Heartland Payment Systems Reports 22% Increase in Fourth Quarter and Full Year Adjusted Earnings Per Share

Full Year GAAP Earnings a Record $1.96 Per Share

PRINCETON, N.J.--()--Heartland Payment Systems, Inc. (NYSE: HPY), one of the nation's largest payment processors, today announced Adjusted Net Income and Adjusted Earnings per share from continuing operations of $20.5 million and $0.55 per share, respectively, for the quarter ended December 31, 2013. Adjusted Net Income and Adjusted Earnings per share from continuing operations were $17.7 million and $0.45, respectively, for the quarter ended December 31, 2012. GAAP net income was $17.4 million, or $0.46 per share, for the three months ended December 31, 2013. Adjusted Net Income and Adjusted Earnings per share from continuing operations are non-GAAP measures that are detailed later in this press release in the section “Reconciliation of Non-GAAP Financial Measures.”

Highlights for the fourth quarter of 2013 include:

  • Same store sales rose 2.4%, the highest growth in seven quarters, while volume attrition fell to 12.9% in the fourth quarter, a 20 basis point sequential improvement from the preceding quarter
  • Record quarterly and full year new margin installed of $19.2 million and $71.1 million, respectively, up 33% for the fourth quarter and 22% for the year
  • Small and Mid-Sized Enterprise (SME) quarterly transaction processing volume of $18.3 billion, up 4.0% from the fourth quarter of 2012
  • Quarterly Net Revenue of $149.2 million, up 12.8% from the fourth quarter of 2012
  • Operating Margin on Net Revenue of 20.9% compared to 19.1% for the fourth quarter in 2012
  • The combination of share-based compensation and acquisition-related amortization reduced earnings by $5.4 million pre-tax, or approximately $0.09 per share, compared with $5.3 million pre-tax, or $0.08 per share in the fourth quarter of 2012
  • Charges associated with our investment in Leaf reduced earnings by $0.03 per share in the fourth quarter

Robert O. Carr, Chairman and CEO, said, “For the second consecutive year, Heartland Payment Systems reported record earnings and net revenue. We achieved strong performance in both our card and non-card businesses as well as strong momentum in new business activity, particularly new margin installed, which has been steadily increasing since the third quarter of 2012 and is a leading indicator of future growth. New Margin Installed reached record levels in the fourth quarter as well as for the full year. This growth is attributable to successfully adding new relationship managers and providing them with innovative new tools and products that continue to enhance productivity across our sales organization. Non-card business growth remains strong, with both Payroll and Campus Solutions revenues more than doubling in 2013 from 2012 levels reflecting both organic growth and strategic acquisitions. Our expansion is being managed prudently, and we continue to make productivity enhancements a priority, which contributed to an expansion in operating margins for both the fourth quarter and for the full year. Cash flow also remains strong. Reflecting our confidence in the future, the Board authorized a 21% increase in the quarterly dividend, and continues to support the repurchase of shares to reward shareholders. Over the past several years, our performance has been very consistent. The business has been growing and margins have been expanding, providing the resources to invest for the future. This has enabled us to strengthen our market presence and enhance our value proposition, all of which build value for our shareholders.”

SME card processing volume for the three months ended December 31, 2013 increased 4.0% from the year-ago quarter to $18.3 billion, benefitting from a 2.4% increase in same store sales and 30% increase in new margin installed, while volume attrition was held to 12.9%. Led by Payroll and Campus Solutions, non-card businesses continued their strong growth, helping drive a 12.8% increase in total net revenue for the quarter. The fourth quarter 2013 operating margin expanded to 20.9% of net revenue from 19.1% in the year ago quarter, as general and administrative expenses rose just 5.5% in the quarter. Reflecting continued productivity and efficiency enhancements, we were able to increase the fourth quarter operating margin despite funding $1.8 million of operating losses attributable to Leaf in the quarter.

Mr. Carr continued, “Heartland continues to successfully penetrate the SME market. We are increasingly seen as a resource that merchants can trust when considering card, payroll and gift/loyalty solutions. This is a position of respect we have earned over the years through our investment in the industry's largest employee sales organization and their efforts to understand the challenges facing small and mid-sized merchants. At the same time, we continue to achieve success by providing outsourcing solutions, including payments, for K-12 and higher education clients, and in emerging micropayments opportunities. For these reasons, we continue to invest heavily in our organization and selectively add to our capabilities through strategic acquisitions and partnerships. Our commitment to innovation has consistently provided merchants with tools that are ideally suited to their unique needs, and builds value for shareholders.”

FULL YEAR 2013 RESULTS:

For the full year of 2013, net revenue was $599.0 million, up 13.0% from $530.0 million in 2012, and Adjusted Net Income from continuing operations and related earnings was $88.1 million or $2.32 per share, compared to $76.2 million, or $1.90 per share, in the prior year. GAAP net income from continuing operations was $74.7 million, or $1.96 per share, compared to $64.4 million or $1.60 per share, for 2012. Full year 2013 share-based compensation expense and acquisition-related amortization expense reduced pre-tax earnings by $22.0 million, or $0.36 per share in 2013, compared to $19.4 million, or $0.30 per share, in 2012. Both full year GAAP and adjusted per share earnings from continuing operations were reduced by $0.04 in 2013 from our investment in Leaf.

FULL YEAR 2014 GUIDANCE:

For full year 2014, we expect Net Revenue to grow 8% to 10% to be between approximately $645 million and $660 million, and adjusted EPS to be in the range of $2.37- $2.41. Guidance assumes after-tax share-based compensation and acquisition-related amortization expenses reduce earnings per share by $0.41 for the year and an approximately 40% tax rate, due to the non-deductibility of the company's proportionate share of Leaf's operating losses. The earnings reduction from our investment in Leaf, which is reflected in this guidance, is expected to be $0.14 in 2014.

BOARD RAISES DIVIDEND 21%, SETS RECORD AND PAYMENT DATE; SHARE REPURCHASE PROGRAM UPDATE:

The Company also announced that the Board of Directors voted to raise the quarterly dividend by 21% to $0.085 per common share. The new, higher dividend is payable March 14, 2014 to shareholders of record on March 3, 2014. In the fourth quarter, the Company utilized approximately $10.1 million in cash to repurchase approximately 237,000 shares at an average cost of $42.54 per share, raising the amount of cash used to repurchase shares to over $50 million in 2013. At the end of the quarter, approximately $54 million remained outstanding on the Company's existing repurchase authorization.

CONFERENCE CALL:

Heartland Payment Systems, Inc. will host a conference call on February 5, 2014 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, please visit the Investor Relations portion of the Company's website at: www.heartlandpaymentsystems.com. The conference call may also be accessed by calling (888) 317-6003. Please provide the operator with PIN number 2573348. The webcast will be archived on the Company's website within two hours of the live call.

About Heartland Payment Systems

Heartland Payment Systems, Inc. (NYSE: HPY), the sixth largest payments processor in the United States, delivers credit/debit/prepaid card processing, school solutions, loyalty marketing services, campus solutions, payroll and related business solutions and services to more than 250,000 business and education locations nationwide. A FORTUNE 1000 company, Heartland is the founding supporter of The Merchant Bill of Rights, (www.merchantbillofrights.org), a public advocacy initiative that educates merchants about fair credit and debit card processing practices. The company is also a leader in the development of end-to-end encryption technology designed to protect cardholder data, rendering it useless to cybercriminals. For more detailed information, visit www.HeartlandPaymentSystems.com or follow the company on Twitter @HeartlandHPY and Facebook at facebook.com/HeartlandHPY.

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, 2012. We undertake no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

   

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

 

Three Months Ended
December 31,

Year Ended
December 31,

2013   2012 2013   2012
Total revenues $ 530,380   $ 499,965   $ 2,135,372   $ 2,013,436  
Costs of services:
Interchange 332,448 318,720 1,335,487 1,284,038
Dues, assessments and fees 48,757 49,009 200,903 199,503
Processing and servicing 59,264 50,953 237,232 216,863
Customer acquisition costs 10,555 10,201 42,109 43,547
Depreciation and amortization 5,909   5,582   19,975   19,750  
Total costs of services 456,933 434,465 1,835,706 1,763,701
General and administrative 42,326   40,289   173,568   139,934  
Total expenses 499,259   474,754   2,009,274   1,903,635  
Income from operations 31,121   25,211   126,098   109,801  
Other income (expense):
Interest income 29 32 124 201
Interest expense (1,683 ) (902 ) (5,429 ) (3,446 )
Provision for processing system intrusion costs (101 ) (35 ) (353 ) (563 )
Other, net (70 ) (24 ) 112   (949 )
Total other expense (1,825 ) (929 ) (5,546 ) (4,757 )
Income from continuing operations before income taxes 29,296 24,282 120,552 105,044
Provision for income taxes 12,411   9,798   46,450   40,691  
Net income from continuing operations 16,885 14,484 74,102 64,353

Income from discontinued operations, net of income tax of $— , $248, $2,135 and $803

  673   3,970   2,185  
Net income 16,885 15,157 78,072 66,538

Less: Net income (loss) attributable to noncontrolling interests

Continuing operations (520 ) (610 )
Discontinued operations   203   56   649  
Net income attributable to Heartland $ 17,405   $ 14,954   $ 78,626   $ 65,889  
 
Amounts Attributable to Heartland:

Net income from continuing operations, net of noncontrolling interests

$ 17,405 $ 14,484 $ 74,712 $ 64,353

Income from discontinued operations, net of income tax and noncontrolling interests

  470   3,914   1,536  
Net income attributable to Heartland $ 17,405   $ 14,954   $ 78,626   $ 65,889  
 
Basic earnings per share:
Income from continuing operations $ 0.47 $ 0.39 $ 2.03 $ 1.67
Income from discontinued operations   0.01   0.11   0.04  
Basic earnings per share $ 0.47   $ 0.40   $ 2.14   $ 1.71  
 
Diluted earnings per share:
Income from continuing operations $ 0.46 $ 0.37 $ 1.96 $ 1.60
Income from discontinued operations   0.01   0.10   0.04  
Diluted earnings per share $ 0.46   $ 0.38   $ 2.06   $ 1.64  
 
Weighted average number of common shares outstanding:
Basic 36,906 37,386 36,791 38,468
Diluted 37,972 38,878 38,053 40,058
 
   

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)

 

Three Months Ended
December 31,

Year Ended
December 31,

2013   2012 2013   2012
Net income $ 16,885 $ 15,157 $ 78,072 $ 66,538
Other comprehensive income (loss):

Unrealized gains on investments, net of income tax of $4, $2, $8 and 21

8 3 12 33

Unrealized (losses) gains on derivative financial instruments, net of tax of ($38), $49, $153 and $29

(61 ) 79 254 51
Foreign currency translation adjustment   (183 ) (54 ) 281
Comprehensive income 16,832 15,056 78,284 66,903

Less: Net (loss) income attributable to noncontrolling interests

(520 ) 148   (570 ) 733
Comprehensive income attributable to Heartland $ 17,352   $ 14,908   $ 78,854   $ 66,170
 
 

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

 
December 31,
Assets 2013   2012
Current assets:
Cash and cash equivalents $ 71,932 $ 48,440
Funds held for customers 127,375 131,405
Receivables, net 200,040 180,448
Investments 4,101 1,199
Inventory 11,087 9,694
Prepaid expenses 15,284 10,421
Current tax assets 10,426
Current deferred tax assets, net 9,548 10,475
Assets held for sale   17,044  
Total current assets 449,793 409,126
Capitalized customer acquisition costs, net 61,027 56,425
Property and equipment, net 147,388 125,031
Goodwill 190,978 168,062
Intangible assets, net 49,857 53,594
Deposits and other assets, net 1,262   1,176  
Total assets $ 900,305   $ 813,414  
 
Liabilities and Equity
Current liabilities:
Due to sponsor banks $ 19,109 $ 37,586
Accounts payable 70,814 64,065
Customer fund deposits 127,375 131,405
Processing liabilities 130,871 95,273
Current portion of accrued buyout liability 13,943 10,478
Accrued expenses and other liabilities 49,861 47,817
Current portion of borrowings 102,001
Current tax liabilities 4,323
Liabilities related to assets held for sale   1,672  
Total current liabilities 411,973   494,620  
Deferred tax liabilities, net 40,600 29,632
Reserve for unrecognized tax benefits 5,633 3,069
Long-term portion of borrowings 150,000 50,000
Long-term portion of accrued buyout liability 25,436   24,932  
Total liabilities 633,642   602,253  
Commitments and contingencies
 
Equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 37,485,486 and 37,571,708 shares issued at December 31, 2013 and December 31, 2012; 36,950,886 and 36,855,908 outstanding at December 31, 2013 and December 31, 2012 37 38
Additional paid-in capital 245,055 222,705
Accumulated other comprehensive loss (88 ) (399 )
Retained earnings 35,960 7,629
Treasury stock, at cost (534,600 and 715,800 shares at December 31, 2013 and December 31, 2012) (20,489 ) (20,187 )
Total stockholders’ equity 260,475 209,786
Noncontrolling interests 6,188   1,375  
Total equity 266,663   211,161  
Total liabilities and equity $ 900,305   $ 813,414  
 
 

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flow

(In thousands)

(unaudited)

 
Year Ended December 31,
2013   2012
Cash flows from operating activities
Net income $ 78,072 $ 66,538
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of capitalized customer acquisition costs 45,648 45,125
Other depreciation and amortization 35,389 28,213
Addition to loss reserves 2,711 2,595
Provision for doubtful receivables 195 1,043
Deferred taxes 8,403 5,136
Share-based compensation 12,838 14,187
Gain on sale of business (3,786 )
Write off of fixed assets and other 1,034 1,066
Changes in operating assets and liabilities:
Increase in receivables (19,693 ) (665 )
(Increase) decrease in inventory (1,343 ) 1,460
Payment of signing bonuses, net (29,091 ) (29,320 )
Increase in capitalized customer acquisition costs (21,159 ) (17,216 )
Increase in prepaid expenses (2,664 ) (612 )
(Increase) decrease in current tax assets (3,138 ) 9,118
Increase in deposits and other assets (1,118 ) (451 )
Excess tax benefits on employee share-based compensation (11,596 ) (5,954 )
Increase in reserve for unrecognized tax benefits 2,564 1,251
Decrease in due to sponsor banks (18,477 ) (26,295 )
Increase in accounts payable 2,136 11,840
Decrease in accrued expenses and other liabilities (1,605 ) (964 )
Increase in processing liabilities 32,837 61,993
Payouts of accrued buyout liability (13,651 ) (11,886 )
Increase in accrued buyout liability 17,620   15,638  
Net cash provided by operating activities 112,126   171,840  
Cash flows from investing activities
Purchase of investments (5,262 ) (6,556 )
Maturities of investments 2,000 4,714
Decrease (increase) in funds held for customers 4,040 (88,839 )
(Decrease) increase in customer fund deposits (4,030 ) 88,893
Proceeds from sale of business 19,343
Acquisitions of businesses, net of cash acquired (15,182 ) (103,470 )
Purchases of property and equipment (52,924 ) (34,549 )
Net cash used in investing activities (52,015 ) (139,807 )
Cash flows from financing activities
Proceeds from borrowings, net 156,416 133,000
Principal payments on borrowings (161,001 ) (66,003 )
Proceeds from exercise of stock options 14,174 18,303
Excess tax benefits on employee share-based compensation 11,596 5,954
Repurchases of common stock (49,625 ) (103,774 )
Dividends paid on common stock (10,321 ) (9,238 )
Net cash used in financing activities (38,761 ) (21,758 )
 
Net increase in cash 21,350 10,275
Effect of exchange rates on cash 1 5
Cash at beginning of year 50,581   40,301  
Cash at end of year $ 71,932   $ 50,581  
 

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. The Company believes that application of these non-GAAP financial measures is appropriate to enhance understanding of its historical performance as well as prospects for its future performance.

This press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. 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 twelve months ended December 31, 2013 and 2012 follows (in thousands except per share data):

       
Three Months Ended December 31, 2013 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from Operations $ 31,121 $ 2,339 $ 3,075 $ 36,535
Operating Margin (a) 20.9 %

 

24.5 %
Net Income From Continuing Operations Attributable to Heartland $ 17,405 $ 1,348 $ 1,772 $ 20,525
Diluted Earnings Per Share From Continuing Operations $ 0.46 $ 0.04 $ 0.05 $ 0.55

Diluted Shares Used in Computing Earnings Per Share From Continuing Operations

37,972 37,972
 
       
Three Months Ended December 31, 2012 GAAP

Acquisition-
related
Amortization

Share-based

Compensation

Adjusted
Non-GAAP

Income from Operations $ 25,211 $ 1,544 $ 3,775 $ 30,530
Operating Margin (a) 19.1 % 23.1 %
Net Income From Continuing Operations Attributable to Heartland $ 14,484 $ 921 $ 2,252 $ 17,657
Diluted Earnings Per Share From Continuing Operations $ 0.37 $ 0.02 $ 0.06 $ 0.45

Diluted Shares Used in Computing Earnings Per Share From Continuing Operations

38,878

38,878

 
       
Twelve Months Ended December 31, 2013 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from Operations $ 126,098 $ 9,112 $ 12,838 $ 148,048
Operating Margin (a) 21.1 % 24.7 %
Net Income From Continuing Operations Attributable to Heartland $ 74,712 $ 5,577 $ 7,857 $ 88,146
Diluted Earnings Per Share From Continuing Operations $ 1.96 $ 0.15 $ 0.21 $ 2.32

Diluted Shares Used in Computing Earnings Per Share From Continuing Operations

38,053 38,053
 
       
Twelve Months Ended December 31, 2012 GAAP

Acquisition-
related
Amortization

Share-based
Compensation

Adjusted
Non-GAAP

Income from Operations $ 109,801 $ 5,249 $ 14,187 $ 129,237
Operating Margin (a) 20.7 % 24.4 %
Net Income From Continuing Operations Attributable to Heartland $ 64,353 $ 3,209 $ 8,681 $ 76,243
Diluted Earnings Per Share From Continuing Operations $ 1.60 $ 0.08 $ 0.22 $ 1.90

Diluted Shares Used in Computing Earnings Per Share From Continuing Operations

40,058 40,058
 

(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

Release Summary

HEARTLAND PAYMENT SYSTEMS REPORTS 22% INCREASE IN FOURTH QUARTER AND FULL YEAR ADJUSTED EARNINGS PER SHARE

Contacts

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