Deluxe Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars unless noted.
Business context and key financial metrics
Deluxe provides checks, forms, marketing services and financial technology to small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks. It is shifting toward higher-growth marketing and technology services while managing structural declines in checks and printed forms.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1.674 billion | $1.585 billion |
| Gross profit / margin | $1.068 billion / 63.8% | $1.024 billion / 64.6% |
| Operating income / margin | $332.6 million / 19.9% | $317.9 million / 20.1% |
| Net income | $199.8 million | $186.7 million |
| Diluted EPS | $3.96 | $3.65 |
| Operating cash flow | $280.4 million | $261.5 million |
| Cash and cash equivalents at year-end | $61.5 million | $121.1 million |
| Total debt at year-end | $554.3 million | $640.7 million |
FY2014 revenue rose 5.6%; orders were nearly flat at 52.6 million, while revenue per order increased 5.5% to $31.81. Marketing solutions and other services generated $427.1 million, or 25.5% of revenue, up from $343.0 million and 21.6% in 2013. Checks, including contract settlements, fell to 52.0% of revenue from 55.8%.
Fourth-quarter 2014 revenue was $448.5 million, net income was $58.0 million and diluted EPS was $1.16. The comparable 2013 quarter reported revenue of $417.8 million, net income of $45.7 million and diluted EPS of $0.90.
Year-end current assets were $318.9 million and current liabilities were $467.2 million, including $160.0 million of short-term borrowings. The $350.0 million credit facility had $177.3 million available after borrowings and letters of credit. The company reported compliance with debt covenants.
Material changes and segment performance
- Small Business Services: Revenue increased 7.5% to $1.129 billion; operating income rose 7.1% to $188.3 million, with a 16.7% margin. Growth came from services, distributors and pricing, partly offset by lower core-product volume and a $6.5 million intangible-asset impairment.
- Financial Services: Revenue increased 7.4% to $368.4 million; operating income rose 5.4% to $86.8 million, while margin declined to 23.6% from 24.0%. Results included acquisitions and pricing, offset in part by check declines and contract renewal allowances.
- Direct Checks: Revenue declined 7.8% to $176.4 million as check orders fell and certain marketing spend was discontinued. Operating income declined 3.7% to $57.5 million; margin improved to 32.6% from 31.2% through cost reductions and pricing.
Revenue growth reflected $84 million of growth in marketing solutions and other services, including $57 million from acquisitions completed in 2014 and 2013, alongside price increases and distributor-channel growth. Gross margin fell 0.8 percentage point, principally amid a shift toward lower-margin services and outsourced products and higher delivery and material costs. SG&A declined as a share of revenue, to 43.0% from 43.6%.
Acquisitions included Wausau Financial Systems (WFS), acquired in October for $89.8 million net of cash acquired, as well as NetClime, Gift Box Corporation of America and small-business distributors. Acquisition payments totaled $105.0 million in 2014. The company also paid $253.5 million of notes maturing in October, funded with cash and credit-facility borrowings, repurchased $60.1 million of shares and paid $57.6 million in dividends. The quarterly dividend rose from $0.25 to $0.30 per share in 2014.
Outlook, commentary, risks and unusual items
- 2015 outlook: Revenue of $1.74–$1.78 billion; diluted EPS of $4.23–$4.43, including an estimated $0.12 per-share loss on early debt extinguishment; and operating cash flow of $290–$305 million. Management expects approximately $40 million of capital spending and $15 million of contract-acquisition payments.
- Management expects 2015 revenue growth in Small Business Services of 4%–6% and Financial Services of 12%–15%; it expects Direct Checks revenue to decline 9%–10%. Check-order declines, contract renewal allowances and lower-return marketing spending remain headwinds.
- The company expects approximately $50 million of additional net cost reductions in 2015, following approximately $60 million realized in 2014. Management expects growth initiatives and lower interest expense to be partly offset by a sluggish economy, higher medical, material and delivery costs, and continued investment needs.
- In January 2015, Deluxe announced plans to redeem all $200 million of its 7.0% senior notes due 2019 on March 16, 2015, using primarily its credit facility and a short-term bank loan. It expects to forgo $56 million of future interest payments, but incur the stated early-extinguishment charge.
- Notable 2014 items included a $6.5 million non-cash impairment of Small Business Services intangible assets, $9.7 million of total restructuring charges (including amounts in cost of revenue), and a $0.7 million loss on a facility sale. The filing reports no identified litigation expected to materially affect financial position, results or liquidity; environmental accruals were $7.9 million.
- Principal risks include continuing check and forms obsolescence, intense price competition, execution and integration risks from acquisitions, customer-acquisition costs and changing advertising response, cybersecurity and system disruptions, regulatory and privacy compliance, and possible impairment of substantial goodwill and intangible assets. Goodwill and the indefinite-lived trade name represented 52.6% of total assets; the 2014 annual impairment tests found no goodwill or trade-name impairment.
Important facts for investors to verify
- Whether growth in services, especially the WFS business, can offset ongoing check declines and achieve the 2015 revenue and EPS outlook.
- The pace and profitability of cost savings, given the 2014 decline in gross margin and forecasted restructuring and investment costs.
- The completed terms and financing of the planned $200 million note redemption, including its impact on interest expense, debt and liquidity.
- Acquisition integration and returns, including final purchase-price allocation for WFS and the performance of acquired businesses.
- Debt-covenant headroom and cash available for dividends, repurchases and acquisitions; Canadian subsidiary cash is intended to remain reinvested abroad, and repatriation could trigger tax.
- Key reported results and controls: the filing states that management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2014.