Deluxe Corporation — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013. Amounts below are in millions of dollars unless otherwise noted. Deluxe provides printed products and business services through Small Business Services, Financial Services and Direct Checks; it also offers marketing, digital and other services.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $387.6 | $378.0 | +2.5% |
| Gross profit / margin | $254.3 / 65.6% | $250.5 / 66.3% | Profit +1.5%; margin −0.7 pts. |
| Operating income | $77.7 | $78.0 | −0.4% |
| Net income | $45.9 | $44.1 | +4.1% |
| Diluted EPS | $0.89 | $0.86 | +$0.03 |
| Operating cash flow | $51.5 | $52.0 | −$0.5 |
Service revenue rose to $47.7 million from $36.6 million; it was 12.3% of revenue, versus 9.7%. Orders fell 3.8%, while revenue per order increased 6.6% to $29.07. Management attributed revenue growth mainly to price increases, marketing and other services growth, distributor-channel growth, and OrangeSoda, acquired in May 2012. Lower personal-check volume, including two fewer business days, partly offset growth.
Gross margin declined as the mix shifted toward services and outsourced products and delivery and material costs rose; pricing and cost-reduction efforts partly offset the pressure. SG&A was $175.2 million, up 1.9%, but fell to 45.2% of revenue from 45.5%. Interest expense declined 19.0% to $9.5 million, reflecting lower average debt and borrowing costs after 2012 refinancing. The effective tax rate was 33.1%, compared with 33.6%.
Segments
| Segment | Revenue | Operating income | Notable year-over-year change |
|---|---|---|---|
| Small Business Services | $248.3 million | $38.6 million | Revenue +8.2%; operating income −0.5%; margin 15.5%, down 1.4 pts. |
| Financial Services | $87.1 million | $22.9 million | Revenue −3.8%; operating income +4.6%; margin 26.3%, up 2.1 pts. |
| Direct Checks | $52.1 million | $16.2 million | Revenue −9.8%; operating income −6.5%; margin 31.1%, up 1.1 pts. |
Management cited continued check-usage declines as a drag on Financial Services and Direct Checks. Small Business Services growth reflected pricing, distributors, OrangeSoda and marketing and other services; its margin faced mix, commission, delivery-cost and brand-investment pressure.
Cash, liquidity and debt
- Cash and cash equivalents were $70.7 million at March 31, 2013, compared with $45.4 million at year-end. Funds held for customers, reported separately, were $41.4 million.
- Operating cash flow was $51.5 million; investing used $9.8 million and financing used $15.5 million. Financing included $12.7 million in dividends and $12.6 million in share repurchases. Capital expenditures were $8.3 million.
- Total debt was $650.6 million, down $2.0 million from December 31, 2012. Debt included $256.2 million of 5.125% notes due October 2014, $200 million of 7.0% notes due 2019 and $193.7 million of 6.0% notes due 2020, plus capital leases.
- The $200 million credit facility had no borrowings and $192.1 million available after letters of credit. The company reported compliance with debt covenants and expected to remain compliant over the next 12 months.
- Cash and marketable securities held by Canadian subsidiaries totaled $35.4 million. Repatriation to the U.S. would, according to the filing, incur approximately $6 million of U.S. tax.
Outlook, commentary and risks
- 2013 revenue guidance: $1.545–$1.575 billion; diluted EPS guidance: $3.61–$3.76, including $0.04 per share of restructuring costs. Management expected approximately $50 million of net cost reductions versus 2012 and said it was on track.
- Management forecast operating cash flow of $240–$255 million, capital spending of approximately $35 million and contract-acquisition payments of approximately $15 million for 2013. It expected the current dividend level to continue, subject to quarterly board approval, and planned to accumulate cash ahead of the October 2014 note maturity.
- Segment outlook reflected high-single-digit Small Business Services revenue growth, a mid-single-digit Financial Services decline, and a middle-to-high-single-digit Direct Checks decline. Check-order declines and ongoing competitive pricing pressure remain headwinds; growth initiatives include marketing solutions, digital capabilities and selective small-to-medium-sized acquisitions.
- Q1 restructuring charges were $1.4 million in total, including severance and other costs; approximately 20 employees were associated with the quarter’s severance accruals. Most planned employee reductions were expected to be completed by mid-2013, with most severance paid by year-end.
- Environmental accruals were $8.5 million. The company said it did not anticipate significant net environmental cash outlays in 2013 and did not expect identified litigation or indemnification matters to materially affect its financial position, results or liquidity. Management reported no significant changes to the risks described in its 2012 Form 10-K.
Important facts for investors to verify
- Whether revenue growth in services and marketing solutions can offset continued check-volume declines, particularly in Direct Checks and Financial Services.
- Progress toward the $50 million cost-reduction target and whether margin pressure from mix, delivery rates and materials persists.
- Execution against 2013 revenue, EPS and operating-cash-flow guidance, including the assumptions for taxes, bonuses and medical-benefit funding.
- Liquidity and refinancing plans for the $256.2 million notes due in October 2014; confirm covenant capacity and the effect of planned dividends and repurchases.
- Potential changes in environmental, self-insurance and other contingencies, and the timing and proceeds of planned sales of assets held for sale.