10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 14, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ending June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-7945
DELUXE
CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0216800
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St. N., St. Paul, Minnesota 55126-2966
(Address of principal executive offices) (Zip code)
(612) 483-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at August 1, 1997 was 82,404,392.
Item I. Financial Statements
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
See Notes to Consolidated Financial Statements
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Amounts)
(Unaudited)
See Notes to Consolidated Financial Statements
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
(Dollars in Thousands)
(Unaudited)
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of June 30, 1997, the consolidated
statements of income for the quarters ended June 30, 1997 and 1996 and
the six months ended June 30, 1997 and 1996, and the consolidated
statements of cash flows for the six months ended June 30, 1997 and
1996 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements are
included. Other than those discussed in the notes below, such
adjustments consist only of normal recurring items. Interim results are
not necessarily indicative of results for a full year.
The financial statements and notes are presented in accordance with
instructions for Form 10-Q, and do not contain certain information
included in the Company's annual financial statements and notes.
2. As of June 30, 1997, the Company had uncommitted bank lines of credit
of $190.0 million available at variable interest rates. As of that
date, none was drawn on those lines. The Company had a $150 million
committed line of credit available for borrowing and as support for
commercial paper. As of June 30, 1997, the Company had no commercial
paper outstanding. Additionally, the Company had a shelf registration
in place for the issuance of up to $300 million in medium-term notes.
Such notes could be used for general corporate purposes, including
working capital, capital expenditures, possible acquisitions and
repayment or repurchase of outstanding indebtedness and other
securities of the Company. As of June 30, 1997, no such notes were
issued or outstanding.
3. During the first quarter of 1996, the Company recorded charges of $34.8
million related to the closing of 21 of its check printing plants and
the movement of PaperDirect's operations from New Jersey to existing
company facilities in Colorado and Minnesota. The $34.8 million of
charges consisted of employee severance costs and expected losses on
the disposition of plant and equipment. Expenses of $32 million were
included in cost of goods sold and $2.8 million were included in
selling, general and administrative expense. As of June 30, 1997, 12 of
the 21 plants had been closed. The Company's balance sheets reflect
restructuring accruals of $21.1 million and $29.1 million as of June
30, 1997 and December 31, 1996, respectively, for employee severance
costs, and $3.3 million and $3.8 million as of June 30, 1997 and
December 31, 1996, respectively, for estimated losses on asset
dispositions. The majority of the severance costs are expected to be
disbursed in the remainder of 1997 and early 1998 with cash generated
from the Company's operations.
4. In February, 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE, effective for interim and annual periods ending
after December 15, 1997; in June, 1997, the FASB issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME and SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, both effective for
interim and annual periods beginning after December 15, 1997. The
effect of these statements is not expected to materially change the
Company's reported operating results.
5. During December 1996, the Company announced its plans to divest three
of the business units in the Deluxe Direct segment -- Nelco, Inc.,
PaperDirect, Inc. and the Social Expressions unit of Current, Inc.
Together, these business units recorded sales of approximately $39.1
and $46.7 million and contributed net losses of approximately $3.3 and
$7.7 million in the second quarters of 1997 and 1996, respectively.
These business units recorded aggregate sales of approximately $103.2
and $117.7 million and contributed net income of approximately $.7 and
a net loss of approximately $10.8 million in the first six months of
1997 and 1996, respectively.
6. In July, 1997 the Company sold the assets of the check printing unit of
Deluxe U.K. Limited. The effect of this sale will not have a material
impact on the operating results of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Company Profile
The Company has organized its many business units into three reporting segments,
Deluxe Financial Services, Deluxe Direct and Deluxe Electronic Payment Systems.
Through Deluxe Financial Services, the Company provides check printing, direct
marketing assistance, business forms and related services to financial
institutions and their customers in the United States, Canada, and the United
Kingdom and payment systems protection services, including check authorization,
account verification, and collection services to financial institutions and
retailers. Through Deluxe Direct, the Company provides specialty papers to small
businesses; tax forms and electronic tax filing services to tax preparers; and
direct mail greeting cards, gift wrap, and related products to households.
Through Deluxe Electronic Payment Systems, the Company provides electronic funds
transfer and other software services to financial institutions and electronic
benefit transfer services to state governments.
Results of Operations - Quarter and Six Months Ended June 30, 1997 Compared to
the Quarter and Six Months Ended June 30, 1996
Net sales were $440.3 million for the second quarter of 1997, down 5.6% from the
second quarter of 1996, when sales were $466.6 million. Net sales were $906.8
million for the first six months of 1997, down 5.0% from 1996, when sales for
the first six months were $954.7 million. Deluxe Financial Services' revenue
increased 4.1% over the second quarter and 5.0% over the first six months of
1996 due to acquisitions and volume increases in all areas offset slightly by
price decreases in the check printing business. Deluxe Direct's revenue
decreased 50.5% and 44.2% from the second quarter and the first six months of
1996, respectively, due primarily to divestitures and lower volume at the direct
mail businesses as a result of reductions in solicitation mailings. Deluxe
Electronic Payment Systems' revenue increased 6.4% over the second quarter and
5.8% over the first six months of 1996 due to increased volume in virtually all
product lines.
Cost of sales decreased $18.3 million, or 8.6%, from the second quarter and
$64.6 million, or 14.0%, from the first six months of 1996. Deluxe Financial
Services' cost of sales was flat in quarter 2, 1997 compared to quarter 2, 1996
due to savings achieved in the business forms business offset by the volume
increases and the impact of acquisitions. Deluxe Financial Services' cost of
sales was significantly lower in the first six months of 1997 compared to 1996
due to the first quarter restructuring charge recorded in 1996. Deluxe Direct's
cost of sales decreased significantly from 1996 due to divestitures and reduced
sales by the direct mail businesses. Deluxe Electronic Payment Systems' cost of
sales increased slightly as a result of an increase in personnel costs and
general increases related to the higher sales volume.
Selling, general and administrative expenses increased $2.4 million or 1.4% in
the second quarter of 1997 over the second quarter of 1996 and decreased $3.1
million, or .9% from the first six months of 1996. Deluxe Financial Services'
1997 selling, general and administrative expenses increased over 1996 due
primarily to increased expenses for financial institution check printing related
to higher customer service call volumes and the implementation of a new customer
interface system. Deluxe Direct's selling, general and administrative expenses
decreased from 1996 due primarily to divestitures and the suspension of
depreciation and amortization of the business units held for sale (Nelco, Inc.,
PaperDirect, Inc., and the Social Expressions unit of Current, Inc.). Deluxe
Electronic Payment Systems' selling, general and administrative expenses were
flat versus 1996.
Net income was $37.5 million for the second quarter of 1997, or 8.5% of sales,
compared to $38.1 million for the second quarter of 1996, or 8.2% of sales. Net
income for the six months ended June 30, 1997 was $78.9 million, or 8.7% of
sales compared to $57.0 million, or 6.0% of sales in 1996. The increase for the
six month period is primarily attributable to a $3.5 million pretax gain on the
sale of one of the Company's product lines in 1997, restructuring charges
recorded in 1996, and lower employee profit sharing and pension costs as a
result of amendments to the profit sharing and pension plans in 1997.
Financial Condition - Liquidity
Cash provided by operations was $110.0 million for the first six months of 1997,
compared with $134.8 million for the first six months of 1996. The decrease in
cash flow results from restructuring expenditures and other working capital
changes. Cash from operations represents the Company's primary source of working
capital for financing capital expenditures and paying cash dividends. The
Company's working capital on June 30, 1997 was $137.3 million compared to $108.1
million on December 31, 1996. The Company's current ratio on June 30, 1997 was
1.4 to 1 compared to 1.3 to 1 on December 31, 1996.
Financial Condition - Capital Resources
Purchases of capital assets totaled $39.8 million in the first six months of
1997 compared to $41.2 million during the comparable period one year ago. As of
June 30, 1997, the Company had uncommitted bank lines of credit of $190.0
million available at variable interest rates. As of that date, none was drawn on
those lines. The Company had a $150 million committed line of credit available
for borrowing and as support for commercial paper. As of June 30, 1997, the
Company had no commercial paper outstanding. Additionally, the
Company had a shelf registration in place for the issuance of up to $300 million
in medium-term notes. Such notes could be used for general corporate purposes,
including working capital, capital expenditures, possible acquisitions and
repayment or repurchase of outstanding indebtedness and other securities of the
Company. As of June 30, 1997, no such notes were issued or outstanding. Cash
dividends totaled $60.8 million in the first six months of 1997 compared to
$61.1 million in the first six months of 1996.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
During the first quarter, the Company extended the benefits afforded by the
Company's shareholder rights plan, dated as of February 12, 1988 (the "Existing
Plan"), by amending and restating its provisions. The amended plan, like the
Existing Plan, is intended to deter coercive or abusive tender offers and market
accumulations. The amended plan encourages an acquirer to negotiate with the
Company's Board of Directors and enhances the Board's ability to act in the best
interest of all of the Company's shareholders.
Among other things, the Amended and Restated Rights Agreement, dated as of
January 31, 1997 (the "Amended Plan"), contains the following revisions to the
Existing Plan: (i) Norwest Bank Minnesota, National Association has been
appointed as Rights Agent; (ii) the term of the shareholder rights plan has been
extended from February 22, 1998 through January 31, 2007; (iii) the exercise
price of the Rights has been increased from $100 to $150 (subject to adjustment
under certain circumstances described in the Amended Plan); (iv) the threshold
ownership requirement which triggers the exercisability of the Rights has been
reduced from 30% to 15%; (v) the circumstances under which the Rights may be
redeemed or the Amended Plan amended has been revised; (vi) the Board of
Directors may now exchange shares of the Company's Common Stock for the Rights
under certain circumstances; (vii) the events giving rise to the ability of the
holders of the Rights to purchase shares of the Company's Common Stock at a
discount from its current market price have been revised; and (viii) a provision
exempting certain permitted offers and inadvertent acquisitions from the
operation of the Amended Plan has been incorporated. The foregoing summary does
not purport to be complete and is qualified in its entirety by reference to the
full text of the Amended Plan, a copy of which was filed as exhibit 4.1 to the
Company's Amendment No. 1 on Form 8-A/A-1 filed with the Securities and Exchange
Commission on February 7, 1997.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholders' meeting on May 6, 1997:
68,619,115 shares were represented (83.46% of the 82,219,375 shares
outstanding).
1. Election of Directors:
The nominees listed in the proxy statement were: John A. Blanchard III,
Harold V. Haverty, Whitney MacMillan, Dr. James Renier, Barbara B.
Grogan, Allen F. Jacobson, Stephen P. Nachtsheim, Calvin W. Aurund,
Jr., Donald R. Hollis, and Robert C. Salipante.
The results were as follows:
For all nominees: 67,063,071
Withheld as to all nominees: 1,159,375
Withheld as to fewer than all nominees: 1,556,044
2. Ratification of appointment of Deloitte & Touche LLP as independent
auditors:
For all nominees: 68,264,855
Against: 100,436
Abstain: 253,824
Item 5. Other Information
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "should result," "are expected to," "will continue," "will
approximate," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are
necessarily subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
Caution should be taken not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The factors listed below could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ from any opinions or statements expressed
with respect thereto. Such differences could be material and adverse.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. This Item 5 statement supersedes and replaces the
discussion in Exhibit 99.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1996. Capitalized terms used without definition herein
have the meanings assigned to such terms in the Quarterly Report on Form 10-Q of
which this Exhibit is a part.
Earnings Estimates. From time to time, the authorized representatives of the
Company may make predictions or forecasts regarding the Company's future
results, including estimated earnings or earnings from operations. Any forecast,
including the Company's current statement that its 1997 adjusted earnings from
operations will approximate $2.15 per share, regarding the Company's future
performance reflects various assumptions. These assumptions are subject to
significant uncertainties and, as a matter of course, many of them will prove to
be incorrect. Further, the achievement of any forecast depends on numerous
factors (including those described in this discussion), many of which are beyond
the Company's control. As a result, there can be no assurance that the Company's
performance will be consistent with any management forecasts and the variation
from such forecasts may be material and adverse. Investors are cautioned not to
base their entire analysis of the Company's business and prospects upon isolated
predictions, but instead are encouraged to utilize the entire available mix of
historical and forward-looking information made available by the Company and
other information affecting the Company and its products when evaluating the
Company's prospective results of operations.
In addition, authorized representatives of the Company may occasionally comment
on the perceived reasonableness of published reports by independent analysts
regarding the Company's projected future performance. Such comments should not
be interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Generally speaking, the Company does not make public its own internal
projections, budgets or estimates. Undue reliance should not be placed on any
comments regarding the conformity, or lack thereof, of any independent estimates
with the Company's own present expectations regarding its future results of
operations.
The methodologies employed by the Company in arriving at its own internal
projections and the approaches taken by independent analysts in making their
estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and assumptions. The Company expressly disclaims any continuing responsibility
to advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.
Sales of Businesses. The Company has indicated its continuing intention to
divest the businesses comprising its Deluxe Direct segment, but it has not
reached agreement with any prospective buyers nor has it received what it
considers an acceptable bid for any of such companies. As a result, the
possibility exists that the Company will not identify a suitable buyer or
receive an acceptable price for the entities to be divested. A failure to
identify an appropriate buyer and/or reach an acceptable purchase price could
materially delay the anticipated sales and/or could result in further write-offs
by the Company, some of which could be significant. In addition, a delay in the
execution of these sales could cause the Company to incur continued operating
losses from the businesses sought to be divested, or make unanticipated
investments in those businesses, and would postpone the receipt and use by the
Company of the proceeds expected to be generated thereby.
Other Dispositions. In connection with its restructuring, the Company may also
consider divesting or discontinuing operating or using other business units and
assets which could result in write-offs by the Company, some of which could be
significant.
Timing and Amount of Anticipated Cost Reductions. With regard to the results of
the Company's ongoing cost reduction efforts, there can be no assurance that the
anticipated cost savings will be fully realized or will be achieved within the
time periods expected. The
implementation of the printing plant closures is, in large part, dependent upon
the successful development of the software needed to streamline the check
ordering process and redistribute the resultant order flow among the Company's
remaining printing plants. Because of the complexities inherent in the
development of software products as sophisticated as those needed to accomplish
this task, there can be no assurance that unanticipated development delays will
not occur or that delays, currently being experienced by the Company in
connection with such development and the conversion of its systems to the use of
such software, will not continue beyond the Company's current expectations. Any
such occurrence (or the continuation of any such delay beyond current
expectations) could adversely affect the planned consolidation of the Company's
printing facilities and delay the realization or reduce the amount of the
anticipated expense reductions.
In addition, the achievement of the expected level of cost savings is dependent
upon the successful execution of a variety of other cost reduction strategies.
These additional efforts include the consolidation of the Company's purchasing
process, the disposition of unprofitable or low-margin businesses and other
efforts. The optimum means of actualizing many of these strategies is, in some
cases, still being evaluated by the Company. Unexpected delays, complicating
factors and other hindrances are common in these types of endeavors and can
arise from a variety of sources, some of which are likely to have been
unanticipated. A failure to timely achieve one or more of the Company's primary
cost reduction objectives could materially reduce the benefit to the Company of
its cost savings programs and strategies or substantially delay the full
realization of their expected benefits.
Further, there can be no assurance that increased expenses attributable to other
areas of the Company's operations or to increases in raw material, labor,
equipment or other costs will not offset some or all of the savings expected to
be achieved through the cost reduction efforts. Competitive pressures and other
market factors may also require the Company to share the benefit of some or all
of any savings with its customers or otherwise adversely affect the prices it
receives or the market for its products. As a result, even if the expected cost
reductions are fully achieved in a timely manner, such reductions are not likely
to be fully reflected by commensurate gains in the Company's net income, cash
position, dividend rate or the price of its Common Stock.
Effect of Financial Institution Consolidation. There is an ongoing trend towards
increasing consolidation within the banking industry that has resulted in
increased competition and pressure on check prices. This concentration greatly
increases the importance to the Company of retaining its major customers and
attracting significant additional customers in an increasingly competitive
environment. Although the Company devotes considerable efforts towards the
development of a competitively priced, high quality suite of products for the
financial services and retail industries, there can be no assurance that
significant customers will not be lost nor that any such loss can be
counterbalanced through the addition of new customers or by expanded sales to
the Company's remaining customers.
Raw Materials and Postage Costs. Increases in the price of paper and the cost of
postage can adversely affect the profitability of the Company's printing and
mail order businesses. Competitive pressures and overall trends in the
marketplace may have the effect of inhibiting the Company's ability to reflect
increased costs of production in the retail prices of its products.
Competition. Although the Company believes it is the leading check printer in
the United States, it faces considerable competition from other smaller
companies in both its traditional marketing channel to financial institutions
and from direct mail marketers of checks. From time to time, one or more of
these competitors reduce the price of their products in an attempt to gain
market share. The corresponding pricing pressure placed on the Company has
resulted in reduced profit margins in the past and there can be no assurance
that similar pressures will not be exerted in the future.
Check printing is, and is expected to continue to be, an essential part of the
Company's business and the principal source of its operating income for at least
the next several years. A wide variety of alternative payment delivery systems,
including credit cards, debit cards, smart cards, ATM machines, direct deposit
and bill paying services, home banking applications and Internet-based retail
services, are in various stages of maturity or development and additional
systems will likely be introduced. Although the Company expects that there will
continue to be a substantial market for checks for the foreseeable future, the
rate and the extent to which these alternative systems will achieve consumer
acceptance and replace checks cannot be predicted. A surge in the popularity of
any of these alternative payment methods could have a material, adverse effect
on the demand for the Company's primary products and its account verification,
payment protection and collection services. The creation of these alternative
payment methodologies has also resulted in an increased interest in transaction
processing as a source of revenue, which has led to increased competition for
the Company's transaction processing businesses.
Seasonality. A significant portion of the revenues and earnings of the Company's
Deluxe Direct segment is dependent upon its results of operations during the
fourth quarter. As a result, the results reported for this division during the
first three quarters of any given year are not necessarily indicative of those
which may be expected for the entire year.
HCL Joint Venture. Although the Company has reached an agreement in principle to
form a joint venture with HCL Corporation of New Delhi, India ("HCL"), certain
conditions precedent to the formation of the joint venture have not yet been
fulfilled. Transactions of this type are typically complex and difficult to
structure, and the level of complexity is heightened when, as is the case with
HCL, the joint venture involves foreign persons and/or entities. Significant,
unforeseen issues may arise that could delay, or prevent altogether, the formal
creation of the joint venture.
Moreover, there can be no assurance that the software and transaction processing
products and software development services proposed to be offered by the joint
venture will achieve market acceptance in either the United States or India. In
addition, the Company has no operational experience in India and only limited
international exposure to date. Operations in foreign countries are subject to
numerous potential obstacles including, among other things, cultural
differences, political unrest, export controls, governmental interference or
regulation (both domestic and foreign), currency fluctuations, personnel issues
and varying competitive conditions. There can be no assurance that one or more
of these factors, or additional causes or influences, many of which are likely
to have been unanticipated and beyond the ability of the Company to control,
will not operate to inhibit the success of the venture. As a result, there can
be no assurance that the HCL joint venture will generate significant revenues or
profits or provide an adequate return on any investment by the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description Method of Filing
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12.1 Computation of Ratio of Filed herewith
Earnings to Fixed Charges
27.1 Financial Data Schedule Filed herewith
(b) The registrant did not, and was not required to, file any
reports on form 8-K during the quarter for which this report
is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELUXE CORPORATION
(Registrant)
Date August 14, 1997 /s/ J.A. Blanchard III
---------------------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date August 14, 1997 /s/ Thomas W. VanHimbergen
---------------------------------------------
Thomas W. VanHimbergen, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
12.1 Computation of Ratio of
Earnings to Fixed Charges
27.1 Financial Data Schedule