DELUXE CORP quarterly report, Q2 FY2010

Deluxe Corporation 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2010. The interim financial statements are unaudited. Deluxe operates Small Business Services, Financial Services and Direct Checks.

Financial performance

MetricQ2 2010Q2 2009Six months 2010Six months 2009
Revenue$348.0 million$332.1 million$683.1 million$671.6 million
Gross profit / margin$226.1 million / 65.0%$205.1 million / 61.8%$442.8 million / 64.8%$415.4 million / 61.8%
Operating income$63.2 million$53.1 million$132.2 million$80.3 million
Net income$33.6 million$27.8 million$67.0 million$40.3 million
Diluted EPS$0.65$0.54$1.30$0.79
  • Q2 revenue rose 4.8%; orders fell 2.2%, while revenue per order increased 7.2%. For the first half, revenue rose 1.7%, orders declined 5.2% and revenue per order rose 7.3%.
  • Operating income improved year over year, helped by efficiency and cost-reduction measures, higher revenue per order and the absence of 2009 impairment charges. First-half 2009 also included a $9.8 million gain on early debt extinguishment.
  • Cash from continuing operations was $70.5 million in the first half, down from $85.9 million. Capital asset purchases were $21.1 million; acquisition payments were $98.6 million, primarily for Custom Direct. Cash and equivalents were $15.5 million at June 30.
  • Total debt was $846.5 million, up $77.8 million from year-end 2009, primarily reflecting borrowings to fund the Custom Direct acquisition. Debt included $99.0 million drawn on the credit facility. Net available credit was $91.7 million; long-term debt maturities begin in December 2012.
  • Total assets were $1.337 billion and shareholders’ equity was $163.0 million at June 30. The quarterly dividend was $0.25 per share; first-half dividends paid were $25.7 million.

Material changes and business developments

  • In April, Deluxe acquired Custom Direct, a direct-to-consumer check supplier, for $97.9 million net of acquired cash, funded through its credit facility. The preliminary allocation included $65.8 million of goodwill and $36.5 million of identifiable intangibles.
  • In March, Deluxe acquired Cornerstone Customer Solutions for $0.7 million to expand marketing services offered to financial institution clients.
  • By June 30, goodwill was $725.4 million, including acquisition-related additions. The company reported no impairment charges in the first half of 2010; the comparable 2009 period included $24.9 million of impairment charges.
  • Segment results were mixed: first-half revenue was essentially flat in Small Business Services, down 1.4% in Financial Services and up 16.7% in Direct Checks, the latter benefiting from Custom Direct. Direct Checks’ Q2 operating margin fell to 22.5% from 33.3%, reflecting acquisition-related restructuring costs, lower order volume and delivery-rate increases.

Outlook, commentary and risks

  • Management forecast 2010 revenue of $1.390–$1.415 billion and diluted EPS of $2.90–$3.00. The EPS outlook includes an estimated $0.30-per-share contribution from a contract settlement and a $0.10-per-share impact from health-care legislation and restructuring-related costs.
  • In July 2010, after quarter-end, Deluxe finalized a settlement with a financial institution expected to generate approximately $24 million of termination payments and an estimated net revenue benefit of about $18 million after expected lost volume.
  • Management expected 2010 operating cash flow of $220–$230 million and capital spending of approximately $40 million. It expected Custom Direct to contribute about $60 million of 2010 revenue and $15 million of operating cash flow, including estimated tax savings; the acquisition was expected to be neutral to 2010 EPS.
  • The company targeted at least $325 million of annual cost-structure reductions versus its 2006 baseline by year-end 2010. It estimated $260 million had been achieved through 2009 and expected to deliver the remaining $65 million in 2010.
  • Management cited continued economic weakness, declining check and forms usage, reduced small-business discretionary spending, financial-institution failures and consolidations, pricing pressure, and higher delivery costs. It warned that client losses or inability to recover financial-institution contract acquisition costs could materially affect results; unamortized contract acquisition costs were $57.5 million.
  • Other exposures include potential impairment of goodwill and the indefinite-lived trade name if economic conditions worsen, volatility in postretirement plan assets, and interest-rate risk. A one-percentage-point rate change was estimated to affect first-half interest expense by $1.3 million, excluding swaps. The filing reported no significant changes in identified legal or other contingencies; recorded litigation liabilities were not material. Management stated disclosure controls were effective.

Important facts for investors to verify

  • Whether the 2010 revenue and EPS outlook was achieved, particularly the timing and net impact of the July contract settlement.
  • Custom Direct’s realized revenue, cash flow, tax benefits and integration costs compared with management’s estimates, and the final purchase-price allocation.
  • Whether the planned $65 million of additional cost savings and $220–$230 million operating-cash-flow target were delivered.
  • Debt levels, credit-facility availability and covenant compliance as acquisition-related borrowing is managed.
  • Trends in check-order volumes, financial-institution client retention, and recoverability of contract acquisition costs and goodwill.