Deluxe Corporation — Q1 2011 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2011, compared with Q1 2010. Deluxe operates Small Business Services, Financial Services and Direct Checks, primarily in the U.S. Figures below are in millions of dollars except per-share data.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $349.8 | $335.1 | +4.4% |
| Gross profit / margin | $229.6 / 65.6% | $216.8 / 64.7% | Profit +5.9%; margin +0.9 points |
| Operating income | $67.5 | $69.0 | -2.2% |
| Income from continuing operations | $32.6 | $33.8 | -3.6% |
| Net income | $32.6 | $33.4 | -2.5% |
| Diluted EPS | $0.63 | $0.65 | Down $0.02 |
| Operating cash flow, continuing operations | $61.0 | $52.7 | +$8.3 |
SG&A rose 8.6% to $160.8 million, or 46.0% of revenue versus 44.2%. Interest expense increased 14.3% to $12.0 million; the effective tax rate was 33.0% versus 41.8%, primarily reflecting prior-year tax charges and favorable 2011 tax items.
Segments
- Small Business Services: Revenue $200.0 million (+4.0%); operating income $35.8 million (+23.0%); margin 17.9% versus 15.1%. Price increases, business-services growth and cost reductions helped offset declining check and forms usage.
- Financial Services: Revenue $88.0 million (-13.2%); operating income $15.7 million (-34.6%); margin 17.8% versus 23.6%. The prior-year contract settlement revenue, declining check volume and pricing pressure weighed on results.
- Direct Checks: Revenue $61.7 million (+49.3%), substantially reflecting the Custom Direct acquisition; operating income was $16.0 million, nearly flat, and margin fell to 25.9% from 38.4%.
Financial position, debt and liquidity
- At March 31, cash and cash equivalents were $31.9 million; total assets were $1.317 billion and shareholders’ equity was $247.6 million.
- Total debt was $739.2 million, down from $755.1 million at December 31, 2010. No borrowings were outstanding on the $200 million credit facility; net borrowing availability was $191.2 million. The company reported compliance with debt covenants.
- Q1 financing included issuing $200 million of 7.0% notes due 2019 and retiring $195.5 million of 5.0% notes due 2012 and $10 million of notes due 2014. Debt retirement produced a $7.0 million extinguishment loss; related derivative and swap costs contributed to a total pre-tax retirement cost of $8.3 million.
- Investing cash outflow was $8.4 million, including $8.4 million of capital purchases; financing cash outflow was $38.6 million. Cash increased $14.5 million during the quarter. Dividends paid were $12.9 million, and share repurchases were $6.0 million.
Outlook, commentary and risks
- Management forecast 2011 revenue of $1.385–$1.420 billion, diluted EPS of $2.73–$2.93, operating cash flow of $215–$230 million, and an approximately 33% annual effective tax rate. EPS guidance includes an estimated $0.17 per share of debt-retirement, restructuring and acquisition transaction charges.
- Management targeted $65 million of 2011 cost reductions versus 2010 and said it was on track. Expected 2011 capital spending was approximately $35 million. Management expected the current dividend level to continue, subject to quarterly board approval.
- Revenue outlook assumes only slight economic improvement in the second half. Management expected low-to-mid-single-digit revenue growth in Small Business Services, a low-to-mid-single-digit decline in Financial Services, and mid-single-digit growth in Direct Checks. It anticipated Financial Services check-order declines of about 7–8%, partly offset by a new large customer expected to contribute volume early in Q3.
- Key pressures include secular declines in check usage, competitive pricing, higher materials and delivery costs, and exposure to financial-institution failures or consolidation. The company had $53.1 million of unamortized contract acquisition costs and noted possible losses if amounts owed or previously paid by significant financial-institution clients cannot be recovered. Goodwill impairment and postretirement-plan funding are also sensitive to economic and market conditions.
- In April 2011, Deluxe acquired substantially all assets of Banker’s Dashboard for $35 million in cash plus 193,498 shares to be issued later, funded with cash and a credit-facility draw. Management expected the acquisition to be neutral to 2011 EPS. The remaining Thorofare facility was being marketed; management expected its sale price to exceed carrying value.
- Restructuring charges were approximately $1.5 million in Q1. Most employee reductions were expected to be completed by year-end 2011, with most severance paid by mid-2012. Management reported no significant changes in legal, environmental or other disclosed contingencies and no significant changes to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- Whether Financial Services stabilizes after the prior-year settlement comparison, and whether the expected large-client contribution begins on schedule.
- Progress toward the $65 million cost-reduction target and the revenue, margin and EPS guidance, including the impact of continued check-volume declines and cost inflation.
- Debt covenant headroom, refinancing costs and liquidity after the Banker’s Dashboard acquisition and any additional capital deployment.
- Recoverability of financial-institution contract acquisition costs and receivables, plus any change in customer concentration or client credit conditions.
- Integration and performance of Banker’s Dashboard, and the timing and proceeds of the Thorofare property sale.