Business context and reporting period
Entity discrepancy: The request identifies Bread Financial Holdings, Inc., but the supplied Form 10-Q is for Alliance Data Systems Corporation. This summary covers Alliance Data Systems’ unaudited quarter and six months ended June 30, 2018; the filing was signed August 7, 2018.
The company operated through LoyaltyOne (loyalty programs), Epsilon (marketing services), and Card Services (private-label and co-brand credit cards). Financial amounts below are in millions of dollars unless otherwise stated.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,903.9 | $1,821.8 | $3,788.1 | $3,700.8 |
| Operating income | $420.3 | $351.4 | $798.1 | $703.8 |
| Net income | $217.8 | $137.7 | $381.8 | $284.1 |
| Diluted EPS | $3.93 | $2.47 | $6.87 | $5.05 |
| Adjusted EBITDA, net (non-GAAP) | $471.1 | $433.4 | $908.5 | $872.9 |
Q2 revenue increased 5%, operating income 20%, net income 58%, and adjusted EBITDA, net 9% year over year. For the first half, revenue rose 2% (6% on management’s ASC 606-adjusted presentation), net income rose 34%, and adjusted EBITDA, net rose 4%. Lower effective taxes materially supported net income growth.
- Revenue mix: Q2 finance charges, net rose 13% to $1,146.9, while services fell 3% to $609.5 and net redemption revenue fell 20% to $147.5. First-half finance charges rose 14% to $2,304.1; services declined 3% to $1,204.6 and redemption revenue declined 36% to $279.4.
- Credit costs: Provision for loan loss was $311.9 in Q2, up 8%, and $649.6 for the half, up 8%. Net charge-offs of principal were $282.0 in Q2 and $578.1 in the half; reported charge-off rates were 6.4% and 6.6%, respectively, versus 6.2% and 6.3% in 2017. Delinquencies of 31 days or more were 5.5% of principal receivables at June 30, versus 5.1% at December 31, 2017.
- Cash flow: First-half operating cash flow was $1,321.8, compared with $1,022.6; investing cash use was $236.2, compared with $561.0; financing cash use was $1,869.0, versus cash provided of $73.1. Cash, cash equivalents and restricted cash ended at $3,527.2, down $787.5 during the half. Capital expenditures were $98.5.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $3,449.2; total assets $28,950.9; total liabilities $26,831.6; and stockholders’ equity $2,119.3. Credit card and loan receivables, net, were $16,795.9. Long-term and other debt was $5,836.4 before discounts and current portion; non-recourse securitization borrowings were $7,784.7 before discounts and current portion; deposits totaled $10,582.2. The company reported $820.4 of revolving-credit availability and $4.5 billion of securitization conduit capacity, of which $2.9 billion was drawn. Management said liquidity sources should meet requirements for at least 12 months. The company was in covenant compliance; its leverage ratio was 2.5-to-1 against a 3.5-to-1 maximum.
Material changes versus the prior comparable period
- Card Services drove growth: first-half segment revenue rose 14% to $2,303.7, reflecting portfolio acquisitions and higher cardholder spending. Average card and loan receivables increased 12% year over year to $17,646.4 for the half.
- LoyaltyOne first-half revenue declined 23% to $474.9, and Epsilon revenue declined 5% to $1,023.6. Epsilon weakness reflected declines in lower-margin agency and site-based display products.
- ASC 606 adoption reduced reported redemption revenue and cost of operations by $144.9 for the half ($66.3 in Q2) because certain rewards revenue is now presented net. Management said adjusted for this presentation, first-half revenue was $3.9 billion and growth was 6%; adoption had no material effect on consolidated operating results or cash flows.
- First-half interest expense, net rose 24% to $324.9, including higher securitization funding and deposit costs. Loan-loss provision also increased 8%, while the effective tax rate fell to 19.3% from 35.6%.
- Cash returned to shareholders included $99.2 of share repurchases and $63.3 of dividends during the half. A new authorization of up to $500 million of repurchases, effective August 1, 2018 through July 31, 2019, was approved after quarter-end.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided in the supplied filing. Management stated it expects internal funds and other liquidity sources to cover working capital, capital expenditures and other business requirements for at least the next 12 months.
- Management attributed higher Card Services revenue to larger receivables and strong cardholder spending, while noting a decline in yield. Higher net charge-offs, collections-related staffing and marketing costs, and increased funding costs offset part of the segment’s gains.
- Tax expense benefited from the lower federal statutory rate under 2017 tax reform and a current-year foreign restructuring benefit; the filing also cites an offsetting impact from the Supreme Court’s South Dakota v. Wayfair decision.
- In April, the company redeemed $500 million of 6.375% notes due 2020 using revolving-credit borrowings. It also sold a credit card portfolio in June for preliminary proceeds of $55.6 million and recorded a de minimis gain. Valuation adjustments on portfolios held for sale were $14.2 million in Q2 and $35.9 million for the half.
- Key stated risks include higher credit losses and interest costs, reduced access to securitization funding, loss of significant clients or AIR MILES collectors, increased reward redemptions, foreign-exchange changes, regulatory and privacy constraints, and cyber or service disruptions. The filing reported no material change to previously disclosed risk factors and described ordinary-course legal claims as not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Track delinquency and charge-off trends, allowance adequacy, and whether credit costs continue to rise relative to receivables and finance-charge growth.
- Review upcoming debt and securitization maturities, conduit renewal and availability, deposit funding trends, interest-rate exposure, and covenant headroom.
- Assess whether Card Services growth offsets continued weakness in LoyaltyOne and Epsilon, and distinguish reported revenue changes caused by ASC 606 presentation from underlying performance.
- Monitor held-for-sale portfolio valuation adjustments, tax-rate sustainability, and the capital allocation impact of the new repurchase authorization and dividends.