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| DLX > SEC Filings for DLX > Form 10-K on 20-Feb-2009 | All Recent SEC Filings |
20-Feb-2009
Annual Report
• A significant reduction in employee-related costs, primarily performance-based employee compensation; and
• Higher revenue per order in Direct Checks, primarily from price increases and increased sales of fraud protection services.
These benefits were more than offset by the following:
• Lower volume driven by unfavorable economic conditions, primarily affecting
Small Business Services, and the continuing decline in check usage and
advertising response rates, as well as non-recurring financial institution
conversion activity in 2007;
• Restructuring charges and related costs in 2008 resulting from our cost reduction initiatives;
• Impairment charges in 2008 related to Small Business Services trade names and discontinued operations;
• Increased manufacturing costs, including higher delivery-related costs due to mid-2007 and 2008 postal rate increases and fuel surcharges in 2008, as well as higher materials costs due to an unfavorable product mix; and
• Lower revenue per order in Financial Services, despite a price increase in October 2008, due to this segment's competitive pricing environment.
Our Strategies
Small Business Services - Our focus within Small Business Services is to grow
revenue and increase operating margin by continuing to implement the following
strategies:
• Acquire new customers by leveraging customer referrals that we receive from
our financial institution clients and from other marketing initiatives such
as e-commerce and direct mail;
• Increase our share of the amount small businesses spend on the products and services in our portfolio;
• Expand in higher growth areas such as full color, web-to-print, imaging and business services, including payroll, fraud protection, web hosting and other web services, business networking and logo design; and
• Continue to optimize our cost and expense structure.
We are continuing to invest in several key enablers to achieve our strategies
and reposition Small Business Services as not just a provider of printed
products, but also a provider of higher-growth business services. These key
enablers include continuing to improve our e-commerce capabilities, implementing
an integrated platform for our various brands, improving our customer analytics,
focusing on key customer segments and improving our merchandising. We have
refreshed our existing product offerings and have already improved some of our
newer service offerings, which we believe creates a more valuable suite of
products and services. We have acquired companies which allow us to expand our
custom, full color, digital and web-to-print offerings, as well as web hosting
and other web services, logo design and business networking services. We expect
to drive growth as we obtain a greater portion of our revenue from higher growth
annuity-based business services.
In August 2008, we completed the acquisition of Hostopia.com Inc. (Hostopia)
in a cash transaction for $99.4 million, net of cash acquired. Hostopia is a
provider of web services that enable small businesses to establish and maintain
an internet presence. Hostopia's revenue for its fiscal year ended March 31,
2008 was $27.8 million, an increase of 24% from its previous year amount.
Hostopia also provides email marketing, fax-to-email, mobility synchronization
and other services. It provides a unified, scaleable, web-enabled platform that
better positions us to obtain orders for a wider variety of products, including
checks, forms, business cards and full-color, digital and web-to-print
offerings, as well as imaging and other printed products. Hostopia operates
primarily in the United States and Canada. Also during 2008, we acquired the
assets of PartnerUp, Inc. (PartnerUp), Logo Design Mojo, Inc. (Logo Mojo) and
Yoffi Digital Press (Yoffi) for an aggregate cash amount of $5.5 million.
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 custom marketing material.
During 2008, we introduced the www.ShopDeluxe.com website, our new customer
facing e-commerce platform. This website, along with our www.Deluxe.com website,
will serve as a platform for improved e-commerce capability. We intend to
consolidate our Deluxe Marketing Store website into ShopDeluxe.com to further
improve the customer experience, and we have identified opportunities to expand
sales to our existing customers and acquire new customers. Also important to our
growth are the small business customer referrals we receive from our Deluxe
Business Advantage®program, which provides a fast and simple way for financial
institutions to offer expanded personalized service to small businesses. Our
relationships with financial institutions are important in helping us serve
customer segments more deeply, such as contractors, professional services
providers and banks and credit unions.
Financial Services - Our strategies within Financial Services are as follows:
• Continue to maintain core check revenue streams and acquire new clients;
• Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients by helping them grow core deposits; and
• Continue to simplify our business model and optimize our cost and expense structure.
We proactively extended several check contracts during 2008 and will continue our focus on acquiring new clients during 2009. We are also leveraging our loyalty, retention, market intelligence and fraud monitoring and protection offers, as well as our Deluxe Business Advantage program. The Deluxe Business Advantage program is designed to maximize financial institution business check programs by offering the products and services of our Small Business Services segment
to small businesses through a number of service level options. The revenue from
these additional products and services is reflected in our Small Business
Services segment.
In our efforts to expand beyond check-related products, we have introduced
several services and products that focus on customer loyalty and retention, as
well as fraud monitoring and protection. Following are some examples:
• Deluxe ID TheftBlock® - a set of fraud monitoring and recovery services that
provides assistance to consumers in detecting and recovering from identity
theft.
• Welcome HomeSM Tool Kit - a start-to-finish package for financial institution branch offices that captures best practices for securing lasting loyalty among customers by focusing on the first 90 days of the relationship.
• Deluxe CallingSM - an outbound calling program aimed at helping financial institutions generate new organic revenue growth and reduce attrition.
We expect providing products and services that differentiate us from the
competition will help offset the decline in check usage and the pricing
pressures we are experiencing in our check programs. As such, we are also
focused on accelerating the pace at which we introduce new products and
services. In addition to these value-added services, we continue to offer our
Knowledge ExchangeTM Series, a suite of resources and events for our financial
institution clients focused on the customer experience.
Direct Checks - Our strategies within Direct Checks are as follows:
• Optimize cash flow;
• Maximize the lifetime value of customers by selling new features, accessories and products; and
• Continue to lower our cost and expense structure.
We intend to optimize the cash flow generated by this segment by continuing
to lower our cost and expense structure in all functional areas, particularly in
the areas of marketing and fulfillment. We will continue to actively market our
products and services through targeted advertising and will focus a greater
portion of our investment in the e-commerce channel. Additionally, we continue
to explore avenues to increase sales to existing customers. For example, we have
had success with the EZShieldTM product, a check protection service that
provides reimbursement to consumers for forged signatures or endorsements and
altered checks.
Cost Reduction Initiatives
We are pursuing aggressive cost reduction and business simplification
initiatives, including: reducing shared services infrastructure costs;
streamlining our call center and fulfillment activities; eliminating system and
work stream redundancies; and strengthening our ability to quickly develop new
products and services and bring them to market. We believe significant cost
reduction opportunities exist in the reduction of stock keeping units (SKUs),
the standardization of products and services and improvements in sourcing
third-party goods and services. In addition, we closed one customer call center
during the third quarter of 2008 and one printing facility in December 2008, and
we plan to close five additional printing facilities and one customer call
center in 2009. These and other actions since 2006 collectively are expected to
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 annual diluted earnings per share guidance for 2006 of $1.41 to $1.51, which
we provided in our press release on July 27, 2006 regarding second quarter 2006
results. We expect all three of our business segments to benefit from cost
reductions. We estimate that approximately 40% of the $300 million target will
come from reorganizing our sales and marketing functions and that another 30% of
the target will come from our shared services infrastructure organizations of
information technology, real estate, finance, human resources and legal. We
expect information technology will provide the greatest percentage of these
savings through lowering data center costs, improving mainframe and server
utilization and reducing the cost of networking and voice communications. We
also estimate that approximately 30% of the $300 million target will come from
fulfillment, including manufacturing and supply chain. Overall, approximately
one-third of the savings are expected to affect cost of goods sold, with the
remaining two-thirds impacting selling, general and administrative (SG&A)
expense.
Through December 31, 2008, we estimate that we have realized approximately
$155 million of our $300 million target. We anticipate that we will realize an
additional $90 million in 2009 and the remaining $55 million in 2010.
Outlook for 2009
We anticipate that consolidated revenue from continuing operations will be
between $1.3 billion and $1.4 billion for 2009, as compared to $1.47 billion for
2008. We expect that current economic conditions will continue to adversely
affect volumes in Small Business Services and drive a mid-single to low-double
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 an acceleration of check order declines to
approximately six to seven percent given the turmoil in the financial services
industry. We expect the related revenue pressure to be partially offset by a
price increase implemented in the fourth quarter of 2008, as well as a modest
contribution from our loyalty, retention, monitoring and protection offers. We
expect the revenue decline in Direct Checks 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 $1.91 and
$2.31, which includes an estimated $0.04 per share for restructuring activities,
compared to $1.97 for 2008. We expect that continued progress with our cost
reduction initiatives, as well as the impact of restructuring and asset
impairment charges in 2008, will be partially offset by the revenue decline, as
well as an estimated $20 million increase in performance-based employee
compensation, an estimated $12 million increase in material and delivery costs
and an estimated $12 million increase in employee and retiree medical expenses.
Our outlook also reflects a wage freeze in 2009 which avoids an $8 million
increase in our expense structure. We estimate that our annual effective tax
rate for 2009 will be approximately 35%, compared to 33.9% in 2008.
We anticipate that net cash provided by operating activities of continuing
operations will be between $175 million and $200 million in 2009, compared to
$198 million in 2008. We anticipate that lower performance-based compensation
payments in 2009, as well as working capital improvements, will be partially
offset by increased restructuring-related payments. We estimate that capital
spending will be approximately $40 million in 2009 as we plan to expand our use
of digital printing technology and invest in manufacturing productivity and
revenue growth initiatives.
We funded our acquisitions in 2008 through cash and borrowings on our credit
facilities. Additionally, we repurchased $21.8 million of common stock in 2008.
Even with these actions, we believe that we continue to have reasonable access
to capital in order to fund operations and execute our strategies in 2009. 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 will be to further reduce our debt. We anticipate
that our board of directors will maintain our current dividend level. However,
dividends are approved by our board of directors on a quarterly basis and thus,
are subject to change.
BUSINESS CHALLENGES/MARKET RISKS
Market for checks and business forms
The market for our two largest products, checks and business forms, is very
competitive. These products are mature and their use has been declining.
According to our estimates, the total number of checks written in the United
States has been in decline as a result of alternative payment methods, including
credit cards, debit cards, automated teller machines and electronic payment
systems. According to a Federal Reserve study released in December 2007,
approximately 33 billion checks are written annually. This includes checks which
are converted to automated clearing house (ACH) payments. The check remains the
largest single non-cash payment method in the United States, accounting for
approximately 35% of all non-cash payment transactions. This is a reduction from
the Federal Reserve study released in December 2004 when checks accounted for
approximately 45% of all non-cash payment transactions. The Federal Reserve
estimates that checks written declined approximately four percent per year
between 2003 and 2006. According to our estimates, the use of business checks is
declining at a rate of approximately four to six percent per year, although the
decline, we believe, was greater in 2008 due to the economic recession and
instability in the financial services industry. The total transaction volume of
all electronic payment methods exceeds check payments, and we expect that to
continue. In addition to the decline in check usage, the use of business forms
is also under pressure. Continued technological improvements have provided small
business customers with alternative means to enact and record business
transactions. For example, off-the-shelf business software applications and
electronic transaction systems have been designed to replace pre-printed
business form products.
Financial institution clients
Because check usage is declining and financial institutions are
consolidating, we have been encountering significant pricing pressure when
negotiating contracts with our financial institution clients. Our traditional
financial institution relationships are typically formalized through supply
contracts averaging three to five years in duration. As we compete to retain and
acquire new financial institution business, the resulting pricing pressure,
combined with declining check usage in the marketplace, has reduced our revenue
and profit margins. We expect this trend to continue.
Continued turmoil in the financial services industry, including further 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 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 treated as pre-paid product discounts, are sometimes utilized in our Financial Services segment when signing or renewing contracts with our financial institution clients and totaled $37.7 million as of December 31, 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 most situations, the contract requires 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 are smaller and 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 that 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 any significant contract terminations are expected.
• If one or more of our larger clients were to consolidate with a financial institution that 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 sometimes results in new contracts which are not as favorable to us as those historically negotiated with the clients individually.
• We could generate non-recurring conversion revenue. Conversions are driven by the need to replace obsolete 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.
Consumer response rates to direct mail advertisements
Direct Checks and portions of Small Business Services have been impacted by
reduced consumer response rates to direct mail advertisements. Our own
experience indicates that direct-to-consumer media response rates are declining
across a wide variety of products and services. Additionally, our consumer
response rates are declining further due to the decline in check usage and the
gradual obsolescence of standardized forms products.
Economic conditions
General economic conditions negatively impacted our 2008 results of
operations, primarily in Small Business Services. The rate of small business
formations and small business confidence impact Small Business Services. The
index of small business optimism published by the National Federation of
Independent Business in December 2008 was at a near-record low. According to
estimates of the Small Business Administration's Office of Advocacy, new small
business formations were down slightly in 2007, the most recent date for which
information is available, as compared to 2006. Consumer spending and employment
levels also have some impact on our personal check businesses. Both measures
trended negatively during 2008, and
we did experience some negative impact in our personal check businesses. We
expect that general economic conditions will continue to have a negative impact
on our 2009 results of operations. A prolonged downturn in general economic
conditions could result in additional declines in our revenue and profitability.
The effects of the recent economic downturn on our expected operating results
and the broader U.S. market resulted in a significant reduction in our share
price and led to asset impairment charges in 2008 related to trade names in our
Small Business Services segment. Both before and after December 31, 2008, our
common stock traded at prices lower than the December 31, 2008 closing stock
price of $14.96. If such a decline in our stock price occurs in the future for a
sustained period, it may be indicative of a further decline in our fair value
and would likely require us to record an impairment charge for a portion of the
$40.2 million of goodwill allocated to one of our reporting units. Accordingly,
we believe that a non-cash goodwill impairment charge related to this reporting
unit and/or further impairment charges related to our indefinite-lived trade
name are reasonably possible in the future. This reporting unit had a calculated
fair value which exceeded its carrying value by $2.7 million as of December 31,
2008. The calculated fair values of our other reporting units exceeded their
carrying values by amounts between $26 million and $391 million. Our
indefinite-lived trade name had a carrying value of $24.0 million as of
December 31, 2008. 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. Significant impairment charges in the future could
impact our ability to comply with this debt covenant, in which case, our lenders
could demand immediate repayment of amounts outstanding under our line of
credit. We would have remained in compliance with this debt covenant even if our
reported pre-tax earnings for 2008 had been $52 million lower than we reported.
For further information regarding the impairment analyses completed during 2008,
see the goodwill and indefinite-lived assets discussion under Application of
Critical Accounting Policies.
Postretirement and pension plans
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 saw a significant decline in value. As such, the
fair values of our plan assets decreased significantly during the year. Our plan
assets and liabilities were 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
unfunded status of our plans increased by $30.0 million from December 31, 2007,
due in large part to the decrease in the fair values of plan assets. This
affected the amounts reported in the consolidated balance sheet as of
December 31, 2008. It also contributes to an expected increase in postretirement
benefit expense of approximately $8 million in 2009. If the equity and bond
markets continue to decline, the funded status of our plans could continue to be
materially affected. This could result in higher postretirement benefit expense
in the future, as well as the need to contribute increased amounts of cash to
fund the benefits payable under the plans, although our obligation is limited to
funding benefits as they become payable.
Deferred compensation plan
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 phantom investments elected by plan participants, which are
similar to the investments available in our defined contribution pension plan.
As such, our liability for this plan fluctuates with market conditions. During
2008, we reduced our deferred compensation liability by $1.5 million due to
losses on the underlying investments elected by plan participants. The carrying
value of this liability, which was $3.9 million as of December 31, 2008, may
change significantly in future periods if volatility in the equity markets
continues.
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