Add
DLX to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| DLX > SEC Filings for DLX > Form 10-Q on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
Various management initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing;
Higher revenue per order in Direct Checks, primarily from price increases and increased sales of fraud protection services;
Reduced employee benefit costs related to lower workers' compensation and medical claims activity;
The year-over-year benefit of a February 2007 price increase in Financial Services; and
Lower amortization of acquired intangible assets in Small Business Services, as certain of the assets are amortized using accelerated methods.
These benefits were more than offset by the following:
Lower volume driven by unfavorable economic conditions, primarily affecting
Small Business Services;
Restructuring charges and related costs resulting from our cost savings initiatives;
Lower order volume in Direct Checks due to the continuing decline in check usage and advertising response rates;
Increased manufacturing costs, including higher delivery-related costs due to a mid-2007 postal rate increase and fuel surcharges in 2008, as well as higher materials costs due to an unfavorable product mix;
Impairment charges in 2008 related to Small Business Services trade names;
Lower revenue per order in Financial Services;
Lower volume in Financial Services due to the continuing decline in check usage and non-recurring financial institution conversion activity in 2007;
Additional revenue in the first quarter of 2007 in Direct Checks due to a weather-related backlog from the last week of 2006; and
Investments made primarily in the first half of the year to drive revenue growth opportunities, primarily within Small Business Services' e-commerce and marketing.
Our Strategies and Business Challenges
Details concerning our strategies and business challenges were provided in
the Management's Discussion and Analysis of Financial Condition and Results of
Operation section of our Annual Report on Form 10-K for the year ended
December 31, 2007 (the "2007 Form 10-K"). For additional information regarding
recent developments, see the section entitled Market Risks within this quarterly
report.
We completed four acquisitions in 2008. These acquisitions support our
strategy to expand revenue from higher growth business services. In June 2008,
we entered into a definitive agreement to acquire all of the common shares of
Hostopia.com Inc. (Hostopia) in a cash transaction for $99.4 million, net of
cash acquired. The transaction closed on August 6, 2008, and we utilized
availability under our existing lines of credit to fund the acquisition.
Hostopia is a provider of web services that enable small businesses to establish
and maintain an internet presence. It also provides email marketing,
fax-to-email, mobility synchronization and other services and is included in our
Small Business Services segment. Hostopia provides a unified, scaleable services
delivery platform which we expect to utilize as we strive to obtain a greater
portion of our revenue from annuity-based business services. We plan to use
Hostopia's technology architecture as the primary delivery platform for these
business services offerings. Hostopia's revenue for its fiscal year ended
March 31, 2008 was $27.8 million.
We also acquired the assets of PartnerUp, Inc. (PartnerUp), Logo Design Mojo,
Inc. (Logo Mojo) and Yoffi Digital Press (Yoffi) during 2008 for an aggregate
cash amount of $5.6 million. The PartnerUp transaction also includes contingent
compensation payments through 2012 based on PartnerUp's revenue and operating
margin, provided the principals remain employed by the company. PartnerUp is an
online community that is designed to connect small businesses and entrepreneurs
with resources and contacts to build their businesses. Logo Mojo is a
Canadian-based online logo design firm and Yoffi is a commercial digital printer
specializing in one-to-one marketing strategies. The results of all three
businesses are included in Small Business Services from the acquisition dates.
Update on Cost Reduction Initiatives
In the Management's Discussion and Analysis of Financial Condition and
Results of Operationsection of the 2007 Form 10-K, we discussed that we were
pursuing aggressive cost reduction and business simplification initiatives which
we expected to collectively reduce our annual cost structure by at least
$225 million, net of required investments, by the end of 2009. The baseline for
these anticipated savings was the estimated cost structure for 2006, which was
reflected in the earnings guidance reported in our press release on July 27,
2006 regarding second quarter 2006 results. During the third quarter of 2008, we
announced further cost reduction actions, including the planned closing of three
printing facilities and one customer call center. As such, we now expect to
generate $250 million of cost reductions, net of required investments, through
2010. We realized $105 million of this target through the end of 2007. We expect
to realize approximately $50 million in 2008, $60 million in 2009 and
$35 million in 2010. To date, most of our savings are from sales and marketing,
information technology and fulfillment, including manufacturing and supply
chain.
Outlook for 2008
We anticipate that consolidated revenue will be between $1.490 billion and
$1.505 billion for 2008, as compared to $1.606 billion for 2007. We expect that
current economic conditions will continue to adversely affect volumes in Small
Business Services and drive a mid-single digit decline in revenue despite modest
contributions from our e-commerce initiatives and revenue from the Hostopia and
PartnerUp acquisitions. In Financial Services, we expect check usage to continue
to decline 4% to 5% per year, with the related revenue pressure being partially
offset by a previously planned price increase in the fourth quarter, as well as
a modest contribution from several new loyalty, retention, monitoring and
protection offers. We expect the revenue decline in Direct Checks to be in the
high single digits, driven by the decline in check usage and the $3 million
revenue benefit in 2007 attributable to the weather-related backlog at the end
of 2006.
We expect that 2008 diluted earnings per share will be between $2.07 and
$2.17, compared to $2.76 for 2007. We expect that the economic softness in Small
Business Services and the declines in our personal check businesses driven
primarily by fewer checks being written, as well as restructuring costs and
asset impairment charges, will be partially offset by continued progress with
our cost reduction initiatives. We estimate that our annual effective tax rate
for 2008 will be approximately 34%, comparable with the 2007 rate.
We anticipate that net cash provided by operating activities will be between
$185 million and $200 million in 2008, compared to $245 million in 2007. We
expect that working capital improvements will partially offset the lower
expected earnings and the higher payments made in the first quarter of 2008 for
employee performance-based compensation related to our 2007 performance. We
estimate that capital spending will be approximately $30 million in 2008, with
investment focused on cost reductions and key multi-segment growth enablers,
such as our e-commerce platform.
We funded our recent acquisitions through cash and borrowings on our credit
facilities. Additionally, during the third quarter of 2008, we repurchased
$7.9 million of common stock. Even with these actions, we continue to have
reasonable access to capital in order to fund operations and execute our
strategies. Our priorities for the use of cash remain investing both organically
and in small to medium-sized acquisitions to augment growth. We also consider
other opportunities to deploy cash
to create shareholder value. We do not expect to purchase a significant amount
of shares during the remainder of 2008 as we have nearly depleted our capacity
for share repurchases based on limitations in the debt agreement related to our
notes due in June 2015. To the extent we have excess cash, we intend to pay down
borrowings on our credit facilities.
Market Risks
We recorded non-cash asset impairment charges of $9.7 million during the
third quarter of 2008 related to trade names in our Small Business Services
segment. Of this amount, $9.3 million related to indefinite-lived trade names.
The impairment charges resulted from the effects of the economic downturn on our
expected revenues and the broader effects of recent U.S. market conditions on
the fair value of the assets. The impairment analysis completed during the third
quarter of 2008 indicated no impairment of goodwill. However, due to the ongoing
uncertainty in market conditions, which may continue to negatively impact our
market value, we will continue to monitor and evaluate the carrying value of
goodwill and our indefinite-lived trade names, particularly with respect to our
Safeguard distributor reporting unit. The calculated fair value of this
reporting unit exceeded its carrying value by $1.6 million as of the measurement
date. The fair values of our other reporting units exceeded their carrying
values between $32 and $482 million. If market and economic conditions
deteriorate further, this could increase the likelihood of future non-cash
impairment charges related to our indefinite-lived trade names and/or goodwill.
The plan assets of our postretirement benefit and pension plans are valued
at fair value using quoted market prices. Investments, in general, are subject
to various risks, including credit, interest and overall market volatility
risks. During 2008, the equity markets have seen a significant decline in value.
As such, the fair values of our plan assets have decreased significantly from
December 31, 2007. As our plan assets and liabilities will be re-measured at
December 31, 2008, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans, the decreases in the fair values of plan assets
could materially affect the funded status of the plans. This would affect the
amounts reported in the consolidated balance sheet, as well as increase future
postretirement benefit expense, which would impact our consolidated results of
operations.
Upheaval in the financial services industry resulting in recent bank
failures and consolidations could have a significant impact on our consolidated
results of operations if any of the following were to occur:
We could lose a significant contract, which would have a negative impact on
our future results of operations.
We may be unable to recover the value of any related unamortized contract acquisition cost and/or accounts receivable. Contract acquisition costs, which are essentially pre-paid product discounts, are sometimes utilized in our Financial Services segment when signing or renewing contracts with our financial institution clients and totalled $41.5 million as of September 30, 2008. These amounts are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. In certain situations, the contract may require a financial institution to reimburse us for the unamortized contract acquisition cost if it terminates its contract with us prior to the end of the contract term. Our contract acquisition costs are comprised of amounts paid to individual financial institutions, many of which would not have a significant impact on our consolidated financial statements if they were deemed unrecoverable. However, the inability to recover amounts paid to one or more of our larger financial institution clients could have a significant negative impact on our consolidated results of operations.
If one or more of our financial institution clients is taken over by a financial institution which is not one of our clients, we could lose significant business. In the case of a cancelled contract, we may be entitled to collect a contract termination payment. However, if a financial institution fails, we may be unable to collect that termination payment. We have no indication at this time that a significant contract termination is expected.
If one or more of our larger clients were to consolidate with a financial institution which is not one of our clients, our results of operations could be positively impacted if we retain the client, as well as obtain the additional business from the other party in the consolidation.
If two of our financial institution clients consolidate, the increase in general negotiating leverage possessed by the consolidated entities could result in new contracts which are not as favorable to us as those historically negotiated with the clients.
We could generate non-recurring conversion revenue. Conversions are driven by the need to replace checks after one financial institution merges with or acquires another. However, we presently do not have specific information that indicates that we should expect to generate significant income from conversions.
We have a non-qualified deferred compensation plan that allows eligible employees to defer a portion of their compensation. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. As such, our liability for this plan fluctuates with market conditions. During
the nine months ended September 30, 2008, we reduced our deferred compensation liability by $0.9 million due to losses on the underlying investments elected by plan participants. The carrying value of this liability, which was $5.0 million as of September 30, 2008, may change significantly in future periods if the equity markets continue to be volatile.
|
|