Filing identity and reporting period
Important mismatch: The request identifies Bread Financial Holdings, Inc., but the supplied filing is Alliance Data Systems Corporation’s Form 10-K for the fiscal year ended December 31, 2013 (filed February 28, 2014). The summary below reflects the supplied filing, not Bread Financial. It reports full-year results and unaudited fourth-quarter results.
Business context
Alliance Data provided data-driven marketing and loyalty services and private-label and co-brand credit card programs. Its reportable segments were LoyaltyOne (including Canada’s AIR MILES program), Epsilon (marketing services), and Private Label Services and Credit (consumer credit and card services).
Financial results and key metrics
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $4.319 billion | $3.641 billion | +18.6% |
| Operating income | $1.099 billion | $974.4 million | +12.8% |
| Net income | $496.2 million | $422.3 million | +17.5% |
| Diluted EPS | $7.42 | $6.58 | Up |
| Adjusted EBITDA | $1.374 billion | $1.192 billion | +15.3% |
| Operating cash flow | $1.003 billion | $1.134 billion | Down |
| Cash used in investing activities | $1.619 billion | $2.671 billion | Lower use |
| Cash provided by financing activities | $704.2 million | $2.209 billion | Lower inflow |
FY 2013 operating margin was approximately 25.4% versus 26.8% in 2012; adjusted EBITDA margin was 31.8% versus 32.7%. The effective tax rate was 37.5%, down from 38.2%. Net interest expense was $305.5 million, up 4.8%. The filing defines adjusted EBITDA as a non-GAAP measure and cautions it is not a substitute for GAAP earnings or operating cash flow.
Fourth quarter: Revenue was $1.141 billion versus $971.8 million in Q4 2012; operating income was $249.7 million versus $216.7 million; net income was $117.9 million versus $83.7 million. Diluted EPS was $1.79 versus $1.27.
Segments: Private Label Services and Credit generated $2.035 billion in revenue and $916.1 million adjusted EBITDA; Epsilon generated $1.380 billion and $289.7 million; LoyaltyOne generated $919.5 million and $258.5 million. Epsilon revenue rose 38.6%, primarily including HMI acquisition contribution and growth in telecommunications and automotive. Private Label revenue rose 17.5%, reflecting receivables growth and spending. LoyaltyOne revenue was essentially flat, while adjusted EBITDA rose 9.5%.
Balance sheet, liquidity, and capital
At December 31, 2013, cash and cash equivalents were $969.8 million; net credit card and loan receivables were $8.132 billion; total assets were $13.244 billion; and stockholders’ equity was $855.8 million. Long-term and other debt, including current maturities, was $2.800 billion; non-recourse securitization borrowings were $4.592 billion; and deposits were $2.816 billion. These funding obligations are distinct categories and should not be treated as identical forms of corporate recourse debt.
The company had $336.0 million drawn and $914.0 million available under its revolving credit facility. Its total leverage ratio under the credit agreement was 2.0x, below the 3.5x maximum covenant. It reported compliance with debt covenants and said internally generated funds and other liquidity sources should cover requirements for at least 12 months, including settlement of the 2014 convertible notes. A $345.0 million principal amount of convertible notes was due in May 2014. The company relied substantially on securitizations and bank deposits to fund receivables; $1.0 billion of securitization borrowings was due within 12 months.
Material changes, outlook, and risks
- Credit sales increased 21.8% to $15.252 billion and average credit card and loan receivables rose 21.7% to $7.213 billion. Provision for loan losses increased 21.1% to $345.8 million. Net charge-off rate improved to 4.7% from 4.8%, while delinquency rose to 4.2% from 4.0%.
- Epsilon growth included HMI, acquired in late 2012; HMI contributed approximately $273.6 million of 2013 segment revenue. The filing also describes 2013 credit-card portfolio acquisitions and new client agreements.
- AIR MILES breakage estimate was reduced from 27% to 26% at year-end. Management expected this estimate change to reduce 2014 earnings by approximately $30 million, with an expected offset from lower operating expenses and higher product margins. A 10% rise in reward redemption costs would have reduced 2013 pretax income by $41.8 million.
- Management expected the 2014 charge-off rate to be consistent with 2013 and the 2014 effective tax rate to be similar to 2013. Capital expenditures were expected not to exceed approximately 3% of annual revenue. The filing does not provide a consolidated revenue or earnings forecast.
- On January 2, 2014, the company acquired a 60% interest in BrandLoyalty for initial cash consideration of approximately €172.4 million ($235.6 million), plus assumed debt; consideration could increase through an earn-out. The company could acquire the remaining interest over four years under specified terms.
- Key exposures include dependence on major clients (the top 10 represented 42.5% of consolidated revenue), consumer credit losses, securitization-market access and refinancing, rising interest rates, AIR MILES redemption costs and estimation risk, foreign-exchange movements, privacy and cybersecurity, and evolving consumer-finance regulation. A 1 percentage-point interest-rate increase was estimated to reduce 2013 pretax income by $23.9 million. The company did not hedge its net Canadian or European investment exposure.
- The company repurchased approximately 1.4 million shares for $231.1 million in 2013 and authorized a new $400 million repurchase program for 2014. It did not anticipate cash dividends in the foreseeable future.
- Management concluded disclosure controls and internal control over financial reporting were effective; Deloitte issued unqualified audit opinions on the financial statements and internal controls. Ordinary-course legal claims were reported, with no material effect expected.
Important facts for investors to verify
- Confirm the issuer and filing: the supplied document is Alliance Data Systems Corporation’s 2013 Form 10-K, not a Bread Financial filing.
- Review the composition, maturity schedule, pricing, and renewal terms of securitization funding, deposits, revolving credit, and the May 2014 convertible notes.
- Assess receivables growth alongside the rise in delinquencies and loan-loss provision, including portfolio seasoning and acquisition effects.
- Examine the AIR MILES breakage estimate, deferred revenue, redemption-cost sensitivity, and the disclosed expected 2014 earnings impact.
- Assess whether the BrandLoyalty acquisition price, assumed debt, earn-out, and future purchase obligations are supportable by realized performance and liquidity.
- Distinguish GAAP earnings and cash flows from adjusted EBITDA, and consider the effect of share dilution from convertible-note warrants and other equity arrangements.