Press release from the issuing company
St. Paul, Minn. - Deluxe Corporation reported third quarter adjusted diluted earnings per share (EPS) from continuing operations of $0.99 compared to $0.60 in the prior year. Results for 2010 include revenue of $24.6 million or $0.31 per diluted share, from a previously announced contract settlement with a large financial institution client. Adjusted diluted EPS for 2009 excludes the impact of restructuring-related costs and transaction-related costs associated with acquisitions. Operating results were better than expected for the current period due primarily to strong overall performance in the Small Business Services segment, partially offset by a higher effective tax rate.
Reported diluted EPS was $0.98 on net income of $50.8 million in the third quarter of 2010 and was $0.56 on net income of $28.6 million in the comparable quarter of 2009. Results for 2010 include a loss from discontinued operations of $0.4 million, or $0.01 per diluted share, associated with a previous business disposition. Results for 2009 included restructuring and transaction-related costs of $3.4 million, or $0.04 per diluted share.
"Deluxe delivered another strong quarter," said Lee Schram, CEO of Deluxe. "We further stabilized our core checks customer base, expanded existing organic revenue initiatives, and delivered 33% revenue growth in business services over the third quarter of 2009. We also continued to strategically invest in our future through increased brand awareness, new technology initiatives, and adding key leadership talent in the new transformative spaces."
Third Quarter Performance
Revenue for the quarter was $367.6 million compared to $332.3 million during the third quarter of 2009. Small Business Services segment revenue of $206.6 million was $12.7 million higher than the comparable 2009 quarter driven primarily by revenue of $12.1 million from the contract settlement. Revenue in this segment also grew sequentially over the previous quarter's reported amount of $193.2 million. Financial Services revenue was $3.7 million higher than the third quarter of 2009 driven by revenue of $12.5 million from the contract settlement and higher non-check services revenues which were partly offset by lower order volume and lower check pricing. Direct Checks revenue increased $18.9 million due to the recent acquisition of Custom Direct, Inc., but was down only 4 percent excluding the acquisition due to strong re-order performance.
Gross margin was 67.0 percent of revenue compared to 63.3 percent in 2009. The favorable impact of the contract settlement and the Company's cost reduction initiatives were partially offset by increased delivery rates.
Selling, general and administrative (SG&A) expense increased $3.5 million in the quarter compared to 2009, but decreased from 46.4 percent of revenue in 2009 to 42.9 percent in 2010. Increased SG&A expense associated with the Custom Direct acquisition and our brand awareness and direct response advertising campaigns were partially offset by benefits from the continued execution of our cost reduction initiatives.
Operating income in 2010 was $88.5 million compared to $54.5 million in the third quarter of 2009. Operating income was 24.1 percent of revenue compared to 16.4 percent in the prior year driven primarily by the contract settlement, benefits from our cost reduction initiatives, and favorable product mix.
Reported diluted EPS increased $0.42 from the prior year driven by the higher operating income, including approximately $0.31 per share from the contract settlement.
Third Quarter Performance by Business Segment
Small Business Services revenue was $206.6 million versus $193.9 million in 2009. The increase was due primarily to the revenue contribution of the contract settlement, as well as growth in business services, but was unfavorably impacted by continued economic weakness. Operating income in 2010 increased to $45.3 million from $23.2 million in 2009.
Financial Services revenue was $102.6 million compared to $98.9 million in 2009. The increase was primarily due to the contract settlement and growth from non-check services, partly offset by lower order volumes caused by check usage declines and a weak economy, and lower check pricing. Operating income in 2010 increased to $27.2 million from $18.5 million in 2009.
Direct Checks revenue was $58.4 million compared to $39.5 million in 2009. The Custom Direct acquisition in April contributed $20.5 million in the quarter which was partly offset by lower order volume resulting from the continued decline in check usage and the weak economy. Operating income was $16.0 million, or 27.4 percent of revenue, compared to $12.8 million or 32.4 percent of revenue in 2009.
Cash Flow Performance
Cash provided by operating activities for the first nine months of 2010 totaled $170.5 million, an increase of $20.3 million compared to 2009. The increase was due primarily to the contract settlement received during the quarter and improved earnings partially offset by higher performance-based compensation payments in the first quarter and higher income tax payments.
The Company stated that for the fourth quarter of 2010, revenue is expected to be between $346 and $354 million. Diluted EPS is expected to be between $0.65 and $0.72. For the full year, revenue is expected to be between $1.397 and $1.405 billion, including approximately $60 million associated with Custom Direct and diluted EPS is expected to be between $2.93 and $3.00. Adjusted diluted EPS from continuing operations is expected to be between $3.05 and $3.12 and excludes the first quarter $0.07 per share charge due to the impact of recent health care legislation and an estimated $0.03 per share for restructuring and transaction-related costs. The Company also stated that it expects operating cash flow to be between $220 million and $226 million in 2010, including the after-tax impact of the contract settlement and more than $15 million from the operations of Custom Direct. Capital expenditures are expected to be approximately $40 million.
"We continue to make positive strategic moves to reposition Deluxe for sustainable revenue growth while continuing to generate consistent strong cash flows on top of our culture of cost reduction and operational efficiency," Schram stated. "We are pleased to be able to raise our earnings guidance range for the year and are optimistic we are accelerating our pace around revenue growth initiatives as we head into the last quarter of the year and as we look further towards 2011."
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