Business Context and Reporting Period
Company: Deluxe Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Deluxe operates three primary segments: Small Business Services (57.1% of H1 2008 revenue), Financial Services (29.9%), and Direct Checks (13.0%). The company provides checks, printed forms, promotional products, and related services to small businesses, financial institutions, and consumers.
Key Financial Metrics
| Metric | Q2 2008 | Q2 2007 | H1 2008 | H1 2007 |
|---|---|---|---|---|
| Revenue | $367.7M | $399.9M | $749.0M | $803.7M |
| Gross Profit | $227.9M | $257.1M | $463.3M | $511.6M |
| Gross Margin | 62.0% | 64.3% | 61.9% | 63.7% |
| Operating Income | $61.3M | $67.5M | $116.1M | $136.5M |
| Net Income | $32.6M | $36.0M | $59.9M | $71.2M |
| Diluted EPS | $0.63 | $0.69 | $1.16 | $1.37 |
| Cash & Equivalents | $17.8M | $21.6M (Dec '07) | N/A | |
| Total Debt | $836.4M | $844.0M (Dec '07) | N/A | |
| Operating Cash Flow (H1) | N/A | $66.7M | $104.7M |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 8.0% in Q2 and 6.8% in H1 2008 compared to 2007. Drivers included unfavorable economic conditions affecting Small Business Services, declining check usage impacting Direct Checks and Financial Services, and lower revenue per order in Financial Services.
- Margin Compression: Gross margin decreased 2.3 percentage points in Q2 and 1.8 points in H1 due to higher delivery costs (fuel surcharges, postal rate increases), unfavorable product mix, and pricing pressure in Financial Services.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 12.1% in Q2 and 8.4% in H1, driven by lower performance-based compensation, cost reduction initiatives, and reduced employee benefit costs.
- Cash Flow: Operating cash flow for H1 2008 dropped $38.0M year-over-year, primarily due to a $19.7M increase in employee profit sharing and pension contributions related to 2007 performance.
Guidance, Outlook, and Risks
2008 Outlook
- Revenue: Expected to be between $1.515 billion and $1.535 billion (vs. $1.61 billion in 2007).
- Diluted EPS: Expected to be between $2.52 and $2.62 (vs. $2.76 in 2007).
- Operating Cash Flow: Anticipated between $195 million and $205 million.
- Capital Spending: Estimated at approximately $30 million.
Management Commentary & Risks
- Acquisitions: Completed four acquisitions in H1 2008 (PartnerUp, Hostopia, Logo Mojo, Yoffi) to drive growth in Small Business Services. The Hostopia acquisition ($100M) is expected to reduce EPS by approximately $0.08 due to amortization and interest.
- Cost Reduction: Aggressive initiatives targeting $225 million in annual cost savings by end of 2009. Approximately $70 million of this target is expected to be realized in 2008.
- Restructuring: Recorded $2.6 million in restructuring accruals in H1 2008 for employee severance and facility closures (Flagstaff call center). Net charges were $1.7 million after reversals.
- Liquidity: Total debt remains high at $836.4M. The company has $428.8M available under committed lines of credit. Commercial paper market is currently unavailable due to credit ratings.
- Accounting Changes: New FASB guidance (FSP No. EITF 03-6-1) will require the use of the two-class method for EPS calculations starting January 1, 2009, requiring restatement of historical data.
Investor Verification Checklist
- Check Usage Trends: Verify the continuing decline in check usage and its specific impact on the Financial Services and Direct Checks segments.
- Acquisition Integration: Monitor the revenue contribution and integration costs of the Hostopia and PartnerUp acquisitions.
- Cost Savings Realization: Track progress against the $225 million cost reduction target, specifically the $70 million expected for 2008.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the EBITDA to interest expense ratio, given the high debt load.
- EPS Restatement: Review the impact of the new two-class EPS methodology on historical earnings data when implemented in 2009.