Deluxe profits drop 44 percent
Friday, January 23, 2009
Press release from the issuing companyST. PAUL, Minn. -- Deluxe Corporation reported fourth quarter diluted earnings per share (EPS) of $0.55 on net income of $27.9 million, which included a diluted loss per share from discontinued operations of $0.05 related to the Company's decision to sell its Russell and Miller retail packaging and signage business. EPS for the fourth quarter of 2007 was $0.77 on net income of $40.2 million. Results from continuing operations for the 2008 quarter include restructuring related costs of $6.2 million associated with the Company's previously announced restructuring actions and charges from actions initiated primarily to close an additional three fulfillment sites and implement further consolidation in the sales and marketing organization. Also included is an asset impairment charge of $0.3 million.
"The difficult economy created unprecedented challenges for our business," said Lee Schram, CEO of Deluxe. "Despite these challenges, our focus on our cost structure enabled us to meet our previous adjusted EPS outlook and increase our cost reduction program to $300 million through 2010. Our cash flow results remained strong during the quarter, allowing us to reduce our credit facility borrowings by nearly 30 percent. At the same time, we made good progress integrating our recent acquisitions and investing in our future."
Fourth Quarter Performance
Revenue from continuing operations for the quarter was $364.9 million compared to $409.8 million during the fourth quarter of 2007. Small Business Services revenue was $28.5 million lower than the previous year driven primarily by continued economic softness. Financial Services revenue was down $10.6 million from the previous year due to lower order volume and slightly lower revenue per order, while Direct Checks revenue decreased $5.8 million due to lower order volume. Revenue of $3.0 million and $4.3 million from the Russell and Miller business has been reported as discontinued operations in the 2008 and 2007 quarters, respectively.
Gross margin was 62.6 percent of revenue compared to 63.9 percent in 2007. The restructuring related costs reduced our gross margin by 0.7 percentage points in the fourth quarter of 2008. Lower revenue per order in Financial Services also reduced gross margin.
Selling, general and administrative (SG&A) expense decreased $23.5 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 45.1 percent from 45.9 percent in 2007.
Operating income was $60.4 million compared to $71.1 million in the fourth quarter of 2007. Operating income was 16.6 percent of revenue compared to 17.3 percent in the prior year. The restructuring related costs reduced operating income by 1.7 percentage points of revenue in the current quarter. Benefits from cost reduction initiatives and lower performance-based compensation partly offset the impact of the revenue decline.
Net income decreased $12.3 million and diluted EPS decreased $0.22, driven by lower operating income, a higher loss from discontinued operations and a higher effective tax rate. The 2008 loss from discontinued operations included a $3.4 million pre-tax charge related to writing down the Russell and Miller net assets to their estimated fair value. The 2007 tax rate was favorable due to higher discrete tax benefits.
Fourth Quarter Performance by Business Segment
Small Business Services revenue was $218.7 million versus $247.2 million in 2007. The decline was due primarily to soft economic conditions, especially in discretionary products such as holiday cards, apparel and other promotional products, and a $3.8 million reduction attributable to an unfavorable Canadian exchange rate. These reductions were partially offset by contributions from the Hostopia acquisition and fraud protection services. Operating income decreased to $27.1 million, from $37.8 million in 2007. The quarter's results include $3.7 million of restructuring related costs.
Financial Services revenue was $102.3 million compared to $112.9 million in 2007. Revenue per order was down slightly as continued competitive pricing was partially offset by an October price increase. Fourth quarter order volume was down 7.2% compared to last year due to lower check writing and turmoil in the financial services industry. Operating income in 2008 increased to $20.6 million from $18.7 million in 2007, as cost reduction initiatives and lower performance-based compensation more than offset the impact of revenue declines and $1.1 million of restructuring related costs.
Direct Checks revenue was $43.9 million compared to $49.7 million in 2007. Fourth quarter order volume was down due to the continued decline in check usage and advertising response rates. Operating income was $12.7 million compared to $14.6 million in 2007. The quarter's results include $1.7 million of restructuring costs.
Full Year Operating Cash Flow Performance
Cash provided by operating activities for 2008 totaled $198.5 million, a decrease of $46.6 million compared to last year. The reduction in 2008 primarily relates to lower earnings and higher payments in the first quarter of 2008 for 2007-related incentive compensation, partially offset by lower income tax payments and benefits from working capital initiatives.
The Company stated that for the first quarter of 2009, revenue is expected to be between $335 million and $350 million, and diluted EPS is expected to be between $0.38 and $0.46, which does not include an estimated $0.03 of restructuring related costs. For the full year, revenue is expected to be between $1.3 billion and $1.4 billion, and diluted EPS is expected to be between $1.95 and $2.35, which does not include an estimated $0.04 of restructuring related costs. The Company also stated that it expects operating cash flow to be between $175 million and $200 million in 2009 and capital expenditures to be approximately $40 million. The 2009 outlook does not include the Russell and Miller business, which reported revenue of $14.4 million in 2008.
"We are taking a cautious view on our outlook for 2009," Schram stated. "On the high end, we have assumed that economic trends do not improve throughout 2009 and that we benefit only a modest amount from our revenue initiatives. On the low end of our range, our estimates assume a considerable further deterioration in the economy throughout the year. Our focus for the year will be on leveraging new revenue streams from our recent acquisitions and e-commerce initiatives. We are also continuing to drive improvements in our cost structure which we believe better positions us to deliver increasingly better margins once the economy does begin to recover."
The Board of Directors of Deluxe Corporation declared a regular quarterly dividend of 25 cents per share on all outstanding shares of the Company. The dividend will be payable on March 2, 2009 to shareholders of record at the close of business on February 16, 2009. The Company had 51,170,358 shares outstanding as of January 19, 2009.
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