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Deluxe Reports Q2 2010 Results; Revenue and EPS exceed previous outlook

Friday, July 23, 2010

Press release from the issuing company

St. Paul, Minn. - Deluxe Corporation reported second quarter adjusted diluted earnings per share (EPS) of $0.68 compared to $0.57 in the prior year second quarter. Adjusted EPS for both periods excludes the impact of restructuring-related costs and transaction-related costs associated with recent acquisitions. Operating results were better than expected for the current period due primarily to the solid revenue performance in each business segment, and a favorable shift in product mix.

Reported diluted EPS was $0.65 on net income of $33.6 million in the second quarter of 2010 and was $0.54 on net income of $27.8 million in the comparable quarter of 2009. Results for 2010 include restructuring and transaction-related costs of $2.7 million, or $0.03 per diluted share. Results for 2009 included restructuring and transaction-related costs of $2.3 million, or $0.03 per diluted share.

"We are pleased to see our momentum continue as we delivered another strong quarter with revenue and EPS exceeding the high end of our outlook," said Lee Schram, CEO of Deluxe. "We maintained strong operating margins while making a number of strategic advances during the quarter including growing business services revenue in excess of 50% over second quarter 2009, introducing our new brand awareness advertising and starting to realize both revenue and cost synergies from our recent acquisition of Custom Direct."

Second Quarter Performance
Revenue for the quarter was $348.0 million compared to $332.1 million during the second quarter of 2009. Small Business Services revenue was $1.3 million higher than the comparable 2009 quarter driven primarily by growth in business services. Financial Services revenue was down $2.3 million from the 2009 quarter due to lower order volume partially offset by higher revenue per order. Direct Checks revenue increased $16.9 million due to the recent acquisition of Custom Direct, Inc., partly offset by lower order volume.

Gross margin was 65.0 percent of revenue compared to 61.8 percent in 2009. The impact of the Company's cost reduction initiatives, increased revenue per order and a favorable shift in product mix, were partially offset by increased delivery rates.

Selling, general and administrative (SG&A) expense increased $9.0 million in the quarter compared to 2009. Increased SG&A expense associated with acquisitions and our brand awareness advertising was partially offset by benefits from the continued execution of our cost reduction initiatives. As a percent of revenue, SG&A increased to 46.2 percent from 45.7 percent in 2009.

Operating income in 2010 was $63.2 million compared to $53.1 million in the second quarter of 2009. Operating income was 18.2 percent of revenue compared to 16.0 percent in the prior year driven primarily by benefits from our cost reduction initiatives and higher revenue per order.

Reported diluted EPS increased $0.11 driven by the higher operating income.

Second Quarter Performance by Business Segment
Small Business Services revenue was $193.2 million versus $191.9 million in 2009. The increase was due primarily to revenue contributions from growth in business services and a $2.1 million increase related to the effect of exchange rates on our Canadian operations. Operating income in 2010 increased to $30.5 million from $20.6 million in 2009.

Financial Services revenue was $98.2 million compared to $100.5 million in 2009. The decline was primarily due to lower order volumes caused by check usage declines and a weak economy, mostly offset by higher revenue per order, including growth from non-check services. Operating income in 2010 increased to $20.0 million from $19.3 million in 2009.

Direct Checks revenue was $56.6 million compared to $39.7 million in 2009. The Custom Direct acquisition in April contributed $18.3 million in the quarter which was partly offset by lower order volume resulting from the continued decline in check usage and the weak economy. Operating income, including the impact of restructuring and transaction-related costs, was $12.7 million, or 22.4 percent of revenue, compared to $13.2 million or 33.2 percent of revenue in 2009.

Cash Flow Performance
Cash provided by operating activities for the first half of 2010 totaled $70.6 million, a decrease of $15.2 million compared to 2009. The decrease was due primarily to higher performance-based compensation payments in the first quarter and higher income tax payments partially offset by lower contract acquisition payments and improved earnings.

Business Outlook
The Company also reported that it finalized a contract settlement with a large financial institution that previously acquired one of the Company's clients and recently chose to consolidate its check printing business with another provider. Deluxe has been producing checks for a small portion of the client's customers. The business is expected to be phased out in the third quarter during which time the Company expects to receive contract termination payments aggregating approximately $24 million, or $0.30 per diluted share, which will be reflected as revenue in the Company's financial statements. The Company stated that for the third quarter of 2010, revenue is expected to be between $360 and $370 million which includes a net $22 million associated with the contract settlement after considering the anticipated reduction in volume. Diluted EPS is expected to be between $0.94 and $0.98.

For the full year, revenue is expected to be between $1.390 and $1.415 billion, including approximately $60 million associated with Custom Direct and a net $18 million from the contract settlement including the anticipated volume reduction, and diluted EPS is expected to be between $2.90 and $3.00. Adjusted diluted EPS from continuing operations is expected to be between $3.00 and $3.10 and excludes the first quarter $0.07 per share charge due to the impact of recent health care legislation and an estimated $0.03 per share for restructuring and transaction-related costs. The Company also stated that it expects operating cash flow to be between $220 million and $230 million in 2010, including the after-tax impact of the contract settlement and approximately $15 million from the operations of Custom Direct. Capital expenditures are expected to be approximately $40 million.

"Building on a strong second quarter, our primary focus continues to be on revenue growth, while we invest in future performance through better products and services, brand awareness and direct response campaigns," Schram stated. "We are making positive strategic moves to reposition the Company for sustainable longer-term growth. Our 2010 priorities continue to be to stabilize checks, grow new business services revenue, and execute on our cost reductions and process improvements."

 

 

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