Business context and reporting period
The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2012, filed November 5, 2012. This does not match the request metadata naming Bread Financial Holdings, Inc.; investors should verify the intended company and filing. Alliance Data reported three segments: LoyaltyOne, Epsilon, and Private Label Services and Credit. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Change | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|---|
| Revenue | $911.5M | $844.8M | +7.9% | $2,669.5M | $2,325.7M |
| Operating income | $264.5M | $227.7M | +16.2% | $757.6M | $631.4M |
| Net income | $119.5M | $94.0M | +27.2% | $338.6M | $249.4M |
| Diluted EPS | $1.84 | $1.60 | +15.0% | $5.33 | $4.35 |
| Adjusted EBITDA (non-GAAP) | $318.6M | $283.2M | +12.5% | $915.1M | $778.5M |
| Adjusted EBITDA margin | 35.0% | 33.5% | +1.5 points | 34.3% | 33.5% |
| Operating cash flow | Nine months: $862.1M | $862.1M | $762.5M |
Q3 operating margin was approximately 29.0% versus 26.9% a year earlier; net margin was approximately 13.1% versus 11.1%. Nine-month operating cash flow rose $99.6M. Investing activities used $1,188.6M, mainly for credit-card portfolio purchases ($780.2M) and receivables growth ($418.5M); financing activities provided $869.8M. Capital expenditures were $77.3M for the nine months, and management expected full-year capital expenditures not to exceed 3.5% of annual revenue.
At September 30, cash and cash equivalents were $766.3M and total assets were $10,412.3M. Asset-backed securities debt was $3,515.1M; long-term and other debt was $2,443.4M; deposits totaled $1,835.7M. The company had no borrowings under its $917.5M revolving facility, reported a 2.1x total leverage ratio against a 3.5x covenant maximum, and said it was covenant-compliant. Management believed available liquidity would cover requirements for at least 12 months. Of $3.5B in asset-backed securities debt, $1.4B was due within 12 months. Much of the securitized receivables and related assets are restricted to settling trust obligations.
Material changes versus comparable periods
- Nine-month revenue increased 14.8%, operating income 20.0%, net income 35.8%, and adjusted EBITDA 17.5% versus 2011.
- Private Label Services and Credit drove much of the growth: nine-month segment revenue rose 14.2% and adjusted EBITDA 20.6%. Average credit-card receivables increased 15.2% and credit sales rose 26.2%.
- Credit performance improved: nine-month principal net charge-off rate was 4.8% versus 7.0%; delinquency was 4.2% of principal receivables at quarter-end versus 4.9% a year earlier. The allowance for loan losses was $448.5M.
- Epsilon’s nine-month revenue rose 18.8%, partly due to the Aspen acquisition; however, Q3 revenue declined 3.1% year over year amid pharmaceutical weakness and lower customer-acquisition marketing programs from a major client.
- LoyaltyOne’s nine-month redemption revenue benefited from an AIR MILES expiry policy introduced in December 2011. Redemptions rose 18.1% year over year, but management expected the elevated activity to moderate.
- The company acquired credit-card portfolios from Pier 1 Imports, Premier Designs, The Bon-Ton, and Talbots. The Bon-Ton and Talbots purchase prices were preliminary; management expected Bon-Ton to be accretive to 2013 earnings per share, not 2012.
Outlook, commentary, risks, and unusual items
- Management expected mid-single-digit year-over-year AIR MILES issuance growth for the remainder of 2012 and continued moderation in redemptions. AIR MILES Cash expansion depended partly on participating sponsors’ point-of-sale changes; its impact was not expected to be material in 2012.
- For Epsilon, management expected continued pharmaceutical softness and flat Q4 revenue, while anticipating double-digit Q4 adjusted EBITDA growth and margin expansion.
- The company expected approximately $15M of 2012 losses associated with international LoyaltyOne initiatives.
- Funding remains exposed to securitization-market access and renewal of short-term conduit commitments. The filing warns that nonrenewal could constrain funding; an early amortization event could significantly limit or prevent further securitizations.
- Other disclosed exposures include consumer credit losses, interest rates, foreign exchange, and AIR MILES redemption obligations. A weaker Canadian dollar reduced nine-month LoyaltyOne revenue by $17.4M and adjusted EBITDA by $4.9M.
- In March 2012, the company issued $500M of 6.375% senior notes due 2020. Convertible senior notes with $1.15B principal were scheduled to mature in 2013 and 2014; Q3 diluted EPS reflects assumed conversion effects and should be read with the filing’s share-count disclosures.
- An October 2012 asset-backed securities issuance of $466.7M was disclosed as a subsequent event. The filing reported ordinary-course claims and lawsuits that management did not believe would materially adversely affect the business or financial condition; it reported no material changes to previously disclosed risk factors.
- Adjusted EBITDA is a non-GAAP measure and excludes items including interest, taxes, stock compensation, depreciation, and amortization; the company cautions it is not a substitute for GAAP income or operating cash flow.
Most important facts for investors to verify
- Whether the intended filing is this Alliance Data Systems 2012 Q3 report or a filing for Bread Financial Holdings.
- The maturity and renewal schedule for securitization debt and conduit facilities, including the $1.4B of asset-backed debt due within 12 months.
- Credit-card portfolio performance and comparability of reported charge-off rates, particularly because acquired receivable losses are reflected in purchase accounting.
- Whether Epsilon’s Q4 revenue and margin outlook, international initiative costs, and AIR MILES redemption trends developed as management expected.
- Acquisition purchase-price adjustments, funding needs, and the expected earnings contribution from the Bon-Ton and Talbots portfolios.
- The dilution and settlement effects of convertible notes, warrants, and related hedges when evaluating diluted EPS.