Business Context and Reporting Period
Company: Deluxe Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1997
Business Overview: Deluxe operates three segments: Deluxe Financial Services (check printing, payment protection), Deluxe Direct (specialty papers, tax forms, greeting cards), and Deluxe Electronic Payment Systems (electronic fund transfer software). The company is currently undergoing significant restructuring, including the divestiture of the Deluxe Direct segment and consolidation of check printing plants.
Key Financial Metrics
| Metric (in thousands) | Q3 1997 | Q3 1996 | 9 Months 1997 | 9 Months 1996 |
|---|---|---|---|---|
| Net Sales | $443,041 | $460,520 | $1,349,864 | $1,415,188 |
| Net Income (Loss) | ($67,515) | $33,524 | $11,367 | $90,501 |
| Diluted EPS | ($0.82) | $0.41 | $0.14 | $1.10 |
| Operating Cash Flow (9mo) | $198,227 (vs. $198,593 in 1996) | |||
| Cash and Equivalents | $109,227 | ($142,571 at Dec 31, 1996) | ||
| Total Debt (Short + Long Term) | $123,929 | ($115,543 at Dec 31, 1996) | ||
| Working Capital | $92,857 | ($108,147 at Dec 31, 1996) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3.8% in Q3 and 4.6% for the nine months ended September 30, 1997, compared to 1996. This was driven by a 37.1% revenue drop in the Deluxe Direct segment due to divestitures and lower volume, partially offset by growth in Financial Services and Electronic Payment Systems.
- Significant Non-Recurring Charges: The company recorded a net loss in Q3 1997 primarily due to:
- Goodwill Impairment: An $82.9 million charge related to businesses held for sale (Deluxe Direct units) and the Electronic Payment Systems unit.
- Restructuring: $24.5 million in pretax charges for plant closures and job reductions.
- Legal Reserve: A $40 million pretax charge to reserve for an adverse jury verdict in the Mellon Bank litigation.
- Profitability: Net income for the nine months dropped from $90.5 million in 1996 to $11.4 million in 1997. Operating income for the nine months was $70.4 million, down from $155.9 million in the prior year.
- Balance Sheet: Total assets decreased to $1.10 billion from $1.18 billion, reflecting the write-down of intangibles and goodwill. Shareholders' equity declined to $602.1 million from $712.9 million.
Guidance, Outlook, and Risks
- Management Guidance: Management stated that 1997 adjusted earnings from operations are expected to approximate $2.15 per share. They cautioned that this forecast is subject to significant uncertainties.
- Divestitures: The company intends to divest the remaining businesses in the Deluxe Direct segment but has not yet reached agreements with buyers. Delays could result in further write-offs or continued operating losses.
- Legal Contingency: In October 1997, a jury rendered a $30 million verdict against a subsidiary (Deluxe Data Systems) in the Mellon Bank case. The company believes the verdict is erroneous and plans to appeal, but has reserved $40 million for the judgment and related costs.
- Operational Risks:
- Restructuring Execution: Cost savings depend on the successful development of software to streamline check ordering and redistribute order flow. Delays in software development could hinder plant consolidation.
- Competition: Increased consolidation in the banking industry is driving price pressure on check printing. Alternative payment systems (credit/debit cards, electronic transfers) pose a long-term threat to check demand.
- Input Costs: Increases in paper prices, postage, and delivery costs (e.g., UPS strikes) could adversely affect margins.
- Liquidity: The company maintains $180 million in uncommitted bank lines and a $150 million committed line of credit, with no borrowings outstanding as of September 30, 1997. A shelf registration for up to $300 million in medium-term notes is in place.
Investor Verification Checklist
- Legal Outcome: Monitor the status of the Mellon Bank litigation appeal and the potential impact of the $30 million verdict on future cash flows.
- Divestiture Progress: Verify if agreements have been reached for the sale of the remaining Deluxe Direct units (Nelco, PaperDirect, Social Expressions) to prevent further goodwill write-downs.
- Restructuring Timeline: Assess the progress of the software development required to consolidate check printing plants and realize anticipated cost savings.
- Adjusted Earnings: Compare actual year-end results against the management guidance of $2.15 adjusted earnings per share for 1997.
- Segment Performance: Analyze the organic growth rates of the Financial Services and Electronic Payment Systems segments to ensure they can offset the loss of the Deluxe Direct segment.