DLX

Business Context and Reporting Period

Company: Deluxe Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Deluxe operates three segments: Small Business Services (56.9% of revenue), Financial Services (30.1%), and Direct Checks (13.0%). The company provides checks, printed forms, and related services to small businesses, financial institutions, and consumers. The reporting period was significantly impacted by a severe economic downturn and turmoil in the financial services sector.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 10.0% year-over-year, driven by lower order volumes across all segments due to the economic recession and declining check usage.
• Asset Impairment Charges: The company recorded a non-cash impairment charge of $24.9 million in the Small Business Services segment ($20.0 million for goodwill and $4.9 million for an indefinite-lived trade name) due to stock price declines and economic conditions.
• Debt Reduction: Total debt decreased by $41.3 million. The company retired $31.2 million of long-term notes, realizing a pre-tax gain of $9.8 million.
• Restructuring: Net restructuring charges were $1.3 million, primarily related to facility closures and lease obligations.
• Effective Tax Rate: The effective tax rate increased to 49.9% from 35.8% in the prior year, largely due to the non-deductible portion of the goodwill impairment charge.

Guidance, Outlook, and Risks

2009 Outlook

• Revenue: Expected to be between $1.3 billion and $1.385 billion (down from $1.47 billion in 2008).
• Diluted EPS: Expected to be between $1.70 and $2.00. This includes an estimated $0.35 per share reduction for impairment charges, restructuring, and debt gains.
• Operating Cash Flow: Anticipated to be between $175 million and $200 million.
• Capital Spending: Estimated at approximately $40 million, focused on digital printing and manufacturing productivity.

Management Commentary

Management is pursuing aggressive cost reduction initiatives targeting $300 million in annual savings by the end of 2010. The company expects to realize approximately $90 million of these savings in 2009. While revenue is under pressure, the company is focused on reducing debt and maintaining liquidity.

Risks and Contingencies

• Financial Services Turmoil: Continued bank failures and consolidations could lead to lost contracts or unrecoverable contract acquisition costs ($60.6 million recorded as assets).
• Debt Covenants: The credit facility requires an EBIT-to-interest expense ratio of 3.0x. Significant future impairment charges could jeopardize compliance, potentially triggering immediate repayment demands.
• Postretirement Benefits: Market volatility has increased the unfunded status of the postretirement plan, potentially leading to higher future expenses and cash contributions.

Investor Verification Checklist

• Impairment Sustainability: Verify if the $24.9 million impairment charge is a one-time event or if further write-downs are likely given the ongoing economic downturn.
• Debt Covenant Compliance: Monitor the EBIT-to-interest ratio closely to ensure compliance with the 3.0x covenant requirement.
• Contract Acquisition Costs: Assess the recoverability of the $60.6 million in contract acquisition costs amidst potential client consolidations or failures.
• Revenue Mix Shift: Confirm the trajectory of the decline in check usage and the effectiveness of new revenue streams (e.g., fraud protection, e-commerce) in offsetting volume losses.
• Liquidity Position: Review the utilization of the $275 million credit line and the sufficiency of operating cash flow to cover dividends and debt service.