Deluxe Earnings up 43% in Q1, Raises Full Year Guidance
Press release from the issuing company
ST. PAUL, Minn., April 24 -- Deluxe Corporation reported first quarter diluted earnings per share (EPS) of $0.68 on net income of $35.2 million. EPS for the first quarter of 2006 was $0.48 on net income of $24.7 million. The quarter's results reflect stronger than expected revenue in the personal check businesses, lower costs and favorable shifts in the timing of investments in key initiatives.
"We had a strong first quarter and are pleased with our financial performance and continued progress as we remain on track with our transformation," said Lee Schram, CEO of Deluxe. "All three of our businesses delivered solid results in the quarter as our momentum exiting 2006 continues. Our revenue for the quarter was strong, especially in the personal check businesses where Financial Services reported only a low single-digit decline and Direct Checks grew for the first time since the third quarter of 2002. On the cost side, we continue to make steady progress with our initiatives and are solidly on track to meet our cost reduction target for the year."
First Quarter Performance
Revenue for the quarter was $403.8 million compared to $411.4 million during the first quarter of 2006. Revenue in Small Business Services (SBS) decreased $4.3 million due to the sale of the industrial packaging product line. Financial Services (FS) revenue decreased $3.5 million due to lower revenue per order while Direct Checks (DC) revenue increased $0.2 million.
Gross margin improved to 63.0 percent of revenue compared to 62.1 percent in 2006. The benefit of strong check volumes, favorable reductions in manufacturing costs and 2006 facility closing costs were partly offset by lower revenue per order for FS.
Selling, general, and administrative (SG&A) expense decreased $18.8 million in the quarter. The decrease resulted from cost saving initiatives, primarily in sales and marketing and information technology, and from lower amortization. As a percent of revenue, SG&A decreased to 46.9 percent from 50.6 percent in 2006.
Operating income was $69.0 million, compared to $52.3 million in the first quarter of 2006. Operating margin was 17.1 percent of revenue compared to 12.7 percent in the prior year driven by improved gross margin and lower SG&A expenses.
Net income increased $10.5 million and diluted EPS increased $0.20 due to higher operating income and lower interest expense related to our lower debt level.
First Quarter Performance by Business Segment
Small Business Services' revenue decreased to $231.8 million from $236.1 million in 2006 due to the sale of the industrial packaging product line. Operating income increased to $33.2 million from $11.8 million in 2006. Cost reductions, lower manufacturing costs, and a $3.8 million pre-tax gain from the sale of our industrial packaging product line contributed to the improved performance. The product line sale transaction had no impact on EPS because of an unfavorable effective tax rate specifically attributable to the gain.
Financial Services' revenue was $113.5 million compared to $117.0 million in 2006, because of lower revenue per order. Partially offsetting the decrease, order volume was up 6.2 percent versus the same period last year driven by net client gains in the second half of 2006 and bank conversion volume from a large financial institution that had originally been expected later this year. The higher bank conversion volume accounted for nearly half of the reported growth in order volume. Operating income decreased to $15.7 million from $20.6 million in 2006 due to lower revenue per order and a $4.9 million pre-tax gain last year on the sale of a closed facility. These impacts were partly offset by benefits from cost reduction initiatives and higher order volume.
Direct Checks' revenue was up slightly to $58.5 million compared to $58.3 million in 2006. Operating income was $20.1 million compared to $19.9 million in 2006. Revenue for the quarter benefited nearly $3 million due to weather-related production and shipping delays at the end of December. In addition, the sale of additional accessories, premium features and services also helped offset the decline in check usage and the impact of reduced advertising spending in previous quarters.
First Quarter Operating Cash Flow Performance
Cash provided by operating activities for the quarter totaled $69.0 million, a decrease of $3.7 million compared to last year. Higher earnings and progress with working capital initiatives were more than offset by higher medical and severance benefits, higher income tax payments and higher performance-based employee compensation payments related to our 2006 operating performance. The strong cash flow performance drove debt reduction of $68.5 million in the quarter.
The Company stated that for the second quarter of 2007, revenue is expected to be between $382 million and $390 million, and diluted EPS is expected to be between $0.52 and $0.56. For the full year, revenue is expected to be between $1.57 billion and $1.60 billion, and diluted EPS is expected to be between $2.45 and $2.65. The Company also stated that it expects operating cash flows to be between $225 million and $245 million in 2007. The revised guidance reflects stronger performance in the Company's check businesses.
"We ran on all cylinders in the first quarter having performed well compared with our key objectives for 2007," Schram stated. "We are pleased with the start to the year and continue to be energized and passionate about attacking the challenges ahead of us. We still have a lot of work to do, but our objective is to continue to execute and improve our performance each day and deliver against our improved commitments."
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