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Form 10-Q HEARTLAND PAYMENT SYSTEM For: Sep 30

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November 6, 2015 12:26 PM EST

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 001-32594
__________________________________ 
HEARTLAND PAYMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3755714
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
90 Nassau Street, Princeton, New Jersey 08542
(Address of principal executive offices) (Zip Code)
(609) 683-3831
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
As of November 2, 2015, there were 36,755,918 shares of the registrant’s Common Stock, $0.001 par value, outstanding.
 


INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6.


PART I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements

Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
September 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,148

 
$
70,793

Funds held for customers
180,458

 
176,492

Receivables, net
258,378

 
234,104

Investments
107

 
106

Inventory
10,279

 
12,048

Prepaid expenses
21,625

 
22,658

Current tax assets
749

 
15,082

Current deferred tax assets, net
12,311

 
9,308

Total current assets
527,055

 
540,591

Capitalized customer acquisition costs, net
83,192

 
73,107

Property and equipment, net
168,244

 
154,303

Goodwill
475,317

 
425,712

Intangible assets, net
197,254

 
192,553

Deposits and other assets, net
1,677

 
1,507

Total assets
$
1,452,739

 
$
1,387,773

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
49,266

 
$
31,165

Accounts payable
58,576

 
58,460

Customer fund deposits
180,458

 
176,492

Processing liabilities
119,884

 
119,398

Current portion of accrued buyout liability
17,471

 
15,023

Current portion of borrowings
48,793

 
36,792

Current portion of unearned revenue
53,150

 
46,601

Accrued expenses and other liabilities
49,050

 
41,517

Total current liabilities
576,648

 
525,448

Deferred tax liabilities, net
59,057

 
45,804

Reserve for unrecognized tax benefits
8,630

 
7,315

Long-term borrowings
450,041

 
523,122

Long-term portion of accrued buyout liability
38,175

 
32,970

Long-term portion of unearned revenue
3,025

 
2,354

Total liabilities
1,135,576

 
1,137,013

Commitments and contingencies (Note 11)
—

 
—

 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,752,588 and 36,344,921 shares issued and outstanding at September 30, 2015 and December 31, 2014
37

 
36

Additional paid-in capital
271,171

 
255,921

Accumulated other comprehensive loss
(8
)
 
(130
)
Retained earnings (accumulated deficit)
45,963

 
(5,067
)
Total equity
317,163

 
250,760

Total liabilities and equity
$
1,452,739

 
$
1,387,773

See accompanying notes to condensed consolidated financial statements.

1

Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
705,667

 
$
600,626

 
$
1,983,818

 
$
1,706,768

Costs of services:
 
 
 
 
 
 
 
Interchange
425,572

 
373,372

 
1,194,461

 
1,059,241

Dues, assessments and fees
65,506

 
57,864

 
180,548

 
163,218

Processing and servicing
85,817

 
69,328

 
246,227

 
204,985

Customer acquisition costs
15,501

 
12,289

 
44,284

 
34,907

Depreciation and amortization
11,541

 
7,981

 
33,382

 
20,472

Total costs of services
603,937

 
520,834

 
1,698,902

 
1,482,823

General and administrative
59,216

 
49,381

 
174,212

 
137,241

Total expenses
663,153

 
570,215

 
1,873,114

 
1,620,064

Income from operations
42,514

 
30,411

 
110,704

 
86,704

Other income (expense):
 
 
 
 
 
 
 
Interest income
29

 
33

 
82

 
95

Interest expense
(3,647
)
 
(2,142
)
 
(11,178
)
 
(4,450
)
Other, net
(9
)
 
3,581

 
(309
)
 
3,869

Total other (expense) income
(3,627
)
 
1,472

 
(11,405
)
 
(486
)
Income before income taxes
38,887

 
31,883

 
99,299

 
86,218

Provision for income taxes
15,006

 
11,727

 
37,274

 
34,579

Net income
23,881

 
20,156

 
62,025

 
51,639

Less: Net loss attributable to noncontrolling interests
—

 
(302
)
 
—

 
(2,011
)
Net income attributable to Heartland
$
23,881

 
$
20,458

 
$
62,025

 
$
53,650

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
      Basic
$
0.65

 
$
0.57

 
$
1.69

 
$
1.47

      Diluted
$
0.64

 
$
0.56

 
$
1.67

 
$
1.44

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
36,744

 
36,069

 
36,600

 
36,388

Diluted
37,281

 
36,850

 
37,186

 
37,249

 
 
 
 
 
 
 
 
Dividends declared per share:
$
0.10

 
$
0.085

 
$
0.30

 
$
0.255


See accompanying notes to condensed consolidated financial statements.

2

Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
23,881

 
$
20,156

 
$
62,025

 
$
51,639

Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification of losses (gains) on investments, net of income tax of
$(7), $5, $(7) and $108
12

 
(6
)
 
12

 
(170
)
Unrealized gains (losses) on investments, net of income tax of
$11, $(5), $16 and $5
28

 
(8
)
 
43

 
6

Unrealized gains on derivative financial instruments, net of income tax of
$17, $28, $50 and $83
11

 
45

 
67

 
140

Comprehensive income
23,932

 
20,187

 
62,147

 
51,615

Less: Comprehensive loss attributable to noncontrolling interests
—

 
(302
)
 
—

 
(2,011
)
Comprehensive income attributable to Heartland
$
23,932

 
$
20,489

 
$
62,147

 
$
53,626



See accompanying notes to condensed consolidated financial statements.

3


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands)
(unaudited)
 
Heartland Stockholders’ Equity
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
 Loss
 

Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
36,951

 
$
37

 
$
245,055

 
$
(88
)
 
$
35,960

 
$
(20,489
)
 
$
6,188

 
$
266,663

Issuance of common stock–
options exercised
346

 
—

 
4,482

 
—

 
—

 
—

 
—

 
4,482

Issuance of common stock –
RSU’s vested
230

 
—

 
(5,225
)
 
—

 
—

 
—

 
—

 
(5,225
)
Excess tax benefit on employee
share-based compensation
—

 
—

 
5,670

 
—

 
—

 
—

 
—

 
5,670

Repurchase of common stock
(1,348
)
 
—

 
—

 
—

 
—

 
(54,455
)
 
—

 
(54,455
)
Retirement of treasury stock
—

 
(1
)
 
(12,368
)
 
—

 
(62,575
)
 
74,944

 
—

 
—

Share-based compensation
—

 
—

 
10,936

 
—

 
—

 
—

 
—

 
10,936

Acquisition of noncontrolling
interest
—

 
—

 
3,577

 
—

 
—

 
—

 
(4,177
)
 
(600
)
Other comprehensive loss
—

 
—

 
—

 
(24
)
 
—

 
—

 
—

 
(24
)
Dividends on common stock
—

 
—

 
—

 
—

 
(9,249
)
 
—

 
—

 
(9,249
)
Net income (loss) for the period
 
 
—

 
—

 
—

 
53,650

 
—

 
(2,011
)
 
51,639

Balance, September 30, 2014
36,179

 
$
36

 
$
252,127

 
$
(112
)
 
$
17,786

 
$
—

 
$
—

 
$
269,837

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
36,345

 
$
36

 
$
255,921

 
$
(130
)
 
$
(5,067
)
 
$
—

 
$
—

 
$
250,760

Issuance of common stock–
options exercised
173

 
—

 
2,677

 
—

 
—

 
—

 
—

 
2,677

Issuance of common stock –
RSU’s vested
235

 
1

 
(7,145
)
 
—

 
—

 
—

 
—

 
(7,144
)
Excess tax benefit on employee
share-based compensation
—

 
—

 
5,578

 
—

 
—

 
—

 
—

 
5,578

Share-based compensation
—

 
—

 
14,140

 
—

 
—

 
—

 
—

 
14,140

Other comprehensive income
—

 
—

 
—

 
122

 
—

 
—

 
—

 
122

Dividends on common stock
—

 
—

 
—

 
—

 
(10,995
)
 
—

 
—

 
(10,995
)
Net income for the period
—

 
—

 
—

 
—

 
62,025

 
—

 
—

 
62,025

Balance, September 30, 2015
36,753

 
$
37

 
$
271,171

 
$
(8
)
 
$
45,963

 
$
—

 
$
—

 
$
317,163


See accompanying notes to condensed consolidated financial statements.

4

Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
62,025

 
$
51,639

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
44,420

 
38,056

Other depreciation and amortization
46,283

 
33,516

Addition to loss reserves
2,528

 
3,000

Provision for doubtful receivables
4,991

 
3,010

Deferred taxes
3,611

 
8,361

Share-based compensation
14,140

 
10,936

Write off of fixed assets and other
1,223

 
(3,315
)
Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(27,594
)
 
(11,339
)
Decrease (increase) in inventory
1,896

 
(287
)
Payment of signing bonuses, net
(33,855
)
 
(27,647
)
Increase in capitalized customer acquisition costs
(20,650
)
 
(18,349
)
Decrease (increase) in current tax assets
19,870

 
(2,957
)
Decrease in prepaid expenses, deposits and other assets
1,190

 
29

Excess tax benefits on employee share-based compensation
(5,578
)
 
(5,670
)
Increase in reserve for unrecognized tax benefits
1,315

 
1,136

Increase in due to sponsor banks
18,101

 
22,074

Decrease in accounts payable
(1,443
)
 
(12,509
)
Increase (decrease) in unearned revenue
4,620

 
(2,414
)
Decrease in accrued expenses and other liabilities
(2,809
)
 
(12,304
)
Decrease in processing liabilities
(2,076
)
 
(29,016
)
Payouts of accrued buyout liability
(12,861
)
 
(9,621
)
Increase in accrued buyout liability
20,514

 
15,199

Net cash provided by operating activities
139,861

 
51,528

Cash flows from investing activities
 
 
 
Purchase of investments
(1,546
)
 
(31,017
)
Sales of investments
—

 
17,215

Maturities of investments
1,800

 
—

Decrease in funds held for customers
42,055

 
18,849

Decrease in customer fund deposits
(42,309
)
 
(5,064
)
Acquisitions of businesses, net of cash acquired
(60,969
)
 
(355,066
)
Capital expenditures
(42,734
)
 
(39,140
)
Net cash used in investing activities
(103,703
)
 
(394,223
)
Cash flows from financing activities
 
 
 
Proceeds from borrowings, net
171,000

 
436,392

Principal payments on borrowings
(232,063
)
 
(17,500
)
Proceeds from exercise of stock options
2,677

 
4,482

Excess tax benefits on employee share-based compensation
5,578

 
5,670

Repurchases of common stock
—

 
(54,455
)
Dividends paid on common stock
(10,995
)
 
(9,249
)
Net cash (used in) provided by financing activities
(63,803
)
 
365,340

 
 
 
 
Net (decrease) increase in cash
(27,645
)
 
22,645

Cash at beginning of year
70,793

 
71,932

Cash at end of period
$
43,148

 
$
94,577

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
9,946

 
$
3,559

Income taxes
12,311

 
28,038

See accompanying notes to condensed consolidated financial statements.

5

Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Operations
Basis of Financial Statement Presentation— The accompanying consolidated financial statements include those of Heartland Payment Systems, Inc. (the "Company," “we,” “us,” or “our”) and its wholly-owned subsidiaries, Heartland Payroll Solutions, Inc., Heartland Payment Solutions, Inc., Heartland Acquisition LLC, TouchNet Information Systems, Inc. (“TouchNet”) and Heartland Commerce, Inc. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions with the Company's subsidiaries have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements are unaudited. In the opinion of the Company's management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position at September 30, 2015, its results of operations for the three and nine months ended September 30, 2015 and 2014 and changes in equity and cash flows for the nine months ended September 30, 2015 and 2014. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2015. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Form 10-K"). For a summary of all significant accounting policies, refer to Note 2 of the 2014 Form 10-K. The December 31, 2014 Condensed Consolidated Balance Sheet was derived from the audited 2014 consolidated financial statements.

Out of Period Adjustments Recorded in Prior Year—In the second quarter of 2014, the Company recorded out-of-period adjustments decreasing its revenue and increasing bad debt expense (included in Processing and Servicing in its Consolidated Statements of Income) by $1.4 million and $0.9 million, respectively. These adjustments related to immaterial errors that originated in 2013 in the Company's Heartland School Solutions business. These adjustments included revenue which was incorrectly recorded in prior periods and a reassessment of the collectability of certain customer accounts receivable. These out-of-period adjustments reduced earnings before income taxes and net income in the year ended December 31, 2014 by $2.3 million and $1.4 million, respectively, and reduced diluted earnings per share by $0.04. The Company considered existing guidance in evaluating whether a restatement of prior financial statements was required as a result of these misstatements. The guidance requires corrections of errors to be recorded by restatement of prior periods, if material. The Company quantitatively and qualitatively assessed the materiality of the errors and concluded that the errors were not material to its earnings for the year ended December 31, 2014, and accordingly, no restatement of prior period financial statements was warranted.

Use of Estimates— The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include, among other things, the accrued buyout liability, capitalized customer acquisition costs, goodwill and intangible asset impairment review, revenue recognition for multiple element arrangements, loss reserves, certain accounts payable and accrued expenses and certain tax assets and liabilities as well as the related valuation allowances, if any. Actual results could differ from those estimates.
Business Description—The Company’s primary business is to provide 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, the Company undertakes merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support, and risk management. The Company also provides additional services, including those provided through its subsidiaries, such as:

•
Integrated commerce solutions, payment processing, higher education loan services and open and closed-loop payment solutions to higher-education institutions through Campus Solutions,
•
School nutrition, point-of-sale solutions ("POS"), and associated payment solutions, including online prepayment solutions, to kindergarten through 12th grade ("K-12") schools through Heartland School Solutions,

6
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

•
Full-service payroll processing and related tax filing services, through Heartland Payroll Solutions, and
•
Others including (1) prepaid and stored-value card solutions through Micropayments, (2) POS solutions and other adjacent business service applications through Heartland Commerce, and (3) marketing solutions including loyalty and gift cards which the Company provides through Heartland Marketing Solutions.

Approximately 72% of the Company's revenue is derived from processing and settling Visa and MasterCard bankcard transactions for its merchant customers. Because the Company is not a ''member bank'' as defined by Visa and MasterCard, in order to process and settle these bankcard transactions for its merchants, the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship agreement with a member bank permits the Company to route Visa and MasterCard bankcard transactions under the member bank's control and identification numbers to clear credit and signature debit bankcard transactions through Visa and MasterCard. A sponsorship agreement also enables the Company to settle funds between cardholders and merchants by delivering funding files to the member bank, which in turn transfers settlement funds to the merchants' bank accounts. These restrictions place the settlement assets and obligations under the control of the member bank.
The sponsorship agreements with the member banks require, among other things, that the Company abide by the bylaws and regulations of the Visa and MasterCard networks, and certain sponsor banks require a cash balance in a deposit account. If the Company were to breach a sponsorship agreement and under certain other circumstances, the sponsor banks may terminate the agreement and, under the terms of the agreement, the Company would have six months to identify an alternative sponsor bank. The Company is generally dependent on its sponsor banks, Visa and MasterCard for notification of any compliance breaches. As of September 30, 2015, the Company has not been notified of any such issues by its sponsor banks, Visa or MasterCard.

As of September 30, 2015, the Company is party to three bank sponsorship agreements.
•
Processing for the majority of the Company’s small and mid-sized merchants (referred to as "Small and Midsized Enterprises," or “SME merchants”) is performed under a February 8, 2012, sponsorship agreement with Wells Fargo Bank, N.A. ("WFB"). The WFB sponsorship agreement is in effect until February 8, 2016 and would automatically renew for three years unless either party provides written notice of non-renewal to the other party. On November 5, 2015, the Company provided written notice of non-renewal to WFB. Under the terms of the WFB sponsorship agreement, the Company has up to six months beyond February 8, 2016 to complete a conversion of its SME merchants to another sponsorship arrangement.

On November 5, 2015, the Company entered into a sponsorship agreement with Deutsche Bank Trust Company Americas ("Deutsche Bank") for its SME merchants. The Company is highly confident it will complete the conversion of its SME merchants to the Deutsche Bank sponsorship arrangement within the six-month conversion period beginning February 8, 2016. The sponsorship agreement with Deutsche Bank involves substantially the same terms as applied in the February 8, 2012 agreement with WFB. The agreement with Deutsche Bank is for a five-year term expiring on November 5, 2020 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.

•
In November 2009, the Company entered into a sponsorship agreement with The Bancorp Bank ("TBB") to sponsor processing for the Company's Network Services merchants, which are predominantly petroleum industry merchants of all sizes (referred to as "Network Services Merchants"), and since October 2013, certain of the Company's SME merchants. In August 2015, the agreement with TBB automatically renewed until February 2017. The agreement with TBB expires in February 2017 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.
•
On March 24, 2011, the Company entered into a sponsorship agreement with Barclays Bank Delaware to sponsor processing for certain of the Company's large national merchants. In September 2015, the agreement with Barclays Bank Delaware automatically renewed until March 2017. The agreement with Barclays Bank Delaware expires in March 2017 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.
  

7
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The following is a breakout of the Company’s total Visa and MasterCard settled card processing volume for the month ending September 30, 2015 by percentage processed under its individual bank sponsorship agreements:
 
% of
September 2015
Sponsor Bank
Bankcard Processing
Volume
Wells Fargo Bank, N.A.
71%
The Bancorp Bank
20%
Barclays Bank Delaware
9%

The Company also provides card transaction processing for DFS Services, LLC ("Discover") and is designated as an
acquirer by Discover. The agreement with Discover allows the Company to acquire, process and fund transactions directly
through Discover's network without the need of a bank sponsor. The Company processes Discover transactions similarly to
the way it processes Visa and MasterCard transactions. The Company must comply with Discover's acquirer operating regulations and uses its sponsor banks to assist in funding its merchants' Discover transactions.

Under a prior sales and servicing program agreement with American Express Travel Related Services Company, Inc.
("American Express") the Company: (a) provided solicitation services by signing new-to-American Express merchants directly
with American Express; (b) provided transactional support services on behalf of American Express to the Company's American
Express accepting merchants; and (c) provided processing, settlement, customer support and reporting to merchants, similar to
the services provided for the merchants' Visa, MasterCard and Discover transactions. In May 2014, the Company began offering a new American Express Card Acceptance Program (referred to as "OptBlue") to new merchants. The Company converted a majority of its existing merchants who were processing under the prior sales and servicing agreement with American Express to OptBlue during the third quarter of 2014.  As a participant in OptBlue, the Company acquires, contracts, and establishes pricing, as well as provides customer service to merchants, similar to the transaction processing services the Company provides through Discover, Visa and MasterCard. The Company also uses its sponsor banks to assist in funding its merchants' American Express transactions.

New Accounting Pronouncements— From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that the Company adopts as of the specified effective date.
    
In May 2014, the FASB issued guidance on revenue from contracts with customers, which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This made the new guidance effective December 15, 2017 for annual reporting periods beginning after that date. The FASB also approved early adoption of the standard, but not before the original effective date which was for reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method and is currently assessing the impact the adoption of this guidance will have on the Company's consolidated financial statements and disclosures.

In April 2015, the FASB issued guidance on debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. In August 2015, the FASB issued updated guidance to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

In April 2015, the FASB issued guidance that defines specific criteria entities must apply to determine if a cloud computing arrangement includes an in-substance software license. The new guidance clarifies that software licenses included in a cloud computing software should be accounted for in the same manner as other software licenses. This amendment is

8
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new guidance can be applied on either a prospective or retrospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

In July 2015, the FASB issued guidance to more clearly articulate the requirements for the subsequent measurement of inventory and related disclosures. The new guidance clarifies the basis for measuring inventory at the lower of cost and net realizable value. This amendment is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2016. Early adoption is permitted. The new guidance should be applied on a prospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

In September 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments for business combinations. The new guidance eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This amendment is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new guidance should be applied on a prospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

2. Supplementary Financial Statement Information
Cash—At September 30, 2015, cash included approximately $16.5 million of processing-related cash in transit and collateral, compared to approximately $17.8 million of processing-related cash in transit and collateral at December 31, 2014. Processing-related cash in transit and collateral includes merchant deposits, collateral deposits, and funds in transit relating to timing differences for the Company's card and non-card payment processing businesses.
Other Income (Expense)— Other income (expense) consists of interest income on cash and investments, the interest cost on the Company's borrowings, gains or losses on the disposal of assets, write downs of capitalized information technology development projects and other non-operating income or expense items.

As a result of the stock purchase agreement that the Company entered into on August 6, 2014 with the noncontrolling shareholders of Leaf Acquisition, LLC ("Leaf"), the Company was released from a contingent earn-out liability to those noncontrolling shareholders and recognized a pre- and after-tax gain of $3.6 million in the three and nine months ended September 30, 2014. The non-cash impact of the gain associated with the release of the contingent earn-out liability is recorded in "Other, net" in the Condensed Consolidated Statements of Income and "Write off of fixed assets and other" in the Condensed Consolidated Statement of Cash Flows.

Income Taxes—The Company accounts for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates. The impact on deferred assets and liabilities of a change in tax rates is recognized in the period that the rate change is enacted. Valuation allowances are recorded when it is determined that it is more likely than not that a deferred tax asset will not be realized.
The provision for income taxes for the three and nine months ended September 30, 2015 and 2014 and the resulting effective tax rates were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Provision for income taxes
$
15,006

 
$
11,727

 
$
37,274

 
$
34,579

Effective tax rate
38.6
%
 
36.8
%
 
37.5
%
 
40.1
%
    
The effective tax rate for the three months ended September 30, 2015, reflects an increase as compared to the three months ended September 30, 2014 due to a benefit recognized in the three months ended September 30, 2014 for the permanent non-taxable status of the gain recognized on the release of a contingent earn-out liability to the former noncontrolling shareholders of Leaf.


9
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The decrease in the effective tax rate for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, primarily reflects the partial recognition of deferred tax benefits during the first quarter of 2015 from past accumulated losses of Leaf due to the generation of future taxable income resulting from the Company's acquisition of Dinerware, Inc. ("Dinerware"). The structure of this acquisition along with the corresponding preliminary purchase price allocation resulted in the recording of deferred tax liabilities on finite lived intangible assets that will provide a source of future taxable income. Additionally, the Company’s effective tax rate benefited from its ability to utilize the losses generated from Leaf against consolidated taxable income since its August 6, 2014 acquisition of the shares held by the former noncontrolling shareholders of Leaf.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the Company's estimated tax rate changes, it makes a cumulative adjustment in that period.
The Company regularly evaluates its tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions, which have been deemed reasonable by management. The Company does not expect any material changes to unrecognized tax benefits in the next twelve months. At September 30, 2015, the reserve for unrecognized tax benefits related to uncertain tax positions was $8.6 million, of which $5.8 million would, if recognized, impact the effective tax rate. At December 31, 2014, the reserve for unrecognized tax benefits related to uncertain tax positions was $7.3 million, of which $4.9 million would, if recognized, impact the effective tax rate.

Share–Based Compensation— The Company expenses employee share-based compensation under the fair value method. Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company grants three types of Restricted Share Units (“RSUs”): service-based RSUs, performance-based RSUs (“PRSUs”), and total shareholder return RSUs (“TRSUs”). The Company's Board of Directors approves grants of PRSUs and TRSUs with grant-specific vesting and performance target terms. The methods and assumptions used in the determination of the fair value of share-based awards and measurement of performance targets are consistent with those described in the 2014 Form 10-K. Share-based compensation costs recognized were $4.4 million and $3.4 million, respectively, for the three months ended September 30, 2015 and 2014 and $14.1 million and $10.9 million, respectively, for the nine months ended September 30, 2015 and 2014.
    
Common Stock Repurchases— On May 8, 2013, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. During the nine months ended September 30, 2014, the Company had repurchased 1,347,817 shares for $54.5 million at an average cost of approximately $40.40 per share. Total repurchases under this authorization were 1,882,417 shares for $74.9 million at an average cost of approximately $39.81 per share. Repurchases under this authorization were completed during the second quarter of 2014. These repurchases were made through the open market in accordance with applicable laws and regulations. On May 8, 2014, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. As of September 30, 2015, the Company has not repurchased any shares under the May 8, 2014 authorization.

The Company intends to fund any repurchases with cash flow from operations, existing cash on the balance sheet, and other sources, including the 2014 Revolving Credit Facility. The manner, timing and amount of repurchases, if any, will be determined by management and will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements. The repurchase program may be modified or discontinued at any time.

Noncontrolling Interests— Prior to August 6, 2014, the Company owned 66.67% of the outstanding capital stock of Leaf. Noncontrolling shareholders' share of after-tax net loss of Leaf was included in Net loss attributable to noncontrolling interests in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2014. On August 6, 2014, the Company entered into a stock purchase agreement with the noncontrolling shareholders of Leaf under which it acquired all shares of Leaf common stock held by the noncontrolling shareholders. As a result of this transaction, Leaf became a wholly-owned subsidiary of the Company and there is no noncontrolling interest on the Condensed Consolidated Balance Sheet as of September 30, 2015 and December 31, 2014.

10
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Subsequent Events—The Company evaluated subsequent events through the issuance date with respect to the condensed consolidated financial statements as of and for the nine months ended September 30, 2015. On October 30, 2015, the Company acquired the stock of Menusoft Systems Corporation (a.k.a. “Digital Dining”) for a cash payment of $18.7 million. The purchase price was financed under the 2014 Revolving Credit Facility.

3. Acquisitions

Campus Solutions

TouchNet Information Systems, Inc.
On September 4, 2014, the Company completed the acquisition of TouchNet for a cash payment of $375 million, less a net working capital deficit, for all outstanding common shares. The purchase was funded through a new five-year $375 million term loan.

The transaction was accounted for under the acquisition method of accounting. Beginning September 4, 2014, TouchNet's results of operations are included in the Company's results of operations. The fair values of the TouchNet assets acquired and liabilities assumed were estimated as of their acquisition date. The excess of the purchase price over the net assets, approximately $221.6 million, was recorded as goodwill, which is deductible for income tax reporting.  Acquisition-related costs of approximately $2.3 million for advisory, legal and regulatory costs incurred in connection with the TouchNet acquisition have been expensed in general and administrative expenses.
The following table summarizes the purchase price allocation (in thousands):
 
Cash and cash equivalents
$
34,576

 
 
Receivables, net
12,243

 
 
Inventory
66

 
 
Prepaid expenses
601

 
 
Property and equipment, net
3,360

 
 
Intangible assets, net
144,400

 
 
Goodwill
221,575

 
 
    Total assets acquired
416,821

 
 
Accounts payable
2,236

 
 
Accrued expenses and other liabilities
2,896

 
 
Current portion of unearned revenue
24,014

 
 
Current tax liability
13,914

 
 
Long-term portion of unearned revenue
2,037

 
 
    Net assets acquired
$
371,724

 

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of TouchNet is as follows:
 
Weighted average amortization life
 
 
 
 
(In years)
 
 
 
Customer relationships
20
 
 
 
Software
15
 
 
 
Trademark
5
 
 
 
Non-compete agreements
5
 
 
 
Overall
18
 
 

The following pro forma information shows the results of the Company's operations for the three and nine months ended September 30, 2014 as if the TouchNet acquisition had occurred on January 1, 2013. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of that date. The pro forma information is also not intended to be a projection of future results due to the integration of the acquired business.

11
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
(In thousands, except share data)
Total revenues
$
619,861

 
$
1,760,516

Net income attributable to Heartland
$
19,205

 
$
55,538

Basic earnings per share
$
0.53

 
$
1.53

Diluted earnings per share
$
0.52

 
$
1.49


Heartland School Solutions
    
MCS Software Corporation
On April 1, 2014, the Company purchased the net assets of MCS Software Corporation ("MCS Software") for a $17.3 million cash payment. The purchase price was financed under an existing credit facility and from operating cash flows.

The transaction was accounted for under the acquisition method of accounting. Beginning April 1, 2014, MCS Software's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $11.2 million to goodwill, $6.4 million to intangible assets and $0.3 million to net tangible liabilities. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of MCS Software is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
14
 
 
Software
5
 
 
Non-compete agreement
5
 
 
Overall
11
 

Heartland Payroll Solutions

Payroll 1, Inc.
On February 27, 2015, the Company purchased the stock of Payroll 1, Inc. ("Payroll 1") for a $30.0 million cash payment, plus net working capital. The purchase price was financed under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning February 27, 2015, Payroll 1's results of operations were included in the Company's results of operations. The allocation of the total purchase price was as follows: $20.8 million to goodwill, $14.5 million to intangible assets and $4.5 million to net tangible liabilities. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition date, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is not expected to be deductible for income tax reporting.

The weighted average amortization life for the 2015 acquired finite lived intangible assets related to the acquisition of Payroll 1 is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
13
 
 
Software
6
 
 
Non-compete agreement
4
 
 
Overall
12
 

12
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Heartland Commerce

Dinerware, LLC
On February 11, 2015, the Company purchased the stock of Dinerware for a $15.0 million cash payment, plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning on February 11, 2015, Dinerware's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $12.8 million to goodwill, $2.6 million to intangible assets, and $0.2 million to net tangible liabilities. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition date, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is not expected to be deductible for income tax reporting.
The weighted average amortization life for the 2015 acquired finite lived intangible assets related to the acquisition of Dinerware is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
17
 
 
Software
5
 
 
Trademark
5
 
 
Non-compete agreement
3
 
 
Overall
13
 

pcAmerica, LLC
On January 30, 2015, the Company purchased the assets of Automation, Inc. ("pcAmerica") for a $15.0 million cash payment, plus net working capital. The cash purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning on January 30, 2015, pcAmerica's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $14.9 million to goodwill, $1.5 million to intangible assets, and $1.3 million to net tangible liabilities. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition date, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2015 acquired finite lived intangible assets related to the acquisition of pcAmerica is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
20
 
 
Software
5
 
 
Trademark
5
 
 
Non-compete agreement
5
 
 
Overall
14
 

Xpient Solutions, LLC
On October 31, 2014, the Company acquired the net assets of Xpient Solutions, LLC (“Xpient”) for a cash payment of $30.0 million, plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning October 31, 2014, Xpient's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $21.5 million to goodwill, $9.5 million to intangible assets and $3.0 million to net tangible assets. The fair values of Xpient's assets acquired and liabilities assumed were estimated as of their acquisition date. Pro forma results of operations

13
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of Xpient is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
21
 
 
Software
10
 
 
Trademark
5
 
 
Non-compete agreement
3
 
 
Overall
14
 

Liquor Point of Sale
On February 14, 2014, the Company purchased the assets of Merchant Software Corporation (referred to as
"Liquor POS") for a $3.3 million cash payment. The cash purchase price was funded from operating cash flows.

The transaction was accounted for under the acquisition method of accounting. Beginning on February 15, 2014, Liquor POS's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $2.2 million to goodwill, $1.2 million to intangible assets, and $0.1 million to net tangible liabilities. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.
The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of Liquor POS is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
10
 
 
Software
7
 
 
Patents
5
 
 
Non-compete agreement
5
 
 
Overall
9
 

4. Receivables
A summary of receivables by major class was as follows at September 30, 2015 and December 31, 2014:

 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Accounts receivable from merchants and customers
$
222,422

 
$
200,912

Accounts receivable from bankcard networks
33,613

 
31,279

Accounts receivable from others
4,297

 
3,465

 
260,332

 
235,656

Less allowance for doubtful accounts
(1,954
)
 
(1,552
)
Total receivables, net
$
258,378

 
$
234,104


Included in accounts receivable from others are amounts due from employees (predominantly salespersons), which were $2.7 million and $1.6 million at September 30, 2015 and December 31, 2014, respectively. Accounts receivable related to bankcard networks are primarily amounts due from Discover and American Express for bankcard transactions.

14
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

A summary of the activity in the allowance for doubtful accounts for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning balance
$
1,593

 
$
1,780

 
$
1,552

 
$
1,032

Out-of-Period adjustment (a)
—

 
—

 
—

 
875

Additions to allowance
2,285

 
557

 
4,991

 
1,685

Charges against allowance
(1,924
)
 
(1,234
)
 
(4,652
)
 
(2,489
)
Additions for acquisitions (b)
—

 
450

 
63

 
450

Ending balance
$
1,954

 
$
1,553

 
$
1,954

 
$
1,553

(a) See Note 1, Organization and Operations for a discussion of an Out-of-Period adjustment.
(b) Consists of allowances of businesses acquired during the nine months ended September 30, 2015 and 2014.


5. Funds Held for Customers
A summary of Funds held for customers, including the amortized cost, gross unrealized gains (losses) and estimated fair value for available-for-sale securities by major security type and class of security were as follows at September 30, 2015 and December 31, 2014:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
September 30, 2015
 
 
 
 
 
 
 
Funds held for customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
13,012

 
$
—

 
$
(29
)
 
$
12,983

Fixed income - municipal bonds - available for sale
14,031

 
32

 
(8
)
 
14,055

Cash and cash equivalents held for customers
153,420

 
—

 
—

 
153,420

Total funds held for customers
$
180,463

 
$
32

 
$
(37
)
 
$
180,458

 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
December 31, 2014
 
 
 
 
 
 
 
Funds held for customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
13,012

 
$
—

 
$
(16
)
 
$
12,996

Fixed income - municipal bonds - available for sale
14,688

 
2

 
(51
)
 
14,639

Cash and cash equivalents held for customers
148,857

 
—

 
—

 
148,857

Total funds held for customers
$
176,557

 
$
2

 
$
(67
)
 
$
176,492


Expected maturities of the Fixed income - municipal bonds at September 30, 2015 are as follows:

 
Total
 
Less Than 1 Year
 
1 To 5 Years
 
5 To 10 Years
 
(In thousands)
September 30, 2015
 
 
 
 
 
 
 
Funds held for customers:
 
 
 
 
 
 
 
Fixed income - municipal bonds - available for sale cost
$
14,031

 
$
2,931

 
$
11,100

 
$
—

Fixed income - municipal bonds - available for sale estimated fair value
$
14,055

 
$
2,933

 
$
11,122

 
$
—

During the nine months ended September 30, 2015, the Company did not experience any other-than-temporary losses on its investments.

15
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)


During the nine months ended September 30, 2014, the Company sold available for sale securities for $17.2 million and realized a gain of $0.3 million which was recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2014.

6. Capitalized Customer Acquisition Costs, Net
A summary of net capitalized customer acquisition costs as of September 30, 2015 and December 31, 2014 was as follows:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Capitalized signing bonuses
$
111,155

 
$
98,879

Less accumulated amortization
(51,539
)
 
(47,238
)
 
59,616

 
51,641

Capitalized customer deferred acquisition costs
61,570

 
54,583

Less accumulated amortization
(37,994
)
 
(33,117
)
 
23,576

 
21,466

Capitalized customer acquisition costs, net
$
83,192

 
$
73,107


A summary of the activity in capitalized customer acquisition costs, net for the three and nine month periods ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Balance at beginning of period
$
78,640

 
$
66,433

 
$
73,107

 
$
61,027

Plus additions to:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
12,468

 
9,468

 
33,855

 
27,647

Capitalized customer deferred acquisition costs
7,521

 
6,192

 
20,650

 
18,349

 
19,989

 
15,660

 
54,505

 
45,996

Less amortization expense on:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
(8,928
)
 
(7,703
)
 
(25,880
)
 
(22,357
)
Capitalized customer deferred acquisition costs
(6,509
)
 
(5,423
)
 
(18,540
)
 
(15,699
)
 
(15,437
)
 
(13,126
)
 
(44,420
)
 
(38,056
)
Balance at end of period
$
83,192

 
$
68,967

 
$
83,192

 
$
68,967


Net signing bonus adjustments from estimated amounts to actual were $(1.5) million and $(0.7) million for the three months ended September 30, 2015 and 2014, respectively and $(3.8) million and $(2.8) million, respectively, for the nine months ended September 30, 2015 and 2014. Net signing bonus adjustments are netted against additions in the table above. Negative signing bonus adjustments occur when the actual gross margin generated by the merchant contract during the first year is less than the estimated gross margin for that year, resulting in the overpayment of the up-front signing bonus and would be recovered from the relevant salesperson. Positive signing bonus adjustments result from the prior underpayment of signing bonuses and would be paid to the relevant salesperson.

Fully amortized signing bonuses of $6.6 million and $6.9 million, respectively, were written off during the three month periods ended September 30, 2015 and 2014 and $21.6 million and $19.4 million, respectively, were written off during the nine month periods ended September 30, 2015 and 2014. In addition, fully amortized customer deferred acquisition costs of $4.4 million and $3.9 million, respectively, were written off during the three months ended September 30, 2015 and 2014 and $13.3 million and $11.3 million, respectively, were written off during the nine months ended September 30, 2015 and 2014.

The Company believes that no impairment of capitalized customer acquisition costs has occurred as of September 30, 2015.


16

7. Intangible Assets and Goodwill
Intangible Assets — Intangible assets consisted of the following as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
176,175

 
$
31,349

 
$
144,826

 
5 to 21 years—proportional cash flow
Merchant portfolios
4,214

 
3,456

 
758

 
7 years—proportional cash flow
Software
61,404

 
16,953

 
44,451

 
3 to 15 years—straight line
Non-compete agreements
6,162

 
3,713

 
2,449

 
3 to 5 years—straight line
Other
6,076

 
1,306

 
4,770

 
5 to 9 years—straight line
 
$
254,031

 
$
56,777

 
$
197,254

 
 
 
December 31, 2014
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
159,925

 
$
22,011

 
$
137,914

 
6 to 21 years—proportional cash flow
Merchant portfolios
4,214

 
3,161

 
1,053

 
7 years—proportional cash flow
Software
58,377

 
13,300

 
45,077

 
1 to 15 years—straight line
Non-compete agreements
5,947

 
2,830

 
3,117

 
5 years—straight line
Other
5,800

 
408

 
5,392

 
5 to 9 years—straight line
 
$
234,263

 
$
41,710

 
$
192,553

 
 
Amortization expense related to the intangible assets was $5.1 million and $3.4 million, respectively, for the three months ended September 30, 2015 and 2014 and $15.1 million and $8.3 million, respectively, for the nine months ended September 30, 2015 and 2014. The estimated amortization expense related to intangible assets for the remainder of 2015 and the next five fiscal years are as follows:
For the Fiscal Year Ending December 31,
 
(In thousands)
2015
$
5,031

2016
19,018

2017
17,472

2018
15,662

2019
14,236

2020
12,426

Thereafter
113,409

 
$
197,254




17

Goodwill — The changes in the carrying amount of goodwill by segment for the nine months ended September 30,
2015 and 2014 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Payment Processing
 
Campus Solutions
 
Heartland School Solutions
 
Heartland Payroll Solutions
 
Leaf
 
Other
 
Total
Balance, January 1, 2014
$
43,701

 
$
35,789

 
$
53,350

 
$
31,018

 
$
20,619

 
$
6,501

 
$
190,978

 
Goodwill acquired during the period
—

 
222,076

 
13,592

 
—

 
—

 
2,247

 
237,915

 
Other (a)
—

 
—

 
(2,493
)
 
—

 
(2,130
)
 
—

 
(4,623
)
Balance, September 30, 2014
43,701

 
257,865

 
64,449

 
31,018

 
18,489

 
8,748

 
424,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
43,701

 
257,337

 
64,522

 
31,018

 
—

 
29,134

 
425,712

 
Goodwill acquired during the period
—

 
—

 
—

 
21,915

 
—

 
27,927

 
49,842

 
Other (a)
—

 
26

 
—

 
(1,165
)
 
—

 
902

 
(237
)
Balance, September 30, 2015
$
43,701

 
$
257,363

 
$
64,522

 
$
51,768

 
$
—

 
$
57,963

 
$
475,317

(a) Reflects adjustments to allocations of purchase price after the quarter of acquisition.
The percentage of total reportable segments' assets comprised of goodwill as of September 30, 2015 and 2014 was as follows:
 
 
Percent of Goodwill to Reportable Segments' Total Assets
 
 
 
September 30, 2015
 
September 30, 2014
 
 
Payment Processing
7.9%
 
8.0%
 
 
Campus Solutions
53.4%
 
51.4%
 
 
Heartland School Solutions
75.3%
 
70.3%
 
 
Heartland Payroll Solutions
22.0%
 
23.3%
 
 
Leaf
—%
 
44.7%
 
 
Other
61.6%
 
37.3%
 

In the fourth quarter of 2014, the Company considered the overlapping cloud-based POS systems in development at Heartland Commerce businesses (see Note 3, Acquisitions) and decided that it would stop POS development efforts at Leaf, a previous Heartland Commerce business. This decision caused a significant adverse change in the extent or manner in which the long-lived asset group of Leaf would be used, including Prosper, an internally developed POS software technology. Due to these changes in circumstances, the implied fair value of the Leaf reporting unit was determined to be significantly below its carrying value. This led to a Goodwill impairment charge for the full balance of Leaf goodwill as of December 31, 2014. In the fourth quarter of 2014, the Company recorded pre-tax goodwill and asset impairment charges of $18.5 million and $18.9 million, respectively.

8. Processing Liabilities
Processing liabilities result primarily from the Company's card processing activities and include merchant deposits maintained to offset potential liabilities arising from merchant chargebacks. A summary of processing liabilities and loss reserves was as follows at September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
 
(In thousands)
Merchant processing
$
111,634

 
$
109,361

Merchant deposits
6,758

 
6,655

Loss reserves
1,492

 
3,382

 
$
119,884

 
$
119,398


The timing for presentment of transaction funding files to the bankcard networks results in the Company's sponsor banks receiving settlement cash one day before payment is made to merchants, thereby increasing funding obligations to its SME merchants, which are carried in processing liabilities. The Company funds interchange advances to SME merchants first from this settlement cash received from bankcard networks, then from the Company's available cash or by incurring a liability to its sponsor banks. At September 30, 2015 and December 31, 2014, the Company did not use any of its available cash to fund merchant advances. The amount due to sponsor banks for funding merchant advances was $47.7 million at September 30, 2015

18

and $29.9 million at December 31, 2014. The liability to sponsor banks is repaid at the beginning of the following month out of the fees the Company collects from its merchants.

The Company's merchants have the liability for any charges properly reversed by the cardholder through a mechanism known as a chargeback. If the merchant is unable to pay this amount, the Company will be liable to the card brand networks for the reversed charges. The Company has determined that the fair value of its obligation to stand ready to perform is minimal. The Company requires personal guarantees and merchant deposits from certain merchants to minimize its obligation.

The card brand networks generally allow chargebacks within four months after the later of (1) the date the transaction is processed, or (2) the delivery of the product or service to the cardholder. As the majority of the Company's SME merchant transactions involve the delivery of the product or service at the time of the transaction, a reasonable basis for determining an estimate of the Company's exposure to chargebacks is the last four months' processing volume on the SME portfolio, which was $32.5 billion and $27.8 billion for the four months ended September 30, 2015 and December 31, 2014, respectively. However, for the four months ended September 30, 2015 and December 31, 2014, the Company was presented with $17.5 million and $16.0 million, respectively, in chargebacks by issuing banks. In the nine months ended September 30, 2015 and 2014, the Company incurred merchant losses of $2.6 million and $2.5 million, respectively, or 0.37 basis points and 0.42 basis points, respectively, on total SME card processing volumes processed of $69.1 billion and $60.1 billion, respectively. These losses are included in processing and servicing costs in the Company's Condensed Consolidated Statements of Income.

The loss recorded by the Company for chargebacks associated with any individual merchant is typically small, due both to the relatively small size and the processing profile of the Company's SME merchants. However, from time to time the Company will encounter instances of merchant fraud, and the resulting chargeback losses may be considerably more significant to the Company. The Company has established a contingent reserve for estimated currently existing credit and fraud losses on its Condensed Consolidated Balance Sheets, amounting to $1.5 million and $3.4 million at September 30, 2015 and December 31, 2014, respectively. This reserve is determined by performing an analysis of the Company's historical loss experience applied to current processing volumes and exposures.

A summary of the activity in the loss reserve for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning balance
$
1,437

 
$
1,762

 
$
3,382

 
$
1,505

Additions to reserve
759

 
943

 
2,528

 
3,000

Charges against reserve
(704
)
 
(1,073
)
 
(4,418
)
 
(2,873
)
Ending balance
$
1,492

 
$
1,632

 
$
1,492

 
$
1,632


9. Accrued Buyout Liability
A summary of the accrued buyout liability was as follows as of September 30, 2015 and December 31, 2014:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Vested Relationship Managers and sales managers
$
53,971

 
$
46,301

Unvested Relationship Managers and sales managers
1,675

 
1,692

 
55,646

 
47,993

Less current portion
(17,471
)
 
(15,023
)
Long-term portion of accrued buyout liability
$
38,175

 
$
32,970


In calculating the accrued buyout liability for unvested Relationship Managers and sales managers, the Company has assumed that 31% of the unvested Relationship Managers and sales managers will vest in the future, which represents the Company’s historical vesting rate. A 5% increase to 36% in the expected vesting rate would have increased the accrued buyout liability for unvested Relationship Managers and sales managers by $0.2 million at September 30, 2015 and December 31, 2014, respectively.

19

A summary of the activity in the accrued buyout liability for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning balance
$
51,140

 
$
41,268

 
$
47,993

 
$
39,379

Increase in settlement obligation, net
7,585

 
5,354

 
20,514

 
15,199

Buyouts
(3,079
)
 
(1,665
)
 
(12,861
)
 
(9,621
)
Ending balance
$
55,646

 
$
44,957

 
$
55,646

 
$
44,957


10. Credit Facilities

On September 4, 2014, the Company entered into an amended and restated senior secured credit facility (the "2014 Credit Agreement") with Bank of America, N.A., as administrative agent, and certain lenders who are a party to the 2014 Credit Agreement. The 2014 Credit Agreement provides for a revolving credit facility in the aggregate amount of up to $400 million (the “2014 Revolving Credit Facility”) and a term loan in an initial principal amount of $375 million (the “2014 Term Credit Facility”).

The following is a summary of the Company's borrowings under its credit facilities as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
Amount outstanding:
 
 
 
2014 Term Credit Facility
$
356,250

 
$
370,000

2014 Revolving Credit Facility
142,500

 
189,500

Total amount outstanding
$
498,750

 
$
559,500


The weighted average interest rate at September 30, 2015 was 2.3%. Remaining unamortized fees and direct costs incurred for the Company's credit facilities as of September 30, 2015 were $4.9 million.

11. Commitments and Contingencies
Litigation—The Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. In the opinion of the Company, based on consultations with outside counsel, material losses in addition to amounts previously accrued are not considered reasonably possible in connection with these ordinary course legal proceedings.

Contingencies—The Company collects and stores sensitive data about its merchant customers and bankcard holders. If the Company’s network security is breached or sensitive merchant or cardholder data is misappropriated, the Company could be exposed to assessments, fines or litigation costs that could be material.

Leases—The Company leases various office spaces and certain equipment under operating leases with remaining terms ranging up to 15 years. The majority of the office space lease agreements contain renewal options and generally require the Company to pay certain operating expenses.

20
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The future minimum lease payments for all non-cancelable leases for the remainder of 2015 and the next five fiscal years are as follows:

For the Fiscal Year Ending December 31,
Operating Leases (a)
 
(In thousands)
2015
$
3,696

2016
16,610

2017
13,964

2018
12,054

2019
9,247

2020
7,618

Thereafter
43,826

Total future minimum lease payments
$
107,015

(a) There were no material capital leases at September 30, 2015.

Rent expense for leased facilities and equipment was $4.3 million and $2.9 million, respectively, for the three months ended September 30, 2015 and 2014, and $13.5 million and $8.7 million, respectively, for the nine months ended September 30, 2015 and 2014.
Commitments—Certain officers of the Company have entered into employee confidential information and non-competition agreements under which they are entitled to severance pay equal to their base salary and medical benefits for one year or two years depending on the officer and a pro-rated bonus in the event they are terminated by the Company other than for cause. The Company paid $0.6 million under one of these agreements in the nine months ended September 30, 2014.
The following table reflects the Company’s other significant contractual obligations, including leases from above, as of September 30, 2015:
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 year
 
1 to 3
Years
 
3 to 5
years
 
More than 5
years
 
 
(In thousands)
Processing providers (a)
 
$
9,008

 
$
4,013

 
$
4,995

 


 
$
—

Telecommunications providers (b)
 
6,818

 
3,307

 
3,511

 
—

 
—

Facility and equipment leases
 
107,015

 
16,673

 
26,777

 
17,843

 
45,722

2014 Term Credit Facility
 
356,250

 
18,750

 
51,563

 
285,937

 
—

2014 Revolving Credit Facility (c)
 
142,500

 
—

 
—

 
142,500

 
—

Capital Lease Obligation
 
84

 
43

 
41

 
—

 
—

 
 
$
621,675

 
$
42,786

 
$
86,887

 
$
446,280

 
$
45,722


(a)
The Company has agreements with several third-party processors to provide to it on a non-exclusive basis payment processing and transmittal, transaction authorization and data capture services, and access to various reporting tools. The Company's agreements with third-party processors require it to submit a minimum monthly number of transactions or volume for processing. If the Company submits a number of transactions or volume that is lower than the minimum, it is required to pay the third-party processors the fees that they would have received if the Company had submitted the required minimum number or volume of transactions.

(b)
The Company has agreements in place with several large telecommunications companies that provide data center services, wide area network connectivity, and voice services that are used by both the Company call center and card payment processing platforms. These providers require both dollar and term commitments for the services they provide. If the Company does not meet the minimum terms, then there is a requirement to pay the remaining commitments.

(c)
Interest rates on the 2014 Revolving Credit Facility are variable in nature; however, the Company is party to fixed-pay amortizing interest rate swaps having a remaining notional amount of $3.8 million. The 2014 Revolving Credit Facility is available on a revolving basis until September 4, 2019. While the Company is not contractually obligated to pay $30.0 million of the outstanding balance of the 2014 Revolving Credit Facility, the Company includes this amount in the Current portion of borrowings on the Condensed Consolidated Balance Sheet since the Company intends to pay this amount in October 2015.

12. Segments
The Company bases its business segments on how it monitors and manages the performance of its operations as determined by the Company's chief operating decision maker or decision making group. The Company's operating segments

21
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

are strategic business units that offer different products and services. They are managed separately because each business requires different marketing strategies, personnel skill sets and technology.

The Company has the following six reportable segments: (1) Payment Processing, which provides card payment processing and related services to the Company's SME merchants and Network Services merchants, (2) Campus Solutions, which provides payment processing, integrated commerce solutions, loan services and open- and closed-loop payment solutions to institutions of higher education, (3) Heartland School Solutions, which provides school nutrition and POS solutions and associated payment solutions to K-12 schools, (4) Heartland Payroll Solutions, which provides payroll processing and related tax filing services, (5) Leaf, which includes the operating losses for Leaf as well as the goodwill and POS asset impairment charges recorded in the fourth quarter of 2014, (see Note 7, Intangible Assets and Goodwill for further details) and (6) Other. The Other segment consists of (a) prepaid and stored-value card solutions provided by Micropayments, (b) loyalty and gift card marketing solutions including loyalty and gift cards provided by Heartland Marketing Solutions, and (c) POS solutions and other adjacent business service applications provided by Heartland Commerce. The individual components of the Other segment do not meet the defined thresholds for being individually reportable segments under applicable accounting guidance.

SME merchants and Network Services merchants are aggregated for financial reporting purposes in the Payment Processing Segment, as they both provide processing services related to bankcard transactions, exhibit similar economic characteristics, and share the same systems to provide services. Campus Solutions includes TouchNet and Educational Computer Systems, Inc. ("ECSI") for financial reporting purposes because they provide similar commerce solutions, exhibit similar economic characteristics, and provide services to a similar higher education customer base, including some client overlap.
The Company allocates revenues, expenses, assets and liabilities to segments only where directly attributable. The unallocated corporate administration amounts consist primarily of costs attributed to finance, corporate administration, human resources and corporate services. We have reclassified our comparable segment information for consistent presentation in this Quarterly Report on Form 10-Q.
The accounting policies of the operating segments are the same as described in the summary of significant accounting policies. The Company believes the terms and conditions of transactions between the segments are comparable to those which could have been obtained in transactions with unaffiliated parties.     
At September 30, 2015 and 2014, 62% and 60%, respectively, of Heartland Payroll Solutions segment's total assets were funds that the Company holds as a fiduciary in its payroll processing services activities primarily for payment to taxing authorities. At September 30, 2015 and 2014, 7% and 8%, respectively, of the Campus Solutions segment's total assets represent funds held for the Company's loan servicing customers related to payment processing services provided for student loan billing and processing that are payable to higher education institutions and other businesses. See Note 7, Intangible Assets and Goodwill for goodwill as a percentage of the reportable segments' total assets.
A summary of the Company’s segments as of and for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
(In thousands)
    Payment Processing
$
626,039

 
$
551,176

 
$
1,753,722

 
$
1,567,593

    Campus Solutions
31,475

 
14,400

 
89,369

 
36,883

    Heartland School Solutions
14,564

 
15,061

 
45,464

 
42,685

    Heartland Payroll Solutions
17,171

 
12,170

 
50,869

 
37,978

    Other
16,418

 
7,819

 
44,394

 
21,629

         Total revenues
$
705,667

 
$
600,626

 
$
1,983,818

 
$
1,706,768


22
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Depreciation and amortization
(In thousands)
    Payment Processing
$
8,951

 
$
8,212

 
$
25,789

 
$
23,106

    Campus Solutions
3,561

 
1,473

 
10,212

 
2,756

    Heartland School Solutions
1,274

 
1,282

 
3,583

 
2,665

    Heartland Payroll Solutions
1,117

 
727

 
3,153

 
2,416

    Other
1,055

 
804

 
3,149

 
2,291

    Unallocated corporate administration amounts
128

 
165

 
397

 
282

         Total depreciation and amortization
$
16,086

 
$
12,663

 
$
46,283

 
$
33,516

Income (loss) from operations
 
 
 
 
 
    Payment Processing
$
33,657

 
$
34,094

 
$
92,563

 
$
96,833

    Campus Solutions
11,295

 
3,187

 
26,633

 
8,060

    Heartland School Solutions
4,769

 
2,720

 
17,151

 
5,290

    Heartland Payroll Solutions
1,911

 
1,590

 
6,308

 
7,289

    Leaf
—

 
(2,710
)
 
(4,692
)
 
(8,172
)
    Other
16

 
623

 
(792
)
 
1,757

    Unallocated corporate administration amounts
(9,134
)
 
(9,093
)
 
(26,467
)
 
(24,353
)
         Total income from operations
$
42,514

 
$
30,411

 
$
110,704

 
$
86,704

Interest expense
 
 
 
 
 
 
 
    Payment Processing
$
1,065

 
$
1,453

 
$
3,669

 
$
3,761

    Campus Solutions
2,019

 
689

 
6,037

 
689

    Heartland Payroll Solutions
180

 
—

 
419

 
—

    Other
383

 
—

 
1,053

 
—

         Total interest expense
$
3,647

 
$
2,142

 
$
11,178

 
$
4,450

Net income (loss)
 
 
 
 
 
    Payment Processing
$
19,881

 
$
19,138

 
$
54,568

 
$
56,503

    Campus Solutions
5,830

 
2,239

 
12,930

 
5,566

    Heartland School Solutions
2,929

 
1,658

 
10,784

 
3,240

    Heartland Payroll Solutions
985

 
940

 
3,603

 
4,487

    Leaf
—

 
1,657

 
(2,148
)
 
(3,843
)
    Other
(135
)
 
273

 
(1,117
)
 
625

    Unallocated corporate administration amounts
(5,609
)
 
(5,749
)
 
(16,595
)
 
(14,939
)
         Total net income
$
23,881

 
$
20,156

 
$
62,025

 
$
51,639

        
 
September 30,
 
September 30,
 
2015
 
2014
Assets
(In thousands)
    Payment Processing
$
555,886

 
$
545,033

    Campus Solutions
481,944

 
501,982

    Heartland School Solutions
85,653

 
91,703

    Heartland Payroll Solutions
235,099

 
133,204

    Leaf (a)
—

 
41,374

    Other
94,157

 
23,468

         Total assets
$
1,452,739

 
$
1,336,764

(a) See Note 7, Intangible Assets and Goodwill for a discussion of Goodwill and Asset Impairments.


23
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

13. Earnings Per Share
The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share)
Basic:
 
 
 
 
 
Net income attributable to Heartland
$
23,881

 
$
20,458

 
$
62,025

 
$
53,650

Weighted average common stock outstanding
36,744

 
36,069

 
36,600

 
36,388

Earnings per share
$
0.65

 
$
0.57

 
$
1.69

 
$
1.47

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Net income attributable to Heartland
$
23,881

 
$
20,458

 
$
62,025

 
$
53,650

Basic weighted average common stock outstanding
36,744

 
36,069

 
36,600

 
36,388

Effect of dilutive instruments:
 
 
 
 
 
 
 
  Stock options and restricted stock units
537

 
781

 
586

 
861

Diluted weighted average common stock outstanding
37,281

 
36,850

 
37,186

 
37,249

Earnings per share
$
0.64

 
$
0.56

 
$
1.67

 
$
1.44


14. Fair Value of Financial Instruments
The Company applies a fair value framework in order to measure and disclose its financial assets and liabilities, which include fixed income equity securities, interest swap derivatives and certain other financial instruments. The Company determines fair value based on quoted prices when available or through the use of alternative approaches when market quotes are not readily accessible or available.
The Company’s framework for measuring fair value provides a three-level hierarchy, which prioritizes the factors (inputs) used to calculate the fair value of assets and liabilities as follows:

•
Level 1 inputs are unadjusted quoted prices, such as a New York Stock Exchange closing price, in active markets for identical assets. Level 1 is the highest priority in the hierarchy.

•
Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as other significant inputs that are observable at commonly quoted intervals, such as interest rates, foreign exchange rates, and yield curves.

•
Level 3 inputs are unobservable and are based on the Company's assumptions due to little, if any, observable market information. Level 3 is the lowest priority in the hierarchy.

For the nine months ended September 30, 2015, there have been no transfers between Level 1 and Level 2 categories. The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2015 and at December 31, 2014:
September 30, 2015
 
 
Fair Value Measurement Category
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
(In thousands)
Investments available for sale:
 
 
 
 
 
 
 
    Conservative income bond fund (a)
$
12,983

 
$
12,983

 
$
—

 
$
—

    Fixed income bonds (a)
14,055

 
14,055

 
—

 
—

         Total assets
$
27,038

 
$
27,038

 
$
—

 
$
—

 
 
 
 
 
 
 
 

24
Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

December 31, 2014
 
 
Fair Value Measurement Category
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
(In thousands)
Investments available for sale:
 
 
 
 
 
 
 
    Conservative income bond fund (a)
$
12,996

 
$
12,996

 
$
—

 
$
—

    Fixed income bonds (a)
14,639

 
14,639

 
—

 
—

         Total assets
$
27,635

 
$
27,635

 
$
—

 
$
—

 
 
 
 
 
 
 
 
(a) amounts included in Funds held for customers on the Condensed Consolidated Balance Sheets
The following tables provide the liabilities carried at fair value measured on a non-recurring basis as of September 30, 2015 and at December 31, 2014:
September 30, 2015
 
 
Fair Value Measurement Category
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
(In thousands)
    2014 Term Credit Facility
$
356,250

 
$
—

 
$
356,250

 
$
—

    2014 Revolving Credit Facility
142,500

 
—

 
142,500

 
—

    Capital Lease Obligation
84

 
—

 
—

 
84

         Total liabilities
$
498,834

 
$
—

 
$
498,750

 
$
84

December 31, 2014
 
 
Fair Value Measurement Category
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
(In thousands)
    2014 Term Credit Facility
$
370,312

 
$
—

 
$
370,312

 
$
—

    2014 Revolving Credit Facility
189,500

 
—

 
189,500

 
—

    Capital Lease Obligation
102

 
—

 
—

 
102

         Total liabilities
$
559,914

 
$
—

 
$
559,812

 
$
102

    
    

PART I. FINANCIAL INFORMATION (continued)
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, 2014 (the “2014 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 forward‑looking 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.


25

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 2014 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 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. 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, predominantly petroleum industry merchants of all sizes (referred to as “Network Services merchants”).

We provide additional services such as:

•
Integrated commerce solutions, payment processing, higher education loan services and open and closed-loop payment solutions to higher-education institutions through Campus Solutions,
•
School nutrition, point-of-sale solutions ("POS"), and associated payment solutions, including online prepayment solutions, to kindergarten through 12th grade ("K-12") schools through Heartland School Solutions,
•
Full-service payroll processing and related tax filing services throughout the United States provided by Heartland Payroll Solutions, and
•
Other, including (1) prepaid and stored-value card solutions throughout the United States and Canada provided by Micropayments, (2) POS solutions and other adjacent business service applications provided by Heartland Commerce, and (3) marketing solutions including loyalty and gift cards which we provide through Heartland Marketing Solutions.

Payment Processing
At September 30, 2015, we provided our card payment processing services to 181,064 active SME merchants located across the United States. This compares to 169,831 active SME merchants at December 31, 2014 and 170,589 active SME merchants at September 30, 2014. At September 30, 2015, we provided card payment processing services to 3,098 Network Services merchants with 44,069 locations. This compares to 2,181 merchants with 42,397 locations at December 31, 2014 and 2,118 merchants with 42,937 locations at September 30, 2014. According to The Nilson Report, in 2014 we were the 5th largest merchant acquirer in the United States ranked by transaction count and the 9th largest merchant acquirer by processed dollar volume, which consisted of Visa and MasterCard credit and debit cards, as well as other credit cards such as American Express, UnionPay, Discover, Diners Club, Carte Blanche, JPB, EBT, etc. These rankings represented 3.8 billion transactions and 2.9% of the total U.S. bankcard processed dollar volume.

Our total card processing volume for SME and Network Services merchants for the three months ended September 30, 2015 was $31.3 billion, a 5.9% increase from the $29.6 billion processed during the three months ended September 30, 2014. Our total card processing volume for the nine months ended September 30, 2015 was $87.7 billion, a 6.4% increase from the $82.5 billion processed during the nine months ended September 30, 2014. Our SME card processing volume for the nine months ended September 30, 2015 was $69.1 billion, an increase of 15.0% over the nine months ended September 30, 2014. This increase in processing volume reflects same store sales growth and the addition of SME merchants whose processing volume exceeded that of merchants who attrited during the year. The increase in SME processing volume also reflects the impact of American Express Card Acceptance Program (referred to as "OptBlue") provided to new and existing merchants. We converted a majority of our existing merchants processing under the former sales and servicing agreement with American Express to OptBlue during the third quarter of 2014. For the nine months ended September 30, 2015, our OptBlue processing volume was $4.7 billion as compared to $1.2 billion for the nine months ended September 30, 2014. Our card processing volume for the three and nine months ended September 30, 2015 also includes $6.9 billion and $18.7 billion, respectively, of settled volume for Network Services merchants, compared to $7.9 billion and $22.4 billion, respectively, for the three and nine

26

months ended September 30, 2014. The decrease in Network Services card processing volume primarily reflects lower gasoline prices at our petroleum industry customers. Card processing volume for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
SME merchants
$
24,476

 
$
21,648

 
$
69,057

 
$
60,056

Network Services merchants
6,874

 
7,942

 
18,677

 
22,407

Total card processing volume (a)
$
31,350

 
$
29,590

 
$
87,734

 
$
82,463

(a) 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 and nine months ended September 30, 2015, we experienced 9.1% and 9.5% average annualized net volume attrition in our SME card processing volume compared to an average net volume attrition of 12.7% for the year ended December 31, 2014.

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 September 30, 2015, same store sales grew 4.1% on average, compared to growth of 1.8% in the quarter ended September 30, 2014 and 2.0% growth on average in all of 2014. 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 POS, and sales growth or contraction experienced by our retained SME merchants. Generally, our same store sales experience has tracked with the overall economic conditions in the industries we serve. The following table compares our same store sales growth/(contraction) during 2015 and 2014:
Same Store Sales Growth (Contraction)
2015
 
2014
First Quarter
4.4%
 
(0.2)%
Second Quarter
3.4%
 
2.4%
Third Quarter
4.1%
 
1.8%
Fourth Quarter

 
3.9%
Full Year

 
2.0%
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 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 and nine months ended September 30, 2015 increased 29.5% and 18.1% compared to the three and nine months ended September 30, 2014. We attribute this increase in newly installed gross margin to improved individual productivity achieved by our salespersons as well as growth in our sales force. Our combined Relationship Managers, Territory Managers and Senior Product Advisors ("SPAs") totaled 1,250 and 985 at September 30, 2015 and December 31, 2014, respectively, and 990 at September 30, 2014. We expect to drive increases in year-over-year installed margin in future periods primarily by increasing the number of Relationship Managers, Territory Managers and SPAs.
 
    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, American Express and Discover.

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 most of the merchants which comprise Network Services' customer base pay on a per transaction basis for processing services. The number of Network Services transactions increased in 2015 primarily due to an increase in the number of transactions at our large petroleum merchants and the addition of smaller-size merchants.

27


Additionally, we provide authorization, settlement and account servicing services on our front and back-end systems for American Express transactions for SME merchants and merchants originally signed to American Express by other processors. For those services we receive compensation from American Express on a per transaction basis. We converted a majority of our existing merchants processing under the former sales and servicing agreement with American Express to OptBlue during the third quarter of 2014. The number of transactions we processed for Network Services merchants and American Express for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Network Services merchants:
 
 
 
 
 
 
 
Settled
330,736

 
297,876

 
899,134

 
807,892

Authorized
645,946

 
626,970

 
1,803,791

 
1,816,867

             Total Network Services
976,682

 
924,846

 
2,702,925

 
2,624,759

American Express (a)
264

 
985

 
782

 
16,747

Total
976,946

 
925,831

 
2,703,707

 
2,641,506

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

Campus Solutions
Campus Solutions provides payment processing, integrated commerce solutions, higher education loan services and open- and closed-loop payment solutions to campuses throughout the United States and Canada.

We provide 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. Our OneCard product enables personal identification, door access, cashless vending and laundry transactions, meal plans and cashless printing at campus facilities. Our 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.
On September 4, 2014, we acquired TouchNet Information Systems, Inc. ("TouchNet"), an integrated commerce solutions provider to higher-education institutions. TouchNet became a part of our Campus Solutions business. See “—Liquidity and Capital Resources — Acquisitions” for additional information on this transaction. TouchNet added over 600 higher education clients serving over six million students which is nearly one-third of higher education enrollment in the United States.
As of September 30, 2015, we provided services to more than 3,400 colleges and universities serving over 12 million students and borrowers. Annually we support approximately $24.8 billion in higher education payments, 27.1 million payment transactions, 5 million tax documents, and over $650 million in annual reimbursements.
Heartland School Solutions
We provide school nutrition, POS solutions, and associated payment solutions including online prepayment, to K-12 schools throughout the United States. At both September 30, 2015 and December 31, 2014 our Heartland School Solutions business provided services to more than 34,000 public and private schools. Our Heartland School Solutions business has been built through a series of six acquisitions, including the April 2014 acquisition of MCS Software. This acquisition continues the expansion of our market-leading position in the K-12 school nutrition and POS technology industry. The more than 34,000 K-12 schools that Heartland School Solutions serves nationwide, represent a 35% share of the public schools in the U.S.

Heartland Payroll Solutions
We provide payroll processing services throughout the United States. At September 30, 2015, we processed payroll for 34,052 customers, an increase of 33.6% from 25,492 payroll customers at September 30, 2014. In the nine months ended September 30, 2015, we installed 5,872 new payroll processing customers. We operate a comprehensive payroll management platform, which streamlines all aspects of the payroll process to enable time and cost savings for our customers. We consider our payroll platform to be state of the art, enabling us to process payroll on a large scale and provide customizable solutions for businesses of all sizes.


28

On February 27, 2015, we purchased the stock of Payroll 1, Inc. ("Payroll 1") for a $30.0 million cash payment, plus net working capital. The purchase price was financed from the 2014 Revolving Credit Facility. The acquisition of Payroll 1 expanded our existing payroll processing business and customer base by adding 6,573 customers at acquisition.

Heartland Commerce
We provide the hospitality and retail industry with leading-edge POS solutions, payments processing capabilities and other adjacent business service applications through our Heartland Commerce business. Heartland Commerce is comprised of Xpient Solutions, LLC (“Xpient” acquired in October 2014); Merchant Software Corporation (referred to as "Liquor POS" which was acquired in February 2014); Automation, Inc. (d/b/a “pcAmerica” acquired in January 2015) and Dinerware, Inc. (“Dinerware” acquired in February 2015). On October 30, 2015, we added Menusoft Systems Corporation (a.k.a. “Digital Dining”) to the Heartland Commerce business. Digital Dining offers restaurants the convenience of a handheld POS on an iPad, iPhone, iPod and iPad in a hybrid environment with conventional fixed terminals, and is also used by restaurateurs for table management, delivery, reservations, labor scheduling, inventory and loyalty programs. See "— Liquidity and Capital Resources — Acquisitions" for more detail on these acquisitions.

In the fourth quarter of 2014, management considered the overlapping cloud-based POS systems in development at Heartland Commerce businesses and decided that it would stop POS development efforts at Leaf Acquisition, LLC (“Leaf”), a previous Heartland Commerce business. This decision caused a significant adverse change in the extent or manner in which the long-lived asset group of Leaf would be used, including Prosper, an internally developed POS software technology. Due to these changes in circumstances, the implied fair value of the Leaf reporting unit was determined to be significantly below its carrying value. This led to a Goodwill Impairment charge for the full balance of Leaf Goodwill as of December 31, 2014. In the fourth quarter of 2014, we recorded pre-tax Goodwill and Asset Impairment charges of $18.5 million and $18.9 million, respectively. As of June 30, 2015, losses from Leaf have concluded. Leaf’s operations lost $2.7 million, or $0.05 per share, in the three months ended September 30, 2014.
        
Third Quarter of 2015 Financial Results
For the three months ended September 30, 2015, we recorded net income of $23.9 million, or $0.64 per share, compared to $20.5 million, or $0.56 per share, in the three months ended September 30, 2014. Our financial results for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014, reflect the benefits of 26.7% year-over-year growth in net revenue partially offset by increases in all expense categories, including increases of 19.9% in general and administrative expenses and 23.8% in processing and servicing costs.
Our income from operations, which we also refer to as operating income, increased $12.1 million, or 39.8%, to $42.5 million for the three months ended September 30, 2015, from $30.4 million for the three months ended September 30, 2014. Our operating margin, which we measure as operating income divided by net revenue, was 19.8% for the three months ended September 30, 2015, compared to 18.0% for the three months ended September 30, 2014. Results for the three months ended September 30, 2014 include losses from operations of $2.7 million for Leaf. Excluding the operating losses from Leaf, our operating income was $33.1 million and our operating margin was 19.6% for the three months ended September 30, 2014.
The following is a summary of our financial results for the three months ended September 30, 2015:
•
Net revenue, which we define as total revenues less interchange fees and dues, assessments and fees, increased $45.2 million, or 26.7%, from $169.4 million in the three months ended September 30, 2014 to $214.6 million in the three months ended September 30, 2015. The increase in net revenue reflects $26.1 million and 15.4% growth relating to our 2014 and 2015 acquisitions. The remaining $19.1 million, or 11.3%, organic increase in net revenue reflects the following:
◦
Increased Payment Processing net revenue of $15.1 million, or 12.5%, which reflects growth in SME processing volume. During the three months ended September 30, 2015, our SME processing volume increased 13.1% to $24.5 billion from $21.6 billion during the three months ended September 30, 2014. The year-over-year increase reflects same store sales growth and the addition of SME merchants whose processing volume and net revenue exceeded that of merchants who attrited in the same period. The increase in SME processing volume also reflects the conversion of new and existing merchants to OptBlue. We converted a majority of our existing merchants processing under the former sales and servicing agreement with American Express to OptBlue during the third quarter of 2014. For the three months ended September 30, 2015, our OptBlue processing volume was $1.7 billion compared to $1.2 billion for the three months ended September 30, 2014.

29

◦
Organic increases in revenues across other business segments including Heartland Payroll Solutions and Campus Solutions. These organic increases are further detailed in “— Results of Operations — Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014.”
•
Our Processing and servicing expense increased 23.8% from $69.3 million for the three months ended September 30, 2014 to $85.8 million for the three months ended September 30, 2015. The increase in processing and servicing expenses includes a $6.7 million increase from our 2014 and 2015 acquisitions. The remaining increase of $9.8 million is attributable to increased costs associated with processing and servicing higher SME bankcard processing volume, increased sales and incentive compensation, increased card equipment costs and increased cost of sales and servicing related to higher Heartland Payroll Solutions and Campus Solutions net revenue.
•
Our General and administrative expenses increased 19.9% from $49.4 million in the three months ended September 30, 2014 to $59.2 million in the three months ended September 30, 2015. The increase in General and administrative expenses includes $9.5 million from our 2014 and 2015 acquisitions. The remaining increase reflects higher personnel expense including incentive and share-based compensation increases offset by a decrease in acquisition related expenses.
See “— Results of Operations — Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014” for a more detailed discussion of our third 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 September 30, 2015, our results of operations, our changes in equity and our cash flows for the nine months ended September 30, 2015 and 2014. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ended December 31, 2015. 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 our 2014 Form 10-K.

Our critical accounting estimates and judgments have not changed materially from those reported in Item 7 of Part II, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2014 Form 10-K.


30

Results of Operations
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
The following table shows certain income statement data as a percentage of net revenue for the periods indicated (in thousands):
 
Three Months Ended September 30,
 
% of Net
Revenue
 
Three Months Ended September 30,
 
% of Net
Revenue
 
Change
 
2015
 
 
2014
 
 
Amount
 
%
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
 Total revenues
$
705,667

 
 
 
$
600,626

 
 
 
$
105,041

 
17.5
 %
Less: Interchange
425,572

 
 
 
373,372

 
 
 
52,200

 
14.0
 %
Less: Dues, assessments and fees
65,506

 
 
 
57,864

 
 
 
7,642

 
13.2
 %
          Total net revenue
214,589

 
100.0
 %
 
169,390

 
100.0
 %
 
45,199

 
26.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Processing and servicing
85,817

 
40.0
 %
 
69,328

 
40.9
 %
 
16,489

 
23.8
 %
Customer acquisition costs
15,501

 
7.2
 %
 
12,289

 
7.3
 %
 
3,212

 
26.1
 %
Depreciation and amortization
11,541

 
5.4
 %
 
7,981

 
4.7
 %
 
3,560

 
44.6
 %
General and administrative
59,216

 
27.6
 %
 
49,381

 
29.2
 %
 
9,835

 
19.9
 %
Total expenses
172,075

 
80.2
 %
 
138,979

 
82.0
 %
 
33,096

 
23.8
 %
Income from operations
42,514

 
19.8
 %
 
30,411

 
18.0
 %
 
12,103

 
39.8
 %
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income
29

 
—
 %
 
33

 
—
 %
 
(4
)
 
(12.1
)%
Interest expense
(3,647
)
 
(1.7
)%
 
(2,142
)
 
(1.3
)%
 
(1,505
)
 
(70.3
)%
Other, net
(9
)
 
—
 %
 
3,581

 
2.1
 %
 
(3,590
)
 
(100.3
)%
Total other expense
(3,627
)
 
(1.7
)%
 
1,472

 
0.9
 %
 
(5,099
)
 
(346.4
)%
Income before income taxes
38,887

 
18.1
 %
 
31,883

 
18.8
 %
 
7,004

 
22.0
 %
Provision for income taxes
15,006

 
7.0
 %
 
11,727

 
6.9
 %
 
3,279

 
28.0
 %
Net income
23,881

 
11.1
 %
 
20,156

 
11.9
 %
 
3,725

 
18.5
 %
Less: Net loss attributable to noncontrolling interests
—

 
—
 %
 
(302
)
 
(0.2
)%
 
302

 
100.0
 %
Net income attributable to Heartland
$
23,881

 
11.1
 %
 
$
20,458

 
12.1
 %
 
$
3,423

 
16.7
 %

Total Revenues. The following tables summarize total revenue and total net revenue (which we define as total revenue less interchange fees and dues, assessments and fees) by segment for the three months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Change from
Prior Year
Total revenue:
2015
 
2014
 
Amount
 
%
        Payment Processing
$
626,039

 
$
551,176

 
$
74,863

 
13.6
 %
Campus Solutions
31,475

 
14,400

 
17,075

 
118.6
 %
        Heartland School Solutions
14,564

 
15,061

 
(497
)
 
(3.3
)%
        Heartland Payroll Solutions
17,171

 
12,170

 
5,001

 
41.1
 %
Other
16,418

 
7,819

 
8,599

 
110.0
 %
  Total revenue
$
705,667

 
$
600,626

 
$
105,041

 
17.5
 %
 
Three Months Ended September 30,
 
Change from
Prior Year
Total net revenue:
2015
 
2014
 
Amount
 
%
        Payment Processing
$
134,961

 
$
119,940

 
$
15,021

 
12.5
 %
Campus Solutions
31,475

 
14,400

 
17,075

 
118.6
 %
        Heartland School Solutions
14,564

 
15,061

 
(497
)
 
(3.3
)%
        Heartland Payroll Solutions
17,171

 
12,170

 
5,001

 
41.1
 %
Other
16,418

 
7,819

 
8,599

 
110.0
 %
         Total net revenue
$
214,589

 
$
169,390

 
$
45,199

 
26.7
 %
    

31

Payment Processing
Payment Processing net revenue increased $15.1 million, or 12.5%, from $119.9 million in the three months ended September 30, 2014 to $135.0 million in the three months ended September 30, 2015. This increase was driven by a $14.2 million or 13.4% increase in SME net revenue, reflecting a 13.1% increase in SME processing volume from $21.6 billion in the three months ended September 30, 2014 to $24.5 billion in the three months ended September 30, 2015. The year-over-year increase reflects same store sales growth and the addition of SME merchants whose processing volume and net revenue exceeded that of merchants who attrited in the same period. This increase in processing volume also reflects the conversion of new and existing merchants to OptBlue. We converted a majority of our existing merchants processing under the former sales and servicing agreement with American Express to OptBlue during the third quarter of 2014.  For the three months ended September 30, 2015, our OptBlue processing volume was $1.7 billion compared to $1.2 billion for the three months ended September 30, 2014. Our SME processing volume includes processing volumes for merchants in our Heartland School Solutions, Campus Solutions, and Other businesses. Net revenue related to that processing volume is included in the net revenue reported for those businesses.

Campus Solutions
Campus Solutions net revenue increased $17.1 million, or 118.6%, from $14.4 million in the three months ended September 30, 2014 to $31.5 million in the three months ended September 30, 2015. The increase in Campus Solutions net revenue included an increase in TouchNet revenue of $13.5 million in the three months ended September 30, 2015. The remaining increase in Campus Solutions net revenue was primarily due to higher student loan servicing related revenue.

Heartland School Solutions
Heartland School Solutions net revenue decreased $0.5 million, or 3.3%, from $15.1 million in the three months ended September 30, 2014 to $14.6 million in the three months ended September 30, 2015. The decrease in Heartland School Solutions net revenue for the three months ended September 30, 2015 was due primarily to a decrease in one-time revenues, including equipment sales, partially offset by an increase in transaction processing net revenue.

Heartland Payroll Solutions
Heartland Payroll Solutions net revenue increased $5.0 million, or 41.1%, from $12.2 million in the three months ended September 30, 2014 to $17.2 million in the three months ended September 30, 2015. The increase in payroll processing net revenue included $3.1 million of net revenue added by Payroll 1. The remaining organic increase of $1.9 million, or 15.3%, is primarily due to a 8.2% increase in payroll processing customers (excluding the 6,457 customers added by Payroll 1) from 25,492 at September 30, 2014 to 27,595 at September 30, 2015, as well as an overall increase in payroll processing revenue per customer.

Other
Other net revenue increased $8.6 million, or 110.0%, from $7.8 million in the three months ended September 30, 2014 to $16.4 million in the three months ended September 30, 2015. The increase in other revenue included $8.3 million of net revenue added by Xpient, pcAmerica, and Dinerware (which are all part of Heartland Commerce). The remaining organic increase of $0.3 million primarily reflects growth in Heartland Marketing Solutions, which provides loyalty and gift cards for merchants.

Total expenses. Total expenses increased $33.1 million, or 23.8%, from $139.0 million in the three months ended September 30, 2014 to $172.1 million in the three months ended September 30, 2015, due to increases in all of our major expense categories. The increases in expenses reflect both acquisitions and organic growth, and are further discussed below. Total expenses represented 80.2% of net revenue in the three months ended September 30, 2015 compared to 82.0% in the three months ended September 30, 2014.

Processing and servicing expense increased $16.5 million, or 23.8%, from $69.3 million for the three months ended September 30, 2014 to $85.8 million for the three months ended September 30, 2015. The increase in processing and servicing expenses includes a $6.7 million increase from our 2014 and 2015 acquisitions. The remaining increase of $9.8 million is attributable to increased costs associated with processing and servicing higher SME bankcard processing volume, increased sales and incentive compensation, increased card equipment costs and increased cost of sales and servicing related to higher Heartland Payroll Solutions and Campus Solutions net revenue. As a percentage of net revenue, processing and servicing expense decreased to 40.0% for the three months ended September 30, 2015, from 40.9% for the three months ended September 30, 2014.
Customer acquisition costs for the three months ended September 30, 2015 increased $3.2 million, or 26.1%, from $12.3 million for the three months ended September 30, 2014 to $15.5 million for the three months ended September 30, 2015. As reflected in the table below, this increase reflects higher amortization on increased signing bonuses and capitalized deferred

32

acquisition costs resulting from improved levels of new installed margin and the impact of subsequent changes in the estimated accrued buyout liability due to lower merchant attrition and same-store sales growth. As a percentage of net revenue, customer acquisition costs decreased to 7.2% for the three months ended September 30, 2015 compared with 7.3% for the three months ended September 30, 2014.
Customer acquisition costs for the three months ended September 30, 2015 and 2014 included the following components (in thousands):
 
Three Months Ended September 30,
 
Change from
Prior Year
 
2015
 
2014
 
Amount
 
%
Amortization of signing bonuses, net
$
8,928

 
$
7,703

 
$
1,225

 
15.9
%
Amortization of capitalized customer deferred acquisition costs
6,509

 
5,423

 
1,086

 
20.0
%
Increase in accrued buyout liability
7,585

 
5,355

 
2,230

 
41.6
%
Capitalized customer deferred acquisition costs
(7,521
)
 
(6,192
)
 
(1,329
)
 
21.5
%
Total customer acquisition costs
$
15,501

 
$
12,289

 
$
3,212

 
26.1
%
Depreciation and amortization expense included in the consolidated income statement for the three months ended September 30, 2015 and 2014, by financial statement line item is as follows (in thousands):

 
Three Months Ended September 30,
 
Change from
Prior Year
 
2015
 
2014
 
Amount
 
%
Processing and servicing
 
 
 
 
 
 
 
    Amortization – capitalized system development
$
3,497

 
$
3,795

 
$
(298
)
 
(7.9
)%
    Other
1,048

 
886

 
162

 
18.3
 %
       Total processing and servicing
4,545

 
4,681

 
(136
)
 
(2.9
)%
Depreciation and amortization
 
 
 
 
 
 
 
    Acquired intangibles
5,121

 
3,501

 
1,620

 
46.3
 %
    Amortization – capitalized system development
4,412

 
2,952

 
1,460

 
49.5
 %
    Other
2,008

 
1,528

 
480

 
31.4
 %
       Total depreciation and amortization
11,541

 
7,981

 
3,560

 
44.6
 %
Total depreciation and amortization
$
16,086

 
$
12,662

 
$
3,424

 
27.0
 %
Total depreciation and amortization expenses increased $3.4 million, or 27.0%, from $12.7 million in the three months ended September 30, 2014 to $16.1 million in the three months ended September 30, 2015. The increase in total depreciation and amortization expenses in the three months ended September 30, 2015 includes increases in acquired intangibles amortization of $1.6 million due to our 2014 and 2015 acquisitions. See “— Liquidity and Capital Resources — Acquisitions” for further information on these acquisitions. The increase in total depreciation and amortization expense also reflects a $1.2 million increase in capitalized system development amortization in the three months ended September 30, 2015.

Most of our investments in information technology have supported the continuing development of our product, servicing and sales-related initiatives. Additionally, we capitalized outsourced programming costs as well as salaries, fringe benefits and other expenses incurred by our employees who worked on internally developed software projects. Amortization does not begin on the internally developed software until the project is complete and placed in service, at which time we begin to amortize the asset over expected lives of three to seven years. The amount capitalized decreased from $10.2 million in the three months ended September 30, 2014 to $9.0 million in the three months ended September 30, 2015. The total amount of capitalized costs for projects placed in service in the three months ended September 30, 2015 and 2014 was $7.5 million and $11.1 million, respectively.

General and administrative expenses increased $9.8 million, or 19.9%, from $49.4 million in the three months ended September 30, 2014 to $59.2 million in the three months ended September 30, 2015. The increase in General and administrative expenses includes $9.5 million from our 2014 and 2015 acquisitions. The remaining increase reflects higher personnel expense including incentive and share-based compensation increases, offset by a decrease in acquisition related expenses. General and administrative expenses as a percentage of net revenue for the three months ended September 30, 2015 was 27.6%, a decrease from 29.2% for the three months ended September 30, 2014.
Income from operations. Our income from operations, which we also refer to as operating income, increased $12.1 million, or 39.8%, to $42.5 million for the three months ended September 30, 2015, from $30.4 million for the three months ended September 30, 2014. Our Operating Margin, which we measure as operating income divided by net revenue, was 19.8%

33

for the three months ended September 30, 2015 compared to 18.0% for the three months ended September 30, 2014. Results for the three months ended September 30, 2014 include losses from operations of $2.7 million for Leaf. Excluding the operating losses from Leaf, our operating margin for the three months ended September 30, 2014 was 19.6%.
Interest expense. Interest expense for the three months ended September 30, 2015 was $3.6 million, compared with $2.1 million for the three months ended September 30, 2014. The increase in interest expense reflects higher borrowings under our 2014 Revolving Credit Facility (as defined in "—Liquidity and Capital Resources—Credit Facilities" herein) as well as interest expense on our 2014 Term Credit Facility (as defined in "—Liquidity and Capital Resources—Credit Facilities" herein) that was used to fund the acquisition of TouchNet ("the TouchNet Acquisition") in September 2014. See “— Liquidity and Capital Resources — Credit Facilities” for more detail on our borrowings.
Other income (expense), net. Other income (expense), net for the three months ended September 30, 2014 included a pre and after-tax gain of $3.6 million relating to a release from a contingent earn-out liability to the noncontrolling shareholders of Leaf. As a result of the Stock Purchase Agreement we entered into on August 6, 2014 with the noncontrolling shareholders of Leaf, we were released from a contingent earn-out liability to those noncontrolling shareholders.
Income taxes. Income tax expense for the three months ended September 30, 2015 was $15.0 million, reflecting an effective tax rate of 38.6%. This compares to income tax expense of $11.7 million for the three months ended September 30, 2014, and an effective tax rate of 36.8%. The effective tax rate for the three months ended September 30, 2014 benefited from the permanent non-taxable status of the gain recognized on the release of a contingent earn-out liability to the former noncontrolling shareholders of Leaf.

Net income attributable to Heartland. As a result of the above factors, we recorded net income of $23.9 million for the three months ended September 30, 2015. This compares to a net income of $20.5 million for the three months ended September 30, 2014.

Results of Operations
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
The following table shows certain income statement data as a percentage of net revenue for the periods indicated (in thousands):
 
Nine Months Ended September 30, 2015
 
% of Net
Revenue
 
Nine Months Ended September 30, 2014
 
% of Net
Revenue
 
Change
 
 
 
 
 
Amount
 
%
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
 Total revenues
$
1,983,818

 
 
 
$
1,706,768

 
 
 
$
277,050

 
16.2
 %
Less: Interchange
1,194,461

 
 
 
1,059,241

 
 
 
135,220

 
12.8
 %
Less: Dues, assessments and fees
180,548

 
 
 
163,218

 
 
 
17,330

 
10.6
 %
          Total net revenue
608,809

 
100.0
 %
 
484,309

 
100.0
 %
 
124,500

 
25.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Processing and servicing
246,227

 
40.4
 %
 
204,985

 
42.3
 %
 
41,242

 
20.1
 %
Customer acquisition costs
44,284

 
7.3
 %
 
34,907

 
7.2
 %
 
9,377

 
26.9
 %
Depreciation and amortization
33,382

 
5.5
 %
 
20,472

 
4.2
 %
 
12,910

 
63.1
 %
General and administrative
174,212

 
28.6
 %
 
137,241

 
28.3
 %
 
36,971

 
26.9
 %
Total expenses
498,105

 
81.8
 %
 
397,605

 
82.1
 %
 
100,500

 
25.3
 %
Income from operations
110,704

 
18.2
 %
 
86,704

 
17.9
 %
 
24,000

 
27.7
 %
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income
82

 
—
 %
 
95

 
—
 %
 
(13
)
 
(13.7
)%
Interest expense
(11,178
)
 
(1.8
)%
 
(4,450
)
 
(0.9
)%
 
(6,728
)
 
(151.2
)%
Other, net
(309
)
 
(0.1
)%
 
3,869

 
0.8
 %
 
(4,178
)
 
(108.0
)%
Total other expense
(11,405
)
 
(1.9
)%
 
(486
)
 
(0.1
)%
 
(10,919
)
 
(2,246.7
)%
Income before income taxes
99,299

 
16.3
 %
 
86,218

 
17.8
 %
 
13,081

 
15.2
 %
Provision for income taxes
37,274

 
6.1
 %
 
34,579

 
7.1
 %
 
2,695

 
7.8
 %
Net income
62,025

 
10.2
 %
 
51,639

 
10.7
 %
 
10,386

 
20.1
 %
Less: Net loss attributable to noncontrolling interests
—

 
—
 %
 
(2,011
)
 
(0.4
)%
 
2,011

 
100.0
 %
Net income attributable to Heartland
$
62,025

 
10.2
 %
 
$
53,650

 
11.1
 %
 
$
8,375

 
15.6
 %

34


Revenue. The following tables summarize total revenue and total net revenue (which we define as total revenue less
interchange fees and dues, assessments and fees) by segment for the nine months ended September 30, 2015 and 2014 (in thousands):
 
Nine Months Ended September 30,
 
Change from
Prior Year
Total revenue:
2015
 
2014
 
Amount
 
%
        Payment Processing
$
1,753,722

 
$
1,567,593

 
$
186,129

 
11.9
%
Campus Solutions
89,369

 
36,883

 
52,486

 
142.3
%
        Heartland School Solutions
45,464

 
42,685

 
2,779

 
6.5
%
        Heartland Payroll Solutions
50,869

 
37,978

 
12,891

 
33.9
%
Other
44,394

 
21,629

 
22,765

 
105.3
%
  Total revenue
$
1,983,818

 
$
1,706,768

 
$
277,050

 
16.2
%

 
Nine Months Ended September 30,
 
Change from
Prior Year
Total net revenue:
2015
 
2014
 
Amount
 
%
        Payment Processing
$
384,586

 
$
345,134

 
$
39,452

 
11.4
%
Campus Solutions
83,496

 
36,883

 
46,613

 
126.4
%
        Heartland School Solutions
45,464

 
42,685

 
2,779

 
6.5
%
        Heartland Payroll Solutions
50,869

 
37,978

 
12,891

 
33.9
%
Other
44,394

 
21,629

 
22,765

 
105.3
%
         Total net revenue
$
608,809

 
$
484,309

 
$
124,500

 
25.7
%
    
Payment Processing
Payment Processing net revenue increased $39.5 million, or 11.4%, from $345.1 million in the nine months ended September 30, 2014 to $384.6 million in the nine months ended September 30, 2015. This increase was driven by a $37.8 million or 12.4% increase in SME net revenue, reflecting a 15.0% increase in SME processing volume from $60.1 billion in the nine months ended September 30, 2014 to $69.1 billion in the nine months ended September 30, 2015. The year-over-year increase reflects same store sales growth and the addition of SME merchants whose processing volume and net revenue exceeded that of merchants who attrited in the same period. This increase in processing volume also reflects the conversion of new and existing merchants to OptBlue. We converted a majority of our existing merchants processing under the former sales and servicing agreement with American Express to OptBlue during the third quarter of 2014.  For the nine months ended September 30, 2015, our OptBlue processing volume was $4.7 billion as compared to $1.2 billion for the nine months ended September 30, 2014. Our reported SME processing volume includes processing volumes for merchants in our Heartland School Solutions, Campus Solutions, and Other businesses. Net revenue related to that processing volume is included in the net revenue reported for those businesses.

Campus Solutions
Campus Solutions net revenue increased $46.6 million, or 126.4%, from $36.9 million in the nine months ended September 30, 2014 to $83.5 million in the nine months ended September 30, 2015. The increase in Campus Solutions net revenue included an increase in TouchNet revenue of $40.1 million in the nine months ended September 30, 2015. The remaining increase in Campus Solutions net revenue was due primarily to higher student loan servicing related revenue.

Heartland School Solutions
Heartland School Solutions net revenue increased $2.8 million, or 6.5%, from $42.7 million in the nine months ended September 30, 2014 to $45.5 million in the nine months ended September 30, 2015. The increase in Heartland School Solutions net revenue is due primarily to an increase in transaction processing revenue reflecting growth in the number of parents who are adopting our electronic payment options. Also, in the second quarter of 2014, we recorded out-of-period adjustments decreasing our revenue and increasing bad debt expense (included in Processing and Servicing in our Condensed Consolidated Statements of Income) by $1.4 million and $0.9 million, respectively. These adjustments related to immaterial errors that originated in the prior year. These adjustments included revenue which was incorrectly recorded in prior periods and a reassessment of the collectability of certain customer accounts receivable. Partially offsetting the increases in net revenue was a decrease of $3.7 million in pass-through installation services net revenue for the nine months ended September 30, 2015 associated with a large school district customer in 2014 that did not repeat in 2015.


35

Heartland Payroll Solutions
Heartland Payroll Solutions net revenue increased $12.9 million, or 33.9%, from $38.0 million in the nine months ended September 30, 2014 to $50.9 million in the nine months ended September 30, 2015. The increase in payroll processing net revenue included $7.5 million of net revenue added by Payroll 1. The remaining organic increase of $5.4 million is primarily due to a 8.2% increase in payroll processing customers (excluding 6,457 customers added by Payroll 1) from 25,492 at September 30, 2014 to 27,595 at September 30, 2015, as well as an overall increase in payroll processing revenue per customer.

Other
Other net revenue increased $22.8 million, or 105.3%, from $21.6 million in the nine months ended September 30, 2014 to $44.4 million in the nine months ended September 30, 2015. The increase in other revenue included $19.9 million of net revenue added by Xpient, pcAmerica, and Dinerware (which are all part of Heartland Commerce). The remaining organic increase of $2.9 million reflects growth in Micropayments revenue which reflects higher equipment sales and payment processing for unattended payment locations such as laundry facilities, kiosks and vending machines.

Total expenses. Total expenses increased $100.5 million, or 25.3%, from $397.6 million in the nine months ended September 30, 2014 to $498.1 million in the nine months ended September 30, 2015, due to increases in all of our major expense categories. The increases in expenses reflect acquisition related and organic growth and are further discussed below. Total expenses represented 81.8% of total net revenue in the nine months ended September 30, 2015, compared to 82.1% in the nine months ended September 30, 2014.

Processing and servicing expense increased $41.2 million, or 20.1%, from $205.0 million for the nine months ended September 30, 2014 to $246.2 million for the nine months ended September 30, 2015. The increase in processing and servicing expenses includes a $18.7 million increase from the 2014 and 2015 acquisitions. The remaining increase of $22.5 million is attributable to increased costs associated with processing and servicing higher SME bankcard processing volume, increased sales compensation and increased organic cost of sales and servicing related to higher Heartland Payroll Solutions, Campus Solutions, and Micropayments revenues. Partially offsetting the growth in processing and servicing expenses is a decrease of $0.9 million in bad debt expense associated with an out-of-period adjustment for Heartland School Solutions that is discussed above. There was also a decrease in pass through installation services expense of $3.7 million associated with a large school district customer in 2014 that did not repeat in 2015. As a percentage of net revenue, processing and servicing expense decreased to 40.4% for the nine months ended September 30, 2015, compared with 42.3% for the nine months ended September 30, 2014.
Customer acquisition costs for the nine months ended September 30, 2015 increased $9.4 million, or 26.9%, from $34.9 million for the nine months ended September 30, 2014 to $44.3 million for the nine months ended September 30, 2015. As reflected in the table below, this increase reflects higher amortization on increased signing bonuses and capitalized deferred acquisition costs resulting from improved levels of new installed margin and the impact of subsequent changes in the estimated accrued buyout liability due to lower merchant attrition and same-store sales growth. As a percentage of net revenue, customer acquisition costs increased to 7.3% for the nine months ended September 30, 2015 compared with 7.2% for the nine months ended September 30, 2014.
Customer acquisition costs for the nine months ended September 30, 2015 and 2014 included the following components (in thousands):
 
Nine Months Ended September 30,
 
Change from
Prior Year
 
2015
 
2014
 
Amount
 
%
Amortization of signing bonuses, net
$
25,880

 
$
22,357

 
$
3,523

 
15.8
%
Amortization of capitalized customer deferred acquisition costs
18,540

 
15,699

 
2,841

 
18.1
%
Increase in accrued buyout liability
20,514

 
15,200

 
5,314

 
35.0
%
Capitalized customer deferred acquisition costs
(20,650
)
 
(18,349
)
 
(2,301
)
 
12.5
%
Total customer acquisition costs
$
44,284

 
$
34,907

 
$
9,377

 
26.9
%

36

Depreciation and amortization expense included in the consolidated income statement for the nine months ended September 30, 2015 and 2014, by financial statement line item is as follows (in thousands):
 
Nine Months Ended September 30,
 
Change from
Prior Year
 
2015
 
2014
 
Amount
 
%
Processing and servicing
 
 
 
 
 
 
 
    Amortization – capitalized system development
$
10,197

 
$
10,837

 
$
(640
)
 
(5.9
)%
    Other
2,704

 
2,207

 
497

 
22.5
 %
       Total processing and servicing
12,901

 
13,044

 
(143
)
 
(1.1
)%
Depreciation and amortization
 
 
 
 
 
 
 
    Acquired intangibles
15,218

 
8,421

 
6,797

 
80.7
 %
    Amortization – capitalized system development
12,212

 
7,665

 
4,547

 
59.3
 %
    Other
5,952

 
4,386

 
1,566

 
35.7
 %
       Total depreciation and amortization
33,382

 
20,472

 
12,910

 
63.1
 %
Total depreciation and amortization
$
46,283

 
$
33,516

 
$
12,767

 
38.1
 %

Total depreciation and amortization expenses increased $12.8 million, or 38.1%, from $33.5 million in the nine months ended September 30, 2014 to $46.3 million in the nine months ended September 30, 2015. The increase in total depreciation and amortization expenses in the nine months ended September 30, 2015 includes increases in acquired intangibles amortization of $6.8 million due to our 2014 and 2015 acquisitions. See “— Liquidity and Capital Resources — Acquisitions” for further information on these acquisitions. The increase in total depreciation and amortization expense is also due to a $3.9 million increase in capitalized system development amortization in the nine months ended September 30, 2015.

Most of our investments in information technology have supported the continuing development of our product, servicing and sales-related initiatives. Additionally, we capitalized outsourced programming costs as well as salaries, fringe benefits and other expenses incurred by our employees who worked on internally developed software projects. Amortization does not begin on the internally developed software until the project is complete and placed in service, at which time we begin to amortize the asset over expected lives of three to seven years. The amount capitalized decreased from $32.5 million in the nine months ended September 30, 2014 to $27.9 million in the nine months ended September 30, 2015. The total amount of capitalized costs for projects placed in service in the nine months ended September 30, 2015 and 2014 was $29.2 million and $28.2 million, respectively.

General and administrative expenses increased $37.0 million, or 26.9%, from $137.2 million in the nine months ended September 30, 2014 to $174.2 million in the nine months ended September 30, 2015. The increase in general and administrative expenses includes $27.6 million from our 2014 and 2015 acquisitions. The remaining increase of $9.4 million reflects higher personnel expense including incentive and share-based compensation increases. General and administrative expenses also include $2.9 million relating to the March 2015 sales and servicing organization summit and $1.7 million of acquisition related expenses. General and administrative expenses also increased due to continued investment in new growth initiatives and critical strategic areas including marketing, corporate and IT security initiatives. General and administrative expenses as a percentage of net revenue for the nine months ended September 30, 2015 was 28.6%, an increase from 28.3% for the nine months ended September 30, 2014.
Income from operations. Our income from operations, which we also refer to as operating income, increased $24.0 million to $110.7 million for the nine months ended September 30, 2015, from $86.7 million for the nine months ended September 30, 2014, as a result of an increase in net revenue partially offset by increases in processing and servicing expenses, customer acquisition costs, depreciation and amortization and general and administrative expenses. Our Operating Margin, which we measure as operating income divided by net revenue, was 18.2% for the nine months ended September 30, 2015, compared to 17.9% for the nine months ended September 30, 2014. Excluding the operating loss from Leaf, our Operating Margin for the nine months ended September 30, 2015 and 2014 was 19.0% and 19.6%, respectively.
Interest expense. Interest expense for the nine months ended September 30, 2015 was $11.2 million, compared with $4.5 million for the nine months ended September 30, 2014. The increase in interest expense reflects higher borrowings under our 2014 Revolving Credit Facility (as defined in "—Liquidity and Capital Resources—Credit Facilities" herein) as well as interest expense on our 2014 Term Credit Facility (as defined in "—Liquidity and Capital Resources—Credit Facilities" herein) that was used to fund the TouchNet Acquisition in September 2014. See “— Liquidity and Capital Resources — Credit Facilities” for more detail on our borrowings.
Other income (expense), net. Other income (expense), net for the nine months ended September 30, 2014 included a pre and after-tax gain of $3.6 million relating to a release from a contingent earn-out liability to the noncontrolling shareholders

37

of Leaf. As a result of the stock purchase agreement we entered into on August 6, 2014 with the noncontrolling shareholders of Leaf, we were released from a contingent earn-out liability to those noncontrolling shareholders    

Income taxes. Income tax expense for the nine months ended September 30, 2015 was $37.3 million, reflecting an effective tax rate of 37.5%. This compares to income tax expense of $34.6 million for the nine months ended September 30, 2014, and an effective tax rate of 40.1%. The decrease in the effective tax rate for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, primarily reflects the partial recognition of deferred tax benefits during the first quarter of 2015 from past accumulated losses of Leaf due to the generation of future taxable income resulting from the acquisition of Dinerware. The structure of this acquisition along with the corresponding preliminary purchase price allocation resulted in the recording of deferred tax liabilities on finite lived intangible assets that will provide a source of future taxable income. Additionally, our effective tax rate benefited from the ability to utilize the losses generated from Leaf against consolidated taxable income since our August 6, 2014 acquisition of the shares held by the former noncontrolling shareholders of Leaf.

Net income attributable to Heartland. As a result of the above factors, we recorded net income of $62.0 million for the nine months ended September 30, 2015. This compares to a net income of $53.7 million for the nine months ended September 30, 2014.
Balance Sheet Information
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Selected Balance Sheet Data
 
 
 
Cash and cash equivalents
$
43,148

 
$
70,793

Funds held for customers
180,458

 
176,492

Receivables, net
258,378

 
234,104

Property and equipment, net
168,244

 
154,303

Goodwill
475,317

 
425,712

Intangible assets, net
197,254

 
192,553

Total assets
1,452,739

 
1,387,773

Due to sponsor banks
49,266

 
31,165

Customer fund deposits
180,458

 
176,492

Processing liabilities
119,884

 
119,398

Borrowings:
 
 
 
Current portion
48,793

 
36,792

Long-term portion
450,041

 
523,122

Unearned revenue:
 
 
 
Current portion
53,150

 
46,601

Long term portion
3,025

 
2,354

Total liabilities
1,135,576

 
1,137,013

Total equity
317,163

 
250,760


September 30, 2015 Compared to December 31, 2014
Total assets increased $65.0 million, or 4.7%, to $1,452.7 million at September 30, 2015 from $1,387.8 million at December 31, 2014. The increases at September 30, 2015 included $24.3 million in receivables, $13.9 million in property and equipment, net and $49.6 million in goodwill. The increase in goodwill is primarily due to the acquisitions of pcAmerica, Dinerware and Payroll 1. These increases were partially offset by a decrease in cash of $27.6 million to fund these acquisitions. See “— Liquidity and Capital Resources” for further details on these acquisitions.
Our receivables, which increased $24.3 million or 10.4% from December 31, 2014, are primarily due from our card payment processing merchants and result in large part from our practice of advancing interchange fees to most of our SME merchants during the month and collecting those fees from our merchants at the beginning of the following month, as well as from transaction fees we charge merchants for processing transactions. Total receivables also include amounts due from Discover and American Express bankcard networks for merchant sales transactions. Receivables from the networks are recovered the following business day from the date of processing the transaction. Amounts due from SME bankcard processing merchants and bankcard networks at September 30, 2015 increased $18.1 million from December 31, 2014.

38

The amount due to sponsor banks primarily for funding merchant advances was $47.7 million and $29.9 million at September 30, 2015 and December 31, 2014, respectively. The liability to sponsor banks is repaid at the beginning of the following month out of the fees we collect from our merchants.

Total borrowings under our credit facility decreased $61.1 million, or 10.9%, to $498.8 million at September 30, 2015 from $559.9 million at December 31, 2014 reflecting our use of cash flow to reduce borrowings. See “—Liquidity and Capital Resources” for discussion of Credit Facilities.

Total equity increased $66.4 million from December 31, 2014 primarily due to net income of $62.0 million. Other increases in total stockholders’ equity for the nine months ended September 30, 2015 included proceeds received from the exercise of stock options, tax benefits related to those stock option exercises and share-based compensation. Partially offsetting the increases in stockholders' equity were payments of cash dividends of $11.0 million and restricted stock units vested of $7.1 million during the nine months ended September 30, 2015.

Liquidity and Capital Resources
General. Liquidity and capital resource management is a process focused on providing the funding we need to meet our short and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, our technology platforms, our service center, and to make acquisitions with the expectation that these investments will generate cash flows sufficient to cover our working capital needs and other anticipated needs for capital.

Our cash requirements include funding payments to salespersons for signing bonuses, residual commissions and residual buyouts, paying interest expense and other operating expenses, including taxes, investing in our technology infrastructure, and making acquisitions of businesses or assets. We expect that our future cash requirements will continue to include amounts used to repurchase our common stock and pay dividends, both as authorized by our Board of Directors.

Other than borrowings we use to fund certain acquisitions and share repurchases, we fund our cash needs primarily with cash flow from our operating activities and through our agreements with our sponsor banks to fund SME merchant advances. We believe that our current cash and investment balances, cash generated from operations and our agreements with our sponsor banks to fund SME merchant advances will provide sufficient liquidity to meet our anticipated needs for operating capital for at least the next twelve months.

Working Capital. Our working capital, defined as current assets less current liabilities, was negative by $49.6 million at September 30, 2015 compared to positive by $15.1 million at December 31, 2014. The decrease in working capital is primarily due to the acquisitions of pcAmerica and Dinerware, which were partially funded by operating cash, and our use of operating cash to pay down borrowings under our 2014 Revolving Credit Facility which are generally classified as non-current liabilities.

At September 30, 2015, we had cash on our Condensed Consolidated Balance Sheet totaling $43.1 million compared to cash of $70.8 million at December 31, 2014. Our September 30, 2015 cash balance included approximately $16.5 million of processing-related cash in transit and collateral, compared to approximately $17.8 million of processing-related cash in transit and collateral at December 31, 2014.

On September 30, 2015, we had $257.2 million available to us under our Revolving Credit Facility. See “— Credit Facilities” for more details.

Acquisitions.

Campus Solutions
On September 4, 2014, we completed the acquisition of TouchNet, an integrated commerce solutions provider to higher-education institutions for a cash payment of $375 million for all outstanding common shares. The purchase was funded with the new five year, $375 million 2014 Term Credit Facility. See “— Credit Facilities” for further discussion. TouchNet added over 600 higher education clients serving over 6 million students, nearly one-third of the higher education enrollment in the United States, to our Campus Solutions business.


39

Heartland School Solutions
On April 1, 2014, we purchased the net assets of MCS Software for a $17.3 million cash payment. The purchase price was financed under our 2013 Credit Facility and from operating cash flows. The acquisition further expands our market-leading position in the K-12 school nutrition and POS technology industry in our Heartland School Solutions business.
    
Heartland Payroll Solutions
On February 27, 2015, we purchased the stock of Payroll 1 for a $30.0 million cash payment. The purchase price was financed under our 2014 Revolving Credit Facility. The acquisition of Payroll 1 expanded our existing payroll processing business and customer base by adding 6,573 customers.

Heartland Commerce
On February 11, 2015, we acquired the stock of Dinerware for a cash payment of $15.0 million. The purchase was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility. Dinerware provides restaurant POS software solutions to the hospitality industry and POS systems to enhance the operations of a wide range of food service establishments.
    
On January 30, 2015, we acquired the net assets of pcAmerica for a cash payment of $15.0 million. The purchase was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility. PcAmerica delivers POS systems to streamline daily operations, including customer transactions, inventory tracking, employee labor, and marketing reports to meet the evolving needs of retail stores and restaurants.
    
On October 31, 2014, we acquired the net assets of Xpient for a cash payment of $30.0 million. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility. Xpient provides POS software solutions to enterprise customers primarily in the food service industry.

On February 15, 2014, we purchased the assets of Liquor POS for a $3.3 million cash payment. The purchase price was financed from operating cash flows. Liquor POS is a leading provider of POS systems to the liquor retail vertical.

On October 30, 2015, we acquired the stock of Digital Dining for a cash payment of $18.7 million. The purchase price was financed under our 2014 Revolving Credit Facility. Digital Dining is a national provider of restaurant POS and management systems. Digital Dining offers restaurants the convenience of a handheld POS on an iPad, iPhone, iPod and iPad in a hybrid environment with conventional fixed terminals, and is also used by restaurateurs for table management, delivery, reservations, labor scheduling, inventory and loyalty programs.
    
Cash Flows Provided By Operating Activities. We reported net cash provided by operating activities of $139.9 million for the nine months ended September 30, 2015, compared to $51.5 million in the nine months ended September 30, 2014. Cash provided by operating activities reflects the benefit of higher net income as adjusted for non-cash operating items including increases in amortization of capitalized customer acquisition costs, depreciation and amortization and stock based compensation. Additionally, the increase in net cash provided for the nine months ended September 30, 2015 reflects timing of collecting unearned revenue, net processing activities and income tax payments.
Other major determinants of operating cash flow are net signing bonus payments, which consume operating cash as we install new merchants, and payouts on the accrued buyout liability, which represent the costs of buying out residual commissions owned by our salespersons. We paid net signing bonuses of $33.9 million and $27.6 million, respectively, in the nine months ended September 30, 2015 and 2014. In the nine months ended September 30, 2015 and 2014, we reduced our accrued buyout liability by making buyout payments of $12.9 million and $9.6 million, respectively. The increase in buyouts for the nine months ended September 30, 2015 reflects the company initiating buyouts of residual commissions owned by salespersons.

Cash Flows Used In Investing Activities. Net cash used in investing activities was $103.7 million for the three months ended September 30, 2015, compared to $394.2 million for the nine months ended September 30, 2014.
Cash flows used in investing activities for the nine months ended September 30, 2015 reflect the purchases, net of cash acquired, of pcAmerica, Dinerware and Payroll 1 for $15.0 million, $15.0 million and $30.0 million, respectively. Cash flows used in investing activities for the nine months ended September 30, 2014 reflect the purchases, net of cash acquired, of Liquor POS for $3.3 million, MCS Software for $17.3 million and TouchNet for $333.9 million. We made capital expenditures of $42.7 million during the nine months ended September 30, 2015, compared to $39.1 million in the nine months ended September 30, 2014. We continue building our technology infrastructure, primarily for hardware and software needed for the

40

development and expansion of our products and operating platforms. To further develop our technology, we anticipate that these expenditures will continue near current levels in the future.
Cash Flows (Used In) Provided By Financing Activities. Net cash used in financing activities was $63.8 million for the nine months ended September 30, 2015, compared to net cash provided of $365.3 million for the nine months ended September 30, 2014.
During nine months ended September 30, 2015, we borrowed $171.0 million and made payments of $232.1 million, resulting in a net decrease of $61.1 million in borrowings under our credit facilities. During the nine months ended September 30, 2014, we borrowed $436.4 million and made payments of $17.5 million.
Cash dividends paid in the nine months ended September 30, 2015 were $11.0 million, compared to dividends paid of $9.2 million in the nine months ended September 30, 2014.

Cash used in financing activities in the nine months ended September 30, 2014 included cash used for common stock repurchases. We used $54.5 million of cash to repurchase 1,347,817 shares of our common stock during the nine months ended September 30, 2014.

Credit Facilities. On September 4, 2014, we entered into an amended and restated senior secured credit facility (the "2014 Credit Agreement") with Bank of America, N.A., as administrative agent, and certain lenders who are a party to the 2014 Credit Agreement. This 2014 Credit Agreement replaced our senior secured credit facility dated as of October 23, 2013 (the "2013 Credit Agreement”). Credit extended under the 2014 Credit Agreement is guaranteed by our subsidiaries and is secured by substantially all of our assets and the assets of our subsidiaries.

The 2014 Credit Agreement provides for a revolving credit facility in the aggregate amount of up to $400 million (the “2014 Revolving Credit Facility”) and a term loan in an initial principal amount of $375 million (the “2014 Term Credit Facility”). The 2014 Revolving Credit Facility included up to $35 million that may be used for the issuance of letters of credit and up to $35 million that is available for swing line loans. All principal and interest not previously paid on the 2014 Revolving Credit Facility will mature and be due and payable on September 4, 2019. On September 4, 2014, we borrowed $375 million under the 2014 Term Credit Facility to fund the TouchNet Acquisition. The 2014 Term Credit Facility amortizes on a quarterly basis as follows, with the remaining principal balance due on September 4, 2019: (i) 5% of the initial 2014 Term Credit Facility to be payable in each of the first three years, (ii) 7.5% of the initial Term Credit Facility to be payable in the fourth year and (iii) 10% of the initial 2014 Term Credit Facility to be payable in the fifth year. The 2014 Term Credit Facility is also subject to mandatory prepayment from the net cash proceeds of certain asset dispositions, casualty or condemnation events, issuance of indebtedness and extraordinary receipts. Subject to the terms and conditions of the 2014 Credit Agreement, without the consent of the then existing lenders (but subject to the receipt of commitments), the 2014 Revolving Credit Facility may be increased and new incremental term loans may be issued in an aggregate principal amount of up to $150 million for all such increases under the 2014 Revolving Credit Facility and new term loans, subject to certain minimum threshold amounts.
We had $356.3 million and $370.0 million outstanding under our 2014 Term Credit Facility at September 30, 2015 and December 31, 2014, respectively. We had $142.5 million and $189.5 million outstanding under our 2014 Revolving Credit Facility at September 30, 2015 and December 31, 2014, respectively.
    
The 2014 Credit Agreement contains covenants which include: maintenance of certain leverage and fixed charge coverage ratios; limitations on our indebtedness, liens on our properties and assets, investments in, loans to other business units, and our ability to enter into business combinations and asset sales; and certain other financial and non-financial covenants. These covenants also apply to certain of our subsidiaries. We were in compliance with these covenants as of September 30, 2015 and December 31, 2014 and expect we will remain in compliance with the covenants of the 2014 Credit Agreement for at least the next twelve months.

Dividends on Common Stock. On October 28, 2015, our Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, payable on December 15, 2015 to stockholders of record on November 24, 2015.
    

41

Contractual Obligations. The following table reflects our significant contractual obligations as of September 30, 2015:
 
Payments Due by Period
Contractual Obligations
Total
 
Less than
1 year
 
1 to 3
years
 
3 to 5
years
 
More than
5 years
 
(In thousands)
Processing providers (a)
$
9,008

 
$
4,013

 
$
4,995

 


 
$
—

Telecommunications providers (b)
6,818

 
3,307

 
3,511

 
—

 
—

Facility and equipment leases
107,015

 
16,673

 
26,777

 
17,843

 
45,722

2014 Term Credit Facility
356,250

 
18,750

 
51,563

 
285,937

 
—

2014 Revolving Credit Facility (c)
142,500

 
—

 
—

 
142,500

 
—

Capital Lease Obligation
84

 
43

 
41

 
—

 
—

 
$
621,675

 
$
42,786

 
$
86,887

 
$
446,280

 
$
45,722

(a)
We have agreements with several third-party processors to provide to us on a non-exclusive basis payment processing and transmittal, transaction authorization and data capture services, and access to various reporting tools. Our agreements with third-party processors require us to submit a minimum monthly number of transactions or volume for processing. If we submit a number of transactions or volume that is lower than the minimum, we are required to pay the third-party processors the fees that they would have received if we had submitted the required minimum number or volume of transactions.
(b)
We have agreements in place with several large telecommunications companies that provide data center services, wide area network connectivity, and voice services that are used by both our call center and card payment processing platforms. These providers require both dollar and term commitments for the services they provide. If we do not meet the minimum terms, then there is a requirement to pay the remaining commitments.
(c)
Interest rates on the 2014 Revolving Credit Facility are variable in nature; however, we are party to fixed-pay amortizing interest rate swaps having a remaining notional amount of $3.8 million. The 2014 Revolving Credit Facility is available on a revolving basis until September 4, 2019. While we are not contractually obligated to pay $30.0 million of the outstanding balance of the 2014 Revolving Credit Facility, we include this amount in the Current portion of borrowings on the Condensed Consolidated Balance Sheet since we intend to pay this amount in October 2015.
In addition, we are contractually obligated for merchant chargeback activity. The card brand networks generally allow chargebacks up to four months after the later of the date the transaction is processed or the delivery of the product or service to the cardholder. If the merchant incurring the chargeback is unable to fund the refund to the card issuing bank, we must do so. As the majority of our SME transactions involve the delivery of the product or service at the time of the transaction, a good basis to estimate our exposure to chargebacks is the last four months' bankcard processing volume on our SME portfolio, which was $32.5 billion for the four months ended September 30, 2015 and $27.8 billion for the four months ended December 31, 2014. However, during the four months ended September 30, 2015 and December 31, 2014, we were presented with $17.5 million and $16.0 million, respectively, of chargebacks by issuing banks. In the nine months ended September 30, 2015 and the year ended December 31, 2014, we experienced merchant losses of $2.6 million and $7.3 million, respectively, or 0.37 basis points and 0.90 basis points, respectively, on total SME bankcard dollar volumes processed of $69.1 billion and $81.1 billion, respectively. In the year ended December 31, 2014, our losses included $4.6 million resulting from chargebacks from a single merchant who entered bankruptcy in the fourth quarter. These losses are included in processing and servicing expense in our Condensed Consolidated Statements of Income.
Unrecognized Tax Benefits. At September 30, 2015, we had gross tax-effected unrecognized tax benefits of approximately $8.6 million. As of September 30, 2015, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority, hence the unrecognized tax benefits have been excluded from the above commitment and contractual obligations table.

Legal and Regulatory Considerations
Except as disclosed in “Legal Proceedings” of Part II of this Quarterly Report on Form 10-Q, there were no material developments that occurred since the filing of our 2014 Form 10-K in the proceedings under Part I, Item 3. Legal Proceedings, nor are we aware of any other material legal proceedings initiated against us during such time.
    

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Office Facilities
At September 30, 2015, we owned one facility and leased thirty four facilities which we use for operational, sales and administrative purposes.

Our principal executive offices are located in approximately 9,300 square feet of leased office space on Nassau
Street in Princeton, New Jersey. The Nassau Street lease expires in June 2023. We own 58 acres of land in Jeffersonville, Indiana, on which we constructed our operations and service center. The state-of-the-art facility is comprised of 238,000 square feet of space supporting customer service, operations, deployment, day care, fitness, cafeteria, and large company meetings.

As of September 30, 2015, we also leased the following facilities located throughout the United States to operate our business. Multi-purpose facilities include administrative, sales, operations, technology and facilities shared by multiple business segments.
Segment
Square Feet
 
Expiration
Multi-purpose
249,063

 
5/15/2016 to 12/31/2026
Campus Solutions
136,607

 
7/31/2016 to 12/31/2030
Heartland School Solutions
39,815

 
5/25/2016 to 6/30/2023
Heartland Payroll Solutions
84,337

 
12/31/2015 to 7/31/2019
Heartland Commerce
54,203

 
8/14/2016 to 2/29/2024
Heartland Marketing Solutions
10,838

 
12/31/2016
 
574,863

 
 
We believe that our facilities are suitable and adequate for our current business operations and, if necessary, could be replaced with little disruption to our company. We periodically review our space requirements and may acquire new space to meet our business needs or consolidate and dispose of or sublet facilities which are no longer required.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our primary market risk exposure is to increase in interest rates.

We have interest rate risk related to our amounts payable to our sponsor banks. Within our payable to our sponsor banks are balances which our sponsor banks have advanced to our SME merchants for interchange fees. The amount due to sponsor banks for funding merchant advances was $47.7 million at September 30, 2015. During the quarter ended September 30, 2015, the average daily interest-bearing balance of that payable was approximately $46.4 million. We incur interest expense on this payable at the prime rate. A hypothetical 100 basis point increase in the interest rate applied to our average payable to sponsor banks would result in decrease of approximately $464,000 in annual pre-tax income.

We also incur interest rate risk on borrowings under our 2014 Credit Agreement. At September 30, 2015, there was $356.3 million outstanding under the 2014 Term Credit Facility and $142.5 million outstanding under the 2014 Revolving Credit Facility. We incur interest expense on these variable-rate borrowings based on short-term interest rates. The impact that a hypothetical 100 basis point increase in short-term interest rates would have on our outstanding September 30, 2015 balances under the Credit Agreement would be a decline of approximately $5.0 million in annual pre-tax income.

While the bulk of our cash and cash-equivalents, including Funds held for customers, are held in demand accounts or money market funds, we do hold certain fixed-income investments with remaining terms of less than five years. At September 30, 2015, a hypothetical 100 basis point increase in short-term interest rates would result in no material change in annual in annual pre-tax income from investment holdings, but would result in a decrease in the value of fixed-rate investments of approximately $533,000.

Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective

43

and provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based, in part, upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Changes in Internal Controls
During the quarter ended September 30, 2015, there was no change in our internal controls over financial reporting (as defined in Rule 13 a-15(f) and 15d-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. We believe that the outcome of the proceedings to which we are currently a party will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors
There have been no material changes in our Risk Factors as previously reported in our 2014 Form 10-K for the year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On May 8, 2014, our Board of Directors authorized the repurchase of up to $75 million of our outstanding common stock. As of September 30, 2015, we have not repurchased any shares under the May 8, 2014 authorization.

Item 3. Defaults Upon Senior Securities
None

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information
None.










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Item 6. Exhibits
Exhibit
Number
 
Description
 
 
 
*31.1
 
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
*31.2
 
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
*32.1
 
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
*32.2
 
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
*101
 
The following financial information from the Quarterly Report on Form 10-Q for the quarter ended September 30,2015, formatted in XBRL ("Extensible Business Reporting Language") and furnished electronically herewith: (i) the Consolidated Statements of Income and Comprehensive Income; (ii) The Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flow; (iv) the Consolidated Statements of Equity; and (v) the Notes to the Consolidated Financial Statements.
_____________________
*    Filed herewith.

45

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 6, 2015
HEARTLAND PAYMENT SYSTEMS, INC.
(Registrant)
 
 
By:
/S/    ROBERT O. CARR        
 
Robert O. Carr
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
By:
/S/    SAMIR M. ZABANEH        
 
Samir M. Zabaneh
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)

46

EXHIBIT INDEX
Exhibit
Number
 
Description
 
 
 
*31.1
 
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
*31.2
 
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
*32.1
 
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
*32.2
 
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
*101
 
The following financial information from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL ("Extensible Business Reporting Language") and furnished electronically herewith: (i) the Consolidated Statements of Income and Comprehensive Income; (ii) The Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flow; (iv) the Consolidated Statements of Equity; and (v) the Notes to the Consolidated Financial Statements.
_____________________
*
Filed herewith.



47


Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert O. Carr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heartland Payment Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 6, 2015
/s/
Robert O. Carr
 
Robert O. Carr
 
Chief Executive Officer
 
(Principal Executive Officer)





Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Samir M. Zabaneh, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heartland Payment Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 6, 2015
/s/
Samir M. Zabaneh
 
Samir M. Zabaneh
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)





Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Heartland Payment Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert O. Carr, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being provided pursuant to 18 U.S.C. Section 1350 and is not deemed to be “filed” for any purpose whatsoever.
Date: November 6, 2015
/s/
Robert O. Carr
 
Robert O. Carr
 
Chief Executive Officer
 
(Principal Executive Officer)





Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Heartland Payment Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Samir M. Zabaneh, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being provided pursuant to 18 U.S.C. Section 1350 and is not deemed to be “filed” for any purpose whatsoever.
Date: November 6, 2015
/s/
Samir M. Zabaneh
 
Samir M. Zabaneh
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)




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