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| DLX > SEC Filings for DLX > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
• Net pre-tax gains of $9.3 million from the retirement of long-term notes, including additional interest expense of $0.5 million related to accelerating the amortization of a portion of the loss on a derivative associated with the notes;
• Increased sales of fraud protection services by Direct Checks and Small Business Services; and
• Direct Checks price increases.
These benefits were more than offset by the following:
• Asset impairment charges of $24.9 million within Small Business Services
related to goodwill and an indefinite-lived trade name resulting from
declines in our stock price during the first quarter of 2009 coupled with the
continuing impact of the economic downturn on our expected operating results;
• Reduced volume for our personal check businesses due to the continuing decline in check usage and turmoil in the financial services industry;
• Lower volume in Small Business Services due primarily to changes in our customers' buying patterns, we believe as a result of the economic recession;
• An increase of approximately $7 million in performance-based compensation expense, based on our 2009 results of operations as compared to the performance metrics established for the year;
• Increases in paper prices and delivery rates; and
• Restructuring and related costs in 2009 related to previously announced cost reduction initiatives.
Our Strategies
Details concerning our strategies were provided in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
of our Annual Report on Form 10-K for the year ended December 31, 2008 (the
"2008 Form 10-K"). There were no significant changes in our strategies during
the first half of 2009.
Consistent with our strategy to invest in higher growth business services,
we purchased all of the common stock of Abacus America, Inc., a wholly-owned
subsidiary of APlus Holdings Inc., a web hosting and internet services provider,
in July 2009. This transaction will bring to our customer base more than 80,000
small business subscribers of shared web hosting, hosted e-commerce stores,
managed e-mail services, domain name registration and a variety of website
management applications. Also during July 2009, we purchased substantially all
of the assets of MerchEngines.com, a search engine marketing firm.
MerchEngines.com provides ad agencies, traditional media companies, online
publishers and local aggregators a hosted and fully managed search engine
marketing solution. The results of operations of both companies will be included
in our Small Business Services segment from their acquisition dates. We expect
to pay approximately $30 million for these companies and expect they will
contribute approximately $7 million of revenue and nearly flat earnings per
share in the last half of 2009 after the impact of transaction costs and
expenses incurred to transfer customers onto our existing web hosting platform.
Update on Cost Reduction Initiatives
As discussed in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of the 2008 Form 10-K, we are
pursuing aggressive cost reduction and business simplification initiatives which
we expect to collectively reduce our annual cost structure by at least
$300 million, net of required investments, by the end of 2010. The baseline for
these anticipated savings is 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. We are currently on track to realize
approximately $90 million of the $300 million target in 2009. We estimate that
we realized approximately $155 million of this target through the end of 2008,
and we expect the remaining $55 million to be realized in 2010. To date, most of
our savings are from sales and marketing, information technology and
fulfillment, including manufacturing and supply chain.
Outlook for 2009
We anticipate that consolidated revenue will be between $1.32 billion and
$1.36 billion for 2009, as compared to $1.47 billion for 2008. In Small Business
Services, we expect that weak economic conditions will continue to adversely
affect volumes and drive a mid to upper single digit percentage decline in
revenue despite contributions from our e-commerce investments and business
services offerings. In Financial Services, we expect check order declines of
approximately six to seven percent for the last half of 2009, compared to 2008,
given the turmoil in the financial services industry and increases in electronic
payments. We expect the related revenue pressure to be partially offset by a
price increase implemented in the fourth quarter of 2008 and another increase
scheduled for the third quarter of 2009, as well as a modest contribution from
our loyalty, retention, and fraud monitoring and protection offers. In Direct
Checks, we expect the revenue decline percentage to be in the double digits,
driven by the decline in check usage and the weak economy, which is negatively
impacting our ability to sell additional products. The upper end of our outlook
assumes the current economic trends do not improve throughout the year and that
we benefit only a modest amount from our revenue growth initiatives. The lower
end of our outlook assumes a further deterioration in the economy throughout the
year.
We expect that 2009 diluted earnings per share will be between $1.75 and
$1.95, which includes an estimated $0.40 per share impact of impairment charges,
restructuring and acquisition-related costs and gains on debt repurchases,
compared to $1.97 for 2008. We expect that continued progress with our cost
reduction initiatives, the gain recognized on the retirement of long-term notes
in 2009, as well as the impact of higher restructuring charges in 2008, will be
partially offset by the revenue decline and the increased impairment charges in
2009, as well as increases in materials and delivery costs, performance-based
employee compensation, and employee and retiree medical expenses. Our outlook
also reflects a merit wage freeze in 2009 which avoids an approximately $8
million increase in our expense structure, based on the normal level of wage
increases. We estimate that our annual effective tax rate for 2009 will be
between 35% and 36%, which includes approximately 3.0 percentage points
associated with gains on debt retirements, restructuring and acquisition-related
costs and the non-deductible portion of the goodwill impairment charge. Our
annual effective tax rate was 33.9% in 2008.
We anticipate that net cash provided by operating activities of continuing
operations will be between $185 million and $200 million in 2009, compared to
$198 million in 2008. We anticipate that lower earnings and increased
restructuring payments will be offset by lower performance-based compensation
payments in 2009, associated with our 2008 performance, as well as working
capital improvements. We estimate that capital spending will be approximately
$40 million in 2009 as we continue to
expand our use of digital printing technology, further advance our flat check
packaging process and invest in manufacturing productivity and revenue growth
initiatives.
We believe our credit facility, which expires in July 2010, along with cash
generated by operating activities, will be sufficient to support our operations,
including capital expenditures, small acquisitions, required debt service and
dividend payments, for the next 12 months. We anticipate that we may replace our
existing credit facility within the next six to nine months. With no long-term
debt maturities until 2012, we are focused on a disciplined approach to capital
deployment that balances the need to continue investing in initiatives to drive
revenue growth, including small acquisitions, with our focus on reducing debt.
Although we have periodically repurchased shares in the recent past, our focus
in 2009 has been to reduce our debt. During the first half of 2009, we retired
$31.2 million of long-term notes and we re-paid $2.7 million borrowed under our
committed line of credit. We anticipate that our board of directors will
maintain our current dividend level. However, dividends are approved by the
board of directors on a quarterly basis, and thus are subject to change.
BUSINESS CHALLENGES/MARKET RISKS
Details concerning business challenges/market risks were provided in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of our 2008 Form 10-K. There were no significant changes in
these items, with the exception of the impairment charges recorded during the
first quarter of 2009 in conjunction with our impairment analyses of goodwill
and our indefinite-lived trade name. No such impairment analyses were required
during the quarter ended June 30, 2009, as there were no indicators of potential
impairment during the quarter. As a result of the impairment analyses completed
during the quarter ended March 31, 2009, we recorded impairment charges in our
Small Business Services segment of $20.0 million related to goodwill and
$4.9 million related to an indefinite-lived trade name. Due to the ongoing
uncertainty in market conditions, which may continue to negatively impact our
expected operating results, we will continue to monitor whether additional
impairment analyses are required with respect to the carrying value of these
assets. The fair value of the reporting unit for which goodwill was impaired
exceeded its carrying value by $12 million as of March 31, 2009, subsequent to
the impairment charge. The calculated fair values of our other reporting units
exceeded their carrying values by amounts between $17 million and $209 million
as of March 31, 2009.
The credit agreement governing our committed line of credit requires us to
maintain a ratio of earnings before interest and taxes to interest expense of
3.0 times, as measured quarterly on an aggregate basis for the preceding four
quarters. Although significant unforeseen impairment charges in the future could
impact our ability to comply with this debt covenant, we were in compliance with
this debt covenant as of June 30, 2009, and we expect to remain in compliance
with this debt covenant throughout the next 12 months.
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