Deluxe Corporation — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are the unaudited quarter ended December 31, 2013. Deluxe serves small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks. Its portfolio spans checks and forms, marketing solutions and other services.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $1,584.8 million | $1,514.9 million | +4.6% |
| Gross profit / margin | $1,023.7 million / 64.6% | $990.5 million / 65.4% | Margin down 0.8 percentage points |
| Operating income / margin | $317.9 million / 20.1% | $302.0 million / 19.9% | Income +5.3% |
| Net income | $186.7 million | $170.5 million | +9.5% |
| Diluted EPS | $3.65 | $3.32 | +9.9% |
| Operating cash flow | $261.5 million | $244.1 million | +7.1% |
- Fourth-quarter 2013 revenue was $417.8 million versus $387.6 million in Q4 2012; net income was $45.7 million versus $42.6 million, and diluted EPS was $0.90 versus $0.83.
- Cash and cash equivalents were $121.1 million at year-end, compared with $45.4 million a year earlier. Total debt was $640.7 million, down from $652.6 million. Of that debt, $255.6 million was classified as due within one year, including $253.5 million of notes maturing in October 2014.
- At December 31, $191.6 million was available under the then-current $200 million credit facility, with no borrowings outstanding. In February 2014, the facility was expanded to $350 million and extended to February 2019.
- Capital expenditures were $37.5 million; acquisition spending, net of cash acquired, was $69.7 million. Dividends paid totaled $50.7 million, and share repurchases totaled $48.8 million.
Material changes and segment trends
- Small Business Services revenue rose 9.2% to $1,050.3 million; operating income increased 9.7% to $175.9 million, while its margin remained 16.7%. Growth reflected marketing solutions, acquisitions, distributor-channel expansion and price increases, partly offset by lower core business-product volume.
- Financial Services revenue edged up 0.6% to $343.2 million, its first year-over-year increase since the current segment structure was adopted in 2001. Operating income rose 5.9% to $82.3 million and margin increased to 24.0%. Check-order declines and renewal pricing pressure were partly offset by pricing, non-check services and new-client revenue.
- Direct Checks revenue fell 9.8% to $191.4 million as check orders declined. Operating income decreased 6.7% to $59.7 million, but margin improved to 31.2%, supported by pricing and cost reductions.
- Marketing solutions, including services, increased to 15.7% of revenue from 13.6%; checks, including contract settlements, declined to 55.8% from 58.7%. Service revenue grew to $215.1 million from $169.0 million.
- Orders declined 1.2%, while revenue per order rose 5.9%. Gross margin contracted as revenue mix shifted toward lower-margin services and outsourced products and delivery and material costs increased.
Outlook, management commentary and risks
- Management projected 2014 revenue of $1.610 billion to $1.650 billion, diluted EPS of $3.90 to $4.10, and operating cash flow of $260 million to $275 million. These are forecasts, not reported results.
- Management expected approximately $55 million in additional net cost reductions in 2014, following approximately $55 million realized in 2013. Planned 2014 capital spending was about $40 million; anticipated contract-acquisition payments were about $25 million.
- 2014 segment outlook: Small Business Services revenue growth of 6%–8%; Financial Services revenue approximately flat, including expected check-order declines of about 6%; Direct Checks revenue decline of 10%–11%. Management expected cost savings and lower interest expense to support EPS, partly offset by medical, materials and delivery costs and continued growth investments.
- 2013 earnings benefited from price increases, cost reductions and lower interest, performance-based compensation and medical expenses. Offsets included declining personal-check volumes and investment in growth initiatives. The company acquired VerticalResponse, Acton Marketing and Destination Rewards in 2013, among other distributor operations.
- Unusual items included a $5.0 million non-cash impairment of a Small Business Services customer-relationship intangible, $10.9 million of total restructuring costs, and $5.3 million of acquisition-related transaction costs cited in the annual EPS comparison. The impairment followed lower-than-projected revenue from the affected customer group.
- Key risks include continued substitution away from checks and printed forms, competitive pricing pressure, customer acquisition costs and marketing effectiveness, execution and integration of acquisitions, cybersecurity and IT interruptions, privacy and regulatory obligations, economic weakness among small businesses, and potential goodwill or intangible-asset impairment. Goodwill and the indefinite-lived trade name represented about 53.6% of total assets.
- The company reported environmental remediation accruals of $8.3 million and stated that current identified litigation was not expected to materially affect financial position, results or liquidity. The postretirement medical plan was overfunded by $25.0 million at year-end, but plan-asset performance and participation changes remain relevant risks.
Most important facts for investors to verify
- Whether 2014 guidance was achieved, especially Small Business Services growth and the expected declines in both check-focused segments.
- Whether growth in marketing solutions and services can offset the structural reduction in check and forms demand without further gross-margin deterioration.
- How the October 2014 $253.5 million note maturity was funded and the resulting debt, interest expense and covenant position.
- Whether projected cost savings were realized and whether they came with restructuring costs, service impacts or reduced growth investment.
- Acquisition performance and integration, particularly the returns from VerticalResponse, Acton Marketing and Destination Rewards; Destination Rewards’ purchase-price allocation was still preliminary at year-end.
- Changes in customer volumes, contract renewals and financial-institution acquisition payments, as well as any new impairment, cybersecurity, environmental or tax exposures.