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Deluxe Reports First Quarter 2017 Financial Results

Friday, April 28, 2017

Press release from the issuing company

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 first quarter ended March 31, 2017. Key financial highlights include:

               
      Q1 2017   Q1 2016   % Change
Revenue     $487.8 million   $459.3 million   6.2%
Net Income     $57.1 million   $58.1 million   (1.7%)
Diluted EPS – GAAP     $1.16   $1.18   (1.7%)
Adjusted Diluted EPS – Non-GAAP     $1.25   $1.19   5.0%
               

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 exceeded the Company’s prior outlook driven by the Small Business Services segment and a strong performance from the Financial Services segment, primarily from the recent acquisition of FMCG Direct which was acquired in December 2016. GAAP Diluted EPS was at the high end of the range of the prior outlook, despite recognizing a $0.07 per share asset impairment charge during the quarter related to a business held for sale and adjusted diluted EPS exceeded the prior outlook due to strong operating performance in all segments. The Company exceeded the high end of the adjusted diluted EPS previous outlook by $0.08 per share due to higher than expected revenue and results from FMCG which drove $0.06 per share, a lower tax rate which drove $0.03 per share, higher revenue from each of the three segments which drove $0.02 per share and these were partially offset by a legal settlement and expenses in Financial Services of $0.03 per share.

“We delivered very strong first quarter results to start the year,” said Lee Schram, CEO of Deluxe. “Both revenue and adjusted diluted EPS exceeded our expectations and marketing solutions and other services grew 20 percent over the prior year and ended the quarter at over 35 percent of total revenue. We are pleased with early results from recent acquisitions and based on our strong overall performance in the quarter, we are slightly tightening our full year adjusted diluted earnings per share outlook. We continue to expect that we will deliver another strong year of revenue, earnings and operating cash flow growth.”

First Quarter 2017 Highlights

  • Revenue increased 6.2% year-over-year, driven by Small Business Services which grew 6.1% and includes the results of several small tuck-in acquisitions and from growth in Financial Services of 10.7% driven by the results of FMCG Direct and Data Support Systems, which were acquired in the fourth quarter of 2016.
  • Revenue from marketing solutions and other services increased 19.7% year-over-year and grew to 35.3% of total revenue in the quarter.
  • Gross margin was 63.3% of revenue, compared to 64.2% in the first quarter of 2016. The impact of acquisitions and increased delivery and material costs were only partially offset by previous price increases and continued improvements in manufacturing productivity.
  • Selling, general and administrative (SG&A) expense increased 7.6% from last year primarily due to additional SG&A expense from acquisitions, $2.5 million of legal settlement and expenses in Financial Services, and higher new acquisition and brand awareness spend which were partially offset by continued cost reduction initiatives in all segments and a $6.8 million gain on the sale of two small company owned businesses that were sold into the distributor network. SG&A as a percent of revenue was 44.4% in the quarter compared to 43.9% last year.
  • Operating income decreased 7.7% year-over-year and includes restructuring and transaction-related costs in both periods and a $5.3 million asset impairment charge in 2017. Adjusted operating income, which excludes these items, decreased 1.4% year-over-year primarily from the continuing decline in check and forms usage, investments in various growth initiatives, higher legal and medical costs and the impact of acquisitions, including acquisition-related amortization. Partially offsetting these decreases were price increases, continued cost reduction initiatives and the $6.8 million gain from the sale of two small company owned businesses that were sold into the distributor network.
  • Diluted EPS decreased 1.7% year-over-year. Excluding restructuring and transaction-related costs in both periods and the asset impairment charge in 2017, adjusted diluted EPS increased 5.0% year-over-year driven primarily by a favorable tax rate and lower average shares outstanding.

Segment Highlights
Small Business Services

  • Revenue of $308.1 million was slightly better than our expectations and increased 6.1% year-over-year due primarily to increased marketing solutions and other services revenue, partially offset by the decline in check and forms usage. From a channel perspective, revenue increased in the online, major accounts, Canada and dealer channels, including benefits from previous price increases.
  • Operating income of $52.6 million increased $1.5 million from last year. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods and an asset impairment charge in 2017, increased $7.1 million or 1.2 points year-over-year due to price increases, continued cost reductions and the gain from the sale of two small company owned businesses that were sold into the distributor network, partially offset by the decline in check and forms usage and increases in new acquisition and brand awareness spending.

Financial Services

  • Revenue of $140.8 million was much better than our expectations and increased 10.7% year-over-year primarily due to growth in marketing solutions and other services, which includes incremental revenue from the acquisitions of FMCG Direct and Data Support Systems in the fourth quarter of 2016.
  • The FMCG Direct incremental revenue of approximately $8 million resulted from the conversion of their cash-basis accounting to GAAP accounting which affected the timing of our previous revenue outlook. Revenue was pulled forward from later quarters but did not impact our expectations for full year 2017 revenue.
  • Revenue also benefitted from the impact of price increases. These increases in revenue were partially offset by the secular decline in check usage.
  • Operating income of $20.4 million decreased $6.3 million compared to last year. Adjusted operating income decreased $6.1 million or 6.3 points compared to last year driven by the secular decline in check usage, the $2.5 million legal settlement and expenses and the loss of revenue and operating income from Deluxe Rewards highlighted on the fourth quarter earnings call that collectively contributed 2.5 points of the variance. Recent acquisitions, even though they were slightly accretive to operating income including acquisition amortization, drove an additional 2.4 points of the unfavorable variance. These items were only partially offset by continued benefits of cost reductions and price increases.

Direct Checks

  • Revenue of $38.9 million was slightly better than expectations and declined 6.9% year-over-year due primarily to the secular decline in check usage.
  • Operating income of $12.5 million decreased $2.3 million or 3.3 points compared to last year due to lower order volume and a timing shift to the first quarter of marketing spend to optimize response rates. These decreases were only partly offset by cost reductions.

Other Highlights

  • Cash provided by operating activities for the first quarter of 2017 was $74.3 million, an increase of $1.6 million compared to 2016.
  • The Company repurchased $15.0 million of common stock in open market transactions during the quarter.
  • On April 4, 2017, the company completed the acquisition of RDM Corporation of Canada for approximately $70.0 million, net of cash acquired. The acquisition was financed through cash on hand, primarily from the Company’s Canadian operations and the revolving credit facility.
  • At the end of the first quarter, the company had $739.5 million of total debt outstanding which includes approximately $417 million outstanding on the Company’s revolving credit facility and $321 million in term loans.
             
      Current Outlook      
Second Quarter 2017:     (4/27/2017)      
Revenue     $476 to $484 million      
Diluted EPS – GAAP     $1.23 to $1.28      
Adjusted Diluted EPS – Non-GAAP     $1.23 to $1.28      
             
      Current Outlook      
Third Quarter 2017:     (4/27/2017)      
Revenue     $483 to $492 million      
Diluted EPS – GAAP     $1.20 to $1.25      
Adjusted Diluted EPS – Non-GAAP     $1.20 to $1.25      
             
      Prior Outlook     Current Outlook
Full Year 2017:     (1/26/2017)     (4/27/2017)
Revenue     $1.935 to $1.975 billion     $1.945 to $1.975 billion
Marketing Solutions & Other Services Revenue     $735 to $755 million     $735 to $755 million

Diluted EPS - GAAP

    $5.10 to $5.30     $5.06 to $5.21
Adjusted Diluted EPS - Non-GAAP     $5.10 to $5.30     $5.15 to $5.30
Operating Cash Flow     $335 to $355 million     $330 to $350 million
Contract Acquisition Payments     approx. $23 million     approx. $23 million
Capital Expenditures     approx. $45 million     approx. $45 million
Depreciation and Amortization     approx. $127 million     approx. $123 million
Acquisition-Related Amortization     approx. $79 million     approx. $75 million
Cost and Expense Reductions     approx. $50 million     approx. $45 million
Effective Tax Rate     approx. 33%     approx. 32.5%

 

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