Heartland Payment Systems Reports 26% Increase In Fourth Quarter Adjusted Earnings Per Share

Heartland Payment Systems, Inc. (NYSE: HPY), one of the nation's largest payment processors, today announced GAAP net income of $15.0 million, or $0.38 per share, for the three months ended December 31, 2012. Adjusted Net Income and Adjusted Earnings per Share were $17.2 million and $0.44, respectively, for the quarter ended December 31, 2012, compared to Adjusted Net Income and Adjusted Earnings per Share of $14.2 million and $0.35, respectively, for the quarter ended December 31, 2011. 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 fourth quarter of 2012 include:
  • Closed two strategic acquisitions, which provide immediate scale that will leverage operating costs while improving product and distribution capabilities in both the company's payroll and campus businesses
  • Small and Mid-Sized Enterprise (SME) quarterly transaction processing volume of $17.6 billion, up 5.0% from the fourth quarter of 2011
  • Quarterly Net Revenue of $135.7 million, up 8.4% from the fourth quarter of 2011
  • Operating Margin on Net Revenue of 19.3% compared to 16.1% for the same quarter in 2011
  • Same store sales rose 1.5% and volume attrition was 13.3% in the fourth quarter
  • New margin installed of $14.5 million, up 1% from the fourth quarter of 2011

Robert O. Carr, Chairman and CEO, said, “Heartland Payment Systems achieved record earnings in fiscal 2012, with outstanding fourth quarter financial performance leading to a 48% increase in both 2012 adjusted net income and adjusted earnings per share. These results are the product of continued success in the marketplace driving double-digit net revenue growth, and success improving operating efficiencies, resulting in a 460 basis point increase in our operating margin. While we were achieving this significant growth, we also enhanced our ability to sustain our performance over the long haul through the strategic acquisitions of Ovation Payroll and ECSI, which strengthen our Payroll and Campus Solutions businesses, respectively. In addition to the aggressive share repurchases and dividend increases implemented over the past few years, these acquisitions represent another use of our strong cash flow and balance sheet to reward and build value for our shareholders.”

SME card processing volume for the three months ended December 31, 2012 increased 5.0% from the year-ago quarter to $17.6 billion, benefitting from a 1.5% increase in same store sales and 1% increase in new margin installed, while holding volume attrition to 13.3%. Together with strong growth at Heartland School Solutions and other non-card businesses, total net revenue rose 8.4%. The increase in general and administrative expenses in the quarter was held to 6.7%. As a result, fourth quarter 2012 operating margin expanded to 19.3% of net revenue compared to 16.1% in the year ago quarter. The operating margin for the full year was 20.8%, an improvement of 460 basis points over the full year 2011 operating margin of 16.2%, and well above the Company's intermediate-term 20% operating margin target.

Mr. Carr continued, “The convergence of payments and operational systems is creating opportunities to grow by developing innovative new products that simplify and improve business operations for merchants both small and large. We've been developing new products, investing in infrastructure, making acquisitions, building partnerships, and strengthening our management team to assure we have solutions that offer the market's most enduring value for our merchants. Combined with the extensive merchant goodwill Heartland has earned through our commitment to a fair deal and continually improving the industry's largest and most-respected sales organization, we are in a strong position to capitalize on our unique franchise to achieve outstanding growth and build value for our shareholders.”

FULL YEAR 2012 RESULTS:

For the full year of 2012, GAAP net income was $65.9 million or $1.64 per share, compared to $43.9 million, or $1.09 per share for the full year of 2011. Net revenue for the full year of 2012 was $543.0 million, up 12.6% compared to the full year of 2011. Adjusted net income and earnings per share for the full year of fiscal 2012 were $75.0 million or $1.87 per share, compared to $50.5 million, or $1.26 per share in the prior year. Year-to-date 2012, share-based compensation expense has reduced pre-tax earnings by $14.2 million or $0.22 per share, compared to $9.5 million, or $0.15 per share, a year ago.

FULL YEAR 2013 GUIDANCE:

For full year 2013, we expect Net Revenue to grow 10% to 12% to be between approximately $600 million and $610 million, and GAAP EPS to be in the range $1.92 to $1.96, net of after-tax share-based compensation expense of $0.22 per share for the year.

BOARD RAISES DIVIDEND 17%, SETS RECORD AND PAYMENT DATE

The Company also announced that the Board of Directors has raised the quarterly dividend by 17% to $0.07 per common share. The new, higher dividend is payable March 15, 2013 to shareholders of record on March 4, 2013.

CONFERENCE CALL:

Heartland Payment Systems, Inc. will host a conference call on February 7, 2013 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) 438-5491. Please provide the operator with PIN number 6409305. 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, 2011. 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 and Comprehensive Income

(In thousands, except per share data)

(unaudited)
 
Three Months Ended Year Ended
December 31, December 31,
Total revenues   2012       2011     2012       2011  
$ 503,401   $ 471,423   $ 2,026,559   $ 1,996,950  
Costs of services:

 

 
Interchange

318,720
304,435

1,284,038
1,359,448
Dues, assessments and fees 49,009 41,860 199,503 155,233
Processing and servicing 52,069 51,577 221,580 212,747
Customer acquisition costs 10,201 10,518 43,547 46,140
Depreciation and amortization   5,618     3,829     19,890     14,675  
Total costs of services 435,617 412,219 1,768,558 1,788,243
General and administrative   41,667     39,057     145,263     130,724  
Total expenses   477,284     451,276     1,913,821     1,918,967  
Income from operations   26,117     20,147     112,738     77,983  
Other income (expense):

 

 
Interest income

47
48

252
177
Interest expense (902 ) (863 ) (3,446 ) (4,125 )
Provision for processing system intrusion costs (35 ) (222 ) (563 ) (1,012 )
Other, net   (24 )   (770 )   (949 )   (1,550 )
Total other expense   (914 )   (1,807 )   (4,706 )   (6,510 )
Income before income taxes 25,203 18,340 108,032 71,473
Provision for income taxes   10,046     7,028     41,494     27,126  
Net income 15,157 11,312 66,538 44,347
Less: Net income attributable to noncontrolling interests   203     92     649     408  
Net income attributable to Heartland $ 14,954   $ 11,220   $ 65,889   $ 43,939  
 
Net income $ 15,157 $ 11,312 $ 66,538 $ 44,347
Other comprehensive income (loss):

Unrealized gains (losses) on investments, net of income tax of $2, ($3), $21 and ($4)
3 (4 ) 33 (5 )

Unrealized gains (losses) on derivative financial instruments, net of tax of $49, $59, $29 and ($341)
79 95 51 (556 )
Foreign currency translation adjustment   (183 )   270     281     (223 )
Comprehensive income 15,056 11,673 66,903 43,563
Less: Net income attributable to noncontrolling interests   148     173     733     341  
Comprehensive income attributable to Heartland $ 14,908   $ 11,500   $ 66,170   $ 43,222  
Earnings per common share:
 
Basic $ 0.40 $ 0.29 $ 1.71 $ 1.13
Diluted $ 0.38 $ 0.28 $ 1.64 $ 1.09

Weighted average number of common shares outstanding:

 

 
Basic

37,386
39,198

38,468
38,931
Diluted 38,878 40,494 40,058 40,233
 
Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)
 
December 31,
Assets   2012       2011  
Current assets: $

 
Cash and cash equivalents

50,581
$ 40,301
Funds held for customers 131,405 42,511
Receivables, net 181,352 176,535
Investments held to maturity 4,428 2,505
Inventory 10,100 11,492
Prepaid expenses 10,568 9,660
Current deferred tax assets, net   10,475     6,746  
Total current assets 398,909 289,750
Capitalized customer acquisition costs, net 56,425 55,014
Property and equipment, net 125,651 115,579
Goodwill 177,399 103,399
Intangible assets, net 53,854 32,498
Deposits and other assets, net   1,176     681  
Total assets $ 813,414   $ 596,921  
Liabilities and Equity
 
Current liabilities: $

 
Due to sponsor banks

37,586
$ 63,881
Accounts payable 64,562 47,373
Customer fund deposits 131,405 42,511
Processing liabilities 95,359 30,689
Current portion of borrowings 102,001 15,003
Current portion of accrued buyout liability 10,478 8,104
Accrued expenses and other liabilities 48,655 50,884
Current tax liabilities   4,580     1,408  
Total current liabilities   494,626     259,853  
Deferred tax liabilities, net 29,626 21,643
Reserve for unrecognized tax benefits 3,069 1,819
Long-term portion of borrowings 50,000 70,000
Long-term portion of accrued buyout liability   24,932     23,554  
Total liabilities   602,253     376,869  
Commitments and contingencies
Equity

Common stock, $0.001 par value, 100,000,000 shares authorized, 37,571,708 and 39,626,846 shares issued at December 31, 2012 and 2011; 36,855,908 and 38,847,957 outstanding at December 31, 2012 and 2011
38 39
Additional paid-in capital 222,705 207,643
Accumulated other comprehensive loss (399 ) (680 )
Retained earnings 7,629 29,236
Treasury stock, at cost (715,800 and 778,889 shares at December 31, 2012 and 2011)   (20,187 )   (16,828 )
Total stockholders’ equity 209,786 219,410
Noncontrolling interests   1,375     642  
Total equity   211,161     220,052  
Total liabilities and equity $ 813,414   $ 596,921  
 
Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flow

(In thousands)

(unaudited)
 
Year Ended December 31,
  2012       2011  
Cash flows from operating activities

 

 
Net income

$

66,538
$ 44,347
Adjustments to reconcile net income to net cash provided by operating activities:

 
Amortization of capitalized customer acquisition costs

45,125
47,188
Other depreciation and amortization 28,213 27,837
Addition to loss reserves 2,595 6,011
Provision for doubtful receivables 1,043 2,423
Deferred taxes 5,136 778
Share-based compensation 14,187 9,548
Write downs on fixed assets and system development costs 1,066 129
Other 1,915
Changes in operating assets and liabilities:

 
Increase in receivables

(665

)
(1,409 )
Decrease (increase) in inventory 1,460 (194 )
Payment of signing bonuses, net (29,320 ) (29,035 )
Increase in capitalized customer acquisition costs (17,216 ) (14,276 )
Increase in prepaid expenses (612 ) (1,677 )
Decrease in current tax assets 9,118 23,522
Increase in deposits and other assets (451 ) (65 )
Excess tax benefits on employee share-based compensation (5,954 ) (3,454 )
Increase in reserve for unrecognized tax benefits 1,251 510
Decrease in due to sponsor banks (26,295 ) (8,692 )
Increase in accounts payable 11,840 3,779
Decrease in accrued expenses and other liabilities (964 ) (755 )
Increase (decrease) in processing liabilities 61,993 (4,104 )
Decrease in reserve for processing system intrusion (8 )
Payouts of accrued buyout liability (11,886 ) (10,380 )
Increase in accrued buyout liability   15,638     13,228  
Net cash provided by operating activities   171,840     107,166  
Cash flows from investing activities (6,556 )
Purchase of investments held to maturity (3,781 )
Maturities of investments held to maturity 4,714 2,934
Increase in funds held for customers (88,839 ) (6,163 )
Increase in customer fund deposits 88,893 5,988
Acquisitions of businesses, net of cash acquired (103,470 ) (23,165 )
Purchases of property and equipment   (34,549 )   (36,543 )
Net cash used in investing activities   (139,807 )   (60,730 )
Cash flows from financing activities

 
Proceeds from borrowings

133,000
Principal payments on borrowings (66,003 ) (38,287 )
Proceeds from exercise of stock options 18,303 9,685
Excess tax benefits on employee share-based compensation 5,954 3,454
Repurchases of common stock (103,774 ) (16,414 )
Dividends paid on common stock   (9,238 )   (6,232 )
Net cash used in financing activities   (21,758 )   (47,794 )
 
Net increase (decrease) in cash 10,275 (1,358 )
Effect of exchange rates on cash 5 (70 )
Cash at beginning of year   40,301     41,729  
Cash at end of year $ 50,581   $ 40,301  

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, namely net income and earnings per share, which exclude share-based compensation expense, and certain costs and expenses and recoveries related to the criminal breach of its payment systems environment (the “Processing System Intrusion”) announced in 2009. 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.

Use and Economic Substance of the Non-GAAP Financial Measures - Management uses these non-GAAP measures to evaluate performance period over period, to analyze the underlying trends in the Company's business, to assess its on-going operating performance relative to its competitors, and to establish operational goals and forecasts. Share-based compensation expense is excluded as a non-cash expense that the Company does not believe is reflective of ongoing operating results and which is an amount excluded from calculations of earnings per share used in measuring its achievement of performance targets required for vesting performance-based share awards. Net costs and expenses related to the Processing System Intrusion are not indicative of the Company's on-going operating performance and are therefore excluded by management in assessing the Company's operating performance, as well as from the measures used for making operating decisions.

The following is an explanation of the adjustments that management excluded as part of its non-GAAP measures for the fourth quarter and full year ended December 31, 2012 and 2011:

Share-based Compensation Expense - These expenses consist primarily of expenses related to the stock options and restricted share units, including performance-based awards, which the Company has granted its employees. The Company excludes share-based compensation expense from its non-GAAP measures of net income and earnings per share primarily because:
  • Share-based compensation expense is non-cash expense that the Company does not believe is reflective of ongoing operating results;
  • Share-based compensation expense is excluded from calculations of earnings per share used in measuring its achievement of performance targets required for vesting performance-based awards; and
  • The Company's use of performance-based share awards has increased significantly in recent years, with the result that reported share-based compensation expense can vary significantly from year to year, or quarter to quarter, in ways that may not be related to the underlying operating performance of the Company.

Processing System Intrusion - On January 20, 2009, the Company publicly announced the discovery of a criminal breach of its payment systems environment. The Processing System Intrusion involved malicious software that appears to have been used to collect in-transit, unencrypted payment card data while it was being processed by the Company during the transaction authorization process. The Company believes the breach did not extend beyond 2008.

Since its announcement of the Processing System Intrusion on January 20, 2009 and through December 31, 2012, the Company has expensed a total of $147.6 million, before reducing those charges by $31.2 million of total insurance recoveries. The majority of the total charges, approximately $114.7 million, relates to settlements of claims. Approximately $32.9 million of the total charges were for legal fees and costs the Company incurred for investigations, defending various claims and actions, remedial actions and crisis management services.

During the three months ended December 31, 2012, the Company incurred approximately $35,000, or less than one cent per share, for legal fees and costs it incurred related to the Processing System Intrusion. During the three months ended December 31, 2011, the Company expensed approximately $0.2 million, or less than one cent per share, related to the Processing System Intrusion. During the full year of 2012, the Company incurred approximately $0.6 million, or $0.01 per share, for legal fees and costs it incurred related to the Processing System Intrusion. During the full year of 2011, the Company expensed approximately $1.0 million, or $0.02 per share, related to the Processing System Intrusion.

Material Limitations Associated with the Use of Non-GAAP Financial Measures - Non-GAAP net income and non-GAAP earnings per share that exclude the impact of share-based compensation expense and the Provision for Processing System Intrusion may have limitations as analytical tools, and these non-GAAP measures should not be considered in isolation from or as a replacement for GAAP financial measures, and should be considered only as supplemental to the Company's GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are:
  • Share-based compensation expense, and Processing System Intrusion costs and recoveries that are excluded from non-GAAP net income and non-GAAP earnings per share can have a material impact on cash flows, GAAP net income and GAAP earnings per share.
  • Other companies may calculate non-GAAP net income and non-GAAP earnings per share that exclude the impact of similar expenses and recoveries differently than the Company does, limiting the usefulness of those measures for comparative purposes.

Usefulness of Non-GAAP Financial Measures to Investors - The Company believes that presenting non-GAAP net income and non-GAAP earnings per share that exclude the impact of the Provision for Processing System Intrusion and share-based compensation expense in addition to the related GAAP measures provides investors greater transparency to the information used by the Company's management for its financial and operational decision-making and allows investors to see the Company's results through the eyes of management. Additionally, the Company believes that the inclusion of these non-GAAP financial measures provides enhanced comparability in its financial reporting. The Company further believes that providing this information better enables its investors to understand the Company's operating performance and underlying business fundamentals, and to evaluate the methodology used by management to evaluate and measure such 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 months and full years ended December 31, 2012 and 2011 follows:
   
Three Months Ended Year Ended

(In thousands, except per share):
December 31, December 31,

Net income attributable to Heartland
  2012       2011     2012       2011  

Non-GAAP - Adjusted net income attributable to Heartland
$ 17,245   $ 14,181   $ 74,965   $ 50,479  
Less adjustments:
Share-based compensation expense 3,775 4,578 14,187 9,548

Income tax benefit on share-based compensation expense
  (1,505 )   (1,754 )   (5,458 )   (3,635 )
After-tax share-based compensation expense   2,270     2,824     8,729     5,913  

Provision for processing system intrusion costs
35 222 563 1,012

Income tax benefit on provision for processing system intrusion
  (14 )   (85 )   (216 )   (384 )

After-tax provision for processing system intrusion costs
  21     137     347     628  
GAAP - Net income attributable to Heartland $ 14,954   $ 11,220   $ 65,889   $ 43,938  

Earnings per share
 
Non-GAAP - Adjusted net income per share $ 0.44 $ 0.35 $ 1.87 $ 1.26
Less: share-based compensation expense 0.06 0.07 0.22 0.15

Less: provision for processing system intrusion costs
          0.01     0.02  
GAAP - Net income per share $ 0.38   $ 0.28   $ 1.64   $ 1.09  
 

Shares used in computing net income per share
38,878 40,494 40,058 40,233

Copyright Business Wire 2010

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