A year ago a relentless decline in its core business was dragging down earnings at Deluxe Corp., the nation's largest check printer.
But last week the company said that profit had risen 18.8% last quarter - more than it had forecast - and predicted even better results in coming years.
With use of paper checks falling, how did Deluxe do it? By turning itself into a supplier of printing services and office supplies to small businesses.
"2004 was an excellent year for Deluxe. It was a year of many changes," said Lawrence J. Mosner, its chairman and chief executive, in an earnings conference call Thursday. "We are on the right course."
At the heart of the transformation is New England Business Service Inc. Deluxe bought the Groton, Mass., company in June for $643 million in cash and $166 million in assumed debt.
The Nebs business reversed a 2003 slide in sales and profits at Deluxe, and executives said it should propel growth for at least the next three years.
Deluxe, of Shoreview, Minn., absorbed the acquired operations throughout the second half. Last week Deluxe said Nebs - which prints business forms and stationary, and operates an office supply catalog service - would be merged with its own business services unit to create a small-business services division.
The Nebs deal made the biggest change in Deluxe's business since 2000, when the company spun off its technology and transaction processing operations to form today's eFunds Corp.
Mr. Mosner said Nebs "outperformed our expectations" by contributing $191.7 million of revenue in the fourth quarter. Small-business services accounted for 54% of Deluxe's $476.9 million in total revenue and 45% of $85 million in total operating profit.
By comparison, in the same period of 2003 the business services unit contributed 21% of $300.5 million in total revenue and 31% of $68.7 million in operating profit.
Without Nebs' revenue contributions in the second half, full-year sales would have been just $1.2 billion, following the same downward trajectory Deluxe reported for 2003. That year its net income fell 10.2%, to $192.5 million, and revenue dropped 3.3%, to $1.24 billion.
Deluxe's two check-printing operations are slipping. Fourth-quarter revenue in the direct checks business, which sells products to consumers, was down 5.9% from a year earlier, to $68.3 million. The financial services unit, which sells checks to banks, did even worse: revenue fell 8.6%, to $151.3 million.
NEBS drove total fourth-quarter earnings of $46.8 million, or 92 cents a share, an 18.8% jump from a year earlier. Total revenue grew 59%, to $476.9 million.
Full year per-share earnings of $3.92 set a record, though overall results remained lower than in the late 1990s, when the eFunds operations and other divested businesses were part of the mix.
Reflecting their confidence in the restructured business, executives said the board had increased the quarterly dividend by 3 cents, to 40 cents a share.
Deluxe predicts earnings per share of $3.30 in 2005. Douglas Treff, a senior vice president and the company's chief financial officer, said a stock repurchase plan drove up EPS in 2004 but that no further buybacks are planned.
Instead, Mr. Treff said, Deluxe will focus on paying down debt and integrating the acquisition more fully. He projected that small-business gains will offset declines in check printing this year, and Mr. Mosner said the unit would drive higher profit and cash flows in 2006 and 2007.
Deluxe plans to close two check-printing plants in Ohio and California in the next 18 months (in addition to the six it shuttered in 2004), executives said. That will leave it with 18 printing and call-center facilities.
They also cautioned that check-reorder cycles would lengthen as consumers write fewer checks, and that pricing pressure would continue for contracts with financial institutions, which previously had been Deluxe's largest market.
Mr. Mosner estimated that check-writing volume would keep falling, at 3.5% to 4.5% a year.
Deluxe is beginning to offer fees to banks for referring small-business clients for general printing, office supplies and equipment, and products and services.
Nikolai D. Fisken, an analyst at Stephens Inc. of Little Rock, said that the slide in check volume might be even steeper than Deluxe expects and that it could face more pricing pressure as printers bid more aggressively for shrinking bank business, he said.
In 2004, Deluxe lost the check-printing account for Wells Fargo & Co. to its Atlanta rival, John H. Harland Co.
"We're in a pretty good price war right now, and I think it's accelerating," Mr. Fisken said.
