DLX

Business Context and Reporting Period

Company: Deluxe Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Deluxe provides personalized printed items (checks, forms, business cards) and business services (web design, hosting, fraud protection, payroll) to small businesses and financial institutions. Operations are organized into three segments: Small Business Services (58.4% of revenue), Financial Services (29.5%), and Direct Checks (12.1%). The company operates primarily in the United States, with additional operations in Canada and Europe.

Key Financial Metrics (2009)

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenue decreased 8.5% to $1.344 billion, driven by lower order volumes across all segments due to the economic recession, declining check usage, and turmoil in the financial services industry (bank failures/consolidations).
• Asset Impairments: The company recorded $24.9 million in non-cash asset impairment charges in Q1 2009 related to goodwill and an indefinite-lived trade name in the Small Business Services segment, compared to $9.9 million in 2008.
• Restructuring: Net restructuring charges were $12.0 million in 2009, down from $28.3 million in 2008. The company closed seven manufacturing facilities and two call centers in 2009.
• Debt Reduction: Total debt decreased by $84.6 million. The company retired $31.2 million of long-term notes in Q1 2009, realizing a $9.8 million pre-tax gain.
• Segment Performance:
  • Small Business Services: Revenue down 7.7%; Operating income down 32.5% (impacted by impairments and volume).
  • Financial Services: Revenue down 7.8%; Operating income up 14.6% (driven by cost reductions and price increases offsetting volume declines).
  • Direct Checks: Revenue down 13.2%; Operating income up 2.0% (driven by cost reductions and higher revenue per order).

Guidance, Outlook, and Risks

2010 Outlook

• Revenue: Expected to be between $1.275 billion and $1.335 billion (a decline from 2009).
• Diluted EPS: Expected to be between $2.35 and $2.65.
• Operating Cash Flow: Expected to be between $180 million and $200 million.
• Capital Expenditures: Estimated at approximately $40 million.
• Dividends: The company anticipates maintaining the current quarterly dividend of $0.25 per share.

Key Risks and Contingencies

• Economic Conditions: Continued weak economic conditions and low small business optimism may further reduce demand for core products.
• Financial Services Turmoil: Bank failures and consolidations pose risks to contract retention and the recoverability of unamortized contract acquisition costs ($45.7 million as of year-end).
• Declining Check Usage: The shift to electronic payments continues to erode the core check printing market.
• Debt Covenant Compliance: The company must maintain an EBIT-to-interest expense ratio of 3.0x. While compliant in 2009, significant future impairment charges could threaten this covenant.
• Line of Credit Renewal: The $275 million committed line of credit expires in July 2010. Renewal terms may be less favorable due to the credit environment.

Investor Verification Checklist

• Asset Impairment Sensitivity: Verify the assumptions used in goodwill and trade name impairment tests, as further stock price declines or operational misses could trigger additional charges.
• Contract Acquisition Costs: Assess the recoverability of the $45.7 million in unamortized contract acquisition costs given the instability of financial institution clients.
• Debt Refinancing: Monitor the terms of the replacement line of credit maturing in July 2010, specifically interest rates and collateral requirements.
• Cost Reduction Realization: Track the realization of the remaining $65 million of the $325 million cost reduction target planned for 2010.
• Service Revenue Growth: Evaluate the growth trajectory of higher-margin business services (web hosting, fraud protection) intended to offset declining check volumes.