UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     (Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                         

DELUXE CORPORATION

Minnesota		41-0216800
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3680 Victoria St. N., Shoreview, Minnesota		55126-2966
(Address of principal executive offices)		(Zip Code)

(651) 483-7111
(Registrant’s 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ               Accelerated filer o               Non-accelerated filer o

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 registrant’s common stock, par value $1.00 per share, at October 22, 2007 was 52,130,853.

 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)

		September 30,				December 31,
		2007				2006
ASSETS
Current Assets:
Cash and cash equivalents		$	28,207			$	11,599
Marketable securities			216,955				—
Trade accounts receivable (net of allowances for uncollectible accounts of $7,290 and $8,189, respectively)			93,946				103,014
Inventories and supplies			34,662				42,854
Deferred income taxes			19,587				18,776
Cash held for customers			13,647				13,758
Other current assets			11,902				12,116
Total current assets			418,906				202,117
Long-Term Investments (including $2,971 of investments at fair value in 2007 — see Note 2)			35,980				35,985
Property, Plant, and Equipment (net of accumulated depreciation of $324,379 and $317,955, respectively)			137,910				142,247
Intangibles (net of accumulated amortization of $363,458 and $330,194, respectively)			153,203				178,537
Goodwill			585,104				590,543
Other Non-Current Assets			119,239				117,703
Total assets		$	1,450,342			$	1,267,132
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	79,695			$	78,489
Accrued liabilities			148,443				146,823
Short-term debt			—				112,660
Long-term debt due within one year			326,709				326,531
Total current liabilities			554,847				664,503
Long-Term Debt			775,479				576,590
Deferred Income Taxes			13,858				16,315
Other Non-Current Liabilities			81,614				75,397
Commitments and Contingencies (Notes 2, 11 and 12)
Shareholders’ Equity (Deficit):
Common shares $1 par value (authorized: 500,000 shares; outstanding: 2007 — 52,126; 2006 — 51,519)			52,126				51,519
Additional paid-in capital			70,428				50,101
Accumulated deficit			(64,649	)			(125,420	)
Accumulated other comprehensive loss			(33,361	)			(41,873	)
Total shareholders’ equity (deficit)			24,544				(65,673	)
Total liabilities and shareholders’ equity (deficit)		$	1,450,342			$	1,267,132

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenue		$	388,636			$	398,087			$	1,192,341			$	1,212,476
Cost of goods sold			143,498				149,729				435,610				457,373
Gross Profit			245,138				248,358				756,731				755,103
Selling, general and administrative expense			184,416				190,618				563,327				595,502
Asset impairment loss			—				—				—				44,698
Net loss (gain) on sale of product line and assets held for sale			—				490				(3,773	)			(4,458	)
Operating Income			60,722				57,250				197,177				119,361
Interest expense			(15,517	)			(14,377	)			(42,226	)			(42,966	)
Other income			2,675				517				4,540				412
Income Before Income Taxes			47,880				43,390				159,491				76,807
Income tax provision			15,720				12,227				56,128				23,740
Income From Continuing Operations			32,160				31,163				103,363				53,067
Income from Discontinued Operations			—				—				—				396
Net Income		$	32,160			$	31,163			$	103,363			$	53,463
Basic Earnings per Share:
Income from continuing operations		$	0.62			$	0.61			$	2.01			$	1.04
Income from discontinued operations			—				—				—				0.01
Basic earnings per share			0.62				0.61				2.01				1.05
Diluted Earnings per Share:
Income from continuing operations		$	0.62			$	0.61			$	1.99			$	1.03
Income from discontinued operations			—				—				—				0.01
Diluted earnings per share			0.62				0.61				1.99				1.03
Cash Dividends per Share		$	0.25			$	0.25			$	0.75			$	1.05
Total Comprehensive Income		$	35,929			$	31,893			$	112,186			$	56,114

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

		Nine Months Ended
		September 30,
		2007				2006
Cash Flows from Operating Activities:
Net income		$	103,363			$	53,463
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Income from discontinued operations			—				(396	)
Depreciation			16,622				19,643
Amortization of intangibles			34,924				46,320
Asset impairment loss			—				44,698
Amortization of contract acquisition costs			21,764				28,063
Employee share-based compensation expense			9,667				3,887
Deferred income taxes			2,521				(20,428	)
Gain on sale of product line and assets held for sale			(3,773	)			(4,458	)
Other non-cash items, net			14,114				6,436
Changes in assets and liabilities, net of effect of acquisition, product line disposition and discontinued operations:
Trade accounts receivable			453				1,351
Inventories and supplies			(2,899	)			(789	)
Other current assets			2,719				16,964
Non-current assets			(6,881	)			(3,990	)
Accounts payable			2,882				(7,531	)
Contract acquisition payments			(12,797	)			(16,121	)
Other accrued and non-current liabilities			(4,937	)			5,278
Net cash provided by operating activities of continuing operations			177,742				172,390
Cash Flows from Investing Activities:
Purchases of capital assets			(17,594	)			(33,883	)
Payment for acquisition, net of cash acquired			(2,316	)			—
Purchases of marketable securities			(855,760	)			—
Proceeds from sales of marketable securities			638,805				—
Proceeds from sale of product line and facilities			19,214				7,439
Other			4,075				3,549
Net cash used by investing activities of continuing operations			(213,576	)			(22,895	)
Cash Flows from Financing Activities:
Net payments on short-term debt			(112,660	)			(51,496	)
Proceeds from issuance of long-term debt, net of debt issuance costs			196,329				—
Payments on long-term debt			(1,171	)			(50,992	)
Change in book overdrafts			(5,625	)			(3,748	)
Proceeds from issuing shares under employee plans			15,309				8,936
Excess tax benefit from share-based employee awards			971				1,175
Common share repurchases			(3,019	)			—
Cash dividends paid to shareholders			(39,015	)			(54,073	)
Net cash provided (used) by financing activities			51,119				(150,198	)
Effect of Exchange Rate Change on Cash			1,323				93
Cash Provided by Operating Activities of Discontinued Operations			—				23
Cash Provided by Investing Activities of Discontinued Operations — Net Proceeds from Sale			—				2,971
Net Change in Cash and Cash Equivalents			16,608				2,384
Cash and Cash Equivalents: Beginning of Period			11,599				6,867
End of Period		$	28,207			$	9,251

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Consolidated financial statements

     The consolidated balance sheet as of September 30, 2007, the consolidated statements of income for the quarters and nine months ended September 30, 2007 and 2006 and the consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006 are unaudited. The consolidated balance sheet as of December 31, 2006 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, 2006 (the 2006 Form 10-K).

     We have reclassified certain amounts presented in the consolidated balance sheet as of December 31, 2006 and the consolidated statements of cash flows for the nine months ended September 30, 2006 to conform to the current period presentation. These reclassifications did not effect our previously reported financial position, results of operations or cash flows.

Note 2: New accounting pronouncements

     On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes. The new standard defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in our judgment is greater than 50% likely to be realized. The adoption of FIN No. 48 impacted our consolidated balance sheet as of January 1, 2007 as follows:

		Increase/
(in thousands)		(decrease)
Current deferred income taxes		$	59
Goodwill			576
Other non-current assets			330
Accrued liabilities			(8,332	)
Other non-current liabilities			20,139
Non-current deferred income taxes			(7,768	)
Accumulated deficit			3,074

     The total amount of unrecognized tax benefits as of January 1, 2007 was $16.2 million, excluding accrued interest and penalties. Of this amount, $9.3 million would affect our effective tax rate if recognized. Interest and penalties recorded for uncertain tax positions were included in our provision for income taxes in the consolidated statements of income prior to the adoption of FIN No. 48, and we continue this classification subsequent to the adoption of FIN No. 48. As of January 1, 2007, $4.7 million of accrued interest and penalties was accrued, excluding the tax benefits of deductible interest. The years 2003 through 2006 remain subject to examination by the Internal Revenue Service (IRS). The years 2002 through 2006 remain subject to examination by major state and city tax jurisdictions. In the event that we have determined not to file tax returns with a particular state or city, all years remain subject to examination by the tax jurisdiction.

     During the nine months ended September 30, 2007, we settled a city jurisdictional matter for $1.0 million and reduced our reserve for contingent tax liabilities. There were no other significant changes to our unrecognized tax benefits during this period. Within the next 12 months, it is reasonably possible that our unrecognized tax benefits will change in the range of a decrease of $7.4 million to an increase of $3.6 million as we attempt to settle certain federal and state tax matters or as federal and state statutes of limitations expire. We are not able to predict what, if any, impact these changes may have on our effective tax rate.

     On January 1, 2007, we adopted the measurement date provisions of Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires companies to measure the funded status of a plan as of the date of its year-end balance sheet. We historically used a September 30 measurement date. To transition to a December 31 measurement date, we completed plan measurements for our postretirement benefit and pension plans as of December 31, 2006. In accordance with SFAS No. 158, postretirement benefit expense for the period from October 1, 2006 through December 31, 2006, as calculated based on the September 30, 2006 measurement date, was recorded as an increase to accumulated deficit of $0.7 million, net of tax, as of January 1, 2007. Additionally, we adjusted our postretirement assets and liabilities to reflect the funded status of the plans, as calculated based on the December 31, 2006 measurement date. This adjustment, along with the postretirement benefit expense for the period from October 1, 2006 through December 31, 2006, resulted in an increase in other comprehensive loss of $0.1 million, net of tax, as of January 1, 2007. Postretirement benefit expense reflected in our consolidated statements of income for the quarter and nine months ended September 30, 2007 is based on the December 31, 2006 measurement date. Further information regarding the expense included in our consolidated statements of income can be found in Note 9: Pension and other postretirement benefits.

     On January 1, 2007, we adopted SFAS No. 157, Fair Value Measurements. This new standard addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. For recognition purposes, on a recurring basis we are required to measure at fair value our marketable securities, which are classified as available-for-sale, and a long-term mutual fund investment accounted for under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Further information regarding our marketable securities can be found in Note 3: Supplemental balance sheet and cash flow information. The long-term mutual fund investment had an aggregate fair value of $3.0 million as of September 30, 2007 and $3.3 million as of December 31, 2006 and is included in long-term investments on our consolidated balance sheets. The fair value of these investments is determined using quoted prices in active markets for identical assets. Changes in the fair value of these investments have historically been insignificant. For disclosure purposes, we are required to measure the fair value of outstanding debt on a recurring basis. The fair value of our outstanding debt is determined using quoted prices in active markets.

     On a nonrecurring basis, we are required to use fair value measures when measuring plan assets of our postretirement benefit and pension plans and when analyzing asset impairment. As we elected to adopt the measurement date provisions of SFAS No. 158 as of January 1, 2007, we were required to determine the fair value of our postretirement benefit and pension plan assets as of December 31, 2006. During the third quarter of each year, we evaluate goodwill and indefinite-lived intangibles for impairment. Our goodwill analysis estimates the fair value of our reporting units utilizing the income approach. The income approach is a valuation technique under which we estimate future cash flows using the reporting units’ financial forecasts from the perspective of an unrelated market participant. Future estimated cash flows are discounted to their present value to calculate fair value. The financial forecasts are considered to be a level 3 fair value input under SFAS No. 157. For reasonableness, the summation of our reporting units’ fair values is compared to our market capitalization. When analyzing our indefinite-lived trade names for impairment, we apply a relief from royalty method which calculates the cost savings associated with owning rather than licensing the trade name, applying an assumed royalty rate within our discounted cash flow calculation. This calculation uses forecasted revenue, which is a level 3 fair value input under SFAS No. 157.

     Assets measured at fair value during the nine months ended September 30, 2007 were as follows:

						Fair value measurements using
						Quoted prices in
		Fair value				active markets for				Significant other				Significant
		as of measurement				identical assets				observable inputs				unobservable inputs
(in thousands)		date				(Level 1)				(Level 2)				(Level 3)
Indefinite-lived trade names		$	74,503			$	—			$	—			$	74,503
Goodwill			2,494,281				—				—				2,494,281
Postretirement and pension plan assets			100,424				100,424				—				—

     No gains or losses related to these asset measurements were reflected in our consolidated statements of income for the nine months ended September 30, 2007.

     On January 1, 2007, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This new standard permits companies to choose to measure many financial instruments and certain other items at fair value that were not previously required to be measured at fair value. We have elected the fair value option for a mutual fund investment previously classified as available-for-sale. This investment was carried at fair value on our consolidated balance sheets. However, under the fair value option, unrealized gains and losses now will be reflected in our consolidated statements of income, as opposed to being recorded in accumulated other comprehensive loss on the consolidated balance sheets. 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, so changes in the value of both the plan asset and the liability are now netted in the consolidated statements of income. This mutual fund investment had a fair value of $3.0 million as of September 30, 2007 and $3.3 million as of December 31, 2006, and is included in long-term investments on our consolidated balance sheets. The long-term investments caption on our consolidated balance sheet also includes life insurance policies which are recorded at their cash surrender values. The fair value of the mutual fund investment is determined using quoted prices in active markets. Changes in the fair value of this investment have historically been insignificant and were insignificant during the nine months ended September 30, 2007. As required by SFAS No. 159, the cumulative unrealized gain related to this mutual fund investment of $0.2 million, net of tax, as of January 1, 2007, was reclassified from accumulated other comprehensive loss to accumulated deficit as of January 1, 2007. The unrealized pre-tax gain on this investment as of January 1, 2007 was $0.4 million.

Note 3: Supplemental balance sheet and cash flow information

     Marketable securities — As of September 30, 2007, marketable securities were comprised of investments in tax-exempt money market funds. These investments are accounted for as available-for-sale securities and are carried at fair value on the consolidated balance sheet. They are reported as current assets as they represent the investment of cash available for current operations. Fair value is determined using quoted prices in active markets. The tax-exempt money market funds are comprised of variable rate demand notes, municipal bonds and notes, and commercial paper. The cost of these investments equaled fair value as of September 30, 2007 due to the short-term duration of the underlying investments. Proceeds from sales of available-for-sale marketable securities were $638.8 million for the nine months ended September 30, 2007. There were no gains or losses realized on these sales.

     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 unsecured notes due October 1, 2007, plus accrued interest.

     Inventories and supplies — Inventories and supplies were comprised of the following:

		September 30,				December 31,
(in thousands)		2007				2006
Raw materials		$	7,194			$	7,663
Semi-finished goods			11,974				13,761
Finished goods			9,035				11,257
Total inventories			28,203				32,681
Supplies to be used within the next year, primarily production			6,459				10,173
Inventories and supplies		$	34,662			$	42,854

     Intangibles — Intangibles were comprised of the following:

		September 30, 2007												December 31, 2006
										Net												Net
		Gross carrying				Accumulated				carrying				Gross 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			272,852				(239,426	)			33,426				264,847				(228,719	)			36,128
Customer lists			115,461				(86,414	)			29,047				114,344				(71,088	)			43,256
Distributor contracts			30,900				(17,986	)			12,914				30,900				(14,552	)			16,348
Trade names			30,378				(15,436	)			14,942				31,644				(12,350	)			19,294
Other			7,670				(4,196	)			3,474				7,596				(3,485	)			4,111
Amortizable intangibles			457,261				(363,458	)			93,803				449,331				(330,194	)			119,137
Intangibles		$	516,661			$	(363,458	)		$	153,203			$	508,731			$	(330,194	)		$	178,537

     Total amortization of intangibles was $11.3 million for the quarter ended September 30, 2007 and $13.5 million for the quarter ended September 30, 2006. Amortization of intangibles was $34.9 million for the nine months ended September 30, 2007 and $46.3 million for the nine months ended September 30, 2006. Based on the intangibles in service as of September 30, 2007, estimated future amortization expense is as follows:

(in thousands)
Remainder of 2007		$	10,898
2008			36,087
2009			23,655
2010			9,564
2011			5,406

     Goodwill — Changes in goodwill during the nine months ended September 30, 2007 were as follows:

		Small
		Business				Direct
(in thousands)		Services				Checks				Total
Balance, December 31, 2006		$	508,306			$	82,237			$	590,543
Sale of industrial packaging product line (see Note 5)			(5,864	)			—				(5,864	)
Adjustment of income tax receivable related to the New England Business Service, Inc. (NEBS) acquisition			(1,117	)			—				(1,117	)
Acquisition of All Trade Computer Forms, Inc. (see Note 5)			711				—				711
Adoption of FIN No. 48 (see Note 2)			576				—				576
Translation adjustment			255				—				255
Balance, September 30, 2007		$	502,867			$	82,237			$	585,104

     Other non-current assets — Other non-current assets were comprised of the following:

		September 30,				December 31,
(in thousands)		2007				2006
Contract acquisition costs (net of accumulated amortization of $79,120 and $97,910, respectively)		$	60,267			$	71,721
Deferred advertising costs			31,727				27,891
Other			27,245				18,091
Other non-current assets		$	119,239			$	117,703

     Changes in contract acquisition costs during the first nine months of 2007 and 2006 were as follows:

		Nine Months Ended September 30,
(in thousands)		2007				2006
Balance, beginning of year		$	71,721			$	93,664
Additions(1)			10,310				13,929
Amortization			(21,764	)			(28,063	)
Balance, end of period		$	60,267			$	79,530

     Accrued liabilities — Accrued liabilities were comprised of the following:

		September 30,				December 31,
(in thousands)		2007				2006
Employee profit sharing and pension		$	32,545			$	20,890
Customer rebates			24,315				19,314
Interest			22,723				7,197
Wages, including vacation			20,477				17,214
Cash held for customers			13,647				13,758
Restructuring due within one year (see Note 8)			3,757				10,697
Income taxes			—				25,219
Other			30,979				32,534
Accrued liabilities		$	148,443			$	146,823

     Supplemental cash flow disclosure — As of September 30, 2007, we had accounts payable of $4.6 million related to capital asset purchases. These amounts were reflected in property, plant and equipment and intangibles in our consolidated balance sheet as of September 30, 2007, as we did receive the assets as of that date. The payment of these liabilities will be included in purchases of capital assets on the consolidated statements of cash flows when these liabilities are paid.

Note 4: Earnings per share

     The following table reflects the calculation of basic and diluted earnings per share from continuing operations. 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								Nine Months Ended
		September 30,								September 30,
(in thousands, except per share amounts)		2007				2006				2007				2006
Earnings per share — basic:
Income from continuing operations		$	32,160			$	31,163			$	103,363			$	53,067
Weighted-average shares outstanding			51,616				51,098				51,422				50,961
Earnings per share — basic		$	0.62			$	0.61			$	2.01			$	1.04
Earnings per share — diluted:
Income from continuing operations		$	32,160			$	31,163			$	103,363			$	53,067
Re-measurement of share-based awards classified as liabilities			(1	)			12				(9	)			(584	)
Income available to common shareholders		$	32,159			$	31,175			$	103,354			$	52,483
Weighted-average shares outstanding			51,616				51,098				51,422				50,961
Dilutive impact of options, restricted stock units, unvested restricted stock and employee stock purchase plan			507				182				471				220
Weighted-average shares and potential dilutive shares outstanding			52,123				51,280				51,893				51,181
Earnings per share — diluted		$	0.62			$	0.61			$	1.99			$	1.03
Antidilutive options excluded from calculation (weighted-average amount for nine month periods)			1,815				3,025				1,946				3,067

     Earnings per share amounts for continuing operations, discontinued operations and net income, as presented on the consolidated statements of income, are calculated individually and may not sum due to rounding differences.

Note 5: Acquisition and disposition

     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 Trade’s operating results are included in our consolidated results of operations from the acquisition date. The allocation of the purchase price to the assets acquired and liabilities assumed resulted in goodwill of $0.7 million. We believe this acquisition resulted in goodwill due to All Trade’s expertise in custom printing which we expect will help us expand our core printing capabilities and product offerings for small businesses.

     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 because the effective tax rate specifically attributable to the gain was higher since 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: Discontinued operations

     In December 2004, we sold our European operations, with the exception of one facility which was sold in the second quarter of 2006. Income from discontinued operations for the nine months ended September 30, 2006 consisted primarily of the net gain on disposal of the facility.

Note 7: Asset impairment loss

     In June 2006, we determined that a software project intended to replace major portions of our existing order capture, billing and pricing systems would not meet our future business requirements in a cost-effective manner. Therefore, we made the decision to abandon the project. Accordingly, we wrote down the carrying value of the related internal-use software to zero during the second quarter of 2006. This resulted in a non-cash asset impairment loss of $44.7 million, of which $26.4 million was allocated to the Financial Services segment and $18.3 million was allocated to the Small Business Services segment.

Note 8: Restructuring accruals

     Restructuring accruals of $3.8 million as of September 30, 2007 and $11.2 million as of December 31, 2006 are reflected in accrued liabilities and other non-current 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. During the quarter ended September 30, 2007, we recorded restructuring accruals of $2.6 million related to employee reductions resulting from our cost savings initiatives. The restructuring accruals included severance benefits for 128 employees. Also during the quarter ended September 30, 2007, we reversed $0.5 million of previously recorded restructuring accruals due to fewer employees receiving severance benefits than originally estimated. These restructuring charges, net of reversals, were reflected as a $0.1 million reduction of cost of goods sold and an increase of $2.2 million in selling, general and administrative (SG&A) expense in our consolidated statement of income for the quarter ended September 30, 2007. Restructuring accruals recorded during the nine months ended September 30, 2007 totaled $4.1 million. These accruals related to our cost reduction initiatives and included severance benefits for 184 employees. Also during the nine months ended September 30, 2007, we reversed $2.3 million of restructuring accruals due to fewer employees receiving severance benefits than originally estimated and the re-negotiation of operating lease obligations. These restructuring charges, net of reversals, were reflected as a $0.3 million reduction of cost of goods sold, an increase of $1.9 million in SG&A expense and a $0.2 million reduction of the gain recognized on the sale of our industrial packaging product line (see Note 5) in our consolidated statement of income for the nine months ended September 30, 2007.

     The remaining severance accruals relate to employee reductions resulting from our cost savings initiatives. Severance payments related to the 2006 restructuring accruals are expected to be fully paid by the end of 2007 utilizing cash from operations. The employee terminations related to the 2007 restructuring accruals are expected to be completed by the end of 2008, with severance payments fully paid by mid-2009. The remaining payments due under the operating lease obligations will be paid through early 2009, utilizing cash from operations. 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 2006 Form 10-K.

     As of September 30, 2007, our restructuring accruals, by company initiative, were as follows:

		NEBS				2006				2007
		acquisition				cost savings				cost savings
(in thousands)		related				initiatives				initiatives				Total
Balance, December 31, 2006		$	1,825			$	9,386			$	—			$	11,211
Restructuring charges			—				142				3,959				4,101
Restructuring reversals			(654	)			(1,415	)			(270	)			(2,339	)
Payments			(1,128	)			(7,415	)			(673	)			(9,216	)
Balance, September 30, 2007		$	43			$	698			$	3,016			$	3,757
Cumulative amounts:
Restructuring accruals		$	30,243			$	10,843			$	3,959			$	45,045
Restructuring reversals			(837	)			(1,644	)			(270	)			(2,751	)
Payments			(29,363	)			(8,501	)			(673	)			(38,537	)
Balance, September 30, 2007		$	43			$	698			$	3,016			$	3,757

     As of September 30, 2007, the components of our restructuring accruals, by segment, were as follows:

																		Operating
																		lease
																		obligations
		Employee severance benefits																Small
		Small Business				Financial				Direct								Business
(in thousands)		Services				Services				Checks				Corporate				Services				Total
Balance, December 31, 2006		$	2,304			$	2,703			$	128			$	4,481			$	1,595			$	11,211
Restructuring charges			716				957				—				2,428				—				4,101
Restructuring reversals			(231	)			(437	)			(142	)			(978	)			(551	)			(2,339	)
Inter-segment transfer			633				378				32				(1,043	)			—				—
Payments			(2,710	)			(2,644	)			(18	)			(2,841	)			(1,003	)			(9,216	)
Balance, September 30, 2007		$	712			$	957			$	—			$	2,047			$	41			$	3,757
Cumulative amounts for current initiatives(1) :
Restructuring accruals		$	30,404			$	4,218			$	128			$	7,377			$	2,918			$	45,045
Restructuring reversals			(418	)			(602	)			(142	)			(1,038	)			(551	)			(2,751	)
Inter-segment transfer			633				378				32				(1,043	)			—				—
Payments			(29,907	)			(3,037	)			(18	)			(3,249	)			(2,326	)			(38,537	)
Balance, September 30, 2007		$	712			$	957			$	—			$	2,047			$	41			$	3,757

Note 9: Pension and other postretirement benefits

     We have historically provided certain health care benefits for a large number of retired employees. In addition to our postretirement medical plan, we also have supplemental executive retirement plans (SERPs) in the United States and Canada and a pension plan which covers certain Canadian employees. As discussed in Note 2, on January 1, 2007, we adopted the measurement date provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. As such, pension and postretirement benefit expense reflected in our consolidated statements of income for the quarter and nine months ended September 30, 2007 is based on a December 31, 2006 measurement date. 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 2006 Form 10-K.

     Pension and postretirement benefit expense for the quarters ended September 30, 2007 and 2006 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2007				2006				2007				2006
Service cost		$	39			$	268			$	57			$	87
Interest cost			1,753				1,890				130				119
Expected return on plan assets			(2,066	)			(1,905	)			(67	)			(76	)
Amortization of prior service benefit			(990	)			(654	)			—				—
Recognized amortization of net actuarial losses			2,464				2,538				2				3
Total benefit expense		$	1,200			$	2,137			$	122			$	133

     Pension and postretirement benefit expense for the nine months ended September 30, 2007 and 2006 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2007				2006				2007				2006
Service cost		$	117			$	805			$	161			$	259
Interest cost			5,258				5,670				378				356
Expected return on plan assets			(6,198	)			(5,715	)			(190	)			(226	)
Amortization of prior service benefit			(2,969	)			(1,963	)			—				—
Recognized amortization of net actuarial losses			7,393				7,613				5				7
Total benefit expense		$	3,601			$	6,410			$	354			$	396

Note 10: Provision for income taxes

     Our effective tax rate for the nine months ended September 30, 2007 was 35.2%, compared to our 2006 annual effective tax rate of 29.5%. Our 2006 effective tax rate included net favorable adjustments which lowered our effective tax rate 2.8 percentage points, including the true-up of certain deferred income tax balances, as discussed under the caption “Note 9: Provision for income taxes” of the Notes to Consolidated Financial Statements included in the 2006 Form 10-K. Additionally, our overall state tax rate was lower in 2006, and the lower pre-tax income in 2006 resulted in our permanent differences having a larger positive impact on the 2006 effective tax rate.

Note 11: Debt

     Total debt outstanding was comprised of the following:

		September 30,				December 31,
(in thousands)		2007				2006
5.0% senior, unsecured notes due December 15, 2012, net of discount		$	299,014			$	298,872
5.125% senior, unsecured notes due October 1, 2014, net of discount			274,569				274,523
7.375% senior, unsecured notes due June 1, 2015			200,000				—
Long-term portion of capital lease obligations			1,896				3,195
Long-term portion of debt			775,479				576,590
3.5% senior, unsecured notes due October 1, 2007, net of discount			325,000				324,950
Amounts drawn on credit facilities			—				112,660
Capital lease obligations due within one year			1,709				1,581
Short-term portion of debt			326,709				439,191
Total debt		$	1,102,188			$	1,015,781

     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.

     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 Securities and Exchange Commission (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 market value of the notes issued in May 2007 was $198.3 million as of September 30, 2007, based on quoted market prices.

     In October 2004, we issued $325.0 million of 3.5% senior, unsecured notes which matured and were repaid on October 1, 2007 and $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. These notes 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 of the $275.0 million notes may be made at our election prior to their stated maturity. Proceeds from the offering, net of offering costs, were $595.5 million. These proceeds were used to pay off commercial paper borrowings used for the acquisition of NEBS in 2004. The fair market value of these notes was $569.8 million as of September 30, 2007, 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 $264.0 million as of September 30, 2007, based on quoted market prices.

     As of September 30, 2007, 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 levels of subsidiary indebtedness. No commercial paper was outstanding during the nine months ended September 30, 2007. The daily average amount outstanding under our lines of credit during the nine months ended September 30, 2007 was $33.2 million at a weighted-average interest rate of 5.78%. As of September 30, 2007, no amounts were outstanding under our lines of credit. During 2006, the daily average amount outstanding under our commercial paper program and our lines of credit was $162.5 million at a weighted-average interest rate of 5.34%. As of December 31, 2006, no commercial paper was outstanding and $112.7 million was outstanding under our lines of credit at a weighted-average interest rate of 6.01%. As of September 30, 2007, 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
Outstanding letters of credit			(11,225	)
Net available for borrowing as of September 30, 2007		$	488,775

     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 2 to 1, our debt covenants do not restrict our ability to pay cash dividends at our current rate.

Note 12: 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 2006 Form 10-K. No significant changes in these items have occurred during the nine months ended September 30, 2007.

Note 13: Shareholders’ equity (deficit)

     As of December 31, 2006, we were in a shareholders’ deficit position due partially to the adoption of the recognition provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Adoption of SFAS No. 158 increased shareholders’ deficit $33.4 million as of December 31, 2006. Additionally, shareholders’ equity had been reduced due to the required accounting treatment for share repurchases, completed primarily in 2002 and 2003. 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, additional paid-in capital and retained earnings. 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 7.8 million shares remain available for purchase under this authorization.

     Changes in shareholders’ equity (deficit) during the nine months ended September 30, 2007 were as follows:

																		Accumulated				Total
		Common shares								Additional								other				shareholders’
		Number				Par				paid-in				Accumulated				comprehensive				equity
(in thousands)		of shares				value				capital				deficit				loss				(deficit)
Balance, December 31, 2006			51,519			$	51,519			$	50,101			$	(125,420	)		$	(41,873	)		$	(65,673	)
Net income			—				—				—				103,363				—				103,363
Cash dividends			—				—				—				(39,015	)			—				(39,015	)
Common shares issued(1)			744				744				15,380				—				—				16,124
Tax impact of share-based awards			—				—				443				—				—				443
Common shares repurchased			(100	)			(100	)			(2,919	)			—				—				(3,019	)
Other common shares retired			(37	)			(37	)			(1,257	)			—				—				(1,294	)
Fair value of share-based compensation			—				—				8,680				—				—				8,680
Adoption of measurement date provisions of SFAS No. 158, net of tax(2)			—				—				—				(745	)			(69	)			(814	)
Adoption of FIN No. 48(2)			—				—				—				(3,074	)			—				(3,074	)
Adoption of SFAS No. 159, net of tax(2)			—				—				—				242				(242	)			—
Amortization of postretirement prior service credit, net of tax			—				—				—				—				(2,070	)			(2,070	)
Amortization of postretirement net actuarial losses, net of tax			—				—				—				—				5,107				5,107
Amortization of loss on derivatives, net of tax			—				—				—				—				2,005				2,005
Translation adjustment			—				—				—				—				3,781				3,781
Balance, September 30, 2007			52,126			$	52,126			$	70,428			$	(64,649	)		$	(33,361	)		$	24,544

     Accumulated other comprehensive loss was comprised of the following:

		September 30,				December 31,
(in thousands)		2007				2006
Postretirement and pension plans:
Unrealized prior service credit		$	25,703			$	28,398
Unrealized net actuarial losses			(56,377	)			(61,993	)
Fourth quarter plan contributions			—				(47	)
Postretirement and pension plans, net of tax			(30,674	)			(33,642	)
Loss on derivatives, net of tax			(9,157	)			(11,162	)
Unrealized gain on securities, net of tax			—				242
Translation adjustment			6,470				2,689
Accumulated other comprehensive loss		$	(33,361	)		$	(41,873	)

Note 14: Business segment information

     We operate three business segments: Small Business Services, Financial Services and Direct Checks. Small Business Services sells business checks, forms and related printed products to small businesses and home offices through financial institution referrals, direct response marketing, sales representatives, independent distributors and the internet. Financial Services sells personal and business checks, check-related products and services, and customer loyalty solutions 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 2006 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 segment’s results. Due to our 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.

     Effective January 1, 2007, we reclassified as corporate assets the property, plant and equipment, internal-use software, inventories and supplies related to our corporate shared services functions of manufacturing, information technology and real estate. These assets had previously been managed as business segment assets and were reported within our business segments. As we realigned our organization and continued the implementation of a shared services approach for most functions, these assets are now managed as corporate assets which we do not allocate to our business segments. Other corporate assets consist primarily of long-term investments and deferred income taxes. Asset and capital expenditure information for prior periods has been recast to reflect this change. Amortization and depreciation expense related to corporate assets is allocated to our business segments based on segment revenue.

     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 September 30, 2007 and 2006:

						Reportable Business Segments
						Small
						Business				Financial				Direct
(in thousands)						Services				Services				Checks				Corporate				Consolidated
Revenue from external customers:			2007			$	225,789			$	113,001			$	49,846			$	—			$	388,636
			2006				234,103				113,664				50,320				—				398,087
Operating income:			2007				30,197				16,752				13,773				—				60,722
			2006				24,486				17,299				15,465				—				57,250
Depreciation and amortization expense:			2007				12,861				2,856				1,201				—				16,918
			2006				14,409				3,308				1,769				—				19,486
Total assets:			2007				753,578				76,835				103,269				516,660				1,450,342
			2006				772,866				97,980				104,972				319,833				1,295,651
Capital purchases:			2007				—				—				—				5,568				5,568
			2006				—				—				—				5,640				5,640
The following is our segment information as of and for the nine months ended September 30, 2007 and 2006:
						Reportable Business Segments
						Small
						Business				Financial				Direct
(in thousands)						Services				Services				Checks				Corporate				Consolidated
Revenue from external customers:			2007			$	687,674			$	344,421			$	160,246			$	—			$	1,192,341
			2006				703,315				347,965				161,196				—				1,212,476
Operating income:			2007				93,362				55,646				48,169				—				197,177
			2006				37,539				30,438				51,384				—				119,361
Depreciation and amortization expense:			2007				40,523				7,415				3,608				—				51,546
			2006				48,882				11,396				5,685				—				65,963
Asset impairment loss:			2007				—				—				—				—				—
			2006				18,285				26,413				—				—				44,698
Total assets:			2007				753,578				76,835				103,269				516,660				1,450,342
			2006				772,866				97,980				104,972				319,833				1,295,651
Capital purchases:			2007				—				—				—				17,594				17,594
			2006				—				—				—				33,883				33,883

Item 2. Management’s 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 57.7% of our consolidated revenue for the first nine months of 2007. This segment sells business checks, forms and related printed products to more than six million small businesses and home offices through financial institution referrals, direct response marketing, sales representatives, independent distributors and the internet. Our Financial Services segment generated 28.9% of our consolidated revenue for the first nine months of 2007. This segment sells personal and business checks, check-related products and services, and customer loyalty services to approximately 7,500 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 13.4% of our consolidated revenue for the first nine months of 2007. This segment is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited® and Designer® Checks brands. Through these two 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 nine months of 2007, as compared to the first nine months of 2006, benefited from the following:

	•		Various cost reductions from previously announced management initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing;
	•		Lower amortization expense and project costs related to a software project written-off in the second quarter of 2006;
	•		Additional revenue in Direct Checks from selling additional premium features and services, as well as a weather-related backlog from the last week of December 2006;
	•		Lower amortization of acquisition-related intangible assets within Small Business Services, as certain of the assets are amortized using accelerated methods; and
	•		An increase in order volume for Financial Services as compared to the first nine months of 2006, due to net client gains and financial institution conversion activity.

     These benefits were partially offset by higher performance-based employee compensation, lower revenue per order for our Financial Services segment and lower order volume for our Direct Checks segment. Our results for the first nine months of 2006 included a non-cash pre-tax asset impairment loss of $44.7 million and a $4.5 million net pre-tax gain on facility sales.

     In May 2007, we issued $200.0 million of 7.375% senior, unsecured notes maturing on June 1, 2015. 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. Further information regarding our debt can be found under the caption “Note 11: Debt” of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

Our Strategies and Business Challenges

     Details concerning our strategies and business challenges were provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for the year ended December 31, 2006 (the 2006 Form 10-K). There were no significant changes to our strategies or business challenges during the first nine months of 2007.

Update on Cost Reduction Initiatives

     As discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of the 2006 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 $150 million, net of required investments, by the end of 2008. The baseline for these anticipated savings is the estimated cost structure for 2006 which was reflected in the earnings guidance reported in our press release on July 27, 2006 regarding second quarter 2006 results. We are currently on track to achieve approximately 60% of our original $150 million target in 2007. We realized 10% of this target in 2006, and we expect the remaining 30% to be realized in 2008. To date, most of our savings are from sales and marketing, information technology and fulfillment, including manufacturing and supply chain. In October 2007, we announced that we expect to generate an additional $75 million of cost savings by the end of 2009. The additional savings are expected to be generated within fulfillment, our shared services infrastructure and our sales and marketing support operations.

Outlook for 2007

     We anticipate that consolidated revenue will be between $1.608 billion and $1.615 billion for 2007, as compared to $1.640 billion for 2006. As discussed in the 2006 Form 10-K, in January 2007, we completed the sale of our Small Business Services industrial packaging product line. This product line generated approximately $51 million of revenue in 2006. Excluding the impact of the divestiture, we expect low single digit revenue growth for Small Business Services. We expect this growth will be mostly offset by continuing pricing pressure within Financial Services and volume pressure for Direct Checks. However, based on the strategies outlined in the 2006 Form 10-K, we anticipate that the revenue declines for our personal check businesses will decrease to single digit rates.

     We expect that 2007 diluted earnings per share will be between $2.75 and $2.80, compared to $1.96 for 2006. We expect that operating income will increase from 2006 due to our cost reduction initiatives, partially offset by the impact of revenue declines in our personal check businesses, higher performance-based employee compensation and other cost increases. Also, our results for 2006 included a non-cash pre-tax asset impairment loss of $44.7 million. We estimate that our annual effective tax rate for 2007 will be approximately 35%.

     We anticipate that operating cash flow will be between $240 million and $250 million in 2007, compared to $239 million in 2006. Anticipated higher earnings and working capital improvements will be mostly offset by the $34.6 million benefit realized in 2006 from a decision to lower the level at which we pre-fund our voluntary employee beneficiary association (VEBA) trust, which is used to pay medical and severance benefits. We do not expect the sale of our industrial packaging product line to have a significant impact on operating cash flow. We expect capital spending to be approximately $30 million in 2007, with investment focused on manufacturing productivity, business simplification and non-check revenue growth. Our priorities for the use of cash flow include investing both organically and in acquisitions to augment growth, as well as paying down our credit facilities in order to strengthen our credit ratios and enhance our financial flexibility. We will also continue to evaluate all options for delivering value to our shareholders, including share repurchase opportunities and our dividend policy.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue

		Quarter Ended September 30,												Nine Months Ended September 30,
(in thousands, except per order amounts)		2007				2006				Change				2007				2006				Change
Revenue		$	388,636			$	398,087				(2.4	%)		$	1,192,341			$	1,212,476				(1.7	%)
Orders			16,102				16,276				(1.1	%)			49,080				48,796				0.6	%
Revenue per order		$	24.14			$	24.46				(1.3	%)		$	24.29			$	24.85				(2.2	%)

     Revenue for the third quarter of 2007 decreased $9.5 million, as compared to the third quarter of 2006, primarily due to the sale of our industrial packaging product line in January 2007 and a decline in volume for our Direct Checks segment. Lower volume for Direct Checks was due to the overall decline in check usage, as well as lower customer retention, lower direct mail consumer response rates and lower advertising expenditures in prior periods which are negatively impacting reorder volumes in the current period. Partially offsetting these decreases was the acquisition of the Johnson Group in the fourth quarter of 2006 and higher revenue per order for Direct Checks due to the introduction of new products and services, including the EZShield^TM product, a fraud protection service which provides reimbursement to consumers for forged signatures or endorsements and altered checks. Also, revenue increased due to a favorable Canadian foreign exchange rate.

     The number of orders decreased for the third quarter of 2007, as compared to the third quarter of 2006, due primarily to the decline at Direct Checks and the sale of Small Business Services industrial packaging product line. Revenue per order decreased in the third quarter of 2007, as compared to the third quarter of 2006, due primarily to competitive pricing at Financial Services. This impact was significantly offset by a price increase earlier in the year and the increase in revenue per order for Direct Checks discussed above.

     The $20.1 million decrease in revenue for the first nine months of 2007, as compared to the first nine months of 2006, was primarily due to the sale of our industrial packaging product line in January 2007, lower revenue per order given lower pricing in our Financial Services segment and a decline in volume for our Direct Checks segment for the same reasons as discussed for the quarter. Partially offsetting these decreases were the acquisition of the Johnson Group in the fourth quarter of 2006, higher revenue per order for Direct Checks due to the introduction of new products and services, including the EZShield product discussed earlier, and increased check sales in Canada due to a new check format mandated by the Canadian Payments Association. Additionally, Financial Services volume increased due to client gains and financial institution conversion activity and Direct Checks benefited approximately $3 million due to weather-related production and shipping disruptions during the last week of December 2006, which caused revenue to be delayed into 2007.

     The number of orders increased for the first nine months of 2007, as compared to the first nine months of 2006, as the Financial Services volume increase of 1.9% exceeded the negative impacts of Direct Checks’ volume decline and the sale of Small Business Services’ industrial packaging product line. Revenue per order decreased for the first nine months of 2007, as compared to the first nine months of 2006, as lower prices in Financial Services more than offset the impact of increases in revenue per order for Direct Checks and Small Business Services.

Consolidated Gross Margin

		Quarter Ended September 30,												Nine Months Ended September 30,
(in thousands)		2007				2006				Change				2007				2006				Change
Gross profit		$	245,138			$	248,358				(1.3	%)		$	756,731			$	755,103				0.2	%
Gross margin			63.1	%			62.4	%		0.7		pt.			63.5	%			62.3	%		1.2		pt.

     Gross margin increased for the third quarter of 2007, as compared to the third quarter of 2006, primarily due to manufacturing efficiencies, as well as lower material costs in 2007 related to a higher mix of check products in Small Business Services. These gross margin increases were partially offset by delivery rate increases and costs associated with the implementation of new check packaging intended to offset postal rate increases.

     Gross margin increased for the first nine months of 2007, as compared to the first nine months of 2006, for the same reasons as discussed for the quarter. Additionally, we benefited from increased Financial Services check volume for the first nine months of 2007, and 2006 results included costs related to the closing of two manufacturing facilities in mid-2006. Partially offsetting these gross margin increases was the lower Financial Services revenue per order discussed earlier.

Consolidated Selling, General & Administrative (SG&A) Expense

		Quarter Ended September 30,												Nine Months Ended September 30,
(in thousands)		2007				2006				Change				2007				2006				Change
SG&A expense		$	184,416			$	190,618				(3.3	%)		$	563,327			$	595,502				(5.4	%)
SG&A as a percentage of revenue			47.5	%			47.9	%		(0.4		)pt.			47.2	%			49.1	%		(1.9		)pt.

     The decrease in SG&A expense for the third quarter of 2007, as compared to the third quarter of 2006, was primarily due to various cost reduction initiatives within our shared services organizations, partially offset by higher expense for performance-based employee compensation, as well as higher advertising expense within Small Business Services and Direct Checks related to increased circulation.

     The decrease in SG&A expense for the first nine months of 2007, as compared to the first nine months of 2006, was due to various cost reductions within our shared services organizations, lower amortization expense and project costs related to a software project we wrote-off in the second quarter of 2006 and investments made in 2006 related to implementing our Small Business Services strategy. We also benefited from lower amortization of acquisition-related intangible assets within Small Business Services, as certain of these assets are amortized using accelerated methods. Partially offsetting these SG&A decreases was higher expense for performance-based employee compensation and a higher referral commission rate for Small Business Services resulting from growth in our Deluxe Business Advantage financial institution referral program.

Asset Impairment Loss

		Quarter Ended September 30,												Nine Months Ended September 30,
(in thousands)		2007				2006				Change				2007				2006				Change
Asset impairment loss		$	—			$	—			$	—			$	—			$	44,698			$	(44,698	)