Annual Report (10-k)

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Table of Contents

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

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)

GRAPHIC

Delaware

31-1429215

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

3075 Loyalty Circle

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 is a shell company (as defined in Rule 12b-2 of the Act). Yes No

As of June 30, 2019, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $7.0 billion, based upon the closing price of $140.13 per share on the New York Stock Exchange on June 28, 2019, which was the last business day of the registrant’s most recently completed second fiscal quarter.

As of February 20, 2020, 47,627,611 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 2019 Annual Meeting of our stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.

Table of Contents

ALLIANCE DATA SYSTEMS CORPORATION

INDEX

Item No.

Form 10-K

Report

Page

    

    

Caution Regarding Forward-Looking Statements

1

PART I

1. 

Business

2

1A. 

Risk Factors

10

1B. 

Unresolved Staff Comments

24

2. 

Properties

24

3. 

Legal Proceedings

24

4. 

Mine Safety Disclosures

24

PART II

5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

25

6. 

Selected Financial Data

28

7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

7A. 

Quantitative and Qualitative Disclosures About Market Risk

47

8. 

Financial Statements and Supplementary Data

48

9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

48

9A. 

Controls and Procedures

48

9B. 

Other Information

49

PART III

10. 

Directors, Executive Officers and Corporate Governance

50

11. 

Executive Compensation

50

12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

50

13. 

Certain Relationships and Related Transactions, and Director Independence

50

14. 

Principal Accounting Fees and Services

50

PART IV

15. 

Exhibits, Financial Statement Schedules

51

16. 

Form 10-K Summary

62

Table of Contents

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

loss of, or reduction in demand for services from, significant clients;
increases in net charge-offs in credit card and loan receivables and increases in the allowance for loan loss that may result from the application of the current expected credit loss model;
failure to identify, complete or successfully integrate or disaggregate business acquisitions or divestitures;
continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;
failure to realize expected cost savings from restructuring plans;
increases in the cost of doing business, including market interest rates;
inability to access the asset-backed securitization funding market or deposits market;
loss of active AIR MILES® Reward Program collectors;
continuing impacts related to COVID-19, including reduction in demand from clients, supply chain disruption for our reward suppliers and disruptions in the airline or travel industries;
increased redemptions by AIR MILES Reward Program collectors;
unfavorable fluctuations in foreign currency exchange rates;
limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy;
increases in Federal Deposit Insurance Corporation (“FDIC”), Delaware or Utah regulatory capital requirements for banks;
failure to maintain exemption from regulation under the Bank Holding Company Act;
loss or disruption, due to cyber attack or other service failures, of data center operations or capacity;
loss of consumer information due to compromised physical or cyber security; and
those factors 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.

1

Table of Contents

PART I

Item 1.Business.

We are a leading global provider of data-driven marketing and loyalty solutions serving large, consumer-based industries. We create and deploy customized 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. We help our clients create and increase customer loyalty 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 client base of more than 400 companies 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, Rewe and Albert Heijn. Our client base is diversified across a broad range of end-markets, including financial services, specialty retail, grocery and drugstore chains, petroleum retail, home furnishings and hardware, beauty and jewelry, hospitality and travel and telecommunications. We believe our comprehensive suite of marketing solutions offers us a significant competitive advantage, as many of our competitors offer a more limited range of services. We believe the breadth and quality of our service offerings have enabled us to establish and maintain long-standing client relationships.

Segments

Beginning with the first quarter of 2019, our products and services are reported under two segments—LoyaltyOne and Card Services, and are listed below. Effective March 31, 2019, 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.

Segment

Products and Services

LoyaltyOne

AIR MILES Reward Program

Short-term Loyalty Programs

Loyalty Services

—Loyalty consulting

—Customer analytics

—Creative services

—Mobile solutions

    

Card Services

Receivables Financing

—Underwriting and risk management

—Receivables funding

Processing Services

—New account processing

—Bill processing

—Remittance processing

—Customer care

Marketing Services

2

Table of Contents

LoyaltyOne

Our LoyaltyOne clients are focused on acquiring 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.

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Card Services

Our Card Services segment assists some of the best known retailers in extending their brand with a private label and/or co-brand credit card account that can be used by their customers in the store, or through online or catalog purchases. 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 card members.

Receivables Financing. Our Card Services segment provides risk management solutions, account origination and funding services for our more than 160 private label and co-brand credit card programs. Through these credit card programs, as of December 31, 2019, we had $18.4 billion in principal receivables from 40.5 million active accounts, with an average balance for the year ended December 31, 2019 of approximately $811 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 risk-based origination decisions when approving new credit card accountholders and establishing their credit limits. Credit quality is monitored at least monthly during the life of an account. We augment these procedures with credit risk scores provided by credit bureaus. 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 on general purpose credit cards. We focus our sales efforts on prime borrowers and do not target sub-prime borrowers.

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. Our call centers are equipped to handle a variety of inquiry types, 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 clients and their customers. In 2019, for the fourteenth 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 call centers.

Marketing Services. 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 clients in acquiring, retaining and managing valuable repeat customers. Our credit card programs capture transaction data that we analyze to better understand consumer behavior and use to increase the effectiveness of our clients’ marketing activities. We use multi-channel marketing communication tools, including in-store, web, permission-based email, mobile messaging and direct mail to reach our clients’ customers.

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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’ 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.

Protection of Intellectual Property and Other Proprietary Rights

We rely on a combination of 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.

Competition

The markets for our products and services are highly competitive. We compete with marketing services companies and credit card issuers, as well as with the in-house staffs of our current and potential clients.

LoyaltyOne. As a provider of marketing services, our LoyaltyOne segment generally competes 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. Our focus has primarily been on targeting specialty retailers 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-based transaction data we obtain through managing our credit card programs, including customer specific transaction data and overall consumer spending patterns, to develop and implement successful marketing strategies for our clients. As an issuer of private label retail credit cards and co-brand Visa®, MasterCard® and Discover® credit cards, we also compete with general purpose credit cards issued by other financial institutions, as well as cash, checks and debit cards. 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.

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Regulation

Federal and state laws and regulations extensively regulate the operations of our bank subsidiaries, Comenity Bank and Comenity Capital Bank. Many of these laws and regulations are intended to maintain the safety and soundness of Comenity Bank and Comenity Capital Bank, and they impose significant restraints to which other non-regulated companies are not subject. Because Comenity Bank is deemed a credit card bank and Comenity Capital Bank is an industrial bank within the meaning of the Bank Holding Company Act, we are not subject to regulation as a bank holding company. If we were subject to regulation as a bank holding company, we would be constrained in our operations to a limited number of 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 Bank and Comenity Capital Bank must maintain minimum amounts of regulatory capital, including maintenance of certain capital ratios, paid-in capital minimums, and an appropriate allowance for loan loss, as well as meeting specific guidelines that involve measures and ratios of their assets, liabilities, regulatory capital and interest rate, among other factors. If Comenity Bank or Comenity Capital Bank does 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, Comenity Bank and Comenity Capital Bank must maintain adequate capital above regulatory guidelines.

We are limited under Sections 23A and 23B of the Federal Reserve Act in the extent to which we can borrow or otherwise obtain credit from or engage in other “covered transactions” with Comenity Bank or Comenity Capital Bank, which may have the effect of limiting the extent to which Comenity Bank or Comenity Capital 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 “covered transactions,” they do require that we engage in “covered transactions” with Comenity Bank or Comenity Capital Bank only on terms and under circumstances that are substantially the same, or at least as favorable to Comenity Bank or Comenity Capital 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 Capital 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. We are also subject to numerous laws and regulations that are intended to protect consumers, including state laws, the Truth in Lending Act, as amended by the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or the CARD Act, Equal Credit Opportunity Act and Fair Credit Reporting Act. These laws and regulations mandate various disclosure requirements and regulate the manner in which we may interact 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.

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Data protection and consumer privacy laws and regulations continue to evolve. These laws and regulations place many 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 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, the 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 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.

In the United States, the 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.

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 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.

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.

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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 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.

We also have systems and processes to comply with the USA PATRIOT ACT of 2001, which is designed to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes.

Ontario’s Protecting Rewards Points Act (Consumer Protection Amendment), 2016, and additional related regulations effective January 2018, prohibit suppliers from entering into 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 passed in Quebec in 2017, with regulations taking effect in 2018 and 2019.

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Employees

As of December 31, 2019, we had over 8,500 employees. We believe our relations with our employees are good. We have no collective bargaining agreements with our employees.

Other Information

Our corporate headquarters are located at 3075 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 committee and nominating and corporate governance committee charters, our corporate governance guidelines, and our code of ethics, code of ethics for Senior Financial Officers, and code of ethics for Board Members 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

Strategic Business Risk and Competitive Environment

Our 10 largest clients represented 44% and 41%, respectively, of our consolidated revenue for the years ended December 31, 2019 and 2018, and the loss of any of these clients could cause a significant drop in our revenue.

We depend on a limited number of large clients for a significant portion of our consolidated revenue. Our 10 largest clients represented approximately 44% and 41%, respectively, of our consolidated revenue during the years ended December 31, 2019 and 2018. L Brands and its retail affiliates represented approximately 11% of our consolidated revenue during both of these same respective periods. A decrease in revenue from any of our significant clients 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, the contract for one of our 10 largest clients, representing approximately 3% of our consolidated revenue for the year ended December 31, 2019, is effective through September 2020 and is not expected to renew.

Card Services. Card Services represents 81% 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 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.

LoyaltyOne. LoyaltyOne represents 19% 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.

We expect growth in our Card Services segment to result from new and acquired credit card programs whose credit card receivables performance could result in increased portfolio losses and negatively impact our profitability.

We expect an important source of growth in our credit card operations to come from the acquisition of existing credit card programs and initiating credit card programs with retailers and others who do not currently offer a private label or co-brand credit card. 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 credit card programs may result in defaults greater than our expectations and could have a material adverse impact on us and our profitability.

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’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 cardholders to minimize delinquencies and losses. An increase in defaults or net charge-offs could result in a reduction in net 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 credit card and loan receivables 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, our net

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charge-off rate was 6.1%, compared to 6.1% and 6.0% for 2018 and 2017, respectively. Delinquency rates were 5.8% of principal credit card and loan receivables at December 31, 2019, compared to 5.7% and 5.1% at December 31, 2018 and 2017, respectively.

A new accounting standard will require us to increase our allowance for loan loss and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that became effective for us January 1, 2020. This standard, referred to as Current Expected Credit Loss, or CECL, requires us to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan loss. The adoption of this standard resulted in an increase in our allowance for loan loss of $644.0 million. For additional information regarding the impact 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. The ongoing impact of CECL will be significantly influenced by the composition, characteristics and quality of our credit card and loan portfolio, as well as the prevailing economic conditions and forecasts utilized. The CECL model may create more volatility in the level of our allowance for loan loss. If we are required to materially increase our level of allowance for loan loss, such increase could adversely affect or our business, financial condition and results of operations.

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

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

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

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

the difficulty and expense that we incur in connection with the acquisition, disposition or new business opportunity;
the inability to satisfy pre-closing conditions preventing consummation of the acquisition, disposition or new business opportunity;
the potential for adverse consequences when conforming the acquired company’s accounting policies to ours;
the diversion of management’s attention from other business concerns;
the potential loss of customers or key employees of the acquired company;
the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations;
the acceptance of continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;
the assumption of unknown liabilities of the acquired company;
the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies;
the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of debt;
the requirement to provide transition services in connection with a disposition resulting in the diversion of resources and focus; and
the difficulty retaining and motivating key personnel from acquisitions or in connection with dispositions.

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For example, upon the sale of the Epsilon segment in July 2019, we have agreed to indemnify Publicis Groupe S.A. for the matter included in Note 18, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements. If adversely determined, the financial impact of our indemnification obligation may be substantial.

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 which could negatively impact our growth and profitability.

Our growth and continued profitability depend on acceptance of the services that we offer. Our clients may not continue to use the loyalty and targeted marketing strategies and programs that we offer. 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. Additionally, downturns in the economy or the performance of retailers may result in a decrease in the demand for our marketing strategies. Any decrease in the demand for our 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 unable to realize some or all of the anticipated benefits of restructuring initiatives and restructuring may adversely affect our business.

In response to changes in industry and market conditions, we may undertake restructuring, reorganization, or other strategic initiatives to realign our resources with our growth strategies, operate more efficiently, and control costs. The successful implementation of these initiatives may require us to effect business and asset dispositions, workforce reductions, management restructurings, decisions to limit investments 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.

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, and other restructuring costs. Further, as a result of restructuring initiatives, we may experience a loss of continuity, loss of accumulated knowledge and/or inefficiency, 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 growing our business.

We have undertaken, and may undertake in the future, restructuring initiatives to simplify our business structure as well as focus capital on the highest earning and growth assets. The implementation of any restructuring initiatives may be costly and disruptive 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, could present significant potential risks that may impair our ability to achieve anticipated operating enhancements or cost reductions, or otherwise have a material adverse effect on our business, competitive position, operating results, and financial condition. For more information about our restructuring initiatives taken in 2019, see Note 14, “Restructuring and Other Charges” of the Notes to Consolidated Financial Statements.

Competition in our industries is intense and we expect it to intensify.

The markets for our products and services are highly competitive 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, marketing and other resources than we do. Certain of our segments also compete against in-house staffs of our current clients and others or internally developed products and services by our current clients and others. Our ability to generate significant revenue from clients and partners will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our programs to consumers. We may not be able to continue to compete successfully against our current and potential competitors.

Liquidity, Market and Credit Risk

If we are unable to securitize our credit card receivables due to changes in the market, we may not be able to fund new credit card receivables, which would have a negative impact on our operations and profitability.

A number of factors affect our ability to fund our receivables 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;
conformity in the quality of our credit card receivables to rating agency requirements and changes in that quality or those requirements; and
ability to fund required overcollateralizations or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing cost.

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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, such 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 recent financial crisis, banks are becoming subject to more stringent capital, liquidity and leverage requirements. In response to Basel III, investors of our securitization trusts’ funding securities 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 investors who have not delayed their funding, access to financing could be disrupted if all of the investors 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 card receivables 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 and profitability.

Inability to grow our deposits in the future could have a material adverse effect on our liquidity, ability to grow our business and profitability.

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, with 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 originate and maintain retail deposits is also highly dependent on the strength of our bank subsidiaries and the perceptions of consumers and others 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, 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 either 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 significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited), unless it is “well capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC. A bank that is “adequately 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, each of our bank subsidiaries 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 subsidiaries will continue to meet those requirements. Limitations on our bank subsidiaries’ 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. Any limitation on the interest rates our bank subsidiaries can pay on deposits may competitively disadvantage us in attracting and retaining deposits, resulting in a material adverse effect on our business.

At December 31, 2019, we had $12.2 billion in deposits, with approximately $3.6 billion in money market deposits that are redeemable on demand and approximately $8.6 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 incur additional indebtedness to fund future needs.

We have a high 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 and other corporate purposes;
increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage;
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 and other corporate purposes;
delay 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 indenture 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 indenture 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.

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, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Interest rate increases on our variable rate debt could materially adversely affect our profitability.

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 the year ended December 31, 2019, treating our former Epsilon segment as a discontinued operation. To manage our risk from market interest rates, we actively monitor the interest rates 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 on 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 on the London interbank offered rate (LIBOR) for deposits of U.S. dollars. LIBOR tends to fluctuate based on multiple factors, including general short-term interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of 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.

On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established or if LIBOR continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index. These changes may have a negative impact on our interest expense and profitability.

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, we had an aggregate of 79,212,386 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 6,573,861 shares of our common stock for issuance under our employee stock purchase plan and our long-term incentive plans, of which 1,278,642 shares have been issued and 596,822 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, 462,101 of which remain issuable, under our 401(k) and Retirement Savings Plan as of December 31, 2019. 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. 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. Other risks described in this 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, our Board of Directors has approved various share repurchase programs, including the share repurchase program approved in July 2019 for the repurchase of up to $1.1 billion of our common stock through June 30, 2020. 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 board deems relevant. 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. dollar and certain foreign currencies.

The results of our operations are exposed 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 differ from our expectations. For the year ended December 31, 2019, foreign currency movements relative to the U.S. dollar negatively impacted our revenue by approximately $45 million and negatively impacted our income from continuing operations before income taxes by approximately $1 million.

Regulatory Environment

Current and proposed regulation and legislation relating to our card services could limit our business activities, product offerings and fees charged and may have a significant impact on our business, results of operations and financial condition.

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, if legislation were enacted to eliminate these exemptions without any grandfathering of or accommodations for existing institutions, we could be required to become a

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bank holding company and cease certain of our activities that are not permissible for bank holding companies or divest our credit card 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 changes to the federal consumer protection laws and regulations. The CFPB assumed rulemaking authority under the existing federal consumer financial protection laws, 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 Governors of the Federal Reserve System. The CFPB’s ability 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, we may be required to alter products or services offered in some jurisdictions or cease offering products, which will increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide.

Various federal and state laws and regulations significantly limit the retail credit card services activities 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, could 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 application 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.

In the normal course of business, from time 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, there can be no assurance that the banks will be successful in enforcing the arbitration clause in the future. There may also be legislative, administrative 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, we may be required to invest significant management time and resources to address the provisions of the Dodd-Frank Act and the regulations that are required to be issued under it. The Dodd-Frank Act and any related legislation or regulations and their interpretation and enforcement may have a material impact on our business, results of operations and financial condition.

Legislation relating to consumer privacy and security may affect our ability to collect data that we use in providing our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients’ needs.

The evolution of legal standards and regulations around data protection and consumer privacy may affect our business. The enactment of new or amended legislation or industry regulations pertaining to consumer, public or private sector privacy issues could have a material adverse impact on our marketing services, including placing restrictions upon 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’ requirements 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 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, the 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 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.

In the United States, the 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. 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 monetary

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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 to consumer protection may affect our ability to provide our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients’ needs.

The enactment of new or amended legislation or industry regulations pertaining to consumer protection, or any failure to comply with such changes, could have a material adverse impact on our loyalty and marketing services. Such changes could result in a negative impact to our reputation, an adverse effect on our profitability or an increase in our litigation exposure.

For example, Ontario’s Protecting Rewards Points Act (Consumer Protection Amendment), 2016, and additional related regulations effective January 2018, prohibit suppliers from entering into 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 passed 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 require us to make capital contributions to them, 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, as well as Comenity Capital Bank. Many of these laws and regulations are intended to maintain the safety 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 our 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:

it engages only in credit card operations;
it does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties;
it does not accept any savings or time deposits of less than $100,000, except for deposits pledged as collateral for its extensions of credit;
it maintains only one office that accepts deposits; and
it does not engage in the business of making commercial loans (except small business loans).

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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:

it is an institution organized under the laws of a state which, on March 5, 1987, had in effect or had under consideration in such state’s legislature a statute which required or would require such institution to obtain insurance under the Federal Deposit Insurance Act; and
it does not accept demand deposits that the depositor may withdraw by check or similar means for payment to third parties.

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.

Our failure to protect our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly.

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 any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type

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could require us to 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.

Our international operations, acquisitions and personnel subject us to complex U.S. and international laws and regulations, which if violated could subject us to penalties and other adverse consequences.

Our operations, acquisitions and employment of personnel outside 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 jurisdictions in which we operate could subject us to other obstacles, including lack of a developed legal system, elevated levels 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.

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.

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Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

As of December 31, 2019, we lease approximately 50 general office properties worldwide, comprised of approximately three million square feet. These facilities are used to carry out our operational, sales and administrative functions. Our principal facilities are as follows:

Approximate

Location

    

Segment

    

Square Footage

    

Lease Expiration Date

 

Plano, Texas

 

Corporate

 

67,274

 

June 30, 2026

Columbus, Ohio

 

Corporate, Card Services

 

567,006

 

September 12, 2032

Toronto, Ontario, Canada

 

LoyaltyOne

 

205,525

 

March 31, 2033

Mississauga, Ontario, Canada

 

LoyaltyOne

 

50,908

 

February 29, 2020

Den Bosch, Netherlands

 

LoyaltyOne

 

132,482

 

December 31, 2033

Maasbree, Netherlands

 

LoyaltyOne

 

668,923

 

September 1, 2033

Draper, Utah

Card Services

134,903

May 31, 2031

Columbus, Ohio

 

Card Services

 

103,161

 

December 31, 2027

Westminster, Colorado

 

Card Services

 

120,132

June 30, 2028

Couer D’Alene, Idaho

 

Card Services

 

114,000

July 31, 2038

Westerville, Ohio

 

Card Services

 

100,800

July 31, 2024

Wilmington, Delaware

 

Card Services

 

5,198

November 30, 2020

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, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements.

Item 4.

Mine Safety Disclosures.

Not applicable.

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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, the closing price of our common stock was $103.06 per share, there were 47,627,611 shares of our common stock outstanding, and there were 97 holders of record of our common stock.

Dividends

We paid cash dividends per share during the periods presented as follows:

    

Dividends Per Share

    

Amount
(in millions)

 

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 FactorsThere 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.

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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:

Total Number of

Approximate Dollar

Shares Purchased as

Value of Shares that

Part of Publicly

May Yet Be

Total Number of

Average Price Paid

Announced Plans or

Purchased Under the

Period

    

Shares Purchased (1)

    

per Share

    

Programs

    

Plans or Programs (2)

(Dollars in millions)

During 2019:

October 1-31

 

3,403

$

116.83

$

347.8

November 1-30

 

2,564

 

106.27

 

 

347.8

December 1-31

3,650

109.35

347.8

Total

 

9,617

$

111.18

$

347.8

(1) During the period represented by the table, 9,617 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Saving Plan for the benefit of the employees who participated in that portion of the plan.
(2) In 2019, our Board of Directors authorized a new stock repurchase program to acquire up to $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020. Our authorization is subject to any restrictions pursuant to the terms of our credit agreements and applicable securities laws or otherwise.

Performance Graph

The following graph compares the yearly percentage change in cumulative total stockholder return on our common stock since December 31, 2014, with the cumulative total return over the same period of (1) the S&P 500 Index and (2) a peer group of sixteen companies selected by us and utilized 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.

The fifteen companies in the 2019 Peer Group Index 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.

Pursuant to rules of the SEC, the comparison assumes $100 was invested on December 31, 2014 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.

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GRAPHIC

Alliance Data

Systems

2018 Peer

2019 Peer

    

Corporation

    

S&P 500

    

Group Index

    

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

December 31, 2017

 

89.65

 

138.29

 

147.82

 

165.75

December 31, 2018

 

53.78

 

132.23

 

153.09

 

166.66

December 31, 2019

 

40.98

 

173.86

 

230.35

 

240.21

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.

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Item 6.

Selected Financial Data.

SELECTED 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

$

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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

(1) See “Use of Non-GAAP Financial Measures” set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of our use of adjusted EBITDA and adjusted EBITDA, net and a reconciliation to income from continuing operations, the most directly comparable GAAP financial measure.

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Item 7.

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

Overview

We are a leading global provider of data-driven marketing and loyalty solutions serving large, consumer-based industries. We create and deploy customized 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. We help our clients create and increase customer loyalty 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 Epsilon segment was treated as a discontinued operation, and was subsequently sold on July 1, 2019.

Year in Review

While our financial results did not meet original expectations, we made several strategic changes and achieved certain objectives during the year ended December 31, 2019.

Organizational Changes

On June 5, 2019, the Board of Directors of Alliance Data appointed Melisa A. Miller, who led Alliance Data’s Card Services business, as Alliance Data’s President and Chief Executive Officer as well as a Director of the Company. She succeeded Ed Heffernan who announced his resignation as President and Chief Executive Officer and as a Director of 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, which appointment became effective February 3, 2020. Melisa Miller stepped down from those positions in November 2019 but continued to serve the Company in 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. 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 sold our former Epsilon segment to Publicis Groupe S.A. for $4.4 billion in cash. We incurred approximately $79.0 million in transaction costs for the year ended December 31, 2019 and recorded a $512.2 million pre-tax gain ($252.1 million after-tax loss) on sale.

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 Results of Operations

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)

%

*

not meaningful

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 net decrease was due to the following:

Services. Revenue decreased $79.9 million, or 27%, to $215.5 million for the year ended December 31, 2019 primarily as a result of a $109.0 million decrease in merchant fee revenue due to increased royalty payments to our retailers, including new clients, and a $10.0 million decrease in other servicing fees charged to cardholders due to a decline in revenue from certain payment protection products. These decreases were offset in part by a $35.5 million increase in other servicing revenue, resulting from fees generated from servicing certain third-party credit card receivables.
Redemption. Revenue decreased $39.0 million, or 6%, to $637.3 million for the year ended December 31, 2019. Redemption revenue from our coalition loyalty program decreased $46.4 million due to the net presentation of $43.0 million of revenue from the outsourcing of additional rewards inventory during the year ended December 31, 2019. Redemption revenue from our short-term loyalty programs increased $7.4 million due to strong performance in Europe, Asia and Brazil, offset in part by the decline in the Euro relative to the U.S. dollar.
Finance charges, net. Revenue increased $33.6 million, or 1%, to $4,728.5 million for the year ended December 31, 2019. The increase was driven by a 1% increase in normalized average receivables, which includes receivables held for sale that increased revenue by $53.3 million, offset in part by an approximate 10 basis point decrease in finance charge yield, which decreased revenue by $19.7 million.

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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:

Within the LoyaltyOne segment, cost of operations increased $23.4 million due primarily to $50.8 million of restructuring and other charges incurred during the year ended December 31, 2019. See Note 14, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements. Additionally, data processing expense increased $21.2 million driven by an increase in outsourced technology costs. These increases were offset in part by the net presentation of $43.0 million in cost of redemptions within our coalition loyalty program as discussed in revenue above.
Within the Card Services segment, cost of operations increased $127.2 million due primarily to an $88.1 million increase in valuation adjustments to certain portfolios within credit card receivables held for sale and $29.4 million of restructuring and other charges incurred during the year ended December 31, 2019. See Note 14, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements.

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:

Securitization funding costs. Securitization funding costs decreased $6.8 million due to lower average borrowings, which decreased funding costs by approximately $30.5 million, offset in part by higher average interest rates, which increased funding costs by approximately $23.7 million.
Interest expense on deposits. Interest expense on deposits increased $59.9 million due to higher average interest rates, which increased interest expense by approximately $49.4 million, and higher average borrowings, which increased interest expense by approximately $10.5 million.
Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased $26.4 million primarily due to a $9.5 million increase in interest income earned on the excess proceeds from the Epsilon sale on July 1, 2019 and a $6.9 million decrease in interest expense due to the early redemption of senior notes due in 2020 in April 2018, offset in part by the issuance of senior notes in December 2019. Additionally, interest expense on the revolving line of credit decreased $4.3 million due to lower average

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borrowings in the current year, while interest expense on the BrandLoyalty credit agreement decreased $1.8 million due to the September 2019 repayment and amortization of debt issuance costs decreased $2.2 million due to the redemption of senior notes in 2019.

Taxes. Provision for income taxes decreased $103.7 million, or 38%, to $165.8 million for the year ended December 31, 2019 from $269.5 million for the year ended December 31, 2018, primarily related 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.

(Loss) income from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes was ($294.6) million for the year ended December 31, 2019 as compared to income from discontinued operations of $17.6 million for the year ended December 31, 2018, 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.

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:

Services. Revenue decreased $72.1 million, or 20%, to $295.4 million for the year ended December 31, 2018 primarily due to a $75.2 million decrease in merchant fee revenue due to increased royalty payments to our retailers associated with higher volumes and new clients.
Redemption. Revenue decreased $259.0 million, or 28%, to $676.3 million for the year ended December 31, 2018. Upon adoption of ASC 606, certain redemption revenue for which we do not control the good or service prior to transferring it to the collector is recorded on a net basis, which reduced both redemption revenue and cost of operations by $283.4 million for the year ended December 31, 2018. This decrease was partially offset by an increase of $38.3 million in redemption revenue from our short-term loyalty programs due to an increase in the number of active programs in market as compared to the prior year.
Finance charges, net. Revenue increased $523.0 million, or 13%, to $4,694.9 million for the year ended December 31, 2018. This increase was driven by an 8% increase in average credit card and loan receivables, which impacted revenue by $485.9 million through a combination of recent credit card portfolio acquisitions and new client signings, and an increase in net finance charge yield of approximately 20 basis points, which increased revenue by $37.1 million.

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:

Within the LoyaltyOne segment, cost of operations decreased $230.6 million due to a $237.7 million decrease in cost of redemptions. This decrease in cost of redemptions was driven by a $283.4 million decrease related to the adoption of ASC 606 as discussed above, offset in part by the increase in cost of redemptions related to our short-term loyalty programs due to the increase in revenue.  
Within the Card Services segment, cost of operations increased $298.3 million due to $101.6 million in valuation adjustments to certain portfolios within credit card receivables held for sale, a $67.4 million increase in payroll and benefit expenses to support in-house collections and operational initiatives, and higher credit card processing costs attributable to increases in volume.

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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Table of Contents

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.

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.

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:

Securitization funding costs. Securitization funding costs increased $63.6 million due to higher average interest rates, which increased funding costs by approximately $36.6 million, and higher average borrowings, which increased funding costs by approximately $27.0 million.
Interest expense on deposits. Interest expense on deposits increased $40.6 million due to higher average borrowings, which increased interest expense by approximately $21.8 million, and higher average interest rates, which increased interest expense by approximately $18.8 million.
Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased $17.3 million due to a $42.7 million decrease in interest expense on senior notes primarily due to the repayment of senior notes due 2017 in December 2017 and senior notes due 2020 in April 2018, offset in part by a $26.5 million increase in interest expense on term debt due to higher average interest rates due to increases in the LIBOR rate.

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.

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, 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

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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

(1) Represents the impact of the cancellation of the AIR MILES Reward Program’s five-year expiry policy on December 1, 2016.
(2) Represents costs associated with the consent orders with the FDIC to provide restitution to eligible customers and $2.5 million in civil penalties.
(3) Represents costs for professional services associated with strategic initiatives.
(4) Represents costs associated with restructuring or other exit activities. See Note 14, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements for more information.
(5) Represents loss on extinguishment of debt resulting from the redemption price of senior notes and the write-off of deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion outstanding senior notes and the amendment to the

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credit agreement, which was effective upon the consummation of the sale of Epsilon. See Note 16, “Debt,” of the Notes to Consolidated Financial Statements for more information.

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

$