Filing summary
Entity and period: The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2012, not a filing identified in the text as Bread Financial Holdings, Inc. It reports Q2 and six-month results compared with the same 2011 periods. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $866.5 | $740.5 | $1,758.1 | $1,480.9 |
| Operating income | $240.5 | $191.8 | $493.2 | $403.7 |
| Net income | $103.8 | $69.0 | $219.1 | $155.4 |
| Diluted EPS | $1.63 | $1.19 | $3.49 | $2.74 |
| Adjusted EBITDA (non-GAAP) | $292.8 | $238.9 | $596.5 | $495.3 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $417.4 | $407.9 |
Q2 revenue rose 17.0%, operating income 25.4%, and net income 50.4% year over year. For the first half, revenue increased 18.7%, operating income 22.2%, and net income 40.9%. Q2 operating margin was approximately 27.8% versus 25.9%; first-half operating margin was approximately 28.0% versus 27.3%. Adjusted EBITDA margin was 33.8% in Q2 and 33.9% for the first half. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP income or cash flow.
Revenue growth reflected higher credit-card finance charges, increased AIR MILES redemptions, and Epsilon growth that included the Aspen acquisition. First-half segment revenue and adjusted EBITDA were: LoyaltyOne $487.4 million and $119.0 million; Epsilon $463.4 million and $88.6 million; Private Label Services and Credit $809.8 million and $430.5 million.
Cash, liquidity and debt
- Cash and cash equivalents were $642.2 million at June 30, 2012, up from $216.2 million at year-end 2011. Six-month operating cash flow was $417.4 million; investing activities used $613.0 million and financing activities provided $621.8 million.
- Credit-card receivables, net, were $5.278 billion; the allowance for loan losses was $432.5 million. Total assets were $9.827 billion and stockholders’ equity was $361.0 million.
- Reported debt included $3.438 billion of asset-backed securities owed to securitization investors and $2.428 billion of long-term and other debt. Deposits totaled $1.653 billion. These funding categories have different structures; securitized receivables and related debt are associated with consolidated trusts, and the filing says trust creditors generally have no recourse to the company’s general credit.
- The company reported no borrowings under its $917.5 million revolving credit facility, total leverage of 2.2x against a 3.5x maximum covenant, and compliance with covenants. Management said available liquidity was expected to meet needs for at least the next 12 months.
Material changes and outlook
- Credit quality improved: portfolio delinquency was 3.9% at June 30, versus 4.4% at December 31, 2011 and 4.5% at June 30, 2011. First-half principal net charge-off rate fell to 5.1% from 7.5%; management expected a 150–180 basis-point improvement for full-year 2012 versus 2011.
- AIR MILES redemptions increased 26.0% in the first half, partly because a five-year expiry policy stimulated activity. Management expected redemption activity to moderate during the rest of 2012 and projected mid-single-digit year-over-year issuance growth for 2012.
- Epsilon’s first-half revenue growth included Aspen, acquired in May 2011. Management anticipated temporary revenue softness in the second half, particularly Q3, due to weakness in pharmaceuticals, while expecting continued double-digit adjusted EBITDA growth and margin expansion.
- International loyalty initiatives were expected to generate approximately $15 million of losses in 2012. AIR MILES Cash expansion was not expected to have a significant financial impact in 2012.
- In March 2012, the company issued $500 million of 6.375% senior notes due 2020 and amended its credit agreement, increasing the revolver to $917.5 million. It also acquired the Pier 1 Imports and Premier Designs card portfolios for approximately $97.7 million and a preliminary $24.5 million, respectively.
- After quarter-end, the company paid approximately $500 million for The Bon-Ton Stores’ card portfolio; management did not expect 2012 EPS accretion but expected accretion in 2013. July securitization issuances included $325 million of Class A notes at 1.76% and additional notes across classes.
- The company repurchased $59.0 million of shares during the first half and had $341.0 million remaining under its $400 million 2012 authorization. Capital expenditures were $55.5 million; management expected 2012 capex not to exceed approximately 3.5% of annual revenue.
Risks, contingencies and unusual items
- Funding depends in part on securitization facilities and conduits, some of which are short-term and subject to renewal; renewal on similar terms or at all is not assured. Management cited $1.6 billion of asset-backed securities debt due within 12 months at June 30.
- The filing identifies interest-rate, credit, foreign-exchange and redemption-reward risks. A weaker Canadian dollar reduced first-half LoyaltyOne revenue by $14.6 million and adjusted EBITDA by $4.0 million.
- The filing added emphasis on risks from unauthorized access to consumer databases, privacy concerns, legal or regulatory claims, reputational harm, and potential damage to client relationships.
- Ordinary-course claims and lawsuits were reported; management did not expect them to have a material adverse effect. The filing reported no material changes to other previously disclosed risk factors.
- Disclosure controls were deemed effective as of June 30, 2012, with no material changes to internal control over financial reporting reported for the quarter. Interim results are unaudited and not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the issuer: the source text is for Alliance Data Systems Corporation, despite the request metadata naming Bread Financial Holdings, Inc.
- Review subsequent-period performance and integration of The Bon-Ton portfolio, including funding, purchase-price adjustments and the stated expected 2013 accretion.
- Track credit-card delinquencies, net charge-offs, payment rates, allowance adequacy and receivables growth against management’s outlook.
- Assess securitization and conduit renewals, upcoming maturities, unrestricted liquidity and compliance with debt covenants.
- Monitor AIR MILES redemption normalization, Canadian-dollar exposure, pharmaceutical-sector softness at Epsilon, and planned international investment losses.