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VNTV > SEC Filings for VNTV > Form 10-Q on 24-Oct-2013All Recent SEC Filings

Show all filings for VANTIV, INC.

Form 10-Q for VANTIV, INC.


24-Oct-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. This management's discussion and analysis should also be read in conjunction with the management's discussion and analysis and consolidated financial statements for the year ended December 31, 2012 included in our 10-K filed with the SEC on February 20, 2013.

General

We are the third largest merchant acquirer and the largest personal identification number ("PIN") debit acquirer by transaction volume, according to the Nilson Report, and a leading, integrated payment processor in the United States differentiated by a single, proprietary technology platform. This enables us to efficiently provide a suite of comprehensive services to both merchants and financial institutions of all sizes in the United States. Our technology platform offers our clients a single point of access and service that is easy to connect to and use in order to access a broad range of payment services and solutions. Our integrated business and single platform also enable us to innovate, develop and deploy new services and provide us with significant economies of scale. Our varied and broad distribution provides us with a diverse client base and channel partner relationships.

We believe our single, proprietary technology platform is differentiated from our competitors' multiple platform architectures. Because of our single point of service and ability to collect, manage and analyze data across the payment processing value chain, we can identify and develop new services more efficiently. Once developed, we can more cost-effectively deploy new solutions to our clients through our single platform. Our single scalable platform also enables us to efficiently manage, update and maintain our technology, increase capacity and speed and realize significant operating leverage.

We enable merchants of all sizes to accept and process credit, debit and prepaid payments and provide them supporting services, such as information solutions, interchange management and fraud management, as well as vertical-specific solutions in sectors such as grocery, pharmacy, retail, petroleum and restaurants/quick service restaurants. We also provide mission critical payment services to financial institutions, such as card issuer processing, payment network processing, fraud protection, card production, prepaid program management, automated teller machine ("ATM") driving and network gateway and switching services that utilize our proprietary Jeanie PIN debit payment network.

We provide small and mid-sized clients with the comprehensive solutions that we have developed to address the extensive requirements of our large clients. We then tailor these solutions to the unique needs of our small and mid-sized clients. In addition, we take a consultative approach to providing these services that helps our clients enhance their payments-related services.

We distribute our services through diversified distribution channels using a unified sales approach that enables us to efficiently and effectively target merchants and financial institutions of all sizes. These channels include a national sales force that targets financial institutions and national merchants, regional and mid-market sales teams that sell solutions to merchants and third-party reseller clients and a telesales operation that targets small and mid-sized merchants. In addition, we have relationships with a broad range of merchant banks, independent software vendors, value-added resellers, independent sales organizations, or ISOs, and trade associations that target merchants, including difficult to reach small and mid-sized merchants. We also have relationships with third-party resellers and core processors that target financial institutions.

Executive Overview

In May 2013, a secondary offering took place in which selling shareholders sold 40.7 million shares of Vantiv Class A common stock. We did not receive any proceeds from these sales. In connection with the secondary offering, we repurchased approximately 17.5 million shares of our Class A common stock sold to the underwriters in the secondary offering for $400 million at a price per share equal to the price paid by the underwriters to purchase the shares from the selling shareholders in the offering. As a result of the share repurchase, we incurred costs of approximately $0.6 million. In connection with the stock repurchase, we refinanced our existing senior secured credit facilities, resulting in an increase in the amount of debt by approximately $650 million, $400 million of which was used to fund the share repurchase.

In August 2013, a secondary offering took place in which selling shareholders sold 20.0 million shares of Vantiv, Inc. Class A common stock. We did not receive any proceeds from these sales.


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On October 22, 2013, our board of directors approved a program to repurchase up to $137 million of our Class A common stock. Purchases under the repurchase program may be made from time to time in the open market, in privately negotiated transactions, or otherwise. The manner, timing, and amount of any purchases will be determined by management based on an evaluation of market conditions, stock price, and other factors. No share repurchases have been transacted under this program as of the date of this filing. There is no guarantee as to the exact number or amount of shares that will be repurchased, and we may discontinue purchases at any time that management determines additional purchases are not warranted.

On October 23, 2013, we entered into substantially identical tax receivable termination agreements with Advent International Corporation ("Advent") and JPDN Enterprises, LLC ("JPDN") to terminate the obligations owed to them under the tax receivable agreements ("TRAs") established at the time of our initial public offering ("IPO"). Under the terms of the tax receivable termination agreements, we paid approximately $112 million to Advent and $0.5 million to JPDN to settle approximately $254 million of obligations under the TRAs, the difference of which will be recorded as an addition to paid-in capital. As a result of the termination agreements, the TRAs with Advent and JPDN were terminated and we have no further obligations to Advent or JPDN under the TRAs. We remain obligated to pay amounts due to Fifth Third Bank under the TRA with all pre-IPO investors and the TRA with Fifth Third Bank. Advent is a stockholder, and JPDN is an affiliate of our president and chief executive officer. A special committee of our board of directors comprised of independent, disinterested directors authorized the tax receivable termination agreements. See Note 4 of Part I, Item 1 for additional information about the TRAs.

Revenue for the three months ended September 30, 2013, increased 14% to $532.3 million from $466.7 million in 2012. Revenue for the nine months ended September 30, 2013, increased 13% to $1,549.7 million from $1,369.1 million in 2012. The revenue growth for the three months and nine months ended September 30, 2013 was due primarily to transaction growth of 9% and 11%, including the impact of the acquisition of Litle & Co., LLC ("Litle") in November 2012.

Income from operations for the three months ended September 30, 2013, increased $10.6 million to $90.2 million from $79.6 million in 2012. Income from operations for the nine months ended September 30, 2013, increased $45.5 million to $259.0 million from $213.5 million in 2012.

Net income for the three months ended September 30, 2013, increased $6.0 million to $54.6 million from $48.6 million in 2012. Net income for the nine months ended September 30, 2013, increased $91.7 million to $145.0 million from $53.3 million in 2012. Net income attributable to Vantiv, Inc. for the three months ended September 30, 2013, increased $11.4 million to $35.7 million from $24.3 million in 2012. Net income attributable to Vantiv, Inc. for the nine months ended September 30, 2013, increased $61.9 million to $90.7 million from $28.9 million in 2012.

Recent Acquisitions

In July 2013, we acquired Element Payment Services, Inc. ("Element") for $162.5 million in cash. Element is a provider of fully integrated payment processing solutions for independent software vendors ("ISVs"). In November 2012, we acquired Litle, an ecommerce payment processor for approximately $361 million. The acquisition of Element provides us the strategic capabilities to partner with ISVs and positions us to increase our presence in the integrated payments market, while the acquisition of Litle strengthened our capabilities in ecommerce, expanded our customer base of online merchants and enabled the delivery of Litle's innovative ecommerce solutions to our merchant and financial institutions clients.

Our Segments, Revenue and Expenses

Segments

We operate as a single integrated business and report our results of operations in two segments, Merchant Services and Financial Institution Services. We evaluate segment performance based upon segment profit, which is defined as net revenue, which represents total revenue less network fees and other costs, less sales and marketing expense attributable to that segment.

Merchant Services

We provide a comprehensive suite of payment processing services, including acquiring and processing transactions, value-added services and merchant services for banks and credit unions. We authorize, clear, settle and provide reporting for electronic payment transactions for our merchant services clients. Our client base includes approximately 400,000 merchant


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locations, with an emphasis on non-discretionary everyday spend categories where spending has been more resilient during economic downturns.

We provide our merchant services to merchants of varying sizes, which provides us with a number of key benefits. Given their size, large merchants generally receive customized payment processing solutions and lower per transaction pricing. These merchants provide us with significant operating scale efficiencies and recurring revenues, due to the large transaction volume that they generate. Small and mid-sized merchants are more difficult to reach on an individual basis, but generally generate higher per transaction fees.

Financial Institution Services

We provide integrated card issuer processing, payment network processing and value-added services to financial institutions. Our services include a comprehensive suite of transaction processing capabilities, including fraud protection, card production, prepaid cards and ATM driving and allow financial institutions to offer electronic payments solutions to their customers on a secure and reliable technology platform at a competitive cost. We provide these services using a consultative approach that helps our financial institution clients enhance their payments-related business.

We serve a diverse set of financial institutions, including regional banks, community banks, credit unions and regional PIN debit networks. We focus on small to mid-sized institutions with less than $15 billion in assets. Smaller financial institutions, including many of our clients, generally do not have the scale or infrastructure typical of large banks and are more likely to outsource payment processing needs. We provide a turnkey solution to such institutions to enable them to offer payment processing solutions.

Revenue

We generate revenue primarily by processing electronic payment transactions. Set forth below is a description of our revenues by segment and factors impacting segment revenues.

Our Merchant Services segment revenues are primarily derived from processing credit and debit card transactions. Merchant Services revenue is primarily comprised of fees charged to businesses, net of interchange fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. The fees charged consist of either a percentage of the dollar volume of the transaction or a fixed fee, or both, and are recognized at the time of the transaction. Merchant Services revenue also includes a number of revenue items that are incurred by us and are reimbursable as the costs are passed through to and paid by our clients. These items primarily consist of Visa, MasterCard and other payment network fees. In addition, for sales through ISOs and certain other referral sources in which we are the primary party to the contract with the merchant, we record the full amount of the fees collected from the merchant as revenue. Associated residual payments made to ISOs are included in sales and marketing expenses. Merchant Services revenue also includes revenue from ancillary services such as fraud management, equipment sales and terminal rent. Revenue in our Merchant Services segment is impacted primarily by transaction volume, average transaction size, the mix of merchant types in our client portfolio, the performance of our merchant clients and the effectiveness of our distribution channels.

Our Financial Institution Services revenues are primarily derived from debit, credit and ATM card transaction processing, ATM driving and support, and PIN debit processing services. Financial Institution Services revenue associated with processing transactions includes per transaction and account related fees, card production fees and fees generated from our Jeanie network. Financial Institution Services revenue is impacted by the number of financial institutions using our services as well as their transaction volume. The number of financial institutions in the United States has declined as a result of prevailing economic conditions, consolidation as well as other market and regulatory pressures. These factors have contributed to industry-wide pricing compression of the fees that financial institutions are willing to pay for payment processing.

Network Fees and Other Costs

Network fees and other costs consist primarily of charges incurred by us which we pass through to our clients, including Visa, MasterCard and other payment network fees, card production costs, telecommunication charges, postage and other third party processing expenses.


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Net Revenue

Net revenue is revenue, less network fees and other costs and reflects revenue generated from the services we provide to our clients. Management uses net revenue to assess our operating performance. We believe that net revenue, when reviewed together with revenue, is meaningful to our investors in order to understand our performance.

Expenses

Set forth below is a brief description of the components of our expenses, aside
from the network fees and other costs discussed above:

         Sales and marketing expense primarily consists of salaries and benefits
          paid to sales personnel, sales management and other sales and marketing
          personnel, advertising and promotional costs and residual payments made
          to ISOs, agent banks and other third party partners.



         Other operating costs primarily consist of salaries and benefits paid
          to operational and IT personnel, costs associated with operating our
          technology platform and data centers, information technology costs for
          processing transactions, product development costs, software consulting
          fees and maintenance costs.



         General and administrative expenses primarily consist of salaries and
          benefits paid to executive management and administrative employees,
          including finance, human resources, product development, legal and risk
          management, share-based compensation costs, equipment and occupancy
          costs and consulting costs.



         Depreciation and amortization expense consists of our depreciation
          expense related to investments in property, equipment and software as
          well as our amortization of intangible assets, principally customer
          relationships acquired in connection with the acquisition of a majority
          interest in Vantiv Holding in June 2009 and our subsequent
          acquisitions.



         Interest expense-net consists primarily of interest on borrowings under
          our senior secured credit facilities less interest income earned on our
          cash and cash equivalents.

Income tax expense represents federal, state and local taxes based on income in multiple jurisdictions.

         Non-operating expenses consist of charges related to the refinancing of
          our senior secured credit facilities in May 2013 and March 2012 and our
          early termination of interest rate swaps in connection with the March
          2012 debt refinancing, as well as a one-time activity fee of $6.0
          million assessed by MasterCard as a result of our IPO.

Non-Controlling Interest

As a result of the non-controlling ownership interests in Vantiv Holding held by Fifth Third, our results of operations include net income attributable to non-controlling interests. Net income attributable to non-controlling interests for the three months ended September 30, 2013 and 2012 was $18.9 million and $24.4 million, respectively. Net income attributable to non-controlling interests for the nine months ended September 30, 2013 and 2012 was $54.3 million and $24.4 million, respectively. Net income attributable to non-controlling interests for the three months and nine months ended September 30, 2013 reflects the changes in ownership of Vantiv Holding as a result of the May and August 2013 secondary offerings and the share repurchase which occurred in May 2013. Future sales or redemptions of ownership interests in Vantiv Holding by Fifth Third will continue to reduce the amount recorded as non-controlling interest and increase net income attributable to Vantiv, Inc.

Factors and Trends Impacting Our Business and Results of Operations

We expect a number of factors will impact our business, results of operations and financial condition. In general, our revenue is impacted by the number and dollar volume of card based transactions which in turn are impacted by general economic conditions, consumer spending and the emergence of new technologies and payment types, such as ecommerce, mobile payments, and prepaid cards. In our Merchant Services segment, our net revenues are impacted by the mix of the size of merchants that we provide services to as well as the mix of transaction volume by merchant category. In our Financial Institution Services segment, our net revenues are also impacted by the mix of the size of financial institutions to which we provide services as well as consolidation and market and industry pressures, which have contributed and are expected to continue to contribute to pricing compression of payment processing fees in this segment. We also expect our results of operations to be impacted by the factors discussed below.


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Pro Forma Adjusted Net Income

We use pro forma adjusted net income for financial and operational decision making as a means to evaluate period-to-period comparisons of our performance and results of operations. Pro forma adjusted net income is also incorporated into performance metrics underlying certain share-based payments issued under the 2012 Vantiv, Inc. Equity Incentive Plan and our variable compensation plan. We believe pro forma adjusted net income provides useful information about our performance and operating results, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to key metrics used by management in its financial and operational decision making.

In calculating pro forma adjusted net income, we make certain non-GAAP adjustments, as well as pro forma adjustments, to adjust our GAAP operating results for the items discussed below. This measure should be considered together with GAAP operating results.

Non-GAAP Adjustments

Transition, Acquisition and Integration Costs

In connection with our acquisitions, we incurred costs associated with the acquisitions and related integration activities, consisting primarily of consulting fees for advisory and integration services and personnel related costs. Additionally, our expenses include costs associated with a one-time signing bonus issued to certain employees that transferred to us from Fifth Third in connection with our separation from Fifth Third in June 2009. This signing bonus contained a five-year vesting period beginning on the date of the separation. These transition, acquisition and integration costs are included in other operating costs and general and administrative expenses. For the three months ended September 30, 2013 and 2012, transition, acquisition and integration costs were $3.2 million and $2.3 million, respectively. For the nine months ended September 30, 2013 and 2012, transition, acquisition, and integration costs were $9.2 million and $6.3 million, respectively.

Share-Based Compensation

Prior to our IPO, certain employees and directors of Vantiv Holding participated in the Vantiv Holding Management Phantom Equity Plan. In connection with the IPO, outstanding awards under the Vantiv Holding Management Phantom Equity Plan were converted into unrestricted and restricted stock, issued under the 2012 Vantiv, Inc. Equity Incentive Plan. Subsequent to the IPO, we have granted share-based awards to certain employees and members of our board of directors and intend to continue to grant additional share-based awards in the future. During the three months ended September 30, 2013 and 2012, we incurred share-based compensation expense of $7.4 million and $9.4 million, respectively. During the nine months ended September 30, 2013 and 2012, we incurred share-based compensation expense of $21.4 million and $26.9 million respectively. Share-based compensation is included in general and administrative expense.

Intangible Amortization Expense

These expenses represent amortization of intangible assets acquired through business combinations and customer portfolio and related asset acquisitions.

Non-operating Expenses

For the nine months ended September 30, 2013, we recorded $20.0 million within non-operating expenses related to the refinancing of our senior secured credit facilities in May 2013. For the nine months ended September 30, 2012, we recorded $92.7 million within non-operating expenses, which consisted of $86.7 million related to the refinancing of our senior secured credit facilities and the early termination of our interest rate swaps in March 2012 and a $6.0 million one-time activity fee assessed by MasterCard as a result of our IPO.

Pro Forma Adjustments

Income Tax Expense Adjustments

Our effective tax rate reported in our results of operations reflects the impact of our non-controlling interest not being taxed at the statutory corporate tax rate. For purposes of calculating pro forma adjusted net income, income tax


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expense is adjusted to reflect an effective tax rate of 38.5%, assuming conversion of non-controlling interests into shares of Class A common stock, including the income tax effect of the non-GAAP adjustments described above.

Tax Adjustments

In addition to the adjustment described above, income tax expense is also adjusted for the cash tax benefits resulting from the amortization of intangible assets and other tax attributes resulting from or acquired with our acquisitions, the tax basis step up associated with our separation from Fifth Third and the purchase or exchange of Class B units of Vantiv Holding, net of payment obligations under TRAs established at the time of our IPO. The estimate of the cash tax benefits is based on the consistent and highly predictable realization of the underlying tax attributes.

As a result of the agreement to terminate and settle in full our obligations to Advent and JPDN under the TRAs as discussed above, beginning in the fourth quarter we will reflect the retention of the full amount of the cash tax benefits resulting from the realization of the tax attributes underlying the respective TRAs in pro forma adjusted net income.

The table below provides a reconciliation of GAAP income before applicable income taxes to pro forma adjusted net income for the three months and nine months ended September 30, 2013 and 2012:

                                            Three Months Ended             Nine Months Ended
                                              September 30,                  September 30,
                                           2013            2012           2013           2012
                                              (in thousands)                (in thousands)
Income before applicable taxes         $    79,498     $   69,534     $  208,688     $   76,137
Non-GAAP Adjustments:
 Transition, acquisition and
integration costs                            3,215          2,254          9,235          6,291
 Share-based compensation                    7,422          9,396         21,352         26,889
 Intangible amortization                    31,968         29,579         92,874         88,155
 Non-operating expenses                          -              -         20,000         92,672
  Non-GAAP Adjusted Income Before
Applicable Taxes                           122,103        110,763        352,149        290,144
Pro Forma Adjustments:
 Income tax expense adjustment             (47,010 )      (42,644 )     (135,577 )     (111,705 )
 Tax adjustments                             4,875              -         13,511              -
Pro Forma Adjusted Net Income          $    79,968     $   68,119     $  230,083     $  178,439

Pro forma adjusted net income was previously referred to as cash net income.


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Results of Operations

The following tables set forth our statements of income in dollars and as a
percentage of net revenue for the periods presented.
                                   Three Months Ended
                                     September 30,
                                   2013          2012       $ Change    % Change
                                             (dollars in thousands)
Revenue                         $  532,347    $ 466,736    $ 65,611       14  %
Network fees and other costs       238,141      208,239      29,902       14
Net revenue                        294,206      258,497      35,709       14
Sales and marketing                 79,551       69,313      10,238       15
Other operating costs               48,340       40,376       7,964       20
General and administrative          27,489       28,600      (1,111 )     (4 )
Depreciation and amortization       48,604       40,618       7,986       20
Income from operations          $   90,222    $  79,590    $ 10,632       13  %
Non-financial data:
Transactions (in millions)           4,266        3,928                    9  %


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