SEC Filing Summary
Registrant discrepancy: The supplied filing is Alliance Data Systems Corporation’s Form 10-Q, not a filing by Bread Financial Holdings, Inc. It covers the quarter ended September 30, 2011, and was signed November 7, 2011. Financial amounts below are in U.S. dollars.
Business context and reporting period
Alliance Data reported three segments: LoyaltyOne (the Canadian AIR MILES program), Epsilon (marketing services and analytics), and Private Label Services and Credit (private-label credit card programs). The filing presents third-quarter and nine-month results through September 30, 2011, compared with the corresponding 2010 periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $844.8 million | $702.4 million | $2,325.7 million | $2,035.7 million |
| Operating income | $227.7 million | $170.0 million | $631.4 million | $488.6 million |
| Net income | $94.0 million | $53.1 million | $249.4 million | $147.0 million |
| Diluted earnings per share | $1.60 | $0.96 | $4.35 | $2.63 |
| Adjusted EBITDA (non-GAAP) | $283.2 million | $218.9 million | $778.5 million | $629.1 million |
| Adjusted EBITDA margin | 33.5% | 31.2% | 33.5% | 30.9% |
- Q3 revenue rose 20.3%, operating income 33.9%, net income 77.1%, and adjusted EBITDA 29.4% year over year. Nine-month revenue increased 14.2% and adjusted EBITDA 23.8%.
- For the first nine months, operating cash flow was $762.5 million, versus $693.5 million. Investing activities used $741.8 million, including $359.1 million for Aspen and $468.7 million of increased restricted cash collateral; financing activities provided $84.3 million. Capital expenditures were $48.5 million.
- At September 30, cash and cash equivalents were $239.6 million; current assets were $5.90 billion and current liabilities $3.98 billion. Restricted cash collateral was $654.7 million. These restricted funds are not equivalent to freely available cash.
- Debt included $3.08 billion of asset-backed securities, $1.37 billion of certificates of deposit, and $2.25 billion of long-term and other debt. The company had $297.5 million available under its credit facility and reported $2.5 billion of available liquidity at bank subsidiaries. It said it expected liquidity sources to meet requirements for at least 12 months.
- The company reported a 2.3-to-1 core debt-to-adjusted-EBITDA covenant ratio against a 3.5-to-1 covenant limit, and said it was in compliance with covenants. Its main bank subsidiary’s Tier 1 risk-based capital, leverage, and total risk-based capital ratios were 14.9%, 14.5%, and 16.3%, respectively.
Material changes versus the prior comparable period
- Epsilon revenue growth reflected organic expansion and the May 2011 acquisition of Aspen Marketing Holdings for $359.1 million net of acquired cash. Aspen contributed $71.3 million of Q3 revenue and $11.8 million of Q3 adjusted EBITDA; acquisition-related mix reduced Epsilon’s adjusted EBITDA margin.
- Private Label Services and Credit benefited from higher gross yield following cardholder-term changes and improving credit quality. Nine-month credit sales grew 8.3%, while average credit card receivables declined 2.7% as payment rates increased.
- Loan-loss provision fell 21.1% in Q3 and 27.0% for the nine months. The nine-month net charge-off rate improved to 7.0% from 8.9%; delinquent receivables were 4.9% of principal balances at quarter-end, versus 6.1% at September 30, 2010.
- LoyaltyOne revenue benefited from a stronger Canadian dollar. AIR MILES issuance rose 6.8% and redemptions 5.4% for the nine months.
- Interest expense declined year over year, primarily reflecting favorable interest-rate swap valuation changes and lower securitization funding costs; long-term debt expense rose partly due to Aspen-related borrowing and convertible-note discount amortization.
- The company entered a new credit agreement in May 2011, replacing prior facilities, and amended it in September to increase the uncommitted accordion capacity and maximum potential facility size to $2.5 billion. It repaid $250 million of Series B senior notes at maturity in May.
Outlook, commentary, risks, and unusual items
- Management expected AIR MILES issuance growth of at least 5% in Q4 2011 and low-single-digit redemption growth for 2011. It expected payment rates in Q4 to be consistent with the prior-year quarter and credit-quality metrics to continue improving through year-end.
- Management described Epsilon’s outlook as strong, citing client wins and acquisitions. The company also reported new and extended merchant agreements, including a Marathon portfolio acquisition expected in Q4 2011 and a Pier 1 Imports agreement and portfolio acquisition expected to close in Q1 2012.
- Credit-card securitization is a primary funding source. Approximately $1.8 billion of asset-backed securities debt was due within 12 months, and some funding commitments were short-term and subject to renewal. The filing cautions that renewal on similar terms—or at all—was not guaranteed. An asset-performance-triggered early amortization event could restrict further securitizations.
- Cash use is seasonal and typically peaks in December because of holiday-related credit-card activity. Management also identified foreign-exchange, interest-rate, credit, redemption, and broader economic risks.
- An unauthorized entry into Epsilon’s email system in March exposed a subset of client customer names and/or email addresses. The company said no associated personal information was at risk and did not expect significant costs or a material financial impact.
- For the nine months, the company repurchased 2.31 million shares for $187.7 million; $140.3 million remained under its $400 million program at September 30. Restricted cash increased substantially, partly due to excess funding deposits and cash accumulated for an asset-backed securities maturity.
- A potential tax benefit associated with Aspen’s approximately $140 million tax-loss carryforward was not recognized because its availability depended on whether a prior merger qualified as a tax reorganization. The company reported no material changes to previously disclosed risk factors and no material litigation expected to adversely affect business or financial condition.
Most important facts for investors to verify
- Confirm the intended issuer: this document is Alliance Data Systems Corporation’s 2011 Q3 10-Q, not Bread Financial Holdings, Inc.’s filing.
- Review the composition and availability of reported liquidity, distinguishing unrestricted cash from restricted collateral and bank-level liquidity.
- Check upcoming securitization maturities, conduit renewals, and the company’s ability to refinance or replace funding commitments.
- Assess whether improving delinquencies and charge-offs persist, and monitor changes in payment rates, receivable balances, and loan-loss allowances.
- Separate organic Epsilon growth from acquired revenue and evaluate acquisition integration, amortization, and debt effects.
- Consider the effect of share repurchases, leverage, and restricted cash on financial flexibility; treat adjusted EBITDA as a non-GAAP measure rather than a substitute for cash flow or GAAP earnings.