Heartland Payment Systems Reports Record Second Quarter 2015 Adjusted Earnings Per Share of $0.72

PRINCETON, N.J.--()--Heartland Payment Systems, Inc. (NYSE: HPY), one of the nation's largest payment processors, today announced record second quarter Adjusted Net Income and Adjusted Earnings per Share of $27.1 million and $0.72, respectively, for the quarter ended June 30, 2015. Adjusted Net Income and Adjusted Earnings per Share were $21.0 million and $0.58, respectively, for the quarter ended June 30, 2014. For the second quarter of 2015, Heartland reported GAAP Net Income of $20.9 million, or $0.56 per share. Adjusted Net Income and Adjusted Earnings per Share are non-GAAP measures that are detailed later in this press release in the section “Reconciliation of Non-GAAP Financial Measures.”

Highlights for the second quarter of 2015 include:

  • Small and Mid-Sized Enterprise (SME) transaction processing volume was a quarterly record $23.8 billion, up 16.5% from the second quarter of 2014, the fourth consecutive quarter of double-digit acceleration
  • Quarterly Net Revenue was a record $203.9 million, up 27.9% from the second quarter of 2014, with organic net revenue growth of 12.5% for the quarter
  • New margin installed was an all-time record $23.9 million, a 14.6% increase from the second quarter of 2014, and a sequential acceleration from the 9.6% growth rate achieved in the first quarter of 2015
  • Same store sales were up 3.4%. Net volume attrition was 9.8% for the second quarter, down from 12.6% in the second quarter of 2014 and up only marginally from the first quarter of 2015

Operating results for the second quarter of 2015 include:

  • A $1.2 million operating loss (equivalent to $0.02 per share) for Leaf, which concludes losses related to this investment
  • Stock compensation expense of $5.1 million and acquisition-related intangible amortization of $5.1 million, increases of $1.4 million and $2.5 million, respectively, compared to the second quarter of 2014
  • Excluding acquisition-related intangible amortization, all other depreciation and amortization expense was $10.4 million, an increase of $2.0 million over the second quarter of 2014
  • Increases in sales compensation and general incentive compensation in the second quarter of 2015, both due to improved financial performance

Robert O. Carr, Chairman and CEO, said, "This was the most profitable quarter in Heartland's history, with major improvements in a number of our key operating metrics. The addition of productive new relationship managers contributed to another quarter of record new margin installed, and we not only accelerated the growth rate in installs, but in June also surpassed the $8 million mark for the first time ever. Combined with single-digit net volume attrition, we achieved double-digit card processing net revenue growth. Non-card revenues grew even faster, with acquisitions significantly enhancing the strong organic growth achieved in the quarter. We continued to heavily invest in strengthening security and ramping up marketing spend to drive future growth. With our momentum building, we are well-positioned to capitalize on the dynamic changes in our markets and create value for our shareholders."

SME card transaction processing volume growth for the quarter was 16.5% compared to the second quarter of 2014, the fifth consecutive quarter in which the rate of SME transaction processing volume growth accelerated, driven by new margin installs and improved net volume attrition. Core Visa and MasterCard volume processed in the quarter was up 12.0% compared to the second quarter of 2014, also sequentially accelerating growth from the first quarter of 2015.

Total non-card revenue growth was 75% for the quarter, of which over 20% was organic growth with the balance attributable to recent acquisitions.

The Adjusted Operating Margin for the second quarter of 2015 was 23.9%, up from the prior year second quarter, despite the continuing investments in Heartland Commerce, out-of-scope solutions, marketing, and security initiatives, and the year-over-year increase in sales and incentive compensation, as well as a final quarterly loss from Leaf. Comparatively, the prior year second quarter operating margin was also impacted by Leaf’s operating loss and the correction of a billing error at Heartland School Solutions as previously reported.

Mr. Carr continued, “We continued our investment in new growth initiatives and critical strategic areas. Heartland Commerce is at the heart of our strategy to help small-to-mid-size merchants use integrated point-of-sale technology to enhance their business operations. Over the past several months, we have achieved meaningful progress in our plans to integrate our point-of-sale technologies and organizations. With our ability to offer SMEs the same, if not better, functionality, security and EMV compliance currently only available to their larger rivals, Heartland Commerce is at the forefront of an emerging trend that is already beginning to shape the future of the payments industry."

FULL YEAR 2015 GUIDANCE:

For full year 2015, we expect Net Revenue to grow 18% to 20%, to between approximately $795 million and $805 million, and adjusted EPS to be in the range of $2.82 - $2.87. Guidance assumes after-tax share-based compensation and acquisition-related amortization expenses reduce earnings per share by $0.66 for the year and an approximate 39% tax rate.

BOARD DECLARES QUARTERLY DIVIDEND

The Company also announced that the Board of Directors declared a quarterly dividend of $0.10 per common share payable September 15, 2015 to shareholders of record on August 25, 2015.

CONFERENCE CALL

Heartland Payment Systems, Inc. will host a conference call on July 31, 2015 at 8:30 a.m. Eastern Time to discuss financial results and business highlights. Heartland Payment Systems invites all interested parties to listen to its conference call, broadcast through a webcast on the Company's website. To access the call, along with the related presentation slides, please visit the Investor Relations portion of the Company's website at: www.heartlandpaymentsystems.com/about/investor-relations. The conference call may be accessed by calling (888)-317-6003. Please provide the operator with PIN number 5336613. The webcast will be archived on the Company's website within two hours of the live call.

ABOUT HEARTLAND

Heartland Payment Systems, Inc. (NYSE: HPY), one of the largest payment processors in the United States, delivers credit/debit/prepaid card processing and security technology through Heartland Secure™ and its comprehensive Heartland breach warranty. Heartland also offers point of sale, mobile commerce, e-Commerce, marketing solutions, payroll solutions, and related business solutions and services to more than 400,000 business and educational locations nationwide.

A FORTUNE 1000 company, Heartland is the founding supporter of the Merchant Bill of Rights, a public advocacy initiative that educates merchants about fair credit and debit card processing practices. Heartland also established the Sales Professional Bill of Rights to advocate for the rights of sales professionals everywhere.

Forward-looking Statements

This press release contains statements of a forward-looking nature which represent our management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions and are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including risks and additional factors that are described in the Company's Securities and Exchange Commission filings, including but not limited to the Company's annual report on Form 10-K for the year ended December 31, 2014. We undertake no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

TABLES FOLLOW:

   

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

 

Three Months Ended
June 30,

Six Months Ended
June 30,
2015   2014 2015   2014
Total revenues $ 675,692   $ 582,859   $ 1,278,151   $ 1,106,142  
Costs of services:
Interchange 409,549 367,773 768,889 685,869
Dues, assessments and fees 62,267 55,686 115,042 105,354
Processing and servicing 82,673 67,048 160,410 135,657
Customer acquisition costs 14,735 12,368 28,783 22,618
Depreciation and amortization   11,168     6,679     21,841     12,491  
Total costs of services 580,392 509,554 1,094,965 961,989
General and administrative   56,872     43,374     114,996     87,860  
Total expenses   637,264     552,928     1,209,961     1,049,849  
Income from operations   38,428     29,931     68,190     56,293  
Other income (expense):
Interest income 28 30 53 62
Interest expense (3,884 ) (1,258 ) (7,531 ) (2,308 )
Other, net   (326 )   420     (300 )   288  
Total other expense   (4,182 )   (808 )   (7,778 )   (1,958 )
Income before income taxes 34,246 29,123 60,412 54,335
Provision for income taxes   13,340     12,552     22,268     22,852  
Net income 20,906 16,571 38,144 31,483

Less: Net loss attributable to noncontrolling interests

      (881 )       (1,709 )
Net income attributable to Heartland $ 20,906   $ 17,452   $ 38,144   $ 33,192  
 
Earnings per common share:
Basic $ 0.57 $ 0.49 $ 1.04 $ 0.91
Diluted $ 0.56 $ 0.48 $ 1.03 $ 0.89
 
Weighted average number of common shares outstanding:
Basic 36,620 35,936 36,527 36,350
Diluted 37,164 36,734 37,138 37,250
 
 

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)

 
 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

2015   2014 2015   2014
Net income $ 20,906 $ 16,571 $ 38,144 $ 31,483
Other comprehensive income:

Reclassification of gains on investments, net of income tax of $—, $103, $— and $103

(164 ) (164 )

Unrealized (losses) gains on investments, net of income tax of $(7), $1, $6 and $10

(17 ) 2 15 14

Unrealized gains on derivative financial instruments, net of income tax of $15, $27, $34 and $55

  24     48     56   95  
Comprehensive income 20,913 16,457 38,215 31,428
Less: Comprehensive loss attributable to noncontrolling interests       (881 )     (1,709 )
Comprehensive income attributable to Heartland $ 20,913   $ 17,338   $ 38,215 $ 33,137  
 
 

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)
   
June 30, December 31,
2015 2014
Assets
Current assets:
Cash and cash equivalents $ 50,566 $ 70,793
Funds held for customers 171,631 176,492
Receivables, net 271,288 234,104
Investments 110 106
Inventory 10,972 12,048
Prepaid expenses 22,790 22,658
Current tax assets 3,101 15,082
Current deferred tax assets, net 9,754   9,308  
Total current assets 540,212 540,591
Capitalized customer acquisition costs, net 78,640 73,107
Property and equipment, net 166,645 154,303
Goodwill 474,147 425,712
Intangible assets, net 202,053 192,553
Deposits and other assets, net 1,735   1,507  
Total assets $ 1,463,432   $ 1,387,773  
 
Liabilities and Equity
Current liabilities:
Due to sponsor banks $ 55,848 $ 31,165
Accounts payable 58,674 58,460
Customer fund deposits 171,631 176,492
Processing liabilities 120,516 119,398
Current portion of accrued buyout liability 16,386 15,023
Current portion of borrowings 36,779 36,792
Current portion of unearned revenue 50,692 46,601
Accrued expenses and other liabilities 44,164   41,517  
Total current liabilities 554,690 525,448
Deferred tax liabilities, net 54,868 45,804
Reserve for unrecognized tax benefits 8,160 7,315
Long-term borrowings 515,760 523,122
Long-term portion of accrued buyout liability 34,754 32,970
Long-term portion of unearned revenue 3,136   2,354  
Total liabilities 1,171,368   1,137,013  
Commitments and contingencies
 
Equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,704,141 and 36,344,921 shares issued and outstanding at June 30, 2015 and December 31, 2014 37 36
Additional paid-in capital 266,329 255,921
Accumulated other comprehensive loss (59 ) (130 )
Retained earnings (accumulated deficit) 25,757   (5,067 )
Total equity 292,064   250,760  
Total liabilities and equity $ 1,463,432   $ 1,387,773  
 
 

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)
 
Six Months Ended June 30,
2015   2014
Cash flows from operating activities
Net income $ 38,144 $ 31,483
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of capitalized customer acquisition costs 28,983 24,930
Other depreciation and amortization 30,197 20,854
Addition to loss reserves 1,769 2,057
Provision for doubtful receivables 2,706 2,003
Deferred taxes 2,758 7,260
Share-based compensation 9,711 7,542
Write off of fixed assets and other 1,047 220
Changes in operating assets and liabilities:
Increase in receivables (38,228 ) (14,197 )
Decrease in inventory 1,202 740
Payment of signing bonuses, net (21,387 ) (18,179 )
Increase in capitalized customer acquisition costs (13,129 ) (12,157 )
Decrease (increase) in current tax assets 16,945 (3,969 )
Increase in prepaid expenses, deposits and other assets (25 ) (2,488 )
Excess tax benefits on employee share-based compensation (5,006 ) (3,394 )
Increase in reserve for unrecognized tax benefits 845 1,106
Increase in due to sponsor banks 24,683 39,665
Decrease in accounts payable (1,344 ) (51 )
Increase (decrease) in unearned revenue 2,299 (13,785 )
Decrease in accrued expenses and other liabilities (7,299 ) (11,486 )
Decrease in processing liabilities (686 ) (25,821 )
Payouts of accrued buyout liability (9,782 ) (7,956 )
Increase in accrued buyout liability 12,929   9,845  
Net cash provided by operating activities 77,332   34,222  
 
Cash flows from investing activities
Purchase of investments (16,017 )
Sales of investments 2,215
Decrease in funds held for customers 51,135 9,736
(Decrease) increase in customer fund deposits (51,135 ) 4,073
Acquisitions of businesses, net of cash acquired (60,969 ) (20,493 )
Capital expenditures (29,157 ) (25,952 )
Net cash used in investing activities (90,126 ) (46,438 )
 
Cash flows from financing activities
Proceeds from borrowings 131,000 60,000
Principal payments on borrowings (138,375 ) (10,000 )
Proceeds from exercise of stock options 2,256 1,337
Excess tax benefits on employee share-based compensation 5,006 3,394
Repurchases of common stock (54,455 )
Dividends paid on common stock (7,320 ) (6,153 )
Net cash used in financing activities (7,433 ) (5,877 )
 
Net decrease in cash (20,227 ) (18,093 )
Cash at beginning of year 70,793   71,932  
Cash at end of period $ 50,566   $ 53,839  
 
 

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

To supplement its consolidated financial statements presented in accordance with accounting principles generally accepted in the United States (“GAAP”), the Company provides additional measures of its operating results on a continuing operations basis, namely income from operations, operating margin, net income and earnings per share, which exclude acquisition-related amortization expense and share-based compensation expense. These measures meet the definition of a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The Company believes that application of these non-GAAP financial measures is appropriate to enhance understanding of its historical performance, its performance relative to its competitors, as well as prospects for its future performance.
 
This press release contains non-GAAP financial measures. Pursuant to Regulation G, a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the three and six months ended June 30, 2015 and 2014 follows (in thousands except per share data):
       
Three Months Ended June 30, 2015 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from operations $ 38,428 $ 5,135 $ 5,062 $ 48,625
Operating margin (a) 18.8 % 23.9 %
Net income attributable to Heartland $ 20,906 $ 3,126 $ 3,082 $ 27,114
Diluted earnings per share $ 0.56 $ 0.08 $ 0.08 $ 0.72
Diluted shares used in computing earnings per share 37,164 37,164
 
Three Months Ended June 30, 2014 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from operations $ 29,931 $ 2,600 $ 3,704 $ 36,235
Operating margin (a) 18.8 % 22.7 %
Net income attributable to Heartland $ 17,452 $ 1,479 $ 2,108 $ 21,039
Diluted earnings per share $ 0.48 $ 0.04 $ 0.06 $ 0.58
Diluted shares used in computing earnings per share 36,734 36,734
 
Six Months Ended June 30, 2015 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from operations $ 68,190 $ 10,097 $ 9,711 $ 87,998
Operating margin (a) 17.3 % 22.3 %
Net income attributable to Heartland $ 38,144 $ 6,158 $ 5,922 $ 50,224
Diluted earnings per share $ 1.03 $ 0.17 $ 0.16 $ 1.36
Diluted shares used in computing earnings per share 37,138 37,138
 
Six Months Ended June 30, 2014 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from operations $ 56,293 $ 4,910 $ 7,542 $ 68,745
Operating margin (a) 17.9 % 21.8 %
Net income attributable to Heartland $ 33,192 $ 3,005 $ 4,378 $ 40,575
Diluted earnings per share $ 0.89 $ 0.08 $ 0.12 $ 1.09
Diluted shares used in computing earnings per share 37,250 37,250
 
(a) Operating margin is measured as Income from operations divided by Net revenue. Net revenue is defined as total revenues less interchange fees and dues, assessments and fees.
 

Contacts

Gregory FCA Communications
Joe Hassett, 610-228-2110
Heartland_ir@gregoryfca.com

Contacts

Gregory FCA Communications
Joe Hassett, 610-228-2110
Heartland_ir@gregoryfca.com