BREAD FINANCIAL HOLDINGS, INC. 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. OurLoyaltyOne business owns and operates the AIR MILES Reward Program,Canada's most recognized loyalty program, andNetherlands -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. EffectiveMarch 31, 2019 , our Epsilon segment was treated as a discontinued operation, and was subsequently sold onJuly 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 endedDecember 31, 2019 . Organizational Changes OnJune 5, 2019 , the Board of Directors ofAlliance Data appointedMelisa A. Miller , who ledAlliance Data's Card Services business, asAlliance Data's President and Chief Executive Officer as well as a Director of the Company. She succeededEd Heffernan who announced his resignation as President and Chief Executive Officer and as a Director of the Company. OnNovember 18, 2019 , we announced thatRalph Andretta had been selectedAlliance Data's President and Chief Executive Officer as well as a Director of the Company, which appointment became effectiveFebruary 3, 2020 .Melisa Miller stepped down from those positions inNovember 2019 but continued to serve the Company in an advisory capacity throughFebruary 16, 2020 .Charles Horn , Executive Vice President, served as acting Chief Executive Officer until the effective date ofMr. 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
OnJuly 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 endedDecember 31, 2019 and recorded a$512.2 million pre-tax gain ($252.1 million after-tax loss) on sale. InJuly 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
InDecember 2019 , we issued and sold$850.0 million aggregate principal amount of 4.750% senior notes dueDecember 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 fromJune 14, 2021 toDecember 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. 30
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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
Revenue. Total revenue decreased
Services. Revenue decreased
year ended
in merchant fee revenue due to increased royalty payments to our retailers,
? including new clients, and a
charged to cardholders due to a decline in revenue from certain payment
protection products. These decreases were offset in part by a
increase in other servicing revenue, resulting from fees generated from servicing certain third-party credit card receivables.
Redemption. Revenue decreased
year ended
program decreased
? revenue from the outsourcing of additional rewards inventory during the year
ended
programs increased
Finance charges, net. Revenue increased
million for the year ended
? increase in normalized average receivables, which includes receivables held for
sale that increased revenue by
10 basis point decrease in finance charge yield, which decreased revenue by$19.7 million . 31 Table of Contents
Cost of operations. Cost of operations increased$150.6 million , or 6%, to$2,687.8 million for the year endedDecember 31, 2019 as compared to$2,537.2 million for the year endedDecember 31, 2018 . The net increase was due to the following:
Within the
primarily to
the year ended
? Charges," of the Notes to Consolidated Financial Statements. Additionally, data
processing expense increased
technology costs. These increases were offset in part by the net presentation
of
discussed in revenue above.
Within the Card Services segment, cost of operations increased
due primarily to an
? portfolios within credit card receivables held for sale and
restructuring and other charges incurred during the year ended
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 endedDecember 31, 2019 as compared to$1,016.0 million for the year endedDecember 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 endedDecember 31, 2019 as compared to$162.5 million for the year endedDecember 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 endedDecember 31, 2019 , as compared to$80.7 million for the year endedDecember 31, 2018 , due to certain fully depreciated property and equipment atLoyaltyOne , 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 endedDecember 31, 2019 , as compared to$112.9 million for the year endedDecember 31, 2018 , primarily due to certain fully amortized intangible assets, including portfolio premiums and customer contracts. Loss on extinguishment of debt. For the year endedDecember 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 theJuly 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 endedDecember 31, 2019 as compared to$542.3 million for the year endedDecember 31, 2018 . The net increase was due to the following:
Securitization funding costs. Securitization funding costs decreased
? million due to lower average borrowings, which decreased funding costs by
approximately
which increased funding costs by approximately
Interest expense on deposits. Interest expense on deposits increased
? million due to higher average interest rates, which increased interest expense
by approximately
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
million increase in interest income earned on the excess proceeds from the
? Epsilon sale on
due to the early redemption of senior notes due in 2020 in
in part by the issuance of senior notes in
interest expense on the revolving line of credit decreased$4.3 million due to lower average 32 Table of Contents
borrowings in the current year, while interest expense on the BrandLoyalty
credit agreement decreased
amortization of debt issuance costs decreased
of senior notes in 2019. Taxes. Provision for income taxes decreased$103.7 million , or 38%, to$165.8 million for the year endedDecember 31, 2019 from$269.5 million for the year endedDecember 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 endedDecember 31, 2019 as compared to income from discontinued operations of$17.6 million for the year endedDecember 31, 2018 , due to the after-tax loss on the sale of Epsilon completedJuly 1, 2019 and a loss contingency as described in Note 18, "Commitments and Contingencies," of the Notes to Consolidated Financial Statements. For the year endedDecember 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
Revenue. Total revenue increased
Services. Revenue decreased
? year ended
merchant fee revenue due to increased royalty payments to our retailers associated with higher volumes and new clients.
Redemption. Revenue decreased
year ended
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
31, 2018. This decrease was partially offset by an increase of
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
million for the year ended
increase in average credit card and loan receivables, which impacted revenue by
?
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 endedDecember 31, 2018 as compared to$2,469.5 million for the year endedDecember 31, 2017 . The net increase resulted from the following:
Within the
to a
? redemptions was driven by a
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
due to
? credit card receivables held for sale, a
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 endedDecember 31, 2018 as compared to$1,140.1 million for the year endedDecember 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. 33 Table of Contents General and administrative. General and administrative expenses increased$3.2 million , or 2%, to$162.5 million for the year endedDecember 31, 2018 as compared to$159.3 million for the year endedDecember 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 endedDecember 31, 2018 , as compared to$73.7 million for the year endedDecember 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 endedDecember 31, 2018 , as compared to$114.2 million for the year endedDecember 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 endedDecember 31, 2018 as compared to$455.4 million for the year endedDecember 31, 2017 . The net increase was due to the following:
Securitization funding costs. Securitization funding costs increased
? million due to higher average interest rates, which increased funding costs by
approximately
funding costs by approximately
Interest expense on deposits. Interest expense on deposits increased
? million due to higher average borrowings, which increased interest expense by
approximately
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
? decrease in interest expense on senior notes primarily due to the repayment of
senior notes due 2017 in
offset in part by a
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 endedDecember 31, 2018 from$293.3 million for the year endedDecember 31, 2017 , due to the reduction in the federal statutory rate pursuant to tax reform enacted inDecember 2017 . The effective tax rate for the year endedDecember 31, 2018 decreased to 22.2% as compared to 27.6% for the year endedDecember 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 endedDecember 31, 2018 from$19.5 million the year endedDecember 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 inthe 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 inJuly 2019 . In 2016, adjusted EBITDA excluded the impact of the cancellation of the AIR MILES Reward Program's five-year expiry policy onDecember 1, 2016 . In 2015, adjusted EBITDA excluded costs associated with the consent orders with theFDIC . These costs, as well as stock compensation expense, were not included in the measurement of segment adjusted EBITDA as the chief operating 34
Table of Contents
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. EffectiveApril 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
(2) Represents costs associated with the consent orders with the
restitution to eligible customers and
(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 35 Table of Contents
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 $ 1,033.1 $ 1,068.4 $ 1,303.5 (3) % (18) %
Card Services 4,547.8 4,597.6 4,170.6 (1) 10
Corporate/Other 0.4 0.6 0.6 nm * nm *
Total $ 5,581.3 $ 5,666.6 $ 5,474.7 (2) % 4 %
Adjusted EBITDA, net:
LoyaltyOne $ 244.5 $ 254.2 $ 256.7 (4) % (1) %
Card Services 1,119.7 1,496.0 1,344.9 (25) 11
Corporate/Other (92.9) (140.8) (136.2) (34) 3
Total $ 1,271.3 $ 1,609.4 $ 1,465.4 (21) % 10 %
* not meaningful
Year ended
Revenue. Total revenue decreased
year ended
Canadian dollar relative to the
? decrease in revenue, and by a
outsourcing of additional rewards inventory recorded on a net basis. The
declines were partially offset by strong performance in
related to our short-term loyalty programs.
Card Services. Revenue decreased
the year ended
merchant fees as a result of increased payments associated with new clients and
a
? to certain payment protection products. These decreases were offset in part by
a
from servicing certain third-party credit card receivables and a
increase in finance charges, net due to an increase in normalized average
receivables for the year endedDecember 31, 2019 . Adjusted EBITDA, net. Adjusted EBITDA, net decreased$338.1 million , or 21%, to$1,271.3 million for the year endedDecember 31, 2019 from$1,609.4 million for the year endedDecember 31, 2018 . The net decrease was due to the following:
million for the year ended
foreign exchange rate impact due to the decline in both the Euro and the
? Canadian dollar relative to the
decrease in adjusted EBITDA, net. Restructuring and other charges of
million and strategic transaction costs of
adjusted EBITDA, net for the year endedDecember 31, 2019 . Card Services. Adjusted EBITDA, net decreased$376.3 million , or 25%, to
million increase in provision for loan loss, an
? valuation adjustments to certain portfolios within credit card receivables held
for sale and a
Restructuring and other charges of
EBITDA, net for the year ended
Corporate/Other. Adjusted EBITDA, net improved
? million for the year ended
implemented in the first half of 2019, which among other
36
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items included reduced headcount, office space, charitable contributions and
overall corporate overhead costs. Loss on extinguishment of debt of
million, restructuring costs of
$10.7 million were excluded from adjusted EBITDA, net for the year endedDecember 31, 2019 .
Year ended
Revenue. Total revenue increased
the year ended
? which negatively impacted revenue by
in part by a 12% increase in revenue from our short-term loyalty programs
primarily due to an increase in the number of active programs in market.
Card Services. Revenue increased
for the year ended
finance charges, net as a result of an 8% increase in average credit card and
loan receivables. This increase was offset in part by a decrease in servicing
? fees of
increased royalty payments to our retailers associated with higher volumes and
new clients, and other servicing fees charged to cardholders declined
million due in part to a decline in revenue from certain payment protection
products. Adjusted EBITDA, net. Adjusted EBITDA, net increased$144.0 million , or 10%, to$1,609.4 million for the year endedDecember 31, 2018 from$1,465.4 million for the year endedDecember 31, 2017 . The net increase was due to the following:
? million for the year ended
programs in key markets within our short-term loyalty programs and weakened
performance inAsia . Card Services. Adjusted EBITDA, net increased$151.1 million , or 11%, to
positively impacted by an increase in finance charges, net and a decrease in
? the provision for loan loss, but offset in part by valuation adjustments to
certain portfolios within credit card receivables held for sale, higher funding
costs, and an increase in payroll and benefit expenses to support in-house
collections and operational initiatives.
Corporate/Other. Adjusted EBITDA, net decreased
? professional fees, medical benefits and charitable contributions, which were
offset 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. Asset Quality
Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our credit card and loan receivables, the success of our collection and recovery efforts, and general economic conditions.
Delinquencies. A credit card account is contractually delinquent if we do not receive the minimum payment by the specified due date on the cardholder's statement. Our policy is to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder's billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys
to
continue those efforts.
37
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The following table presents the delinquency trends of our credit card and loan
receivables portfolio:
December 31, % of December 31, % of
2019 Total 2018 Total
(in millions, except percentages)Receivables outstanding - principal$ 18,413.1 100.0 %$ 16,869.9 100.0 % Principal receivables balances contractually delinquent: 31 to 60 days $ 337.4 1.8 % $ 303.2 1.8 % 61 to 90 days 233.6 1.3 207.9 1.3 91 or more days 496.5 2.7 443.4 2.6 Total$ 1,067.5 5.8 % $ 954.5 5.7 %
Net Charge-Offs. Our net charge-offs include the principal amount of losses from cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame. The net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period. Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated. The following table presents our net charge-offs for the
periods indicated:
Years Ended December 31,
2019 2018 2017
(in millions, except percentages)
Average credit card and loan receivables $ 17,298.2 $ 17,412.1 $ 16,185.5
Net charge-offs of principal receivables 1,054.7 1,067.2 970.9
Net charge-offs as a percentage of average
credit card and loan receivables 6.1 % 6.1 % 6.0 %
Liquidity and Capital Resources
Our primary sources of liquidity include cash generated from operating activities, our credit agreements and issuances of debt or equity securities, our credit card securitization program and deposits issued byComenity Bank andComenity Capital Bank . In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources. InApril 2019 ,Comenity Capital Bank launched a consumer retail deposit platform, Comenity Direct™, to the public; retail deposits comprised approximately$1.2 billion of our$12.2 billion deposits outstanding atDecember 31, 2019 . Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, stock repurchases
and dividends. We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and may be funded through the issuance of debt securities. The amounts involved may be material. OnJuly 1, 2019 , we sold our former Epsilon segment to Publicis Groupe S.A. for$4.4 billion in cash. Proceeds were used for the repayment of corporate debt, share repurchases, and payment of taxes associated with the sale.
We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months.
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Cash Flow Activity
Operating Activities. We generated cash flow from operating activities of
$1,217.7 million and $2,754.9 million for the years ended December 31, 2019 and
2018, respectively. The decrease in operating cash flows of $1,537.2 million
during the year ended December 31, 2019 was primarily due to lower profitability
and the sale of Epsilon in July 2019 .
Investing Activities. Cash provided by investing activities was $2,860.8 million
for the year ended December 31, 2019 , and cash used in investing activities was
$1,872.0 million for the year ended December 31, 2018 . Significant components of
investing activities are as follows:
Credit card and loan receivables. Cash decreased
? million for the years ended
growth in credit card and loan receivables in each respective year.
? Proceeds from sale of business. Cash increased
ended
Purchase of credit card portfolios. During the year ended
? paid cash consideration of
portfolios. No credit card portfolios were acquired in 2018.
Proceeds from sale of credit card portfolios. During the year ended December
31, 2019, we received cash consideration of
? 13 credit card portfolios. During the year ended
cash consideration of$1,153.5 million from the sale of six credit card portfolios.
Capital expenditures. Cash paid for capital expenditures was
?
anticipate capital expenditures to continue to be less than 3% of annual revenue. Financing Activities. Cash used in financing activities was$4,091.7 million and$1,217.9 million for the years endedDecember 31, 2019 and 2018, respectively. Significant components of financing activities are as follows:
Debt. Cash decreased
year ended
extinguishment of
the sale of Epsilon and the mandatory payment of
? revolving credit facility. In
notes, of which the net proceeds of
prepayment of our term debt under the credit agreement. Cash decreased
million in net repayments for the year ended
to the redemption of
Non-recourse borrowings of consolidated securitization entities. Cash decreased
? due to net repayments under the conduit facilities. Cash decreased
million in net repayments for the year ended
million in net repayments under the conduit facilities and
net maturities under the asset-backed term notes.
Deposits. Cash increased
?
by timing of maturities.
Dividends. Cash paid for quarterly dividends and dividend equivalents was
?
2018, respectively.
?
million for the years endedDecember 31, 2019 and 2018, respectively. 39 Table of Contents
Debt Credit Agreement AtDecember 31, 2018 , our credit agreement, as amended, provided for$3,052.6 million in term loans subject to certain principal repayments and a$1,572.4 million revolving line of credit. OnApril 30, 2019 , we amended our credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement would be reduced by one year fromJune 14, 2022 toJune 14, 2021 , a mandatory payment of$500 million of the revolving credit facility would be required, the aggregate revolving credit commitments would be reduced in the same amount (to$1,072.4 million ), all of our outstanding senior notes would be required to be redeemed, net proceeds from future asset sales in excess of$50 million must be applied to repayment of the credit agreement and certain other minor amendments.
In
OnDecember 20, 2019 , we amended our credit agreement to extend the maturity date fromJune 14, 2021 toDecember 31, 2022 , reduce the aggregate revolving credit commitments from$1,072.4 million to$750.0 million , add a consolidated minimum tangible net worth covenant upon certain triggering events and make certain other amendments. The amendment also required us to prepay the term loans to$2,028.8 million upon consummation of the offering of the Senior Notes due 2024, which obligation was satisfied in full with a prepayment of$833.0 million , representing the net proceeds from the offering of the Senior Notes due 2024. AtDecember 31, 2019 , our credit agreement, as amended, provided for$2,028.8 million in term loans subject to certain principal repayments and a$750.0 million revolving line of credit. As ofDecember 31, 2019 , there were no amounts outstanding under our revolving line of credit and the total availability was$750.0 million . Our total leverage ratio, as defined in our credit agreement, was 1.6 to 1 atDecember 31, 2019 , as compared to the maximum covenant ratio of 3.5 to 1.
As of
BrandLoyalty Credit Agreement
InSeptember 2019 , we repaid the €115.0 million in term loans outstanding under the BrandLoyalty credit agreement, originally scheduled to mature inJune 2020 , and repaid the €32.5 million amount outstanding under the revolving line
of credit. Senior Notes
In
InDecember 2019 , we issued and sold$850.0 million aggregate principal amount of 4.750% senior notes dueDecember 15, 2024 . The Senior Notes due 2024 accrue interest on the principal amount at the rate of 4.750% per annum fromDecember 20, 2019 , payable semi-annually in arrears, onJune 15 andDecember 15 of each year, beginning onJune 15, 2020 . The Senior Notes due 2024 will mature onDecember 15, 2024 , subject to earlier repurchase or redemption.
See Note 16, "Debt," of the Notes to Consolidated Financial Statements for additional information regarding our debt.
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Funding Sources
Deposits
We utilize money market deposits and certificates of deposit to finance the
operating activities, including funding for our non-securitized credit card
receivables, and fund securitization enhancement requirements of our bank
subsidiaries,
Comenity Bank andComenity Capital Bank offer non-maturity deposit programs through contractual arrangements with various financial counterparties. As ofDecember 31, 2019 ,Comenity Bank andComenity Capital Bank had$3.6 billion in money market deposits outstanding with interest rates ranging from 1.84% to 3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.Comenity Bank andComenity Capital Bank issue certificates of deposit in denominations of at least$100,000 and$1,000 , respectively, in various maturities ranging betweenJanuary 2020 andDecember 2024 and with effective annual interest rates ranging from 1.33% to 4.00%. As ofDecember 31, 2019 , we had$8.6 billion of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements. Securitization Program We sell a majority of the credit card receivables originated byComenity Bank toWFN Credit Company, LLC , which in turn sells them toWorld Financial Network Credit Card Master Trust ,World Financial Network Credit Card Master Note Trust , or Master Trust I, and World Financial Network Credit Card Master Trust III, or Master Trust III, or collectively, the WFN Trusts, as part of our credit card securitization program, which has been in existence sinceJanuary 1996 . We also sell our credit card receivables originated byComenity Capital Bank toWorld Financial Capital Credit Company, LLC , which in turn sells them toWorld Financial Capital Master Note Trust , or theWFC Trust . These securitization programs are a principal vehicle through which we financeComenity Bank's andComenity Capital Bank's credit card receivables. Historically, we have used both public and private term asset-backed securitization transactions as well as private conduit facilities as sources of funding for our securitized credit card receivables. Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.
During the year endedDecember 31, 2019 , Master Trust I issued$1.6 billion of asset-backed term notes with various maturities ranging betweenFebruary 2022 andSeptember 2022 , of which$74.1 million were retained by us and eliminated from the consolidated balance sheets. Additionally,$1.9 billion of asset-backed term notes matured and were repaid, of which$347.9 million were retained by us and eliminated from the consolidated balance sheets. As ofDecember 31, 2019 , the WFN Trusts and theWFC Trust had approximately$13.5 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and theWFC Trust and by the performance of the credit card receivables in these credit card securitization trusts. We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card receivables through Master Trust I, Master Trust III and theWFC Trust . As ofDecember 31, 2019 , total capacity under the conduit facilities was$4.7 billion , of which$2.4 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider. The conduits have varying maturities fromSeptember 2020 toApril 2021 with variable interest rates ranging from 2.79% to 2.96% as ofDecember 31, 2019 . 41 Table of Contents
The following table shows the maturities of borrowing commitments as of
2020 2021 2022 2023 Thereafter Total
(in millions)
Term notes $ 1,467.2 $ 1,852.1 $ 1,571.7 $ - $ - $ 4,891.0
Conduit facilities (1) 2,480.0 2,175.0 - - - 4,655.0
Total (2) $ 3,947.2 $ 4,027.1 $ 1,571.7 $ - $ - $ 9,546.0 (1) Amount represents borrowing capacity, not outstanding borrowings.
(2) Total amounts do not include
securitization trusts, which was retained by us and has been eliminated in
the consolidated financial statements.
Early amortization events as defined within each asset-backed securitization
transaction are generally driven by asset performance. We do not believe it is
reasonably likely that an early amortization event will occur due to asset
performance. However, if an early amortization event were declared, the trustee
of the particular credit card securitization trust would retain the interest in
the receivables along with the excess interest income that would otherwise be
paid to our bank subsidiary until the credit card securitization investors were
fully repaid. The occurrence of an early amortization event would significantly
limit or negate our ability to securitize additional credit card receivables.
We have secured and continue to secure the necessary commitments to fund our
portfolio of credit card receivables originated by Comenity Bank and Comenity
Capital Bank . However, certain of these commitments are short-term in nature and
subject to renewal. There is not a guarantee that these funding sources, when
they mature, will be renewed on similar terms or at all as they are dependent on
the availability of the asset-backed securitization and deposit markets atthe time.
See Note 16, "Debt," of the Notes to Consolidated Financial Statements for additional information regarding our securitized debt.
Stock Repurchase Programs We had an authorized stock repurchase program to acquire up to$500.0 million of our outstanding common stock fromAugust 1, 2018 throughJuly 31, 2019 . AtDecember 31, 2018 we had$222.8 million remaining under the stock repurchase program. For the six months endedJune 30, 2019 , we acquired a total of 1.3 million shares of our common stock for$222.8 million . AtJune 30, 2019 , we did not have any amounts remaining under our authorization. InJuly 2019 , our Board of Directors authorized a new stock repurchase program to acquire up to$1.1 billion of our outstanding common stock fromJuly 5 ,
2019 throughJune 30, 2020 . InAugust 2019 , we repurchased approximately 5.1 million shares of our outstanding common stock for an aggregate cost of approximately$750.0 million as part of a "modified Dutch Auction" tender offer, as described in more detail in Note 19, "Stockholders' Equity," of the Notes to Consolidated Financial Statements.
As of
Dividends
For the year ended
For the year ended
On
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Contractual Obligations
In the normal course of business, we enter into various contractual obligations
that may require future cash payments. Our future cash payments associated with
our contractual obligations and commitments to make future payments by type and
period as of December 31, 2019 are summarized below:
2020 2021 2022 2023 2024 Thereafter Total
(in millions)
Deposits (1) $ 7,189.8 $ 2,303.7 $ 1,638.1 $ 964.0 $ 532.9 $ - $ 12,628.5
Non-recourse borrowings of
consolidated securitization
entities (1) 3,202.0 2,766.7 1,588.7 - - - 7,557.4
Long-term and other debt
(1) 209.6 206.2 1,924.9 40.4 888.7 - 3,269.8
Operating leases 38.4 39.6 38.6 36.8 35.6 237.4 426.4
Software licenses 13.8 14.9 10.5 7.6 - - 46.8
ASC 740 obligations (2) - - - - - - -
Purchase obligations (3) 438.2 171.9 101.9 39.9 12.3 - 764.2
Total $ 11,091.8 $ 5,503.0 $ 5,302.7 $ 1,088.7 $ 1,469.5 $ 237.4 $ 24,693.1 (1) The deposits, non-recourse borrowings of consolidated securitization entities
and long-term and other debt represent our estimated debt service
obligations, including both principal and interest. Interest was based on the
interest rates in effect as of
repayment period.
(2) ASC 740 obligations do not reflect unrecognized tax benefits of
million, of which the timing remains uncertain.
(3) Purchase obligations are defined as an agreement to purchase goods or
services that is enforceable and legally binding and specifying all
significant terms, including the following: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and approximate
timing of the transaction. The purchase obligation amounts disclosed above
represent estimates of the minimum for which we are obligated and the time
period in which cash outflows will occur. Purchase orders and authorizations
to purchase that involve no firm commitment from either party are excluded
from the above table. Purchase obligations include sponsor commitments under
our AIR MILES Reward Program, minimum payments under support and maintenance
contracts and agreements to purchase other goods and services.
We believe that we will have access to sufficient resources to meet these commitments.
Inflation and Seasonality Although we cannot precisely determine the impact of inflation on our operations, we do not believe that we have been significantly affected by inflation. For the most part, we have relied on operating efficiencies from scale, technology and expansion in lower cost jurisdictions in select circumstances, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses. With respect to seasonality, our revenues, earnings and cash flows are affected by increased consumer spending patterns leading up to and including the holiday shopping period in the fourth quarter and, to a lesser extent, during the first quarter as credit card and loan receivable balances are paid down.
Legislative and Regulatory Matters
Comenity Bank is subject to various regulatory capital requirements administered by theState of Delaware and theFDIC .Comenity Capital Bank is subject to regulatory capital requirements administered by both theFDIC and theState of Utah . Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, bothComenity Bank andComenity Capital Bank must meet specific capital guidelines that involve quantitative measures of its assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by these regulators about components, risk weightings and other factors. BothComenity Bank andComenity Capital Bank are limited in the amounts that they can pay as dividends to us. OnSeptember 10, 2019 ,Comenity Capital Bank submitted a bank merger application to theFDIC seeking theFDIC's approval to mergeComenity Bank with and intoComenity Capital Bank as the surviving bank entity. On the same date,Comenity Capital Bank andComenity Bank each submitted counterpart bank merger applications to theUtah 43 Table of ContentsDepartment of Financial Institutions and theDelaware Office of the State Bank Commissioner , respectively, in connection with the proposed merger. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the outcome or timing of such review. Quantitative measures established by regulations to ensure capital adequacy requireComenity Bank andComenity Capital Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets.Comenity Bank andComenity Capital Bank are considered well capitalized. The actual capital ratios and minimum ratios as ofDecember 31, 2019 are as follows: Minimum Ratio to be Minimum Ratio for Well Capitalized under Actual Capital Adequacy Prompt Corrective Ratio Purposes Action ProvisionsComenity Bank
Tier 1 capital to average assets 12.9 % 4.0 % 5.0 % Common Equity Tier 1 capital to risk-weighted assets 14.6 4.5 6.5 Tier 1 capital to risk-weighted assets 14.6 6.0 8.0 Total capital to risk-weighted assets 15.9 8.0 10.0Comenity Capital Bank Tier 1 capital to average assets 11.9 % 4.0 % 5.0 % Common Equity Tier 1 capital to risk-weighted assets 14.4 4.5 6.5 Tier 1 capital to risk-weighted assets 14.4 6.0 8.0 Total capital to risk-weighted assets 15.7 8.0
10.0
In
InAugust 2014 , theSEC adopted a number of rules that will change the disclosure, reporting and offering process for publicly registered offerings of asset-backed securities, including those offered under our credit card securitization program. A number of rules proposed by theSEC in 2010 and 2011, such as requiring group-level data for the underlying assets in credit card securitizations, were not adopted in 2014 but may be implemented by theSEC in the future with or without modifications. TheSEC has also issued an advance notice of proposed rulemaking relating to the exemptions that our credit card securitization trusts rely on in our credit card securitization program to avoid registration as investment companies. Regulations adopted by theFDIC , theSEC , theFederal Reserve and certain other federal regulators mandate a minimum five percent risk retention requirement for securitizations issued on and afterDecember 24, 2016 , known as Regulation RR. 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.
Discussion of Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting policies that are described in the Notes to
Consolidated Financial Statements. The preparation of the consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We continually evaluate our
judgments and estimates in determination of our financial condition and
operating results. Estimates are based on information available as of the date
of the financial statements and, accordingly, actual results could differ from
these estimates, sometimes materially. Critical accounting estimates are defined
as those that are both most important to the portrayal of our financial
condition and operating results and require management's most subjective
judgments. The primary critical accounting estimates are described below.
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Allowance for Loan Loss.
We maintain an allowance for loan loss at a level that is appropriate to absorb
probable losses inherent in credit card and loan receivables. The estimate of
our allowance for loan loss considers uncollectible principal as well as unpaid
interest and fees reflected in the credit card and loan receivables. While our
estimation process includes historical data and analysis, there is a significant
amount of judgment applied in selecting inputs and analyzing the results to
determine the allowance for loan loss. We use a migration analysis to estimate
the future likelihood that a credit card or loan receivable will progress
through the various stages of delinquency and to charge-off based on historical
performance. In evaluating the allowance for loan loss for both principal and
unpaid interest and fees, past and current credit card and loan performance is
considered in addition to factors that may impact loan loss experience,
including seasoning and growth, account collection strategies, economic
conditions, bankruptcy filings, policy changes, payment rates and forecasting
uncertainties. Given the same information, others may reach different reasonable
estimates.
If we used different assumptions in estimating net charge-offs that could be
incurred, the impact to the allowance for loan loss could have a material effect
on our consolidated financial condition and results of operations. For example,
a 100 basis point change in our estimate of incurred net loan losses could have
resulted in a change of approximately $186 million in the allowance for loan
loss at December 31, 2019 , with a corresponding change in the provision forloan loss. EffectiveJanuary 1, 2020 , we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." For additional information regarding the impact of this standard, see "Recently Issued Accounting Standards" under Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial
Statements. Revenue Recognition. We recognize revenue when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In that determination, under ASC 606, we follow a five-step model that includes: (1) determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. We enter into contracts with customers that may include multiple performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. If the standalone selling price is not directly observable, we estimate the standalone selling price based on either the adjusted market assessment or cost plus a margin approach. Certain of our contracts may provide for variable consideration. We estimate these amounts based on either the expected amount or most likely amount to be provided to the customer to determine the transaction price for the contract. The estimation method is consistent for contracts with similar terms and is applied consistently throughout each contract. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information that is reasonably available. AIR MILES Reward Program. The AIR MILES Reward Program collects fees from its sponsors based on the number of AIR MILES reward miles issued and, in limited circumstances, the number of AIR MILES reward miles redeemed. Because management has determined that the earnings process is not complete at the time an AIR MILES reward mile is issued, the recognition of redemption and service revenue is deferred. Under certain of our contracts, a portion of the consideration is paid to us upon the issuance of AIR MILES reward miles and a portion is paid at the time of redemption and therefore, we do not have a redemption obligation related to these contracts.
Total consideration from the issuance of AIR MILES reward miles is allocated to three performance obligations: redemption, service, and brand, based on a relative standalone selling price basis.
The estimated standalone selling price for the redemption and the service performance obligations are based on cost plus a reasonable margin. The estimated standalone selling price of the brand performance obligation is determined using a relief from royalty approach. Accordingly, management determines the estimated standalone selling price by
45
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considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize. The number of AIR MILES reward miles issued and redeemed are factored into the estimates, as management estimates the standalone selling prices and volumes over the term of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management's estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base. Additionally, the estimated life of an AIR MILES reward mile impacts the timing of revenue recognition. Breakage and the life of an AIR MILES reward mile are based on management's estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure. Throughout 2018 and 2019, our estimated breakage rate remained 20%. Our cumulative redemption rate, which represents program to date redemptions divided by program to date issuance, is 70% as ofDecember 31, 2019 . We expect the ultimate redemption rate will approximate 80% based on our historical redemption patterns, statistical regression models, and consideration of enacted program changes, as applicable.
Throughout 2018 and 2019, our estimated life of an AIR MILES reward mile
remained 38 months. We estimate that a change to the estimated life of an AIR
MILES reward mile of one month would impact revenue by approximately
Any future changes in collector behavior could result in further changes in our estimates of breakage or life of an AIR MILES reward mile.
As of
Goodwill .
We test goodwill for impairment annually, as ofJuly 31 , or when events and circumstances change that would indicate the carrying amount may not be recoverable. ASC 350, "Intangibles -Goodwill and Other," permits the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step quantitative goodwill impairment test required under ASC 350. ASC 350 also allows the option to skip the qualitative assessment and proceed directly to a quantitative assessment. For our qualitative analysis, we consider the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit's fair value with its carrying value. If the qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit. For our quantitative analysis, the fair value of the reporting units is estimated using both an income- and market-based approach. Our income-based approach utilizes a discounted cash flow analysis based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate and other assumptions that are judgmental in nature. Changes in these estimates and assumptions could materially affect the results of our tests for goodwill impairment. The market-based approach involves an analysis of market multiples of revenues and earnings to a group of comparable public companies and recent transactions, if any, involving comparable companies. While the guideline companies in the market-based valuation method have comparability to the reporting units, they may not fully reflect the market share, product portfolio and operations of the reporting units. In addition, we also consult independent valuation experts
in
applying these valuation
46
Table of Contents
techniques. We generally base our measurement of the fair value of a reporting
unit on a blended analysis of the present value of future discounted cash flows
and the market-based valuation approach.
For the 2019 annual impairment test, we performed a qualitative analysis for the
Card Services reporting unit and determined that it was more likely than not
that there was no impairment of goodwill. We performed a quantitative analysis
for the reporting units within the LoyaltyOne segment, identified as
BrandLoyalty and LoyaltyOne excluding BrandLoyalty. We determined there was no
impairment of goodwill on these reporting units.
As of December 31, 2019 , we had goodwill of approximately $954.9 million . The
following table presents the December 31, 2019 goodwill by reporting unit as
well as the percentage by which fair value of the reporting units exceeded
carrying value as of the 2019 annual impairment test:
Approximate
Reporting Unit Goodwill Excess Fair Value %
(in millions, except percentages)
BrandLoyalty $ 498.1 ? 10%
LoyaltyOne excluding BrandLoyalty 192.8 360 - 400%
Card Services 264.0 (1)
Total $ 954.9 (1) In 2019, the Company elected to perform a qualitative analysis for Card
Services. In 2018, the fair value of Card Services exceeded carrying value by
approximately 390 to 460 percent.
As with all assumptions, there is an inherent level of uncertainty and actual
results, to the extent they differ from those assumptions, could have a material
impact on fair value. For example, a reduction in customer demand would impact
our assumed growth rate resulting in a reduced fair value, or multiples for
similar type reporting units could deteriorate due to changes in technology or a
downturn in economic conditions. Potential events or circumstances could have a
negative effect on the estimated fair value. The loss of a major customer or
program could have a significant impact on the future cash flows of the
reporting unit(s).
We do not currently believe there is a reasonable likelihood that there will be
a material change in estimates or assumptions used to test goodwill and other
intangible assets for impairment. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to an impairment charge
that could be material.
Income Taxes.
We account for uncertain tax positions in accordance with Accounting Standards
Codification, or ASC, 740, "Income Taxes." The application of income tax law is
inherently complex. Laws and regulations in this area are voluminous and are
often ambiguous. As such, we are required to make many subjective assumptions
and judgments regarding our income tax exposures. Interpretations of, and
guidance surrounding, income tax laws and regulations change over time. Changes
in our subjective assumptions and judgments can materially affect amounts
recognized in the consolidated balance sheets and statements of income. See
Note 22, "Income Taxes," of the Notes to Consolidated Financial Statements for
additional detail on our uncertain tax positions and further information
regarding ASC 740.
Recent Accounting Pronouncements
See "Recently Issued Accounting Standards" under Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition, results of operations or cash flow.
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