Deluxe Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Dollar amounts below are in millions except per-share data.
Business context
Deluxe serves small businesses, financial institutions and consumers through Small Business Services, Financial Services and Direct Checks. Its traditional check and printed-forms businesses face declining usage and pricing pressure; management is expanding marketing solutions and other services, including web, digital marketing and financial-management offerings.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $1,514.9 | $1,417.6 | +6.9% |
| Gross profit / margin | $990.5 / 65.4% | $924.2 / 65.2% | Margin +0.2 percentage point |
| Operating income / margin | $302.0 / 19.9% | $271.1 / 19.1% | Margin +0.8 percentage point |
| Net income | $170.5 | $144.6 | +17.9% |
| Diluted EPS | $3.32 | $2.80 | +18.6% |
| Cash from continuing operations | $244.1 | $235.4 | +$8.7 |
| Capital expenditures | $35.2 | $35.5 | -$0.3 |
| Total debt | $652.6 | $741.7 | -$89.1 |
At year-end, cash was $45.4, current assets were $219.7 and current liabilities were $220.1. The $200.0 revolving credit facility had $191.5 available and no borrowings outstanding. The company reported compliance with debt covenants. Cash dividends were $1.00 per share for the year; the quarterly rate was $0.25.
Fourth quarter: Revenue was $387.6 versus $366.4 in Q4 2011; net income was $42.6 versus $39.8; diluted EPS was $0.83 versus $0.78. Q4 2012 included $4.0 of restructuring charges and a $5.3 pretax debt-extinguishment loss, partly offset at the tax line by a $1.7 discrete tax benefit.
Segments and material changes
- Small Business Services: Revenue $961.6, up 13.6%; operating income $160.4, up 10.4%; operating margin 16.7%, down 0.5 percentage point. Growth reflected pricing, distributor-channel gains, marketing services and acquisitions, including OrangeSoda.
- Financial Services: Revenue $341.1, down 0.4%; operating income $77.7, up 30.0%; margin 22.8%, up 5.3 percentage points. Pricing and cost reductions improved profit despite lower check orders and contract-renewal pressure.
- Direct Checks: Revenue $212.2, down 7.3%; operating income $63.9, down 3.2%; margin 30.1%, up 1.2 percentage points. Lower order volume was partly offset by higher revenue per order and cost reductions.
- Orders declined 2.1%, while revenue per order rose 9.2%. Checks’ share of consolidated revenue fell to 58.7% from 61.5%; marketing solutions’ share increased to 13.6% from 10.6%.
- Management attributed higher earnings to price increases, cost initiatives and lower acquisition-related amortization. It reported approximately $50 of net cost reductions in 2012. The company acquired OrangeSoda for $26.7 and spent $34.2 in total on acquisitions, net of cash acquired.
Outlook, risks and unusual items
For 2013, management forecast revenue of $1.535–$1.575 billion, diluted EPS of $3.60–$3.80 and operating cash flow of $240–$255. It expected approximately $50 of further net cost reductions, $35 of capital spending and $15 of contract-acquisition payments. Segment outlook was high-single-digit revenue growth in Small Business Services, a mid-single-digit decline in Financial Services and a mid-to-high-single-digit decline in Direct Checks. The outlook assumes a sluggish economy; management expected benefits from cost savings to be partly offset by material and delivery-cost increases and growth investments. It expected an approximately 34% effective tax rate and said operating cash and the credit facility should fund operations, debt service, dividends and potential small-to-medium-sized acquisitions.
- Core risks include continued check and forms decline, competitive pricing and possible customer losses, weak small-business conditions, and uncertainty that newer services and acquisitions will generate expected growth and returns.
- Management also cited risks from direct-marketing costs and response rates, cybersecurity or IT interruptions, privacy regulation, supplier and delivery costs, financial-institution consolidation, and potential environmental liabilities.
- Debt actions included issuing $200.0 of 6.0% notes due 2020 and retiring $200.0 of 7.375% notes due 2015 in Q4, recording the $5.3 loss. The 5.125% notes due October 2014 totaled $256.8 at year-end, making refinancing or repayment a notable upcoming cash requirement.
- Restructuring charges totaled $10.7 in 2012, including severance and facility-related costs; most associated severance payments were expected by year-end 2013. Environmental accruals were $8.4, of which $5.3 was covered by insurance. The filing said identified litigation reserves were adequate and current claims were not expected to materially affect the company.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion.
Most important facts for investors to verify
- Whether 2013 revenue, EPS and cash-flow guidance is achieved, and whether the planned cost savings are realized without impairing customer service or growth investment.
- Actual check-order trends, Financial Services contract pricing and retention, and the pace at which marketing and other services replace traditional product revenue.
- Cash generation and capital allocation against the October 2014 note maturity, including dividends, repurchases, acquisitions and contract-acquisition payments.
- Whether acquisition integration and customer growth at OrangeSoda and other newer services support expected returns; monitor goodwill and intangible-asset assumptions.
- Developments in environmental, tax and other contingencies, and any changes in credit-facility availability or covenant compliance.