Deluxe Reports Fourth Quarter and Full-year Results
Press release from the issuing company
ST. PAUL, Minn., Jan. 29 -- Deluxe Corporation, the nation's leading check printing company, reported fourth quarter diluted earnings per share (EPS) of $0.77 on net income of $39.4 million. Diluted earnings per share and net income for the fourth quarter in 2002 were $.84 and $52.3 million, respectively.
"Deluxe's fourth quarter EPS was at the high end of our expectations despite recording additional nonrecurring net charges related to actions that will lower our future operating costs," said Lawrence J. Mosner, chairman and CEO of Deluxe Corporation. "We are responding to the competitive environment by initiating actions that will maximize revenue per order, improve efficiency and lower our cost structure."
Fourth Quarter Performance
Deluxe's fourth quarter net income was $39.4 million, compared to $52.3 million during the same quarter in 2002. EPS was $0.77 per diluted share compared to $.84 for the same period a year ago. Fourth quarter results were impacted by $13.7 million of severance and asset impairment charges, partially offset by a $4.0 million gain related to changes in retiree health care benefits. EPS was positively impacted $0.14 due to the net impact of shares outstanding compared to the fourth quarter of 2002, and $0.01 due to share repurchase activity since September 30, 2003.
Revenue was $300.5 million in the fourth quarter, compared to $306.8 million during the same quarter a year ago. The decrease in revenue was due to a 1.1 percent decline in revenue per unit and a 1.0 percent decline in unit volume.
Gross margin was 65.6 percent of revenue for the quarter compared to 66.0 percent in 2002. Lower revenue per unit and net charges of $2.4 million, primarily related to the previously-announced closing of two check printing facilities, were partially offset by productivity improvements and other cost management efforts.
Selling, general and administrative expense (SG&A) was 41.2 percent of revenue, compared to 39.5 percent in 2002. Higher advertising expense and net charges of $2.6 million were partially offset by lower employee costs and other discretionary spending.
Asset impairment charges of $4.7 million were recorded in the fourth quarter of 2003 related to manufacturing technologies and software assets.
As a result, operating income was $68.7 million in the fourth quarter, compared to $81.0 million last year. Operating margin was 22.9 percent of revenue, compared to 26.4 percent last year.
Interest expense increased to $5.0 million for the quarter, compared to $1.8 million in the same period a year ago, primarily due to higher debt levels related to share repurchase activity.
The Company's effective tax rate for the quarter was 38.4 percent, up from 34.2 percent in the same period a year ago. The tax rate for the fourth quarter of 2002 was impacted by favorable resolution of IRS audits, partially offset by an expense to recognize the likelihood that benefits from certain deferred tax assets would not be realized.
Total Year Performance
2003 net income was $192.5 million, compared to net income of $214.3 million during 2002. Earnings per share for 2003 increased to $3.49 diluted per share, compared to $3.36 diluted per share in 2002, primarily due to the accretive effect of repurchasing shares during the past two years.
Revenue was $1,242.1 million for the year, compared to $1,284.0 million a year ago. The 3.3 percent decrease in revenue was due to a unit decline of 3.8 percent, partially offset by an increase in revenue per unit of 0.6 percent.
Gross margin was 65.7 percent of revenue for the full year compared to 66.1 percent in 2002. The decrease was due to lower unit volume and net charges of $3.8 million, primarily related to the previously-announced closing of three check printing facilities, partially offset by the increase in revenue per unit, productivity improvements, and other cost management efforts.
SG&A for 2003 was 39.6 percent of revenue, compared to 39.2 percent in 2002. However, SG&A dollars declined $10.5 million due to lower employee costs and discretionary spending in response to the challenging business and economic environments, partially offset by net charges of $4.0 million.
Total year results for 2003 included the asset impairment charges mentioned above.
As a result, operating income was $318.9 million for the year, compared to $344.9 million in 2002. Operating margin was 25.7 percent of revenue compared to 26.9 percent of revenue a year ago.
Interest expense increased to $19.2 million for the year, compared to $5.1 million in 2002 due to higher interest rates and debt levels.
The Company's effective tax rate for the full year was 35.7 percent, down from 37.1 percent for 2002. The annual tax rate reduction was due primarily to the $7.3 million favorable impact recognized in the third quarter of 2003, related to the expiration of certain income tax periods and the resolution of some tax audits.
Deluxe to Expense Stock-Based Compensation Beginning in 2004
Deluxe will adopt the fair value method of recording stock-based compensation as contained in Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Beginning in 2004, all future employee stock-based compensation and the unvested portion of previous stock option grants will be expensed over the option vesting period based on the fair value at the date the stock awards are granted. Had the company adopted SFAS No. 123 in 2003, operating income would have been $7.1 million lower.
Deluxe indicated that it anticipates revenue for 2004 to be down slightly compared to 2003, and that operating income will be flat in 2004 versus 2003, excluding the impact of expensing stock-based compensation. The Company expects first quarter diluted EPS to be in the range of $.85 to $.88 per share, and full-year results to reach approximately $3.50 per share. This compares to EPS of $.83 and $3.49 for the first quarter and full year 2003, respectively. The 2004 EPS estimate includes the impact of adopting SFAS No. 123, but excludes the impact of additional share repurchases subsequent to December 31, 2003.
"In 2004, we will continue to face many of the business pressures we faced in 2003," Mosner said. "We anticipate that checks will decline at an annual rate of 3-4 percent in the United States due to the increased use of electronic payments. We also expect continued pricing pressure in our financial institution channel, and soft response rates in our direct business. Still, we plan to maintain current operating profit levels through strong cost management and by driving increased revenue per check order."
Fourth Quarter Segment Performance
Deluxe operates three business segments: Financial Services, which sells checks, related products and check merchandising services to financial institutions; Direct Checks, which sells checks and related products directly to consumers through direct mail and the Internet; and Business Services, which sells checks, forms and related products to small businesses and home offices through financial institution referrals, business alliances and via direct mail and the Internet.
Financial Services' revenue was $163.9 million for the quarter, compared to $175.9 million in 2002. Operating income for the quarter decreased to $25.3 million, from $33.7 million in 2002. The decreases were the result of heightened pricing pressure and the net charges discussed earlier.
Direct Checks' revenue was $72.6 million for the quarter, down slightly from $74.2 million in 2002. Operating income for the quarter decreased to $21.1 million, from $27.8 million in 2002. The decreases were due to increased advertising expense and lower unit volume, partially offset by higher revenue per unit and productivity improvements.
Business Services' revenue was $64.0 million for the quarter, up from $56.7 million in 2002. Operating income for the quarter increased to $22.3 million, from $19.5 million in 2002. Revenue and operating income were favorably impacted by new business and increased revenue per unit.
Share Repurchase Program
The Company repurchased 1.4 million shares during the fourth quarter and 12.2 million shares for the year. Through December 31, 2003, Deluxe had purchased 1.5 million shares under the 10 million share repurchase authorization approved by its board of directors in August, 2003. Shares outstanding at December 31, 2003 were 50.2 million.
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