | create liens or use assets as security in other transactions; |
● | merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; |
● | enter into transactions with affiliates; |
● | sell or transfer certain assets; and |
● | enter into any consensual encumbrance or restriction on the ability of certain of our subsidiaries to pay dividends or make loans or sell assets to us. |
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As a result of these covenants and restrictions, we may be limited in how we conduct our business and we may be unable to raise additional indebtedness to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, iffuture. If we fail to do so, thatcomply with such covenants, we willmay not be able to obtain waivers of non-compliance from the lenders and/or amend the covenants.covenants so that we are in compliance therewith.
Interest rate increases on our variable rate debtChanges in market interest rates could materially adverselynegatively affect our profitability.
We have both fixed-rateChanges in market interest rates cause our finance charges, net and variable-rate debt, and are subject to interest rate risk in connection with the issuance of variable-rate debt. Ourour interest expense, net was $569.0 million for the year ended December 31, 2019, treatingto increase or decrease, as certain of our former Epsilon segment as a discontinued operation. To manage our risk from marketassets and liabilities carry interest rates we actively monitorthat fluctuate with market benchmarks. We fund credit card and other loans with a combination of fixed rate and floating rate funding sources that include deposits and asset-backed securities. We also have unsecured term debt that is subject to variable interest rates.
The interest rate benchmark for most of our floating rate assets is the interest ratesprime rate, and the interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income and cash flow. In 2019, a 1% increase or decrease in interest rates onrate benchmark for our variable-rate debt would have resulted in a change to our interest expense of approximately $83 million.
Our variable-rate indebtedness bears interest at fluctuating interest rates, primarily based onfloating rate liabilities is generally either the London interbank offered rate (LIBOR) for depositsor the federal funds rate. See “The discontinuance of U.S. dollars. LIBOR tendsmay negatively impact our access to fluctuate basedfunding and the value of our financial instruments and commercial agreements” below.The prime rate and LIBOR or the federal funds rate could reset at different times or could diverge, leading to mismatches in the interest rates on multipleour floating rate assets and floating rate liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including general short-termeconomic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products, and policies of various governmental and regulatory agencies, in particular, the U.S. Federal Reserve. Changes in monetary policy, including changes in interest rates, rates setrate controls being applied by the U.S. Federal Reserve, which has already indicated plans for multiple interest rate increases in 2022, could influence the amount of interest we receive on our credit card and other central banks,loans and the supplyamount of interest we pay on deposits and demand for credit in the London interbank market and general economic conditions. At this time, we have not hedged our interest rate exposure with respect to our floating rate debt. Accordingly, our interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates.borrowings.
On July 27, 2017,If the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intendsinterest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on our credit card and other loans, our profitability would be adversely affected. Conversely, our profitability could also be adversely affected if the interest we receive on our credit card and other loans falls more quickly than the interest we pay on deposits and other borrowings.
The discontinuance of LIBOR may negatively impact our access to stop compellingfunding and the value of our financial instruments and commercial agreements.
Central banks and global regulators have called for financial market participants to submit ratesprepare for the calculationdiscontinuance of LIBOR after 2021. It is unclear whether new methodsand the establishment of calculatingalternative reference rates. Certain of our financial instruments and commercial agreements reference LIBOR, which will need to be establishedamended or if LIBOR continuesotherwise modified to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollarreplace LIBOR with a newly created index.an alternative reference rate. Most of those instruments and agreements contain provisions to replace LIBOR as the benchmark following the occurrence of specified transition events. To facilitate an orderly transition away from LIBOR, we have established an enterprise-wide initiative to assess and implement necessary changes to our contracts, systems, processes, documentation, and models. These changes may introduce operational challenges and have a negative impact on our interest expense and profitability.profitability
Alternative reference rates are calculated using components different from those used in the calculation of LIBOR and may fluctuate differently than, and not be representative of, LIBOR. In order to compensate for these differences, certain of our financial instruments and commercial agreements allow for a benchmark replacement adjustment. However, there is no assurance that any benchmark replacement adjustment will be sufficient to produce the economic equivalent of LIBOR, either at the benchmark replacement date or over the life of such instruments and agreements.
Uncertainty as to the nature and timing of the potential discontinuance or modification of LIBOR, the replacement of LIBOR with one or more alternative reference rates or other reforms may negatively impact market liquidity, our access to funding and the trading market for our financial instruments. Furthermore, the timing of implementation and use of alternative reference rates and corresponding adjustments or other reforms could be subject to disputes, could cause the financial obligations related to our outstanding financial instruments and commercial agreements to be materially different than expected and may impact the value of such instruments and agreements.
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Future sales of our common stock, or the perception that future sales could occur, may adversely affect our common stock price.
As of February 20, 2020,18, 2022, we had an aggregate of 79,212,386146,873,346 shares of our common stock authorized but unissued and not reserved for specific purposes. In general, we may issue all of these shares without any action or approval by our stockholders. We have reserved 6,573,8613,934,553 shares of our common stock for issuance under our employee stock purchase plan and our long-term incentive plans, of which 1,278,642749,265 shares have been issued and 596,8221,166,516 shares are issuable upon vesting of restricted stock awards and restricted stock units. We have reserved for issuance 1,500,000 shares of our common stock, 462,101290,897 of which remain issuable, under our 401(k) and Retirement Savings Plan as of December 31, 2019.2021. In addition, we may pursue acquisitions of competitors and related businesses and may issue shares of our
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common stock in connection with these acquisitions. For example, on December 3, 2020, we issued 1,903,868 shares of our common stock in a private placement completed with our acquisition of Lon Inc. Sales or issuances of a substantial number of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the ownership interests of existing stockholders.
The market price and trading volume of our common stock may be volatile and our stock price could decline.
The trading price of shares of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price of our common stock may be affected by a number of factors, including our operating results, changes in our earnings estimates, additions or departures of key personnel, our financial condition, legislative and regulatory changes, general conditions in the industries in which we operate, general economic conditions, and general conditions in the securities markets.In addition, until the market has fully evaluated our business without Loyalty Ventures, the price at which our common stock trades may fluctuate significantly. Other risks described in this reportAnnual Report could also materially and adversely affect our share price.
There is no guarantee that we will pay future dividends or repurchase shares at a level anticipated by stockholders, which could reduce returns to our stockholders. Decisions to declare future dividends on, or repurchase, our common stock will be at the discretion of our Board of Directors based upon a review of relevant considerations.
Since October 2016, our Board of Directors has declared quarterly cash dividend payments on our outstanding common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors. Since 2001,In the approximately 20 years since our initial public offering, our Board of Directors has approved various share repurchase programs including the share repurchase program approvedresulting in July 2019 for the repurchase of up to $1.1 billionapproximately 67.4 million shares of our common stock, through June 30, 2020.although there is no active share repurchase program at this time. The Board’s determination to declare dividends on, or repurchase shares of, our common stock will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that the boardBoard of Directors deems relevant. For example, beginning with the second quarter of 2020, our Board of Directors reduced our quarterly dividend payment by 67% from $0.63 to $0.21 per quarter. Based on an evaluation of these factors, the Board of Directors may determine not to declare future dividends at all, to declare future dividends at a reduced amount, not to repurchase shares or to repurchase shares at reduced levels compared to historical levels, any or all of which could reduce returns to our stockholders.
Our reported financial information will be affected by fluctuations in the exchange rate between the U.S. dollarWe are a holding company and certain foreign currencies.depend on payments from our subsidiaries.
The resultsAlliance Data Systems Corporation, our parent holding company, depends on dividends, distributions and other payments from subsidiaries, particularly our Banks, to fund dividend payments, any potential share repurchases, payment obligations, including debt obligations, and to provide funding and capital as needed to our other operating subsidiaries. Banking laws and regulations and our banking regulators may limit or prohibit our transfer of our operations are exposedfunds freely, either to foreign exchange rate fluctuations. We are exposed primarily to fluctuations in the exchange rate between the U.S. and Canadian dollars and the exchange rate between the U.S. dollar and the Euro. Upon translation, operating results may differor from our expectations.subsidiaries, at any time. These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations or otherwise achieve strategic objectives. For the year ended December 31, 2019, foreign currency movements relative to the U.S. dollar negatively impacted our revenue by approximately $45 millionmore information, see “Business — Supervision and negatively impacted our income from continuing operations before income taxes by approximately $1 million.Regulation.”
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Legal, Regulatory Environmentand Compliance Risks
Current and proposedOur business is subject to comprehensive government regulation and legislationsupervision, which could materially adversely affect our results of operations and financial condition.
We, primarily through our Banks and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are intended to protect consumers, depositors’ funds, the DIF, and the safety and soundness of the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies (including as a result of leadership changes at the federal banking agencies resulting from the 2020 election), could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or limit what we may charge for certain banking services, among other things.
We expect that the current presidential administration will continue to implement a regulatory reform agenda that is significantly different than that of the previous administration. This reform agenda could include a heightened focus on consumer protection, fair lending, heightened scrutiny on Bank Secrecy Act and AML requirements, topics related to social equity, executive compensation, and increased capital and liquidity, as well as limits on share buybacks and dividends. It is uncertain whether and to what extent the current administration will increase the regulatory burden on banks, and changes in existing regulations and their enforcement may require modification to the Banks’ existing regulatory compliance and risk management infrastructure.
Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
See “Business — Supervision and Regulation” for more information about certain laws and regulations to which we are subject and their impact on us.
Litigation and regulatory actions could subject us to significant fines, penalties, judgments and/or requirements resulting in significantly increased expenses, damage to our reputation and/or a material adverse effect on our business.
Businesses in the financial services and payments industries have historically been, and continue to be, subject to significant legal actions, including class action lawsuits. Many of these actions have included claims for substantial compensatory or punitive damages. While we have historically relied on our arbitration clause in agreements with customers to limit our exposure to class action litigation, there can be no assurance that we will continue to be successful in enforcing our arbitration clause in the future, including as a result of regulation that would require that our consumer arbitration clause not apply to cases filed in court as class actions, and claims of the type we previously arbitrated could be subject to the complexities, risks and costs associated with class action cases. The continued focus of merchants on issues relating to the acceptance of various forms of payment may lead to additional litigation and other legal actions. Given the inherent uncertainties involved in litigation, and the very large or indeterminatedamages sought in some matters asserted against us, there is significant uncertainty as to the ultimate liability we may incur from litigation.
We have been subject to regulatory actions and may continue to be subject to such actions, including governmental inquiries, investigations and enforcement proceedings, in the event of noncompliance or alleged noncompliance with laws or regulations. External publicity concerning investigations, including those that are narrow in scope, can increase their scope and scale and lead to further regulatory inquiries.
We expect that regulators will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public supervisory actions or findings, which could involve restrictions on our card servicesactivities, among other limitations that could limitadversely affect our business. In addition, a violation of law or regulation by another financial institution could give rise to an investigation by regulators and other governmental agencies of the same or similar practices by us. Further, a single event may give rise to numerous and overlapping
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investigations and proceedings. Regulatory action could subject us to significant fines, penalties or other requirements resulting in cardholder reimbursements, increased expenses, limitations or conditions on our business activities, product offerings and fees chargeddamage to our reputation and our brand, all of which could adversely affect our results of operations and financial condition.
Governmental authorities have adopted or proposed measures to provide economic assistance to individual households and businesses, stabilize markets and support economic growth in response to the COVID-19 pandemic. The future success of these measures is unknown and they may not be sufficient to mitigate the negative impact of the pandemic. Additionally, some measures, such as a suspension of loan payments and encouragement of forbearances, has had, and may continue to have, a significantnegative impact on our business, results of operations and financial condition. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions, such as a renewed focus on fair lending laws, and actions governmental authorities take in response to those conditions.
In addition to litigation and regulatory matters, from time to time, through our operational and compliance controls, we identify compliance issues that require us to make operational changes and, depending on the nature of the issue, result in financial remediation to impacted cardholders. These self-identified issues and voluntary remediation payments could be significant depending on the issue and the number of cardholders impacted. They also could generate litigation or regulatory investigations that subject us to additional adverse effects on our business, results of operations and financial condition.
Our Banks are subject to extensive federal and state regulation that may restrict their ability to make cash available to us and may require us to make capital contributions to them.
Federal and state laws and regulations extensively regulate the operations of our Banks, including to limit the ability of the Banks to pay dividends to us. Many of these laws and regulations are intended to maintain the safety and soundness of our Banks, and they impose significant restraints on them to which other non-regulated entities are not subject.
Our Banks must maintain minimum amounts of regulatory capital. If the Banks do not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our financial statements. To pay any dividend, the Banks must each maintain adequate capital above regulatory guidelines. Accordingly, neither Comenity Bank nor Comenity Capital Bank may be able to make any of its cash or other assets available to us, including to service our indebtedness. If either of our Banks were to fail to meet any of the capital requirements to which it is subject, we may be required to provide them with additional capital, which could also impair our ability to service our indebtedness.
In addition, under the “source of strength” requirement, we are required to serve as a source of financial strength to our Banks and may not conduct our operations in an unsafe or unsound manner. Under these requirements, in the future, we could be required to provide financial assistance to our Banks if the Banks experience financial distress. This support may be required at times when we might otherwise determine not to provide it or when doing so is not otherwise in tour interests or the interests of our shareholders or creditors.
If legislative attempts to amend the Bank Holding Company Act to eliminate the exclusion of credit card banks or industrial loan companies from the definition of “bank” are successful, we may become a bank holding company.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), among other things, includes a sweeping reform of the regulation and supervision of financial institutions, as well as of the regulation of derivatives and capital market activities.
The full impact of the Dodd-Frank Act is not yet known because some of the final implementing regulations have not yet been issued by the requisite federal agencies. In addition, the Dodd-Frank Act mandates multiple studies, which could result in future legislative or regulatory action. In particular, the Government Accountability Office issued its study on whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system of the United States, to eliminate the exemptions to the definition of “bank” under the Bank Holding Company Act for certain institutions including limited purpose credit card banks and industrial loan companies. The study did not recommend the elimination of these exemptions. However, iflegislation is periodically introduced that would eliminate this exception for industrial loan companies and other “nonbank banks”. If such legislation were enacted to eliminate these exemptions without any grandfathering of or accommodations for existing institutions, we could be required to become a bank holding company.
As a bank holding company, we and our nonbank subsidiaries would be subject to supervision, regulation and examination by the Federal Reserve Board. We would be required to provide annual reports and such additional
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information as the Federal Reserve Board may require pursuant to the BHC Act, and applicable regulations. In addition, we would be subject to consolidated regulatory capital requirements.
Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, a bank holding company and cease certain of ourmay only engage in, or own companies that engage in, activities that are notdeemed by the Federal Reserve Board to be permissible for bank holding companies or divest our credit cardfinancial holding companies. Activities permissible for bank subsidiary, Comenity Bank, or our industrial bank subsidiary, Comenity Capital Bank.
The Dodd-Frank Act created the CFPB, a federal consumer protection regulator with authority to make further changesholding companies are those that are so closely related to the federal consumer protection lawsbusiness of banking or managing or controlling banks as to be a proper incident thereto. Permissible activities for financial holding companies include those "so closely related to banking as to be a proper incident thereto" as well as certain additional activities deemed "financial in nature or incidental to such financial activity" or complementary to a financial activity and regulations. The CFPB assumed rulemaking authority underthat does not pose a substantial risk to the existing federal consumer financial protection laws,safety and enforces those laws against and examines certain non-depository institutions and insured depository institutions with total assets greater than $10 billion and their affiliates.
Since October 2016, both Comenity Bank and Comenity Capital Bank are under the CFPB’s supervision and the CFPB may, from time to time, conduct reviews of their practices. In addition, the CFPB’s broad rulemaking authority is expected to impact their operations, including with respect to deferred interest products. For example, the CFPB’s rulemaking authority may allow it to change regulations adopted in the past by other regulators including regulations issued under the Truth in Lending Act by the Board of Governorssoundness of the Federal Reserve System. The CFPB’s abilitydepository institution or the financial system. If we were required to rescind, modify or interpret past regulatory guidance could increase our compliance costs and litigation exposure. Further, the CFPB has broad authority to prevent “unfair, deceptive or abusive” acts or practices and has taken enforcement action against other credit card issuers and financial services companies. Evolution of these standards could result in changes to pricing, practices, procedures and other activities relating to our credit card accounts in ways that could reduce the associated return. While the CFPB has taken public positions on certain matters, it is unclear what additional changes may be promulgated by the CFPB and what effect, if any, such changes would have on our credit accounts.
The Dodd-Frank Act authorizes certain state officials to enforce regulations issued by the CFPB and to enforce the Dodd-Frank Act’s general prohibition against unfair, deceptive or abusive practices. To the extent that states enact requirements that differ from federal standards or courts adopt interpretations of federal consumer laws that differ from those adopted by the federal banking agencies,become a bank holding company, we may be required to alter productsmodify or services offered in some jurisdictions or cease offering products,discontinue certain of our business activities, which will increase compliance costs and reducemay materially adversely affect our ability to offer the same products and services to consumers nationwide.results of operations.
Various federal and state laws and regulations significantly limit the retail credit card services activitiesIncreases in which we are permitted to engage. Such laws and regulations, among other things, limit the fees and other charges that we can impose on consumers, limit or proscribe certain other terms of our products and services, require specified disclosures to consumers, or require that we maintain certain licenses, qualifications and minimum capital levels. In some cases, the precise application of these statutes and regulations is not clear. In addition, numerous legislative and regulatory proposals are advanced each year which, if adopted, couldFDIC insurance premiums may have a material adverse effect on our profitability or further restrict the manner in which we conduct our activities. The CARD Act, as implemented by regulations issued under the Truth in Lending Act, acts to limit or modify certain credit card practices and requires increased disclosures to consumers. The credit card practices addressed by the rules include, but are not limited to, restrictions on the applicationresults of rate increases to existing and new balances, payment allocation, default pricing, imposition of late fees and two-cycle billing. The failure to comply with, or adverse changes in, the laws or regulations to which our business is subject, or adverse changes in their interpretation, could have a material adverse effect on our ability to collect our receivables and generate fees on the receivables, thereby adversely affecting our profitability.operations.
InWe are generally unable to control the normal courseamount of business, from timepremiums that are required to time, Comenity Bank and Comenity Capital Bank have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with their business activities. While historically the arbitration provision in each bank’s customer agreement has generally limited such bank’s exposure to consumer class action litigation,be paid for FDIC insurance. If there can be no assurance that the banks will be successful in enforcing the arbitration clause in the future. There may also be legislative, administrativeare bank or regulatory efforts to directly or indirectly prohibit the use of pre-dispute arbitration clauses.
Comenity Bank and Comenity Capital Bank are also involved, from time to time, in reviews, investigations, and proceedings (both formal and informal) by governmental agencies regarding the banks’ business, which could subject the banks to significant fines, penalties, obligations to change its business practices or other requirements. In September 2015, each bank entered into a consent order with the FDIC in settlement of the FDIC’s review regarding the marketing, promotion and sale of certain add-on products; these consent orders were terminated in August 2018.
The effect of the Dodd-Frank Act on our business and operations, which will depend upon final implementing regulations, the actions of our competitors, the behavior of other marketplace participants and its interpretation and
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enforcement by federal or state officials or regulators, could be significant. In addition,financial institution failures, we may be required to invest significant management time and resources to addresspay significantly higher premiums than the provisions of the Dodd-Frank Act and the regulationslevels currently imposed or additional special assessments or taxes that arecould adversely affect earnings. Any future increases or required to be issued under it. The Dodd-Frank Act and any related legislation or regulations and their interpretation and enforcementprepayments in FDIC insurance premiums may have a material impact onmaterially adversely affect our business, results of operations and financial condition.operations.
Legislation relating to consumer privacyNoncompliance with the Bank Secrecy Act and security may affect our ability to collect data that we use in providing our loyaltyother anti-money laundering statutes and marketing services, which, among other things,regulations could negatively affect our ability to satisfy our clients’ needs.cause us material financial loss.
The evolution of legal standardsBank Secrecy Act and regulations around data protectionthe PATRIOT Act contain anti-money laundering and consumer privacy may affect our business. The enactment of new or amended legislation or industry regulations pertainingfinancial transparency provisions intended to consumer, public or private sector privacy issues could have a material adverse impact on our marketing services, including placing restrictions upondetect and prevent the collection, sharing and use of information that is currently legally available. This, in turn, could materially increase our cost of collecting certain data. These types of legislation or industry regulations could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet our clients’ requirementsthe U.S. financial system for money laundering and our profitability and cash flow targets. In addition to the United States, Canadian and European Union regulations discussed below, we have expanded our marketing services through the acquisition of companies formed and operating in foreign jurisdictions that may be subject to additional or more stringent legislation and regulations regarding consumer or private sector privacy.
There are also a number of specific laws and regulations governing the collection and use of certain types of consumer data primarily in connection with financial services transactions that are relevant to our various businesses and services. In the United States, federal laws such as the Gramm-Leach-Bliley Act, or GLBA, and the Fair Credit Reportingterrorist financing activities. The Bank Secrecy Act, as amended by the FairPATRIOT Act, requires depository institutions and Accurate Credit Transactionstheir holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of partners, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. FinCEN, a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of 2003,those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as similarthe U.S. Department of Justice, Drug Enforcement Administration, and applicable state laws, make it more difficult to collect, shareIRS.
Regulation in the areas of privacy, data protection, data governance, account access and use information that has previously been legally available and maycyber security could increase our costs of collecting some data. These laws give bank customers, including cardholders and depositors, the ability to “opt out” of having certain information generated by their applicable financial services transactions shared with other affiliatedaffect or limit our business opportunities and unaffiliated parties how we collect and/or the public. Our ability to gather, share and utilize this data will be adversely affected if a significant percentage of the consumers whose purchasing behavior we track elect to “opt out,” thereby precluding us and our affiliates from using their data.use personal information.
Legislators and regulators in the United States and other countries are increasingly adopting or revising privacy, data protection, data governance, account access and information and cyber security laws, including data localization, authentication and notification laws. As such laws are interpreted and applied (in some cases, with significant differences or conflicting requirements across jurisdictions), compliance and technology costs will continue to increase, particularly in the context of ensuring that adequate data governance, data protection, data transfer and account access mechanisms are in place.
Compliance with current or future privacy, data protection, data governance, account access and information and cyber security laws could significantly impact our collection, use, sharing, retention and safeguarding of consumer and/or colleague information and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability. Our failure to comply with such laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring, customer attrition, decreases in the use or acceptance of our cards and damage to our reputation and our brand. In recent years, there has been increasing regulatory enforcement and litigation activity in the areas of privacy, data protection and information and cyber security in the United States, the federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with prospectiveEU and existing customers. Similar measures were implemented in Canada beginning September 1, 2008. Regulations in both the United States and Canada give consumers the ability to “opt out,” through a national do-not-call registry and state do-not-call registries, of having telephone solicitations placed to them by companies that do not have an existing business relationship with the consumer. In addition, regulations require companies to maintain an internal do-not-call list for those who do not want the companies to solicit them through telemarketing. These regulations could limit our ability to provide services and information to our clients. Failure to comply with these regulations could have a negative impact on our reputation and subject us to significant penalties. Further, the Federal Communications Commission has approved interpretations of rules related to the Telephone Consumer Protection Act defining robo-calls broadly, which may affect our ability to contact customers and may increase our litigation exposure.various other countries.
In the United States, the federal Controlling the Assault of Non-Solicited PornographyFor more information on regulatory and Marketing Act of 2003 restricts our ability to send commercial electronic mail messages, the primary purpose of which is advertising or promoting a commercial product or service, to our customerslegislative activity in this area, see “Privacy and prospective customers. The act requires that a commercial electronic mail message provide the customers with an opportunity to opt-out from receiving future commercial electronic mail messages from the sender. Failure to comply with the terms of this act could have a negative impact on our reputation and subject us to significant penalties.
In the United States, California enacted the California Consumer Privacy Act, or CCPA, which went into effect on January 1, 2020. The CCPA creates new individual privacy rights for California consumers and places increased privacy and security obligations on entities handling certain personal data of consumers and households. The CCPA includes new and expanded disclosure requirements to consumers about companies’ data collection, use and sharing practices; provides consumers new ways to opt-out of certain sales or transfers of personal information; and provides consumers with additional causes of action. The CCPA prohibits companies from discriminating against consumers who have opted out of the sale of their personal information, subject to a narrow exception. The CCPA provides for certain monetaryData Protection Regulation” above.
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penalties and for enforcement of the statute by the California Attorney General or by consumers whose rights under the law are not observed. It also provides for damages, as well as injunctive or declaratory relief, if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA. It remains unclear what, if any, modifications will be made to the CCPA or how it will be interpreted.
Further, many other state governments are reviewing or proposing the need for greater regulation of the collection, processing, sharing and use of consumer data for marketing purposes or otherwise. This may result in new laws or regulations imposing additional compliance requirements.
In Canada, the Personal Information Protection and Electronic Documents Act, or PIPEDA, requires an organization to obtain a consumer’s consent to collect, use or disclose personal information. Under this act, consumer personal information may be used only for the purposes for which it was collected. We allow our customers to voluntarily “opt out” from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail. Heightened consumer awareness of, and concern about, privacy may result in customers “opting out” at higher rates than they have historically. This would mean that a reduced number of customers would receive bonus and promotional offers and therefore those customers may collect fewer AIR MILES reward miles.
Canada’s Anti-Spam Legislation, or CASL, may restrict our ability to send “commercial electronic messages,” defined to include text, sound, voice and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and prospective customers. CASL requires, in part, that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender. Failure to comply with the terms of CASL could have a negative impact on our reputation and subject us to significant monetary penalties.
On May 25, 2018, The General Data Protection Regulation, or GDPR, a European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights came into force. The GDPR replaced the European Union Directive 95/46/EC and applies to and binds the 27 EU Member States. The GDPR details greater compliance obligations on organizations, including the implementation of a number of processes and policies around data collection and use. These, and other terms of the GDPR, could limit our ability to provide services and information to our customers. In addition, the GDPR includes significant new penalties for non-compliance, with fines up to the higher of €20 million ($22 million as of December 31 2019) or 4% of total annual worldwide revenue.
In general, GDPR, and other European Union and Member State specific privacy and data governance laws, could also lead to adaptation of our technologies or practices to satisfy local privacy requirements and standards that may be more stringent than in the U.S. Similarly, it is possible that in the future, U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our advertising services, such as the FTC’s proposed “Do-Not-Track” standard or other legislation or regulations similar to EU Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” which directs EU Member States to ensure that accessing information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. On January 31, 2020, the United Kingdom left the European Union and entered into a Brexit transition period. During this period, which runs until the end of December 2020, the GDPR will continue to apply to the United Kingdom. It is not yet known what the data protection landscape will look like at the end of the transition period.
There is also rapid development of new privacy laws and regulations elsewhere around the globe, including amendments of existing data protection laws to the scope of such laws and penalties for noncompliance. Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation and subject us to significant penalties.
While all 50 U.S. states and the District of Columbia have enacted data breach notification laws, there is no such U.S. federal law generally applicable to our businesses. Data breach notification legislation and regulations relating to mandatory reporting came into force in Canada on November 1, 2018. Data breach notification laws have been proposed widely and exist in other specific countries and jurisdictions in which we conduct business. Legislative and regulatory measures, such as mandatory breach notification provisions, impose, among other elements, strict requirements on reporting time frames and providing notice to individuals.
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Legislation relating
We may not be able to consumer protection may affect our abilityeffectively manage the operational and compliance risks to provide our loyalty and marketing services, which among other things, could negatively affect our ability to satisfy our clients’ needs.we are exposed.
The enactment of newOperational risk is the risk arising from inadequate or amended legislationfailed internal processes or industry regulations pertaining to consumer protection,systems, human errors or anymisconduct, or adverse external events. Operational losses result from internal fraud; external fraud; inadequate or inappropriate employment practices and workplace safety; failure to comply withmeet professional obligations involving partners, products, and business practices; damage to physical assets; business disruption and systems failures; and/or failures in execution, delivery, and process management. As processes or organizations are changed, or new products and services are introduced, we may not fully appreciate or identify new operational risks that may arise from such changes, could have a material adverse impact on our loyalty and marketing services. Such changes couldchanges. Through human error, fraud or malfeasance, conduct risk can result in a negative impactharm to our reputation, an adverse effect on our profitability or an increase in our litigation exposure.customers, broader markets and the company and its employees.
For example, Ontario’s Protecting Rewards Points Act (Consumer Protection Amendment), 2016,Compliance risk arises from the failure to adhere to applicable laws, rules, regulations and additional related regulations effective January 2018, prohibit suppliers from entering intointernal policies and procedures. We need to continually update and enhance our control environment to address operational and compliance risks. Operational and compliance failures or amending consumer agreements to provide for the expiry of rewards points due to the passage of time alone, while permitting the expiry of rewards points if the underlying consumer agreement is terminated and that agreement provides that reward points expire upon termination. Similar legislation pertaining to the expiry of rewards points due to the passage of time alone was passeddeficiencies in Quebec in 2017, with regulations taking effect in 2018 and 2019.
Our bank subsidiaries are subject to extensive federal and state regulation that may requireour control environment can expose us to make capital contributions to them,reputational and that may restrict the ability of these subsidiaries to make cash available to us.
Federal and state laws and regulations extensively regulate the operations of Comenity Bank,legal risks as well as Comenity Capital Bank. Manyfines, civil money penalties or payment of these lawsdamages and regulations are intendedcan lead to maintain the safetydiminished business opportunities and soundness of Comenity Bank and Comenity Capital Bank, and they impose significant restraints on them to which other non-regulated entities are not subject. As a state bank, Comenity Bank is subject to overlapping supervision by the State of Delaware and the FDIC. As a Utah industrial bank, Comenity Capital Bank is subject to overlapping supervision by the FDIC and the State of Utah. Comenity Bank and Comenity Capital Bank must maintain minimum amounts of regulatory capital. If Comenity Bank and Comenity Capital Bank do not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our financial statements. Comenity Bank and Comenity Capital Bank, as institutions insured by the FDIC, must maintain certain capital ratios, paid-in capital minimums and adequate allowances for loan loss. If either Comenity Bank or Comenity Capital Bank were to fail to meet any of the capital requirements to which it is subject, we may be required to provide them with additional capital, which could impair ourdiminished ability to service our indebtedness. To pay any dividend, Comenity Bank and Comenity Capital Bank must each maintain adequate capital above regulatory guidelines. Accordingly, neither Comenity Bank nor Comenity Capital Bank may be able to make any of its cash or other assets available to us, including to service our indebtedness.
If our bank subsidiaries fail to meet certain criteria, we may become subject to regulation under the Bank Holding Company Act, which could force us to cease all of our non-banking activities and lead to a drastic reduction in our revenue and profitability.
If either of our depository institution subsidiaries failed to meet the criteria for the exemption from the definition of “bank” in the Bank Holding Company Act under which it operates (which exemptions are described below), and if we did not divest such depository institution upon such an occurrence, we would become subject to regulation under the Bank Holding Company Act. This would require us to cease certain of our activities that are not permissible for companies that are subject to regulation under the Bank Holding Company Act. One of our depository institution subsidiaries, Comenity Bank, is a Delaware State FDIC-insured bank and a limited-purpose credit card bank located in Delaware. Comenity Bank will not be a “bank” as defined under the Bank Holding Company Act so long as it remains in compliance with the following requirements:
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Our other depository institution subsidiary, Comenity Capital Bank, is a Utah industrial bank that is authorized to do business by the State of Utah and the FDIC. Comenity Capital Bank will not be a “bank” as defined under the Bank Holding Company Act so long as it remains an industrial bank in compliance with the following requirements:
Operational and Other Risk
We rely on third party vendors to provide products and services. Our profitability could be adversely impacted if they fail to fulfill their obligations.
The failure of our suppliers to deliver products and services in sufficient quantities and in a timely manner could adversely affect our business, including, but not limited to, supply chain disruptions resulting from the current impacts of COVID-19. If our significant vendors were unable to renew our existing contracts, we might not be able to replace the related product or service at the same cost which would negatively impact our profitability.
Failure to safeguard our databases and consumer privacy could affect our reputation among our clients and their customers, and may expose us to legal claims.
Although we have extensive physical and cyber security controls and associated procedures, our data has in the past been and in the future may be subject to unauthorized access. In such instances of unauthorized access, the integrity of our data has in the past been and may in the future be affected. Security and privacy concerns may cause consumers to resist providing the personal data necessary to support our loyalty and marketing programs. Information security risks for large financial institutions have increased with the adoption of new technologies, including those used on mobile devices, to conduct financial and other business transactions, and the increased sophistication and activity level of threat actors. The use of our loyalty, marketing services or credit card programs could decline if any compromise of physical or cyber security occurred. In addition, any unauthorized release of customer information or any public perception that we released consumer information without authorization, could subject us to legal claims from our clients or their customers, consumers or regulatory enforcement actions, which may adversely affect our client relationships.
Loss of data center capacity, interruption due to cyber-attacks, loss of network links or inability to utilize proprietary software of third party vendors could affect our ability to timely meet the needs of our clients and their customers.
Our ability, and that of our third-party service providers, to protect our data centers against damage, loss or performance degradation from fire, power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, and other disasters is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data as well as periodically expand and upgrade our technology capabilities. Any damage to our data centers, or those of our third-party service providers, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our clients’ needs and their confidence in utilizing us for future services.key operations.
Our failure to protect our intellectual property rights and use of open source software may harm our competitive position, and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly.costly, any of which could negatively impact our business, results of operations and profitability.
Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. The actions we take to protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We may not be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. Third parties may also assert infringement claims against us. Any claims and an adverse determination in any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type
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coulddamages and require us to either design around a third party’s patent or to license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims. Further, our competitors or other third parties may independently design around or develop similar technology, or otherwise duplicate our services or products in a way that would preclude us from asserting our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property or confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure.
Aspects of our platform include software covered by open source licenses. United States courts have not interpreted the terms of various open source licenses, but could interpret them in a manner that imposes unanticipated conditions or restrictions on our platform. If portions of our proprietary software are determined to be subject to an open source license, we could also be required to, under certain circumstances, publicly release or license, at no cost, our products that incorporate the open source software or the affected portions of our source code. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or other contractual protections regarding infringement, misappropriation, security vulnerabilities, defects or errors in the code or other violations, any of which could result in liability to us and negatively impact our business, results of operations, financial condition and profitability.
Our
We have international operations acquisitions and personnelthat subject us to complex U.S.various international risks as well as increased compliance and regulatory risks and costs.
We have international lawsoperations, primarily in India, and regulations,some of our third-party service providers provide services to us from other countries, all of which if violated could subject us to penaltiesa number of international risks, including, among other things, sovereign volatility and other adverse consequences.
Our operations, acquisitions and employment of personnel outsidesocio-political instability. Any future political or social instability in the United States require us to comply with numerous complex laws and regulations of the U.S. government and the various international jurisdictions where we do business. These laws and regulations may apply to our company, or our individual directors, officers, employees or agents, and may restrict our operations, investment decisions or other activities. Specifically, we are subject to anti-corruption and anti-bribery laws and regulations, including, but not limited to, the U.S. Foreign Corrupt Practices Act, or FCPA; the U.K. Bribery Act 2010, or UKBA; and Canada’s Corruption of Foreign Public Officials Act, or CFPOA. These laws generally prohibit providing anything of value to foreign officials for the purpose of influencing official decisions, obtaining or retaining business, or obtaining preferential treatment, and require us to maintain books and records that fairly and accurately reflect transactions and maintain an adequate system of internal accounting controls. As part of our business, we or our partners may do business with state-owned enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA, UKBA or CFPOA. There can be no assurance that our policies, procedures, training and compliance programs will effectively prevent violation of all U.S. and international laws and regulations with which we are required to comply. Violations of such laws and regulations could subject us to penalties that could adversely affect our reputation, business, financial condition or results of operations. In addition, some international jurisdictionscountries in which we operate could subject ushave a material adverse effect on our business operations. U.S. regulations also govern various aspects of the international activities of domestic corporations and increase our compliance and regulatory risks and costs. Any failure on our part or the part of our service providers to comply with applicable U.S. regulations, as well as the regulations in the countries and markets in which we or they operate, could result in fines, penalties, injunctions or other obstacles, including lack
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similar restrictions, any of which could have a developed legal system, elevated levelsmaterial adverse effect on our business, results of corruption, strict currency controls, adverse tax consequences or foreign ownership requirements, difficult or lengthy regulatory approvals, or lack of enforcement for non-compete agreements.operations and financial condition.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent or delay change of control transactions or attempts by our stockholders to replace or remove our current management.
Delaware law, as well as provisions of our certificate of incorporation, including those relating to our Board’s authority to issue series of preferred stock without further stockholder approval, our bylaws and our existing and future debt instruments, could discourage unsolicited proposals to acquire us, even though such proposals may be beneficial to our stockholders.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors, including a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market price of our common stock to decline or delay or prevent our stockholders from receiving a premium over the market price of our common stock that they might otherwise receive.
Cybersecurity, Technology and Vendor Risks
We rely on third party vendors to provide products and services and are transitioning additional services to strategic outsourcing partners. Our business operations, reputation and profitability could be adversely impacted if our vendors fail to fulfill their obligations.
The failure of our suppliers to deliver products and services at contracted service levels or standards or in sufficient quantities and in a timely manner could adversely affect our business. These impacts arise from and include, but are not limited to, closures or restricted operating conditions and supply chain disruptions resulting from the current impacts of the global COVID-19 pandemic. If our significant vendors were unable or unwilling to fulfill or renew our existing contracts on current terms, we might not be able to replace the related product or service at the same cost, in a timely fashion, or at all, any of which could negatively impact our profitability. In addition, if a third party vendor fails to meet contractual requirements, such as compliance with applicable laws and regulations, our business operations could suffer economic or reputational harm that could have a material adverse impact on our business and results of operations.
Further, we are in the process of transitioning our credit card processing to strategic outsourcing partners with targeted completion in 2022, and we have also recently completed outsourcing certain print and mail and remittance processing functions. Transitioning these services from our legacy platforms to strategic partners with established systems and functionality presents significant risks, including, but not limited to, potential losses or corruption of data, changes in security processes, implementation delays and cost overruns, resistance from current partners and account holders, disruption to operations, loss of customization or functionality, reliability issues with legacy systems prior to cutover and incurrence of outsized consulting costs to complete the transition. In addition, the pursuit of multiple new product integrations and outsourcing transitions simultaneously could increase the complexity and risk, as well as magnify the unintended consequences, including an inability to retain or replace key personnel during the transition as well as the incurrence of unexpected expenses as we adopt new processes for managing these service providers and establish controls and procedures to ensure regulatory compliance. Any transition or implementation delays, errors or difficulties may result in operational challenges, security failures, increased costs or reputational harm, any of which could materially adversely impact our profitability.
Failure to safeguard our data and consumer privacy could affect our reputation among our partners and their customers, and may expose us to legal claims.
Although we have extensive physical and cyber security controls and associated procedures, our data has in the past been and in the future may be subject to unauthorized access. In such instances of unauthorized access, we may have data loss that could harm our loan holders. This in turn could lead to reputational risk as concerns with security and
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privacy of data may result in consumers not wanting to participate in our product offerings. Information security risks for large financial institutions have increased with the adoption of new technologies, including those used on mobile devices, to conduct financial and other business transactions, and the increased sophistication and activity level of threat actors. The use of our products and services could decline if any compromise of physical or cyber security occurred. In addition, any unauthorized release of customer information or any public perception that we released consumer information without authorization, could subject us to legal claims from our partners or their customers, consumers or regulatory enforcement actions, which may adversely affect our partner relationships. We cannot be certain that our cybersecurity insurance coverage will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.
Business interruptions, including loss of data center capacity, interruption due to cyber-attacks, loss of network connectivity or inability to utilize proprietary software of third party vendors, could affect our ability to timely meet the needs of our partners and customers and harm our business.
Our ability, and that of our third-party service providers, to protect our data centers and other facilities and systems against damage, loss or performance degradation from power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, insider threats, hardware and software defects or malfunctions, human error, computer viruses or other malware, public health crises, disruptions in telecommunications services, fraud, fires and other disasters and other events is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data as well as periodically expand and upgrade our technology capabilities. Any damage to our data centers or other facilities and systems, or those of our third-party service providers, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our partners’ needs and their confidence in utilizing us for future services. In addition, any failure to successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies in a timely manner could have an adverse impact on our business if we are not able to be competitive with other financial services companies, and could also adversely impact our internal controls (including internal controls over financial reporting), results of operations, and financial condition.
If we are not able to invest successfully in, and compete at the leading edge of, technological developments across all our businesses, our revenue and profitability could be materially adversely affected.
Our industry is subject to rapid and significant technological changes. In order to compete in our industry, we need to continue to invest in technology across all areas of our business, including in access management, vulnerability management, transaction processing, data management and analytics, machine learning and artificial intelligence, customer interactions and communications, alternative payment and financing mechanisms, authentication technologies and digital identification, tokenization, real-time settlement, and risk management and compliance systems. Incorporating new technologies into our products and services, including developing the appropriate governance and controls consistent with regulatory expectations, requires substantial expenditures and takes considerable time, and ultimately may not be successful. We expect that new technologies in the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, our existing technology.
The process of developing new products and services, enhancing existing products and services and adapting to technological changes and evolving industry standards is complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological trends accurately could significantly impede our ability to compete effectively. Consumer and merchant adoption is a key competitive factor and our competitors may develop products, platforms or technologies that become more widely adopted than ours. In addition, we may underestimate the time and expense we must invest in new products and services before they generate significant revenues, if at all. Our use of artificial intelligence and machine learning is subject to risks related to flaws in our algorithms and datasets that may be insufficient or contain biased information. These deficiencies could undermine the decisions based on impact to data quality, predictions or analysis such technologies produce, subjecting us to competitive harm, legal liability, and brand or reputational harm.
Our ability to develop, acquire or access competitive technologies or business processes on acceptable terms may also be limited by intellectual property rights that third parties, including those that current and potential competitors, may assert. In addition, our ability to adopt new technologies may be inhibited by the emergence of industry-wide
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standards, a changing legislative and regulatory environment, an inability to develop appropriate governance and controls, a lack of internal product and engineering expertise, resistance to change from partners or consumers, lack of appropriate change management processes or the complexity of our systems.
Risks Related to the LoyaltyOne Spinoff
We may be unable to achieve some or all of the benefits we expect to achieve from the spinoff.
In November 2021, we completed the spinoff of our LoyaltyOne segment, consisting of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc. Although we believe that the spinoff will enhance our long-term value, we may not be able to achieve some or all of the anticipated benefits from the separation of our businesses, and the spinoff may adversely affect our business. Separating the businesses resulted in two independent, publicly traded companies, each of which is now a smaller, less diversified and more narrowly focused business than before the spinoff, which makes us more vulnerable to changing market and economic conditions. Additionally, a potential loss of synergies from separating the businesses could negatively impact the balance sheet, profit margins or earnings of both businesses and the combined value of the common stock of the two publicly traded companies may not be equal to or greater than the value of Alliance Data’s common stock had the spinoff not occurred. We currently hold 19% of the outstanding shares of common stock of Loyalty Ventures Inc., and the value of these shares is dependent upon the current and future performance of Loyalty Ventures Inc. We cannot guarantee that Loyalty Ventures Inc. will be successful as a standalone company, and Loyalty Ventures Inc.’s performance remains subject to various risks and uncertainties, including those related to the ongoing COVID-19 pandemic and the other risks described in Loyalty Ventures Inc.’s filings with the SEC, including its registration statement on Form 10 filed with the SEC in connection with the spinoff. Most recently, for example, Loyalty Ventures Inc. noted in its quarterly earnings release for the quarter ended December 31, 2021 that, based on its preliminary results, it was recognizing a non-cash, goodwill impairment charge of $50 million in connection with the ongoing impact of COVID-19. Any such current or future impairment charges or other results or circumstances that adversely impact Loyalty Ventures Inc. will in turn adversely impact the value of our ownership position in Loyalty Ventures Inc. While we intend to divest this position in a tax-efficient manner (i.e., in a debt-for-equity exchange within one year of the completion of the spinoff), there is no assurance that we will be able to do so in a tax-efficient manner or at a price that is attractive to us. If we fail to achieve some or all of the benefits that we expect to achieve as a result of the spinoff, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.
The LoyaltyOne spinoff could result in substantial tax liability to us and our stockholders.
We received an opinion from our tax advisor confirming that the spinoff of our LoyaltyOne segment qualifies as tax-free for U.S. federal income tax purposes for us and our stockholders (except for cash received in lieu of fractional shares), and we also received a private letter ruling, or PLR, from the Internal Revenue Service to this effect. However, if the factual assumptions or representations made by us in connection with the delivery of the opinion or the PLR are inaccurate or incomplete in any material respect, including those relating to the past and future conduct of our business, we may not be able to rely on the same. Furthermore, the opinion from our tax advisor is not binding on the IRS or the courts. If, notwithstanding receipt of the opinion from our tax advisor and the PLR, the spinoff transaction and certain related transactions are determined to be taxable, we would be subject to a substantial tax liability. In addition, if the spinoff transaction is taxable, each holder of our common stock who received shares of Loyalty Ventures Inc. in connection with the spinoff would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares received.
Even if the spinoff otherwise qualifies as a tax-free transaction, the distribution would be taxable to us (but not to our stockholders) in certain circumstances if future significant acquisitions of our stock or the stock of Loyalty Ventures Inc. are deemed to be part of a plan or series of related transactions that included the spinoff. In this event, the resulting tax liability could be substantial. In connection with the spinoff, we entered into a tax matters agreement with Loyalty Ventures Inc., pursuant to which Loyalty Ventures Inc. agreed to not enter into any transaction that could cause any portion of the spinoff to be taxable to us without our consent and to indemnify us for any tax liability resulting from any such transaction. In addition, these potential tax liabilities may discourage, delay or prevent a change of control of us.
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A director who serves on our Board of Directors also serves as a director of Loyalty Ventures Inc., and ownership of shares of common stock of Loyalty Ventures Inc. by our directors and executive officers may create, or appear to create, conflicts of interest.
A director who serves on our Board of Directors also currently serves on the Board of Directors of Loyalty Ventures Inc. This may create, or appear to create, conflicts of interest when our or Loyalty Ventures Inc.’s management and directors face decisions that could have different implications for us and Loyalty Ventures Inc., including the resolution of any dispute regarding the terms of the agreements governing the spinoff and our relationship with Loyalty Ventures Inc. or any other commercial agreements entered into in the future between us and Loyalty Ventures Inc.
Some of our executive officers and non-employee directors currently own shares of the common stock of Loyalty Ventures Inc. The continued ownership of such common stock by our directors and executive officers may create, or may appear to create, a conflict of interest when these directors and executive officers are faced with decisions that could have different implications for us and Loyalty Ventures Inc.
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RISK MANAGEMENT
Our Enterprise Risk Management (ERM) program is designed to ensure that all significant risks are identified, measured, monitored and addressed. Our ERM program defines our risk appetite, governance, culture and reporting. We manage enterprise risk using our Board-approved Enterprise Risk Management Framework, which includes board-level oversight, several risk management committees, and a dedicated risk management team led by our Chief Risk Officer (CRO). Our Board and management manage the level of risk the organization is willing to accept in pursuit of its objectives through well-defined risk appetite statements. We utilize the "three lines of defense" risk management model to assign roles, responsibilities and accountabilities in the organization for taking and managing risk.
Governance and Accountability
Board and Board Committees
Our Board of Directors, as a whole and through its committees, maintains responsibilities for the oversight of risk management, including monitoring the “tone at the top,” and our risk culture and overseeing emerging and strategic risks. While our Board’s Risk Committee has primary responsibility for oversight of enterprise risk management, the Audit, Compensation & Human Capital and Nominating & Corporate Governance Committees also oversee risks within their respective areas of responsibilities. Each of these Board committees consists entirely of independent directors and provides regular reports to the full Board regarding matters reviewed at their Committee meetings.
Risk Management Roles and Responsibilities
In addition to our Board and Board Committees, responsibility for risk management also flows to other individuals and entities throughout the Company, including various management committees and senior management. As defined in our ERM Framework, we utilize the “three lines of defense” risk management model.
The “first line of defense” is comprised of the business areas that engage in activities that generate revenue or provide operational support or services that introduce risk to the Company. As the business owner, the first line of defense is responsible for, among other things, identifying, owning, managing and controlling key risks associated with their activities, addressing issues and remediation, and implementing processes and procedures to strengthen the risk and control environment. The first line of defense identifies and manages key performance indicators and risks and controls consistent with the Company’s risk appetite statements. The senior executive officers who serve as leaders in the "first line of defense," are responsible for ensuring that their respective functions operate within established risk limits, in accordance with our risk appetite statements. These leaders are also responsible for identifying risks, considering risk when developing strategic plans, budgets and new products and implementing appropriate risk controls when pursuing business strategies and objectives. In addition, these leaders are responsible for deploying sufficient financial resources and qualified personnel to manage the risks inherent in our business activities.
The “second line of defense” consists of an independent risk management team charged with oversight and monitoring of risk within the business. The second line of defense is responsible for, among other things, implementing our ERM Framework and related policies and procedures, challenging the first line of defense and identifying, monitoring and reporting on aggregate risks of the business and support functions.
Our risk management team, including compliance, which is led by our CRO, provides oversight of our risk profile and is responsible for maintaining a compliance program that includes compliance risk assessment, policy development, testing and reporting activities.
The CRO manages our risk management team and is responsible for establishing and implementing standards for the identification, management, measurement, monitoring and reporting of risk on an enterprise-wide basis. The CRO has responsibility for developing an appropriate risk appetite with corresponding limits that aligns with supervisory expectations, and presenting our risk appetite statements to the Board of Directors. The CRO regularly reports to the Risk Committee as well as the Bank Risk and Compliance Committees on risk management matters.
The “third line of defense” is comprised of the Global Audit organization. The third line of defense provides an independent review and objective assessment of the design and operating effectiveness of the first and second lines of defense governance, policies, procedures, processes and internal controls and reports its findings to senior management
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and the Board through the Audit Committee. Global Audit is responsible for performing periodic, independent reviews and testing compliance with the Company’s and the Banks’ risk management policies and standards, as well as with regulatory guidance and industry best practices. Global Audit also assesses the design of the Company's and the Banks’ policies and standards and validates the effectiveness of risk management controls, and reports the results of such reviews to the Audit Committee.
Management Committees
The Company operates several internal management committees, including a Bank Risk Management Committee (BRMC) at each of our Banks. The BRMCs are the highest-level management committees to oversee risks and are responsible for risk governance, risk oversight and making recommendations on the Banks’ and its affiliates’ risk appetite. The BRMCs monitor compliance with limits and related escalation requirements and oversee implementation of risk policies.
In addition to the BRMCs, we maintain the following management risk committees at each of our Banks to oversee the risks listed below: the Credit Risk Management Committee; Compliance Risk Management Committee; Operational Risk Management Committee; Model Risk Management Committee; and the Asset & Liability Management Committee. Each of these committees is responsible for one or more of the Banks’ eight risk categories. For its risk category(ies) of responsibility, each committee provides risk governance, risk oversight and monitoring. Each committee reviews key risk exposures, trends and significant compliance matters, and provides guidance on steps to monitor, control and escalate significant risks. We include the risk information provided by the BRMCs and these management committees, along with additional risk information that is identified at the ADSC parent company level in our determination and assessment of the risks that are presented to and discussed with our Board and the relevant Board Committees.
Risk Categories
We have divided risk into the following eight categories: credit, market, liquidity, operational, compliance, model, strategic and reputational risk. We evaluate the potential impact of a risk event on us (including our subsidiaries) by assessing the partner and customer, financial, reputational, and legal and regulatory impacts.
Credit Risk
Credit Risk is the risk arising from an obligor’s failure to meet the terms of any contract or otherwise perform as agreed. Credit Risk is found in all activities in which settlement or repayment depends on counterparty, issuer, or borrower performance.
We are exposed to credit risk relating to the credit card, installment or other loans we make to our partners’ or Bank customers. Our credit risk relates to the risk that consumers using the private label, co-brand, general purpose or business credit cards or installment or other loans that we issue will not repay their revolving credit card, installment or other loan balances. To minimize our risk of credit card, installment or other loan charge-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing. The credit risk on our credit card, installment or other loans is quantified through our Allowance for credit losses which is recorded net with Credit card and other loans on our Consolidated Balance Sheets.
Market Risk
Market Risk includes interest rate risk which is the risk arising from movements in interest rates. Interest rate risk results from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among different yield curves affecting an organization’s activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options embedded in certain products (options risk). Our principal market risk exposures arise from volatility in interest rates and their impact on economic value, capitalization levels and earnings. We use various market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our Net interest income. The approach we use to quantify interest rate risk is a sensitivity analysis, which we believe best reflects the risk inherent in our business. This approach calculates the impact on Net interest income from an instantaneous and sustained 100 basis point increase or decrease in interest rates. Due to the mix of fixed and floating rate assets and liabilities on our Consolidated Balance
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Sheet as of December 31, 2021, this hypothetical instantaneous 100 basis point increase in interest rates would have an insignificant impact on our annual Net interest income. Actual changes in our Net interest income will depend on many factors, and therefore may differ from our estimated risk to changes in interest rates. Market risk is managed by the Asset & Liability Management Committee.
Liquidity Risk
Liquidity Risk is the risk arising from an inability to meet obligations when they come due. Liquidity Risk includes the inability to access funding sources or manage fluctuations in funding levels. Liquidity Risk also results from an organization’s failure to recognize or address changes in market conditions. The primary liquidity objective is to maintain a liquidity profile that will enable us, even in times of stress or market disruption, to fund our existing assets and meet liabilities in a timely manner and at an acceptable cost. Policy and risk appetite limits require the Company and the Banks to ensure that sufficient liquid assets are available to survive liquidity stresses over a specified time period. The Asset & Liability Management Committee reviews liquidity exposures in the context of approved policy and risk appetite limits and reports results quarterly.
Operational Risk
Operational Risk is the risk arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. Operational losses result from internal fraud; external fraud; inadequate or inappropriate employment practices and workplace safety; failure to meet professional obligations involving partners, products, and business practices; damage to physical assets; business disruption and systems failures; and/or failures in execution, delivery, and process management.
Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal and regulatory penalties. The Company has implemented a comprehensive operational risk framework that is defined in the Operational Risk Management Policy. The Operational Risk Management Committee, chaired by our Chief Operational Risk Officer, coordinates with all control groups on effective risk assessments and controls.
As part of our Operational Risk program, we maintain an information and cyber security program, which is led by our Chief Information Security Officer and is designed to protect the confidentiality, integrity, and availability of information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction. The program is built upon a foundation of advanced security technology, a well-staffed and highly trained team of experts, and robust operations based on the National Institute of Standards and Technology Cybersecurity Framework. This consists of controls designed to identify, protect, detect, respond and recover from information and cyber security incidents. We continue to invest in enhancements to cyber security capabilities and engage in industry and government forums to promote advancements to the broader financial services cyber security ecosystem.
Compliance Risk
Compliance Risk is the risk arising from violations of laws or regulations, or from nonconformance with prescribed practices, internal policies and procedures, or ethical standards. This risk exposes organizations to fines, payment of damages, and the voiding of contracts. Our Compliance organization is responsible for establishing and maintaining our Compliance Risk Management Program. Pursuant to this program, we seek to manage and mitigate compliance risk by assessing, controlling, monitoring, measuring and reporting the legal and regulatory risks to which we are exposed. The Compliance Risk Management Committee, chaired by the Chief Compliance Officer, is responsible for identifying, evaluating, managing, and escalating compliance risks.
Model Risk
Model Risk is the risk arising from decisions based on incorrect or misused model outputs and reports. Model risk occurs primarily for three reasons: (1) a model may have fundamental errors and produce inaccurate outputs when viewed against its design objective and intended business uses; (2) a model may be used incorrectly or inappropriately or there may be a misunderstanding about its limitations and assumptions; or (3) the model produces results that are not compliant with fair lending or other regulations.
39
We manage model risk through a comprehensive model governance framework, including policies and procedures for model development, maintenance and performance monitoring activities, independent model validation and change management capabilities. We also assess model performance on an ongoing basis. Model Risk oversight is conducted by the Model Risk Management Committee.
Strategic Risk
Strategic Risk is the risk arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the industry and operating environment. This risk is a function of an organization’s strategic goals, business strategies, resources, and quality of implementation. Strategic decisions are reviewed and approved by business leaders and various committees and must be aligned with our Company policies. We seek to manage strategic and business risks through risk controls embedded in these processes as well as overall risk management oversight over business goals. Existing product performance is reviewed periodically by committees and business leaders.
Reputational Risk
Reputational Risk is the risk arising from negative public opinion. This risk may impair an organizations competitiveness by affecting its ability to establish new relationships or services or continue servicing existing relationships. Reputational Risk is inherent in all activities and requires management to exercise caution in dealing with stakeholders, such as customers, counterparties, correspondents, investors, regulators, employees, and the community. Our business leaders are responsible for considering the reputational risk implications of business activities and strategies and ensuring the relevant subject matter experts are engaged as needed.
| Item 1B.Unresolved Staff Comments. |
None.
Item 2. | Properties. |
As of December 31, 2019,2021, we lease approximately 50leased 14 general office properties, worldwide, comprised of approximately three1 million square feet. These facilities are used to carry out our operational, sales and administrative functions. Our principal facilities are as follows:
| | | | | | |
| ||
|
| | | Approximate | | | | | |
Location |
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|
| Lease Expiration Date |
| ||
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| |
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| | ||
Columbus, Ohio |
|
| (1) |
| September 12, 2032 | | |||
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| December 31, | | ||
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|
| |
|
|
| ||
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|
| |||||
|
|
|
| | |||||
Draper, Utah | |
|
| (1) | |
| | ||
|
| New York, New York |
| 18,500 |
| | January 31, | | |
|
| Plano, Texas |
| 27,925 | (1) | | June 30, |
| |
|
|
|
|
|
| ||||
|
|
|
|
| | ||||
Wilmington, Delaware |
|
| 5,198 | |
| June 30, | |
(1) Excludes square footage of subleased portion.
We believe our current facilities are suitable to our businesses and that we will be able to lease, purchase or newly construct additional facilities as needed.
Item 3. | 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 effect on our business or financial condition, including claims and lawsuits alleging breaches of our contractual obligations. See Indemnification in Note 18,15, “Commitments and Contingencies,” ofto the Notes to Consolidated Financial Statements.
|
|
Not applicable.
2440
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Our common stock is listed on the New York Stock Exchange, or NYSE, and trades under the symbol “ADS.”
Holders
As of February 20, 2020,18, 2022, the closing price of our common stock was $103.06$70.50 per share, there were 47,627,61149,948,146 shares of our common stock outstanding, and there were 97101 holders of record of our common stock.
Dividends
We paid cash dividends per share during the periods presented as follows:
| | | | | | | |
|
| Dividends Per Share |
| Amount |
| ||
Year Ended December 31, 2019 | | | | | | | |
First quarter | | $ | 0.63 | | $ | 33.9 | |
Second quarter | |
| 0.63 | |
| 33.1 | |
Third quarter | |
| 0.63 | |
| 30.4 | |
Fourth quarter | |
| 0.63 | |
| 30.0 | |
Total cash dividends paid | | $ | 2.52 | | $ | 127.4 | |
| | | | | | | |
Year Ended December 31, 2018 | | | | | | | |
First quarter | | $ | 0.57 | | $ | 31.7 | |
Second quarter | |
| 0.57 | |
| 31.6 | |
Third quarter | |
| 0.57 | |
| 31.2 | |
Fourth quarter | |
| 0.57 | |
| 30.7 | |
Total cash dividends paid | | $ | 2.28 | | $ | 125.2 | |
On January 30, 2020 our Board of Directors declared a quarterly cash dividend of $0.63 per share on our common stock, payable on March 19, 2020 to stockholders of record at the close of business on February 14, 2020.
Payment of future dividends is subject to declaration by our Board of Directors. Factors considered in determining dividends include, but are not limited to, our profitability, expected capital needs, and contractual restrictions. See also “Risk Factors—There is no guarantee that we will pay future dividends or repurchase shares at a level anticipated by stockholders, which could reduce returns to our stockholders.” Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis.
25
Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of our common stock made during the three months ended December 31, 2019:2021:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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 | ||||
| | | | | | | | | (Dollars in millions) | | | | | | | | | (Dollars in millions) | ||
During 2019: | | | | | | | | | | | ||||||||||
During 2021: | | | | | | | | | | | ||||||||||
October 1-31 |
| 3,403 | | $ | 116.83 | | — | | $ | 347.8 |
| 2,744 | | $ | 97.44 | | — | | $ | — |
November 1-30 |
| 2,564 | |
| 106.27 |
| — | |
| 347.8 |
| 5,469 | |
| 71.85 |
| — | |
| — |
December 1-31 | | 3,650 | | | 109.35 | | — | | | 347.8 | | 5,527 | | | 66.98 | | — | | | — |
Total |
| 9,617 | | $ | 111.18 | | — | | $ | 347.8 |
| 13,740 | | $ | 75.00 | | — | | $ | — |
(1) | During the period represented by the table, |
Performance Graph
The following graph compares the yearly percentage change in cumulative total stockholder return on our common stock since December 31, 2014,2016, with the cumulative total return over the same period of (1) the S&P 500 Index and (2) a peer group of sixteenfifteen companies selected by us andfor fiscal year 2021 (which was the same peer group utilized as our 2020 peer group in our prior Annual Report on Form 10-K, which we will refer to as the 2018 Peer Group Index, and (3) a new peer group of fifteen companies selected by us, which we will refer to as the 2019 Peer Group Index.
The sixteen companies in the 2018 Peer Group Index are CDK Global, Inc., Discover Financial Services, Equifax, Inc., Experian PLC, Fidelity National Information Services, Inc., Fiserv, Inc., Global Payments, Inc., MasterCard Incorporated, Nielsen Holdings plc, Omnicom Group Inc., Synchrony Financial, The Dun & Bradstreet Corporation, The Interpublic Group of Companies, Inc., Total System Services, Inc., Vantiv, Inc. and WPP plc.10-K).
The fifteen companies utilized in the 2019 Peer Group Indexour peer group are PayPal Holdings, Inc., MasterCard Incorporated, Synchrony Financial, Discover Financial Services, Fifth Third Bancorp, Key Corp, Citizens Financial Group, Inc., Ally Financial Inc., M&T Bank Corporation, Regions Financial Corporation, Huntington Bancshares Incorporated, Santander Consumer USA Holdings Inc., Comerica Incorporated, SVB Financial Group and Popular, Inc. Management believes the new peer group taken as a whole provides a more meaningful comparison subsequent to the sale of Epsilon in July 2019.Capital One Financial Corporation.
42
Pursuant to rules of the SEC, the comparison assumes $100 was invested on December 31, 20142016 in our common stock and in each of the indices and assumes reinvestment of dividends, if any. Also pursuant to SEC rules, the returns of each of the companies in the peer group are weighted according to the respective company’s stock market capitalization at the beginning of each period for which a return is indicated. Historical stock prices are not indicative of future stock price performance. For the purpose of this graph, historical stock prices have been adjusted to reflect the impact of the spinoff of Loyalty Ventures Inc. on November 5, 2021.
26
| | | | | | | | | | | | | | | | | | | | | | | |
| | Alliance Data | | | | | | | | | | | | Alliance Data | | | | | | | | ||
| | Systems | | | | | 2018 Peer | | 2019 Peer | | | Systems | | | | | 2020 Peer | | |||||
|
| Corporation |
| S&P 500 |
| Group Index |
| Group Index |
|
| Corporation |
| S&P 500 |
| Group Index |
| |||||||
December 31, 2014 | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 | | ||||||||||
December 31, 2015 | |
| 96.69 | |
| 101.38 | |
| 109.78 | |
| 101.61 | | ||||||||||
December 31, 2016 | |
| 80.09 | |
| 113.51 | |
| 122.61 | |
| 122.77 | | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 | |
December 31, 2017 | |
| 89.65 | |
| 138.29 | |
| 147.82 | |
| 165.75 | | |
| 111.94 | |
| 121.83 | |
| 133.72 | |
December 31, 2018 | |
| 53.78 | |
| 132.23 | |
| 153.09 | |
| 166.66 | | |
| 66.96 | |
| 116.49 | |
| 131.43 | |
December 31, 2019 | |
| 40.98 | |
| 173.86 | |
| 230.35 | |
| 240.21 | | |
| 51.03 | |
| 153.17 | |
| 189.21 | |
December 31, 2020 | |
| 34.36 | |
| 181.35 | |
| 246.31 | | |||||||||||||
December 31, 2021 | |
| 39.06 | |
| 233.41 | |
| 263.04 | |
Our future filings with the SEC may “incorporate information by reference,” including this Form 10-K. Unless we specifically state otherwise, this Performance Graph shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
27
Item 6. | Selected Financial Data. |
Part II, Item 6 is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K that eliminates Item 301SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION.
The following table sets forth our summary historical consolidated financial information for the periods ended and as of the dates indicated. You should read the following historical consolidated financial information along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Form 10-K. The fiscal year financial information included in the table below for the year ended December 31, 2015 and as of December 31, 2015 has been recast to present our former Epsilon business as a discontinued operation and was derived from our audited consolidated financial statements.
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | |||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
| | (in millions, except per share amounts) | |||||||||||||
Income statement data | | | | | | | | | | | | | | | |
Total revenue | | $ | 5,581.3 | | $ | 5,666.6 | | $ | 5,474.7 | | $ | 5,013.2 | | $ | 4,327.3 |
Cost of operations (exclusive of amortization and depreciation disclosed separately below) | |
| 2,687.8 | |
| 2,537.2 | |
| 2,469.5 | |
| 2,600.3 | |
| 2,164.0 |
Provision for loan loss | |
| 1,187.5 | |
| 1,016.0 | |
| 1,140.1 | |
| 940.5 | |
| 668.2 |
General and administrative | |
| 150.6 | |
| 162.5 | |
| 159.3 | |
| 135.6 | |
| 132.7 |
Regulatory settlement | |
| — | |
| — | |
| — | |
| — | |
| 64.6 |
Depreciation and other amortization | |
| 79.9 | |
| 80.7 | |
| 73.7 | |
| 67.3 | |
| 60.3 |
Amortization of purchased intangibles | |
| 96.2 | |
| 112.9 | |
| 114.2 | |
| 119.6 | |
| 104.8 |
Loss on extinguishment of debt | | | 71.9 | | | — | | | — | | | — | | | — |
Total operating expenses | |
| 4,273.9 | |
| 3,909.3 | |
| 3,956.8 | |
| 3,863.3 | |
| 3,194.6 |
Operating income | |
| 1,307.4 | |
| 1,757.3 | |
| 1,517.9 | |
| 1,149.9 | |
| 1,132.7 |
Interest expense, net | |
| 569.0 | |
| 542.3 | |
| 455.4 | |
| 370.9 | |
| 294.3 |
Income from continuing operations before income taxes | |
| 738.4 | |
| 1,215.0 | |
| 1,062.5 | |
| 779.0 | |
| 838.4 |
Provision for income taxes | |
| 165.8 | |
| 269.5 | |
| 293.3 | |
| 298.8 | |
| 294.1 |
Income from continuing operations | | $ | 572.6 | | $ | 945.5 | | $ | 769.2 | | $ | 480.2 | | $ | 544.3 |
(Loss) income from discontinued operations, net of taxes | | | (294.6) | | | 17.6 | | | 19.5 | | | 37.4 | | | 61.1 |
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 | | $ | 517.6 | | $ | 605.4 |
Less: Net income attributable to non-controlling interest | |
| — | |
| — | |
| — | |
| 1.8 | |
| 8.9 |
Net income attributable to common stockholders | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 | | $ | 515.8 | | $ | 596.5 |
| | | | | | | | | | | | | | | |
Basic income attributable to common stockholders per share: | | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 11.25 | | $ | 17.24 | | $ | 13.82 | | $ | 6.73 | | $ | 7.93 |
(Loss) income from discontinued operations | | $ | (5.89) | | $ | 0.32 | | $ | 0.35 | | $ | 0.64 | | $ | 0.98 |
Net income attributable to common stockholders per share | | $ | 5.36 | | $ | 17.56 | | $ | 14.17 | | $ | 7.37 | | $ | 8.91 |
| | | | | | | | | | | | | | | |
Diluted income attributable to common stockholders per share: | | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 11.24 | | $ | 17.17 | | $ | 13.75 | | $ | 6.71 | | $ | 7.87 |
(Loss) income from discontinued operations | | $ | (5.78) | | $ | 0.32 | | $ | 0.35 | | $ | 0.63 | | $ | 0.98 |
Net income attributable to common stockholders per share | | $ | 5.46 | | $ | 17.49 | | $ | 14.10 | | $ | 7.34 | | $ | 8.85 |
| | | | | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | | | | |
Basic | |
| 50.0 | |
| 54.9 | |
| 55.7 | |
| 58.6 | |
| 61.9 |
Diluted | |
| 50.9 | |
| 55.1 | |
| 55.9 | |
| 58.9 | |
| 62.3 |
| | | | | | | | | | | | | | | |
Dividends declared per share: | | $ | 2.52 | | $ | 2.28 | | $ | 2.08 | | $ | 0.52 | | $ | — |
28
| | | | | | | | | | | | | | | |
| | As of December 31, | |||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
| | (in millions) | |||||||||||||
Balance sheet data | | | | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 18,292.0 | | $ | 16,816.7 | | $ | 17,494.5 | | $ | 15,595.9 | | $ | 13,057.9 |
Redemption settlement assets, restricted | |
| 600.8 | |
| 558.6 | |
| 589.5 | |
| 324.4 | |
| 456.6 |
Total assets | |
| 26,494.8 | |
| 30,387.7 | |
| 30,684.8 | |
| 25,514.1 | |
| 22,349.9 |
Deferred revenue | |
| 922.0 | |
| 875.3 | |
| 966.9 | |
| 931.5 | |
| 844.9 |
Deposits | |
| 12,151.7 | |
| 11,793.7 | |
| 10,930.9 | |
| 8,391.9 | |
| 5,605.9 |
Non-recourse borrowings of consolidated securitization entities | |
| 7,284.0 | |
| 7,651.7 | |
| 8,807.3 | |
| 6,955.4 | |
| 6,482.7 |
Long-term and other debt, including current maturities | |
| 2,849.9 | |
| 5,725.4 | |
| 6,070.9 | |
| 5,595.4 | |
| 5,017.4 |
Total liabilities | |
| 24,906.5 | |
| 28,055.6 | |
| 28,829.5 | |
| 23,855.9 | |
| 20,172.5 |
Redeemable non-controlling interest | |
| — | |
| — | |
| — | |
| — | |
| 167.4 |
Total stockholders’ equity | |
| 1,588.3 | |
| 2,332.1 | |
| 1,855.3 | |
| 1,658.2 | |
| 2,010.0 |
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | |||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
| | (in millions) | |||||||||||||
Cash flow data | |
| | |
| | |
| | |
| | |
| |
Cash flows from operating activities | | $ | 1,217.7 | | $ | 2,754.9 | | $ | 2,599.1 | | $ | 2,127.2 | | $ | 1,761.4 |
Cash flows from investing activities | | $ | 2,860.8 | | $ | (1,872.0) | | $ | (4,268.1) | | $ | (4,291.5) | | $ | (3,298.7) |
Cash flows from financing activities | | $ | (4,091.7) | | $ | (1,217.9) | | $ | 4,004.9 | | $ | 2,637.4 | | $ | 1,718.9 |
| |
| | |
| | |
| | |
| | |
| |
Other financial data (1) | |
| | |
| | |
| | |
| | |
| |
Adjusted EBITDA | | $ | 1,710.3 | | $ | 1,995.3 | | $ | 1,747.1 | | $ | 1,620.0 | | $ | 1,404.9 |
Adjusted EBITDA, net | | $ | 1,271.3 | | $ | 1,609.4 | | $ | 1,465.4 | | $ | 1,404.2 | | $ | 1,223.3 |
| | | | | | | | | | | | | | | |
Segment operating data | | | | |
| | |
| | |
| | |
| |
Credit card statements generated | |
| 281.1 | |
| 300.7 | |
| 296.7 | |
| 279.4 | |
| 242.3 |
Credit sales | | $ | 30,986.9 | | $ | 30,702.3 | | $ | 31,001.6 | | $ | 29,271.3 | | $ | 24,736.1 |
Average credit card and loan receivables | | $ | 17,298.2 | | $ | 17,412.1 | | $ | 16,185.5 | | $ | 14,085.8 | | $ | 11,364.6 |
AIR MILES reward miles issued | |
| 5,511.1 | |
| 5,500.0 | |
| 5,524.2 | |
| 5,772.3 | |
| 5,743.1 |
AIR MILES reward miles redeemed | |
| 4,415.7 | |
| 4,482.0 | |
| 4,552.1 | |
| 7,071.6 | |
| 4,406.3 |
2943
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K particularly under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Unless otherwise specified, references to Notes to our Consolidated Financial Statements are to the Notes to our audited Consolidated Financial Statements as of December 31, 2021 and 2020 and for years ended December 31, 2021, 2020 and 2019.
OverviewOVERVIEW
We are a leading global provider of data-driven marketingtech-forward payment and loyaltylending solutions, serving large,customers and consumer-based industries. We createindustries in North America. Through omnichannel touch points and deploy customizeda comprehensive product suite that includes credit products and Bread digital payment solutions, enhancing the critical customer marketing experience and measurably changing consumer behavior while driving business growth and profitability for some of today’s most recognizable brands. Wewe help our clients createpartners drive loyalty and increase customer loyaltygrowth, while giving customers greater payment choices. We also offer credit and savings products directly to consumers through solutions that engage millions of customers each day across multiple touch points using traditional, digital, mobile and emerging technologies. We operate under two segments—LoyaltyOne and Card Services. Our LoyaltyOne business owns and operates the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of tailor-made loyalty programs for grocers. Our Card Services business is a provider of private label, co-brand, and business credit card programs. Effective March 31, 2019, our Epsilonproprietary products, including our Comenity-branded financial services. On November 5, 2021, our LoyaltyOne segment was treatedspun off and therefore is reflected herein as a discontinued operation, and was subsequently sold on July 1, 2019.Discontinued Operations.
Year in ReviewYEAR IN REVIEW
Spinoff of our LoyaltyOne Segment
On November 5, 2021 (the Distribution Date), the separation of Loyalty Ventures Inc. (Loyalty Ventures) from ADS was completed (the Closing) after market close (the Separation). The Separation of Loyalty Ventures, which comprised our former LoyaltyOne segment and has been classified as Discontinued Operations, was achieved through ADS’ distribution (the Distribution) of 81% of the shares of Loyalty Ventures common stock to holders of ADS common stock as of the close of business on the record date of October 27, 2021. ADS stockholders of record received one share of Loyalty Ventures common stock for every two and one-half shares of ADS common stock. Following the Distribution, Loyalty Ventures became an independent, publicly-traded company, in which we have retained a 19% ownership interest. As part of the plan regarding the Separation, we received distributions from Loyalty Ventures prior to the effectiveness of the Separation in the aggregate amount of $750 million, of which $725 million was used by us to repay certain term loans as required under our credit agreement and $25 million was used by us to make scheduled amortization payments for the fourth quarter of 2021 with respect to such term loans.
Financial Statement Presentation
As a result of the Separation and consequential classification of LoyaltyOne as Discontinued Operations, we have adjusted the presentation of our Consolidated Financial Statements from our historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither we nor our any of our subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from our historical presentation to the bank holding company presentation are intended to reflect our operations going forward and better align us with our peers for comparability purposes, which we believe will improve investor understanding of our Company. Prior to the Separation and associated reporting changes applied herein, we had two reportable operating segments (Card Services and LoyaltyOne); we now operate as a single segment that includes all of our continuing operations.
Business Environment
This Business Environment section provides high-level commentary regarding our results of operations and financial position for 2021, as well as our related outlook for 2022 and the uncertainties associated with achieving that outlook. This section should be read in conjunction with the other information appearing in this Form 10-K, including “Consolidated Results of Operations” below, which provides further commentary around variances in our results of operations over the years of comparison.
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The ongoing effects of the global COVID-19 pandemic remain difficult to predict due to numerous uncertainties, including the transmissibility, severity, duration and resurgence of the virus; the emergence of new variants of the virus; the uptake and effectiveness of health and safety measures or actions that are voluntarily adopted by the public or required by governments or public health authorities; the effectiveness of vaccines and treatments; the speed and strength of an economic recovery, including the reopening of borders and the resumption of international travel; increased logistics costs; an increasingly competitive labor market; and the impact of the global COVID-19 pandemic on our employees, our operations, and the business of our partners and suppliers. As the global COVID-19 pandemic has continued to evolve, our priority has been and continues to be, the health and safety of our employees, with the vast majority of our employees continuing to work from home. As a result of the pandemic and its impacts on the operations of our brand partners, and consumer behavior and spending patterns, our financial performance as described in “Consolidated Results of Operations” below varies significantly over the periods of comparison. As the global COVID-19 pandemic continues to evolve and new variants emerge, our results did not meet original expectations,of operations, financial condition and liquidity could be impacted. We will continue to evaluate the nature and extent of the impact on our business.
However, our performance in 2021 reflected the strength and resilience of our business model, as we made several strategic changeshad stronger than expected credit card loan growth, disciplined expense management, and achieved certain objectives duringpositive credit performance. In addition, the Separation allowed us to strengthen our balance sheet by improving our Bank capital ratios and reducing our leverage ratio, sequentially.
For the year ended December 31, 2019.2021, Credit sales were up year-over-year as consumers resumed in-store shopping as impacts from COVID-19 moderated while consumer financial health remained strong. Net interest income was flat for the periods of comparison, while Interchange revenue, net of retailer share arrangements increased in correlation with Credit sales, and Other non-interest income decreased due to a decline in ancillary revenues and portfolio sale gains. We expect a continued return to more normalized economic activity and consumer behavior in our outlook for 2022, which we also expect will positively affect Credit sales and our revenues; however, we remain vigilant in monitoring COVID-19 conditions and the impact on consumers and our brand partners. Our outlook assumes Total net interest and non-interest income growth for 2022 will be closely aligned with growth in average Total credit card and other loans, with net interest margin expected to remain relatively steady on a full year basis as compared to 2021. We have also included four Federal Reserve Bank interest rate increases in our 2022 outlook; our expectation is the rate increases will result in a nominal benefit to Total net interest income for the year.
Provision for credit losses decreased year-over-year due to lower net charge-offs and a lower overall reserve rate reflective of improving macroeconomic variables and shifting product mix. Credit metrics remained strong in 2021 with a delinquency rate of 3.9% and a net loss rate of 4.6% for the year. These low rates continue to be the result of our disciplined risk management, as well as elevated consumer payment rates. Our outlook assumes a moderation in the consumer payment rate throughout 2022, and we expect a net loss rate in the low-to-mid 5% range for 2022 as credit metrics begin to normalize from historically low rates due in part to federal stimulus and assistance programs largely expiring.
Related to our Provision for credit losses, full year 2021 average Total credit card and other loans of $15.7 billion were down 4% year-over-year, with the end-of-period balance being up 4%. Our Allowance for credit losses decreased year-over-year, with a reserve rate of 10.5% in 2021, relative to 12.0% in 2020; and our outlook for 2022 assumes the reserve rate will stay in the range of 10.5% until greater economic certainty emerges. Our outlook for growth in average Total credit card and other loans in 2022, based on our new business expectations, visibility into our pipeline, and the current economic outlook, is in the high-single- to low-double-digit range relative to 2021. This outlook contemplates both the non-renewal of certain brand partners, including the previously announced non-renewal of our contract with BJ’s Wholesale Club (BJ’s), as well as the addition of certain new brand partners, with the forecasted high-single- to low-double-digit ends of the range reflecting payment rate variability as a key determinant. Specifically related to BJ’s, for the year ended December 31, 2021, BJ’s branded co-brand accounts generated approximately 8% of Total net interest and non-interest income. As of December 31, 2021, BJ’s branded co-brand accounts were responsible for approximately 11% of Total credit card and other loans. BJ’s filed a lawsuit against us in January 2022 in connection with the non-renewal of its contract and related transition to another service provider. We have subsequently settled the lawsuit on satisfactory terms with neither party admitting fault.
With regard to our expenses, Total non-interest expenses for 2021 were down moderately year-over-year. In 2022, as a result of continued investment, including the planned incremental strategic investment of more than $125 million in digital and product innovation, marketing, and technology enhancements during the year, along with strong growth in
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Total credit card and other loans, our outlook anticipates Total non-interest expenses will increase in 2022, while also reflecting modest positive operating leverage for the full year.
Overall, we remain optimistic that the strength of our business model will continue, and we are committed to ensuring our strategic investments deliver long-term stockholder value.
See “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” for information on additional risks and uncertainties impacting our business, including potential impacts of the global COVID-19 pandemic and other strategic, business and competitive conditions that could affect our business, and see “Business–Supervision and Regulation” for information on legislative and regulatory matters that could have a material adverse effect on our results of operations and financial condition.
NON-GAAP FINANCIAL MEASURES
We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included within this Form 10-K constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies. In particular, Pre-tax pre-provision earnings is calculated by increasing Income from continuing operations before income taxes by Provision for credit losses. We believe the use of this non-GAAP financial measure provides additional clarity in understanding our results of operations and trends. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure, please see the financial tables and information that follows.
CONSOLIDATED RESULTS OF OPERATIONS
Organizational ChangesThe following provides commentary on the variances in our financial performance when comparing the results of operations for the year ended December 31, 2021, with those of the year ended December 31, 2020, as well as the variances between the years ended December 31, 2020 and December 31, 2019, as presented in the accompanying Tables. This variance commentary should be read in conjunction with the discussion in “Business Environment” above, which highlights the impacts of the global COVID-19 pandemic on us and our results of operations.
On June 5, 2019,Effective January 1, 2020, we adopted the Board of Directors of Alliance Data appointed Melisa A. Miller, who led Alliance Data’s Card Services business,new credit reserving methodology referred to as Alliance Data’s President and Chief Executive Officer as well asCurrent Expected Credit Loss (CECL). Under the CECL methodology, the Company utilizes a Directorfinancial instrument impairment model to establish an allowance based on expected losses over the estimated life of the Company. She succeeded Ed Heffernan who announced his resignation as Presidentexposure, not only based on historical experience and Chief Executive Officercurrent conditions, but also by including reasonable and as a Director ofsupportable forecasts incorporating forward-looking information. This approach differs from the Company.
On November 18, 2019, we announced that Ralph Andretta had been selected Alliance Data’s President and Chief Executive Officer as well as a Director of the Company,Company’s historic model prior to January 1, 2020, which appointment became effective February 3, 2020. Melisa Miller stepped down from those positions in November 2019 but continued to serve the Company inwas based on an advisory capacity through February 16, 2020. Charles Horn, Executive Vice President, served as acting Chief Executive Officer until the effective date of Mr. Andretta’s appointment and will continue to focus his attention on international operations, operating efficiencies and strategic initiatives.
Additionally, during 2019, executive management and the Board of Directors evaluated the cost structure and potential cost saving initiatives throughout the organization.incurred loss approach. As a result we incurred $118.1 million in restructuring and other charges in 2019 to streamline our cost structure, as described in more detail in Note 14, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements.
Capital Transactions
On July 1, 2019, we soldadoption, there is a lack of comparability in both our former Epsilon segment to Publicis Groupe S.A.Allowance for $4.4 billion in cash. We incurred approximately $79.0 million in transaction costscredit losses and the Provision for credit losses for the periods presented. Results for the years ended December 31, 2021 and 2020, are reported following the CECL methodology, while results for the year ended December 31, 2019, and recorded a $512.2 million pre-tax gain ($252.1 million after-tax loss) on sale.are reported under the previously prescribed incurred loss methodology. Refer to Note 4, “Allowance for Credit Losses,” to the Consolidated Financial Statements for further information.
In July 2019, proceeds from the sale of Epsilon 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, which reduced available credit commitments in the same amount.
During 2019, we repurchased approximately 6.3 million shares of our common stock for aggregate consideration of $976.1 million and paid dividends and dividend equivalent rights of $127.4 million.
During 2019, we purchased four credit card portfolios for aggregate cash consideration of $924.8 million and sold 13 credit card portfolios for aggregate cash consideration of $2,061.8 million.
In December 2019, we issued and sold $850.0 million aggregate principal amount of 4.750% senior notes due December 15, 2024. The net proceeds of $833.0 million were used to make a prepayment of our term debt under the credit agreement. We also amended our credit agreement, extending the maturity date from June 14, 2021 to December 31, 2022. As amended, our credit agreement provides for a $2,028.8 million term loan and a $750.0 million revolving line of credit.
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Consolidated ResultsTable 1: Summary of OperationsOur Financial Performance
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | | |||||||||
| | | | | | | | | | | 2019 | | 2018 | |
|
| 2019 |
| 2018 |
| 2017 |
| to 2018 |
| to 2017 |
| |||
| | (in millions, except percentages) |
| |||||||||||
Revenues | | | | | | | | | | | | | | |
Services | | $ | 215.5 | | $ | 295.4 | | $ | 367.5 |
| (27) | % | (20) | % |
Redemption, net | |
| 637.3 | |
| 676.3 | |
| 935.3 |
| (6) | | (28) | |
Finance charges, net | |
| 4,728.5 | |
| 4,694.9 | |
| 4,171.9 |
| 1 | | 13 | |
Total revenue | |
| 5,581.3 | |
| 5,666.6 | |
| 5,474.7 |
| (2) | | 4 | |
Operating expenses | | | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 2,687.8 | |
| 2,537.2 | |
| 2,469.5 |
| 6 | | 3 | |
Provision for loan loss | |
| 1,187.5 | |
| 1,016.0 | |
| 1,140.1 |
| 17 | | (11) | |
General and administrative | |
| 150.6 | |
| 162.5 | |
| 159.3 |
| (7) | | 2 | |
Depreciation and other amortization | |
| 79.9 | |
| 80.7 | |
| 73.7 |
| (1) | | 10 | |
Amortization of purchased intangibles | |
| 96.2 | |
| 112.9 | |
| 114.2 |
| (15) | | (1) | |
Loss on extinguishment of debt | | | 71.9 | | | — | | | — | | 100 | | — | |
Total operating expenses | |
| 4,273.9 | |
| 3,909.3 | |
| 3,956.8 |
| 9 | | (1) | |
Operating income | |
| 1,307.4 | |
| 1,757.3 | |
| 1,517.9 |
| (26) | | 16 | |
Interest expense | | | | | | | | | | | | | | |
Securitization funding costs | |
| 213.4 | |
| 220.2 | |
| 156.6 |
| (3) | | 41 | |
Interest expense on deposits | |
| 225.6 | |
| 165.7 | |
| 125.1 |
| 36 | | 32 | |
Interest expense on long-term and other debt, net | |
| 130.0 | |
| 156.4 | |
| 173.7 |
| (17) | | (10) | |
Total interest expense, net | |
| 569.0 | |
| 542.3 | |
| 455.4 |
| 5 | | 19 | |
Income from continuing operations before income taxes | |
| 738.4 | |
| 1,215.0 | |
| 1,062.5 |
| (39) | | 14 | |
Provision for income taxes | |
| 165.8 | |
| 269.5 | |
| 293.3 |
| (38) | | (8) | |
Income from continuing operations | | | 572.6 | | | 945.5 | | | 769.2 |
| (39) | | 23 | |
(Loss) income from discontinued operations, net of taxes | |
| (294.6) | |
| 17.6 | |
| 19.5 |
| nm | * | (10) | |
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 |
| (71) | % | 22 | % |
| | | | | | | | | | | | | | |
Key Operating Metrics: | | | | | | | | | | | | | | |
Credit card statements generated | |
| 281.1 | |
| 300.7 | |
| 296.7 |
| (7) | % | 1 | % |
Credit sales | | $ | 30,986.9 | | $ | 30,702.3 | | $ | 31,001.6 |
| 1 | % | (1) | % |
Average credit card and loan receivables | | $ | 17,298.2 | | $ | 17,412.1 | | $ | 16,185.5 |
| (1) | % | 8 | % |
AIR MILES reward miles issued | |
| 5,511.1 | |
| 5,500.0 | |
| 5,524.2 |
| — | % | — | % |
AIR MILES reward miles redeemed | |
| 4,415.7 | |
| 4,482.0 | |
| 4,552.1 |
| (1) | % | (2) | % |
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | | |||||||||||
| | | | | | | | | | | | | 2021 | | 2020 | |
|
| 2021 |
| | 2020 |
| | 2019 |
| to 2020 |
| to 2019 |
| |||
| | (in millions, except per share amounts and percentages) |
| |||||||||||||
Total net interest and non-interest income | | $ | 3,272 | | | $ | 3,298 | | | $ | 4,050 | | (1) | | (19) | |
Provision for credit losses | | | 544 | | | | 1,266 | | | | 1,188 | | (57) | | 7 | |
Total non-interest expenses | | | 1,684 | | | | 1,731 | | | | 2,200 | | (3) | | (21) | |
Income from continuing operations before income taxes | | | 1,044 | | | | 301 | | | | 662 | | 247 | | (55) | |
Provision for income taxes | | | 247 | | | | 93 | | | | 156 | | 168 | | (41) | |
Income from continuing operations | | | 797 | | | | 208 | | | | 506 | | 283 | | (59) | |
Income (loss) from discontinued operations, net of taxes | | | 4 | | | | 6 | | | | (228) | | (38) | | nm | * |
Net income | | | 801 | | | | 214 | | | | 278 | | 275 | | (23) | |
| | | | | | | | | | | | | | | | |
Net income per diluted share | | $ | 16.02 | | | $ | 4.46 | | | $ | 5.46 | | 259 | | (18) | |
Income from continuing operations per diluted share | | $ | 15.95 | | | $ | 4.35 | | | $ | 9.94 | | 267 | | (56) | |
Net interest margin (1) | | | 18.2 | % | | | 16.8 | % | | | 19.4 | % | 1.4 | | (2.6) | |
Return on average equity (2) | | | 40.7 | % | | | 16.7 | % | | | 25.0 | % | 24.0 | | (8.3) | |
Effective income tax rate - continuing operations | | | 23.7 | % | | | 30.7 | % | | | 23.6 | % | (7.0) | | 7.1 | |
(1) | Net interest margin represents Net interest income divided by average Total interest-earning assets. See also Table 5: Net Interest Margin. |
(2) | Return on average equity represents Income from continuing operations divided by average Total stockholders’ equity. |
* | not meaningful |
Table 2: Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | |||||||||||
| | | | | | | | | | | | | 2021 | | 2020 |
|
| 2021 |
| | 2020 |
| | 2019 |
| to 2020 |
| to 2019 | |||
| | (in millions, except percentages) | |||||||||||||
Interest income | | | | | | | | | | | | | | | |
Interest and fees on loans | | $ | 3,861 | | | $ | 3,931 | | | $ | 4,729 | | (2) | | (17) |
Interest on cash and investment securities | | | 7 | | | | 21 | | | | 98 | | (64) | | (79) |
Total interest income | | | 3,868 | | | | 3,952 | | | | 4,827 | | (2) | | (18) |
Interest expense | | | | | | | | | | | | | | | |
Interest on deposits | | | 167 | | | | 238 | | | | 307 | | (30) | | (23) |
Interest on borrowings | | | 216 | | | | 261 | | | | 331 | | (18) | | (21) |
Total interest expense | | | 383 | | | | 499 | | | | 638 | | (23) | | (22) |
Net interest income | | | 3,485 | | | | 3,453 | | | | 4,189 | | 1 | | (18) |
Non-interest income | | | | | | | | | | | | | | | |
Interchange revenue, net of retailer share arrangements | | | (369) | | | | (332) | | | | (358) | | 11 | | (7) |
Other | | | 156 | | | | 177 | | | | 219 | | (12) | | (19) |
Total non-interest income | | | (213) | | | | (155) | | | | (139) | | 38 | | 11 |
Total net interest and non-interest income | | | 3,272 | | | | 3,298 | | | | 4,050 | | (1) | | (19) |
Provision for credit losses | | | 544 | | | | 1,266 | | | | 1,188 | | (57) | | 7 |
Total net interest and non-interest income, after provision for credit losses | | $ | 2,728 | | | $ | 2,032 | | | $ | 2,862 | | 34 | | (29) |
Total Net Interest and Non-interest Income, After Provision for Credit Losses
Year ended December 31, 20192021 compared towith the year ended December 31, 20182020:
RevenueInterest income:. Total revenueinterest income decreased $85.3$84 million, or 2%, to $5,581.3$3,868 million for the year ended December 31, 2019 from $5,666.6 million for the year ended December 31, 2018. The net decrease was2021, due to the following:
● |
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Cost of operations. Cost of operations increased $150.6 million, or 6%, to $2,687.8 million for the year ended December 31, 2019 as compared to $2,537.2 million for the year ended December 31, 2018. The net increase was due to the following:
Provision for loan loss. Provision for loan loss increased $171.5 million, or 17%, to $1,187.5 million for the year ended December 31, 2019 as compared to $1,016.0 million for the year ended December 31, 2018, as principal loss rates stabilized in 2019 as compared to improved in 2018. Additionally, end of period credit card and loan receivables increased in the current year as compared to the prior year.
General and administrative. General and administrative expenses decreased $11.9 million, or 7%, to $150.6 million for the year ended December 31, 2019 as compared to $162.5 million for the year ended December 31, 2018, 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. These declines were offset in part by the $37.9 million in restructuring costs and $10.7 million in strategic transaction costs incurred in the current year. See Note 14, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements.
Depreciation and other amortization. Depreciation and other amortization decreased $0.8 million, or 1%, to $79.9 million for the year ended December 31, 2019, as compared to $80.7 million for the year ended December 31, 2018, due to certain fully depreciated property and equipment at LoyaltyOne, offset in part by additional assets placed into service from recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $16.7 million, or 15%, to $96.2 million for the year ended December 31, 2019, as compared to $112.9 million for the year ended December 31, 2018, primarily due to certain fully amortized intangible assets, including portfolio premiums and customer contracts.
Loss on extinguishment of debt. For the year ended December 31, 2019, we recorded a $71.9 million loss on extinguishment of debt resulting from the $49.9 million redemption price of the senior notes and the write-off of $22.0 million deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion outstanding senior notes and the amendment to the credit agreement, which was effective upon the consummation of the sale of Epsilon.
Interest expense, net. Total interest expense, net increased $26.7 million, or 5%, to $569.0 million for the year ended December 31, 2019 as compared to $542.3 million for the year ended December 31, 2018. The net increase was due to the following:
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● | Interest on cash and investment securities decreased $14 million, or 64%, to $7 million for the year ended December 31, 2021, due to lower interest rates as well as lower average cash and investment securities balances in the current |
TaxesInterest expense:. Provision for income taxes Total interest expense decreased $103.7$116 million, or 38%23%, to $165.8$383 million for the year ended December 31, 2019 from $269.52021, due to the following:
● | Interest on deposits decreased $71 million due to lower average interest rates, which decreased interest expense by approximately $45 million, and lower average balances outstanding, which decreased interest expense by approximately $26 million. |
● | Interest on borrowings decreased $45 million due to a $55 million decrease related to secured borrowings, offset in part by a $10 million increase related to unsecured borrowings. The decrease in interest expense on secured borrowings was due to lower average interest rates, which decreased interest expense by approximately $45 million, and lower average balances outstanding, which decreased interest expense by approximately $10 million. Interest expense on unsecured borrowings increased $25 million due to the issuance of senior notes in September 2020, offset in part by a $14 million decrease in interest expense on term debt due to lower average borrowings. |
Non-interest income: Total non-interest income decreased $58 million, or 38%, to $(213) million for the year ended December 31, 2018, primarily related2021, due to a decrease in taxable income. The effective tax rate for the current year period was 22.5% as compared to 22.2% for the prior year period.following:
● | Interchange revenue, net of retailer share arrangements decreased $37 million due to increased payments to our retailers as credit sales volumes increased from the prior year, which was depressed due to the global COVID-19 pandemic. |
● | Other income decreased $21 million due to a $15 million decrease in ancillary revenue, in particular revenue from payment protection products. In addition, we recognized a $10 million gain on the sale of a credit card loan portfolio for the year ended December 31, 2021, as compared to a $20 million gain recognized on the sale of a credit card loan portfolio in the prior year. |
(Loss) income from discontinued operations, net of taxesProvision for credit losses: . Loss from discontinued operations, net of taxes was ($294.6)Provision for credit losses decreased $722 million, or 57%, to $544 million for the year ended December 31, 20192021 due to lower net charge-offs and a lower overall reserve rate reflective of improving macroeconomic variables and shifting product mix. For the year ended December 31, 2020, there was a significant increase in the provision due to a reserve build in the Allowance for credit losses associated with the deterioration of the macroeconomic outlook as a result of the global COVID-19 pandemic; the Allowance for credit losses also reflected a $644 million increase attributable to our adoption of CECL on January 1, 2020.
Year ended December 31, 2020 compared with the year ended December 31, 2019:
Interest income: Total interest income decreased $875 million, or 18%, to income from discontinued operations of $17.6$3,952 million for the year ended December 31, 2018,2020, due to the following:
● | Interest and fees on loans decreased $798 million, or 17%, to $3,931 million for the year ended December 31, 2020 as a 13% decrease in normalized average credit card and other loans, which includes loans held for sale, decreased revenue by $618 million, and an approximate 110 basis point decrease in finance charge yield decreased revenue by $180 million. The decrease in normalized average credit card and other loans was due to a 20% decline in credit sales compared to the prior year due to the global COVID-19 pandemic, as well as sales of credit card loan portfolios. The decrease in finance charge yield was due primarily to forbearance programs offered, including waivers of late fees, in response to the global COVID-19 pandemic, as well as the lowering of market interest rates as a result of Federal Reserve Bank interest rate cuts. |
● | Interest on cash and investment securities decreased $77 million, or 79%, to $21 million for the year ended December 31, 2020, as interest income was elevated in the prior year due to investment of the excess cash proceeds received from our sale of our Epsilon business. |
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Interest expense: Total interest expense decreased $139 million, or 22%, to $499 million for the year ended December 31, 2020, due to the following:
● | Interest on deposits decreased $69 million due to lower average balances outstanding for the year. |
● | Interest on borrowings decreased $70 million due to a $53 million decrease in interest expense on secured borrowings resulting from lower average borrowings, offset in part by higher average interest rates due to the timing of maturities, and a $17 million decrease in interest expense on unsecured borrowings due to lower average borrowings. |
Non-interest income: Total non-interest income decreased $16 million, or 11%, to $(155) million for the year ended December 31, 2020, due to the following:
● | Interchange revenue, net of retailer share arrangements increased $26 million due to a $33 million increase in merchant fee revenue due to decreased royalty payments to our retailers, offset in part by a $7 million decrease in servicing fees due to lower volumes, both as a result of the global COVID-19 pandemic. |
● | Other income decreased $42 million due to an $18 million decrease in ancillary revenue, in particular revenue from payment protection products. In addition, we recognized a $20 million gain on the sale of a credit card loan portfolio for the year ended December 31, 2020, as compared to net gains of $44 million recognized on the sale of 13 credit card loan portfolios in the prior year. |
Provision for credit losses. Provision for credit losses increased $78 million, or 7%, to $1,266 million for the year ended December 31, 2020, due to the deterioration of the macroeconomic outlook as a result of the global COVID-19 pandemic; offset in part by the decline in credit card and other loans of $2.7 billion. The Allowance for credit losses reflected $644 million attributable to our adoption of CECL on January 1, 2020.
Table 3: Summary of Total Non-interest Expenses
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | |||||||||||
| | | | | | | | | | | | | 2021 | | 2020 |
|
| 2021 |
| | 2020 |
| | 2019 |
| to 2020 |
| to 2019 | |||
| | (in millions, except percentages) | |||||||||||||
Non-interest expenses | | | | | | | | | | | | | | | |
Employee compensation and benefits | | $ | 671 | | | $ | 609 | | | $ | 721 | | 10 | | (16) |
Card and processing expenses | | | 323 | | | | 396 | | | | 479 | | (18) | | (17) |
Information processing and communication | | | 216 | | | | 191 | | | | 187 | | 13 | | 2 |
Marketing expenses | | | 160 | | | | 143 | | | | 205 | | 12 | | (30) |
Depreciation and amortization | | | 92 | | | | 106 | | | | 96 | | (13) | | 10 |
Other | | | 222 | | | | 286 | | | | 512 | | (23) | | (44) |
Total non-interest expenses | | $ | 1,684 | | | $ | 1,731 | | | $ | 2,200 | | (3) | | (21) |
Total Non-interest Expenses
Year ended December 31, 2021 compared with the year ended December 31, 2020:
Non-interest expenses: Total non-interest expenses decreased $47 million, or 3%, to $1,684 million for the year ended December 31, 2021, due to the following:
● | Employee compensation and benefits increased $62 million due to our Bread acquisition in December 2020 and an increase in incentive compensation. |
● | Card and processing expenses decreased $73 million due to a commensurate reduction in fraud losses for the year ended December 31, 2021. |
● | Information processing and communication increased $25 million due to an increase in data processing expense driven by the Fiserv core processing platform migration. |
● | Marketing expenses increased $17 million as the prior year was impacted by a reduction in retailer marketing due to the global COVID-19 pandemic. |
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● | Depreciation and amortization decreased $14 million due to our real estate optimization in 2020 as well as certain fully amortized loan portfolio acquisition premiums, offset in part by an increase in amortization of purchased intangibles associated with the Bread acquisition in December 2020. |
● | Other expenses decreased $64 million due to a commensurate amount of asset impairment charges recognized in 2020 related to certain deferred contract costs, fixed assets and right of use assets. There were no such impairment charges in 2021. |
Year ended December 31, 2020 compared with the year ended December 31, 2019:
Non-interest expenses: Total non-interest expenses decreased $469 million, or 21%, to $1,731 million for the year ended December 31, 2020, due to the following:
● | Employee compensation and benefits decreased $112 million due to cost saving initiatives executed in the fourth quarter of 2019, including reductions in force. |
● | Card and processing expenses decreased $83 million due to a $54 million reduction in fraud losses, and a $29 million decrease in other card and processing costs due to the decline in volumes as a result of the global COVID-19 pandemic. |
● | Information processing and communication increased $4 million due to an increase in software costs. |
● | Marketing expenses decreased $62 million due to the decline in volumes and a reduction in retailer marketing as a result of the global COVID-19 pandemic. |
● | Depreciation and amortization increased $10 million due to $25 million in accelerated depreciation expense of fixed assets associated with certain real estate properties, offset in part by certain fully amortized loan portfolio acquisition premiums and capitalized software. |
● | Other expenses decreased $226 million due primarily to a $182 million decrease in lower of cost or market valuation adjustments on certain loan portfolios held for sale and a $72 million loss recognized on the extinguishment of debt in 2019. These decreases were offset in part by $64 million in asset impairment charges recognized in 2020 related to certain deferred contract costs, fixed assets and right of use assets. |
Income Taxes
Year ended December 31, 2021 compared with the year ended December 31, 2020:
Provision for income taxes increased $154 million, or 168%, to $247 million for the year ended December 31, 2021, primarily related to a $743 million increase in earnings before taxes in 2021. The effective tax rate for year ended December 31, 2021 was 23.7% as compared to 30.7% for the year ended December 31, 2020. The lower effective tax rate in 2021 included a discrete tax benefit related to a favorable settlement with a state tax authority and a discrete tax benefit triggered by the divestiture of our former LoyaltyOne segment. The 2020 effective tax rate was unfavorably impacted by lower earnings before taxes.
Year ended December 31, 2020 compared with the year ended December 31, 2019:
Provision for income taxes decreased $63 million, or 41%, to $93 million for the year ended December 31, 2020, primarily related to a $361 million reduction in earnings before taxes in 2020. The effective tax rate for year ended December 31, 2020 was 30.7% as compared to 23.6% for the year ended December 31, 2019. The 2020 effective tax rate was unfavorably impacted by lower earnings before taxes. The lower effective tax rate in 2019 included a decrease in tax reserves resulting from a change in accounting method for tax purposes.
Income from Discontinued Operations, Net of Income Taxes
Year ended December 31, 2021 compared with the year ended December 31, 2020:
Income from discontinued operations, net of income taxes was $4 million for the year ended December 31, 2021 as compared to $6 million for the year ended December 31, 2020, and represents results of operations from our former
50
LoyaltyOne segment, as well as both direct costs identifiable to the LoyaltyOne segment and allocations of interest expense on corporate debt. Discontinued operations for the year ended December 31, 2020 also included the resolution of a loss contingency as described in Note 15, “Commitments and Contingencies,” to the Consolidated Financial Statements.
Year ended December 31, 2020 compared with the year ended December 31, 2019:
Income from discontinued operations, net of income taxes was $6 million for the year ended December 31, 2020, which represents results of operations from our former LoyaltyOne segment, as well as both direct costs identifiable to the LoyaltyOne segment and allocations of interest expense on corporate debt. Discontinued operations for the year ended December 31, 2020 also included the resolution of a loss contingency as discussed above. Loss from discontinued operations, net of income taxes was $228 million for the year ended December 31, 2019 due to the after-tax loss on the sale of Epsilon completed July 1, 2019 and a loss contingency as described in Note 18, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements. For the year ended December 31, 2018, loss from discontinued operations, net of taxes represents results of operations from our former Epsilon segment, as well as certain direct costs identifiable to the Epsilon segment and allocations of interest expense on corporate debt.discussed above.
Year ended December 31, 2018 compared to the year ended December 31, 2017Table 4: Summary Financial Highlights – Continuing Operations
Revenue. Total revenue increased $191.9 million, or 4%, to $5,666.6 million for the year ended December 31, 2018 from $5,474.7 million for the year ended December 31, 2017. The net increase was due to the following:
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | |||||||||||
| | | | | | | | | | | | | 2021 | | 2020 |
|
| 2021 |
| | 2020 |
| | 2019 |
| to 2020 |
| to 2019 | |||
| | (in millions, except percentages) | |||||||||||||
Credit sales | | $ | 29,603 | | | $ | 24,707 | | | $ | 30,987 | | 20 | | (20) |
Pre-tax pre-provision earnings (PPNR) (1) | | | 1,588 | | | | 1,567 | | | | 1,850 | | 1 | | (15) |
Average receivables | | | 15,656 | | | | 16,367 | | | | 17,298 | | (4) | | (5) |
End-of-period receivables | | | 17,399 | | | | 16,784 | | | | 19,463 | | 4 | | (14) |
End-of-period direct-to-consumer deposits | | | 3,180 | | | | 1,700 | | | | 1,161 | | 87 | | 46 |
| | | | | | | | | | | | | | | |
Return on average assets (2) | | | 3.6 | % | | | 0.9 | % | | | 1.8 | % | 2.7 | | (0.9) |
Return on average equity (3) | | | 40.7 | % | | | 16.7 | % | | | 25.0 | % | 24.0 | | (8.3) |
| | | | | | | | | | | | | | | |
Net interest margin (4) | | | 18.2 | % | | | 16.8 | % | | | 19.4 | % | 1.4 | | (2.6) |
Loan yield (5) | | | 24.7 | % | | | 24.0 | % | | | 27.3 | % | 0.7 | | (3.3) |
Risk-adjusted loan yield (6) | | | 20.1 | % | | | 17.4 | % | | | 21.2 | % | 2.7 | | (3.8) |
| | | | | | | | | | | | | | | |
Efficiency ratio (7) | | | 51.5 | % | | | 52.5 | % | | | 54.3 | % | (1.0) | | (1.8) |
| | | | | | | | | | | | | | | |
Tangible book value per common share (8) | | $ | 28.09 | | | $ | 16.34 | | | $ | 25.73 | | 71.9 | | (36.5) |
Tangible common equity / tangible assets ratio (TCE/TA) (9) | | 6.6 | % | | | 3.7 | % | | | 4.7 | % | 2.9 | | (1.0) | |
Cash dividend per common share | | $ | 0.84 | | | $ | 1.26 | | | $ | 2.52 | | (33.3) | | (50.0) |
| | | | | | | | | | | | | | | |
Net loss rate | | | 4.6 | % | | | 6.6 | % | | | 6.1 | % | (2.0) | | 0.5 |
Delinquency rate | | | 3.9 | % | | | 4.4 | % | | | 5.8 | % | (0.5) | | (1.4) |
Reserve rate | | | 10.5 | % | | | 12.0 | % | | | 6.0 | % | (1.5) | | 6.0 |
(1) |
(2) |
(3) |
Cost of operations. Cost of operations increased $67.7 million, or 3%, to $2,537.2 million for the year ended December 31, 2018 as compared to $2,469.5 million for the year ended December 31, 2017. The net increase resulted from the following:
(5) | Loan yield represents Interest and fees on loans divided by |
(6) | Risk-adjusted loan yield represents Loan yield less Net loss rate. |
(7) | Efficiency ratio represents Total non-interest expenses divided by Total net interest and non-interest income. |
(8) | Tangible book value per common share represents Total stockholders’ equity less Intangible assets, net, and Goodwill divided by shares outstanding. |
(9) | Tangible common equity represents Total stockholders’ equity less Intangible assets, net, and Goodwill. Tangible assets represents Total assets less Intangible assets, net, and Goodwill. |
* |
|
Provision for loan loss. Provision for loan loss decreased $124.1 million, or 11%, to $1,016.0 million for the year ended December 31, 2018 as compared to $1,140.1 million for the year ended December 31, 2017, due to the change in credit card and loan receivables in each respective period, including the impact of the classification of credit card receivables held for sale, offset in part by an increase in net charge-offs.
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General and administrative. General and administrative expenses increased $3.2 million, or 2%, to $162.5 million for the year ended December 31, 2018 as compared to $159.3 million for the year ended December 31, 2017, due to an increase in professional fees, medical benefits and charitable contributions, which were offset in part by a decrease in net foreign currency exchange losses realized and a decrease in incentive compensation driven by bonuses in 2017 to our non-executive associates resulting from tax reform benefits.
Table 5: Net Interest Margin
Depreciation and other amortization. Depreciation and other amortization increased $7.0 million, or 10%, to $80.7 million for the year ended December 31, 2018, as compared to $73.7 million for the year ended December 31, 2017, due to additional assets placed into service from capital expenditures.
| | | | | | | | | | |
| | Year Ended December 31, 2021 | | |||||||
|
| Average Balance |
| Interest Income / Expense |
| Average Yield / Rate |
| |||
| | (in millions, except percentages) | | |||||||
Cash and investment securities | | $ | 3,480 | | $ | 7 | | | 0.21 | % |
Credit card and other loans | | | 15,656 | | | 3,861 | | | 24.66 | % |
Total interest-earning assets | | | 19,136 | | | 3,868 | | | 20.21 | % |
| | | | | | | | | | |
Direct-to-consumer deposits (retail) | | | 2,490 | | | 23 | | | 0.91 | % |
Wholesale deposits | | | 7,509 | | | 144 | | | 1.92 | % |
Interest-bearing deposits | | | 9,999 | | | 167 | | | 1.67 | % |
| | | | | | | | | | |
Secured borrowings | | | 4,596 | | | 112 | | | 2.43 | % |
Unsecured borrowings | | | 2,699 | | | 104 | | | 3.84 | % |
Total interest-bearing liabilities | | | 17,294 | | | 383 | | | 2.21 | % |
| | | | | | | | | | |
Net Interest Income | | | | | $ | 3,485 | | | | |
| | | | | | | | | | |
Net Interest Margin (1) | | | | | | 18.2 | % | | | |
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $1.3 million, or 1%, to $112.9 million for the year ended December 31, 2018, as compared to $114.2 million for the year ended December 31, 2017, primarily due to certain fully amortized intangible assets, including portfolio premiums.
Interest expense, net. Total interest expense, net increased $86.9 million, or 19%, to $542.3 million for the year ended December 31, 2018 as compared to $455.4 million for the year ended December 31, 2017. The net increase was due to the following:
| | | | | | | | | | |
| | Year Ended December 31, 2020 | | |||||||
|
| Average Balance |
| Interest Income / Expense |
| Average Yield / Rate |
| |||
| | (in millions, except percentages) | | |||||||
Cash and investment securities | | $ | 4,212 | | $ | 21 | | | 0.48 | % |
Credit card and other loans | | | 16,367 | | | 3,931 | | | 24.02 | % |
Total interest-earning assets | | | 20,579 | | | 3,952 | | | 19.20 | % |
| | | | | | | | | | |
Direct-to-consumer deposits (retail) | | | 1,549 | | | 27 | | | 1.71 | % |
Wholesale deposits | | | 9,399 | | | 211 | | | 2.25 | % |
Interest-bearing deposits | | | 10,948 | | | 238 | | | 2.17 | % |
| | | | | | | | | | |
Secured borrowings | | | 5,272 | | | 167 | | | 3.16 | % |
Unsecured borrowings | | | 2,847 | | | 94 | | | 3.33 | % |
Total interest-bearing liabilities | | | 19,067 | | | 499 | | | 2.62 | % |
| | | | | | | | | | |
Net Interest Income | | | | | $ | 3,453 | | | | |
| | | | | | | | | | |
Net Interest Margin (1) | | | | | | 16.8 | % | | | |
(1) |
Taxes. Provision for income taxes decreased $23.8 million, or 8%, to $269.5 million for the year ended December 31, 2018 from $293.3 million for the year ended December 31, 2017, due to the reduction in the federal statutory rate pursuant to tax reform enacted in December 2017. The effective tax rate for the year ended December 31, 2018 decreased to 22.2% as compared to 27.6% for the year ended December 31, 2017. Additionally, income tax expense in 2018 was positively impacted by a tax benefit associated with a foreign restructuring.
Income from discontinued operations, net of taxes. Income from discontinued operations, net of taxes decreased $1.9 million, or 10%, to $17.6 million for the year ended December 31, 2018 from $19.5 million the year ended December 31, 2017. Income from discontinued operations, net of taxes represents results of operations from our former Epsilon segment, as well as certain direct costs identifiable to the Epsilon segment and allocations of interest expense on corporate debt.
UseTable 6: Reconciliation of GAAP to Non-GAAP Financial MeasuresMeasure
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | |||||||||||
| | | | | | | | | | | | | 2021 | | 2020 |
|
| 2021 |
| | 2020 |
| | 2019 |
| to 2020 |
| to 2019 | |||
| | (in millions, except percentages) | |||||||||||||
Income from continuing operations before income taxes | | $ | 1,044 | | | $ | 301 | | | $ | 662 | | 247 | | (55) |
Provision for credit losses | | | 544 | | | | 1,266 | | | | 1,188 | | (57) | | 7 |
Pre-tax pre-provision earnings (PPNR) | | $ | 1,588 | | | $ | 1,567 | | | $ | 1,850 | | 1 | | (15) |
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, provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles.
In 2019, adjusted EBITDA excluded costs for professional services associated with strategic initiatives, restructuring and other charges as detailed in Note 14, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements, and loss related to the extinguishment of debt in July 2019. In 2016, adjusted EBITDA excluded the impact of the cancellation of the AIR MILES Reward Program’s five-year expiry policy on December 1, 2016. In 2015, adjusted EBITDA excluded costs associated with the consent orders with the FDIC. These costs, as well as stock compensation expense, were not included in the measurement of segment adjusted EBITDA as the chief operating
3452
decision maker did not factor these expenses for purposes of assessing segment performance and decision making with respect to resource allocations.
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs, interest expense on deposits and adjusted EBITDA attributable to the non-controlling interest. Effective April 1, 2016, we acquired the remaining 20% interest in BrandLoyalty, which increased our ownership percentage to 100%.
We use adjusted EBITDA and adjusted EBITDA, net as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management, and we believe it provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and adjusted EBITDA, net are each considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of intangible assets, including certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.
Adjusted EBITDA and adjusted EBITDA, net are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either operating income, income from continuing operations or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and adjusted EBITDA, net are not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
The adjusted EBITDA and adjusted EBITDA, net measures presented in this Annual Report on Form 10-K 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.
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | |||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
| | (in millions) | |||||||||||||
Income from continuing operations | | $ | 572.6 | | $ | 945.5 | | $ | 769.2 | | $ | 480.2 | | $ | 544.3 |
Stock compensation expense | |
| 25.1 | |
| 44.4 | |
| 41.3 | |
| 41.5 | |
| 42.5 |
Provision for income taxes | |
| 165.8 | |
| 269.5 | |
| 293.3 | |
| 298.8 | |
| 294.1 |
Interest expense, net | |
| 569.0 | |
| 542.3 | |
| 455.4 | |
| 370.9 | |
| 294.3 |
Depreciation and other amortization | |
| 79.9 | |
| 80.7 | |
| 73.7 | |
| 67.3 | |
| 60.3 |
Amortization of purchased intangibles | |
| 96.2 | |
| 112.9 | |
| 114.2 | |
| 119.6 | |
| 104.8 |
Impact of expiry (1) | | | — | | | — | | | — | | | 241.7 | | | — |
Regulatory settlement (2) | | | — | | | — | | | — | | | — | | | 64.6 |
Strategic transaction costs (3) | | | 11.7 | | | — | | | — | | | — | | | — |
Restructuring and other charges (4) | | | 118.1 | | | — | | | — | | | — | | | — |
Loss on extinguishment of debt (5) | | | 71.9 | | | — | | | — | | | — | | | — |
Adjusted EBITDA | | $ | 1,710.3 | | $ | 1,995.3 | | $ | 1,747.1 | | $ | 1,620.0 | | $ | 1,404.9 |
Less: Securitization funding costs | |
| 213.4 | |
| 220.2 | |
| 156.6 | |
| 125.6 | |
| 97.1 |
Less: Interest expense on deposits | |
| 225.6 | |
| 165.7 | |
| 125.1 | |
| 84.7 | |
| 53.6 |
Less: Adjusted EBITDA attributable to non-controlling interest | | | — | | | — | | | — | | | 5.5 | | | 30.9 |
Adjusted EBITDA, net | | $ | 1,271.3 | | $ | 1,609.4 | | $ | 1,465.4 | | $ | 1,404.2 | | $ | 1,223.3 |
35
Segment Revenue and Adjusted EBITDA, net
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| |||||||||
| | | | | | | | | | | 2019 | | 2018 | |
|
| 2019 |
| 2018 |
| 2017 |
| to 2018 |
| to 2017 |
| |||
| | (in millions, except percentages) |
| |||||||||||
Revenue: | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 1,033.1 | | $ | 1,068.4 | | $ | 1,303.5 |
| (3) | % | (18) | % |
Card Services | |
| 4,547.8 | |
| 4,597.6 | |
| 4,170.6 |
| (1) | | 10 | |
Corporate/Other | |
| 0.4 | |
| 0.6 | |
| 0.6 |
| nm | * | nm | * |
Total | | $ | 5,581.3 | | $ | 5,666.6 | | $ | 5,474.7 |
| (2) | % | 4 | % |
Adjusted EBITDA, net: | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 244.5 | | $ | 254.2 | | $ | 256.7 |
| (4) | % | (1) | % |
Card Services | |
| 1,119.7 | |
| 1,496.0 | |
| 1,344.9 |
| (25) | | 11 | |
Corporate/Other | |
| (92.9) | |
| (140.8) | |
| (136.2) |
| (34) | | 3 | |
Total | | $ | 1,271.3 | | $ | 1,609.4 | | $ | 1,465.4 |
| (21) | % | 10 | % |
|
|
Year ended December 31, 2019 compared to the year ended December 31, 2018
Revenue. Total revenue decreased $85.3 million, or 2%, to $5,581.3 million for the year ended December 31, 2019 from $5,666.6 million for the year ended December 31, 2018. The decrease was due to the following:
Adjusted EBITDA, net. Adjusted EBITDA, net decreased $338.1 million, or 21%, to $1,271.3 million for the year ended December 31, 2019 from $1,609.4 million for the year ended December 31, 2018. The net decrease was due to the following:
36
Year ended December 31, 2018 compared to the year ended December 31, 2017
Revenue. Total revenue increased $191.9 million, or 4%, to $5,666.6 million for the year ended December 31, 2018 from $5,474.7 million for the year ended December 31, 2017. The net increase was due to the following:
Adjusted EBITDA, net. Adjusted EBITDA, net increased $144.0 million, or 10%, to $1,609.4 million for the year ended December 31, 2018 from $1,465.4 million for the year ended December 31, 2017. The net increase was due to the following:
Asset QualityASSET QUALITY
OurGiven the nature of our business, the quality of our assets, in particular our credit card and other loans, is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to our Credit card and other loans portfolio, we closely monitor two metrics – our delinquency rates and net charge-off rates – which reflect, among other factors, our underwriting, the inherent credit risk ofin our credit card and loan receivables,portfolio, the success of our collection and recovery efforts, and more broadly the general economicmacroeconomic conditions.
Delinquencies. A credit card: An account is contractually delinquent if we do not receive the minimum payment due by the specified due date on the cardholder’s statement.date. 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, which is typically at 180 days delinquent. When an account becomes delinquent, a message is printed on thepast due for credit cardholder’s billing statement requesting payment.card loans and 120 days past due for installment loans. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. TheThis collection systemscoring algorithm then recommends a collection strategy for collecting on the past due account, based on the collection score and account balance and dictates theincluding a contact schedule and collections priority for the account.priority. If, we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies andor outside attorneys to continue those efforts.efforts, or sell the charged-off balances.
37
The following table presents the delinquency trends ofon our credit card and loan receivables portfolio:other loans portfolio based on the principal balances outstanding as of December 31:
| | | | | | | | | | | |
| | December 31, | | % of | | December 31, | | % of |
| ||
|
| 2019 |
| Total |
| 2018 |
| Total |
| ||
| | (in millions, except percentages) |
| ||||||||
Receivables outstanding - principal | | $ | 18,413.1 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | |
31 to 60 days | | $ | 337.4 | | 1.8 | % | $ | 303.2 |
| 1.8 | % |
61 to 90 days | |
| 233.6 |
| 1.3 | |
| 207.9 |
| 1.3 | |
91 or more days | |
| 496.5 |
| 2.7 | |
| 443.4 |
| 2.6 | |
Total | | $ | 1,067.5 |
| 5.8 | % | $ | 954.5 |
| 5.7 | % |
Table 7: Delinquency Trends on Credit Card and Other Loans
| | | | | | | | | | | |
| | | | % of | | | | % of |
| ||
|
| 2021 |
| Total |
| 2020 |
| Total |
| ||
| | (in millions, except percentages) |
| ||||||||
Credit card and other loans outstanding ─ principal | | $ | 16,590 |
| 100.0 | % | $ | 15,963 |
| 100.0 | % |
Outstanding balances contractually delinquent: | | | | | | | | | | | |
31 to 60 days | | $ | 219 | | 1.3 | % | $ | 230 |
| 1.4 | % |
61 to 90 days | |
| 147 |
| 0.9 | |
| 163 |
| 1.0 | |
91 or more days | |
| 281 |
| 1.7 | |
| 315 |
| 2.0 | |
Total | | $ | 647 |
| 3.9 | % | $ | 708 |
| 4.4 | % |
In response to the global COVID-19 pandemic, we have offered forbearance programs, which provided 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 the announcement of the forbearance programs. Those accounts receiving forbearance relief may not advance to the next delinquency cycle, including eventually to charge-off, in the same timeframe that would have occurred had the forbearance relief not been granted. As of December 31, 2021 and 2020, the outstanding balance of credit card loans that are under a forbearance program offered by us totaled approximately $86 million and $157 million, respectively.
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,that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, netInterest and fees on loans while fraud losses are recorded as an expense.in Card and processing expenses. Credit card and loan receivables,loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days contractually past due, exceptdue. Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptciesbankruptcy or death. Creditdeath, credit card and loan receivables,other loans, including unpaid interest and fees associated with customer bankruptcies or deathas applicable, 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.180 days past due.
53
The net charge-off rate is calculated by dividing net charge-offs of principal receivablesbalances for the period by the average credit card and loan receivablesother loans for the same period. Average credit card and loan receivablesother loans represent the average balance of the cardholder receivablesloans at the beginning of each month in the periods indicated. The following table presents our net charge-offs for the periods indicated:years ended December 31:
| | | | | | | | | | |
| | | | | | | | | |
|
| | Years Ended December 31, | | |||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||
| | (in millions, except percentages) |
| |||||||
Average credit card and loan receivables | | $ | 17,298.2 | | $ | 17,412.1 | | $ | 16,185.5 | |
Net charge-offs of principal receivables | |
| 1,054.7 | |
| 1,067.2 | |
| 970.9 | |
Net charge-offs as a percentage of average credit card and loan receivables | |
| 6.1 | % |
| 6.1 | % |
| 6.0 | % |
LiquidityTable 8: Net Charge-Offs on Credit Card and Capital ResourcesOther Loans
| | | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| |||
| | (in millions, except percentages) |
| |||||||
Average credit card and other loans | | $ | 15,656 | | $ | 16,367 | | $ | 17,298 | |
Net charge-offs of principal balances | |
| 720 | |
| 1,083 | |
| 1,055 | |
Net charge-offs as a percentage of average credit card and other loans | |
| 4.6 | % |
| 6.6 | % |
| 6.1 | % |
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements (including certain capital and leverage ratio requirements applicable to our Banks under FDIC regulations discussed elsewhere in this Annual Report) in a cost effective and prudent manner through expected and unexpected market environments.
Our primary sources of liquidity include cash generated from operating activities, our credit agreementsagreement and issuances of debt or equity securities, our credit card securitization programprograms and deposits issued by Comenity Bank and Comenity Capital Bank. InBank, 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; retail deposits comprised approximately $1.2 billion of our $12.2 billion deposits outstanding at December 31, 2019.
Our primary uses of cash are for ongoing businessand varied lending operations, repaymentsscheduled payments of principal and interest on our debt, capital expenditures, investments or acquisitions, stock repurchasesincluding digital and product innovation and technology enhancements, and dividends.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges if any, willwould depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and may be funded through the issuance of debt securities. The amounts involved may be material.
On July 1, 2019,Because of the alternatives available to us as discussed above, we soldbelieve that our former Epsilon segmentshort-term and long-term liquidity are adequate to Publicis Groupe S.A. for $4.4 billion in cash. Proceeds were used for thefund not only our current operations, but also our near-term and long-term funding requirements including dividend payments, debt service obligations and repayment of corporate debt share repurchases, and payment of taxes associated with the sale.
We believe that internally generated fundsmaturities and other sourcesamounts that may ultimately be paid in connection with contingencies. However, volatility in the financial and capital markets due to the global COVID-19 pandemic or otherwise may limit our access to or increase our cost of liquidity discussed below will be sufficientcapital, and could make capital unavailable on terms acceptable to meet working capital needs, capital expenditures, and other business requirements forus or at least the next 12 months.all.
Cash Flows
The table below summarizes our cash flows by operating, investing and financing activities, followed by a discussion of the variance drivers for the year ended December 31, 2021 compared with the year ended December 31, 2020.
Table 9: Cash Flows
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Total cash provided by (used in): | | | | | | | | | |
Operating activities | | $ | 1,543 | | $ | 1,883 | | $ | 1,218 |
Investing activities | |
| (1,691) | |
| 1,774 | |
| 2,861 |
Financing activities | |
| 608 | |
| (4,167) | |
| (4,092) |
Effect of foreign currency exchange rates | |
| — | |
| 15 | |
| 3 |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 460 | | $ | (495) | | $ | (10) |
3854
Cash Flow Activity
Cash Flows from Operating ActivitiesActivities:. We generated cash flow from operating activities of $1,217.7$1,543 million and $2,754.9$1,883 million for the years ended December 31, 20192021 and 2018,2020, respectively. The year-over-year decrease in operating cash flows of $1,537.2 million during the year ended December 31, 2019 was primarily due to lower profitability and the sale of Epsilonan increase in July 2019.working capital.
Cash Flows from Investing ActivitiesActivities:. Cash provided byused in investing activities was $2,860.8$1,691 million for the year ended December 31, 2019,2021, and cash used inprovided by investing activities was $1,872.0$1,774 million for the year ended December 31, 2018. Significant components of2020. The year-over-year decrease in investing activities arecash flows was primarily due to the change in credit card and other loans, as follows:cash decreased $1,805 million in the current year due to growth in the portfolio; however, cash increased $1,784 million in the prior year due to a decrease in credit card and other loans resulting from lower sales volumes due to the global COVID-19 pandemic.
Cash Flows from Financing ActivitiesActivities:. Cash provided by financing activities was $608 million for the year ended December 31, 2021, and cash used in financing activities was $4,091.7 million and $1,217.9$4,167 million for the yearsyear ended December 31, 2019 and 2018, respectively. Significant components of2020. The year-over-year increase in financing activities arecash flows was primarily due to the change in deposits, as follows:well as net long-debt debt repayments in the prior year.
39
DebtFunding Sources
Credit Agreement
At December 31, 2018,2020, our credit agreement, as amended, provided for $3,052.6$1,484 million in term loans outstanding (the term loans), subject to certain principal repayments, and a $1,572.4$750 million revolving credit facility (the revolving line of credit).
In July 2021, we amended the 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, including a financial covenant that Comenity Bank and Comenity Capital Bank each maintain a common equity tier 1 capital ratio of at least 11% at all times there are term loans outstanding (or at least 10% if no term loans are outstanding), (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 minus, in the case of the first transaction associated with the divestiture of the LoyaltyOne spinoff or sale, $25 million and (vi) add Lon Inc. and Lon Operations LLC acquired in our acquisition of Bread as additional guarantors. Following our receipt of $750 million in connection with the spinoff of our former LoyaltyOne segment in November 2021, we used $725 million of such amount to repay term loans under our credit agreement, as required by the July 2021 amendment, and used the remaining $25 million to make our scheduled fourth quarter amortization payment with respect to such loans.
At December 31, 2021, we had $658 million aggregate principal amount of term loans outstanding and a $750 million revolving line of credit; we had no borrowings on our revolving line of credit.
On April 30, 2019, we amended ourThe credit agreement to provide that, upon consummation of the sale of Epsilon,includes various restrictive financial and non-financial covenants. If we do not comply with these covenants, the maturity date of amounts outstanding under the credit agreement wouldmay be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility would be required, the aggregate revolving credit commitments would be reduced in the same amount (to $1,072.4 million), all of our outstanding senior notes would be required to be redeemed, net proceeds from future asset sales in excess of $50 million must be applied to repayment of the credit agreementaccelerated and certain other minor amendments.
In July 2019, we made a mandatory payment of $500.0 million on our revolving credit facility, with the aggregate revolving credit commitments reduced to $1,072.4 million.
On December 20, 2019, we amended our credit agreement to extend the maturity date from June 14, 2021 to December 31, 2022, reduce the aggregate revolving credit commitments from $1,072.4 million to $750.0 million, add a consolidated minimum tangible net worth covenant upon certain triggering events and make certain other amendments. The amendment also required us to prepay the term loans to $2,028.8 million upon consummation of the offering of the Senior Notes due 2024, which obligation was satisfied in full with a prepayment of $833.0 million, representing the net proceeds from the offering of the Senior Notes due 2024.
At December 31, 2019, our 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 December 31, 2019, there were no amounts outstanding under our revolving line of creditbecome payable and the total availability was $750.0 million. Our total leverage ratio, as defined in our credit agreement, was 1.6 to 1 at December 31, 2019, as compared to the maximum covenant ratio of 3.5 to 1.
As of December 31, 2019, wecommitments may be terminated. We were in compliance with our debt covenants.all of these covenants at December 31, 2021.
BrandLoyalty Credit AgreementDeposits
In September 2019, we repaid the €115.0 million in termWe utilize a variety of deposit products to finance our operating activities, including as funding for our non-securitized credit card and other loans, outstanding under the BrandLoyalty credit agreement, originally scheduledand to mature in June 2020, and repaid the €32.5 million amount outstanding under the revolving line of credit.
Senior Notes
In July 2019, with the proceeds from the Epsilon transaction, we extinguished all of our senior notes, which had an outstanding balance of $1.9 billion.
In December 2019, we issued and sold $850.0 million aggregate principal amount of 4.750% senior notes due December 15, 2024. The Senior Notes due 2024 accrue interest on the principal amount at the rate of 4.750% per annum from December 20, 2019, payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on June 15, 2020. The Senior Notes due 2024 will mature on December 15, 2024, subject to earlier repurchase or redemption.
See Note 16, “Debt,”fund securitization enhancement requirements of the NotesBanks. We offer both direct-to-consumer retail deposit products as well as deposits sourced through contractual arrangements with various financial counterparties. Direct-to-consumer retail deposits comprised approximately $3.2 billion and $1.7 billion of total deposits outstanding at December 31, 2021 and 2020, respectively. Other third-party sourced deposits (often referred to Consolidated Financial Statements for additional information regarding our debt.
as wholesale deposits) comprised approximately $7.8 billion and $8.1 billion of total deposits outstanding at December 31, 2021 and 2020, respectively.
4055
Funding Sources
Deposits
We utilize 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.
Comenity Bank and Comenity Capital BankThe Banks offer various non-maturity deposit programs through contractual arrangements with various financial counterparties. As of December 31, 2019, Comenity Bank and Comenity Capital Bank had $3.6 billion in money market deposits outstanding with interest rates ranging from 1.84% to 3.50%. Money market depositsproducts that are generally redeemable on demand by the customer and, as such, have no scheduled maturity date. As of December 31, 2021, the Banks had $5.6 billion in non-maturity deposits outstanding with annual interest rates ranging from 0.05% to 3.50%, with a weighted average interest rate of 0.68%. As of December 31, 2020, the Banks had $3.8 billion in non-maturity deposits outstanding with annual interest rates ranging from 0.38% to 3.50%, with a weighted average interest rate of 1.00%.
Comenity Bank and Comenity Capital BankThe Banks issue certificates of deposit in denominations of at least $100,000 and $1,000, respectively, in various maturities ranging between January 20202022 and December 20242026 and with effective annual interest rates ranging from 1.33%0.20% to 4.00%. As3.75%, with a weighted average interest rate of 1.91%, at December 31, 2019, we had $8.6 billion2021. At December 31, 2020, interest rates ranged from 0.15% to 3.75%, with a weighted average interest rate of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.2.58%. Interest is paid either monthly or at maturity.
Securitization ProgramPrograms and Conduit Facilities
We sell a majority of the credit card receivablesloans originated by Comenity Bankthe Banks 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.certain master trusts. These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’sthe Banks’ credit card receivables. Historically, we have used bothloans. We use a combination of public and private term asset-backed securitization transactions as well asnotes and private conduit facilities as sources of funding for our securitized credit card receivables. Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.this purpose.
During the year ended December 31, 2019, Master Trust I issued $1.6 billion of asset-backed term notes with various maturities ranging between February 2022 and September 2022, of which $74.1 million were retained by us and eliminated from the consolidated balance sheets. Additionally, $1.92021, $2.1 billion of asset-backed term notes matured and were repaid, of which $347.9$281 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.
During the year ended December 31, 2021, we obtained increased lender commitments under our conduit facilities of $1.3 billion and extended the respective maturities to August 2022 and October 2023. As of December 31, 2021, total capacity under the conduit facilities was $4.5 billion, of which $3.9 billion had been drawn and was included in Debt issued by consolidated variable interest entities in the Consolidated Balance Sheet.
At December 31, 2020, we had a secured loan facility related to the acquisition of Bread, with an outstanding balance sheets.of $86 million that was set to mature in November 2022, with prepayment permitted. In August 2021, we repaid this outstanding secured loan facility in full.
As of December 31, 2019, the WFN Trusts and the WFC Trust2021, we had approximately $13.5$11.2 billion of securitized credit card receivables.loans. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivablesloans and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and the WFC Trusttrusts and by the performance of the credit card receivables in these credit card securitization trusts.
We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card receivables through Master Trust I, Master Trust III and the WFC Trust. As of December 31, 2019, total capacity under the conduit facilities was $4.7 billion, of which $2.4 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entitiesloans in the consolidated balance sheets. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider. The conduits have varying maturities from September 2020 to April 2021 with variable interest rates ranging from 2.79% to 2.96% as of December 31, 2019.trusts.
41
The following table shows the maturities of borrowing commitments as of December 31, 20192021 for the WFN Trusts and the WFC Trusttrusts by year:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
|
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | ||||||
| | (in millions) | ||||||||||||||||
Term notes | | $ | 1,467.2 | | $ | 1,852.1 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | 4,891.0 |
Conduit facilities (1) | |
| 2,480.0 | |
| 2,175.0 | |
| — | |
| — | |
| — | |
| 4,655.0 |
Total (2) | | $ | 3,947.2 | | $ | 4,027.1 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | 9,546.0 |
Table 10: Borrowing Commitment Maturities
| | | | | | | | | | | | |
|
| 2022 |
| 2023 |
| Thereafter |
| Total | ||||
| | (in millions) | ||||||||||
Fixed rate asset-backed term note securities | | $ | 1,572 | | $ | — | | $ | — | | $ | 1,572 |
Conduit facilities (1) | |
| 1,725 | |
| 2,750 | |
| — | |
| 4,475 |
Total (2) | | $ | 3,297 | | $ | 2,750 | | $ | — | | $ | 6,047 |
(1) | Amount represents borrowing capacity, not outstanding borrowings. |
(2) | Total amounts do not include |
Early amortization events as defined within each asset-backed securitization transaction are generally driven by asset performance. We do not believe it is reasonably likely that an early amortization event will occur due to asset performance. However, if an early amortization event were declared, the trustee of the particular credit card securitization trust would retain the interest in the receivablesloans along with the excess interest incomespread that would otherwise be paid to our bank subsidiary until the credit card securitization investors were fully repaid. The occurrence of an early amortization event would significantly limit or negate our ability to securitize additional credit card receivables.loans.
56
We have secured and continue to secure the necessary commitments to fund our portfolio of credit card receivables originated by Comenity Bank and Comenity Capital Bank.other loans. However, certain of these commitments are short-term in nature and subject to renewal. There is not a guarantee that these funding sources, when they mature, will be renewed on similar terms, or at all, as they are dependent on the availability of the asset-backed securitization and deposit markets at the time.
See Note 16, “Debt,”Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandates a minimum five percent risk retention requirement for securitizations. Such risk retention requirements may limit our liquidity by restricting the amount of asset-backed securities we are able to issue or affecting the Notes to Consolidated Financial Statements for additional information regarding our securitized debt.timing of future issuances of asset-backed securities; we satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.
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 endedthat expired on 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.
In August 2019, we repurchased approximately 5.1 million No shares of our outstanding common stock for an aggregate cost of approximately $750.0 million as part of a “modified Dutch Auction” tender offer, as describedwere repurchased by us in more detail in Note 19, “Stockholders’ Equity,” of the Notes to Consolidated Financial Statements.
As of December 31, 2019, we had $347.8 million remaining under our authorized stock repurchase program.2020 or 2021.
Dividends
For the year ended December 31, 2019,2021, we paid quarterlydeclared cash dividends of $0.63$0.84 per share of $126.3 million and $1.1 million in cash related to dividend equivalent rights, for a total of $127.4$42 million, and paid cash dividends and dividend equivalents totaling $42 million.
For the year ended December 31, 2018,2020, we paid quarterlydeclared cash dividends of $0.57$1.26 per share of $124.9 million and $0.3 million in cash related to dividend equivalent rights, for a total of $125.2$60 million, and paid cash dividends and dividend equivalents totaling $61 million.
For the year ended December 31, 2019, we declared cash dividends of $2.52 per share for a total of $127 million, and paid cash dividends and dividend equivalents totaling $127 million.
On January 30, 2020,27, 2022, our Board of Directors declared a quarterly cash dividend of $0.63$0.21 per share on our common stock, payable on March 19, 202018, 2022 to stockholders of record at the close of business on February 14, 2020.11, 2022.
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Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments. Our future cash payments, associated with our contractual obligationsthe vast majority of which relate to deposits, debt issued by consolidated variable interest entities, long-term and commitments to make future payments by typeother debt and period as of December 31, 2019 are summarized below:operating leases.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
|
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total | |||||||
| | | (in millions) | ||||||||||||||||||
Deposits (1) | | $ | 7,189.8 | | $ | 2,303.7 | | $ | 1,638.1 | | $ | 964.0 | | $ | 532.9 | | $ | — | | $ | 12,628.5 |
Non-recourse borrowings of consolidated securitization entities (1) | |
| 3,202.0 | |
| 2,766.7 | |
| 1,588.7 | |
| — | |
| — | |
| — | |
| 7,557.4 |
Long-term and other debt (1) | |
| 209.6 | |
| 206.2 | |
| 1,924.9 | |
| 40.4 | |
| 888.7 | |
| — | |
| 3,269.8 |
Operating leases | |
| 38.4 | |
| 39.6 | |
| 38.6 | |
| 36.8 | |
| 35.6 | |
| 237.4 | |
| 426.4 |
Software licenses | |
| 13.8 | |
| 14.9 | |
| 10.5 | |
| 7.6 | |
| — | |
| — | |
| 46.8 |
ASC 740 obligations (2) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Purchase obligations (3) | |
| 438.2 | |
| 171.9 | |
| 101.9 | |
| 39.9 | |
| 12.3 | |
| — | |
| 764.2 |
Total | | $ | 11,091.8 | | $ | 5,503.0 | | $ | 5,302.7 | | $ | 1,088.7 | | $ | 1,469.5 | | $ | 237.4 | | $ | 24,693.1 |
We believe that we will have access to sufficient resources to meet these commitments.
Inflation and SeasonalityINFLATION AND SEASONALITY
Although we cannot precisely determine the impact of inflation on our operations, we do not believe that we have been significantly affected by inflation. For the most part, we have relied on operating efficiencies from scale, technology and expansion in lower cost jurisdictions in select circumstances, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses. With respect to seasonality, our revenues, earnings and cash flows are affected by increased consumer spending patterns leading up to and including the holiday shopping period in the fourth quarter and, to a lesser extent, during the first quarter as credit card and loan receivable balancesother loans are paid down.
Legislative and Regulatory MattersLEGISLATIVE AND REGULATORY MATTERS
Comenity Bank is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. Comenity Capital Bank is also subject to various regulatory capital requirements administered by both the FDIC, andas well as the State of Utah. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by our regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Comenity Bank and Comenity Capital BankBanks must meet specific capital guidelines that involve quantitative measures of itstheir assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by these regulators about components, risk weightings and other factors. Both Comenity Bank and Comenity Capital BankBanks are
57
limited in the amounts that they can pay as dividends to Alliance Data Systems Corporation (ADSC). See “Business–Supervision and Regulation” under Part I of this Annual Report on Form 10-K for additional information about legislative and regulatory matters impacting us.
On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the FDIC seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah
43
Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in connection with the proposed merger. TheOn April 20, 2021, Comenity Capital Bank withdrew its bank merger application remains subject to regulatory reviewwith the FDIC. On May 3, 2021, each of Comenity Capital Bank and approvalComenity Bank similarly withdrew their counterpart bank merger applications in Utah and no guarantee can be provided as to the outcome or timing of such review.Delaware, respectively.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bankthe Banks 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, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank andBank’s and/or Comenity Capital Bank’s operating activities, as well as our operating activities. Based on these regulations, as of December 31, 2021 and 2020, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized. The Banks are considered well capitalized.capitalized and seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer. The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of December 31, 20192021, 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 | | 12.9 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.9 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 11.9 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.4 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.4 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.7 | | | 8.0 | | | 10.0 | |
Table 11: Capital Ratios
| | | | | | | | | |
| | | | | | 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 (1) | | 20.0 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets (2) | | 21.4 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets (3) | | 21.4 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets (4) | | 22.7 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets (1) | | 17.3 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets (2) | | 18.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets (3) | | 18.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets (4) | | 19.9 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Combined Banks | | | | | | | | | |
Tier 1 capital to average assets (1) | | 18.6 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets (2) | | 20.0 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets (3) | | 20.0 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets (4) | | 21.3 | | | 8.0 | | | 10.0 | |
(1) | Tier 1 capital to average assets ratio represents tier 1 capital divided by total assets for leverage ratio. |
(2) | Common Equity Tier 1 capital to risk-weighted assets ratio represents common equity tier 1 capital divided by total risk-weighted assets. |
(3) | Tier 1 capital to risk-weighted assets ratio represents tier 1 capital divided by total risk-weighted assets. |
(4) | Total capital to risk-weighted assets ratio represents total capital divided by total risk-weighted assets. |
In September 2015, each bank entered into a consent order withComenity Bank and Comenity Capital Bank have adopted the FDIC in settlement of the FDIC’s review regarding the marketing, promotion and sale of certain add-on products; these consent orders were terminated in August 2018.
In August 2014, the SEC adopted a number of rules that will change the disclosure, reporting and offering process for publicly registered offerings of asset-backed securities, including those offered under our credit card securitization program. A number of rules proposedoption provided by the SEC in 2010 and 2011, such as requiring group-level datainterim final rule issued by joint federal bank regulatory agencies, which largely delays the effects of CECL on its regulatory capital for two years, after which the underlying assets in credit card securitizations, were not adopted in 2014 but mayeffects will be implemented byphased-in over a three-year period from January 1, 2022, through December 31, 2024. Under the SEC in the future with or without modifications. The SEC has also issued an advance notice of proposed rulemaking relating to the exemptions that our credit card securitization trusts rely on in our credit card securitization program to avoid registration as investment companies.
Regulations adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandate a minimum five percent risk retention requirement for securitizations issued on and after December 24, 2016, known as Regulation RR. Such risk retention requirements may limit our liquidity by restrictinginterim final rule, the amount of asset-backed securities we are ableadjustments to issue or affectingregulatory capital deferred until the timingphase-in period includes
58
both the initial impact of asset-backed securities; we intend to satisfy such risk retention requirements by maintaining a seller’s interest calculatedour adoption of CECL at January 1, 2020 and 25% of subsequent changes in accordance with Regulation RR.our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.
Discussion of Critical Accounting EstimatesDISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations and overall financial condition is based upon our consolidated financial statements,Consolidated Financial Statements, which have been prepared in accordance with the accounting policies that are described in the Notes to the Consolidated Financial Statements. The preparation of the consolidated financial statementsConsolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determination of our financial conditionposition and operating results. Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting estimates are defined as those that are both most important to the portrayal of our financial conditionposition and operating results and require management’s most subjective judgments.judgments, which for us is our Allowance for Credit Losses.
Allowance for Credit Losses.
Effective January 1, 2020, we adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine our Allowance for credit losses. The primary critical accounting estimatesAllowance for credit losses is an estimate of expected credit losses, measured over the estimated life of our credit card and other loans 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 our portfolio of credit card and other loans, as well as the prevailing economic conditions and forecasts utilized. The estimate of the Allowance for credit losses includes an estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts, net of recoveries are described below.deducted from the Allowance. The Allowance is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness. Prior to January 1, 2020, our Allowance for credit losses was determined utilizing an incurred loss model under ASC 450, “Contingencies.”
In estimating our Allowance for credit losses, for each identified group, we utilize various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. Our quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. We consider the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, with no reversion period. In addition to the quantitative estimate of expected credit losses, we also incorporate qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the Allowance for credit losses reflects our best estimate of current expected credit losses.
Since the implementation of the CECL standard, we have maintained a consistent approach to the forecasting of the life of loan losses for purposes of establishing the Allowance for credit losses. The approach involves the use of third-party projections of economic variables, and applies those projections to their historical correlation to losses in segments of our loan portfolio exhibiting common risk characteristics. The level of the allowance includes qualitative overlays to the modeled output to address risks not inherently covered by the modeled output as well as management-perceived risks in the economic environment. These overlays have changed over the periods since implementation through December 31, 2021 to reflect changes in the macroeconomic environment and the impact to our loan portfolio, particularly throughout the global COVID-19 pandemic.
If we used different assumptions in estimating current expected credit losses, the impact on the Allowance for credit losses could have a material effect on our consolidated financial position and results of operations. For example, a 100 basis point increase in the Allowance as a percentage of the amortized cost of our Credit card and other loans could have resulted in a change of approximately $171 million in the Allowance for credit losses at December 31, 2021, with a corresponding change in the Provision for credit losses.
4459
Allowance for Loan Loss.Income Taxes.
We maintain an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The estimate of our allowance for loan loss considers uncollectible principal as well as unpaid interest and fees reflected in the credit card and loan receivables. While our estimation process includes historical data and analysis, there is a significant amount of judgment applied in selecting inputs and analyzing the results to determine the allowance for loan loss. We use a migration analysis to estimate the future likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off based on historical performance. In evaluating the allowance for loan loss for both principal and unpaid interest and fees, past and current credit card and loan performance is considered in addition to 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. Given the same information, others may reach different reasonable estimates.
If we used different assumptions in estimating net charge-offs that could be incurred, the impact to the allowance for loan loss could have a material effect on our consolidated financial condition and results of operations. For example, a 100 basis point change in our estimate of incurred net loan losses could have resulted in a change of approximately $186 million in the allowance for loan loss at December 31, 2019, with a corresponding change in the provision for loan loss.
Effective January 1, 2020, we adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” For additional information regarding the impact of this standard, see “Recently Issued Accounting Standards” under Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.
Revenue Recognition.
We recognize revenue when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In that determination, under ASC 606, we follow a five-step model that includes: (1) determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied.
We enter into contracts with customers that may include multiple performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. If the standalone selling price is not directly observable, we estimate the standalone selling price based on either the adjusted market assessment or cost plus a margin approach.
Certain of our contracts may provide for variable consideration. We estimate these amounts based on either the expected amount or most likely amount to be provided to the customer to determine the transaction price for the contract. The estimation method is consistent for contracts with similar terms and is applied consistently throughout each contract. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information that is reasonably available.
AIR MILES Reward Program. The AIR MILES Reward Program collects fees from its sponsors based on the number of AIR MILES reward miles issued and, in limited circumstances, the number of AIR MILES reward miles redeemed. Because management has determined that the earnings process is not complete at the time an AIR MILES reward mile is issued, the recognition of redemption and service revenue is deferred. Under certain of our contracts, a portion of the consideration is paid to us upon the issuance of AIR MILES reward miles and a portion is paid at the time of redemption and therefore, we do not have a redemption obligation related to these contracts.
Total consideration from the issuance of AIR MILES reward miles is allocated to three performance obligations: redemption, service, and brand, based on a relative standalone selling price basis.
The estimated standalone selling price for the redemption and the service performance obligations are based on cost plus a reasonable margin. The estimated standalone selling priceincome tax laws of the brand performance obligationUnited States, as well as its states and municipalities in which we operate, are inherently complex; the manners in which they apply to our facts is determined using a relief from royalty approach. Accordingly, management determinesoften open to interpretation, and consequentially requires us to make judgments in establishing our Provision for income taxes.
Differences between the estimated standalone selling price by
45
considering multiple inputsassets and methods, including discounted cash flowsliabilities give rise to deferred tax assets and available market dataliabilities, which measure the future tax effects of items recognized in consideration of applicable marginsthe Consolidated Financial Statements and royalty rates to utilize. The number of AIR MILES reward miles issuedrequire certain estimates and redeemed are factored into the estimates, as management estimates the standalone selling prices and volumes over the term of the respective agreementsjudgments in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base. Additionally, the estimated life of an AIR MILES reward mile impacts the timing of revenue recognition.
Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure.
Throughout 2018 and 2019, our estimated breakage rate remained 20%. Our cumulative redemption rate, which represents program to date redemptions divided by program to date issuance, is 70% as of December 31, 2019. We expect the ultimate redemption rate will approximate 80% based on our historical redemption patterns, statistical regression models, and consideration of enacted program changes, as applicable.
Throughout 2018 and 2019, our estimated life of an AIR MILES reward mile remained 38 months. We estimate that a change to the estimated life of an AIR MILES reward mile of one month would impact revenue by approximately $5 million.
Any future changes in collector behavior could result in further changes in our estimates of breakage or life of an AIR MILES reward mile.
As of December 31, 2019, we had $922.0 million in deferred revenue related to the AIR MILES Reward Program that will be recognized in the future. Further information is provided in Note 3, “Revenue,” of the Notes to Consolidated Financial Statements.
Goodwill.
We test goodwill for impairment annually, as of July 31, or when events and circumstances change that would indicate the carrying amount may not be recoverable. ASC 350, “Intangibles – Goodwill and Other,” permits the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step quantitative goodwill impairment test required under ASC 350. ASC 350 also allows the option to skip the qualitative assessment and proceed directly to a quantitative assessment.
For our qualitative analysis, we consider the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value. If the qualitative assessment results in a conclusion that it is more likely than not that all or a portion of the fair valuebenefit of a reporting unit exceedsdeferred tax asset will not be realized. In evaluating our deferred tax assets on a quarterly basis as new facts and circumstances emerge, we analyze and estimate the carrying value, then no further testing is performed for that reporting unit.impact of future taxable income, reversing temporary differences and available tax planning strategies. Uncertainties can lead to changes in the ultimate realization of deferred tax assets.
For our quantitative analysis,A liability for unrecognized tax benefits, representing the fair value ofdifference between a tax position taken or expected to be taken in a tax return and the reporting units is estimated using both an income- and market-based approach. Our income-based approach utilizes a discounted cash flow analysis based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate withbenefit recognized in the risks associated with those cash flows. The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate and other assumptions that are judgmental in nature. Changes in theseConsolidated Financial Statements, inherently requires estimates and assumptions could materially affectjudgments. A tax position is recognized only when it is more likely than not to be sustained, based purely on its technical merits after examination by the results of our tests for goodwill impairment. The market-based approach involves an analysis of market multiples of revenues and earnings to a group of comparable public companies and recent transactions, if any, involving comparable companies. While the guideline companies in the market-based valuation method have comparability to the reporting units, they may not fully reflect the market share, product portfolio and operations of the reporting units. In addition, we also consult independent valuation experts in applying these valuation
46
techniques. We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flowstaxing authority, and the market-based valuation approach.amount recognized is the benefit we believe is more likely than not to be realized upon ultimate settlement. We evaluate our tax positions as new facts and circumstances become available, making adjustments to our unrecognized tax benefits as appropriate. Uncertainties can mean the tax benefits ultimately realized differ from amounts previously recognized, with any differences recorded in Provision for income taxes.
ForOur assessment of the 2019 annual impairment test,technical merits and measurement of tax benefits associated with uncertain tax positions is subject to a high degree of judgment and estimation. Actual results may differ from our current judgments due to a variety of factors, including interpretations of law by taxing authorities that differ from our assessments and results of tax examinations. We believe we performed a qualitative analysishave adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the Card Services reporting unit and determined that it was more likely than not that there was no impairmentperiod the assessments are made or resolved, or when statutes of goodwill. We performed a quantitative analysis for the reporting units within the LoyaltyOne segment, identified as BrandLoyalty and LoyaltyOne excluding BrandLoyalty. We determined there was no impairment of goodwilllimitation on these reporting units.
potential assessments expire. As of December 31, 2019,2021, we had goodwill of approximately $954.9 million. The following table presents the December 31, 2019 goodwill by reporting unit as well as the percentage by which fair value of the reporting units exceeded carrying value as of the 2019 annual impairment test:
| | | | | | | |
|
| |
| Approximate |
| ||
Reporting Unit |
| Goodwill |
| Excess Fair Value % |
| ||
| | (in millions, except percentages) | | ||||
BrandLoyalty | | $ | 498.1 | | | ≤ 10% | |
LoyaltyOne excluding BrandLoyalty | |
| 192.8 | |
| 360 - 400% | |
Card Services | |
| 264.0 | |
| (1) | |
Total | | $ | 954.9 | | | | |
As with all assumptions, there is an inherent level of uncertainty$288 million in unrecognized tax benefits, including interest and actual results, to the extent they differ from those assumptions, could have a material impact on fair value. For example, a reductionpenalties, recorded in customer demand would impact our assumed growth rate resulting in a reduced fair value, or multiples for similar type reporting units could deteriorate due to changes in technology or a downturn in economic conditions. Potential events or circumstances could have a negative effectOther liabilities on the estimated fair value. The loss of a major customer or program could have a significant impact on the future cash flows of the reporting unit(s).
We do not currently believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to test goodwill and other intangible assets for impairment. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Income Taxes.
We account for uncertain tax positions in accordance with Accounting Standards Codification, or ASC, 740, “Income Taxes.” The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding, income tax laws and regulations change over time. Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 22, “Income Taxes,” of the Notes to Consolidated Financial Statements for additional detail on our uncertain tax positions and further information regarding ASC 740.Balance Sheet.
Recent Accounting PronouncementsRECENTLY ISSUED ACCOUNTING STANDARDS
See the “Recently Issued Accounting Standards” under Note 2, “Summary1, “Description of Business and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition, results of operations or cash flow.Statements.
Item 7A.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.
47
Interest Rate Risk. We have both fixed-rate and variable-rate debt, and are subject to interest rate risk in connection with the issuance of variable-rate debt. Our interest expense, net was $569.0 million for 2019, treating our former Epsilon segment as a discontinued operation. To manage our risk from market interest rates, we actively monitor interest rates and other interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income and cash flow. To achieve this objective, we manage our exposure to fluctuations in market interest rates through the use of fixed-rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In addition, we may enter into derivative instruments such as interest rate swaps and interest rate caps to mitigate our interest rate risk on related financial instruments or to lock the interest rate on a portion of our variable debt. We do not enter into derivative or interest rate transactions for trading or other speculative purposes.
The approach we use to quantify interest rate risk is a sensitivity analysis, which we believe best reflects the risk inherent in our business. This approach calculates the impact on pre-tax income from an instantaneous and sustained increase or decrease in interest rates of 1%. In 2019, a 1% increase or decrease in interest rates on our variable-rate debt would have resulted in a change to our interest expense of approximately $83 million. Our use of this methodology to quantify the market risk of financial instruments should not be construed as an endorsement of its accuracy or the appropriateness of the related assumptions.
Credit Risk. We are exposed to credit risk relating to the credit card loans we make to our clients’ customers. Our credit risk relates to the risk that consumers using the private label or co-brand credit cards that we issue will not repay their revolving credit card loan balances. To minimize our risk of credit card loan charge-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing. We also utilize a proprietary collection scoring algorithm to assess accounts for collections efforts if they become delinquent; after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.
Foreign Currency Exchange Rate Risk. We are exposed to fluctuations in the exchange rate between the U.S. and the Canadian dollar and between the U.S. dollar and the Euro. For the year ended December 31, 2019, an additional 10% decrease in the strength of the Canadian dollar versus the U.S. dollar and the Euro versus the U.S. dollar would have resulted in an additional decrease in pre-tax income of approximately $13 million and $3 million, respectively. Conversely, a corresponding increase in the strength of the Canadian dollar or the Euro versus the U.S. dollar would result in a comparable increase to pre-tax income in these periods.See “Risk Management” section within Item 1A.
Item 8. | Financial Statements and Supplementary Data. |
Our consolidated financial statementsConsolidated Financial Statements begin on page F-1 of this Form 10-K.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. | Controls and Procedures. |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2019, we carried out an evaluation under the supervision and2021 our management, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, ofhas evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.1934, as amended (the Exchange
60
Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019,2021, our disclosure controls and procedures are effective. Disclosure controlseffective and procedures are controls and procedures designed to ensure that the 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 requisite time periods specified in the SEC’sapplicable rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reportsit is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal controlscontrol over financial reporting areis a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted accounting principles in the United States.States of America (GAAP), and include those policies and procedures that:
● | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets; |
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Under the supervision andOur management, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation ofassessed the effectiveness of our internal control over financial reporting.reporting as of December 31, 2021. In conductingmaking this evaluation,assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework(2013). Based on this evaluation, management,those criteria and management’s assessment, with the participation of the Chief Executive Officer and Chief Financial Officer, concludedwe conclude that our internal control over financial reporting was effective as of December 31, 2019.2021.
The effectiveness of internal control over financial reporting as of December 31, 20192021 has been audited by Deloitte & Touche LLP, theour independent registered public accounting firm who also audited our consolidated financial statements. Deloitte & Touche’sConsolidated Financial Statements; their attestation report on the effectiveness of our internal control over financial reporting appears on page F-6.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.F-4.
Item 9B. | Other Information. |
None.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
Incorporated by reference to the Proxy Statement for the 20202022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2019.2021.
Item 11. | Executive Compensation. |
Incorporated by reference to the Proxy Statement for the 20202022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2019.2021.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Incorporated by reference to the Proxy Statement for the 20202022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2019.2021.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Incorporated by reference to the Proxy Statement for the 20202022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2019.2021.
Item 14. | Principal Accounting Fees and Services. |
Incorporated by reference to the Proxy Statement for the 20202022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2019.2021.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
a) | The following documents are filed as part of this Annual Report: |
(1) | Financial Statements |
(1)Financial Statements
(2) | Financial Statement Schedules. |
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
(2)Financial Statement Schedule
(3) | Exhibits. |
The following exhibits are filed as part of this Annual Report on Form 10-K or, where indicated, were previously filed and are hereby incorporated by reference.
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| | | | | | Incorporated by Reference | ||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | |
3.1 | | (a) | | Third Amended and Restated Certificate of Incorporation of the Registrant. | | 8-K | | 3.2 | | 6/10/16 |
| | | | | | | | | | |
3.2 | | (a) | | | 8-K | | 3.1 | | 4/29/19 | |
| | | | | | | | | | |
3.3 | | (a) | | | 8-K | | 3.1 | | 2/1/16 | |
| | | | | | | | | | |
4.1 | | (a) | | Specimen Certificate for shares of Common Stock of the Registrant. | | 10-Q | | 4 | | 8/8/03 |
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*4.2 | | (a) | | | | | | | | |
| | | | | | | | | | |
+10.1 | | (a) | | | 8-K | | 10.1 | | 11/24/17 | |
| | | | | | | | | | |
+10.2 | | (a) | | Alliance Data Systems Corporation 2005 Long-Term Incentive Plan. | | DEF 14A | | A | | 4/29/05 |
| | | | | | | | | | |
+10.3 | | (a) | | | 10-Q | | 10.8 | | 11/9/09 | |
| | | | | | | | | | |
+10.4 | | (a) | | Alliance Data Systems Corporation 2010 Omnibus Incentive Plan. | | DEF 14A | | A | | 4/20/10 |
| | | | | | | | | | |
+10.5 | | (a) | | Alliance Data Systems Corporation 2015 Omnibus Incentive Plan. | | DEF 14A | | B | | 4/20/15 |
| | | | | | | | | | |
+10.6 | | (a) | | | 8-K | | 10.1 | | 2/20/18 | |
| | | | | | | | | | |
+10.7 | | (a) | | | 8-K | | 10.2 | | 2/20/18 | |
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+10.8 | | (a) | | | 8-K | | 10.2 | | 2/20/19 | |
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+10.9 | | (a) | | | 8-K | | 10.1 | | 2/20/20 | |
| | | | | | | | | | |
+10.10 | | (a) | | | 8-K | | 10.2 | | 2/20/20 | |
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| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | ||||||||||
+10.10 | | (a) | | | 10-Q | | 10.6 | | 8/7/17 | |||||||||||
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+10.11 | | (a) | | | 8-K | | 10.3 | | 2/20/20 | | (a) | | | 8-K | | 10.1 | | 6/15/21 | ||
| | | | | | | | | | | | | | | | | | | | |
+10.12 | | (a) | | | 10-Q | | 10.10 | | 8/8/08 | | (a) | | Alliance Data Systems Corporation Non-Employee Director Deferred Compensation Plan. | | 8-K | | 10.1 | | 6/9/06 | |
| | | | | | | | | | | | | | | | | | | | |
+10.13 | | (a) | | | 10-K | | 10.52 | | 2/28/13 | | (a) | | Form of Alliance Data Systems Associate Confidentiality Agreement. | | 10-K | | 10.18 | | 2/27/17 | |
| | | | | | | | | | | | | | | | | | | | |
+10.14 | | (a) | | | 10-Q | | 10.6 | | 8/7/17 | | (a) | | Form of Alliance Data Systems Corporation Indemnification Agreement for Officers and Directors. | | 8-K | | 10.1 | | 6/5/15 | |
| | | | | | | | | | | | | | | | | | | | |
+10.15 | | (a) | | Alliance Data Systems Corporation Non-Employee Director Deferred Compensation Plan. | | 8-K | | 10.1 | | 6/9/06 | | (a) | | Alliance Data Systems Corporation 2015 Employee Stock Purchase Plan, effective July 1, 2015. | | DEF 14A | | C | | 4/20/15 |
| | | | | | | | | | | | | | | | | | | | |
+10.16 | | (a) | | Form of Alliance Data Systems Associate Confidentiality Agreement. | | 10-K | | 10.18 | | 2/27/17 | ||||||||||
<+10.16 | | (a) | | | 8-K | | 10.1 | | 5/12/21 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
+10.17 | | (a) | | Form of Alliance Data Systems Corporation Indemnification Agreement for Officers and Directors. | | 8-K | | 10.1 | | 6/5/15 | ||||||||||
#10.17 | | (a) | | | 10-K | | 10.26 | | 2/28/20 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
+10.18 | | (a) | | Alliance Data Systems Corporation 2015 Employee Stock Purchase Plan, effective July 1, 2015. | | DEF 14A | | C | | 4/20/15 | ||||||||||
10.18 | | (a) | | | 10-K | | 10.27 | | 2/28/20 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
+10.19 | | (a) | | LoyaltyOne, Inc. Registered Retirement Savings Plan, as amended. | | 10-Q | | 10.1 | | 5/7/10 | ||||||||||
#10.19 | | (a) | | | 10-Q | | 10.4 | | 11/4/20 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
+10.20 | | (a) | | | 10-Q | | 10.2 | | 5/7/10 | |||||||||||
>10.20 | | (a) | | | 10-Q | | 10.9 | | 8/5/21 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
+10.21 | | (a) | | LoyaltyOne, Inc. Canadian Supplemental Executive Retirement Plan, effective as of January 1, 2009. | | 10-Q | | 10.3 | | 5/7/10 | ||||||||||
| | | | | | | | | | | ||||||||||
+10.22 | | (a) | | | 8-K | | 10.1 | | 6/7/19 | |||||||||||
| | | | | | | | | | | ||||||||||
+10.23 | | (a) | | | 8-K | | 10.1 | | 1/3/20 | |||||||||||
| | | | | | | | | | | ||||||||||
10.24 | | (a) | | | S-1 | | 10.43 | | 1/13/00 | |||||||||||
| | | | | | | | | | | ||||||||||
10.21 | | (b) (c) | | | 8-K | | 4.6 | | 8/31/01 |
5264
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | ||||||||||
10.22 | | (b) (c) (d) | | | 8-K | | 4.1 | | 8/4/04 | |||||||||||
| | | | | | | | | | | ||||||||||
10.23 | | (b) (c) (d) | | | 8-K | | 4.1 | | 4/5/05 | |||||||||||
| | | | | | | | | | | ||||||||||
10.24 | | (b) (d) | | | 8-K | | 4.1 | | 6/15/07 | |||||||||||
| | | | | | | | | | | ||||||||||
10.25 | | (a) | | | S-1 | | 10.44 | | 1/13/00 | | (b) (c) (d) | | | 8-K | | 4.1 | | 10/31/07 | ||
| | | | | | | | | | | | | | | | | | | | |
*#10.26 | | (a) | | | | | | | | |||||||||||
10.26 | | (b) (d) | | | 8-K | | 4.1 | | 5/29/08 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
*10.27 | | (a) | | | | | | | | |||||||||||
10.27 | | (b) (d) | | | 8-K | | 4.2 | | 6/30/10 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
10.28 | | (b) (c) | | | 8-K | | 4.6 | | 8/31/01 | | (b) (d) | | | 8-K | | 4.1 | | 8/12/10 | ||
| | | | | | | | | | | | | | | | | | | | |
10.29 | | (b) (c) (d) | | | 8-K | | 4.1 | | 8/4/04 | | (b) (c) (d) | | | 8-K | | 4.1 | | 11/14/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.30 | | (b) (c) (d) | | | 8-K | | 4.1 | | 4/5/05 | | (b) (c) (d) | | | 8-K | | 4.1 | | 12/2/16 | ||
| | | | | | | | | | | | | | | | | | | | |
10.31 | | (b) (d) | | | 8-K | | 4.1 | | 6/15/07 | | (b) (c) (d) | | | 8-K | | 4.1 | | 8/20/18 | ||
| | | | | | | | | | | | | | | | | | | | |
10.32 | | (b) (c) (d) | | | 8-K | | 4.1 | | 10/31/07 | | (b) (c) (d) | | | 8-K | | 4.2 | | 6/16/20 | ||
| | | | | | | | | | | ||||||||||
10.33 | | (b) (d) | | | 8-K | | 4.1 | | 5/29/08 | |||||||||||
| | | | | | | | | | | ||||||||||
10.34 | | (b) (d) | | | 8-K | | 4.2 | | 6/30/10 |
5365
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | ||||||||||
10.33 | | (b) (c) (d) | | | 8-K | | 4.1 | | 10/30/20 | |||||||||||
| | | | | | | | | | | ||||||||||
10.34 | | (b) (c) | | | 8-K | | 4.7 | | 8/31/01 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
10.35 | | (b) (d) | | | 8-K | | 4.1 | | 8/12/10 | | (b) (c) | | | 8-K | | 4.3 | | 11/20/02 | ||
| | | | | | | | | | | | | | | | | | | | |
10.36 | | (b) (c) (d) | | | 8-K | | 4.1 | | 11/14/11 | | (b) (c) (d) | | | 8-K | | 4.1 | | 7/8/16 | ||
| | | | | | | | | | | | | | | | | | | | |
10.37 | | (b) (c) (d) | | | 8-K | | 4.1 | | 12/2/16 | | (b) (c) | | | 8-K | | 4.3 | | 8/31/01 | ||
| | | | | | | | | | | | | | | | | | | | |
10.38 | | (b) (c) (d) | | | 8-K | | 4.1 | | 8/20/18 | | (b) (c) | | | 8-K | | 4.2 | | 11/20/02 | ||
| | | | | | | | | | | | | | | | | | | | |
10.39 | | (b) (c) | | | 8-K | | 4.7 | | 8/31/01 | | (b) (c) (d) | | | 8-K | | 4.2 | | 8/4/04 | ||
| | | | | | | | | | | | | | | | | | | | |
10.40 | | (b) (c) | | | 8-K | | 4.3 | | 11/20/02 | | (b) (c) (d) | | | 8-K | | 4.2 | | 4/5/05 | ||
| | | | | | | | | | | | | | | | | | | | |
10.41 | | (b) (c) (d) | | | 8-K | | 4.1 | | 7/8/16 | | (b) (d) | | | 8-K | | 4.2 | | 6/15/07 | ||
| | | | | | | | | | | | | | | | | | | | |
10.42 | | (b) (c) | | | 8-K | | 4.3 | | 8/31/01 | | (b) (c) (d) | | | 8-K | | 4.2 | | 10/31/07 | ||
| | | | | | | | | | | | | | | | | | | | |
10.43 | | (b) (c) | | | 8-K | | 4.2 | | 11/20/02 | | (b) (d) | | | 8-K | | 4.4 | | 6/30/10 | ||
| | | | | | | | | | | | | | | | | | | | |
10.44 | | (b) (c) (d) | | | 8-K | | 4.2 | | 8/4/04 | |||||||||||
| | | | | | | | | | | ||||||||||
10.45 | | (b) (c) (d) | | | 8-K | | 4.2 | | 4/5/05 | |||||||||||
| | | | | | | | | | |
5466
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
10.44 | | (b) (d) | | | 8-K | | 4.3 | | 8/12/10 | |||||||||||
| | | | | | | | | | | ||||||||||
10.45 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/15/11 | |||||||||||
| | | | | | | | | | | ||||||||||
10.46 | | (b) (d) | | | 8-K | | 4.2 | | 6/15/07 | | (b) (c) (d) | | | 8-K | | 4.3 | | 11/14/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.47 | | (b) (c) (d) | | | 8-K | | 4.2 | | 10/31/07 | | (b) (c) (d) | | | 8-K | | 4.4 | | 7/8/16 | ||
| | | | | | | | | | | | | | | | | | | | |
10.48 | | (b) (d) | | | 8-K | | 4.4 | | 6/30/10 | | (b) (c) | | | 8-K | | 4.8 | | 8/31/01 | ||
| | | | | | | | | | | | | | | | | | | | |
10.49 | | (b) (d) | | | 8-K | | 4.3 | | 8/12/10 | | (b) (d) | | | 8-K | | 4.3 | | 6/30/10 | ||
| | | | | | | | | | | | | | | | | | | | |
10.50 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/15/11 | | (b) (d) | | | 8-K | | 4.2 | | 8/12/10 | ||
| | | | | | | | | | | | | | | | | | | | |
10.51 | | (b) (c) (d) | | | 8-K | | 4.3 | | 11/14/11 | | (b) (c) (d) | | | 8-K | | 4.2 | | 11/14/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.52 | | (b) (c) (d) | | | 8-K | | 4.4 | | 7/8/16 | | (b) (c) (d) | | | 8-K | | 4.2 | | 7/8/16 | ||
| | | | | | | | | | | | | | | | | | | | |
10.53 | | (b) (c) | | | 8-K | | 4.8 | | 8/31/01 | | (b) (c) (d) | | | 8-K | | 4.3 | | 6/16/20 | ||
| | | | | | | | | | | | | | | | | | | | |
10.54 | | (b) (d) | | | 8-K | | 4.3 | | 6/30/10 | | (b) (c) | | | 8-K | | 4.1 | | 8/31/01 | ||
| | | | | | | | | | | | | | | | | | | | |
10.55 | | (b) (d) | | | 8-K | | 4.2 | | 8/12/10 | | (b) (c) | | | 8-K | | 4 | | 4/22/03 | ||
| | | | | | | | | | | | | | | | | | | | |
10.56 | | (b) (c) (d) | | | 8-K | | 4.2 | | 11/14/11 | | (b) (c) | | | 8-K | | 4.2 | | 8/28/03 | ||
| | | | | | | | | | | ||||||||||
10.57 | | (b) (c) (d) | | | 8-K | | 4.2 | | 7/8/16 | |||||||||||
| | | | | | | | | | |
5567
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | ||||||||||
10.57 | | (b) (d) | | | 8-K | | 4.3 | | 6/15/07 | |||||||||||
| | | | | | | | | | | ||||||||||
10.58 | | (b) (c) | | | 8-K | | 4.1 | | 8/31/01 | | (b) (d) | | | 8-K | | 4.2 | | 5/29/08 | ||
| | | | | | | | | | | | | | | | | | | | |
10.59 | | (b) (c) | | | 8-K | | 4 | | 4/22/03 | | (b (d) | | | 8-K | | 4.1 | | 6/30/10 | ||
| | | | | | | | | | | | | | | | | | | | |
10.60 | | (b) (c) | | | 8-K | | 4.2 | | 8/28/03 | | (b) (c) (d) | | | 8-K | | 4.2 | | 2/22/13 | ||
| | | | | | | | | | | | | | | | | | | | |
10.61 | | (b) (d) | | | 8-K | | 4.3 | | 6/15/07 | | (b) (c) (d) | | | 8-K | | 4.3 | | 7/8/16 | ||
| | | | | | | | | | | | | | | | | | | | |
10.62 | | (b) (d) | | | 8-K | | 4.2 | | 5/29/08 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/16/20 | ||
| | | | | | | | | | | | | | | | | | | | |
10.63 | | (b (d) | | | 8-K | | 4.1 | | 6/30/10 | | (b) (c) (d) | | | 8-K | | 4.1 | | 7/11/17 | ||
| | | | | | | | | | | | | | | | | | | | |
10.64 | | (b) (c) (d) | | | 8-K | | 4.2 | | 2/22/13 | | (b) (c) (d) | | | 8-K | | 4.4 | | 6/16/20 | ||
| | | | | | | | | | | | | | | | | | | | |
10.65 | | (b) (c) (d) | | | 8-K | | 4.3 | | 7/8/16 | | (b) (c) (d) | | | 8-K | | 4.1 | | 5/28/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.66 | | (b) (c) (d) | | | 8-K | | 4.1 | | 7/11/17 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/24/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.67 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/26/12 | | (b) (c) (d) | | | 8-K | | 4.2 | | 6/24/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.68 | | (b) (c) (d) | | | 8-K | | 4.2 | | 6/26/12 | | (b) (c) (d) | | | 8-K | | 4.1 | | 2/21/19 | ||
| | | | | | | | | | | | | | | | | | | | |
10.69 | | (b) (c) (d) | | | 8-K | | 4.1 | | 8/25/15 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/28/19 | ||
| | | | | | | | | | | ||||||||||
10.70 | | (b) (c) (d) | | | 8-K | | 4.1 | | 7/28/16 | |||||||||||
| | | | | | | | | | |
5668
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | ||||||||||
10.70 | | (b) (c) (d) | | | 8-K | | 4.1 | | 9/20/19 | |||||||||||
| | | | | | | | | | | ||||||||||
10.71 | | (b) (c) (d) | | | 8-K | | 4.1 | | 5/24/17 | | (b) (c) | | | 8-K | | 4.4 | | 8/31/01 | ||
| | | | | | | | | | | | | | | | | | | | |
10.72 | | (b) (c) (d) | | | 8-K | | 4.1 | | 11/17/17 | | (b) (c) (d) | | | 8-K | | 4.2 | | 5/28/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.73 | | (b) (c) (d) | | | 8-K | | 4.1 | | 3/5/18 | | (b) (c) | | | 8-K | | 4.5 | | 8/31/01 | ||
| | | | | | | | | | | | | | | | | | | | |
10.74 | | (b) (c) (d) | | | 8-K | | 4.1 | | 5/4/18 | | (b) (d) | | | 8-K | | 4.1 | | 7/31/09 | ||
| | | | | | | | | | | | | | | | | | | | |
10.75 | | (b) (c) (d) | | | 8-K | | 4.1 | | 9/28/18 | | (b) (c) (d) | | | 8-K | | 99.1 | | 4/23/19 | ||
| | | | | | | | | | | | | | | | | | | | |
10.76 | | (b) (c) (d) | | | 8-K | | 4.2 | | 11/8/18 | | (b) (c) (d) | | | 8-K | | 99.1 | | 11/1/19 | ||
| | | | | | | | | | | | | | | | | | | | |
10.77 | | (b) (c) (d) | | | 8-K | | 4.1 | | 11/8/18 | | (b) (c) (d) | | | 8-K | | 99.2 | | 11/1/19 | ||
| | | | | | | | | | | | | | | | | | | | |
10.78 | | (b) (c) (d) | | | 8-K | | 4.1 | | 2/21/19 | | (b) (c) (d) | | | 8-K | | 99.1 | | 2/25/20 | ||
| | | | | | | | | | | | | | | | | | | | |
10.79 | | (b) (c) (d) | | | 8-K | | 4.1 | | 6/28/19 | | (b) (c) (d) | | | 8-K | | 99.1 | | 5/4/20 | ||
| | | | | | | | | | | | | | | | | | | | |
10.80 | | (b) (c) (d) | | | 8-K | | 4.1 | | 9/20/19 | | (b) (c) (d) | | | 10-D | | 99.2 | | 9/14/20 | ||
| | | | | | | | | | | | | | | | | | | | |
10.81 | | (b) (c) | | | 8-K | | 4.4 | | 8/31/01 | | (b) (c) (d) | | | 8-K | | 99.1 | | 1/29/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.82 | | (b) (c) | | | 8-K | | 4.5 | | 8/31/01 | | (b) (c) (d) | | | 8-K | | 99.1 | | 4/2/21 | ||
| | | | | | | | | | | ||||||||||
10.83 | | (b) (d) | | | 8-K | | 4.1 | | 7/31/09 | |||||||||||
| | | | | | | | | | |
5769
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | ||||||||||
10.83 | | (b) (c) (d) | | | 8-K | | 99.1 | | 5/3/21 | |||||||||||
| | | | | | | | | | | ||||||||||
10.84 | | (b) (c) (d) | | | 8-K | | 99.1 | | 4/23/19 | | (b) (c) (d) | | | 8-K | | 99.1 | | 9/3/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.85 | | (b) (c) (d) | | | 8-K | | 99.1 | | 11/1/19 | | (b) (c) (d) | | | 8-K | | 99.1 | | 1/6/22 | ||
| | | | | | | | | | | | | | | | | | | | |
10.86 | | (b) (c) (d) | | | 8-K | | 99.2 | | 11/1/19 | | (b) (c) (d) | | | 8-K | | 10.1 | | 7/8/16 | ||
| | | | | | | | | | | | | | | | | | | | |
10.87 | | (b) (c) (d) | | | 8-K | | 10.1 | | 7/8/16 | | (a) | | | 10-Q | | 10.5 | | 11/7/08 | ||
| | | | | | | | | | | | | | | | | | | | |
10.88 | | (a) | | | 10-Q | | 10.5 | | 11/7/08 | | (a) | | | 10-K | | 10.94 | | 3/2/09 | ||
| | | | | | | | | | | | | | | | | | | | |
10.89 | | (a) | | | 10-K | | 10.94 | | 3/2/09 | | (a) | | | 10-K | | 10.127 | | 2/28/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.90 | | (a) | | | 10-K | | 10.127 | | 2/28/11 | | (a) | | | 10-K | | 10.128 | | 2/28/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.91 | | (a) | | | 10-K | | 10.128 | | 2/28/11 | | (a) | | | 10-Q | | 10.4 | | 11/7/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.92 | | (a) | | | 10-Q | | 10.4 | | 11/7/11 | | (a) | | | 10-Q | | 10.6 | | 11/7/08 | ||
| | | | | | | | | | | | | | | | | | | | |
10.93 | | (a) | | | 10-Q | | 10.6 | | 11/7/08 | | (a) | | | 10-Q | | 10.7 | | 11/7/08 | ||
| | | | | | | | | | | | | | | | | | | | |
10.94 | | (a) | | | 10-Q | | 10.7 | | 11/7/08 | | (a) | | | 10-Q | | 10.8 | | 11/7/08 | ||
| | | | | | | | | | | | | | | | | | | | |
10.95 | | (a) | | | 10-Q | | 10.8 | | 11/7/08 | |||||||||||
| | | | | | | | | | | ||||||||||
10.96 | | (a) | | | 10-Q | | 10.9 | | 11/7/08 |
5870
| | | | | | | | | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Incorporated by Reference | | | | | | Incorporated by Reference | ||||||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
10.95 | | (a) | | | 10-Q | | 10.9 | | 11/7/08 | |||||||||||
| | | | | | | | | | | ||||||||||
10.96 | | (a) | | | 10-Q | | 10.9 | | 5/7/10 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
10.97 | | (a) | | | 10-Q | | 10.9 | | 5/7/10 | | (a) | | | 10-Q | | 10.3 | | 11/7/11 | ||
| | | | | | | | | | | | | | | | | | | | |
10.98 | | (a) | | | 10-Q | | 10.3 | | 11/7/11 | | (a) | | | 10-K | | 10.94 | | 2/27/17 | ||
| | | | | | | | | | | | | | | | | | | | |
10.99 | | (a) | | | 10-K | | 10.94 | | 2/27/17 | | (a) | | | 10-K | | 10.96 | | 2/27/18 | ||
| | | | | | | | | | | | | | | | | | | | |
10.100 | | (a) | | | 10-K | | 10.96 | | 2/27/18 | | (a) | | | 10-K | | 10.105 | | 2/26/21 | ||
| | | | | | | | | | | | | | | | | | | | |
10.101 | | (a) | | | 10-K | | 10.134 | | 2/28/11 | | (a) | | | 10-K | | 10.134 | | 2/28/11 | ||
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10.102 | | (a) | | | 10-Q | | 10.3 | | 11/7/08 | | (a) | | | 10-Q | | 10.3 | | 11/7/08 | ||
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10.103 | | (a) | | | 10-Q | | 10.11 | | 8/9/10 | | (a) | | | 10-Q | | 10.11 | | 8/9/10 | ||
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10.104 | | (a) | | | 10-Q | | 10.4 | | 11/7/08 | | (a) | | | 10-Q | | 10.4 | | 11/7/08 | ||
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10.105 | | (a) | | | 10-Q | | 10.12 | | 8/9/10 | | (a) | | | 10-Q | | 10.12 | | 8/9/10 | ||
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10.106 | | (a) | | | 10-K | | 10.104 | | 2/27/18 | | (a) | | | 10-K | | 10.104 | | 2/27/18 | ||
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10.107 | | (a) | | | 10-K | | 10.129 | | 2/27/15 | |||||||||||
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10.108 | | (a) | | | 10-Q | | 10.8 | | 8/7/17 |
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10.107 | | (a) | | | 10-K | | 10.129 | | 2/27/15 | |||||||||||
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10.108 | | (a) | | | 10-Q | | 10.8 | | 8/7/17 | |||||||||||
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10.109 | | (a) | | | 10-K | | 10.109 | | 2/27/18 | | (a) | | | 10-K | | 10.109 | | 2/27/18 | ||
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10.110 | | (a) | | | 10-K | | 10.110 | | 2/26/19 | | (a) | | | 10-K | | 10.110 | | 2/26/19 | ||
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10.111 | | (a) | | | 10-K | | 10.111 | | 2/26/19 | | (a) | | | 10-K | | 10.111 | | 2/26/19 | ||
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10.112 | | (a) | | | 10-K | | 10.112 | | 2/26/19 | | (a) | | | 10-K | | 10.112 | | 2/26/19 | ||
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10.113 | | (a) | | | 10-Q | | 10.7 | | 8/7/17 | | (a) | | | 10-K | | 10.118 | | 2/26/21 | ||
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10.114 | | (a) | | | 10-Q | | 10.4 | | 11/8/17 | | (a) | | | 10-K | | 10.119 | | 2/26/21 | ||
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10.115 | | (a) | | | 10-K | | 10.115 | | 2/26/19 | | (a) | | | 10-Q | | 10.7 | | 8/7/17 | ||
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10.116 | | (a) | | | 10-K | | 10.102 | | 2/27/17 | | (a) | | | 10-Q | | 10.4 | | 11/8/17 | ||
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10.117 | | (a) | | | 10-Q | | 10.5 | | 11/8/17 | | (a) | | | 10-K | | 10.115 | | 2/26/19 | ||
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10.118 | | (a) | | | 10-Q | | 10.3 | | 11/6/18 | |||||||||||
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10.119 | | (a) | | | 8-K | | 10.1 | | 6/15/16 |
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Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | | Filer | | Description | | Form | | Exhibit | | Filing Date |
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10.118 | | (a) | | | 10-K | | 10.123 | | 2/26/21 | |||||||||||
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10.119 | | (a) | | | 10-K | | 10.124 | | 2/26/21 | |||||||||||
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10.120 | | (a) | | | 8-K | | 10.1 | | 6/19/17 | | (a) | | | 10-K | | 10.102 | | 2/27/17 | ||
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10.121 | | (a) | | | 8-K | | 10.2 | | 6/19/17 | | (a) | | | 10-Q | | 10.5 | | 11/8/17 | ||
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10.122 | | (a) | | | 10-Q | | 10.2 | | 8/7/18 | | (a) | | | 10-Q | | 10.3 | | 11/6/18 | ||
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10.123 | | (a) | | | 10-Q | | 10.7 | | 5/6/19 | | (a) | | | 8-K | | 10.1 | | 6/19/17 | ||
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10.124 | | (a) | | | 8-K | | 10.2 | | 12/23/19 | | (a) | | | 8-K | | 10.2 | | 6/19/17 | ||
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*10.125 | | (a) | | | | | | | | |||||||||||
10.125 | | (a) | | | 10-Q | | 10.2 | | 8/7/18 | |||||||||||
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10.126 | | (a) | | | 8-K | | 4.1 | | 12/23/19 | | (a) | | | 10-Q | | 10.7 | | 5/6/19 | ||
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#10.127 | | (a) | | | 8-K | | 2.1 | | 4/15/19 | |||||||||||
10.127 | | (a) | | | 8-K | | 10.2 | | 12/23/19 | |||||||||||
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*21 | | (a) | | | | | | | | |||||||||||
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*31.1 | | (a) | | | | | | | | |||||||||||
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| | | | | | Incorporated by Reference | ||||
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
10.128 | | (a) | | | 10-K | | 10.125 | | 2/28/20 | |
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10.129 | | (a) | | | 8-K | | 10.2 | | 9/23/20 | |
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10.130 | | (a) | | | 8-K | | 10.1 | | 7/14/21 | |
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10.131 | | (a) | | | 8-K | | 4.1 | | 12/23/19 | |
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10.132 | | (a) | | | 10-Q | | 10.4 | | 11/3/21 | |
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˄10.133 | | (a) | | | 8-K | | 4.1 | | 9/23/20 | |
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10.134 | | (a) | | | 10-Q | | 10.5 | | 11/3/21 | |
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Ù10.135 | | (a) | | | 8-K | | 2.1 | | 11/8/21 | |
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Ù10.136 | | (a) | | | 8-K | | 10.1 | | 11/8/21 | |
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Ù10.137 | | (a) | | | 8-K | | 10.2 | | 11/8/21 | |
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Ù10.138 | | (a) | | | 8-K | | 10.3 | | 11/8/21 | |
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10.139 | | (a) | | | 8-K | | 10.1 | | 12/7/21 | |
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Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
10.140 | | (a) | | | 8-K | | 10.4 | | 11/8/21 | |
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*21 | | (a) | | | | | | | | |
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*23.1 | | (a) | | | | | | | | |
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*31.1 | | (a) | | | | | | | | |
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*31.2 | | (a) | | | | | | | | |
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*32.1 | | (a) | | | | | | | | |
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*32.2 | | (a) | | | | | | | | |
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*101 | | (a) | | The following financial information from Alliance Data Systems Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. | | | | | | |
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*104 | | (a) | | Cover Page Interactive Data File (formatted as Inline XBRL 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. |
˄ Certain exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Alliance Data hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the U.S. Securities and Exchange Commission.
< 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 considered confidential non-public personal information. 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.
(a) | Alliance Data Systems Corporation |
75
(b) | WFN Credit Company |
(c) | World Financial Network Credit Card Master Trust |
(d) | World Financial Network Credit Card Master Note Trust |
Item 16. Form 10-K Summary.
None.
6276
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
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| Page |
ALLIANCE DATA SYSTEMS CORPORATION AND SUBSIDIARIES | | |
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 34) | | F-2 |
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Consolidated Statements of Income for the years ended December 31, | |
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Consolidated Balance Sheets as of December 31, 2021 and 2020 | | F-7 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Alliance Data Systems Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alliance Data Systems Corporation and subsidiaries (the “Company”"Company") as of December 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2021 and the related notes and the schedule listed in the index at Item 15 (collectively referred to as the “financial statements”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2020,25, 2022, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 21 to the financial statements, the Company adopted Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers,”ASC 326, Measurement of Credit Losses on Financial Instruments (“CECL”), using the modified retrospective approach on January 1, 2018, and adopted ASC 842, “Leases,” using the modified retrospective approach on January 1, 2019.2020.
Emphasis of a Matter
As discussed in Note 122 to the financial statements, the Company’s financial statements have been presented with its former EpsilonLoyaltyOne segment as a discontinued operation. Further, the Company has adjusted the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.”
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
it relates.
F-2
Allowance for Loan LossCredit Losses — Refer to Notes 21 and 7 to the financial statements
Critical Audit Matter Description
Management’s methodology for assessing the appropriateness of the allowance for loan loss (ALL) consists of a migration analysis of delinquent and current credit card and loan receivables, along with analyzing and considering several other relevant internal and external factors. The estimate of the ALL covers uncollectible principal as well as unpaid interest and fees. Migration analysis is the technique used to estimate the future likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off based on historical performance. In evaluating the ALL 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. Based on management’s review of these relevant factors, they evaluate the reasonableness of the ALL on an ongoing basis and whether any changes need to be made to the ALL methodology.
Given the significant judgments made by management when developing the migration analysis and considering the additional relevant factors, performing audit procedures to evaluate the reasonableness of the estimated ALL required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the ALL included the following, among others:
Goodwill — BrandLoyalty Reporting Unit — Refer to Notes 2 and 134 to the financial statements
Critical Audit Matter Description
Effective January 1, 2020, the Company adopted ASC 326 on a modified retrospective approach and applied a Current Expected Credit Loss (“CECL”) model to determine its allowance for credit losses. Under CECL, the allowance for credit losses is an estimate of expected credit losses, measured over the estimated life of its credit card and other loans 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 other loans, as well as the prevailing economic conditions and forecasts utilized.
In estimating its allowance for credit losses, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. The Company tests goodwillconsiders the forecast used to be reasonable and supportable over the estimated life of the BrandLoyalty reporting unitcredit card and other loans, with no reversion period. In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for impairment annually,certain factors such as of July 31, or when events and circumstances changeCompany-specific risks, changes in current economic conditions that would indicate the carrying amount may not be recoverable. Thecaptured in the quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects the Company’s evaluationbest estimate of goodwillcurrent expected credit losses. At December 31, 2021, the total allowance for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company estimated the fair value of its reporting units using both an income and market-based approach. The Company’s income approach utilizes a discounted cash flow model based on management’s estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate, and other assumptions that are judgmental in nature. The market-based approach involves an analysis of market multiples of revenues and earnings to a group of comparable public companies and recent transactions, if any, involving comparable companies. The fair value of the BrandLoyalty reporting unit exceeded its carrying value as of the measurement date by less than 10% and, therefore, no impairmentcredit losses was recognized.$1.8 billion.
F-3
Given the significant judgments made by management in estimating its allowance for credit losses related to estimate the fair value, and the difference between the fair value over carrying value of the BrandLoyalty reporting unit,credit card loans, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions relatedthe estimated allowance for credit losses, including procedures to evaluate the forecasts of revenue growth and profit performance, the selection of the discount rate, and the selection of a market multiplequalitative adjustments, required a high degree of auditor judgment and an increased extent of effort, including involvement ofthe need to involve our fair valuecredit modeling specialists.
How the Critical Audit Matter Was Addressed in the Audit
● | We tested the design and operating effectiveness of management’s controls over |
● | We evaluated |
● | We tested the completeness and accuracy of the historical data used in management’s models. |
● | With assistance from credit modeling specialists, we evaluated whether the model is suitable for determining the estimate, which included understanding the model methodology and logic, whether the selected method for estimating credit losses is appropriate and whether the significant assumptions were reasonable. |
● | We evaluated the reasonableness of |
-Historical results,
-Internal communications to management and the Board of Directors,
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● | We evaluated whether judgments have been applied consistently to the |
-Testing the source information underlying the determination of both the discount rate and the market multiple,
-Testing the mathematical accuracy of the calculations,
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Disclosure of ASU 2016-13 Adoption — Refer to Note 2 to the financial statements
Critical Audit Matter Description
On January 1, 2020, the Company adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which introduces a forward-looking “expected loss” model (the “Current Expected Credit Losses (CECL)” model) to estimate credit losses over the remaining expected life of the Company’s loan portfolio upon adoption, rather than the incurred loss model under current accounting principles generally accepted in the United States of America. 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 formed a cross-functional implementation team to oversee the implementation of the standard, the loss forecasting models, and the processes and controls necessary to satisfy the requirements of ASU 2016-13. Management expects an increase in the ALL at adoption of $644 million, which will be recorded through a cumulative-effect adjustment to retained earnings—net of taxes.
Given the estimation of credit losses significantly changes under the CECL model due to the application of new accounting policies, the use of new subjective judgments, and changes made to the loss forecasting models, performing audit procedures to evaluate the disclosure of ASU 2016-13 adoption involved a high degree of auditor judgment and required significant effort, including the need to involve our credit-modeling specialists.
F-4
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the disclosure of ASU 2016-13 adoption included the following, among others:
● | We |
/s/ Deloitte & Touche LLP
Dallas, Texas
February 28, 202025, 2022
We have served as the Company’sCompany's auditor since 1998.
F-5F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Alliance Data Systems Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Alliance Data Systems Corporation and subsidiaries (the “Company”) as of December 31, 2019,2021, based on criteria established in Internal Control—Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019,2021, of the Company and our report dated February 28, 2020,25, 2022 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of new accounting standardsthe Accounting Standards Codification ASC 326, Measurement of Credit Losses on Financial Instruments and an emphasis of matter paragraph regarding the discontinued operations presentation.and adjustments related to the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.”
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 28, 2020
F-6
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | |
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| | December 31, | ||||
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| 2019 |
| 2018 | ||
| | (in millions, except per share amounts) | ||||
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 3,874.4 | | $ | 3,817.4 |
Accounts receivable, net, less allowance for doubtful accounts ($3.4 and $0.4 at December 31, 2019 and December 31, 2018, respectively) | |
| 451.1 | |
| 404.0 |
Credit card and loan receivables: | | | | | | |
Credit card receivables – restricted for securitization investors | |
| 13,504.2 | |
| 13,418.3 |
Other credit card and loan receivables | |
| 5,958.9 | |
| 4,436.7 |
Total credit card and loan receivables | |
| 19,463.1 | |
| 17,855.0 |
Allowance for loan loss | |
| (1,171.1) | |
| (1,038.3) |
Credit card and loan receivables, net | |
| 18,292.0 | |
| 16,816.7 |
Credit card receivables held for sale | | | 408.0 | | | 1,951.6 |
Inventories, net | | | 218.0 | | | 248.0 |
Other current assets | |
| 268.4 | |
| 293.2 |
Redemption settlement assets, restricted | |
| 600.8 | |
| 558.6 |
Current assets of discontinued operations | | | — | | | 622.2 |
Total current assets | |
| 24,112.7 | |
| 24,711.7 |
Property and equipment, net | |
| 282.3 | |
| 288.2 |
Right of use assets - operating | | | 264.3 | | | — |
Deferred tax asset, net | |
| 45.2 | |
| 44.0 |
Intangible assets, net | |
| 153.3 | |
| 217.4 |
Goodwill | |
| 954.9 | |
| 954.8 |
Other non-current assets | |
| 682.1 | |
| 636.4 |
Long-term assets of discontinued operations | | | — | | | 3,535.2 |
Total assets | | $ | 26,494.8 | | $ | 30,387.7 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Accounts payable | | $ | 300.8 | | $ | 486.2 |
Accrued expenses | |
| 327.8 | |
| 322.2 |
Current operating lease liabilities | | | 22.6 | | | — |
Current portion of deposits | |
| 6,942.4 | |
| 6,537.7 |
Current portion of non-recourse borrowings of consolidated securitization entities | |
| 3,030.8 | |
| 2,717.6 |
Current portion of long-term and other debt | |
| 101.4 | |
| 138.9 |
Other current liabilities | |
| 338.3 | |
| 291.8 |
Deferred revenue | |
| 807.9 | |
| 766.1 |
Current liabilities of discontinued operations | | | — | | | 223.5 |
Total current liabilities | |
| 11,872.0 | |
| 11,484.0 |
Deferred revenue | |
| 114.1 | |
| 109.2 |
Deferred tax liability, net | |
| 80.0 | |
| 256.5 |
Long-term operating lease liabilities | | | 291.7 | | | — |
Deposits | |
| 5,209.3 | |
| 5,256.0 |
Non-recourse borrowings of consolidated securitization entities | |
| 4,253.2 | |
| 4,934.1 |
Long-term and other debt | |
| 2,748.5 | |
| 5,586.5 |
Other liabilities | |
| 337.7 | |
| 392.4 |
Long-term liabilities of discontinued operations | | | — | | | 36.9 |
Total liabilities | |
| 24,906.5 | |
| 28,055.6 |
Commitments and contingencies (Note 18) | | | | | | |
Stockholders’ equity: | | | | | | |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 115.0 shares and 113.0 shares at December 31, 2019 and December 31, 2018, respectively | |
| 1.1 | |
| 1.1 |
Additional paid-in capital | |
| 3,257.7 | |
| 3,172.4 |
Treasury stock, at cost, 67.4 shares and 59.6 shares at December 31, 2019 and December 31, 2018, respectively | |
| (6,733.9) | |
| (5,715.7) |
Retained earnings | |
| 5,163.3 | |
| 5,012.4 |
Accumulated other comprehensive loss | |
| (99.9) | |
| (138.1) |
Total stockholders’ equity | |
| 1,588.3 | |
| 2,332.1 |
Total liabilities and stockholders' equity | | $ | 26,494.8 | | $ | 30,387.7 |
See accompanying notes to consolidated financial statements.25, 2022
F-7F-4
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions, except per share amounts) | |||||||
Revenues | | | | | | | | | |
Services | | $ | 215.5 | | $ | 295.4 | | $ | 367.5 |
Redemption, net | |
| 637.3 | |
| 676.3 | |
| 935.3 |
Finance charges, net | |
| 4,728.5 | |
| 4,694.9 | |
| 4,171.9 |
Total revenue | |
| 5,581.3 | |
| 5,666.6 | |
| 5,474.7 |
Operating expenses | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | |
| 2,687.8 | |
| 2,537.2 | |
| 2,469.5 |
Provision for loan loss | | | 1,187.5 | | | 1,016.0 | | | 1,140.1 |
General and administrative | |
| 150.6 | |
| 162.5 | |
| 159.3 |
Depreciation and other amortization | |
| 79.9 | |
| 80.7 | |
| 73.7 |
Amortization of purchased intangibles | |
| 96.2 | |
| 112.9 | |
| 114.2 |
Loss on extinguishment of debt | |
| 71.9 | |
| — | |
| — |
Total operating expenses | |
| 4,273.9 | |
| 3,909.3 | |
| 3,956.8 |
Operating income | |
| 1,307.4 | |
| 1,757.3 | |
| 1,517.9 |
Interest expense | | | | | | | | | |
Securitization funding costs | |
| 213.4 | |
| 220.2 | |
| 156.6 |
Interest expense on deposits | |
| 225.6 | |
| 165.7 | |
| 125.1 |
Interest expense on long-term and other debt, net | |
| 130.0 | |
| 156.4 | |
| 173.7 |
Total interest expense, net | |
| 569.0 | |
| 542.3 | |
| 455.4 |
Income from continuing operations before income taxes | | | 738.4 | | | 1,215.0 | | | 1,062.5 |
Provision for income taxes | |
| 165.8 | |
| 269.5 | |
| 293.3 |
Income from continuing operations | | | 572.6 | | | 945.5 | | | 769.2 |
(Loss) income from discontinued operations, net of taxes | |
| (294.6) | |
| 17.6 | |
| 19.5 |
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 |
| | | | | | | | | |
Basic income (loss) per share (Note 4): | | | | | | | | | |
Income from continuing operations | | $ | 11.25 | | $ | 17.24 | | $ | 13.82 |
(Loss) income from discontinued operations | | $ | (5.89) | | $ | 0.32 | | $ | 0.35 |
Net income per share | | $ | 5.36 | | $ | 17.56 | | $ | 14.17 |
| | | | | | | | | |
Diluted income (loss) per share (Note 4): | | | | | | | | | |
Income from continuing operations | | $ | 11.24 | | $ | 17.17 | | $ | 13.75 |
(Loss) income from discontinued operations | | $ | (5.78) | | $ | 0.32 | | $ | 0.35 |
Net income per share | | $ | 5.46 | | $ | 17.49 | | $ | 14.10 |
| | | | | | | | | |
Weighted average shares (Note 4): | | | | | | | | | |
Basic | |
| 50.0 | |
| 54.9 | |
| 55.7 |
Diluted | |
| 50.9 | |
| 55.1 | |
| 55.9 |
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions, except per share amounts) | |||||||
Interest income | | | | | | | | | |
Interest and fees on loans | | $ | 3,861 | | $ | 3,931 | | $ | 4,729 |
Interest on cash and investment securities | |
| 7 | |
| 21 | |
| 98 |
Total interest income | |
| 3,868 | |
| 3,952 | |
| 4,827 |
Interest expense | | | | | | | | | |
Interest on deposits | |
| 167 | |
| 238 | |
| 307 |
Interest on borrowings | |
| 216 | |
| 261 | |
| 331 |
Total interest expense | | | 383 | | | 499 | | | 638 |
Net interest income | | | 3,485 | | | 3,453 | | | 4,189 |
Non-interest income | | | | | | | | | |
Interchange revenue, net of retailer share arrangements | | | (369) | | | (332) | | | (358) |
Other | | | 156 | | | 177 | | | 219 |
Total non-interest income | | | (213) | | | (155) | | | (139) |
Total net interest and non-interest income | | | 3,272 | | | 3,298 | | | 4,050 |
Provision for credit losses | | | 544 | | | 1,266 | | | 1,188 |
Total net interest and non-interest income, after provision for credit losses | | | 2,728 | | | 2,032 | | | 2,862 |
Non-interest expenses | | | | | | | | | |
Employee compensation and benefits | | | 671 | | | 609 | | | 721 |
Card and processing expenses | | | 323 | | | 396 | | | 479 |
Information processing and communication | | | 216 | | | 191 | | | 187 |
Marketing expenses | | | 160 | | | 143 | | | 205 |
Depreciation and amortization | |
| 92 | |
| 106 | |
| 96 |
Other | | | 222 | | | 286 | | | 512 |
Total non-interest expenses | | | 1,684 | | | 1,731 | | | 2,200 |
Income from continuing operations before income taxes | | | 1,044 | | | 301 | | | 662 |
Provision for income taxes | |
| 247 | |
| 93 | |
| 156 |
Income from continuing operations | | | 797 | | | 208 | | | 506 |
Income (loss) from discontinued operations, net of income taxes | |
| 4 | |
| 6 | |
| (228) |
Net income | | $ | 801 | | $ | 214 | | $ | 278 |
| | | | | | | | | |
Basic income per share (Note 20): | | | | | | | | | |
Income from continuing operations | | $ | 16.02 | | $ | 4.36 | | $ | 9.94 |
Income (loss) from discontinued operations | | $ | 0.07 | | $ | 0.11 | | $ | (4.56) |
Net income per share | | $ | 16.09 | | $ | 4.47 | | $ | 5.38 |
| | | | | | | | | |
Diluted income per share (Note 20): | | | | | | | | | |
Income from continuing operations | | $ | 15.95 | | $ | 4.35 | | $ | 9.94 |
Income (loss) from discontinued operations | | $ | 0.07 | | $ | 0.11 | | $ | (4.48) |
Net income per share | | $ | 16.02 | | $ | 4.46 | | $ | 5.46 |
| | | | | | | | | |
Weighted average shares (Note 20): | | | | | | | | | |
Basic | |
| 49.7 | |
| 47.8 | |
| 50.0 |
Diluted | |
| 50.0 | |
| 47.9 | |
| 50.9 |
See accompanying notesNotes to consolidated financial statements.
Consolidated Financial Statements.
F-8F-5
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 |
| | | | | | | | | |
Other comprehensive income: | | | | | | | | | |
Unrealized gain (loss) on securities available-for-sale | | | 15.5 | | | (3.1) | | | (7.3) |
Tax benefit (expense) | | | (2.3) | | | 1.1 | | | 0.2 |
Unrealized gain (loss) on securities available-for-sale, net of tax | |
| 13.2 | |
| (2.0) | |
| (7.1) |
| | | | | | | | | |
Unrealized gain (loss) on cash flow hedges | | | 0.1 | | | (0.1) | | | (0.7) |
Tax benefit | | | — | | | — | | | 0.2 |
Unrealized gain (loss) on cash flow hedges, net of tax | | | 0.1 | | | (0.1) | | | (0.5) |
| | | | | | | | | |
Unrealized gain (loss) on net investment hedge | | | 6.5 | | | 39.1 | | | (72.3) |
Tax benefit (expense) | | | (1.6) | | | (9.5) | | | 26.2 |
Unrealized gain (loss) on net investment hedge, net of tax | | | 4.9 | | | 29.6 | | | (46.1) |
| | | | | | | | | |
Foreign currency translation adjustments (inclusive of deconsolidation of $26.8 million related to sale of business for the year ended December 31, 2019) | |
| 20.0 | |
| (25.4) | |
| 64.2 |
| | | | | | | | | |
Other comprehensive income, net of tax | |
| 38.2 | |
| 2.1 | |
| 10.5 |
| | | | | | | | | |
Total comprehensive income, net of tax | | $ | 316.2 | | $ | 965.2 | | $ | 799.2 |
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Net income | | $ | 801 | | $ | 214 | | $ | 278 |
| | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | |
Unrealized (loss) gain on available-for-sale securities | | | (24) | | | 22 | | | 15 |
Tax benefit (expense) | | | 2 | | | (1) | | | (2) |
Unrealized (loss) gain on available-for-sale securities, net of tax | |
| (22) | |
| 21 | |
| 13 |
| | | | | | | | | |
Unrealized gain (loss) on cash flow hedges | | | 1 | | | (1) | | | — |
Tax benefit (expense) | | | — | | | — | | | — |
Unrealized gain (loss) on cash flow hedges, net of tax | | | 1 | | | (1) | | | — |
| | | | | | | | | |
Unrealized gain on net investment hedge | | | 20 | | | — | | | 7 |
Tax expense | | | (13) | | | — | | | (2) |
Unrealized gain on net investment hedge, net of tax | | | 7 | | | — | | | 5 |
| | | | | | | | | |
Foreign currency translation adjustments (inclusive of deconsolidation of $54 million, $4 million and $27 million for the years ended December 31, 2021, 2020 and 2019, respectively, related to the disposition of businesses) | |
| 17 | |
| 75 | |
| 20 |
| | | | | | | | | |
Other comprehensive income, net of tax | |
| 3 | |
| 95 | |
| 38 |
| | | | | | | | | |
Total comprehensive income, net of tax | | $ | 804 | | $ | 309 | | $ | 316 |
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
F-9F-6
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in millions, except per share amounts) | ||||
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 3,046 | | $ | 2,796 |
Credit card and other loans: | | | | | | |
Total credit card and other loans (includes loans available to settle obligations of consolidated variable interest entities: 2021, $11,215; 2020, $11,208) | |
| 17,399 | |
| 16,784 |
Allowance for credit losses | |
| (1,832) | |
| (2,008) |
Credit card and other loans, net | |
| 15,567 | |
| 14,776 |
Available-for-sale securities | | | 239 | | | 225 |
Property and equipment, net | |
| 215 | |
| 213 |
Goodwill and intangible assets, net | |
| 687 | |
| 711 |
Other assets | |
| 1,992 | |
| 1,363 |
Assets of discontinued operations | | | — | | | 2,463 |
Total assets | | $ | 21,746 | | $ | 22,547 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Deposits | | $ | 11,027 | | $ | 9,793 |
Debt issued by consolidated variable interest entities | |
| 5,453 | |
| 5,710 |
Long-term and other debt | |
| 1,986 | |
| 2,806 |
Other liabilities | |
| 1,194 | |
| 1,359 |
Liabilities of discontinued operations | | | — | | | 1,357 |
Total liabilities | |
| 19,660 | |
| 21,025 |
Commitments and contingencies (Note 15) | | | | | | |
Stockholders’ equity: | | | | | | |
Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 49.9 million and 117.1 million shares at December 31, 2021 and December 31, 2020, respectively | |
| 1 | |
| 1 |
Additional paid-in capital | |
| 2,174 | |
| 3,427 |
Treasury stock, at cost, no shares and 67.4 million shares at December 31, 2021 and December 31, 2020, respectively | |
| — | |
| (6,733) |
(Accumulated deficit) retained earnings | |
| (87) | |
| 4,832 |
Accumulated other comprehensive loss | |
| (2) | |
| (5) |
Total stockholders’ equity | |
| 2,086 | |
| 1,522 |
Total liabilities and stockholders’ equity | | $ | 21,746 | | $ | 22,547 |
See Notes to Consolidated Financial Statements.
F-7
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | |||||
| | | | | | | | | | | | Additional | | | | | | Other | | Total | |||||
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | |||||||||||
|
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||
| | (in millions) | |||||||||||||||||||||||
January 1, 2017 |
| 112.5 | | $ | 1.1 | | — | | $ | — | | $ | 3,046.1 | | $ | (4,733.1) | | $ | 3,494.8 | | $ | (150.7) | | $ | 1,658.2 |
Net income |
| — | | | — | | — | | | — | | | — | | | — | | | 788.7 | | | — | |
| 788.7 |
Other comprehensive income |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | 10.5 | | | 10.5 |
Stock-based compensation |
| — | | | — | | — | | | — | | | 75.1 | | | — | | | — | | | — | | | 75.1 |
Repurchases of common stock |
| — | | | — | | — | | | — | | | (14.3) | | | (539.4) | | | — | | | — | | | (553.7) |
Dividends and dividend equivalent rights declared ($0.52 per common share) |
| — | | | — | | — | | | — | | | — | | | — | | | (116.4) | | | — | | | (116.4) |
Other | | 0.3 | | | — | | — | | | — | | | (7.1) | | | — | | | — | | | — | | | (7.1) |
December 31, 2017 | | 112.8 | | $ | 1.1 | | — | | $ | — | | $ | 3,099.8 | | $ | (5,272.5) | | $ | 4,167.1 | | $ | (140.2) | | $ | 1,855.3 |
Net income |
| — | | | — | | — | | | — | | | — | | | — | | | 963.1 | | | — | | | 963.1 |
Other comprehensive income |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | 2.1 | |
| 2.1 |
Stock-based compensation |
| — | | | — | | — | | | — | | | 80.8 | | | — | | | — | | | — | | | 80.8 |
Repurchases of common stock |
| — | | | — | | — | | | — | | | — | | | (443.2) | | | — | | | — | | | (443.2) |
Dividends and dividend equivalent rights declared ($0.57 per common share) |
| — | | | — | | — | | | — | | | — | | | — | | | (125.9) | | | — | | | (125.9) |
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 | | 0.2 | | | — | | — | | | — | | | (8.2) | | | — | | | — | | | — | | | (8.2) |
December 31, 2018 | | 113.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,172.4 | | $ | (5,715.7) | | $ | 5,012.4 | | $ | (138.1) | | $ | 2,332.1 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 278.0 | | | — | | | 278.0 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 38.2 | | | 38.2 |
Stock-based compensation | | — | | | — | | — | | | — | | | 54.5 | | | — | | | — | | | — | | | 54.5 |
Issuance of preferred stock | | — | | | — | | 0.2 | | | — | | | 42.1 | | | (42.1) | | | — | | | — | | | — |
Conversion of preferred stock to common stock | | 1.5 | | | — | | (0.2) | | | — | | | — | | | — | | | — | | | — | | | — |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (976.1) | | | — | | | — | | | (976.1) |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (127.1) | | | — | | | (127.1) |
Other | | 0.5 | | | — | | — | | | — | | | (11.3) | | | — | | | — | | | — | | | (11.3) |
December 31, 2019 | | 115.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,257.7 | | $ | (6,733.9) | | $ | 5,163.3 | | $ | (99.9) | | $ | 1,588.3 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | (Accumulated | | Accumulated | | | |||||
| | | | | | | | | | | | Additional | | | | Deficit) | | Other | | Total | |||||
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | |||||||||||
|
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | |||||||
| | (in millions) | |||||||||||||||||||||||
January 1, 2019 |
| 113.0 | | $ | 1 | | — | | $ | — | | $ | 3,172 | | $ | (5,715) | | $ | 5,012 | | $ | (138) | | $ | 2,332 |
Net income |
| — | | | — | | — | | | — | | | — | | | — | | | 278 | | | — | | | 278 |
Other comprehensive income |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | 38 | | | 38 |
Stock-based compensation |
| — | | | — | | — | | | — | | | 55 | | | — | | | — | | | — | | | 55 |
Issuance of preferred stock | | — | | | — | | 0.2 | | | — | | | 42 | | | (42) | | | — | | | — | | | — |
Conversion of preferred stock to common stock | | 1.5 | | | — | | (0.2) | | | — | | | — | | | — | | | — | | | — | | | — |
Repurchases of common stock |
| — | | | — | | — | | | — | | | — | | | (976) | | | — | | | — | | | (976) |
Dividends and dividend equivalent rights declared ($2.52 per common share) |
| — | | | — | | — | | | — | | | — | | | — | | | (127) | | | — | | | (127) |
Issuance of shares to employees, net of shares withheld for employee taxes | | 0.5 | | | — | | — | | | — | | | (11) | | | — | | | — | | | — | | | (11) |
December 31, 2019 | | 115.0 | | $ | 1 | | — | | $ | — | | $ | 3,258 | | $ | (6,733) | | $ | 5,163 | | $ | (100) | | $ | 1,589 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 214 | | | — | | | 214 |
Cumulative effect of change in accounting principle — Allowance for credit losses | | — | | | — | | — | | | — | | | — | | | — | | | (485) | | | — | | | (485) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 95 | | | 95 |
Stock-based compensation | | — | | | — | | — | | | — | | | 21 | | | — | | | — | | | — | | | 21 |
Common stock issued as consideration for acquired business | | 1.9 | | | — | | — | | | — | | | 149 | | | — | | | — | | | — | | | 149 |
Dividends and dividend equivalent rights declared ($1.26 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (60) | | | — | | | (60) |
Issuance of shares to employees, net of shares withheld for employee taxes | | 0.2 | | | — | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) |
December 31, 2020 | | 117.1 | | $ | 1 | | — | | $ | — | | $ | 3,427 | | $ | (6,733) | | $ | 4,832 | | $ | (5) | | $ | 1,522 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 801 | | | — | | | 801 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 |
Stock-based compensation | | — | | | — | | — | | | — | | | 29 | | | — | | | — | | | — | | | 29 |
Dividends and dividend equivalent rights declared ($0.84 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (42) | | | — | | | (42) |
Retirement of treasury stock | | (67.4) | | | — | | — | | | — | | | (1,280) | | | 6,733 | | | (5,453) | | | — | | | — |
Spinoff of Loyalty Ventures Inc. | | — | | | — | | — | | | — | | | — | | | — | | | (225) | | | — | | | (225) |
Issuance of shares to employees, net of shares withheld for employee taxes | | 0.2 | | | — | | — | | | — | | | (2) | | | — | | | — | | | — | | | (2) |
December 31, 2021 | | 49.9 | | $ | 1 | | — | | $ | — | | $ | 2,174 | | $ | — | | $ | (87) | | $ | (2) | | $ | 2,086 |
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
F-10F-8
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Years Ended December 31, | ||||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2021 |
| 2020 |
| 2019 | ||||||
| | (In millions) | | (in millions) | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 | | $ | 801 | | $ | 214 | | $ | 278 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | |
Provision for credit losses | | | 544 | | | 1,266 | | | 1,188 | |||||||||
Depreciation and amortization | | | 249.3 | | | 487.3 | | | 497.6 | | | 123 | | | 184 | | | 249 |
Deferred income taxes | | | (186.1) | | | 16.3 | | | (113.8) | | | (15) | | | (223) | | | (186) |
Provision for loan loss | | | 1,187.5 | | | 1,016.0 | | | 1,140.1 | |||||||||
Non-cash stock compensation | | | 54.8 | | | 80.8 | | | 75.1 | | | 29 | | | 21 | | | 55 |
Amortization of deferred financing costs | | | 43.4 | | | 47.3 | | | 44.0 | | | 31 | | | 36 | | | 43 |
Gain on sale of business | | | (512.2) | | | — | | | — | | | — | | | (14) | | | (512) |
Loss on extinguishment of debt | | | 71.9 | | | — | | | — | | | — | | | — | | | 72 |
Asset impairment charges | | | 52.0 | | | — | | | — | | | — | | | 64 | | | 52 |
Change in other operating assets and liabilities, net of sale of business: | | | | | | | | | | |||||||||
Change in deferred revenue | | | 2.9 | | | (17.5) | | | (27.0) | |||||||||
Change in accounts receivable | | | 4.1 | | | (93.0) | | | (10.3) | |||||||||
Change in accounts payable and accrued expenses | | | (255.0) | | | (93.7) | | | 167.4 | |||||||||
Amortization of deferred origination costs and other charges | | | 71 | | | 52 | | | 241 | |||||||||
Change in other operating assets and liabilities, net of acquisitions and dispositions | | | | | | | | | | |||||||||
Change in other assets | | | (46.8) | | | (29.8) | | | (20.9) | | | (30) | | | 210 | | | (43) |
Change in other liabilities | | | 32.9 | | | 49.8 | | | (24.9) | | | (11) | | | 73 | | | (219) |
Originations of credit card and loan receivables held for sale | | | — | | | (4,799.0) | | | (8,709.4) | |||||||||
Sales of credit card and loan receivables held for sale | | | — | | | 4,928.8 | | | 8,651.9 | |||||||||
Other | | | 241.0 | | | 198.5 | | | 140.6 | |||||||||
Net cash provided by operating activities | | | 1,217.7 | | | 2,754.9 | | | 2,599.1 | | | 1,543 | | | 1,883 | | | 1,218 |
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Change in credit card and other loans | | | (1,805) | | | 1,784 | | | (2,587) | |||||||||
Change in redemption settlement assets | | | (9.5) | | | (42.2) | | | (231.3) | | | (113) | | | (41) | | | (9) |
Change in credit card and loan receivables | | | (2,586.8) | | | (2,749.6) | | | (3,600.2) | |||||||||
Proceeds from sale of business | | | 4,409.7 | | | — | | | — | | | — | | | 27 | | | 4,410 |
Purchase of credit card portfolios | | | (924.8) | | | — | | | — | |||||||||
Proceeds from sale of credit card portfolios | | | 2,061.8 | | | 1,153.5 | | | 797.7 | |||||||||
Proceeds from sale of real estate | | | 15.1 | | | — | | | — | |||||||||
Payments for acquired businesses, net of cash | | | (6.7) | | | — | | | (945.6) | |||||||||
Payments for acquired businesses, net of cash and restricted cash | | | (75) | | | (267) | | | (7) | |||||||||
Proceeds from sale of credit card loan portfolio | | | 512 | | | 289 | | | 2,062 | |||||||||
Purchase of credit card loan portfolios | | | (110) | | | — | | | (925) | |||||||||
Capital expenditures | | | (142.3) | | | (199.8) | | | (225.4) | | | (84) | | | (54) | | | (142) |
Purchases of other investments | | | (20.2) | | | (89.5) | | | (101.4) | |||||||||
Maturities/sales of other investments | | | 60.0 | | | 47.4 | | | 42.5 | |||||||||
Purchases of available-for-sale securities | | | (93) | | | (40) | | | (20) | |||||||||
Maturities of available-for-sale securities | | | 73 | | | 77 | | | 60 | |||||||||
Other | | | 4.5 | | | 8.2 | | | (4.4) | | | 4 | | | (1) | | | 19 |
Net cash provided by (used in) investing activities | | | 2,860.8 | | | (1,872.0) | | | (4,268.1) | |||||||||
Net cash (used in) provided by investing activities | | | (1,691) | | | 1,774 | | | 2,861 | |||||||||
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Borrowings under debt agreements | | | 3,111.3 | | | 4,575.3 | | | 7,696.7 | |||||||||
Repayments of borrowings | | | (5,981.8) | | | (4,893.0) | | | (7,341.4) | |||||||||
Non-recourse borrowings of consolidated securitization entities | | | 4,851.8 | | | 3,714.6 | | | 5,172.5 | |||||||||
Repayments/maturities of non-recourse borrowings of consolidated securitization entities | | | (5,219.0) | | | (4,871.0) | | | (3,320.3) | |||||||||
Net increase in deposits | | | 355.6 | | | 864.1 | | | 2,543.2 | |||||||||
Unsecured borrowings under debt agreements | | | 38 | | | 1,276 | | | 3,111 | |||||||||
Repayments/maturities of unsecured borrowings under debt agreements | | | (864) | | | (1,320) | | | (5,982) | |||||||||
Debt issued by consolidated variable interest entities | | | 4,278 | | | 2,419 | | | 4,852 | |||||||||
Repayments/maturities of debt issued by consolidated variable interest entities | | | (4,538) | | | (4,096) | | | (5,219) | |||||||||
Net increase (decrease) in deposits | | | 1,228 | | | (2,370) | | | 356 | |||||||||
Debt proceeds from spinoff of Loyalty Ventures Inc. | | | 652 | | | — | | | — | |||||||||
Transfers to Loyalty Ventures Inc. related to spinoff | | | (127) | | | — | | | — | |||||||||
Payment of debt extinguishment costs | | | (46.1) | | | — | | | — | | | — | | | — | | | (46) |
Payment of deferred financing costs | | | (45.4) | | | (25.8) | | | (65.7) | | | (13) | | | (19) | | | (45) |
Proceeds from issuance of common stock | | | 12.4 | | | 17.6 | | | 18.4 | | | 4 | | | 3 | | | 12 |
Dividends paid | | | (127.4) | | | (125.2) | | | (115.5) | | | (42) | | | (61) | | | (127) |
Purchase of treasury shares | | | (976.1) | | | (443.2) | | | (553.7) | | | — | | | — | | | (976) |
Other | | | (27.0) | | | (31.3) | | | (29.3) | | | (8) | | | 1 | | | (28) |
Net cash (used in) provided by financing activities | | | (4,091.7) | | | (1,217.9) | | | 4,004.9 | |||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 3.6 | | | (12.0) | | | 10.3 | |||||||||
Net cash provided by (used in) financing activities | | | 608 | | | (4,167) | | | (4,092) | |||||||||
| | | | | | | | | | |||||||||
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | | | — | | | 15 | | | 3 | |||||||||
| | | | | | | | | | |||||||||
Change in cash, cash equivalents and restricted cash | | | (9.6) | | | (347.0) | | | 2,346.2 | | | 460 | | | (495) | | | (10) |
Cash, cash equivalents and restricted cash at beginning of year | | | 3,967.7 | | | 4,314.7 | | | 1,968.5 | | | 3,463 | | | 3,958 | | | 3,968 |
Cash, cash equivalents and restricted cash at end of year | | $ | 3,958.1 | | $ | 3,967.7 | | $ | 4,314.7 | | $ | 3,923 | | $ | 3,463 | | $ | 3,958 |
| | | | | | | | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | | |
Interest paid | | $ | 671.9 | | $ | 719.8 | | $ | 551.4 | |||||||||
Income taxes paid, net | | $ | 1,070.6 | | $ | 234.0 | | $ | 344.1 | |||||||||
Cash paid during the year for interest | | $ | 357 | | $ | 488 | | $ | 672 | |||||||||
Cash paid during the year for income taxes, net | | $ | 325 | | $ | 268 | | $ | 1,071 |
The consolidated statementsConsolidated Statements of cash flowsCash Flows are presented with the combined cash flows from continuing and discontinued operations with cash flows from continuing operations within each cash flow statement category.
operations.
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements.
F-11F-9
1. DESCRIPTION OF BUSINESSBUSINESS AND BASISSUMMARY OF PRESENTATIONSIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Description of the Business—
Alliance Data Systems Corporation (“ADSC”(ADSC or, including its consolidated subsidiaries and variable interest entities, the “Company”)Company) is a leading global provider of data-driven marketingtech-forward payment and loyaltylending solutions, serving large, consumer-based businesses. The Company captures and analyzes data created during each customer interaction, leveraging the insight derived from that data to enable clients to identify and acquire new customers and enhance customer loyalty. Theconsumer-based industries in North America. Through omnichannel touch points and a comprehensive product suite that includes credit products and Bread® digital payment solutions, the Company helps its partners drive loyalty and growth, while giving customers greater payment choices. Through its Comenity-branded financial services, it also offers credit and savings products to consumers. With the spinoff of its LoyaltyOne® segment in November 2021, classified as discontinued operations herein, the Company operates in 21 reportable segments: LoyaltyOne® and Card Services. LoyaltyOne provides coalition and short-term loyalty programs through the Canadian AIR MILES® Reward Program and BrandLoyalty Group B.V. (“BrandLoyalty”). Card Services encompasses credit card processing, billing and payment processing, customer care and collections services for private label retailers as well as private label and co-brand retail credit card and loan receivables financing, including securitization and other funding of certain credit card and loan receivables that it underwrites from its private label and co-brand retail credit card programs.segment.
BASIS OF PRESENTATION
Basis
The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of Presentation—America (GAAP). For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation. In particular, as a result of the spinoff of its LoyaltyOne segment as discontinued operations, the Company has adjusted the presentation in accordanceof its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither the Company nor any of its subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the bank holding company presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s operations going forward and better align the Company with accounting principles generally accepted inits peers for comparability purposes. As noted above, the United States of America (“GAAP”). The Company’s consolidated financial statementsConsolidated Financial Statements have been presented with its former Epsilon®LoyaltyOne segment as a discontinued operation.operations. See Note 6,22, “Discontinued Operations and Bank Holding Company Financial Presentation,” for more information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company presents its accounting policies within the Notes to the Consolidated Financial Statements to which they relate; the table below lists such accounting policies and the related Notes. The remaining significant accounting policies applied by the Company are included below.
| | | | |
Significant Accounting Policy | Note Number | Note Title | ||
Credit Card and Other Loans | Note 3 | Credit Card and Other Loans | ||
Allowance for Credit Losses | Note 4 | Allowance for Credit Losses | ||
Transfers of Financial Assets | | Note 5 | | Securitizations |
Available-for-Sale Securities | Note 6 | Available-for-Sale Securities | ||
Property and Equipment | Note 7 | Property and Equipment, Net | ||
Goodwill | Note 8 | Goodwill and Intangible Assets, Net | ||
Intangible Assets, Net | Note 8 | Goodwill and Intangible Assets, Net | ||
Leases | Note 10 | Leases | ||
Stock Compensation Expense | | Note 18 | | Stockholders' Equity |
Income Taxes | | Note 19 | | Income Taxes |
Earnings Per Share | | Note 20 | | Earnings Per Share |
Principles of Consolidation—
The accompanying consolidated financial statements include the accounts of ADSC and all subsidiaries in which the Company has a controlling financial interest. ControllingFor voting interest entities, a controlling financial interest is determined bywhen the Company is able to exercise control over the operating and financial decisions of the investee. For variable interest entities (VIEs), which are themselves determined based on the amount and characteristics of the equity in the entity, the Company has a majority ownershipcontrolling financial interest when it is determined to be the primary beneficiary. The primary beneficiary is the party having both the power to exercise control over the activities that most significantly impact the
F-10
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
VIE’s financial performance, as well as the obligation to absorb the losses of, or the right to receive the benefits from, the VIE that could potentially be significant to that VIE. The Company is the primary beneficiary of its securitization trusts and therefore consolidates these trusts within its Consolidated Financial Statements.
In cases where the absenceCompany does not have a controlling financial interest, but is able to exert significant influence over the operating and financial decisions of substantive third party participating rights. the entity, the Company accounts for such investments under the equity method.
All intercompany transactions have been eliminated.
In accordanceCurrency Translation
The Company’s monetary assets and liabilities denominated in foreign currencies, for example those of subsidiaries outside the U.S., are translated into U.S. dollars based on the rates of exchange in effect at the end of the reporting period, while non-monetary assets and liabilities are translated based on the rates of exchange in effect as of the date of the transaction giving rise to the asset or liability. Income and expense items are translated at the average exchange rates prevailing during the period. The resulting effects, along with Accounting Standards Codification (“ASC”) 860, “Transfersany related hedge or tax impacts, are recorded in Accumulated other comprehensive loss, a component of stockholders’ equity. Translation adjustments, along with the related hedge and Servicing,”tax impacts, are recognized in the Consolidated Statements of Income upon the sale or substantial liquidation of an investment in a foreign subsidiary. Gains and ASC 810, “Consolidation,”losses resulting from transactions in currencies other than the Company isentity’s functional currency are recognized in Other non-interest expenses in the primary beneficiaryConsolidated Statements of World Financial Network Credit Card Master Trust (“Master Trust”), World Financial Network Credit Card Master Note Trust (“Master Trust I”)Income, and World Financial Network Credit Card Master Trust III (“Master Trust III”) (collectively, the “WFN Trusts”), and World Financial Capital Master Note Trust (the “WFC Trust”). The Company is deemed to be the primary beneficiary for the WFN Trusts and the WFC Trust, as it is the servicerwere insignificant for each of the trustsperiods presented. Historically, the Company’s impacts from foreign currency exchange rate fluctuations were most prevalent within businesses that have been spun off, such as LoyaltyOne, or sold, such as Epsilon, both of which are reflected as discontinued operations herein.
Amounts Based on Estimates and Judgments
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, as well as the reported amounts of income and expenses during the reporting periods. The most significant of those estimates and judgments relate to the Company’s Allowance for credit losses; actual results could differ.
Revenue Recognition
The Company’s primary source of revenue is from Interest and fees on loans from its various credit card and other loan products, and to a lesser extent from contractual relationships with its brand partners. The following describes the Company’s recognition policies across its various sources of revenue.
Interest and fees on loans: Represent revenue earned on customer accounts owned by the Company, and is a holderrecognized in the period earned in accordance with the contractual provisions of the residual interest. The Company, through its involvementcredit agreements. Interest and fees continue to accrue on all accounts, except in limited circumstances, until the account balance and all related interest and fees are paid or charged-off, in the activitiesmonth during which an account becomes 180 days past due for credit card loans or 120 days past due for installment loans. Charge-offs for unpaid interest and fees, as well as any adjustments to the allowance associated with unpaid interest and fees, are recorded as a reduction of these trusts, hasInterest and fees on loans. Direct loan origination costs on credit card and other loans are deferred and amortized on a straight-line basis over a one-year period for credit card loans, or for installment loans over the powerlife of the loan, and are recorded as a reduction to Interest and fees on loans. As of December 31, 2021 and 2020, the remaining unamortized deferred direct loan origination costs were $48 million and $38 million, respectively, and included in Total credit card and other loans.
Interest on cash and investment securities: Represents revenue earned on cash and cash equivalents as well as investments in debt and equity securities, and is recognized in the activities that most significantly impactperiod earned.
F-11
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Interchange revenue, net of retailer share arrangements: Represents revenue earned from merchants, including our brand partners, and cardholders from processing and servicing accounts, and is recognized as such services are performed. Revenue earned from merchants, including our brand partners, primarily consists of merchant and interchange fees, which are transaction fees charged to the merchant for the processing of credit card transactions and are recognized at the time the cardholder transaction occurs. Our credit card program agreements may also provide for royalty payments to our brand partners based on purchased volume, or if certain contractual incentives are met such as if the economic performance of such trusts, and the obligation (or right) to absorb losses (or receive benefits)program exceeds a contractually defined threshold, or payments for new accounts. These amounts are recorded as a reduction of revenue in the trusts that could potentially be significant. As such, the Company consolidates these trusts in its consolidated financial statements.period incurred.
Other non-interest income: Represents ancillary revenues earned from cardholders, consisting primarily of monthly fees from the purchase of certain payment protection products which are recognized based on the average cardholder account balance over time and can be cancelled at any point by the cardholder, as well as gains or losses on the sales of loan portfolios and income or losses from equity method investments.
Contract Costs: The Company recognizes as an asset contract costs, such as up-front payments pursuant to contractual agreements with brand partners. Such costs are deferred and recognized on a straight-line basis over the term of the related agreement. Depending on the nature of the contract costs, the amortization is recorded as a reduction to Non-interest income, or a charge to Non-interest expenses, in the Company’s consolidated statements of income. Amortization of contract costs recorded as a reduction to Interchange revenue, net of retailer share arrangements was $64 million, $65 million and $72 million for the years ended December 31, 2021, 2020 and 2019, respectively; amortization of contract costs recorded in Non-interest expenses totaled $11 million, $12 million and $12 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the remaining unamortized contract costs were $364 million and $311 million, respectively, and are included in Other assets on the Consolidated Balance Sheets.
The Company performs an impairment assessment when events or changes in circumstances indicate that the carrying amount of contract costs may not be recoverable. For investmentsthe year ended December 31, 2020, due to the global COVID-19 pandemic and resulting retail store closures and significant declines in any entities in whichcredit sales, the Company owns 50% or lessrecognized an impairment charge of $38 million in Non-interest expenses in its Consolidated Statement of Income. NaN impairment charges were recognized in either of the outstanding voting stock but in which the Company has significant influence over operating and financial decisions, the Company applies the equity method of accounting. In cases where the Company's equity investment is less than 20% and significant influence does not exist, such investments are carried at cost.years ended December 31, 2021 or 2019.
Cash and Cash Equivalents—The Company considers all
Cash and cash equivalents include cash and due from banks, interest-bearing cash balances such as those invested in money market funds, as well as other highly liquid short-term investments with an original maturity of three months or less, to beand restricted cash. As of December 31, 2021 and 2020, cash equivalents.and due from banks was $251 million and $262 million, respectively, interest-bearing cash balances were $2.7 billion and $2.5 billion, respectively, and short-term investments were $80 million and $29 million, respectively.
Accounts Receivable, net—Accounts receivable, net consistRestricted cash primarily represents cash restricted for principal and interest repayments of amounts receivable from customers, whichdebt issued by consolidated VIE securitization trusts, and is recorded in Other assets on the Consolidated Balance Sheets. Restricted cash totaled $877 million and $323 million at December 31, 2021 and 2020, respectively.
Derivative Financial Instruments
From time to time, the Company uses derivative financial instruments to manage its exposure to various financial risks; the Company does not trade or speculate in derivative financial instruments. Subject to the criteria set forth in GAAP, the Company will either designate its derivative financial instruments in hedging relationships, or as economic hedges should the criteria in GAAP not be met. For those derivatives designated in hedging relationships, changes in their fair values, excluding any ineffective portions, are recorded atin Accumulated other comprehensive income, net of income taxes, until the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable. The Company analyzeshedged transactions affect net income; the appropriateness of its allowance for doubtful accounts based on its assessment of various factors, including historical experience, the ageineffective portions of the accounts receivable balance, customer creditworthiness, currentderivative financial instruments are recognized through net income. For those derivatives not designated in hedging relationships, or economic trends, andhedges, changes in its customer payment terms and collection trends. Account balancestheir fair values are charged-off againstrecognized in the allowance after all reasonable meansConsolidated Statements of collection have been exhausted and the potential for recovery is considered remote.
Income as they occur.
F-12
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company’s derivative financial instruments were immaterial to the Consolidated Financial Statements for the periods presented. With the spinoff of its LoyaltyOne segment in November 2021, the Company does not hold any derivative financial instruments as of December 31, 2021.
Credit Card
CONCENTRATIONS
We depend on a limited number of large partner relationships for a significant portion of our revenue. The business generated through our 10 largest partners represented approximately 59% and Loan Receivables— Credit card65%, respectively, of our Total net interest and loan receivables consistnon-interest income during the years ended December 31, 2021 and 2020. Business generated through our relationship with Victoria’s Secret & Co. and its retail affiliates represented approximately 13% and 14% of our Total net interest and non-interest income during these same respective periods. We previously announced the non-renewal of our contract with BJ’s Wholesale Club (BJ’s). For the year ended December 31, 2021, BJ’s branded co-brand accounts generated approximately 8% of our Total net interest and non-interest income. As of December 31, 2021, BJ’s branded co-brand accounts were responsible for approximately 11% of our Total credit card and loan receivables held for investment. The Company sells a majority of the credit card receivables originated by Comenity Bank to WFN Credit Company, LLC, which in turn sells them to the WFN Trusts as part of a securitization program. The Company also sells certain of its credit card receivables originated by Comenity Capital Bank to World Financial Capital Credit Company, LLC, which in turn sells them to the WFC Trust. The credit card receivables sold to each of the trusts are restricted for securitization investors. All new originations of credit card and loan receivables are deemed to be held for investment at origination because management has the intent and ability to hold them for the foreseeable future. In determining what constitutes the foreseeable future, management considers the short average life and homogenous nature of the Company’s credit card and loan receivables. In assessing whether these credit card and loan receivables continue to be held for investment, management also considers capital levels and scheduled maturities of funding instruments used. Management believes that the assertion regarding its intent and ability to hold credit card and loan receivables for the foreseeable future can be made with a high degree of certainty given the maturity distribution of the Company’s money market deposits, certificates of deposit and other funding instruments; the historic ability to replace maturing certificates of deposits and other borrowings with new deposits or borrowings; and historic credit card payment activity. Due to the homogenous nature of the Company’s credit card and loan receivables, amounts are classified as held for investment on an individual client portfolio basis.loans.
Credit Card and Loan Receivables Held for Sale—Credit card and loan receivables held for sale are determined on an individual client portfolio basis. The Company carries these assets at the lower of aggregate cost or fair value. The fair value of the credit card and loan receivables held for sale is determined on an aggregate homogeneous portfolio basis. The Company continues to recognize finance fees on these credit card and loan receivables on the accrual basis. Cash flows associated with credit card portfolios that are purchased with the intent to sell are included in cash flows from operating activities. Cash flows associated with credit card and loan receivables originated or purchased for investment are classified as investing cash flows, regardless of a subsequent change in intent.
Transfers of Financial Assets—The Company accounts for transfers of financial assets under ASC 860, “Transfers and Servicing,” as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor and (3) the transferor does not maintain effective control over the transferred assets. If the transfer of financial assets does not meet these criteria, the transfer is accounted for as a financing. Transfers of financial assets that are treated as sales are removed from the Company’s accounts with any realized gain or loss reflected in income during the period of sale.
Allowance for Loan Loss—The Company maintains an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The estimate of the allowance for loan loss covers uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.RECENTLY ISSUED ACCOUNTING STANDARDS
In estimatingMarch 2020, the allowanceFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for principal loan losses, management utilizesapplying 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, and the adoption is not expected to have a migration analysis of delinquent and current credit card and loan receivables. Migration analysis is a technique used to estimatematerial impact on 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.Company’s Consolidated Financial Statements.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In estimatingDecember 2019, the allowanceFASB issued ASU 2019-12, “Simplifying the Accounting for uncollectible unpaid interestIncome Taxes.” ASU 2019-12 eliminated certain exceptions within Accounting Standards Codification (ASC) 740, “Income Taxes,” and fees,clarified certain aspects of ASC 740 to promote consistency among reporting entities. Most amendments within the standard were required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company’s adoption of this standard on January 1, 2021 did not have a material impact on its financial position, results of operations or cash flows, and there were no significant changes to accounting policies, business processes or internal controls as a result of adopting the standard.
Effective January 1, 2020, the Company adopted the new credit reserving methodology referred to as Current Expected Credit Loss (CECL), following a modified retrospective transition which resulted in an increase to the Allowance for credit losses of $644 million, an increase to net deferred tax assets of $159 million, with the offset to the opening balance of Retained earnings, net of income taxes, of $485 million. Under the CECL methodology, the Company utilizes a financial instrument impairment model to establish an allowance based on expected losses over the estimated life of the exposure, not only based on historical charge-off trends, analyzing actual charge-offs forexperience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. This approach differs from the Company’s historic model prior three months. The allowance is maintained throughto January 1, 2020, which was based on an adjustmentincurred loss approach. Although there were no significant changes to finance charges, net.the Company’s accounting systems or internal controls as a result of adopting the standard, the Company modified certain of its existing controls and added new controls around its loss forecasting models.
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.
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F-13
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Effective January 1,2. ACQUISITIONS
Bread
On September 28, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Measurementacquired 3.5 million preferred Series D Shares of Credit LossesLon Inc., a Delaware corporation (Bread), for approximately $25 million, which represented an approximate 6% ownership interest in Bread. On December 3, 2020, the Company acquired the remaining interest in Bread, and accordingly its approximate 6% interest was remeasured at fair value; 0 gain or loss was recognized on Financial Instruments.” For additional information regarding the impact of the new standard, see “Recently Issued Accounting Standards” below.remeasurement.
Inventories, net—Inventories, net are stated atConsideration for the lower100% ownership of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories ifBread consisted of cash of $275 million, equity of $149 million with the costissuance of inventory exceeds the amount it expects to realize from the ultimate sale or disposal1.9 million shares of the inventory. These estimates are based on management’s judgment regarding future market conditionsCompany’s common stock, and an analysisdeferred cash consideration of historical experience.approximately $75 million paid in December 2021. Consideration, net of cash and restricted cash acquired, was $491 million.
Redemption Settlement Assets, Restricted—The following table summarizes the allocation of the consideration and the respective fair values of the assets acquired and liabilities assumed in the transaction, net of cash and investments relatedrestricted cash acquired, as of December 3, 2020 (in millions):
| | | |
Installment loans | | $ | 112 |
Developed technology | | | 91 |
Right of use assets - operating | | | 4 |
Deferred tax asset, net | | | 7 |
Intangible assets | | | 11 |
Goodwill | | | 370 |
Total assets acquired | |
| 595 |
| | | |
Accounts payable | |
| 2 |
Accrued expenses | |
| 3 |
Operating lease liabilities | |
| 3 |
Debt issued by consolidated variable interest entities | |
| 96 |
Total liabilities assumed | |
| 104 |
| | | |
Net assets acquired, net of cash and restricted cash | | $ | 491 |
The goodwill resulting from the acquisition was not deductible for tax purposes. Bread utilized certain statutory trusts to securitize its installment loans. As part of the redemptionacquisition, the Company acquired $112 million of installment loans restricted for securitization investors. In addition, the Company assumed 2 warehouse facilities totaling $96 million utilized to fund securitized loans, which were amended in December 2020 and repaid in full in August 2021. See Note 11, “Borrowings of Long-term and Other Debt,” for more information.
3. CREDIT CARD AND OTHER LOANS
The Company’s payment and lending solutions result in the AIR MILES Reward Programgeneration of credit card and other loans, which are recorded at the time a cardholder enters into a point-of-sale transaction with a merchant. Credit card loans represent revolving amounts due and have a range of terms that include credit limits, interest rates and fees, which can be revised over time based on new information about the cardholder, in accordance with applicable regulations and the governing terms and conditions. Cardholders choosing to revolve their amounts due, instead of paying in full, are subject to finance charges and are required to make monthly payments based on pre-established amounts. Other loans, which are primarily installment loans offered to our customers, have a securityrange of fixed terms such as interest which is held in trust forrates, fees and repayment periods, and borrowers are required to make pre-established monthly payments over the benefit of funding redemptions by collectors. These assets are restricted to funding rewards for the collectors by certainterm of the Company’s sponsor contracts. Investments in equity securities are stated at fair value, with holding gains and losses recognized through net income. Investments in debt securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss), as the investments are classified as available-for-sale.
Property and Equipment—Furniture, equipment, computer software and development, buildings and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Land is carried at cost and is not depreciated. Depreciation and amortization for furniture, equipment and buildings are computed on a straight-line basis, using estimated lives ranging from one to twenty-one years. Software development is capitalizedloan in accordance with ASC 350-40, “Intangibles – Goodwillthe applicable terms and Other – Internal–Use Software,”conditions. Credit card and is amortizedother loans are presented on a straight-line basis over the expected benefit period, which ranges from one to seven years. Leasehold improvements are amortized over the remaining livesConsolidated Balance Sheets net of the respective leasesAllowance for credit losses, and include principal and any related accrued interest and fees. The Company continues to accrue interest and fee income on all accounts, except in limited circumstances, until the related balance and all related interest and fees are paid or the remaining useful lives of the improvements, whichevercharged-off; an Allowance for credit losses is shorter. Long-lived assets are tested for impairment when events or conditions indicate that the carrying value of an asset may not be fully recoverable from future cash flows.
Goodwill and Other Intangible Assets—Goodwill and indefinite lived intangible assets are not amortized, but are reviewed at least annually for impairment or more frequently if circumstances indicate that an impairment is probable, using qualitative or quantitative analysis. Separable intangible assets that have finite useful lives are amortized over their respective useful lives.
Income Taxes— Income tax returns are filed in federal, state, local and foreign jurisdictions as applicable. Provisions for current income tax liabilities are calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings also include deferred income tax provisions and provisions for uncertain tax positions.
Deferred income tax assets and liabilities are computed on differences between the financial statement bases and tax bases of assets and liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities associated with components of other comprehensive income are charged or credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets when realization is less than more likely than not.
Liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions, in our judgment, do not meet a more-likely-than-not threshold based on the technical merits of the positions. Additionally, liabilities may be established for uncertain tax positions when, in our judgement, the more-likely-than-not threshold is met, but the position does not rise to the level of highly certain based upon the technical merits of the position. Estimateduncollectable interest and penalties related to uncertain tax positions are included as a component of income tax expense.
Derivative Instruments—The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or other speculative purposes. Certain derivatives used to managefees.
F-14
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
the Company’s exposure to foreign currency exchange rate movements are not designated as hedges and do not qualify for hedge accounting.
Derivatives DesignatedFor the most part, the Company classifies its credit card and other loans as Hedging Instruments—held for investment. The Company assesses bothsells a majority of its credit card loans originated by Comenity Bank and by Comenity Capital Bank, which together are referred to herein as the “Banks,” to securitization master trusts, which are themselves consolidated VIEs, and therefore these loans are restricted for securitization investors. All new originations of credit card and other loans are determined to be held for investment at origination because the Company has the intent and ability to hold them for the foreseeable future. In determining what constitutes the foreseeable future, the Company considers the average life and homogenous nature of its credit card and other loans. In assessing whether its credit card and other loans continue to be held for investment, the Company also considers capital levels and scheduled maturities of funding instruments used. The assertion regarding the intent and ability to hold credit card and other loans for the foreseeable future can be made with a high degree of certainty given the maturity distribution of the Company’s direct-to-consumer deposits and other funding instruments; the demonstrated ability to replace maturing time-based deposits and other borrowings with new deposits or borrowings; and historic payment activity on its credit card and other loans. Due to the homogenous nature of the Company’s credit card loans, amounts are classified as held for investment on a brand partner portfolio basis. From time to time certain credit card loans are classified as held for sale, as determined on a brand partner basis. The Company carries these assets at the hedge’s inceptionlower of aggregate cost or fair value, and continues to recognize finance charges on an ongoing basis, whether the derivatives thataccrual basis. Cash flows associated with credit card and other loans originated or purchased for investment are usedclassified as Cash flows from investing activities, regardless of any subsequent change in the hedging transaction, including net investment hedges, have been highly effective in offsetting changes in the cash flows or remeasurement of the hedged items and whether the derivatives may be expected to remain highly effective in future periods.intent.
The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in cash flowCompany’s credit card and other loans were as follows, as of the hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) it determines that designating the derivative as a hedging instrument is no longer appropriate.December 31:
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (in millions) | ||||
Credit card loans | | $ | 17,217 | | $ | 16,666 |
Installment loans | | | 182 | | | 118 |
Total credit card and other loans (1)(2) | | | 17,399 | | | 16,784 |
Less: Allowance for credit losses | | | (1,832) | | | (2,008) |
Credit card and other loans, net | | $ | 15,567 | | $ | 14,776 |
(1) | Includes $11.2 billion of credit card and other loans available to settle obligations of consolidated VIEs as of both December 31, 2021 and 2020, respectively. |
(2) | Includes $224 million and $219 million, of accrued interest and fees that have not yet been billed to cardholders as of December 31, 2021 and 2020, respectively. |
Credit Card and Other Loans Aging
ChangesAn account is contractually delinquent if the Company does not receive the minimum payment due by the specified due date. The Company’s policy is to continue to accrue interest and fee income on all accounts, except in the fair value of derivative instruments designated as hedging instruments, excluding any ineffective portion, are recorded in other comprehensive income (loss)limited circumstances, until the hedged transactions affect net income. The ineffective portionbalance and all related interest and fees are paid or charged-off, which is typically at 180 days past due for credit card loans and 120 days past due for installment loans. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of this hedging instrumentthe account becoming further delinquent. This collection scoring algorithm then recommends a strategy for collecting on the past due account, including a contact schedule and collections priority. If, after exhausting all in-house collection efforts, the Company is recognized through net income whenunable to make a collection it may engage collection agencies or outside attorneys to continue those efforts, or sell the ineffectiveness occurs.charged-off balances.
Derivatives not Designated as Hedging Instruments—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 instruments not designated as hedging instruments are recorded in the consolidated statements of income as they occur.
Net Investment Hedges—The Company used Euro-denominated debt to hedge a portion of its net investment in foreign subsidiaries against adverse movements in exchange rates. The effective portion of the foreign currency gains and losses related to the Euro-denominated debt is reported in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets. The gains or losses will be subsequently reclassified into net income when the hedged net investment is either sold or substantially liquidated.
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 consolidated balance sheets. Investments in equity securities are stated at fair value, with holding gains and losses recognized through net income. Investments in debt securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss), as the investments are classified as available-for-sale.
Revenue Recognition—Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” applying the modified retrospective method to those contracts that were not completed as of January 1, 2018. The Company recognizes revenues when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In that determination, under ASC 606, the Company follows a five-step model that includes: (1) determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. ASC 606 does not apply to financial instruments and other contractual rights or obligations.
See Note 3, “Revenue,” for more information about the Company’s revenue and the associated timing and basis of revenue recognition.
Earnings Per Share—Basic earnings per share is based only on the weighted average number of common shares outstanding, excluding any dilutive effects of options or other dilutive securities. Diluted earnings per share is based on the weighted average number of common and potentially dilutive common shares (dilutive stock options, unvested
F-15
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
restricted stock unitsThe following table presents the delinquency trends on the Company’s credit card and other dilutive securitiesloans portfolio based on the principal balances outstanding during the year), pursuantas of December 31, and excludes amounts that have not yet been billed to the treasury stock method. For periods with participating securities,cardholders:
| | | | | | | | | | | | | | | | | | |
| | Aging Analysis of Delinquent Amortized Cost | | | | | | | ||||||||||
|
| 31 to 60 days |
| 61 to 90 days |
| 91 or more days delinquent |
| Total |
| Current |
| Total | ||||||
| | (in millions) | ||||||||||||||||
As of December 31, 2021 | $ | 262 | | $ | 186 | | $ | 401 | | $ | 849 | | $ | 16,284 | | $ | 17,133 | |
| | | | | | | | | | | | | | | | | | |
As of December 31, 2020 | $ | 273 | | $ | 203 | | $ | 440 | | $ | 916 | | $ | 15,578 | | $ | 16,494 |
(1) | Installment loan delinquencies have been included with credit card loan delinquencies in the table above, as amounts were insignificant at each period presented. |
From time to time the Company computes earnings per share using the two-class method,may re-age cardholders’ accounts, which is intended to assist delinquent cardholders who have experienced financial difficulties but who demonstrate both an allocationability and willingness to repay the amounts due; this practice affects credit card loan delinquencies and charge-offs. Accounts meeting specific defined criteria are re-aged when the cardholder makes one or more consecutive payments aggregating to a certain pre-defined amount of earnings betweentheir account balance. Upon re-aging, the holdersoutstanding balance of common stocka delinquent account is returned to Current status. For the years ended December 31, 2021, 2020 and a company’s participating security holders.2019, the Company’s re-aged accounts represented 1.7%, 2.8% and 2.4%, respectively, of total credit card and other loans. The Company’s re-aging practices comply with regulatory guidelines.
Currency TranslationNet Principal Charge-offs—The assets and liabilities of the Company’s subsidiaries outside the U.S. are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates, primarily from Canadian dollars and Euros. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from currency transactions are recognized currently in income and those resulting from translation of financial statements are included in accumulated other comprehensive income (loss). The Company recognized net foreign transaction gains of $1.3 million for the year ended December 31, 2019, gains of $0.6 million for the year ended December 31, 2018, and losses of $9.1 million for the year ended December 31, 2017.
Leases—The Company’s net charge-offs include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce Interest and fees on loans, while fraud losses are recorded in Card and processing expenses. Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due. Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptcy or death, credit card and other loans, including unpaid interest and fees as applicable, 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 180 days past due. The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease right-of-use assetsrecords the actual charge-offs for unpaid interest and lease liabilities are recognized at commencement based on the present value of lease payments over the lease term. As the implicit rate is typically not readily determinable in the Company’s lease agreements, 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. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recognized on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and nonlease componentsfees as a single lease component for its identified asset classes. As of December 31, 2019, the Company does not have any finance leases.
Marketingreduction to Interest and Advertising Costs—The Company participates in various marketing and advertising programs, including collaborative arrangements with certain clients. The cost of marketing and advertising programs is expensed in the period incurred. The Company has recognized marketing and advertising expenses, includingfees on behalf of its clients, of $229.4loans, which were $456 million, $244.5$717 million and $236.8$809 million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
Stock Compensation ExpenseModified Credit Card Loans—The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized ratably over the requisite service period.
Management Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting StandardsForbearance Programs
In June 2016,response to the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Measurementglobal COVID-19 pandemic, the Company offered forbearance programs, which provided for short-term modifications in the form of Credit Losses on Financial Instruments.” ASU 2016-13 requires entitiespayment deferrals and late fee waivers to utilize a financial instrument impairment modelborrowers who were current as of their most recent billing cycle, prior to establish an allowance based on expected losses over the lifeannouncement of the exposure rather thanforbearance programs. As of December 31, 2021 and 2020, the amount of credit card loans in these forbearance programs was approximately $86 million and $157 million, respectively. Additionally, the Company instituted 2 short-term forbearance programs with durations of three and six months, which provide concessions consisting primarily of a model based onreduced minimum payment and an incurred loss approach. Estimatesinterest rate reduction, the balances of expected credit losseswhich were $12 million and $67 million as of December 31, 2021 and 2020, respectively. As a result of legislation enacted by the United States that provided companies with the option to temporarily suspend (a) certain requirements under GAAP for loan modifications directly related to the current expected credit loss model are based on relevant information about past events, current conditions,global COVID-19 pandemic that would otherwise be treated as troubled debt restructurings (TDRs) and reasonable and supportable forward-looking forecasts regarding the collectability(b) any determination that a loan modified as a result of the loan portfolio. ASU 2016-13 also expandspandemic is a TDR, these short-term modifications offered by the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, ASU 2016-13 modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The Company formed a cross-functional implementation team to oversee the implementation of the standard, developed loss forecasting models and processes to satisfy the requirements of ASU 2016-13. The Company adopted the standard effective January 1, 2020. Management expects an increase in the allowance for loan loss at adoption of $644.0 million,are not considered TDRs.
F-16
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
which will be recorded through a cumulative-effect adjustment to retained earnings, net of taxes. The scope of this standard also impacts the Company’s accounts receivable and available-for-sale debt securities, for which the Company’s adoption did not have a material impact on its consolidated financial statements.
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 effect of the adoption of ASU 2018-13 will be a change to the disclosure requirements for certain fair value measurements.
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 does not expect the adoption of ASU 2018-15 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued 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 is evaluating the impact that adoption of ASU 2019-12 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 leasesCredit Card Loans Modified 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 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.TDRs
The Company elected the transition practical expedients permitted under ASC 842-10-65-1 underconsiders impaired loans to be loans for which it was not requiredis probable that it will be unable to reassess (i) whether expired or existing contracts were or contained leasescollect all amounts due according to the original contractual terms of the cardholder agreement, including credit card loans modified as defined by ASC 842, (ii)TDRs. In instances where cardholders are experiencing financial difficulty, the classificationCompany may modify its credit card loans with the intention of minimizing losses and improving collectability, while providing cardholders with financial relief; such leases,credit card loans are classified as TDRs, exclusive of forbearance programs described above. Modifications, including for temporary hardship and (iii) whether previously capitalized initial direct costs qualifiedpermanent workout programs, include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for capitalization under ASC 842. The Company also electeda period no longer than twelve months, while the practical expedient to use hindsightpermanent programs remain in determiningplace through the lease term.payoff of the credit card loans, if the cardholder complies with the terms of the program. Additionally, the Company instituted 2 temporary hardship programs with durations of three and six months with similar terms to our short-term forbearance programs described above. As of December 31, 2021 and 2020, the outstanding balance of credit card loans in these 2 short-term temporary hardship programs treated as troubled debt restructurings totaled approximately $9 million and $40 million, respectively.
TDR concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments, and the cardholder’s ability to make future purchases is either limited, or suspended until the cardholder successfully exits from the modification program. In accordance with the terms of the Company’s temporary hardship and permanent workout programs, the credit agreement reverts back to its original contractual terms (including the contractual interest rate) when the customer exits the program, which is either when all payments have been made in accordance with the accounting policy electionprogram, or when the customer defaults out of the program.
TDRs are collectively evaluated for impairment on a pooled basis. In measuring the appropriate allowance for credit losses, these modified credit card loans are included in the general pool of credit card loans, with the allowance determined under a contingent loss model. The Company’s impaired credit card loans represented less than 3% of total credit card loans as of December 31, 2021 and 2020, respectively. As of those same dates, the Company’s recorded investment in impaired credit card loans was $281 million and $490 million, respectively, with an associated allowance for credit losses of $81 million and $166 million, respectively. The average recorded investment in impaired credit card loans was $383 million and $412 million for the years ended December 31, 2021 and 2020, respectively.
Interest income on these impaired credit card loans is accounted for in the same manner as other non-impaired credit card loans, and cash collections are allocated according to accountthe same payment hierarchy methodology applied for leasecredit card loans not in modification programs. The Company recognized $26 million, $30 million and nonlease components as a single lease component$23 million for its identified asset classes.the years ended December 31, 2021, 2020 and 2019, respectively, in interest income associated with credit card loans in modification programs, during the period that such loans were impaired.
The cumulative effect of the changes made to the consolidated January 1, 2019 balance sheetfollowing table provides additional information regarding credit card loans modified as TDRs for the adoptionyears ended December 31:
| | | | | | | | | | | | | | | | | |
| | 2021 |
| 2020 | | ||||||||||||
|
| |
| Pre- |
| Post- |
| |
| Pre- |
| Post- |
| ||||
| | | | modification | | modification |
| | | modification | | modification | | ||||
| | Number of | | Outstanding | | Outstanding |
| Number of | | Outstanding | | Outstanding | | ||||
| | Restructurings | | Balance | | Balance |
| Restructurings | | Balance | | Balance | | ||||
| | (Dollars in millions) | | ||||||||||||||
Troubled debt restructurings |
| 171,993 |
| $ | 254 |
| $ | 254 | | 391,049 |
| $ | 554 |
| $ | 553 | |
The following table provides additional information regarding credit card loans modified as TDRs that have subsequently defaulted within 12 months of ASC 842 established operating lease liabilitiestheir modification dates for the years ended December 31; the probability of approximately $324.5 million and corresponding right-of-use assets of approximately $269.9 million, based upondefault is factored into the operating lease liabilities adjustedallowance for deferred rent and lease incentives,credit losses:
| | | | | | | | | | |
| | 2021 | | 2020 | ||||||
| | Number of | | Outstanding |
| Number of | | Outstanding | ||
|
| Restructurings |
| Balance |
| Restructurings |
| Balance | ||
| | (Dollars in millions) | ||||||||
Troubled debt restructurings that subsequently defaulted |
| 114,531 | | $ | 154 | | 118,600 | | $ | 162 |
F-17
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
which resulted in the reclassification of approximately $54.6 million in liabilities to the right-of-use assetCredit Quality. There was 0 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. Credit Card Loans
As part of the adoptionCompany’s credit risk management activities, the Company assesses overall credit quality by reviewing information related to the performance of ASC 842, capital leasesa credit cardholder’s account, as well as information from credit bureaus relating to the cardholder’s broader credit performance. The Company utilizes VantageScore (Vantage) credit scores to assist in its assessment of credit quality. Vantage credit scores are obtained at origination of the account and are refreshed monthly thereafter to assist in predicting customer behavior. The Company categorizes these Vantage credit scores into the following three credit score categories: (i) 661 or higher, which are considered the strongest credits and therefore have the lowest credit risk; (ii) 601 to 660, considered to have moderate credit risk; and (iii) 600 or less, which are considered weaker credits and therefore have the highest credit risk. In certain limited circumstances there are customer accounts for which a Vantage score is not available and the Company uses alternative sources to assess credit risk and predict behavior. The table below excludes 0.1% of our total credit card loans balance at each of December 31, 2021 and 2020, representing those customer accounts for which a Vantage credit score is not available. The following table reflects the distribution of the Company’s credit card loans by Vantage score as of December 31:
| | | | | | | | | | | | | | | | | | |
| | Vantage | | |||||||||||||||
| | 2021 | | | 2020 | | ||||||||||||
|
| 661 or |
|
| 601 to |
|
| 600 or |
|
| 661 or |
|
| 601 to |
|
| 600 or |
|
| | Higher | | | 660 | | | Less | | | Higher | | | 660 | | | Less | |
Credit card loans | | 62 | % |
| 26 | % |
| 12 | % |
| 60 | % |
| 28 | % |
| 12 | % |
Note: The Company’s credit card loans are revolving as they do not have stated maturities, and therefore are exempted from certain vintage disclosures otherwise required under GAAP.
Installment Loans
The amortized cost basis of the Company’s installment loans totaled $182 million and $118 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, approximately 84% of these loans were originated by customers with Fair Isaac Corporation (FICO) scores of 660 or above, and approximately 16% of these loans were originated by customers with FICO scores below 660. Similarly, as of December 31, 2020, approximately 86% and 14% of these loans were originated by customers with FICO scores of 660 or above, and below 660, respectively.
Unfunded Loan Commitments
The Company is active in originating private label and co-brand credit cards in the United States. The Company manages potential credit risk in its unfunded lending commitments by reviewing each potential customer’s credit application and evaluating the applicant’s financial history and ability and perceived willingness to repay. Credit card loans are made primarily on an unsecured basis. Cardholders reside throughout the United States and are not significantly concentrated in any one area.
The Company manages its potential risk in credit commitments by limiting the total amount of credit, both by individual customer and in total, by monitoring the size and maturity of its portfolios and applying consistent underwriting standards. The Company has the unilateral ability to cancel or reduce unused credit card lines at any time. Unused credit card lines available to cardholders totaled approximately $112 billion and $108 billion at December 31, 2021 and 2020, respectively. While these amounts represented the total available unused credit card lines, the Company has not experienced and does not anticipate that all cardholders will access their entire available line at any given point in time.
Portfolio Sales
As of December 31, 2021 and 2020, there were 0 credit card loans held for sale. During the years ended December 31, 2021 and 2020, the Company sold credit card loan portfolios for cash consideration of approximately $512 million
F-18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
and $289 million, respectively, and recognized associated gains of approximately $10 million and $20 million, respectively, which were recorded in Other non-interest income in the Consolidated Statements of Income.
Also during the year ended December 31, 2020, the Company recorded $8 million in portfolio valuation adjustments, which are reflected in Non-interest expenses, and as finance leases at their existing carrying amounts effectiveof September 2020, 1 of the Company’s credit card loan portfolios totaling approximately $82 million was transferred from held for sale to held for investment, and was included in Total credit card and other loans as of December 31, 2020. NaN such valuation adjustments or transfers occurred in 2021.
Portfolio Acquisitions
During the year ended December 31, 2021, the Company acquired 3 credit card loan portfolios for aggregate cash consideration of approximately $110 million, which consisted of approximately $106 million of credit card loans and $4 million of purchased credit card relationships intangible assets. NaN portfolio acquisitions were made during the year ended December 31, 2020.
4. ALLOWANCE FOR CREDIT LOSSES
Effective January 1, 2019,2020, the Company adopted the CECL model on a modified retrospective approach and applied a CECL model to determine its allowance for credit losses. Reserves for reporting periods beginning after January 1, 2020 are presented using the CECL methodology, while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods. The allowance for credit losses is an estimate of expected credit losses, measured over the estimated life of its credit card and other loans 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 other loans, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for credit losses 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. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans. The allowance is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness.
In estimating its allowance for credit losses, for 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. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, 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 may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects the Company’s best estimate of current expected credit losses. As permitted by GAAP, the Company excludes unbilled finance charges from its amortized cost basis of credit card and other loans. As of December 31, 2021 and 2020, unbilled finance charges were $224 million and $219 million, respectively, and included in Credit card and other loans on the Consolidated Balance Sheets.
Credit Card Loans
The Company uses 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 loans portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its allowance for credit losses, the Company segregates its credit card loans into 4 groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score. These risk characteristics are evaluated on at least an annual basis, or more frequently as facts and circumstances
F-19
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
warrant. In determining the estimated life of the Company’s credit card loans, payments were applied to the measurement date balance with 0 payments allocated to future purchase activity. The Company uses a combination of First In First Out (FIFO) and the accounting remained substantially unchanged, with capital lease assets totaling $13.0 millionCredit Card Accountability, Responsibility, and capital lease liabilities totaling $12.6 million.Disclosure Act of 2009 (CARD Act) methodology to model balance paydown.
The Company’s adoptiongroups 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.pooled financial assets with similar risk characteristics and their estimated life is as follows:
| | | |
| | 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 |
Installment Loans
ASC 842 also requires expanded qualitativeThe allowance for credit losses for installment loans utilizes a migration model over the remaining life of the loans. The model segmented accounts based on three attributes: delinquency, risk score and quantitative disclosure regardingremaining term. As of December 31, 2021 and 2020, the Company’s leasing activities. See Note 11, “Leases,”allowance for the Company’s ASC 842 disclosures.credit losses related to installment loans was $14 million and $6 million, respectively.
Allowance for Credit Losses Rollforward
The following table presents the Company’s allowance for credit losses for its credit card and other loans. With the acquisition of Bread in December 2020, the Company acquired certain installment loans which represented a separate portfolio segment; the amount of the related allowance for credit losses was insignificant and therefore has been included in the table below. The amounts presented are for the years ended December 31:
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Beginning balance | | $ | 2,008 | | $ | 1,815 | (3) | $ | 1,038 |
| | | | | | | | | |
Provision for credit losses (1) | |
| 544 | |
| 1,266 | |
| 1,188 |
Change in estimate for uncollectible unpaid interest and fees | |
| — | |
| 10 | |
| — |
Net principal charge-offs (2) | |
| (720) | | | (1,083) | | | (1,055) |
Ending balance | | $ | 1,832 | | $ | 2,008 | | $ | 1,171 |
(1) | Provision for credit losses includes a build/release for the allowance, as well as replenishment of Net principal charge-offs. |
(2) | Principal charge-offs are presented net of recoveries of $163 million, $205 million and $234 million for the years ended December 31, 2021, 2020 and 2019, respectively. |
(3) | Includes an increase of $644 million as of January 1, 2020, related to the adoption of the CECL methodology. |
During the year ended December 31, 2021, the decrease in the allowance for credit losses was due to improved credit performance, lower net charge-offs and improving macroeconomic variables. 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 ofaddition, improvements in customer payment behavior, which include the effects of hedging instrumentsgovernment stimulus actions, have contributed to a reduction in credit card and hedged itemsother loans, as well as delinquencies, which also contributed to the reduction in the financial statements, and made certain targeted improvementsallowance for credit losses. During the year ended December 31, 2020, the increase in the allowance for credit losses was due to simplifya $644 million cumulative-effect adjustment for the applicationadoption of hedge accounting guidance relatedthe CECL methodology as well as deterioration of the macroeconomic outlook due 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.
3. REVENUE
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s contracts with its customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. Taxes assessed on revenue-producing transactions are excluded from revenues.global COVID-19 pandemic.
F-18F-20
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
5. SECURITIZATIONS
The Company accounts for transfers of financial assets as either sales or financings. Transfers of financial assets that are accounted for as sales are removed from the Consolidated Balance Sheets with any realized gain or loss reflected in the Consolidated Statements of Income during the period in which the sale occurs. Transfers of financial assets that are not accounted for as a sale are treated as a financing.
The Company regularly securitizes the majority of its credit card loans through the transfer of those loans to one of its master trusts (the Trusts). The Company performs the decision making for the Trusts, as well as servicing the cardholder accounts that generate the credit card loans held by the Trusts. In its capacity as a servicer, the Company administers the loans, collects payments and charges-off uncollectible balances. Servicing fees are earned by a subsidiary of ADSC, which are eliminated in consolidation.
The Trusts are VIEs because they have insufficient equity at risk to finance their activities – being the issuance of debt securities and notes, collateralized by the underlying credit card loans. Because the Company performs the decision making and servicing for the Trusts, it has the power to direct the activities that most significantly impact the Trusts’ economic performance (the collection of the underlying credit card loans). In addition, the Company holds all of the variable interests in the Trusts, with the exception of the liabilities held by third-parties. These variable interests provide the Company with the right to receive benefits and the obligation to absorb losses, which could be significant to the Trusts. As a result of these considerations, the Company is deemed to be the primary beneficiary of the Trusts and therefore consolidates the Trusts.
The Trusts issue debt securities and notes, which are non-recourse to the Company. The collections on the securitized credit card loans held by the Trusts are available only for payment of those debt securities and notes, or other obligations arising in the securitization transactions. For its securitized credit card loans, during the initial phase of a securitization reinvestment period, the Company generally retains principal collections in exchange for the transfer of additional credit card loans into the securitized pool of assets. During the amortization or accumulation period of a securitization, the investors’ share of principal collections (in certain cases, up to a maximum specified amount each month) is either distributed to the investors or held in an account until it accumulates to the total amount due, at which time it is paid to the investors in a lump sum.
The Company is required to maintain minimum interests in its Trusts ranging from 4% to 10% of the securitized credit card loans. This requirement is met through a transferor’s interest and is supplemented through excess funding deposits which represent cash amounts deposited with the trustee of the securitizations. Cash collateral, restricted deposits are generally released proportionately as investors are repaid. Under the terms of the Trusts, the occurrence of certain triggering events associated with the performance of the securitized credit card loans in each Trust could result in certain required actions, including payment of Trust expenses, the establishment of reserve funds, or early amortization of the debt securities and/or notes, in a worst-case scenario. During the years ended December 31, 2021, 2020 and 2019, no such triggering events occurred.
The following tables provide the total securitized credit card loans and related delinquencies as of December 31, and net principal charge-offs of securitized credit card loans for the years ended December 31:
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (in millions) | ||||
Total credit card loans – available to settle obligations of consolidated VIEs | | $ | 11,215 | | $ | 11,208 |
Of which: principal amount of credit card loans 91 days or more past due | | $ | 159 | | $ | 201 |
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Net charge-offs of securitized principal | | $ | 453 | | $ | 756 | | $ | 908 |
F-21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
6. AVAILABLE-FOR-SALE SECURITIES
The Company’s available-for-sale (AFS) securities consist of available-for-sale debt securities, equity securities, U.S. Treasury bonds and mutual funds. These investments are carried at fair value on the Consolidated Balance Sheets within Other assets. For any AFS debt securities in an unrealized loss position, the CECL methodology requires estimation of the lifetime expected credit losses which then would be recognized in the Consolidated Statements of Income by establishing, or adjusting an existing allowance for those credit losses. The Company did not have any such credit losses for the periods presented. Any unrealized gains, or any portion of a security’s non-credit-related unrealized losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax. The Company typically invests in highly-rated securities with low probabilities of default. Gains and losses on investments in equity securities are recorded in Other non-interest expenses in the Consolidated Statements of Income. Realized gains and losses are recognized upon disposition of the securities, using the specific identification method. The table below reflects unrealized gains and losses as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | ||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| | |
| Amortized |
| Unrealized |
| Unrealized |
| | | ||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
| | (in millions) | ||||||||||||||||||||||
Available-for-sale securities | | $ | 237 | | $ | 4 | | $ | (2) | | $ | 239 | | $ | 219 | | $ | 6 | | $ | — | | $ | 225 |
Total | | $ | 237 | | $ | 4 | | $ | (2) | | $ | 239 | | $ | 219 | | $ | 6 | | $ | — | | $ | 225 |
The following table provides information about the Company’s AFS debt securities with gross unrealized losses, as of December 31, 2021, and the length of time such individual securities have been in a continuous unrealized loss position. The gross unrealized losses were insignificant on AFS debt securities as of December 31, 2020.
| | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
|
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Available-for-sale securities | | $ | 57 | | $ | (1) | | $ | 15 | | $ | (1) | | $ | 72 | | $ | (2) |
Total | | $ | 57 | | $ | (1) | | $ | 15 | | $ | (1) | | $ | 72 | | $ | (2) |
At December 31, 2021, the amortized cost and estimated fair value of the Company’s AFS securities by contractual maturity, are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less (1) | | $ | 65 | | $ | 65 |
Due after one year through five years | | | — | | | — |
Due after five years through ten years | |
| — | |
| — |
Due after ten years | |
| 172 | |
| 174 |
Total | | $ | 237 | | $ | 239 |
(1) | Includes mutual funds, which do not have a stated maturity. |
There were 0 realized gains or losses from the sale of any AFS securities for the years ended December 31, 2021, 2020 and 2019.
F-22
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
7. PROPERTY AND EQUIPMENT, NET
Furniture, equipment, buildings and leasehold improvements are carried at cost less accumulated depreciation, and depreciation is measured on a straight-line basis. Costs incurred during construction are capitalized; depreciation begins once the asset is placed in service. As of December 31, 2021, the Company’s furniture and equipment has remaining estimated useful lives ranging from less than one year to 10 years. Leasehold improvements are depreciated over the lesser of the remaining terms of the respective leases, or the economic lives of the improvements, and range from less than one year to 17 years, at December 31, 2021.
Costs associated with the acquisition or development of internal-use software are also capitalized and recorded in Property and equipment, net. Once the internal-use software is ready for its intended use, the cost is amortized on a straight-line basis over the software’s estimated useful life. As of December 31, 2021, the Company’s internal-use software has remaining estimated useful lives ranging from less than one year to four years.
The Company reviews long-lived assets and asset groups for impairment whenever events or circumstances indicate their carrying amounts may not be recoverable. An impairment is recognized if the carrying amount is not recoverable and exceeds the asset or asset group’s fair value.
With the Bread acquisition on December 3, 2020, the Company acquired $91 million of developed technology recorded in Property and equipment, net, which is being amortized over a 5 year life; the Company also impaired $4 million in capitalized software with the acquisition, which is included in Non-interest expenses in the Consolidated Statements of Income for the year ended December 31, 2020. Also during the fourth quarter of 2020, the Company determined it would reduce its real estate footprint and cease use of certain properties with the intent to sublease, triggering an impairment analysis of certain property and equipment. As a result of the analysis, the Company recorded asset impairment charges of $3 million and accelerated depreciation expense of $25 million, which is included in Non-interest expenses in the Consolidated Statements of Income for the year ended December 31, 2020.
Property and equipment consist of the following as of December 31:
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (in millions) | ||||
Internal-use computer software and development | | $ | 263 | | $ | 248 |
Furniture and equipment | |
| 107 | |
| 122 |
Land and leasehold improvements | |
| 76 | |
| 90 |
Construction in progress | |
| 25 | |
| 24 |
Total | |
| 471 | |
| 484 |
Accumulated depreciation and amortization | |
| (256) | |
| (271) |
Property and equipment, net | | $ | 215 | | $ | 213 |
Depreciation expense totaled $26 million, $57 million and $30 million for the years ended December 31, 2021, 2020 and 2019, respectively, and includes purchased software. Amortization expense on capitalized internal-use software costs totaled $37 million, $15 million and $18 million for the years ended December 31, 2021, 2020 and 2019, respectively.
As of December 31, 2021 and 2020, the net amount of unamortized capitalized internal-use software costs included in Property and equipment, net on the Consolidated Balance Sheets was $113 million and $118 million, respectively.
8. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill is reviewed at least annually for impairment, or more frequently if circumstances indicate that an impairment is probable, using qualitative or quantitative analysis. No goodwill impairment has been recognized during any of the years ended December 31, 2021, 2020, or 2019.
F-23
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company’s productschanges in the carrying amount of goodwill for the years ended December 31, 2021 and services are reported under 2 segments—LoyaltyOne and Card Services,2020, respectively, were as shown below. The following tables present revenue disaggregated by major source, as well as geographic region based on the location of the subsidiary that generally correlates with the location of the customer:follows (in millions):
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Year Ended December 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 290.1 | | $ | — | | $ | — | | $ | 290.1 |
Short-term loyalty programs | |
| 635.5 | |
| — | |
| — | |
| 635.5 |
Servicing fees, net | |
| — | |
| (180.7) | |
| — | |
| (180.7) |
Other | |
| 94.9 | |
| — | |
| 0.4 | |
| 95.3 |
Revenue from contracts with customers | | $ | 1,020.5 | | $ | (180.7) | | $ | 0.4 | | $ | 840.2 |
| | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 4,728.5 | |
| — | |
| 4,728.5 |
Investment income | |
| 12.6 | |
| — | |
| — | |
| 12.6 |
Total | | $ | 1,033.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 5,581.3 |
| | | | |
Balance at December 31, 2019 | | $ | 264 | |
Goodwill acquired during the period (1) | |
| 370 | |
Balance at December 31, 2020 | | $ | 634 | |
Goodwill acquired during the period | |
| — | |
Balance at December 31, 2021 | | $ | 634 | |
(1) | Fully related to the acquisition of Bread in December 2020. |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Year Ended December 31, 2018 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 352.3 | | $ | — | | $ | — | | $ | 352.3 |
Short-term loyalty programs | |
| 613.8 | |
| — | |
| — | |
| 613.8 |
Servicing fees, net | |
| — | |
| (97.3) | |
| — | |
| (97.3) |
Other | |
| 90.7 | |
| — | |
| 0.6 | |
| 91.3 |
Revenue from contracts with customers | | $ | 1,056.8 | | $ | (97.3) | | $ | 0.6 | | $ | 960.1 |
| | | | | | | | | | | | |
Finance charges, net | |
| — | |
| 4,694.9 | |
| — | |
| 4,694.9 |
Investment income | |
| 11.6 | |
| — | |
| — | |
| 11.6 |
Total | | $ | 1,068.4 | | $ | 4,597.6 | | $ | 0.6 | | $ | 5,666.6 |
There were no accumulated goodwill impairment losses as of both December 31, 2021 and 2020.
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Year Ended December 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 40.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 4,588.3 |
Canada | |
| 352.2 | |
| — | |
| — | |
| 352.2 |
Europe, Middle East and Africa | |
| 449.1 | |
| — | |
| — | |
| 449.1 |
Asia Pacific | |
| 121.7 | |
| — | |
| — | |
| 121.7 |
Other | |
| 70.0 | |
| — | |
| — | |
| 70.0 |
Total | | $ | 1,033.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 5,581.3 |
Intangible Assets, net
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | | |
Year Ended December 31, 2018 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Disaggregation of Revenue by Geographic Region: | | | | | | | | | | |||
| | | | | | | | | | | | |
United States | | $ | 23.1 | | $ | 4,597.6 | | $ | 0.6 | | $ | 4,621.3 |
Canada | |
| 411.3 | |
| — | |
| — | |
| 411.3 |
Europe, Middle East and Africa | |
| 463.2 | |
| — | |
| — | |
| 463.2 |
Asia Pacific | |
| 122.0 | |
| — | |
| — | |
| 122.0 |
Other | |
| 48.8 | |
| — | |
| — | |
| 48.8 |
Total | | $ | 1,068.4 | | $ | 4,597.6 | | $ | 0.6 | | $ | 5,666.6 |
The Company’s identifiable intangible assets consist of both amortizable and non-amortizable intangible assets. Definite-lived intangible assets are subject to amortization and are amortized on a straight-line basis over their estimated useful lives; indefinite-lived intangible assets are not amortized. The Company reviews long-lived assets and asset groups, including intangible assets, for impairment whenever events and circumstances indicate their carrying amounts may not be recoverable; recognizing an impairment if the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. NaN impairment of intangible assets has been recognized during any of the years ended December 31, 2021, 2020, or 2019.
Intangible assets consist of the following as of December 31:
| | | | | | | | | | | |
| | 2021 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Useful Life | |||
| | (in millions) | | | |||||||
Definite-Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 9 | | $ | (3) | | $ | 6 |
| 3 years |
Premium on purchased credit card loan portfolios |
| 133 | | | (89) | |
| 44 |
| 1-13 years | |
Non-compete agreements | |
| 2 | | | — | | | 2 |
| 5 years |
| | $ | 144 | | $ | (92) | | $ | 52 | | |
Indefinite-Lived Assets | | | | | | | | | | | |
Tradename | |
| 1 | |
| — | |
| 1 |
| Indefinite life |
Total intangible assets | | $ | 145 | | $ | (92) | | $ | 53 | | |
| | | | | | | | | | | |
| | 2020 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Useful Life | |||
| | (in millions) | | | |||||||
Definite-Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 9 | | $ | — | | $ | 9 |
| 3 years |
Premium on purchased credit card loan portfolios |
| 138 | | | (73) | |
| 65 |
| 1-13 years | |
Non-compete agreements | |
| 2 | | | — | | | 2 |
| 5 years |
| | $ | 149 | | $ | (73) | | $ | 76 | | |
Indefinite-Lived Assets | | | | | | | | | | | |
Tradename | |
| 1 | |
| — | |
| 1 |
| Indefinite life |
Total intangible assets | | $ | 150 | | $ | (73) | | $ | 77 | | |
With the Bread acquisition on December 3, 2020, the Company acquired $11 million of intangible assets, consisting of customer relationships of $9 million and a non-compete agreement of $2 million that are being amortized over weighted average lives of 3.0 years and 5.0 years, respectively.
F-19F-24
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Amortization expense related to intangible assets was approximately $29 million, $34 million and $48 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows for the years ending December 31 (in millions):
| | | |
2022 | | $ | 20 |
2023 | |
| 15 |
2024 | |
| 11 |
2025 | |
| 2 |
2026 | |
| 1 |
Thereafter | |
| 3 |
| | $ | 52 |
LoyaltyOne9. OTHER ASSETS
LoyaltyOne provides coalition
The following is a summary of Other assets as of December 31:
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (in millions) | ||||
Restricted cash (1) | | $ | 877 | | $ | 323 |
Deferred contract costs | | | 364 | | | 311 |
Deferred tax asset, net | |
| 302 | |
| 289 |
Accounts receivable, net (2) | | | 151 | | | 114 |
Right of use assets - operating | | | 97 | | | 119 |
Investment in LVI | | | 50 | | | — |
Other (3) | | | 151 | | | 207 |
Total other assets | | $ | 1,992 | | $ | 1,363 |
(1) | Represents principal accumulation for the repayment of debt issued by consolidated variable interest entities that matures in 2022 or that matured in 2021, at December 31, 2021 and 2020, respectively. |
(2) | Primarily related to amounts receivable from brand partners, which are recorded at the invoiced amount and do not bear interest. |
(3) | Primarily comprised of prepaid expenses and non-income-based tax receivables. |
10. LEASES
The Company has various operating leases for facilities and short-term loyalty programs throughequipment which are recorded as lease-related assets (right-of-use assets) and liabilities for those leases with terms greater than 12 months. The Company does not have any finance leases. The Company determines if an arrangement is a lease or contains a lease at inception, and does not separate lease and non-lease components. Right-of-use assets are recognized as of the lease commencement date at amounts equal to the respective lease liabilities, adjusted for any prepaid lease payments, initial direct costs and lease incentives. The Company’s lease liabilities are recognized at the present value of the contractual fixed lease payments discounted using the Company’s Canadian AIR MILES Reward Program and BrandLoyalty. The AIR MILES Reward Programincremental borrowing rate, as the rate implicit in the lease is a coalition loyalty program for sponsors, who pay LoyaltyOne a fee per AIR MILES reward mile issued, in return for which LoyaltyOne provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made short-term loyalty programs for grocers worldwide.
Total consideration fromtypically not readily determinable, as of the issuancelease commencement date or upon modification of AIR MILES reward milesthe lease. Operating lease expense is allocated to 3 performance obligations: redemption, service, and brand, basedrecognized on a relative standalone selling price basis. Because the standalone selling price is not directly observable for the 3 performance obligations, the Company estimates the standalone selling price for the redemption and the service performance obligations based on cost plus a reasonable margin. The Company estimates the standalone selling price of the brand performance obligation using a relief from royalty approach. Accordingly, management determines the estimated standalone selling price by considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize. The number of AIR MILES reward miles issued and redeemed are factored into the estimates, as management estimates the standalone selling prices and volumesstraight-line basis over the lease term, while variable lease payments are expensed as incurred. As of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base.
Redemption revenue is recognized at a point in time, as the AIR MILES reward miles are redeemed. For the fulfillment of certain rewards where the AIR MILES Reward Program does not control the goods or services before they are transferred to the collector, revenue is recorded on a net basis. Service revenue is recognized over time using a time-elapsed output method, the estimated life of an AIR MILES reward mile. Revenue from the brand is recognized over time, using an output method, when an AIR MILES reward mile is issued. Revenue associated with both the service and brand is included in service revenue inDecember 31, 2021, the Company’s consolidated statements of income.
The amount of revenue recognized in a period is subject to the estimate of breakage and the estimated life of an AIR MILES reward mile. Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure. Throughout 2017, 2018 and 2019, the Company’s breakage rate was 20%. During 2017, the Company changed its estimated life of an AIR MILES reward mileleases have remaining lease terms ranging from 42 months to 38 months. Throughout 2018 and 2019, the Company’s estimated life of a mile was 38 months.
The short-term loyalty programs typically last between 12 and 20 weeks, depending on the nature of the program, with contract terms usually less than one year, in length. These programsup to 17 years, some of which may include renewal options. Leases with an initial term of 12 months or less are tailorednot recognized on the Consolidated Balance Sheets; lease expense for the specific retailer client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Revenuethese leases is recognized aton a straight-line basis over the point in time control passes from BrandLoyalty to the retailer.lease term.
As with other long-lived assets, right-of-use assets are reviewed for impairment whenever events and circumstances indicate their carrying amounts may not be recoverable. In the fourth quarter of 2020, the Company performed an impairment assessment for its right-of-use assets associated with its locations where it ceased use with the intent to
F-20F-25
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Contract Liabilities. Thesublease. As a result, the Company records a contract liability when cash payments are receivedrecorded an asset impairment charge of $18 million, which is included in advance of its performance, which applies to the service and redemption of an AIR MILES reward mile and the reward products for its short-term loyalty programs.
A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:
| | | | | | | | | |
| | Deferred Revenue | |||||||
|
| Service |
| Redemption |
| Total | |||
| | (in millions) | |||||||
Balance at January 1, 2018 | | $ | 283.8 | | $ | 683.1 | | $ | 966.9 |
Cash proceeds | |
| 194.7 | |
| 324.8 | |
| 519.5 |
Revenue recognized (1) | |
| (209.2) | |
| (328.4) | |
| (537.6) |
Other | |
| — | |
| 0.7 | |
| 0.7 |
Effects of foreign currency translation | |
| (21.3) | |
| (52.9) | |
| (74.2) |
Balance at December 31, 2018 | | | 248.0 | | | 627.3 | | | 875.3 |
Cash proceeds | |
| 192.0 | |
| 313.3 | |
| 505.3 |
Revenue recognized (1) | |
| (193.7) | |
| (309.2) | |
| (502.9) |
Other | |
| — | |
| 0.6 | |
| 0.6 |
Effects of foreign currency translation | |
| 12.3 | |
| 31.4 | |
| 43.7 |
Balance at December 31, 2019 | | $ | 258.6 | | $ | 663.4 | | $ | 922.0 |
Amounts recognized in the consolidated balance sheets: | |
|
| |
|
| |
|
|
Deferred revenue (current) | | $ | 144.5 | | $ | 663.4 | | $ | 807.9 |
Deferred revenue (non-current) | | $ | 114.1 | | $ | — | | $ | 114.1 |
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 revenueNon-interest expenses in the amountConsolidated Statements of $144.5 million in 2020, $79.5 million in 2021, $33.5 million in 2022, and $1.1 million in 2023.
Additionally, contract liabilitiesIncome for the Company’s short-term loyalty programs are recognized in other current liabilities in the Company’s consolidated balance sheets. In 2019, the beginning balance as of January 1, 2019 was $110.2 million and the closing balance as of December 31, 2019 was $122.8 million, with the change due to cash payments received in advance of program performance, offset in part by revenue recognized of approximately $526.6 million during the year ended December 31, 2019. In 2018,2020.
The components of lease expense were as follows for the beginning balanceyears ended December 31:
| | | | | | | | | |
|
| 2021 | | | 2020 | 2019 | |||
| | (in millions) | |||||||
Operating lease cost |
| $ | 23 | | $ | 25 | | $ | 24 |
Short-term lease cost | | | — | | | 1 | | | 1 |
Variable lease cost | | | 2 | | | 2 | | | 3 |
Sublease income | | | (5) | | | (1) | | | — |
Total | | $ | 20 | | $ | 27 | | $ | 28 |
The table below reflects other lease-related information as of January 1, 2018December 31:
| | | | | | |
|
| 2021 | | 2020 | ||
Weighted-average remaining lease term (in years): | | | | | | |
Operating leases | | | 9.8 | | | 10.3 |
Weighted-average discount rate: | | | | | | |
Operating leases | | | 5.8% | | | 5.8% |
Supplemental lease-related cash flow information was $87.5 million andas follows for the closing balanceyears ended December 31:
| | | | | | | | | |
|
| 2021 | | 2021 | | 2020 | |||
| | (in millions) | |||||||
Cash paid for amounts included in the measurement of lease liabilities: |
| | | | | | | | |
Operating cash flows from operating leases | | $ | 25 | | $ | 28 | | $ | 27 |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | | | |
Operating leases | | $ | 5 | | $ | 1 | | $ | 23 |
Maturities of the Company’s lease liabilities by year were as follows as of December 31, 2018 was $110.2 million, with the change due to cash payments received in advance of program performance revenue, offset in part by revenue recognized of approximately $506.5 million during the year ended December 31, 2018.2021 (in millions):
Card Services
Card Services is a provider of branded credit card programs, both private label and co-brand, that drive sales for its brand partners. For these private label and co-brand programs, Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services.
Finance charges, net. Finance charges, net represents revenue earned on customer accounts owned by the Company, and is recognized in the period in which it is earned. The Company recognizes earned finance charges, interest income and fees on credit card and loan receivables in accordance with the contractual provisions of the credit arrangements, which are within the scope of ASC 310, “Receivables.” Interest and fees continue to accrue on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, in the month during which an account becomes 180 days delinquent. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to finance charges, net. Pursuant to ASC 310-20, “Receivables - Nonrefundable Fees and Other Costs,” direct
F-21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
loan origination costs on credit card and loan receivables are deferred and amortized on a straight-line basis over a one-year period and recorded as a reduction to finance charges, net. As of December 31, 2019 and 2018, the remaining unamortized deferred costs related to loan origination were $47.1 million and $40.6 million, respectively.
Servicing fees, net. Servicing fees, net represents revenue earned from retailers and cardholders from processing and servicing accounts, and is recognized as such services are performed.
Revenue earned from retailers primarily consists of merchant and interchange fees, which are transaction fees charged to the merchant for the processing of credit card transactions. Merchant and interchange fees are recognized at a point in time upon the cardholder purchase.
Our credit card program agreements may also provide for payments to the retailer based on purchased volume or if certain contractual incentives are met, such as if the economic performance of the program exceeds a contractually defined threshold. These amounts are recorded as a reduction of revenue.
Revenue earned from cardholders primarily consists of monthly fees from the purchase of certain payment protection products purchased by our cardholders. The fees are based on the average cardholder account balance, and these products can be cancelled at any time by the cardholder. Revenue is recognized over time using a time-elapsed output method.
Contract Costs. The Company recognizes an asset for the incremental costs of obtaining or fulfilling a contract with the retailer for a credit card program agreement to the extent it expects to recover those costs, in accordance with ASC 340-40. Contract costs are deferred and amortized on a straight-line basis over the respective term of the agreement, which represents the period of service. Depending on the nature of the contract costs, the amortization is recorded as a reduction to revenue, or costs of operations, in the Company’s consolidated statements of income. As of December 31, 2019 and 2018, the remaining unamortized contract costs were $406.8 million and $372.5 million, respectively, and are included in other current assets and other non-current assets in the Company’s consolidated balance sheets.
For the year ended December 31, 2019, amortization of contract costs recorded as a reduction to revenue totaled $71.8 million and amortization of contract costs recorded to cost of operations expense totaled $11.9 million. For the year ended December 31, 2018, amortization of contract costs recorded as a reduction to revenue totaled $68.7 million and amortization of contract costs recorded to cost of operations expense totaled $9.8 million. NaN impairment was recognized during the periods presented.
Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which the Company has the right to invoice for services performed.
The Company has elected the practical expedient from ASC 340-40 with respect to contract costs, and expenses the incremental costs as incurred for those costs that would otherwise be recognized with an amortization period of one year or less. These costs are recorded to cost of operations expense in the Company’s consolidated statements of income.
| | | |
2022 | | $ | 20 |
2023 | |
| 21 |
2024 | |
| 21 |
2025 | |
| 20 |
2026 | |
| 19 |
Thereafter | |
| 86 |
Total undiscounted lease liabilities | | | 187 |
Less: Amount representing interest | | | (47) |
Total present value of minimum lease payments | | $ | 140 |
F-22F-26
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
4. EARNINGS PER SHARE11. BORROWINGS OF LONG-TERM AND OTHER DEBT
TheLong-term and other debt consisted of the following table sets forth the computationas of basic and diluted net income per share of common stock for the periods indicated:December 31:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions, except per share amounts) | |||||||
Basic income per share: | | | | | | | | | |
Numerator: | | | | | | | | | |
Income from continuing operations | | $ | 572.6 | | $ | 945.5 | | $ | 769.2 |
Less: Dividends declared on preferred stock | | | 2.8 | | | — | | | — |
Less: Allocation of undistributed earnings | | | 6.8 | | | — | | | — |
Income from continuing operations - basic | | | 563.0 | | | 945.5 | | | 769.2 |
(Loss) income from discontinued operations, net of tax | | | (294.6) | | | 17.6 | | | 19.5 |
Net income - basic | | $ | 268.4 | | $ | 963.1 | | $ | 788.7 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Weighted average shares, basic | |
| 50.0 | |
| 54.9 | |
| 55.7 |
| | | | | | | | | |
Basic income (loss) attributable to common stockholders per share: | | | | | | | | | |
Income from continuing operations | | $ | 11.25 | | $ | 17.24 | | $ | 13.82 |
(Loss) income from discontinued operations | | $ | (5.89) | | $ | 0.32 | | $ | 0.35 |
Net income per share | | $ | 5.36 | | $ | 17.56 | | $ | 14.17 |
| | | | | | | | | |
Diluted income per share (1): | | | | | | | | | |
Numerator: | | | | | | | | | |
Income from continuing operations | | $ | 572.6 | | $ | 945.5 | | $ | 769.2 |
(Loss) income from discontinued operations, net of tax | | | (294.6) | | | 17.6 | | | 19.5 |
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Weighted average shares, basic | |
| 50.0 | |
| 54.9 | |
| 55.7 |
Weighted average effect of dilutive securities: | | | | | | | | | |
Shares from assumed conversion of preferred stock | |
| 0.8 | |
| — | |
| — |
Net effect of dilutive stock options and unvested restricted stock (2) | |
| 0.1 | |
| 0.2 | |
| 0.2 |
Denominator for diluted calculation | |
| 50.9 | |
| 55.1 | |
| 55.9 |
| | | | | | | | | |
Diluted income (loss) attributable to common stockholders per share: | | | | | | | | | |
Income from continuing operations | | $ | 11.24 | | $ | 17.17 | | $ | 13.75 |
(Loss) income from discontinued operations | | $ | (5.78) | | $ | 0.32 | | $ | 0.35 |
Net income per share | | $ | 5.46 | | $ | 17.49 | | $ | 14.10 |
| | | | | | | | | | |
Description |
| 2021 |
| 2020 |
| Contractual Maturities |
| Interest Rates | ||
| | (Dollars in millions) | | | | | ||||
Long-term and other debt: | | | | | | | | | | |
Revolving line of credit | | $ | — | | $ | — |
| July 2024 |
| (1) |
Term loans | |
| 658 | |
| 1,484 |
| July 2024 |
| (2) |
Senior notes due 2024 | | | 850 | | | 850 | | December 2024 | | 4.750% |
Senior notes due 2026 | | | 500 | | | 500 | | January 2026 | | 7.000% |
Subtotal | |
| 2,008 | |
| 2,834 | | | | |
Less: Unamortized debt issuance costs | | | 22 | | | 28 | | | | |
Total long-term and other debt | | $ | 1,986 | | $ | 2,806 | | | | |
| | | | | | | | | | |
Deposits: | | | | | | | | | | |
Certificates of deposit | | $ | 5,447 | | $ | 6,015 |
| Various – Jan 2022 to Dec 2026 |
| 0.20% to 3.75% |
Money market and other non-maturity deposits | |
| 5,586 | |
| 3,790 |
| Non-maturity |
| (3) |
Subtotal | |
| 11,033 | |
| 9,805 | | | | |
Less: Unamortized debt issuance costs | | | 6 | | | 12 | | | | |
Total deposits | | $ | 11,027 | | $ | 9,793 | | | | |
| | | | | | | | | | |
Debt issued by consolidated VIEs: | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 1,572 | | $ | 3,424 |
| Various – Feb 2022 to Sep 2022 |
| 2.21% to 3.61% |
Conduit asset-backed securities | |
| 3,883 | |
| 2,205 |
| Various – Aug 2022 to Oct 2023 |
| (4) |
Secured loan facility | | | �� | | | 86 | | | | |
Subtotal | |
| 5,455 | |
| 5,715 | | | | |
Less: Unamortized debt issuance costs | | | 2 | | | 5 | | | | |
Total debt issued by consolidated VIEs | | $ | 5,453 | | $ | 5,710 | | | | |
| | | | | | | | | | |
Total borrowings of long-term and other debt | | $ | 18,466 | | $ | 18,309 | | | | |
(1) |
(2) |
(3) | The interest rates are based on the Federal Funds rate plus an applicable margin. At December 31, 2021, the interest rates ranged from 0.05% to 3.50%. At December 31, 2020, the interest rates ranged from 0.38% to 3.50%. |
(4) | The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At December 31, 2021, the interest rates ranged from 0.89% to 0.96%. At December 31, 2020, the interest rates ranged from 1.39% to 1.89%. |
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
Certain of the Company’s common stock for an aggregatelong-term debt agreements contain various restrictive financial and non-financial covenants. If the Company does not satisfy these covenants, the maturity of 150,000 shares of Series A Non-Voting Convertible Preferred Stock (“preferred stock”). In October 2019, ValueAct exchangedamounts outstanding may be accelerated and become payable. The Company was in compliance with all 150,000 shares of preferred stock back to common stock. See Note 19, “Stockholders’ Equity,” for more information. Atsuch covenants at December 31, 2019, the Company did not have any shares of preferred stock outstanding.
F-23
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
For the year ended December 31, 2019, the Company’s calculation of basic and diluted EPS was computed using the two-class method for those periods in which participating securities were outstanding. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
5. ACQUISITIONS
2019 Acquisitions:
On February 7, 2019, the Company acquired certain assets as well as the assembled workforce and related office lease agreements of blispay inc. (“Blispay”), a financial technology company, for cash consideration of $6.7 million, and a $1.0 million limited guarantee was issued by the Company as part of the transaction. The acquisition was determined to constitute a business combination under ASC 805, “Business Combinations.” Total assets acquired were $7.3 million, including $5.0 million of capitalized software and $2.3 million of goodwill, with the fair value of the guarantee determined to be approximately $0.6 million on the acquisition date.2021.
Long-term and Other Debt
2017 Acquisitions:
On October 20, 2017, the Company acquired credit card receivables and the associated accounts and assumed a portion of an existing customer care operation, including a facility sublease agreement and approximately 250 employees, from Signet Jewelers Limited (“Signet”) for cash consideration of approximately $945.6 million. This acquisition increases the Company’s presence in the jewelry vertical. The Company determined these acquired activities and assets constituted a business under ASC 805, “Business Combinations,” based on the nature of the inputs, processes and outputs acquired from the transaction. In addition, the parties entered into a long-term agreement under which the Company became the primary issuer of private-label credit cards and related marketing services for Signet. The Company obtained control of the assets and assumed the liabilities on October 20, 2017, and the results of operations have been included since the date of acquisition in the Company’s Card Services segment.Credit Agreement
The Company, engagedas borrower, and certain of its wholly owned subsidiaries, as guarantors, are party to a third party specialist to assist it in the measurement of the fair value of the assets acquired. The fair value of the assets acquired exceeded the cost of the acquisition. Consequently, the Company reassessed the recognitioncredit agreement with various agents and measurement of the identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. The excess value of the net assets acquired over the purchase price of $7.9 million was recordedlenders dated June 14, 2017, as a bargain purchase gain, which was included in cost of operations in the Company’s consolidated statement of income for the year endedamended (the credit agreement). At December 31, 2017.
The following table summarizes2021, the fair values of the assets acquired and the liabilities assumed in the Signet acquisition as of October 20, 2017:
| | | |
|
| As of | |
| | (in millions) | |
Credit card receivables | | $ | 906.3 |
Intangible assets | | | 52.3 |
Total assets acquired | |
| 958.6 |
| | | |
Other liabilities | |
| 0.2 |
Deferred tax liability | |
| 4.9 |
Total liabilities assumed | |
| 5.1 |
| | | |
Net assets acquired | | $ | 953.5 |
Total consideration paid | | | 945.6 |
Gain on business combination | | $ | 7.9 |
F-24
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
6. DISCONTINUED OPERATIONS
Effective April 12, 2019, the Company entered into a definitivecredit agreement to sell its Epsilon segment to Publicis Groupe S.A. for $4.4 billion in cash, subject to certain specified adjustments. Beginning in the first quarter of 2019, Epsilon met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations.”
The sale of Epsilon was completed on July 1, 2019, and the pre-tax gain is shown in the table below.
| | | |
|
| July 1, | |
|
| 2019 | |
| | (in millions) | |
Consideration received (1) | | $ | 4,451.9 |
Net carrying value of assets and liabilities (including other comprehensive income) | |
| 3,939.7 |
Pre-tax gain on deconsolidation | | $ | 512.2 |
The Company recorded transaction costs of approximately $79.0had $658 million for the year ended December 31, 2019 and recorded an after-tax loss on sale of $252.1 million, which is included in loss from discontinued operations, net of taxes. Following the sale of Epsilon, Card Services has continued its existing contractual relationships with Epsilon for digital marketing services.
The following table summarizes the results of discontinued operations for the periods presented:
| | | | | | | | | |
| | | | | | ||||
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 | | 2017 | |||
| | (in millions) | |||||||
Revenue | | $ | 999.6 | | $ | 2,175.1 | | $ | 2,272.1 |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 993.9 | | | 1,744.4 | | | 1,834.8 |
Depreciation and other amortization | | | 29.7 | | | 115.4 | | | 109.4 |
Amortization of purchased intangibles | | | 43.5 | | | 178.3 | | | 200.3 |
Interest expense (1) | | | 64.1 | | | 128.3 | | | 109.0 |
Gain on sale of Epsilon | | | (512.2) | | | — | | | — |
Income before provision (benefit) from income taxes | | | 380.6 | | | 8.7 | | | 18.6 |
Provision (benefit) for income taxes | | | 675.2 | | | (8.9) | | | (0.9) |
(Loss) income from discontinued operations, net of taxes (2) | | $ | (294.6) | | $ | 17.6 | | $ | 19.5 |
F-25
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table summarizes the assets and liabilities of discontinued operations at December 31, 2018:
| | | |
|
| December 31, | |
|
| 2018 | |
| | (in millions) | |
Assets: | | | |
Cash and cash equivalents | | $ | 45.7 |
Accounts receivable, net | | | 519.9 |
Other current assets | | | 56.6 |
Property and equipment, net | | | 306.9 |
Intangible assets, net | | | 322.3 |
Goodwill | | | 2,886.2 |
Other assets | | | 19.8 |
Total assets of discontinued operations | | $ | 4,157.4 |
| | | |
Liabilities: | | | |
Accounts payable | | $ | 72.2 |
Accrued expenses | | | 98.8 |
Other current liabilities | | | 52.5 |
Other liabilities | | | 36.9 |
Total liabilities of discontinued operations | | $ | 260.4 |
Depreciation and amortization and capital expenditures from discontinued operations for the periods presented are as follows:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 | | 2017 | |||
| | (in millions) | |||||||
Depreciation and amortization | | $ | 73.2 | | $ | 293.7 | | $ | 309.7 |
Capital expenditures | | $ | 55.8 | | $ | 106.5 | | $ | 107.2 |
7. 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:
| | | | | | |
|
| December 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
| | (in millions) | ||||
Principal receivables | | $ | 18,413.1 | | $ | 16,869.9 |
Billed and accrued finance charges | |
| 977.3 | |
| 898.3 |
Other | |
| 72.7 | |
| 86.8 |
Total credit card and loan receivables | |
| 19,463.1 | |
| 17,855.0 |
Less: Credit card receivables – restricted for securitization investors | |
| 13,504.2 | |
| 13,418.3 |
Other credit card and loan receivables | | $ | 5,958.9 | | $ | 4,436.7 |
Allowance for Loan Loss
The Company maintains an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The estimate of the allowance for loan loss covers uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.
F-26
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table presents the Company’s allowance for loan loss for the years indicated:
| | | | | | | | | |
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Balance at beginning of year | | $ | 1,038.3 | | $ | 1,119.3 | | $ | 948.0 |
Provision for loan loss | |
| 1,187.5 | |
| 1,016.0 | |
| 1,140.1 |
Allowance associated with credit card and loan receivables transferred | | | — | | | (54.8) | | | (27.9) |
Change in estimate for uncollectible unpaid interest and fees | |
| — | |
| 25.0 | |
| 30.0 |
Recoveries | |
| 234.5 | |
| 214.2 | |
| 196.6 |
Principal charge-offs | |
| (1,289.2) | |
| (1,281.4) | |
| (1,167.5) |
Balance at end of year | | $ | 1,171.1 | | $ | 1,038.3 | | $ | 1,119.3 |
Net charge-offs include theaggregate principal amount of losses fromterm loans outstanding (the term loans) and provided for a $750 million revolving credit cardholders unwilling or unable to pay their account balances,facility (the revolving line of credit) which was undrawn 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. For the years ended December 31, 2019, 2018 and 2017, actual charge-offs for unpaid interest and fees were $808.6 million, $803.1 million and $653.2 million, respectively.2021.
Delinquencies
A credit card account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder’s statement. It is the Company’s policy to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder’s billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.
The following table presents the delinquency trends of the Company’s credit card and loan receivables portfolio:
| | | | | | | | | | | |
| | December 31, | | % of | | December 31, | | % of |
| ||
|
| 2019 |
| Total |
| 2018 |
| Total |
| ||
| | (in millions, except percentages) | | ||||||||
Receivables outstanding - principal | | $ | 18,413.1 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | |
31 to 60 days | | $ | 337.4 | | 1.8 | % | $ | 303.2 |
| 1.8 | % |
61 to 90 days | |
| 233.6 |
| 1.3 | |
| 207.9 |
| 1.3 | |
91 or more days | |
| 496.5 |
| 2.7 | |
| 443.4 |
| 2.6 | |
Total | | $ | 1,067.5 |
| 5.8 | % | $ | 954.5 |
| 5.7 | % |
F-27
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The practice of re-aging an account may affect credit card loan delinquencies and charge-offs. A re-age of an account is intended to assist delinquent cardholders who have experienced financial difficulties but who demonstrate both an ability and willingness to repay the amounts due. Accounts meeting specific defined criteria are re-aged when the cardholder makes one or more consecutive payments aggregating a certain pre-defined amount of their account balance. With re-aging, the outstanding balance of a delinquent account is returned to a current status. For the years ended December 31, 2019, 2018 and 2017, the Company’s re-aged accounts represented 2.4%, 2.1% and 1.4%, respectively, of total credit card and loan receivables for each period and thus do not have a significant impact on the Company’s delinquencies or net charge-offs. The Company’s re-aging practices comply with regulatory guidelines.
Modified Credit Card Receivables
The Company holds certain credit card receivables for which the terms have been modified. The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. These concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms.
Credit card receivables for which temporary hardship and permanent concessions were granted are each considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivable balance and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of ASC 450-20, “Loss Contingencies.” If the Company applied accounting under ASC 310-40, “Troubled Debt Restructurings by Creditors,” to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.
The Company had $308.7 million and $292.4 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $75.4 million and $101.3 million, respectively, as of December 31, 2019 and 2018. These modified credit card receivables represented less than 2% of the Company’s total credit card receivables as of both December 31, 2019 and 2018.
The average recorded investment in the impaired credit card receivables was $295.4 million and $340.9 million for the years ended December 31, 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 $22.6 million, $27.9 million and $19.7 million for the years ended December 31, 2019, 2018 and 2017, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.
F-28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables provide information on credit card receivables that are considered troubled debt restructurings as described above, which entered into a modification program during the specified periods:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| Year Ended December 31, 2018 | | ||||||||||||
|
| |
| Pre- |
| Post- |
| |
| Pre- |
| Post- |
| ||||
| | | | modification | | modification |
| | | modification | | modification | | ||||
| | Number of | | Outstanding | | Outstanding |
| Number of | | Outstanding | | Outstanding | | ||||
| | Restructurings | | Balance | | Balance |
| Restructurings | | Balance | | Balance | | ||||
| | (Dollars in millions) | | ||||||||||||||
Troubled debt restructurings – credit card receivables |
| 259,311 |
| $ | 381.4 |
| $ | 380.8 | | 501,906 | | $ | 621.4 | | $ | 620.7 | |
The tables below summarize troubled debt restructurings that have defaulted in the specified periods where the default occurred within 12 months of their modification date:
| | | | | | | | | | |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | ||||||
| | Number of | | Outstanding |
| Number of | | Outstanding | ||
|
| Restructurings |
| Balance |
| Restructurings |
| Balance | ||
| | (Dollars in millions) | ||||||||
Troubled debt restructurings that subsequently defaulted – credit card receivables |
| 126,476 | | $ | 170.8 | | 293,591 | | $ | 340.5 |
Age of Credit Card and Loan Receivable Accounts
The following tables set forth, as of December 31, 2019 and 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:
| | | | | | | | | | |
| | December 31, 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 |
| 7.1 |
| 27.8 | % | $ | 4,585.1 |
| 24.9 | % |
13-24 Months |
| 3.9 |
| 15.3 | |
| 2,826.6 |
| 15.4 | |
25-36 Months |
| 3.2 |
| 12.6 | |
| 2,423.1 |
| 13.2 | |
37-48 Months |
| 2.5 |
| 9.7 | |
| 2,051.7 |
| 11.1 | |
49-60 Months |
| 1.8 |
| 7.0 | |
| 1,509.7 |
| 8.2 | |
Over 60 Months |
| 7.0 |
| 27.6 | |
| 5,016.9 |
| 27.2 | |
Total |
| 25.5 |
| 100.0 | % | $ | 18,413.1 |
| 100.0 | % |
| | | | | | | | | | |
| | December 31, 2018 |
| |||||||
|
| |
| |
| | |
| Percentage of |
|
| | Number of | | Percentage of | | Principal | | Principal |
| |
| | Active Accounts | | Active Accounts | | Receivables | | Receivables |
| |
Age of Accounts Since Origination |
| with Balances |
| with Balances |
| Outstanding |
| Outstanding |
| |
| | (in millions, except percentages) | | |||||||
0-12 Months |
| 6.5 |
| 26.7 | % | $ | 4,099.9 |
| 24.3 | % |
13-24 Months |
| 4.2 |
| 17.1 | |
| 2,887.8 |
| 17.1 | |
25-36 Months |
| 3.1 |
| 13.0 | |
| 2,428.9 |
| 14.4 | |
37-48 Months |
| 2.2 |
| 9.1 | |
| 1,795.0 |
| 10.7 | |
49-60 Months |
| 1.7 |
| 7.1 | |
| 1,367.2 |
| 8.1 | |
Over 60 Months |
| 6.5 |
| 27.0 | |
| 4,291.1 |
| 25.4 | |
Total |
| 24.2 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
F-29
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Credit Quality
The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 91 or more days past due at any time within the next 12 months. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects the composition of the Company’s credit card and loan receivables by obligor credit quality as of December 31, 2019 and 2018:
| | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| ||||||
|
| | |
| Percentage of |
| | |
| Percentage of |
|
| | Total Principal | | Principal | | Total Principal | | Principal |
| ||
Probability of an Account Becoming 91 or More Days Past | | Receivables | | Receivables | | Receivables | | Receivables |
| ||
Due or Becoming Charged-off (within the next 12 months) |
| Outstanding |
| Outstanding |
| Outstanding |
| Outstanding |
| ||
| | (in millions, except percentages) | | ||||||||
No Score | | $ | 290.0 |
| 1.6 | % | $ | 249.0 |
| 1.5 | % |
27.1% and higher | |
| 1,591.4 |
| 8.6 | |
| 1,394.0 |
| 8.2 | |
17.1% - 27.0% | |
| 1,065.4 |
| 5.8 | |
| 770.1 |
| 4.6 | |
12.6% - 17.0% | |
| 1,127.7 |
| 6.1 | |
| 1,047.6 |
| 6.2 | |
3.7% - 12.5% | |
| 7,985.8 |
| 43.4 | |
| 6,877.6 |
| 40.8 | |
1.9% - 3.6% | |
| 3,285.3 |
| 17.8 | |
| 3,060.7 |
| 18.1 | |
Lower than 1.9% | |
| 3,067.5 |
| 16.7 | |
| 3,470.9 |
| 20.6 | |
Total | | $ | 18,413.1 |
| 100.0 | % | $ | 16,869.9 |
| 100.0 | % |
Transfer of Financial Assets
During 2018, the Company originated loan receivables under one previous client agreement, and after origination, these loan receivables were sold to the client at par value plus accrued interest. These transfers qualified for sale treatment as they met the conditions established in ASC 860-10, “Transfers and Servicing.” Following the sale, the client owned the loan receivables, assumed the risk of loss in the event of loan defaults and was responsible for all servicing functions related to the loan receivables. 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 consolidated statements of cash flows.
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 $408.0 million and $1,951.6 million as of December 31, 2019 and 2018, respectively.
During the year ended December 31, 2019, the Company transferred 1 credit card portfolio totaling approximately $510.3 million into credit card receivables held for sale, and sold 13 credit card portfolios for cash consideration of approximately $2.1 billion and recognized approximately $43.9 million in net gains on the transactions. The Company recorded portfolio valuation adjustments, which are reflected in cost of operations expense, of $189.8 million for the year ended December 31, 2019.
For the year ended December 31, 2019, the portfolio sales were as follows:
F-30
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
During the year ended December 31, 2018, the Company transferred 11 credit card portfolios totaling approximately $2.3 billion into credit card receivables held for sale, and sold 6 credit card portfolios for cash consideration of approximately $1.2 billion and recognized approximately $29.2 million in net gains on the transactions. The Company recorded portfolio valuation adjustments of $101.6 million for the year ended December 31, 2018.
In February 2020, the Company sold 1 credit card portfolio, subject to certain conditions as defined in the purchase and sale agreement. At December 31, 2019, the carrying value of this portfolio was $313.9 million and included in credit card receivables held for sale in the Company’s consolidated December 31, 2019 balance sheet.
Portfolio Acquisitions
During the year ended December 31, 2019, the Company acquired 4 credit card portfolios for cash consideration of approximately $924.8 million, which consisted of approximately $843.5 million of credit card receivables, $35.7 million of intangible assets and $45.6 million of other non-current assets, subject to customary purchase price adjustments.
During the year ended December 31, 2017, the Company acquired approximately $906.3 million of credit card receivables in connection with the Signet acquisition. For more information, see Note 5, “Acquisitions.”
Securitized Credit Card Receivables
The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of the WFN Trusts and the WFC Trust. The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore are not reflected in the consolidated statements of income for the years ended December 31, 2019, 2018 and 2017.
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.
During the initial phase of a securitization reinvestment period, the Company generally retains principal collections in exchange for the transfer of additional credit card receivables into the securitized pool of assets. During the amortization or accumulation period of a securitization, the investors’ share of principal collections (in certain cases, up to a maximum specified amount each month) is either distributed to the investors or held in an account until it accumulates to the total amount due, at which time it is paid to the investors in a lump sum.
The Company is required to maintain minimum interests ranging from 4% to 10% of the securitized credit card receivables. This requirement is met through transferor’s interest and is supplemented through excess funding deposits. Excess funding deposits represent cash amounts deposited with the trustee of the securitizations. Cash collateral, restricted deposits are generally released proportionately as investors are repaid, although some cash collateral, restricted deposits are released only when investors have been paid in full. NaN cash collateral, restricted deposits were required to be used to cover losses on securitized credit card receivables in the years ended December 31, 2019, 2018 and 2017.
F-31
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The tables below present quantitative information about the components of total securitized credit card receivables, delinquencies and net charge-offs:
| | | | | | |
|
| December 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
| | (in millions) | ||||
Total credit card receivables – restricted for securitization investors | | $ | 13,504.2 | | $ | 13,418.3 |
Principal amount of credit card receivables – restricted for securitization investors, 91 days or more past due | | $ | 321.8 | | $ | 301.6 |
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Net charge-offs of securitized principal | | $ | 907.7 | | $ | 927.0 | | $ | 741.1 |
8. INVENTORIES, NET
Inventories, net of $218.0 million and $248.0 million at December 31, 2019 and 2018, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. For the year ended December 31, 2019, the Company recorded an inventory write-down of $18.4 million on certain discontinued product lines. See Note 14, “Restructuring and Other Charges,” for more information.
9. 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 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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | ||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| | |
| Amortized |
| Unrealized |
| Unrealized |
| | | ||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
| | (in millions) | ||||||||||||||||||||||
Marketable securities | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 | | $ | 272.8 | | $ | 0.1 | | $ | (6.5) | | $ | 266.4 |
U.S. Treasury bonds | | | — | | | — | | | — | | | — | | | 25.0 | | | — | | | (0.1) | | | 24.9 |
Total | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 | | $ | 297.8 | | $ | 0.1 | | $ | (6.6) | | $ | 291.3 |
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of December 31, 2019 and 2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
|
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Marketable securities | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) |
Total | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) |
F-32
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
|
| | |
| Unrealized |
| | |
| Unrealized |
| | |
| Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Marketable securities | | $ | 57.3 | | $ | (0.5) | | $ | 164.0 | | $ | (6.0) | | $ | 221.3 | | $ | (6.5) |
U.S. Treasury bonds | | | — | | | — | | | 24.9 | | | (0.1) | | | 24.9 | | | (0.1) |
Total | | $ | 57.3 | | $ | (0.5) | | $ | 188.9 | | $ | (6.1) | | $ | 246.2 | | $ | (6.6) |
The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at December 31, 2019 by contractual maturity are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less | | $ | 31.3 | | $ | 31.3 |
Due after one year through five years | | | 1.7 | | | 1.7 |
Due after five years through ten years | |
| — | |
| — |
Due after ten years | |
| 224.2 | |
| 226.8 |
Total | | $ | 257.2 | | $ | 259.8 |
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security's issuer, and the Company's intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of December 31, 2019, the Company does not consider the investments to be other-than-temporarily impaired.
There were 0 realized gains or losses from the sale of investment securities for the years ended December 31, 2019, 2018 and 2017.
10. 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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | ||||||||||||||||||||
| | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | |
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
| | (in millions) | ||||||||||||||||||||||
Restricted cash |
| $ | 39.3 |
| $ | — |
| $ | — |
| $ | 39.3 |
| $ | 43.9 |
| $ | — |
| $ | — |
| $ | 43.9 |
Mutual funds | | | 25.1 | | | — | | | — | | | 25.1 | | | 23.2 | | | — | | | — | | | 23.2 |
Corporate bonds | | | 536.0 | | | 2.4 | | | (2.0) | | | 536.4 | | | 497.5 | | | 0.1 | | | (6.1) | | | 491.5 |
Total |
| $ | 600.4 |
| $ | 2.4 |
| $ | (2.0) |
| $ | 600.8 |
| $ | 564.6 |
| $ | 0.1 |
| $ | (6.1) |
| $ | 558.6 |
F-33
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of December 31, 2019 and 2018, respectively, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Corporate bonds |
| $ | 166.6 | | $ | (1.3) | | $ | 155.1 | | $ | (0.7) | | $ | 321.7 |
| $ | (2.0) |
Total | | $ | 166.6 | | $ | (1.3) | | $ | 155.1 | | $ | (0.7) | | $ | 321.7 | | $ | (2.0) |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | ||||||||||||||||
| | Less than 12 months | | 12 Months or Greater | | Total | ||||||||||||
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
| | (in millions) | ||||||||||||||||
Corporate bonds | | $ | 31.2 | | $ | (0.1) | | $ | 414.4 | | $ | (6.0) | | $ | 445.6 |
| $ | (6.1) |
Total | | $ | 31.2 | | $ | (0.1) | | $ | 414.4 | | $ | (6.0) | | $ | 445.6 | | $ | (6.1) |
The amortized cost and estimated fair value of the securities at December 31, 2019 by contractual maturity are as follows:
| | | | | | |
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
| | (in millions) | ||||
Due in one year or less | | $ | 129.5 | | $ | 129.4 |
Due after one year through five years | |
| 427.8 | |
| 428.2 |
Due after five year through ten years | | | 3.8 | | | 3.9 |
Total | | $ | 561.1 | | $ | 561.5 |
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security’s issuer, and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of December 31, 2019, the Company does not consider the investments to be other-than-temporarily impaired.
For the years ended December 31, 2019, 2018, and 2017, realized gains and losses from the sale of investment securities were de minimis.
11. LEASES
The Company has operating leases for general office properties, warehouses, data centers, call centers, automobiles and certain equipment. As of December 31, 2019, the Company’s leases have remaining lease terms of less than 1 year to 19 years, some of which may include renewal options. For leases in which the implicit rate is not readily determinable, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of the lease payments. The incremental borrowing rate is based on the Company’s specific rate of interest to borrow on a collateralized basis, over a similar term and in a similar economic environment as the lease.
Leases with an initial term of 12 months or less are not recognized on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and nonlease components as a single lease component for its identified asset classes.
F-34
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The components of lease expense were as follows:
| | | |
| | Year Ended | |
|
| December 31, 2019 | |
| | (in millions) | |
Operating lease cost |
| $ | 41.1 |
Short-term lease cost | | | 2.7 |
Variable lease cost | | | 6.8 |
Total | | $ | 50.6 |
Lease expense was $47.5 million and $67.3 million for the years ended December 31, 2018 and 2017, respectively.
Other information related to leases was as follows:
|
|
|
|
|
|
| |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
| | | |
| | Year Ended | |
|
| December 31, 2019 | |
| | (in millions) | |
Cash paid for amounts included in the measurement of lease liabilities: |
| | |
Operating cash flows from operating leases | | $ | 46.6 |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | | $ | 28.4 |
Maturities of the lease liabilities as of December 31, 2019 were as follows:
| | | |
| | Operating | |
Year | | Leases | |
|
| (in millions) | |
2020 | | $ | 38.4 |
2021 | |
| 39.6 |
2022 | |
| 38.6 |
2023 | |
| 36.8 |
2024 | |
| 35.6 |
Thereafter | |
| 237.4 |
Total undiscounted lease liabilities | | | 426.4 |
Less: Amount representing interest | | | (112.1) |
Total present value of minimum lease payments | | $ | 314.3 |
| | | |
Amounts recognized in the December 31, 2019 consolidated balance sheet: | | | |
Current operating lease liabilities | | $ | 22.6 |
Long-term operating lease liabilities | | | 291.7 |
Total | | $ | 314.3 |
F-35
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Under ASC 840, future annual minimum rental payments required under noncancellable operating leases as of December 31, 2018 were as follows:
| | | |
| | Operating | |
Year | | Leases | |
|
| (in millions) | |
2019 | | $ | 42.0 |
2020 | |
| 39.9 |
2021 | |
| 37.7 |
2022 | |
| 36.8 |
2023 | |
| 35.6 |
Thereafter | |
| 256.4 |
Total | | $ | 448.4 |
12. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| | | | | | |
| | December 31, | ||||
|
| 2019 |
| 2018 | ||
| | (in millions) | ||||
Computer software and development | | $ | 327.1 | | $ | 331.9 |
Furniture and equipment | |
| 164.3 | |
| 166.4 |
Land, buildings and leasehold improvements | |
| 126.0 | |
| 128.1 |
Construction in progress | |
| 46.2 | |
| 22.7 |
Total | |
| 663.6 | |
| 649.1 |
Accumulated depreciation and amortization | |
| (381.3) | |
| (360.9) |
Property and equipment, net | | $ | 282.3 | | $ | 288.2 |
Depreciation expense totaled $40.6 million, $41.2 million and $40.8 million for the years ended December 31, 2019, 2018 and 2017, respectively, and includes purchased software. Amortization expense on capitalized software totaled $39.3 million, $39.5 million and $32.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019 and 2018, the net amount of unamortized capitalized software costs included in the consolidated balance sheets was $74.0 million and $87.5 million, respectively.
Sale of Real Estate
In October 2019, the Company sold a building and land for cash proceeds of $15.1 million and simultaneously entered into a new 15 year lease agreement for the building, with 4 consecutive tenant options to extend the lease for five-year terms. Under the criteria of ASC 842, the transaction met the definition of a sale and the Company recognized a $6.1 million gain on the transaction, which was included in cost of operations in the Company’s consolidated statement of income for the year ended December 31, 2019.
F-36
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
13. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | |
| | December 31, 2019 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 325.1 | | $ | (278.7) | | $ | 46.4 |
| 7 years—straight line |
Premium on purchased credit card portfolios | |
| 192.6 | |
| (93.2) | |
| 99.4 |
| 1-13 years—straight line |
Collector database | |
| 53.9 | |
| (52.9) | |
| 1.0 |
| 5 years—straight line |
Tradenames | |
| 31.8 | |
| (26.5) | |
| 5.3 |
| 8-15 years—straight line |
| | $ | 603.4 | | $ | (451.3) | | $ | 152.1 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | |
| — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 604.6 | | $ | (451.3) | | $ | 153.3 | | |
| | | | | | | | | | | |
| | December 31, 2018 | | | |||||||
|
| Gross |
| Accumulated |
| | |
| | ||
|
| Assets |
| Amortization |
| Net |
| Amortization Life and Method | |||
| | (in millions) | | | |||||||
Finite Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 339.5 | | $ | (244.4) | | $ | 95.1 |
| 3-7 years—straight line |
Premium on purchased credit card portfolios | |
| 286.0 | |
| (172.9) | |
| 113.1 |
| 3-13 years—straight line |
Collector database | |
| 51.3 | |
| (49.9) | |
| 1.4 |
| 5 years—straight line |
Tradenames | |
| 32.5 | |
| (25.9) | |
| 6.6 |
| 8-15 years—straight line |
| | $ | 709.3 | | $ | (493.1) | | $ | 216.2 | | |
Indefinite Lived Assets | | | | | | | | | | | |
Tradename | |
| 1.2 | |
| — | |
| 1.2 |
| Indefinite life |
Total intangible assets | | $ | 710.5 | | $ | (493.1) | | $ | 217.4 | | |
As part of the portfolio acquisitions during the year ended December 31, 2019, the Company acquired $35.7 million of intangible assets, consisting of $21.8 million of customer relationships being amortized over a life of 2.7 years and $13.9 million of marketing relationships being amortized over a life of 5.9 years.
As part of the Signet acquisition in October 2017, the Company acquired $52.3 million of intangible assets, consisting of $35.9 million of customer relationships being amortized over a life of 3.0 years and $16.4 million of marketing relationships being amortized over a life of 7.0 years. For more information on this acquisition, see Note 5, “Acquisitions.”
Amortization expense related to the intangible assets was approximately $96.2 million, $112.9 million and $114.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.
F-37
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
| | | |
|
| For the Years Ending | |
|
| December 31, | |
| | (in millions) | |
2020 | | $ | 82.7 |
2021 | |
| 22.4 |
2022 | |
| 17.6 |
2023 | |
| 12.9 |
2024 | |
| 10.7 |
Thereafter | |
| 5.8 |
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018, respectively, are as follows:
| | | | | | | | | | |
| | | | | | | | |
| |
|
| LoyaltyOne |
| Card Services |
| Total |
| |||
| | (in millions) |
| |||||||
Balance at January 1, 2018 | | $ | 731.1 | | $ | 261.7 | | $ | 992.8 | |
Effects of foreign currency translation |
|
| (38.0) | |
| — | |
| (38.0) | |
Balance at December 31, 2018 | | $ | 693.1 | | $ | 261.7 | | $ | 954.8 | |
Goodwill acquired during the period | | | — | | | 2.3 | | | 2.3 | |
Effects of foreign currency translation | |
| (2.2) | |
| — | |
| (2.2) | |
Balance at December 31, 2019 | | $ | 690.9 | | $ | 264.0 | | $ | 954.9 | |
The Company completed annual impairment tests for goodwill on July 31, 2019, 2018 and 2017 and determined at each date that 0 impairment exists. No further testing of goodwill impairments will be performed until July 31, 2020, unless events occur or circumstances indicate an impairment is probable.
F-38
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
14. 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. As a result, the Company incurred restructuring and other charges of $118.1 million. 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 of $37.9 million were recorded to general and administrative expense in the Company’s consolidated statements of income. Restructuring and other charges incurred in the LoyaltyOne and Card Services segments of $50.8 million and $29.4 million, respectively, were recorded to cost of operations in the Company’s consolidated statements of income. These charges are not expected to continue in 2020.
LoyaltyOne
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 termination benefits of $1.2 million. In the third quarter of 2019, asset impairment charges of $33.5 million were recorded related to the discontinuance of certain product lines within inventory and the impairment of certain prepaid assets and fixed assets, and termination benefits of $8.1 million were incurred, primarily related to changes in management structure. LoyaltyOne also incurred lease termination costs of $0.2 million related to the closure of leased office space and contract termination costs of $0.2 million. In the fourth quarter of 2019, as a result of certain changes in estimates, LoyaltyOne incurred an additional $2.6 million of impairment charges and decreased its termination benefits accrual by $1.7 million.
Corporate/Other
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon segment to Publicis Groupe S.A. for $4.4 billion in cash, subject to certain specified adjustments. Due to the pending sale of Epsilon, in the second quarter of 2019, the Company incurred restructuring charges at Corporate as a result of efforts to realign the organization, including termination benefits of $11.3 million and asset impairment charges of $11.1 million related to assets primarily utilized to support the Epsilon segment. Subsequent to the sale of Epsilon, the Company further sought to eliminate redundancies and executed a second reduction in force with further management changes and incurred $3.3 million and $4.0 million in termination benefits in the third and fourth quarters of 2019, respectively. Additionally, the Company incurred lease termination costs of $7.0 million related to the reduction of its leased office space, as well as other exit costs of $1.2 million.
Card Services
In the fourth quarter of 2019, the Company executed a significant reduction in force in its Card Services segment and incurred $27.3 million in termination benefits. For the year ended December 31, 2019, Card Services also incurred lease termination costs of $1.9 million related to the reduction of its leased office space as well as the related impairment of certain assets of $0.2 million.
F-39
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Restructuring and other charges incurred by reportable segment for all restructuring activities for the year ended December 31, 2019 are as follows:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Year Ended December 31, 2019 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Corporate/Other | | $ | 18.6 | | $ | 11.1 | | $ | 7.0 | | $ | 1.2 | | $ | 37.9 |
LoyaltyOne | |
| 7.6 | |
| 40.7 | |
| 0.2 | |
| 2.3 | | | 50.8 |
Card Services | | | 27.3 | | | 0.2 | | | 1.9 | | | — | | | 29.4 |
Total | | $ | 53.5 | | $ | 52.0 | | $ | 9.1 | | $ | 3.5 | | $ | 118.1 |
The Company’s liability for restructuring and other charges is recognized in accrued expenses and other liabilities in its consolidated balance sheets. The following table summarizes the activities related to the restructuring and other charges, as discussed above, for the year ended December 31, 2019:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | | |||||
Year Ended December 31, 2019 |
| Benefits |
| Impairments |
| Termination Costs |
| Exit Costs |
| Total | |||||
| | (in millions) | |||||||||||||
Liability as of December 31, 2018 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Charged to expense | |
| 53.5 | |
| 52.0 | |
| 9.1 | |
| 3.5 | | | 118.1 |
Adjustments for non-cash charges (1) | |
| — | |
| (52.0) | |
| 0.7 | |
| (0.1) | | | (51.4) |
Cash payments | |
| (18.8) | |
| — | |
| (9.8) | |
| (3.3) | | | (31.9) |
Liability as of December 31, 2019 | | $ | 34.7 | | $ | — | | $ | — | | $ | 0.1 | | $ | 34.8 |
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.
15. ACCRUED EXPENSES
Accrued expenses consist of the following:
| | | | | | |
| | December 31, | ||||
|
| 2019 |
| 2018 | ||
| | (in millions) | ||||
Accrued payroll and benefits | | $ | 133.4 | | $ | 187.1 |
Accrued taxes | |
| 18.1 | |
| 22.6 |
Accrued other liabilities | |
| 176.3 | |
| 112.5 |
Accrued expenses | | $ | 327.8 | | $ | 322.2 |
F-40
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
16. DEBT
Debt consists of the following:
| | | | | | | | | | |
|
| December 31, |
| December 31, |
| |
| | ||
Description |
| 2019 |
| 2018 |
| Maturity |
| Interest Rate | ||
| | (Dollars in millions) | | | | | ||||
Long-term and other debt: | | | | | | | | | | |
2017 revolving line of credit | | $ | — | | $ | 740.0 |
| December 2022 |
| (1) |
2017 term loans | |
| 2,028.8 | |
| 2,938.1 |
| December 2022 |
| (2) |
BrandLoyalty credit agreement | |
| — | |
| 183.7 |
| June 2020 |
| (3) |
Senior notes due 2021 | |
| — | |
| 500.0 | | |
| |
Senior notes due 2022 | |
| — | |
| 600.0 | | |
| |
Senior notes due 2022 (€400.0 million) | | | — | | | 458.8 | | | | |
Senior notes due 2023 (€300.0 million) | | | — | | | 344.1 | | | | |
Senior notes due 2024 | | | 850.0 | | | — | | December 2024 | | 4.750% |
Total long-term and other debt | |
| 2,878.8 | |
| 5,764.7 | | | | |
Less: Unamortized debt issuance costs | | | 28.9 | | | 39.3 | | | | |
Less: Current portion | |
| 101.4 | |
| 138.9 | | | | |
Long-term portion | | $ | 2,748.5 | | $ | 5,586.5 | | | | |
| | | | | | | | | | |
Deposits: | | | | | | | | | | |
Certificates of deposit | | $ | 8,585.2 | | $ | 8,395.1 |
| Various – Jan 2020 to Dec 2024 |
| 1.33% to 4.00% |
Money market deposits | |
| 3,589.8 | |
| 3,424.3 |
| Non-maturity |
| (4) |
Total deposits | |
| 12,175.0 | |
| 11,819.4 | | | | |
Less: Unamortized debt issuance costs | | | 23.3 | | | 25.7 | | | | |
Less: Current portion | |
| 6,942.4 | |
| 6,537.7 | | | | |
Long-term portion | | $ | 5,209.3 | | $ | 5,256.0 | | | | |
| | | | | | | | | | |
Non-recourse borrowings of consolidated securitization entities: | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 4,891.0 | | $ | 4,893.3 |
| Various – May 2020 to Sep 2022 |
| 2.03% to 3.95% |
Conduit asset-backed securities | |
| 2,405.0 | |
| 2,770.0 |
| Various – Sep 2020 to Apr 2021 |
| (5) |
Total non-recourse borrowings of consolidated securitization entities | |
| 7,296.0 | |
| 7,663.3 | | | | |
Less: Unamortized debt issuance costs | | | 12.0 | | | 11.6 | | | | |
Less: Current portion | |
| 3,030.8 | |
| 2,717.6 | | | | |
Long-term portion | | $ | 4,253.2 | | $ | 4,934.1 | | | | |
At December 31, 2019, the Company was in compliance with its financial covenants.
F-41
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Long-term and Other Debt
Credit Agreement
The Company, as borrower, and ADS Alliance Data Systems, Inc., ADS Foreign Holdings, Inc., Alliance Data Foreign Holdings, Inc., Alliance Data International LLC, Comenity LLC and Comenity Servicing LLC, as guarantors, are party to a credit agreement with various agents and lenders dated June 14, 2017 (the “2017 Credit Agreement”).
At December 31, 2018, the 2017 Credit Agreement provided for $3,052.6 million in term loans (the “2017 Term Loans”) and a $1,572.4 million revolving credit facility (the “2017 Credit Facility”), with total availability under the 2017 Credit Facility of $832.4 million.
On April 30, 2019, the Company amended its credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement would be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500 million of the revolving credit facility would be required, the aggregate revolving credit commitments would be reduced in the same amount (to $1,072.4 million), all of the Company’s outstanding senior notes would 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.
In July 2019, the Company made a mandatory payment of $500.0 million of the revolving credit facility, with the aggregate revolving credit commitments reduced to $1,072.4 million.
On December 20, 2019, the Company amended its credit agreement to extend the maturity date from June 14, 2021 to December 31, 2022, reduce the aggregate revolving credit commitments from $1,072.4 million to $750.0 million, add a consolidated minimum tangible net worth covenant upon certain triggering events and make certain other amendments. The amendment also required the Company to prepay the term loans to $2,028.8 million upon consummation of the offering of the $850.0 million aggregate principal amount of 4.750% senior notes due December 15, 2024 (“Senior Notes due 2024”), which obligation was satisfied in full with a prepayment of $833.0 million, representing the net proceeds from the offering of the Senior Notes due 2024.
At December 31, 2019, the credit agreement, as amended, provided for a $2,028.8 million term loan, subject to certain principal repayments, and a $750.0 million revolving credit facility.
Total availability under the 2017 Credit Facility at December 31, 2019 was $750.0 million.
The loans under the credit agreement are scheduled to mature on December 31, 2022. The 2017 Term Loan provides for aggregate principal payments of 1.25% of the $2,028.8 million term loan amount, payable in equal quarterly installments beginning on March 31, 2020. The credit agreement is unsecured.
The credit agreement contains the usual and customary negative and affirmative covenants, for transactions of this type, including, but not limited to, restrictions on the Company’s ability and in certain instances, its subsidiaries’ ability to consolidate or merge; substantially change the nature of its business; sell, lease, or otherwise transfer any substantial part of its assets; create or incur indebtedness; create liens; and make acquisitions. The negative covenants are subject to certain exceptions as specified in the credit agreement. The credit agreement also requires the Company to satisfycomply with certain financial covenants including a maximum total leverage ratio and a minimum ratio of consolidated operating EBITDA to consolidated interest expense, each as determined in accordance with the credit agreement. The credit agreement also includes customary events of default.
F-42
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
BrandLoyalty Credit Agreementour 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, including a financial covenant that Comenity Bank and Comenity Capital Bank each maintain a common equity tier 1 capital ratio of at least 11% at all times there are term loans outstanding (or at least 10% if no term loans are outstanding), (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 minus, in the case of the first transaction associated with the divestiture of the LoyaltyOne spinoff or sale, $25 million and (vi) add Lon Inc. and Lon Operations LLC acquired in our acquisition of Bread as additional guarantors. Following our receipt of $750 million in connection with the spinoff of our former LoyaltyOne segment in November 2021, we used $725 million of such amount to repay term loans under our credit agreement, as required by the July 2021 amendment, and used the remaining $25 million to make our scheduled fourth quarter amortization payment with respect to such loans.
BrandLoyalty and certainAs of its subsidiaries, as borrower and guarantors, are parties to a credit agreement that provides for an A-1 term loan facility of €90.0 million and an A-2 term loan facility of €100.0 million, subject to certain principal repayments, a committed revolving line of credit of €37.5 million and an uncommitted revolving line of credit of €37.5 million, all of which mature in June 2020.
In September 2019,December 31, 2021, the Company repaid the €115.0had $658 million inaggregate principal amount of term loans outstanding under the BrandLoyalty credit agreement, originally scheduled to mature in June 2020, and repaid the €32.5with $750 million amount outstandingtotal availability under the revolving line of credit.
Senior Notes Due 2024 and 2026
In July 2019, with the proceeds from the Epsilon transaction, the Company extinguished all of its senior notes, which had an outstanding balance of $1.9 billion. The Company incurred a loss from the extinguishment of debt of approximately $71.9 million, resulting from the redemption price of each of the notes of $49.9 million and the write-off of deferred issuance costs of $22.0 million. The senior notes extinguished were as follows:set forth below are each governed by their respective indenture that includes usual and customary negative covenants and events of default. These senior notes are unsecured and are guaranteed on a senior unsecured basis by certain of the Company’s existing and future domestic restricted subsidiaries that incurs or in any other manner becomes liable for any debt under the Company’s domestic credit facilities, including the credit agreement.
Due 2024:In December 2019, the Company issued and sold $850.0$850 million aggregate principal amount of 4.750% senior notes due December 15, 2024.2024 (the Senior Notes due 2024). The Senior Notes due 2024 accrue interest on the outstanding principal amount at the rate of 4.750% per annum from December 20, 2019, payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on June 15, 2020. The Senior Notes due 2024 will mature on December 15, 2024, subject to earlier repurchase or redemption.
Due 2026: In September 2020, the Company issued and sold $500 million aggregate principal amount of 7.000% senior notes due January 15, 2026 (the Senior Notes due 2026). The Senior Notes due 2024 are governed by an indenture that includes usual2026 accrue interest on the outstanding principal amount at the rate of 7.000% per annum from September 22, 2020, payable semi-annually in arrears, on March 15 and customary negative covenants and eventsSeptember 15 of default.each year, beginning on March 15, 2021. The Senior Notes due 2024 are guaranteed2026 will mature on a senior unsecured basis by each of the Company’s existing and future domestic restricted subsidiaries that incursJanuary 15, 2026, subject to earlier repurchase or in any other manner becomes liable for any debt under the Company’s domestic credit facilities, including the credit agreement.redemption.
Deposits
Comenity Bank and Comenity Capital Bank issue certificatesThe Company uses a variety of deposit in denominations of at least $100,000products to finance its operating activities, including funding for its non-securitized credit card and $1,000, respectively, in various maturities ranging between January 2020other loans, and December 2024 and with effective annual interest rates ranging from 1.33% to 4.00%, with a weighted average interest rate of 2.66%, at December 31, 2019. At December 31, 2018, interest rates ranged from 1.25% to 4.00%, with a weighted average interest rate of 2.44%. Interest is paid monthly and at maturity.
Comenity Bank and Comenity Capital Bank offer non-maturityfund securitization enhancement requirements for the Banks. The Company offers both direct-to-consumer retail deposit programsproducts as well as deposits sourced through contractual arrangements with various financial counterparties. Money marketDirect-to-consumer retail deposits are redeemable on demand by the customercomprised approximately $3.2 billion and as such, have no scheduled maturity date. As$1.7 billion of total deposits outstanding at December 31, 2019, Comenity Bank2021 and Comenity Capital Bank had $3.62020, respectively. Other third-party sourced deposits (often referred to as wholesale deposits) comprised approximately $7.8 billion in money marketand $8.1 billion of total deposits outstanding with annual interest rates ranging from 1.84% to 3.50%, with a weighted average interest rate of 2.05%. As ofat December 31, 2018, Comenity Bank2021 and Comenity Capital Bank had $3.4 billion in money market deposits outstanding with annual interest rates ranging from 1.90% to 2.71%, with a weighted average interest rate of 2.59%.
2020, respectively.
F-43F-28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Non-Recourse BorrowingsThe Banks issue certificates of deposit in denominations of at least $1,000, across various maturities ranging between January 2022 and December 2026. As of December 31, 2021, the effective annual interest rates on the certificates of deposit ranged from 0.20% to 3.75%, with a weighted average interest rate of 1.91%; as of December 31, 2020, the effective annual interest rates ranged from 0.15% to 3.75%, with a weighted average interest rate of 2.58%. Interest is paid monthly and at maturity, depending on the certificate of deposit.
The Banks also offer various non-maturity deposits; these deposits are redeemable on demand by the customer and, as such, have no scheduled maturity dates. As of December 31, 2021, the effective annual interest rates on such deposits ranged from 0.05% to 3.50%, with a weighted average interest rate of 0.68%; as of December 31, 2020, the effective annual interest rates ranged from 0.38% to 3.50%, with a weighted average interest rate of 1.00%. Interest is paid either monthly or at maturity.
Debt Issued by Consolidated Securitization EntitiesVIEs
An asset-backed security is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets.assets – in the case of the Company, its credit card loans. The sale of the pool of underlying assets to general investors is accomplished through a securitization process. The Company regularly sells its credit card receivablesloans to its credit card securitization trusts, the WFN Trusts, and the WFC Trust, which are consolidated onby the balance sheets of the Company under ASC 860 and ASC 810.Company. The liabilities of thethese consolidated VIEs include asset-backed securities for which creditors, or beneficial interest holders, do not have recourse to the general credit of the Company.
Asset-Backed Term Notes
For the year ended December 31, 2019, the following2021, 0 asset-backed term notes were issued, and $2.1 billion of asset-backed term notes matured and were repaid, of which $281 million were previously retained by Master Trust I:us and therefore eliminated from the Consolidated Balance Sheets.
For the year endedAs of December 31, 2019,2021, the following asset-backed termCompany collected $846 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the $563 million Series 2019-A notes, from Master Trust Iwhich matured and were repaid:repaid in February 2022, the $399 million Series 2019-B notes, which mature in June 2022, and the $684 million Series 2019-C notes, which mature in September 2022. The cash is restricted to the securitization investors and is reflected in Other assets in the Consolidated Balance Sheet as of December 31, 2021.
Conduit Facilities
The Company has access tomaintained committed undrawn capacity through 3syndicated bank conduit facilities to support the funding of its credit card receivables through Master Trust I, Master Trust III and the WFC Trust.loans for its Trusts. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider. During the year ended December 31, 2021, the Company obtained increased lender commitments under its conduit facilities of $1.3 billion and extended the respective maturities to August 2022 and October 2023. Total capacity under the conduit facilities was $4.5 billion, of which $3.9 billion had been drawn and was included in Debt issued by consolidated variable interest entities on the Consolidated Balance Sheets.
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.Secured Loan Facility
At December 31, 2020, the Company had a secured loan facility related to the acquisition of Bread, with an outstanding balance of $86 million that was set to mature in November 2022, with prepayment permitted. In August 2021, the Company repaid this outstanding secured loan facility in full.
F-44F-29
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
As of December 31, 2019, the conduits have varying maturities from September 2020 to April 2021 with variable interest rates ranging from 2.79% to 2.96%. Total capacity under the conduit facilities was $4.7 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.
Maturities
The future principal payments for the Company’s long-term and other debt are as follows, as of December 31, 2019 are as follows:2021:
| | | | | | | | | | ||||||||||||
|
| | |
| | |
| Non-Recourse | |||||||||||||
| | | | | | | | Borrowings of | | | | | | | | | | | | | |
| | Long-Term | | | | | Consolidated | | Long-Term | | | | | Debt Issued by | | | |||||
| | and | | | | | Securitization | | and | | | | | Consolidated | | | |||||
Year | | Other Debt | | Deposits | | Entities | | Other Debt | | Deposits | | VIEs | | Total | |||||||
| | (in millions) | | (in millions) | | | | ||||||||||||||
2020 | | $ | 101.4 | | $ | 6,944.8 | | $ | 3,032.2 | ||||||||||||
2021 | |
| 101.4 | |
| 2,193.9 | |
| 2,692.1 | ||||||||||||
2022 | |
| 1,826.0 | |
| 1,574.0 | |
| 1,571.7 | | $ | 231 | | $ | 9,096 | | $ | 3,034 | | $ | 12,361 |
2023 | |
| — | |
| 935.0 | |
| — | |
| 177 | |
| 1,217 | |
| 2,421 | |
| 3,815 |
2024 | |
| 850.0 | |
| 527.3 | |
| — | |
| 1,100 | |
| 627 | |
| — | |
| 1,727 |
2025 | |
| — | |
| 57 | |
| — | |
| 57 | |||||||||
2026 | |
| 500 | |
| 36 | |
| — | |
| 536 | |||||||||
Thereafter | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total maturities | |
| 2,878.8 | |
| 12,175.0 | |
| 7,296.0 | |
| 2,008 | |
| 11,033 | |
| 5,455 | |
| 18,496 |
Unamortized debt issuance costs | |
| (28.9) | |
| (23.3) | |
| (12.0) | |
| (22) | |
| (6) | |
| (2) | |
| (30) |
| | $ | 2,849.9 | | $ | 12,151.7 | | $ | 7,284.0 | | $ | 1,986 | | $ | 11,027 | | $ | 5,453 | | $ | 18,466 |
17. 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 December 31, 2019, the Company does not maintain any derivative instruments subject to master agreements that would require the Company to post collateral or that contain any credit-risk related contingent features.
The Company enters into foreign currency derivatives to reduce the volatility of the Company’s cash flows resulting from changes in foreign currency exchange rates associated with certain inventory transactions, some of which are designated as cash flow hedges. The Company generally hedges foreign currency exchange rate risks for periods of 12 months or less. As of December 31, 2019, the maximum term over which the Company is hedging its exposure to the variability of future cash flows associated with certain inventory transactions is 7 months.12. OTHER LIABILITIES
The following tables present the fair valuesis a summary of the derivative instruments included within the Company’s consolidated balance sheetsOther liabilities as of December 31, 2019 and 2018:31:
| | | | | | | ||||||||||
| | | | | | | | | | |
| 2021 |
| 2020 | ||
| | December 31, 2019 | ||||||||||||||
| | Notional | | | | | | | | (in millions) | ||||||
|
| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||||||||
| | (in millions) | ||||||||||||||
Designated as hedging instruments: | | | | | | | | | | | ||||||
Foreign currency exchange hedges |
| $ | 5.5 |
| $ | 0.2 |
| Other current assets |
| January 2020 to February 2020 | ||||||
Foreign currency exchange hedges |
| $ | 7.8 |
| $ | 0.3 |
| Other current liabilities |
| February 2020 to July 2020 | ||||||
Accounts payable and other brand partner liabilities | | $ | 291 | | $ | 354 | ||||||||||
Accrued liabilities (1) | | | 314 | | | 384 | ||||||||||
Operating lease liabilities | | | 140 | | | 172 | ||||||||||
Long-term tax reserves | | | 313 | | | 347 | ||||||||||
Other (2) | | | 136 | | | 102 | ||||||||||
Total other liabilities | | $ | 1,194 | | $ | 1,359 |
(1) | Primarily related to accrued payroll and benefits, marketing, taxes and professional services expenses. |
(2) | Primarily comprised of long-term unearned revenue and cardholder liabilities. |
13. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSES
The following table provides the components of Other non-interest income for the years ended December 31:
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Payment protection products | | $ | 141 | | $ | 156 | | $ | 174 |
Gain on portfolio and other sales | | | 10 | | | 20 | | | 41 |
Other | |
| 5 | |
| 1 | |
| 4 |
Total other non-interest income | | $ | 156 | | $ | 177 | | $ | 219 |
F-45F-30
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table provides the components of Other non-interest expenses for the years ended December 31:
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Professional services and regulatory fees | | $ | 136 | | | 114 | | $ | 120 |
Asset impairment charges | | | — | | | 64 | | | 11 |
Portfolio valuation adjustments (to reflect the lower of cost or market) | | | — | | | — | | | 190 |
Loss on extinguishment of debt | | | — | | | — | | | 72 |
Other (1) | | | 86 | | | 108 | | | 119 |
Total other non-interest expenses | | $ | 222 | | $ | 286 | | $ | 512 |
(1) | Primarily related to occupancy expense and non-income based taxes. |
| | | | | | | | | | |
| | December 31, 2018 | ||||||||
| | Notional | | | | | | | | |
|
| Amount |
| Fair Value |
| Balance Sheet Location |
| Maturity | ||
| | (in millions) | ||||||||
Designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange hedges |
| $ | 5.2 | | $ | 0.3 | | Other current assets | | January 2019 to April 2019 |
Foreign currency exchange hedges | | $ | 20.3 |
| $ | 0.3 | | Other current liabilities |
| March 2019 to November 2019 |
| | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | |
Foreign currency exchange forward contract |
| $ | 61.6 | | $ | 3.5 | | Other current assets | | January 2019 to February 2019 |
Derivatives Designated as Hedging Instruments14. FAIR VALUES OF FINANCIAL INSTRUMENTS
ForFair value is defined under GAAP as the year ended December 31, 2019, gainsprice that would be required to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; with such transaction based on the principal market, or in the absence of $0.1 million, neta principal market the most advantageous market for the specific instrument. GAAP provides for a three-level fair value hierarchy that classifies the inputs to valuation techniques used to measure fair value, defined as follows:
Level 1: Inputs that are unadjusted quoted prices for identical assets or liabilities in active markets that the entity can access.
Level 2: Inputs, other than those included within Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of tax, were recognizedthe asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or inputs other comprehensive income related to foreign currency exchange hedges designatedthan quoted prices that are observable for the asset or liability.
Level 3: Inputs that are unobservable (e.g., internally derived assumptions) and reflect an entity’s own estimates about estimates market participants would use in pricing the asset or liability based on the best information available under the circumstances. In particular, Level 3 inputs and valuation techniques involve judgment and as effective, lossesa result are not necessarily indicative of $0.1 million, netamounts the Company would realize in a current market exchange. The use of tax, were reclassified from accumulated other comprehensive income into net income (cost of operations),different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.
We monitor the market conditions and a de minimis amount of ineffectiveness was recorded. Changes inevaluate the fair value of these hedges, excluding any ineffective portion are recorded in other comprehensive income until the hedged transactions affect net income. The ineffective portion of these cash flow hedges impacts net income when the ineffectiveness occurs. At December 31, 2019, $0.1 million is expected to be reclassified from accumulated other comprehensive income into net income in the coming 12 months.
For the year ended December 31, 2018, losses of $0.1 million, net of tax, were recognized in other comprehensive income related to foreign currency exchange hedges designated as effective, gains of $0.2 million, net of tax, were reclassified from accumulated other comprehensive income into net income (cost of operations), and a de minimis amount of ineffectiveness was recorded.
For the year ended December 31, 2017, losses of $0.5 million, net of tax, were recognized in other comprehensive income related to foreign currency exchange hedges designated as effective, gains of $0.2 million, net of tax, were reclassified from accumulated other comprehensive income into net income (cost of operations), and $0.1 million of ineffectiveness was recorded.
Derivatives Not Designated as Hedging Instruments
hierarchy levels quarterly. For the years ended December 31, 2019, 20182021 and 2017, the Company recognized losses2020, there were 0 transfers into or out of $1.4 million, gains of $10.6 million,Level 3, and gains of $12.5 million, respectively, related to foreign currency exchange forward contracts not designated as hedging instruments in general0 transfers between Levels 1 and administrative expense in the Company’s consolidated statements of income.
As of December 31, 2019, the Company did not hold any derivatives not designated as hedging instruments.
Net Investment Hedges2.
The Company previously designated its Euro-denominated 5.250% senior notes due 2023 (€300.0 million)following table summarizes the carrying values 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 was intended to reduce the volatility in stockholders’ equity caused by the changes in foreign currency exchange ratesfair values of the Euro with respect to the U.S. dollar.
On July 1, 2019, the Company dedesignated its net investment hedge,Company’s financial assets and the Euro-denominated senior notes were repaid in July 2019. The $7.5 million unamortized amountfinancial liabilities as of the net investment hedge will remain in accumulated other comprehensive loss until the Company’s investment in BrandLoyalty is disposed of or substantially liquidated.December 31:
| | | | | | | | | | | | |
| | 2021 | | 2020 | ||||||||
| | Carrying | | Fair | | Carrying | | Fair | ||||
|
| Amount |
| Value |
| Amount |
| Value | ||||
| | (in millions) | ||||||||||
Financial assets | | | | | | | | | | | | |
Credit card and other loans, net | | $ | 15,567 | | $ | 17,989 | | $ | 14,776 | | $ | 17,301 |
Available-for-sale securities | |
| 239 | |
| 239 | |
| 225 | |
| 225 |
Financial liabilities | | | | | | | | | | | | |
Deposits | |
| 11,027 | |
| 11,135 | |
| 9,793 | |
| 10,016 |
Debt issued by consolidated variable interest entities | |
| 5,453 | |
| 5,467 | |
| 5,710 | |
| 2,783 |
Long-term and other debt | |
| 1,986 | |
| 2,053 | |
| 2,806 | |
| 2,875 |
For the years ended December 31, 2019, 2018 and 2017, the Company recorded unrealized gains of $4.9 million, unrealized gains of $29.6 million, and unrealized losses of $46.1 million, net of tax, respectively, in other comprehensive income and 0 ineffectiveness was recorded on the net investment hedges.
F-46F-31
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
18. COMMITMENTS AND CONTINGENCIESValuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities
AIR MILES Reward ProgramCredit card and other loans, net: The Company’s Credit card and other loans are recorded at historical cost, less an allowance for credit losses, on the Consolidated Balance Sheets. In estimating the fair values, the Company uses a discounted cash flow model (i.e., Level 3 inputs), primarily because a comparable whole loan sales market for similar loans does not exist, and therefore there is a lack of observable pricing inputs. The Company uses various internally derived inputs, including projected income, discount rates and forecasted write-offs; economic value attributable to future loans generated by the cardholder accounts is not included in the fair values.
Available-for-sale securities: AFS securities consist of available-for-sale debt securities, equity securities, U.S. Treasury bonds and mutual funds, and are recorded at fair value on the Consolidated Balance Sheets. Quoted prices of identical or similar investment securities in active markets are used to estimate the fair values (i.e., Level 1 or Level 2 inputs).
Deposits: Money market and other non-maturity deposits carrying values approximate their fair values because they are short-term in duration and have no defined maturity. Certificates of deposit are recorded at their historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, with fair value being estimated based on the currently observable market rates available to the Company for similar deposits with similar remaining maturities (i.e., Level 2 inputs). Interest payable is included within Other liabilities on the Consolidated Balance Sheets.
Debt issued by consolidated VIEs: The Company records debt issued by its consolidated VIEs at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. Fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction (i.e., Level 2 inputs).
Long-term and other debt: The Company records its long-term and other debt at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. The fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities, or quoted market prices for the same transaction (i.e., Level 2 inputs).
The Company has entered into contractual arrangements with certain AIR MILES Reward Program sponsors that result in fees being billed to those sponsors upon the redemption of AIR MILES reward miles issued by those sponsors. The Company has obtained letters of credit and other assurances from those sponsors forfollowing tables summarize the Company’s benefit that expirefinancial assets and financial liabilities measured at various dates. These lettersfair value on a recurring basis, categorized by the fair value hierarchy described in the preceding paragraphs, as of credit and other assurances totaled $141.7 million at December 31, 2019, which exceeds the amount of the Company’s estimate of its obligation to provide travel and other rewards upon the redemption of the AIR MILES reward miles issued by those sponsors.31:
The Company currently has an obligation to provide AIR MILES Reward Program collectors with travel and other rewards upon the redemption of AIR MILES reward miles. The Company believes that the redemption settlement assets, including the letters of credit and other assurances mentioned above, are sufficient to meet that obligation.
| | | | | | | | | | | | |
| | 2021 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Available-for-sale securities | | $ | 239 | | $ | 48 | | $ | 191 | | $ | — |
Total assets measured at fair value | | $ | 239 | | $ | 48 | | $ | 191 | | $ | — |
The Company has entered into certain long-term arrangements with airlines and other suppliers in connection with reward redemptions under the AIR MILES Reward Program. These long-term arrangements allow the Company to retain preferred pricing subject to meeting agreed upon annual volume commitments for rewards purchased.
Regulatory Matters
Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (“FDIC”). Comenity Bank remains subject to regulation by the Board of the Governors of the Federal Reserve System. The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC. Both Comenity Bank and Comenity Capital Bank are under the supervision of the Consumer Financial Protection Bureau (“CFPB”), a federal consumer protection regulator with authority to make further changes to the federal consumer protection laws and regulations, and the CFPB may, from time to time, conduct reviews of their practices.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank (collectively, the “Banks”) 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. Based on these guidelines, the Banks are considered well capitalized.
The actual capital ratios and minimum ratios as of December 31, 2019 are as follows:
| | | | | | | | | |
| | | | | | Minimum Ratio to be | |||
|
| | | Minimum Ratio for | | Well Capitalized under | |||
|
| Actual | | Capital Adequacy | | Prompt Corrective | |||
|
| Ratio | | Purposes | | Action Provisions | |||
Comenity Bank | | | | | | | | | |
Tier 1 capital to average assets | | 12.9 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.9 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 11.9 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.4 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.4 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.7 | | | 8.0 | | | 10.0 | |
| | | | | | | | | | | | |
| | 2020 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Available-for-sale securities | | $ | 225 | | $ | 34 | | $ | 191 | | $ | — |
Total assets measured at fair value | | $ | 225 | | $ | 34 | | $ | 191 | | $ | — |
F-47F-32
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Financial Instruments Disclosed but Not Carried at Fair Value
The following tables summarize the Company’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of December 31, 2021 and 2020. The fair values of these financial instruments are estimates as of December 31, 2021 and 2020, and require management’s judgment; therefore, these figures may not be indicative of future fair values, nor can the fair value of the Company be estimated by aggregating all of the amounts presented.
| | | | | | | | | | | | |
| | 2021 | ||||||||||
|
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Financial assets: | | | | | | | | | | | | |
Credit card and other loans, net | | $ | 17,989 | | $ | — | | $ | — | | $ | 17,989 |
Total | | $ | 17,989 | | $ | — | | $ | — | | $ | 17,989 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 11,135 | | $ | — | | $ | 11,135 | | $ | — |
Debt issued by consolidated VIEs | |
| 5,467 | |
| — | |
| 5,467 | |
| — |
Long-term and other debt | |
| 2,053 | |
| — | |
| 2,053 | |
| — |
Total | | $ | 18,655 | | $ | — | | $ | 18,655 | | $ | — |
| | | | | | | | | | | | |
| | 2020 | ||||||||||
|
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Financial assets: | | | | | | | | | | | | |
Credit card and other loans, net | | $ | 17,301 | | $ | — | | $ | — | | $ | 17,301 |
Total | | $ | 17,301 | | $ | — | | $ | — | | $ | 17,301 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 10,016 | | $ | — | | $ | 10,016 | | $ | — |
Debt issued by consolidated VIEs | |
| 5,783 | |
| — | |
| 5,783 | |
| — |
Long-term and other debt | |
| 2,875 | |
| — | |
| 2,875 | |
| — |
Total | | $ | 18,674 | | $ | — | | $ | 18,674 | | $ | — |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property and equipment, right-of-use assets, deferred contract assets, goodwill, and intangible assets. These assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances, such as upon impairment. The Company did 0t have any impairments for the year ended December 31, 2021.
For the year ended December 31, 2020, the Company recorded asset impairment charges of $64 million related to certain deferred contract costs, fixed assets and right-of-use assets. The fair values were determined by using discounted cash flow models over the estimated life of each asset; the principal assumptions used were forecasted future cash flows and the discount rate, which are considered Level 3 inputs. See Note 7, “Property and Equipment, Net,” and Note 10, “Leases,” for more information regarding asset impairments.
For the year ended December 31, 2019, as part of restructuring and other charges, the Company recorded asset impairments of $52 million.
F-33
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
Regulatory Matters
Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (FDIC). The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC. While neither of our Banks is currently subject to regular examinations by the CFPB due to each Bank’s total assets not having exceeded $10 billion for four consecutive quarters, we have in the past been, and may in the future become, subject to supervision and examination by the CFPB with respect to federal consumer protection laws.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Tier 1 capital to average assets, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as those of the Company. Based on these regulations, as of December 31, 2021 and 2020, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized.
The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of December 31, 20182021, 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 | | 13.1 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.9 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 12.1 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.4 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.4 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.7 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
| | | | | | 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 (1) | | 20.0 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets (2) | | 21.4 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets (3) | | 21.4 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets (4) | | 22.7 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets (1) | | 17.3 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets (2) | | 18.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets (3) | | 18.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets (4) | | 19.9 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Combined Banks | | | | | | | | | |
Tier 1 capital to average assets (1) | | 18.6 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets (2) | | 20.0 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets (3) | | 20.0 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets (4) | | 21.3 | | | 8.0 | | | 10.0 | |
(1) | Tier 1 capital to average assets ratio represents tier 1 capital divided by total assets for leverage ratio. |
(2) | Common Equity Tier 1 capital to risk-weighted assets ratio represents common equity tier 1 capital divided by total risk-weighted assets. |
(3) | Tier 1 capital to risk-weighted assets ratio represents tier 1 capital divided by total risk-weighted assets. |
(4) | Total capital to risk-weighted assets ratio represents total capital divided by total risk-weighted assets. |
On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the Federal Deposit Insurance Corporation (“FDIC”)FDIC seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in connection with the proposed merger. TheOn April 20, 2021, Comenity Capital Bank withdrew its bank merger application remains subject to regulatory review
F-34
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
with the FDIC. On May 3, 2021, each of Comenity Capital Bank and approvalComenity Bank similarly withdrew their counterpart bank merger applications in Utah and no guarantee can be provided as to the outcome or timing of such review.Delaware, respectively.
Cardholders
Indemnification
The Company’s Card Services segment is active in originating private label and co-brand credit cards in the United States. The Company reviews each potential customer’s credit application and evaluates the applicant’s financial history and ability and perceived willingness to repay. Credit card loans are made primarily on an unsecured basis. Cardholders reside throughout the United States and are not significantly concentrated in any one area.
Holders of credit cards issued by the Company have available lines of credit, which vary by cardholder. These lines of credit represent elements of risk in excess of the amount recognized in the financial statements. The lines of credit are subject to change or cancellation by the Company. At December 31, 2019, the Company had 61.0 million total accounts, including both active and inactive, having unused lines of credit averaging $2,307 per account.
Indemnification
On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (“Publicis”)(Publicis). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a United States Department of Justice (“DOJ”)(DOJ) investigation. The DOJ investigation relatesrelated 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 ongoingthe investigation. On January 19, 2021, Epsilon entered into a deferred prosecution agreement (DPA) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $150 million, to be paid in 2 equal installments, the first in January 2021 and the second in January 2022. A $150 million loss contingency was recorded as of December 31, 2020. The Company records a loss contingency when a loss is probable and an amount can be reasonably estimated. For the year endedpaid $75 million to Publicis pursuant to its contractual indemnification obligation in January 2021. As of December 31, 2019,2021, the Company recorded a loss contingency of $32.9had $75 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. For the year ended December 31, 2019, the Company incurred $3.2 millionAccrued expenses in legal fees associated with this matter, which was included in cost of operations in the Company’s consolidated statements of income.its Consolidated Balance Sheets.
F-48
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)In January 2022, the Company paid the second remaining $75 million installment to Publicis pursuant to its contractual indemnification obligation.
Legal Proceedings
From time to time the Company is involved in various claims and lawsuits arising in the ordinary course of business that it believes will not have a material effect on its business,consolidated financial condition or cash flows,liquidity, including claims and lawsuits alleging breaches of the Company’s contractual obligations.
19. STOCKHOLDERS’ EQUITY16. EMPLOYEE BENEFIT PLANS
Employee Stock Repurchase ProgramsPurchase Plan
In March 2015, the Company’s Board of Directors adopted the 2015 Employee Stock Purchase Plan (the 2015 ESPP), which was subsequently approved by the Company’s stockholders on June 3, 2015. The 2015 ESPP became effective July 1, 2015 with no definitive expiration date. The Company’s Board of Directors may at any time and for any reason terminate or amend the 2015 ESPP. No employee may purchase more than $25,000 worth of stock under the 2015 ESPP in any calendar year, and no employee may purchase stock under the 2015 ESPP if such purchase would cause the employee to own more than 5% of the voting rights or value of the Company’s common stock. The 2015 ESPP provides for six-month offering periods, commencing on the first trading day of the first and third calendar quarter of each year and ending on the last trading day of each subsequent calendar quarter. The purchase price of the common stock upon exercise is 85% of the fair market value of shares on the applicable purchase date as determined by averaging the high and low trading prices of the last trading day of each six-month period as defined above. An employee elects to participate and have contributions deducted through payroll deductions. The 2015 ESPP provides for the issuance of any remaining shares available for issuance under the 2005 ESPP, which were 441,327 shares at June 30, 2015. The 2015 ESPP reserved an additional 1,000,000 shares of the Company’s common stock for issuance under the 2015 Plan, bringing the maximum number of shares reserved for issuance under the 2015 ESPP to 1,441,327 shares, subject to adjustment as provided in the 2015 ESPP.
During the year ended December 31, 2021, the Company issued 57,713 shares of common stock under the 2015 ESPP at a weighted-average issue price of $70.44. Since its adoption on July 1, 2015, 571,825 shares of common stock have been issued, with 869,502 shares available for issuance under the 2015 ESPP.
F-35
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
401(k) Retirement Savings Plan
The Alliance Data Systems 401(k) and Retirement Savings Plan (the RSP) is a defined contribution plan that is qualified under Section 401(k) of the Internal Revenue Code of 1986. The Company amended the RSP effective December 3, 2020. The RSP is an IRS-approved safe harbor plan design that eliminates the need for most discrimination testing. Eligible employees can participate in the RSP immediately upon joining the Company and after 180 days of employment begin receiving company matching contributions; “seasonal” or “on-call” employees must complete a year of eligibility service before they may participate. The RSP covers U.S. employees of Alliance Data Systems, Inc. who are at least 18 years old, one of the Company’s wholly-owned subsidiaries, and any other subsidiary or affiliated organization that adopts the RSP; employees of the Company and all of its U.S. subsidiaries are currently covered.
The RSP permits eligible employees to make Roth elective deferrals, which are included in the employee’s taxable income at the time of contribution, but not when distributed. Regular, or Non-Roth, elective deferrals made by employees, together with contributions by the Company to the RSP, and income earned on these contributions, are not taxable until withdrawn from the RSP. The Company matches an employee’s contribution dollar-for-dollar up to 5 percent of the employee’s eligible compensation; all Company matching contributions immediately vest. For the years ended December 31, 2021, 2020 and 2019, 2018 and 2017, the Company repurchased approximately 6.3matching contributions were $15 million, 2.2$16 million and 2.3 million shares of its common stock, respectively, for an aggregate amount of $976.1 million, $443.2 million and $553.7$35 million, respectively.
2017 Authorization
In January 2017,Participants in the RSP can direct their contributions and the Company’s Board of Directors authorized a stock repurchase programmatching contribution to acquire up to $500.0 million ofnumerous investment options, including the Company’s outstanding common stock from January 1, 2017 through December 31, 2017. In July 2017, the Company's Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2017 to acquire an additional $500.0 million of the Company’s outstanding common stock through July 31, 2018, for a total stock repurchase authorization of up to $1.0 billion. At July 31, 2018, $280.3 million of this program expired unused.
2018 Authorization
stock. On July 26, 2018, the Company’s Board of Directors authorized a new stock repurchase program to acquire up to $500.0 million of the Company’s outstanding common stock from August 1, 2018 through July 31, 2019.
For the year ended December 31, 2018,20, 2001, the Company acquired approximately 0.8 millionregistered 1,500,000 shares of its common stock for $166.0 million under its previous stock repurchase program and acquired approximately 1.4 million shares of its common stock for $277.2 million under its current stock repurchase program.
Forissuance in accordance with the six months ended June 30, 2019, the Company acquiredRSP pursuant to a total of 1.3 million shares of its common stock for $222.8 million under its stock repurchase program.Registration Statement on Form S-8, File No. 333-65556. As of June 30, 2019, the Company did not have any amounts remaining under its authorized stock repurchase program.
2019 AuthorizationDecember 31, 2021, 290,897 of such shares remain available for issuance.
In July 2019,Executive Deferred Compensation Plan
The Company also maintains an Executive Deferred Compensation Plan (EDCP). The EDCP permits a defined group of management and highly compensated employees to defer on a pre-tax basis a portion of their base salary and incentive compensation (as defined in the EDCP) payable for services rendered. Deferrals under the EDCP are unfunded and subject to the claims of the Company’s creditors. Each participant in the EDCP is 100% vested in their account, and account balances accrue interest at a rate established and adjusted periodically by the Compensation and Human Capital committee of 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, 2019, the Company commenced a “modified Dutch Auction” tender offer to acquire up to $750.0 million in aggregate purchase price of its issued and outstanding common stock at a price not greater than $162.00 nor less than $144.00 per share, to 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. The tender offer expired on August 15, 2019, and the Company repurchased 5,050,505 shares of its issued and outstanding common stock at a price of $148.50 per share, for an aggregate cost of approximately $750.0 million. Additionally, the Company incurred approximately $3.3 million of direct costs related to the repurchase, including $2.2 million in commissions, which have been recorded to treasury stock in the Company’s consolidated balance sheets.
Directors. As of December 31, 2019,2021 and 2020, the Company had $347.8Company’s outstanding liability related to the EDCP, which was included in Other liabilities on the Consolidated Balance Sheets, was $18 million remaining under its authorized stock repurchase program.
and $19 million, respectively.
F-49F-36
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
17. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:
| | | | | | | | | | | | | | | |
|
| | | | |
| |
| Foreign Currency |
| Accumulated | ||||
| | Net Unrealized | | Net Unrealized | | Net Unrealized | | Translation | | Other | |||||
| | Gains (Losses) on | | (Losses) Gains on | | Gains (Losses) on | | Adjustment | | Comprehensive | |||||
|
| AFS Securities |
| Cash Flow Hedges |
| Net Investment Hedge |
| (Losses) Gains (1) | | Loss | |||||
| | (in millions) | |||||||||||||
Balance as of January 1, 2019 | | $ | (11) | | $ | — | | $ | (12) | | $ | (115) | | $ | (138) |
Changes in other comprehensive income (loss) | |
| 13 | | | — | | | 5 | | | (7) | | | 11 |
Recognition resulting from the sale of Epsilon's foreign subsidiaries | | | — | | | — | | | — | | | 27 | | | 27 |
Balance at December 31, 2019 | | $ | 2 | | $ | — | | $ | (7) | | $ | (95) | | $ | (100) |
Changes in other comprehensive income (loss) | | | 21 | | | (1) | | | — | | | 71 | | | 91 |
Recognition resulting from the sale of Precima's foreign subsidiaries | | | — | | | — | | | — | | | 4 | | | 4 |
Balance at December 31, 2020 | | $ | 23 | | $ | (1) | | $ | (7) | | $ | (20) | | $ | (5) |
Changes in other comprehensive income (loss) | | | (21) | | | 2 | | | — | | | (37) | | | (56) |
Recognition resulting from the spinoff of LoyaltyOne's foreign subsidiaries | | | (1) | | | (1) | | | 7 | | | 54 | | | 59 |
Balance at December 31, 2021 | | $ | 1 | | $ | — | | $ | — | | $ | (3) | | $ | (2) |
(1) | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates from the Company’s LoyaltyOne segment, which was spun off in November 2021. |
With the spinoff of the Company’s LoyaltyOne segment on November 5, 2021, the $7 million net unrealized loss on its net investment hedge related to its net investment in BrandLoyalty was reclassified into net income. Upon the sale of Precima on January 10, 2020, $4 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 the sale of Precima. Upon the sale of Epsilon on July 1, 2019, $27 million of accumulated foreign currency translation adjustments attributable to Epsilon’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation of the loss on the sale of the Epsilon segment. Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.
18. STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
During the years ended December 31, 2021 and 2020, the Company did 0t repurchase any shares of its common stock. During the year ended December 31, 2019, the Company repurchased approximately 6.3 million shares of its common stock for an aggregate amount of $976 million. The stock repurchase program expired on June 30, 2020, and $348 million of this program expired unused.
Stock Compensation Plans
The Company has adopted equity compensation plans to advance the interests of the Company by rewarding certain employees for their contributions to the financial success of the Company and thereby motivating them to continue to make such contributions in the future.
F-37
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The 20102015 Omnibus Incentive Plan became effective July 1, 20102015 and reserved 3,000,0005,100,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units,unit awards (RSUs), performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants who performed services for the Company or its affiliates, with only employees eligible to receive incentive stock options. The 20102015 Omnibus Incentive Plan expired on June 30, 2015.2020.
In March 2015,2020, the Company’s Board of Directors adopted the 20152020 Omnibus Incentive Plan (the “2015 Plan”)2020 Plan), which was subsequently approved by the Company’s stockholders on June 3, 2015.9, 2020. The 20152020 Plan became effective July 1, 20152020 and expires on June 30, 2020.2030. The 20152020 Plan reserves 5,100,0002,400,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units,RSUs, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants performing services for the Company or its affiliates, with only employees being eligible to receive incentive stock options.
The maximum amount that may be awarded to any independent member of the Company’s Board of Directors in any one calendar year may not exceed $1 million. On June 5, 2015,9, 2020, the Company registered 5,100,0002,400,000 shares of its common stock for issuance in accordance with the 20152020 Plan pursuant to a Registration Statement on Form S-8, File No. 333-204758.
Beginning February 15, 2017, the restricted stock unit award agreements under the 2015 Plan provide for dividend equivalent rights (“DERs”), which entitle holders of restricted stock units to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested restricted stock units. DERs are paid only when the underlying shares vest.
333-239040. Terms of all awards under the 20152020 Plan are determined by the Board of Directors or the compensation committeeCompensation & Human Capital Committee of the Board of Directors or its designee at the time of award.
Stock Compensation Expense
Under the fair value recognition provisions, stock-basedStock-based compensation expense is measured at the grant date of the award, based on the fair value of the award and is recognized ratably over the requisite service period.
Stock-based compensation expense recognized in Employee benefits and compensation expense in the Company’s consolidated statementsConsolidated Statements of incomeIncome for the years ended December 31, 2021, 2020 and 2019 2018was $25 million, $15 million and 2017, is as follows:$18 million, respectively, with corresponding income tax benefits of $4 million, $3 million and $3 million, respectively. Stock-based compensation expense related to discontinued operations for the years ended December 31, 2021, 2020 and 2019 was $4 million, $6 million and $37 million, respectively.
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Cost of operations | | $ | 16.5 | | $ | 23.3 | | $ | 18.8 |
General and administrative | |
| 8.6 | |
| 21.1 | |
| 22.5 |
Total | | $ | 25.1 | | $ | 44.4 | | $ | 41.3 |
As the amount of stock-based compensation expense recognized is based on awards ultimately expected to vest, the amount recognized in the Company’s Consolidated Statements of Income has been reduced for estimated forfeitures. The Company estimates forfeitures at each grant date based on historical experience, with forfeiture estimates to be revised, if necessary, in subsequent periods should actual forfeitures differ from those estimates; forfeitures were estimated at 5% for each of the years ended December 31, 2021, 2020 and 2019.
Effective April 12, 2019, the Company entered into a definitive agreementAs of December 31, 2021, there was approximately $35 million of unrecognized expense, adjusted for estimated forfeitures, related to sell its Epsilon segmentnon-vested, stock-based equity awards granted to Publicis Groupe S.A. for $4.4 billion in cash, subject to certain specified adjustments. The agreement provided for certain unvested restricted stock units held by Epsilon employees, which is expected to be modified, with original vesting conditions to be accelerated upon consummationrecognized over a weighted average remaining period of the sale of Epsilon. Additionally, the agreement provided for certain other awards held by Epsilon employees to be forfeited upon consummation of the sale of Epsilon, which occurred July 1, 2019. As a result, in April 2019 the Company recorded $19.4 million of incremental stock-based compensation expense in discontinued operations related to the modifications, net of forfeitures. Stock-based compensation expense included inapproximately 1.8 years.
F-50F-38
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
loss from discontinued operations totaled $29.7 million, $36.4 million and $33.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The income tax benefits related to stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017 were $3.6 million, $7.3 million and $5.4 million, respectively.
As the amount of stock-based compensation expense recognized is based on awards ultimately expected to vest, the amount recognized in the Company’s results of operations has been reduced for estimated forfeitures. In connection with the Company’s adoption of ASU 2016-09, the Company elected to continue to estimate forfeitures at each grant date, with forfeiture estimates to be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience, with a forfeiture rate of 5% for the years ended December 31, 2019, 2018 and 2017.
As of December 31, 2019, there was approximately $29.4 million of unrecognized expense, adjusted for estimated forfeitures, related to non-vested, stock-based equity awards granted to employees, which is expected to be recognized over a weighted average period of approximately 1.3 years.
Restricted Stock Unit Awards
During 2019,The following table summarizes RSUs activity under the Company awarded service-based, performance-based and market-based restricted stock units. In accordance with ASC 718, the Company recognizes the estimated stock-basedCompany’s equity compensation expense, net of estimated forfeitures, over the applicable service period.plans:
| | | | | | | | | | | |
| | |
| |
| |
| |
| Weighted | |
| | Market- | | Performance- | | Service- | | | | Average | |
| | Based (1) | | Based (1) | | Based | | Total | | Fair Value | |
Balance at January 1, 2019 | | 56,229 |
| 423,242 |
| 317,441 |
| 796,912 | | $ | 218.81 |
Shares granted | | 37,878 |
| 420,239 |
| 246,118 |
| 704,235 | |
| 161.05 |
Shares vested | | — |
| (262,773) |
| (178,730) |
| (441,503) | |
| 218.45 |
Shares forfeited | | (69,819) |
| (350,436) |
| (126,257) |
| (546,512) | |
| 188.40 |
Balance at December 31, 2019 | | 24,288 |
| 230,272 |
| 258,572 |
| 513,132 | | $ | 172.06 |
Shares granted | | 20,770 |
| 219,186 |
| 241,610 |
| 481,566 | |
| 89.11 |
Shares vested | | — |
| (42,097) |
| (127,921) |
| (170,018) | |
| 175.09 |
Shares forfeited | | (22,831) |
| (186,135) |
| (38,447) |
| (247,413) | |
| 166.93 |
Balance at December 31, 2020 | | 22,227 |
| 221,226 |
| 333,814 |
| 577,267 | | $ | 103.89 |
Shares granted (2) | | 2,641 |
| 111,542 |
| 774,062 |
| 888,245 | |
| 88.18 |
Shares vested | | — |
| (24,677) |
| (167,723) |
| (192,400) | |
| 118.78 |
Shares forfeited | | (5,801) |
| (216,675) |
| (291,201) |
| (513,677) | |
| 93.16 |
Balance at December 31, 2021 | | 19,067 |
| 91,416 |
| 648,952 |
| 759,435 | | $ | 89.14 |
Outstanding and Expected to Vest | | | | | | |
| 633,480 | | $ | 90.09 |
(1) | Shares granted reflect a 100% target attainment of the respective market-based or performance-based metric. Shares forfeited include those restricted stock units forfeited as a result of the Company not meeting the respective market-based or performance-based metric conditions. |
(2) | Shares granted reflect a November 2021 make-whole equity adjustment to unvested shares due to the reduction in the Company’s share value resulting from the spinoff of Loyalty Ventures Inc. This adjustment increased shares granted by 2,641 shares, 12,659 shares and 96,556 shares for market-based, performance-based and service-based awards, respectively. These shares were excluded from the weighted average fair value calculation. |
For service-basedperformance-based and performance-basedservice-based awards, the fair value of the restricted stock unitsRSUs was estimated using the Company’s closing share price on the date of grant. Service-based restricted stock unit awardsRSUs typically vest ratably over a three year period. Performance-based restricted stock unit awardsRSUs typically vest ratably over a three year period if specified performance measures tied to the Company’s financial performance are met. For the performance-based RSUs awarded in 2021, the pre-defined vesting criteria typically permit a range from 0% to 170% to be earned. Accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition.
The total fair value of RSUs vested was $23 million, $30 million and $96 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, the aggregate intrinsic value of RSUs outstanding and expected to vest was $42 million.
Dividends
For the market-based award granted inyear ended December 31, 2021, the Company declared cash dividends of $0.84 per share for a total of $42 million, and paid cash dividends and dividend equivalents totaling $42 million.
For the year ended December 31, 2020, the Company declared cash dividends of $1.26 per share for a total of $60 million, and paid cash dividends and dividend equivalents totaling $61 million.
For the year ended December 31, 2019, the fair valueCompany declared cash dividends of $2.52 per share for a total of $127 million, and paid cash dividends and dividend equivalents totaling $127 million.
On January 27, 2022, the restrictedCompany’s Board of Directors declared a quarterly cash dividend of $0.21 per share on its common stock, units was estimated utilizing Monte Carlo simulationspayable on March 18, 2022 to stockholders of record at the close of business on February 11, 2022.
F-39
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Treasury Stock
On July 30, 2021, the Company retired its 67.4 million shares of treasury stock outstanding, which increased Treasury stock by $6,733 million, reduced Retained earnings by $5,453 million, reduced Additional paid-in capital by $1,280 million and reduced Common stock by an immaterial amount, with no impact to total stockholders’ equity, on the Consolidated Balance Sheets.
19. INCOME TAXES
The Company files income tax returns in federal, state, local and foreign jurisdictions, as applicable. Provisions for current income tax liabilities are calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings also include deferred income tax provisions and provisions for uncertain tax positions.
The components of the Company’s stock price correlation (0.55), expected volatility (29.2%) and risk-free rate (2.5%) over two-year time horizons matchingProvision for income taxes for the performance period. Upon determinationyears ended December 31 included in the Consolidated Statements of Income were are as follows:
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Current | | | | | | | | | |
Federal | | $ | 218 | | $ | 228 | | $ | 123 |
State | |
| 49 | |
| 36 | |
| 35 |
Total current income tax expense | |
| 267 | |
| 264 | |
| 158 |
Deferred | | | | | | | | | |
Federal | |
| (13) | |
| (143) | |
| (9) |
State | |
| (7) | |
| (28) | |
| 7 |
Total deferred income tax benefit | |
| (20) | |
| (171) | |
| (2) |
Total Provision for income taxes | | $ | 247 | | $ | 93 | | $ | 156 |
A reconciliation of the market condition,Company’s expected income tax expense computed by applying the restrictions will lapse with respectfederal statutory rate to income from continuing operations before income taxes to the entire awardrecorded Provision for income taxes for the years ended December 31 is as follows:
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Expected expense at statutory rate | | $ | 219 | | $ | 63 | | $ | 139 |
Increase (decrease) in income taxes resulting from: | | | | | | | | | |
State and local income taxes, net of federal benefit | |
| 33 | |
| 6 | |
| 33 |
Impact of 2017 Tax Reform | | | (8) | | | (2) | | | (30) |
Non-deductible expenses | | | 4 | | | 6 | | | 7 |
IRC Section 199, net of tax reserves | | | — | | | 12 | | | — |
Other | |
| (1) | |
| 8 | |
| 7 |
Total | | $ | 247 | | $ | 93 | | $ | 156 |
Differences between the Consolidated Financial Statements and tax bases of assets and liabilities give rise to deferred tax assets and liabilities, which measure the future tax effects of items recognized in the Consolidated Financial Statements. Changes in deferred income tax assets and liabilities associated with components of other comprehensive income are charged or credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The effect on February 15, 2021, provided thatdeferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the participant is employed by the Company on such vesting date.period of enactment.
F-51F-40
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Deferred tax assets require certain estimates and judgments in order to determine whether it is more likely than not that all or a portion of the benefit of a deferred tax asset will not be realized. In evaluating the Company’s deferred tax assets on a quarterly basis as new facts and circumstances emerge, the Company analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. Uncertainties can lead to changes in the ultimate realization of deferred tax assets. A liability for unrecognized tax benefits, representing the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized in the Consolidated Financial Statements, inherently requires estimates and judgments. A tax position is recognized only when it is more likely than not to be sustained, based purely on its technical merits after examination by the taxing authority, and the amount recognized is the benefit the Company believes is more likely than not to be realized upon ultimate settlement. The Company evaluates its tax positions as new facts and circumstances become available, making adjustments to unrecognized tax benefits as appropriate. Uncertainties can mean the tax benefits ultimately realized differ from amounts previously recognized, with any differences recorded in Provision for income taxes, along with amounts for estimated interest and penalties related to uncertain tax positions.
The following table reflects the significant components of Deferred tax assets and liabilities as of December 31:
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (in millions) | ||||
Deferred tax assets | | | | | | |
Deferred revenue | | $ | 17 | | $ | 14 |
Allowance for credit losses | |
| 447 | |
| 482 |
Net operating loss carryforwards and other carryforwards | |
| 42 | |
| 43 |
Operating lease liabilities | |
| 33 | |
| 42 |
Accrued expenses and other | |
| 65 | |
| 75 |
Total deferred tax assets | |
| 604 | |
| 656 |
Valuation allowance | |
| (8) | |
| (8) |
Deferred tax assets, net of valuation allowance | |
| 596 | |
| 648 |
Deferred tax liabilities | | | | | | |
Deferred income | | $ | 221 | | $ | 291 |
Depreciation | |
| 28 | |
| 14 |
Right of use assets | |
| 22 | |
| 28 |
Intangible assets | |
| 23 | |
| 26 |
Total deferred tax liabilities | |
| 294 | |
| 359 |
| | | | | | |
Net deferred tax assets | | $ | 302 | | $ | 289 |
| | | | | | |
Amounts recognized on the Consolidated Balance Sheets: | | | | | | |
Other assets | | $ | 302 | | $ | 289 |
At December 31, 2021, included in the Company’s U.S. tax returns are approximately $132 million of U.S. federal net operating loss carryovers (“NOLs”) and approximately $34 million of foreign tax credits. With the exception of NOLs generated after December 31, 2017, these attributes expire at various times through the year 2037. As well, as of December 31, 2021, the Company has state income tax NOLs of approximately $231 million and state credits of approximately $3 million, both available to offset future state taxable income, and state capital losses of approximately $7 million to offset capital gains. The state NOLs, credits and capital losses will expire at various times through the year 2040.
The Company uses the portfolio approach relating to the release of stranded tax effects recorded in accumulated other comprehensive loss. Under the portfolio approach, the net unrealized gains or losses recorded in accumulated other comprehensive loss would be eliminated only on the date the entire portfolio of available-for-sale securities is sold or otherwise disposed of.
F-41
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Reform”) was enacted on December 22, 2017 and permanently reduced the corporate tax rate to 21% from 35%, effective January 1, 2018. For the year ended December 31, 2021, the Company recorded an income tax benefit of approximately $8 million related to the 2017 Tax Reform rate differential that was released from Other comprehensive income due to the divestiture of the LoyaltyOne segment.
For the year ended December 31, 2020, the Company recorded an income tax benefit of approximately $2 million related to the rate benefit for a capital loss that will be carried back to a year preceding the 2017 Tax Reform rate reduction. The Company is currently under audit with the Internal Revenue Service for years 2012-2018. For years 2012-2014, the audit is limited in scope to research and development tax credits and IRC Section 199 deductions claimed on amended returns. As a result of the preliminary audit findings, the Company increased its reserve for IRC Section 199 deductions by $12 million during the year ended December 31, 2020.
For the year ended December 31, 2019, the Company recorded an income tax benefit of approximately $30 million related to a decrease in unrecognized tax benefits as a result of a tax accounting method change required by the 2017 Tax Reform.
The following table presents changes in unrecognized tax benefits (in millions):
| | | |
Balance at January 1, 2019 |
| $ | 223 |
Increases related to prior years’ tax positions | |
| 2 |
Decreases related to prior years’ tax positions | |
| (66) |
Increases related to current year tax positions | |
| 58 |
Settlements during the period | |
| (1) |
Lapses of applicable statutes of limitation | |
| (1) |
Balance at December 31, 2019 | | $ | 215 |
Increases related to prior years’ tax positions | |
| 59 |
Decreases related to prior years’ tax positions | |
| (23) |
Increases related to current year tax positions | |
| 11 |
Settlements during the period | |
| (5) |
Lapses of applicable statutes of limitation | |
| (2) |
Balance at December 31, 2020 | | $ | 255 |
Increases related to prior years’ tax positions | |
| 1 |
Decreases related to prior years’ tax positions | |
| (13) |
Increases related to current year tax positions | |
| 12 |
Settlements during the period | |
| (8) |
Balance at December 31, 2021 | | $ | 247 |
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in Provision for income taxes. The Company has potential cumulative interest and penalties with respect to unrecognized tax benefits of approximately $76 million, $69 million and $60 million at December 31, 2021, 2020 and 2019, respectively. For the years ended December 31, 2021, 2020 and 2019, the Company recorded approximately $8 million, $9 million and $2 million, respectively, in Provision for income taxes for potential interest and penalties for unrecognized tax benefits.
At December 31, 2021, 2020 and 2019, the Company had unrecognized tax benefits of approximately $241 million, $243 million and $198 million, respectively, that, if recognized, would impact the effective tax rate. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions, as applicable. With some exceptions, the tax returns filed by the Company are no longer subject to U.S. federal income tax and state and local examinations for the years before 2015 or foreign income tax examinations for years before 2017.
F-42
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table summarizes restricted stock unit activity under the Company’s equity compensation plans:
| | | | | | | | | | | |
| | |
| |
| |
| |
| Weighted | |
| | Market- | | Performance- | | Service- | | | | Average | |
| | Based (1) | | Based (1) | | Based | | Total | | Fair Value | |
Balance at January 1, 2017 | | — |
| 444,319 |
| 332,378 |
| 776,697 | | $ | 216.89 |
Shares granted | | 28,172 |
| 282,311 |
| 126,051 |
| 436,534 | |
| 229.37 |
Shares vested | | — |
| (188,929) |
| (96,723) |
| (285,652) | |
| 248.70 |
Shares forfeited | | — |
| (87,122) |
| (32,647) |
| (119,769) | |
| 211.69 |
Balance at December 31, 2017 | | 28,172 |
| 450,579 |
| 329,059 |
| 807,810 | | $ | 207.45 |
Shares granted | | 28,057 |
| 263,542 |
| 138,160 |
| 429,759 | |
| 233.98 |
Shares vested | | — |
| (188,680) |
| (130,823) |
| (319,503) | |
| 224.62 |
Shares forfeited | | — |
| (102,199) |
| (18,955) |
| (121,154) | |
| 227.66 |
Balance at December 31, 2018 | | 56,229 |
| 423,242 |
| 317,441 |
| 796,912 | | $ | 218.81 |
Shares granted | | 37,878 |
| 420,239 |
| 246,118 |
| 704,235 | |
| 161.05 |
Shares vested | | — |
| (262,773) |
| (178,730) |
| (441,503) | |
| 218.45 |
Shares forfeited | | (69,819) |
| (350,436) |
| (126,257) |
| (546,512) | |
| 188.40 |
Balance at December 31, 2019 | | 24,288 |
| 230,272 |
| 258,572 |
| 513,132 | | $ | 172.06 |
Outstanding and Expected to Vest | | | | | | |
| 271,685 | | $ | 200.63 |
The total fair value of restricted stock units vested was $96.4 million, $71.8 million and $71.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. The aggregate intrinsic value of restricted stock units outstanding and expected to vest was $30.5 million at December 31, 2019. The weighted-average remaining contractual life for unvested restricted stock units was 1.3 years at December 31, 2019.20. EARNINGS PER SHARE
Stock Options
Stock optionBasic earnings (losses) per share (EPS) is based only on the weighted average number of common shares outstanding, excluding any dilutive effects of stock options, unvested restricted stock awards, are granted with an exercise price equalor other dilutive securities. Diluted EPS is based on the weighted average number of common and potentially dilutive common shares (dilutive stock options, unvested restricted stock awards and other dilutive securities outstanding during the year) pursuant to the market priceTreasury Stock method. For periods with participating securities, in this case 2019, the Company computes EPS using the two-class method, which is an allocation of earnings between the Company’sholders of common stock on the dateand a company’s participating security holders that determines EPS for each class of grant. Options typically vest ratably over three yearscommon stock and expire ten years after the date of grant. There were no stock options outstanding as of December 31, 2019.participating securities according to dividends declared and participation rights in undistributed earnings.
The following table summarizes stock option activity undersets forth the Company’s equity compensation plans:computation of basic and diluted EPS attributable to common stockholders for the years ended December 31:
| | | | | | | | | | |
| | Outstanding | | Exercisable | ||||||
|
| |
| Weighted |
| |
| Weighted | ||
| | | | Average | | | | Average | ||
| | Options | | Exercise Price | | Options | | Exercise Price | ||
Balance at January 1, 2017 |
| 18,866 | | $ | 37.60 |
| 18,864 | | $ | 37.60 |
Options granted |
| — | |
| — | | | | | |
Options exercised |
| (7,004) | |
| 60.85 | | | | | |
Options forfeited |
| (3) | |
| 35.56 | | | | | |
Balance at December 31, 2017 |
| 11,859 | | $ | 23.87 |
| 11,859 | | $ | 23.87 |
Options granted |
| — | |
| — | | | | | |
Options exercised |
| (886) | |
| 12.70 | | | | | |
Options forfeited |
| (119) | |
| 2.74 | | | | | |
Balance at December 31, 2018 |
| 10,854 | | $ | 25.01 |
| 10,854 | | $ | 25.01 |
Options granted |
| — | |
| — | | | | | |
Options exercised |
| (10,854) | |
| 25.01 | | | | | |
Options forfeited |
| — | |
| — | | | | | |
Balance at December 31, 2019 |
| — | | $ | — |
| — | | $ | — |
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions, except per share amounts) | |||||||
Basic EPS: | | | | | | | | | |
Numerator: | | | | | | | | | |
Income from continuing operations | | $ | 797 | | $ | 208 | | $ | 506 |
Less: Dividends declared on preferred stock | | | — | | | — | | | 3 |
Less: Allocation of undistributed earnings | | | — | | | — | | | 6 |
Income from continuing operations | | | 797 | | | 208 | | | 497 |
Income (loss) from discontinued operations, net of income taxes | | | 4 | | | 6 | | | (228) |
Net income | | $ | 801 | | $ | 214 | | $ | 269 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Weighted average shares | |
| 49.7 | |
| 47.8 | |
| 50.0 |
| | | | | | | | | |
Basic EPS: | | | | | | | | | |
Continuing operations | | $ | 16.02 | | $ | 4.36 | | $ | 9.94 |
Discontinued operations | | $ | 0.07 | | $ | 0.11 | | $ | (4.56) |
Total | | $ | 16.09 | | $ | 4.47 | | $ | 5.38 |
| | | | | | | | | |
| | | | | | | | | |
Diluted EPS (1): | | | | | | | | | |
Numerator: | | | | | | | | | |
Income from continuing operations | | $ | 797 | | $ | 208 | | $ | 506 |
Income (loss) from discontinued operations, net of income taxes | | | 4 | | | 6 | | | (228) |
Net income | | $ | 801 | | $ | 214 | | $ | 278 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Weighted average shares from Basic EPS above | |
| 49.7 | |
| 47.8 | |
| 50.0 |
Weighted average effect of dilutive securities (2): | | | | | | | | | |
Shares from assumed conversion of preferred stock | |
| — | |
| — | |
| 0.8 |
Net effect of dilutive unvested restricted stock awards (1) | |
| 0.3 | |
| 0.1 | |
| 0.1 |
Denominator for diluted calculation | |
| 50.0 | |
| 47.9 | |
| 50.9 |
| | | | | | | | | |
Diluted EPS: | | | | | | | | | |
Continuing operations | | $ | 15.95 | | $ | 4.35 | | $ | 9.94 |
Discontinued operations | | $ | 0.07 | | $ | 0.11 | | $ | (4.48) |
Total | | $ | 16.02 | | $ | 4.46 | | $ | 5.46 |
(1) | Computed using the if-converted method, as the result was more dilutive. |
(2) | For the years ended December 31, 2021, 2020 and 2019, an insignificant amount of restricted stock awards were excluded from each calculation of weighted average dilutive common shares as the effect would have been anti-dilutive. |
F-52F-43
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Based on the market value on their respective exercise dates, the total intrinsic value of stock options exercised was approximately $1.3 million, $0.2 million and $1.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company received $0.3 million of cash proceeds from stock options exercised during the year ended December 31, 2019.
Dividends
During the year ended December 31, 2019, the Company declared quarterly cash dividends of $0.63 per share, for a total of $127.1 million. The Company paid cash dividends and dividend equivalents aggregating $127.4 million for the year ended December 31, 2019, and $1.2 million of dividend equivalents were accrued but not yet paid at December 31, 2019.
During the year ended December 31, 2018, the Company declared quarterly cash dividends of $0.57 per share, for a total of $125.9 million. The Company paid cash dividends and dividend equivalents aggregating $125.2 million for the year ended December 31, 2018, and $0.7 million of dividend equivalents were accrued but not yet paid at December 31, 2018.
During the year ended December 31, 2017, the Company declared quarterly cash dividends of $0.52 per share, for a total of $116.4 million. The Company paid cash dividends and dividend equivalents aggregating $115.5 million for the year ended December 31, 2017, and $0.9 million of dividend equivalents were accrued but not yet paid at December 31, 2017.
On 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, payable on March 19, 2020 to stockholders of record at the close of business on February 14, 2020.
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 preferred stock will initially be convertible into 10 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 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 preferred stock, (c) in which no one transferee (or group of associated transferees) would receive 2% or more of any class of the Company’s voting securities then outstanding (including pursuant to a related series of such transfers), or (d) to a transferee that would control more than 50% of the Company voting securities (not including voting securities such person is acquiring from the transferor). Upon such a transaction, the transferred shares of preferred stock will automatically be converted into shares of common stock on a 10-for-one basis (subject to adjustment as described in the Certificate of Designations).
The shares of preferred stock have no voting rights, except as otherwise required by the General Corporation Law of the State of Delaware. The 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 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. (“ValueAct”) 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 preferred stock. The issuance to ValueAct of the shares of preferred stock was, and the
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
issuance of the shares of common stock issuable upon conversion of the preferred stock was, made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Series A Non-Voting Convertible Preferred Stock (preferred stock). In October 2019, ValueAct exchangedconverted all 150,000 shares of preferred stock back to common stock. At December 31, 2019, the Company did not have any shares of preferred stock outstanding.
20. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
In March 2015, the Company’s Board of Directors adopted the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was subsequently approved by the Company’s stockholders on June 3, 2015. The 2015 ESPP became effective July 1, 2015 with no definitive expiration date. The Company’s Board of Directors may at any time and for any reason terminate or amend the 2015 ESPP. No employee may purchase more than $25,000 in stock under the 2015 ESPP in any calendar year, and no employee may purchase stock under the 2015 ESPP if such purchase would cause the employee to own more than 5% of the voting power or value of the Company’s common stock. The 2015 ESPP provides for six month offering periods, commencing on the first trading day of the first and third calendar quarter of each year and ending on the last trading day of each subsequent calendar quarter. The purchase price of the common stock upon exercise shall be 85% of the fair market value of shares on the applicable purchase date as determined by averaging the high and low trading prices of the last trading day of the six-month period. An employee may elect to pay the purchase price of such common stock through payroll deductions. The 2015 ESPP provides for the issuance of any remaining shares available for issuance under the 2005 ESPP, which were 441,327 shares at June 30, 2015. The 2015 ESPP reserved an additional 1,000,000 shares of the Company’s common stock for issuance under the 2015 Plan, bringing the maximum number of shares reserved for issuance under the 2015 ESPP to 1,441,327 shares, subject to adjustment as provided in the 2015 ESPP.
On June 5, 2015, the Company registered 1,441,327 shares of its common stock for issuance in accordance with the 2015 ESPP pursuant to a Registration Statement on Form S-8, File No. 333-204759.
During the year ended December 31, 2019, the Company issued 107,167 shares of common stock under the 2015 ESPP at a weighted-average issue price of $113.17. Since its adoption on July 1, 2015, 448,682 shares of common stock have been issued, with 992,645 shares available for issuance under the 2015 ESPP.
2015 Omnibus Incentive Plan
The 2015 Omnibus Incentive Plan authorizes the compensation committee to grant cash-based and other equity-based or equity-related awards, including deferred stock units. The maximum cash amount that may be awarded to any single participant in any one calendar year may not exceed $7.5 million. See Note 19, “Stockholders’ Equity,” for more information about the 2015 Plan.
401(k) Retirement Savings Plan
The Alliance Data Systems 401(k) and Retirement Savings Plan is a defined contribution plan that is qualified under Section 401(k) of the Internal Revenue Code of 1986. The Company amended its 401(k) and Retirement Savings Plan effective January 1, 2019. The 401(k) and Retirement Savings Plan is an IRS-approved safe harbor plan design that eliminates the need for most discrimination testing. Eligible employees can participate in the 401(k) and Retirement Savings Plan immediately upon joining the Company and after 180 days of employment begin receiving company matching contributions. In addition, “seasonal” or “on-call” employees must complete a year of eligibility service before they may participate in the 401(k) and Retirement Savings Plan. The 401(k) and Retirement Savings Plan permits eligible employees to make Roth elective deferrals, which are included in the employee’s taxable income at the time of contribution, but not when distributed. Regular, or Non-Roth, elective deferrals made by employees, together with contributions by the Company to the 401(k) and Retirement Savings Plan, and income earned on these contributions, are not taxable to employees until withdrawn from the 401(k) and Retirement Savings Plan. The 401(k) and Retirement Savings Plan covers U.S. employees, who are at least 18 years old, of ADS Alliance Data Systems, Inc., one of the
F-54
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Company’s wholly-owned subsidiaries, and any other subsidiary or affiliated organization that adopts this 401(k) and Retirement Savings Plan. Employees of the Company, and all of its U.S. subsidiaries, are currently covered under the 401(k) and Retirement Savings Plan.
The Company matches an employee’s contribution dollar-for-dollar up to 5 percent of the employee’s eligible compensation. All company matching contributions are immediately vested. Company matching contributions for the years ended December 31, 2019, 2018 and 2017 were $35.3 million, $44.8 million and $41.6 million, respectively.
The participants in the plan can direct their contributions and the Company’s matching contribution to numerous investment options, including the Company’s common stock. On July 20, 2001, the Company registered 1,500,000 shares of its common stock for issuance in accordance with its 401(k) and Retirement Savings Plan pursuant to a Registration Statement on Form S-8, File No. 333-65556. As of December 31, 2019, 462,101 of such shares remain available for issuance.
Group Retirement Savings Plan and Deferred Profit Sharing Plan (LoyaltyOne)
The Company provides for its Canadian employees the Group Retirement Savings Plan of the Loyalty Group (“GRSP”), which is a group retirement savings plan registered with the Canada Revenue Agency. Contributions made by Canadian employees on their behalf or on behalf of their spouse to the GRSP, and income earned on these contributions, are not taxable to employees until withdrawn from the GRSP. Employee contributions eligible for company match may not exceed the overall maximum allowed by the Income Tax Act (Canada); the maximum tax-deductible GRSP contribution is set by the Canada Revenue Agency each year. The Deferred Profit Sharing Plan (“DPSP”) is a legal trust registered with the Canada Revenue Agency. Eligible full-time employees can participate in the GRSP after three months of employment and eligible part-time employees after six months of employment. Employees become eligible to receive company matching contributions into the DPSP on the first day of the calendar quarter following twelve months of employment. Based on the eligibility guidelines, the Company matches an employee’s contribution dollar-for-dollar up to 5 percent of the employee’s eligible compensation. Contributions made to the DPSP reduce an employee’s maximum contribution amounts to the GRSP under the Income Tax Act (Canada) for the following year. All company matching contributions into the DPSP vest after receipt of one continuous year of DPSP contributions. LoyaltyOne matching and discretionary contributions were $1.8 million, $1.7 million and $1.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Executive Deferred Compensation Plan and the Canadian Supplemental Executive Retirement Plan
The Company also maintains an Executive Deferred Compensation Plan (“EDCP”). The EDCP permits a defined group of management and highly compensated employees to defer on a pre-tax basis a portion of their base salary and incentive compensation (as defined in the EDCP) payable for services rendered. Deferrals under the EDCP are unfunded and subject to the claims of the Company’s creditors. Each participant in the EDCP is 100% vested in their account, and account balances accrue interest at a rate established and adjusted periodically by the committee that administers the EDCP.
The Company provides a Canadian Supplemental Executive Retirement Plan for a defined group of management and highly compensated employees of LoyaltyOne, Co., one of the Company’s wholly-owned subsidiaries. Similar to the EDCP, participants may defer on a pre-tax basis a portion of their compensation and bonuses payable for services rendered and to receive certain employer contributions.
As of December 31, 2019 and 2018, the Company’s outstanding liability related to these plans and included in accrued expenses in the Company’s consolidated balance sheets was $33.3 million and $63.2 million, respectively.
F-55
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
21. ACCUMULATED OTHER COMPREHENSIVE LOSSSUPPLEMENTAL CASH FLOW INFORMATION
The changesConsolidated Statements of Cash Flows are presented with the combined cash flows from continuing and discontinued operations. The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in each componentthe Consolidated Statements of accumulated other comprehensive loss, netCash Flows as of tax effects, are as follows:December 31:
| | | | | | | | | | | | | | | |
|
| | | | |
| |
| |
| Accumulated | ||||
| | Net Unrealized | | Net Unrealized | | Net Unrealized | | Foreign Currency | | Other | |||||
| | Gains (Losses) on | | Gains (Losses) on | | Gains (Losses) on | | Translation | | Comprehensive | |||||
|
| Securities |
| Cash Flow Hedges |
| Net Investment Hedge |
| Adjustments (1) |
| Loss | |||||
| | (in millions) | |||||||||||||
Balance as of January 1, 2017 | | $ | (1.6) | | $ | 0.4 | | $ | 4.1 | | $ | (153.6) | | $ | (150.7) |
Changes in other comprehensive income (loss) | |
| (7.1) | | | (0.5) | | | (46.1) | | | 64.2 | |
| 10.5 |
Balance at December 31, 2017 | | $ | (8.7) | | $ | (0.1) | | $ | (42.0) | | $ | (89.4) | | $ | (140.2) |
Changes in other comprehensive income (loss) | | | (2.0) | | | (0.1) | | | 29.6 | | | (25.4) | | | 2.1 |
Balance at December 31, 2018 | | $ | (10.7) | | $ | (0.2) | | $ | (12.4) | | $ | (114.8) | | $ | (138.1) |
Changes in other comprehensive income (loss) | | | 13.2 | | | 0.1 | | | 4.9 | | | (6.8) | | | 11.4 |
Recognition resulting from the sale of Epsilon's foreign subsidiaries | | | — | | | — | | | — | | | 26.8 | | | 26.8 |
Balance at December 31, 2019 | | $ | 2.5 | | $ | (0.1) | | $ | (7.5) | | $ | (94.8) | | $ | (99.9) |
| | | | | | |
| | 2021 | | 2020 | ||
| | (in millions) | ||||
Cash and cash equivalents | | $ | 3,046 | | $ | 2,796 |
Restricted cash included within Other assets | | | 877 | | | 323 |
Cash, cash equivalents and restricted cash included within Assets of discontinued operations | | — | | | 344 | |
Total cash, cash equivalents and restricted cash | | $ | 3,923 | | $ | 3,463 |
In accordance with ASC 830, “Foreign Currency Matters,Non-cash investing and financing activities for the year ended December 31, 2021 included the Company’s equity method investment in Loyalty Ventures Inc. upon spinoff, which totaled $48 million on November 5, 2021, and the Company’s retirement of its outstanding treasury stock in July 2021. For more information, see Note 22, “Discontinued Operations and Bank Holding Company Financial Presentation,” uponand Note 18, “Stockholders’ Equity.”
Non-cash investing and financing activities for the sale of Epsilon on July 1, 2019, $26.8year ended December 31, 2020 included $75 million of accumulated foreign currency translation adjustments attributable to Epsilon’s foreign subsidiaries sold were reclassified from accumulated other comprehensive lossdeferred consideration and includedthe issuance of approximately 1.9 million shares of the Company’s common stock as non-cash consideration in the calculationacquisition of the gain/lossBread on sale of Epsilon segment. Additionally, as of January 1, 2018, a cumulative-effect adjustment of $1.5 million, net of tax, 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.”December 3, 2020. For more information, see Note 2, “Summary“Acquisitions.”
22. DISCONTINUED OPERATIONS AND BANK HOLDING COMPANY FINANCIAL PRESENTATION
DISCONTINUED OPERATIONS
LoyaltyOne
On November 5, 2021, the separation of Significant Accounting Policies.” Other reclassificationsLoyalty Ventures Inc. (Loyalty Ventures) from accumulated other comprehensive loss into net income for eachthe Company was completed after market close (the Separation). The Separation of Loyalty Ventures, which comprised the LoyaltyOne segment and has been classified as discontinued operations, was achieved through the Company’s distribution of 81% of the periods presentedshares of Loyalty Ventures common stock to holders of ADS common stock as of the close of business on the record date of October 27, 2021. ADS stockholders of record received one share of Loyalty Ventures common stock for every two and a half shares of ADS common stock. Following this distribution, Loyalty Ventures became an independent, publicly-traded company, in which the Company has retained a 19% ownership interest. As part of the plan regarding the Separation, the Company received distributions from Loyalty Ventures prior to the effectiveness of the Separation in the aggregate amount of $750 million, of which $725 million was used by the Company to repay certain term loans as required under the Company’s credit agreement and $25 million was used by the Company to make scheduled amortization payments for the fourth quarter of 2021 with respect to such term loans. See Note 11, “Borrowings of Long-term and Other Debt,” for further discussion on the Company’s outstanding long-term debt.
The Company accounts for its 19% ownership interest in Loyalty Ventures following the equity method of accounting. As of December 31, 2021, the carrying amount of the Company’s ownership interest in Loyalty Ventures, which investment totaled was $50 million, and is included in Other assets in the Consolidated Balance Sheet, while earnings (losses), which were not material.immaterial for the period, are recorded in Other non-interest income in the Consolidated Statements of Income.
F-56F-44
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
22. INCOME TAXES
The componentsfollowing table summarizes the results of income from continuing operations before income taxes and income tax expense are as follows:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Components of income from continuing operations before income taxes: | | | | | | | | | |
Domestic | | $ | 591.9 | | $ | 1,052.7 | | $ | 883.8 |
Foreign | |
| 146.5 | |
| 162.3 | |
| 178.7 |
Total | | $ | 738.4 | | $ | 1,215.0 | | $ | 1,062.5 |
Components of income tax expense: | | | | | | | | | |
Current | | | | | | | | | |
Federal | | $ | 126.0 | | $ | 152.2 | | $ | 295.0 |
State | |
| 35.8 | |
| 58.0 | |
| 17.5 |
Foreign | |
| 11.5 | |
| 52.8 | |
| 56.7 |
Total current | |
| 173.3 | |
| 263.0 | |
| 369.2 |
Deferred | | | | | | | | | |
Federal | |
| (11.8) | |
| 48.0 | |
| (65.3) |
State | |
| 6.7 | |
| 14.7 | |
| 6.2 |
Foreign | |
| (2.4) | |
| (56.2) | |
| (16.8) |
Total deferred | |
| (7.5) | |
| 6.5 | |
| (75.9) |
Total provision for income taxes | | $ | 165.8 | | $ | 269.5 | | $ | 293.3 |
A reconciliation of recorded federal provision for income taxesthe Company’s former LoyaltyOne segment, direct costs identifiable to the expected amount computed by applyingLoyaltyOne segment, and the federal statutory rate for all periods to income from continuing operations before income taxes is as follows:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Expected expense at statutory rate | | $ | 155.1 | | $ | 255.1 | | $ | 371.9 |
Increase (decrease) in income taxes resulting from: | | | | | | | | | |
State income taxes, net of federal benefit | |
| 33.6 | |
| 57.4 | |
| 14.5 |
Foreign rate differential | |
| (2.3) | |
| 11.6 | |
| (26.0) |
Foreign restructuring | |
| — | |
| (48.0) | |
| — |
Impact of 2017 Tax Reform | | | (30.2) | | | (29.7) | | | (64.9) |
Global intangible low-taxed income | | | 8.7 | | | 15.5 | | | — |
Non-deductible expenses (non-taxable income) | | | 9.1 | | | 3.7 | | | (4.6) |
Other | |
| (8.2) | |
| 3.9 | |
| 2.4 |
Total | | $ | 165.8 | | $ | 269.5 | | $ | 293.3 |
H.R. 1, originally known as the Tax Cuts and Jobs Actallocation of 2017 (the “2017 Tax Reform”) was enactedinterest expense on December 22, 2017. The 2017 Tax Reform permanently reduced the corporate tax rate to 21% from 35%, effective January 1, 2018 and implemented a change from a system of worldwide taxation with deferral to a hybrid territorial system. This system taxes excess foreign profits above a deemed routine return through the Global Intangible Low-Taxed Income (“GILTI”) regime. The Company recognizes tax on GILTI as an expense in the period incurred. For the year ended December 31, 2019, the Company recorded an income tax benefit of approximately $30.2 million related to a decrease in unrecognized tax benefits as a result of a tax accounting method change required by the 2017 Tax Reform.
F-57
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Deferred tax assets and liabilities consist of the following:
| | | | | | |
| | December 31, | ||||
|
| 2019 |
| 2018 | ||
| | (in millions) | ||||
Deferred tax assets | | | | | | |
Deferred revenue | | $ | 9.5 | | $ | 10.6 |
Allowance for doubtful accounts | |
| 267.6 | |
| 267.0 |
Net operating loss carryforwards and other carryforwards | |
| 69.0 | |
| 57.8 |
Stock-based compensation and other employee benefits | |
| 13.7 | |
| 24.4 |
Lease liabilities | |
| 74.4 | |
| — |
Accrued expenses and other | |
| 40.3 | |
| 66.2 |
Intangible assets | |
| 23.2 | |
| — |
Total deferred tax assets | |
| 497.7 | |
| 426.0 |
Valuation allowance | |
| (64.0) | |
| (36.3) |
Deferred tax assets, net of valuation allowance | |
| 433.7 | |
| 389.7 |
Deferred tax liabilities | | | | | | |
Deferred income | | $ | 365.6 | | $ | 409.8 |
Depreciation | |
| 41.8 | |
| 79.0 |
Right of use assets | |
| 61.1 | |
| — |
Intangible assets | |
| — | |
| 113.4 |
Total deferred tax liabilities | |
| 468.5 | |
| 602.2 |
| | | | | | |
Net deferred tax liability | | $ | (34.8) | | $ | (212.5) |
| | | | | | |
Amounts recognized in the consolidated balance sheets: | | | | | | |
Non-current assets | | $ | 45.2 | | $ | 44.0 |
Non-current liabilities | |
| (80.0) | |
| (256.5) |
Total – Net deferred tax liability | | $ | (34.8) | | $ | (212.5) |
At December 31, 2019, included in the Company’s U.S. tax returns are approximately $20.1 million of U.S. federal net operating loss carryovers (“NOLs”) and approximately $33.8 million of foreign tax credits. With the exception of NOLs generated after December 31, 2017, these attributes expire at various times through the year 2037. Pursuant to Section 382 of the Internal Revenue Code, the Company’s utilization of a portion of such NOLs is subject to an annual limitation. The Company does not believe it is more likely than not that all of its NOLs will be utilized and has therefore, in accordance with ASC 740-10-30, “Income Taxes-Overall-Initial Measurement,” established a valuation allowance against a portion of the NOLs. At December 31, 2019, the Company has state income tax NOLs of approximately $175.4 million and state credits of approximately $5.9 million available to offset future state taxable income. The state NOLs and credits will expire at various times through the year 2038. The Company believes a majority of these NOLs will expire before utilization and has therefore established a valuation allowance against those NOLs expected to expire unutilized. The Company has $216.3 million of foreign NOLs and $5.6 million of foreign capital losses at December 31, 2019. The foreign NOLs and capital losses have an unlimited carryforward period. The Company does not believe it is more likely than not that the NOLs or capital losses will be utilized and has therefore, in accordance with ASC 740-10-30, “Income Taxes—Overall—Initial Measurement,” established a full valuation allowance against them. The Company’s valuation allowance increased $27.7 million during the year ended December 31, 2019, due primarily to an increase in the amount of state and foreign NOLs that the Company does not believe will be utilized. The Company’s valuation allowance decreased $40.1 million during the year ended December 31, 2018 and increased $31.7 million during the year ended December 31, 2017.
Should certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of carryovers and credits that can be utilized. The impact of such a limitation would likely not be significant.
At December 31, 2019, the Company did not have any excess financial reporting basis over tax basis from a U.S. federal tax perspective primarily as a result of the GILTI regime pursuant to the 2017 Tax Reform. The Company may
F-58
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
have, in certain state or foreign jurisdictions, amounts of financial reporting basis that exceeds tax basis as of December 31, 2019. However, these amounts are immaterial and no additional state or foreign tax liability has been recorded. Finally, despite the immaterial nature, the Company intends to permanently reinvest any previously undistributed earnings of our foreign subsidiaries in the operations outside the United States to support its international growth.
The net tax impact of the change in the carrying value of the Euro-denominated Senior Notes due 2022 and 2023 due to foreign exchange fluctuations that was recorded directly to other comprehensive income was an expense of $1.6 million, an expense of $9.5 million and a benefit of $26.2 milliondebt, for the years ended December 31, 2019, 2018 and 2017, respectively. These notes were repaid in July 2019.31:
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| | | |
Balance at January 1, 2017 |
| $ | 192.0 |
Increases related to prior years’ tax positions | |
| 9.3 |
Decreases related to prior years’ tax positions | |
| (15.7) |
Increases related to current year tax positions | |
| 33.0 |
Settlements during the period | |
| (6.7) |
Lapses of applicable statutes of limitation | |
| (3.6) |
Balance at December 31, 2017 | | $ | 208.3 |
Increases related to prior years’ tax positions | |
| 41.3 |
Decreases related to prior years’ tax positions | |
| (9.6) |
Increases related to current year tax positions | |
| 61.5 |
Settlements during the period | |
| (1.0) |
Lapses of applicable statutes of limitation | |
| (4.2) |
Balance at December 31, 2018 | | $ | 296.3 |
Increases related to prior years’ tax positions | |
| 2.7 |
Decreases related to prior years’ tax positions | |
| (76.6) |
Increases related to current year tax positions | |
| 58.3 |
Settlements during the period | |
| (0.6) |
Lapses of applicable statutes of limitation | |
| (5.8) |
Balance at December 31, 2019 | | $ | 274.3 |
Included in the balance at December 31, 2019 are tax positions reclassified from deferred income taxes. Deductibility or taxability is highly certain for these tax positions but there is uncertainty about the timing of such deductibility or taxability. Because of the impact of deferred tax accounting, other than interest and penalties, this timing uncertainty, if realized, would not have a material effect on the annual effective tax rate but could accelerate the payment of cash to the taxing authority to an earlier period.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has potential cumulative interest and penalties with respect to unrecognized tax benefits of approximately $67.0 million, $66.7 million and $41.6 million at December 31, 2019, 2018 and 2017, respectively. For the years ended December 31, 2019, 2018 and 2017, the Company recorded approximately an $0.8 million benefit, a $24.5 million expense and a $5.7 million expense, respectively, for potential interest and penalties with respect to unrecognized tax benefits.
At December 31, 2019, 2018 and 2017, the Company had unrecognized tax benefits of approximately $255.1 million, $247.7 million and $170.0 million, respectively, that, if recognized, would impact the effective tax rate. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. With some exceptions, the tax returns filed by the Company are no longer subject to U.S. federal income tax examinations for the years before 2015, state and local examinations for years before 2014 or foreign income tax examinations for years before 2013.
| | | | | | | | | |
|
| 2021 |
| 2020 | | 2019 | |||
| | (in millions) | |||||||
Total interest income | | $ | 1 | | $ | 1 | | $ | 2 |
Total interest expense (1) | | | 11 | | | 17 | | | 31 |
Net interest income | | | (10) | | | (16) | | | (29) |
Total non-interest income | | | 574 | | | 765 | | | 1,033 |
Total non-interest expenses | | | 519 | | | 656 | | | 927 |
Income before provision from income taxes | | | 45 | | | 93 | | | 77 |
Provision for income taxes | | | 36 | | | 6 | | | 10 |
Income from discontinued operations, net of income taxes | | $ | 9 | | $ | 87 | | $ | 67 |
F-59
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
23. 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:
| | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | ||||||||
| | Carrying | | Fair | | Carrying | | Fair | ||||
|
| Amount |
| Value |
| Amount |
| Value | ||||
| | (in millions) | ||||||||||
Financial assets | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 18,292.0 | | $ | 19,126.0 | | $ | 16,816.7 | | $ | 17,472.7 |
Credit card receivables held for sale | | | 408.0 | | | 436.2 | | | 1,951.6 | | | 1,995.5 |
Redemption settlement assets, restricted | |
| 600.8 | |
| 600.8 | |
| 558.6 | |
| 558.6 |
Other investments | |
| 259.8 | |
| 259.8 | |
| 291.3 | |
| 291.3 |
Derivative instruments | |
| 0.2 | |
| 0.2 | |
| 3.8 | |
| 3.8 |
Financial liabilities | | | | | | | | | | | | |
Derivative instruments | | | 0.3 | | | 0.3 | | | 0.3 | | | 0.3 |
Deposits | |
| 12,151.7 | |
| 12,303.6 | |
| 11,793.7 | |
| 11,768.7 |
Non-recourse borrowings of consolidated securitization entities | |
| 7,284.0 | |
| 7,333.6 | |
| 7,651.7 | |
| 7,626.9 |
Long-term and other debt | |
| 2,849.9 | |
| 2,878.8 | |
| 5,725.4 | |
| 5,755.3 |
(1) | As described above, the Company’s credit agreement, as amended, required a $725 million prepayment of term loans in conjunction with the LoyaltyOne spinoff. As a result, the interest expense reflected above is the allocation to discontinued operations of interest on the basis of this $725 million mandatory prepayment. |
The following techniquestable summarizes the assets 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 measurementliabilities 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 measurementCompany’s former LoyaltyOne segment as of the credit card portfolios held for sale, as well as market data as applicable.
Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.
Other investments — Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the 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.
F-60
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)December 31:
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:
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.
| | | |
|
| 2020 | |
| | (in millions) | |
Assets: | | | |
Cash and cash equivalents | | $ | 286 |
Accounts receivable, net | | | 270 |
Inventories | | | 164 |
Redemption settlement assets, restricted | | | 693 |
Property and equipment, net | | | 98 |
Goodwill | | | 736 |
Other assets | | | 216 |
Total assets of discontinued operations | | $ | 2,463 |
| | | |
Liabilities: | | | |
Accounts payable | | $ | 68 |
Accrued expenses | | | 61 |
Deferred revenue | | | 1,004 |
Other liabilities | | | 224 |
Total liabilities of discontinued operations | | $ | 1,357 |
The following tables provide informationtable summarizes the depreciation and amortization, and capital expenditures of the Company’s former LoyaltyOne segment for the assets and liabilities carried at fair value measured on a recurring basis as ofyears ended December 31, 2019 and 2018:31:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| 2021 |
| 2020 | | 2019 | ||||||||||
| | | | | December 31, 2019 Using | | (in millions) | ||||||||||||||
|
| Balance at |
| | |
| | |
| | | ||||||||||
| | December 31, | | | | | | | | | | ||||||||||
|
| 2019 |
| Level 1 |
| Level 2 |
| Level 3 | |||||||||||||
| | (in millions) | |||||||||||||||||||
Mutual funds (1) | | $ | 25.1 | | $ | 25.1 | | $ | — | | $ | — | |||||||||
Corporate bonds (1) | | | 536.4 | | | — | | | 536.4 | | | — | |||||||||
Marketable securities (2) | | | 259.8 | | | 26.2 | | | 233.6 | | | — | |||||||||
Derivative instruments (3) | | | 0.2 | | | — | | | 0.2 | | | — | |||||||||
Total assets measured at fair value | | $ | 821.5 | | $ | 51.3 | | $ | 770.2 | | $ | — | |||||||||
| | | | | | | | | | | | | |||||||||
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — | |||||||||
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — | |||||||||
Depreciation and amortization | | $ | 31 | | $ | 78 | | $ | 80 | ||||||||||||
Capital expenditures | | $ | 15 | | $ | 24 | | $ | 41 |
F-61F-45
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at | |||||||
| | | | | December 31, 2018 Using | |||||||
|
| Balance at |
| | |
| | |
| | | |
| | December 31, | | | | | | | | | | |
|
| 2018 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Mutual funds (1) | | $ | 23.2 | | $ | 23.2 | | $ | — | | $ | — |
Corporate bonds (1) | | | 491.5 | | | — | | | 491.5 | | | — |
Marketable securities (2) | | | 266.4 | | | 25.0 | | | 241.4 | | | — |
U.S. Treasury bonds (2) | | | 24.9 | | | 24.9 | | | — | | | — |
Derivative instruments (3) | | | 3.8 | | | — | | | 3.8 | | | — |
Total assets measured at fair value | | $ | 809.8 | | $ | 73.1 | | $ | 736.7 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
Epsilon
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon segment to Publicis Groupe S.A. for $4 billion in cash, subject to certain specified adjustments. Beginning in the first quarter of 2019, Epsilon met the criteria for classification as discontinued operations.
The sale of Epsilon was completed on July 1, 2019, and the pre-tax gain is shown in the table below (in millions).
| | | |
Consideration received (1) | | $ | 4,452 |
Net carrying value of assets and liabilities (including other comprehensive income) | |
| 3,940 |
Pre-tax gain on deconsolidation | | $ | 512 |
(1) |
There were 0 transfers between Levels 1The Company recorded transaction costs of approximately $79 million for the year ended December 31, 2019 and 2 withinrecorded an after-tax loss on sale of $252 million, which is included in Loss from discontinued operations, net of taxes. Following the fair value hierarchysale of Epsilon, the Company has continued its existing contractual relationships with Epsilon for digital marketing services.
The following table summarizes 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, for the years ended December 31, 2019 and 2018.31:
| | | | | | | | | |
|
| 2021 |
| 2020 | | 2019 | |||
| | (in millions) | |||||||
Total interest income | | $ | — | | $ | — | | $ | — |
Total interest expense (1) | | | — | | | — | | | 64 |
Net interest income | | | — | | | — | | | (64) |
Total non-interest income | | | — | | | — | | | 963 |
Total non-interest expenses | | | 7 | | | 110 | | | 519 |
(Loss) income before (benefit) provision for income taxes | | | (7) | | | (110) | | | 380 |
(Benefit) provision for income taxes | | | (2) | | | (29) | | | 675 |
(Loss) income from discontinued operations, net of income taxes | | $ | (5) | | $ | (81) | | $ | (295) |
(1) | The Company’s credit agreement, as amended, required a $500 million payment of the revolving credit facility and the redemption of all of the Company’s outstanding senior notes. As a result, the interest expense reflected above is the allocation to discontinued operations of interest on the basis of this $500 million mandatory repayment and redemption of its $2 billion in senior notes outstanding. |
Financial Instruments Disclosed but Not Carried at Fair Value
For the year ended December 31, 2021, loss from discontinued operations reflects a tax liability associated with indemnification issues with the purchaser. For the year ended December 31, 2020, loss from discontinued operations reflects a loss contingency associated with indemnification issues with the purchaser. For the year ended December 31, 2019, loss from discontinued operations reflects the results of operations of the Company’s former Epsilon segment, direct costs identifiable to the Epsilon segment including a loss contingency associated with indemnification issues with the purchaser and the allocation of interest expense on corporate debt. See Note 15, “Commitments and Contingencies,” for additional information with respect to the loss contingency.
The following tables provide assetstable summarizes the depreciation and liabilities disclosed but not carried at fair value asamortization, and capital expenditures of the Company’s former Epsilon segment for the years ended December 31, 2019 and 2018:31:
| | | | | | | | | | | | |
| | Fair Value Measurements at | ||||||||||
| | December 31, 2019 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 19,126.0 | | $ | — | | $ | — | | $ | 19,126.0 |
Credit card receivables held for sale | | | 436.2 | | | — | | | — | | | 436.2 |
Total | | $ | 19,562.2 | | $ | — | | $ | — | | $ | 19,562.2 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 12,303.6 | | $ | — | | $ | 12,303.6 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | |
| 7,333.6 | |
| — | |
| 7,333.6 | |
| — |
Long-term and other debt | |
| 2,878.8 | |
| — | |
| 2,878.8 | |
| — |
Total | | $ | 22,516.0 | | $ | — | | $ | 22,516.0 | | $ | — |
| | | | | | | | | |
|
| 2021 |
| 2020 | | 2019 | |||
| | (in millions) | |||||||
Depreciation and amortization | | $ | — | | $ | — | | $ | 73 |
Capital expenditures | | $ | — | | $ | — | | $ | 56 |
F-62F-46
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | Fair Value Measurements at | ||||||||||
| | December 31, 2018 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in millions) | ||||||||||
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 17,472.7 | | $ | — | | $ | — | | $ | 17,472.7 |
Credit card receivables held for sale | |
| 1,995.5 | | | — | | | — | | | 1,995.5 |
Total | | $ | 19,468.2 | | $ | — | | $ | — | | $ | 19,468.2 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 11,768.7 | | $ | — | | $ | 11,768.7 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | |
| 7,626.9 | |
| — | |
| 7,626.9 | |
| — |
Long-term and other debt | |
| 5,755.3 | |
| — | |
| 5,755.3 | |
| — |
Total | | $ | 25,150.9 | | $ | — | | $ | 25,150.9 | | $ | — |
BANK HOLDING COMPANY FINANCIAL PRESENTATION
As a result of the Separation and consequential classification of LoyaltyOne as discontinued operations, the Company has adjusted the presentation of its Consolidated Financial Statements from the Company’s historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither the Company nor any of its subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the bank holding company presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s operations going forward and better align the Company with its peers for comparability purposes. The Separation and associated reporting changes applied herein also results in the Company reflecting 1 reportable operating segment.
24. PARENT-ONLY FINANCIAL STATEMENTS
The following ADSC financial statements are provided in accordance withtables reflect a reconciliation from the rulesCompany’s historical approach to the presentation of its Consolidated Statements of Income to the Company’s bank holding company presentation for the years ended December 31, 2020 and 2019. The “Adjustments for Discontinued Operations” column reflects the removal of the Securitiesoperations of Loyalty Ventures and Exchange Commission, which requireis derived from the LoyaltyOne reportable operating segment, presented in the corresponding Annual Report on Form 10-K, adjusted to reflect directly attributable costs and allocations previously held in the Corporate segment, such disclosure whenas transaction costs, hedging costs, and interest on term loans required to be repaid as a result of the restricted net assetsSeparation. The “Adjustments for Bank Holding Company Presentation” column reflects the changes, due to the removal of consolidated subsidiaries exceed 25 percentthe operations of consolidated net assets. CertainLoyalty Ventures, in the presentation of the Company’s subsidiaries may be restricted in distributing cash or other assetshistoric Consolidated Statements of Income from commercial and industrial company presentation to ADSC, which could be utilized to service its indebtedness. The stand-alone parent-only financial statements are presented below.
Balance Sheets
| | | | | | |
| | December 31, | ||||
|
| 2019 |
| 2018 | ||
| | (in millions) | ||||
Assets: | | | | | | |
Cash and cash equivalents | | $ | 0.2 | | $ | 0.1 |
Investment in subsidiaries | |
| 5,326.2 | |
| 8,606.0 |
Other assets | |
| 3.4 | |
| 20.1 |
Total assets | | $ | 5,329.8 | | $ | 8,626.2 |
Liabilities: | | | | | | |
Current portion of long-term and other debt | | $ | 101.4 | | $ | 114.4 |
Long-term and other debt | |
| 2,748.5 | |
| 5,427.7 |
Intercompany liabilities | |
| 806.7 | |
| 395.9 |
Other liabilities | |
| 84.9 | |
| 356.1 |
Total liabilities | |
| 3,741.5 | |
| 6,294.1 |
Stockholders’ equity | |
| 1,588.3 | |
| 2,332.1 |
Total liabilities and stockholders’ equity | | $ | 5,329.8 | | $ | 8,626.2 |
See Note 16, “Debt,” for more information regarding the Company’s long-term and other debt.bank holding company presentation.
F-63
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Statements of Income
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Interest from loans to subsidiaries | | $ | 19.2 | | $ | 17.9 | | $ | 13.8 |
Dividends from subsidiaries | |
| 922.6 | |
| 810.1 | |
| 360.6 |
Total revenue | |
| 941.8 | |
| 828.0 | |
| 374.4 |
Loss on extinguishment of debt | |
| 71.9 | |
| — | |
| — |
Interest expense, net | |
| 130.0 | |
| 281.2 | |
| 278.9 |
Other expenses, net | |
| (0.7) | |
| (0.4) | |
| 12.9 |
Total expenses | |
| 201.2 | |
| 280.8 | |
| 291.8 |
Income before income taxes and equity in undistributed net income of subsidiaries | |
| 740.6 | |
| 547.2 | |
| 82.6 |
Benefit for income taxes | |
| 42.1 | |
| 7.0 | |
| 322.7 |
Income before equity in undistributed net (loss) income of subsidiaries | |
| 782.7 | |
| 554.2 | |
| 405.3 |
Equity in undistributed net (loss) income of subsidiaries (1) | |
| (504.7) | |
| 408.9 | |
| 383.4 |
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 |
Statements of Comprehensive Income
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Net income | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 |
Other comprehensive income (loss), net of tax | |
| 4.9 | |
| 29.6 | |
| (46.1) |
Total comprehensive income, net of tax | | $ | 282.9 | | $ | 992.7 | | $ | 742.6 |
Statements of Cash Flows
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions) | |||||||
Net cash (used in) provided by operating activities | | $ | (1,029.1) | | $ | 82.3 | | $ | 72.3 |
Investing activities: | | | | | | | | | |
Investment in subsidiaries | |
| (135.0) | |
| — | |
| (164.0) |
Proceeds from sale of business | | | 4,118.3 | | | — | | | — |
Dividends received | |
| 922.6 | |
| 810.1 | |
| 360.6 |
Net cash provided by investing activities | |
| 4,905.9 | |
| 810.1 | |
| 196.6 |
Financing activities: | | | | | | | | | |
Borrowings under debt agreements | |
| 3,083.0 | |
| 4,527.0 | |
| 7,673.6 |
Repayments of borrowings | |
| (5,778.2) | |
| (4,838.3) | |
| (7,232.4) |
Payment of debt extinguishment costs | |
| (46.1) | |
| — | |
| — |
Payment of deferred financing costs | |
| (20.7) | |
| (4.6) | |
| (33.7) |
Purchase of treasury shares | |
| (976.1) | |
| (443.2) | |
| (553.7) |
Dividends paid | |
| (127.4) | |
| (125.2) | |
| (115.5) |
Proceeds from issuance of common stock | |
| 12.4 | |
| 17.6 | |
| 18.4 |
Other | |
| (23.6) | |
| (25.7) | |
| (25.6) |
Net cash used in financing activities | |
| (3,876.7) | |
| (892.4) | |
| (268.9) |
Change in cash, cash equivalents and restricted cash | |
| 0.1 | |
| — | |
| — |
Cash, cash equivalents and restricted cash at beginning of year | |
| 0.1 | |
| 0.1 | |
| 0.1 |
Cash, cash equivalents and restricted cash at end of year | | $ | 0.2 | | $ | 0.1 | | $ | 0.1 |
Non-cash investing activities related to the parent-only statement of cash flows for the year ended December 31, 2019 included a $3.0 billion non-cash dividend in the form of an intercompany return of capital from ADS Alliance Data Systems, Inc. to ADSC.
F-64
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
25. 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 6, “Discontinued Operations,” in the first quarter of 2019 the Company’s Epsilon segment was classified as a discontinued operation and was sold on July 1, 2019. The Company operates in the LoyaltyOne and Card Services reportable segments, which consist of the following:
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/ | | | | ||
Year Ended December 31, 2019 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 1,033.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 5,581.3 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 103.1 | | $ | 991.7 | | $ | (356.4) | | $ | 738.4 |
Interest expense, net | |
| 2.3 | |
| 439.0 | |
| 127.7 | |
| 569.0 |
Operating income (loss) | |
| 105.4 | |
| 1,430.7 | |
| (228.7) | |
| 1,307.4 |
Depreciation and amortization | |
| 80.1 | |
| 89.3 | |
| 6.7 | |
| 176.1 |
Stock compensation expense | |
| 7.2 | | | 9.3 | |
| 8.6 | |
| 25.1 |
Strategic transaction costs | | | 1.0 | | | — | | | 10.7 | | | 11.7 |
Restructuring and other charges | | | 50.8 | | | 29.4 | | | 37.9 | | | 118.1 |
Loss on extinguishment of debt | |
| — | |
| — | |
| 71.9 | |
| 71.9 |
Adjusted EBITDA (1) | |
| 244.5 | |
| 1,558.7 | |
| (92.9) | |
| 1,710.3 |
Less: Securitization funding costs | | | — | | | 213.4 | | | — | | | 213.4 |
Less: Interest expense on deposits | | | — | | | 225.6 | | | — | | | 225.6 |
Adjusted EBITDA, net (1) | | $ | 244.5 | | $ | 1,119.7 | | $ | (92.9) | | $ | 1,271.3 |
| | | | | | | | | | | | |
Capital expenditures | | $ | 41.5 | | $ | 44.2 | | $ | 0.8 | | $ | 86.5 |
F-65F-47
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | | ||
Year Ended December 31, 2018 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 1,068.4 | | $ | 4,597.6 | | $ | 0.6 | | $ | 5,666.6 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 153.8 | | $ | 1,381.6 | | $ | (320.4) | | $ | 1,215.0 |
Interest expense, net | |
| 5.6 | |
| 385.9 | |
| 150.8 | |
| 542.3 |
Operating income (loss) | |
| 159.4 | |
| 1,767.5 | |
| (169.6) | |
| 1,757.3 |
Depreciation and amortization | |
| 84.8 | |
| 101.1 | |
| 7.7 | |
| 193.6 |
Stock compensation expense | |
| 10.0 | |
| 13.3 | |
| 21.1 | |
| 44.4 |
Adjusted EBITDA (1) | |
| 254.2 | |
| 1,881.9 | |
| (140.8) | |
| 1,995.3 |
Less: Securitization funding costs | | | — | | | 220.2 | | | — | | | 220.2 |
Less: Interest expense on deposits | | | — | | | 165.7 | | | — | | | 165.7 |
Adjusted EBITDA, net (1) | | $ | 254.2 | | $ | 1,496.0 | | $ | (140.8) | | $ | 1,609.4 |
| | | | | | | | | | | | |
Capital expenditures | | $ | 34.0 | | $ | 53.8 | | $ | 5.5 | | $ | 93.3 |
| | | | | | | | | | | | |
|
| | |
| |
| | |
| | | |
| | | | | | | Corporate/ | | | | ||
Year Ended December 31, 2017 |
| LoyaltyOne |
| Card Services |
| Other |
| Total | ||||
| | (in millions) | ||||||||||
Revenues | | $ | 1,303.5 | | $ | 4,170.6 | | $ | 0.6 | | $ | 5,474.7 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 161.6 | | $ | 1,235.7 | | $ | (334.8) | | $ | 1,062.5 |
Interest expense, net | |
| 5.4 | |
| 281.7 | |
| 168.3 | |
| 455.4 |
Operating income (loss) | |
| 167.0 | |
| 1,517.4 | |
| (166.5) | |
| 1,517.9 |
Depreciation and amortization | |
| 81.7 | |
| 98.4 | |
| 7.8 | |
| 187.9 |
Stock compensation expense | |
| 8.0 | |
| 10.8 | |
| 22.5 | |
| 41.3 |
Adjusted EBITDA (1) | |
| 256.7 | |
| 1,626.6 | |
| (136.2) | |
| 1,747.1 |
Less: Securitization funding costs | | | — | | | 156.6 | | | — | | | 156.6 |
Less: Interest expense on deposits | | | — | | | 125.1 | | | — | | | 125.1 |
Adjusted EBITDA, net (1) | | $ | 256.7 | | $ | 1,344.9 | | $ | (136.2) | | $ | 1,465.4 |
| | | | | | | | | | | | |
Capital expenditures | | $ | 55.2 | | $ | 54.2 | | $ | 8.8 | | $ | 118.2 |
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.
The table below reconciles the reportable segments’ total assets to consolidated total assets:
| | | | | | | | | | | | | | | |
| | | LoyaltyOne | | | Card Services | | | Corporate/ Other | | | Discontinued Operations | | | Total |
| | | (in millions) | ||||||||||||
Total Assets | | | | | | | | | | | | | | | |
December 31, 2019 | | $ | 2,338.0 | | $ | 23,931.1 | | $ | 225.7 | | $ | — | | $ | 26,494.8 |
December 31, 2018 | | $ | 2,200.2 | | $ | 23,904.2 | | $ | 125.9 | | $ | 4,157.4 | | $ | 30,387.7 |
F-66
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
With respect to information concerning principal geographic areas, revenues are based on the location of the subsidiary that generally correlates with the location of the customer. Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” applying the modified retrospective method to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. Information concerning principal geographic areas is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Europe, | | | | | | | | | | |
|
| United |
| | |
| Middle East | | | | | | |
| | | ||
|
| States |
| Canada |
| and Africa |
| Asia Pacific |
| Other |
| Total | ||||||
| | (in millions) | ||||||||||||||||
Revenues | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019 | | $ | 4,588.3 | | $ | 352.2 | | $ | 449.1 | | $ | 121.7 | | $ | 70.0 | | $ | 5,581.3 |
Year Ended December 31, 2018 | | $ | 4,621.3 | | $ | 411.3 | | $ | 463.2 | | $ | 122.0 | | $ | 48.8 | | $ | 5,666.6 |
Year Ended December 31, 2017 | | $ | 4,192.5 | | $ | 726.6 | | $ | 411.4 | | $ | 129.2 | | $ | 15.0 | | $ | 5,474.7 |
| | | | | | | | | | | | | | | | | | |
Long Lived Assets | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | $ | 1,361.1 | | $ | 311.1 | | $ | 696.2 | | $ | 12.8 | | $ | 0.9 | | $ | 2,382.1 |
December 31, 2018 | | $ | 4,693.1 | | $ | 261.0 | | $ | 698.6 | | $ | 22.5 | | $ | 0.8 | | $ | 5,676.0 |
As of December 31, 2019, 2018 and 2017, revenues from L Brands and its affiliates represented approximately 10.6%, 10.8% and 12.0%, respectively, of consolidated revenues and are included in the Card Services segment.
26. SUPPLEMENTAL CASH FLOW INFORMATION
The 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 consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| December 31, | | December 31, |
| December 31, | For the Year Ended December 31, 2020 | | ||||||||||||||||
| | 2019 | | 2018 | | 2017 | Historical as Reported | | Adjustments for Discontinued Operations | | As Adjusted for Discontinued Operations | | Adjustments for Bank Holding Company Presentation | | Per Consolidated Statements of Income | | ||||||||
| | (in millions) | (in millions) | | ||||||||||||||||||||
Cash and cash equivalents | | $ | 3,874.4 | | $ | 3,863.1 | | $ | 4,190.0 | |||||||||||||||
Restricted cash included within other current assets (1) | | | 44.4 | | 60.7 | | | 50.4 | ||||||||||||||||
Restricted cash included within redemption settlement assets, restricted (2) | | | 39.3 | | | 43.9 | | | 74.3 | |||||||||||||||
Total cash, cash equivalents and restricted cash | | $ | 3,958.1 | | $ | 3,967.7 | | $ | 4,314.7 | |||||||||||||||
Revenues | | | | | | | | | | | | | | | | |||||||||
Services | $ | 117 | | $ | (292) | | $ | (175) | | $ | 175 | | $ | — | | |||||||||
Redemption, net | | 473 | | | (473) | | | — | | | — | | | — | | |||||||||
Finance charges, net | | 3,931 | | | — | | | 3,931 | | | (3,931) | | | — | | |||||||||
Interest and fees on loans | | — | | | — | | | — | | | 3,931 | | | 3,931 | (1) | |||||||||
Interest on cash and investment securities | | — | | | — | | | — | | | 21 | | | 21 | (1) | |||||||||
Total interest income* | | 4,521 | | | (765) | | | 3,756 | | | 196 | | | 3,952 | | |||||||||
Interest expense | | | | | | | | | | | | | | | | |||||||||
Interest on deposits | | — | | | — | | | — | | | 238 | | | 238 | (1) | |||||||||
Interest on borrowings | | — | | | — | | | — | | | 261 | | | 261 | (1) | |||||||||
Total interest expense | | — | | | — | | | — | | | 499 | | | 499 | | |||||||||
Net interest income* | | 4,521 | | | (765) | | | 3,756 | | | (303) | | | 3,453 | | |||||||||
Non-interest income | | | | | | | | | | | | | | | | |||||||||
Interchange revenue, net of retailer share arrangements | | — | | | — | | | — | | | (332) | | | (332) | (2) | |||||||||
Other | | — | | | — | | | — | | | 177 | | | 177 | (2) | |||||||||
Total non-interest income | | — | | | — | | | — | | | (155) | | | (155) | | |||||||||
Total net interest and non-interest income* | | 4,521 | | | (765) | | | 3,756 | | | (458) | | | 3,298 | | |||||||||
Provision for credit losses | | 1,266 | | | — | | | 1,266 | | | — | | | 1,266 | | |||||||||
Total net interest and non-interest income, after provision for credit losses* | | 3,255 | | | (765) | | | 2,490 | | | (458) | | | 2,032 | | |||||||||
Operating expenses | | | | | | | | | | | | | | | | |||||||||
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | 2,077 | | | (577) | | | 1,500 | | | (1,500) | | | — | | |||||||||
General and administrative | | 106 | | | (1) | | | 105 | | | (105) | | | — | | |||||||||
Depreciation and other amortization | | 99 | | | (29) | | | 70 | | | (70) | | | — | | |||||||||
Amortization of purchased intangibles | | 85 | | | (49) | | | 36 | | | (36) | | | — | | |||||||||
Non-interest expenses | | | | | | | | | | | | | | | | |||||||||
Employee compensation and benefits | | — | | | — | | | — | | | 609 | | | 609 | (3) | |||||||||
Card and processing expenses | | — | | | — | | | — | | | 396 | | | 396 | (3) | |||||||||
Information processing and communication | | — | | | — | | | — | | | 191 | | | 191 | (3) | |||||||||
Marketing expense | | — | | | — | | | — | | | 143 | | | 143 | (3) | |||||||||
Depreciation and amortization | | — | | | — | | | — | | | 106 | | | 106 | (3) | |||||||||
Other | | — | | | — | | | — | | | 286 | | | 286 | (3) | |||||||||
Total non-interest expenses* | | 2,367 | | | (656) | | | 1,711 | | | 20 | | | 1,731 | | |||||||||
| | | | | | | | | | | | | | | | |||||||||
Operating income | | 888 | | | (109) | | | 779 | | | (478) | | | 301 | | |||||||||
Interest expense | | | | | | | | | | | | | | | | |||||||||
Securitization funding costs | | 166 | | | — | | | 166 | | | (166) | | | — | | |||||||||
Interest expense on deposits | | 220 | | | — | | | 220 | | | (220) | | | — | | |||||||||
Interest expense on long-term and other debt, net | | 108 | | | (16) | | | 92 | | | (92) | | | — | | |||||||||
Total interest expense, net | | 494 | | | (16) | | | 478 | | | (478) | | | — | | |||||||||
Income from continuing operations before income taxes | | 394 | | | (93) | | | 301 | | | — | | | 301 | | |||||||||
Provision for income taxes | | 99 | | | (6) | | | 93 | | | — | | | 93 | | |||||||||
Income from continuing operations | | 295 | | | (87) | | | 208 | | | — | | | 208 | | |||||||||
(Loss) income from discontinued operations, net of income taxes | | (81) | | | 87 | | | 6 | | | — | | | 6 | | |||||||||
Net income | $ | 214 | | $ | — | | $ | 214 | | $ | — | | $ | 214 | |
Non-cash financing activities for the year ended December 31, 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 preferred stock, and ValueAct’s subsequent exchange of all 150,000 shares of preferred stock back to common stock. For more information, see Note 19, “Stockholders’ Equity.”
* Caption total not historically provided.
F-67F-48
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
27. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended December 31, 2019 and 2018 are presented below.
| | | | | | | | | | | | |
| | Quarter Ended | ||||||||||
|
| March 31, |
| June 30, |
| September 30, |
| December 31, | ||||
|
| 2019 (1) |
| 2019 |
| 2019 |
| 2019 | ||||
| | (in millions, except per share amounts) | ||||||||||
Revenues | | $ | 1,334.2 | | $ | 1,348.5 | | $ | 1,437.6 | | $ | 1,461.0 |
Operating expenses | |
| 977.3 | |
| 1,011.2 | |
| 1,133.4 | |
| 1,152.0 |
Operating income | |
| 356.9 | |
| 337.3 | |
| 304.2 | |
| 309.0 |
Interest expense, net | |
| 143.9 | |
| 143.5 | |
| 140.0 | |
| 141.6 |
Income from continuing operations before income taxes | |
| 213.0 | |
| 193.8 | |
| 164.2 | |
| 167.4 |
Provision for income taxes | |
| 34.8 | |
| 51.4 | |
| 42.6 | |
| 37.0 |
Income from continuing operations | | | 178.2 | |
| 142.4 | |
| 121.6 | |
| 130.4 |
Loss from discontinued operations, net of taxes | | | (29.1) | | | (3.4) | | | (229.2) | | | (32.9) |
Net income (loss) | | $ | 149.1 | | $ | 139.0 | | $ | (107.6) | | $ | 97.5 |
| | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 3.36 | | $ | 2.72 | | $ | 2.47 | | $ | 2.73 |
Loss from discontinued operations | | $ | (0.55) | | $ | (0.07) | | $ | (4.69) | | $ | (0.70) |
Net income (loss) per share | | $ | 2.81 | | $ | 2.65 | | $ | (2.22) | | $ | 2.03 |
| | | | | | | | | | | | |
Diluted income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 3.35 | | $ | 2.71 | | $ | 2.41 | | $ | 2.74 |
Loss from discontinued operations | | $ | (0.55) | | $ | (0.07) | | $ | (4.54) | | $ | (0.69) |
Net income (loss) per share | | $ | 2.80 | | $ | 2.64 | | $ | (2.13) | | $ | 2.05 |
| | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2019 | | |||||||||||||
| Historical as Reported | | Adjustments for Discontinued Operations | | As Adjusted for Discontinued Operations | | Adjustments for Bank Holding Company Presentation | | Per Consolidated Statements of Income | | |||||
| (in millions) | | |||||||||||||
Revenues | | | | | | | | | | | | | | | |
Services | $ | 216 | | $ | (396) | | $ | (180) | | $ | 180 | | $ | — | |
Redemption, net | | 637 | | | (637) | | | — | | | — | | | — | |
Finance charges, net | | 4,729 | | | — | | | 4,729 | | | (4,729) | | | — | |
Interest and fees on loans | | — | | | — | | | — | | | 4,729 | | | 4,729 | (1) |
Interest on cash and investment securities | | — | | | — | | | — | | | 98 | | | 98 | (1) |
Total interest income* | | 5,582 | | | (1,033) | | | 4,549 | | | 278 | | | 4,827 | |
Interest expense | | | | | | | | | | | | | | | |
Interest on deposits | | — | | | — | | | — | | | 307 | | | 307 | (1) |
Interest on borrowings | | — | | | — | | | — | | | 331 | | | 331 | (1) |
Total interest expense | | — | | | — | | | — | | | 638 | | | 638 | |
Net interest income* | | 5,582 | | | (1,033) | | | 4,549 | | | (360) | | | 4,189 | |
Non-interest income | | | | | | | | | | | | | | | |
Interchange revenue, net of retailer share arrangements | | — | | | — | | | — | | | (358) | | | (358) | (2) |
Other | | — | | | — | | | — | | | 219 | | | 219 | (2) |
Total non-interest income | | — | | | — | | | — | | | (139) | | | (139) | |
Total net interest and non-interest income* | | 5,582 | | | (1,033) | | | 4,549 | | | (499) | | | 4,050 | |
Provision for credit losses | | 1,188 | | | — | | | 1,188 | | | — | | | 1,188 | |
Total net interest and non-interest income, after provision for credit losses* | | 4,394 | | | (1,033) | | | 3,361 | | | (499) | | | 2,862 | |
Operating expenses | | | | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | 2,688 | | | (847) | | | 1,841 | | | (1,841) | | | — | |
General and administrative | | 150 | | | — | | | 150 | | | (150) | | | — | |
Depreciation and other amortization | | 80 | | | (32) | | | 48 | | | (48) | | | — | |
Amortization of purchased intangibles | | 96 | | | (48) | | | 48 | | | (48) | | | — | |
Loss on extinguishment of debt | | 72 | | | — | | | 72 | | | (72) | | | — | |
Non-interest expenses | | | | | | | | | | | | | | | |
Employee compensation and benefits | | — | | | — | | | — | | | 721 | | | 721 | (3) |
Card and processing expenses | | — | | | — | | | — | | | 479 | | | 479 | (3) |
Information processing and communication | | — | | | — | | | — | | | 187 | | | 187 | (3) |
Marketing expense | | — | | | — | | | — | | | 205 | | | 205 | (3) |
Depreciation and amortization | | — | | | — | | | — | | | 96 | | | 96 | (3) |
Other | | — | | | — | | | — | | | 512 | | | 512 | (3) |
Total non-interest expenses* | | 3,086 | | | (927) | | | 2,159 | | | 41 | | | 2,200 | |
| | | | | | | | | | | | | | | |
Operating income | | 1,308 | | | (106) | | | 1,202 | | | (540) | | | 662 | |
Interest expense | | | | | | | | | | | | | | | |
Securitization funding costs | | 213 | | | — | | | 213 | | | (213) | | | — | |
Interest expense on deposits | | 226 | | | — | | | 226 | | | (226) | | | — | |
Interest expense on long-term and other debt, net | | 130 | | | (29) | | | 101 | | | (101) | | | — | |
Total interest expense, net | | 569 | | | (29) | | | 540 | | | (540) | | | — | |
Income from continuing operations before income taxes | | 739 | | | (77) | | | 662 | | | — | | | 662 | |
Provision for income taxes | | 166 | | | (10) | | | 156 | | | — | | | 156 | |
Income from continuing operations | | 573 | | | (67) | | | 506 | | | — | | | 506 | |
(Loss) income from discontinued operations, net of income taxes | | (295) | | | 67 | | | (228) | | | — | | | (228) | |
Net income | $ | 278 | | $ | — | | $ | 278 | | $ | — | | $ | 278 | |
* Caption total not historically provided.
F-68F-49
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | Quarter Ended | ||||||||||
|
| March 31, |
| June 30, |
| September 30, |
| December 31, | ||||
|
| 2018 |
| 2018 |
| 2018 |
| 2018 | ||||
| | (in millions, except per share amounts) | ||||||||||
Revenues | | $ | 1,381.7 | | $ | 1,397.2 | | $ | 1,423.2 | | $ | 1,464.5 |
Operating expenses | |
| 1,009.4 | |
| 1,000.5 | |
| 943.4 | |
| 956.0 |
Operating income | |
| 372.3 | |
| 396.7 | |
| 479.8 | |
| 508.5 |
Interest expense, net | |
| 127.2 | |
| 133.6 | |
| 136.8 | |
| 144.7 |
Income from continuing operations before income taxes | |
| 245.1 | |
| 263.1 | |
| 343.0 | |
| 363.8 |
Provision for income taxes | |
| 65.2 | |
| 39.3 | |
| 54.3 | |
| 110.7 |
Income from continuing operations | | | 179.9 | | | 223.8 | | | 288.7 | | | 253.1 |
(Loss) income from discontinued operations, net of taxes | | | (16.0) | | | (6.0) | | | 7.8 | | | 31.8 |
Net income | | $ | 163.9 | | $ | 217.8 | | $ | 296.5 | | $ | 284.9 |
| | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 3.25 | | $ | 4.05 | | $ | 5.27 | | $ | 4.69 |
(Loss) income from discontinued operations | | $ | (0.29) | | $ | (0.11) | | $ | 0.14 | | $ | 0.59 |
Net income per share | | $ | 2.96 | | $ | 3.94 | | $ | 5.41 | | $ | 5.28 |
| | | | | | | | | | | | |
Diluted income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 3.23 | | $ | 4.04 | | $ | 5.25 | | $ | 4.67 |
(Loss) income from discontinued operations | | $ | (0.28) | | $ | (0.11) | | $ | 0.14 | | $ | 0.58 |
Net income per share | | $ | 2.95 | | $ | 3.93 | | $ | 5.39 | | $ | 5.25 |
(1) | The following tables provide a net interest income reconciliation of interest income previously reported in Finance charges, net revenue, and represents interest income and interest expense previously reported in Total interest expense, net. |
| | | | | | | | | | | | | | |
| For the Year Ended December 31, 2020 | |||||||||||||
| Finance charges, net | | Securitization funding costs | | Interest expense on deposits | | Interest expense on long-term and other debt, net | | Total | |||||
| (in millions) | |||||||||||||
Interest income | | | | | | | | | | | | | | |
Interest and fees on loans | $ | 3,931 | | $ | — | | $ | — | | $ | — | | $ | 3,931 |
Interest on cash and investment securities | | — | | | 1 | | | 18 | | | 2 | | | 21 |
| | | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | | |
Interest on deposits | | — | | | — | | | (238) | | | — | | | (238) |
Interest on borrowings | | — | | | (167) | | | — | | | (94) | | | (261) |
| | | | | | | | | | | | | | |
Net interest income | $ | 3,931 | | $ | (166) | | $ | (220) | | $ | (92) | | $ | 3,453 |
| | | | | | | | | | | | | | |
| For the Year Ended December 31, 2019 | |||||||||||||
| Finance charges, net | | Securitization funding costs | | Interest expense on deposits | | Interest expense on long-term and other debt, net | | Total | |||||
| (in millions) | |||||||||||||
Interest income | | | | | | | | | | | | | | |
Interest and fees on loans | $ | 4,729 | | $ | — | | $ | — | | $ | — | | $ | 4,729 |
Interest on cash and investment securities | | — | | | 7 | | | 81 | | | 10 | | | 98 |
| | | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | | |
Interest on deposits | | — | | | — | | | (307) | | | — | | | (307) |
Interest on borrowings | | — | | | (220) | | | — | | | (111) | | | (331) |
| | | | | | | | | | | | | | |
Net interest income | $ | 4,729 | | $ | (213) | | $ | (226) | | $ | (101) | | $ | 4,189 |
(2) | The following tables provide a non-interest income reconciliation of servicing fees previously reported in Services revenue, and the gain/loss on portfolio and other sales previously reported in Cost of operations expense. |
| | | | | | | | |
| For the Year Ended December 31, 2020 | |||||||
| Services | | Cost of operations | | Total | |||
| (in millions) | |||||||
Non-interest income | | | | | | | | |
Interchange revenue, net of retailer share arrangements | $ | (332) | | $ | — | | $ | (332) |
Other | | | | | | | | |
Payment protection products | | 157 | | | — | | | 157 |
Gain on portfolio and other sales | | — | | | 20 | | | 20 |
Subtotal | | 157 | | | 20 | | | 177 |
| | | | | | | | |
Total non-interest income | $ | (175) | | $ | 20 | | $ | (155) |
F-50
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | |
| For the Year Ended December 31, 2019 | |||||||
| Services | | Cost of operations | | Total | |||
| (in millions) | |||||||
Non-interest income | | | | | | | | |
Interchange revenue, net of retailer share arrangements | $ | (358) | | $ | — | | $ | (358) |
Other | | | | | | | | |
Payment protection products | | 178 | | | — | | | 178 |
Gain on portfolio and other sales | | — | | | 41 | | | 41 |
Subtotal | | 178 | | | 41 | | | 219 |
| | | | | | | | |
Total non-interest income | $ | (180) | | $ | 41 | | $ | (139) |
(3) | The following tables provide a reconciliation of further detailed expense line items previously reported in Cost of operations expense, General and administrative expense, Depreciation and other amortization, Amortization of purchased intangibles, and Loss on extinguishment of debt. |
| | | | | | | | | | | | | | |
| For the Year Ended December 31, 2020 | |||||||||||||
| Cost of operations expense | | General and administrative expense | | Depreciation and other amortization | | Amortization of purchased intangibles | | Total | |||||
| (in millions) | |||||||||||||
Non-interest expenses | | | | | | | | | | | | | | |
Employee compensation and benefits | $ | 562 | | $ | 47 | | $ | — | | $ | — | | $ | 609 |
Card and processing expenses | | 396 | | | — | | | — | | | — | | | 396 |
Information processing and communication | | 177 | | | 14 | | | — | | | — | | | 191 |
Marketing expense | | 143 | | | — | | | — | | | — | | | 143 |
Depreciation and amortization | | — | | | — | | | 70 | | | 36 | | | 106 |
Other | | 242 | | | 44 | | | — | | | — | | | 286 |
Total non-interest expenses | $ | 1,520 | | $ | 105 | | $ | 70 | | $ | 36 | | $ | 1,731 |
| | | | | | | | | | | | | | |
Gain on portfolio and other sales (non-interest income) | | (20) | | | — | | | — | | | — | | | (20) |
| | | | | | | | | | | | | | |
Total | $ | 1,500 | | $ | 105 | | $ | 70 | | $ | 36 | | $ | 1,711 |
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2019 | ||||||||||||||||
| Cost of operations expense | | General and administrative expense | | Depreciation and other amortization | | Amortization of purchased intangibles | | Loss on extinguishment of debt | | Total | ||||||
| (in millions) | ||||||||||||||||
Non-interest expenses | | | | | | | | | | | | | | | | | |
Employee compensation and benefits | $ | 654 | | $ | 67 | | $ | — | | $ | — | | $ | — | | $ | 721 |
Card and processing expenses | | 479 | | | — | | | — | | | — | | | — | | | 479 |
Information processing and communication | | 168 | | | 19 | | | — | | | — | | | — | | | 187 |
Marketing expense | | 204 | | | 1 | | | — | | | — | | | — | | | 205 |
Depreciation and amortization | | — | | | — | | | 48 | | | 48 | | | — | | | 96 |
Other | | 377 | | | 63 | | | — | | | — | | | 72 | | | 512 |
Total non-interest expenses | $ | 1,882 | | $ | 150 | | $ | 48 | | $ | 48 | | $ | 72 | | $ | 2,200 |
| | | | | | | | | | | | | | | | | |
Gain on portfolio and other sales (non-interest income) | | (41) | | | — | | | — | | | — | | | — | | | (41) |
| | | | | | | | | | | | | | | | | |
Total | $ | 1,841 | | $ | 150 | | $ | 48 | | $ | 48 | | $ | 72 | | $ | 2,159 |
F-51
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The adjustments to the presentation of the Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets, Consolidated Statements of Stockholders' Equity and Consolidated Statements of Cash Flows, from the Company's historical approach under SEC Regulation S-X Article 5, to Article 9, were insignificant.
28. SUBSEQUENT EVENTS23. PARENT COMPANY FINANCIAL STATEMENTS
In JanuaryThe following ADSC financial statements are provided in accordance with the rules of the Securities and Exchange Commission, which require such disclosure when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets. Certain of the Company’s subsidiaries may be restricted in distributing cash or other assets to ADSC, which could be utilized to service its indebtedness. The stand-alone parent-only financial statements are presented below.
Parent Company – Condensed Balance Sheets
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in millions) | ||||
Assets: | | | | | | |
Cash and cash equivalents | | $ | — | | $ | — |
Investment in subsidiaries | |
| 4,446 | |
| 5,127 |
Investment in Loyalty Ventures | |
| 50 | |
| — |
Other assets | |
| 123 | |
| 42 |
Total assets | | $ | 4,619 | | $ | 5,169 |
Liabilities: | | | | | | |
Long-term and other debt | | $ | 1,985 | | $ | 2,805 |
Intercompany liabilities, net | |
| 482 | |
| 742 |
Other liabilities | |
| 66 | |
| 100 |
Total liabilities | |
| 2,533 | |
| 3,647 |
Stockholders’ equity | |
| 2,086 | |
| 1,522 |
Total liabilities and stockholders’ equity | | $ | 4,619 | | $ | 5,169 |
Parent Company – Condensed Statements of Income
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Total interest income | | $ | 12 | | $ | 13 | | $ | 19 |
Total interest expense | |
| 103 | |
| 110 | |
| 130 |
Net interest expense | |
| (91) | |
| (97) | |
| (111) |
Dividends from subsidiaries | |
| 535 | |
| 256 | |
| 923 |
Total net interest and non-interest income | |
| 444 | |
| 159 | |
| 812 |
Total non-interest expenses | |
| 1 | |
| 1 | |
| 71 |
Income before income taxes and equity in undistributed net income (loss) of subsidiaries | |
| 443 | |
| 158 | |
| 741 |
Benefit for income taxes | |
| 36 | |
| 21 | |
| 42 |
Income before equity in undistributed net income (loss) of subsidiaries | |
| 479 | |
| 179 | |
| 783 |
Equity in undistributed net income (loss) of subsidiaries | |
| 322 | |
| 35 | |
| (505) |
Net income | | $ | 801 | | $ | 214 | | $ | 278 |
Parent Company – Condensed Statements of Comprehensive Income
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Net income | | $ | 801 | | $ | 214 | | $ | 278 |
Other comprehensive income, net of tax | |
| 7 | |
| — | |
| 5 |
Total comprehensive income, net of tax | | $ | 808 | | $ | 214 | | $ | 283 |
F-52
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Parent Company – Condensed Statements of Cash Flows
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (in millions) | |||||||
Net cash used in operating activities | | $ | (398) | | $ | (138) | | $ | (1,029) |
Investing activities: | | | | | | | | | |
Investment in subsidiaries | |
| — | |
| (3) | |
| (135) |
Proceeds from sale of business | | | — | | | — | | | 4,118 |
Dividends received | |
| 533 | |
| 256 | |
| 923 |
Purchases of available-for-sale securities | | | (10) | | | — | | | — |
Net cash provided by investing activities | |
| 523 | |
| 253 | |
| 4,906 |
Financing activities: | | | | | | | | | |
Debt proceeds from spinoff of Loyalty Ventures Inc. | | | 750 | | | — | | | — |
Borrowings under debt agreements | |
| 38 | |
| 1,276 | |
| 3,083 |
Repayments of borrowings | |
| (864) | |
| (1,320) | |
| (5,778) |
Payment of debt extinguishment costs | |
| — | |
| — | |
| (46) |
Payment of deferred financing costs | |
| (4) | |
| (9) | |
| (21) |
Purchase of treasury shares | |
| — | |
| — | |
| (976) |
Dividends paid | |
| (42) | |
| (61) | |
| (127) |
Proceeds from issuance of common stock | |
| 4 | |
| 3 | |
| 12 |
Other | |
| (7) | |
| (4) | |
| (24) |
Net cash used in financing activities | |
| (125) | |
| (115) | |
| (3,877) |
Change in cash, cash equivalents and restricted cash | |
| — | |
| — | |
| — |
Cash, cash equivalents and restricted cash at beginning of year | |
| — | |
| — | |
| — |
Cash, cash equivalents and restricted cash at end of year | | $ | — | | $ | — | | $ | — |
Non-cash investing and financing activities for the year ended December 31, 2021 included the Company’s equity method investment in Loyalty Ventures Inc. upon spinoff, which totaled $48 million on November 5, 2021.
Non-cash investing and financing activities related to the Parent Company – Condensed Statements of Cash Flows for the year ended December 31, 2020, included the Company entered into a securities purchase agreement and effectuated the sale of Precima, a provider of retail strategy and customer data applications and analytics, for total considerationissuance of approximately $40.01.9 million of which $10.0 million is contingent upon the occurrence of specified events and performanceshares of the business. Precima was includedCompany’s common stock as non-cash consideration in the Company’s LoyaltyOne segment.acquisition of Bread on December 3, 2020. For more information, see Note 2, “Acquisitions.”
Non-cash investing activities related to the Parent Company – Condensed Statements of Cash Flows for the year ended December 31, 2019, included a $3 billion non-cash dividend in the form of an intercompany return of capital from ADS Alliance Data Systems, Inc. to ADSC.
F-69F-53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Alliance Data Systems Corporation has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| ALLIANCE DATA SYSTEMS CORPORATION | |
| | |
| By: | /S/ |
| |
|
| |
|
DATE: February 28, 202025, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Alliance Data Systems Corporation and in the capacities and on the dates indicated.
| | |||
Name |
| Title |
| Date |
| | | | |
/S/ RALPH J. ANDRETTA | | President, Chief Executive | | February |
Ralph J. Andretta | | Officer and Director | | |
| | | | |
/S/ | | Executive Vice President and | | February |
| | Chief Financial Officer | | |
| | | | |
/S/ | | Senior Vice President and | | February |
| | Chief Accounting Officer | | |
| | | | |
/S/ |
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|
|
|
|
|
|
|
|
|
|
|
|
|
| | Chairman of the Board, Director | | February |
Roger H. Ballou | | | | |
| | | | |
/S/ | | Director | | February |
| | | | |
| | | | |
/S/ | |
| | February |
| | | | |
| | | | |
/S/ RAJESH NATARAJAN | | Director | | February 25, 2022 |
Rajesh Natarajan | | | | |
| | | | |
/S/ TIMOTHY J. THERIAULT | | Director | | February |
Timothy J. Theriault | | | | |
| | | | |
/S/ LAURIE A. TUCKER | | Director | | February |
Laurie A. Tucker | | | | |
| | | | |
/S/ SHAREN J. TURNEY | | Director | | February |
Sharen J. Turney | | | | |
| | | | |
SCHEDULE II
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | |
|
| Balance at |
| Charged to |
| Charged to |
| Write-Offs |
| Balance at |
| |||||
| | Beginning of | | Costs and | | Other | | Net of | | End of |
| |||||
Description |
| Year |
| Expenses |
| Accounts |
| Recoveries (1) |
| Year |
| |||||
|
| (in millions) | | |||||||||||||
Allowance for Doubtful Accounts—Accounts receivable: | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019 | | $ | 0.4 | | $ | 3.5 | | $ | — | | $ | (0.5) | | $ | 3.4 | |
Year Ended December 31, 2018 | | $ | 0.1 | | $ | 0.4 | | $ | — | | $ | (0.1) | | $ | 0.4 | |
Year Ended December 31, 2017 | | $ | 0.3 | | $ | 0.1 | | $ | (0.1) | | $ | (0.2) | | $ | 0.1 | |
S-II