DELUXE CORP - 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Deluxe Corporation for the period ended June 30, 2009. Deluxe operates three reportable segments: Small Business Services (57.4% of revenue), Financial Services (30.1% of revenue), and Direct Checks (12.5% of revenue). The company provides business checks, printed forms, promotional products, web services, and fraud protection services to small businesses, financial institutions, and consumers. The reporting period reflects the impact of a severe economic downturn and turmoil in the financial services industry.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Revenue | $332,069 | $363,992 | $671,589 | $741,069 |
| Gross Profit | $205,105 | $226,832 | $415,366 | $460,971 |
| Gross Margin | 61.8% | 62.3% | 61.8% | 62.2% |
| Operating Income | $53,083 | $62,515 | $80,265 | $118,041 |
| Net Income | $27,776 | $32,617 | $40,280 | $59,934 |
| Diluted EPS | $0.54 | $0.63 | $0.79 | $1.15 |
| Cash from Operations (6mo) | $85,860 (vs $66,914 in 2008) | |||
| Total Debt | $818,638 (as of June 30, 2009) | |||
| Cash & Equivalents | $18,141 (as of June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 8.8% in Q2 and 9.4% for the six months ended June 30, 2009, compared to the prior year. This was driven by lower order volumes across all segments due to the economic recession, declining check usage, and financial industry consolidation.
- Asset Impairment: A significant non-cash asset impairment charge of $24.9 million was recorded in the first half of 2009 (Q1), consisting of $20.0 million for goodwill and $4.9 million for an indefinite-lived trade name in the Small Business Services segment. No impairment charges were recorded in Q2 2009.
- Debt Reduction: The company retired $31.2 million of long-term notes in Q1 2009, realizing a pre-tax gain of $9.8 million. Total debt decreased by $34.7 million from year-end 2008.
- Restructuring: Net restructuring charges were $2.4 million for the six months ended June 30, 2009, compared to $2.4 million in the same period of 2008. However, 2008 included significant accruals for severance that were paid down in 2009.
- Discontinued Operations: The company sold its Russell & Miller retail packaging and signage business in January 2009. Results are reported as discontinued operations.
Guidance, Outlook, and Risks
- 2009 Revenue Outlook: Management anticipates consolidated revenue between $1.32 billion and $1.36 billion for 2009, down from $1.47 billion in 2008.
- Small Business Services: Expected mid-to-upper single-digit revenue decline.
- Financial Services: Expected 6-7% check order decline in H2 2009.
- Direct Checks: Expected double-digit revenue decline.
- 2009 EPS Outlook: Diluted earnings per share expected between $1.75 and $1.95. This includes an estimated $0.40 per share impact from impairment charges, restructuring, acquisition costs, and debt repurchase gains.
- Cost Reduction: The company is on track to realize approximately $90 million of its $300 million cost reduction target in 2009.
- Acquisitions: In July 2009 (subsequent to period end), Deluxe acquired Abacus America, Inc. and MerchEngines.com for approximately $30 million to expand web hosting and search engine marketing services.
- Risks:
- Economic Conditions: Continued uncertainty may require additional impairment analyses.
- Financial Institution Clients: Bank failures or consolidations could lead to loss of contracts or inability to recover contract acquisition costs ($55.8 million recorded).
- Postretirement Benefits: Market volatility could increase unfunded status and future expenses.
Investor Verification Checklist
- Impairment Sustainability: Verify if the $24.9 million impairment charge in Q1 2009 was a one-time event or if further write-downs are likely given the ongoing economic downturn.
- Contract Acquisition Costs: Assess the recoverability of the $55.8 million in contract acquisition costs, particularly given the risk of financial institution client consolidation.
- Debt Covenant Compliance: Confirm continued compliance with the 3.0x EBITDA to interest expense covenant, especially if future impairment charges occur.
- Check Usage Trends: Monitor the rate of decline in check usage, which is a fundamental driver for the Financial Services and Direct Checks segments.
- Acquisition Integration: Evaluate the revenue contribution and integration costs of the July 2009 acquisitions (Abacus America and MerchEngines.com) in subsequent quarters.