Deluxe Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results. Deluxe provides printed products and business services to small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $1,402.2 million | $1,344.2 million |
| Gross profit / margin | $913.8 million / 65.2% | $839.4 million / 62.4% |
| Operating income / margin | $281.5 million / 20.1% | $190.6 million / 14.2% |
| Income from continuing operations | $153.4 million | $99.4 million |
| Net income | $152.6 million | $99.4 million |
| Diluted EPS | $2.96 ($2.97 continuing operations) | $1.94 |
| Operating cash flow | $212.6 million | $206.4 million |
| Capital spending | $43.9 million | $44.3 million |
| Cash and total debt at year-end | $17.4 million / $755.1 million | $12.8 million / $768.8 million |
Revenue rose 4.3%, while orders declined 4.1%; revenue per order increased 8.8%. The company attributed the improvement chiefly to the Custom Direct acquisition, contract settlement revenue, price increases and business-services growth. The FY2010 operating margin also benefited from cost reductions and the absence of FY2009 impairment charges.
Fourth quarter: Revenue was $351.5 million, gross profit $224.8 million, net income $34.8 million and diluted EPS $0.68. In Q4 2009, the corresponding reported figures were $340.3 million, $213.7 million, $30.5 million and $0.59.
Segment performance
| Segment | FY2010 revenue | Change vs. FY2009 | FY2010 operating margin |
|---|---|---|---|
| Small Business Services | $796.3 million | +1.4% | 17.3% (vs. 7.7%) |
| Financial Services | $390.3 million | -1.5% | 21.6% (vs. 18.9%) |
| Direct Checks | $215.7 million | +32.5% | 27.8% (vs. 33.6%) |
Direct Checks’ revenue growth largely reflected $60.3 million of Custom Direct revenue after its April 2010 acquisition. Small Business Services’ margin improvement reflected cost savings, the contract settlement and the absence of the prior-year impairment charge. Financial Services revenue remained pressured by lower check volume and pricing competition.
Liquidity, debt and capital
Operating cash flow increased $6.2 million year over year. Investing activities used $136.2 million, including $98.6 million for acquisitions; financing activities used $72.5 million, including $51.4 million of dividends and $19.0 million of net credit-facility repayments. Year-end shareholders’ equity was $226.2 million, up from $117.2 million.
Deluxe had $183.7 million available under its $200 million revolving credit facility at year-end, after $7.0 million drawn and $9.3 million of letters of credit. It reported compliance with debt covenants and expected to remain compliant in 2011. Long-term notes mature in 2012, 2014 and 2015; total debt was $755.1 million. The quarterly dividend was $0.25 per share, or $1.00 for the year.
Material changes, outlook and risks
- FY2010 outlook: Management forecast 2011 revenue of $1.375–$1.415 billion, diluted EPS from continuing operations of $2.85–$3.10, operating cash flow of $205–$225 million, and capital spending of approximately $35 million. It expected about $65 million in additional cost reductions versus 2010 and an effective tax rate near 34%.
- Management expected small-business revenue growth to be partly offset by declines in core printed products; Financial Services revenue was expected to fall low-to-mid single digits, including anticipated check-order declines of approximately 7–8%; Direct Checks revenue was expected to rise mid-single digits, partly due to a full year of Custom Direct.
- FY2010 included $24.6 million in contract termination revenue, recognized after a financial institution consolidated its check-printing business with another provider. A new contract’s revenue offset the lost business. This settlement is a notable, non-recurring contributor to reported performance.
- FY2010 restructuring charges totaled $10.3 million. The company estimated it had reduced annual costs by approximately $325 million since 2006, net of required investments. FY2010 also included a $4.1 million tax charge related to health-care legislation. FY2009 included $24.9 million of impairment charges and a $9.8 million gain on early debt extinguishment.
- Key risks include continued declines in check and forms usage, weak economic conditions and small-business spending, financial-institution consolidation and pricing pressure, competition, direct-mail and online customer-acquisition costs, and execution and integration risks for growth initiatives and acquisitions.
- Other exposures include recovery of $57.5 million of unamortized financial-institution contract acquisition costs, data security and IT disruption, raw-material and delivery costs, regulation and privacy requirements, and market-sensitive postretirement benefits. The postretirement plan was underfunded by $40.0 million at year-end. Identified litigation reserves were not material, and management did not expect identified claims to materially affect the company’s financial position, results or liquidity.
Investor verification priorities
- Separate recurring operating improvement from acquisition contributions, the $24.6 million settlement, prior-year impairment charges and other unusual items.
- Track check-order declines, pricing, and the ability of business services and other non-check offerings to replace shrinking core products.
- Assess whether the 2011 revenue, EPS, cash-flow and cost-reduction outlook was achieved, including the anticipated new Financial Services customer.
- Review debt maturities, covenant headroom, cash conversion and the funding needs of dividends, acquisitions and contract acquisition payments.
- Monitor Custom Direct and other acquisition integration, goodwill and intangible-asset assumptions, and the recoverability of contract acquisition costs.
Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal control.