Business context and reporting period
The supplied filing is Alliance Data Systems Corporation’s Form 10-K for the fiscal year ended December 31, 2015—not a filing for Bread Financial Holdings, Inc. It covers LoyaltyOne (including AIR MILES and BrandLoyalty), Epsilon marketing services, and Card Services. The filing also provides unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $6.440 billion | $5.303 billion | +21% |
| Operating income | $1.262 billion | $1.098 billion | +15% |
| Net income | $605.4 million | $516.1 million | +17% |
| Net income attributable to common stockholders | $596.5 million | $506.3 million | +18% |
| Diluted EPS | $8.85 | $7.87 | +12% |
| Adjusted EBITDA, net (non-GAAP) | $1.728 billion | $1.426 billion | +21% |
| Cash from operating activities | $1.706 billion | $1.344 billion | +27% |
- Operating margin was approximately 19.6%, versus 20.7% in 2014; net margin was approximately 9.4%, versus 9.7%. The filing reports interest expense, net of $330.2 million, up 27%, and income tax expense of $326.2 million; the effective tax rate was 35.0%, down from 38.4%.
- Cash and cash equivalents were $1.168 billion at year-end. Investing activities used $3.363 billion, mainly reflecting receivables growth, portfolio purchases, acquisitions, and capital expenditures; financing activities provided $1.773 billion.
- At year-end, long-term and other debt was $5.063 billion, non-recourse securitization borrowings were $6.493 billion, and deposits were $5.622 billion. These are distinct funding obligations. Revolver borrowings were $465 million, with $835 million available; the covenant leverage ratio was 2.7x against a 3.5x maximum. The company reported compliance with debt covenants.
- Net credit card and loan receivables were $13.058 billion, against an allowance for loan losses of $741.6 million. The net charge-off rate rose to 4.5% from 4.2%; delinquency was 4.2% versus 4.0%.
- Fourth-quarter 2015 revenue was $1.749 billion, operating income $364.1 million, net income $180.2 million, and diluted EPS $2.35. Fourth-quarter 2014 figures were $1.486 billion, $212.5 million, $76.3 million, and $0.86, respectively.
Material changes versus the prior comparable period
- Card Services revenue grew 24% to $2.974 billion and adjusted EBITDA, net grew 16% to $1.069 billion, principally with 30% growth in average receivables. Finance-charge yield declined about 100 basis points, while the provision for loan losses rose 57% to $668.2 million.
- Epsilon revenue rose 41% to $2.141 billion and adjusted EBITDA, net rose 64% to $508.4 million, primarily reflecting the December 2014 Conversant acquisition. Excluding Conversant, both measures increased 5%.
- LoyaltyOne revenue declined 4% to $1.353 billion and adjusted EBITDA, net declined 12% to $270.6 million, largely due to the stronger U.S. dollar. Excluding currency effects, management reported revenue growth of approximately 13% and adjusted EBITDA, net growth of 2%.
- Foreign currency movements reduced revenue by approximately $240 million and pretax earnings by approximately $35 million. The company repurchased approximately 3.4 million shares for $951.6 million.
Outlook, commentary, risks, and unusual items
- Management expected AIR MILES issuance growth in the low- to mid-single digits in 2016 and expected the Card Services charge-off rate to approximate 5.0%. A short-term loyalty pilot was expected to launch in the U.S. in first-quarter 2016.
- Management said internally generated funds and other liquidity sources should meet working-capital, capital-expenditure, and other business needs for at least the next 12 months. This is a forward-looking assessment, not a guarantee.
- In September 2015, the bank subsidiaries entered FDIC consent orders concerning marketing and sale of add-on products. The company recorded $64.6 million of expense, including approximately $61.5 million of customer restitution and $2.5 million in penalties. Penalties were paid by year-end; restitution was expected to begin in first-quarter 2016. The banks entered the orders without admitting or denying violations.
- Other key risks include consumer-credit losses, dependence on securitization and deposit funding, interest-rate sensitivity (a 1% rate increase was estimated to add about $76 million to annual interest expense), client concentration, AIR MILES redemption costs and breakage estimates, privacy and cybersecurity, and evolving consumer-protection and data-privacy regulation. Management estimated a 10% increase in AIR MILES redemption costs would reduce 2015 pretax income by $35.9 million.
- Subsequent developments disclosed include a January 2016 purchase of a private-label credit-card portfolio for $547.5 million and authorization of up to $1.0 billion in 2016 share repurchases. The company acquired an additional 10% of BrandLoyalty effective January 1, 2016, bringing ownership to 80%.
- The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective. The filing corrected a mathematical error in 2014 comprehensive income attributable to common stockholders, from $470.7 million to $447.1 million.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc., and covers fiscal 2015 rather than a standalone fourth-quarter filing.
- Review Card Services credit performance, allowance adequacy, portfolio seasoning, and management’s 2016 charge-off expectation.
- Assess the maturity and renewal profile of securitization facilities, deposits, and other debt, as well as the effect of rate changes and securitization regulation.
- Evaluate whether reported growth and margins are sustainable apart from acquisitions, foreign-exchange movements, and non-GAAP adjustments.
- Track FDIC restitution and required compliance enhancements, AIR MILES redemption and breakage assumptions, and the integration and returns of acquisitions and purchased portfolios.