Deluxe Reports $27M Operating Income
Friday, April 24, 2009
Press release from the issuing companyST. PAUL, Minn. -- Deluxe Corporation reported first quarter adjusted diluted earnings per share (EPS) of $0.56 compared to $0.52 in the prior year period. Adjusted EPS excludes the impact of several significant items described below which aggregate $0.32 per share. Operating results were better than expected in each of the three business segments due to favorable shifts in product mix, lower spending and earlier than expected savings from the Company's cost initiatives.
Reported diluted EPS of $0.24 on net income of $12.5 million in 2009 includes the impact of several significant items including asset impairment charges of $24.9 million ($0.40 per share) related to the write-down of goodwill and a trade name within Small Business Services, as well as restructuring-related costs of $2.4 million ($0.03 per share) associated with the Company's previously announced actions. The impairment charges resulted from the effects of U.S. market conditions on our assessment of fair value in relation to these assets. Results for the first quarter of 2009 also include a net benefit of $9.3 million ($0.11 per share) from gains on long-term debt repurchases during the quarter. Diluted EPS for the first quarter of 2008 was $0.52 on net income of $27.3 million.
"We are extremely pleased that we were able to deliver solidly on our commitments during the quarter despite a continuation of the economic challenges," said Lee Schram, CEO of Deluxe. "We made good progress on our strategic transformation while maintaining a strong focus on our cost reduction initiatives and implementing spending controls. We also reduced our debt level meaningfully and continue to manage all aspects of our business in a disciplined manner."
First Quarter Performance
Revenue from continuing operations for the quarter was $339.5 million compared to $377.1 million during the first quarter of 2008. The 2009 period had one less business day which accounted for an estimated $5.4 million reduction from the prior year. Small Business Services revenue was $18.5 million lower than the previous year driven primarily by continued economic softness. Financial Services revenue was down $11.9 million from the previous year and Direct Checks revenue decreased $7.2 million both due primarily to lower order volumes.
Gross margin was 61.9 percent of revenue compared to 62.1 percent in 2008. The restructuring - related costs reduced our gross margin by 0.8 percentage points in the first quarter of 2009. Gross margin benefited from our cost reduction initiatives and favorable product mix.
Selling, general and administrative (SG&A) expense decreased $20.7 million in the quarter compared to 2008. The decrease was driven by benefits from cost reduction initiatives and lower spending. As a percent of revenue, SG&A decreased to 46.7 percent from 47.5 percent in 2008.
Operating income was $27.2 million compared to $55.5 million in the first quarter of 2008. Operating income was 8.0 percent of revenue compared to 14.7 percent in the prior year. The restructuring-related costs and asset impairment charges reduced operating margin by 8.0 percentage points of revenue in the current quarter. Benefits from cost reduction initiatives and lower spending more than offset the impact of the revenue decline.
Net income decreased $14.8 million and diluted EPS decreased $0.28, driven by lower operating income and a higher effective tax rate. A portion of the goodwill impairment charge is non-deductible for tax purposes which increased the effective tax rate by 19.4 percentage points. These decreases in net income were partially offset by $9.3 million of pre-tax gains on debt repurchases.
First Quarter Performance by Business Segment
Small Business Services revenue was $193.3 million versus $211.8 million in 2008. The decline was due primarily to soft economic conditions, declines in checks and forms and a $3.2 million decline from a lower Canadian exchange rate. These reductions were partially offset by revenue contributions from the Hostopia acquisition and fraud protection services. This segment reported an operating loss of $6.6 million for the quarter, compared to operating income of $21.8 million in 2008. The quarter's results include asset impairment charges of $24.9 million and restructuring-related costs of $2.4 million.
Financial Services revenue was $102.0 million compared to $113.9 million in 2008. First quarter order volume was down 10.5% compared to last year due to lower check writing and turmoil in the financial services industry. The benefit of a price increase implemented in the fourth quarter of 2008 helped to mitigate the impact of continued pricing pressure. Operating income in 2009 increased to $19.6 million from $19.0 million in 2008 as cost reduction initiatives and lower spending more than offset the impact of the revenue decline.
Direct Checks revenue was $44.2 million compared to $51.4 million in 2008. First 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 $14.2 million compared to $14.7 million in 2008.
Cash Flow Performance
Cash provided by operating activities for the first quarter of 2009 totaled $63.0 million, an increase of $32.9 million compared to last year. The increase in 2009 primarily relates to significantly lower incentive compensation payments as well as benefits from working capital initiatives in the current period, several of which have also reduced the Company's exposure to credit losses from customer accounts receivables.
During the quarter, the Company made open market repurchases of an aggregate $31.2 million principal amount of outstanding 5.0% senior unsecured notes due 2012 and 5.125% senior unsecured notes due 2014. In connection with the repurchases, the Company recognized a pre-tax gain of $9.8 million, representing the difference between the net carrying amount of these securities and the total repurchase price of $21.2 million, plus additional interest expense of $0.5 million related to accelerating the amortization of derivative losses associated with the notes. In addition, the Company also reduced the amount it has outstanding under its credit facility by $9.8 million during the 2009 quarter.
The Company stated that for the second quarter of 2009, revenue is expected to be between $325 and $340 million, and diluted EPS is expected to be between $0.41 and $0.49. Adjusted diluted EPS is expected to be between $0.43 and $0.51, which does not include an estimated $0.02 of restructuring-related costs. For the full year, revenue is expected to be between $1.3 and $1.385 billion, and diluted EPS is expected to be between $1.70 and $2.00. Adjusted diluted EPS is expected to be between $2.05 and $2.35, which does not include an estimated $0.35 related to asset impairment charges, restructuring-related costs and net gains on repurchases of long-term debt. 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.
"We continue to expect that the economic climate will not improve during 2009, but are hopeful that the pace of decline is slowing," Schram stated. "Our focus for the year continues to be on leveraging new revenue streams from our recent acquisitions and e-commerce initiatives, stabilizing core check revenues and continuing to drive improvements in our cost structure. We believe these activities will position us to deliver better margins once the economy begins to recover."
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