Deluxe Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited. 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 | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $346.3M | $348.0M | $696.0M | $683.1M |
| Gross profit / margin | $225.6M / 65.1% | $226.1M / 65.0% | $455.2M / 65.4% | $442.8M / 64.8% |
| Operating income | $64.0M | $63.2M | $131.4M | $132.2M |
| Net income | $35.5M | $33.6M | $68.0M | $67.0M |
| Diluted EPS | $0.68 | $0.65 | $1.31 | $1.30 |
- Second-quarter revenue declined 0.5%; first-half revenue rose 1.9%. Orders fell 5.8% in Q2 and 3.5% year to date, while revenue per order increased 5.6% in both comparisons, primarily reflecting pricing.
- Operating margin was approximately 18.5% in Q2 and 18.9% for the first half. Q2 SG&A declined 2.0% year over year; first-half SG&A increased 3.1%.
- First-half operating cash flow was $104.2M, versus $70.5M in 2010. Capital expenditures were $19.3M; cash and cash equivalents were $17.6M at June 30.
- Total debt was $753.0M, down $2.2M from year-end; shareholders’ equity was $265.6M. The $200M credit facility had $178.2M available after borrowings and letters of credit. The company reported compliance with debt covenants.
- Quarterly dividend was $0.25 per share; $25.7M of dividends were paid in the first half. The company repurchased 0.7M shares for $18.0M.
Changes and segment results
- Small Business Services revenue increased 5.2% in Q2 and 4.6% for the first half; first-half operating income rose 17.7% to $70.1M. Pricing, distributor/dealer growth and services helped offset declining check and forms usage.
- Financial Services revenue fell 11.8% in Q2 and 12.5% for the first half; first-half operating income declined 34.3% to $28.9M and margin fell to 16.6%. Prior-year deferred revenue from a contract settlement accounted for a substantial part of the decline; check-volume decreases and pricing pressure also weighed.
- Direct Checks Q2 revenue was nearly flat; first-half revenue rose 20.7%, including $24.1M from the Custom Direct acquisition. First-half operating margin declined to 27.4%, while Q2 operating income rose 29.4%.
- In April, Deluxe acquired Banker’s Dashboard for $39.7M in cash and equity-related consideration. It issued $200M of 7.0% notes due 2019 and retired $205.5M of older notes, recording a $7.0M early-extinguishment loss. In July, after quarter-end, it acquired PsPrint for approximately $45M in cash, funded with a credit-facility draw.
Outlook, commentary and risks
- 2011 guidance: revenue of $1.41B–$1.435B; diluted EPS of $2.77–$2.92, including estimated charges of $0.23 per share for debt retirement, restructuring and acquisition costs; operating cash flow of $218M–$228M; capital spending of approximately $35M; and an estimated effective tax rate of approximately 33%.
- Management expects approximately $65M of cost reductions in 2011 and reported being on track. It expects revenue growth in Small Business Services and Direct Checks, but mid- to upper-single-digit revenue declines in Financial Services. Management no longer assumes economic improvement in the second half at the high end of its revenue outlook.
- Management cited secular declines in check usage, competitive pricing, higher material and delivery costs, ongoing growth investments and increased interest expense as offsets to pricing, cost savings and favorable mix. It expects the current dividend level to continue, subject to quarterly board approval, and believes available liquidity and operating cash flow will support needs for the next 12 months.
- Risks include potential loss of financial-institution clients and impaired recovery of contract-acquisition costs ($50.4M unamortized at June 30), market exposure affecting postretirement plan assets, interest-rate sensitivity, and possible goodwill or trade-name impairment if operating expectations weaken. A 1 percentage-point interest-rate change was estimated to affect first-half interest expense by $1.5M, excluding hedge ineffectiveness.
- First-half restructuring charges were reported as $6.1M in management’s discussion; related accruals were $5.0M at June 30. Most employee reductions are expected to be completed by year-end 2011, with most severance payments by mid-2012. Management said identified legal reserves were adequate and no significant changes occurred in other disclosed contingencies.
Investor verification priorities
- Confirm the durability of order declines and whether pricing and service growth can offset falling check usage, especially in Financial Services.
- Track segment margins, the realization of the $65M cost-reduction target, and the cost and earnings contributions of Banker’s Dashboard and PsPrint.
- Reconcile actual full-year revenue, EPS and cash flow with guidance, including the specified unusual charges and assumptions about economic conditions.
- Monitor debt-service costs, covenant headroom, liquidity after the PsPrint acquisition, and whether planned debt reduction competes with acquisitions, dividends or repurchases.
- Assess recovery of contract-acquisition costs and exposure to client failures, restructuring execution, pension-market volatility and potential asset impairment.