HEARTLAND PAYMENT SYSTEMS, INC. Heartland Payment Systems, Inc. (NYSE: HPY), one of the nation's largest payment processors, today announced record third quarter Adjusted Net Income and Adjusted Earnings per Share of $29.7 million and $0.79, respectively, for the quarter ended September 30, 2015. Adjusted Net Income and Adjusted Earnings per Share were $24.8 million and $0.68, respectively, for the quarter ended September 30, 2014. For the third quarter of 2015, Heartland reported GAAP Net Income of $23.9 million, or $0.64 per share. Adjusted Net Income and Adjusted Earnings per Share are non-GAAP measures that are detailed at the end of this press release in the “Reconciliation of Non-GAAP Financial Measures.”
Highlights for the third quarter of 2015 include:
- Small and Mid-Sized Enterprise (SME) transaction processing volume was an all-time quarterly record $24.5 billion, up 13.1% from the third quarter of 2014, the fifth consecutive quarter of double-digit growth
- Quarterly Net Revenue was a record $214.6 million, up 26.7% from the third quarter of 2014, with organic net revenue growth of 11.3% for the quarter
- Net Revenue for our Non-Payment Processing segments grew by 61% in the third quarter of 2015 including the benefit of acquisitions; excluding such acquisitions, organic net revenue grew by over 8%
- New margin installed was an all-time record $27.7 million, a 29.5% increase from the third quarter of 2014, and the fastest rate of new margin installed growth since the fourth quarter of 2013
- Same store sales were up 4.1% and net volume attrition was 9.1%, continuing their trend of steady improvement
Operating results for the third quarter of 2015 include:
- Stock compensation expense of $4.4 million and acquisition-related intangible amortization of $5.1 million, increases of $1.0 million and $1.6 million, respectively, compared to the third quarter of 2014
- Increases in sales compensation and general incentive compensation in the third quarter of 2015, both due to improved financial performance
- There was no impact from the Company's former Leaf business in the third quarter of 2015, whereas a year ago there was a net $0.05 per share benefit to both GAAP and Adjusted Earnings
Robert O. Carr, Chairman and CEO, said, "The strong momentum in new margin installed, transaction processing and net revenue growth continues to drive record earnings. Our new business growth was outstanding this quarter, with new margin installed up nearly 30%, one of the fastest rates of new business growth in many years, and this growth was accomplished from a much higher base. Our success this quarter was driven by the growth and productivity of our sales organization, our focus on complementary acquisitions, an improvement in consumer spending, and our innovative new technologies and products, such as Heartland Secure. We also had our best operating margin in nearly two years, consistent with our expectations and a reflection of the solid operating leverage inherent in our business model. We will continue to invest in our strategy, providing small and mid-sized merchants the same best-in-class solutions as the largest merchants, to help them improve their business, while building the value of the Heartland franchise."
SME card transaction processing volume for the quarter was up 13.1% compared to the third quarter of 2014, driven by new margin installs, growth in same store sales and improved net volume attrition. SME card transaction processing volume in both the third quarters of 2015 and 2014 includes Visa, MasterCard, Discover and Amex OptBlue, the latter of which we first began including in volume in the third quarter of 2014. Our total non-card segments grew their revenue by 61% for the quarter as a result of both organic and acquisition related growth.
The Adjusted Operating Margin for the third quarter of 2015 was 24.3%, a 230 basis point improvement from the third quarter of 2014. Margin expansion primarily reflected increased operating leverage as net revenue growth remains at levels consistent with the first half of the year while the planned rate of growth of investment in security, marketing, Heartland Commerce as well as incentive compensation slowed from the pace of the first half of 2015.
For the third quarter of 2014, both GAAP and Adjusted Net Income per share include a net $0.05 per share benefit related to the former Leaf business, primarily a $3.6 million one-time gain related to the settlement of an earn out obligation. Leaf was completely wound down as of the second quarter of 2015. Since March 31, 2015, the last quarter in which cash was used for acquisitions, we have reduced total debt by $90 million.
Mr. Carr continued, “The implementation of new EMV standards, the growing adoption of integrated point-of-sale technology, heightened security concerns and continual innovation is driving the payments industry to the center of the commerce universe. This is helping broaden and deepen our relationships with the small and mid-sized merchant community who have always considered Heartland a trusted partner and who are now increasingly turning to us to help navigate the increased complexity precipitated by these changes. Through our investments in Heartland Commerce, payroll solutions, and related businesses, we are expanding the range of solutions we can offer our merchants with the ultimate goal of simplifying their lives while improving their businesses. Heartland is well positioned to prosper in an environment where our long and unparalleled legacy of small and mid-sized merchant advocacy is often the only constant in a time of rapid and unprecedented change."
FULL YEAR 2015 GUIDANCE:
For full year 2015, we expect to deliver Net Revenue growth in excess of 20%, to between approximately $810 million and $815 million, and adjusted EPS to be in the range of $2.86 - $2.89. Guidance assumes after-tax share-based compensation and acquisition-related amortization expenses reduce earnings per share by $0.65 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 December 15, 2015 to shareholders of record on November 24, 2015.
CONFERENCE CALL
Heartland Payment Systems, Inc. will host a conference call on October 30, 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: http://www.heartlandpaymentsystems.com/investor-relations/. The conference call may be accessed by calling (888)-317-6003. Please provide the operator with PIN number 5426918. 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 300,000 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 | Nine Months Ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Total revenues | $ | 705,667 | $ | 600,626 | $ | 1,983,818 | $ | 1,706,768 | ||||||||
| Costs of services: | ||||||||||||||||
| Interchange | 425,572 | 373,372 | 1,194,461 | 1,059,241 | ||||||||||||
| Dues, assessments and fees | 65,506 | 57,864 | 180,548 | 163,218 | ||||||||||||
| Processing and servicing | 85,817 | 69,328 | 246,227 | 204,985 | ||||||||||||
| Customer acquisition costs | 15,501 | 12,289 | 44,284 | 34,907 | ||||||||||||
| Depreciation and amortization | 11,541 | 7,981 | 33,382 | 20,472 | ||||||||||||
| Total costs of services | 603,937 | 520,834 | 1,698,902 | 1,482,823 | ||||||||||||
| General and administrative | 59,216 | 49,381 | 174,212 | 137,241 | ||||||||||||
| Total expenses | 663,153 | 570,215 | 1,873,114 | 1,620,064 | ||||||||||||
| Income from operations | 42,514 | 30,411 | 110,704 | 86,704 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 29 | 33 | 82 | 95 | ||||||||||||
| Interest expense | (3,647 | ) | (2,142 | ) | (11,178 | ) | (4,450 | ) | ||||||||
| Other, net | (9 | ) | 3,581 | (309 | ) | 3,869 | ||||||||||
| Total other (expense) income | (3,627 | ) | 1,472 | (11,405 | ) | (486 | ) | |||||||||
| Income before income taxes | 38,887 | 31,883 | 99,299 | 86,218 | ||||||||||||
| Provision for income taxes | 15,006 | 11,727 | 37,274 | 34,579 | ||||||||||||
| Net income | 23,881 | 20,156 | 62,025 | 51,639 | ||||||||||||
| Less: Net loss attributable to noncontrolling interests | — | (302 | ) | — | (2,011 | ) | ||||||||||
| Net income attributable to Heartland | $ | 23,881 | $ | 20,458 | $ | 62,025 | $ | 53,650 | ||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.65 | $ | 0.57 | $ | 1.69 | $ | 1.47 | ||||||||
| Diluted | $ | 0.64 | $ | 0.56 | $ | 1.67 | $ | 1.44 | ||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 36,744 | 36,069 | 36,600 | 36,388 | ||||||||||||
| Diluted | 37,281 | 36,850 | 37,186 | 37,249 | ||||||||||||
Heartland Payment Systems, Inc. and Subsidiaries | ||||||||||||||
Condensed Consolidated Statements of Comprehensive Income | ||||||||||||||
(In thousands) | ||||||||||||||
(unaudited) | ||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||
| Net income | $ | 23,881 | $ | 20,156 | $ | 62,025 | $ | 51,639 | ||||||
| Other comprehensive income (loss): | ||||||||||||||
Reclassification of losses (gains) on investments, net of income tax of $(7), $5, $(7) and $108 | 12 | (6 | ) | 12 | (170 | ) | ||||||||
Unrealized gains (losses) on investments, net of income tax of $11, $(5), $16 and $5 | 28 | (8 | ) | 43 | 6 | |||||||||
Unrealized gains on derivative financial instruments, net of income tax of $17, $28, $50 and $83 | 11 | 45 | 67 | 140 | ||||||||||
| Comprehensive income | 23,932 | 20,187 | 62,147 | 51,615 | ||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | — | (302 | ) | — | (2,011 | ) | ||||||||
Comprehensive income attributable to Heartland | $ | 23,932 | $ | 20,489 | $ | 62,147 | $ | 53,626 | ||||||
Heartland Payment Systems, Inc. and Subsidiaries | ||||||||
Condensed Consolidated Balance Sheets | ||||||||
(In thousands, except share data) | ||||||||
(unaudited) | ||||||||
| September 30, 2015 |
December 31, 2014 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 43,148 | $ | 70,793 | ||||
| Funds held for customers | 180,458 | 176,492 | ||||||
| Receivables, net | 258,378 | 234,104 | ||||||
| Investments | 107 | 106 | ||||||
| Inventory | 10,279 | 12,048 | ||||||
| Prepaid expenses | 21,625 | 22,658 | ||||||
| Current tax assets | 749 | 15,082 | ||||||
| Current deferred tax assets, net | 12,311 | 9,308 | ||||||
| Total current assets | 527,055 | 540,591 | ||||||
| Capitalized customer acquisition costs, net | 83,192 | 73,107 | ||||||
| Property and equipment, net | 168,244 | 154,303 | ||||||
| Goodwill | 475,317 | 425,712 | ||||||
| Intangible assets, net | 197,254 | 192,553 | ||||||
| Deposits and other assets, net | 1,677 | 1,507 | ||||||
| Total assets | $ | 1,452,739 | $ | 1,387,773 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Due to sponsor banks | $ | 49,266 | $ | 31,165 | ||||
| Accounts payable | 58,576 | 58,460 | ||||||
| Customer fund deposits | 180,458 | 176,492 | ||||||
| Processing liabilities | 119,884 | 119,398 | ||||||
| Current portion of accrued buyout liability | 17,471 | 15,023 | ||||||
| Current portion of borrowings | 48,793 | 36,792 | ||||||
| Current portion of unearned revenue | 53,150 | 46,601 | ||||||
| Accrued expenses and other liabilities | 49,050 | 41,517 | ||||||
| Total current liabilities | 576,648 | 525,448 | ||||||
| Deferred tax liabilities, net | 59,057 | 45,804 | ||||||
| Reserve for unrecognized tax benefits | 8,630 | 7,315 | ||||||
| Long-term borrowings | 450,041 | 523,122 | ||||||
| Long-term portion of accrued buyout liability | 38,175 | 32,970 | ||||||
| Long-term portion of unearned revenue | 3,025 | 2,354 | ||||||
| Total liabilities | 1,135,576 | 1,137,013 | ||||||
| Commitments and contingencies | — | — | ||||||
| Equity | ||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,752,588 and 36,344,921 shares issued and outstanding at September 30, 2015 and December 31, 2014 | 37 | 36 | ||||||
| Additional paid-in capital | 271,171 | 255,921 | ||||||
| Accumulated other comprehensive loss | (8 | ) | (130 | ) | ||||
| Retained earnings (accumulated deficit) | 45,963 | (5,067 | ) | |||||
| Total equity | 317,163 | 250,760 | ||||||
| Total liabilities and equity | $ | 1,452,739 | $ | 1,387,773 | ||||
Heartland Payment Systems, Inc. and Subsidiaries | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
(In thousands) | ||||||||
(unaudited) | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 62,025 | $ | 51,639 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Amortization of capitalized customer acquisition costs | 44,420 | 38,056 | ||||||
| Other depreciation and amortization | 46,283 | 33,516 | ||||||
| Addition to loss reserves | 2,528 | 3,000 | ||||||
| Provision for doubtful receivables | 4,991 | 3,010 | ||||||
| Deferred taxes | 3,611 | 8,361 | ||||||
| Share-based compensation | 14,140 | 10,936 | ||||||
| Write off of fixed assets and other | 1,223 | (3,315 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in receivables | (27,594 | ) | (11,339 | ) | ||||
| Decrease (increase) in inventory | 1,896 | (287 | ) | |||||
| Payment of signing bonuses, net | (33,855 | ) | (27,647 | ) | ||||
| Increase in capitalized customer acquisition costs | (20,650 | ) | (18,349 | ) | ||||
| Decrease (increase) in current tax assets | 19,870 | (2,957 | ) | |||||
| Decrease in prepaid expenses, deposits and other assets | 1,190 | 29 | ||||||
| Excess tax benefits on employee share-based compensation | (5,578 | ) | (5,670 | ) | ||||
| Increase in reserve for unrecognized tax benefits | 1,315 | 1,136 | ||||||
| Increase in due to sponsor banks | 18,101 | 22,074 | ||||||
| Decrease in accounts payable | (1,443 | ) | (12,509 | ) | ||||
| Increase (decrease) in unearned revenue | 4,620 | (2,414 | ) | |||||
| Decrease in accrued expenses and other liabilities | (2,809 | ) | (12,304 | ) | ||||
| Decrease in processing liabilities | (2,076 | ) | (29,016 | ) | ||||
| Payouts of accrued buyout liability | (12,861 | ) | (9,621 | ) | ||||
| Increase in accrued buyout liability | 20,514 | 15,199 | ||||||
| Net cash provided by operating activities | 139,861 | 51,528 | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of investments | (1,546 | ) | (31,017 | ) | ||||
| Sales of investments | — | 17,215 | ||||||
| Maturities of investments | 1,800 | — | ||||||
| Decrease in funds held for customers | 42,055 | 18,849 | ||||||
| Decrease in customer fund deposits | (42,309 | ) | (5,064 | ) | ||||
| Acquisitions of businesses, net of cash acquired | (60,969 | ) | (355,066 | ) | ||||
| Capital expenditures | (42,734 | ) | (39,140 | ) | ||||
| Net cash used in investing activities | (103,703 | ) | (394,223 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from borrowings, net | 171,000 | 436,392 | ||||||
| Principal payments on borrowings | (232,063 | ) | (17,500 | ) | ||||
| Proceeds from exercise of stock options | 2,677 | 4,482 | ||||||
| Excess tax benefits on employee share-based compensation | 5,578 | 5,670 | ||||||
| Repurchases of common stock | — | (54,455 | ) | |||||
| Dividends paid on common stock | (10,995 | ) | (9,249 | ) | ||||
| Net cash (used in) provided by financing activities | (63,803 | ) | 365,340 | |||||
| Net (decrease) increase in cash | (27,645 | ) | 22,645 | |||||
| Cash at beginning of year | 70,793 | 71,932 | ||||||
| Cash at end of period | $ | 43,148 | $ | 94,577 | ||||
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 nine months ended September 30, 2015 and 2014 follows (in thousands except per share data):
| Three Months Ended September 30, 2015 | GAAP | Acquisition- |
Share-based |
Adjusted | ||||||||||
| Income from operations | $ | 42,514 | $ | 5,121 | $ | 4,429 | $ | 52,064 | ||||||
| Operating margin (a) | 19.8 | % | 24.3 | % | ||||||||||
| Net income attributable to Heartland | $ | 23,881 | $ | 3,130 | $ | 2,707 | $ | 29,718 | ||||||
| Diluted earnings per share | $ | 0.64 | $ | 0.08 | $ | 0.07 | $ | 0.79 | ||||||
| Diluted shares used in computing earnings per share | 37,281 | 37,281 | ||||||||||||
| Three Months Ended September 30, 2014 | GAAP | Acquisition- |
Share-based |
Adjusted | ||||||||||
| Income from operations | $ | 30,411 | $ | 3,501 | $ | 3,394 | $ | 37,306 | ||||||
| Operating margin (a) | 18.0 | % | 22.0 | % | ||||||||||
| Net income attributable to Heartland | $ | 20,458 | $ | 2,213 | $ | 2,146 | $ | 24,817 | ||||||
| Diluted earnings per share | $ | 0.56 | $ | 0.06 | $ | 0.06 | $ | 0.68 | ||||||
| Diluted shares used in computing earnings per share | 36,850 | 36,850 | ||||||||||||
| Nine Months Ended September 30, 2015 | GAAP | Acquisition- |
Share-based |
Adjusted | ||||||||||
| Income from operations | $ | 110,704 | $ | 15,218 | $ | 14,140 | $ | 140,062 | ||||||
| Operating margin (a) | 18.2 | % | 23.0 | % | ||||||||||
| Net income attributable to Heartland | $ | 62,025 | $ | 9,301 | $ | 8,642 | $ | 79,968 | ||||||
| Diluted earnings per share | $ | 1.67 | $ | 0.25 | $ | 0.23 | $ | 2.15 | ||||||
| Diluted shares used in computing earnings per share | 37,186 | 37,186 | ||||||||||||
| Nine Months Ended September 30, 2014 | GAAP | Acquisition- |
Share-based |
Adjusted | ||||||||||
| Income from operations | $ | 86,704 | $ | 8,411 | $ | 10,936 | $ | 106,051 | ||||||
| Operating margin (a) | 17.9 | % | 21.9 | % | ||||||||||
| Net income attributable to Heartland | $ | 53,650 | $ | 5,038 | $ | 6,550 | $ | 65,238 | ||||||
| Diluted earnings per share | $ | 1.44 | $ | 0.14 | $ | 0.18 | $ | 1.76 | ||||||
| Diluted shares used in computing earnings per share | 37,249 | 37,249 | ||||||||||||
| (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. | ||
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