(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 25, 2004 was 50,227,262.
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share par value)
(Unaudited)
| September 30, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 13,899 | $ | 2,968 | ||||
| Restricted cash | 819 | — | ||||||
| Trade accounts receivable (net of allowances for | ||||||||
| uncollectible accounts of $3,196 and $1,881, respectively) | 120,454 | 37,066 | ||||||
| Inventories and supplies | 61,549 | 18,652 | ||||||
| Deferred income taxes | 21,396 | 258 | ||||||
| Other current assets | 53,734 | 19,984 | ||||||
| Total current assets | 271,851 | 78,928 | ||||||
| Long-term Investments | 46,389 | 42,510 | ||||||
| Property, Plant, and Equipment (net of accumulated | ||||||||
| depreciation of $297,852 and $295,570, respectively) | 164,743 | 123,615 | ||||||
| Assets Held for Sale | 5,803 | — | ||||||
| Intangibles (net of accumulated amortization of $210,156 and | ||||||||
| $172,614, respectively) | 384,620 | 78,161 | ||||||
| Goodwill | 527,687 | 82,237 | ||||||
| Other Non-current Assets | 160,086 | 157,509 | ||||||
| Total assets | $ | 1,561,179 | $ | 562,960 | ||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 84,437 | $ | 46,694 | ||||
| Accrued liabilities | 211,496 | 126,821 | ||||||
| Short-term debt | 318,606 | 213,250 | ||||||
| Long-term debt due within one year | 1,503 | 1,074 | ||||||
| Total current liabilities | 616,042 | 387,839 | ||||||
| Long-term Debt | 975,559 | 380,620 | ||||||
| Deferred Income Taxes | 121,301 | 42,654 | ||||||
| Other Non-current Liabilities | 62,054 | 49,930 | ||||||
| Shareholders’ Deficit: | ||||||||
| Common shares $1 par value (authorized: 500,000,000 | ||||||||
| shares; issued: 2004 – 50,225,104; 2003 – 50,173,067) | 50,225 | 50,173 | ||||||
| Additional paid-in capital | 15,730 | — | ||||||
| Accumulated deficit | (263,886 | ) | (345,950 | ) | ||||
| Unearned compensation | — | (41 | ) | |||||
| Accumulated other comprehensive loss, net of tax | (15,846 | ) | (2,265 | ) | ||||
| Total shareholders’ deficit | (213,777 | ) | (298,083 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 1,561,179 | $ | 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 September 30, | Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||
| Revenue | $ | 484,965 | $ | 314,869 | $ | 1,103,176 | $ | 941,623 | ||||||
| Cost of goods sold | 170,520 | 105,974 | 380,271 | 322,515 | ||||||||||
| Gross Profit | 314,445 | 208,895 | 722,905 | 619,108 | ||||||||||
| Selling, general and administrative expense | 213,744 | 120,914 | 460,479 | 368,815 | ||||||||||
| Asset impairment and net disposition (gains) | ||||||||||||||
| losses | (46 | ) | 319 | 33 | 108 | |||||||||
| Operating Income | 100,747 | 87,662 | 262,393 | 250,185 | ||||||||||
| Other income (expense) | 18 | (424 | ) | 671 | (858 | ) | ||||||||
| Income Before Interest and Taxes | 100,765 | 87,238 | 263,064 | 249,327 | ||||||||||
| Interest expense | (8,926 | ) | (4,934 | ) | (19,303 | ) | (14,205 | ) | ||||||
| Interest income | 605 | 75 | 801 | 308 | ||||||||||
| Income Before Income Taxes | 92,444 | 82,379 | 244,562 | 235,430 | ||||||||||
| Provision for income taxes | 34,939 | 24,197 | 93,407 | 82,377 | ||||||||||
| Net Income | $ | 57,505 | $ | 58,182 | $ | 151,155 | $ | 153,053 | ||||||
| Earnings per Share: Basic | $ | 1.15 | $ | 1.10 | $ | 3.02 | $ | 2.74 | ||||||
Diluted | 1.14 | 1.09 | 2.99 | 2.71 | ||||||||||
| Cash Dividends per Share | $ | 0.37 | $ | 0.37 | $ | 1.11 | $ | 1.11 | ||||||
| Total Comprehensive Income | $ | 45,758 | $ | 58,245 | $ | 137,574 | $ | 153,241 | ||||||
See Notes to Unaudited Consolidated Financial Statements
3
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 151,155 | $ | 153,053 | ||||
| Adjustments to reconcile net income to net cash provided | ||||||||
| by operating activities: | ||||||||
| Depreciation | 19,132 | 16,445 | ||||||
| Amortization of intangibles | 43,862 | 27,696 | ||||||
| Amortization of contract acquisition costs | 24,152 | 18,783 | ||||||
| Employee stock-based compensation expense | 8,660 | 671 | ||||||
| Other non-cash items, net | 8,730 | 7,750 | ||||||
| Changes in assets and liabilities, net of effects of | ||||||||
| acquisition: | ||||||||
| Trade accounts receivable | (15,440 | ) | 871 | |||||
| Inventories and supplies | (1,039 | ) | 1,287 | |||||
| Other current assets | (17,957 | ) | (5,218 | ) | ||||
| Contract acquisition payments | (8,319 | ) | (44,553 | ) | ||||
| Deferred advertising costs | (637 | ) | (10,916 | ) | ||||
| Other non-current assets | (2,631 | ) | (6,444 | ) | ||||
| Accounts payable | (609 | ) | (5,579 | ) | ||||
| Accrued and other non-current liabilities | 4,393 | (2,897 | ) | |||||
| Net cash provided by operating activities | 213,452 | 150,949 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Payments for acquisition, net of cash acquired | (623,550 | ) | — | |||||
| Increase in restricted cash | (819 | ) | — | |||||
| Purchases of capital assets | (26,177 | ) | (15,672 | ) | ||||
| Other | (767 | ) | (852 | ) | ||||
| Net cash used by investing activities | (651,313 | ) | (16,524 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Net borrowings of short-term debt | 105,315 | 200,090 | ||||||
| Net proceeds from long-term debt | 595,644 | 49,825 | ||||||
| Payments of long-term debt | (166,594 | ) | (1,326 | ) | ||||
| Settlement of interest rate lock agreements | (23,564 | ) | — | |||||
| Change in book overdrafts | 1,952 | (6,775 | ) | |||||
| Payments for common shares repurchased | (26,637 | ) | (453,234 | ) | ||||
| Proceeds from issuing shares under employee plans | 17,913 | 17,328 | ||||||
| Cash dividends paid to shareholders | (55,701 | ) | (61,751 | ) | ||||
| Net cash provided (used) by financing activities | 448,328 | (255,843 | ) | |||||
| Effect of Exchange Rate Change on Cash | 464 | — | ||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 10,931 | (121,418 | ) | |||||
| Cash and Cash Equivalents: Beginning of Period | 2,968 | 124,855 | ||||||
End of Period | $ | 13,899 | $ | 3,437 | ||||
See Notes to Unaudited Consolidated Financial Statements
4
The consolidated balance sheet as of September 30, 2004, the consolidated statements of income for the quarters and nine months ended September 30, 2004 and 2003 and the consolidated statements of cash flows for the nine months ended September 30, 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 our 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.
On June 25, 2004, we acquired New England Business Service, Inc. (NEBS) for $639.6 million. Further detail regarding the accounting for this acquisition can be found in Note 3, Acquisition of New England Business Service, Inc. To finance the acquisition, we utilized $475.0 million of an $800.0 million bridge financing agreement, as well as commercial paper (see Note 10). During the third quarter of 2004, we increased our commercial paper program from $500.0 million to $1.0 billion and utilized commercial paper to pay-off the bridge financing. On October 1, 2004, we issued $600.0 million of long-term debt and subsequently canceled the bridge financing agreement. The net proceeds from this debt of $595.6 million were utilized to pay outstanding commercial paper. As such, $595.6 million of commercial paper debt is presented as long-term debt in our consolidated balance sheet as of September 30, 2004. Further details concerning the long-term debt issued can be found in Note 10, Debt. On October 7, 2004, we reduced our commercial paper program back to $500.0 million.
On June 25, 2004, we acquired via a tender offer approximately 98% of the outstanding common stock of NEBS for $44 per share. Immediately following the close of the tender offer, we completed a merger under which NEBS became a wholly-owned subsidiary and we became obligated to pay for the untendered shares at a price of $44 per share. We also agreed to redeem all outstanding NEBS stock options for $44 per option share less the option exercise price. As of September 30, 2004, a portion of the direct costs of the acquisition had not been paid and were included in accrued liabilities in our consolidated balance sheet. We anticipate that substantially all of these payments will be completed during the fourth quarter of 2004. The total purchase price for the acquisition was comprised of the following (dollars in thousands):
| Cash payments for NEBS common stock | $ | 585,352 | |||
| Cash payments to redeem NEBS stock options | 44,087 | ||||
| Direct costs of the acquisition | 10,161 | ||||
| Total purchase price | $ | 639,600 | |||
Amount paid through September 30, 2004 | $ | 638,231 | |||
| Cash acquired from NEBS | (14,681 | ) | |||
| Payments for acquisition through September 30, | |||||
| 2004, net of cash acquired | $ | 623,550 | |||
5
As of September 30, 2004, we had $0.8 million of restricted cash. Upon the acquisition of NEBS, we were required to place on deposit the funds required to pay the shareholders who did not tender their shares of NEBS common stock under the tender offer. These shareholders must present their stock certificates in order to receive their portion of the funds. The funds must remain on deposit for a period of nine months, after which time the funds will be returned to us, and thereafter, any remaining unclaimed funds will be remitted to the appropriate governmental authority under applicable escheat laws.
NEBS is a leading provider of products and services to small businesses. Its offerings include checks, forms, packaging supplies, embossed foil anniversary seals, promotional products and other printed material which are marketed through direct sales, telesales, a direct sales force, dealers, dedicated distributors and the Internet. NEBS also designs, embroiders and sells specialty apparel products through distributors and independent sales representatives. We believe NEBS is a strategic fit, as we both serve small business customers, and the acquisition expands our product offerings, customer base and non-check revenue.
NEBS operating results are included in our consolidated results of operations from the date of acquisition. Our consolidated balance sheet as of September 30, 2004 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. This allocation is preliminary, pending the completion of detailed analyses and outside appraisals of the fair values of the assets acquired, as well as completion of management’s integration plans. Once these analyses and appraisals have been completed, the allocation of the purchase price will be finalized. We have announced our intention to utilize a shared services environment approach for both manufacturing and certain selling, general and administrative (SG&A) functions. This approach will most likely result in the exit of certain activities. However, to ensure that we continue to meet customer expectations, significant analysis is required before all such plans can be finalized. To the extent the activities to be discontinued are NEBS activities, we would adjust the preliminary purchase price allocation to reflect additional restructuring liabilities. If the discontinued activities are Deluxe activities, any restructuring accruals would be reflected in our consolidated statements of income. The preliminary allocation of the purchase price does reflect $20.5 million of restructuring accruals for those NEBS activities which we have already decided to exit. These accruals are discussed in Note 9, Restructuring charges.
6
The preliminary purchase price allocation resulted in goodwill of $445.5 million. We believe that the NEBS acquisition resulted in the recognition of goodwill primarily because of its industry position, the potential to introduce products across multiple channels and the ability to realize cost synergies. The following illustrates our preliminary allocation of the purchase price to the assets acquired and liabilities assumed (dollars in thousands):
| Cash and cash equivalents | $ | 14,681 | |||
| Trade accounts receivable | 71,563 | ||||
| Inventories and supplies | 41,729 | ||||
| Deferred income taxes | 21,370 | ||||
| Other current assets | 14,732 | ||||
| Long-term investments | 2,974 | ||||
| Property, plant and equipment | 54,816 | ||||
| Assets held for sale | 2,208 | ||||
| Intangibles | 333,883 | ||||
| Goodwill | 445,450 | ||||
| Other non-current assets | 8,420 | ||||
| Accounts payable | (34,729 | ) | |||
| Accrued liabilities | (81,963 | ) | |||
| Long-term debt due within one year | (10,417 | ) | |||
| Long-term debt | (155,203 | ) | |||
| Deferred income taxes | (86,902 | ) | |||
| Other non-current liabilities | (3,012 | ) | |||
| Total purchase price | $ | 639,600 | |||
Our preliminary allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets (dollars in thousands):
| Amount | Weighted- average amortization period | ||||||
|---|---|---|---|---|---|---|---|