Business context and reporting period
The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015, filed August 6, 2015. It is not a filing by Bread Financial Holdings, Inc. Alliance Data reported three segments: LoyaltyOne, Epsilon, and Card Services.
Financial results and key metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,500.6 | $1,265.2 | $3,101.8 | $2,498.1 |
| Operating income | $285.7 | $282.5 | $610.3 | $564.3 |
| Net income | $130.0 | $139.2 | $294.9 | $274.9 |
| Net income attributable to common stockholders | $131.3 | $137.4 | $293.9 | $274.8 |
| Diluted EPS | $2.11 | $2.19 | $4.43 | $4.27 |
| Operating margin | 19.0% | 22.3% | 19.7% | 22.6% |
| Net margin | 8.7% | 11.0% | 9.5% | 11.0% |
| Adjusted EBITDA, net (non-GAAP) | $392.5 | $332.0 | $822.8 | $666.5 |
- Revenue drivers: In the first half, finance charges, net rose 27% to $1,363.4 million and marketing-services revenue rose 40% to $936.6 million. Redemption revenue increased 3% to $526.3 million.
- Credit metrics: Average credit card and loan receivables grew 33% to $10,771.8 million for the first half; credit sales rose 35% to $10,968.5 million. The loan-loss provision increased 74% to $290.3 million. First-half net charge-offs were $241.6 million, or 4.5% of average receivables, versus 4.6% a year earlier; total delinquency was 4.1% at June 30 versus 4.0% at year-end 2014.
- Cash flow: First-half operating cash flow was $563.8 million, versus $587.8 million. Investing activities used $339.3 million and financing activities used $463.0 million. Capital expenditures were $88.1 million; operating cash flow less capital expenditures was approximately $475.7 million. Cash and cash equivalents fell to $822.3 million from $1,077.2 million at year-end.
- Debt and funding: At June 30, long-term and other debt was $4,849.9 million, securitization borrowings were $5,223.2 million, and deposits were $4,578.3 million. These are distinct funding categories; securitization debt is non-recourse. The company had $586.0 million available under its revolving credit facility and $2.1 billion of conduit capacity, of which $1.4 billion was drawn. It reported compliance with debt covenants.
- Liquidity and capital: Management said available funding and internally generated cash should meet working-capital, capital-expenditure, and other business needs for at least 12 months. The two bank subsidiaries were considered well capitalized. The filing does not provide a conventional current ratio or a single undifferentiated total-debt measure.
Material changes versus the prior comparable period
- Q2 revenue increased 19%, but operating income grew only 1%; net income fell 7%. Higher operating expenses, loan-loss provision, amortization, and interest expense offset much of the revenue growth. First-half revenue rose 24%, operating income 8%, and net income 7%.
- Conversant, acquired in December 2014, contributed $261.0 million of Epsilon revenue and $87.7 million of Epsilon adjusted EBITDA, net in the first half. Epsilon’s reported first-half revenue rose 42% and adjusted EBITDA, net rose 76%.
- Card Services first-half revenue rose 27% and adjusted EBITDA, net rose 17%, supported by portfolio growth and cardholder spending, alongside higher loan-loss provisions and operating costs.
- LoyaltyOne first-half revenue was nearly flat and adjusted EBITDA, net declined 7%. Currency movements reduced revenue by approximately $115.3 million and adjusted EBITDA, net by $19.0 million; excluding currency effects, management reported growth in both measures.
- The company repurchased 2.45 million shares for $698.7 million in the first half, including unsettled purchases. The 2015 repurchase authorization was increased to $1.0 billion; $301.3 million remained available at June 30.
Outlook, commentary, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is stated in the supplied filing. Management expected capital expenditures not to exceed 3% of annual revenue and stated liquidity should be sufficient for at least 12 months.
- Credit and funding risks: Management identified credit, interest-rate, foreign-exchange, and redemption-reward risks. Some securitization and conduit commitments are short-term and require renewal; renewal on similar terms or at all is not assured. An early-amortization event could restrict the ability to securitize additional receivables.
- Regulatory contingency: The FDIC notified Comenity Bank and Comenity Capital Bank that it planned to pursue an enforcement action regarding certain credit-card add-on products. Potential outcomes could include penalties, restitution, and business-practice changes. The company said it could not estimate a loss.
- Acquisition-related cash use: In February 2015, the company paid $305.5 million to settle BrandLoyalty contingent consideration and $87.4 million to acquire an additional 10% interest, bringing ownership to 70%.
- Accounting and presentation: The filing describes the financial statements as unaudited and notes interim results are not necessarily indicative of full-year results. Adjusted EBITDA, net is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review the full filing’s segment and acquisition disclosures to distinguish underlying growth from Conversant’s contribution and foreign-exchange effects.
- Assess the sharp increase in loan-loss provision against receivables growth, loss rates, delinquencies, and portfolio seasoning.
- Verify securitization maturities, conduit renewals, undrawn capacity, and the distinction between corporate debt, non-recourse borrowings, and deposits.
- Monitor the FDIC matter and any resulting estimates, proceedings, or customer-remediation obligations.
- Reconcile share repurchases, reported EPS, and non-GAAP adjusted EBITDA, net to the underlying cash-flow and GAAP statements.