Business Context and Reporting Period
Company: Deluxe Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Deluxe operates three segments: Small Business Services (printed products and business services), Financial Services (check products for financial institutions), and Direct Checks (direct-to-consumer check sales). The company is navigating a severe economic downturn, declining check usage, and turmoil in the financial services industry, while executing aggressive cost reduction initiatives and strategic acquisitions.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Revenue | $332,297 | $362,714 | $1,003,887 | $1,103,783 |
| Net Income | $28,555 | $13,760 | $68,836 | $73,694 |
| Diluted EPS | $0.56 | $0.27 | $1.34 | $1.42 |
| Operating Income | $54,549 | $30,796 | $134,814 | $148,837 |
| Gross Margin | 63.3% | 58.6% | 62.3% | 61.0% |
| Cash from Operations (9M) | $150,208 | $145,204 | ||
| Total Debt | $807,289 | $853,336 | ||
| Cash & Equivalents | $14,141 | $15,590 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 8.4% in Q3 and 9.1% for the nine months ended Sept 30, 2009, compared to 2008. This was driven by lower order volumes across all segments due to the economic recession, declining check usage, and financial industry consolidation.
- Profitability Improvement: Despite revenue declines, Net Income increased significantly in Q3 2009 ($28.6M vs $13.8M in Q3 2008). This was primarily due to a $19.0M reduction in restructuring costs compared to 2008 and a $9.8M pre-tax gain from the early retirement of long-term debt.
- Asset Impairments: The company recorded $24.9M in non-cash asset impairment charges during the first nine months of 2009 (primarily in Q1), related to goodwill and an indefinite-lived trade name in the Small Business Services segment. This compares to $9.7M in impairment charges for the same period in 2008.
- Debt Reduction: Total debt decreased by $46.0M from year-end 2008. The company retired $31.2M of long-term notes in Q1 2009 and reduced short-term borrowings on its line of credit.
Guidance, Outlook, and Risks
- 2009 Revenue Guidance: Management anticipates consolidated revenue between $1.330 billion and $1.345 billion for 2009, down from $1.469 billion in 2008.
- 2009 EPS Guidance: Diluted earnings per share are expected to be between $1.87 and $1.97. This includes an estimated $0.40 per share impact from impairment charges, restructuring, and transaction costs.
- Cost Reduction: The company increased its target for cost reductions to $325 million by the end of 2010. Approximately $105 million of this is expected to be realized in 2009.
- Acquisitions: In July 2009, Deluxe acquired Abacus America, Inc. and MerchEngines.com for $30.8 million net of cash. These are expected to contribute approximately $7 million in revenue in 2009.
- Key Risks:
- Economic Conditions: Continued downturn may necessitate further impairment analyses of goodwill and trade names.
- Financial Industry Turmoil: Bank failures and consolidations could lead to loss of significant contracts or uncollectible receivables.
- Contract Acquisition Costs: $50.6 million in contract acquisition costs are at risk if major financial institution clients fail or consolidate.
Investor Verification Checklist
- Impairment Sustainability: Verify the assumptions used in the Q3 2009 goodwill and trade name impairment tests, specifically the discount rates and royalty rates, to ensure no further write-downs are imminent.
- Restructuring Accruals: Review the $6.9 million remaining restructuring accruals and the timeline for payments (mostly through Q1 2011) to assess future cash outflows.
- Debt Covenant Compliance: Confirm continued compliance with the 3.0x EBITDA to interest expense covenant on the $275 million line of credit, especially given the volatility in operating income.
- Contract Acquisition Recoverability: Assess the concentration risk of the $50.6 million in contract acquisition costs relative to the stability of the top financial institution clients.
- Check Usage Trends: Monitor the rate of decline in check usage and the effectiveness of price increases in offsetting volume losses in the Financial Services and Direct Checks segments.