Deluxe Corp. Reports Operating Results (10-Q)
Deluxe Corporation through its industry-leading businesses and brands helps financial institutions and small businesses better manage promote and grow their businesses. The Company uses direct marketing distributors and a North American sales force to provide a wide range of customized products and services: personalized printed items checks forms business cards stationery greeting cards labels and retail/packaging supplies promotional products and merchandising materials fraud prevention services and customer retention programs. The Company also sells personalized checks and accessories directly to consumers. Deluxe Corp. has a market cap of $730.2 million; its shares were traded at around $14.28 with a P/E ratio of 6 and P/S ratio of 0.5. The dividend yield of Deluxe Corp. stocks is 6.9%. Deluxe Corp. had an annual average earning growth of 3% over the past 5 years. Highlight of Business Operations: As discussed in the Managements 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 expected to collectively reduce our annual cost structure by at least $300 million, net of required investments, by the end of 2010. During the third quarter of 2009, we increased our estimate of expected cost reductions to $325 million 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 $105 million of the $325 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 $65 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.
We expect that 2009 diluted earnings per share will be between $1.87 and $1.97, which includes an estimated $0.40 per share impact of impairment charges, restructuring and transaction-related costs and gains on debt repurchases, compared to $1.97 for 2008, which included a $0.50 per share impact of restructuring and related costs and asset impairment charges. 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, increased performance-based employee compensation, the increased impairment charges in 2009, as well as increases in materials and delivery costs and employee and retiree medical expenses. Our outlook also reflects a merit wage freeze in 2009 which avoids an approximate $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 approximately 35.5%, compared to 33.9% in 2008.
We anticipate that net cash provided by operating activities of continuing operations will be between $190 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 lower income tax payments. We estimate that capital spending will be approximately $45 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 and information technology productivity and revenue growth initiatives.
Details concerning business challenges/market risks were provided in the Managements 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. As a result of the impairment analyses completed during the first quarter of 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. We completed our annual impairment analyses during the third quarter of 2009, which indicated no further impairment of goodwill or our indefinite-lived trade name. The annual goodwill impairment analysis indicated that the calculated fair values of our reporting units exceeded their carrying values by amounts between $18 million and $308 million, or by amounts between 46% and 70% above their carrying values. The calculated fair value of our indefinite-lived trade name exceeded its carrying value of $19.1 million by $4.4 million based on the annual impairment analysis completed during the third quarter of 2009. Due to the ongoing uncertainty in economic 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.
During the nine months ended September 30, 2009, we recorded net restructuring charges of $4.6 million. This amount included expenses related to our restructuring activities, including items such as equipment moves, training and travel, as well as net restructuring accruals of $1.0 million. The net restructuring accruals included charges of $3.2 million related to employee reductions in various functional areas as we continue our cost reduction initiatives, as well as operating lease obligations on two manufacturing facilities closed during the first quarter of 2009. These charges were reduced by the reversal of $2.2 million of previously recorded restructuring accruals as fewer employees received severance benefits than originally estimated. The restructuring charges were reflected as net restructuring charges of $2.7 million within cost of goods sold and net restructuring charges within other operating expenses of $1.9 million in the consolidated statement of income for the nine months ended September 30, 2009. In addition to the amounts reflected in the net restructuring charges captions in the consolidated statement of income, we incurred approximately $2.4 million of other restructuring-related costs, such as labor redundancies occurring during the closing of facilities, during the nine months ended September 30, 2009.
As a result of the employee reductions and facility closings reflected in our restructuring charges, we expect to realize cost savings of approximately $7 million in cost of goods sold and $24 million in SG&A expense in 2009 relative to 2008. In 2010, we expect to realize cost savings of approximately $12 million in cost of goods sold and $6 million in SG&A expense relative to 2009. Expense reductions consist primarily of labor and facility costs and are a component of the $325 million cost reduction initiatives discussed under Executive Overview.
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