ST. PAUL, Minn. -- Deluxe Corporation reported third quarter adjusted diluted earnings per share (EPS) of $0.60 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 recent acquisitions. Adjusted EPS for 2008 also excludes asset impairment charges. Reported diluted EPS was $0.56 on net income of $28.6 million in 2009 and $0.27 on net income of $13.8 million in 2008. Operating results were slightly better than expected for the current period due primarily to cost reduction and containment initiatives.
"Although challenges in the economy persist and bank failures continue, we delivered another solid quarter meeting all our financial commitments," said Lee Schram, CEO of Deluxe. "We made good progress integrating our recent acquisitions and advancing our transformation during the quarter and we took another hard look at our cost structure. As a result, we now have plans in place to achieve an additional $25 million of cost reductions over the balance of 2009 and 2010."
Third Quarter Performance
Revenue for the quarter was $332.3 million compared to $362.7 million during the third quarter of 2008. Small Business Services revenue was $19.0 million lower than the comparable 2008 quarter driven primarily by continued economic softness. Financial Services revenue was down $4.9 million from the 2008 quarter and Direct Checks revenue decreased $6.5 million, both due to lower order volumes.
Gross margin was 63.3 percent of revenue compared to 58.6 percent in 2008. Restructuring-related costs were higher in 2008, reducing the 2008 gross margin by 3.6 percentage points. The benefit of our cost reduction initiatives was partly offset by increased performance-based compensation expense, materials cost and delivery rates.
Selling, general and administrative (SG&A) expense decreased $9.0 million in the quarter compared to 2008. Increased performance-based compensation expense was more than offset by benefits from cost reduction and containment initiatives. As a percent of revenue, SG&A increased to 46.4 percent from 45.0 percent in 2008.
Operating income was $54.5 million compared to $30.8 million in the third quarter of 2008. In addition to the factors previously discussed, restructuring and transaction-related costs and asset impairment charges of $3.4 million in 2009 were $28.2 million lower than in 2008. Operating income was 16.4 percent of revenue compared to 8.5 percent in the prior year.
Net income increased $14.8 million and diluted EPS increased $0.29, driven primarily by higher operating income partially offset by a higher effective tax rate in 2009. The 2008 effective tax rate was significantly lower than in 2009 due to the impact of the restructuring costs and asset impairment charges on the calculation and additional one-time benefits.
Third Quarter Performance by Business Segment
Small Business Services revenue was $193.9 million versus $212.9 million in 2008. The decline was due to soft economic conditions, primarily in the sales of checks and forms. These reductions were partially offset by revenue contributions from acquisitions. Operating income in 2009 increased to $23.2 million from $10.8 million in 2008. Restructuring and transaction-related costs and asset impairment charges were $18.2 million lower in 2009.
Financial Services revenue was $98.9 million compared to $103.8 million in 2008. The decline was primarily due to lower order volumes caused by check usage declines and turmoil in the financial services industry. The benefit of price increases implemented in the third quarter of 2009 and the fourth quarter of 2008 more than offset the impact of continued pricing pressure. Operating income in 2009 increased to $18.5 million from $7.1 million in 2008. Restructuring-related costs were $10.0 million lower in 2009.
Direct Checks revenue was $39.5 million compared to $46.0 million in 2008. Third 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 and services. Operating income was $12.8 million, or 32.4 percent of revenue, compared to $12.9 million or 28.0% of revenue in 2008.
Year-to-Date Cash Flow Performance
Cash provided by operating activities for the first nine months of 2009 totaled $150.2 million, an increase of $5.0 million compared to last year. Higher contract acquisition and severance payments were more than offset by significantly lower performance-based compensation and income tax payments.
The Company stated that for the fourth quarter of 2009, revenue is expected to be between $326 and $341 million, and diluted EPS is expected to be between $0.53 and $0.63. Adjusted diluted EPS is expected to be between $0.54 and $0.64, which excludes an estimated $0.01 of transaction-related costs. For the full year, revenue is expected to be between $1.330 and $1.345 billion, and diluted EPS is expected to be between $1.87 and $1.97. Adjusted diluted EPS is expected to be between $2.27 and $2.37 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 $190 million and $200 million in 2009 and capital expenditures to be approximately $45 million.
"We are hopeful that the recession's negative impact on our business continues to stabilize as we head into the fourth quarter," Schram stated. "We are managing our cost structure aggressively, which has allowed us to increase our EPS outlook for the year. Given the weak economic climate and current lack of directional clarity, we believe it is prudent to expect 2010 revenue to be down low to mid-single digits as compared to 2009, which is expected to produce adjusted diluted EPS ranging from a low single digit decline to low single digit growth. As part of these estimates, we expect to deliver strong double-digit revenue growth in our new business services offerings as we continue to advance our transformation. However, we believe it is important for us to monitor the marketplace over the next three months before providing a more specific outlook for 2010."
The Board of Directors of Deluxe Corporation declared a regular quarterly dividend of $0.25 per share on all outstanding shares of the Company. The dividend will be payable on December 7, 2009 to shareholders of record at the close of business on November 16, 2009. The Company had 51,204,096 shares outstanding as of October 20, 2009.
Conference Call Information
Deluxe will hold an open-access teleconference call today at 11:00 a.m. EDT (10:00 a.m. CDT) to review the financial results. All interested persons may listen to the call by dialing 1-866-713-8395 (access code 51403286). The presentation also will be available via a simultaneous webcast at www.deluxe.com in the news and investors relations section. An audio replay of the call will be available through midnight on October 29th by calling 1-888-286-8010 (access code 15299747). The presentation will be archived on Deluxe's Web site.
Statements made in this release concerning the Company's or management's intentions, expectations, or predictions about future results or events are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which variations could be material and adverse. Factors that could produce such a variation include, but are not limited to, the following: the impact that a further deterioration or prolonged softness in the economy may have on demand for the Company's products and services; further declines in the Company's market capitalization which could trigger additional non-cash asset impairment charges; the inherent unreliability of earnings, revenue and cash flow predictions due to numerous factors, many of which are beyond the Company's control; declining demand for the Company's check and check-related products and services due to increasing use of alternative payment methods; intense competition in the check printing business; continued consolidation of financial institutions and/or additional bank failures, thereby reducing the number of potential customers and referral sources and increasing downward pressure on the Company's revenues and gross margins; risks that the Small Business Services segment strategies to increase its pace of new customer acquisition and average annual sales to existing customers, while at the same time increase its operating margins, are delayed or unsuccessful; risks that the Company's recent acquisitions do not produce the anticipated results or revenue synergies; risks that the Company's cost reduction initiatives will be delayed or unsuccessful; performance shortfalls by the Company's major suppliers, licensors or service providers; unanticipated delays, costs and expenses in the development and marketing of new products and services, including new e-commerce, customer loyalty and business services, and the failure of such new products and services to deliver the expected revenues and other financial targets; and the impact of governmental laws and regulations. The Company's cash dividends are declared by the Board of Directors on a current basis and therefore may be subject to change. Our forward-looking statements speak only as of the time made, and we assume no obligation to publicly update any such statements. Additional information concerning these and other factors that could cause actual results and events to differ materially from the Company's current expectations are contained in the Company's Form 10-K for the year ended December 31, 2008.
The table below is provided to assist in understanding the comparability of the Company's results of operations for the quarters ended September 30, 2009 and 2008 and our outlook for 2009. The Company's management believes that adjusted earnings per share (EPS) is a useful financial measure because the unusual items during 2009 and 2008 (asset impairment charges, restructuring and related costs, net gain on repurchases of debt, and transaction-related costs) impacted the comparability of reported net income. The presentation below 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.