e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended June 30, 2008
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the transition period from to
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
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41-0216800 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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3680 Victoria St. N., Shoreview, Minnesota
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55126-2966 |
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(Address of principal executive offices)
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(Zip Code) |
(651) 483-7111
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
The number of shares outstanding of registrants common stock, par value $1.00 per share, at July
25, 2008 was 51,522,195.
1
TABLE OF CONTENTS
PART IFINANCIAL INFORMATION
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)
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June 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
17,780 |
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$ |
21,615 |
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Trade accounts receivable (net of allowances for uncollectible
accounts of $6,529 and $7,194, respectively) |
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74,350 |
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85,687 |
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Inventories and supplies |
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32,055 |
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32,279 |
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Deferred income taxes |
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14,359 |
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14,901 |
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Cash held for customers |
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26,283 |
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23,285 |
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Other current assets |
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11,072 |
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14,178 |
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Total current assets |
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175,899 |
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191,945 |
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Long-Term Investments (including $2,815 and $3,025 of investments at
fair value, respectively) |
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36,872 |
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36,013 |
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Property, Plant, and Equipment (net of accumulated depreciation of
$334,485 and $326,742, respectively) |
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132,382 |
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139,245 |
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Intangibles (net of accumulated amortization of $388,458 and $368,816,
respectively) |
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135,902 |
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148,487 |
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Goodwill |
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586,177 |
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585,294 |
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Other Non-Current Assets |
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95,980 |
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109,771 |
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Total assets |
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$ |
1,163,212 |
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$ |
1,210,755 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
64,889 |
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$ |
78,871 |
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Accrued liabilities |
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114,777 |
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149,763 |
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Short-term debt |
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60,330 |
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67,200 |
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Long-term debt due within one year |
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1,847 |
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1,754 |
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Total current liabilities |
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241,843 |
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297,588 |
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Long-Term Debt |
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774,264 |
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775,086 |
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Deferred Income Taxes |
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12,650 |
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10,194 |
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Other Non-Current Liabilities |
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66,761 |
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86,780 |
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Commitments and Contingencies (Notes 8, 9 and 10)
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Shareholders Equity: |
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Common shares $1 par value (authorized: 500,000 shares;
outstanding: 2008 51,523; 2007 51,887) |
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51,523 |
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51,887 |
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Additional paid-in capital |
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56,709 |
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65,796 |
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Accumulated deficit |
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(3,375 |
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(37,530 |
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Accumulated other comprehensive loss |
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(37,163 |
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(39,046 |
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Total shareholders equity |
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67,694 |
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41,107 |
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Total liabilities and shareholders equity |
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$ |
1,163,212 |
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$ |
1,210,755 |
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See Condensed Notes to Unaudited Consolidated Financial Statements
2
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
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Quarter Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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$ |
367,749 |
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$ |
399,871 |
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$ |
748,962 |
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$ |
803,705 |
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Cost of goods sold |
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139,816 |
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142,794 |
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285,694 |
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292,112 |
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Gross Profit |
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227,933 |
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257,077 |
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463,268 |
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511,593 |
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Selling, general and administrative expense |
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166,632 |
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189,595 |
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347,137 |
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378,910 |
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Net gain on sale of product line |
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(3,773 |
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Operating Income |
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61,301 |
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67,482 |
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116,131 |
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136,456 |
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Interest expense |
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(12,380 |
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(13,909 |
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(25,133 |
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(26,709 |
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Other income |
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379 |
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876 |
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874 |
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1,864 |
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Income Before Income Taxes |
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49,300 |
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54,449 |
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91,872 |
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111,611 |
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Income tax provision |
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16,683 |
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18,474 |
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31,938 |
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40,408 |
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Net Income |
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$ |
32,617 |
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$ |
35,975 |
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$ |
59,934 |
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$ |
71,203 |
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Earnings per share: |
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Basic |
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$ |
0.64 |
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$ |
0.70 |
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$ |
1.17 |
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$ |
1.39 |
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Diluted |
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0.63 |
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0.69 |
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1.16 |
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1.37 |
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Cash Dividends per Share |
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$ |
0.25 |
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$ |
0.25 |
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$ |
0.50 |
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$ |
0.50 |
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Total Comprehensive Income |
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$ |
33,905 |
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$ |
39,235 |
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$ |
61,817 |
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$ |
76,257 |
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See Condensed Notes to Unaudited Consolidated Financial Statements
3
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2008 |
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2007 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
59,934 |
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$ |
71,203 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation |
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10,703 |
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11,031 |
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Amortization of intangibles |
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20,389 |
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23,597 |
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Amortization of contract acquisition costs |
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12,442 |
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15,001 |
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Employee share-based compensation expense |
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4,873 |
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6,050 |
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Deferred income taxes |
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971 |
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1,665 |
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Gain on sale of product line |
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(3,773 |
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Other non-cash items, net |
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9,088 |
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9,721 |
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Changes in assets and liabilities, net of effect of
acquisitions and product line disposition: |
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Trade accounts receivable |
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7,358 |
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4,507 |
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Inventories and supplies |
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(735 |
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(1,120 |
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Other current assets |
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(1,181 |
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1,736 |
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Non-current assets |
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4,009 |
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(2,461 |
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Accounts payable |
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(4,354 |
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(3,324 |
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Contract acquisition payments |
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(4,571 |
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(9,700 |
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Other accrued and non-current liabilities |
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(52,183 |
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(19,439 |
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Net cash provided by operating activities |
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66,743 |
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104,694 |
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Cash Flows from Investing Activities: |
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Purchases of capital assets |
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(15,214 |
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(12,026 |
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Payments for acquisitions, net of cash acquired |
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(1,675 |
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(2,316 |
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Purchases of marketable securities |
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(280,252 |
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Proceeds from sales of marketable securities |
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102,972 |
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Proceeds from sale of product line |
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19,214 |
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Other |
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109 |
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3,933 |
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Net cash used by investing activities |
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(16,780 |
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(168,475 |
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Cash Flows from Financing Activities: |
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Net payments on short-term debt |
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(6,870 |
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(112,660 |
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Proceeds from long-term debt, net of debt issuance costs |
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196,507 |
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Payments on long-term debt |
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(855 |
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(771 |
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Change in book overdrafts |
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(7,876 |
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(5,225 |
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Proceeds from issuing shares under employee plans |
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1,635 |
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13,787 |
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Excess tax benefit from share-based employee awards |
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92 |
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521 |
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Payments for common shares repurchased |
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(13,943 |
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Cash dividends paid to shareholders |
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(25,779 |
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(25,971 |
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Net cash (used) provided by financing activities |
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(53,596 |
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66,188 |
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Effect of Exchange Rate Change on Cash |
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(202 |
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579 |
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Net Change in Cash and Cash Equivalents |
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(3,835 |
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2,986 |
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Cash and Cash Equivalents: Beginning of Period |
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21,615 |
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11,599 |
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End of Period |
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$ |
17,780 |
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$ |
14,585 |
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See Condensed Notes to Unaudited Consolidated Financial Statements
4
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Consolidated financial statements
The consolidated balance sheet as of June 30, 2008, the consolidated statements of income for
the quarters and six months ended June 30, 2008 and 2007 and the consolidated statements of cash
flows for the six months ended June 30, 2008 and 2007 are unaudited. The consolidated balance sheet
as of December 31, 2007 was derived from audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles (GAAP) in the United
States of America. In the opinion of management, all adjustments necessary for a fair statement of
the consolidated financial statements are included. Adjustments consist only of normal recurring
items, except for any discussed in the notes below. Interim results are not necessarily indicative
of results for a full year. The consolidated financial statements and notes are presented in
accordance with instructions for Form 10-Q, and do not contain certain information included in our
consolidated annual financial statements and notes. The consolidated financial statements and notes
appearing in this report should be read in conjunction with the consolidated audited financial
statements and related notes included in our Annual Report on Form 10-K for the year ended December
31, 2007 (the 2007 Form 10-K).
Note 2: New accounting pronouncements
Recently adopted accounting pronouncements In December 2007, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 110. This guidance allows companies, in
certain circumstances, to utilize a simplified method in determining the expected term of stock
option grants when calculating the compensation expense to be recorded under Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment. The simplified method can be used
after December 31, 2007 only if a companys stock option exercise experience does not provide a
reasonable basis upon which to estimate the expected option term. Through 2007, we utilized the
simplified method to determine the expected option term, based upon the vesting and original
contractual terms of the option. On January 1, 2008, we began calculating the expected option term
based on our historical option exercise data. This change did not have a significant impact on the
compensation expense recognized for stock options granted in 2008.
Accounting pronouncements not yet adopted In December 2007, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141(R), Business Combinations, which modifies the required
accounting for business combinations. This guidance applies to all transactions or other events in
which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including
those sometimes referred to as true mergers or mergers of equals. SFAS No. 141(R) changes the
accounting for business acquisitions and will impact financial statements at the acquisition date
and in subsequent periods. We are required to apply the new guidance to business combinations
completed after December 31, 2008.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the
Useful Life of Intangible Assets. This guidance addresses the determination of the useful life of
intangible assets which have legal, regulatory or contractual provisions that potentially limit a
companys use of an asset. Under the new guidance, a company should consider its own historical
experience in renewing or extending similar arrangements. We are required to apply the new guidance
to intangible assets acquired after December 31, 2008.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This guidance states that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
are participating securities and should be included in the computation of earnings per share using
the two-class method outlined in SFAS No. 128, Earnings per Share. The two-class method is an
earnings allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared and participation rights in undistributed
earnings. The terms of our restricted stock unit and restricted stock awards do provide a
nonforfeitable right to receive dividend equivalent payments on unvested awards. As such, these
awards are considered participating securities under the new guidance. Effective January 1, 2009,
we will begin reporting earnings per share under the two-class method and will restate all
historical earnings per share data. We are currently evaluating the impact of this new guidance on
our reported earnings per share.
5
Note 3: Supplemental balance sheet and cash flow information
Inventories and supplies Inventories and supplies were comprised of the following:
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June 30, |
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December 31, |
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(in thousands) |
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2008 |
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2007 |
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Raw materials |
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$ |
6,426 |
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$ |
6,803 |
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Semi-finished goods |
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11,116 |
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10,886 |
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Finished goods |
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8,055 |
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8,499 |
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Total inventories |
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25,597 |
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26,188 |
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Supplies, primarily production |
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6,458 |
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6,091 |
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Inventories and supplies |
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$ |
32,055 |
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$ |
32,279 |
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Fair value measurements During the quarter and six months ended June 30, 2008 and 2007, we
measured a long-term mutual fund investment at fair value based on quoted prices in active markets
for identical assets. This is considered a Level 1 fair value measurement under SFAS No. 157, Fair
Value Measurements. We account for this investment at fair value in accordance with SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities. This investment corresponds
to our liability under an officers deferred compensation plan. This deferred compensation plan is
not available to new participants and is fully funded by the mutual fund investment. The liability
under the plan equals the fair value of the mutual fund investment. Under SFAS No. 159, changes in
the value of both the plan asset and the liability are netted in the consolidated statements of
income within selling, general and administrative (SG&A) expense. Dividends earned by the mutual
fund investment, as reported by the fund, are also netted within SG&A expense in the consolidated
statements of income. The fair value of this investment was $2.8 million as of June 30, 2008 and
$3.0 million as of December 31, 2007 and is included in long-term investments in the consolidated
balance sheets. The long-term investment caption on our consolidated balance sheets also includes
life insurance policies which are recorded at their cash surrender values. We recognized a net
unrealized gain on the mutual fund investment of $0.2 million during the quarters ended June 30,
2008 and 2007. During the six months ended June 30, 2008 and 2007, we recognized a net unrealized
loss of $0.3 million and $37,000, respectively.
Intangibles Intangibles were comprised of the following:
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|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
(in thousands) |
|
amount |
|
|
amortization |
|
|
amount |
|
|
amount |
|
|
amortization |
|
|
amount |
|
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
$ |
59,400 |
|
|
$ |
|
|
|
$ |
59,400 |
|
|
$ |
59,400 |
|
|
$ |
|
|
|
$ |
59,400 |
|
Amortizable intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal-use software |
|
|
285,673 |
|
|
|
(250,123 |
) |
|
|
35,550 |
|
|
|
278,802 |
|
|
|
(243,483 |
) |
|
|
35,319 |
|
Customer lists |
|
|
110,280 |
|
|
|
(93,185 |
) |
|
|
17,095 |
|
|
|
110,165 |
|
|
|
(85,199 |
) |
|
|
24,966 |
|
Distributor contracts |
|
|
30,900 |
|
|
|
(21,076 |
) |
|
|
9,824 |
|
|
|
30,900 |
|
|
|
(19,016 |
) |
|
|
11,884 |
|
Trade names |
|
|
30,449 |
|
|
|
(19,239 |
) |
|
|
11,210 |
|
|
|
30,369 |
|
|
|
(16,708 |
) |
|
|
13,661 |
|
Other |
|
|
7,658 |
|
|
|
(4,835 |
) |
|
|
2,823 |
|
|
|
7,667 |
|
|
|
(4,410 |
) |
|
|
3,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangibles |
|
|
464,960 |
|
|
|
(388,458 |
) |
|
|
76,502 |
|
|
|
457,903 |
|
|
|
(368,816 |
) |
|
|
89,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles |
|
$ |
524,360 |
|
|
$ |
(388,458 |
) |
|
$ |
135,902 |
|
|
$ |
517,303 |
|
|
$ |
(368,816 |
) |
|
$ |
148,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Total amortization of intangibles was $10.1 million for the quarter ended June 30, 2008 and
$11.7 million for the quarter ended June 30, 2007. Amortization of intangibles was $20.4 million
for the six months ended June 30, 2008 and $23.6 million for the six months ended June 30, 2007.
Based on the intangibles in service as of June 30, 2008, estimated future amortization expense is
as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Remainder of 2008 |
|
$ |
17,099 |
|
2009 |
|
|
25,163 |
|
2010 |
|
|
11,006 |
|
2011 |
|
|
5,710 |
|
2012 |
|
|
2,683 |
|
Goodwill Changes in goodwill during the six months ended June 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small |
|
|
|
|
|
|
|
|
|
Business |
|
|
Direct |
|
|
|
|
(in thousands) |
|
Services |
|
|
Checks |
|
|
Total |
|
|
Balance, December 31, 2007 |
|
$ |
503,057 |
|
|
$ |
82,237 |
|
|
$ |
585,294 |
|
Adjustment to New England Business Service, Inc.
(NEBS) acquisition uncertain tax position |
|
|
(435 |
) |
|
|
|
|
|
|
(435 |
) |
Acquisition of Logo Design Mojo, Inc. (see Note 5) |
|
|
1,359 |
|
|
|
|
|
|
|
1,359 |
|
Currency translation adjustment |
|
|
(41 |
) |
|
|
|
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
503,940 |
|
|
$ |
82,237 |
|
|
$ |
586,177 |
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets Other non-current assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Contract acquisition costs (net of accumulated amortization of
$92,493 and $82,976, respectively) |
|
$ |
47,650 |
|
|
$ |
55,516 |
|
Deferred advertising costs |
|
|
22,241 |
|
|
|
26,009 |
|
Other |
|
|
26,089 |
|
|
|
28,246 |
|
|
|
|
|
|
|
|
Other non-current assets |
|
$ |
95,980 |
|
|
$ |
109,771 |
|
|
|
|
|
|
|
|
Changes in contract acquisition costs during the first six months of 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Balance, beginning of year |
|
$ |
55,516 |
|
|
$ |
71,721 |
|
Additions(1) |
|
|
4,576 |
|
|
|
9,138 |
|
Amortization |
|
|
(12,442 |
) |
|
|
(15,001 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
47,650 |
|
|
$ |
65,858 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contract acquisition costs are accrued upon contract execution. Cash payments made
for contract acquisition costs were $4,571 for the six months ended June 30, 2008 and $9,700 for
the six months ended June 30, 2007. |
7
Accrued liabilities Accrued liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Cash held for customers |
|
$ |
26,283 |
|
|
$ |
23,285 |
|
Customer rebates |
|
|
20,389 |
|
|
|
20,397 |
|
Wages, including vacation |
|
|
20,233 |
|
|
|
17,275 |
|
Employee profit sharing and pension |
|
|
10,155 |
|
|
|
40,294 |
|
Interest |
|
|
5,414 |
|
|
|
5,414 |
|
Restructuring (see Note 6) |
|
|
3,415 |
|
|
|
5,050 |
|
Other |
|
|
28,888 |
|
|
|
38,048 |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
114,777 |
|
|
$ |
149,763 |
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure As of June 30, 2008, we had accounts payable of $2.2
million related to capital asset purchases. These amounts were reflected in property, plant and
equipment and intangibles in our consolidated balance sheet as of June 30, 2008, as we received the
assets as of that date. As these liabilities are paid, the payments will be included in purchases
of capital assets on the consolidated statements of cash flows. As of December 31, 2007, we had
accounts payable of $3.9 million related to capital asset purchases.
Marketable securities purchased and sold during the six months ended June 30, 2007 consisted
of auction rate securities and investments in tax-exempt mutual funds. The mutual funds were
comprised of variable rate demand notes, municipal bonds and notes, and commercial paper. The cost
of these investments equaled their fair value due to their short-term duration. Proceeds from sales
of marketable securities were $103.0 million during the six months ended June 30, 2007. No gains or
losses were realized on these sales.
8
Note 4: Earnings per share
The
following table reflects the calculation of basic and diluted earnings per share. During
each period, certain options as noted below, were excluded from the calculation of diluted earnings
per share because their effect would have been antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in thousands, except per share amounts) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Earnings per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,617 |
|
|
$ |
35,975 |
|
|
$ |
59,934 |
|
|
$ |
71,203 |
|
Weighted-average shares outstanding |
|
|
51,005 |
|
|
|
51,449 |
|
|
|
51,047 |
|
|
|
51,342 |
|
Earnings per share basic |
|
$ |
0.64 |
|
|
$ |
0.70 |
|
|
$ |
1.17 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,617 |
|
|
$ |
35,975 |
|
|
$ |
59,934 |
|
|
$ |
71,203 |
|
Re-measurement of share-based awards classified
as
liabilities |
|
|
(48 |
) |
|
|
|
|
|
|
(272 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
32,569 |
|
|
$ |
35,975 |
|
|
$ |
59,662 |
|
|
$ |
71,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
51,005 |
|
|
|
51,449 |
|
|
|
51,047 |
|
|
|
51,342 |
|
Dilutive impact of options, restricted stock
units, unvested restricted stock and employee
stock purchase plan |
|
|
387 |
|
|
|
575 |
|
|
|
435 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares and potential dilutive
shares outstanding |
|
|
51,392 |
|
|
|
52,024 |
|
|
|
51,482 |
|
|
|
51,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
0.63 |
|
|
$ |
0.69 |
|
|
$ |
1.16 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive options excluded from calculation
(weighted-average amount for six month periods) |
|
|
3,645 |
|
|
|
1,001 |
|
|
|
3,677 |
|
|
|
2,011 |
|
Note 5: Acquisitions and disposition
Acquisitions In July 2008, we acquired the assets of PartnerUp, Inc. (PartnerUp) for cash of
approximately $3.8 million plus contingent payments based on the revenue and operating
margin generated by the business, provided the principals remain with the company. PartnerUp is an online community that is designed to connect small
businesses and entrepreneurs with people, resources and contacts to build their businesses. Its
results of operations will be included in our Small Business Services segment.
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 of approximately $100 million, net of cash
acquired. The merger agreement was approved by Hostopia stockholders on July 30, 2008, and the
transaction became effective on August 6, 2008, in accordance with the rules of the Toronto Stock
Exchange. We utilized availability on our existing lines of credit to fund the acquisition.
Hostopia is a leading provider of web services that enable small and medium-sized businesses to
establish and maintain an internet presence. It also provides email marketing, fax-to-email,
mobility synchronization and other services. Its results of operations will be included in our Small Business
Services segment.
In April 2008, we acquired the assets of Logo Design Mojo, Inc. (Logo Mojo) for cash of $1.5
million. Of this amount, $1.4 million was paid as of June 30, 2008. Logo Mojo is a Canadian-based
online logo design firm and is included in our Small Business Services segment. Logo Mojos
operating results are included in our consolidated results of operations from the acquisition date.
The allocation of the purchase price based upon the fair values of the assets acquired and
liabilities assumed resulted in goodwill of $1.4 million and a trade name intangible asset of $0.1
million. We believe this acquisition resulted in goodwill primarily due to Logo Mojos web-based
workflow which we can incorporate into our processes and which we expect will increase our product
offerings for small businesses.
9
In March 2008, we acquired certain assets of Yoffi Digital Press (Yoffi) for cash of $0.3
million. Yoffi is a commercial digital printer specializing in one-to-one marketing strategies and
is included in our Small Business Services segment. Yoffis operating results are included in our
consolidated results of operations from the acquisition date. The assets acquired consisted
primarily of a customer list.
In February 2007, we acquired all of the common stock of All Trade Computer Forms, Inc. (All
Trade) for cash of $2.3 million, net of cash acquired. All Trade is a custom form printer based in
Canada and is included in our Small Business Services segment. All Trades operating results are
included in our consolidated results of operations from the acquisition date. The allocation of the
purchase price based upon the fair values of the assets acquired and liabilities assumed resulted
in goodwill of $0.7 million. We believe this acquisition resulted in goodwill due to All Trades
expertise in custom printing which we expect will help us expand our core printing capabilities and
product offerings for small businesses.
Disposition
In January 2007, we completed the sale of the assets of our Small Business
Services industrial packaging product line for $19.2 million, realizing a pre-tax gain of $3.8
million. This sale had an insignificant impact on diluted earnings per share as the effective tax
rate specifically attributable to the gain was higher because the goodwill written-off is not
deductible for tax purposes. This product line generated approximately $51 million of revenue in
2006. The disposition of this product line did not qualify to be reported as discontinued
operations in our consolidated financial statements.
Note 6: Restructuring accruals
During the quarter ended June 30, 2008, we recorded restructuring accruals of $2.3 million for
employee severance related to the planned closing of our customer service call center located in
Flagstaff, Arizona, as well as employee reductions in various functional areas, including sales,
marketing and fulfillment. These reductions are a result of our cost savings initiatives. The
restructuring accruals included severance benefits for 163 employees. We expect to close the
Flagstaff facility during the third quarter of 2008 and we expect the other employee reductions to
be completed by mid-2009, with the majority of severance payments completed by the end of 2009
utilizing cash from operations. Also during the quarter ended June 30, 2008, we reversed $0.1
million of restructuring accruals due to fewer employees receiving severance benefits than
originally estimated. These restructuring charges, net of reversals, were reflected as cost of
goods sold of $0.4 million and SG&A expense of $1.8 million in our consolidated statement of income
for the quarter ended June 30, 2008. During the six months ended June 30, 2008, we recorded
restructuring accruals of $2.6 million related to our cost savings initiatives, and we reversed
$0.9 million of restructuring accruals as fewer employees received severance benefits than
originally estimated. These restructuring charges, net of reversals, were reflected as cost of
goods sold of $0.5 million and SG&A expense of $1.2 million in our consolidated statement of income
for the six months ended June 30, 2008.
Restructuring accruals of $3.4 million as of June 30, 2008 and $5.1 million as of December 31,
2007 are reflected in accrued liabilities in the consolidated balance sheets. The accruals consist
of employee severance benefits and payments due under operating lease obligations for facilities
that we have vacated. The remaining payments due under the operating lease obligations will be paid
through early 2009. Further information regarding our restructuring accruals can be found under the
caption Note 6: Restructuring accruals in the Notes to Consolidated Financial Statements
appearing in the 2007 Form 10-K.
As of June 30, 2008, our restructuring accruals, by company initiative, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
(in thousands) |
|
related |
|
|
initiatives |
|
|
initiatives |
|
|
initiatives |
|
|
Total |
|
|
Balance, December 31, 2007 |
|
$ |
36 |
|
|
$ |
325 |
|
|
$ |
4,689 |
|
|
$ |
|
|
|
$ |
5,050 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
2,552 |
|
|
|
2,564 |
|
Restructuring reversals |
|
|
|
|
|
|
(27 |
) |
|
|
(838 |
) |
|
|
(21 |
) |
|
|
(886 |
) |
Payments |
|
|
(11 |
) |
|
|
(108 |
) |
|
|
(2,867 |
) |
|
|
(327 |
) |
|
|
(3,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
25 |
|
|
$ |
190 |
|
|
$ |
996 |
|
|
$ |
2,204 |
|
|
$ |
3,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accruals |
|
$ |
30,243 |
|
|
$ |
10,859 |
|
|
$ |
6,940 |
|
|
$ |
2,552 |
|
|
$ |
50,594 |
|
Restructuring reversals |
|
|
(839 |
) |
|
|
(1,671 |
) |
|
|
(1,400 |
) |
|
|
(21 |
) |
|
|
(3,931 |
) |
Payments |
|
|
(29,379 |
) |
|
|
(8,998 |
) |
|
|
(4,544 |
) |
|
|
(327 |
) |
|
|
(43,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
25 |
|
|
$ |
190 |
|
|
$ |
996 |
|
|
$ |
2,204 |
|
|
$ |
3,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
As of June 30, 2008, the components of our restructuring accruals, by segment, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lease |
|
|
|
|
|
|
Employee severance benefits |
|
|
obligations |
|
|
|
|
|
|
Small |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small |
|
|
|
|
|
|
Business |
|
|
Financial |
|
|
Direct |
|
|
|
|
|
|
Business |
|
|
|
|
(in thousands) |
|
Services |
|
|
Services |
|
|
Checks |
|
|
Corporate |
|
|
Services |
|
|
Total |
|
|
Balance, December 31, 2007 |
|
$ |
2,001 |
|
|
$ |
953 |
|
|
$ |
|
|
|
$ |
2,060 |
|
|
$ |
36 |
|
|
$ |
5,050 |
|
Restructuring charges |
|
|
1,508 |
|
|
|
75 |
|
|
|
150 |
|
|
|
831 |
|
|
|
|
|
|
|
2,564 |
|
Restructuring reversals |
|
|
(380 |
) |
|
|
(405 |
) |
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
(886 |
) |
Inter-segment transfer |
|
|
763 |
|
|
|
354 |
|
|
|
|
|
|
|
(1,117 |
) |
|
|
|
|
|
|
|
|
Payments |
|
|
(1,886 |
) |
|
|
(538 |
) |
|
|
(39 |
) |
|
|
(839 |
) |
|
|
(11 |
) |
|
|
(3,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
2,006 |
|
|
$ |
439 |
|
|
$ |
111 |
|
|
$ |
834 |
|
|
$ |
25 |
|
|
$ |
3,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amounts
for current
initiatives(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accruals |
|
$ |
33,821 |
|
|
$ |
4,385 |
|
|
$ |
278 |
|
|
$ |
9,192 |
|
|
$ |
2,918 |
|
|
$ |
50,594 |
|
Restructuring reversals |
|
|
(800 |
) |
|
|
(1,041 |
) |
|
|
(142 |
) |
|
|
(1,397 |
) |
|
|
(551 |
) |
|
|
(3,931 |
) |
Inter-segment transfer |
|
|
1,396 |
|
|
|
732 |
|
|
|
32 |
|
|
|
(2,160 |
) |
|
|
|
|
|
|
|
|
Payments |
|
|
(32,411 |
) |
|
|
(3,637 |
) |
|
|
(57 |
) |
|
|
(4,801 |
) |
|
|
(2,342 |
) |
|
|
(43,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
2,006 |
|
|
$ |
439 |
|
|
$ |
111 |
|
|
$ |
834 |
|
|
$ |
25 |
|
|
$ |
3,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes accruals related to our 2008, 2007 and 2006 cost reduction initiatives and
the NEBS acquisition in June 2004. |
Note 7: Pension and other postretirement benefits
We have historically provided certain health care benefits for a large number of retired
employees. In addition to our retiree health care plan, we also have supplemental executive
retirement plans (SERPs) in the United States and Canada and a pension plan which covers certain
Canadian employees. These pension plans were acquired as part of the NEBS acquisition in 2004.
Further information regarding our postretirement benefit plans can be found under the caption Note
12: Pension and other postretirement benefits in the Notes to Consolidated Financial Statements
appearing in the 2007 Form 10-K.
Pension and postretirement benefit expense for the quarters ended June 30, 2008 and 2007
consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit |
|
|
|
|
|
|
plan |
|
|
Pension plans |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Service cost |
|
$ |
24 |
|
|
$ |
39 |
|
|
$ |
|
|
|
$ |
54 |
|
Interest cost |
|
|
1,989 |
|
|
|
1,753 |
|
|
|
128 |
|
|
|
126 |
|
Expected return on plan assets |
|
|
(2,183 |
) |
|
|
(2,066 |
) |
|
|
(70 |
) |
|
|
(64 |
) |
Amortization of prior service credit |
|
|
(990 |
) |
|
|
(990 |
) |
|
|
|
|
|
|
|
|
Amortization of net actuarial losses |
|
2,369 |
|
|
2,464 |
|
|
3 |
|
|
2 |
|
Total periodic benefit expense |
|
$ |
1,209 |
|
|
$ |
1,200 |
|
|
$ |
61 |
|
|
$ |
118 |
|
11
Pension and postretirement benefit expense for the six months ended June 30, 2008 and 2007
consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit |
|
|
|
|
|
|
plan |
|
|
Pension plans |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Service cost |
|
$ |
47 |
|
|
$ |
78 |
|
|
$ |
|
|
|
$ |
104 |
|
Interest cost |
|
|
3,977 |
|
|
|
3,506 |
|
|
|
257 |
|
|
|
248 |
|
Expected return on plan assets |
|
|
(4,367 |
) |
|
|
(4,132 |
) |
|
|
(141 |
) |
|
|
(123 |
) |
Amortization of prior service credit |
|
|
(1,979 |
) |
|
|
(1,980 |
) |
|
|
|
|
|
|
|
|
Amortization of net actuarial losses |
|
|
4,739 |
|
|
|
4,928 |
|
|
|
5 |
|
|
|
3 |
|
Settlement loss |
|
|
|
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodic benefit expense |
|
$ |
2,417 |
|
|
$ |
2,400 |
|
|
$ |
232 |
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2008, we used $0.5 million of plan assets to settle approximately one-half of the
benefits due under our Canadian SERP plan. We anticipate that final settlement of this plan will
occur by the end of 2008.
Note 8: Provision for income taxes
Our effective tax rate for the six months ended June 30, 2008 was 34.8%, compared to our 2007
annual effective tax rate of 34.1%. Our 2008 effective tax rate included favorable discrete
adjustments related primarily to uncertain tax positions, which lowered our effective tax rate 1.3
percentage points. Our 2007 effective tax rate included favorable adjustments which lowered our
effective tax rate 2.1 percentage points related to receivables for prior year tax returns and the
reconciliation of our 2006 federal income tax return to our 2006 estimated provision for income
taxes. Additionally, our 2007 effective tax rate was favorably impacted by tax-exempt interest
income. These favorable amounts in 2007 were partially offset by the non-deductible write-off of
goodwill related to the sale of our industrial packaging product line in January 2007.
As of June 30, 2008, our unrecognized tax benefits, excluding interest and penalties, were
$12.8 million compared to $14.4 million as of December 31, 2007. The majority of the change related
to reductions for tax positions of prior years of $2.3 million, partially offset by additions for
tax positions of prior years of $1.5 million. These adjustments were the result of changes in
judgment arising from new information. The remainder of the change related to minor settlements,
statute expirations and additions for tax positions of the current year.
Note 9: Debt
Total debt outstanding was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
5.0% senior, unsecured notes due December 15, 2012, net of discount |
|
$ |
299,156 |
|
|
$ |
299,062 |
|
5.125% senior, unsecured notes due October 1, 2014, net of discount |
|
|
274,615 |
|
|
|
274,584 |
|
7.375% senior, unsecured notes due June 1, 2015 |
|
|
200,000 |
|
|
|
200,000 |
|
Long-term portion of capital lease obligation |
|
|
493 |
|
|
|
1,440 |
|
|
|
|
|
|
|
|
Long-term portion of debt |
|
|
774,264 |
|
|
|
775,086 |
|
|
|
|
|
|
|
|
Amounts drawn on credit facilities |
|
$ |
60,330 |
|
|
$ |
67,200 |
|
Capital lease obligation due within one year |
|
|
1,847 |
|
|
|
1,754 |
|
|
|
|
|
|
|
|
Short-term portion of debt |
|
|
62,177 |
|
|
|
68,954 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
836,441 |
|
|
$ |
844,040 |
|
|
|
|
|
|
|
|
Our senior, unsecured notes include covenants that place restrictions on the issuance of
additional debt, the execution of certain sale-leaseback agreements and limitations on certain
liens. Discounts from par value are being amortized ratably as increases to interest expense over
the term of the related debt.
12
In May 2007, we issued $200.0 million of 7.375% senior, unsecured notes maturing on June 1,
2015. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933.
These notes were subsequently registered with the SEC via a registration statement which became
effective on June 29, 2007. Interest payments are due each June and December. The notes place a
limitation on restricted payments, including increases in dividend levels and share repurchases.
This limitation does not apply if the notes are upgraded to an investment-grade credit rating.
Principal redemptions may be made at our election at any time on or after June 1, 2011 at
redemption prices ranging from 100% to 103.688% of the principal amount. We may also redeem up to
35% of the notes at a price equal to 107.375% of the principal amount plus accrued and unpaid
interest using the proceeds of certain equity offerings completed before June 1, 2010. In addition,
at any time prior to June 1, 2011, we may redeem some or all of the notes at a price equal to 100%
of the principal amount plus accrued and unpaid interest and a make-whole premium. If we sell
certain of our assets or experience specific types of changes in control, we must offer to purchase
the notes at 101% of the principal amount. Proceeds from the offering, net of offering costs, were
$196.3 million. These proceeds were used to repay amounts drawn on our credit facility and to
invest in marketable securities. On October 1, 2007, we used proceeds from liquidating all of our
marketable securities and certain cash equivalents, together with a $120.0 million advance on our
credit facilities, primarily to repay $325.0 million of 3.5% unsecured notes plus accrued interest.
The fair value of the notes issued in May 2007 was $176.0 million as of June 30, 2008, based on
quoted market prices.
In October 2004, we issued $275.0 million of 5.125% senior, unsecured notes maturing on
October 1, 2014. The notes were issued via a private placement under Rule 144A of the Securities
Act of 1933 and were subsequently registered with the SEC via a registration statement which became
effective on November 23, 2004. Interest payments are due each April and October. Principal
redemptions may be made at our election prior to their stated maturity. Proceeds from the offering,
net of offering costs, were $272.3 million. These proceeds were used to repay commercial paper
borrowings used for the acquisition of NEBS in 2004. The fair value of these notes was $207.7
million as of June 30, 2008, based on quoted market prices.
In December 2002, we issued $300.0 million of 5.0% senior, unsecured notes maturing on
December 15, 2012. These notes were issued under our shelf registration statement covering up to
$300.0 million in medium-term notes, thereby exhausting that registration statement. Interest
payments are due each June and December. Principal redemptions may be made at our election prior to
the stated maturity. Proceeds from the offering, net of offering costs, were $295.7 million. These
proceeds were used for general corporate purposes, including funding share repurchases, capital
asset purchases and working capital. The fair value of these notes was $246.0 million as of June
30, 2008, based on quoted market prices.
As of June 30, 2008, we had a $500.0 million commercial paper program in place. Given our
current credit ratings, the commercial paper market is not available to us. We also have committed
lines of credit which are available for borrowing and to support our commercial paper program. The
credit agreements governing the lines of credit contain customary covenants requiring a ratio of
earnings before interest and taxes to interest expense of 3.0 times, as well as limits on the level
of subsidiary indebtedness. No commercial paper was outstanding during the six months ended June
30, 2008 or during 2007. The daily average amount outstanding under our lines of credit during the
six months ended June 30, 2008 was $64.7 million at a weighted-average interest rate of 3.58%. As
of June 30, 2008, $60.3 million was outstanding at a weighted-average interest rate of 3.15%.
During 2007, the daily average amount outstanding under our lines of credit was $45.5 million at a
weighted-average interest rate of 5.57%. As of December 31, 2007, $67.2 million was outstanding at
a weighted-average interest rate of 5.62%. As of June 30, 2008, amounts were available under our
committed lines of credit for borrowing or for support of commercial paper, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Expiration |
|
|
Commitment |
|
(in thousands) |
|
available |
|
|
Date |
|
|
Fee |
|
|
Five year line of credit |
|
$ |
275,000 |
|
|
July 2010 |
|
|
.175 |
% |
Five year line of credit |
|
|
225,000 |
|
|
July 2009 |
|
|
.225 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total committed lines of credit |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
Amounts drawn on lines of credit |
|
|
(60,330 |
) |
|
|
|
|
|
|
|
|
Outstanding letters of credit |
|
|
(10,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net available for borrowing as of
June 30, 2008 |
|
$ |
428,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Absent certain defined events of default under our debt instruments, and as long as our ratio
of earnings before interest, taxes, depreciation and amortization to interest expense is in excess
of two to one, our debt covenants do not restrict our ability to pay cash dividends at our current
rate.
13
Note 10: Other commitments and contingencies
Information regarding indemnifications, environmental matters, self-insurance and litigation
can be found under the caption Note 14: Other commitments and contingencies in the Notes to
Consolidated Financial Statements appearing in the 2007 Form 10-K. Based on information available
as of June 30, 2008, the liability for workers compensation decreased to $7.6 million as of June
30, 2008 from $9.9 million as of December 31, 2007, and the liability for self-insured medical and
dental benefits decreased to $6.1 million as of June 30, 2008 from
$8.5 million as of December 31, 2007.
Note 11: Shareholders equity
We have an outstanding authorization from our board of directors to purchase up to 10 million
shares of our common stock. This authorization has no expiration date, and 7.0 million shares
remain available for purchase under this authorization. Share repurchases are reflected as
reductions of shareholders equity in the consolidated balance sheets. Under the laws of Minnesota,
our state of incorporation, shares which we repurchase are considered to be authorized and unissued
shares. Thus, share repurchases are not presented as a separate treasury stock caption in our
consolidated balance sheets, but are recorded as direct reductions of common shares and additional
paid-in capital and increases in accumulated deficit.
Changes in shareholders equity during the six months ended June 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Common shares |
|
Additional |
|
|
|
|
|
other |
|
Total |
|
|
Number |
|
Par |
|
paid-in |
|
Accumulated |
|
comprehensive |
|
shareholders |
(in thousands) |
|
of shares |
|
value |
|
capital |
|
deficit |
|
loss |
|
equity |
|
Balance, December 31, 2007 |
|
|
51,887 |
|
|
$ |
51,887 |
|
|
$ |
65,796 |
|
|
$ |
(37,530 |
) |
|
$ |
(39,046 |
) |
|
$ |
41,107 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,934 |
|
|
|
|
|
|
|
59,934 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,779 |
) |
|
|
|
|
|
|
(25,779 |
) |
Common shares issued(1) |
|
|
283 |
|
|
|
283 |
|
|
|
1,364 |
|
|
|
|
|
|
|
|
|
|
|
1,647 |
|
Tax impact of share-based
awards |
|
|
|
|
|
|
|
|
|
|
(1,446 |
) |
|
|
|
|
|
|
|
|
|
|
(1,446 |
) |
Common shares repurchased |
|
|
(580 |
) |
|
|
(580 |
) |
|
|
(13,363 |
) |
|
|
|
|
|
|
|
|
|
|
(13,943 |
) |
Other common shares retired |
|
|
(67 |
) |
|
|
(67 |
) |
|
|
(1,457 |
) |
|
|
|
|
|
|
|
|
|
|
(1,524 |
) |
Fair value of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
5,815 |
|
|
|
|
|
|
|
|
|
|
|
5,815 |
|
Amortization of postretirement
prior service credit, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,237 |
) |
|
|
(1,237 |
) |
Amortization of postretirement
net actuarial losses, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,007 |
|
|
|
3,007 |
|
Amortization of loss on
derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
692 |
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(579 |
) |
|
|
(579 |
) |
|
|
|
Balance, June 30, 2008 |
|
|
51,523 |
|
|
$ |
51,523 |
|
|
$ |
56,709 |
|
|
$ |
(3,375 |
) |
|
$ |
(37,163 |
) |
|
$ |
67,694 |
|
|
|
|
|
|
|
(1) |
|
Includes shares issued to employees for cash payments of $1,635, as well as the
vesting of share-based awards previously classified as accrued liabilities in our consolidated
balance sheet of $12. |
14
Accumulated other comprehensive loss was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Postretirement and defined benefit pension plans: |
|
|
|
|
|
|
|
|
Unrealized prior service credit |
|
$ |
24,068 |
|
|
$ |
25,305 |
|
Unrealized net actuarial losses |
|
|
(58,415 |
) |
|
|
(61,422 |
) |
|
|
|
|
|
|
|
Postretirement and defined benefit pension plans, net of tax |
|
|
(34,347 |
) |
|
|
(36,117 |
) |
Loss on derivatives, net of tax |
|
|
(8,189 |
) |
|
|
(8,881 |
) |
Currency translation adjustment |
|
|
5,373 |
|
|
|
5,952 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(37,163 |
) |
|
$ |
(39,046 |
) |
|
|
|
|
|
|
|
Note 12: Business segment information
We operate three business segments: Small Business Services, Financial Services and Direct
Checks. Small Business Services sells business checks, printed forms, promotional products,
marketing materials and related services and products to small businesses and home offices through
direct response marketing, financial institution referrals, independent
distributors, the internet and sales representatives. Financial Services sells personal and business checks, check-related
products and services, stored value gift cards, and customer loyalty, retention and fraud
monitoring and protection services to financial institutions. Direct Checks sells personal and
business checks and related products and services directly to consumers through direct response
marketing and the internet. All three segments operate primarily in the United States. Small
Business Services also has operations in Canada.
The accounting policies of the segments are the same as those described in the Notes to
Consolidated Financial Statements included in the 2007 Form 10-K. We allocate corporate costs to
our business segments, including costs of our executive management, human resources, supply chain,
finance, information technology and legal functions. Generally, where costs incurred are directly
attributable to a business segment, primarily within the areas of information technology, supply
chain and finance, those costs are reported in that segments results. Due to our corporate shared
services approach to many of our functions, certain costs are not directly attributable to a
business segment. These costs are allocated to our business segments based on segment revenue, as
revenue is a measure of the relative size and magnitude of each segment and indicates the level of
corporate shared services consumed by each segment. Corporate assets are not allocated to the
segments and consist of property, plant and equipment, internal-use software, inventories and
supplies related to our corporate shared services functions of manufacturing, information
technology and real estate, as well as long-term investments and deferred income taxes.
We are an integrated enterprise, characterized by substantial intersegment cooperation, cost
allocations and the sharing of assets. Therefore, we do not represent that these segments, if
operated independently, would report the operating income and other financial information shown.
The following is our segment information as of and for the quarters ended June 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Business Segments |
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Small Business Services |
|
Financial Services |
|
Direct Checks |
|
Corporate |
|
Consolidated |
|
Revenue from external
customers: |
|
|
2008 |
|
|
$ |
211,490 |
|
|
$ |
110,064 |
|
|
$ |
46,195 |
|
|
$ |
|
|
|
$ |
367,749 |
|
|
|
|
2007 |
|
|
|
230,082 |
|
|
|
117,933 |
|
|
|
51,856 |
|
|
|
|
|
|
|
399,871 |
|
|
Operating income: |
|
|
2008 |
|
|
|
29,107 |
|
|
|
18,779 |
|
|
|
13,415 |
|
|
|
|
|
|
|
61,301 |
|
|
|
|
2007 |
|
|
|
29,989 |
|
|
|
23,168 |
|
|
|
14,325 |
|
|
|
|
|
|
|
67,482 |
|
|
Depreciation and amortization expense: |
|
|
2008 |
|
|
|
12,117 |
|
|
|
2,377 |
|
|
|
1,079 |
|
|
|
|
|
|
|
15,573 |
|
|
|
|
2007 |
|
|
|
13,935 |
|
|
|
2,232 |
|
|
|
1,126 |
|
|
|
|
|
|
|
17,293 |
|
|
Total assets: |
|
|
2008 |
|
|
|
725,263 |
|
|
|
61,284 |
|
|
|
99,921 |
|
|
|
276,744 |
|
|
|
1,163,212 |
|
|
|
|
2007 |
|
|
|
758,315 |
|
|
|
82,972 |
|
|
|
102,465 |
|
|
|
465,792 |
|
|
|
1,409,544 |
|
|
Capital asset purchases: |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,412 |
|
|
|
9,412 |
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,670 |
|
|
|
7,670 |
|
15
The following is our segment information as of and for the six months ended June 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable
Business Segments |
|
|
|
|
(in thousands) |
|
|
|
|
|
Small Business Services |
|
Financial Services |
|
Direct Checks |
|
Corporate |
|
Consolidated |
|
Revenue from external
customers: |
|
|
2008 |
|
|
$ |
427,339 |
|
|
$ |
223,995 |
|
|
$ |
97,628 |
|
|
$ |
|
|
|
$ |
748,962 |
|
|
|
|
2007 |
|
|
|
461,885 |
|
|
|
231,420 |
|
|
|
110,400 |
|
|
|
|
|
|
|
803,705 |
|
|
Operating income: |
|
|
2008 |
|
|
|
50,271 |
|
|
|
37,749 |
|
|
|
28,111 |
|
|
|
|
|
|
|
116,131 |
|
|
|
|
2007 |
|
|
|
63,165 |
|
|
|
38,894 |
|
|
|
34,397 |
|
|
|
|
|
|
|
136,456 |
|
|
Depreciation and amortization expense: |
|
|
2008 |
|
|
|
24,147 |
|
|
|
4,767 |
|
|
|
2,178 |
|
|
|
|
|
|
|
31,092 |
|
|
|
|
2007 |
|
|
|
27,662 |
|
|
|
4,559 |
|
|
|
2,407 |
|
|
|
|
|
|
|
34,628 |
|
|
Total assets: |
|
|
2008 |
|
|
|
725,263 |
|
|
|
61,284 |
|
|
|
99,921 |
|
|
|
276,744 |
|
|
|
1,163,212 |
|
|
|
|
2007 |
|
|
|
758,315 |
|
|
|
82,972 |
|
|
|
102,465 |
|
|
|
465,792 |
|
|
|
1,409,544 |
|
|
Capital asset purchases: |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,214 |
|
|
|
15,214 |
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,026 |
|
|
|
12,026 |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
EXECUTIVE OVERVIEW
Our business is organized into three segments: Small Business Services, Financial Services and
Direct Checks. Our Small Business Services segment generated 57.1% of our consolidated revenue for
the first half of 2008. This segment has sold business checks, printed forms, promotional products,
marketing materials and related services and products to more than six million small businesses and
home offices in the past five years through direct response
marketing, financial institution referrals, independent distributors, the internet and sales representatives. Of the more than six
million customers we have served in the past five years, approximately four million have ordered
our products or services in the last 24 months. Our Financial Services segment generated 29.9% of
our consolidated revenue for the first half of 2008. This segment sells personal and business
checks, check-related products and services, stored value gift cards, and customer loyalty,
retention and fraud monitoring and protection services to approximately 7,000 financial institution
clients nationwide, including banks, credit unions and financial services companies. Our Direct
Checks segment generated 13.0% of our consolidated revenue for the first half of 2008. This segment
is the nations leading direct-to-consumer check supplier, selling under the Checks Unlimited®,
Designer® Checks and Checks.com brand names. Through these brands, we sell personal and business
checks and related products and services directly to consumers using direct response marketing and
the internet. We operate primarily in the United States. Small Business Services also has
operations in Canada.
Our net income for the first half of 2008, as compared to 2007, benefited from the following:
|
|
|
A significant reduction in performance-based employee
compensation; |
|
|
|
|
Various cost reductions from previously announced management initiatives to reduce our
cost structure, primarily within sales and marketing, information technology and
manufacturing; |
|
|
|
|
Reduced employee benefit costs related to lower workers compensation and medical claims
activity; |
|
|
|
|
The first quarter year-over-year benefit of a February 2007 price increase in Financial
Services; and |
|
|
|
|
Lower amortization of acquired intangible assets within 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; |
|
|
|
|
Lower order volume for Direct Checks due to the continuing decline in check usage and
advertising response rates; |
|
|
|
|
Lower revenue per order in Financial Services; |
|
|
|
|
Higher delivery-related costs due to a mid-2007 postal rate increase and fuel surcharges
in 2008; |
|
|
|
|
Lower volume in Financial Services due to non-recurring financial institution conversion
activity in 2007 and the continuing decline in check usage; |
16
|
|
|
Additional revenue in the first quarter of 2007 for Direct Checks due to a
weather-related backlog from the last week of 2006; and |
|
|
|
|
Investments made 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 Managements
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). There were no
significant changes in our strategies or business challenges during the first half of 2008,
although the impact of economic conditions on our Small Business Services segment was greater than
anticipated. Additionally, we have completed four acquisitions this year. We expect that these
acquisitions will expand revenue from higher growth business services.
In July 2008, we acquired the assets of PartnerUp, Inc. (PartnerUp) for cash of approximately
$3.8 million plus contingent payments based on the revenue
and operating margin generated by the business, provided the principals remain with the
company. PartnerUp is an online community that is designed to connect small businesses and
entrepreneurs with people, resources and contacts to build their businesses. Its results of
operations will be included in our Small Business Services segment.
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 of approximately $100 million, net of cash
acquired. The merger agreement was approved by Hostopia stockholders on July 30, 2008, and the
transaction became effective on August 6, 2008, in accordance with rules of the Toronto Stock
Exchange. We utilized availability on our existing lines of credit to fund the acquisition.
Hostopia is a leading provider of web services that enable small and medium-sized businesses to
establish and maintain an internet presence. It also provides email marketing, fax-to-email,
mobility synchronization and other services. Its results of operations will be included in our Small Business
Services segment. Hostopias revenue for its fiscal year ended March 31, 2008 was $27.8 million.
In April 2008, we acquired the assets of Logo Design Mojo, Inc. (Logo Mojo) for cash of $1.5
million. Of this amount, $1.4 million was paid as of June 30, 2008. Logo Mojo is a Canadian-based
online logo design firm. Its results of operations are included in our Small Business Services
segment.
In March 2008, we acquired certain assets of Yoffi Digital Press (Yoffi) for cash of $0.3
million. Yoffi is a commercial digital printer specializing in one-to-one marketing strategies. Its
results of operations are included in our Small Business Services segment.
Update on Cost Reduction Initiatives
As discussed in the Managements Discussion and Analysis of Financial Condition and Results of
Operation section of the 2007 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 $225 million, net of required investments, by the end of 2009. 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
expect to realize approximately $70 million of the $225 million target in 2008. We realized $105
million of this target through the end of 2007, and we expect the remaining $50 million to be
realized in 2009. 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 $1.515 billion and $1.535 billion for
2008, as compared to $1.61 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 approximately
$15 million of 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, the year-over-year lapping of several new feature and accessory initiatives 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 $2.52 and $2.62, compared to
$2.76 for 2007. We expect the revenue decline to be partially offset by continued progress with our
cost reduction initiatives. Our outlook includes an
17
expected decrease in diluted earnings per share of approximately $0.08 from the Hostopia and
PartnerUp acquisitions due to the estimated amortization associated with acquired intangible assets
and interest expense. We estimate that our annual effective tax rate for 2008 will be approximately
35%, compared to 34.1% for 2007, although the third quarter 2008 tax rate will be lower due to the
settlement of tax contingencies. Additionally, we are undertaking a review of our small business
cost structure in light of recent business trends. Additional charges and the corresponding savings
which may occur once the review is complete are not reflected in our earnings per share outlook or
in our cost reduction target.
We anticipate that operating cash flow will be between $195 million and $205 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.
Our priorities for the use of cash include investing both organically and in small to
medium-sized acquisitions to augment growth. We also consider other opportunities to deploy cash to
enhance shareholder value, which have focused this year on share repurchase opportunities. We do
not expect our capacity for share repurchases to exceed $10 million for the remainder of 2008 based
on limitations in the debt agreement related to our notes due in June 2015.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands, except per order amounts) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Revenue |
|
$ |
367,749 |
|
|
$ |
399,871 |
|
|
|
(8.0 |
%) |
|
$ |
748,962 |
|
|
$ |
803,705 |
|
|
|
(6.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders |
|
|
15,607 |
|
|
|
16,121 |
|
|
|
(3.2 |
%) |
|
|
31,578 |
|
|
|
32,978 |
|
|
|
(4.2 |
%) |
Revenue per order |
|
$ |
23.56 |
|
|
$ |
24.80 |
|
|
|
(5.0 |
%) |
|
$ |
23.72 |
|
|
$ |
24.37 |
|
|
|
(2.7 |
%) |
Revenue for the second quarter of 2008 decreased $32.1 million as compared to the second
quarter of 2007 due to unfavorable economic conditions, primarily affecting Small Business
Services, as well as lower volume for Direct Checks due to the overall decline in check usage and
advertising response rates, lower revenue per order for Financial Services and lower volume for
Financial Services due to the decline in check usage. Additionally, Canadian check sales decreased
due to the positive impact in 2007 of a new check format mandated by the Canadian Payments
Association. Partially offsetting these decreases was higher revenue per order for Direct Checks
due to price increases, as well as a favorable Canadian foreign currency exchange rate.
Revenue for the first half of 2008 decreased $54.7 million as compared to the first half of
2007 primarily due to the same factors discussed for the second quarter. Additionally, Small Business
Services revenue decreased $3 million due to revenue generated in 2007 by our industrial packaging
product line which was sold in January 2007, and Direct Checks revenue decreased $3 million due to
a weather-related backlog from the last week of 2006 which pushed revenue into 2007. Revenue in
2007 also benefited from non-recurring client conversion activity within Financial Services.
Conversion activity is driven by the need to replace checks after one financial institution merges
with or acquires another. Revenue per order was down slightly for the six month period as lower
revenue per order was partially offset by the first quarter 2008 benefit of the Financial Services
price increase implemented in February 2007.
The number of orders decreased for the second quarter and first half of 2008, as compared to
the same periods in 2007, due to the volume declines for Direct Checks and Financial Services
discussed earlier, as well as the unfavorable economic conditions primarily affecting Small
Business Services. Additionally, for the six-month period, 2007 orders included non-recurring
client conversion activity. Revenue per order decreased for the second quarter and first half of
2008, as compared to the same periods in 2007, primarily due to continued pricing pressure within
Financial Services partially offset by Direct Checks price increases. For the six-month period, the
competitive pricing in Financial Services was partially offset by the first quarter 2008 benefit of
the price increase implemented in February 2007.
18
Consolidated Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Gross profit |
|
$ |
227,933 |
|
|
$ |
257,077 |
|
|
|
(11.3 |
%) |
|
$ |
463,268 |
|
|
$ |
511,593 |
|
|
|
(9.4 |
%) |
Gross margin |
|
|
62.0 |
% |
|
|
64.3 |
% |
|
|
(2.3 |
) pts. |
|
|
61.9 |
% |
|
|
63.7 |
% |
|
|
(1.8 |
) pts. |
|
Gross margin
decreased for the second quarter of 2008, as compared to the second quarter of
2007, primarily due to lower prices in Financial Services, higher materials costs due to an
unfavorable product mix and higher delivery costs related to fuel surcharges. These decreases in
gross margin were partially offset by price increases for Direct Checks, as well as manufacturing
efficiencies and other benefits resulting from our cost reduction initiatives.
Gross margin
decreased for the first half of 2008, as compared to the first half of 2007,
primarily due to higher delivery-related costs from a mid-2007 postal rate increase and fuel
surcharges in 2008, as well as higher materials costs due to an unfavorable product mix. These
gross margin decreases were partially offset by price increases for Direct Checks, as well as
manufacturing efficiencies and other benefits resulting from our cost reduction initiatives. For
the six month period, lower pricing in Financial Services was partially offset by the first quarter
2008 benefit of the price increase implemented in February 2007.
Consolidated Selling, General & Administrative
(SG&A) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
SG&A expense |
|
$ |
166,632 |
|
|
$ |
189,595 |
|
|
|
(12.1 |
%) |
|
$ |
347,137 |
|
|
$ |
378,910 |
|
|
|
(8.4 |
%) |
SG&A as a percentage of revenue |
|
|
45.3 |
% |
|
|
47.4 |
% |
|
|
(2.1 |
) pts. |
|
|
46.3 |
% |
|
|
47.1 |
% |
|
|
(0.8 |
) pts. |
|
The decrease in
SG&A expense for the second quarter and first half of 2008, as compared to the
same periods in 2007, was primarily due to lower performance-based employee compensation,
including a reversal of amounts recorded in the first quarter, various
cost reduction initiatives within our shared services organizations, primarily within sales and
marketing and information technology, reduced employee benefit costs related to lower workers
compensation and medical claims activity and lower amortization expense. For the first half of
2008, these decreases were partially offset by investments made to drive revenue growth
opportunities, including higher marketing expense within Small Business Services and information
technology investments.
Net Gain on Sale of Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Net gain on sale of product line |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,773 |
|
|
$ |
(3,773 |
) |
In January 2007, we completed the sale of our Small Business Services industrial packaging
product line for $19.2 million, realizing a pre-tax gain of $3.8 million. This sale had an
insignificant impact on earnings per share because of an unfavorable income tax impact specifically
attributable to the gain. The industrial packaging product line generated approximately $3 million
of revenue in the first quarter of 2007.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Interest expense |
|
$ |
12,380 |
|
|
$ |
13,909 |
|
|
|
(11.0 |
%) |
|
$ |
25,133 |
|
|
$ |
26,709 |
|
|
|
(5.9 |
%) |
Weighted-average debt outstanding |
|
|
835,264 |
|
|
|
1,031,579 |
|
|
|
(19.0 |
%) |
|
|
842,446 |
|
|
|
1,007,405 |
|
|
|
(16.4 |
%) |
Weighted-average interest rate |
|
|
5.50 |
% |
|
|
4.84 |
% |
|
|
0.66 |
pts. |
|
|
5.51 |
% |
|
|
4.74 |
% |
|
|
0.77 |
pts. |
The decrease in interest expense for the second quarter and first half of 2008, as compared to
the same periods in 2007, was due to our lower average debt level in 2008, partially offset by a
higher average interest rate.
19
Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Income tax provision |
|
$ |
16,683 |
|
|
$ |
18,474 |
|
|
|
(9.7 |
%) |
|
$ |
31,938 |
|
|
$ |
40,408 |
|
|
|
(21.0 |
%) |
Effective tax rate |
|
|
33.8 |
% |
|
|
33.9 |
% |
|
|
(0.1 |
) pts. |
|
|
34.8 |
% |
|
|
36.2 |
% |
|
|
(1.4 |
) pts. |
The decrease in our effective tax rate for the first half of 2008, as compared to the first
half of 2007, was primarily due to discrete income tax items. Our 2008 income tax provision
included favorable discrete adjustments related primarily to uncertain tax positions, which lowered
our effective tax rate 1.3 percentage points. Additionally, our 2007 income tax provision included
unfavorable discrete adjustments related primarily to the non-deductible write-off of goodwill
related to the sale of our industrial packaging product line, which increased our 2007 effective
tax rate 1.3 percentage points. Partially offsetting the decreases in our income tax provision for
2008 was a lower production activity deduction in 2008, as well as interest earned on tax-exempt
investments in 2007.
RESTRUCTURING ACCRUALS
During the first six months of 2008, we recorded restructuring accruals of $2.6 million for
employee severance related to the planned closing of our customer service call center located in
Flagstaff, Arizona, as well as employee reductions in various shared services functions, including
sales, marketing and fulfillment. During 2007, we recorded restructuring accruals of $7.1 million
for severance benefits related to employee reductions within our shared services functions and
during 2006, we recorded restructuring accruals of $11.1 million for severance benefits related to
employee reductions in our shared services functions, as well as the closing of our Financial
Services customer service call center located in Syracuse, New York. The Syracuse facility was
closed in January 2007. We expect to close the Flagstaff facility during the third quarter of 2008
and we expect the other employee reductions to be completed by mid-2009, with the majority of
severance payments completed by the end of 2009 using cash from operations. These reductions were
the result of the cost reduction initiatives discussed earlier under Executive Overview. During the
first six months of 2008, we reversed $0.9 million of restructuring accruals due to fewer employees
receiving severance benefits than originally estimated. Further information regarding our
restructuring accruals can be found under the caption Note 6: Restructuring accruals of the
Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.
As a result of our employee reductions and facility closings, we expect to realize cost
savings of approximately $15 million in SG&A expense in 2008, in comparison to our 2007 results of
operations, and incremental cost savings of approximately $6 million in 2009 relative to 2008.
Expense reductions consist primarily of labor costs.
SEGMENT RESULTS
Additional financial information regarding our business segments appears under the caption
Note 12: Business segment information of the Condensed Notes to Unaudited Consolidated Financial
Statements appearing in Item 1 of this report.
Small Business Services
This segment sells business checks, printed forms, promotional products, marketing materials
and related services and products to small businesses and home offices through financial
institution referrals, direct response marketing and via sales representatives, independent
distributors and the internet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Revenue |
|
$ |
211,490 |
|
|
$ |
230,082 |
|
|
|
(8.1 |
%) |
|
$ |
427,339 |
|
|
$ |
461,885 |
|
|
|
(7.5 |
%) |
Operating income |
|
|
29,107 |
|
|
|
29,989 |
|
|
|
(2.9 |
%) |
|
|
50,271 |
|
|
|
63,165 |
|
|
|
(20.4 |
%) |
% of revenue |
|
|
13.8 |
% |
|
|
13.0 |
% |
|
|
0.8 |
pts. |
|
|
11.8 |
% |
|
|
13.7 |
% |
|
|
(1.9 |
) pts. |
The decrease in revenue for the second quarter and first half of 2008, as compared to the same
periods in 2007, was due primarily to general economic conditions affecting our customers buying
patterns, mainly in our core checks and forms products. Additionally, check sales in Canada were
higher in 2007 due to a new check format required by the Canadian
20
Payments Association. The six
month period ended June 30, 2007 also included $3 million of revenue generated by our
industrial packaging product line, which was sold in January 2007. Partially offsetting these
decreases was a favorable Canadian foreign currency exchange rate and growth in our promotional
products and custom, full-color, digital and web-to-print products and services.
The decrease in operating income for the second quarter of 2008, as compared to the second
quarter of 2007, was due to the revenue decrease, unfavorable product mix and higher materials
costs, partially offset by lower performance-based employee compensation, continued progress on our
cost reduction initiatives, reduced employee benefit costs related to lower workers compensation
and medical claims activity and lower amortization of acquired intangible assets. Operating margin
increased for the second quarter of 2008, as compared to the second quarter of 2007, as reduced
costs exceeded the negative impact of the revenue decrease.
Operating income and operating margin decreased for the first half of 2008, as compared to the
first half of 2007, for the same reasons discussed for the quarter. Additionally, 2008 results
included investments made to drive revenue growth opportunities, including increased marketing
expense and information technology investments, and 2007 results included a $3.8 million pre-tax
gain on the sale of our industrial packaging product line.
Financial Services
Financial Services sells personal and business checks, check-related products and services,
stored value gift cards, and customer loyalty, retention and fraud monitoring and protection
services to banks and other financial institutions. We also offer enhanced services such as
customized reporting, file management and expedited account conversion support.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Revenue |
|
$ |
110,064 |
|
|
$ |
117,933 |
|
|
|
(6.7 |
%) |
|
$ |
223,995 |
|
|
$ |
231,420 |
|
|
|
(3.2 |
%) |
Operating income |
|
|
18,779 |
|
|
|
23,168 |
|
|
|
(18.9 |
%) |
|
|
37,749 |
|
|
|
38,894 |
|
|
|
(2.9 |
%) |
% of revenue |
|
|
17.1 |
% |
|
|
19.6 |
% |
|
(2.5 |
) pts. |
|
|
16.9 |
% |
|
|
16.8 |
% |
|
0.1 |
pts. |
|
The decrease in revenue for the second quarter of 2008, as compared to the second quarter of
2007, was due to lower revenue per order, as well as a 1.3% decrease in order volume primarily due
to the continuing decline in check usage.
The decrease in revenue for the first half of 2008, as compared to the first half of 2007, was
due to a 2.5% decrease in order volume primarily due to non-recurring client conversion activity in
2007, as well as the continuing decline in check usage. Conversion activity is driven by the need
to replace checks after one financial institution merges with or acquires another. Order volume for
the first half of 2008 was down 1.1% from the first half of 2007 excluding the impact of conversion
activity. Additionally, revenue per order was down slightly for the six month period as competitive
pricing was partially offset by the first quarter 2008 benefit of the price increase implemented in
February 2007.
Operating income and operating margin decreased for the second quarter of 2008, as compared to
the second quarter of 2007, primarily due to the revenue decrease and higher delivery-related
costs, partially offset by lower performance-based employee compensation, various cost
reduction initiatives and reduced employee benefit costs related to lower workers compensation and
medical claims activity.
Operating income decreased for the first half of 2008, as compared to the first half of 2007,
primarily due to the revenue decrease, higher delivery-related costs from a postal rate increase in
mid-2007 and fuel surcharges in 2008, higher materials costs and investments made in 2008 to drive
revenue growth opportunities. Partially offsetting these decreases were lower performance-based
employee compensation, various cost reduction initiatives and reduced employee benefit costs
related to lower workers compensation and medical claims activity. Operating margin increased
slightly for the first half of 2008, as compared to the first half of 2007, as reduced costs
exceeded the negative impact of the revenue decrease.
21
Direct Checks
Direct Checks sells personal and business checks and related products and services directly to
consumers through direct response marketing and the internet. We use a variety of direct marketing
techniques to acquire new customers in the direct-to-consumer channel, including newspaper inserts,
in-package advertising, statement stuffers and co-op advertising. We also use e-commerce strategies
to direct traffic to our websites. Direct Checks sells under the Checks Unlimited, Designer Checks
and checks.com brand names.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
Revenue |
|
$ |
46,195 |
|
|
$ |
51,856 |
|
|
|
(10.9 |
%) |
|
$ |
97,628 |
|
|
$ |
110,400 |
|
|
|
(11.6 |
%) |
Operating income |
|
|
13,415 |
|
|
|
14,325 |
|
|
|
(6.4 |
%) |
|
|
28,111 |
|
|
|
34,397 |
|
|
|
(18.3 |
%) |
% of revenue |
|
|
29.0 |
% |
|
|
27.6 |
% |
|
1.4
|
pts. |
|
|
28.8 |
% |
|
|
31.2 |
% |
|
(2.4 |
) pts. |
|
The decrease in revenue for the second quarter and first half of 2008, as compared to the same
periods in 2007, was due to a reduction in orders stemming from the decline in check usage and
advertising response rates. Additionally, in the second quarter of 2008, revenue decreased due to
an internet search engines decision to limit our internet advertising based upon their revised
advertising policies. A sales tax law change in the State of New York also negatively affected our
internet affiliate program. Partially offsetting the volume decline was higher revenue per order
resulting from price increases. Additionally, for the six-month period, revenue decreased $3
million due to a weather-related backlog from the last week of 2006, which pushed revenue into
2007.
The decrease in operating income for the second quarter of 2008, as compared to the second
quarter of 2007, was primarily due to the lower order volume, partially offset by our cost
reduction initiatives, lower advertising expense and lower performance-based employee compensation.
Operating margin increased for the second quarter of 2008, as compared to the second quarter of
2007, as reduced costs and price increases exceeded the negative impact of the volume decline.
The decrease in operating income and operating margin for the first half of 2008, as compared
to the first half of 2007, was primarily due to the lower order volume and higher delivery-related
costs from a postal rate increase in mid-2007. These decreases in operating income were partially
offset by our cost reduction initiatives, lower advertising expense and lower performance-based
employee compensation.
CASH FLOWS
As of June 30, 2008, we held cash and cash equivalents of $17.8 million. The following table
shows our cash flow activity for the six months ended June 30, 2008 and 2007, and should be read in
conjunction with the consolidated statements of cash flows appearing in Item 1 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Net cash provided by operating activities |
|
$ |
66,743 |
|
|
$ |
104,694 |
|
|
$ |
(37,951 |
) |
Net cash used by investing activities |
|
|
(16,780 |
) |
|
|
(168,475 |
) |
|
|
151,695 |
|
Net cash (used) provided by financing
activities |
|
|
(53,596 |
) |
|
|
66,188 |
|
|
|
(119,784 |
) |
Effect of exchange rate change on cash |
|
|
(202 |
) |
|
|
579 |
|
|
|
(781 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
(3,835 |
) |
|
$ |
2,986 |
|
|
$ |
(6,821 |
) |
|
|
|
|
|
|
|
|
|
|
The $38.0 million decrease in cash provided by operating activities for the first half of
2008, as compared to the first half of 2007, was due to a $19.7 million increase in 2008 in
employee profit sharing and pension contributions related to our 2007 performance, as well as the
lower earnings discussed earlier under Consolidated Results of Operations. These decreases were
partially offset by lower income tax payments.
22
Included in net cash provided by operating activities were the following operating cash
outflows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
Employee profit sharing and
pension contributions |
|
$ |
35,424 |
|
|
$ |
15,740 |
|
|
$ |
19,684 |
|
Interest payments |
|
|
25,133 |
|
|
|
24,988 |
|
|
|
145 |
|
Voluntary employee
beneficiary association
(VEBA) trust contributions
to fund medical benefits |
|
|
21,300 |
|
|
|
17,700 |
|
|
|
3,600 |
|
Income tax payments |
|
|
36,411 |
|
|
|
53,602 |
|
|
|
(17,191 |
) |
Contract acquisition payments |
|
|
4,571 |
|
|
|
9,700 |
|
|
|
(5,129 |
) |
Severance payments |
|
|
3,302 |
|
|
|
6,949 |
|
|
|
(3,647 |
) |
Net cash used by investing activities in the first half of 2008 was $151.7 million lower than
the first half of 2007, due primarily to net purchases of marketable securities in 2007 following
the issuance of long-term notes in May 2007. Partially offsetting this impact was proceeds of $19.2
million from the sale of our industrial packaging product line in 2007.
Net cash used by financing activities in the first half of 2008 was $119.8 million higher than
the first half of 2007 due to net proceeds in 2007 from the issuance of $200.0 million of long-term
notes, as well as share repurchases of $13.9 million in 2008. Additionally, proceeds from issuing
shares under employee plans was $12.2 million lower in 2008 due to fewer stock options being
exercised. Partially offsetting these increases in cash used by financing activities was lower
payments on short-term debt in 2008.
Significant cash inflows, excluding those related to operating activities, for each period
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
Proceeds from issuing shares
under employee plans |
|
$ |
1,635 |
|
|
$ |
13,787 |
|
|
$ |
(12,152 |
) |
Proceeds from long-term debt, net
of debt issuance costs |
|
|
|
|
|
|
196,507 |
|
|
|
(196,507 |
) |
Proceeds from sales of marketable
securities |
|
|
|
|
|
|
102,972 |
|
|
|
(102,972 |
) |
Proceeds from sale of product line |
|
|
|
|
|
|
19,214 |
|
|
|
(19,214 |
) |
Significant cash outflows, excluding those related to operating activities, for each period
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Change |
|
Cash dividends paid to shareholders |
|
$ |
25,779 |
|
|
$ |
25,971 |
|
|
$ |
(192 |
) |
Purchases of capital assets |
|
|
15,214 |
|
|
|
12,026 |
|
|
|
3,188 |
|
Payments for common shares repurchased |
|
|
13,943 |
|
|
|
|
|
|
|
13,943 |
|
Net payments on short-term debt |
|
|
6,870 |
|
|
|
112,660 |
|
|
|
(105,790 |
) |
Payments for acquisitions, net of
cash acquired |
|
|
1,675 |
|
|
|
2,316 |
|
|
|
(641 |
) |
Purchases of marketable securities |
|
|
|
|
|
|
280,252 |
|
|
|
(280,252 |
) |
We believe future cash flows provided by operating activities and our available credit
capacity are sufficient to support our operations, including capital expenditures, acquisitions,
required debt service and anticipated dividend payments, for the next 12 months.
23
CAPITAL RESOURCES
Our total debt was $836.4 million as of June 30, 2008, a decrease of $7.6 million from
December 31, 2007.
Capital Structure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Amounts drawn on credit facilities |
|
$ |
60,330 |
|
|
$ |
67,200 |
|
|
$ |
(6,870 |
) |
Current portion of long-term debt |
|
|
1,847 |
|
|
|
1,754 |
|
|
|
93 |
|
Long-term debt |
|
|
774,264 |
|
|
|
775,086 |
|
|
|
(822 |
) |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
836,441 |
|
|
|
844,040 |
|
|
|
(7,599 |
) |
Shareholders equity |
|
|
67,694 |
|
|
|
41,107 |
|
|
|
26,587 |
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
904,135 |
|
|
$ |
885,147 |
|
|
$ |
18,988 |
|
|
|
|
|
|
|
|
|
|
|
We have an outstanding authorization from our board of directors to purchase up to 10 million
shares of our common stock. This authorization has no expiration date, and 7.0 million shares
remain available for purchase under this authorization. We repurchased 0.6 million shares for $13.9
million during the first half of 2008. We do not expect our capacity for share repurchases to
exceed $10 million for the remainder of 2008 based on limitations in the debt
agreement related to our notes due in June 2015. Further information regarding changes in
shareholders equity appears under the caption Note 11: Shareholders equity of the Condensed
Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.
Debt Structure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
interest |
|
|
|
|
|
|
interest |
|
|
|
|
(in thousands) |
|
Amount |
|
|
rate |
|
|
Amount |
|
|
rate |
|
|
Change |
|
|
Fixed interest rate |
|
$ |
773,771 |
|
|
|
5.7 |
% |
|
$ |
773,646 |
|
|
|
5.7 |
% |
|
$ |
125 |
|
Floating interest rate |
|
|
60,330 |
|
|
|
3.2 |
% |
|
|
67,200 |
|
|
|
5.6 |
% |
|
|
(6,870 |
) |
Capital lease |
|
|
2,340 |
|
|
|
10.4 |
% |
|
|
3,194 |
|
|
|
10.4 |
% |
|
|
(854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
836,441 |
|
|
|
5.5 |
% |
|
$ |
844,040 |
|
|
|
5.7 |
% |
|
$ |
(7,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further information concerning our outstanding debt can be found under the caption Note 9:
Debt of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of
this report.
We do not anticipate retiring outstanding long-term debt as we do not believe this is the best
use of our financial resources at this time. However, we may, from time to time, consider retiring
outstanding debt through open market purchases, privately negotiated transactions or otherwise. Any
such repurchases or exchanges would depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors.
We currently have a $500.0 million commercial paper program in place which is supported by two
committed lines of credit. Given our current credit ratings, the commercial paper market is not
available to us. As necessary, we utilize our $500.0 million committed lines of credit to meet our
working capital requirements. The credit agreements governing the lines of credit contain customary
covenants requiring a ratio of earnings before interest and taxes to interest expense of 3.0 times,
as well as limits on the level of subsidiary indebtedness. We were in compliance with all debt
covenants as of June 30, 2008, and we expect to remain in compliance with all debt covenants
throughout the next 12 months.
Absent certain defined events of default under our debt instruments, and as long as our ratio
of earnings before interest, taxes, depreciation and amortization to interest expense is in excess
of two to one, our debt covenants do not restrict our ability to pay cash dividends at our current
rate.
24
As of June 30, 2008, amounts were available under our committed lines of credit for borrowing
or for support of commercial paper, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
available |
|
|
Expiration date |
|
|
Commitment fee |
|
|
Five year line of credit |
|
$ |
275,000 |
|
|
July 2010 |
|
|
.175 |
% |
Five year line of credit |
|
|
225,000 |
|
|
July 2009 |
|
|
.225 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total committed lines of credit |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
Amounts drawn on credit facilities |
|
|
(60,330 |
) |
|
|
|
|
|
|
|
|
Outstanding letters of credit |
|
|
(10,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net available for borrowing as of
June 30, 2008 |
|
$ |
428,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT ACQUISITION COSTS
Other non-current assets include contract acquisition costs of our Financial Services segment.
These costs, which are essentially pre-paid product discounts, 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. Cash payments made for contract acquisition costs were $4.6
million for the first half of 2008 and $9.7 million for the first half of 2007. Changes in contract
acquisition costs during the first six months of 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Balance, beginning of year |
|
$ |
55,516 |
|
|
$ |
71,721 |
|
Additions |
|
|
4,576 |
|
|
|
9,138 |
|
Amortization |
|
|
(12,442 |
) |
|
|
(15,001 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
47,650 |
|
|
$ |
65,858 |
|
|
|
|
|
|
|
|
The number of checks being written has been in decline since the mid-1990s, which has
contributed to increased competitive pressure when attempting to retain or acquire clients. Both
the number of financial institution clients requesting contract acquisition payments and the amount
of the payments increased in the mid-2000s and has fluctuated significantly from year to year.
Although we anticipate that we will selectively continue to make contract acquisition payments, we
cannot quantify future amounts with certainty. The amount paid depends on numerous factors such as
the number and timing of contract executions and renewals, competitors actions, overall product
discount levels and the structure of up-front product discount payments versus providing higher
discount levels throughout the term of the contract. When the overall discount level provided for
in a contract is unchanged, contract acquisition costs do not result in lower net revenue. These
costs impact the timing of cash flows. An up-front cash payment is made as opposed to providing
higher product discount levels throughout the term of the contract. Beginning in 2006, we sought to
reduce the use of up-front product discounts by structuring new contracts with incentives
throughout the duration of the contract. We plan to continue this strategy.
Liabilities for contract acquisition payments are recorded upon contract execution. These
obligations are monitored for each contract and are adjusted as payments are made. Contract
acquisition payments due within the next year are included in accrued liabilities in our
consolidated balance sheets. These accruals were $2.7 million as of June 30, 2008 and $2.5 million
as of December 31, 2007. Accruals for contract acquisition payments included in other non-current
liabilities in our consolidated balance sheets were $3.0 million as of June 30, 2008 and $3.4
million as of December 31, 2007.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND CONTRACTUAL OBLIGATIONS
It is not our general business practice to enter into off-balance sheet arrangements or to
guarantee the performance of third parties. In the normal course of business we periodically enter
into agreements that incorporate general indemnification language. These indemnifications encompass
such items as product or service defects, including breach of security, intellectual property
rights, governmental regulations and/or employment-related matters. Performance under these
indemnities would generally be triggered by our breach of terms of the contract. In disposing of
assets or businesses, we often provide representations, warranties and/or indemnities to cover
various risks including, for example, unknown damage to the
25
assets, environmental risks involved in
the sale of real estate, liability to investigate and remediate environmental contamination at
waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees
related to
periods prior to disposition. We do not have the ability to estimate the potential liability
from such indemnities because they relate to unknown conditions. However, we have no reason to
believe that any likely liability under these indemnities would have a material adverse effect on
our financial position, annual results of operations or annual cash flows. We have recorded
liabilities for known indemnifications related to environmental matters. Further information can be
found under the caption Note 14: Other commitments and contingencies of the Notes to Consolidated
Financial Statements appearing in the 2007 Form 10-K.
We are not engaged in any transactions, arrangements or other relationships with
unconsolidated entities or other third parties that are reasonably likely to have a material effect
on our liquidity or on our access to, or requirements for, capital resources. In addition, we have
not established any special purpose entities.
A table of our contractual obligations was provided in the Managements Discussion and
Analysis of Financial Condition and Results of Operation section of the 2007 Form 10-K. There were
no significant changes in these obligations during the first half of 2008.
RELATED PARTY TRANSACTIONS
We have not entered into any material related party transactions during the six months ended
June 30, 2008 or during 2007.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies was provided in the Managements Discussion
and Analysis of Financial Condition and Results of Operation section of the 2007 Form 10-K. There
were no changes in these policies during the first half of 2008.
We have completed a reassessment of our branding strategy and will be transitioning to our new
strategy over the next year. We do not expect our strategy to have a significant impact on the
carrying value of our trade name intangible assets.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding the accounting pronouncement adopted during the first half of 2008 can
be found under the caption Note 2: New accounting pronouncements of the Condensed Notes to
Unaudited Consolidated Financial Statements appearing in Item 1 of this report.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards
(SFAS) No.
141(R), Business Combinations, which modifies the
required accounting for business combinations. This guidance applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree),
including those sometimes referred to as true mergers or mergers of equals. SFAS No. 141(R)
changes the accounting for business acquisitions and will impact financial statements at the
acquisition date and in subsequent periods. We are required to apply the new guidance to business
combinations completed after December 31, 2008.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the
Useful Life of Intangible Assets. This guidance addresses the determination of the useful life of
intangible assets which have legal, regulatory or contractual provisions that potentially limit a
companys use of an asset. Under the new guidance, a company should consider its own historical
experience in renewing or extending similar arrangements. We are required to apply the new guidance
to intangible assets acquired after December 31, 2008.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This guidance states that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
are participating securities and should be included in the computation of earnings per share using
the two-class method outlined in SFAS No. 128, Earnings per Share. The two-class method is an
earnings allocation formula that determines earnings per share for each class of common stock and
participating
26
security according to dividends declared and participation rights in undistributed
earnings. The terms of our restricted stock unit and restricted stock awards do provide a
nonforfeitable right to receive dividend equivalent payments on unvested awards. As such, these
awards are considered participating securities under the new guidance. Effective January 1, 2009,
we will begin reporting earnings per share under the two-class method and will restate all
historical earnings per share data. We are currently evaluating the impact of this new guidance on
our reported earnings per share.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe
harbor for forward-looking statements to encourage companies to provide prospective information.
We are filing this cautionary statement in connection with the Reform Act. When we use the words or
phrases should result, believe, intend, plan, are expected to, targeted, will
continue, will approximate, is anticipated, estimate, project or similar expressions in
this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission
(SEC), in our press releases and in oral statements made by our representatives, they indicate
forward-looking statements within the meaning of the Reform Act.
We want to caution you that any forward-looking statements made by us or on our behalf are
subject to uncertainties and other factors that could cause them to be incorrect. The material
uncertainties and other factors known to us are discussed in Item 1A of the 2007 Form 10-K and are
incorporated into this report as if fully stated herein. Although we have attempted to compile a
comprehensive list of these important factors, we want to caution you that other factors may prove
to be important in affecting future operating results. New factors emerge from time to time, and it
is not possible for us to predict all of these factors, nor can we assess the impact each factor or
combination of factors may have on our business.
You are further cautioned not to place undue reliance on those forward-looking statements
because they speak only of our views as of the date the statements were made. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to changes in interest rates primarily as a result of the borrowing activities
used to support our capital structure, maintain liquidity and fund business operations. We do not
enter into financial instruments for speculative or trading purposes. During the first half of
2008, we used our committed lines of credit to fund working capital and debt service requirements.
The nature and amount of debt outstanding can be expected to vary as a result of future business
requirements, market conditions and other factors. As of June 30, 2008, our total debt was
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
Carrying |
|
|
Fair |
|
|
interest |
|
(in thousands) |
|
amount |
|
|
value(1) |
|
|
rate |
|
|
Long-term notes maturing December 2012 |
|
$ |
299,156 |
|
|
$ |
246,000 |
|
|
|
5.00 |
% |
Long-term notes maturing October 2014 |
|
|
274,615 |
|
|
|
207,653 |
|
|
|
5.13 |
% |
Long-term notes maturing June 2015 |
|
|
200,000 |
|
|
|
176,000 |
|
|
|
7.38 |
% |
Amounts drawn on credit facilities |
|
|
60,330 |
|
|
|
60,330 |
|
|
|
3.15 |
% |
Capital lease obligation maturing in September 2009 |
|
|
2,340 |
|
|
|
2,340 |
|
|
|
10.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
836,441 |
|
|
$ |
692,323 |
|
|
|
5.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Based on quoted market rates as of June 30, 2008, except for our capital lease
obligation which is shown at carrying value. |
Although the fair value of our long-term debt is less than its carrying amount, we do not
anticipate settling our outstanding debt at its reported fair value. We do not believe that
settling our long-term notes is the best use of our financial resources at this time.
Based on the outstanding variable rate debt in our portfolio, a one percentage point increase
in interest rates would have resulted in additional interest expense of $0.3 million for the first
half of 2008.
We are exposed to changes in foreign currency exchange rates. Investments in and loans and
advances to foreign subsidiaries and branches, as well as the operations of these businesses, are
denominated in foreign currencies, primarily the
27
Canadian dollar. The effect of exchange rate
changes is expected to have a minimal impact on our results of operations and cash flows, as our
foreign operations represent a relatively small portion of our business.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures As of the end of the period covered by this report
(the Evaluation Date), we carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the 1934 Act)).
Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file or submit under the Exchange
Act is (i) recorded, processed, summarized and reported within the time periods specified in
applicable rules and forms, and (ii) accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosure.
(b) Internal Control Over Financial Reporting There were no changes in our internal control
over financial reporting identified in connection with our evaluation during the quarter ended June
30, 2008, which have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in routine litigation incidental to our business, but there are no material
pending legal proceedings to which we are a party or to which any of our property is subject.
Item 1A. Risk Factors.
Our risk factors are outlined in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2007 (the 2007 Form 10K). There have been no significant changes to these risk
factors since we filed the 2007 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In August 2003, our board of directors approved an authorization to purchase up to 10 million
shares of our common stock. This authorization has no expiration date and 7.0 million shares remain
available for purchase under this authorization. During the second quarter of 2008, we did not
purchase any of our own equity securities.
While not considered repurchases of shares, we do at times withhold shares that would
otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the
exercising or vesting of such awards. During the second quarter of 2008, we withheld 20,794 shares
in conjunction with the vesting and exercise of equity-based awards.
Item 3. Defaults Upon Senior Securities.
None.
28
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual shareholders meeting on April 30, 2008.
42,434,048 shares were represented (82.4% of the 51,524,764 shares outstanding and entitled to
vote at the meeting). Four items were considered at the meeting, and the results of the voting
were as follows:
Election of Directors:
The nominees in the proxy statement were: Ronald C. Baldwin, Charles A. Haggerty, Isaiah Harris,
Jr., Don J. McGrath, Cheryl E. Mayberry McKissack, Neil J. Metviner, Stephen P. Nachtsheim, Mary
Ann ODwyer, Martyn R. Redgrave and Lee J. Schram. The results were as follows:
|
|
|
|
|
|
|
|
|
Election of Directors |
|
For |
|
Withhold |
Ronald C. Baldwin |
|
|
41,842,269 |
|
|
|
591,779 |
|
Charles A. Haggerty |
|
|
40,137,098 |
|
|
|
2,296,950 |
|
Isaiah Harris, Jr. |
|
|
40,325,004 |
|
|
|
2,109,044 |
|
Don J. McGrath |
|
|
41,636,712 |
|
|
|
797,335 |
|
Cheryl E. Mayberry McKissack |
|
|
34,984,795 |
|
|
|
7,449,253 |
|
Neil J. Metviner |
|
|
41,834,361 |
|
|
|
599,687 |
|
Stephen P. Nachtsheim |
|
|
39,166,670 |
|
|
|
3,267,378 |
|
Mary Ann ODwyer |
|
|
41,630,078 |
|
|
|
803,970 |
|
Martyn Redgrave |
|
|
41,629,368 |
|
|
|
804,679 |
|
Lee J. Schram |
|
|
41,606,882 |
|
|
|
827,166 |
|
Ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the year ending December 31, 2008:
|
|
|
|
|
For: |
|
|
42,199,062 |
|
Against: |
|
|
153,230 |
|
Abstain: |
|
|
81,755 |
|
|
|
|
|
|
Approval of the Deluxe Corporation 2008 Annual Incentive Plan: |
|
|
|
|
|
For: |
|
|
35,009,048 |
|
Against: |
|
|
2,732,978 |
|
Abstain: |
|
|
204,428 |
|
Broker non-vote: |
|
|
4,487,594 |
|
|
|
|
|
|
Approval of the Deluxe Corporation 2008 Stock Incentive Plan: |
|
|
|
|
|
For: |
|
|
32,304,679 |
|
Against: |
|
|
5,448,027 |
|
Abstain: |
|
|
193,748 |
|
Broker non-vote: |
|
|
4,487,594 |
|
Item 5. Other Information.
None.
29
Item 6. Exhibits.
|
|
|
|
|
Exhibit |
|
|
|
Method of |
Number |
|
Description |
|
Filing |
|
|
|
|
|
1.1
|
|
Purchase Agreement, dated September 28, 2004, by
and among us and J.P. Morgan Securities Inc. and
Wachovia Capital Markets, LLC, as representatives
of the several initial purchasers listed in
Schedule 1 of the Purchase Agreement (incorporated
by reference to Exhibit 1.1 to the Current Report
on Form 8-K filed with the Commission on October 4,
2004)
|
|
* |
|
|
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of May 17,
2004, by and among us, Hudson Acquisition
Corporation and New England Business Service, Inc.
(incorporated by reference to Exhibit (d)(1) to the
Deluxe Corporation Schedule TO-T filed with the
Commission on May 25, 2004)
|
|
* |
|
|
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of June 18,
2008, by and among us, Deluxe Business Operations,
Inc., Helix Merger Corp. and Hostopia.com Inc.
(excluding schedules which we agree to furnish to
the Commission upon request) (incorporated by
reference to Exhibit 2.1 to the Current Report on
Form 8-K filed with the Commission on June 23,
2008)
|
|
* |
|
|
|
|
|
3.1
|
|
Articles of Incorporation (incorporated by
reference to the Annual Report on Form 10-K for the
year ended December 31, 1990)
|
|
* |
|
|
|
|
|
3.2
|
|
Bylaws (incorporated by reference to Exhibit 3.2 to
the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006)
|
|
* |
|
|
|
|
|
4.1
|
|
Amended and Restated Rights Agreement, dated as of
December 20, 2006, by and between us and Wells
Fargo Bank, National Association, as Rights Agent,
which includes as Exhibit A thereto, the Form of
Rights Certificate (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K filed
with the Commission on December 21, 2006)
|
|
* |
|
|
|
|
|
4.2
|
|
First Supplemental Indenture dated as of December
4, 2002, by and between us and Wells Fargo Bank
Minnesota, N.A. (formerly Norwest Bank Minnesota,
National Association), as trustee (incorporated by
reference to Exhibit 4.1 to the Current Report on
Form 8-K filed with the Commission on December 5,
2002)
|
|
* |
|
|
|
|
|
4.3
|
|
Indenture, dated as of April 30, 2003, by and
between us and Wells Fargo Bank Minnesota, N.A.
(formerly Norwest Bank Minnesota, National
Association), as trustee (incorporated by reference
to Exhibit 4.8 to the Registration Statement on
Form S-3 (Registration No. 333-104858) filed with
the Commission on April 30, 2003)
|
|
* |
|
|
|
|
|
4.4
|
|
Form of Officers Certificate and Company Order
authorizing the 2014 Notes, series B (incorporated
by reference to Exhibit 4.9 to the Registration
Statement on Form S-4 (Registration No. 333-120381)
filed with the Commission on November 12, 2004)
|
|
* |
30
|
|
|
|
|
Exhibit |
|
|
|
Method of |
Number |
|
Description |
|
Filing |
|
4.5
|
|
Specimen of 5 1/8% notes due 2014, series B
(incorporated by reference to Exhibit 4.10 to the
Registration Statement on Form S-4 (Registration
No. 333-120381) filed with the Commission on
November 12, 2004)
|
|
* |
|
|
|
|
|
4.6
|
|
Indenture, dated as of May 14, 2007, by and between
us and The Bank of New York Trust Company, N.A., as
trustee (including form of 7.375% Senior Notes due
2015) (incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K filed with the
Commission on May 15, 2007)
|
|
* |
|
|
|
|
|
4.7
|
|
Registration Rights Agreement, dated May 14, 2007,
by and between us and J.P. Morgan Securities Inc.,
as representative of the several initial purchasers
listed in Schedule I to the Purchase Agreement
related to the 7.375% Senior Notes due 2015
(incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K filed with the
Commission on May 15, 2007)
|
|
* |
|
|
|
|
|
4.8
|
|
Specimen of 7.375% Senior Notes due 2015 (included
in Exhibit 4.6)
|
|
* |
|
|
|
|
|
10.1
|
|
Description of Non-employee Director Compensation
Arrangements, updated April 30, 2008
|
|
Filed
herewith |
|
|
|
|
|
12.1
|
|
Statement re: Computation of Ratios
|
|
Filed
herewith |
|
|
|
|
|
31.1
|
|
CEO Certification of Periodic Report pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed
herewith |
|
|
|
|
|
31.2
|
|
CFO Certification of Periodic Report pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed
herewith |
|
|
|
|
|
32.1
|
|
CEO and CFO Certification of Periodic Report
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
Furnished
herewith |
|
|
|
* |
|
Incorporated by reference |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
DELUXE CORPORATION
(Registrant)
|
|
Date: August 7, 2008 |
/s/ Lee J. Schram
|
|
|
Lee J. Schram |
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 7, 2008 |
/s/ Richard S. Greene
|
|
|
Richard S. Greene |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
Date: August 7, 2008 |
/s/ Terry D. Peterson
|
|
|
Terry D. Peterson |
|
|
Vice President, Investor Relations and
Chief
Accounting Officer
(Principal Accounting Officer) |
|
|
32
INDEX TO EXHIBITS
|
|
|
Exhibit No. |
|
Description |
10.1
|
|
Description of Non-employee Director Compensation
Arrangements, updated April 30, 2008 |
|
|
|
12.1
|
|
Statement re: Computation of Ratios |
|
|
|
31.1
|
|
CEO Certification of Periodic Report pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
CFO Certification of Periodic Report pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
CEO and CFO Certification of Periodic Report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
33