Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 15, 1994

Documents

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on November 15, 1994



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 ended September 30, 1994
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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
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DELUXE CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

MINNESOTA 41-0216800
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

1080 West County Road "F", St. Paul, Minnesota 55126-8201
- - --------------------------------------------------------------------------------
(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 November 1, 1994 was 82,586,882.


1


ITEM I. FINANCIAL STATEMENTS

PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET




September 31, 1994 December 31,
(Unaudited) 1993
------------------ ------------

CURRENT ASSETS
Cash and cash equivalents $40,337 $114,103
Marketable securities 55,619 107,705
Trade accounts receivable 138,908 123,119
Inventories:
Raw material 23,608 18,260
Semi-finished goods 27,886 21,155
Finished goods 39,873 29,989
Supplies 18,396 15,915
Deferred advertising 14,795 26,080
Deferred income taxes 29,633 28,914
Prepaid expenses and other current assets 56,916 37,123
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Total current assets 445,971 522,363
LONG-TERM INVESTMENTS 43,439 34,815
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PROPERTY, PLANT AND EQUIPMENT
Land 31,035 32,706
Buildings and improvements 270,223 261,974
Machinery and equipment 523,623 483,853
Construction in progress 3,955 1,360
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Total 828,836 779,893
Less accumulated depreciation 401,954 378,252
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Property, plant, and equipment - net 426,882 401,641
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INTANGIBLES
Cost in excess of net assets acquired - net 285,794 246,104
Other intangible assets - net 45,522 47,071
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Total intangibles 331,316 293,175
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TOTAL ASSETS $1,247,608 $1,251,994
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $61,281 $50,424
Accrued liabilities:
Wages, including vacation pay 57,668 45,584
Employee profit sharing and pension 44,072 59,560
Restructuring costs 6,166 35,489
Accrued rebates 29,414 26,473
Income taxes 8,298 3,847
Other 60,070 69,527
Short term debt 18,000
Long-term debt due within one year 7,409 6,967
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Total current liabilities 292,378 297,871
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LONG-TERM DEBT 110,823 110,755
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DEFERRED INCOME TAXES 40,298 42,119
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SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares;
issued: 82,319,595) 82,320 82,549
Additional paid in capital 341
Retained earnings 722,716 719,046
Cumulative translation adjustment 695 (687)
Unearned compensation (165)
Net unrealized change - marketable securities (1,457)
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Total shareholders' equity $804,109 $801,249
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,247,608 $1,251,994
---------- ----------
---------- ----------





See Notes to Consolidated Financial Statements


2


DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Amounts)
(Unaudited)




QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30
--------------------------- ------------------------------
1994 1993 1994 1993
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NET SALES $426,654 $371,974 $1,268,986 $1,140,590
---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of sales 195,914 173,376 581,813 528,160
Selling, general, and administrative 160,601 116,148 457,935 342,638
Employee profit sharing and pension 15,383 14,660 45,826 45,697
Employee bonus and stock purchase discount 4,946 3,671 17,615 16,287
Restructuring (credit) charge (10,000) (10,000) 60,000
---------- ---------- ---------- ----------
Total 366,844 307,855 1,093,189 992,782
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INCOME FROM OPERATIONS 59,810 64,119 175,797 147,808

OTHER INCOME (EXPENSE)
Investment and other income 1,593 2,796 7,261 10,737
Interest expense (2,592) (2,710) (8,891) (7,594)
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INCOME BEFORE INCOME TAXES 58,811 64,205 174,167 150,951
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PROVISION FOR INCOME TAXES
Federal income tax 22,160 23,197 62,037 50,303
State income taxes 3,376 4,012 11,257 9,614
---------- ---------- ---------- ----------
Total 25,536 27,209 73,294 59,917
---------- ---------- ---------- ----------

NET INCOME $33,275 $36,996 $100,873 $91,034
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

AVERAGE COMMON SHARES OUTSTANDING 82,332,373 82,568,717 82,396,913 83,061,450
NET INCOME PER COMMON SHARE $ .40 $ .45 $ 1.22 $ 1.10
CASH DIVIDENDS PER COMMON SHARE $ .37 $ .36 $ 1.09 $ 1.06



See Notes to Consolidated Financial Statements


3



DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1994 and 1993
(Dollars in Thousands)
(Unaudited)




1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $100,873 $91,034
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 43,717 41,001
Amortization of intangibles 19,551 11,323
Stock purchase discount 6,274 6,407
Deferred income taxes and investment credit (1,036) (21,431)
Changes in assets and liabilities:
Trade accounts receivable (10,337) (4,219)
Inventories (21,139) (10,166)
Accounts payable 8,531 35
Restructuring costs (29,323) 52,923
Other assets and liabilities (4,229) (16,675)
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Net cash provided by operating activities 112,882 150,232
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities with maturities of more than 3 months (13,115) (116,832)
Proceeds from sales of marketable securities with maturities of more than 3 months 43,500 125,294
Net change in marketable securities with maturities of 3 months or less 20,000 (6,100)
Purchases of property, plant, and equipment (74,203) (51,416)
Payments for acquisitions, net of cash acquired (52,196) (110,136)
Other (21,816) (21,284)
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Net cash used in investing activities (97,830) (180,474)
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CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (2,632) (9,080)
Payments to retire common stock (33,135) (80,742)
Proceeds from issuing stock under employee plans 18,900 21,897
Increase in short term debt 18,000
Cash dividends paid to shareholders (89,951) (88,204)
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Net cash used in financing activities (88,818) (156,129)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (73,766) (186,371)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 114,103 275,172
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $40,337 $88,801
---------- ----------
---------- ----------



See Notes to Consolidated Financial Statements


4


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The consolidated balance sheet as of September 30, 1994, the related
consolidated statements of income for the three-month and nine-month
periods ended September 30, 1994 and 1993 and the consolidated statements
of cash flows for the nine-month periods ended September 30, 1994 and 1993
are unaudited; in the opinion of management, all adjustments necessary for
a fair presentation of such financial statements are included. 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. Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." As a result, the carrying value of the Company's
marketable securities was reduced to reflect market value. The Company
classifies all marketable securities as available for sale. Accordingly,
the reduction of $1,457,000 as of September 30, 1994 is recorded as a
component of shareholders' equity.

3. Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 112 "Employers' Accounting for
Postemployment Benefits." Under SFAS 112 the Company accrues the estimated
cost of post employment benefit payments during the years in which
employees provide services. The adoption of SFAS 112 did not have a
material effect on the Company's financial position or results of
operations.

4. During the third quarter of 1994, the Company recorded a $10 million credit
to reduce its restructuring reserve. The restructuring reserve was
established in 1993 when the Company recorded a $60 million charge (reduced
to $49 million in the 4th quarter of 1993) in connection with a formal
restructuring plan for the closure of 16 of its check printing plants. As
of September 30, 1994, the Company had closed 15 of the 16 plants. Certain
costs included in the 1993 charge were not incurred. The $6.2 million
balance of the reserve at September 30, 1994 represents specifically
identified, incremental employee severance and asset impairment and
disposal costs to be incurred as a result of the closings.

5. During the third quarter of 1994, the Company acquired all of the
outstanding stock of Software Partnership Limited, which is included in the
Electronic Payment Systems Division, for $15.8 million. The Company
recorded the acquisition under the purchase method of accounting. The
acquisition did not have a material proforma impact on operations.

6. The Company has uncommitted bank lines of credit of $155 million available
at variable interest rates. As of September 30, 1994, $18 million was
drawn on those lines at an interest rate of 5.13%.



5


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1993

Net sales were $1,269.0 million for the first nine months of 1994, up 11.3% over
the first nine months of 1993, when sales were $1,140.6 million. The Payment
Systems segment revenue for the first nine months of 1994 decreased 0.3% from
the first nine months of 1993 due to continued price competition in the
financial institution (FI) market. This decline was offset by a 31.4% increase
in revenue from the Company's Electronic Payment Systems division.

Deluxe's Business Systems segment posted a 54.5% increase in revenue for the
first nine months of 1994 over the first nine months of 1993 primarily due to
the contribution of PaperDirect, Inc., which the Company acquired in the third
quarter of 1993, and the growth of the Company's Canadian and United Kingdom
operations. Revenue of the Consumer Specialty Products segment increased 25.4%
as a result of Current's strong sales in its social expressions and direct mail
check printing product lines.

Selling, general and administrative expenses increased $115.3 million or 33.7%
for the first nine months of 1994 over the first nine months of 1993. The
Business Systems segment's expenses increased approximately $58.1 million
primarily due to the acquisition of PaperDirect, Inc. Also, the Consumer
Specialty Products segment increased its selling expense by approximately $26.0
million, primarily due to increased advertising. The remaining increase is due
to increases in costs associated with acquisitions, international operations and
re-engineering projects. Net income was $100.9 million for the first nine
months of 1994, or 8.0% of sales, compared to $91.0 million for the first nine
months of 1993 or 8.0% of sales. 1993 net income includes a one-time, pretax
charge of $60 million for costs related to the restructuring of the Check
Printing division taken in the second quarter of 1993. During the third quarter
of 1994 the Company recorded a $10 million credit to reduce its 1993
restructuring charge, as certain of the costs included in the charge were not
incurred.

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1993

Net sales were $426.7 million for the third quarter of 1994, up 14.7% over the
third quarter of 1993, when sales were $372.0 million. The third quarter
Payment Systems segment's revenue increased 5.1% over the third quarter of 1993.
A 45.8% increase in revenue from the Company's Electronic Payment Systems
division was partially offset by a decline in revenue due to continued price
competition in the FI market.

Deluxe's Business Systems segment posted a 60.6% increase in revenue in the
third quarter of 1994 over third quarter 1993 primarily due to the contribution
of PaperDirect, Inc., which the Company acquired in the third quarter of 1993,
T-Maker Inc., which the company acquired in the second quarter of 1994, and the
growth of the Company's Canadian and United Kingdom operations. Revenue for the
Consumer Specialty Products segment increased 17.6% as a result of Current's
strong sales in its social expressions and direct mail check printing product
lines.

Selling, general and administrative expenses increased $44.5 million or 38.3% in
third quarter 1994 over third quarter 1993. The Business Systems segment's
expenses increased approximately $20.2 million primarily due to the acquisition
of PaperDirect, Inc. Also, the Consumer Specialty Products segment increased
its selling expense by approximately $6.4 million, primarily due to increased
advertising. The remaining increase is due to increases in costs associated
with acquisitions, international operations and re-engineering projects. Net
income was $33.3 million in the third quarter of 1994, or 7.8% of sales,
compared to $37.0 million in 1993 or 10.0% of sales.

FINANCIAL CONDITION - LIQUIDITY

Cash provided by operations was $112.9 million for the first nine months of
1994, compared with $150.2 million for the first nine months of 1993. This
represents the Company's primary source of working capital for financing capital
expenditures, acquisitions, and paying cash dividends. The decline in 1994 is
primarily the result of cash payments related to the 1993 restructuring of the
Company's financial institution check printing operations. The Company's
working capital on September 30, 1994 was $153.6 million, compared to $224.5
million on December 31, 1993. The decrease in 1994 is primarily the result of
the acquisitions of National Revenue Corporation, T-Maker, Inc., and Software
Partnership. The current ratio was 1.5 to 1 on September 30, 1994 and 1.8 to 1
on December 31, 1993.


6


FINANCIAL CONDITION - CAPITAL RESOURCES

Purchases of property, plant, and equipment totaled $74.2 million for the first
nine months of 1994, compared to $51.4 million one year ago. The Company
anticipates total capital expenditures of approximately $85 million in 1994 for
new electronic payment system investments, further enhancements to printing
capabilities, and additional production facilities for the manufacturing of its
new water-washable ink, Printwise.

In February, 1991, the Company issued $100 million of notes, payable in 2001
under its 1989 shelf registration of debt securities. Additional long-term
borrowings could be secured in the event the Company makes a significant
acquisition. Such borrowings could include medium or long-term notes.

In addition, the Company has uncommitted bank lines of credit of $155 million.
As of September 30, 1994, $18 million was drawn on those lines. The Company may
secure additional short-term financing to fund acquisitions. Such financings
could include committed lines of credit and a commercial paper program.
Borrowings under these financings would be dependent upon favorable short-term
interest rates.

Cash dividends totaled $90.0 million for the first nine months of 1994 compared
to $88.2 million for the first nine months of 1993.


7


PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) None

(b) The Company did not, and was not required to, file any reports on
Form 8-K during the quarter for which this report is filed.


8


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 November 15, 1994 /s/ H. V. Haverty
--------------------------- --------------------------------------
H. V. Haverty, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)


Date November 15, 1994 /s/ C. M. Osborne
--------------------------- --------------------------------------
C. M. Osborne, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)


9