Deluxe Reports Second Quarter Results
Friday, July 24, 2009
ST. PAUL, Minn. -- Deluxe Corporation reported second quarter adjusted diluted earnings per share (EPS) of $0.57 compared to $0.65 in the prior year period. Adjusted EPS for both periods excludes the impact of restructuring-related costs, and for 2009, also excludes the impact of transaction-related costs associated with the recently announced acquisitions. Reported diluted EPS was $0.54 on net income of $27.8 million in 2009 and $0.63 on net income of $32.6 million in 2008. Operating results were better than expected for the current period due to favorable shifts in product mix, lower spending and a lower effective tax rate.
"We had another strong quarter solidly delivering on our financial commitments," said Lee Schram, CEO of Deluxe. "More importantly, we saw growth in the quarter in key strategic areas, including our loyalty, retention, and fraud and security offerings, as well as new business services. We also advanced our transformational strategy with the recently announced acquisition of MerchEngines and execution of a definitive agreement to purchase Aplus.net's shared hosting business."
Second Quarter Performance
Revenue for the quarter was $332.1 million compared to $364.0 million during the second quarter of 2008. Small Business Services revenue was $15.9 million lower than the previous year driven primarily by continued economic softness. Financial Services revenue was down $9.5 million from the previous year and Direct Checks revenue decreased $6.5, million both due to lower order volumes.
Gross margin was 61.8 percent of revenue compared to 62.3 percent in 2008. Increased restructuring-related costs in 2009 caused a 0.3 percentage point decrease in gross margin as compared to the prior year. The benefit of our cost reduction initiatives was offset by increased materials cost and performance-based compensation expense.
Selling, general and administrative (SG&A) expense decreased $11.0 million in the quarter compared to 2008. Increased performance-based compensation expense was more than offset by benefits from cost reduction initiatives and lower spending. As a percent of revenue, SG&A increased to 45.7 percent from 44.7 percent in 2008.
Operating income was $53.1 million compared to $62.5 million in the second quarter of 2008. Benefits from cost reduction initiatives and lower spending were more than offset by the impact of lower revenue levels and increased performance-based compensation expense, which alone increased approximately $8 million in the 2009 quarter. Operating income was 16.0 percent of revenue compared to 17.2 percent in the prior year.
Net income decreased $4.8 million and diluted EPS decreased $0.09, driven by lower operating income.
Second Quarter Performance by Business Segment
Small Business Services revenue was $191.9 million versus $207.8 million in 2008. The decline was due primarily to soft economic conditions, declines in sales of checks and forms, and a $2 million decline from the effect of Canadian exchange rate changes. These reductions were partially offset by revenue contributions from the Hostopia acquisition and fraud protection services. Operating income in 2009 decreased to $20.6 million from $30.3 million in 2008. The 2009 quarter's results include restructuring and transaction-related costs of $2.1 million.
Financial Services revenue was $100.5 million compared to $110.0 million in 2008. The decline was primarily due to lower order volumes caused by lower check usage and turmoil in the financial services industry. The benefit of a price increase implemented in the fourth quarter of 2008 mitigated the impact of continued pricing pressure. Operating income in 2009 increased to $19.3 million from $18.8 million in 2008.
Direct Checks revenue was $39.7 million compared to $46.2 million in 2008. Second quarter order volume was down due to the continued decline in check usage and a weak economy which is negatively impacting our ability to sell additional products. Operating income was $13.2 million, or 33.2 percent of revenue, compared to $13.4 million or 29.0% of revenue in 2008.
Year-to-Date Cash Flow Performance
Cash provided by operating activities for the first six months of 2009 totaled $85.8 million, an increase of $18.8 million compared to last year. The increase in 2009 primarily relates to significantly lower performance-based compensation payments, as well as benefits from working capital initiatives in the current year, which also have reduced the Company's exposure to credit losses from customer accounts receivable.
The Company stated that for the third quarter of 2009, revenue is expected to be between $325 and $340 million, and diluted EPS is expected to be between $0.46 and $0.54. Adjusted diluted EPS is expected to be between $0.51 and $0.59, which excludes an estimated $0.05 of restructuring and transaction-related costs. For the full year, revenue is expected to be between $1.32 and $1.36 billion, and diluted EPS is expected to be between $1.75 and $1.95. Adjusted diluted EPS is expected to be between $2.15 and $2.35, which excludes an estimated $0.40 related to asset impairment charges, restructuring and transaction-related costs and net gains on repurchases of long-term debt. The Company also stated that it expects operating cash flow to be between $185 million and $200 million in 2009 and capital expenditures to be approximately $40 million.
Included in the full year estimates are approximately $7 million of revenue from the recently announced transactions to purchase Aplus.net and MerchEngines. The impact of these transactions on EPS is insignificant after recording transaction and customer migration expenses. For 2010, on a full year basis, these transactions are expected to generate revenue of approximately $20 million and be accretive to EPS.
"We are not expecting the economic climate to improve in the last half of 2009, but are hopeful that the pace of decline is slowing down," Schram stated. "We believe Deluxe has demonstrated its value as a disciplined, stable company in these challenging economic times. Our transformational strategy continues to advance as we reposition the Company for sustainable growth long-term."