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Deluxe Reports Record Q2 Results: Net Income Rises 23.5% to $54.7 million

Friday, July 19, 2002

Press release from the issuing company

ST. PAUL, Minn., July 18 -- Deluxe, the nation's leading check printing company, reported a $10.4 million, or 23.5 percent increase in second quarter net income on a revenue increase of 3.1 percent. The Company's performance, combined with the impact of its share repurchase activities, yielded an increase in diluted earnings per share (EPS) of 34.9 percent for the second quarter, compared to the same period a year ago. Deluxe indicated that its results established new Company records for net income and EPS for both the second quarter and six-month periods. "We had another excellent quarter," said Lawrence J. Mosner, Chairman and CEO of Deluxe. "A number of factors, including a focused commitment to our business strategy and ongoing cost management initiatives, contributed to our strong second quarter results. Revenue increased at the same time gross and operating margins improved. Second quarter results also were positively impacted by a contract buyout that contributed approximately $5 million to second quarter revenues and approximately $3 million to net income." The Company indicated that it had expected the buyout to occur in the last half of the year. Mosner added, "Although our preference is to retain all of our clients and customers, mergers and acquisitions among financial institutions often produce shifts in unit volume between check suppliers, as was the case here." Second Quarter Performance Deluxe's second quarter 2002 net income increased to $54.7 million, or $.85 diluted per share, compared to net income of $44.3 million, or $.63 diluted per share, in 2001. Revenue increased to $328.5 million in the second quarter, compared to $318.6 million during the same quarter a year ago. The 3.1 percent increase in revenue was due to the contract buyout as well as an increase in revenue per unit of 2.9 percent. Unit volume declined 1.4 percent as a result of fewer conversion programs. Revenue for Financial Services increased by 1.3 percent, Direct Checks increased 6.5 percent and Business Services increased 4.8 percent. Gross margin increased to 66.3 percent of revenue for the quarter, compared to 64.5 percent in 2001. The improvement was due to the 2.9 percent increase in revenue per unit, as well as continued focus on cost reduction and productivity improvements. Selling, general and administrative expense (SG&A) improved to 39.4 percent of revenue, compared to 41.2 percent in 2001. Increased electronic and Internet orders, lower depreciation and amortization and cost management drove this decrease. As a result, operating margin improved in the second quarter to 26.9 percent of revenue, compared to 22.6 percent of revenue in the year- earlier period. Six-month Performance Through six months, net income increased 25.9 percent to $109.3 million, or $1.69 diluted per share, compared to net income of $86.8 million, or $1.22 diluted per share in 2001. Revenue increased to $657.4 million for the first six months of the year, compared to $635.3 million for the same period a year ago. The 3.5 percent increase in revenue was due to an increase in revenue per unit of 4.0 percent. Unit volume was down 0.5 percent due primarily to fewer conversion programs. Revenue increased in all businesses: Financial Services increased 2.0 percent, Direct Checks increased 3.7 percent and Business Services increased 8.7 percent. Gross margin increased to 66.0 percent of revenue for the first six months of 2002, compared to 63.8 percent in 2001. The improvement was due to the 4.0 percent increase in revenue per unit, continued focus on cost reduction and productivity improvements and reduced spoilage. SG&A for the first six months of 2002 improved to 39.1 percent of revenue, compared to 41.2 percent in 2001. Factors driving the decrease were: increased electronic and Internet orders, cost management and lower depreciation and amortization. As a result, operating margin improved to 27.0 percent of revenue for the first six months of 2002, compared to 22.1 percent of revenue a year ago. Business Outlook "The Company's performance continues to surpass our expectations for a good year," Mosner said. "Each of our three business segments performed well in the first six months. Our Financial Services segment introduced its DeluxeSelect(SM) program in late April, and early reactions from our financial institution clients are extremely positive." DeluxeSelect is a program that gives financial institutions the opportunity to rely more heavily on Deluxe for customer service, support, sales and product knowledge through a variety of service channels. Mosner added, "Within Business Services, our segment that serves small business owners, a stationery and related products rollout has had early success." The Company also noted that while its Direct Checks business segment continues to perform well, this business has seen a softening in direct mail response rates, which could have an impact on this segment in the last half of the year. Mosner concluded with, "As we've previously stated, on a comparison basis, we do not expect the second half of the year to be as strong as the first half due to the anniversary of share gains from last year, increased investment in both revenue generating and cost saving initiatives, the impact of higher postal rates that went into effect this month and the earlier than expected impact of a non-recurring contract buyout. That being said, we still expect 2002 to be a record year for net income and EPS." Deluxe indicated that it expects third quarter EPS to be in the range of $.76 to $.79 and full-year results to reach at least $3.15 per share, compared to $.75 and $2.69 for the third quarter and full year of 2001, respectively. Segment Reporting Deluxe operates three business segments: Financial Services, which sells checks and related products and services on behalf of financial institutions; Direct Checks, which sells checks and related products directly to consumers through direct mail and the Internet; and Business Services, which sells checks, forms and related products to small businesses on behalf of financial institutions and directly to customers via direct mail and the Internet. Financial Services' revenue increased 1.3 percent to $196.6 million in the second quarter, compared to $194.0 million in 2001. Operating income increased 23.3 percent to $52.4 million from $42.5 million in 2001. These increases were the result of the contract buyout, lower depreciation and amortization, efficiencies due to continued migration from mail to electronic order processing, improved productivity and cost management efforts. Direct Checks' revenue increased 6.5 percent to $79.9 million in the second quarter, compared to $75.0 million in 2001. Operating income increased 31.1 percent to $21.1 million from $16.1 million in 2001. Both revenue per unit and unit volume increased for this business segment. In addition, a change in accounting for goodwill, continued migration to the Internet channel and process improvements contributed to a better operating margin. Business Services' revenue increased 4.8 percent to $52.0 million in the second quarter, compared to $49.6 million in 2001. Operating income increased 11.3 percent to $14.8 million, from $13.3 million in 2001. Increases in both unit volume and revenue per unit contributed to these results. Share Repurchase Program The Company announced that it has completed the 14 million share repurchase program authorized by the board of directors on January 29, 2001. During the second quarter of 2002, the Company repurchased approximately 2 million shares. Over the course of the buy-back program, a total of $463.8 million was returned to shareholders at an average price per share of $33.13.

 

 

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