Business context and reporting period
Alliance Data Systems Corporation (not Bread Financial Holdings, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2012. Its businesses were LoyaltyOne (AIR MILES), Epsilon (marketing services and technology), and Private Label Services and Credit (retail credit-card programs).
Financial performance and position
Unless otherwise stated, figures are in U.S. dollars; financial statement amounts are in millions.
| Metric | Q1 2012 | Q1 2011 / prior date | Change |
|---|---|---|---|
| Revenue | $891.6 | $740.4 | +20.4% |
| Operating income | $252.6 | $211.9 | +19.2% |
| Net income | $115.2 | $86.4 | +33.4% |
| Diluted earnings per share | $1.86 | $1.56 | +19.2% |
| Adjusted EBITDA (non-GAAP) | $303.6 | $256.4 | +18.4% |
| Adjusted EBITDA margin | 34.1% | 34.6% | -0.5 percentage points |
| Cash from operating activities | $239.6 | $210.4 | +$29.2 |
| Cash and cash equivalents, March 31 | $399.0 | $216.2 at Dec. 31, 2011 | +$182.8 |
Credit quality improved: delinquent principal was 4.0% of receivables versus 4.9% a year earlier; the net charge-off rate was 5.3% versus 7.9%. Average credit-card receivables grew 7.1%, and credit sales rose 20.0%.
At March 31, total debt-like balances comprised $1.288 billion in deposits, $2.910 billion in asset-backed securities debt, and $2.429 billion in long-term and other debt. The company had $902.5 million available on its credit facility, $2.8 billion of bank-subsidiary liquidity, and a core debt-to-adjusted-EBITDA covenant ratio of 2.3x versus a 3.5x maximum. It reported covenant compliance.
Material changes versus the prior comparable period
- Revenue growth reflected Aspen, acquired in May 2011, higher AIR MILES redemptions, and stronger credit-card finance charges. Aspen contributed $65.2 million to Epsilon revenue.
- Net income and operating income increased, while overall adjusted EBITDA margin edged down. Epsilon’s margin fell to 17.5% from 21.6%, partly due to acquisition-related mix and infrastructure spending; Private Label Services and Credit’s margin rose to 55.1% from 49.7%.
- Loan-loss provision declined to $49.3 million from $67.7 million as charge-offs and delinquencies improved.
- In March, the company issued $500 million of 6.375% senior notes due 2020 and amended its credit agreement, increasing revolving commitments to $917.5 million and term loans by $125.5 million. Long-term and other debt rose to $2.429 billion from $2.183 billion at year-end.
- Investing cash inflow was $134.8 million, down from $258.7 million, including a $97.7 million Pier 1 Imports credit-card portfolio acquisition and seasonal receivables paydown.
Outlook, commentary, risks and unusual items
- Management expected AIR MILES redemption growth to moderate to low-single-digit year-over-year rates for the rest of 2012, following a 26.4% first-quarter increase stimulated by the five-year expiry policy. Issuance growth was expected in the mid-single digits.
- Management expected about $15 million of 2012 losses from international initiatives and capital expenditures not to exceed approximately 3.5% of annual revenue. It stated liquidity would be sufficient for at least the next 12 months.
- Management noted securitization funding commitments may be short-term and subject to renewal; future availability or terms are not assured. $1.4 billion of asset-backed securities debt was current within 12 months. An asset-performance-triggered early amortization event could restrict further securitizations.
- An April 2012 subsequent event was a $550 million seven-year asset-backed securities issuance; $412.5 million of Class A notes were sold at 3.14%, with other classes retained by the company.
- The filing reported ordinary-course legal claims that management did not believe would materially affect the business or financial condition, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; Aspen was excluded from the quarter-end internal-control evaluation because of acquisition timing.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Review the sustainability of credit-quality improvement and the effects of receivables growth, charge-offs, and the Pier 1 portfolio acquisition.
- Assess refinancing and renewal exposure for securitization facilities and near-term maturities, alongside the company’s reported liquidity and covenant headroom.
- Distinguish GAAP results from adjusted EBITDA, a company-defined non-GAAP measure, and evaluate acquisition-related costs and margin effects.
- Track whether AIR MILES redemption activity normalizes as management expected and whether international initiatives incur the forecast losses.