Filing identity and reporting period
Important: The supplied filing is Alliance Data Systems Corporation’s (ADS) Form 10-Q for the quarter ended March 31, 2019—not a filing by Bread Financial Holdings, Inc. This summary therefore covers ADS.
ADS reported LoyaltyOne and Card Services as continuing operations; Epsilon was presented as a discontinued operation. The financial statements are unaudited.
Financial performance and position
- Revenue: $1.334 billion, down 3% from $1.382 billion in Q1 2018. Continuing-operations operating income was $356.9 million, down 4%; operating margin was approximately 26.8%, versus 26.9%.
- Profit: Continuing-operations income was $174.3 million, versus $176.5 million. Net income was $149.1 million, down 9%, including a $25.2 million after-tax loss from discontinued operations (prior-year loss: $12.6 million). Diluted EPS was $2.80, versus $2.95; continuing-operations diluted EPS was $3.28, versus $3.17.
- Segment measure: Adjusted EBITDA, net, a non-GAAP measure, was $316.5 million, down 9%. Card Services contributed $294.9 million (down 7%); LoyaltyOne contributed $55.1 million (up 2%); Corporate/Other was a loss of $33.5 million.
- Credit and portfolio: Provision for loan losses fell 25% to $252.1 million. Net charge-offs were $269.3 million, or 6.4% of average receivables, versus $296.1 million and 6.7%. Delinquent principal was 5.2% of receivables, versus 5.7% at December 31, 2018. Credit card and loan receivables, net, were $15.829 billion at quarter-end.
- Cash flow: Operating cash flow was $610.8 million, versus $649.9 million; investing cash flow provided $717.5 million; financing activities used $1.483 billion. Cash, cash equivalents and restricted cash totaled $3.816 billion at quarter-end, compared with $4.142 billion a year earlier. Cash flows include discontinued operations.
- Debt and funding: Long-term and other debt was $5.917 billion before unamortized issuance costs and current classification; deposits totaled $11.317 billion; non-recourse securitization borrowings were $6.788 billion. Revolver borrowings were $945 million, with $627.4 million available. The company reported compliance with financial covenants and a 2.4-to-1 leverage ratio against a 3.5-to-1 maximum.
- Capital and liquidity: Stockholders’ equity was $2.240 billion. The company repurchased 1.3 million shares for $222.8 million and paid $33.9 million in dividends. Management said available liquidity sources were expected to meet needs for at least 12 months.
Material changes and management commentary
- Revenue declined as services and redemption revenue fell; finance-charge revenue was also slightly lower. LoyaltyOne revenue decreased 10%, while Card Services revenue decreased 2%.
- Card Services’ adjusted EBITDA, net, was pressured by higher funding costs, lower finance charges and lower gross yields. Interest expense increased 13% to $149.5 million, including higher deposit and securitization funding costs.
- Management attributed the lower loan-loss provision primarily to lower net charge-offs and a decrease in the change in receivables. Credit sales and statements generated each declined 7% year over year.
- The effective tax rate on continuing operations fell to 16.0% from 26.6%, primarily because of a decrease in tax reserves following a change in tax accounting method.
- ADS recorded $7.9 million of restructuring charges for the wind-down of BrandLoyalty’s Merison division; management said these costs were not expected to continue into Q2.
Outlook, transactions and risks
- No specific earnings or revenue guidance is provided. On April 12, 2019, after quarter-end, ADS agreed to sell Epsilon to Publicis Groupe for $4.4 billion in cash, subject to adjustments, closing conditions and regulatory approvals. Closing was expected in Q3 2019. Management expected net proceeds after taxes and fees to repay corporate debt and fund share repurchases.
- An April 30 credit-agreement amendment, also after quarter-end, provides that upon the Epsilon sale closing, the agreement’s maturity would move forward one year to June 2021, $500 million of revolving borrowings would be mandatorily repaid, revolving commitments would be reduced by the same amount, and outstanding senior notes would be redeemed.
- Epsilon’s Q1 revenue was $507.8 million and its after-tax loss was $25.2 million. The loss included $5.0 million of strategic transaction costs and allocated interest expense.
- Key disclosed risks include higher credit losses, client demand reductions, inability to access securitization funding, interest-rate and currency movements, AIR MILES redemptions or collector attrition, regulatory changes, cyber or service disruptions, and failure to complete the Epsilon sale or satisfy its conditions.
- Other notable items: ADS adopted lease accounting on January 1, 2019, recording operating lease liabilities of approximately $324.5 million at adoption, with no material expected effect on earnings or cash flows. In April, it created non-voting convertible preferred stock and ValueAct exchanged 1.5 million common shares for 150,000 preferred shares.
Investor verification checklist
- Confirm the issuer and ticker: the supplied filing identifies Alliance Data Systems Corporation (ADS), not Bread Financial Holdings, Inc.
- Track completion terms, net proceeds and actual debt repayment and repurchases from the Epsilon sale; the transaction was pending when the filing was signed.
- Review subsequent credit performance, receivables trends, portfolio-sale valuation adjustments and funding costs.
- Assess the effect of the amended credit agreement, upcoming maturities, deposit funding and securitization capacity.
- Reconcile continuing-operations results with discontinued Epsilon results and note that reported cash flows combine both.