Filing summary
Entity note: The supplied filing is Alliance Data Systems Corporation (NYSE: ADS), not Bread Financial Holdings, Inc. It is the company’s Form 10-K for the fiscal year ended December 31, 2020; Bread was acquired in December 2020.
Business context and reporting period
Alliance Data operated two reportable segments: LoyaltyOne, including Canada’s AIR MILES program and BrandLoyalty, and Card Services, providing private-label, co-brand and other credit products, processing, marketing and digital payment solutions. The former Epsilon segment had been sold in 2019 and is reported as discontinued operations.
Financial and operating metrics
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $4.521 billion | $5.581 billion |
| Operating income | $888.4 million | $1.307 billion |
| Income from continuing operations | $295.0 million | $572.6 million |
| Net income | $213.7 million | $278.0 million |
| Diluted EPS | $4.46 | $5.46 |
| Adjusted EBITDA, net (non-GAAP) | $771.5 million | $1.271 billion |
| Cash from operating activities | $1.883 billion | $1.218 billion |
Operating margin was approximately 19.7%, down from 23.4% in 2019. Revenue fell 19%; operating income declined 32%, continuing-operations income 48%, and adjusted EBITDA, net 39%.
- Segments: LoyaltyOne revenue was $764.8 million and adjusted EBITDA, net $186.2 million, down 26% and 24%, respectively. Card Services revenue was $3.757 billion and adjusted EBITDA, net $667.0 million, down 17% and 40%.
- Credit portfolio: Year-end principal receivables were $16.0 billion from 40.2 million active accounts; net receivables after allowance were $14.776 billion, versus $18.292 billion a year earlier. Credit sales fell 20% to $24.707 billion.
- Credit quality: Net charge-off rate was 6.6%, compared with 6.1% in 2019. Delinquencies were 4.4% of principal receivables at year-end, down from 5.8%.
- Year-end balance sheet and funding: Cash and cash equivalents were $3.082 billion; total assets $22.547 billion; stockholders’ equity $1.522 billion. Deposits were $9.793 billion and non-recourse securitization borrowings $5.710 billion. Long-term and other debt was $2.806 billion, including $1.484 billion of term loans and $1.350 billion of senior notes. The $750 million revolving credit facility was undrawn.
- Cash flow: Investing activities provided $1.774 billion, largely reflecting a $1.784 billion cash inflow from the reduction in receivables. Financing activities used $4.167 billion. Cash, cash equivalents and restricted cash totaled $3.463 billion at year-end.
- Fourth quarter: Revenue was $1.110 billion, continuing-operations income $93.3 million and net income $12.0 million, including an $81.3 million after-tax discontinued-operations loss. Q4 2019 revenue was $1.461 billion and net income $97.5 million.
Material changes versus prior period
- COVID-19 reduced consumer spending, credit sales, finance-charge yield and short-term loyalty activity. FY 2020 finance-charge revenue fell 17%, redemption revenue 26%, and AIR MILES miles issued and redeemed fell 10% and 29%, respectively. Management reported sequential improvement in credit sales and AIR MILES activity in the third and fourth quarters.
- The company adopted CECL on January 1, 2020, increasing the allowance for loan loss by $644.0 million through an after-tax cumulative adjustment to retained earnings. The year-end allowance was $2.008 billion, versus $1.171 billion at year-end 2019.
- Alliance Data acquired Bread for approximately $491 million, net of cash and restricted cash acquired; consideration included cash, approximately 1.9 million shares, and $75 million of deferred cash consideration due in December 2021. Goodwill increased by $369.6 million from the acquisition.
- Precima was sold in January 2020 for approximately $43.8 million total consideration; the company recorded an $8.0 million pre-tax gain net of transaction costs. It also sold a credit card portfolio for $289.5 million.
- The company reduced its quarterly dividend from $0.63 to $0.21 per share beginning in Q2 2020 and made no company share repurchases during 2020. A $500 million 7.0% senior-note issue in September was used to prepay term debt.
Outlook, risks, contingencies and unusual items
- Management said internally generated funds and available liquidity were expected to meet working-capital and other needs for at least 12 months, but it could not reasonably estimate COVID-19’s future effects on results or cash flows. No specific financial guidance was provided in the supplied filing text.
- Key risks include continuing pandemic effects, unsecured consumer-credit losses, funding-market and deposit access, high indebtedness, client concentration, regulation and privacy requirements, cyber and vendor disruptions, and execution of processing-platform transitions. The ten largest clients generated 48% of 2020 revenue; L Brands and affiliates accounted for approximately 10%.
- In connection with the Epsilon sale, Alliance Data indemnified Publicis for a DOJ matter. A January 2021 deferred prosecution agreement requires $150 million in total payments, in two $75 million installments in January 2021 and January 2022. The company recognized an additional $110 million contingency in 2020, or $81.3 million after tax.
- Asset impairment charges were $63.7 million in 2020, including charges relating to deferred contract costs, fixed assets and lease right-of-use assets. BrandLoyalty goodwill fair value exceeded carrying value by 10% or less in the 2020 test; no impairment was recorded.
- At year-end, the company reported compliance with debt covenants and its bank subsidiaries were classified as well capitalized. The auditor issued an unqualified opinion on the financial statements and internal controls; Bread was excluded from the internal-control assessment because of acquisition timing.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review the durability of the 2020 credit-sales and receivables decline, and whether later recovery offset weaker finance-charge yield and continuing credit costs.
- Assess the CECL allowance, assumptions about economic forecasts, and subsequent delinquency and charge-off trends.
- Verify funding availability, refinancing needs and covenant headroom, including maturities of deposits, securitizations and corporate debt.
- Track Bread integration, deferred purchase consideration, dilution and whether the acquisition produces the expected growth and returns.
- Confirm settlement and remaining exposure under the Epsilon indemnity, and monitor BrandLoyalty goodwill impairment sensitivity and client concentration.