Deluxe Reports Q3 2018 Financial Results, Chooses Successor to CEO Lee Schram

ST. PAUL, Minn. - October 26, 2018 - Deluxe Corporation, a leader in providing small businesses and financial institutions with products and services to drive customer revenue, announced its financial results for the third quarter ended September 30, 2018. Key financial highlights include:

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Revenue was in the middle of the Company’s outlook range of $489.0 to $497.0 million provided on August 16, 2018 and GAAP diluted loss per share was ($0.67). During the quarter, the Company recognized non-GAAP adjustments of $2.03 per share. Of this amount, $1.59 per share was a non-cash goodwill impairment in the Small Business Services segment primarily in the distributor channel attributable to changes in strategy and in the mix of products and services sold, including declining checks and forms. The Company also recognized non-cash asset impairment charges of $0.34 per share, primarily for the Safeguard trade name. In addition, charges for restructuring and CEO transition costs totaled $0.13 per share, and the company recorded a benefit of $0.03 per share related to federal tax reform.

Adjusted diluted EPS was $1.36 and excluded the aggregate charges of $2.03 per share discussed above. Adjusted diluted EPS exceeded the high end of the range of the July 2018 outlook driven primarily by lower shares outstanding, a lower income tax rate and continued expense management initiatives, partially offset by lower check and forms usage.

The Company also announced today that it has concluded its search for and signed an employment agreement with the successor to Lee Schram as President, Chief Executive Officer and a member of its Board of Directors. This individual will assume these roles effective November 26^th. Deluxe has agreed to formally announce the appointment on Tuesday, November 6^th as an accommodation to this person’s current employer.

“We delivered a solid quarter,” said Lee Schram, CEO of Deluxe. “We continue to see our transformation taking hold and this was the first quarter that marketing solutions & other services (MOS) revenue was the largest component of revenue, accounting for 43% of total revenue in the quarter. We believe we have established a foundation that will allow us to continue to grow revenue k forward to announcing the appointment on November 6^th.”

Third Quarter 2018 Highlights

• Revenue decreased 0.9% year-over-year. Financial Services revenue was down 6.7% compared to the prior year, while Small Business Services revenue grew 3.0%, including the results of several small tuck-in acquisitions.
• Revenue from marketing solutions and other services (MOS) increased 5.0% year-over-year and grew to 42.6% of total revenue in the quarter.
• Gross margin was 59.9% of revenue, compared to 61.2% in the third quarter of 2017. The impact to margin from product and service mix and increased delivery and material costs this year, as well as acquisitions, was only partially offset by previous price increases and continued improvements in manufacturing productivity.
• Selling general and administrative (SG&A) expense as a percent of revenue was 42.3% in the quarter compared to 40.8% last year. SG&A expense dollars increased $5.3 million compared to last year as continued cost reduction initiatives and lower medical costs were more than offset by additional SG&A expense from acquisitions and costs related to the CEO transition process.
• Operating income decreased $70.7 million year-over-year. Adjusted operating income decreased $12.3 million year-over-year primarily from the continuing decline in check and forms usage, lower data-driven marketing revenue and the loss of the previously discussed customer in Deluxe Rewards, partially offset by price increases and continued cost reduction initiatives.
• Diluted EPS decreased $1.26 per share year-over-year and included aggregate non-GAAP charges of $2.03 per share. Adjusted diluted EPS increased 3.0% year-over-year. A lower income tax rate in 2018, primarily due to the Tax Cuts and Jobs Act of 2017, contributed to the increase in EPS and was partially offset by the continuing secular decline in check and forms usage, lower data-driven marketing revenue and the loss of revenue and operating income from Deluxe Rewards highlighted in previous quarters.

Segment Highlights

Small Business Services

• Revenue of $315.6 million was slightly lower than expectations and increased 3.0% year-over-year due primarily to increased MOS revenue and benefits from previous price increases, partially offset by the decline in check and forms usage.
• Operating loss of $45.3 million included non-GAAP adjustments of $101.9 million. Adjusted operating income decreased $3.9 million and adjusted operating margin decreased 1.8 points year-over-year. This decrease was due to the secular decline in check and forms usage, partially offset by previous price increases and continued cost reductions.

Financial Services

• Revenue of $146.8 million was slightly below our expectations and decreased 6.7% year-over-year driven by the secular decline in check usage, lower data-driven marketing revenue and the loss of the previously discussed customer in Deluxe Rewards.
• Operating income of $17.6 million decreased $11.6 million compared to last year. Adjusted operating income decreased $7.5 million and adjusted operating margin decreased 3.8 points year-over-year. This decrease was due primarily to the revenue decline and higher delivery rates, partially offset by continued benefits of cost reductions.

Direct Checks

• Revenue of $30.8 million was slightly better than our expectations and declined 9.1% year-over-year due primarily to the secular decline in check usage.
• Operating income of $10.4 million decreased $0.9 million, while operating margin increased 0.5 points year-over-year. This decrease in operating income was due primarily to lower order volume, partly offset by cost reductions.

Other Highlights

• Cash provided by operating activities for the first nine months of 2018 was $219.1 million, a decrease of $6.8 million compared to 2017.
• The Company repurchased $80.0 million of common stock in open market transactions during the quarter, bringing the year-to-date stock repurchase total to $120.0 million.
• At the end of the third quarter, the Company had $890.9 million of total debt outstanding, $889.0 million of which was outstanding under the revolving credit facility.
• On October 24, 2018, the Board of Directors increased the authorization for the share repurchase program to $500 million effective immediately, inclusive of the $119 million remaining under the previous authorization.
• On October 24, 2018, the Board of Directors declared a regular quarterly dividend of $0.30 per share on all outstanding shares of the Company. The dividend will be payable on December 3, 2018 to all shareholders of record at the close of business on November 19, 2018.

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Source: Deluxe Corporation

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