Market Overview

Deluxe Reports First Quarter 2018 Financial Results

Share:

Revenue increases 0.8% over last year – exceeds high end of outlook

Diluted EPS $1.31; Adjusted diluted EPS of $1.39 – exceeds high end
of adjusted EPS outlook

Deluxe Corporation (NYSE:DLX), a leader in providing small businesses
and financial institutions with products and services to drive customer
revenue, announced its financial results for the first quarter ended
March 31, 2018. Key financial highlights include:

           

1st Quarter

1st Quarter

2018 2017 % Change
Revenue $491.9 million $487.8 million 0.8 %
Net Income $63.3 million $57.1 million 10.9 %
Diluted EPS – GAAP $1.31 $1.16 12.9 %
Adjusted Diluted EPS – Non-GAAP $1.39 $1.25 11.2 %
 

A reconciliation of diluted earnings per share (EPS) on a GAAP basis and
adjusted diluted EPS on a non-GAAP basis is provided after the
Forward-Looking Statements.

Revenue exceeded the high end of the range of the Company's prior
outlook driven primarily by strong performance in the Financial Services
segment. GAAP diluted EPS was $1.31 and included aggregate charges of
$0.08 per share primarily for restructuring, integration and transaction
costs, and an asset impairment charge. Excluding these items, adjusted
diluted EPS exceeded the high end of the range of the prior outlook
driven primarily by the strong results in Financial Services.

"We delivered a very strong first quarter to start off the year," said
Lee Schram, CEO of Deluxe. "Diluted EPS ended at the high-end of our
outlook and both revenue and adjusted diluted EPS exceeded our outlook.
We grew marketing solutions and other services revenue over 12 percent
from last year and it now accounts for over 39 percent of total revenue.
Looking ahead, we continue to believe our transformation will deliver a
ninth consecutive year of revenue growth."

First Quarter 2018 Highlights

  • Revenue increased 0.8% year-over-year, driven by Small Business
    Services growth of 2.7% which includes the results of several small
    tuck-in acquisitions. Financial Services revenue was flat compared to
    the prior year.
  • Revenue from marketing solutions and other services (MOS) increased
    12.2% year-over-year and grew to 39.3% of total revenue in the quarter.
  • Gross margin was 61.6% of revenue, compared to 63.2% in the first
    quarter of 2017. The impact of product and service mix and increased
    delivery and material costs this year, as well as acquisitions, was
    only partially offset by previous price increases and continued
    improvements in manufacturing productivity.
  • Selling, general and administrative (SG&A) expense decreased 2.7% from
    last year primarily due to continued cost reduction initiatives
    compared to the prior year, re-calendarization of paid time-off and
    lower legal costs which were partially offset by additional SG&A
    expense from acquisitions. SG&A as a percent of revenue was well
    leveraged at 43.0% in the quarter compared to 44.5% last year.
    Included in SG&A were gains from sales of businesses within Small
    Business Services of $7.2 million, compared to gains recognized in the
    first quarter of 2017 of $6.8 million.
  • Operating income increased 3.2% year-over-year. Adjusted operating
    income, which excludes restructuring, integration and transaction
    costs, as well as asset impairment charges, in both periods, increased
    0.9% year-over-year primarily from price increases and continued cost
    reduction initiatives, partially offset by the continuing decline in
    check and forms usage.
  • Diluted EPS increased $0.15 per share year-over-year and included
    aggregate net charges of $0.08 per share for restructuring,
    integration and transaction costs, as well as an asset impairment
    charge and costs related to the retirement of term loans under our
    previous credit facility, partially offset by a small favorable
    adjustment related to federal tax reform. Adjusted diluted EPS, which
    excludes these items, increased 11.2% year-over-year. Our lower income
    tax rate in 2018, primarily due to the Tax Cuts and Jobs Act of 2017,
    contributed $0.10 to the increase in EPS. Additionally, EPS benefitted
    from favorable operating performance and lower shares outstanding.

Segment Highlights
Small Business Services

  • Revenue of $316.3 million was in-line with our expectations and
    increased 2.7% year-over-year due primarily to increased MOS revenue,
    partially offset by the decline in check and forms usage. From a
    channel perspective, revenue increased in online, major accounts, and
    Canada, and included benefits from previous price increases.
  • Operating income of $58.9 million increased $6.6 million from last
    year. Adjusted operating income, which excludes restructuring,
    integration and transaction costs, as well as asset impairment
    charges, increased $4.2 million or 0.8 points year-over-year. This
    increase was due to price increases and continued cost reductions,
    which were partially offset by the secular decline in check and forms
    usage.

Financial Services

  • Revenue of $140.6 million was better than our expectations and was
    flat year-over-year. MOS revenue increased 10.1% year-over-year driven
    by the acquisition of RDM Corporation in April 2017 and increased
    data-driven marketing solutions. These increases were offset by the
    secular decline in check usage.
  • Operating income of $18.0 million decreased $2.2 million compared to
    last year. Adjusted operating income decreased $1.7 million or 1.2
    points year-over-year. This decrease was due to the secular decline in
    check usage and the loss of revenue and operating income from Deluxe
    Rewards highlighted in previous quarters, partially offset by
    continued benefits of cost reductions and lower legal costs.

Direct Checks

  • Revenue of $35.0 million was in-line with our expectations and
    declined 10.0% year-over-year due primarily to the secular decline in
    check usage.
  • Operating income of $10.8 million decreased $1.7 million or 1.2 points
    compared to last year primarily due to lower order volume, partly
    offset by cost reductions.

Other Highlights

  • Cash provided by operating activities for the first quarter of 2018
    was $80.8 million, an increase of $6.5 million compared to 2017.
  • The Company repurchased $20.0 million of common stock in open market
    transactions during the quarter.
  • In March, the Company executed a new 5-year revolving credit facility,
    increasing the size slightly to $950.0 million. At the end of the
    first quarter, the Company had $742.5 million of total debt
    outstanding, $740.6 million of which was outstanding under the
    revolving credit facility.
       
Current Outlook

Second Quarter 2018:

    (4/26/2018)
Revenue $492 to $499 million
Diluted EPS – GAAP $1.29 to $1.35
Adjusted Diluted EPS – Non-GAAP $1.29 to $1.35
 
Current Outlook Prior Outlook

Full Year 2018:

    (4/26/2018)     (1/25/2018)
Revenue $2.065 to $2.085 billion $2.065 to $2.105 billion
Marketing Solutions & Other Services (MOS) Revenue $910 to $925 million $910 to $940 million
MOS Revenue % of Total Revenue 45% 45%

Diluted EPS - GAAP

$5.52 to $5.72 $5.42 to $5.67
Adjusted Diluted EPS - Non-GAAP $5.60 to $5.80 $5.55 to $5.80
Operating Cash Flow $360 to $380 million $360 to $380 million
Prepaid Product Discount Payments approx. $27 million approx. $27 million
Capital Expenditures approx. $55 million approx. $55 million
Depreciation and Amortization approx. $143 million approx. $146 million
Acquisition-Related Amortization approx. $89 million approx. $92 million
Cost and Expense Reductions approx. $50 million approx. $50 million
Effective Tax Rate approx. 25% approx. 25%
 

Earnings Call Information
A live conference call will be
held today at 11:00 a.m. ET (10:00 a.m. CT) to review the financial
results. Listeners can access the call by dialing 615-247-0252 (access
code 4568859). A presentation also will be available via a simultaneous
webcast on the investor relations website at www.deluxe.com/investor.
Alternatively, an audio replay of the call will be available on the
investor relations website or by calling 404-537-3406 (access code
4568859).

Upcoming Management Presentations

  • May 16 Needham Emerging Technology Conference in New York
  • June 5 R.W. Baird Consumer, Technology and Services Conference in New
    York

About Deluxe Corporation
Deluxe is a growth engine for small
businesses and financial institutions. Nearly 4.4 million small business
customers access Deluxe's wide range of products and services, including
customized checks and forms, as well as website development and hosting,
email marketing, social media, search engine optimization and logo
design. For our approximately 4,900 financial institution customers,
Deluxe offers industry-leading programs in checks, data analytics and
customer acquisition and treasury management solutions including fraud
prevention and profitability. Deluxe is also a leading provider of
checks and accessories sold directly to consumers. For more information,
visit us at www.deluxe.com,
www.facebook.com/deluxecorp
or www.twitter.com/deluxecorp.

Forward-Looking Statements
Statements made in this release
concerning Deluxe, "the Company's" or management's intentions,
expectations, outlook or predictions about future results or events are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements reflect
management's current intentions or beliefs and are subject to risks and
uncertainties that could cause actual results or events to vary from
stated expectations, which variations could be material and adverse.
Factors that could produce such a variation include, but are not limited
to, the following: the impact that a deterioration or prolonged softness
in the economy may have on demand for the Company's products and
services; the inherent unreliability of earnings, revenue and cash flow
predictions due to numerous factors, many of which are beyond the
Company's control; the financial impact from the ongoing assessment of
the Tax Cut and Jobs Act; declining demand for the Company's check and
check-related products and services due to increasing use of other
payment methods; intense competition in the check printing business;
continued consolidation of financial institutions and/or additional bank
failures, thereby reducing the number of potential customers and
referral sources and increasing downward pressure on the Company's
revenue and gross profit; risks that the Small Business Services segment
strategies to increase its pace of new customer acquisition and average
annual sales to existing customers, while at the same time maintaining
its operating margins, are delayed or unsuccessful; risks that the
Company's recent acquisitions do not produce the anticipated results or
revenue synergies; risks that the Company's cost reduction initiatives
will be delayed or unsuccessful; performance shortfalls by one or more
of the Company's major suppliers, licensors or service providers;
unanticipated delays, costs and expenses in the development and
marketing of products and services, including web services, financial
technology and treasury management solutions; risks related to security
breaches, computer malware or other cyber-attacks; risks of
interruptions to our website operations or information technology
systems; the failure of such products and services to deliver the
expected revenues and other financial targets; risks of unfavorable
outcomes and the costs to defend litigation and other disputes; and the
impact of governmental laws and regulations. Our forward-looking
statements speak only as of the time made, and we assume no obligation
to publicly update any such statements. Additional information
concerning these and other factors that could cause actual results and
events to differ materially from the Company's current expectations are
contained in the Company's Form 10-K for the year ended December 31,
2017.

Diluted EPS Reconciliation
The Company's management believes
that adjusted diluted EPS provides useful additional information for
investors because it provides better comparability of ongoing
performance to prior periods given that it excludes the impact of
certain items during 2018 and 2017 (restructuring, integration and
transaction costs, asset impairment charges, a loss on debt retirement
and tax reform) that impact the comparability of reported net income and
which management believes to be non-indicative of ongoing operations. It
is reasonable to expect that one or more of these excluded items will
occur in future periods, but the amounts recognized can vary
significantly from period to period and may not directly relate to the
Company's ongoing operations. The presentation below is not intended as
an alternative to results reported in accordance with generally accepted
accounting principles (GAAP) in the United States of America. Instead,
the Company believes that this information is a useful financial measure
to be considered in addition to GAAP performance measures.

Reported EPS reconciles to adjusted EPS as follows:

   
Actual

1st Quarter
2018

   

1st Quarter
2017

Reported Diluted EPS $1.31 $1.16
Restructuring and integration costs 0.04 0.01
Asset impairment charges 0.03 0.07
Transaction costs 0.01 0.01

Loss on debt retirement

0.01

--

Impact of federal tax reform (0.01) --
Adjusted Diluted EPS $1.39 $1.25
 
Outlook

2nd Quarter
2018

   

Full Year
2018

Reported Diluted EPS $1.29 - $1.35 $5.52 - $5.72
Restructuring and integration costs -- 0.04
Asset impairment charges -- 0.03
Transaction costs -- 0.01
Loss on debt retirement -- 0.01
Impact of federal tax reform -- (0.01)
Adjusted Diluted EPS $1.29 - $1.35 $5.60 - $5.80
 
 
DELUXE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars and shares in millions, except per share amounts)

(Unaudited)

 
    Quarter Ended March 31,

2018(1)

   

2017(2)

Product revenue $363.4     $372.2    
Service revenue 128.5   115.6  
Total revenue 491.9 487.8
Cost of products (133.3 ) (27.1 %) (132.5 ) (27.2 %)
Cost of services (55.4 ) (11.3 %) (46.8 ) (9.6 %)
Total cost of revenue (188.7 ) (38.4 %) (179.3 ) (36.8 %)
Gross profit 303.2 61.6 % 308.5 63.2 %
Selling, general and administrative expense (211.3 ) (43.0 %) (217.2 ) (44.5 %)
Net restructuring charges (2.1 ) (0.4 %) (1.0 ) (0.2 %)
Asset impairment charges (2.1 ) (0.4 %) (5.3 ) (1.1 %)
Operating income 87.7 17.8 % 85.0 17.4 %
Interest expense (5.6 ) (1.1 %) (4.8 ) (1.0 %)
Other income 1.3   0.3 % 1.0   0.2 %
Income before income taxes 83.4 17.0 % 81.2 16.6 %
Income tax provision (20.1 ) (4.1 %) (24.1 ) (4.9 %)
Net income $63.3   12.9 % $57.1   11.7 %
 
Weighted-average dilutive shares outstanding 48.0 48.7
Diluted earnings per share $1.31 $1.16
 
Capital expenditures $14.0 $11.0
Depreciation and amortization expense 31.1 29.6
Number of employees-end of period 5,905 5,997
 
Non-GAAP financial measure - EBITDA(3) $120.1 $115.6
Non-GAAP financial measure - Adjusted EBITDA(3) 125.5 122.4
 

(1)

  Effective January 1, 2018, we adopted Accounting Standards Update
(ASU) No. 2014-09, Revenue from Contracts with Customers, and
related amendments. Adoption of these standards resulted in an
increase in revenue of $0.5 million and a decrease in net income of
$0.2 million. We do not expect these standards to have a significant
impact on our results of operations, financial position or cash
flows on an ongoing basis.
 

(2)

Results have been revised to reflect the adoption of ASU No.
2017-07, Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost. This standard requires
that we revise prior periods to reclassify the net periodic benefit
income related to our postretirement plans from cost of revenue and
SG&A expense to other income. This revision had no impact on total
revenue or net income.
 

(3)

Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) and Adjusted EBITDA are not measures of financial
performance under generally accepted accounting principles (GAAP) in
the United States of America. We disclose EBITDA and Adjusted EBITDA
because we believe they are useful in evaluating our operating
performance compared to that of other companies in our industry, as
the calculation eliminates the effects of long-term financing (i.e.,
interest expense), income taxes, the accounting effects of capital
investments (i.e., depreciation and amortization) and in the case of
Adjusted EBITDA, certain items (i.e., restructuring and integration
costs, transaction costs, asset impairment charges and loss on debt
retirement) that may vary for companies for reasons unrelated to
overall operating performance. In our case, depreciation and
amortization of intangibles and interest expense in the current year
and in previous years have been impacted by acquisitions. Certain
transactions in 2018 and 2017 also impacted the comparability of
reported net income. We believe that measures of operating
performance that exclude these impacts are helpful in analyzing our
results. We also believe that an increasing EBITDA and Adjusted
EBITDA depict increased ability to attract financing and an increase
in the value of our business. We do not consider EBITDA and Adjusted
EBITDA to be measures of cash flow, as they do not consider certain
cash requirements such as interest, income taxes or debt service
payments. We do not consider EBITDA or Adjusted EBITDA to be
substitutes for operating income or net income. Instead, we believe
that EBITDA and Adjusted EBITDA are useful performance measures
which should be considered in addition to GAAP performance measures.
EBITDA and Adjusted EBITDA are derived from net income as follows:
 
   
Quarter Ended March 31,
2018     2017
Net income $63.3 $57.1
Interest expense 5.6 4.8
Income tax provision 20.1 24.1
Depreciation and amortization expense 31.1 29.6
EBITDA 120.1 115.6
Restructuring and integration costs 2.3 1.0
Transaction costs 0.5 0.5
Asset impairment charges 2.1 5.3
Loss on debt retirement 0.5
Adjusted EBITDA $125.5 $122.4
 
 
DELUXE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)

(Unaudited)

 
   

March 31,
2018

   

December 31,
2017

   

March 31,
2017

Cash and cash equivalents $67.7 $59.2 $85.5
Other current assets 332.2 333.8 306.0
Property, plant and equipment-net 82.7 84.6 83.5
Intangibles-net 393.9 384.3 390.9
Goodwill 1,161.3 1,130.9 1,105.0
Other non-current assets 236.0   216.0   191.4
Total assets $2,273.8   $2,208.8   $2,162.3
 
Current portion of long-term debt $0.8 $44.0 $37.8
Other current liabilities 374.8 381.8 372.4
Long-term debt 741.7 665.3 701.7
Deferred income taxes 56.7 50.5 80.4
Other non-current liabilities 48.1 52.2 56.8
Shareholders' equity 1,051.7   1,015.0   913.2
Total liabilities and shareholders' equity $2,273.8   $2,208.8   $2,162.3
 
Shares outstanding 47.8 48.0 48.5
 
 
DELUXE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 
    Quarter Ended March 31,
2018     2017
Cash provided (used) by:
Operating activities:
Net income $63.3 $57.1
Depreciation and amortization of intangibles 31.1 29.6
Asset impairment charges 2.1 5.3
Prepaid product discount payments (5.4 ) (6.1 )
Other (10.3 ) (11.6 )
Total operating activities 80.8   74.3  
Investing activities:
Purchases of capital assets (14.0 ) (11.0 )
Payments for acquisitions (52.4 ) (5.2 )
Other (0.4 ) 0.4  
Total investing activities (66.8 ) (15.8 )
Financing activities:
Net change in debt 32.4 (19.5 )
Dividends (14.4 ) (14.6 )
Share repurchases (20.0 ) (15.0 )
Shares issued under employee plans 5.2 5.0
Other (7.8 ) (5.9 )
Total financing activities (4.6 ) (50.0 )
Effect of exchange rate change on cash (0.9 ) 0.4  
Net change in cash and cash equivalents 8.5 8.9
Cash and cash equivalents: Beginning of period 59.2   76.6  
Cash and cash equivalents: End of period $67.7   $85.5  
 
 
DELUXE CORPORATION
SEGMENT INFORMATION

(In millions)

(Unaudited)

 
    Quarter Ended March 31,

2018(1)

   

2017(2)

Revenue:
Small Business Services $316.3 $308.1
Financial Services 140.6 140.8
Direct Checks 35.0   38.9  
Total $491.9   $487.8  
 
Operating income:(3)
Small Business Services $58.9 $52.3
Financial Services 18.0 20.2
Direct Checks 10.8   12.5  
Total $87.7   $85.0  
 
Operating margin:(3)
Small Business Services 18.6 % 17.0 %
Financial Services 12.8 % 14.3 %
Direct Checks 30.9 % 32.1 %
Total 17.8 % 17.4 %
 

The segment information reported here was calculated utilizing the
methodology outlined in the Notes to Consolidated Financial Statements
included in our Annual Report on Form 10-K for the year ended December
31, 2017.

(1)

  Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from
Contracts with Customers, and related amendments. Adoption of these
standards resulted in an increase in revenue of $0.5 million and a
decrease in net income of $0.2 million. We do not expect these
standards to have a significant impact on our results of operations,
financial position or cash flows on an ongoing basis.
 

(2)

Results have been revised to reflect the adoption of ASU No.
2017-07, Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost . This standard requires
that we revise prior periods to reclassify the net periodic benefit
income related to our postretirement plans from cost of revenue and
SG&A expense to other income. This revision had no impact on total
revenue or net income.
 

(3)

Operating income includes the following restructuring, integration
and transaction costs, as well as asset impairment charges, in both
periods:
 
   

  Quarter Ended  

March 31,
2018     2017
Small Business Services $4.0 $6.4
Financial Services 0.9 0.4
Direct Checks
Total $4.9 $6.8
 

The table below is provided to assist in understanding the comparability
of the Company's results of operations for the quarters ended March 31,
2018 and 2017. The Company's management believes that operating income
by segment, excluding restructuring, integration and transaction costs
and asset impairment charges, provides useful additional information for
investors because it provides better comparability of ongoing
performance to prior periods given that it excludes the impact of items
that affect the comparability of reported operating results and which
management believes to be non-indicative of ongoing operations. It is
reasonable to expect that one or more of these excluded items will occur
in future periods, but the amounts recognized can vary significantly
from period to period and may not directly relate to the Company's
ongoing operations. The presentation below is not intended as an
alternative to results reported in accordance with generally accepted
accounting principles (GAAP) in the United States of America. Instead,
the Company believes that this information is a useful financial measure
to be considered in addition to GAAP performance measures.

 
DELUXE CORPORATION
SEGMENT OPERATING INCOME
EXCLUDING RESTRUCTURING, INTEGRATION AND TRANSACTION COSTS
AND ASSET IMPAIRMENT CHARGES

(In millions)

(Unaudited)

 
    Quarter Ended
March 31,

2018(1)

   

2017(2)

Adjusted operating income:(3)
Small Business Services $62.9 $58.7
Financial Services 18.9 20.6
Direct Checks 10.8   12.5  
Total $92.6   $91.8  
Adjusted operating margin:(3)
Small Business Services 19.9 % 19.1 %
Financial Services 13.4 % 14.6 %
Direct Checks 30.9 % 32.1 %
Total 18.8 % 18.8 %
 

(1)

  Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from
Contracts with Customers, and related amendments. Adoption of these
standards resulted in an increase in revenue of $0.5 million and a
decrease in net income of $0.2 million. We do not expect these
standards to have a significant impact on our results of operations,
financial position or cash flows on an ongoing basis.
 

(2)

Results have been revised to reflect the adoption of ASU No.
2017-07, Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost. This standard requires
that we revise prior periods to reclassify the net periodic benefit
income related to our postretirement plans from cost of revenue and
SG&A expense to other income. This revision had no impact on total
revenue or net income.
 

(3)

Reported operating income reconciles to operating income excluding
restructuring, integration and transaction costs, as well as asset
impairment charges, in both periods as follows:
 
   

  Quarter Ended  
March 31,

2018     2017
Reported operating income $87.7 $85.0
Restructuring, integration and transaction costs and asset
impairment charges:
Small Business Services 4.0 6.4
Financial Services 0.9 0.4
Direct Checks
Total 4.9 6.8
Adjusted operating income $92.6 $91.8
 

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