Business context and reporting period
This is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company reported three segments: LoyaltyOne, Epsilon and Card Services. The request metadata names Bread Financial Holdings, Inc.; that does not match the registrant identified in this filing.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,912.4 | $1,885.6 | $5,613.2 | $5,310.5 |
| Operating income | $478.9 | $421.0 | $1,182.8 | $1,085.8 |
| Net income | $233.2 | $207.5 | $517.4 | $507.0 |
| Diluted EPS | $4.20 | $3.55 | $9.23 | $7.12 |
| Adjusted EBITDA, net (non-GAAP) | $550.1 | $512.0 | $1,423.0 | $1,373.0 |
- Q3 revenue rose 1%; operating income rose 14% and net income rose 12%. Nine-month revenue rose 6%, operating income rose 9%, and net income rose 2%. Nine-month diluted EPS increased 30%, partly reflecting the prior-year $83.5 million accretion charge on the BrandLoyalty minority interest; excluding that item, management reported EPS growth of 8%.
- Calculated operating margin was approximately 25.0% in Q3 2017 versus 22.3% in Q3 2016; nine-month operating margin was approximately 21.1% versus 20.4%. Net margin was approximately 12.2% and 11.0% for the quarters, and 9.2% and 9.5% for the nine-month periods, respectively.
- Q3 revenue growth reflected Card Services finance charges, up 10%, and Services revenue, up 3%, partly offset by Redemption revenue, down 29%. For the nine months, finance charges rose 16%, Services rose 3%, and Redemption fell 23%.
- Provision for loan loss was $204.7 million in Q3, down 19% year over year, but $807.9 million for the nine months, up 24%. The allowance for loan loss was $1,033.8 million at September 30.
- Operating cash flow was $1,779.6 million for the nine months, versus $1,354.8 million a year earlier; investing cash outflow was $2,038.1 million and financing cash inflow was $1,723.1 million. Cash and cash equivalents were $3,326.0 million at period-end.
- At September 30, total assets were $27,894.1 million and stockholders’ equity was $1,593.6 million. Long-term and other debt was $6,242.6 million net of discounts and issuance costs; non-recourse securitization borrowings were $6,866.1 million net; and deposits were $10,374.0 million net.
- The company had $1,347.4 million available under its revolving credit facility and reported a 2.9-to-1 total leverage ratio against a 3.5-to-1 maximum covenant. It said it was in compliance with financial covenants. The banks were described as well-capitalized.
Material changes versus the prior comparable period
- Card Services was the principal growth driver: nine-month segment revenue increased 15% to $3,083.6 million and adjusted EBITDA, net increased 13% to $1,033.5 million. Average receivables grew 15% year over year for the nine-month period.
- LoyaltyOne weakened: nine-month revenue fell 16% and adjusted EBITDA, net fell 25%, reflecting AIR MILES breakage-rate changes, lower redemptions after prior-year planned mileage expirations, and short-term program timing.
- Epsilon’s nine-month revenue rose 5% to $1,631.8 million, while adjusted EBITDA, net was essentially flat at $316.8 million. Management cited product mix pressure.
- Credit quality indicators worsened year over year: total delinquent receivables were 5.4% of principal at September 30, versus 4.8% at December 31, 2016; 91-or-more-day delinquencies rose to 2.5% from 2.1%. Nine-month net principal charge-offs were 6.0% of average receivables versus 5.0%.
- Interest expense rose 34% in Q3 and 31% for the nine months, reflecting higher borrowings, rates and new senior notes. The company refinanced its credit agreement in June 2017 and issued €400 million of 4.5% senior notes due 2022.
Outlook, commentary, risks and unusual items
- Management expected full-year 2017 Epsilon revenue and adjusted EBITDA growth of 4%, and double-digit Card Services revenue and adjusted EBITDA, net growth. It expected Card Services delinquencies to be at least flat year over year and gross losses to improve in Q4.
- For AIR MILES, management expected 2017 burn rate of approximately 80%, fourth-quarter issuance growth, and improving adjusted EBITDA margins trending toward the mid-20% range. The program remained affected by the change in breakage rate from 26% to 20%.
- BrandLoyalty results were soft year to date. Management expected Q4 major program launches and double-digit quarterly revenue and adjusted EBITDA growth, but anticipated a negative contribution to segment and consolidated full-year 2017 results.
- Hurricane-related two-month leniency for affected cardholders depressed Q3 credit sales and gross yields and was expected to continue into Q4.
- After quarter-end, the company acquired Signet Jewelers’ credit card receivables and associated accounts for preliminary consideration of $960.2 million and became the primary private-label card issuer and related marketing-services provider under a long-term agreement. Purchase price allocation was not finalized.
- Other notable capital actions: the company repurchased 2.3 million shares for $553.7 million during the nine months and paid $86.8 million in dividends. The board authorized a total $1.0 billion repurchase program; $446.3 million remained at September 30. A quarterly dividend of $0.52 per share was declared in October.
- Key stated risks include higher credit losses and funding costs, access to securitization markets, client demand, AIR MILES redemptions and collector activity, acquisition integration, foreign exchange, regulatory changes, and cyber or service disruption. Management said there had been no material change to previously disclosed risk factors and that disclosure controls were effective.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Track delinquency and charge-off trends, allowance adequacy, and whether management’s expected Q4 gross-loss improvement materialized.
- Assess funding and refinancing exposure, including the $1.9 billion of securitization borrowings classified as current, revolving facility availability, deposit funding costs and covenant headroom.
- Evaluate whether segment outlooks were achieved, particularly AIR MILES recovery, BrandLoyalty’s full-year drag and Epsilon’s growth and margins.
- Review the final Signet purchase price allocation, integration and subsequent portfolio performance, and distinguish reported GAAP results from non-GAAP adjusted EBITDA measures.