Filing identity and reporting period
Important identity discrepancy: The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2013; it is not a filing by Bread Financial Holdings, Inc. The summary below describes the filing text provided and should not be attributed to Bread Financial.
Alliance Data reported three business segments: LoyaltyOne, Epsilon, and Private Label Services and Credit. Unless otherwise stated, figures below are in U.S. dollars; financial statement amounts are in thousands.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.096 billion | $911.5 million | $3.178 billion | $2.670 billion |
| Operating income | $288.8 million | $264.5 million | $849.2 million | $757.6 million |
| Net income | $132.9 million | $119.5 million | $378.3 million | $338.6 million |
| Diluted earnings per share | $2.01 | $1.84 | $5.63 | $5.33 |
| Adjusted EBITDA (non-GAAP) | $358.7 million | $318.6 million | $1.053 billion | $915.1 million |
| Adjusted EBITDA margin | 32.7% | 35.0% | 33.2% | 34.3% |
| Net interest expense | $74.0 million | $74.4 million | $240.0 million | $213.1 million |
Revenue grew 20.3% in Q3 and 19.0% for the first nine months; net income increased 11.2% and 11.7%, respectively. GAAP operating margin was approximately 26.3% in Q3 versus 29.0% a year earlier, and 26.7% for nine months versus 28.4%. The company cautions that adjusted EBITDA is non-GAAP and should not be treated as a substitute for GAAP earnings or operating cash flow.
For the nine months, operating cash flow was $798.8 million, down from $862.1 million. Investing activities used $374.3 million, compared with $1.189 billion used in the prior-year period; financing activities used $528.8 million, versus $869.8 million provided. Cash and cash equivalents were $784.0 million at September 30, 2013, down from $893.4 million at December 31, 2012.
At September 30, total assets were $11.965 billion, total liabilities $11.253 billion, and stockholders’ equity $711.4 million. Net credit card receivables were $7.046 billion, with an allowance for loan losses of $462.0 million. Debt balances included $2.683 billion of long-term and other debt and $3.982 billion of non-recourse securitization borrowings; deposits totaled $2.311 billion. These funding categories have different terms and recourse, and should not be interpreted as equivalent forms of corporate debt.
Material changes and business drivers
- Epsilon: Nine-month revenue rose 42.8% and adjusted EBITDA rose 28.5%, driven substantially by the November 2012 acquisition of Hyper Marketing (HMI), as well as demand in telecommunications and automotive. HMI contributed about $226.5 million of nine-month revenue. Epsilon’s Q3 adjusted EBITDA margin fell to 22.0% from 26.7%, which management attributed primarily to revenue mix, including HMI.
- Private Label Services and Credit: Nine-month revenue increased 19.2% and adjusted EBITDA 14.2%. Average credit card receivables grew 24.7%, while credit sales rose 24.5%, reflecting spending, client additions, and portfolio acquisitions. Finance-charge revenue benefited from receivables growth, partly offset by a 70-basis-point decline in gross yield, primarily from newly onboarded portfolios.
- LoyaltyOne: Nine-month revenue declined 4.1%, while adjusted EBITDA grew 6.5%. Redemption revenue was lower following a December 2012 change in the estimated breakage rate and a 7.4% decline in AIR MILES redeemed; prior-year redemptions were elevated by the introduction of a five-year expiry policy. A weaker Canadian dollar also reduced reported results.
- The company acquired the Barneys New York private-label credit card portfolio for $37.1 million in March 2013. In August, it began issuing eBay Bill Me Later credit products, with receivables generally sold to eBay; the company also agreed to buy a participating interest in a pool that bears a share of credit losses and related cash flows.
Liquidity, outlook, risks, and unusual items
- A new credit agreement was entered into in July 2013, replacing the prior facility. At quarter-end, $269.0 million was drawn on the revolving facility and $931.0 million was available. The reported leverage ratio was 2.0-to-1, below the 3.5-to-1 maximum covenant; the company said it was in covenant compliance.
- Management said internally generated funds and other liquidity sources should be sufficient for working capital, capital expenditures, and other requirements for at least 12 months, including repayment of the convertible notes due May 15, 2014. The filing does not provide a specific earnings or revenue forecast. It anticipated capital expenditures of no more than approximately 3% of annual revenue for the foreseeable future.
- In August 2013, the company settled the remaining $772.6 million principal of convertible notes due in 2013; $772.5 million was surrendered for conversion for $1.790 billion. The company received $1.018 billion from related hedge counterparties. This was a significant financing and cash-flow event.
- Credit indicators require monitoring: delinquent principal was 4.5% of receivables at September 30, versus 4.0% at December 31, 2012; management reported 4.2% at September 30, 2012. The nine-month net charge-off rate improved to 4.5% from 4.8%, while the Q3 rate was 4.3% in both years. Provision for loan losses rose 17.6% for the nine months, primarily with portfolio growth.
- Securitization and conduit funding are important liquidity sources; some commitments are short-term and require renewal. The company noted that renewal on similar terms, or at all, is not guaranteed. An early-amortization event could significantly restrict additional securitizations, although management did not consider such an event reasonably likely based on asset performance.
- Ordinary-course claims and lawsuits were disclosed, with management stating it did not expect them to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; HMI and Advecor were excluded from the internal-control evaluation, which the company said it would expand in Q4 2013.
Most important facts for investors to verify
- Confirm the issuer and filing match the intended company: the source is Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review the drivers and durability of revenue growth, especially HMI’s contribution, Epsilon’s margin pressure, and credit-card portfolio growth and yield.
- Track delinquency, charge-offs, loan-loss allowance adequacy, and the effects of receivables growth on credit risk.
- Assess funding access, conduit renewal and securitization terms, covenant headroom, and the May 2014 convertible-note repayment requirement.
- Reconcile the substantial convertible-note conversion and hedge proceeds with financing cash flows, and distinguish restricted or securitized assets from freely available liquidity.
- Evaluate the effect of AIR MILES redemption trends, breakage estimates, and Canadian-dollar movements on LoyaltyOne results and deferred revenue.