ST. PAUL, Minn., July 26 -- Deluxe Corporation reported second quarter diluted earnings per share (EPS) of $0.69 on net income of $36.0 million. The quarter's results reflect stronger than expected revenue in each of the three business segments, lower manufacturing costs and lower selling, general, and administrative (SG&A) expense. EPS for the second quarter of 2006 was a loss of $0.05 per share on a net loss of $2.4 million. Last year's results included a pre-tax $44.7 million, or $0.57 per share, asset impairment loss related to an abandoned software project.
"We are excited to report another quarter of strong financial performance as we maintain momentum with our transformation," said Lee Schram, CEO of Deluxe. "Revenue in Small Business Services continued to grow, after adjusting for the sale of the industrial packaging business in January, and our personal check businesses were encouragingly flat year over year. On the cost side, we made good progress with our initiatives, especially in manufacturing and information technology, and are on track to achieve the upper end of our cost reduction target for the year."
Second Quarter Performance
Revenue for the quarter was $399.9 million compared to $403.0 million during the second quarter of 2006. Small Business Services revenue was $3.1 million lower due to the first quarter sale of the industrial packaging product line, which accounted for $51 million in annual revenue in 2006. Financial Services revenue increased $0.6 million while Direct Checks revenue decreased $0.6 million.
Gross margin improved to 64.3 percent of revenue compared to 62.4 percent in 2006. Reductions in manufacturing costs, 2006 facility closing costs and lower material costs related to product mix contributed to the increase.
SG&A expense decreased $7.2 million compared to the second quarter of 2006. The decrease resulted from cost saving initiatives, primarily in sales, marketing and information technology, and from lower amortization. These benefits were partly offset by higher accruals for performance-based employee compensation. As a percent of revenue, SG&A decreased to 47.4 percent from 48.8 percent in 2006.
Operating income was $67.5 million, compared to $9.8 million in the second quarter of 2006. Operating margin was 16.9 percent of revenue compared to 2.4 percent in the prior year. Last year's results included the previously mentioned asset impairment loss. Additionally, the operating margin increase was driven by improved gross margin and lower SG&A expenses.
Net income increased $38.4 million and diluted EPS increased $0.74 due to last year's impairment charge and improved operating performance.
Second Quarter Performance by Business Segment
Small Business Services revenue decreased to $230.1 million from $233.2 million in 2006 due to the sale of the industrial packaging product line in the first quarter of this year, partially offset by revenue from the Johnson Group, a business acquired in October 2006, and higher check volumes. Operating income increased to $30.0 million from $1.3 million in 2006, which included an allocation to this segment of $18.3 million from the 2006 asset impairment loss. Cost reductions, favorable product mix and lower manufacturing costs also contributed to the improvement.
Financial Services revenue was $117.9 million compared to $117.3 million in 2006 due to a price increase implemented in the first quarter of this year. Order volume was down 0.4 percent as net client gains in the second half of 2006 offset the decline in check usage. Operating income increased to $23.2 million from a loss of $7.5 million in 2006, which included an allocation to this segment of $26.4 million from last year's asset impairment loss. Benefits from cost reduction initiatives and lower amortization also were factors.
Direct Checks revenue was down slightly to $51.9 million compared to $52.5 million in 2006. Operating income was $14.3 million compared to $16.0 million in 2006. The decrease was caused by higher manufacturing costs due primarily to the introduction of new product delivery packaging.
Year-to-Date Operating Cash Flow Performance
Cash provided by operating activities for the first six months of 2007 totaled $104.7 million, an increase of $3.6 million compared to last year. Improved operating results and progress with working capital initiatives offset higher payments for medical and severance benefits, income taxes and performance-based compensation.
Business Outlook
The Company stated that for the third quarter of 2007, revenue is expected to be between $386 million and $394 million, and diluted EPS is expected to be between $0.57 and $0.61. For the full year, revenue is expected to be between $1.60 billion and $1.62 billion, and diluted EPS is expected to be between $2.70 and $2.80. The Company also stated that it expects operating cash flows to be between $235 million and $250 million in 2007. The revised outlook reflects stronger operating performance primarily in the Small Business Services and Financial Services segments.
"We are well on our way executing against our transformational plan," Schram stated. "We completed a successful note offering during the second quarter which positions us well to repay our October note maturity. We still have a lot of work to do, but our objective is to continue to execute each day while delivering on our improved commitments."