10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 14, 1996
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 June 30, 1996
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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 _______________________
Commission file number: 1-7945
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DELUXE CORPORATION
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(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)
3680 VICTORIA ST. N., ST. PAUL, MINNESOTA 55126-2966
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(Address of principal executive offices) (Zip code)
(612) 483-7111
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(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
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The number of shares outstanding of registrant's common stock, par value $1.00
per share, at August 1, 1996 was 82,433,612.
1
See Notes to Consolidated Financial Statements
2
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of June 30, 1996, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 1996 and 1995 and the consolidated statements of cash flows
for the six-month periods ended June 30, 1996 and 1995 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. The Company has uncommitted bank lines of credit of $189.3 million
available at variable interest rates. As of June 30, 1996, $18.4 million
was drawn on those lines at a weighted average interest rate of 6.1%.
Also, the Company has in place a $150 million committed line of credit
which is available for borrowing and as support for commercial paper. As
of June 30, 1996, $10 million of commercial paper was issued and
outstanding at a weighted average interest rate of 5.5%. The Company also
has in place a medium-term note program for the issuance of up to $300
million of medium-term notes to be used for general corporate purposes,
including working capital, repayment or repurchase of outstanding
indebtedness and other securities of the Company, capital expenditures, and
possible acquisitions. As of June 30, 1996, no such notes were issued or
outstanding.
3. During the fourth quarter of 1995, the Company adopted a plan to
discontinue its Printwise ink business. The Company recorded charges in
the fourth quarter of 1995 for the disposal of the business, and
anticipated operating losses until disposal. Accordingly, Printwise is
reported as a discontinued operation for the 1996 and 1995 periods
presented.
4. 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 include
employee severance costs and expected losses on the disposition of plant
and equipment. Expenses of $32 million are included in cost of goods sold
and $2.8 million in selling, general, and administrative expense. $27.5
million of the charges are expected to be in the form of cash outlays
occurring in 1996 and 1997, almost all of which will be applied to employee
severance costs. The Company expects to fund such outlays from cash
generated by operations.
5. In July of 1996, the Company sold its T/Maker subsidiary and certain
assets of its Internal Bank Forms unit. The effect of these sales will not
have a material impact on the operating results of the Company.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY PROFILE
Effective January 1, 1996, the Company reorganized its many independent business
units into two market-serving segments, Financial Services and Deluxe Direct.
Through Deluxe Financial Services, the Company provides check printing,
electronic funds transfer, and related services to financial institutions in the
United States, Canada, and the United Kingdom; payment systems protection
services including check authorization, account verification, and collection
services to financial institutions and retailers; and electronic benefit
transfer services to state governments. Through Deluxe Direct, the Company
provides direct mail checks and specialty papers to households and small
businesses; tax forms and electronic tax filing services to tax preparers; and
direct mail greeting cards, gift wrap, and related products to households.
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. Although no assurances can be given in such regard, the
Company anticipates that the consolidation of its check printing plants and its
other restructuring and cost reduction efforts may result in annual pre-tax cost
reductions of approximately $150 million by the end of 1997. Such anticipated
reductions will be reflected primarily in the form of reduced facility,
materials and employee expenses in the Company's operating results.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995
Net sales were $954.7 million for the six months ended June 30, 1996, up 5.2%
over the six months ended June 30, 1995, when sales were $907.7 million. The
Deluxe Financial Services segment's revenue for the first six months of 1996
increased 9.1% over the first six months of 1995, due to revenue growth in all
units. Financial institution check printing revenues were up 3.3%, despite a
slight decline in order counts. The improved results are due to an improved
product mix, a first quarter 1996 price increase, and benefits from the
integration of the businesses that serve financial institutions. The Deluxe
Direct segment's revenue for the first six months of 1996 decreased 2.4% from
the first six months of 1995, due primarily to lower sales of social expression
products.
Selling, general, and administrative expenses increased $11.0 million or 3.2%
for the first six months of 1996 over the first six months of 1995. The Deluxe
Financial Services segment's selling, general and administrative expenses for
the first six months of 1996 increased 6.2% over the first six months of 1995,
due primarily to costs related to the closing of 21 check printing plants and
increased selling expense for financial institution check printing. The Deluxe
Direct segment's selling, general and administrative expenses for the first six
months of 1995 decreased 4.6% from the first six months of 1995, due primarily
to lower advertising expense and reductions in general and administrative
expense throughout the segment.
Net income from continuing operations was $57.0 million for the first six months
of 1996, or 6.0% of sales, compared to $65.3 million for the first six months of
1995, or 7.2% of sales. The decrease from 1995 is due to $34.8 million of
pretax charges taken in the first quarter of 1996 for the closing of 21 check
printing plants and the movement of PaperDirect's operations from New Jersey to
existing company facilities in Colorado and Minnesota. Included in the 1995
income is approximately $5 million of pretax gain resulting from insurance
payments for 1994 earthquake damages to Company facilities.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995
Net sales were $466.6 million for the second quarter of 1996, up 5.5% over the
second quarter of 1995, when sales were $442.3 million. The Deluxe Financial
Services segment's revenue increased 9.3% over the second quarter of 1995, due
to revenue growth in all units. Financial institution check printing revenues
were up 3.8% over 1995. The improved results are due to an improved product
mix, higher prices, and benefits from the integration of the businesses that
serve financial institutions. The Deluxe Direct segment's revenue decreased
2.5% from 1995, due primarily to lower sales of social expressions products.
Selling, general and administrative expenses increased $4.8 million or 2.9% in
second quarter 1996 over second quarter 1995. The Deluxe Financial Services
segment's second quarter 1996 selling, general and administrative expenses
increased 4.6% over second quarter 1995, due primarily to increased selling
expenses for financial institution check printing. The Deluxe Direct segment's
selling, general and administrative expenses decreased 4.9% from second quarter
1995, due primarily to lower advertising expense and reductions in general and
administrative expense throughout the segment.
Net income from continuing operations was $38.1 million for the second quarter
of 1996, or 8.2% of sales, compared to $30.7 million for the second quarter of
1995, or 7.0% of sales. The increase over 1995 is attributable to improvements
in both the Deluxe Financial Services and Deluxe Direct segments.
6
FINANCIAL CONDITION - LIQUIDITY
Cash provided by continuing operations was $135.8 million for the first six
months of 1996, compared with $76.1 million for the first six months of 1995.
This 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, 1996 was $12.8 million compared to $12.3 million on December 31,
1995.
FINANCIAL CONDITION - CAPITAL RESOURCES
Purchases of property, plant, and equipment totaled $41.2 million for the first
six months of 1996 compared to $62.5 million one year ago.
The Company has uncommitted bank lines of credit of $189.3 million. As of June
30, 1996, $18.4 million was drawn on those lines. In addition, the Company has
in place a $150 million committed line of credit which is available for
borrowing and as support for commercial paper. As of June 30, 1996, $10
million of commercial paper was issued and outstanding. The company also has in
place a medium-term note program for the issuance of up to $300 million of
medium-term notes. As of June 30, 1996, no such notes were issued or
outstanding.
Cash dividends totaled $61.1 million for the first six months of 1996 compared
to $61.1 million for the first six months of 1995.
7
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, 1996:
71,457,713 shares were represented (86.66% of the 82,454,607 shares
outstanding).
1. Election of Directors:
The nominees listed in the proxy statement were: John A. Blanchard
III, Harold V. Haverty, Whitney MacMillan, Jerry K. Twogood, Dr. James
J. Renier, Barbara B. Grogan, Allen F. Jacobson, and Stephen P.
Nachtsheim.
The results were as follows:
for all nominees: 70,133,720
Withheld as to all
nominees: 693,200
Withheld as to fewer
than all nominees: 630,793
2. Approval of the 1996 Annual Incentive Plan:
For: 65,122,770
Against: 5,623,054
Abstain: 711,889
Broker Non-Vote: 0
3. Approval of certain amendments to the Stock Incentive Plan:
For: 46,428,909
Against: 18,662,699
Abstain: 779,914
Broker Non-Vote: 5,586,191
4. Approval of certain amendments to the Performance Share Plan:
For: 60,720,748
Against: 4,360,052
Abstain: 790,722
Broker Non-Vote: 5,586,191
5. Ratification of appointment of Deloitte & Touche LLP as independent
auditors:
For: 70,517,700
Against: 504,842
Abstain: 435,171
Broker Non-Vote: 0
8
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
When used in this Form 10-Q and in past and 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 under the caption "Risk Factors and Cautionary Statements" 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.
RISK FACTORS AND CAUTIONARY STATEMENTS
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 $150 million of annual pre-tax 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 and the lengthy testing periods
associated with 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. Any such occurrence 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 may not be
fully reflected by commensurate gains in the Company's net income, 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 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 industry, 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 retail
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.
9
TECHNOLOGICAL CHANGE. 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. 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 development and additional systems will
likely be introduced. Although Deluxe 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.
An unexpected surge in the popularity of any of these alternative payment
methods could have a material, adverse effect on the market for Deluxe's primary
products and its payment protection and collection services. In addition, the
publicity generated by the promoters of these systems and the attendant media
coverage of their development and introduction may have a depressing effect on
the market price of the Company's Common Stock that is disproportionate to their
actual competitive impact.
ANALYST ESTIMATES. From time to time, authorized representatives of the Company
may 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. 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.
Any forecast 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, many of which are
beyond the Company's control. In addition, 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.
10
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
10.1 Deluxe Corporation 1996 Filed herewith
Annual Incentive Plan
10.2 Deluxe Corporation Stock Filed herewith
Incentive Plan (as amended)
10.3 Deluxe Corporation Performance Filed herewith
Share Plan (as amended)
12.2 Computation of Ratio of Filed herewith
Earnings to Fixed Charges
27.2 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.
11
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, 1996 /s/ J.A. Blanchard III
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J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date August 14, 1996 /s/ C.M. Osborne
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C. M. Osborne, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
12
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
10.1 Deluxe Corporation 1996
Annual Incentive Plan
10.2 Deluxe Corporation Stock
Incentive Plan (as amended)
10.3 Deluxe Corporation Performance
Share Plan (as amended)
12.2 Computation of Ratio of
Earnings to Fixed Charges
27.2 Financial Data Schedule
13