Deluxe Corporation (NYSE: DLX) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Deluxe provides products and services to small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks. Checks remained a major revenue source, while the company is investing in marketing solutions, web services and other offerings.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1.418 billion | $1.402 billion |
| Gross profit / margin | $924.2 million / 65.2% | $913.8 million / 65.2% |
| Operating income / margin | $271.1 million / 19.1% | $281.5 million / 20.1% |
| Net income | $144.6 million | $152.6 million |
| Diluted EPS | $2.80 | $2.97 |
| Operating cash flow | $235.4 million | $212.6 million |
| Capital expenditures | $35.5 million | $43.9 million |
| Cash and total debt at year-end | $28.7 million / $741.7 million | $17.4 million / $755.1 million |
Fourth-quarter 2011 revenue was $366.4 million, gross profit $236.5 million, net income $39.8 million and diluted EPS $0.78; the comparable 2010 quarter reported revenue of $351.5 million, net income of $34.8 million and diluted EPS of $0.68.
Year-end current assets were $192.6 million and current liabilities $300.4 million, including $85.6 million of long-term debt due within one year. No amounts were drawn on the $200 million revolving credit facility at year-end; net borrowing availability was $191.4 million. The company paid $1.00 per share in dividends for 2011.
Material changes versus prior year
- Revenue increased 1.1%, but orders declined 4.2%; revenue per order rose 5.5%, principally reflecting price increases and mix.
- Small Business Services revenue rose 6.3% to $846.4 million, with operating income up 5.6% to $145.2 million. Financial Services revenue fell 12.3% to $342.4 million and operating income fell 28.9% to $59.8 million. Direct Checks revenue rose 6.1% to $228.8 million and operating income rose 10.3% to $66.0 million.
- Marketing solutions revenue grew 19.6% to $151.0 million; other services revenue grew 17.2% to $72.0 million. Check revenue declined 2.8% to $871.7 million and represented 61.4% of consolidated revenue, versus 63.9% in 2010.
- Operating income and net income were lower despite cost savings and price increases. Results were affected by lower check volumes, the absence of 2010 contract-settlement revenue and deferred revenue, higher material and delivery costs, increased SG&A, and a $7.0 million pretax loss on early debt extinguishment. The 2011 effective tax rate declined to 33.1% from 35.0%.
- Operating cash flow increased by $22.8 million. Investing cash use included $85.6 million for acquisitions; financing included $215.0 million in debt retirements and $200.0 million in new notes. Total debt declined $13.4 million.
Outlook, commentary and risks
For 2012, management projected revenue of $1.42–$1.46 billion, diluted EPS of $3.10–$3.30, operating cash flow of $225–$245 million, capital spending of approximately $35 million, and an effective tax rate near 33%. It expected approximately $50 million of additional net cost reductions compared with 2011. Management anticipated continued check-order declines, including approximately 7%–8% in Financial Services, while expecting growth in Small Business Services from e-commerce, pricing, distributor/dealer channels and newer services. The outlook assumed challenging economic conditions and continued investment in growth initiatives.
Management said cash from operations and the credit facility should support operations, debt service, dividends, capital spending and potential small-to-medium-sized acquisitions over the next 12 months. It identified $84.8 million of notes due in December 2012. In February 2012, the revolving facility was extended to February 2017 and its commitment fee reduced; financial covenants were unchanged.
- Key business risks include secular declines in check use and printed forms, competitive pricing pressure, weak economic conditions affecting small businesses and consumers, financial-institution consolidation or client loss, and the ability to grow newer services profitably.
- Other risks include acquisition integration, cost-reduction execution, customer acquisition and advertising effectiveness, data security and IT interruptions, privacy regulation, raw-material/postage costs, and potential asset impairment.
- The postretirement benefit plan was underfunded by $45.5 million at year-end; market performance and actuarial assumptions could affect expense and funding needs. Environmental accruals were $8.7 million, with $6.4 million covered by insurance. Management stated identified litigation reserves were not material and did not expect currently identified claims to materially affect financial position, results or liquidity.
- Unusual 2011 items included $13.7 million of restructuring charges, a $1.2 million impairment charge for a vacant facility held for sale, and the $7.0 million early-debt-extinguishment loss. The filing’s 2012 EPS comparison identifies $0.31 per share of 2011 charges related to restructuring, debt retirement, acquisition transaction costs and impairment.
Most important facts for investors to verify
- Whether check-volume declines and Financial Services pricing pressure exceed management’s 2012 assumptions, and whether growth in services offsets them.
- Progress toward the $50 million cost-reduction target and the effect of those actions on margins and customer service.
- Cash generation, covenant compliance and repayment or refinancing of the $84.8 million debt maturity due in December 2012.
- Acquisition performance and integration, particularly PsPrint and Banker’s Dashboard, including returns on the associated goodwill and intangible assets.
- Postretirement plan funding, tax-audit outcomes and environmental obligations; the auditor reported effective internal control over financial reporting and issued an unqualified opinion on the financial statements.