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
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six 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.