Heartland Payment Systems Reports Record Quarterly Earnings

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Heartland Payment Systems Reports Record Quarterly Earnings

Third Quarter Adjusted Net Income and Adjusted Earnings Per Share Increase 61% and 60%, Respectively

Raises Full Year 2012 Net Revenue and Earnings Guidance


PRINCETON, N.J.--(BUSINESS WIRE)-- Heartland Payment Systems, Inc. (NYS: HPY) , one of the nation's largest payment processors, today announced GAAP net income of $19.4 million, or $0.48 per share, for the three months ended September 30, 2012. Adjusted Net Income and Adjusted Earnings per Share were $21.7 million and $0.53, respectively, for the quarter ended September 30, 2012, compared to Adjusted Net Income and Adjusted Earnings per Share of $13.5 million and $0.33, respectively, for the quarter ended September 30, 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 third quarter of 2012 include:

  • Small and Mid-Sized Enterprise (SME) quarterly transaction processing volume of $18.8 billion, up 5.8% from the third quarter of 2011, and a quarterly record
  • Quarterly Net Revenue of $143.4 million, up 17.3% from the third quarter of 2011, and a quarterly record
  • Operating Margin on Net Revenue of 23.5% compared to 17.7% for the same quarter in 2011 and the best quarterly operating margin in five years
  • Same store sales rose 1.8% and volume attrition was 12.9% in the third quarter
  • New margin installed of $14.4 million, up 11.2% from the third quarter of 2011
  • Share-based compensation reduced earnings by $3.5 million pre-tax, or approximately $0.05 per share, compared to $1.3 million pre-tax, or $0.02 per share in the third quarter of 2011

Robert Carr, Chairman and CEO, said, "We are pleased to report the most profitable quarter in the Company's history, with net revenue growing 17% and the operating margin expanding to 23.5% to drive a 56% increase in quarterly operating income. Returning over $275 million of Durbin Dollars to our merchants has significantly increased merchants' awareness of processing costs, which has enabled us to sustain double-digit new business growth and achieve record quarterly transaction processing volumes. The success of our productivity and efficiency initiatives has led to a significant improvement in our operating margin, which will exceed 20% this year, ahead of previous expectations. We continue to use our strong cash flow to reward our shareholders, and have repurchased $100 million of our stock over the past 12 months. As electronic payments continue to evolve, our strong merchant relationships, leading technology and solid financial position provide us with the resources to create innovative solutions for our merchants and to increase value for our shareholders."

SME card processing volume for the three months ended September 30, 2012 increased 5.8% from the year-ago quarter to a record $18.8 billion as same store sales increased 1.8%, volume attrition was 12.9% and new margin installed grew 11.2%. Growth in both the card and non-card businesses contributed to a 17.3% increase in third quarter net revenue, with Heartland School Solutions revenue in the quarter up significantly, reflecting both the June 2012 acquisition of LunchByte Systems and the September 2011 acquisition of School-Link Technologies. The operating margin in the quarter was 23.5% of net revenue, the highest level in five years. The operating margin for the first nine months of 2012 was 21.3%, and we are on pace to exceed 20% for the year, a significant improvement from the full year 2011 operating margin of 16.2%. Higher share-based compensation and additional payroll and other expenses from the Heartland School Solutions acquisitions were the primary drivers of an 18.3% increase in general and administrative expenses in the quarter as compared to a year ago.

Mr. Carr continued, "With the industry's best sales organization, relationships with over 250,000 small and mid-sized merchants, and ownership of the 'last processing mile', we are in a strong position to capitalize on the growing need for innovative new payments solutions that help merchants achieve their business objectives. While opportunities abound, we are focused on developing solutions that leverage our strengths and provide meaningful, lasting benefits to our merchants. From mobile to rewards to new verticals and other emerging solutions, Heartland is uniquely positioned with the technology, resources, merchant-centered culture and management talent to capitalize on the growth opportunities in the market both today as well as in the future."

NINE MONTH RESULTS:

For the first nine months of 2012, GAAP net income was $50.9 million or $1.26 per share, compared to $32.7 million, or $0.82 per share for the first nine months of 2011. Net revenue for the first nine months of 2012 was $407.3 million, up 14.1% compared to the first nine months of 2011. Adjusted net income and earnings per share for the first nine months of fiscal 2012 were $57.7 million or $1.43 per share, compared to $36.3 million, or $0.91 per share in the first nine months of fiscal 2011. Year-to-date 2012, share-based compensation expense has reduced pre-tax earnings by $10.4 million or $0.16 per share, compared to $5.0 million, or $0.08 per share, a year ago.

RAISING FULL YEAR 2012 GUIDANCE:

The Company is raising its 2012 net revenue and earnings expectations. For full year 2012, we expect Net Revenue to be between $544 million and $546 million, and Adjusted EPS of $1.81 to $1.84, before deducting $0.21 per share of after-tax share-based compensation expense.

BOARD DECLARES QUARTERLY DIVIDEND; SHARE REPURCHASE PROGRAM UPDATE

The Company also announced that the Board of Directors declared a quarterly dividend of $0.06 per common share payable December 14, 2012 to shareholders of record on November 23, 2012. In addition, the Company has completed the $50 million Stock Purchase Program authorized by the Board of Directors in July 2012, repurchasing a total of 1.76 million shares at an average price of $28.40 per share.

CONFERENCE CALL:

Heartland Payment Systems, Inc. will host a conference call on November 1, 2012 at 9:00 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 be accessed by calling (888) 438-5453. Please provide the operator with PIN number 7492858. 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

 

Nine Months Ended

September 30,

September 30,

 

2012

  

2011

  

2012

   

2011

 

Total revenues

$

534,152

 $531,904 

$

1,523,158

 $1,525,527 
Costs of services:
Interchange

336,628

369,007

965,318

1,055,013
Dues, assessments and fees

54,121

40,672

150,494

113,373
Processing and servicing

55,601

53,255

169,511

161,170
Customer acquisition costs

10,647

11,834

33,346

35,622
Depreciation and amortization 

5,380

  3,270  

14,272

  10,846 
Total costs of services

462,377

478,038

1,332,941

1,376,024
General and administrative 

38,130

  32,244  

103,596

  91,667 

Total expenses

 

500,507

  510,282  

1,436,537

  1,467,691 
Income from operations 

33,645

  21,622  

86,621

  57,836 

Other income (expense):

Interest income

45

47

205

129
Interest expense

(938

)

(954)

(2,544

)

(3,262)
Provision for processing system intrusion costs

(290

)

(115)

(528

)

(790)
Other, net 

(921

)

 (35) 

(925

)

 (780)
Total other income (expense) 

(2,104

)

 (1,057) 

(3,792

)

 (4,703)
Income before income taxes

31,541

20,565

82,829

53,133
Provision for income taxes 

11,974

  7,784  

31,448

  20,098 

Net income

19,567

12,781

51,381

33,035
Less: Net income attributable to noncontrolling interests 

187

  135  

446

  316 

Net income attributable to Heartland

$

19,380

 $12,646 

$

50,935

 $32,719 
 
Net income

$

19,567

$12,781

$

51,381

$33,035
Other comprehensive income (loss):

Unrealized gains (losses) on investments, net of income tax of $10, $(2), $19 and $(1)

15

(6

)

30

(1

)

Unrealized losses on derivative financial instruments

(19

)

(69)

(28

)

(651)
Foreign currency translation adjustment 

500

  (946) 

464

  (493)

Comprehensive income

20,063

11,760

51,847

31,890

Less: Comprehensive income (loss) attributable to noncontrolling interests

337

  

(149

)

 

585

 

 

168

 

Comprehensive income attributable to Heartland

$

19,726

 $11,909 

$

51,262

 $31,722 
 

Earnings per common share:

Basic

$

0.50

$0.32

$

1.31

$0.84
Diluted

$

0.48

$0.31

$

1.26

$0.82

Weighted average number of common shares outstanding:

Basic

38,813

39,265

38,831

38,841
Diluted

40,352

40,561

40,454

40,145
 

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)
 

September 30,

 

December 31,

 

2012

  

2011

 

Assets

Current assets:
Cash and cash equivalents

$

45,055

$40,301
Funds held for payroll customers

39,217

42,511
Receivables, net

185,923

176,535
Investments held to maturity

4,455

2,505
Inventory

9,878

11,492
Prepaid expenses

8,349

9,660
Current tax assets

2,790

Current deferred tax assets, net 

7,021

  6,746 
Total current assets

302,688

289,750
Capitalized customer acquisition costs, net

56,450

55,014
Property and equipment, net

121,505

115,579
Goodwill

115,902

103,399
Intangible assets, net

35,856

32,498
Deposits and other assets, net 

756

  681 
Total assets

$

633,157

 $596,921 
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