(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, 2005 |
| 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 29, 2005 was 50,536,211.
1
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share par value)
(Unaudited)
| March 31, 2005 | December 31, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 16,209 | $ | 15,492 | ||||
| Restricted cash | 480 | 517 | ||||||
| Trade accounts receivable (net of allowances for uncollectible | ||||||||
| accounts of $5,990 and $5,199, respectively) | 100,532 | 110,529 | ||||||
| Inventories and supplies | 38,674 | 38,890 | ||||||
| Deferred income taxes | 12,607 | 13,531 | ||||||
| Current assets of discontinued operations | 24,138 | 22,641 | ||||||
| Other current assets | 62,171 | 38,786 | ||||||
| Total current assets | 254,811 | 240,386 | ||||||
| Long-term Investments | 47,745 | 47,529 | ||||||
| Property, Plant, and Equipment (net of accumulated depreciation of | ||||||||
| $299,189 and $293,477, respectively) | 155,599 | 158,162 | ||||||
| Assets Held for Sale | 7,712 | 7,719 | ||||||
| Intangibles (net of accumulated amortization of $229,819 and $206,265, | ||||||||
| respectively) | 281,137 | 297,184 | ||||||
| Goodwill | 580,740 | 580,740 | ||||||
| Non-Current Assets of Discontinued Operations | 6,889 | 6,964 | ||||||
| Other Non-Current Assets | 221,025 | 160,395 | ||||||
| Total assets | $ | 1,555,658 | $ | 1,499,079 | ||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 78,405 | $ | 72,984 | ||||
| Accrued liabilities | 219,081 | 202,979 | ||||||
| Short-term debt | 258,849 | 264,000 | ||||||
| Long-term debt due within one year | 26,316 | 26,359 | ||||||
| Current liabilities of discontinued operations | 3,249 | 4,876 | ||||||
| Total current liabilities | 585,900 | 571,198 | ||||||
| Long-term Debt | 953,605 | 953,848 | ||||||
| Deferred Income Taxes | 82,807 | 82,489 | ||||||
| Non-Current Liabilities of Discontinued Operations | 3,396 | 3,490 | ||||||
| Other Non-Current Liabilities | 79,528 | 66,545 | ||||||
| Shareholders’ Deficit: | ||||||||
| Common shares $1 par value (authorized: 500,000 shares; | ||||||||
| issued: 2005 - 50,536; 2004 - 50,266) | 50,536 | 50,266 | ||||||
| Additional paid-in capital | 29,971 | 20,761 | ||||||
| Accumulated deficit | (216,548 | ) | (235,651 | ) | ||||
| Accumulated other comprehensive loss, net of tax | (13,537 | ) | (13,867 | ) | ||||
| Total shareholders’ deficit | (149,578 | ) | (178,491 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 1,555,658 | $ | 1,499,079 | ||||
See Notes to Unaudited Consolidated Financial Statements
2
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| Quarter Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005
| 2004
| |||||||
| Revenue | $ | 437,320 | $ | 308,832 | ||||
| Cost of goods sold | 152,071 | 106,886 | ||||||
| Gross Profit | 285,249 | 201,946 | ||||||
| Selling, general and administrative expense | 208,523 | 120,141 | ||||||
| Operating Income | 76,726 | 81,805 | ||||||
| Other income | 574 | 374 | ||||||
| Income Before Interest and Taxes | 77,300 | 82,179 | ||||||
| Interest expense | (13,401 | ) | (5,166 | ) | ||||
| Interest income | 139 | 113 | ||||||
| Income Before Income Taxes | 64,038 | 77,126 | ||||||
| Provision for income taxes | 24,270 | 29,464 | ||||||
| Income From Continuing Operations | 39,768 | 47,662 | ||||||
| Discontinued Operations: | ||||||||
| Loss from operations | (615 | ) | — | |||||
| Income tax benefit | 219 | — | ||||||
| Net Loss From Discontinued Operations | (396 | ) | — | |||||
| Net Income | $ | 39,372 | $ | 47,662 | ||||
| Basic Earnings per Share: | ||||||||
| Income from continuing operations | $ | 0.79 | $ | 0.95 | ||||
| Loss from discontinued operations | (0.01 | ) | — | |||||
| Basic Earnings per Share | $ | 0.78 | $ | 0.95 | ||||
| Diluted Earnings per Share: | ||||||||
| Income from continuing operations | $ | 0.78 | $ | 0.94 | ||||
| Loss from discontinued operations | — | — | ||||||
| Diluted Earnings per Share | $ | 0.78 | $ | 0.94 | ||||
| Cash Dividends per Share | $ | 0.40 | $ | 0.37 | ||||
| Total Comprehensive Income | $ | 39,702 | $ | 47,725 | ||||
See Notes to Unaudited Consolidated Financial Statements
3
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Quarter Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005
| 2004
| |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 39,372 | $ | 47,662 | ||||
| Adjustments to reconcile net income to net cash provided by operating | ||||||||
| activities: | ||||||||
| Net loss from discontinued operations | 396 | — | ||||||
| Depreciation | 7,160 | 4,664 | ||||||
| Amortization of intangibles | 23,510 | 9,586 | ||||||
| Amortization of contract acquisition costs | 8,326 | 7,908 | ||||||
| Employee stock-based compensation expense | 2,405 | 2,696 | ||||||
| Other non-cash items, net | 5,712 | 2,455 | ||||||
| Changes in assets and liabilities, net of effects of | ||||||||
| discontinued operations: | ||||||||
| Trade accounts receivable | 8,411 | (911 | ) | |||||
| Inventories and supplies | 215 | (109 | ) | |||||
| Other current assets | (25,311 | ) | (26,459 | ) | ||||
| Contract acquisition payments | (14,776 | ) | (5,826 | ) | ||||
| Deferred advertising costs | 1,490 | 1,831 | ||||||
| Other non-current assets | 1,541 | 571 | ||||||
| Accounts payable | (3,916 | ) | 332 | |||||
| Accrued and other non-current liabilities | (22,157 | ) | 4,317 | |||||
| Net cash provided by operating activities of continuing operations | 32,378 | 48,717 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Payments for acquisition, net of cash acquired | (218 | ) | — | |||||
| Change in restricted cash | 37 | — | ||||||
| Purchases of capital assets | (12,089 | ) | (3,974 | ) | ||||
| Other | (486 | ) | (385 | ) | ||||
| Net cash used by investing activities of continuing operations | (12,756 | ) | (4,359 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Net payments on short-term debt | (5,151 | ) | (6,280 | ) | ||||
| Payments on long-term debt | (342 | ) | (258 | ) | ||||
| Change in book overdrafts | 3,219 | (6,133 | ) | |||||
| Payments for common shares repurchased | — | (18,057 | ) | |||||
| Proceeds from issuing shares under employee plans | 7,332 | 6,692 | ||||||
| Cash dividends paid to shareholders | (20,269 | ) | (18,601 | ) | ||||
| Net cash used by financing activities of continuing operations | (15,211 | ) | (42,637 | ) | ||||
| Effect of Exchange Rate Change on Cash | (30 | ) | — | |||||
| Net Cash Used by Discontinued Operations | (3,664 | ) | — | |||||
| Net Increase in Cash and Cash Equivalents | 717 | 1,721 | ||||||
| Cash and Cash Equivalents: Beginning of Period | 15,492 | 2,968 | ||||||
| End of Period | $ | 16,209 | $ | 4,689 | ||||
See Notes to Unaudited Consolidated Financial Statements
4
The consolidated balance sheet as of March 31, 2005 and the consolidated statements of income and cash flows for the quarters ended March 31, 2005 and 2004 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, 2004.
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 reported 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 all employee stock-based compensation, including the unvested portion of stock options granted prior to January 1, 2004. 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.
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. This FSP allows additional time for companies to determine how the new law affects a company’s accounting for deferred tax liabilities on unremitted foreign earnings. The new law provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and which meet certain requirements. We are currently evaluating whether any of the earnings of our Canadian operations will be repatriated in accordance with the terms of this law. Any repatriation of these earnings must occur in 2005. The maximum amount of earnings that could be repatriated is approximately $34 million, which would result in tax expense of approximately $3.5 million. We expect our evaluation to be completed in the second quarter of 2005.
In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock-Based Compensation. The new statement is referred to as SFAS No. 123(R) and is entitled Share-Based Payment. The new statement requires companies to recognize expense for stock-based compensation in the statement of income and is effective for us on January 1, 2006. We do not expect the provisions of SFAS No. 123(R) to result in a significant change in the compensation expense we currently recognize in our statements of income under SFAS No. 123.
5
Inventories and supplies – Inventories and supplies were comprised of the following (in thousands):
| March 31, | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Raw materials | $ | 8,158 | $ | 12,377 | ||||
| Semi-finished goods | 15,408 | 6,321 | ||||||
| Finished goods | 7,152 | 11,732 | ||||||
| Total inventories | 30,718 | 30,430 | ||||||
| Supplies | 7,956 | 8,460 | ||||||
| Inventories and supplies | $ | 38,674 | $ | 38,890 | ||||
Other current assets – Other current assets were comprised of the following (in thousands):
| March 31, | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Prepayment to voluntary employee | ||||||||
| beneficiary association (VEBA) trust | $ | 41,231 | $ | 16,230 | ||||
| Cash held for customers | 7,630 | 9,759 | ||||||
| Other | 13,310 | 12,797 | ||||||
| Other current assets | $ | 62,171 | $ | 38,786 | ||||
We maintain a VEBA trust to fund employee and retiree medical costs, as well as severance benefits. We typically make the majority of our contributions to this trust in the first quarter of the year. During the quarter ended March 31, 2005, we contributed $34.0 million to the trust.
Assets held for sale – Assets held for sale include four Financial Services check printing facilities and one Small Business Services printing facility which we closed during 2004, as well as one Small Business Services facility which was closed prior to our acquisition of New England Business Service, Inc. (NEBS) in June 2004.
6
Intangibles – Intangibles were comprised of the following (in thousands):
| March 31, 2005 | December 31, 2004 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||
| Indefinite lives: | ||||||||||||||||||||
| Trade names | $ | 59,400 | $ | — | $ | 59,400 | $ | 59,400 | $ | — | $ | 59,400 | ||||||||
| Amortizable intangibles: | ||||||||||||||||||||
| Internal-use software | 274,330 | (192,800 | ) | 81,530 | 266,814 | (180,005 | ) | 86,809 | ||||||||||||
| Customer lists | 108,950 | (27,075 | ) | 81,875 | 108,950 | (19,431 | ) | 89,519 | ||||||||||||