Deluxe Corporation — Q1 2015 Form 10-Q
Business context and period. Unaudited results for the quarter ended March 31, 2015, compared with Q1 2014. Deluxe provides checks, forms, marketing solutions and other services through Small Business Services, Financial Services and Direct Checks.
Financial performance
- Revenue: $433.6 million, up 6.6%. Product revenue was $355.0 million; service revenue was $78.6 million, up from $61.3 million. Management attributed growth mainly to marketing solutions and other services, acquisitions and price increases. Orders rose 7.6%, while revenue per order declined 1.0%.
- Profit and margins: Gross profit was $280.9 million, or 64.8% of revenue, versus $262.0 million and 64.4%. Operating income increased 5.6% to $85.3 million; operating margin was approximately 19.7%, versus 19.9%. Net income declined 2.9% to $45.9 million; diluted EPS was $0.91 versus $0.93. The quarter included an $8.9 million pretax loss on early debt extinguishment.
- Segment results: Small Business Services revenue was $277.0 million (+3.9%) and operating income $49.4 million (+13.9%). Financial Services revenue was $111.5 million (+20.7%), but operating income fell 6.5% to $20.4 million; Wausau acquisition effects, contract renewal allowances and higher costs weighed on results. Direct Checks revenue declined 6.0% to $45.1 million; operating income was $15.4 million, down 0.9%.
- Cash flow: Operating cash flow was $77.7 million, up from $73.3 million. Investing used $16.6 million, including $7.6 million for acquisitions; financing used $59.9 million. Cash declined $3.2 million to $58.3 million.
- Debt and liquidity: Total debt was $515.4 million, down from $554.3 million at year-end. Cash less total debt was approximately $457.1 million. The $350 million credit facility had $243.0 million drawn and $94.0 million available after letters of credit. The company reported compliance with debt covenants and said it expected to remain compliant over the next 12 months. Current assets were $294.9 million and current liabilities $615.1 million; funds held for customers are substantially associated with customer obligations.
- Other metrics: The quarterly dividend was $0.30 per share. The effective tax rate was 34.6%, compared with 33.7% in Q1 2014. Comprehensive income was $40.2 million, including foreign currency translation losses.
Material changes versus Q1 2014
- Revenue growth reflected a $29 million increase in marketing solutions and other services, including $21 million from businesses acquired in 2015 and 2014. Marketing solutions and other services rose to 27.8% of revenue from 22.5%; checks fell to 51.7% from 54.7%.
- SG&A increased 9.8% to $195.4 million, with acquisition-related costs and growth investments partly offset by savings. Cost of revenue rose 5.3%, slower than revenue growth.
- Interest expense fell 31.9% to $6.5 million, reflecting changes in the debt structure. The company retired $200 million of 7.0% notes and recorded the $8.9 million extinguishment loss, funding the redemption with credit-facility borrowings and a short-term loan.
- Net restructuring charges were approximately $0.3 million versus $3.5 million in Q1 2014. The filing reports $0.267 million in operating expenses, offset by a $0.003 million credit in cost of revenue.
- Operating cash flow increased, while acquisition spending rose and cash financing outflows reflected the debt redemption. No shares were repurchased in Q1 2015, compared with $31.9 million of repurchases in Q1 2014.
Outlook, commentary and risks
- Management forecast 2015 revenue of $1.75–$1.78 billion, diluted EPS of $4.27–$4.42 (including $0.13 per share for the debt-extinguishment loss and restructuring costs), operating cash flow of $295–$305 million, and capital spending of approximately $40 million.
- Management expected approximately $50 million of net cost reductions in 2015 versus 2014; approximately $11 million had been realized through March 31. It cited profitable revenue growth, marketing solutions, e-commerce investment and selective acquisitions as priorities.
- Outlook assumptions include continuing secular declines in check usage, expected Financial Services check-order declines of approximately 6%, and a decline of approximately 8% in Direct Checks revenue. Small Business Services and Financial Services revenue were forecast to grow 5%–6% and 11%–14%, respectively; Direct Checks revenue was expected to decline.
- Management identified a sluggish economy, medical and material cost increases, delivery rates, foreign currency and continuing check-volume declines as pressures. It said cash from operations and credit availability should support operations, dividends, capital investment, anticipated second-half share repurchases and possible acquisitions over the next 12 months.
- Verify Valid acquisition consideration includes contingent payments for up to eight years tied to revenue thresholds; the recorded fair value was $8.34 million and the agreement specifies no maximum payment. Environmental remediation accruals were $7.6 million; management did not expect significant 2015 net cash outlays. The filing reported no significant changes to previously disclosed risk factors or material litigation concerns.
Important facts for investors to verify
- Whether forecast revenue, EPS and cash-flow ranges remain achievable, particularly given check-volume declines and the growth required from services.
- Whether Financial Services margins recover as Wausau integration effects, acquisition amortization and contract renewal allowances evolve.
- How much of the stated $50 million cost-reduction target is realized, and whether savings offset wage, delivery, materials and growth-investment costs.
- Debt repayment and liquidity needs, including the $75 million short-term loan’s repayment schedule, covenant headroom and available credit.
- Acquisition performance and the eventual valuation and payments for Verify Valid contingent consideration; also monitor environmental and other contingency exposures.