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Deluxe Reports Disappointing Q2 Results

Friday, July 28, 2006

Press release from the issuing company

ST. PAUL, Minn., July 27 -- Deluxe Corporation reported a second quarter diluted loss per share of $0.05 on a net loss of $2 million. Second quarter results include a previously announced pre- tax asset impairment loss of $45 million, or $0.57 per diluted share, related to the abandonment of a software project. Diluted earnings per share (EPS) for the second quarter of 2005 were $0.83 on net income of $42 million. Results for 2005 included a pre-tax benefit of $12 million, or $0.15 per share, for contract termination payments received in the quarter. The Company also announced that its Board of Directors approved a management recommendation to lower its dividend by 37.5 percent, and declared a $0.25 per share quarterly dividend, payable on September 5, 2006 to shareholders of record at the close of business on August 21, 2006. The Company had 51,414,427 shares outstanding as of July 25, 2006. "We are disappointed with our second quarter results, and more specifically, having to take an impairment charge," said Lee Schram, CEO of Deluxe Corporation. "Putting this event behind us and looking to the future, Deluxe has numerous strengths on which we will continue to build, including market-leading brands, solid customer relationships, and unparalleled printing capabilities. We also have identified significant cost reduction and operating efficiency opportunities." Schram added, "Regarding the dividend, the Company continues to generate strong cash flow, but we believe that adjusting the quarterly dividend rate appropriately reflects the Company's earnings level and improves our financial strength and flexibility." Second Quarter Performance Revenue in the quarter was $403 million compared to $434 million during the second quarter of 2005. Revenue in Small Business Services (SBS) increased by $9 million, or 4.0 percent, driven by both a higher number of orders and higher revenue per order. This increase was offset by lower revenue per order for Financial Services, contract termination payments of $12 million in the second quarter of last year, and lower order volume for Direct Checks. Gross margin was 62.3 percent of revenue, compared to 65.4 percent in 2005. Lower prices for Financial Services, along with higher delivery costs in SBS, contributed to the decline. Additionally, gross margin in 2005 was positively impacted 1.1 points by the $12 million of contract termination payments. Selling, general, and administrative (SG&A) expense decreased $6 million in the second quarter. Investments to execute the SBS revenue growth plan were more than offset by lower performance-based compensation, lower amortization expense and synergies resulting from the NEBS integration. Operating income was $10 million, including the $45 million asset impairment loss, down from $82 million last year. As a result, operating margin was 2.5 percent of revenue compared to 18.9 percent in the prior year. Net income decreased $44 million and diluted EPS decreased $0.88 due to lower operating income. Second Quarter Performance by Business Segment Small Business Services' revenue increased to $233 million from $224 million in 2005 as a result of continued execution of the growth strategy that previously has been communicated. The number of customer orders and first-time buyers increased compared to the same period last year, as did revenue per order. Operating income decreased to $1 million from $22 million in 2005, including $18 million of the $45 million asset impairment loss, planned costs related to executing the growth strategy, and higher delivery costs. Financial Services' revenue was $117 million compared to $149 million in 2005, primarily the result of lower revenue per order and the $12 million of contract termination payments in 2005. Order volume was down less than one percent from the same period last year. Comparing second quarter 2006 with first quarter 2006, order volume was up 3.0 percent. An operating loss of $7 million for the quarter included the remaining $27 million of the asset impairment loss and the impact of lower revenue. Operating income in 2005 was $40 million. Direct Checks' revenue was $53 million compared to $61 million in 2005 due to lower order volume from the decline in check usage, as well as lower response rates and lower reorders due to past reductions in advertising spend. As a result, operating income was $16 million compared to $20 million in 2005. Six Months Performance Revenue was $814 million for the first six months of 2006 compared to $872 million during the same period in 2005. Revenue in SBS increased by $20 million, or 4.5 percent, driven by both higher revenue per order and a higher number of orders. This increase was offset by lower revenue per order and lower order volume in our personal check businesses and the $12 million of contract termination payments. Gross margin was 62.3 percent of revenue, compared to 65.3 percent in 2005. Lower prices and lower order volume in personal checks, along with higher manufacturing costs in SBS, contributed to the decline. SG&A expense decreased $6 million in the first six months of the year. As for the quarter, investments to execute the SBS growth plan were more than offset by lower amortization expense, synergies resulting from the NEBS integration and lower performance-based compensation. Operating income of $62 million, including the $45 million asset impairment loss, was down from $158 million last year. Operating margin was 7.6 percent of revenue compared to 18.1 percent in the prior year. Net income, as a result, decreased $59 million, and diluted EPS decreased $1.18. Cash provided by operating activities increased $52 million compared to last year due to lower contract acquisition payments, lower performance-based employee compensation payments related to 2005's operating performance, as well as the timing of medical and severance benefit payments. Business Outlook The Company stated that it expects 2006 third quarter revenue to range from $395 million to $405 million and diluted EPS to range from $0.41 to $0.45. On a full year basis, revenue is expected to be between $1.63 billion and $1.65 billion, and EPS is expected to be between $1.41 and $1.51. Operating cash flows are expected to range from $195 to $210 million for the year. "In response to recent business performance, we have aggressively studied the challenges before us," Schram stated. "While SBS continues to report revenue growth, product mix is unfavorable, and the growth trend has been lower than expected. In addition, we continue to see higher manufacturing costs in SBS because it is taking more time to realize efficiencies from the plant consolidations completed in second quarter, and we are experiencing higher delivery costs. Our Financial Services segment continues to report lower margins due to pricing pressure and unfavorable product mix. In Direct Checks, our profitable reorder sales are lagging due to lengthening reorder cycles and lower retention rates." Schram also said, "We have a strong sense of urgency and have riveted our employees around significantly improving our financial performance." In SBS, the Company is focusing on refining the business model, improving how it goes to market, and evaluating the level and pace of its investment. Financial Services is focusing on simplifying its core business model and reducing its cost structure while investing in new products and services, and Direct Checks will modestly increase its marketing spend to improve order volume. The Company also indicated that it is focusing on cost management and pursuing aggressive cost reduction initiatives, including plans to streamline its call center and check fulfillment activities, eliminate system and work stream redundancies and strengthen its go-to-market capabilities through the continuing application of lean principles. The Company also believes significant cost opportunities exist in its manufacturing, supply chain, and other shared services functions through the reduction of SKUs, standardization of products and services, and improvements in its sourcing of third-party goods and services. The Company stated that, using current 2006 guidance as a baseline, it has identified opportunities that are expected to reduce the cost structure by at least $150 million, net of required investments, by the end of 2008.

 

 

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