Deluxe Corporation — Q1 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter ended March 31, 2012, compared with the quarter ended March 31, 2011. Deluxe sells checks, forms, marketing solutions and other services through Small Business Services, Financial Services and Direct Checks. The company is pursuing growth in marketing and digital services while managing the continuing decline in check and forms usage.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $378.0 million | $349.8 million; up 8.1% |
| Gross profit / margin | $250.5 million / 66.3% | $229.6 million / 65.6% |
| Operating income | $78.0 million | $67.5 million |
| Net income | $44.1 million | $32.6 million |
| Diluted EPS | $0.86 | $0.63 |
| Operating cash flow | $52.0 million | $61.0 million |
| Capital expenditures | $9.0 million | $8.4 million |
Gross margin improved 0.7 percentage points. SG&A was $171.8 million, or 45.5% of revenue, compared with $160.8 million, or 46.0%. Total net restructuring charges were $1.9 million. Q1 2011 included a $7.0 million pre-tax loss on early debt extinguishment and additional related interest charges; their absence in 2012 contributed to the year-over-year earnings increase.
Segments: Small Business Services revenue rose 14.8% to $229.6 million, with operating income of $38.8 million; margin fell to 16.9% from 17.9%. Financial Services revenue rose 2.9% to $90.6 million; operating income increased to $21.9 million and margin to 24.2% from 17.8%. Direct Checks revenue declined 6.4% to $57.8 million, while operating income rose 8.4% to $17.3 million and margin improved to 30.0% from 25.9%.
Cash and cash equivalents were $58.7 million at quarter-end, up from $28.7 million at December 31, 2011. Current assets were $226.1 million and current liabilities $295.1 million. Total debt was $742.0 million, including $85.5 million due in December 2012; shareholders’ equity was $339.6 million. The company had no credit-facility borrowings and reported $191.5 million available under its $200 million facility, extended in February 2012 to February 2017. The filing reports covenant compliance.
Operating cash flow decreased $9.0 million year over year, primarily reflecting higher contributions to the medical-benefit trust, contract acquisition payments, interest and taxes, partly offset by earnings and lower pension and bonus payments. The $30.0 million increase in cash also reflected the absence of the prior-year debt refinancing and repayment flows.
Outlook, commentary and risks
- Management forecast 2012 revenue of $1.445–$1.475 billion and diluted EPS of $3.12–$3.32, including an estimated $0.08 per share of restructuring costs. The forecast assumed an approximately 33% effective tax rate.
- Management expected $225–$245 million of operating cash flow, approximately $35 million of capital spending and approximately $15 million of contract acquisition payments in 2012. It anticipated using cash for the $84.8 million December debt maturity, dividends, investment and potentially debt reduction, repurchases or acquisitions. Management said cash generation and the facility should fund operations and obligations for the next 12 months.
- The company expected approximately $50 million in net 2012 cost reductions versus 2011 and said it was on track. Price increases, cost initiatives and growth in marketing solutions supported results; check usage declines, competitive pricing, higher delivery and material costs, and growth investments were offsets. Small Business Services growth was expected to be high single digits; Financial Services revenue was expected to decline low to mid-single digits; Direct Checks revenue was expected to decline mid to high single digits.
- Debt covenants restrict certain activities, and notes include limits on additional debt and other transactions. A one-percentage-point interest-rate change was estimated to change quarterly interest expense by $0.7 million, excluding hedge ineffectiveness. Approximately $19.2 million of cash and marketable securities held by Canadian subsidiaries would incur an estimated $4 million U.S. tax if repatriated.
- Environmental accruals were $8.7 million, with a substantial portion associated with insured sites; management did not anticipate significant net environmental cash outlays in 2012. The filing says identified litigation reserves were not material and known claims were not expected to materially affect the company. Indemnification exposure is not quantifiable; management reported no reason to believe it would be materially adverse. Risk factors were unchanged from the 2011 Form 10-K.
Important facts for investors to verify
- Whether 2012 revenue, EPS and operating-cash-flow guidance was achieved, and whether the planned cost savings materialized without impairing growth.
- Performance of marketing solutions and other services relative to ongoing check and forms declines, including segment revenue and margin trends.
- Cash generation and liquidity available to meet the $84.8 million December 2012 maturity, dividends and planned investments.
- Effects of contract renewals, contract acquisition payments, material and delivery costs, and interest-rate exposure on margins and cash flow.
- Progress and cash costs of restructuring, including the planned fourth-quarter 2012 facility closure and remaining severance obligations.
- Developments in environmental remediation, insurance recoveries, indemnities or litigation that could change the reported exposure.