Deluxe Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Figures are unaudited; dollar amounts below are in millions except per-share data.
Business context and key financial results
Deluxe operates Small Business Services, Financial Services and Direct Checks, selling printed products and related business, marketing and financial-institution services. It reported Q3 revenue of $355.1 million, down 3.4% year over year; nine-month revenue was $1,051.2 million, essentially unchanged.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $355.1 | $367.6 | $1,051.2 | $1,050.7 |
| Gross profit / margin | $232.5 / 65.5% | $246.2 / 67.0% | $687.7 / 65.4% | $689.0 / 65.6% |
| Operating income | $65.6 | $88.5 | $197.1 | $220.7 |
| Net income | $36.7 | $50.8 | $104.8 | $117.8 |
| Diluted EPS | $0.71 | $0.98 | $2.02 | $2.28 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $171.2 | $170.5 |
Q3 SG&A was $162.5 million, or 45.8% of revenue, versus $157.6 million, or 42.9%, a year earlier. Nine-month interest expense was $35.9 million versus $33.3 million. Cash dividends were $0.25 per share for Q3 and $0.75 per share for the nine-month period.
Financial position, cash flow and debt
At September 30, cash and cash equivalents were $23.0 million; current assets were $180.5 million and current liabilities $242.6 million. Total debt was $775.6 million, up $20.5 million from year-end 2010; this included $33.0 million drawn on the credit facility and $742.6 million of long-term debt. Net available credit-facility capacity was $158.4 million. Shareholders’ equity was $283.4 million.
For the first nine months, operating cash flow was $171.2 million; investing activities used $120.5 million and financing activities used $44.0 million. Cash increased $5.6 million to $23.0 million. Investing included $80.5 million for acquisitions and $28.2 million in capital spending. Financing included $215.0 million of long-term debt repayments, $200.0 million of new note proceeds, $23.6 million of share repurchases and $38.4 million of dividends.
Material changes and segment performance
- The prior-year comparison includes a $24.6 million contract-settlement benefit in Q3 2010; management says it accounted for 6.9 percentage points of the Q3 2011 revenue decline. Nine-month comparisons were also affected by deferred revenue recognized in 2010 from an earlier Financial Services settlement.
- Q3 Small Business Services revenue rose 3.8% to $214.4 million, while operating income fell 23.5% to $34.7 million. Nine-month revenue rose 4.3% to $617.6 million; operating income was essentially flat at $104.7 million.
- Q3 Financial Services revenue fell 17.0% to $85.2 million and operating income fell 48.0% to $14.1 million. Nine-month revenue declined 14.0% to $259.9 million and operating income declined 39.5% to $43.0 million.
- Q3 Direct Checks revenue fell 5.0% to $55.5 million, while operating income rose 5.1% to $16.9 million. Nine-month revenue increased 11.1% to $173.7 million, partly reflecting the Custom Direct acquisition; operating income rose 10.4% to $49.3 million.
- Deluxe acquired Banker’s Dashboard in April for stated consideration of $39.7 million and PsPrint in July for $45.5 million net of cash acquired. Management expected each acquisition to be neutral to 2011 EPS.
Outlook, management commentary and risks
Management forecast 2011 revenue of $1.410–$1.420 billion, diluted EPS of $2.78–$2.85, operating cash flow of $224–$230 million and capital spending of approximately $35 million. EPS guidance includes estimated charges of $0.27 per share for debt-repurchase losses, restructuring and acquisition transaction costs. Management estimated a 32% annual effective tax rate and expected the current dividend level to continue, subject to quarterly board approval.
Management projected approximately $70 million of gross cost savings in 2011, offset by higher restructuring charges, for net cost reductions of approximately $60 million. It cited ongoing check-usage declines, material and delivery cost increases, competitive pricing pressure, and revenue-growth investment needs. Financial Services faces risks if bank failures or consolidation reduce client business or impair recovery of contract-acquisition costs and receivables. Postretirement plan assets are exposed to market volatility. The company reported compliance with debt covenants and believed liquidity would cover operations and obligations for the next 12 months.
Unusual items included a $7.0 million nine-month loss on early debt extinguishment, within total stated pretax debt-retirement losses of $8.3 million including related interest expense. Nine-month restructuring charges were $10.7 million. The annual goodwill and indefinite-lived trade-name impairment analyses recorded no impairment; management reported trade-name fair value approximately $12 million above its $19.1 million carrying value.
Important facts for investors to verify
- Whether the 2011 revenue and EPS outlook was achieved, and how much reported growth depended on acquisitions, pricing and cost reductions versus underlying demand.
- Whether continued check-volume declines and Financial Services customer or contract pressures affect revenue, margins and recoverability of contract-acquisition costs.
- Execution and integration of Banker’s Dashboard and PsPrint, including their contribution to revenue, cash flow and EPS.
- Debt-service capacity, covenant headroom, refinancing needs and the effect of interest-rate changes; debt totaled $775.6 million and $158.4 million of credit capacity was available at quarter-end.
- Actual restructuring cash costs and savings, along with exposure to postretirement-plan markets and potential goodwill or trade-name impairment.