Deluxe Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Fourth-quarter figures are included below. Deluxe provides products and customer-management services to small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks. The company is shifting its mix from checks and printed forms toward marketing solutions and other services (MOS), including web, data-driven marketing and treasury management offerings.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1.966 billion | $1.849 billion |
| Gross margin | 62.2% | 63.9% |
| Operating income / margin | $331.2 million / 16.8% | $368.7 million / 19.9% |
| Net income | $230.2 million | $229.4 million |
| Diluted EPS | $4.72 | $4.65 |
| Operating cash flow | $338.4 million | $319.3 million |
| Cash and cash equivalents, year-end | $59.2 million | $76.6 million |
| Total debt, year-end | $709.3 million | $758.6 million |
- Revenue grew 6.3%, reflecting approximately $173 million of acquired-business revenue and price increases; order volume fell 4.2%, while revenue per order rose 11.0%.
- Service revenue increased to 25.2% of total revenue from 20.3%. MOS reached 38.4% of consolidated revenue, versus 33.4%; checks declined to 43.3% from 46.8%.
- Net income was nearly flat despite lower operating income, supported by a $20.5 million tax benefit from the Tax Cuts and Jobs Act. The effective tax rate fell to 26.4% from 32.6%.
- Investing cash outflow was $180.9 million, including $139.2 million of net acquisition payments and $47.5 million of capital spending. Financing cash outflow was $176.9 million, including $65.0 million of share repurchases and $58.1 million of dividends.
- At year-end, $101.6 million was available under the revolving credit facility. Current assets were $393.0 million and current liabilities were $425.8 million.
Material changes and segment results
- Small Business Services: Revenue rose 3.7% to $1.240 billion, but operating income fell 12.4% to $182.8 million and margin declined to 14.7% from 17.5%. The results included $54.9 million of asset impairment charges, along with lower check, forms and accessories volumes and higher material and delivery costs.
- Financial Services: Revenue increased 17.1% to $585.3 million, largely due to acquisitions and MOS growth. Operating income decreased 4.8% to $101.6 million; margin fell to 17.4% from 21.4%, reflecting acquisition-related costs and amortization, pricing allowances, lower check volume and the decline in Deluxe Rewards revenue.
- Direct Checks: Revenue declined 8.3% to $140.5 million and operating income declined 12.0% to $46.7 million, primarily from continuing check-order declines and higher delivery and material costs.
- FY2017 included $54.9 million of pre-tax impairments, including a $28.4 million goodwill write-down in the Safeguard reporting unit, a $14.8 million NEBS trade-name impairment, software impairment and charges related to a distributor sale. The company also reported $8.7 million of gains from business sales.
- Fourth quarter: Revenue was $494.9 million versus $480.2 million in Q4 2016; net income was $84.7 million versus $54.2 million; diluted EPS was $1.75 versus $1.11. Q4 2017 included a $20.5 million tax-reform benefit and $5.4 million of net restructuring charges.
Outlook, risks and contingencies
- For 2018, management forecast revenue of $2.065–$2.105 billion, diluted EPS of $5.42–$5.67 and operating cash flow of $360–$380 million. Forecasts include about $0.13 per share of integration costs.
- Management expected approximately $50 million of additional net cost reductions in 2018, approximately 7% year-over-year check-order declines, and about $27 million of contract-acquisition payments and $55 million of capital spending. The 2018 effective tax rate was expected to be about 25%.
- Management expected Small Business Services revenue growth of 4%–5% and Financial Services growth of 11%–16%; Direct Checks revenue was forecast to decline about 11%. Financial Services outlook included incremental RDM revenue and an expected loss of about $10 million of Deluxe Rewards revenue, primarily following the loss of Verizon as a customer.
- The $707.9 million credit facility and term loan mature in February 2019. Management planned to secure a new multi-year facility in the first half of 2018; the filing states that failure to refinance, extend or replace the debt would raise substantial doubt about the company’s ability to continue as a going concern. Management expected existing cash and planned refinancing to meet anticipated requirements for at least 12 months.
- Key risks include secular declines in checks and forms, pricing pressure, execution and integration risks from acquisitions, goodwill impairment, competition in MOS and FinTech, cybersecurity and technology disruption, economic weakness among small businesses, and variable-rate debt and refinancing risk. The company reported effective internal control over financial reporting; recorded legal liabilities were not material, though adverse litigation outcomes remain possible.
Investor verification points
- Verify the delivery of 2018 revenue, EPS and cash-flow targets, including the assumptions for acquisitions, cost savings and check-order declines.
- Track progress on refinancing the February 2019 debt maturity, borrowing availability, leverage and covenant compliance.
- Assess whether MOS growth—particularly treasury management, data-driven marketing and web services—can offset check and forms declines while improving segment margins.
- Review integration performance and impairment sensitivity, especially the Safeguard and web-services businesses; goodwill and the indefinite-lived trade name represented about 52% of total assets.
- Monitor the tax-reform accounting estimates, including state conformity and the foreign-earnings toll charge, which management expected to finalize during 2018.
- Check the results of the expected Verizon-related Rewards revenue loss, continued contract-acquisition payments and planned capital investment.