Filing summary
Issuer and period: The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing under the name Bread Financial Holdings, Inc. The filing reports three- and nine-month results through September 30, 2018; financial amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,947.2 million | $1,912.4 million | $5,735.3 million | $5,613.2 million |
| Operating income | $522.0 million | $478.9 million | $1,320.1 million | $1,182.8 million |
| Net income | $296.5 million | $233.2 million | $678.2 million | $517.4 million |
| Diluted earnings per share | $5.39 | $4.20 | $12.25 | $9.23 |
| Operating cash flow | Not stated for the quarter in the summarized cash flow statement | $2,025.4 million | $1,758.8 million |
Q3 revenue increased 2%, operating income 9%, and net income 27% year over year. For the nine months, revenue rose 2%, net income 31%, and adjusted EBITDA, net—a non-GAAP measure—increased 3% to $1,471.5 million. The company reported Q3 operating margin of approximately 26.8% versus 25.0% and nine-month operating margin of approximately 23.0% versus 21.1%, calculated from reported revenue and operating income.
Growth was led by Card Services: revenue rose 10% in Q3 and 12% year to date, while finance charges, net increased 14% in both periods. LoyaltyOne revenue fell 15% in Q3 and 20% year to date; Epsilon revenue declined 4% in both periods. Reported LoyaltyOne revenue was reduced by the new net presentation of certain redemption transactions under ASC 606; management said the accounting change reduced revenue and operating costs by $69.1 million in Q3 and $214.0 million year to date, without material impact on consolidated results or cash flows.
Balance sheet, funding and credit quality
- At September 30, cash and cash equivalents were $3.60 billion, down from $4.19 billion at December 31, 2017. Total assets were $29.76 billion and stockholders’ equity was $2.29 billion.
- Long-term and other debt had a $5.85 billion gross balance ($5.68 billion long-term carrying amount after discounts and current portion); non-recourse securitization borrowings were $7.48 billion gross ($6.01 billion long-term carrying amount). Deposits totaled $11.38 billion gross. These are distinct funding categories.
- The company had $800.4 million available under its revolving credit line, reported compliance with debt covenants, and a total leverage ratio of 2.4-to-1 against a 3.5-to-1 maximum covenant. Management said liquidity sources were expected to meet needs for at least 12 months.
- Cash flow from investing was negative $860.7 million and financing was negative $1.51 billion for the first nine months. Cash, cash equivalents and restricted cash ended at $3.97 billion, down $344.4 million from the start of the period. The company paid $94.5 million in dividends and spent $197.0 million on treasury shares in the cash flow statement.
- Credit quality weakened on several reported measures: total delinquencies rose to 5.8% of principal receivables from 5.1% at year-end 2017; the 91-days-or-more delinquency rate increased to 2.7% from 2.3%. Net charge-offs were 5.9% of average receivables in Q3 versus 5.5%, and 6.3% year to date versus 6.0%. Nine-month provision for loan losses increased 5% to $846.3 million.
Material developments, outlook and risks
- Management said the board was conducting a strategic evaluation of the business portfolio, believing the stock price did not reflect the enterprise’s intrinsic value. It was evaluating which assets might perform better under different ownership and expected to complete its strategy before year-end 2018; no decision or transaction was announced in this filing.
- Six card portfolios were transferred to held-for-sale during the first nine months. The held-for-sale balance reached $1.72 billion at September 30, including $836.9 million transferred in Q3. Valuation adjustments totaled $64.0 million year to date. Two portfolios were sold in October for preliminary consideration of about $247.8 million, subject to customary adjustments.
- Effective April 2, 2018, the company redeemed $500 million of 6.375% notes due 2020, funding the redemption with revolving-credit borrowings. Securitization and deposit funding costs rose materially year over year, and management cited higher average borrowing levels and interest rates.
- The effective tax rate fell to 16.0% for Q3 and 17.9% year to date, from 30.1% and 33.2%, respectively, in 2017. The filing attributes the decrease mainly to U.S. tax reform and related benefits; year-to-date results also included a foreign restructuring tax benefit, partly offset by the impact of the Wayfair decision.
- No specific earnings or revenue guidance is provided in the supplied filing text. Principal stated risks include client losses, higher card losses, access to securitization funding, interest-rate and foreign-exchange movements, AIR MILES participation and redemptions, regulation and consumer privacy, cybersecurity, and execution of acquisitions or dispositions. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this is an Alliance Data Systems Corporation filing, despite the request metadata naming Bread Financial Holdings, Inc.
- Track whether the strategic review resulted in asset sales, business realignment, or other transactions, and assess their proceeds, costs and effects on earnings and leverage.
- Monitor delinquency, net charge-off and loan-loss provision trends, particularly against receivables growth and the rising share of accounts 91 or more days past due.
- Review liquidity and refinancing needs, including revolving-credit availability, securitization maturities and funding costs; much of the reported cash and securitized assets is restricted or associated with bank and securitization operations.
- Assess held-for-sale portfolio valuations and the final proceeds from the October 2018 portfolio sales, as well as the effects of the ASC 606 presentation change when comparing revenue across periods.