Business context and reporting period
The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2018; it does not identify Bread Financial Holdings, Inc. as the registrant. The figures below therefore summarize Alliance Data’s filing, not a Bread Financial filing. Alliance Data operated LoyaltyOne, Epsilon and Card Services.
Financial performance and position
Unless noted otherwise, amounts are in millions of U.S. dollars.
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $1,884.2 | $1,879.0 |
| Operating income | $377.8 | $352.4 |
| Net income | $163.9 | $146.4 |
| Diluted EPS | $2.95 | $2.58 |
| Operating cash flow | $649.9 | $472.1 |
| Investing cash flow | $392.9 | $341.4 |
| Financing cash flow | $(1,213.8) | $(762.9) |
| Cash and cash equivalents at quarter-end | $3,549.5 | $4,190.0 at Dec. 31, 2017 |
| Total assets / stockholders’ equity at quarter-end | $29,392.9 / $2,001.4 | $30,684.8 / $1,855.3 at Dec. 31, 2017 |
- Reported revenue was essentially flat. Operating margin was approximately 20.1%, versus 18.8% a year earlier; net margin was approximately 8.7%, versus 7.8%.
- Finance charges, net rose 14% to $1,157.2; services revenue fell 3% to $595.1, and redemption revenue fell 47% to $131.9. Management said revenue grew 4% on a pro forma basis adjusting for ASC 606’s net presentation of certain redemption transactions.
- Provision for loan losses increased 7% to $337.7. Principal net charge-offs were $296.1, or 6.7% of average receivables, versus $247.9, or 6.3%. Delinquent principal balances were 5.3% of receivables, compared with 5.1% at year-end.
- Debt and funding at March 31 included $6,142.1 of long-term and other debt before discounts and current portion, $10,506.9 of deposits, and $8,134.7 of non-recourse securitization borrowings before discounts and current portion. Management reported $1,078.4 of availability on its revolving credit line, compliance with financial covenants, and a 2.7-to-1 leverage ratio against a 3.5-to-1 maximum.
- Bank capital ratios were above regulatory minimums; both subsidiary banks were described as well capitalized. Management said available liquidity should meet requirements for at least the next 12 months.
Material changes and notable items
- Net income rose 12% and diluted EPS rose 14%, although pretax income fell 4%. The effective tax rate declined to 25.0% from 35.6%, primarily due to the U.S. tax reform rate reduction.
- Interest expense increased 27% to $159.2, reflecting higher average borrowings and rates. Adjusted EBITDA, net, a non-GAAP measure, was $437.4 versus $439.5.
- Card Services revenue increased 13% to $1,155.2, while segment adjusted EBITDA, net fell 4% to $318.6. LoyaltyOne revenue declined 32% to $226.3, partly due to ASC 606; Epsilon revenue declined 4% to $509.4, while its adjusted EBITDA, net rose 8% to $91.6.
- ASC 606 adoption reduced reported redemption revenue and cost of operations by $78.6 in the quarter, with no material impact on consolidated results or cash flows according to the company. Prior-year figures were not restated.
- Card Services costs included a $21.7 valuation adjustment on portfolios held for sale. Management also attributed elevated net charge-offs to bringing recovery of written-off accounts in-house and continuing hurricane impacts.
- After quarter-end, the company redeemed $500.0 of 6.375% senior notes due 2020 at par, funding the redemption with revolving-credit borrowings. It also reported repayment in April of $500.0 of asset-backed notes; $489.2 of accumulated principal cash was set aside for that repayment at quarter-end.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described liquidity as sufficient for at least 12 months. Disclosed risks include higher credit losses and funding costs, reduced demand from significant clients, inability to access securitization markets, changes in AIR MILES participation or redemptions, foreign-exchange movements, regulation and consumer privacy requirements, and cyber or service disruptions. The company reported ordinary-course claims and lawsuits that it did not believe would materially affect its business or financial condition; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Track delinquency and charge-off trends, allowance adequacy, and the effects of the recovery strategy and hurricane-related losses.
- Assess the sustainability of Card Services receivables growth and funding costs, including securitization maturities, deposit funding, and refinancing activity.
- Separate underlying revenue trends from ASC 606 presentation effects and compare reported results with management’s pro forma figures.
- Review portfolio-sale valuation assumptions, available revolving capacity, and the limits of adjusted EBITDA, net as a non-GAAP measure.