Deluxe Corporation — Q3 2013 Form 10-Q
Business context and period. This unaudited quarterly report covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Deluxe sells checks, forms, business products, marketing solutions and other services through Small Business Services, Financial Services and Direct Checks. Its businesses face ongoing declines in check usage.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $398.1 million | $378.3 million | $1,167.1 million | $1,127.3 million |
| Gross profit / margin | $255.9 million / 64.3% | $246.6 million / 65.2% | $758.0 million / 64.9% | $740.6 million / 65.7% |
| Operating income | $79.7 million | $72.7 million | $239.9 million | $224.3 million |
| Net income | $46.9 million | $41.5 million | $140.9 million | $127.8 million |
| Diluted EPS | $0.92 | $0.81 | $2.75 | $2.49 |
- Revenue rose 5.2% in Q3 and 3.5% in the first nine months. Service revenue grew to 13.0% of nine-month revenue from 10.7% a year earlier.
- Q3 operating margin was approximately 20.0%, versus 19.2%; nine-month operating margin was approximately 20.6%, versus 19.9%. Gross margin declined in both comparisons, which management attributed mainly to a shift toward lower-margin services and outsourced products, plus higher delivery and material costs.
- Net cash from operating activities was $184.0 million for the first nine months, up from $177.2 million. Capital purchases were $26.8 million; acquisitions used $48.1 million. Cash dividends paid were $38.0 million and share repurchases were $33.8 million.
- At September 30, cash and cash equivalents were $100.0 million; current assets were $277.9 million and current liabilities $217.7 million. Total debt was $643.6 million, down $9.0 million from year-end 2012. The $200 million credit facility had $192.0 million available; no borrowings were outstanding. The company reported covenant compliance.
Changes and segment results
- Growth reflected price increases, marketing-solutions and other-services expansion, Small Business Services distributor growth, and acquired revenue. Orders rose 1.1% in Q3 but fell 1.5% for the nine-month period; revenue per order increased in both comparisons.
- Small Business Services revenue increased 8.6% in Q3 and 8.3% year to date; operating income rose 16.8% and 12.4%, respectively. Financial Services revenue rose 4.4% in Q3 but declined 0.9% year to date, while operating income increased in both periods. Direct Checks revenue fell 9.6% in Q3 and 10.1% year to date as check usage declined.
- Q3 interest expense fell 18.7% and nine-month expense fell 17.9%, reflecting lower average debt and interest rates after refinancing and debt maturity. Nine-month effective tax rate was 33.6%, versus 32.7%.
Outlook, commentary and risks
- Management forecast 2013 revenue of $1.578–$1.588 billion, diluted EPS of $3.67–$3.74 (including $0.11 per share of restructuring and transaction-related costs), and operating cash flow of $256–$262 million. It expected an approximately 34% annual effective tax rate and about $35 million of capital spending.
- Management said it was on track for approximately $55 million in 2013 net cost reductions, of which approximately $42 million had been realized through the filing date. It expected cost savings and lower interest expense to be partly offset by growth investments, delivery and materials costs, and check-volume declines.
- Management planned to accumulate cash toward the $253.5 million October 2014 senior-note maturity and was evaluating repayment options, including cash, credit-facility renegotiation or new debt. It anticipated maintaining the current dividend, subject to board approval, and repurchasing shares to offset employee-plan dilution.
- VerticalResponse and Acton Marketing were acquired in 2013 for aggregate cash payments of $31.4 million, net of cash acquired, to expand marketing offerings. No impairment was recorded in the annual goodwill or trade-name analyses; the trade name’s estimated fair value exceeded its carrying value by approximately $14 million.
- Other items to monitor include restructuring charges, environmental remediation (an $8.4 million accrual), self-insurance estimates, and interest-rate exposure. Management reported no significant changes to previously disclosed risk factors and said litigation reserves were not material.
Investor verification points
- Verify subsequent results against 2013 revenue, EPS and operating-cash-flow guidance, and the stated cost-reduction target.
- Assess whether marketing-services growth and acquisitions can offset continued check-volume declines, particularly in Direct Checks and Financial Services.
- Review the funding plan for the October 2014 note maturity, covenant headroom, and the balance among debt repayment, dividends, buybacks and acquisitions.
- Track gross-margin pressure from service mix, outsourced products, delivery rates and material costs, alongside restructuring execution and acquisition integration.
- Reconcile restructuring disclosures: the income statement shows $5.1 million of nine-month net restructuring charges in operating expenses, while the note reports $5.6 million including charges recorded in cost of revenue.