ST. PAUL, Minn., Oct. 27 -- Deluxe Corporation reported third quarter diluted earnings per share (EPS) of $0.73 on net income of $37 million. Diluted earnings per share and net income for the third quarter in 2004 were $1.14 and $58 million, respectively. Continued pricing pressure in Financial Services, combined with the loss of a large financial institution (FI) client late last year, contributed to lower earnings. Additionally, third quarter 2004 EPS was positively affected $0.09 by the benefit of a one-time contract termination payment.
"Earnings from continuing operations put us in the mid-range of our EPS guidance for the third quarter," said Lawrence J. Mosner, chairman and CEO of Deluxe Corporation. "Our Financial Services segment is still being challenged by a number of issues, and as expected, produced unfavorable comparisons to last year. Within our Small Business Services (SBS) segment, however, we continue to make progress with the integration of New England Business Service (NEBS), which we acquired last year."
Third Quarter Performance
Revenue was $413 million in the third quarter, compared to $472 million during third quarter 2004. The decrease was primarily due to a decline in Financial Services' revenue related to unit volume decline and lower prices. Additionally, 2004 revenue included $8 million from a one-time contract termination payment.
Gross margin was 63.7 percent of revenue for the quarter, compared to 65.7 percent in 2004. The impact of financial institution pricing pressure and the $8 million contract termination payment in 2004 were the primary factors contributing to the lower margin.
Selling, general, and administrative expense (SG&A) decreased $17 million in the third quarter, primarily due to cost reductions related to lower revenues and integration savings.
As a result, operating income was $71 million in the third quarter compared to $101 million last year. Operating margin was 17.2 percent of revenue compared to 21.4 percent in the prior year.
Small Business Services' revenue was $227 million for the quarter, flat compared to 2004. Operating income for the quarter decreased to $23 million, from $25 million in 2004, as integration savings were offset by a higher percentage of corporate allocations.
Financial Services' revenue was $126 million for the quarter, compared to $176 million in 2004. The decrease was primarily the result of the loss of a large financial institution client, continuing pricing pressure, and the overall decline in check usage. As a result, operating income for the quarter decreased to $28 million, from $54 million in 2004. Last year's third quarter included an $8 million contract termination payment.
Direct Checks' revenue was $60 million for the quarter, compared to $69 million in 2004, driven by lower response rates that contributed to a decline in unit volume. Operating income for the quarter was $20 million compared to $22 million in 2004. Higher revenue per unit, synergies related to the NEBS acquisition, and cost management actions partially offset the decline in unit volume, contributing to a higher operating margin.
Revenue was $1.28 billion during the first three quarters of 2005, compared to $1.09 billion a year ago. 2005 revenue includes an increase of $312 million from the NEBS business acquired in June 2004. The $118 million decrease in revenue for the Company's other businesses was primarily due to lower check unit volume and lower prices in Financial Services.
Gross margin was 64.8 percent of revenue for the first nine months of the year, compared to 66.0 percent in 2004. The addition of NEBS' lower margin business and pricing pressure in Financial Services were the primary factors producing the lower gross margin.
Selling, general, and administrative expense increased $146 million to 46.9 percent of revenue, compared to 41.8 percent in the first nine months of 2004. The addition of NEBS' SG&A expense, acquisition-related amortization and integration costs were the primary contributors.
As a result, operating income was $230 million in the first nine months of the year compared to $263 million last year. NEBS operations contributed $29 million, partially offset by a $19 million increase in acquisition-related amortization expense and an $8 million increase in integration costs.
Operating margin was 17.9 percent of revenue, compared to 24.1 percent in the prior year.
The Company expects diluted EPS for the full-year to be in the range of $3.17 and $3.21. Cash from operating activities is expected to be approximately $200 million for 2005.
"In the fourth quarter, we now anticipate consolidated revenue and earnings per share to be lower than prior guidance due to three primary factors," said Mosner. "Competitive pricing in Financial Services continues to be the most significant challenge and is now expected to have a greater impact than previously anticipated. Another factor is that growth initiatives to support our business strategy are taking longer to gain traction. And the third factor is that Hurricane Katrina is negatively affecting our business, and we expect that to continue in the short term. Mosner added, "We're confident when looking out longer term, however, that our strategy of leveraging the unique assets and strengths of Deluxe for the benefit of the financial institutions and small businesses we serve will create enhanced shareholder value."
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