Alliance Data Systems Corporation (ADS) — Q2 2020 Form 10-Q
Entity note: The supplied filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc. It covers the quarter and six months ended June 30, 2020; financial statements are unaudited.
Business context and reporting period
Alliance Data reported two segments: LoyaltyOne, which includes AIR MILES and BrandLoyalty, and Card Services, which provides private-label and co-brand credit card services. The company sold its Epsilon segment in July 2019, and sold LoyaltyOne business Precima in January 2020.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $979.3 million | $1,348.5 million | $2,361.1 million | $2,682.7 million |
| Operating income | $174.7 million | $337.3 million | $338.6 million | $694.2 million |
| Income from continuing operations | $38.4 million | $142.4 million | $68.4 million | $320.7 million |
| Net income | $38.4 million | $139.0 million | $68.4 million | $288.1 million |
| Diluted EPS | $0.81 | $2.64 | $1.43 | $5.45 |
| Adjusted EBITDA, net (non-GAAP) | $156.2 million | $309.6 million | $239.7 million | $626.2 million |
- Cash flow, six months: Operating cash flow was $1,067.5 million versus $1,089.7 million. Investing activities provided $3,340.0 million, primarily reflecting a $3,053.4 million reduction in credit card and loan receivables. Financing activities used $2,911.6 million. Ending cash, cash equivalents and restricted cash totaled $5,451.1 million; cash and cash equivalents alone were $4,960.0 million.
- Balance sheet at June 30: Total assets were $22,867.4 million, total liabilities $21,712.8 million, and stockholders’ equity $1,154.6 million. Credit card and loan receivables, net, were $13,712.7 million, down from $18,292.0 million at year-end 2019; the allowance for loan losses was $2,096.3 million, versus $1,171.1 million.
- Funding and liquidity: Long-term and other debt totaled $3,228.1 million before issuance costs, including $400.0 million drawn on the revolving line of credit; $350.0 million of revolver capacity remained. Non-recourse securitization borrowings were $5,016.0 million, and deposits were $11,238.6 million. Management said available liquidity sources were expected to meet needs for at least 12 months, while warning that COVID-19 market volatility could limit or increase the cost of funding.
- Credit metrics: Q2 credit sales fell 36% year over year to $4,799.2 million. The net charge-off rate was 7.6%, versus 6.1%; delinquent principal was 4.3% of receivables at June 30, compared with 5.8% at December 31, 2019. Management noted forbearance could defer delinquency progression.
Material changes versus comparable periods
- Q2 revenue declined 27%, operating income 48%, net income 72%, and adjusted EBITDA, net 50%, year over year. For the first half, revenue declined 12%, net income 76%, and adjusted EBITDA, net 62%.
- Card Services revenue fell 24% in Q2, principally from lower receivables and finance-charge yield. LoyaltyOne revenue fell 40%, reflecting delayed short-term loyalty programs, reduced AIR MILES activity, and the Precima sale.
- Six-month provision for loan losses rose 78% to $906.0 million. The increase included the impact of adopting CECL and a weaker COVID-19 economic outlook. CECL adoption on January 1 increased the allowance by $644.0 million, recorded as a cumulative adjustment to retained earnings, net of tax.
- Cash increased from year-end, while total assets and receivables declined. Financing cash outflows included $2,280.0 million of net repayments and maturities of securitization borrowings and a $936.4 million decrease in deposits.
Outlook, management commentary, risks and unusual items
- Management said Card Services credit metrics performed better than expected in Q2; credit sales recovered from an April low as stores reopened, and payment trends were relatively stable for most cardholders. AIR MILES miles issued fell 26% and miles redeemed fell 42% in Q2; travel redemptions were particularly affected. Short-term loyalty programs were delayed.
- The company said it could not reasonably estimate COVID-19’s full financial impact, but expected adverse effects on future revenue growth and overall profitability. No specific earnings or revenue guidance was provided in the supplied filing.
- COVID-19 forbearance included payment deferrals and fee waivers for about $1.8 billion of balances enrolled through June 30; $534.8 million remained in deferred programs at quarter-end. Other short-term concession programs had $58.6 million of balances. The filing states these relief modifications for previously current borrowers were not treated as troubled debt restructurings.
- Q2 included $34.2 million of asset impairment charges, primarily deferred contract costs and right-of-use assets. The first half also included an $8.0 million net gain on the Precima sale. The effective tax rate was unusually low at 5.5% for the first half, primarily due to discrete tax benefits.
- The company suspended its stock repurchase program in April; $347.8 million of authorization expired unused. The quarterly dividend was reduced from $0.63 to $0.21 per share. A $0.21 dividend was declared in July for payment in September.
- Risks include further pandemic-related pressure on consumer spending, credit losses, loyalty redemptions and retail partners; funding-market access and cost; possible covenant or securitization stress; cyber and operational disruption; and foreign-exchange exposure. The company reported compliance with financial covenants at June 30.
- The company had recorded a $32.9 million, net-of-tax contingency in 2019 related to its indemnification of the Epsilon buyer for losses tied to a Department of Justice investigation; the estimate was unchanged at June 30, 2020. Regulatory approval for a proposed merger of Comenity Bank and Comenity Capital Bank remained pending.
Important facts for investors to verify
- Confirm the filing applies to the intended issuer: this document names Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review subsequent credit performance and allowance assumptions, including the effects of CECL forecasts, charge-offs, and temporary borrower relief.
- Track funding access, securitization maturities, deposit levels, and revolving-credit availability against the company’s 12-month liquidity assessment.
- Assess whether store reopening and loyalty-program activity recover sufficiently to offset lower finance-charge yield and delayed promotions.
- Monitor the DOJ investigation indemnity, the pending bank merger application, and any further changes to dividends or capital allocation.