Deluxe Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The financial statements are unaudited. Deluxe provides products and services to small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks; offerings include checks, forms, marketing solutions and other services.
Financial results and liquidity
Unless otherwise noted, amounts below are in millions of dollars. Comparisons are with the corresponding 2011 period.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $378.3 (+6.5%) | $355.1 | $1,127.3 (+7.2%) | $1,051.2 |
| Gross profit / margin | $246.6 / 65.2% | $232.5 / 65.5% | $740.6 / 65.7% | $687.7 / 65.4% |
| Operating income | $72.7 (+10.7%) | $65.6 | $224.3 (+13.8%) | $197.1 |
| Net income | $41.5 (+13.0%) | $36.7 | $127.8 (+22.0%) | $104.8 |
| Diluted EPS | $0.81 | $0.71 | $2.49 | $2.02 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $177.2 | $171.2 |
- Q3 orders fell 4.0%, while revenue per order rose 11.0% to $28.91. For the first nine months, orders declined 1.7% and revenue per order increased 9.1% to $28.07.
- Q3 operating margin was approximately 19.2%, versus 18.5% a year earlier; nine-month operating margin was approximately 19.9%, versus 18.7%.
- Nine-month capital asset purchases were $25.6 million. Cash and cash equivalents were $105.6 million at September 30, up from $28.7 million at year-end 2011. Operating, investing and financing cash flows were $177.2 million, negative $57.9 million and negative $43.2 million, respectively.
- Total debt was $742.3 million, including $85.1 million due in December 2012. The weighted-average interest rate was 5.8%. The company had no credit-facility borrowings and $191.5 million available under its $200 million facility, which was extended to February 2017. It reported compliance with debt covenants.
- Cash dividends were $0.25 per share in Q3 and $0.75 per share for the first nine months.
Material changes and business drivers
- Small Business Services revenue increased 14.0% in Q3 and 14.5% for the nine-month period. Growth reflected price increases, distributor and major-account activity, marketing and other services, and acquisitions including OrangeSoda and PsPrint.
- Financial Services revenue declined 2.8% in Q3 and 0.3% year to date, mainly due to lower order volume and competitive pricing on contract renewals. Operating income rose 25.2% in Q3 and 38.5% year to date, reflecting pricing, cost reductions and lower restructuring charges.
- Direct Checks revenue declined 8.1% in Q3 and 7.3% year to date as check usage and orders continued to fall. Q3 operating income declined 9.0%.
- Marketing solutions, including services, grew to 14.1% of Q3 revenue from 11.3% a year earlier, and to 12.4% of nine-month revenue from 9.5%.
- OrangeSoda, an internet marketing services provider for small businesses, was acquired in May for $26.7 million net of cash acquired. Management expected it to dilute 2012 EPS by $0.01.
Outlook, commentary and risks
- For 2012, management forecast revenue of $1.508–$1.515 billion and diluted EPS of $3.30–$3.37, including estimated restructuring and OrangeSoda transaction costs of $0.13 per share. It expected operating cash flow of $239–$245 million, capital spending of about $35 million, and an effective tax rate of approximately 33%.
- Management said it was on track for approximately $50 million in net cost reductions in 2012 versus 2011. It expected savings to be partly offset by investment in growth, higher performance-based compensation, and increased material and delivery costs.
- For 2013, management forecast revenue growth of approximately 2%–4% and EPS growth of 8%–11% versus 2012. The outlook assumed consumer checks sold through financial institutions would decline 5%–6%; marketing solutions and other services were expected to reach approximately 22% of full-year revenue and 25% in Q4.
- Management expected cash and operating cash flow, together with the credit facility, to fund operations, debt service, dividends, capital spending and potential acquisitions for the next 12 months. It anticipated maintaining the current dividend, subject to quarterly board approval. The $84.8 million note maturity in December 2012 is a near-term cash requirement.
- Key operating pressures include long-term declines in check usage, competitive pricing on Financial Services contract renewals, and higher delivery and material costs. Foreign operations were described as a relatively small share of the business; a 1 percentage-point interest-rate change would have affected nine-month interest expense by an estimated $2.1 million, excluding hedge ineffectiveness.
- Q3 total restructuring charges were approximately $2.9 million, including charges in cost of goods sold; nine-month charges were approximately $6.7 million. Actions included call-center closures and planned printing-facility closures. Most employee reductions were expected to be completed by mid-2013, with most severance paid by year-end 2013.
- The annual goodwill assessment found no circumstances requiring quantitative impairment testing. The indefinite-lived trade name’s estimated fair value exceeded its $19.1 million carrying value by approximately $29 million. Environmental accruals were $8.8 million; the company said it did not expect the range of possible outcomes to materially affect its financial condition, results or liquidity. Identified litigation reserves were not material.
- The filing disclosed immaterial out-of-period corrections in certain guarantor and non-guarantor supplemental information; management stated they did not affect consolidated financial statements. No significant changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the 2012 revenue, EPS and operating-cash-flow outlooks were achieved, including the projected $50 million of cost reductions.
- Whether growth in marketing solutions and other services can offset continuing declines in check orders, especially in Direct Checks and Financial Services.
- Whether the company met the December 2012 $84.8 million debt maturity and how subsequent debt reduction, share repurchases and dividends affected liquidity.
- Whether OrangeSoda and other acquisitions delivered the expected growth and integration benefits, and whether restructuring actions produced sustainable savings.
- Whether delivery and material cost inflation, Financial Services renewal pricing, environmental obligations or other contingencies materially changed after the reporting date.