Business context and reporting period
The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2019, filed August 6, 2019. This does not match the request metadata naming Bread Financial Holdings, Inc.; the summary below follows the filing itself. Epsilon is presented as a discontinued operation, leaving LoyaltyOne and Card Services as the continuing reportable segments.
Financial results and key metrics
Amounts are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2018 period.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,348.5 | $1,397.2 | $2,682.7 | $2,778.9 |
| Operating income | $337.3 | $396.7 | $694.2 | $768.9 |
| Continuing-operations income | $142.4 | $223.8 | $320.7 | $403.7 |
| Net income | $139.0 | $217.8 | $288.1 | $381.8 |
| Diluted EPS | $2.64 | $3.93 | $5.45 | $6.87 |
| Adjusted EBITDA, net (non-GAAP) | $309.6 | $365.3 | $626.2 | $712.3 |
Q2 operating margin was approximately 25.0% versus 28.4%; six-month operating margin was approximately 25.9% versus 27.7%. These percentages are calculated from reported revenue and operating income. Q2 continuing-operations income margin was approximately 10.6% versus 16.0%.
- Revenue drivers: Q2 finance charges, net, decreased 2% to $1,128.4, while services revenue fell 35% to $66.4. Six-month finance charges, net, declined 1% to $2,277.5 and services revenue fell 29% to $139.7.
- Costs and credit: Q2 cost of operations increased 10% to $654.8, including higher credit-card portfolio valuation adjustments and processing costs. Provision for loan losses fell 17% to $257.3. Six-month provision fell 22% to $509.5.
- Cash flow: Six-month operating cash flow was $1,089.7, versus $1,321.8; investing used $514.3, versus $236.2; financing used $396.6, versus $1,869.0. Cash, cash equivalents and restricted cash ended at $4,154.7, compared with $3,527.2 at June 30, 2018.
- Balance sheet and funding: At June 30, cash and cash equivalents were $4,026.8; total assets $30,739.7; and stockholders’ equity $2,391.7. Long-term and other debt was $5,858.8 before issuance costs and current classification; non-recourse securitization borrowings were $6,739.5; and deposits totaled $12,562.3. Revolver availability was $667.4. The company reported compliance with its financial covenants.
- Portfolio indicators: Credit-card and loan receivables, net, were $16,603.6. Delinquencies of 31 days or more were 5.2% of principal receivables, down from 5.7% at year-end 2018. Net charge-offs were 6.1% of average receivables in Q2 and 6.3% year to date, compared with 6.4% and 6.6%, respectively, in 2018.
Material changes versus prior period
- Q2 revenue decreased 3%, operating income 15%, continuing-operations income 36%, and net income 36%. For the first six months, revenue decreased 3%, operating income 10%, continuing-operations income 21%, and net income 25%.
- Adjusted EBITDA, net declined 15% in Q2 and 12% for the first six months. Card Services and LoyaltyOne both reported lower adjusted EBITDA, net for these periods.
- Interest expense, net rose 7% in Q2 and 10% year to date, with higher deposit interest costs a principal factor. The company cited lower finance-charge yields and reduced merchant fee revenue as revenue headwinds.
- The filing recasts Epsilon as discontinued operations. Its sale to Publicis Groupe for $4.4 billion cash closed July 1, 2019, after quarter-end.
Outlook, commentary, risks and unusual items
- Management stated that internal funds and other liquidity sources should meet working capital, capital expenditure and other business needs for at least the next 12 months. The filing provides no clear numerical earnings guidance in the supplied text.
- Following the Epsilon sale, the company used proceeds in July to repay $1.9 billion of senior notes and make a $500 million revolving-credit repayment. It expected an approximately $71.3 million debt-extinguishment loss.
- The April credit-agreement amendment, effective upon the Epsilon sale, shortened facility maturity by one year to June 2021, required the $500 million revolver repayment and senior-note redemption, and reduced revolving commitments to $1,072.4 million.
- Capital allocation included $222.8 million of share repurchases and $67.0 million of dividends paid during the first half. In July, the board authorized repurchases of up to $1.1 billion; the company also announced a tender offer of up to $750 million, subject to its stated terms.
- Unusual costs included $22.4 million of Q2 corporate restructuring charges related to the Epsilon sale and $7.9 million of first-quarter BrandLoyalty restructuring charges. The filing said further restructuring costs could arise from lease-space and contract reviews.
- Disclosed risks include higher credit losses or funding costs, reduced demand from significant clients, limited access to securitization funding, AIR MILES collector and redemption trends, foreign-exchange movements, consumer-protection and privacy regulation, and cyber or service disruptions. An ongoing Canadian tax audit could result in a decrease of up to approximately $35 million in unrecognized tax benefits within 12 months.
Most important facts for investors to verify
- Confirm the filing entity: this document is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review the completed Epsilon sale’s final adjustments, proceeds and use of cash, including debt repayment and the expected extinguishment loss.
- Track credit quality, finance-charge yield, portfolio-sale valuation adjustments and funding costs, which influenced current-period performance.
- Assess the scale and execution of the new repurchase authorization and tender offer alongside remaining debt, liquidity and regulatory capital requirements.