Market Overview

Deluxe Reports Second Quarter 2018 Financial Results

Share:

Revenue increased 0.6% from last year

Diluted EPS $1.25; Adjusted diluted EPS $1.40 – exceeds high-end of
adjusted diluted 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 second quarter ended
June 30, 2018. Key financial highlights include:

       

2nd Quarter

2018

2nd Quarter

2017

% Change
Revenue $488.2 million $485.2 million 0.6%
Net Income $60.2 million $59.6 million 1.0%
Diluted EPS – GAAP $1.25 $1.22 2.5%
Adjusted Diluted EPS – Non-GAAP(1) $1.40 $1.29 8.5%
 
(1)   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. Non-GAAP adjustments include
restructuring costs, which include integration activities;
transaction costs; CEO transition costs; asset impairment charges; a
loss on debt retirement; and one-time impacts of accounting for
federal tax reform.
 

Revenue was in line with the Company's prior outlook and GAAP diluted
EPS was $1.25. Adjusted diluted EPS was $1.40 and excluded aggregate
charges of $0.15 per share for non-GAAP adjustments. Adjusted diluted
EPS exceeded the high end of the range of the prior outlook driven
primarily by a lower income tax rate and lower medical costs, partially
offset by lower check and form usage.

"We continued to deliver year-over-year growth in both revenue and
earnings," said Lee Schram, CEO of Deluxe. "Revenue and Diluted EPS
results were within our prior outlook and adjusted diluted EPS exceeded
the high end of our outlook. Our transformation continues to be well on
track with marketing solutions and other services revenue accounting for
nearly 41 percent of total revenue in the second quarter, growing over 7
percent from last year."

Second Quarter 2018 Highlights

  • Revenue increased 0.6% year-over-year, driven by Small Business
    Services growth of 4.9% which includes the results of several small
    tuck-in acquisitions. Financial Services revenue was down 5.7%
    compared to the prior year.
  • Revenue from marketing solutions and other services (MOS) increased
    7.2% year-over-year and grew to 40.7% of total revenue in the quarter.
  • Gross margin was 61.0% of revenue, compared to 63.0% in the second
    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 as a percent of
    revenue was well leveraged at 42.9% of revenue in the quarter compared
    to 43.0% last year. SG&A expense dollars increased $0.9 million
    compared to last year as continued cost reduction initiatives were
    offset by additional SG&A expense from acquisitions and the timing of
    benefit expense. Additionally, SG&A expense included gains of $3.9
    million within Small Business Services from sales of a business and
    customer lists.
  • Operating income decreased 10.8% year-over-year. Adjusted operating
    income decreased 6.9% year-over-year primarily from the continuing
    decline in check and forms usage partially offset by price increases
    and continued cost reduction initiatives.
  • Diluted EPS increased $0.03 per share year-over-year and included
    aggregate non-GAAP charges of $0.15 per share. Adjusted diluted EPS
    increased 8.5% year-over-year. A lower income tax rate in 2018,
    primarily due to the Tax Cuts and Jobs Act of 2017, contributed to the
    increase in EPS. This favorable impact was partially offset by the
    continuing secular decline in check and forms usage and the loss of
    revenue and operating income from Deluxe Rewards highlighted in
    previous quarters.

Segment Highlights

Small Business Services

  • Revenue of $317.7 million was in-line with our expectations and
    increased 4.9% year-over-year due primarily to increased MOS revenue,
    partially offset by the decline in check and forms usage. Revenue also
    included benefits from previous price increases.
  • Operating income of $58.6 million increased $4.1 million from last
    year. Adjusted operating income increased $2.9 million and adjusted
    operating margin was unchanged year-over-year. This increase was due
    to previous price increases, continued cost reductions and gains of
    $3.9 million from sales of a business and customer lists. These
    increases were partially offset by the secular decline in check and
    forms usage.

Financial Services

  • Revenue of $139.3 million was in-line with our expectations and
    decreased 5.7% year-over-year driven by the secular decline in check
    usage and the loss of revenue and operating income from the Deluxe
    Rewards business discussed in previous quarters.
  • Operating income of $14.0 million decreased $12.6 million compared to
    last year. Adjusted operating income decreased $8.3 million and
    adjusted operating margin decreased 4.8 points year-over-year. This
    decrease was due primarily to the revenue decline, increased benefits
    expense and higher delivery rates, partially offset by continued
    benefits of cost reductions.

Direct Checks

  • Revenue of $31.2 million was slightly better than our expectations and
    declined 9.8% year-over-year due primarily to the secular decline in
    check usage.
  • Operating income of $10.2 million decreased $1.5 million or 1.1 points
    compared to last year. Adjusted operating income decreased $1.4
    million and adjusted operating margin decreased 0.8 points
    year-over-year. This decrease was due primarily to lower order volume,
    partly offset by cost reductions.

Other Highlights

  • Cash provided by operating activities for the first six months of 2018
    was $146.9 million, a decrease of $4.7 million compared to 2017.
  • The Company repurchased $20.0 million of common stock in open market
    transactions during the quarter, bringing the year-to-date stock
    repurchase total to $40.0 million. During the first half of 2017, the
    Company repurchased $30.1 million of common stock.
  • At the end of the second quarter, the Company had $766.8 million of
    total debt outstanding, $765.0 million of which was outstanding under
    the revolving credit facility.
       
Third Quarter 2018:     Current Outlook

(7/26/2018)

  Revenue $496 to $504 million
Diluted EPS – GAAP $1.15 to $1.21
Adjusted Diluted EPS – Non-GAAP $1.26 to $1.32
   
 
Full Year 2018:     Current Outlook

(7/26/2018)

    Prior Outlook

(6/18/2018)

    Prior Outlook

(4/26/2018)

Revenue $2.045 to $2.065 billion $2.055 to $2.075 billion

Marketing Solutions & Other Services (MOS) Revenue

$895 to $910 million $910 to $925 million

MOS Revenue % of Total Revenue

approx. 44% approx. 45%

Diluted EPS - GAAP(1)

$5.23 to $5.35 $5.34 to $5.54
Adjusted Diluted EPS - Non-GAAP $5.68 to $5.80 $5.60 to $5.80
Operating Cash Flow $360 to $370 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. $142 million approx. $143 million
Acquisition-Related Amortization approx. $88 million approx. $89 million
Cost and Expense Reductions approx. $55 million approx. $50 million
Effective Tax Rate approx. 24.5% approx. 25%
 

(1)

  The prior outlook does not include costs related to the CEO
transition and related obligations.
 

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 1-615-247-0252 (access code 6253348). A presentation also will
be available via a 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 1-404-537-3406 (access code
6253348).

Upcoming Management Presentations

  • KeyBanc Capital Markets 20th Annual Technology Leadership
    Forum – August 12-13 – Vail, CO
  • CL King & Associates 16th Annual Best Ideas Conference
    – September 13 – New York, NY

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; the risk that pending and future acquisitions will not be
consummated within the expected time periods or at all; risks that the
Company's recent acquisitions do not produce the anticipated results or
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; the failure of such products and services to
deliver the expected revenues and other financial targets; risks related
to security breaches, computer malware or other cyber attacks; risks of
interruptions to our website operations or information technology
systems; 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

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 (i.e., restructuring costs, which
include integration activities; transaction costs; CEO transition costs;
asset impairment charges; loss on debt retirement; and one-time impacts
of accounting for federal 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

2nd Quarter
2018

   

2nd Quarter
2017

Reported Diluted EPS $1.25 $1.22
Restructuring costs 0.10 0.02

Asset impairment charges

0.04

CEO transition costs 0.03

Transaction costs 0.01 0.01
Impact of federal tax reform 0.01

Adjusted Diluted EPS $1.40 $1.29
 
Outlook

3rd Quarter
2018

   

Full Year
2018

Reported Diluted EPS $1.15 - $1.21 $5.23 - $5.35
Restructuring costs 0.05 0.26
Asset impairment charges

0.03
CEO transition costs 0.04 0.11
Transaction costs 0.02 0.04
Loss on debt retirement

0.01
Impact of federal tax reform

Adjusted Diluted EPS $1.26 - $1.32 $5.68 - $5.80
 
   

DELUXE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

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

(Unaudited)

 
Quarter Ended June 30,
2018(1)     2017(2)
Product revenue $359.9     $363.6    
Service revenue 128.3   121.6  
Total revenue 488.2 485.2
Cost of products (134.3 ) (27.5 %) (130.7 ) (26.9 %)
Cost of services (55.9 ) (11.5 %) (48.6 ) (10.0 %)
Total cost of revenue (190.2 ) (39.0 %) (179.3 ) (37.0 %)
Gross profit 298.0 61.0 % 305.9 63.0 %
Selling, general and administrative expense (209.6 ) (42.9 %) (208.7 ) (43.0 %)
Net restructuring charges (5.6 ) (1.1 %) (1.4 ) (0.3 %)
Asset impairment charges   (3.0 ) (0.6 %)
Operating income 82.8 17.0 % 92.8 19.1 %
Interest expense (6.1 ) (1.2 %) (5.3 ) (1.1 %)
Other income 2.4   0.5 % 1.3   0.3 %
Income before income taxes 79.1 16.2 % 88.8 18.3 %
Income tax provision (18.9 ) (3.9 %) (29.2 ) (6.0 %)
Net income $60.2   12.3 % $59.6   12.3 %
 
Weighted-average dilutive shares outstanding 47.8 48.6
Diluted earnings per share $1.25 $1.22
 
Capital expenditures $14.0 $11.8
Depreciation and amortization expense 32.4 30.4
Number of employees-end of period 5,905 5,956
 
Non-GAAP financial measure - EBITDA(3) $117.6 $124.5
Non-GAAP financial measure - Adjusted EBITDA(3) 126.1 129.8
 
(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 had an
immaterial impact on revenue and resulted in an increase in net
income of $1.1 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 costs, which
include integration activities; transaction costs; CEO transition
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 June 30,
2018     2017
Net income $60.2 $59.6
Interest expense 6.1 5.3
Income tax provision 18.9 29.2

Depreciation and amortization expense

32.4   30.4
EBITDA 117.6 124.5
Restructuring costs 6.4 1.4
Transaction costs 0.6 0.9
CEO transition costs 1.5
Asset impairment charges   3.0
Adjusted EBITDA $126.1   $129.8
 
   

DELUXE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

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

(Unaudited)

 
Six Months Ended June 30,
2018(1)     2017(2)
Product revenue $723.4     $735.8    
Service revenue 256.8   237.2  
Total revenue 980.2 973.0
Cost of products (267.7 ) (27.3 %) (263.3 ) (27.1 %)
Cost of services (111.3 ) (11.4 %) (95.4 ) (9.8 %)
Total cost of revenue (379.0 ) (38.7 %) (358.7 ) (36.9 %)
Gross profit 601.2 61.3 % 614.3 63.1 %
Selling, general and administrative expense (420.8 ) (42.9 %) (425.8 ) (43.8 %)
Net restructuring charges (7.8 ) (0.8 %) (2.4 ) (0.2 %)
Asset impairment charges (2.1 ) (0.2 %) (8.3 ) (0.9 %)
Operating income 170.5 17.4 % 177.8 18.3 %
Interest expense (11.7 ) (1.2 %) (10.1 ) (1.0 %)
Other income 3.7   0.4 % 2.3   0.2 %
Income before income taxes 162.5 16.6 % 170.0 17.5 %
Income tax provision (39.0 ) (4.0 %) (53.4 ) (5.5 %)
Net income $123.5   12.6 % $116.6   12.0 %
 
Weighted-average dilutive shares outstanding 47.9 48.6
Diluted earnings per share $2.56 $2.38
 
Capital expenditures $28.0 $22.8
Depreciation and amortization expense 63.5 60.1
Number of employees-end of period 5,905 5,956
 
Non-GAAP financial measure - EBITDA(3) $237.7 $240.2
Non-GAAP financial measure - Adjusted EBITDA(3) 251.6 252.3
 
(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
$0.6 million and an increase in net income of $0.9 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) See the prior discussion of EBITDA and Adjusted EBITDA. EBITDA and
Adjusted EBITDA are derived from net income as follows:
   
Six Months Ended June 30,
2018     2017
Net income $123.5 $116.6
Interest expense 11.7 10.1
Income tax provision 39.0 53.4
Depreciation and amortization expense 63.5   60.1
EBITDA 237.7 240.2
Restructuring costs 8.7 2.4
Transaction costs 1.1 1.4
CEO transition costs 1.5
Asset impairment charges 2.1 8.3
Loss on debt retirement 0.5  

Adjusted EBITDA $251.6   $252.3
 
       
DELUXE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)

(Unaudited)

 

June 30,
2018

December 31,
2017

June 30,
2017

Cash and cash equivalents $68.6 $59.2 $34.8
Other current assets 340.8 333.8 319.5
Property, plant and equipment-net 81.7 84.6 84.3
Intangibles-net 386.1 384.3 406.0
Goodwill 1,173.5 1,130.9 1,134.7
Other non-current assets 242.5   216.0   189.5
Total assets $2,293.2   $2,208.8   $2,168.8
 
Current portion of long-term debt $0.8 $44.0 $39.8
Other current liabilities 351.0 381.8 369.4
Long-term debt 766.0 665.3 680.7
Deferred income taxes 55.8 50.5 78.7
Other non-current liabilities 44.5 52.2 51.2
Shareholders' equity 1,075.1   1,015.0   949.0
Total liabilities and shareholders' equity $2,293.2   $2,208.8   $2,168.8
 
Shares outstanding 47.6 48.0 48.4
 
   
DELUXE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 
Six Months Ended June 30,
2018     2017
Cash provided (used) by:
Operating activities:
Net income $123.5 $116.6
Depreciation and amortization of intangibles 63.5 60.1
Asset impairment charges 2.1 8.3
Prepaid product discount payments (13.3 ) (10.9 )
Other (28.9 ) (22.5 )
Total operating activities 146.9   151.6  
Investing activities:
Purchases of capital assets (28.0 ) (22.8 )
Payments for acquisitions (90.2 ) (77.5 )
Other 0.7   4.2  
Total investing activities (117.5 ) (96.1 )
Financing activities:
Net change in debt 56.6 (39.0 )
Dividends (28.8 ) (29.2 )
Share repurchases (40.0 ) (30.1 )
Shares issued under employee plans 5.8 5.9
Other (11.9 ) (6.1 )
Total financing activities (18.3 ) (98.5 )
Effect of exchange rate change on cash (1.7 ) 1.2  
Net change in cash and cash equivalents 9.4 (41.8 )
Cash and cash equivalents: Beginning of period 59.2   76.6  
Cash and cash equivalents: End of period $68.6   $34.8  
 
       
DELUXE CORPORATION
SEGMENT INFORMATION

(In millions)

(Unaudited)

 
Quarter Ended June 30, Six Months Ended June 30,
2018(1)   2017(2) 2018(1)   2017(2)
Revenue:
Small Business Services $317.7 $302.9 $634.1 $611.0
Financial Services 139.3 147.7 280.0 288.5
Direct Checks 31.2   34.6   66.1   73.5  
Total $488.2   $485.2   $980.2   $973.0  
Operating income:(3)
Small Business Services $58.6 $54.5 $117.5 $106.8
Financial Services 14.0 26.6 32.0 46.8
Direct Checks 10.2   11.7   21.0   24.2  

Total

$82.8   $92.8   $170.5   $177.8  
Operating margin:(3)
Small Business Services 18.4 % 18.0 % 18.5 % 17.5 %
Financial Services 10.1 % 18.0 % 11.4 % 16.2 %
Direct Checks 32.7 % 33.8 % 31.8 % 32.9 %
Total 17.0 % 19.1 % 17.4 % 18.3 %
 
The segment information reported here was calculated utilizing the
methodology outlined in the Condensed Notes to Unaudited
Consolidated Financial Statements included in our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2018.
 

(1)

 

Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue
from Contracts with Customers
, and related amendments.
Adoption of these standards had an immaterial impact on revenue
and resulted in an increase in net income of $1.1 million for the
quarter ended June 30, 2018 and an increase in revenue of $0.6
million and an increase in net income of $0.9 million for the six
months ended June 30, 2018. 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, transaction
and CEO transition costs, as well as asset impairment charges:

       
Quarter Ended
June 30,
Six Months Ended
June 30,
2018   2017 2018   2017
Small Business Services $2.4 $3.6 $6.4 $10.0
Financial Services 6.0 1.7 6.9 2.1
Direct Checks 0.1     0.1  
Total $8.5   $5.3   $13.4   $12.1
 

The table below is provided to assist in understanding the comparability
of the Company's results of operations for the quarters and six months
ended June 30, 2018 and 2017. Management believes that operating income
by segment, excluding restructuring, transaction and CEO transition
costs, as well as 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,
Management believes that this information is a useful financial measure
to be considered in addition to GAAP performance measures.

       
DELUXE CORPORATION
ADJUSTED SEGMENT OPERATING INCOME

(In millions)

(Unaudited)

 
Quarter Ended June 30, Six Months Ended June 30,
2018(1)   2017(2) 2018(1)   2017(2)
Adjusted operating income:(3)
Small Business Services $61.0 $58.1 $123.9 $116.8
Financial Services 20.0 28.3 38.9 48.9
Direct Checks 10.3   11.7   21.1   24.2  
Total $91.3   $98.1   $183.9   $189.9  
Adjusted operating margin:(3)
Small Business Services 19.2 % 19.2 % 19.5 % 19.1 %
Financial Services 14.4 % 19.2 % 13.9 % 16.9 %
Direct Checks 33.0 % 33.8 % 31.9 % 32.9 %
Total 18.7 % 20.2 % 18.8 % 19.5 %
 

(1)

 

Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue
from Contracts with Customers
, and related amendments.
Adoption of these standards had an immaterial impact on revenue
and resulted in an increase in net income of $1.1 million for the
quarter ended June 30, 2018 and an increase in revenue of $0.6
million and an increase in net income of $0.9 million for the six
months ended June 30, 2018. 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, transaction and CEO transition costs, as well as
asset impairment charges, as follows:

       
Quarter Ended
June 30,
Six Months Ended
June 30,
2018   2017 2018   2017
Reported operating income $82.8 $92.8 $170.5 $177.8
Adjustments:
Small Business Services 2.4 3.6 6.4 10.0
Financial Services 6.0 1.7 6.9 2.1
Direct Checks 0.1     0.1  

Total

8.5   5.3   13.4   12.1
Adjusted operating income $91.3   $98.1   $183.9   $189.9

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