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Deluxe Reports Q2 Results: Net income of $44.9 million

Friday, July 18, 2003

Press release from the issuing company

ST. PAUL, Minn., July 17 -- Deluxe Corporation, the nation's leading check printing company, reported second quarter diluted earnings per share (EPS) of $.80 on net income of $44.9 million. Diluted earnings per share and net income for the second quarter in 2002 were $.85 and $54.7 million, respectively. "As expected, year-over-year financial comparisons were unfavorable during the second quarter," said Lawrence J. Mosner, chairman and CEO of Deluxe Corporation. "A number of factors kept us from matching last year's second-quarter and six-month record net income and EPS," added Mosner. "These factors include: increased competitive pricing pressures in our Financial Services segment, timing of client gains and losses, and also the ongoing softness in the economy. "The consensus opinion from economists is that the U.S. economy will improve in the second half of the year," stated Mosner. "However, because employment growth continues to be weak, our business outlook in the near term is not expected to improve significantly as it relates to the general economy. That being said, we expect new business gains that will take hold later this year, along with our continued focus on cost management initiatives, to result in positive comparisons for the last half of 2003 on a year-over-year basis." Second Quarter Performance Deluxe's second quarter net income was $44.9 million, compared to $54.7 million during the same quarter in 2002. EPS was $.80 per diluted share compared to $.85 for the same period a year ago. EPS was positively impacted $.02 due to share repurchase activity since March 31, 2003, and $.10 due to the net impact of share repurchases made during the past 12 months. Second quarter 2002 included a $.05 per share gain related to a contract buyout in the Financial Services segment. Revenue decreased 5.8 percent to $309.6 million in the second quarter, from $328.5 million during the same quarter a year ago. The decrease in revenue was due to a 5.5 percent decline in unit volume, partially offset by a 1.3 percent increase in revenue per unit, excluding the contract buyout in 2002. Gross margin was 65.5 percent of revenue for the quarter, compared to 66.3 percent in 2002. Most of the decline was attributable to last year's contract buyout. In addition, there was some impact due to lower unit volume. Selling, general and administrative expense (SG&A) as a percentage of revenue was 40.4 percent, compared to 39.4 percent in 2002. Expense declined $4.5 million for the quarter, primarily due to lower discretionary spending in response to the challenging business and economic environments. As a result, operating income decreased 11.9 percent to $77.8 million in the second quarter, from $88.3 million last year. Operating margin was 25.1 percent of revenue, compared to 26.9 percent last year. Interest expense increased to $4.9 million for the quarter, compared to $1.2 million in 2002, due to higher interest rates and higher debt levels. In December 2002, Deluxe issued $300.0 million of 10-year senior, unsecured notes with an interest rate of 5.0 percent. Year-to-Date Performance For the first six months of 2003, net income decreased 13.2 percent to $94.9 million or $1.64 diluted per share, compared to net income of $109.3 million or $1.69 diluted per share in 2002. Revenue was $626.8 million for the first six months of the year, compared to $657.4 million a year ago. The 4.7 percent decrease in revenue was due to a unit decline of 6.6 percent, partially offset by an increase in revenue per unit of 2.0 percent. Gross margin decreased to 65.4 percent of revenue for the first six months of 2003, compared to 66.0 percent in 2002. The change was due to lower unit volume, partially offset by the increase in revenue per unit. SG&A for the first half of 2003 was 39.5 percent of revenue, compared to 39.1 percent for the first half of 2002. SG&A declined $9.1 million, however, due to reduced advertising expense in our Direct Checks segment and lower discretionary expense in response to the current business environment. As a result, operating margin decreased to 25.9 percent of revenue for the first six months of the year, compared to 27.0 percent of revenue a year ago. Interest expense increased to $9.2 million for the first half of the year, compared to $2.1 million in 2002 due to higher interest rates and debt levels. Business Outlook "While we've been faced with some challenges, we are managing through them and delivering respectable results given the prolonged economic downturn and increased competitive pricing," Mosner said. "We expect to report favorable comparisons during the last half of the year; however, based on these same challenges, we are updating our EPS outlook slightly for the third and fourth quarters. Our new guidance takes into account the increased pricing pressure we're seeing in our Financial Services segment, the likely loss of unit volume from a large client and the current high levels of unemployment which negatively impact check usage." Deluxe indicated that it anticipates third quarter diluted EPS to be in the range of $.93 to $.97 per share and full-year results to reach approximately $3.50 per share, excluding the impact of additional share repurchases subsequent to June 30, 2003. This compares to EPS of $.83 and $3.36 for the third quarter and full year 2002, respectively. Segment Information Deluxe operates three business segments: Financial Services, which sells checks, related products and check merchandising services to 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 and home offices through financial institution referrals, business alliances and via direct mail and the Internet. Each business segment felt the impact of the continued weak economy as well as the expected unit decline in checks due to growth of electronic payment transactions. Financial Services' revenue decreased 11.7 percent to $173.5 million for the quarter, from $196.6 million in 2002. Operating income for the quarter decreased 31.9 percent to $35.7 million, from $52.4 million in 2002. The decreases were primarily the result of continued pricing pressure and lower unit volume. Revenue and operating income in 2002 was higher by $5 million due to a contract buyout. Direct Checks' revenue decreased 5.1 percent to $75.8 million for the quarter, from $79.9 million in 2002. Operating income for the quarter increased 10.9 percent to $23.4 million, from $21.1 million in 2002. Revenue decreased due to lower unit volume and operating income increased as a result of higher revenue per unit and productivity improvements. Business Services' revenue increased 16.0 percent to $60.3 million for the quarter, from $52.0 million in 2002. Operating income for the quarter increased 26.4 percent to $18.7 million, from $14.8 million in 2002. Revenue and operating income were favorably impacted by increased revenue per unit and new business from our Microsoft business alliance. Share Repurchase Program Through June 30, 2003, Deluxe had repurchased 9.4 million shares under a 12 million share repurchase program authorized by its board of directors on August 5, 2002. The Company repurchased 3.1 million shares during the second quarter. As of July 16, 2003, the Company has repurchased 10.0 million shares under the current program.

 

 

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