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Deluxe Q3 Profit Declines, Updates 2014 Outlook

Friday, October 24, 2014

Press release from the issuing company

ST. PAUL, Minn. - Deluxe Corporation, a leader in providing small businesses and financial institutions with products and services to drive customer revenue, announced its financial results for the third quarter ended September 30, 2014. Key financial highlights include:

    Q3 2014   Q3 2013   % Change
Revenue   $413.2 million   $398.1 million   3.8%
Net Income   $44.4 million   $46.9 million   (5.3%)
Diluted EPS – GAAP   $0.88   $0.92   (4.3%)
Adjusted Diluted EPS – Non-GAAP   $1.03   $0.96   7.3%
             

A reconciliation of earnings per share on a GAAP basis and adjusted earnings per share on a non-GAAP basis is provided after the Forward-Looking Statements.

Revenue was at the high end of the range in the prior outlook, while adjusted diluted EPS exceeded the high end of the range in the prior outlook. The earnings results were driven by stronger operating results in each of the Company’s segments and better than expected cost reductions partially offset by a slightly higher effective tax rate.

“Our positive transformation continues as we delivered revenue and adjusted EPS growth over the prior year,” said Lee Schram, CEO of Deluxe. “Our approach to diversifying and growing top-line revenue, while at the same time aggressively managing our expense structure continues to deliver strong operating income and cash flow growth. During the quarter, we paid out our regular quarterly dividend, repurchased common stock and increased cash which was subsequently used to retire debt in October. Looking ahead, we are excited about our latest addition, Wausau Financial Systems, as we continue to execute on our services growth strategy. We expect to see revenue, operating cash flow and earnings growth continue in 2014 and 2015, increasing value for our shareholders.”

Third Quarter 2014 Highlights:

  • Revenue increased 3.8% year-over-year due to the strong performance of the Small Business Services segment which grew 7.2%.
  • Revenue from marketing solutions and other services increased 19.4% year-over-year and accounted for 24.8% of total revenue in the quarter.
  • Gross margin was 63.7% of revenue, down from 64.3% in the third quarter of 2013. The decline was primarily driven by a higher services revenue mix and higher delivery and material costs.
  • Selling, general and administrative (SG&A) expense increased 1.3% from last year primarily due to additional SG&A expense from acquisitions in the prior year and higher performance-based compensation. SG&A as a percent of revenue was well leveraged at 42.5% in the quarter and compared to 43.6% of revenue last year.
  • Operating income decreased 3.8% year-over-year and includes a non-cash asset impairment charge in the third quarter of 2014 related to various intangible assets directly associated with the Company’s decision to reduce the revenue base of its search engine marketing and optimization business in order to improve its financial performance, as well as restructuring and transaction-related costs in both periods. Adjusted operating income, which excludes these items, increased 5.8% year-over-year from higher revenue per order and continued cost reductions partially offset by higher performance-based compensation.
  • Diluted EPS decreased 4.3% year-over-year. Excluding the asset impairment charge in the third quarter of 2014 and restructuring and transaction-related costs in both periods, adjusted diluted EPS increased 7.3% year-over-year driven by stronger operating performance and lower shares outstanding, partially offset by a slightly higher effective tax rate.

Segment Highlights
Small Business Services

  • Revenue was $284.6 million and increased 7.2% year-over-year due to growth in marketing solutions and other services, growth in the Safeguard® distributor channel and the impact of previous price increases.
  • Operating income decreased 6.7% from last year to $43.2 million. Adjusted operating income, which excludes the asset impairment charge in the third quarter of 2014 and restructuring and transaction-related costs in both periods, increased 9.3% year-over-year due primarily to higher revenue and cost reductions.

Financial Services

  • Revenue was $85.7 million and decreased 0.9% year-over-year due to the secular decline in check usage, partially offset by growth in non-check services, including the results of Destination Rewards which was acquired late in the fourth quarter of 2013, as well as the impact of previous price increases.
  • Operating income was flat compared to last year at $18.8 million. Adjusted operating income, which excludes restructuring and transaction- related costs, increased 2.4% year-over-year, reflecting previous price increases and the continued benefits of cost reductions, partially offset by check usage declines.

Direct Checks

  • Revenue of $42.9 million declined 6.9% year-over-year due primarily to the secular decline in check usage.
  • Operating income increased 0.7% year-over-year as a result of cost reductions, partially offset by lower revenue.

Other Highlights

  • Cash provided by operating activities for the first nine months of 2014 was $203.3 million, an increase of $19.3 million compared to 2013, driven primarily by improved earnings, changes in working capital, and lower medical and performance-based compensation payments, partially offset by higher income tax payments.
  • The Company repurchased $8.2 million of common stock in open market transactions in the third quarter and $60.1 million year-to-date.
  • On October 21, 2014, the Board of Directors of Deluxe Corporation declared a regular quarterly dividend of $0.30 per common share on all outstanding shares of the company. The dividend will be payable on December 1, 2014 to all shareholders of record at the close of business on November 17, 2014.

Full Release

 

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