Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HPY > SEC Filings for HPY > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for HEARTLAND PAYMENT SYSTEMS INC

Form 10-Q for HEARTLAND PAYMENT SYSTEMS INC


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). Forward Looking Statements
Unless the context requires otherwise, references in this report to "the Company," "we," "us," and "our" refer to Heartland Payment Systems, Inc. and our subsidiaries.

Some of the information in this Quarterly Report on Form 10-Q may contain forward­looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, financial condition and prospects, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "predict," "will be," "will continue" or similar expressions.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in the forward-looking statements. You should understand that many important factors, in addition to those discussed elsewhere in this report, could cause our results to differ materially from those expressed in the forward-looking statements. Certain of these factors are described in Item 1A. Risk Factors of the 2013 Form 10-K and include, without limitation, unauthorized disclosure of user data through breaches of our computer systems or otherwise, our competitive environment, the business cycles and credit risks of our merchants, chargeback liability, merchant attrition, problems with our sponsor banks, our relationships with third-party bankcard payment processors, our inability to pass increased interchange fees, assessments, and transaction fees along to our merchants, economic conditions, systems failures and government regulation.

Overview
General
Our primary business is to provide card payment processing services to merchants throughout the United States. This involves providing end-to-end electronic payment processing services to merchants by facilitating the exchange of information and funds between them and cardholders' financial institutions. To accomplish this, we undertake merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support, and risk management. We also sell and rent point-of-sale devices. Our card-accepting customers primarily fall into two categories: our core small and mid-sized merchants (referred to as "Small and Midsized Enterprises," or "SME merchants") and Network Services merchants, predominately petroleum industry merchants of all sizes (referred to as "Network Services merchants").

We provide additional services such as:

• School nutrition, point-of-sale solutions, and associated payment solutions, including online prepayment solutions, to K-12 schools through Heartland School Solutions,

• Full-service payroll processing and related tax filing services through Heartland Ovation Payroll,

• Payment processing, higher education loan services and open- and closed-loop payment solutions to colleges and universities through Campus Solutions,

• Prepaid and stored-value card solutions through Micropayments, and marketing solutions including loyalty and gift cards, which we provide through Heartland Marketing Solutions.

Card Payment Processing
At March 31, 2014, we provided our card payment processing services to 167,793 active SME merchants located across the United States. This compares to 166,697 active SME merchants at December 31, 2013 and 170,247 active SME


Table of Contents

merchants at March 31, 2013. At March 31, 2014, we provided card payment processing services to approximately 1,130 Network Services merchants with approximately 43,109 locations compared to approximately 500 merchants and 46,154 locations at March 31, 2013. According to The Nilson Report, in 2013 we were the 5th largest merchant acquirer in the United States ranked by transaction count and the 8th largest merchant acquirer by processed dollar volume, which consisted of Visa, MasterCard, and Discover signature debit cards, and PLUS, NYCE, PULSE, STAR, ACCEL/Exchange and other PIN-based debit cards, in addition to Visa, American Express, MasterCard, Discover, Diners Club, Union Pay, and JCB credit cards. These rankings represented 3.5 billion transactions and 3.0% of the total U.S. bankcard processing market, respectively.

We sold our interest in Collective POS Solutions. ("CPOS") in a transaction settled on January 31, 2013. CPOS has historically represented an insignificant component of our financial position and results of operations. However, as further disclosed elsewhere in the notes to the condensed consolidated financial statements, we recognized a gain on the sale of CPOS in the first quarter of 2013. As a result, we presented CPOS as a discontinued operation for all periods presented.

Our total card processing volume for the three months ended March 31, 2014 was $24.5 billion, a 2.7% increase from the $23.9 billion processed during the three months ended March 31, 2013. Our SME card processing volume for the three months ended March 31, 2014 was $18.0 billion, an increase of 3.7% over the three months ended March 31, 2013 reflecting increases for same store sales growth and the addition of SME merchants whose processing volume exceeded that of merchants who attrited during the year.
Our card processing volume for the three months ended March 31, 2014 also includes $6.6 billion of settled volume for Network Services merchants, compared to $6.5 billion for the three months ended March 31, 2013. Card processing volume for the three months ended March 31, 2014 and 2013 was as follows:

                                        Three Months Ended
                                            March 31,
                                         2014         2013
                                          (In millions)
SME merchants                        $    17,963    $ 17,330
Network Services merchants                 6,567       6,486
Canada (a)                                     -          59
Total bankcard processing volume (b) $    24,530    $ 23,875

(a) Canadian operations were discontinued as result of the sale of CPOS in January of 2013.
(b) Card processing volume includes volume for credit and signature debit transactions.

Merchant attrition is expected in the card payment processing industry in the ordinary course of business. We experience attrition in merchant card processing volume resulting from several factors, including business closures, transfers of merchants' accounts to our competitors and account closures that we initiate due to heightened credit risks. We measure SME processing volume attrition relative to all SME merchants that were processing with us in the same month a year earlier. During the three months ended March 31, 2014, we experienced 15.0% average annualized attrition in our SME card processing volume compared to an average attrition of 12.9%, and 12.8% for the years ended December 31, 2013 and 2012, respectively.

In our SME business, we measure same store sales growth, or contraction, as the change in card processing volume for all card merchants that were processing with us in the same month a year earlier. During the three months ended March 31, 2014, same store sales contracted 0.2% on average, compared to growth of 2.2% in the quarter ended March 31, 2013 and 2.0% growth on average in all of 2013. Same store sales growth or contraction results from the combination of the increasing or decreasing use by consumers of bankcards for the purchase of goods and services at the point of sale, and sales growth or contraction experienced by our retained SME merchants. Historically, our same store sales experience has tracked overall economic conditions, and this is the case for 2014. The following table compares our same store sales (contraction)/growth during 2014, 2013 and 2012:

Same Store Sales (Contraction) Growth  2014    2013   2012
First Quarter                         (0.2)%   2.2%   3.4%
Second Quarter                                 1.9%   2.2%
Third Quarter                                  1.6%   1.8%
Fourth Quarter                                 2.4%   1.5%
Full Year                                      2.0%   2.2%

We measure the overall production of our sales force by new gross margin installed, which reflects the expected annual gross profit from a merchant contract after deducting processing and servicing costs associated with that revenue. We


Table of Contents

measure installed margin primarily for our SME card processing, payroll processing and loyalty and gift card marketing businesses. Our newly installed gross margin for the three months ended March 31, 2014 increased 24.3%. We attribute this increase in newly installed gross margin to higher volumes and margins at newly installed merchants and improved individual productivity achieved by our salespersons, as well as growth in the sales force since the first quarter of 2013. Our combined Relationship Managers, Territory Managers and Senior Product Advisors ("SPA") count amounted to 902 and 891 at December 31, 2013 and March 31, 2014, respectively, and 816 in the quarter ended March 31, 2013. We expect to drive increases in year-over-year installed margin in future periods primarily by increasing our Relationship and Territory Managers, and SPA count.

The card revenue we earn in our SME business is recurring in nature, as we typically enter into three-year service contracts with our card processing SME merchants that, in order to qualify for the agreed-upon pricing, require the merchant to achieve card processing volume minimums. Our SME revenue is generated primarily from payment processing fees, which are a combination of a fee equal to a percentage of the dollar amount of each transaction we process plus a flat fee per transaction. We make mandatory payments of interchange fees to the card issuer through the card networks and dues, assessments and other network fees to Visa, MasterCard and Discover. Our SME gross card processing revenue is largely driven by the Visa and MasterCard volume processed by our merchants. We also realize card processing revenues from processing transactions for our SME merchants accepting American Express and from processing Discover transactions.

In contrast to SME card processing revenues, revenues from our Network Services merchants are largely driven by the number of transactions we process (whether settled, or only authorized), not our processing volume, as the merchants which comprise Network Services' customer base pay on a per transaction basis for processing services. Additionally, we provide authorization, settlement and account servicing services on our front and back end systems for American Express transactions for larger merchants, and merchants signed to American Express by other processors; for those services we receive compensation from American Express on a per transaction basis. The number of transactions we processed for Network Services merchants and American Express for the three months ended March 31, 2014 and 2013 were as follows:

                                 Three Months Ended
                                     March 31,
                                  2014          2013
                                   (In thousands)
Network Services merchants:
Settled                         233,944       224,785
Authorized                      564,253       549,252
       Total Network Services   798,197       774,037
American Express (a)              7,500         7,583
Total                           805,697       781,620

(a) Includes only those transactions not eligible for residual compensation

Our ability to manage our front-end authorization systems, HPS Exchange, VAPS and NWS, provides us greater control of the electronic transaction process, allows us to offer our merchants a differentiated product offering, and offers economies of scale that we expect will increase our long-term profitability. During the three months ended March 31, 2014 and 2013, approximately 95% of our SME transactions were processed through HPS Exchange. All of our Network Services transactions were processed through VAPS or NWS.

We provide clearing, settlement and merchant accounting services through our own internally developed back-end processing system, Passport. Passport enables us to customize these services to the needs of our Relationship Managers and merchants. At both March 31, 2014 and 2013, substantially all of SME merchants were processing on Passport and all Network Services settled transactions were processed on Passport.

Heartland School Solutions
We provide school nutrition, point-of-sale solutions, and associated payment solutions including online prepayment, to kindergarten through 12th grade ("K to 12") schools through-out the United States. At March 31, 2014, our Heartland School Solutions business provided services to over 34,000 public and private schools, as compared to over 29,000 public and private schools at December 31, 2013. In April 2014, we acquired MCS Software continuing the expansion of our market-leading position in the K to 12 school nutrition and POS technology industry. Our Heartland School Solutions business has been built through a series of six acquisitions, including the recent April 2014 acquisition of MCS Software. Heartland School Solutions now serves over 34,000 K to 12 schools nationwide, representing a 35% share of the public schools in the U.S.


Table of Contents

Heartland Ovation Payroll
We provide payroll processing services throughout the United States. On December 31, 2012, we acquired Ovation Payroll, Inc. ("Ovation") nearly doubling the customers in our existing payroll business. At March 31, 2014, we processed payroll for 24,625 customers, an increase of 9.6% from 22,468 payroll customers at March 31, 2013. In the three months ended March 31, 2014, we installed 2,095 new payroll processing customers. We operate a comprehensive payroll management system, which we refer to as HOP (formerly PlusOne Payroll), that streamlines all aspects of the payroll process to enable time and cost savings. The HOP platform enables us to process payroll on a large scale and provide customizable solutions for businesses of all sizes. The acquisition of Ovation added scale to our HOP platform, leveraging operating costs, and also added management, a new sales approach including an affinity partner network, and enhanced product and servicing capabilities.

Campus Solutions
We provide open- and closed- loop payment solutions and higher education loan services to campuses throughout the United States and Canada. In December 2012, we added to our Campus Solutions segment by acquiring ECSI, which provides a suite of solutions to support administrative services for higher education including student loan payment processing, delinquency and default services, refund management, tuition payment plans, electronic billing and payment, tax document services, and business outsourcing. ECSI's core services support the management, payment and collection of student loans including Perkins and institutional financing. Since its founding in 1972, ECSI has printed and mailed 500 million billing statements, processed over 400 million tuition and loan payments and managed accounts for approximately 7 million students and borrowers. ECSI also processes nearly 5 million tax documents every year. With ECSI, our Campus Solutions currently serves over 2,000 colleges and universities across multiple higher education sectors including Non-Profit, For-Profit, Private, and Community Colleges.
Campus Solutions also provides open- and closed-loop payment solutions for college or university campuses to efficiently process small value electronic transactions. Besides payment processing, our One-Card product enables personal identification, door access, cashless vending transactions, cashless laundry, meal plans and cashless printing at campus facilities. Our innovative Give Something Back Network adds Internet and phone accessible closed-loop debit card based financial services to the students, faculty, staff and local community merchants of an educational institution. In addition, our Refund Select program, which we introduced in 2010, addresses the major operational needs of campuses by providing an open-loop debit card platform onto which schools will load financial aid refunds. At March 31, 2014, we had 48 colleges enrolled, representing 245,000 students and over $490 million in annual reimbursement, under the Refund Select program. We currently have 226 OneCard and Refund Select college and university accounts.

First Quarter of 2014 Financial Results
Our financial results for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, reflect the benefits of 5.9% year-over-year growth in net revenue and a decrease of 3.0% in general and administrative expenses partially offset by an increase of 15.5% in processing and servicing costs. For the three months ended March 31, 2014, we recorded net income from continuing operations, net of noncontrolling interests of $15.7 million, or $0.42 per share, compared to $15.6 million, or $0.41 per share, in the three months ended March 31, 2013. Results for the three months ended March 31, 2014 include a loss from operations of $2.7 million for Leaf Holdings, Inc. ("Leaf") in which we acquired a 67% ownership in September 2013. The following is a summary of our financial results for the three months ended March 31, 2014:
• Net revenue, which we define as total revenues less interchange fees and dues, assessments and fees, increased $8.7 million, or 5.9%, from $146.8 million in the three months ended March 31, 2013 to $155.5 million in the three months ended March 31, 2014. The increase in net revenue was driven by the increased card processing net revenue from our SME merchants and increases in revenues for Heartland School Solutions, Heartland Ovation Payroll, and Campus Solutions.

•         During the three months ended March 31, 2014, our SME processing volume
          increased 3.7% to $18.0 billion from $17.3 billion during the three
          months ended March 31, 2013. We earn percentage-based revenues on our
          SME processing volume. The year-over-year increase reflects
          improvements in the level of new SME merchants installed.


•         Our processing and servicing expenses increased $9.2 million, or 15.5%,
          from $59.4 million in the three months ended March 31, 2013, to $68.6
          million in the three months ended March 31, 2014. The increase in
          processing and servicing expenses was primarily due to increased costs
          associated with processing and servicing higher SME bankcard processing
          volume, and increased cost of sales and servicing related to higher
          Heartland School Solutions, Heartland Ovation Payroll, and Campus
          Solutions revenues. As we continue to integrate our payroll businesses,
          the increase in processing and servicing expenses reflects
          reclassification of approximately $1.7 million of expenses from general
          and administrative to processing and servicing expense to bring
          operating


Table of Contents

expenses in our legacy payroll business and Ovation business into alignment. The three months ended March 31, 2013 also reflects a decrease in processing and servicing expense due to an adjustment to the carrying value of an unfavorable processing contract associated with our September 30, 2011 acquisition of School-Link Technologies, Inc.of $1.6 million to adjust the liability to reflect the latest estimate of the expected cash processing costs to be paid over the remainder of the contract.

•         Our general and administrative expenses decreased $1.4 million, or
          3.0%, from $45.8 million in the three months ended March 31, 2013 to
          $44.5 million in the three months ended March 31, 2014. General and
          administrative expenses for March 31, 2014 decreased primarily due to
          decreases in IT related costs, equipment lease expense, and lower legal
          costs. As we continue to integrate our payroll businesses, the decrease
          in general and administrative expenses reflects reclassification of
          approximately $1.7 million of expenses from general and administrative
          to processing and servicing to bring operating expenses in our legacy
          payroll business and Ovation business into alignment. Partially
          offsetting these decreases was an increase in General and
          Administrative expenses as a result of the September 2013 acquisition
          of Leaf.

• Our income from operations, which we also refer to as operating income,

          decreased $0.4 million to $26.4 million for the three months ended
          March 31, 2014, from $26.8 million for the three months ended March 31,
          2013. Our Operating Margin, which we measure as operating income
          divided by net revenue, was 17.0% for the three months ended March 31,
          2014, compared to 18.2% for the three months ended March 31, 2013.
          Excluding the operating loss from Leaf, our Operating Margin for the
          three months ended March 31, 2014 was 18.7%.

See "- Results of Operations - Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013" for a more detailed discussion of our first quarter financial results.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. These condensed consolidated financial statements are unaudited. In our opinion, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our financial position at March 31, 2014, our results of operations, our changes in equity and our cash flows for the three months ended March 31, 2014 and 2013. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ended December 31, 2014. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. Our significant accounting policies are more fully described in Note 2 to our condensed consolidated financial statements included elsewhere in this report and in our 2013 Form 10-K.

Our critical accounting estimates and judgments have not changed materially from those reported in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Form 10-K.


Table of Contents

Results of Operations
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
The following table shows certain income statement data as a percentage of net
revenue for the periods indicated (in thousands of dollars):
                            Three Months                Three Months
                                Ended                       Ended                          Change
                              March 31,     % of Net      March 31,     % of Net      Amount        %
                                2014         Revenue        2013         Revenue
Net revenue:
 Total revenues             $  523,283                  $  501,239                  $  22,044      4.4  %
Less: Interchange              318,096                     307,072                     11,024      3.6  %
Less: Dues, assessments and
fees                            49,668                      47,332                      2,336      4.9  %
     Total net revenue         155,519       100.0  %      146,835       100.0  %       8,684      5.9  %

Expenses:
Processing and servicing        68,609        44.1  %       59,397        40.5  %       9,212     15.5  %
Customer acquisition costs      10,250         6.6  %       10,733         7.3  %        (483 )   (4.5 )%
Depreciation and
amortization                     5,812         3.7  %        4,090         2.8  %       1,722     42.1  %
General and administrative      44,486        28.6  %       45,840        31.2  %      (1,354 )   (3.0 )%
Total expenses                 129,157        83.0  %      120,060        81.8  %       9,097      7.6  %
Income from operations          26,362        17.0  %       26,775        18.2  %        (413 )   (1.5 )%
Other income (expense):
Interest income                     32           -  %           34           -  %          (2 )   (5.9 )%
Interest expense                (1,050 )      (0.7 )%       (1,234 )      (0.8 )%         184     14.9  %
Other, net                        (132 )      (0.1 )%          (90 )      (0.1 )%         (42 )  100.0  %
Total other (expense)
income                          (1,150 )      (0.7 )%       (1,290 )      (0.9 )%         140     10.9  %
Income from continuing
operations before income
taxes                           25,212        16.2  %       25,485        17.4  %        (273 )   (1.1 )%
Provision for income taxes      10,300         6.6  %        9,840         6.7  %         460      4.7  %
Net income from continuing
operations                      14,912         9.6  %       15,645        10.7  %        (733 )   (4.7 )%
Income from discontinued
operations,
     net of income tax               -           -  %        3,970         2.7  %      (3,970 )
Net income                      14,912         9.6  %       19,615        13.4  %      (4,703 )  (24.0 )%
Less: Net (loss) income
attributable to
noncontrolling interests
   Continuing operations          (828 )                         -                       (828 )
   Discontinued operations           -                          56                        (56 )
Net income attributable to
Heartland                   $   15,740        10.1  %   $   19,559        13.3  %   $  (3,819 )  (19.5 )%

(a) Attributable to income from discontinued operations.

Revenue. The following tables summarize total revenue and total net revenue . . .

  Add HPY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HPY - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.