Alliance Data Systems Corporation (filing metadata identifies Bread Financial Holdings, Inc.) — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020; filed May 6, 2020. The registrant named in the filing is Alliance Data Systems Corporation. Its continuing reportable segments were LoyaltyOne and Card Services. Unless noted otherwise, amounts are U.S. dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $1,381.8 million | $1,334.2 million; up 4% |
| Operating income | $164.0 million | $356.9 million; down 54% |
| Income from continuing operations | $30.0 million | $178.2 million; down 83% |
| Net income | $30.0 million | $149.1 million; down 80% |
| Diluted EPS | $0.63 | $2.80; down 78% |
| Adjusted EBITDA, net (non-GAAP) | $83.5 million | $316.5 million; down 74% |
| Operating cash flow | $572.5 million | $610.8 million |
Revenue growth reflected a 6% increase in net finance charges and an 8% increase in net redemption revenue, partly offset by a 36% decline in services revenue. The provision for loan losses rose 160% to $655.9 million. Operating margin was approximately 11.9%, versus 26.8% a year earlier; net margin was approximately 2.2%, versus 11.2%.
At March 31, cash and cash equivalents were $4.46 billion and total assets were $24.23 billion. Credit card and loan receivables, net, were $15.58 billion, after a $2.15 billion allowance for loan losses. Stockholders’ equity was $1.09 billion, down from $1.59 billion at year-end 2019, principally reflecting CECL adoption and quarterly results.
Debt and funding included $3.10 billion of long-term and other debt before issuance costs, $6.37 billion of non-recourse securitization borrowings, and $11.41 billion of deposits. The company reported $250 million drawn and $500 million available on its revolving credit line; it was in compliance with financial covenants. Operating, investing and financing activities generated/provided, respectively, $572.5 million, $1.75 billion and negative $1.50 billion in cash flows. Investing cash flow benefited from seasonal receivables paydown and portfolio-sale proceeds.
Material changes and unusual items
- Adopted CECL on January 1, 2020. The adoption increased the loan-loss allowance by $644 million and reduced retained earnings by $485 million, net of taxes. The quarter’s provision also reflected worsening economic forecasts and COVID-19 effects.
- Net charge-offs of principal were $320.2 million, and the net charge-off rate increased to 7.0% from 6.4%. Receivables 91 or more days delinquent represented 2.9% of principal, compared with 2.7% at December 31, 2019.
- Sold Precima in January for stated consideration of $43.8 million, including estimated contingent consideration; recorded an $8.0 million pretax gain net of strategic transaction costs. Also sold a credit card portfolio for preliminary cash consideration of $289.5 million and recorded a $20.4 million gain.
- The 2019 comparison includes a $29.1 million after-tax loss from discontinued Epsilon operations; Epsilon had been sold in July 2019. Continuing-operations income is the more comparable profit measure.
- Cash dividends paid were $30.3 million. Subsequent to quarter-end, the company suspended its repurchase program and declared a quarterly dividend of $0.21 per share, reduced from $0.63.
Outlook, management commentary and risks
Management said it could not reasonably estimate COVID-19’s full financial impact, but expected adverse effects on future revenue growth and profitability. It cited potential increases in delinquencies and credit losses, pressure on finance charges from borrower forbearance and Federal Reserve rate cuts, and disruptions to retail, travel-related rewards, loyalty programs and supply chains. Management also noted that CECL allowance estimates may be volatile as economic conditions and forecasts change. No specific full-year financial guidance is provided in the supplied filing text.
The company introduced short-term payment deferrals and late-fee waivers for eligible cardholders; balances in these programs were not material at March 31. Management reported that more than 95% of associates were teleworking and described steps to maintain service and adjust loyalty promotions and reward options.
The company stated that internally generated funds and other liquidity sources should meet needs for at least the next 12 months, while warning that COVID-related market volatility could limit or increase the cost of capital. Other disclosed matters include a $32.9 million net-of-tax contingency recorded in 2019 relating to indemnification for a DOJ investigation involving the divested Epsilon business; the estimate was unchanged at March 31, 2020. A proposed bank merger remained subject to regulatory review. Management said goodwill was not considered impaired at quarter-end, but further deterioration could create impairment risk.
Important facts for investors to verify
- Confirm the issuer: this supplied 10-Q is for Alliance Data Systems Corporation, despite the request metadata naming Bread Financial Holdings, Inc.
- Track subsequent credit quality, CECL assumptions and allowance changes, including the effects of unemployment, forbearance and macroeconomic forecasts.
- Review funding access and maturities across deposits, revolving credit and securitization facilities, including post-quarter conduit amendments.
- Monitor COVID-19 effects on card sales, finance-charge revenue, delinquencies, redemption activity and retail/loyalty partners.
- Verify the eventual outcome and any changes in the Epsilon-related DOJ indemnification contingency, as well as the bank-merger regulatory process.