Deluxe Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Deluxe provides products and services to small businesses, consumers and financial institutions through Small Business Services, Financial Services and Direct Checks.
Financial performance and liquidity
- Revenue: $1.849 billion, up 4.3% from 2015. Acquisitions contributed approximately $114 million; price increases also helped, partly offset by declining check and forms volumes and Financial Services pricing allowances.
- Revenue mix: Checks were 46.8% of revenue, down from 49.3%; marketing solutions and other services were 33.4%, up from 30.0%. Service revenue rose to 20.3% of total revenue from 18.1%.
- Profit and margins: Gross profit was $1.182 billion, with gross margin of 63.9% (unchanged). Operating income was $368.7 million, up 4.1%, and operating margin was 19.9% versus 20.0%. Net income was $229.4 million, up 4.9%; diluted EPS was $4.65 versus $4.36.
- Cash flow: Operating cash flow was $319.3 million, up from $309.6 million. Investing used $310.8 million, including $270.9 million for acquisitions; capital expenditures were $46.6 million. Financing provided $4.3 million. Dividends paid were $58.7 million and share repurchases were $55.2 million.
- Debt and liquidity: Total debt was $758.6 million, up $129.6 million year over year; weighted-average interest rate at year-end was 2.2%, and borrowings were primarily variable-rate. Cash was $76.6 million; $86.1 million remained available under the revolving credit facility. The company reported compliance with debt covenants.
- Segments: Small Business Services revenue was $1.196 billion (+3.8%) and operating margin 17.5%; Financial Services revenue was $500.0 million (+9.8%) and margin 21.4%; Direct Checks revenue was $153.3 million (-7.4%) and margin 34.6%.
- Fourth quarter: Revenue was $480.2 million versus $463.5 million in Q4 2015; net income was $54.2 million versus $59.7 million; diluted EPS was $1.11 versus $1.20. Q4 2016 included a $7.9 million pretax debt-extinguishment loss and $3.6 million pretax restructuring charges.
Changes, outlook and key risks
- Growth increasingly depends on marketing, web and financial technology services, acquisitions and pricing, as legacy checks and printed forms face secular decline. Orders fell 1.8%, while revenue per order rose 6.2%.
- Management cited approximately $50 million in net cost reductions during 2016 and expected a further approximately $50 million in 2017.
- 2017 outlook: Revenue of $1.935–$1.975 billion; diluted EPS of $5.10–$5.30; operating cash flow of $335–$355 million; and capital spending of approximately $45 million. Forecast includes the pending RDM Corporation acquisition. Management expected check-order declines of 5%–6%, Direct Checks revenue to decline 9%–10%, and Financial Services revenue to grow 13%–16%. FMCG Direct was expected to contribute $80–$85 million of 2017 revenue and dilute EPS by $0.05.
- Management expected continued cost savings to be partly offset by medical, material and delivery costs and investment in growth initiatives. The board was expected to maintain the current dividend, subject to quarterly approval.
- Principal risks include declining check and forms usage, competitive pricing, execution and integration of acquisitions, technology and cybersecurity disruptions, privacy and regulatory requirements, economic sensitivity, variable-rate debt exposure, and potential goodwill impairment. Goodwill and the indefinite-lived trade name represented 51.5% of assets; no impairment charge was recorded in 2016.
- Unusual items included the $7.9 million pretax loss on retiring $200 million of 6.0% senior notes, restructuring charges of $7.8 million in total, and an income-tax benefit from adopting share-based compensation accounting guidance. The filing also revised prior-period balance-sheet and cash-flow presentation for an error it deemed immaterial, with no effect on net income or total equity.
Important facts for investors to verify
- Whether growth in acquired and higher-growth services can offset continuing declines in checks and forms, and sustain segment margins.
- Actual delivery of forecast 2017 revenue, EPS, operating cash flow and $50 million of additional cost reductions, including the effects of RDM and FMCG Direct.
- Debt repayment capacity, refinancing needs around the February 2019 credit-facility maturity, variable-rate sensitivity and covenant headroom.
- Acquisition integration, customer retention and the assumptions supporting goodwill and intangible-asset valuations.
- Exposure to cybersecurity, data privacy, litigation, environmental and tax contingencies; the filing states recorded legal liabilities were not material and identifies $3.2 million of environmental accruals.