Deluxe Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; interim financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Deluxe provides checks, printed forms, marketing solutions and other services through Small Business Services, Financial Services and Direct Checks. It is investing in digital and marketing offerings while reducing costs; check usage continues to decline.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $371.0 million | $346.3 million | $749.0 million | $696.0 million |
| Operating income | $73.6 million | $64.0 million | $151.6 million | $131.4 million |
| Net income | $42.3 million | $35.5 million | $86.3 million | $68.0 million |
| Diluted EPS | $0.82 | $0.68 | $1.68 | $1.31 |
| Gross margin | 65.6% | 65.1% | 65.9% | 65.4% |
Q2 revenue rose 7.1% and net income rose about 19%; six-month revenue increased 7.6%. Growth reflected price increases, acquisitions, marketing and other services, distributor-channel growth, and a new large financial-institution client. Orders declined 1.3% in Q2 and 0.5% in the first half, while revenue per order rose 8.5% and 8.2%, respectively.
For the first half, operating cash flow was $99.9 million, versus $104.2 million a year earlier. Capital spending was $17.3 million; acquisition payments were $28.5 million. Cash and equivalents were $45.1 million at June 30, up from $28.7 million at year-end 2011. Current assets were $221.1 million and current liabilities $289.0 million.
Total debt was $742.1 million, including $85.3 million due in December 2012; cash was $45.1 million. No credit-facility borrowings were outstanding, and $191.5 million was available. The $200 million facility was extended to February 2017; the company reported compliance with debt covenants. Quarterly dividends were $0.25 per share.
Segments and material changes
- Small Business Services: Q2 revenue increased 14.7% to $233.1 million; operating income rose 11.4% to $38.2 million, while margin declined to 16.4% from 16.9%. Acquisitions, pricing and marketing-services growth supported sales; acquisition costs, commissions and growth investments pressured margin.
- Financial Services: Q2 revenue declined 1.1% to $85.7 million, but operating income increased 51.2% to $20.0 million and margin rose to 23.3% from 15.2%, reflecting pricing and cost reductions. Check-order declines and contract-renewal pricing pressure weighed on revenue.
- Direct Checks: Q2 revenue fell 7.4% to $52.3 million as check orders declined. Operating income fell 6.6% to $15.4 million; margin was 29.4%, up 0.3 percentage points.
In May, Deluxe acquired internet-marketing provider OrangeSoda for $26.6 million net of cash acquired. Management expected approximately $15 million of incremental 2012 revenue and $0.01 per share of 2012 dilution. The purchase-price allocation was preliminary. The company also sold a closed New Jersey facility, recording a $0.1 million pretax loss. First-half 2011 results included a $7.0 million debt-extinguishment loss; its absence benefited the 2012 comparison.
Outlook, commentary and risks
- 2012 revenue guidance: $1.49–$1.51 billion; diluted EPS: $3.20–$3.35, including estimated charges of $0.10 per share for restructuring and acquisition costs.
- Management expected $235–$245 million of operating cash flow, approximately $35 million of capital spending, an approximately 33% effective tax rate, and about $20 million of contract-acquisition payments for 2012.
- Management said it was on track for approximately $50 million in 2012 net cost reductions versus 2011. Expected savings may be partly offset by revenue-growth investments, performance-based compensation, and higher material and delivery costs.
- Planned restructuring includes a printing-facility closure and two call-center closures. Most employee reductions were expected by year-end 2012, with most severance payments by mid-2013.
- Key business pressures include ongoing declines in check usage, competition and pricing pressure in Financial Services, and sensitivity to delivery and material costs. A 1-percentage-point interest-rate change was estimated to affect first-half interest expense by $1.4 million, excluding hedge ineffectiveness.
- Environmental remediation accruals were $8.9 million; management did not expect the range of possible outcomes to materially affect financial condition, results or liquidity. The filing also discusses indemnification and self-insurance exposures, and states that identified litigation reserves were not material.
Important facts for investors to verify
- Whether forecast revenue and EPS are achieved, and whether the stated $50 million of cost reductions materialize without undermining growth.
- Whether check-order declines, Financial Services pricing pressure and Direct Checks revenue contraction accelerate or stabilize.
- Funding and repayment of the $84.8 million principal payment due in December 2012, alongside dividends, acquisitions, capital spending and potential repurchases.
- OrangeSoda’s realized revenue contribution, acquisition integration and final purchase-price allocation.
- Cash-flow conversion and the effect of higher taxes, medical-benefit trust contributions and contract-acquisition payments.