ST. PAUL, Minn., April 28 -- Deluxe Corporation, the nation's leading check printer, reported first quarter diluted earnings per share (EPS) of $0.78 on net income of $39 million. Diluted earnings per share and net income for the first quarter in 2004 were $0.94 and $48 million, respectively. The decline in net income and EPS, compared to the prior year period, was due to factors previously communicated- the loss of a large financial institution client in November 2004 and higher interest expense, partially offset by a positive contribution from Small Business Services (SBS).
"Our first quarter performance met our expectations," said Lawrence J. Mosner, chairman and CEO of Deluxe Corporation. "There continues to be a lot of energy and excitement associated with last year's acquisition of New England Business Service (NEBS), both inside Deluxe, and more recently with many of our financial institution (FI) clients as they realize the benefits of doing business with our Small Business Services segment. As an example, Financial Services just launched Deluxe Business Advantage(SM) (DBA), a program that helps financial institutions better serve small businesses with the checks, forms, and related products they need. In addition, DBA offers the potential to generate new business leads for our FI clients. We're excited about the opportunities to leverage the interdependence between our Financial Services and Small Business Services segments."
First Quarter Performance
Revenue was $437 million in the first quarter, compared to $309 million during the same quarter a year ago. First quarter 2005 revenue included $160 million from the acquired NEBS business. The $32 million decrease in revenue for the Company's other businesses was primarily due to the loss of a large financial institution client, which also was the primary contributor to a 17.3 percent decline in unit volume, partially offset by an 8.4 percent increase in revenue per unit.
Gross margin was 65.2 percent of revenue for the quarter, down slightly from 65.4 percent in 2004. Despite the loss in volume and the addition of NEBS' lower margin business, the Company realized beneficial impact from the increase in revenue per unit, continued productivity improvements within the plants and distribution centers, and cost synergies resulting from the NEBS acquisition.
Selling, general, and administrative expense (SG&A) increased $88 million to 47.6 percent of revenue, compared to 38.8 percent in the first quarter of 2004. The addition of NEBS' SG&A expenses and integration costs were partially offset by the Company's cost management actions during the past year.
As a result, operating income was $77 million in the first quarter compared to $82 million last year. NEBS contributed operating income of $4 million after including $10 million of acquisition-related amortization expense and $3 million of integration costs. The decrease in the other businesses was due to the revenue decline, partially offset by productivity improvements, integration savings, and cost management actions. Operating margin was 17.6 percent of revenue, compared to 26.5 percent in the prior year, reflecting, in part, NEBS' lower margin business.
Small Business Services' revenue was $225 million for the quarter, up from $63 million in 2004. In addition to the acquisition of NEBS, the increase was due to higher volume from new business and price increases. Operating income for the quarter increased to $25 million, from $20 million in 2004. The acquired NEBS business contributed $4 million, after including $10 million of acquisition-related amortization and $3 million of integration costs.
Financial Services' revenue was $145 million for the quarter, compared to $169 million in 2004. The decrease was the result of the loss of a large financial institution client in late 2004, as well as the overall decline in check usage. Operating income for the quarter decreased to $32 million, from $41 million in 2004. The revenue decline was partially offset by the Company's cost management actions during the past year.
Direct Checks' revenue was $67 million for the quarter, compared to $77 million in 2004, due to lower unit volume. Operating income for the quarter decreased to $20 million, from $21 million in 2004. A decline in unit volume was partially offset by higher revenue per unit and cost management actions.
The Company expects 2005 second quarter diluted EPS to be in the range of $0.77 to $0.81 per share, and approximately $3.30 per share for the full-year. Cash from operating activities is now expected to be approximately $235 million for 2005 due to higher contract acquisition payments related to newly- acquired financial institution contracts. As previously stated, Deluxe expects growth in its Small Business Services segment to drive consolidated revenue, operating profit, and cash flows higher in 2006 compared to 2005, and higher in 2007 compared to 2006.
"We're off to a solid start in 2005," said Mosner, "and the longer-term outlook is even more exciting, particularly as we execute our growth strategy that leverages the interdependent strengths of Small Business Services and Financial Services." Mosner added, "The loss of a major client in November of 2004 as well as continued pricing pressure in our Financial Services segment, will make comparisons between the rest of this year and 2004 unfavorable. However, in a rather short period of time, we have renewed and acquired business to help offset the loss of this account, and that strengthens our business outlook."
Deluxe announced that it has recently gained three new financial institution clients and renewed its relationship with another major financial institution. The Company's Financial Services and Small Business Services segments expect to bring on the new business during the next 12 months, with the majority arriving in 2006.
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