Deluxe Reports $13.8 Million Profit in Q3
Friday, October 24, 2008
Press release from the issuing companyST. PAUL, Minn., Oct. 23 Deluxe Corporation reported third quarter diluted earnings per share (EPS) of $0.27 on net income of $13.8 million. EPS for the third quarter of 2007 was $0.62 on net income of $32.2 million. The quarter's results reflect charges of $0.38 per share related to an expected pre-tax charge of $21.9 million for our previously announced restructuring actions and unexpected pre-tax asset impairment charges of $9.7 million which were not reflected in the Company's previous outlook. The Company was required to write-down certain trade name assets due to the effects of the recent economic downturn and turmoil in the broader U.S. capital markets. Aside from these charges, results for the quarter benefited from a favorable shift in product mix, lower spending and earlier than expected savings from the Company's cost initiatives.
"In a tough economy, we were able to weather the storm this quarter and are generally pleased with our performance," said Lee Schram, CEO of Deluxe. "We further stabilized our core checks business, advanced our cost initiatives and at the same time, we made progress with our acquisitions and investing in our future."
Third Quarter Performance
Revenue for the quarter was $366.2 million compared to $388.6 million during the third quarter of 2007. Small Business Services revenue was $9.4 million lower than the previous year driven primarily by economic softness. Financial Services revenue was down $9.2 million from the previous year as expected due to lower revenue per order and lower order volume, while Direct Checks revenue decreased $3.8 million due to anticipated lower order volume.
Gross margin was 58.3 percent of revenue compared to 63.1 percent in 2007. The restructuring charges reduced our gross margin by 3.5 percentage points. Lower revenue per order in Financial Services also reduced gross margin.
Selling, general and administrative (SG&A) expense decreased $17.6 million in the quarter compared to 2007. The decrease was driven by benefits from cost reduction initiatives and lower performance-based compensation. As a percent of revenue, SG&A decreased to 44.9 percent from 46.9 percent in 2007.
Operating income was $30.3 million, compared to $60.7 million in the third quarter of 2007. Operating income was 8.3 percent of revenue compared to 15.6 percent in the prior year. The restructuring related costs and asset impairment charges reduced operating income by 8.6 percentage points of revenue. Benefits from cost reduction initiatives and lower performance-based compensation offset the revenue decline.
Net income decreased $18.4 million and diluted EPS decreased $0.35, driven by the restructuring and asset impairment charges as well as the revenue decline. These impacts were partly offset by the reductions in SG&A expense.
Third Quarter Performance by Business Segment
Small Business Services revenue was $216.4 million versus $225.8 million in 2007. The decline was due to soft economic conditions partially offset by contributions from the Hostopia acquisition and fraud protection services. Operating income decreased to $10.3 million, from $30.2 million in 2007. The quarter's results include $20.0 million of restructuring related costs and asset impairment charges.
Financial Services revenue was $103.8 million compared to $113.0 million in 2007. Revenue per order was down in line with the Company's expectation. Third quarter order volume was down 3.7% compared to last year. Operating income in 2008 decreased to $7.1 million from $16.7 million in 2007 and includes $10.8 million of restructuring related costs.
Direct Checks revenue was $46.0 million compared to $49.8 million in 2007. Third quarter order volume was down due to the continued decline in check usage and advertising response rates. Operating income was $12.9 million compared to $13.8 million in 2007. The quarter's results include $0.8 million of restructuring costs.
Year-to-Date Operating Cash Flow Performance
Cash provided by operating activities for the first nine months of 2008 totaled $145.4 million, a decrease of $32.3 million compared to last year. The reduction in 2008 primarily relates to lower earnings and higher payments in the first quarter for 2007-related incentive compensation, partially offset by lower income tax payments and benefits from working capital initiatives.
The Company stated that for the fourth quarter of 2008, revenue is expected to be between $375 million and $390 million, and diluted EPS is expected to be between $0.64 and $0.74, which includes an estimated $0.03 of restructuring related costs. For the full year, revenue is expected to be between $1.490 billion and $1.505 billion, and diluted EPS is expected to be between $2.07 and $2.17. The Company also stated that it expects operating cash flow to be between $185 million and $200 million in 2008 and capital expenditures to be approximately $30 million.
"Deluxe continues to demonstrate its attractiveness as a more stable, mature company in these challenging economic times with sufficient access to capital. We have made positive strategic moves to reposition the Company for sustainable, longer-term growth while continuing to generate consistent strong cash flows and delivering a very attractive dividend," Schram stated. "Although our revenue outlook for the year has come down, we remain roughly on track to deliver our previous earnings per share outlook excluding the additional restructuring and impairment charges."
The table below is provided to assist in understanding changes to the Company's previously communicated diluted EPS outlook for 2008. It also includes a reconciliation of the Company's third quarter adjusted EPS of $0.65 to GAAP EPS of $0.27. The Company's management believes that adjusted EPS is a useful non-GAAP financial measure because the unusual items during 2008 impacted reported net income. This presentation is not intended as an alternative to results reported in accordance with generally accepted accounting principles (GAAP) in the United States of America. Instead, the Company believes that this information is a useful financial measure to be considered in addition to GAAP performance measures.
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