BREAD FINANCIAL HOLDINGS, INC. quarterly report, Q3 FY2014

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SEC Filing Summary

Important identity discrepancy: The request identifies Bread Financial Holdings, Inc., but the supplied filing is Alliance Data Systems Corporation’s Form 10-Q. The summary below describes the filing actually provided and should not be attributed to Bread Financial without verification.

Business context and reporting period

Alliance Data Systems Corporation filed this unaudited quarterly report for the quarter ended September 30, 2014, comparing the third quarter and first nine months of 2014 with the corresponding 2013 periods. Its reportable segments were LoyaltyOne, Epsilon, and Private Label Services and Credit. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.

Financial performance and position

  • Third quarter: Revenue was $1,319.1 million, up 20.3%; operating income was $321.6 million, up 11.4%; net income was $164.9 million, up 24.1%. Net income attributable to Alliance Data stockholders was $164.2 million. Basic and diluted EPS were $2.84 and $2.74, respectively.
  • First nine months: Revenue was $3,817.2 million, up 20.1%; operating income was $886.0 million, up 4.3%; net income was $439.9 million, up 16.3%. Net income attributable to Alliance Data stockholders was $439.1 million. Basic and diluted EPS were $7.98 and $6.98, respectively.
  • Margins: Third-quarter operating margin was approximately 24.4% versus 26.3% a year earlier; net margin was approximately 12.5% versus 12.1%. Nine-month operating margin was approximately 23.2% versus 26.7%; net margin was approximately 11.5% versus 11.9%.
  • Non-GAAP measure: Adjusted EBITDA, net was $376.0 million for the quarter, up 14.5%, and $1,042.5 million for the nine months, up 8.6%. The company cautions that this measure is not a substitute for GAAP results or operating cash flow.
  • Cash flow: Operating cash flow was $968.0 million for the first nine months, compared with $798.8 million in 2013. Investing activities used $1,862.8 million, principally reflecting receivables growth, credit-card portfolio purchases, the BrandLoyalty acquisition, and capital spending. Financing activities provided $564.8 million. Cash and cash equivalents fell to $634.8 million from $969.8 million at year-end 2013.
  • Liquidity and balance sheet: Total assets were $15,193.3 million and total liabilities were $13,795.2 million at September 30. Net credit-card and loan receivables were $8,783.5 million, against an allowance for loan losses of $511.4 million. The balance sheet reported $2,957.0 million of long-term and other debt, $4,451.9 million of non-recourse securitization borrowings, and $3,727.8 million of deposits. These funding categories have different purposes and recourse characteristics.
  • Credit quality: Delinquencies were 4.4% of principal receivables at September 30, versus 4.5% a year earlier and 4.2% at December 31, 2013. The nine-month principal net charge-off rate was 4.4%, compared with 4.5% in 2013. The nine-month provision for loan losses increased 30.8% to $281.8 million.

Material changes versus the prior comparable period

  • BrandLoyalty, acquired on January 2, 2014, contributed $358.8 million of nine-month revenue and $36.6 million of adjusted EBITDA, net to LoyaltyOne. The company acquired a 60% interest; the remaining 40% is subject to staged purchase rights and seller put options.
  • Private Label Services and Credit grew on higher card spending, new client signings, and an 18.2% increase in average receivables over the first nine months. Credit sales rose 20.9%.
  • Epsilon’s nine-month revenue rose 7.6%, with growth across marketing technology, agency, and data products.
  • A weaker Canadian dollar reduced nine-month LoyaltyOne revenue by $44.3 million and adjusted EBITDA, net by $11.9 million, according to management.
  • Operating expenses grew faster than revenue for the first nine months, including higher loan-loss provision, operating costs, and purchased-intangible amortization. Lower interest expense partly offset these pressures.
  • The company issued $600 million of 5.375% senior notes due 2022 in July and repaid its 2014 convertible notes in May. It repurchased $217.5 million of its shares during the first nine months.

Outlook, commentary, risks, and unusual items

  • Management expected low-single-digit AIR MILES issuance growth for 2014, citing sponsor promotional activity and AIR MILES Cash initiatives. Issuance had declined 2.8% and redemptions had increased 5.5% in the first nine months.
  • The company said internally generated funds and other liquidity sources were expected to cover working capital, capital expenditures, the BrandLoyalty contingent liability, and the pending Conversant acquisition for at least 12 months. It anticipated capital expenditures at approximately 3% or less of annual revenue.
  • Alliance Data agreed to acquire Conversant for consideration estimated at approximately $2.3 billion based on the September 30 share price. Closing remained subject to customary conditions, including stockholder and regulatory approvals; completion was not assured.
  • A November 3, 2014 commitment letter contemplated a $1.1 billion five-year incremental term loan and extensions of certain existing credit maturities. The proposed financing was conditional and not assured.
  • The company reported compliance with debt covenants at September 30. Its revolving credit facility had $1.18 billion available; the reported total leverage ratio was 2.1 to 1 against a maximum covenant of 3.5 to 1.
  • Key risks include access to securitization markets and credit enhancements, renewal of short-term funding commitments, potential early amortization triggers, changing regulation of asset-backed securities, consumer credit losses, foreign-exchange movements, and execution and financing of the Conversant transaction.
  • The BrandLoyalty earn-out liability was valued at $229.8 million at September 30 and could change with estimated earnings, net debt, currency rates, and valuation assumptions. BrandLoyalty was excluded from the quarter-end internal-control effectiveness evaluation because of acquisition timing, although management concluded disclosure controls were effective.

Most important facts for investors to verify

  • Confirm whether the intended filing is Alliance Data Systems Corporation’s 2014 Q3 10-Q or a filing for Bread Financial Holdings, Inc.; the supplied issuer and requested company do not match.
  • Review the source filing’s EPS presentation and share-count effects from convertible-note and warrant settlements.
  • Assess credit quality and loss trends against the rapid growth in receivables, including delinquency migration, charge-offs, and allowance adequacy.
  • Verify funding availability, securitization renewals and maturities, and the conditions and completion of the proposed incremental loan and credit-agreement extensions.
  • Track Conversant merger approvals, final consideration, financing needs, and the BrandLoyalty earn-out and remaining ownership obligations.