Deluxe Corp. Reports 8.5 Percent Increase in Revenue for Q3 2017

Deluxe Corp., Shoreview, Minn., announced its financial results for the third quarter ended Sept. 30, 2017. Key financial highlights include:

Revenue exceeded the company’s prior outlook driven by strong performance by all three segments. GAAP diluted EPS was $0.59 which was below the range of the prior outlook and included aggregate charges of $0.73 per share for asset impairment charges, restructuring and transaction-related costs. Excluding these charges, adjusted diluted EPS exceeded the high-end of the range of the prior outlook.

“In the third quarter, we once again delivered strong growth in both revenue and adjusted diluted EPS,” said Lee Schram, CEO of Deluxe. “Marketing solutions and other services revenue grew over 30 percent from the prior year and accounted for over 40 percent of revenue in the third quarter. Despite our expectations for a continued sluggish economy and the impact of multiple weather-related challenges affecting our customers across the country, we expect to deliver another consecutive year of growth in revenue, adjusted diluted EPS and cash flow from operations.”

Third Quarter 2017 Highlights

• Revenue increased 8.5 percent year-over-year, driven by Small Business Services, which grew 2.5 percent and include the results of several small tuck-in acquisitions, and from growth in Financial Services of 28.0 percent driven by the results of FMCG Direct and Data Support Systems, which were acquired in the fourth quarter of 2016 and RDM Corporation, which was acquired in April 2017.
• Revenue from marketing solutions and other services increased 30.2 percent year-over-year and grew to 40.2 percent of total revenue in the quarter.
• Gross margin was 61.2 percent of revenue, compared to 63.8 percent in the third quarter of 2016. The impact of acquisitions and increased delivery and material costs this year was only partially offset by previous price increases and continued improvements in manufacturing productivity.
• Selling, general and administrative (SG&A) expense increased 2.4 percent from last year primarily due to additional SG&A expense from acquisitions, which was partially offset by continued cost reduction initiatives in all segments. SG&A as a percent of revenue was well-leveraged at 40.8 percent in the quarter compared to 43.2 percent last year.
• Operating income decreased 41.6 percent year-over-year. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods, and asset impairment charges in 2017, increased 7.9 percent year-over-year primarily from price increases and continued cost-reduction initiatives, partially offset by the continuing decline in check and forms usage. During the quarter, the company recognized aggregate charges of $0.73 per share for asset impairment, restructuring and transaction-related charges. Of the aggregate $0.73 per share charge, $0.46 per share was a non-cash goodwill impairment charge resulting from the declining core checks and forms business in the Safeguard reporting unit, $0.20 per share was a non-cash impairment charge for the discontinued NEBS trade name, $0.05 per share was a non-cash impairment charge for an internally-developed order-management software solution and $0.02 per share resulted from restructuring and transaction-related costs.
• Diluted EPS decreased 50.4 percent year-over-year. Excluding restructuring and transaction-related costs in both periods and asset-impairment charges in 2017, adjusted diluted EPS increased 8.2 percent year-over-year driven by favorable operating performance. FMCG Direct had a shift into the third quarter of revenue, originally expected to occur in the fourth quarter which drove approximately $0.03 per share of additional EPS improvement and favorable mix, and delayed spending contributed an additional $0.03 per share improvement while medical expenses were approximately $0.02 per share higher than expected in the third quarter.

Segment Highlights

Small Business Services

• Revenue of $306.4 million was in-line with the company’s expectations, and increased 2.5 percent year-over-year due primarily to increased marketing solutions and other services revenue, partially offset by the decline in check and forms usage. The impact of the number of calendar days in the quarter resulted in a 1.6-point decrease in revenue compared to last year. From a channel perspective, revenue increased in the online, major accounts and Canada, and included benefits from previous price increases.
• Operating income of $13.2 million decreased $37.5 million from last year. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods and asset impairment charges in 2017, increased $8.1 million or 2.2 points year-over-year. This increase was due to price increases, continued cost reductions, small gains on the sale of a few distributors and favorable product mix, partially offset by the secular decline in check and forms usage.

Financial Services

• Revenue of $157.4 million exceeded the company’s expectations and increased 28.0 percent year-over-year primarily due to growth in marketing solutions and other services, which includes incremental revenue from the acquisitions of FMCG Direct and Data Support Systems in the fourth quarter of 2016 and RDM Corporation in April 2017. Revenue also benefitted from the impact of previous price increases. These increases in revenue were partially offset by the secular decline in check usage.
• Operating income of $29.4 million increased $0.7 million, compared to last year. Adjusted operating income increased $1.0 million compared to last year driven by continued benefits of cost reductions and previous price increases. These items were partially offset by the secular decline in check usage and the loss of revenue and operating income from Deluxe Rewards highlighted in previous quarters. Recent acquisitions, even though they were slightly accretive to operating income including acquisition amortization, drove a 2.7-point decrease in operating margin.

Direct Checks

• Revenue of $33.9 million was in line with the company’s expectations and declined 8.4 percent year-over-year due primarily to the secular decline in check usage.
• Operating income of $11.3 million decreased $1.6 million or 1.6 points, compared to last year primarily due to lower order volume, partly offset by cost reductions.

Other Highlights

• Cash provided by operating activities for the first nine months of 2017 was $225.9 million, an increase of $17.8 million compared to 2016.
• The company repurchased $20.0 million of common stock in open-market transactions during the quarter, bringing the year-to-date stock repurchase total to $50.1 million.
• At the end of the third quarter, the company had $756.4 million of total debt outstanding consisting of approximately $450 million outstanding on the revolving credit facility and $305 million in term loans.
• On Oct. 25, 2017, the board of directors of Deluxe Corp. declared a regular quarterly dividend of $0.30 per share on all outstanding shares of the company. The dividend will be payable on Dec. 4, 2017 to all shareholders of record at the close of business on Nov. 20, 2017.

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