Filing summary
Entity note: The supplied filing is Alliance Data Systems Corporation’s Form 10-Q for the quarter ended June 30, 2014—not a filing by Bread Financial Holdings, Inc. This summary describes the filing provided.
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2014, compared with the same 2013 periods. Alliance Data operated LoyaltyOne, Epsilon, and Private Label Services and Credit. The January 2 acquisition of a 60% interest in BrandLoyalty is included in LoyaltyOne results from the acquisition date. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,265.2 | $1,028.1 | $2,498.1 | $2,081.5 |
| Operating income | $282.5 | $269.2 | $564.3 | $560.4 |
| Net income | $139.2 | $116.4 | $274.9 | $245.4 |
| Net income attributable to company stockholders | $137.4 | $116.4 | $274.8 | $245.4 |
| Diluted EPS | $2.19 | $1.71 | $4.27 | $3.62 |
| Adjusted EBITDA, net (non-GAAP) | $332.0 | $306.1 | $666.5 | $631.7 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $587.8 | $530.5 |
- Q2 revenue rose 23.1% and net income rose 19.5%; first-half revenue rose 20.0% and net income rose 12.0%. First-half adjusted EBITDA, net increased 5.5%.
- Operating margin was approximately 22.3% in Q2 versus 26.2% a year earlier, and 22.6% for the first half versus 26.9%. Revenue growth therefore outpaced operating income growth, alongside higher operating costs and acquisition-related amortization.
- Q2 finance charges, net increased 16.3%; the first-half increase was 14.3%, primarily reflecting larger average receivables. New-program onboarding reduced yield by 20 basis points in Q2 and 50 basis points in the first half.
- Provision for loan loss increased 67.2% in Q2 and 34.4% in the first half. First-half principal net charge-off rate was 4.6% versus 4.5%; delinquency was 4.0% at June 30, 2014 versus 3.9% at June 30, 2013. Delinquent balances were 4.0% of principal receivables, compared with 4.2% at December 31, 2013.
- Six-month cash flows were $587.8 operating, $(652.1) investing, and $(273.0) financing. Cash and cash equivalents declined to $631.2 at June 30 from $969.8 at year-end.
- At June 30, total long-term and other debt was $2,961.4; non-recourse securitization borrowings were $4,311.9; and deposits were $3,010.0. The company had $720.0 drawn on its revolving facility and $530.0 available. These funding balances are distinct and should not be treated as a single conventional corporate-debt measure.
- Total assets were $14,214.9 and total liabilities $12,924.9 at June 30. The company reported a 2.2-to-1 total leverage ratio under its credit agreement, below the 3.5-to-1 maximum, and said it was covenant-compliant. The banking subsidiaries were described as well capitalized.
Material changes and management commentary
- BrandLoyalty contributed $248.3 of first-half revenue and $24.0 of adjusted EBITDA, net. Its acquisition included approximately $259.5 of initial cash consideration, assumed debt, $423.8 of acquired intangible assets, and $565.0 of goodwill. The remaining 40% is subject to staged purchase and put arrangements; the recorded earn-out liability was $249.1 at June 30.
- LoyaltyOne first-half revenue increased 48.5%, mainly due to BrandLoyalty; a weaker Canadian dollar reduced revenue by $33.8 and adjusted EBITDA, net by $9.2. AIR MILES issuance fell 2.0%, while redemptions rose 2.8%. Management expected full-year AIR MILES issuance growth in the single-digit range.
- Epsilon first-half revenue grew 8.4% and adjusted EBITDA, net 4.1%. Management cited client growth and automotive demand, offset by onboarding costs, higher healthcare costs, and HMI integration severance.
- Private Label Services and Credit first-half revenue rose 14.5% and adjusted EBITDA, net rose 6.3%. Credit sales increased 19.5%, and average card and loan receivables increased 16.3%.
- The company repurchased $201.8 of stock in the first half under a $400.0 2014 authorization, leaving $198.2 available at June 30. Capital expenditures were $77.3; management expected them to remain at approximately 3% or less of annual revenue.
- In July 2014, the company issued $600.0 of 5.375% senior notes due 2022, increased revolving-facility capacity by $50.0, and acquired the Coldwater Creek co-brand portfolio for approximately $279.5, subject to customary adjustments. These are post-quarter events.
Outlook, risks, and contingencies
Management said internally generated funds and other liquidity sources should meet working-capital, capital expenditure, and other requirements for at least 12 months, including the BrandLoyalty contingent liability. The filing cautions that certain securitization and conduit funding commitments are short-term and may not renew on similar terms or at all; an asset-performance-triggered early amortization event could materially constrain additional securitizations. Other relevant exposures include credit losses, interest rates, foreign exchange, redemption rewards, and BrandLoyalty earn-out valuation. Management reported no material change to previously disclosed risk factors. Ordinary-course claims and lawsuits were not expected to materially adversely affect business or financial condition. No specific company-wide earnings guidance was provided in the supplied text.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Assess how much reported growth and future earnings depend on BrandLoyalty, including earn-out assumptions, the remaining minority interest, and acquisition-related amortization.
- Monitor credit performance and reserve adequacy as receivables grow, including delinquency, charge-offs, provision expense, and the effect of lower portfolio yield.
- Review liquidity and refinancing exposure, particularly securitization maturities, conduit renewals, and the impact of post-quarter debt issuance and acquisition spending.
- Reconcile adjusted EBITDA, net—a non-GAAP measure—to GAAP results and cash flow; the company states it is not a substitute for operating income, net income, or operating cash flow.