HEARTLAND PAYMENT SYSTEMS INC - FORM 8-K - EX-99.1 - EARNINGS RELEASE - July 31, 2012

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8-K - SECOND QUARTER 2012 EARNINGS RELEASE - HEARTLAND PAYMENT SYSTEMS INCq22012earningsform8-k08012.htm


EXHIBIT 99.1
Heartland Payment Systems 90 Nassau Street
Princeton, NJ 08542 888.798.3131
HeartlandPaymentSystems.com

HEARTLAND PAYMENT SYSTEMS REPORTS RECORD
QUARTERLY EARNINGS

SECOND QUARTER ADJUSTED NET INCOME INCREASES 50%, ADJUSTED EARNINGS PER SHARE INCREASE 49%

Princeton, NJ - July 31, 2012 - Heartland Payment Systems, Inc. (NYSE: HPY), one of the nation's largest payment processors, today announced GAAP net income of $17.8 million, or $0.44 per share, for the three months ended June 30, 2012. Adjusted Net Income and Adjusted Earnings per Share were $20.3 million and $0.50, respectively, for the quarter ended June 30, 2012, compared to Adjusted Net Income and Adjusted Earnings per Share of $13.6 million and $0.34, respectively, for the quarter ended June 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 second quarter of 2012 include:

•
Small and Mid-Sized Enterprise (SME) quarterly transaction processing volume of $18.6 billion, up 6.2% from the second quarter of 2011
•
Quarterly Net Revenue of $135.3 million, up 10.7% from the second quarter of 2011
•
Operating Margin on Net Revenue of 22.0% compared to 17.7% for the same quarter in 2011
•
Same store sales rose 2.2% and volume attrition was 12.7% in the second quarter
•
New margin installed of $15.1 million, up 20.5% from the second quarter of 2011 and the best quarterly new margin installed performance in three years
Share-based compensation reduced earnings by $4.0 million pre-tax, or approximately $0.06 per share, compared to $1.7 million, or $0.03 per share in the second quarter of 2011Robert Carr, Chairman and CEO, said, “Record

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transaction processing volume and exceptional growth in our non-card businesses in the second quarter drove earnings to a quarterly record. In addition, our operating margin in the quarter exceeded our near term goal as we continue to improve overall efficiency and productivity. New business in the quarter was the best in several years, with new margin installed increasing over 20% from a year ago as our Durbin Dollars marketing campaign continues to bolster results and both our established and newly hired relationship managers achieved individual record levels of new business production. Cash flow in the second quarter was up significantly from the same period a year ago, supporting our strategic growth initiatives, including our Heartland School Solutions' recent acquisition of Lunch Byte, as well as providing the resources to reward our shareholders through dividends and share repurchases. We have made tremendous progress strengthening our organization and expanding our franchise, and are well-positioned to capitalize on the growth opportunities arising across our industry to create value for our shareholders.”

SME card processing volume for the three months ended June 30, 2012 increased 6.2% from the year-ago quarter to $18.6 billion as same store sales increased 2.2%, volume attrition was 12.7% and new margin installed grew 20.5%. Net revenue in the quarter increased 10.7% over the prior year as a result of strong card and non-card business revenue growth, especially Heartland School Solutions. Operating income in the quarter was up 37% over the year-ago quarter to $29.7 million, or 22% of net revenue, reflecting the improved leverage resulting from ongoing efficiency initiatives. The significant improvement in operating performance in the quarter was achieved despite a substantial increase in share-based compensation, which was also the primary driver of an 11% rise in general and administrative expenses. Share-based compensation throughout 2012 is expected to be substantially higher than in 2011, reflecting improvements in corporate financial performance that is triggering the recognition of additional costs associated with certain performance-based Restricted Stock Units that are likely to vest in coming years.

Mr. Carr continued, “These are exciting times throughout the payments industry. We are investing in new technology and developing exciting new products in existing and adjacent markets to remain a leader in this large, fast growing and dynamic industry. Most importantly, this past quarter we added accomplished executives to our management team to more effectively capitalize on existing and emerging opportunities in the industry that will enhance our growth and profitability. By continuing to strengthen our organization, we can more effectively leverage our resources and relationships to grow in markets that are rapidly expanding and offer superior returns. While our business continues to change and grow, we remain committed to providing our merchants with a 'Fair Deal'.”

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SIX MONTH RESULTS:
For the first six months of 2012, GAAP net income was $31.6 million or $0.78 per share, compared to $20.1 million, or $0.50 per share for the first half of 2011. Net revenue for the first half of 2012 was $263.9 million, up 12.4% compared to the first half of 2011. Adjusted net income and earnings per share for the first half of fiscal 2012 were $36.0 million or $0.89 per share, compared to $22.8 million, or $0.57 per share in the first half of fiscal 2011. Year-to-date 2012, share-based compensation expense has reduced earnings by $4.3 million or $0.11 per diluted share, compared to $2.3 million, or $0.06 per diluted share, a year ago.

FULL YEAR 2012 GUIDANCE:
For full year 2012, we expect Net Revenue to be between $540 million and $545 million, and Adjusted EPS to be between $1.70 and $1.74, before deducting $0.22 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 September 14, 2012 to shareholders of record on August 24, 2012. In the second quarter, the Company completed its previously-announced $50 million repurchase program, repurchasing a total of 1.93 million shares at an average cost of $25.82 over the course of the program. The Board has also authorized a new $50 million repurchase program under essentially the same terms and conditions as the completed program.

CONFERENCE CALL:

Heartland Payment Systems, Inc. will host a conference call on July 31, 2012 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 be accessed by calling (888) 466-4518. Please provide the operator with PIN number 3347240. 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.


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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.




Contact
Joe Hassett
Gregory FCA Communications
27 West Athens Ave.
Ardmore, PA 19003
Tel: 610-228-2110
Email: Heartland_ir@gregoryfca.com






TABLES FOLLOW




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Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Total revenues
$
518,521

 
$
525,977

 
$
989,006

 
$
993,623

Costs of services:
 
 
 
 
 
 
 
Interchange
330,742

 
365,207

 
628,690

 
686,006

Dues, assessments and fees
52,505

 
38,551

 
96,373

 
72,701

Processing and servicing
57,188

 
55,359

 
113,910

 
107,915

Customer acquisition costs
11,263

 
12,130

 
22,699

 
23,788

Depreciation and amortization
4,506

 
3,701

 
8,892

 
7,576

Total costs of services
456,204

 
474,948

 
870,564

 
897,986

General and administrative
32,584

 
29,377

 
65,466

 
59,423

Total expenses
488,788

 
504,325

 
936,030

 
957,409

Income from operations
29,733

 
21,652

 
52,976

 
36,214

Other income (expense):
 
 
 
 
 
 
 
Interest income
45

 
41

 
160

 
82

Interest expense
(756
)
 
(1,116
)
 
(1,606
)
 
(2,308
)
Provision for processing system intrusion costs
(81
)
 
(372
)
 
(238
)
 
(675
)
Other, net
(4
)
 
(308
)
 
(4
)
 
(745
)
Total other income (expense)
(796
)
 
(1,755
)
 
(1,688
)
 
(3,646
)
Income before income taxes
28,937

 
19,897

 
51,288

 
32,568

Provision for income taxes
10,975

 
7,505

 
19,474

 
12,314

Net income
17,962

 
12,392

 
31,814

 
20,254

Less: Net income attributable to noncontrolling interests
161

 
134

 
259

 
181

Net income attributable to Heartland
$
17,801

 
$
12,258

 
$
31,555

 
$
20,073

 
 
 
 
 
 
 
 
Net income
$
17,962

 
$
12,392

 
$
31,814

 
$
20,254

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains on investments, net of income tax of $2, $0, $10
and $2
4

 
—

 
15

 
5

Unrealized losses on derivative financial instruments
(3
)
 
(536
)
 
(9
)
 
(582
)
Foreign currency translation adjustment
(267
)
 
97

 
(36
)
 
453

Comprehensive income
17,696

 
11,953

 
31,784

 
20,130

Less: Comprehensive income attributable to noncontrolling interests
81

 
163

 
248

 
317

Comprehensive income attributable to Heartland
$
17,615

 
$
11,790

 
$
31,536

 
$
19,813

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.32

 
$
0.81

 
$
0.52

Diluted
$
0.44

 
$
0.31

 
$
0.78

 
$
0.50

Weighted average number of common
     shares outstanding:
 
 
 
 
 
 
 
Basic
38,844

 
38,792

 
38,840

 
38,625

Diluted
40,448

 
40,128

 
40,504

 
39,934


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Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,951

 
$
40,301

Funds held for payroll customers
48,859

 
42,511

Receivables, net
180,096

 
176,535

Investments held to maturity
3,711

 
2,505

Inventory
11,168

 
11,492

Prepaid expenses
8,787

 
9,660

Current tax asset
4,091

 
—

Current deferred tax assets, net
6,875

 
6,746

Total current assets
306,538

 
289,750

Capitalized customer acquisition costs, net
56,223

 
55,014

Property and equipment, net
120,437

 
115,579

Goodwill
118,610

 
103,399

Intangible assets, net
37,359

 
32,498

Deposits and other assets, net
738

 
681

Total assets
$
639,905

 
$
596,921

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
54,451

 
$
63,881

Accounts payable
56,401

 
47,373

Deposits held for payroll customers
48,859

 
42,511

Current portion of borrowings
43,502

 
15,003

Current portion of accrued buyout liability
9,232

 
8,104

Processing liabilities and loss reserves
37,229

 
30,689

Accrued expenses and other liabilities
41,493

 
50,884

Current tax liability
—

 
1,408

Total current liabilities
291,167

 
259,853

Deferred tax liabilities, net
26,296

 
21,643

Reserve for unrecognized tax benefits
2,190

 
1,819

Long-term portion of borrowings
60,000

 
70,000

Long-term portion of accrued buyout liability
24,218

 
23,554

Total liabilities
403,871

 
376,869

Commitments and contingencies
—

 
—

 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 40,742,488 and 39,626,846 shares
issued at June 30, 2012 and December 31, 2011; 38,806,159 and 38,847,957 outstanding at
June 30, 2012 and December 31, 2011
41

 
39

Additional paid-in capital
229,691

 
207,643

Accumulated other comprehensive loss
(699
)
 
(680
)
Retained earnings
56,111

 
29,236

Treasury stock, at cost (1,936,329 and 778,889 shares at June 30, 2012 and December 31, 2011)
(50,000
)
 
(16,828
)
Total stockholders’ equity
235,144

 
219,410

Noncontrolling interests
890

 
642

Total equity
236,034

 
220,052

Total liabilities and equity
$
639,905

 
$
596,921

        

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Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flow
(In thousands)
(unaudited)
 
Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net income
$
31,814

 
$
20,254

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
22,509

 
24,400

Other depreciation and amortization
14,714

 
14,023

Addition to loss reserves
1,195

 
3,381

Provision for doubtful receivables
390

 
1,270

Share-based compensation
6,901

 
3,700

Deferred taxes
4,522

 
2,253

Exit costs for service center
—

 
771

Other
29

 
83

Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(2,324
)
 
(17,561
)
Decrease in inventory
383

 
1,093

Payment of signing bonuses, net
(15,461
)
 
(14,161
)
Increase in capitalized customer acquisition costs
(8,257
)
 
(6,942
)
Decrease (increase) in prepaid expenses
886

 
(2,750
)
(Increase) decrease in current tax asset
(945
)
 
15,758

Increase in deposits and other assets
(53
)
 
(295
)
Excess tax benefits on employee share-based compensation
(4,556
)
 
(2,537
)
Increase in reserve for unrecognized tax benefits
371

 
273

(Decrease) increase in due to sponsor bank
(9,430
)
 
7,512

Increase in accounts payable
9,035

 
666

(Decrease) increase in accrued expenses and other liabilities
(11,457
)
 
1,723

Increase in processing liabilities and loss reserves
5,263

 
2,025

Payouts of accrued buyout liability
(6,655
)
 
(7,276
)
Increase in accrued buyout liability
8,447

 
6,330

Net cash provided by operating activities
47,321

 
53,993

Cash flows from investing activities
 
 
 
Purchase of investments held to maturity
(1,865
)
 
(2,178
)
Maturities of investments held to maturity
676

 
1,282

(Increase) decrease in funds held for payroll customers
(6,323
)
 
1,818

Increase (decrease) in deposits held for payroll customers
6,348

 
(1,812
)
Acquisition of business, net of cash acquired
(23,682
)
 
(7,598
)
Purchases of property and equipment
(16,420
)
 
(20,365
)
Net cash used in investing activities
(41,266
)
 
(28,853
)
Cash flows from financing activities
 
 
 
Proceeds from borrowings
26,000

 
—

Principal payments on borrowings
(7,502
)
 
(30,778
)
Proceeds from exercise of stock options
11,840

 
5,733

Excess tax benefits on employee share-based compensation
4,556

 
2,537

Repurchases of common stock
(33,586
)
 
—

Dividends paid on common stock
(4,680
)
 
(3,095
)
Net cash used in financing activities
(3,372
)
 
(25,603
)
 
 
 
 
Net increase (decrease) in cash
2,683

 
(463
)
Effect of exchange rates on cash
(33
)
 
37

Cash at beginning of year
40,301

 
41,729

Cash at end of period
$
42,951

 
$
41,303

 
 
 
 

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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 three months ended June 30, 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 June 30, 2012, the Company has expensed a total of $147.3 million, before reducing those charges by $31.2 million of total insurance recoveries. The majority of the total charges of approximately $114.7 million relates to settlements of claims. Approximately $32.6 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 June 30, 2012, the Company incurred approximately $0.1 million, 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 June 30, 2011, the Company expensed approximately $0.4 million, or less than one cent per share, related to the Processing System Intrusion. During the six months ended June 30, 2012, the Company incurred approximately $0.2 million, or less than one cent per share, for legal fees and costs it incurred related to the Processing System Intrusion. During the six months ended June 30, 2011, the Company expensed approximately $0.7 million, or less than one cent 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

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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 and six months ended June 30, 2012 and 2011 follows:


(In thousands, except per share):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Net income attributable to Heartland
 
2012
 
2011
 
2012
 
2011
Non-GAAP - Adjusted net income attributable to Heartland
 
$
20,313

 
$
13,567

 
$
35,983

 
$
22,792

Less adjustments:
 
 
 
 
 
 
 
 
Share-based compensation expense
 
3,967

 
1,730

 
6,901

 
3,700

Income tax benefit on share-based compensation expense
 
(1,505
)
 
(653
)
 
(2,621
)
 
(1,401
)
After-tax share-based compensation expense
 
2,462

 
1,077

 
4,280

 
2,299

    Provision for processing system intrusion costs
 
81

 
372

 
238

 
675

    Income tax impact of provision for processing system intrusion
 
(31
)
 
(140
)
 
(90
)
 
(255
)
    After-tax provision for processing system intrusion costs
 
50

 
232

 
148

 
420

GAAP - Net income attributable to Heartland
 
$
17,801

 
$
12,258

 
$
31,555

 
$
20,073

 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Non-GAAP - Adjusted net income per share
 
$
0.50

 
$
0.34

 
$
0.89

 
$
0.57

Less: share-based compensation expense
 
0.06

 
0.03

 
0.11

 
0.06

Less: provision for processing system intrusion costs
 
—

 
—

 
—

 
0.01

GAAP - Net income per share
 
$
0.44

 
$
0.31

 
$
0.78

 
$
0.50

 
 
 
 
 
 
 
 
 
Shares used in computing net income per share
 
40,448

 
40,128

 
40,504

 
39,934




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HEARTLAND PAYMENT SYSTEMS INC Reports