ST. PAUL, Minn., Jan. 25 -- Deluxe Corporation reported fourth quarter diluted earnings per share (EPS) of $0.92 on net income of $47 million. The quarter's results reflect better than expected operating performance in the Small Business Services (SBS) and Financial Services segments, primarily related to higher revenues and greater than expected cost savings, and one-time benefits resulting in a lower tax rate.
EPS for the fourth quarter of 2006 included the previously announced $0.14 gain from terminating an underperforming outsourced payroll services contract as well as a charge of $0.11 per share for employee severance associated with the Company's cost reduction initiatives. EPS for the fourth quarter of 2005 was $0.76 on net income of $39 million.
"We made solid progress this quarter and are exiting the year with positive momentum," said Lee Schram, CEO of Deluxe Corporation. "We have achieved nearly 10% of our cost savings target, which is ahead of schedule, and we made steady progress with new product initiatives. Achieving nearly flat year-on-year revenue performance for the quarter along with strong earnings, operating cash flow and debt paydown reaffirms that our operational transformation is taking hold and delivering results."
Fourth Quarter Performance
Revenue for the quarter was $427 million compared to $432 million during the fourth quarter of 2005. Revenue in SBS increased $9 million, driven by higher revenue per order and the acquisition of the Johnson Group in October. This increase was offset by lower revenue per order for Financial Services and lower order volume for Direct Checks.
Gross margin was 63.5 percent of revenue compared to 63.9 percent in 2005. Lower revenue per order for Financial Services offset the benefits realized from closing two facilities in mid-2006.
Selling, general, and administrative (SG&A) expense decreased $9 million in the fourth quarter. Severance charges, higher customer care costs and commissions associated with higher volume in SBS were more than offset by the $11 million gain realized from terminating the payroll services contract. SG&A for 2006 also benefited from reduced marketing costs within SBS stemming from decisions earlier in the year to increase our focus on gaining new customers through financial institution referrals. In addition, the prior year SG&A expense included an adjustment related to lowering the performance-based incentive compensation accrual.
As a result, operating income was $79 million, compared to $75 million in the fourth quarter of 2005. Operating margin was 18.5 percent of revenue compared to 17.4 percent in the prior year, reflecting the impact of lower SG&A expenses.
Net income increased $8 million and diluted EPS increased $0.16 due to higher operating income, lower interest expense related to our lower debt level and the one-time tax benefits of $0.09.
Fourth Quarter Performance by Business Segment
Small Business Services' revenue increased to $266 million from $257 million in 2005, up 3.5% as a result of continued execution of the growth strategy, including the acquisition of the Johnson Group. Revenue per order increased compared to the same period last year, as did the number of first-time buyers. Operating income increased to $49 million from $35 million in 2005. In addition to the revenue growth, a gain from terminating an underperforming outsourced payroll services contract, the closing of two printing facilities in mid-2006 and reduced marketing costs contributed to the improved performance.
Financial Services' revenue was $110 million compared to $117 million in 2005, primarily the result of less revenue per order because of lower prices and an unfavorable shift in product mix. Order volume was up 5.3 percent from the same period last year. Operating income decreased to $16 million from $20 million in 2005 due primarily to the impact of lower revenue.
Direct Checks' revenue was $51 million compared to $58 million in 2005 due to lower order volume from the decline in check usage, as well as lower response rates and re-orders due to past reductions in advertising spend. Revenue for the quarter was also negatively impacted by nearly $3 million due to weather-related production and shipping delays at the end of December. Operating income was $14 million compared to $20 million in 2005 as a result of the lower revenue and increased advertising circulations.
Total Year Operating Cash Flow Performance
Cash provided by operating activities for the year totaled $239 million, an increase of $61 million compared to last year. Lower earnings were more than offset by lower contract acquisition payments, income tax payments and performance-based employee compensation payments related to 2005's operating performance, as well as working capital improvements including a decision earlier in the year to reduce the level at which we pre-fund medical and severance benefit payments.
The Company stated that for the first quarter of 2007, revenue is expected to be between $392 million and $400 million, and diluted EPS is expected to be between $0.50 and $0.54. For the full year, revenue is expected to be between $1.56 billion and $1.60 billion, and diluted EPS is expected to be between $2.35 and $2.55. Each of these estimates include the impact of a divestiture in January 2007 of the Company's industrial packaging product line, including an estimated $4 million pre-tax gain on the sale. Revenues for this business were $51 million in 2006.
The Company expects operating cash flows to be between $215 million and $235 million in 2007. In addition, capital expenditures are expected to be approximately $40 million.
"Our guidance for the year reflects several key factors," Schram stated. "Excluding the impact of the industrial packaging product line divestiture, the revenue range is nearly flat to 2006. We expect our SBS segment to continue generating low single digit revenue growth, while declines in the Company's check businesses are expected to ease to single digit rates. We also expect to realize an additional 50% to 55% of our cost savings plan which will more than fund target levels of performance-based compensation, continued investments in new products and other cost increases. Finally, we expect our tax rate to return to 35% to 36%."
WhatTheyThink is the global printing industry's leading independent media organization with both print and digital offerings, including WhatTheyThink.com, PrintingNews.com and WhatTheyThink magazine versioned with a Printing News and Wide-Format & Signage edition. Our mission is to provide cogent news and analysis about trends, technologies, operations, and events in all the markets that comprise today’s printing and sign industries including commercial, in-plant, mailing, finishing, sign, display, textile, industrial, finishing, labels, packaging, marketing technology, software and workflow.