Filing summary
Entity and period: The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2013—not a filing identified as Bread Financial Holdings, Inc. The financial statements cover the three and six months ended June 30, 2013, with comparisons to 2012.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,028.1 | $866.5 | $2,081.5 | $1,758.1 |
| Operating income | $269.2 | $240.5 | $560.4 | $493.2 |
| Net income | $116.4 | $103.8 | $245.4 | $219.1 |
| Diluted EPS | $1.71 | $1.63 | $3.62 | $3.49 |
| Adjusted EBITDA (non-GAAP) | $337.7 | $292.8 | $694.8 | $596.5 |
| Operating margin | 26.2% | 27.8% | 26.9% | 28.0% |
| Net margin | 11.3% | 12.0% | 11.8% | 12.5% |
- For the first half, revenue grew 18.4%, operating income 13.6%, net income 12.0%, and adjusted EBITDA 16.5%. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Revenue growth was led by Epsilon, up 40.2% for the first half, including the HMI acquisition and stronger telecommunications demand; Private Label Services and Credit rose 20.7%. LoyaltyOne revenue fell 5.4%, primarily as AIR MILES redemptions declined.
- Q2 revenue rose 18.7%, while operating income rose 11.9%. For the first half, higher operating costs, loan-loss provision, amortization, and interest expense grew faster than revenue and contributed to lower operating and net margins.
- First-half interest expense was $166.0 million, up 19.7%; income tax expense was $149.0 million, with a 37.8% effective tax rate.
Cash flow, balance sheet, and funding
- First-half operating cash flow was $530.5 million, compared with $417.4 million a year earlier. Investing activities used $331.7 million and financing activities used $334.3 million. Capital expenditures were $59.0 million; operating cash flow less capital expenditures was approximately $471.5 million.
- Cash and cash equivalents were $749.8 million at June 30, down from $893.4 million at year-end 2012. Total assets were $11.87 billion and stockholders’ equity was $580.8 million.
- At June 30, reported long-term and other debt was $2.86 billion, including $1.13 billion classified as current; asset-backed securities debt was $4.01 billion, including $660 million current. Deposits totaled $2.26 billion. These funding categories are distinct and should not be treated as identical types of borrowing.
- The company reported $917.5 million available under its then-existing revolving credit facility, no borrowings on that facility, and a 2.2-to-1 leverage ratio against a 3.5-to-1 maximum covenant. It said it was covenant-compliant and believed liquidity would meet requirements for at least 12 months.
- Credit card principal receivables were $6.87 billion; the allowance for loan loss was $448.4 million. Delinquencies were 3.9% of principal receivables at June 30, 2013, versus 4.0% at year-end. The first-half net charge-off rate improved to 4.5% from 5.1% a year earlier; management cautioned that purchased-portfolio accounting lowered the reported rate.
Material changes, outlook, and risks
- Credit and portfolio growth: First-half credit sales increased 30.2% and average credit card receivables increased 29.1%. Management attributed growth to spending, new client signings, and portfolio acquisitions. The Barneys New York portfolio was acquired for $37.1 million in March 2013.
- Segment trends: First-half LoyaltyOne reward-mile issuance fell 4.0% and redemptions fell 10.4%; management anticipated low- to mid-single-digit year-over-year issuance growth for 2013. Epsilon’s growth included HMI, acquired in November 2012. Private Label Services and Credit benefited from receivables growth, while its adjusted EBITDA margin declined to 50.2% from 53.2%.
- Debt refinancing after quarter-end: A new credit agreement dated July 10, 2013 replaced the prior agreement and provided a $1.14 billion term loan and a $1.14 billion revolving facility, scheduled to mature in 2018. On August 1, the company settled $772.5 million of convertible notes surrendered for conversion for $1.79 billion in cash and received $1.02 billion from related hedge counterparties; remaining principal was paid at maturity. The filing also reported $345 million principal amount of convertible notes scheduled to mature in May 2014.
- Funding exposure: Asset-backed securitization and conduit funding depends partly on market access and renewal of commitments, some of which are short-term. The filing says nonrenewal could affect funding; an early-amortization event could significantly restrict further securitizations. The company did not believe such an event was reasonably likely based on asset performance.
- Other disclosures: Management reported no material change in previously disclosed risk factors or market-risk exposure, and said disclosure controls were effective. Ordinary-course legal claims were not expected by the company to have a material adverse effect. No specific full-year revenue or earnings guidance was stated in the supplied text; capital expenditures were expected not to exceed approximately 3% of annual revenue.
Investor verification checklist
- Confirm the intended issuer: this source is Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review the cash cost and hedge settlement of the August 1, 2013 convertible-note conversion, along with remaining 2014 maturities and financing capacity under the new credit agreement.
- Verify continued access to securitization and conduit facilities, upcoming maturities, and renewal terms for short-term funding commitments.
- Track credit quality, including delinquency and net charge-off trends, purchased-receivable accounting effects, and loan-loss allowance adequacy as receivables grow.
- Assess whether acquired-business growth, particularly HMI, translates into sustained margins and cash generation, and whether AIR MILES issuance and redemption trends meet management’s stated outlook.