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Deluxe Reports Q2 Results: Exceeds Guidance, Raises Full Year Expectation

Friday, July 30, 2004

Press release from the issuing company

ST. PAUL, Minn., July 29 -- Deluxe Corporation, the nation's leading check printing company, reported second quarter diluted earnings per share (EPS) of $0.91 on net income of $46.0 million. Diluted earnings per share and net income for the second quarter in 2003 were $0.80 and $44.9 million, respectively. "We exceeded our EPS guidance for the quarter primarily as a result of our continuing efforts to aggressively manage costs," said Lawrence J. Mosner, chairman and CEO of Deluxe Corporation. "We also completed the acquisition of New England Business Service (NEBS) and are now focused on the successful integration of that acquisition. The Deluxe-NEBS combination has great potential," Mosner said. "With a customer base of more than 6 million small business customers, we have a platform to establish a national presence in the small business market." On June 25, the Company acquired New England Business Service, Inc. for approximately $643 million and the assumption of $166 million of debt. NEBS is a leading provider of products and services to small businesses. Its product offerings include business forms, checks, envelopes, labels, greeting cards, signs, stationery, software, promotional and work apparel, advertising specialties, and packaging and shipping supplies. NEBS results of operations are included in the Deluxe's results for the last five days of the quarter. Second Quarter Performance Deluxe's second quarter net income was $46.0 million, compared to $44.9 million during the same quarter in 2003. EPS was $0.91 per diluted share compared to $0.80 for the same period a year ago. EPS was positively affected $0.09 due to the net impact of fewer shares outstanding compared to the second quarter of 2003, and negatively affected $0.03 due to stock-based compensation expense and $0.02 due to acquisition and integration related expenses. Revenue was $309.4 million in the second quarter, compared to $309.6 million during the same quarter a year ago. Second quarter 2004 revenue included $7.7 million from the acquired NEBS business. The decrease in revenue for the Company's other businesses was due to a 6.1 percent decline in unit volume, partially offset by a 3.8 percent increase in revenue per unit. Gross margin was 66.7 percent of revenue for the quarter, up from 65.5 percent in 2003. The increase in revenue per unit, along with continued productivity improvements and cost management efforts, more than offset the unit decline. Selling, general, and administrative expense (SG&A) increased $1.5 million to 40.9% as a percentage of revenue, compared to 40.4% in the second quarter of 2003. NEBS' SG&A expenses, the impact of stock-based compensation expense, and acquisition and integration costs were partially offset by the Company's cost management actions during the last three quarters, along with reduced discretionary spending. As a result, operating income was $79.8 million in the second quarter, $0.2 million of which was attributable to NEBS. Operating income was $77.8 million in the same period last year. Operating margin was 25.8 percent of revenue, compared to 25.1 percent in the prior year. Year-to-Date Performance Deluxe's net income for the first half of the year was $93.6 million, compared to $94.9 million during the same period in 2003. EPS was $1.86 per diluted share compared to $1.64 a year ago. EPS was positively affected $0.24 due to the net impact of shares outstanding compared to the first half of 2003, and negatively affected $0.06 due to stock-based compensation expense. Revenue was $618.2 million in the first six months of the year, compared to $626.8 million during the same period a year ago. Year-to-date revenue includes $7.7 million from the acquired NEBS business. The decrease in revenue for the other businesses was primarily due to a 4.0 percent decline in unit volume, partially offset by a 1.4 percent increase in revenue per unit. Gross margin was 66.1 percent of revenue for the first half of the year, up from 65.4 percent in 2003. Higher revenue per unit, continued productivity improvements and cost management efforts more than offset the unit decline. SG&A as a percentage of revenue was 40.0% compared to 39.5% in the first half of 2003. However, actual SG&A dollars declined $1.1 million from last year. The Company's cost management actions during the last three quarters, along with reduced discretionary spending, were partially offset by higher advertising costs, the impact of stock-based compensation expense, and the SG&A expense of the acquired NEBS business. As a result, operating income was $161.6 million through June, compared to $162.5 million last year. Operating margin was 26.1 percent of revenue, compared to 25.9 percent last year. Interest expense increased to $10.4 million for the first six months of the year, compared to $9.2 million in the same period a year ago due primarily to higher debt levels related to share repurchase activity. Business Outlook The Company expects third quarter diluted EPS to be in the range of $0.90 to $0.95 per share, and at least $3.65 per share for the full-year, up from the previously stated $3.55, due to the favorable second quarter results. Cash from operating activities is expected to be in excess of $235 million for 2004. "As we continue to integrate Deluxe and NEBS, we're confident that we can deliver enhanced capabilities and the anticipated cost synergies," Mosner said. The Company reconfirmed that it expects the acquisition to contribute $0.35 to $0.45 to EPS next year. "Looking ahead, our biggest challenge will continue to be the ongoing pricing pressure in our Financial Services segment." The Company stated that, in a recent formal bidding situation, it was unable to renew a contract with a large financial institution client whose current contract expires at the end of November 2004. "Retaining the business would have required us to discount prices to a level that would have been unhealthy for our business," explained Mosner. Deluxe indicated that it expects the impact of this client loss to reduce its 2005 operating income by $20 million. Second Quarter Segment Performance Prior to the acquisition of NEBS, Deluxe operated 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. The Company has not yet completed its evaluation as to how it will incorporate NEBS' various lines of business into the Company's reporting segments. Until that evaluation is completed, the Company will manage and monitor NEBS as a separate segment. Financial Services' revenue was $167.1 million for the quarter, compared to $173.5 million in 2003. The decrease was the result of the overall decline in check usage and continued pricing pressure. Operating income for the quarter increased to $38.5 million, from $35.7 million in 2003. The Company's cost management actions during the last three quarters, along with reduced discretionary spending, more than offset the decline in revenue. Direct Checks' revenue was $71.0 million for the quarter, compared to $75.8 million in 2003. Operating income for the quarter decreased to $20.9 million, from $23.4 million in 2003. Both the revenue and operating income declines were the result of lower unit volume. The unit decrease was partially offset by higher revenue per unit and productivity improvements. Business Services' revenue was $63.6 million for the quarter, up from $60.3 million in 2003. Operating income for the quarter increased to $20.2 million, from $18.7 million in 2003. Revenue and operating income were favorably impacted by higher volume from new business. NEBS' revenue was $7.7 million for the last five days of the quarter. Operating income was $0.2 million. Share Repurchase Program The Company repurchased approximately 0.2 million shares during the second quarter, bringing total repurchases to 2.1 million shares under the 10 million share repurchase authorization approved by its board of directors in August, 2003. Deluxe stated that it most likely will not engage in significant share repurchase activity in the near future, and instead will focus on paying off a portion of the debt issued to complete the NEBS acquisition. As a result, while the Company retains the ability to repurchase shares under its 2003 repurchase authorization, it has discontinued its Rule 10b5-1 repurchase program under which shares were automatically purchased during normal trading blackout periods at pre-established prices and volumes. At the end of June, Deluxe had approximately 50.0 million shares outstanding.

 

 

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