(Mark One)
| x | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 |
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from ___________________ to ___________________ |
| Minnesota | 41-0216800 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
3680 Victoria St. N., Shoreview, Minnesota |
55126-2966 |
| (Address of principal executive offices) | (Zip Code) |
(651) 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 ü No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ü No
The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at April 30, 2004 was 49,887,757.
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share par value)
(Unaudited)
| March 31, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 4,689 | $ | 2,968 | ||||
| Trade accounts receivable (net of allowances for | ||||||||
| uncollectible accounts of $1,825 and $1,881, respectively) | 37,030 | 37,066 | ||||||
| Inventories and supplies | 18,761 | 18,652 | ||||||
| Deferred income taxes | 258 | 258 | ||||||
| Other current assets | 46,526 | 19,984 | ||||||
| Total current assets | 107,264 | 78,928 | ||||||
| Long-term Investments | 43,209 | 42,510 | ||||||
| Property, Plant, and Equipment (net of accumulated | ||||||||
| depreciation of $296,663 and $295,570, respectively) | 118,661 | 123,615 | ||||||
| Assets Held for Sale | 1,286 | — | ||||||
| Intangibles (net of accumulated amortization of $182,058 and | ||||||||
| $172,614, respectively) | 70,943 | 78,161 | ||||||
| Goodwill | 82,237 | 82,237 | ||||||
| Other Non-current Assets | 148,420 | 157,509 | ||||||
| Total assets | $ | 572,020 | $ | 562,960 | ||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 41,343 | $ | 46,694 | ||||
| Accrued liabilities | 127,668 | 126,821 | ||||||
| Short-term debt | 206,970 | 213,250 | ||||||
| Long-term debt due within one year | 1,102 | 1,074 | ||||||
| Total current liabilities | 377,083 | 387,839 | ||||||
| Long-term Debt | 380,380 | 380,620 | ||||||
| Deferred Income Taxes | 42,692 | 42,654 | ||||||
| Other Non-current Liabilities | 49,318 | 49,930 | ||||||
| Shareholders’ Deficit: | ||||||||
| Common shares $1 par value (authorized: 500,000,000 | ||||||||
| shares; issued: 2004 – 50,000,956; 2003 – 50,173,067) | 50,001 | 50,173 | ||||||
| Accumulated deficit | (325,252 | ) | (345,950 | ) | ||||
| Unearned compensation | — | (41 | ) | |||||
| Accumulated other comprehensive loss | (2,202 | ) | (2,265 | ) | ||||
| Total shareholders’ deficit | (277,453 | ) | (298,083 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 572,020 | $ | 562,960 | ||||
See Notes to Unaudited Consolidated Financial Statements
2
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| Quarter Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Revenue | $ | 308,832 | $ | 317,199 | ||||
| Cost of goods sold | 106,886 | 109,824 | ||||||
| Gross Profit | 201,946 | 207,375 | ||||||
| Selling, general and administrative expense | 120,111 | 122,758 | ||||||
| Asset impairment and net disposition losses (gains) | 30 | (82 | ) | |||||
| Operating Income | 81,805 | 84,699 | ||||||
| Other income | 374 | 161 | ||||||
| Income Before Interest and Taxes | 82,179 | 84,860 | ||||||
| Interest expense | (5,166 | ) | (4,367 | ) | ||||
| Interest income | 113 | 117 | ||||||
| Income Before Income Taxes | 77,126 | 80,610 | ||||||
| Provision for income taxes | 29,464 | 30,631 | ||||||
| Net Income | $ | 47,662 | $ | 49,979 | ||||
| Earnings per Share: Basic | $ | 0.95 | $ | 0.84 | ||||
| Diluted | 0.94 | 0.83 | ||||||
| Cash Dividends per Share | $ | 0.37 | $ | 0.37 | ||||
| Total Comprehensive Income | $ | 47,725 | $ | 50,042 | ||||
See Notes to Unaudited Consolidated Financial Statements
3
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Quarter Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | ||||||||
| Cash Flows from Operating Activities: | |||||||||
| Net income | $ | 47,662 | $ | 49,979 | |||||
| Adjustments to reconcile net income to net cash provided | |||||||||
| by operating activities: | |||||||||
| Depreciation | 4,664 | 5,761 | |||||||
| Amortization of intangibles | 9,586 | 8,857 | |||||||
| Amortization of contract acquisition costs | 7,908 | 5,806 | |||||||
| Employee stock-based compensation expense | 2,672 | 394 | |||||||
| Other non-cash items, net | 2,455 | 1,920 | |||||||
| Changes in assets and liabilities: | |||||||||
| Trade accounts receivable | (911 | ) | (14,083 | ) | |||||
| Inventories and supplies | (109 | ) | 317 | ||||||
| Other current assets | (26,459 | ) | (19,530 | ) | |||||
| Contract acquisition payments | (4,276 | ) | (19,240 | ) | |||||
| Deferred advertising costs | 1,831 | (9,101 | ) | ||||||
| Other non-current assets | 571 | (6,183 | ) | ||||||
| Accounts payable | 332 | (4,970 | ) | ||||||
| Accrued and other non-current liabilities | 2,767 | (5,923 | ) | ||||||
| Net cash provided (used) by operating activities | 48,693 | (5,996 | ) | ||||||
| Cash Flows from Investing Activities: | |||||||||
| Purchases of capital assets | (3,974 | ) | (5,475 | ) | |||||
| Other | (385 | ) | (213 | ) | |||||
| Net cash used by investing activities | (4,359 | ) | (5,688 | ) | |||||
| Cash Flows from Financing Activities: | |||||||||
| Net (payments) borrowings of short-term debt | (6,280 | ) | 111,730 | ||||||
| Payments of long-term debt | (258 | ) | (358 | ) | |||||
| Change in book overdrafts | (6,133 | ) | (3,418 | ) | |||||
| Payments for common shares repurchased | (18,057 | ) | (201,455 | ) | |||||
| Proceeds from issuing shares under employee plans | 6,716 | 7,332 | |||||||
| Cash dividends paid to shareholders | (18,601 | ) | (21,818 | ) | |||||
| Net cash used by financing activities | (42,613 | ) | (107,987 | ) | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 1,721 | (119,671 | ) | ||||||
| Cash and Cash Equivalents: Beginning of Period | 2,968 | 124,855 | |||||||
| End of Period | $ | 4,689 | $ | 5,184 | |||||
| Share Repurchases Pending Settlement at End of Period | $ | 1,083 | $ | — | |||||
See Notes to Unaudited Consolidated Financial Statements
4
Note 1: Consolidated financial statements
The consolidated balance sheet as of March 31, 2004, the consolidated statements of income for the quarters ended March 31, 2004 and 2003 and the consolidated statements of cash flows for the quarters ended March 31, 2004 and 2003 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q, and do not contain certain information included in the consolidated annual financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2003.
Note 2: Employee stock-based compensation
On January 1, 2004, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. We are reporting this change in accounting principle using the modified prospective method of adoption described in SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Beginning in 2004, our results of operations reflect compensation expense for new stock options granted under our stock incentive plan, for the unvested portion of previous stock options granted, for restricted stock and restricted stock units issued under our stock incentive plan and for our employee stock purchase plan. This is the same amount of compensation expense which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied from its original effective date. Prior to 2004, we accounted for our employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under this method of accounting, no compensation expense was recognized for stock options or for our employee stock purchase plan. In accordance with the modified prospective method of transition, results for 2003 have not been restated to reflect this change in accounting principle.
Total stock-based compensation expense in the first quarter of 2004 was $2.7 million. This expense is reflected as cost of goods sold of $0.2 million and selling, general and administrative (SG&A) expense of $2.5 million in our consolidated statement of income for the quarter ended March 31, 2004. Our total stock-based compensation expense in the first quarter of 2004 included $0.7 million of expense for restricted stock and restricted stock units which would have been recognized even if we had not adopted the fair value recognition provisions of SFAS No. 123 in 2004.
5
The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share amounts):
| Quarter Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | ||||||||
| Net income, as reported | $ | 47,662 | $ | 49,979 | |||||
| Add employee stock-based compensation included in net income: | |||||||||
| Stock options and employee stock purchase plan | 2,019 | — | |||||||
| Restricted stock and restricted stock units | 653 | 394 | |||||||
| Total | 2,672 | 394 | |||||||
| Tax benefit | (1,021 | ) | (150 | ) | |||||
| Employee stock-based compensation included in net income, net of | |||||||||
| tax | 1,651 | 244 | |||||||
| Deduct fair value employee stock-based compensation expense, net | |||||||||
| of tax | (1,651 | ) | (1,103 | ) | |||||
| Pro forma net income | $ | 47,662 | $ | 49,120 | |||||
| Earnings per share: | |||||||||
| Basic – as reported | $ | 0.95 | $ | 0.84 | |||||
| pro forma | 0.95 | 0.83 | |||||||
| Diluted – as reported | $ | 0.94 | $ | 0.83 | |||||
| pro forma | 0.94 | 0.82 | |||||||
Note 3: Changes in accounting estimates
During the first quarter of 2004, we revised the estimated useful lives for certain of our software and production assets, as we anticipate that the assets will be replaced or retired sooner than originally assumed. The weighted-average useful life for these assets was shortened from 8.0 years to 6.8 years. This change in accounting estimate is expected to result in increased depreciation and amortization expense of approximately $8 million in 2004. In the first quarter of 2004, $0.7 million of this additional expense was recorded.
Note 4: New accounting pronouncements
In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003. This FSP outlines the appropriate accounting treatment for the effects of the new Medicare law, as well as the required financial statement disclosures. The new law introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare plan. Our retiree medical plans do provide prescription drug coverage. However, as permitted by FSP No. FAS 106-1, we have elected to defer recognition of the impacts of the new law on the accumulated post-retirement benefit obligation and net periodic post-retirement benefit expense presented in our consolidated financial statements. Specific authoritative accounting guidance on the accounting for the federal subsidy provided for in the Act is pending. That guidance, when issued, could require us to change previously reported information. We anticipate that our retiree prescription drug benefits will be coordinated with Medicare. Thus, we do anticipate some decrease in our prescription drug benefits expense beginning in 2006.
6
Note 5: Supplementary balance sheet information
Inventories and supplies – Inventories and supplies were comprised of the following (dollars in thousands):
| March 31, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw materials | $ | 2,772 | $ | 2,550 | ||||
| Semi-finished goods | 5,881 | 5,623 | ||||||
| Finished goods | 997 | 975 | ||||||
| Total inventories | 9,650 | 9,148 | ||||||
| Supplies | 9,111 | 9,504 | ||||||
| Inventories and supplies | $ | 18,761 | $ | 18,652 | ||||
Other current assets – Other current assets were comprised of the following (dollars in thousands):
| March 31, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Prepayment to voluntary employee | ||||||||
| beneficiary association (VEBA) trust | $ | 37,823 | $ | 12,657 | ||||
| Other | 8,703 | 7,327 | ||||||
| Other current assets | $ | 46,526 | $ | 19,984 | ||||
Assets held for sale – Assets held for sale relate to our Financial Services check printing facility located in Indianapolis, Indiana which was closed in March 2004. We are actively seeking a buyer for this property and expect to dispose of it within one year. Based on preliminary market research and appraisal information, we believe the fair value of the assets less costs to sell exceeds the carrying value of the assets. As such, no impairment loss has been recognized for these assets. Assets held for sale were comprised of the following (dollars in thousands):
| March 31, 2004 | |||||
|---|---|---|---|---|---|
| Land and land improvements | $ | 463 | |||
| Buildings and building improvements | 2,003 | ||||
| Machinery and equipment | 466 | ||||
| Total | 2,932 | ||||
| Accumulated depreciation | (1,646 | ) | |||
| Assets held for sale – net | $ | 1,286 | |||
We are currently in the process of closing three additional check printing facilities (see Note 7). We anticipate that our Pittsburgh, Pennsylvania and Campbell, California facilities will be closed in the second quarter of 2004 and our Anniston, Alabama facility will be closed by the end of 2004. As we were still operating these facilities, they were not classified as held for sale as of March 31, 2004.
7
Other non-current assets – Other non-current assets were comprised of the following (dollars in thousands):
| March 31, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Contract acquisition costs (net of accumulated amortization of | ||||||||
| $49,516 and $41,608, respectively) | $ | 89,193 | $ | 96,085 | ||||
| Deferred advertising costs | 27,213 | 29,044 | ||||||
| Prepaid post-retirement asset | 19,267 | 19,839 | ||||||
| Other | 12,747 | 12,541 | ||||||
| Other non-current assets | $ | 148,420 | $ | 157,509 | ||||
Changes in contract acquisition costs during the first quarter of 2004 were as follows (dollars i