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Deluxe Reports Third Quarter 2016 Financial Results

Thursday, October 27, 2016

Press release from the issuing company

Revenue increase 4.3% over last year

Diluted EPS of $1.19 increased 5.3%; Adjusted diluted EPS of $1.22 increased 5.2%

ST. PAUL, Minn. - Deluxe Corporation (NYSE: DLX), 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, 2016. Key financial highlights include:

                   
      Q3 2016     Q3 2015     % Change
Revenue     $458.9 million     $439.8 million     4.3 %
Net Income     $58.7 million     $56.9 million     3.2 %
Diluted EPS – GAAP     $1.19     $1.13     5.3 %
Adjusted Diluted EPS – Non-GAAP     $1.22     $1.16     5.2 %
                     

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

Revenue was in the middle of the range of the prior outlook and adjusted diluted EPS was at the top end of the range in the prior outlook driven primarily by strong operating results in the Financial Services segment.

“Our strategy of diversifying and growing top-line revenue continued to show progress in the quarter with marketing solutions and other services now accounting for over a third of total revenue,” said Lee Schram, CEO of Deluxe. “During the quarter, we acquired Payce Payroll - a full service payroll and tax filing firm and Inkhead – a technology-based marketer that helps small businesses promote their business. Looking ahead into next year, we believe we continue to be well positioned to deliver another year of growth in revenue, earnings and cash flow from operations.”

Third Quarter 2016 Highlights:

  • Revenue increased 4.3% year-over-year, primarily due to growth in the Financial Services (FS) segment which grew 10.9%. The FS segment includes the results of Datamyx LLC and FISC Solutions which were acquired in the fourth quarter of 2015. The Small Business Services segment grew 3.4% in the quarter. Revenue from marketing solutions and other services increased 16.1% year-over-year and accounted for 33.5% of consolidated revenue in the quarter.
  • Gross margin was 63.8% of revenue, the same as in the third quarter of 2015. Previous price increases and improvements in manufacturing productivity were offset by increased delivery and material costs.
  • Selling, general and administrative (SG&A) expense increased 4.6% from last year primarily due to additional SG&A expense from acquisitions partially offset by continued cost reduction initiatives in all segments and lower incentive compensation expense. SG&A as a percent of revenue was 43.2% in the quarter compared to 43.1% last year.
  • Operating income increased 3.2% year-over-year and includes restructuring and transaction-related costs in both periods. Adjusted operating income, which excludes these items, increased 3.7% year-over-year from higher revenue and continued cost reductions.
  • Diluted EPS increased 5.3% year-over-year. Excluding restructuring and transaction-related costs in both periods, adjusted diluted EPS increased 5.2% year-over-year driven primarily by stronger operating performance, cost management initiatives and lower average shares outstanding.

Segment Highlights
Small Business Services

  • Revenue was $298.9 million and increased 3.4% year-over-year due primarily to growth in marketing solutions and other services. From a channel perspective the company experienced growth in the online, major accounts and dealer channels and also realized revenue benefits from previous price increases.
  • Operating income decreased 2.3% from last year to $50.7 million. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods, decreased 0.8% year-over-year due to acquisitions and higher brand awareness spend, but was partly offset by price increases, cost reductions and lower incentive compensation expense.

Financial Services

  • Revenue was $123.0 million and increased 10.9% year-over-year. The increase in revenue was primarily due to growth in marketing solutions and other services, which includes incremental revenue from the Datamyx and FISC Solutions acquisitions, as well as the impact of previous price increases, partially offset by the secular decline in check usage.
  • Operating income increased 22.6% from last year to $28.7 million. Adjusted operating income, which excludes restructuring costs in both periods and transaction-related costs in 2015, increased 20.2% year-over-year driven by the continued benefits of cost reductions, price increases and lower incentive compensation expense, partially offset by the secular decline in check usage.

Direct Checks

  • Revenue of $37.0 million declined 7.3% year-over-year due primarily to the secular decline in check usage.
  • Operating income decreased 8.5% year-over-year to $12.9 million. Adjusted operating income, which excludes restructuring costs in the current quarter, decreased 7.8% year-over-year due to lower order volume and unfavorable mix but was partly offset by cost reductions.

Other Highlights

  • Cash provided by operating activities for the first nine months of 2016 was $208.1 million, a decrease of $11.1 million compared to 2015, driven primarily by higher income tax payments, higher contract acquisition payments and an incentive payment related to a previous acquisition, partially offset by stronger earnings and lower interest payments.
  • The Company repurchased $15.0 million of common stock in open market transactions during the quarter, bringing the year-to-date total to $44.9 million.
  • At the end of the third quarter, the company had $617.8 million of total debt outstanding which includes approximately $418.0 million outstanding on the Company’s credit facility.
  • On October 13, the Company announced the planned redemption of all of its $200 million 6.00% Senior Notes Due 2020. The early debt extinguishment is expected to generate a loss of approximately $0.11 per diluted share in the fourth quarter of 2016, primarily related to a contractual call premium and associated redemption fees. The early debt extinguishment is being financed through an expansion of the existing credit facility.

 

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