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Deluxe Q3 Profits Down, Lower Revenues

Friday, October 27, 2006

Press release from the issuing company

ST. PAUL, Minn., Oct. 26 -- Deluxe Corporation reported third quarter diluted earnings per share (EPS) of $0.61 on net income of $31 million. EPS for the third quarter of 2005 was $0.73 on net income of $37 million. Continued revenue and operating income growth in Small Business Services (SBS) was offset by lower revenue per order in Financial Services and volume declines in Direct Checks, resulting in lower consolidated net income and EPS. In addition, a lower tax rate in the third quarter due to one-time adjustments contributed $0.06 per share to the quarter's results. "We are pleased with the progress we have made with our operational initiatives during the third quarter, and our financial results are encouraging," said Lee Schram, CEO of Deluxe Corporation. "Our Small Business Services segment demonstrated that it can grow profitably, and our efforts to improve our earnings and balance sheet contributed to better-than-expected operating cash flow of $71 million for the quarter. However, we are in the early stages of our improvement plan, and the team continues to be focused on the hard work ahead of us." Third Quarter Performance Revenue in the quarter was $398 million compared to $413 million during the third quarter of 2005. Revenue in SBS increased by $7 million, driven by higher revenue per order. This increase was offset by lower revenue per order for Financial Services and lower order volume for Direct Checks. Gross margin was 62.3 percent of revenue compared to 63.7 percent in 2005. Lower revenue per order for Financial Services, along with higher overall product delivery costs, contributed to the decline. Selling, general, and administrative expense (SG&A) decreased $1 million in the third quarter. Higher customer care costs, commissions associated with higher volume in SBS, and severance costs were more than offset by lower amortization expense and numerous cost savings. As a result operating income was $57 million, compared to $71 million in the third quarter of 2005. Operating margin was 14.3 percent of revenue compared to 17.2 percent in the prior year, reflecting the impact of the lower revenue in Financial Services. Net income decreased $6 million and diluted EPS decreased $0.12 due to lower operating income partially offset by the lower effective tax rate. Third Quarter Performance by Business Segment Small Business Services' revenue increased to $234 million from $227 million in 2005, up 3.1% as a result of continued execution of the growth strategy. Revenue growth during the quarter was negatively impacted by an estimated two percentage points because 2006 had one less business day. Revenue per order increased compared to the same period last year, as did the number of first-time buyers. Operating income increased to $25 million from $23 million in 2005, as investments to execute the growth strategy earlier in the year were better leveraged during the quarter. In addition, cost savings and lower amortization also contributed to the increase. Financial Services' revenue was $114 million compared to $126 million in 2005, primarily the result of less revenue per order from lower prices and an unfavorable shift in product mix. Order volume was up 4.1 percent from the same period last year. Operating income decreased to $17 million from $28 million in 2005 due primarily to the impact of lower revenue. Direct Checks' revenue was $50 million compared to $60 million in 2005 due to lower order volume from the decline in check usage, as well as lower response rates and lower re-orders due to past reductions in advertising spend. As a result, operating income was $15 million compared to $20 million in 2005. Year-to-date Operating Cash Flow Performance Cash provided by operating activities year-to-date increased $58 million compared to last year. Lower earnings were more than offset by lower contract acquisition payments and lower performance-based employee compensation payments related to 2005's operating performance, as well as working capital improvements including a decision earlier in the year to reduce the level at which we pre-fund medical and severance benefit payments, as well as lower income tax payments. Business Outlook The Company stated that on a full year basis, revenue is expected to be between $1.630 billion and $1.638 billion, and diluted EPS is expected to be between $1.74 and $1.78. Operating cash flows are expected to range from $235 to $245 million for the year. Included in the EPS and operating cash flow expectation is an estimated 14 cent benefit from selling an underperforming outsourced payroll services contract in October. "We are excited to see our improvement initiatives begin to produce positive results across our businesses and with our cash flows," Schram stated. "Our manufacturing costs were lower than expected this quarter as we started realizing the benefits of having closed two plants earlier this year. In addition, lower spending on information technology and marketing costs contributed to the better-than-expected results, as did the lower effective tax rate." Schram added, "Our personal check businesses continue to face revenue challenges. However, we are investing in parts of our business to grow non- check products and services, and we have initiatives in place to reduce our cost structure further. We continue to believe that our transformation plan is the right one and that the progress we have made is only the beginning." Quarterly Dividend The Board of Directors of Deluxe Corporation declared a regular quarterly dividend of 25 cents per share on all outstanding shares of the Company. The dividend will be payable on December 4, 2006 to shareholders of record at the close of business on November 20, 2006. The Company had 51,509,161 shares outstanding as of October 23, 2006.




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