Deluxe Reports Fourth Quarter 2016 Financial Results

ST. PAUL, Minn. — January 26, 2017 — 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 fourth quarter ended December 31, 2016. Key financial highlights include:

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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, diluted EPS and adjusted diluted EPS were all in-line with the prior outlook as provided by the Company on January 6, 2017.

“We had another successful year of growth in both our digital marketing services capabilities and financial results,” said Lee Schram, CEO of Deluxe. “Our team delivered a seventh consecutive year of increased revenue and an eighth consecutive year of increased cash flow from operations. We believe the strategic investments we made during the year in web services, data driven marketing solutions and treasury management solutions, put us well on track toward our goal of growing marketing solutions and other services to 40 percent of our revenue in 2018. Looking ahead, we believe this year we will further diversify our revenue base and once again grow our profitability and operating cash flow.”

Fourth Quarter 2016 Highlights

Revenue increased 3.6% year-over-year, primarily due to growth in the Small Business Services (SBS) segment, which grew 4.8% in the quarter and includes the results of a number of tuck-in acquisitions made throughout the year. The Financial Services segment grew 4.3% in the quarter and includes the results of Data Support Systems, Inc. which was acquired in the fourth quarter of 2016 and incremental revenue from the acquisitions of Datamyx and FISC Solutions which were acquired in the fourth quarter of 2015.
Revenue from marketing solutions and other services increased 12.7% year-over-year and grew to 36.0% of consolidated revenue in the quarter.
Gross margin was 63.2% of revenue, compared to 63.0% in the fourth quarter of 2015. Previous price increases and improvements in manufacturing productivity were partially offset by increased delivery and material costs.
Selling, general and administrative (SG&A) expense increased 3.9% from last year primarily due to additional SG&A expense from acquisitions and higher medical costs, but was partially offset by continued cost reduction initiatives in all segments and lower incentive compensation expense. SG&A as a percent of revenue was 43.2% in the quarter compared to 43.1% 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 5.6% year-over-year primarily from continued cost reductions and lower incentive compensation expense.
Diluted EPS decreased 7.5% year-over-year. Excluding restructuring and transaction-related costs in both periods, as well as a $0.15 loss per share on debt extinguishment in 2016, adjusted diluted EPS increased 7.1% year-over-year driven primarily by stronger operating performance, including cost management initiatives, and lower average shares outstanding. The fourth quarter 2016 restructuring costs of $0.04 per share were related to severance and the $0.05 per share of transaction-related costs were incurred primarily in conjunction with the FMCG Direct acquisition on December 30, 2016.

Segment Highlights
Small Business Services

Revenue was $318.3 million and increased 4.8% year-over-year due primarily to increased marketing solutions and other services revenue. From a channel perspective, revenue increased in the online, major accounts and dealer channels, including benefits from previous price increases.
Operating income increased 6.6% from last year to $58.0 million. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods, increased 5.3% year-over-year due to price increases, cost reductions and lower incentive compensation expense.

Financial Services

Revenue was $125.5 million and increased 4.3% year-over-year. The increase in revenue was primarily due to growth in marketing solutions and other services, which includes incremental revenue from the acquisitions of Data Support Systems, Inc. in the fourth quarter of 2016 and Datamyx and FISC Solutions in the fourth quarter of 2015. Revenue also benefitted from the impact of previous price increases. These increases in revenue were partially offset by the secular decline in check usage.
Operating income was flat compared to last year at $22.3 million. Adjusted operating income, which excludes restructuring and transaction-related costs in both periods, increased 15.4% year-over-year driven by the continued benefits of cost reductions, price increases and lower incentive compensation expense, partially offset by the secular decline in check usage.

Direct Checks

Revenue of $36.4 million declined 7.8% year-over-year due primarily to the secular decline in check usage.
Operating income decreased 11.3% year-over-year to $12.5 million. Adjusted operating income, which excludes restructuring costs in the current quarter, decreased 9.9% 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 2016 was $319.3 million, an increase of $9.7 million compared to 2015, driven primarily by stronger operating performance and lower income tax and interest payments, partially offset by higher contract acquisition payments, as well as an incentive payment in 2016 related to a previous acquisition.
The Company repurchased $10.3 million of common stock in open market transactions during the quarter, bringing the total year amount to $55.2 million.
On November 15, the Company redeemed all of its $200 million 6.00% Senior Notes Due 2020. The early debt extinguishment generated a loss of $0.15 per diluted share related to a contractual call premium, associated redemption fees and interest expense resulting from the settlement of related interest rate swaps. The early debt extinguishment was financed through a credit facility term loan of $200.0 million.
On December 30, 2016, we completed the acquisition of FMCG Direct for $202.5 million, subject to customary adjustments. The acquisition was financed through the existing revolving credit facility and a $130.0 million expansion of the credit facility term loan, bringing the term loan to $330.0 million.
At the end of the fourth quarter, the company had $758.6 million of total debt outstanding which includes approximately $428 million outstanding on the Company’s revolving credit facility and $330 million in term loans.
On January 24, 2016, the Board of Directors of Deluxe Corporation declared a regular quarterly dividend of $0.30 per share on all outstanding shares of the Company. The dividend will be payable on March 6, 2017 to all shareholders of record at the close of business on February 21, 2017.

First Quarter and Full Year 2017 Outlook: The first quarter 2017 earnings per share outlook includes approximately $0.07 per share of EPS dilution attributable to the FMCG Direct acquisition which closed on December 30, 2016.

Deluxe Reports a Revenue Increase of 3.6% Year-Over-Year for Q4 2016