OREANDA-NEWS. Deluxe Corporation (NYSE: DLX), a leader in providing small businesses and financial institutions with products and services to drive customer revenue, announced its financial results for the second quarter ended June 30, 2016. Key financial highlights include:

                   
      Q2 2016     Q2 2015     % Change
Revenue     $450.6 million     $435.9 million     3.4%
Net Income     $58.4 million     $56.1 million     4.1%
Diluted EPS – GAAP     $1.18     $1.11     6.3%
Adjusted Diluted EPS – Non-GAAP     $1.20     $1.13     6.2%
                   

A reconciliation of diluted earnings per share (EPS) on a GAAP basis and adjusted diluted EPS on a non-GAAP basis is provided after the Forward-Looking Statements.

Revenue was in the upper end of the range of the prior outlook and adjusted diluted EPS was at the top end of the range in the prior outlook driven primarily by strong operating results in the Financial Services segment and a favorable effective income tax rate.

“Our transformation strategy continues to deliver strong results as we again saw growth in revenue and earnings,” said Lee Schram, CEO of Deluxe. “While at a macro level there are many events in the news - Brexit, the U.S. presidential election, debates on interest rate hikes and the overall health of the economy - our team continues to be squarely focused on executing our strategy to consistently grow by expanding our marketing solutions and other services offerings while stabilizing our core printed products. Looking ahead we believe we are well positioned as we enter the third quarter to grow 2016 revenue for a seventh consecutive year and continue to enhance shareholder value.”

Second Quarter 2016 Highlights:

  • Revenue increased 3.4% year-over-year, primarily due to growth in the Financial Services (FS) segment which grew 10.2%. The FS segment includes the results of Datamyx LLC and FISC Solutions which were acquired in the fourth quarter of 2015. The Small Business Services segment grew 2.1% in the quarter. Revenue from marketing solutions and other services increased 16.1% year-over-year and accounted for 32.6% of consolidated revenue in the quarter.
  • Gross margin was 64.5% of revenue and increased slightly from 64.2% in the second quarter of 2015. Previous price increases, improvements in manufacturing productivity and a favorable adjustment from an environmental reserve, which was allocated proportionally to each of the three segments, were partially offset by increased delivery and material costs.
  • Selling, general and administrative (SG&A) expense increased 4.6% from last year primarily due to additional SG&A expense from acquisitions and a pre-tax gain in the 2015 quarter from selling four distributors in the Small Business Services Segment that had been classified as held for sale partially offset by continued cost reduction initiatives in all segments. SG&A as a percent of revenue was 44.1% in the quarter compared to 43.6% last year.
  • Operating income increased 2.2% year-over-year and includes restructuring and transaction-related costs in both periods. Adjusted operating income, which excludes these items, increased 2.1% year-over-year from higher revenue and continued cost reductions.
  • Diluted EPS increased 6.3% year-over-year. Excluding restructuring and transaction-related costs in both periods, adjusted diluted EPS increased 6.2% year-over-year driven primarily by stronger operating performance in addition to a lower effective income tax rate and lower average shares outstanding.

Segment Highlights
Small Business Services

  • Revenue was $288.2 million and increased 2.1% year-over-year due primarily to growth in marketing solutions and other services. From a channel perspective the company experienced growth in the online, major accounts and dealer channels and also realized revenue benefits from previous price increases.
  • Operating income increased 1.5% from last year to $48.9 million. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods, increased 0.4% year-over-year due primarily to cost reductions, partly offset by investments in revenue-generating initiatives which includes acquisitions.

Financial Services

  • Revenue was $124.2 million and increased 10.2% year-over-year. The increase in revenue was primarily due to growth in marketing solutions and other services, which includes revenue from the Datamyx and FISC Solutions acquisitions, as well as the impact of previous price increases, partially offset by the secular decline in check usage.
  • Operating income increased 13.7% from last year to $29.0 million. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods, increased 14.8% year-over-year driven by lower incentive compensation expense, the continued benefits of cost reductions and price increases partially offset by the secular decline in check usage.

Direct Checks

  • Revenue of $38.2 million declined 6.6% year-over-year due primarily to the secular decline in check usage.
  • Operating income decreased 14.5% year-over-year to $13.0 million. Adjusted operating income, which excludes restructuring costs in the current quarter, decreased 13.8% year-over-year due to lower order volume and unfavorable mix but was partly offset by cost reductions.

Other Highlights

  • Cash provided by operating activities for the first half of 2016 was $128.3 million, a decrease of $18.6 million compared to 2015, driven primarily by higher income tax payments, higher contract acquisition payments and an incentive payment related to a previous acquisition. partially offset by stronger earnings and lower interest payments.
  • The Company repurchased $15 million of common stock in open market transactions during the quarter, bringing the year-to-date total to $30 million.
  • At the end of the second quarter, the company had $614 million of total debt outstanding which includes approximately $413 million outstanding on the Company’s credit facility.
             

Outlook

            
             
      Current Outlook      

Third Quarter 2016:

     (7/28/2016)      
Revenue     $456 to $464 million      
Diluted EPS     $1.17 to $1.22      
             
      Prior Outlook     Current Outlook

Full Year 2016:

     (4/28/2016)     (7/28/2016)
Revenue     $1.845 to $1.875 billion     $1.855 to $1.875 billion
Marketing Solutions & Other Services Revenue     $615 to $630 million     $620 to $630 million

Diluted EPS - GAAP

     $4.84 to $4.99     $4.87 to $4.97
Adjusted Diluted EPS - Non-GAAP     $4.85 to $5.00     $4.90 to $5.00
Operating Cash Flow     $320 to $330 million     $320 to $330 million
Contract Acquisition Payments     approx. $20 million     approx. $20 million
Capital Expenditures     approx. $43 million     approx. $43 million
Depreciation and Amortization     approx. $91 million     approx. $95 million
Cost and Expense Reductions     approx. $50 million     approx. $50 million
Effective Tax Rate     approx. 33%     approx. 33%
             

 

About Deluxe Corporation
Deluxe is a growth engine for small businesses and financial institutions. 4.5 million small business customers utilize Deluxe's service and product solutions, including website development and hosting, email marketing, social media, search engine optimization and logo design, in addition to our industry-leading checks and forms offerings. Deluxe serves approximately 5,100 financial institutions with a diverse portfolio of financial technology solutions that enable them to grow revenue and manage their customers throughout their lifecycle, including our best-in-class check program solutions. Deluxe is also a leading provider of checks and accessories sold directly to consumers.

       
      Actual
      Q2 2016     Q2 2015
Adjusted Diluted EPS     $1.20     $1.13
Restructuring-related costs     (0.02)     (0.01)
Transaction-related costs     —     (0.01)
Reported Diluted EPS     $1.18     $1.11
       

 

     Outlook
      Q3 2016     Full Year 2016
Adjusted Diluted EPS     $1.17 to $1.22     $4.90 to $5.00

Restructuring-related costs

    

--

    

(0.03)
Reported Diluted EPS     $1.17 to $1.22     $4.87 to $4.97
             
 
DELUXE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars and shares in millions, except per share amounts)
(Unaudited)
 
      Quarter Ended June 30,
      2016     2015
Product revenue     $359.8             $358.9        
Service revenue     90.8             77.0        
Total revenue     450.6             435.9        
Cost of products     (126.9 )     (28.2 %)     (128.3 )     (29.4 %)
Cost of services     (32.9 )     (7.3 %)     (27.7 )     (6.4 %)
Total cost of revenue     (159.8 )     (35.5 %)     (156.0 )     (35.8 %)
Gross profit     290.8       64.5 %     279.9       64.2 %
Selling, general and administrative expense     (198.8 )     (44.1 %)     (190.1 )     (43.6 %)
Net restructuring charges     (1.1 )     (0.2 %)     (0.9 )     (0.2 %)
Operating income     90.9       20.2 %     88.9       20.4 %
Interest expense     (5.2 )     (1.2 %)     (4.4 )     (1.0 %)
Other income     0.5       0.1 %     0.8       0.2 %
Income before income taxes     86.2       19.1 %     85.3       19.6 %
Income tax provision(1)     (27.8 )     (6.2 %)     (29.2 )     (6.7 %)
Net income     $58.4       13.0 %     $56.1       12.9 %
                         
Weighted-average dilutive shares outstanding     49.0             50.2        
Diluted earnings per share     $1.18             $1.11        
                         
Capital expenditures     $12.0             $9.8        
Depreciation and amortization expense     22.8             18.0        
Number of employees-end of period     5,981             5,745        
                         
Non-GAAP financial measure - EBITDA(2)     $114.2             $107.7        
Non-GAAP financial measure - Adjusted EBITDA(2)     115.7             109.3        
                             

(1) The income tax provision for the quarter ended June 30, 2016 reflects a benefit of $1.0 million related to the adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Among other things, this standard requires that excess tax benefits related to share-based compensation be included in income tax expense. Previously, these tax benefits were included in additional paid-in capital on the consolidated balance sheet.

(2) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP) in the United States of America. We disclose EBITDA and Adjusted EBITDA because we believe they are useful in evaluating our operating performance compared to that of other companies in our industry, as the calculation eliminates the effects of long-term financing (i.e., interest expense), income taxes, the accounting effects of capital investments (i.e., depreciation and amortization) and in the case of Adjusted EBITDA, certain items (i.e., restructuring and related costs, transaction-related costs and loss on debt extinguishment) which may vary for companies for reasons unrelated to overall operating performance. In our case, depreciation and amortization of intangibles and interest expense in the current year and in previous years have been impacted by acquisitions. Certain transactions in 2016 and 2015 also impacted the comparability of reported net income. We believe that measures of operating performance which exclude these impacts are helpful in analyzing our results. We also believe that an increasing EBITDA and Adjusted EBITDA depict increased ability to attract financing and an increase in the value of our business. We do not consider EBITDA and Adjusted EBITDA to be measures of cash flow, as they do not consider certain cash requirements such as interest, income taxes or debt service payments. We do not consider EBITDA or Adjusted EBITDA to be substitutes for operating income or net income. Instead, we believe that EBITDA and Adjusted EBITDA are useful performance measures which should be considered in addition to GAAP performance measures. EBITDA and Adjusted EBITDA are derived from net income as follows:

       
      Quarter Ended June 30,
      2016     2015
Adjusted EBITDA     $115.7       $109.3  
Restructuring-related costs     (1.2 )     (1.1 )
Transaction-related costs     (0.3 )     (0.5 )
EBITDA     114.2       107.7  
Income tax provision     (27.8 )     (29.2 )
Interest expense     (5.2 )     (4.4 )
Depreciation and amortization expense     (22.8 )     (18.0 )
Net income     $58.4       $56.1  
                 
 
DELUXE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars and shares in millions, except per share amounts)

(Unaudited)
 
      Six Months Ended June 30,
      2016     2015
Product revenue     $726.0             $713.9        
Service revenue     183.9             155.6        
Total revenue     909.9             869.5        
Cost of products     (257.5 )     (28.3 %)     (252.0 )     (29.0 %)
Cost of services     (66.6 )     (7.3 %)     (56.6 )     (6.5 %)
Total cost of revenue     (324.1 )     (35.6 %)     (308.6 )     (35.5 %)
Gross profit     585.8       64.4 %     560.9       64.5 %
Selling, general and administrative expense     (400.2 )     (44.0 %)     (385.5 )     (44.3 %)
Net restructuring charges     (2.0 )     (0.2 %)     (1.2 )     (0.1 %)
Operating income     183.6       20.2 %     174.2       20.0 %
Loss on debt extinguishment     —       —       (8.9 )     (1.0 %)
Interest expense     (10.4 )     (1.1 %)     (10.9 )     (1.3 %)
Other income     0.6       0.1 %     1.2       0.1 %
Income before income taxes     173.8       19.1 %     155.6       17.9 %
Income tax provision     (57.3 )     (6.3 %)     (53.6 )     (6.2 %)
Net income     $116.5       12.8 %     $102.0       11.7 %
                         
Weighted-average dilutive shares outstanding     49.1             50.1        
Diluted earnings per share     $2.36             $2.02        
                         
Capital expenditures     $22.2             $19.3        
Depreciation and amortization expense     44.7             35.7        
Number of employees-end of period     5,981             5,745        
                         
Non-GAAP financial measure - EBITDA(2)     $228.9             $202.2        
Non-GAAP financial measure - Adjusted EBITDA(2)     231.5             213.2        
                             

(1) The income tax provision for the six months ended June 30, 2016 reflects a benefit of $1.5 million related to the adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Among other things, this standard requires that excess tax benefits related to share-based compensation be included in income tax expense. Previously, these tax benefits were included in additional paid-in capital on the consolidated balance sheet.

(2) See the discussion of EBITDA and Adjusted EBITDA on the previous page. EBITDA and Adjusted EBITDA are derived from net income as follows:

       
      Six Months Ended June 30,
      2016     2015
Adjusted EBITDA     $231.5       $213.2  
Restructuring-related costs     (2.1 )     (1.4 )
Transaction-related costs     (0.5 )     (0.7 )
Loss on debt extinguishment     —       (8.9 )
EBITDA     228.9       202.2  
Income tax provision     (57.3 )     (53.6 )
Interest expense     (10.4 )     (10.9 )
Depreciation and amortization expense     (44.7 )     (35.7 )
Net income     $116.5       $102.0  
                 
 
DELUXE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)

(Unaudited)
 
     

June 30,
2016

    

December 31,
2015(1)

    

June 30,
2015(1)
Cash and cash equivalents     $69.6     $62.4     $64.9
Other current assets     263.4     261.6     245.7
Property, plant and equipment-net     84.9     85.7     84.1
Intangibles-net     297.5     285.3     218.6
Goodwill     977.1     976.4     882.8
Other non-current assets     176.4     170.8     190.2
Total assets     $1,868.9     $1,842.2     $1,686.3
                   
Short-term debt and current portion of long-term debt     $1.0     $1.0     $76.0
Other current liabilities     294.0     316.0     292.9
Long-term debt     612.8     628.0     425.3
Deferred income taxes     81.0     81.1     95.0
Other non-current liabilities     63.4     71.0     71.6
Shareholders' equity     816.7     745.1     725.5
Total liabilities and shareholders' equity     $1,868.9     $1,842.2     $1,686.3
                   
Shares outstanding     48.8     49.0     50.0
                   

(1) Prior period amounts have been revised to correct a prior period error. We corrected the presentation from current to non-current of amounts borrowed under our credit facility and the related asset for debt issuance costs. This revision was not material to previously issued balance sheets and had no impact to previously reported amounts for total assets, total liabilities and shareholders’ equity.

In addition, during the first quarter of 2016, we adopted Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs, other than those associated with our credit facility, be presented in the balance sheet as a reduction of the related debt liability. Prior period amounts have been revised to reflect the adoption of this standard.

 
DELUXE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)
 
      Six Months Ended June 30,
     

2016 (1)

    

2015 (1)
Cash provided (used) by:            
Operating activities:            
Net income     $116.5       $102.0  
Depreciation and amortization of intangibles     44.7       35.7  
Loss on debt extinguishment     —       8.9  
Contract acquisition payments     (14.3 )     (5.8 )
Other     (18.6 )     6.1  
Total operating activities     128.3       146.9  
Investing activities:            
Purchases of capital assets     (22.2 )     (19.3 )
Payments for acquisitions     (28.5 )     (35.8 )
Proceeds from company-owned life insurance policies     3.1       —  
Other     2.1       0.3  
Total investing activities     (45.5 )     (54.8 )
Financing activities:            
Net change in debt, including debt redemption costs     (21.6 )     (59.5 )
Dividends     (29.4 )     (30.0 )
Share repurchases     (30.0 )     —  
Shares issued under employee plans     4.2       4.1  
Other     (2.7 )     0.4  
Total financing activities     (79.5 )     (85.0 )
Effect of exchange rate change on cash     3.9       (3.7 )
Net change in cash and cash equivalents     7.2       3.4  
Cash and cash equivalents: Beginning of period     62.4       61.5  
Cash and cash equivalents: End of period     $69.6       $64.9  
                 

(1) During the first quarter of 2016, we elected to adopt Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Among other things, this standard requires that excess tax benefits related to share-based compensation be reported as operating activities in the statement of cash flows. Prior to 2016, they were reported as financing activities. This change resulted in a $1.8 million increase in cash provided by operating activities for the six months ended June 30, 2016. In addition, the standard requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the statement of cash flows. We previously reported these cash outflows as operating activities. The consolidated cash flow statement for the six months ended June 30, 2015 has been restated to reflect this change.

 
DELUXE CORPORATION
SEGMENT INFORMATION

(In millions)

(Unaudited)
 
      Quarter Ended June 30,
      2016     2015
Revenue:            
Small Business Services     $288.2       $282.3  
Financial Services     124.2       112.7  
Direct Checks     38.2       40.9  
Total     $450.6       $435.9  
             
Operating income:(1)            
Small Business Services     $48.9       $48.2  
Financial Services     29.0       25.5  
Direct Checks     13.0       15.2  
Total     $90.9       $88.9  
             
Operating margin:(1)            
Small Business Services     17.0 %     17.1 %
Financial Services     23.3 %     22.6 %
Direct Checks     34.0 %     37.2 %
Total     20.2 %     20.4 %
             
      Six Months Ended June 30,
      2016     2015
Revenue:            
Small Business Services     $578.4       $559.3  
Financial Services     251.5       224.2  
Direct Checks     80.0       86.0  
Total     $909.9       $869.5  
             
Operating income:(1)            
Small Business Services     $100.1       $97.7  
Financial Services     55.8       45.9  
Direct Checks     27.7       30.6  
Total     $183.6       $174.2  
             
Operating margin:(1)            
Small Business Services     17.3 %     17.5 %
Financial Services     22.2 %     20.5 %
Direct Checks     34.6 %     35.6 %
Total     20.2 %     20.0 %
                 

The segment information reported here was calculated utilizing the methodology outlined in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

(1) Operating income includes the following restructuring and transaction-related costs:

             
      Quarter Ended     Six Months Ended
      June 30,     June 30,
     

  2016  

    

  2015  

    

  2016  

    

  2015  
Small Business Services     $0.9     $1.4     $1.7     $1.6
Financial Services     0.5     0.2     0.7     0.5
Direct Checks     0.1     —     0.2     —
Total     $1.5     $1.6     $2.6     $2.1
                         

The following table is provided to assist in understanding the comparability of the Company’s results of operations for the quarters and six months ended June 30, 2016 and 2015. The Company’s management believes that operating income by segment, excluding restructuring and transaction-related costs, is a useful financial measure because these items impacted the comparability of reported operating income during 2016 and 2015. The presentation below is not intended as an alternative to results reported in accordance with generally accepted accounting principles (GAAP) in the United States of America. Instead, the Company believes that this information is a useful financial measure to be considered in addition to GAAP performance measures.

 
DELUXE CORPORATION
SEGMENT OPERATING INCOME
EXCLUDING RESTRUCTURING AND TRANSACTION-RELATED COSTS

(In millions)

(Unaudited)
 
      Quarter Ended
      June 30,
      2016     2015
Adjusted operating income:(1)            
Small Business Services     $49.8       $49.6  
Financial Services     29.5       25.7  
Direct Checks     13.1       15.2  
Total     $92.4       $90.5  
             
Adjusted operating margin:(1)            
Small Business Services     17.3 %     17.6 %
Financial Services     23.8 %     22.8 %
Direct Checks     34.3 %     37.2 %
Total     20.5 %     20.8 %
             
     

Six Months Ended
      June 30,
      2016     2015
Adjusted operating income:(1)            
Small Business Services     $101.8       $99.3  
Financial Services     56.5       46.4  
Direct Checks     27.9       30.6  
Total     $186.2       $176.3  
             
Adjusted operating margin:(1)            
Small Business Services     17.6 %     17.8 %
Financial Services     22.5 %     20.7 %
Direct Checks     34.9 %     35.6 %
Total     20.5 %     20.3 %
             

(1) Operating income excluding restructuring and transaction-related costs reconciles to reported operating income as follows:

             
      Quarter Ended     Six Months Ended
      June 30,     June 30,
      2016     2015     2016     2015
Adjusted operating income     $92.4       $90.5       $186.2       $176.3  
Restructuring and transaction-related costs:                        
Small Business Services     (0.9 )     (1.4 )     (1.7 )     (1.6 )
Financial Services     (0.5 )     (0.2 )     (0.7 )     (0.5 )
Direct Checks     (0.1 )     —       (0.2 )     —  
Total     (1.5 )     (1.6 )     (2.6 )     (2.1 )
Reported operating income     $90.9       $88.9       $183.6       $174.2