UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2008
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
| Minnesota | 41-0216800 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 3680 Victoria St. N., Shoreview, Minnesota | 55126-2966 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (651) 483-7111
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, par value $1.00 per share | New York Stock Exchange | |
| (Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o Yes
þ No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
o Yes
þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant is
$911,459,391 based on the last sales price of the registrant’s common stock on the New York Stock
Exchange on June 30, 2008. The number of outstanding shares of the registrant’s common stock as of
February 12, 2009, was 51,174,015.
Documents Incorporated by Reference:
| 1. | Portions of our definitive proxy statement to be filed within 120 days after our fiscal year-end are incorporated by reference in Part III. |
DELUXE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
| Item | Description | Page | ||||
| Item 1 | 4 | |||||
| Item 1A | 12 | |||||
| Item 1B | 18 | |||||
| Item 2 | 18 | |||||
| Item 3 | 18 | |||||
| Item 4 | 18 | |||||
| Item 5 | 19 | |||||
| Item 6 | 21 | |||||
| Item 7 | 22 | |||||
| Item 7A | 49 | |||||
| Item 8 | 49 | |||||
| Item 9 | 95 | |||||
| Item 9A | 95 | |||||
| Item 9B | 95 | |||||
| Item 10 | 96 | |||||
| Item 11 | 96 | |||||
| Item 12 | 96 | |||||
| Item 13 | 97 | |||||
| Item 14 | 97 | |||||
| Item 15 | 98 | |||||
| 103 | ||||||
| 105 | ||||||
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PART I
Item 1. Business.
Deluxe Corporation was incorporated under the laws of the State of Minnesota in 1920. From
1920 until 1988 our company was named Deluxe Check Printers, Incorporated. Our principal corporate
offices are located at 3680 Victoria Street North, Shoreview, Minnesota 55126-2966. Our main
telephone number is (651) 483-7111.
COMPANY OVERVIEW
Through our industry-leading businesses and brands, we help small businesses and financial
institutions better operate, protect and grow their businesses. We use direct marketing, a North
American sales force, financial institution referrals, independent distributors and the internet to
provide our customers a wide range of customized products and services: personalized printed items
(checks, forms, business cards, stationery, greeting cards and labels), promotional products and
merchandising materials, web hosting and other web services, fraud prevention and marketing services,
financial institution customer loyalty and retention programs and business networking services. We
also sell personalized checks, accessories, stored value gift cards and other services directly to
consumers.
BUSINESS SEGMENTS
Our business segments include Small Business Services, Financial Services and Direct Checks.
These businesses are generally organized by type of customer and reflect the way we manage the
company. Additional information concerning our segments appears under the caption “Note 17:
Business segment information” of the Notes to Consolidated Financial Statements appearing in Item 8
of this report.
Small Business Services
Small
Business Services operates under various brands including Deluxe,
NEBS®,
Safeguard®,
McBee®,
RapidForms®,
Stephen.Fossler®, and from our recent acquisitions, Johnson Group, Hostopia®,
PartnerUp® and Logo MojoTM. This is our largest segment in terms of revenue and
operating income, and we are concentrating on profitably growing this segment. Small Business
Services strives to be a leading supplier to small businesses by providing personalized products
and services that help them operate, protect and grow their businesses. This segment sells business
checks, printed forms, promotional products, web services, marketing materials and related services
and products to more than six million small business customers in the United States, Canada and
Europe. Of these customers, nearly four million have ordered our products or services in the last
24 months. Printed forms include billing forms, work orders, job proposals, purchase orders,
invoices and personnel forms. We also produce computer forms compatible with accounting software
packages commonly used by small businesses. Our stationery, letterhead, envelopes and business
cards are produced in a variety of formats and ink colors. Recent acquisitions have added
custom, full-color, digital and web-to-print capabilities, as well
as logo design, web hosting and other web services,
and business networking services.
The majority of Small Business Services products are distributed through more than one
channel. Our primary channels are direct mail, in which promotional advertising is delivered by
mail to small businesses, financial institution referrals and internet marketing. These efforts are
supplemented by the account development efforts of an outbound telemarketing group. We also sell
through websites, a network of independent local dealers and Safeguard® distributors. Customer
service for initial order support, product reorders and routine service is provided by a network of
call center representatives located throughout the United States and Canada.
Our focus within Small Business Services is to grow revenue and increase operating margin by
continuing to implement the following strategies:
| • | Acquire new customers by leveraging customer referrals that we receive from our financial institution clients and from other marketing initiatives such as e-commerce and direct mail; | |
| • | Increase our share of the amount small businesses spend on the products and services in our portfolio; | |
| • | Expand in higher growth areas such as full color, web-to-print, imaging and business services, including payroll, fraud protection, web hosting and other web services, business networking and logo design; and | |
| • | Continue to optimize our cost and expense structure. |
4
We are continuing to invest in several key enablers to achieve our strategies and reposition
Small Business Services as not just a provider of printed products, but also a provider of
higher-growth business services. These key enablers include continuing to improve our e-commerce
capabilities, implementing an integrated platform for our various brands, improving our customer
analytics, focusing on key customer segments and improving our merchandising. We have refreshed our
existing product offerings and have already improved some of our newer service offerings, which we
believe creates a more valuable suite of products and services. We have acquired companies which
allow us to expand our custom, full color, digital and web-to-print offerings, as well as web
hosting and other web services, logo design and business networking services. We expect to drive
growth as we obtain a greater portion of our revenue from higher growth annuity-based business
services. In August 2008, we acquired Hostopia.com Inc. (Hostopia), a provider of web services that
enable small businesses to establish and maintain an internet presence. Hostopia also provides
email marketing, fax-to-email, mobility synchronization and other services. It provides a unified,
scaleable, web-enabled platform that better positions us to obtain orders for a wider variety of
products, including checks, forms, business cards and full-color, digital and web-to-print
offerings, as well as imaging and other printed products. Hostopia
operates primarily in the United
States and Canada. Also during 2008, we acquired the assets of PartnerUp, Inc. (PartnerUp), Logo
Design Mojo, Inc. (Logo Mojo) and Yoffi Digital Press (Yoffi). PartnerUp is an online community
that is designed to connect small businesses and entrepreneurs with resources and contacts to build
their businesses. Logo Mojo is a Canadian-based online logo design firm and Yoffi is a commercial
digital printer specializing in custom marketing material.
During 2008, we introduced the www.ShopDeluxe.com website, our new customer facing e-commerce
platform. This website, along with our www.Deluxe.com website, will serve as a platform for
improved e-commerce capability. We intend to consolidate our Deluxe Marketing Store website into
ShopDeluxe.com to further improve the customer experience, and we have identified opportunities to
expand sales to our existing customers and acquire new customers. Also important to our growth are
the small business customer referrals we receive from our Deluxe Business Advantage®
program, which provides a fast and simple way for financial institutions to offer expanded
personalized service to small businesses. Our relationships with financial institutions are
important in helping us serve customer segments more deeply, such as contractors, professional
services providers and banks and credit unions.
As in our other two business segments, we continue our efforts within Small Business Services
to simplify processes, eliminate complexity and lower costs. During 2008, we closed one customer
call center located in Flagstaff, Arizona, and we expect to close our Thorofare, New Jersey
customer call center in the first half of 2009.
Financial Services
Financial Services sells personal and business checks, check-related products and services,
customer loyalty, retention and fraud monitoring and protection services, and stored value gift
cards to financial institutions. As part of our check programs, we also offer enhanced services
such as customized reporting, file management and expedited account conversion support. Our
relationships with financial institutions are generally formalized through supply contracts which
usually range in duration from three to five years. We serve approximately 6,500 financial
institutions in the United States. Consumers and small businesses typically submit their check
order to their financial institution, which then forwards the order to us. We process the order and
ship it directly to the consumer or small business. Financial Services produces a wide range of
check designs, with many consumers preferring one of the dozens of licensed or cause-related
designs we offer, including Disney®, Warner Brothers®, Garfield®, Harley-Davidson®, NASCAR®, PGA
TOUR, Thomas Kinkade®, Susan G. Komen Breast Cancer Foundation and National Arbor Day Foundation®.
Our strategies within Financial Services are as follows:
| • | Continue to maintain core check revenue streams and acquire new clients; | ||
| • | Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients by helping them grow core deposits; and | ||
| • | Continue to simplify our business model and optimize our cost and expense structure. |
5
We proactively extended several check contracts during 2008 and will continue our focus on
acquiring new clients during 2009. We are also leveraging our loyalty, retention, market
intelligence and fraud monitoring and protection offers, as well as our Deluxe Business Advantage
program. The Deluxe Business Advantage program is designed to maximize financial
institution business check programs by offering the products and services of our Small Business
Services segment to small businesses through a number of service level options. The revenue from
these additional products and services is reflected in our Small Business Services segment.
In our efforts to expand beyond check-related products, we have introduced several services
and products that focus on customer loyalty and retention, as well as fraud monitoring and
protection. Following are some examples:
| • | Deluxe ID TheftBlock® — a set of fraud monitoring and recovery services that provides assistance to consumers in detecting and recovering from identity theft. | ||
| • | Welcome HomeSM Tool Kit — a start-to-finish package for financial institution branch offices that captures best practices for securing lasting loyalty among customers by focusing on the first 90 days of the relationship. | ||
| • | Deluxe CallingSM — an outbound calling program aimed at helping financial institutions generate new organic revenue growth and reduce attrition. |
We expect providing products and services that differentiate us from the competition will help
offset the decline in check usage and the pricing pressures we are experiencing in our check
programs. As such, we are also focused on accelerating the pace at which we introduce new products
and services. In addition to these value-added services, we continue to offer our Knowledge
ExchangeTM Series for financial institution clients through which we host knowledge
exchange expos, conduct web seminars and host special industry
conference calls. We also offer
specialized publications. Through this program, financial institutions gain knowledge and exposure
to thought leaders in areas that most impact their core strategies: client loyalty, small business
and retail client strategy, cost management, customer experience and brand enhancement. Our
Collaborative initiative, a key component of the Knowledge Exchange Series, enlists a team of
leading financial institution executives who meet with us over a one year timeframe to develop and
test specific and focused solutions on behalf of the financial services industry. These findings
and new strategies or services are then disseminated for the benefit of all our clients. Our 2007
Small Business Collaborative initiative grew out of our Knowledge Exchange Series and explored and
identified innovative ways for financial institution clients to improve relationships with small
businesses. During 2008, our Collaborative focused on creating customer loyalty through human
interaction, a simple yet powerful brand building strategy for financial institutions.
Direct Checks
Direct Checks is the nation’s 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 estimate the direct-to-consumer personal check printing
portion of the payments industry accounts for approximately 14% of all personal checks sold in the
United States.
We use a variety of direct marketing techniques to acquire new customers, including newspaper
inserts, in-package advertising, statement stuffers and co-op advertising. We also use e-commerce
strategies to direct traffic to our websites, which include: www.checksunlimited.com,
www.designerchecks.com and www.checks.com. Our direct-to-consumer focus has resulted in a total
customer base of approximately 44.5 million customers, the most in the direct-to-consumer checks
marketplace.
Direct Checks competes primarily on price and design. Pricing in the direct-to-consumer
channel is generally lower than prices charged to consumers in the financial institution channel.
We also compete on design by seeking to offer the
most attractive selection of images with high consumer appeal, many of which are acquired or
licensed from well-known artists and organizations such as Disney, Warner Brothers, Harley Davidson
and Thomas Kinkade.
Our strategies within Direct Checks are as follows:
| • | Optimize cash flow; | ||
| • | Maximize the lifetime value of customers by selling new features, accessories and products; and | ||
| • | Continue to lower our cost and expense structure. |
6
We intend to optimize the cash flow generated by this segment by continuing to lower our cost
and expense structure in all functional areas, particularly in the areas of marketing and
fulfillment. We will continue to actively market our products and services through targeted
advertising and will focus a greater portion of our investment in the e-commerce channel.
Additionally, we continue to explore avenues to increase sales to existing customers. For example,
we have had success with the EZShieldTM product, a check protection service that
provides reimbursement to consumers for forged signatures or endorsements and altered checks.
PRODUCTS AND SERVICES
Revenue, by product, as a percentage of consolidated revenue for the last three years was as
follows:
| 2008 | 2007(1) | 2006(1) | ||||||||||
Checks |
65.4 | % | 65.8 | % | 64.3 | % | ||||||
Other printed products, including forms |
22.5 | % | 23.6 | % | 22.6 | % | ||||||
Accessories and promotional products |
7.4 | % | 7.4 | % | 7.6 | % | ||||||
Packaging supplies, services and other |
4.7 | % | 3.2 | % | 5.5 | % | ||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
| (1) | During the fourth quarter of 2008, our Russell & Miller retail packaging and signage business met the criteria to be classified as discontinued operations in our consolidated financial statements. As such, our results for prior years reflect the reclassification of the results of this business to discontinued operations. |
We remain one of the largest providers of checks in the United States, both in terms of
revenue and the number of checks produced. We provide check printing and related services to
approximately 6,500 financial institution clients, as well as personalized checks, related
accessories and other services (including fraud prevention, web hosting, payroll and logo design)
directly to millions of small businesses and consumers. Checks account for the majority of the
revenue in our Financial Services and Direct Checks segments and represent 49.4%, 49.8% and 47.0%
of Small Business Services total revenue in 2008, 2007 and 2006, respectively.
We are a leading provider of printed forms to small businesses, having provided products to
more than six million customers over the past five years. Printed forms include billing forms, work
orders, job proposals, purchase orders, invoices and personnel forms. We produce computer forms
compatible with accounting software packages commonly used by small businesses. Our stationery,
letterhead, envelopes and business cards are produced in a variety of formats and ink colors. These
items are designed to provide small business owners with the customized documents necessary to
efficiently manage their business. We also provide promotional printed items and digital printing
services designed to fulfill selling and marketing needs of the small businesses we serve. We have
expanded our business services offerings, which include check protection, web design and hosting,
payroll, logo design and business networking services.
MANUFACTURING
We continue to focus on improving the customer experience by providing excellent service and
quality, reducing costs and increasing productivity. We accomplish this by embedding lean operating
principles in all processes, emphasizing a culture of continuous improvement. Under this approach,
employees work together to produce products, rather than
working on individual tasks in a linear fashion. Because employees assume more ownership of
the end product, the results are improved productivity and lower costs. During 2007, we
demonstrated our commitment to innovative solutions by implementing a new flat check delivery
package to mitigate the effect on our customers of a postal rate increase. We expect to have the
flat package process fully automated by the end of 2009. We continue to see the benefit of
operational efficiencies in our results. The expertise we have developed in logistics, productivity
and inventory management has allowed us to reduce the number of production facilities while still
meeting client requirements. During 2009, we plan to close five manufacturing facilities located in
Mississauga, Ontario in Canada, North Wales, Pennsylvania, Thorofare, New Jersey, Greensboro, North
Carolina and Colorado Springs, Colorado. We closed one small printing facility located in East
Dubuque,
7
Illinois at the end of 2008. During 2006, we closed our Los Angeles, California and
Athens, Ohio printing facilities. Aside from our plant consolidations, we continue to seek other
innovations to further increase efficiencies and reduce costs. In 2009, this will include expanding
our use of digital printing processes.
In manufacturing, we have a shared services approach which allows our three business segments
to leverage shared manufacturing facilities to optimize capacity utilization, enhance operational
excellence and foster a culture of continuous improvement. We continue to reduce costs by utilizing
our assets and printing technologies more efficiently and by enabling employees to better leverage
their capabilities and talents.
INDUSTRY OVERVIEW
Checks
According to a Federal Reserve study released in December 2007, approximately 33 billion
checks are written annually. This includes checks which are converted to automated clearing house
(ACH) payments. Checks remain the largest single non-cash payment method in the United States,
accounting for approximately 35% of all non-cash payment transactions. This is a reduction from the
Federal Reserve Study released in December 2004 when checks accounted for approximately 45% of all
non-cash payment transactions. The Federal Reserve estimates that checks written declined
approximately four percent per year between 2003 and 2006. According to our estimates, the use of
small business checks is declining at a rate of four to six percent per year, although the decline
was greater in 2008, we believe, due to the economic recession. The total transaction volume of all
electronic payment methods exceeds check payments, and we expect that to continue. We believe check
usage tends to be fairly resilient to downturns in the economy. However, recent turmoil in the
financial services industry has had a negative impact on our check volumes as some banks have
experienced higher than normal customer attrition. Further, we
believe fewer small business start-ups and an
increased number of failures negatively impacted our check volumes in
2008, although the 2008 data is not yet available.
Small Business Customers
The Small Business Administration’s Office of Advocacy defines a small business as an
independent business having fewer than 500 employees. In 2007, the most recent period for which
information is available, it was estimated that there were approximately 27 million small
businesses in the United States. This represented approximately 99.7% of all employers. According
to the same survey, small businesses employ approximately half of all private sector employees and
generated over 60% to 80% of net new jobs created each year over the last decade.
The small business market is impacted by general economic conditions and the rate of small
business formations. The index of small business optimism published by the National Federation of
Independent Business in December 2008 was at a near-record low. According to estimates of the Small
Business Administration’s Office of Advocacy, new small business formations were down slightly in
2007, the most recent period for which information is available, as compared to 2006. The economy
had a negative impact on our 2008 results, primarily in Small Business Services, and we expect the
economic recession to continue impacting our results throughout 2009.
We seek to serve the needs of the small business customer. We design, produce and distribute
business checks, forms, envelopes, retail packaging and related products. We also offer business
services such as web design and hosting, payroll and logo design, all of which are offered to help
our small business customers operate, protect and grow their businesses. The Formtrac 2008 report
from the Print Services Distribution Association, the most recent data available, indicates that
the
business check and forms portion of the markets serviced by Small Business Services declined
at a rate of four to six percent in 2007. Continual technological improvements have provided small
business customers with alternative means to enact and record business transactions. For example,
off-the-shelf business software applications and electronic transaction systems have been designed
to replace pre-printed business forms products.
8
Financial Institution Clients
Checks are most commonly ordered through financial institutions. We estimate approximately 86%
of all consumer checks are ordered in this manner. Financial institutions include banks, credit
unions and other financial services companies. Several developments related to financial
institutions have affected the check printing portion of the payments industry:
| • | Financial institutions seek to maintain the profits they have historically generated from their check programs, despite the decline in check usage. This has put significant pricing pressure on check printers in the past several years. | ||
| • | Turmoil in the financial services industry, including bank failures and consolidations, has negatively impacted order volumes. | ||
| • | When financial institutions consolidate through mergers and acquisitions, often the newly combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply contracts. This results in check providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other party in the merger/acquisition. | ||
| • | Financial institution mergers and acquisitions can also impact the duration of our contracts. Normally, the length of our contracts with financial institutions range from three to five years. However, contracts are sometimes renegotiated or bought out mid-term due to a consolidation of financial institutions. | ||
| • | Banks, especially larger ones, may request pre-paid product discounts made in the form of cash incentives payable at the beginning of a contract. These contract acquisition payments negatively impact check producers’ cash flows in the short-term. | ||
| • | In most situations, contracts require a contract termination payment if a financial institution cancels its contract. |
The recent turmoil in the financial services industry has led to increases in bank failures
and consolidations. To the extent any financial institution failures and consolidations impact
large portions of our customer base, this could have a significant impact on our financial
institution check programs.
Consumer Direct Mail Response Rates
Direct Checks and portions of Small Business Services have been impacted by reduced consumer
response rates to direct mail advertisements. Our own experience indicates that the decline in our
customer response rates is attributable to the decline in check usage and a general decline in
direct marketing response rates. We continuously evaluate our marketing techniques in order to
utilize the most effective and affordable advertising media.
Competition
The small business forms and supplies industry and the business services and business
networking industries are all highly fragmented with many small local suppliers and large national
retailers. We believe we are well-positioned in this competitive landscape through our broad
customer base, the breadth of our small business product and service offerings, multiple
distribution channels, established relationships with our financial institution clients, reasonable
prices, high quality and dependable service.
In the small business forms and supplies industry, the competitive factors influencing a
customer’s purchase decision are breadth of product line, speed of delivery, product quality,
price, convenience and customer service. Our primary competitors are office product superstores,
local printers, business form dealers, contract stationers and internet-based suppliers. Local
printers provide personalization and customization, but typically have a limited variety of
products and services, as well as limited printing sophistication. Office superstores offer a
variety of products at competitive prices, but provide limited personalization and customization.
We are aware of numerous independent companies or divisions of companies offering printed products
and business supplies to small businesses through the internet, direct mail, distributors or a
direct sales force.
In business services, the competitive factors include the breadth, quality and ease of use of
web and other services, professional and technical support service, price, established brand and
responsiveness of customer support.
9
In the check printing portion of the payments industry, we face considerable competition from
several other check printers, and we expect competition to remain intense as check usage continues
to decline and financial institutions continue to consolidate. We also face competition from check
printing software vendors and from internet-based sellers of checks and related products. Moreover,
the check product must compete with alternative payment methods, including credit cards, debit
cards, automated teller machines and electronic payment systems.
In the financial institution check printing business there are two large primary providers,
one of which is Deluxe. The principal factors on which we compete are product and service breadth,
price, quality and check merchandising program management. From time to time, some of our check
printing competitors have reduced the prices of their products during the selection process in an
attempt to gain greater volume. The corresponding pricing pressure placed on us has resulted in
reduced profit margins and some shifts of business. Continuing pricing pressure will likely result
in additional margin compression. Additionally, product discounts in the form of cash incentives
payable to financial institutions upon contract execution have been a practice within the industry
since the late 1990’s. Both the number of financial institution clients requesting these payments
and the size of the payments has fluctuated significantly in recent years. These up-front payments
negatively impact check printers’ cash flows in the short-term and may result in additional pricing
pressure when the financial institution also negotiates greater 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.
Seasonality
General economic conditions have an impact on our business and financial results. From time to
time, the markets in which we sell our products and services experience weak economic conditions
that negatively impact revenue. We experience seasonal trends in selling some of our products. For
example, holiday card sales and stored value gift cards typically are stronger in the fourth
quarter of the year, and sales of tax forms are stronger in the first quarter of the year.
Raw Materials and Supplies
The principal raw materials used in producing our main products are paper, plastics, ink,
cartons and printing plate material, which we purchase from various sources. We also purchase some
stock business forms produced by third parties. We believe that we will be able to obtain an
adequate supply of materials from current or alternative suppliers.
Governmental Regulation
We are subject to regulations implementing the privacy and information security requirements
of the federal financial modernization law known as the Gramm-Leach-Bliley Act and other
federal regulation and state law on the same subject. These laws and regulations require us to
develop, implement and maintain policies and procedures to protect the security and confidentiality
of consumers’ nonpublic personal information. We are also subject to additional requirements in
certain of our contracts with financial institution clients, which are often more restrictive than
the regulations. These regulations and agreements limit our ability to use or disclose nonpublic
personal information for other than the purposes originally intended. This could have the effect of
limiting business opportunities.
Congress and many states have passed and are considering additional laws or regulations that,
among other things, restrict the use, purchase, sale or sharing of nonpublic personal information
about consumers and business customers. Laws and regulations may be adopted in the future with
respect to the internet, e-commerce or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the internet and/or use of other sales or
marketing vehicles. For example, new privacy laws could decrease traffic to our websites, decrease
telemarketing opportunities and increase the cost of obtaining new customers. We do not expect that
changes to these laws and regulations will have a significant impact on our business in 2009.
Intellectual Property
We rely on a combination of trademark and copyright laws, trade secret and patent protection
and confidentiality and license agreements to protect our trademarks, software and other
intellectual property. These protective measures afford only limited protection. Despite our
efforts to protect our intellectual property, third parties may infringe or misappropriate our
10
intellectual property or otherwise independently develop substantially equivalent products or
services which do not infringe on our intellectual property rights. In addition, check designs
exclusively licensed from third parties account for a portion of our revenue. These license
agreements generally average three years in duration. There can be no guarantee that such licenses
will be available to us indefinitely or under terms that would allow us to continue to sell the
licensed products profitably.
EMPLOYEES
As of December 31, 2008, we employed 6,591 employees in the United States and 581 employees in
Canada. None of our employees are represented by labor unions, and we consider our employee
relations to be good.
AVAILABILITY OF COMMISSION FILINGS
We make available through the Investor Relations section of our website, www.deluxe.com, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after these items are electronically filed with or furnished
to the Securities and Exchange Commission (SEC). These reports can also be accessed via the SEC
website, www.sec.gov, or via the SEC’s Public Reference Room located at 100 F Street N.E.,
Washington, D.C. 20549. Information concerning the operation of the SEC’s Public Reference Room can
be obtained by calling 1-800-SEC-0330.
A printed copy of this report may be obtained without charge by calling 651-787-1068, by
sending a written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box
64235, St. Paul, Minnesota 55164-0235, or by sending an email request to
investorrelations@deluxe.com.
CODE OF ETHICS AND CORPORATE GOVERNANCE GUIDELINES
We have adopted a Code of Ethics and Business Conduct which applies to all of our employees
and our board of directors. The Code of Ethics and Business Conduct is available in the Investor
Relations section of our website, www.deluxe.com, and also can be obtained free of charge upon
written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 64235, St.
Paul, Minnesota 55164-0235. Any changes or waivers of the Code of Ethics and Business Conduct will
be disclosed on our website. In addition, our Corporate Governance Guidelines and the charters of
the Audit, Compensation, Corporate Governance and Finance Committees of our board of directors are
available on our website or upon written request.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are elected by the board of directors each year. The following
summarizes our executive officers and their positions.
| Executive | ||||||||||
| Name | Age | Present Position | Officer Since | |||||||
Anthony Scarfone |
47 | Senior Vice President, General Counsel and Secretary | 2000 | |||||||
Terry Peterson |
44 | Vice President, Investor Relations and Chief Accounting Officer | 2005 | |||||||
Richard Greene |
44 | Senior Vice President, Chief Financial Officer | 2006 | |||||||
Lynn Koldenhoven |
42 | Vice President, Sales and Marketing Direct-to-Consumer | 2006 | |||||||
Lee Schram |
47 | Chief Executive Officer | 2006 | |||||||
Pete Godich |
44 | Vice President, Fulfillment | 2008 | |||||||
Julie Loosbrock |
49 | Senior Vice President, Human Resources | 2008 | |||||||
Malcolm McRoberts |
44 | Senior Vice President, Chief Information Officer | 2008 | |||||||
Tom Morefield |
46 | Senior Vice President, Financial Services Segment Leader | 2008 | |||||||
Laura Radewald |
48 | Vice President, Brand, Experience and Media Relations | 2008 | |||||||
11
Anthony Scarfone joined us in September 2000 as senior vice president, general counsel and
secretary.
Terry Peterson was named vice president of investor relations in October 2006. From May 2006
to September 2006, Mr. Peterson served as interim Chief Financial Officer and was named chief
accounting officer in March 2005. Mr. Peterson joined us in September 2004 and served as director
of internal audit until March 2005. From August 2002 until August 2004, Mr. Peterson was vice
president and controller of the GCS Services Division of Ecolab, Inc., a worldwide developer and
marketer of premium cleaning and sanitation products.
Richard Greene joined us as senior vice president, chief financial officer in October 2006.
From April 2005 to April 2006, Mr. Greene served as chief financial officer of the plastics and
adhesives segment of Tyco International Ltd., which was renamed Covalence Specialty Materials Corp.
upon divestiture. From October 2003 to April 2005, Mr. Greene was vice president and chief
financial officer of the Tyco Plastics unit of Tyco International Ltd.
Lynn Koldenhoven was named vice president, sales and marketing direct-to-consumer in October
2006. Prior to this, Ms. Koldenhoven held a variety of positions within Direct Checks, including:
interim vice president from February 2006 to October 2006, executive director of marketing from
March 2004 to January 2006 and director of core marketing from July 2003 to March 2004.
Lee Schram joined us as chief executive officer in May 2006. From March 2003 to April 2006,
Mr. Schram served as senior vice president of the Retail Solutions Division of NCR Corporation
(NCR), a leading global technology company.
Pete Godich was named vice president, fulfillment in May 2008. From December 2006 to May 2008,
Mr. Godich was vice president of marketing and sales operations. From April 2006 to December 2006,
Mr. Godich was vice president of supply chain. Prior to this, Mr. Godich served as vice president,
customer care from March 2003 to April 2006.
Julie Loosbrock was named senior vice president, human resources in September 2008. Prior to
this, Ms. Loosbrock held several leadership positions within human resources, most recently serving
as vice president, human resources - strategic business partners from September 2003 to September
2008.
Malcolm McRoberts joined us as senior vice president, chief information officer in May 2008.
Prior to this, Mr. McRoberts held a variety of leadership positions at NCR,
including vice president of operations for the retail, hospitality and self-service division from
August 2004 to May 2008 and vice president of operations, enterprise re-engineering from April 2001
to August 2004. NCR is a leading global technology company.
Tom Morefield was named senior vice president, financial services segment leader in September
2008. Prior to this, Mr. Morefield served as vice president, sales and customer channels from
November 2006 to September 2008, vice president, sales and sales support from March 2004 to
November 2006 and national director of sales, community market within our Financial Services
segment from October 2002 to March 2004.
Laura Radewald was named vice president, brand, experience and media relations in September
2008. Ms. Radewald joined us in October 2007 and served as vice president, enterprise brand until
September 2008. From November 2005 to September 2007, Ms. Radewald operated her own marketing
consulting practice. From November 2001 to November 2005, she served as vice president of marketing
for Myriad Development, Inc., a software company that provides underwriting automation and
intelligence solutions to the property and casualty, government and mortgage markets.
Item 1A. Risk Factors.
Our business, consolidated results of operations, financial condition and cash flows could be
adversely affected by various risks and uncertainties. These risks include, but are not limited to,
the principal factors listed below and the other matters set forth in this Annual Report on Form
10-K. Additional risks not presently known to us, or that we currently deem immaterial, may also
impair our business, results of operations, financial condition and cash flows. You should
carefully consider all of these risks before making an investment in our common stock.
12
Weak economic conditions within the United States and globally could continue to have an
adverse effect on our operating results and could result in additional impairment charges.
For most of 2008, financial markets globally have experienced disruption, including, among
other things, extreme volatility in security prices, severely diminished liquidity and credit
availability, ratings downgrades of certain investments and declining valuations of others.
Governments have taken unprecedented actions intended to address extreme market conditions that,
among other concerns, include severely restricted credit. Largely as a result of these disruptions
in financial markets, most analysts believe the global economy has entered a potentially prolonged
recession. These economic developments may adversely affect businesses like ours in a number of
ways, such as:
| • | The rate of small business formations, small business confidence, consumer spending and employment levels, as well as energy costs, all have an impact on our businesses. Below average small business optimism and a decline in small business formations negatively impacted our results of operations in Small Business Services in 2008, and we expect this trend to continue, and possibly worsen, through 2009. Consumer spending and employment levels also trended negatively during 2008, resulting in some negative impact in our personal check businesses. A prolonged downturn in general economic conditions could result in additional declines in our revenue and profitability. | ||
| • | The failure of one or more of our larger financial institution clients, or large portions of our customer base, could adversely affect our operating results. In addition to the possibility of losing a significant contract, the inability to recover contract acquisition costs paid to one or more of our larger financial institution clients, or the inability to collect accounts receivable or contractually required contract termination payments from these financial institution clients, could have a significant negative impact on our consolidated results of operations. | ||
| • | There may be an increase in financial institution mergers and acquisitions during this period of economic uncertainty. Such an increase could adversely affect our operating results. Often the newly combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply contracts. This results in check providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other party in the merger/acquisition. Financial institution mergers and acquisitions can also impact the duration of our contracts. Normally, the length of our contracts with financial institutions ranges from three to five years. However, contracts are sometimes renegotiated or bought out mid-term due to a consolidation of financial institutions. | ||
| • | The effects of the recent economic downturn on our expected operating results and the broader U.S. market resulted in a significant reduction in our share price and led to asset impairment charges in 2008 related to trade names in our Small Business Services segment. Both before and after December 31, 2008, our common stock traded at prices lower than the December 31, 2008 closing stock price of $14.96. If such a decline in our stock price occurs in the future for a sustained period, it may be indicative of a further decline in our fair value and would likely require us to record an impairment charge for a portion of the $40.2 million of goodwill allocated to one of our reporting units. Accordingly, we believe that a non-cash goodwill impairment charge related to this reporting unit and/or further impairment charges related to our indefinite-lived trade name are reasonably possible in the future. This reporting unit had a calculated fair value which exceeded its carrying value by $2.7 million as of December 31, 2008 and our indefinite-lived trade name had a carrying value of $24.0 million as of December 31, 2008. The credit agreement governing our committed line of credit requires us to maintain a ratio of earnings before interest and taxes to interest expense of 3.0 times, as measured quarterly on an aggregate basis for the preceding four quarters. Significant impairment charges in the future could impact our ability to comply with this debt covenant, in which case, our lenders could demand immediate repayment of amounts outstanding under our line of credit. Although we would have remained in compliance with this debt covenant even if our reported pre-tax earnings for 2008 had been $52 million lower than we reported, we cannot provide definitive assurance regarding our continued compliance with this debt covenant. |
The severity and length of the present disruptions in the financial markets and recession in
the global economy are unknown. There can be no assurance that there will not be a further
deterioration in financial markets and in general business conditions.
Our ability to reduce costs is critical to our success.
The intense competition we face compels us to continually improve our operating efficiency in
order to maintain or improve profitability. We intend to continue to reduce expenses, primarily
within our shared services functions of fulfillment, information technology, real estate, finance, human resources and legal.
We also expect to continue to simplify our business processes
and reduce our cost and expense structure. These initiatives have required and will
13
continue to
require up-front expenditures related to items such as redesigning and streamlining processes,
consolidating information technology platforms, standardizing technology applications and improving
real estate utilization. We can provide no assurance that we will achieve our anticipated cost
reductions or that we will do so without incurring unexpected or greater than anticipated
expenditures. Moreover, we may find that we are unable to achieve our business simplification and
cost reduction goals without disruption to our business and, as a result, may choose to delay or
forego certain cost reductions as business conditions require. Failure to meet our planned cost
reduction targets would adversely affect our results of operations and could adversely affect our
prospects if we are unable to remain competitive.
We may not be successful at implementing our growth strategies within Small Business Services.
We continue to execute strategies intended to drive sustained growth within Small Business
Services. We are continuing to invest in several key enablers to
achieve our strategies, including continuing to improve our
e-commerce capabilities, implementing an integrated platform for our
various brands, improving our customer analytics, focusing on key
customer segments and improving our merchandising. We
expect to drive growth as we obtain a greater portion of our revenue from higher growth
annuity-based business services, including web hosting and other web services, business networking
and payroll. All of these initiatives have required and will continue to require investment. Small
Business Services revenue decreased in 2008, as compared to 2007, as the impact of economic
conditions more than offset any favorability resulting from our growth strategies. We can provide
no assurance that our growth strategies will be successful in the long-term and result in a
positive return on our investment. Also, negative impacts resulting from the other risk factors
described herein may offset or more than offset the benefit realized from our growth strategies.
We face intense competition in all areas of our business.
Although we are one of the leading check printers in the United States, we face considerable
competition. In addition to competition from alternative payment methods, we also face intense
competition from another check printer in our traditional financial institution sales channel, from
direct mail sellers of personal checks, from sellers of business checks and forms, from check
printing software vendors and from internet-based sellers of checks to individuals and small
businesses. Additionally, low price, high volume office supply chain stores offer standardized
business forms, checks and related products to small businesses. We also face intense competition
with our business services offerings. We can provide no assurance that we will be able to compete
effectively against current and future competitors. Continued competition could result in
additional price reductions, reduced profit margins, loss of customers and an increase in up-front
cash payments to financial institutions upon contract execution or renewal, which would have a
material adverse effect on our results of operations and cash flows.
Small Business Services’ standardized business forms and related products face technological
obsolescence and changing customer preferences.
Continual technological improvements have provided small business customers with alternative
means to enact and record business transactions. For example, because of the lower price and higher
performance capabilities of personal computers and related printers, small businesses now have an
alternate means to print many business forms. Additionally, electronic transaction systems and
off-the-shelf business software applications have been designed to replace pre-printed business
forms products. If small business preferences change rapidly and we are unable to develop new
products and services with comparable profit margins, our results of operations could be adversely
affected.
The check printing portion of the payments industry is mature and, if check usage declines
faster than expected, it could have a material adverse impact on our operating results.
Check printing is, and is expected to continue to be, an essential part of our business,
representing 65.4% of our consolidated revenue in 2008. We sell checks for personal and small
business use and believe that there will continue to be a substantial demand for these checks for
the foreseeable future. However, the total number of checks written in the United States has been
in decline since the mid-1990s. According to our estimates, the total number of checks written by
individuals and small businesses is declining approximately four to six percent each year, although
the declines were greater in 2008, we believe, due to the economic recession and instability in the financial
services industry. We believe that the number of checks written will continue to decline due to the
increasing use of alternative payment methods, including credit cards, debit cards, automated
teller machines, direct deposit and electronic and other bill paying services. However, the rate
and the extent to which alternative payment methods will achieve acceptance and replace checks,
whether as a result of legislative developments, personal preference or otherwise, cannot be
predicted with certainty. A surge in the popularity of any of these alternative payment
14
methods, or
our inability to successfully offset the decline in check usage with other sources of revenue,
could have a material adverse effect on our business, results of operations and prospects.
Consolidation among financial institutions has, and may continue to, adversely affect the
pricing of our products and may result in the loss of clients.
The number of financial institutions has declined due to consolidation in the financial
services industry. Margin pressures arise from such consolidation as merged entities seek to reduce
costs by leveraging economies of scale, including their check supply contracts. The increase in
general negotiating leverage possessed by such consolidated entities has resulted in contracts
which are not as favorable to us as those historically negotiated with these clients, and in some
cases, has resulted in the loss of clients to competitors. Although we devote considerable effort
toward the development of a competitively-priced, high-quality suite of products and services for
the financial services industry, there can be no assurance that significant financial institution
clients will be retained or that the loss of a significant client can be offset through the
addition of new clients or by expanded sales to our remaining clients.
Continuing softness in direct mail response rates could have a further adverse impact on our
operating results.
Our Direct Checks segment and portions of our Small Business Services segment have experienced
declines in response rates related to direct mail promotional materials. We believe that media
response rates are declining across a wide variety of products and services. Additionally, we
believe that our declines are attributable to the general decline in check usage and the gradual
obsolescence of standardized forms products. In an attempt to offset these impacts, we continue to
modify our marketing and sales efforts and have recently shifted a greater portion of our
advertising investment to the internet. Competitive pressure may inhibit our ability to reflect
increased costs in the prices of our products and new marketing strategies may not be successful.
We can provide no assurance that we will be able to offset the decline in response rates, even with
additional marketing and sales efforts.
The inability to secure adequate advertising placements could have an adverse impact on our
operating results.
The profitability of our Direct Checks segment depends in large part on our ability to secure
adequate advertising media placements at acceptable rates. We can provide no assurance regarding
the future cost, effectiveness and/or availability of suitable advertising media. In addition,
future legislation could affect our ability to advertise via direct mail. Congress enacted a
federal “Do Not Call” registry in response to consumer backlash against telemarketers and is
contemplating enacting “anti-spam” legislation in response to consumer complaints about unsolicited
e-mail advertisements. If anti-spam legislation is enacted and/or if similar legislation is enacted
for direct mail advertisers, we may be unable to sustain our current levels of profitability. In
addition, many Direct Checks customers access our websites through internet search engines. During
2008, our results of operations were adversely affected by a dominant search engine’s decision to
limit our internet advertising based upon its revised advertising policies. As we analyze our
overall advertising strategy, we may have to resort to more costly resources to replace this
internet traffic, which would adversely affect our results of operations.
We face uncertainty with respect to recent and future acquisitions.
During 2008, we acquired Hostopia.com Inc., PartnerUp, Inc., and Logo Design Mojo, Inc. with
the intention of increasing sales of higher-growth annuity-based business services. The integration
of any acquisition involves numerous risks, including: difficulties in assimilating operations and
products; diversion of management’s attention from other business concerns; potential loss of key
employees; potential exposure to unknown liabilities; and possible loss of our clients and
customers or the clients and customers of the acquired businesses. One or more of these factors
could impact our ability to successfully integrate an acquisition and could negatively affect our
results of operations.
In regard to future acquisitions, we cannot predict whether suitable acquisition candidates
can be acquired on acceptable terms or whether any acquired products, technologies or businesses
will contribute to our revenue or earnings to any material extent. Significant acquisitions
typically result in additional contingent liabilities or debt and/or additional amortization
expense related to acquired intangible assets, and thus, could adversely affect our business,
results of operations and financial condition.
15
Declines in the equity markets could affect the value of our postretirement benefit and
pension plan assets, which could adversely affect our operating results and cash flows.
The assets of our postretirement benefit and pension plans are valued at fair value using
quoted market prices. Investments, in general, are subject to various risks, including credit,
interest and overall market volatility risks. During 2008, the equity markets saw a significant
decline in value. As such, the fair values of our plan assets decreased significantly from December
31, 2007. This materially affected the funded status of the plans and will result in higher
postretirement benefit expense in 2009. Although our obligation is limited to funding benefits as
they become payable, continued declines in the fair value of these assets would result in further
expense increases, as well as the need to contribute increased amounts of cash to fund benefits
payable under the plans.
The cost and availability of materials, delivery services and energy could adversely affect
our operating results.
We are subject to risks associated with the cost and availability of paper, plastics, ink,
other raw materials, delivery services and energy. Postal rates increased in 2007 and 2008 and fuel
costs have fluctuated over the past several years. Additionally, there are relatively few paper
suppliers. As such, when our suppliers increase paper prices, as they have indicated will be the
case in 2009, we may not be able to obtain better pricing from alternative suppliers. Competitive
pressures and/or contractual arrangements may inhibit our ability to reflect increased costs in the
price of our products.
Paper costs represent a significant portion of our materials cost. Historically, we have not
been negatively impacted by paper shortages because of our relationships with various paper
suppliers. However, we can provide no assurance that we will be able to purchase sufficient
quantities of paper if such a shortage were to occur. Additionally, we depend upon third party
providers for delivery services. Events resulting in the inability of these service providers to
perform their obligations, such as extended labor strikes, could adversely impact our results of
operations by requiring us to secure alternate providers at higher costs.
Forecasts involving future results reflect various assumptions that may prove to be incorrect.
From time to time, we make predictions or forecasts regarding our future results, including,
but not limited to, forecasts regarding estimated revenue, earnings per share or cash provided by
operating activities. Any forecast regarding our future performance reflects various assumptions
which are subject to significant uncertainties and, as a matter of course, may prove to be
incorrect. Further, the achievement of any forecast depends on numerous factors which are beyond
our control. As a result, we cannot assure you that our performance will be consistent with any
management forecasts or that the variation from such forecasts will not be material and adverse.
You are cautioned not to base your entire analysis of our business and prospects upon isolated
predictions, and are encouraged to use the entire mix of historical and forward-looking information
made available by us, and other information affecting us and our products and services, including
the factors discussed here.
In addition, independent analysts periodically publish reports regarding our projected future
performance. The methodologies we employ in arriving at our own internal projections and the
approaches taken by independent analysts in making their estimates are likely different in many
significant respects. We expressly disclaim any responsibility to advise analysts or the public
markets of our views regarding the accuracy of the published estimates of independent analysts. If
you are relying on these estimates, you should pursue your own investigation and analysis of their
accuracy and the reasonableness of the assumptions on which they are based.
Security breaches involving customer data, or the perception that e-commerce is not secure,
could adversely affect our reputation and business.
We rely on various security procedures and systems to ensure the secure storage and
transmission of data. Computer networks and the internet are, by nature, vulnerable to unauthorized
access. We cannot provide assurance that misuse of new technologies or advances in criminal
capabilities will not compromise or breach our security procedures and systems resulting in
unauthorized access and/or use of customer data, including consumers’ nonpublic personal
information. A security breach could damage our reputation, deter clients and consumers from
ordering our products and services, lead to the termination of client contracts and result in
claims against us. If we are unsuccessful in defending a lawsuit regarding
security breaches, we may be forced to pay damages which could have an adverse effect on our
operating results. Additionally, general publicity regarding security breaches at other companies
could lead to the perception among the general public that e-commerce is not secure. This could
decrease traffic to our websites and foreclose future business opportunities.
16
We may be unable to maintain our licenses to use third party intellectual property on
favorable terms.
Check designs exclusively licensed from third parties account for a portion of our revenue.
These license agreements generally average three years in duration. There can be no guarantee that
such licenses will be available to us indefinitely or under terms that would allow us to continue
to sell the licensed products profitably, which would adversely impact our results of operations.
Interruptions to our website operations or information technology systems could damage our
reputation and harm our business.
The satisfactory performance, reliability and availability of our information technology
systems are critical to our reputation and our ability to attract and retain customers. We could
experience temporary interruptions in our websites, transaction processing systems, network
infrastructure, printing production facilities or customer service operations for a variety of
reasons, including human error, software errors, power loss, telecommunications failures, fire,
flood, extreme weather and other events beyond our control. In addition, our technology,
infrastructure and processes may contain undetected errors or design faults which may cause our
websites or operating systems to fail. The failure of our systems could adversely affect our
business, results of operations and prospects.
We may be unable to protect our rights in intellectual property.
We rely on a combination of trademark and copyright laws, trade secret and patent protection,
and confidentiality and license agreements to protect our trademarks, software and other
intellectual property. These protective measures afford only limited protection. Despite our
efforts to protect our intellectual property, third parties may infringe or misappropriate our
intellectual property or otherwise independently develop substantially equivalent products and
services which do not infringe on our intellectual property rights. We may be required to spend
significant resources to protect our trade secrets and to monitor and police our intellectual
property rights. The loss of intellectual property protection or the inability to secure or enforce
intellectual property protection could harm our business and ability to compete.
We are dependent upon third party providers for certain significant information technology
needs.
We have entered into agreements with third party providers for information technology
services, including telecommunications and network server services. In the event that one or more
of these providers is not able to provide adequate or timely information technology services, we
could be adversely affected. Although we believe that information technology services are available
from numerous sources, a failure to perform by one or more of our service providers could cause a
disruption in our business while we obtain an alternative source of supply. In addition, the use of
substitute third party providers could result in increased expense.
Legislation relating to consumer privacy protection could limit or harm our business.
We are subject to regulations implementing the privacy and information security requirements
of the federal financial modernization law known as the Gramm-Leach-Bliley Act and other federal
regulation and state law on the same subject. These laws and regulations require us to develop,
implement and maintain policies and procedures to protect the security and confidentiality of
consumers’ nonpublic personal information. We are also subject to additional
requirements in certain of our contracts with financial institution clients, which are often more
restrictive than the regulations. These regulations and agreements limit our ability to use or
disclose nonpublic personal information for other than the purposes originally intended. This
could have the effect of limiting business opportunities.
We are unable to predict whether more restrictive legislation or regulation will be adopted in
the future. Any future legislation or regulation, or the interpretation of existing legislation or
regulation, could have a negative impact on our business, results of operations and prospects. Laws
and regulations may be adopted in the future with respect to the internet, e-commerce or marketing
practices generally relating to consumer privacy. Such laws or regulations may impede the growth of
the internet and/or use of other sales or marketing vehicles. For example, new privacy laws could
decrease traffic to our websites, decrease telemarketing opportunities and increase the cost of
obtaining new customers.
17
We may be subject to sales and other taxes which could have an adverse effect on our business.
In accordance with existing state and local tax laws, we currently collect sales, use or other
similar taxes in state and local jurisdictions where we have a physical presence. One or more state
or local jurisdiction may seek to impose sales tax collection obligations on out-of-state companies
which engage in remote or online commerce. Further, tax law and the interpretation of
constitutional limitations thereon is subject to change. In addition, any new operations in states
where we do not currently have a physical presence could subject shipments of goods by our
direct-to-consumer businesses into such states to sales tax under current or future laws. If one or
more state or local jurisdiction successfully asserts that we should have collected sales or other
taxes in the past but did not, or that we must collect sales or other taxes in the future beyond
our current practices, either determination could have a material, adverse affect on our business.
We may be subject to environmental risks.
Our printing facilities are subject to many federal and state regulations designed to protect
the environment. We have sold former printing facilities to third parties, and in some instances,
have agreed to indemnify the buyer of the facility for certain environmental liabilities.
Unforeseen conditions at these facilities could result in additional liability and expense beyond
our insurance coverage.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive office is an owned property located in Shoreview, Minnesota. Aside
from small sales offices, we occupy 32 facilities throughout the United States and six facilities
in Canada where we conduct printing and fulfillment, call center and administrative functions.
These facilities are either owned or leased and have a combined floor space of approximately 2.9
million square feet. We believe that our properties are sufficiently maintained and are adequate
and suitable for our business needs as presently conducted.
Item 3. Legal Proceedings.
In accordance with Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies, we record provisions with respect to identified claims or lawsuits when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the
status of a particular matter. We believe the recorded reserves in our consolidated financial
statements are adequate in light of the probable and estimable outcomes. Recorded liabilities were
not material to our financial position, results of operations and liquidity, and we do not believe
that any of the currently identified claims or litigation will materially affect our financial
position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
18
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock is traded on the New York Stock Exchange under the symbol DLX. Dividends are
declared by our board of directors on a current basis and therefore, may be subject to change in
the future, although we currently have no plans to change our $0.25 per share quarterly dividend
amount. As of December 31, 2008, the number of shareholders of record was 8,053. The table below
shows the per share closing price ranges of our common stock for the past two fiscal years as
quoted on the New York Stock Exchange, as well as the quarterly dividend amount for each period.
| Stock price | ||||||||||||||||
| Dividend | High | Low | Close | |||||||||||||
2008 |
||||||||||||||||
Quarter 4 |
$ | 0.25 | $ | 15.70 | $ | 7.52 | $ | 14.96 | ||||||||
Quarter 3 |
0.25 | 19.59 | 12.01 | 14.39 | ||||||||||||
Quarter 2 |
0.25 | 24.51 | 17.66 | 17.82 | ||||||||||||
Quarter 1 |
0.25 | 33.20 | 18.72 | 19.21 | ||||||||||||
2007 |
||||||||||||||||
Quarter 4 |
$ | 0.25 | $ | 40.86 | $ | 28.93 | $ | 32.89 | ||||||||
Quarter 3 |
0.25 | 42.49 | 28.56 | 36.84 | ||||||||||||
Quarter 2 |
0.25 | 44.95 | 33.38 | 40.61 | ||||||||||||
Quarter 1 |
0.25 | 33.95 | 25.13 | 33.53 | ||||||||||||
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 6.5 million shares remain
available for purchase under this authorization. We did not repurchase any shares during the fourth
quarter of 2008.
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 fourth quarter of 2008, we withheld 13,253 shares
in conjunction with the vesting and exercise of equity-based awards.
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 us from paying cash dividends at our current
rate.
19
The table below compares the cumulative total shareholder return on our common stock for the
last five fiscal years with the cumulative total return of the S&P 400 MidCap Index and the Dow
Jones Support Services (DJUSIS) Index.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100*
December 2008
Assumes Initial Investment of $100*
December 2008
| * | The graph assumes that $100 was invested on December 31, 2003 in each of Deluxe common stock, the S&P 400 MidCap Index and the DJUSIS Index, and that all dividends were reinvested. |
20
Item 6. Selected Financial Data.
The following table shows certain selected financial data for the five years ended December
31, 2008. This information should be read in conjunction with Management’s Discussion and Analysis
of Financial Condition and Results of Operations appearing in Item 7 of this report and our
consolidated financial statements appearing in Item 8 of this report. During the fourth quarter of
2008, our Russell & Miller retail packaging and signage business met the criteria to be classified
as discontinued operations in our consolidated financial statements. As such, our results for prior
years reflect the reclassification of the results of this business to discontinued operations.
| (dollars and orders in thousands, except per share and per | |||||||||||||||||||||
| order amounts) | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Statement of Income Data: |
|||||||||||||||||||||
Revenue(1) |
$ | 1,468,662 | $ | 1,588,885 | $ | 1,619,337 | $ | 1,694,246 | $ | 1,555,916 | |||||||||||
As a percentage of revenue: |
|||||||||||||||||||||
Gross profit |
61.4 | % | 63.8 | % | 62.9 | % | 64.9 | % | 66.0 | % | |||||||||||
Selling, general and administrative expense |
45.7 | % | 46.8 | % | 47.6 | % | 47.0 | % | 43.4 | % | |||||||||||
Operating income |
14.2 | % | 17.0 | % | 12.3 | % | 18.0 | % | 22.3 | % | |||||||||||
Operating income |
$ | 209,234 | $ | 269,904 | $ | 198,544 | $ | 304,328 | $ | 347,492 | |||||||||||
Income from continuing operations |
105,872 | 145,117 | 100,838 | 157,943 | 198,985 | ||||||||||||||||
Per share — basic |
2.08 | 2.82 | 1.98 | 3.12 | 3.97 | ||||||||||||||||
Per share — diluted |
2.05 | 2.79 | 1.96 | 3.10 | 3.94 | ||||||||||||||||
Cash dividends per share |
1.00 | 1.00 | 1.30 | 1.60 | 1.48 | ||||||||||||||||
Balance Sheet Data: |
|||||||||||||||||||||
Cash and cash equivalents |
$ | 15,590 | $ | 21,615 | $ | 11,599 | $ | 6,867 | $ | 15,492 | |||||||||||
Return on average assets |
8.4 | % | 11.6 | % | 7.5 | % | 10.8 | % | 19.2 | % | |||||||||||
Total assets |
$ | 1,218,985 | $ | 1,210,755 | $ | 1,267,132 | $ | 1,425,875 | $ | 1,499,079 | |||||||||||
Long-term obligations(2) |
775,336 | 776,840 | 903,121 | 954,164 | 980,207 | ||||||||||||||||
Total debt |
853,336 | 844,040 | 1,015,781 | 1,166,510 | 1,244,207 | ||||||||||||||||
Statement of Cash Flows Data: |
|||||||||||||||||||||
Net cash provided by operating activities of
continuing operations |
$ | 198,487 | $ | 245,075 | $ | 238,895 | $ | 178,591 | $ | 308,148 | |||||||||||
Net cash used by investing activities of
continuing operations |
(135,773 | ) | (10,929 | ) | (32,884 | ) | (55,834 | ) | (670,805 | ) | |||||||||||
Net cash (used) provided by financing
activities
of continuing operations |
(67,681 | ) | (224,890 | ) | (204,587 | ) | (147,816 | ) | 369,963 | ||||||||||||
Purchases of capital assets |
(31,865 | ) | (32,286 | ) | (41,012 | ) | (55,570 | ) | (43,785 | ) | |||||||||||
Payments for acquisitions, net of cash
acquired |
(104,879 | ) | (2,316 | ) | (16,521 | ) | (2,888 | ) | (624,859 | ) | |||||||||||
Payments for common shares repurchased |
(21,847 | ) | (11,288 | ) | — | — | (26,637 | ) | |||||||||||||
Other Data (continuing operations): |
|||||||||||||||||||||
Orders(3) |
62,823 | 64,753 | 64,670 | 65,070 | 76,213 | ||||||||||||||||
Revenue per order(3) |
$ | 23.38 | $ | 24.54 | $ | 25.04 | $ | 26.04 | $ | 20.42 | |||||||||||
Number of employees |
7,172 | 7,910 | 8,728 | 8,617 | 8,852 | ||||||||||||||||
Number of printing/fulfillment facilities |
21 | 22 | 23 | 20 | 19 | ||||||||||||||||
Number of call center facilities |
14 | 14 | 17 | 18 | 18 | ||||||||||||||||
| (1) | Our results of operations were impacted by the acquisition of New England Business Service, Inc. (NEBS) on June 25, 2004. NEBS contributed revenue of $671.2 million in 2005 and $363.2 million in 2004. We are not able to quantify NEBS revenue for 2006 through 2008 or its contribution to operating income because of its integration with our other businesses. | |
| (2) | Long-term obligations include both the current and long-term portions of our long-term debt obligations, including capital leases. | |
| (3) | Orders is our company-wide measure of volume. When portions of a customer order are on back-order, one customer order may be fulfilled via multiple shipments. Generally, an order is counted when the last item ordered is shipped to the customer. Orders and revenue per order in 2008 were impacted by the acquisition of Hostopia.com Inc. (Hostopia) in August 2008 because each monthly customer billing for service fees is considered to be an order. Hostopia orders in 2008, post-acquisition, were 1,500 and revenue per order was $8.36. |
21
Item 7. 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 57.9% of our consolidated revenue for
2008. This segment has sold business checks, printed forms,
promotional products, web services, 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, nearly four million have
ordered our products or services in the last 24 months. Our Financial Services segment generated
29.3% of our consolidated revenue for 2008. This segment sells personal and business checks,
check-related products and services, customer loyalty, retention and fraud monitoring and
protection services, and stored value gift cards to approximately 6,500 financial institution
clients nationwide, including banks, credit unions and financial services companies. Our Direct
Checks segment generated 12.8% of our consolidated revenue for 2008. This segment is the nation’s
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 and
Europe.
Our business was negatively impacted in 2008 by the effects of a severe downturn in the
economy and by the continued turmoil in the financial services sector. We have experienced a
reduction in demand for many of our products in Small Business Services, and check orders from
several of our financial institutions have been lower due to uncertainty related to government
bailouts and consolidations. At the same time, we have accelerated many of our cost reduction
actions and have identified new opportunities to improve our operating cost structure. In addition,
we have continued to invest in our transformation with acquisitions that bring higher growth
business service offerings into our portfolio. We are focused on capitalizing on these
transformational opportunities available to us in this difficult environment and believe that we
will be better positioned to deliver increasingly better margins once the economy begins to
recover.
Our net income for 2008, as compared to 2007, benefited from the following:
| • | Various management initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing; | ||
| • | A significant reduction in employee-related costs, primarily performance-based employee compensation; and | ||
| • | Higher revenue per order in Direct Checks, primarily from price increases and increased sales of fraud protection services. |
These benefits were more than offset by the following:
| • | Lower volume driven by unfavorable economic conditions, primarily affecting Small Business Services, and the continuing decline in check usage and advertising response rates, as well as non-recurring financial institution conversion activity in 2007; | ||
| • | Restructuring charges and related costs in 2008 resulting from our cost reduction initiatives; | ||
| • | Impairment charges in 2008 related to Small Business Services trade names and discontinued operations; | ||
| • | Increased manufacturing costs, including higher delivery-related costs due to mid-2007 and 2008 postal rate increases and fuel surcharges in 2008, as well as higher materials costs due to an unfavorable product mix; and | ||
| • | Lower revenue per order in Financial Services, despite a price increase in October 2008, due to this segment’s competitive pricing environment. |
22
Our Strategies
Small Business Services — Our focus within Small Business Services is to grow revenue and
increase operating margin by continuing to implement the following strategies:
| • | Acquire new customers by leveraging customer referrals that we receive from our financial institution clients and from other marketing initiatives such as e-commerce and direct mail; | ||
| • | Increase our share of the amount small businesses spend on the products and services in our portfolio; | ||
| • | Expand in higher growth areas such as full color, web-to-print, imaging and business services, including payroll, fraud protection, web hosting and other web services, business networking and logo design; and | ||
| • | Continue to optimize our cost and expense structure. |
We are continuing to invest in several key enablers to achieve our strategies and reposition
Small Business Services as not just a provider of printed products, but also a provider of
higher-growth business services. These key enablers include continuing to improve our e-commerce
capabilities, implementing an integrated platform for our various brands, improving our customer
analytics, focusing on key customer segments and improving our merchandising. We have refreshed our
existing product offerings and have already improved some of our newer service offerings, which we
believe creates a more valuable suite of products and services. We have acquired companies which
allow us to expand our custom, full color, digital and web-to-print offerings, as well as web
hosting and other web services, logo design and business networking services. We expect to drive
growth as we obtain a greater portion of our revenue from higher growth annuity-based business
services.
In August 2008, we completed the acquisition of Hostopia.com Inc. (Hostopia) in a cash
transaction for $99.4 million, net of cash acquired. Hostopia is a provider of web services that
enable small businesses to establish and maintain an internet presence. Hostopia’s revenue for its
fiscal year ended March 31, 2008 was $27.8 million, an increase of 24% from its previous year
amount. Hostopia also provides email marketing, fax-to-email, mobility synchronization and other
services. It provides a unified, scaleable, web-enabled platform that better positions us to obtain
orders for a wider variety of products, including checks, forms, business cards and full-color,
digital and web-to-print offerings, as well as imaging and other printed products. Hostopia
operates primarily in the United States and Canada. Also during 2008, we acquired the assets of
PartnerUp, Inc. (PartnerUp), Logo Design Mojo, Inc. (Logo Mojo) and Yoffi Digital Press (Yoffi) for
an aggregate cash amount of $5.5 million. PartnerUp is an online community that is designed to
connect small businesses and entrepreneurs with resources and contacts to build their businesses.
Logo Mojo is a Canadian-based online logo design firm and Yoffi is a commercial digital printer
specializing in custom marketing material.
During 2008, we introduced the www.ShopDeluxe.com website, our new customer facing e-commerce
platform. This website, along with our www.Deluxe.com website, will serve as a platform for
improved e-commerce capability. We intend to consolidate our Deluxe Marketing Store website into
ShopDeluxe.com to further improve the customer experience, and we have identified opportunities to
expand sales to our existing customers and acquire new customers. Also important to our growth are
the small business customer referrals we receive from our Deluxe Business Advantage®
program, which provides a fast and simple way for financial institutions to offer expanded
personalized service to small businesses. Our relationships with financial institutions are
important in helping us serve customer segments more deeply, such as contractors, professional
services providers and banks and credit unions.
Financial Services — Our strategies within Financial Services are as follows:
| • | Continue to maintain core check revenue streams and acquire new clients; | ||
| • | Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients by helping them grow core deposits; and | ||
| • | Continue to simplify our business model and optimize our cost and expense structure. |
We proactively extended several check contracts during 2008 and will continue our focus on
acquiring new clients during 2009. We are also leveraging our loyalty, retention, market
intelligence and fraud monitoring and protection offers, as well as our Deluxe Business Advantage
program. The Deluxe Business Advantage program is designed to maximize
financial institution business check programs by offering the products and services of our
Small Business Services segment
23
to small businesses through a number of service level options. The
revenue from these additional products and services is reflected in our Small Business Services
segment.
In our efforts to expand beyond check-related products, we have introduced several services
and products that focus on customer loyalty and retention, as well as fraud monitoring and
protection. Following are some examples:
| • | Deluxe ID TheftBlock® — a set of fraud monitoring and recovery services that provides assistance to consumers in detecting and recovering from identity theft. | ||
| • | Welcome HomeSM Tool Kit — a start-to-finish package for financial institution branch offices that captures best practices for securing lasting loyalty among customers by focusing on the first 90 days of the relationship. | ||
| • | Deluxe CallingSM — an outbound calling program aimed at helping financial institutions generate new organic revenue growth and reduce attrition. |
We expect providing products and services that differentiate us from the competition will help
offset the decline in check usage and the pricing pressures we are experiencing in our check
programs. As such, we are also focused on accelerating the pace at which we introduce new products
and services. In addition to these value-added services, we continue to offer our Knowledge
ExchangeTM Series, a suite of resources and events for our financial institution clients
focused on the customer experience.
Direct Checks — Our strategies within Direct Checks are as follows:
| • | Optimize cash flow; | ||
| • | Maximize the lifetime value of customers by selling new features, accessories and products; and | ||
| • | Continue to lower our cost and expense structure. |
We intend to optimize the cash flow generated by this segment by continuing to lower our cost
and expense structure in all functional areas, particularly in the areas of marketing and
fulfillment. We will continue to actively market our products and services through targeted
advertising and will focus a greater portion of our investment in the e-commerce channel.
Additionally, we continue to explore avenues to increase sales to existing customers. For example,
we have had success with the EZShieldTM product, a check protection service that
provides reimbursement to consumers for forged signatures or endorsements and altered checks.
Cost Reduction Initiatives
We are pursuing aggressive cost reduction and business simplification initiatives, including:
reducing shared services infrastructure costs; streamlining our call center and fulfillment
activities; eliminating system and work stream redundancies; and strengthening our ability to
quickly develop new products and services and bring them to market. We believe significant cost
reduction opportunities exist in the reduction of stock keeping units (SKUs), the standardization
of products and services and improvements in sourcing third-party goods and services. In addition,
we closed one customer call center during the third quarter of 2008 and one printing facility in
December 2008, and we plan to close five additional printing facilities and one customer call
center in 2009. These and other actions since 2006 collectively are expected to reduce our annual
cost structure by at least $300 million, net of required investments, by the end of 2010. The
baseline for these anticipated savings is the annual diluted earnings per share guidance for 2006
of $1.41 to $1.51, which we provided in our press release on July 27, 2006 regarding second quarter
2006 results. We expect all three of our business segments to benefit from cost reductions. We
estimate that approximately 40% of the $300 million target will come from reorganizing our sales
and marketing functions and that another 30% of the target will come from our shared services
infrastructure organizations of information technology, real estate,
finance, human resources and legal. We expect information technology will provide the greatest percentage
of these savings through lowering data center costs, improving mainframe and server utilization and
reducing the cost of networking and voice communications. We also estimate that approximately 30%
of the $300 million target will come from fulfillment, including manufacturing and supply chain.
Overall, approximately one-third of the savings are expected to affect cost of goods sold, with the
remaining two-thirds impacting selling, general and administrative (SG&A) expense.
Through December 31, 2008, we estimate that we have realized approximately $155 million of our
$300 million target. We anticipate that we will realize an additional $90 million in 2009 and the
remaining $55 million in 2010.
24
Outlook for 2009
We anticipate that consolidated revenue from continuing operations will be between $1.3
billion and $1.4 billion for 2009, as compared to $1.47 billion for 2008. We expect that current
economic conditions will continue to adversely affect volumes in Small Business Services and drive
a mid-single to low-double digit decline in revenue despite modest contributions from our
e-commerce initiatives and revenue from the Hostopia and PartnerUp acquisitions. In Financial
Services, we expect an acceleration of check order declines to
approximately six to seven percent given the
turmoil in the financial services industry. We expect the related revenue pressure to be partially
offset by a price increase implemented in the fourth quarter of 2008, as well as a modest
contribution from our loyalty, retention, monitoring and protection offers. We expect the revenue
decline in Direct Checks to be in the double digits, driven by the decline in check usage and the
weak economy which is negatively impacting our ability to sell additional products. The upper end
of our outlook assumes the current economic trends do not improve throughout the year and that we
benefit only a modest amount from our revenue growth initiatives. The lower end of our outlook
assumes a further deterioration in the economy throughout the year.
We expect that 2009 diluted earnings per share will be between $1.91 and $2.31, which includes
an estimated $0.04 per share for restructuring activities, compared to $1.97 for 2008. We expect
that continued progress with our cost reduction initiatives, as well as the impact of restructuring
and asset impairment charges in 2008, will be partially offset by the revenue decline, as well as
an estimated $20 million increase in performance-based employee compensation, an estimated $12
million increase in material and delivery costs and an estimated $12 million increase in employee
and retiree medical expenses. Our outlook also reflects a wage freeze in 2009 which avoids an $8
million increase in our expense structure. We estimate that our annual effective tax rate for 2009
will be approximately 35%, compared to 33.9% in 2008.
We anticipate that net cash provided by operating activities of continuing operations will be
between $175 million and $200 million in 2009, compared to $198 million in 2008. We anticipate that
lower performance-based compensation payments in 2009, as well as working capital improvements,
will be partially offset by increased restructuring-related payments. We estimate that capital spending will be approximately $40
million in 2009 as we plan to expand our use of digital printing technology and invest in
manufacturing productivity and revenue growth initiatives.
We funded our acquisitions in 2008 through cash and borrowings on our credit facilities.
Additionally, we repurchased $21.8 million of common stock in 2008. Even with these actions, we
believe that we continue to have reasonable access to capital in order to fund operations and
execute our strategies in 2009. With no long-term debt maturities until 2012, we are focused on a
disciplined approach to capital deployment that balances the need to continue investing in
initiatives to drive revenue growth, including small acquisitions, with our focus on reducing
debt. Although we have periodically repurchased shares in the recent past, our focus in 2009 will
be to further reduce our debt. We anticipate that our board of directors will maintain our current
dividend level. However, dividends are approved by our board of
directors on a quarterly basis and thus, are subject to change.
BUSINESS CHALLENGES/MARKET RISKS
Market for checks and business forms
The market for our two largest products, checks and business forms, is very competitive. These
products are mature and their use has been declining. According to our estimates, the total number
of checks written in the United States has been in decline as a result of alternative payment
methods, including credit cards, debit cards, automated teller machines and electronic payment
systems. According to a Federal Reserve study released in December 2007, approximately 33 billion
checks are written annually. This includes checks which are converted to automated clearing house
(ACH) payments. The check remains the largest single non-cash payment method in the United States,
accounting for approximately 35% of all non-cash payment transactions. This is a reduction from the
Federal Reserve study released in December 2004 when checks accounted for approximately 45% of all
non-cash payment transactions. The Federal Reserve estimates that checks written declined
approximately four percent per year between 2003 and 2006. According to our estimates, the use of
business checks is declining at a rate of approximately four to six percent per year, although the
decline, we believe, was greater in
2008 due to the economic recession and instability in the financial services industry. The
total transaction volume of all electronic payment methods exceeds check payments, and we expect
that to continue. In addition to the decline in check usage, the use of business forms is also
under pressure. Continued technological improvements have provided small business customers with
alternative means to enact and record business transactions. For example, off-the-shelf business
software applications and electronic transaction systems have been designed to replace pre-printed
business form products.
25
Financial institution clients
Because check usage is declining and financial institutions are consolidating, we have been
encountering significant pricing pressure when negotiating contracts with our financial institution
clients. Our traditional financial institution relationships are typically formalized through
supply contracts averaging three to five years in duration. As we compete to retain and acquire new
financial institution business, the resulting pricing pressure, combined with declining check usage
in the marketplace, has reduced our revenue and profit margins. We expect this trend to continue.
Continued
turmoil in the financial services industry, including further bank failures and
consolidations, could have a significant impact on our consolidated results of operations if any of
the following were to occur:
| • | We could lose a significant contract, which would have a negative impact on our results of operations. | ||
| • | We may be unable to recover the value of any related unamortized contract acquisition cost and/or accounts receivable. Contract acquisition costs, which are treated as pre-paid product discounts, are sometimes utilized in our Financial Services segment when signing or renewing contracts with our financial institution clients and totaled $37.7 million as of December 31, 2008. These amounts are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. In most situations, the contract requires a financial institution to reimburse us for the unamortized contract acquisition cost if it terminates its contract with us prior to the end of the contract term. Our contract acquisition costs are comprised of amounts paid to individual financial institutions, many of which are smaller and would not have a significant impact on our consolidated financial statements if they were deemed unrecoverable. However, the inability to recover amounts paid to one or more of our larger financial institution clients could have a significant negative impact on our consolidated results of operations. | ||
| • | If one or more of our financial institution clients is taken over by a financial institution that is not one of our clients, we could lose significant business. In the case of a cancelled contract, we may be entitled to collect a contract termination payment. However, if a financial institution fails, we may be unable to collect that termination payment. We have no indication at this time that any significant contract terminations are expected. | ||
| • | If one or more of our larger clients were to consolidate with a financial institution that is not one of our clients, our results of operations could be positively impacted if we retain the client, as well as obtain the additional business from the other party in the consolidation. | ||
| • | If two of our financial institution clients consolidate, the increase in general negotiating leverage possessed by the consolidated entities sometimes results in new contracts which are not as favorable to us as those historically negotiated with the clients individually. | ||
| • | We could generate non-recurring conversion revenue. Conversions are driven by the need to replace obsolete checks after one financial institution merges with or acquires another. However, we presently do not have specific information that indicates that we should expect to generate significant income from conversions. |
Consumer response rates to direct mail advertisements
Direct Checks and portions of Small Business Services have been impacted by reduced consumer
response rates to direct mail advertisements. Our own experience indicates that direct-to-consumer
media response rates are declining across a wide variety of products and services. Additionally,
our consumer response rates are declining further due to the decline in check usage and the gradual
obsolescence of standardized forms products.
Economic conditions
General economic conditions negatively impacted our 2008 results of operations, primarily in
Small Business Services. The rate of small business formations and small business confidence impact
Small Business Services. The index of small business optimism published by the National Federation
of Independent Business in December 2008 was at a near-record low. According to estimates of the
Small Business Administration’s Office of Advocacy, new small business formations were down
slightly in 2007, the most recent date for which information is available, as compared to 2006.
Consumer spending and employment levels also have some impact on our personal check businesses.
Both measures trended negatively during 2008, and
26
we did experience some negative impact in our
personal check businesses. We expect that general economic conditions will continue to have a
negative impact on our 2009 results of operations. A prolonged downturn in general economic
conditions could result in additional declines in our revenue and profitability.
The effects of the recent economic downturn on our expected operating results and the broader
U.S. market resulted in a significant reduction in our share price and led to asset impairment
charges in 2008 related to trade names in our Small Business Services
segment. Both before and
after December 31, 2008, our common stock traded at prices lower than the December 31, 2008
closing stock price of $14.96. If such a decline in our stock price
occurs in the future for a sustained period, it may be indicative of a further decline in our
fair value and would likely require us to record an impairment charge
for a portion of the $40.2 million of goodwill allocated to one of
our reporting units. Accordingly, we believe that a non-cash goodwill impairment charge related to
this reporting unit and/or further impairment charges related to our indefinite-lived trade name
are reasonably possible in the future. This reporting unit had a calculated fair value which
exceeded its carrying value by $2.7 million as of December 31, 2008.
The calculated fair values of our other
reporting units exceeded their carrying values by amounts between $26
million and $391 million. Our
indefinite-lived trade name had a carrying value of $24.0 million as of December 31, 2008. The
credit agreement governing our committed line of credit requires us to maintain a ratio of earnings
before interest and taxes to interest expense of 3.0 times, as measured quarterly on an aggregate
basis for the preceding four quarters. Significant impairment charges in the future could impact
our ability to comply with this debt covenant, in which case, our lenders could demand immediate
repayment of amounts outstanding under our line of credit. We would have remained in compliance
with this debt covenant even if our reported pre-tax earnings for 2008 had been $52 million lower
than we reported. For further information regarding the impairment analyses completed during 2008,
see the goodwill and indefinite-lived assets discussion under Application of Critical
Accounting Policies.
Postretirement and pension plans
The plan assets of our postretirement benefit and pension plans are valued at fair value using
quoted market prices. Investments, in general, are subject to various risks, including credit,
interest and overall market volatility risks. During 2008, the equity markets saw a significant
decline in value. As such, the fair values of our plan assets decreased significantly during the
year. Our plan assets and liabilities were re-measured at December 31, 2008, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. The unfunded status of our plans increased by $30.0
million from December 31, 2007, due in large part to the decrease in the fair values of plan
assets. This affected the amounts reported in the consolidated balance sheet as of December 31,
2008. It also contributes to an expected increase in postretirement benefit expense of
approximately $8 million in 2009. If the equity and bond markets continue to decline, the funded status of
our plans could continue to be materially affected. This could result in higher postretirement
benefit expense in the future, as well as the need to contribute increased amounts of cash to fund
the benefits payable under the plans, although our obligation is limited to funding benefits as
they become payable.
Deferred compensation plan
We have a non-qualified deferred compensation plan that allows eligible employees to defer a
portion of their compensation. The compensation deferred under this plan is credited with earnings
or losses measured by the mirrored rate of return on phantom investments elected by plan
participants, which are similar to the investments available in our
defined contribution pension plan. As
such, our liability for this plan fluctuates with market conditions. During 2008, we reduced our
deferred compensation liability by $1.5 million due to losses on the underlying investments elected
by plan participants. The carrying value of this liability, which was $3.9 million as of December
31, 2008, may change significantly in future periods if volatility in the equity markets continues.
27
CONSOLIDATED RESULTS OF OPERATIONS
During the fourth quarter of 2008, our Russell & Miller retail packaging and signage business
met the criteria to be classified as discontinued operations in our consolidated financial
statements. As such, our results for prior years reflect the reclassification of the results of
this business to discontinued operations, and the discussion that follows pertains only to our
continuing operations.
Consolidated Revenue
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands, except per order amounts) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Revenue |
$ | 1,468,662 | $ | 1,588,885 | $ | 1,619,337 | (7.6 | %) | (1.9 | %) | ||||||||||
Orders |
62,823 | 64,753 | 64,670 | (3.0 | %) | 0.1 | % | |||||||||||||
Revenue per order |
$ | 23.38 | $ | 24.54 | $ | 25.04 | (4.7 | %) | (2.0 | %) | ||||||||||
The decrease in revenue for 2008, as compared to 2007, was 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 order volume for
Financial Services due to the decline in check usage and non-recurring client conversion activity
in 2007, and lower revenue per order for Financial Services. Conversion activity is driven by the
need to replace obsolete checks after one financial institution merges with or acquires another.
Revenue in 2007 benefited from higher non-recurring Canadian check sales due to the introduction of
a new check format required by the Canadian Payments Association. Partially offsetting these
revenue decreases was revenue of $13.4 million from the Small Business Services acquisitions
completed in 2008, as discussed under Executive Overview, higher revenue per order for Direct
Checks due to price increases and increased sales of fraud protection services, as well as the
benefit of Financial Services price increases in February 2007 and October 2008. Sales of fraud
protection services also increased within Small Business Services.
The number of orders decreased for 2008, as compared to 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. Partially offsetting these volume decreases
was the Small Business Services acquisitions completed in 2008. The decline in orders, excluding
the acquisitions, was 5.3% for 2008, as compared to 2007. Revenue per order decreased for 2008, as
compared to 2007, primarily due to continued pricing pressure within Financial Services, partially
offset by the benefit of Direct Checks and Financial Services price increases. Also impacting
revenue per order were the Small Business Services acquisitions completed in 2008. The acquisitions
reduced revenue per order by 1.5 percentage points for 2008 primarily because Hostopia’s revenue
per order is lower as each monthly billing generated for service fees is considered to be an order.
The decrease in revenue for 2007, as compared to 2006, was primarily due to a $48 million
decrease resulting from the sale of our industrial packaging product line in January 2007, as well
as a decline in volume for our Direct Checks segment and lower revenue per order due to lower
pricing in our Financial Services segment. Lower volume for Direct Checks was primarily due to the
overall decline in check usage, as well as lower customer retention and lower direct mail consumer
response rates. Small Business Services also experienced a slight revenue decrease in the last half
of the year related to general economic conditions. Partially offsetting these decreases were
revenues of approximately $18 million generated by the Johnson Group, which we acquired 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 product discussed earlier under Executive
Overview. Additionally, Financial Services volume increased due to client gains and financial
institution conversion activity, and revenue in Canada increased due to a favorable exchange rate
impact of approximately $4 million, plus increased check orders triggered by a new check format
mandated by the Canadian Payments Association.
The number of orders increased slightly for 2007, as compared to 2006, as the Financial
Services volume increase of 1.4% exceeded the negative impacts of Direct Checks’ volume decline,
the sale of Small Business Services’ industrial
packaging product line and the negative economic impact experienced by Small Business Services
in the last half of the year.
28
Revenue per order decreased for 2007, as compared to 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.
Supplemental information regarding revenue by product is as follows:
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Checks |
$ | 960,837 | $ | 1,045,008 | $ | 1,041,523 | (8.1 | %) | 0.3 | % | ||||||||||
Other printed products, including forms |
328,990 | 374,138 | 366,691 | (12.1 | %) | 2.0 | % | |||||||||||||
Accessories and promotional products |
109,773 | 118,181 | 122,635 | (7.1 | %) | (3.6 | %) | |||||||||||||
Packaging supplies, services and other |
69,062 | 51,558 | 88,488 | 34.0 | % | (41.7 | %) | |||||||||||||
Total revenue |
$ | 1,468,662 | $ | 1,588,885 | $ | 1,619,337 | (7.6 | %) | (1.9 | %) | ||||||||||
The percentage of total revenue derived from the sale of checks was 65.4% in 2008, as compared
to 65.8% in 2007 and 64.3% in 2006. Small Business Services contributed non-check revenue of $430.6
million in 2008, $462.5 million in 2007 and $502.8 million in 2006, from the sale of forms,
envelopes, holiday cards, labels, business cards, stationery and other promotional products. Small
Business Services’ non-check revenue for 2008, as compared to 2007, benefited from revenue of $13.4
million from the Small Business Services acquisitions completed in 2008. This impact was more than
offset by lower demand for our products caused by a weak economy. The decrease in Small Business
Services non-check revenue for 2007, as compared to 2006, was primarily due to the sale of our
industrial packaging product line in January 2007.
Consolidated Gross Margin
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Gross profit |
$ | 902,149 | $ | 1,014,281 | $ | 1,019,357 | (11.1 | %) | (0.5 | %) | ||||||||||
Gross margin |
61.4 | % | 63.8 | % | 62.9 | % | (2.4 | ) pt. | 0.9 | pt. | ||||||||||
Gross margin decreased for 2008, as compared to 2007, due primarily to a $16.1 million
increase in restructuring charges and other costs related to our cost reduction initiatives.
Further information regarding our restructuring costs can be found under Restructuring Costs. The
restructuring charges and other related costs lowered our gross margin for 2008 by 1.1 percentage
points. Additionally, higher delivery-related costs from mid-2007 and 2008 postal rate increases
and fuel surcharges in 2008, higher materials costs due to an unfavorable product mix, as well as
competitive pricing in Financial Services negatively affected gross margin. These decreases were
partially offset by price increases for Direct Checks and Financial Services, as well as
manufacturing efficiencies and other benefits resulting from our cost reduction initiatives.
Gross margin increased for 2007, as compared to 2006, due to manufacturing efficiencies,
including the closing of two Small Business Services manufacturing facilities in mid-2006, as well
as lower material costs in 2007 related to a higher mix of check products in Small Business
Services. Additionally, we benefited from increased Financial Services order volume in 2007 and a
$2.3 million decrease in restructuring costs in 2007. Further information regarding our
restructuring costs can be found under Restructuring Costs. Partially offsetting these gross margin
increases was lower Financial Services revenue per order, a postal rate increase in mid-2007 and
costs associated with the implementation of new check packaging intended to mitigate the effects of
the postal rate increase.
Consolidated Selling, General & Administrative Expense
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
SG&A expense |
$ | 670,991 | $ | 743,449 | $ | 770,218 | (9.7 | %) | (3.5 | %) | ||||||||||
SG&A expense as a
percentage of
revenue |
45.7 | % | 46.8 | % | 47.6 | % | (1.1 | ) pt. | (0.8 | ) pt. | ||||||||||
29
The decrease in SG&A expense for 2008, as compared to 2007, was primarily due to various cost
reduction initiatives within our shared services organizations, primarily within sales and
marketing and information technology, a reduction of approximately $24 million in performance-based
employee compensation and lower employee benefit costs related to reduced workers’ compensation and
medical claims activity. These decreases in SG&A expense were partially offset by investments to
drive revenue growth opportunities, including marketing costs within Small Business Services and
information technology investments.
The decrease in SG&A expense for 2007, as compared to 2006, was due to various cost reduction
initiatives within our shared services organizations, lower amortization expense and project costs
of approximately $9 million 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 growth
strategies. We also benefited from lower amortization of acquisition-related intangible assets
within Small Business Services of $4.4 million, as certain of these assets are amortized using
accelerated methods. Partially offsetting these SG&A decreases was an increase in expense for
performance-based employee compensation based on our 2007 operating performance of approximately
$24 million, a gain in 2006 of $11.0 million from the termination of an underperforming outsourced
payroll services contract and higher referral commissions for Small Business Services resulting
from growth in our Deluxe Business Advantage financial institution referral program.
Restructuring Charges
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Restructuring charges |
$ | 13,400 | $ | 4,701 | $ | 10,479 | $ | 8,699 | $ | (5,778 | ) | |||||||||
We recorded restructuring charges related to the cost reduction initiatives discussed under
Executive Overview. The charges for all periods included severance benefits and other direct costs
of our initiatives, including equipment moves, training and travel. In 2008, restructuring charges
also included the acceleration of employee share-based compensation awards. Additional
restructuring charges of $14.9 million in 2008 and $1.9 million in 2006 were included within cost
of goods sold in our consolidated statements of income. Net restructuring reversals of $0.4 million
were included within cost of goods sold in the 2007 consolidated statement of income. Further
information can be found under Restructuring Costs.
Asset Impairment Charges
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Asset impairment charges |
$ | 9,942 | $ | — | $ | 44,698 | $ | 9,942 | $ | (44,698 | ) | |||||||||
We completed the annual impairment analysis of goodwill and indefinite-lived assets during the
third quarter of 2008. As a result of this analysis, we recorded non-cash asset impairment charges
of $9.3 million related to the two indefinite-lived trade names in our Small Business Services
segment due to the impact of the economic downturn on our expected operating results and the
broader effects of recent U.S. market conditions on the fair value of the assets. We completed an
additional impairment analysis as of December 31, 2008, based on the continuing impact of the
economic downturn on our expected operating results. As a result, we recorded an additional asset
impairment charge of $0.3 million related to the NEBS® trade name during the fourth quarter of 2008,
bringing the carrying value of this asset to $25.8 million as of December 31, 2008. The impairment
analysis completed as of December 31, 2008, indicated no additional impairment of our other
indefinite-lived trade name, the Safeguard® trade name, which had a carrying value of $24.0 million
as of December 31, 2008. Because of the further deterioration in our expected operating results, we
determined that the NEBS trade name no longer has an indefinite life, and thus, will be amortized
over its estimated economic life of 20 years on the
straight-line basis beginning in 2009. The analysis indicated no impairment of goodwill. In
addition to the impairment of indefinite-lived trade names, we also recorded an impairment charge
of $0.4 million during the third quarter of 2008 related to an amortizable trade name. This impairment resulted from a
change in our branding strategy. See Business Challenges/Market Risks
for further discussion of asset impairments.
30
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 charge 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.
Net Gain on Sale of Facilities and Product Line
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net gain on sale of
facilities and
product line |
$ | 1,418 | $ | 3,773 | $ | 4,582 | $ | (2,355 | ) | $ | (809 | ) | ||||||||
During 2008, we completed the sale of our Flagstaff, Arizona customer call center facility,
which was closed during the third quarter of 2008, for $4.2 million. We realized a pre-tax gain of
$1.4 million.
During 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 our earnings per share because of an offsetting income tax effect.
During 2006, we completed the sale of three Financial Services facilities which were closed in
2004, realizing a pre-tax gain totaling $5.5 million. During 2006, we also recorded a loss of $0.9
million when we completed the sale of a Small Business Services facility which was closed prior to
the acquisition of New England Business Service, Inc. (NEBS) in June 2004.
Interest Expense
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Interest expense |
$ | 50,421 | $ | 55,294 | $ | 56,661 | (8.8 | %) | (2.4 | %) | ||||||||||
Weighted-average debt outstanding |
859,833 | 994,597 | 1,103,082 | (13.5 | %) | (9.8 | %) | |||||||||||||
Weighted-average interest rate |
5.42 | % | 5.02 | % | 4.59 | % | 0.40 pt. | 0.43 pt. | ||||||||||||
The decrease in interest expense for 2008, as compared to 2007, was due to our lower average
debt level in 2008, partially offset by a slightly higher weighted-average interest rate. Interest
expense decreased in 2007, as compared to 2006, for the same reasons.
Other Income
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Other income |
$ | 1,363 | $ | 5,405 | $ | 905 | $ | (4,042 | ) | $ | 4,500 | |||||||||
The decrease in other income for 2008, as compared to 2007, was primarily due to interest
earned in 2007 on investments in marketable securities which were purchased using the proceeds from
$200.0 million of notes we issued in May 2007. These investments were sold in October 2007 to repay
long-term debt. The increase in other income for 2007, as compared to 2006, was primarily due to
the interest earned on the marketable securities we purchased during 2007.
31
Income Tax Provision
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Income tax provision |
$ | 54,304 | $ | 74,898 | $ | 41,950 | (27.5 | %) | 78.5 | % | ||||||||||
Effective tax rate |
33.9 | % | 34.0 | % | 29.4 | % | (0.1) pt. | 4.6 pt. | ||||||||||||
Our effective tax rate for 2008 was comparable to 2007. Favorable discrete adjustments in 2008
lowered our effective tax rate 2.0 percentage points. The discrete adjustments related primarily to
receivables for amendments to prior year tax returns of $2.4 million and the settlement of $1.2
million due to us under a tax sharing agreement related to the spin-off of our eFunds business in
2000, partially offset by accruals for unrecognized tax benefits. Our 2007 effective tax rate
included favorable discrete adjustments which lowered our effective tax rate 0.8 points. The
discrete adjustments related to receivables for amendments to prior year tax returns of $3.0
million, partially offset by the write-off of non-deductible goodwill related to the sale of our
industrial packaging product line. Partially offsetting the favorable impact of discrete
adjustments in 2008, as compared to 2007, was the impact of restructuring costs and asset
impairment charges in 2008 and interest earned on tax-exempt investments in 2007. We expect that
our annual effective tax rate for 2009 will be approximately 35%, up slightly due to higher
state taxes and the negative impact on our manufacturing deduction of
restructuring costs to be paid in 2009.
The increase in our effective tax rate for 2007, as compared to 2006, was largely due to a
$5.0 million reduction in our 2006 income tax provision for the true-up of certain deferred income
tax balances. As this item was not material to our current or prior periods, we recorded a
one-time, discrete benefit to our provision for income taxes for 2006. In addition, our state
income tax rate was higher in 2007, and the lower pre-tax income in 2006 resulted in our permanent
differences having a larger positive impact on the 2006 effective tax rate. Also, the write-off of
non-deductible goodwill related to the sale of our industrial packaging product line in 2007
unfavorably impacted our 2007 effective tax rate. Partially offsetting these increases in our
effective tax rate in 2007, as compared to 2006, was the impact of positive adjustments in 2007
related to receivables for amendments to prior year tax returns of $3.0 million.
RESTRUCTURING COSTS
During 2008, we recorded net restructuring charges of $28.3 million. Of this amount, $24.0
million related to accruals for employee severance, while the remainder included other expenses
related to our restructuring activities, including the write-off of spare parts, the acceleration
of employee share-based compensation expense, equipment moves, training and travel. Our
restructuring accruals for severance benefits related to the closing of six manufacturing
facilities and two customer call centers, as well as employee reductions within our business unit
support and corporate shared services functions, primarily sales, marketing and fulfillment. These
actions were the result of the continuous review of our cost structure in response to the impact a
weakened U.S. economy continues to have on our business, as well as our previously announced cost
reduction initiatives. Further information regarding our cost reduction initiatives can be found
under Executive Overview.
The restructuring accruals included severance benefits for 1,399 employees. One of the
customer call centers was closed during the third quarter of 2008 and one of the manufacturing
facilities was closed in December 2008. Three of the manufacturing facilities and the remaining
call center are expected to close in the first half 2009, while the remaining two manufacturing
facilities are expected to close in the second half of 2009. The majority of the employee
reductions are expected to be completed by the end of 2009. As such, we expect most of the related
severance payments to be fully paid by the first half of 2010, utilizing cash from operations.
The severance charges, net of reversals, were reflected as restructuring charges within cost
of goods sold of $11.4 million and restructuring charges within operating expenses of $12.6 million
in the 2008 consolidated statement of income. The other costs related to our restructuring
activities were expensed as incurred. We recorded a $3.0 million write-off of the carrying value of
spare parts used on our offset printing presses. During a review of our cost structure, we made the
decision to expand our use of the digital printing process. As such, a portion of the spare parts
kept on hand for use on our offset
printing presses was written down to zero, as these parts have no future use or market value.
The spare parts were included in other non-current assets in our consolidated balance sheet and the
write-down was included in restructuring charges within cost of goods sold in our 2008
32
consolidated
statement of income. The other restructuring costs were reflected as restructuring charges within
cost of goods sold of $0.5 million and restructuring charges within operating expenses of $0.8
million in the 2008 consolidated statement of income. In addition to the amounts reflected in the
restructuring charges captions in the 2008 consolidated statement of income, we incurred other
restructuring-related costs, such as redundancies occurring during the closing of facilities.
During 2007, we recorded net restructuring charges of $4.3 million related to accruals for
severance benefits for employee reductions across various functional areas and during 2006, we
recorded net restructuring charges of $12.4 million for severance benefits and other costs related
to employee reductions in our shared services functions, as well as the closing of a Financial
Services customer call center. The customer call center was closed in January 2007 and the other
employee reductions were substantially completed during 2008. These reductions were also the result
of our cost reduction initiatives and included severance benefits for a total of 768 employees. In
the 2007 consolidated statement of income, the net restructuring charges were reflected as a $0.4
million reduction of restructuring charges within cost of goods sold and an increase of $4.7
million in restructuring charges within operating expenses. In the 2006 consolidated statement of
income, the net restructuring charges were reflected as restructuring charges within cost of goods
sold of $1.9 million and restructuring charges within operating expenses of $10.5 million.
As a result of our employee reductions and facility closings, we estimate that we realized
cost savings of approximately $14 million in SG&A expense in 2008, in comparison to our 2007
results of operations. In 2007, we estimate that we realized cost savings of approximately $2
million in cost of goods sold and $24 million in SG&A expense, in comparison to our 2006 results of
operations. We expect to realize additional cost savings of approximately $8 million in cost of
goods sold and $24 million in SG&A expense in 2009 relative to 2008. Expense reductions consist
primarily of labor and facility costs.
Further information regarding our restructuring charges can be found under the caption “Note
6: Restructuring charges” of the Notes to Consolidated Financial Statements appearing in Item 8 of
this report.
SEGMENT RESULTS
Additional financial information regarding our business segments appears under the caption
“Note 17: Business segment information” of the Notes to Consolidated Financial Statements appearing
in Item 8 of this report.
Small Business Services
This
segment sells business checks, printed forms, promotional products,
web services, marketing materials
and related services and products to small businesses and home offices through
direct response marketing, financial institution referrals and via
independent distributors, the internet and sales representatives.
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Revenue |
$ | 851,060 | $ | 921,657 | $ | 949,492 | (7.7 | %) | (2.9 | %) | ||||||||||
Operating income |
90,078 | 132,821 | 87,009 | (32.2 | %) | 52.7 | % | |||||||||||||
% of revenue |
10.6 | % | 14.4 | % | 9.2 | % | (3.8) pt. | 5.2 pt. | ||||||||||||
The decrease in revenue for 2008, as compared to 2007, was due primarily to general economic
conditions affecting our customers’ buying patterns, mainly in our core checks and forms products,
as well as discretionary products such as holiday cards, imaging and apparel. Additionally, 2007
included $3 million of revenue generated by our industrial packaging product line which was sold in
January 2007, as well as higher non-recurring check sales in Canada due to the introduction of a
new check format required by the Canadian Payments Association. Partially offsetting these
decreases was revenue of $13.4 million from the 2008 acquisitions of Hostopia, PartnerUp and Logo Mojo
discussed under Executive Overview, as well as growth in fraud protection services.
The decrease in operating income and operating margin for 2008, as compared to 2007, was due
to the impact of the revenue decrease, an increase of $12.3 million in restructuring charges and
related costs in 2008, asset impairment charges of $9.9 million in 2008, higher materials costs due
to an unfavorable product mix and investments made in 2008 to drive
33
revenue growth opportunities,
including increased marketing costs and information technology investments. Results in 2007 also
included a pre-tax gain of $3.8 million on the sale of our industrial packaging product line. These
decreases were partially offset by continued progress on our cost reduction initiatives, lower
performance-based employee compensation and reduced employee benefit costs due to lower workers’
compensation and medical claims activity. Further information regarding restructuring charges and
related costs can be found under Restructuring Costs and information regarding the asset impairment
charges can be found under Consolidated Results of Operations-Asset Impairment Charges.
The decrease in revenue for 2007, as compared to 2006, was primarily due to a $48 million
decrease resulting from the sale of our industrial packaging product line in January 2007, as well
as a slight decline in the last half of the year related to general economic conditions. These
decreases were partially offset by revenues of approximately $18 million generated by the Johnson
Group, which we acquired in October 2006, and revenue in Canada increased due to a favorable
exchange rate impact of approximately $4 million, plus increased check orders triggered by a new
check format mandated by the Canadian Payments Association.
The increase in operating income and operating margin for 2007, as compared to 2006, was due
to progress on our cost reduction initiatives, investments related to implementing our growth
strategy in 2006, improved manufacturing efficiencies in 2007, including the closing of two
manufacturing facilities in mid-2006, lower materials expense related to a higher mix of check
products, a $4.4 million reduction in amortization of acquisition-related intangibles, a $3.8
million pre-tax gain on the sale of our industrial packaging product line and a $3.6 million
reduction in restructuring costs in 2007. In addition, 2006 results include the recognition of
$18.3 million of the 2006 impairment charge discussed earlier under Consolidated Results of
Operations-Asset Impairment Charges. Partially offsetting these operating income improvements were
higher expense in 2007 related to performance-based employee compensation and higher referral
commissions. In addition, during 2006 we realized a gain of $11.0 million from the termination of
an underperforming outsourced payroll services contract.
Financial Services
Financial Services sells personal and business checks, check-related products and services,
customer loyalty, retention and fraud monitoring and protection services, and stored value gift
cards to banks and other financial institutions. As part of our check programs, we also offer
enhanced services such as customized reporting, file management and expedited account conversion
support.
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Revenue |
$ | 430,018 | $ | 457,292 | $ | 458,118 | (6.0 | %) | (0.2 | %) | ||||||||||
Operating income |
65,540 | 74,305 | 46,613 | (11.8 | %) | 59.4 | % | |||||||||||||
% of revenue |
15.2 | % | 16.2 | % | 10.2 | % | (1.0) pt. | 6.0 pt. | ||||||||||||
The decrease in revenue for 2008, as compared to 2007, was due to a 4.0% decrease in order
volume resulting from the continuing decline in check usage, as well as non-recurring client
conversion activity in 2007. Order volume for 2008 was down 2.9% from 2007, excluding the impact of
conversion activity. Additionally, revenue per order was down for 2008, despite price increases in
February 2007 and October 2008, due to this segment’s competitive pricing environment.
Operating income and operating margin decreased for 2008, as compared to 2007, primarily due
to the revenue decrease, an increase of $10.5 million in restructuring charges and related costs in
2008, as well as higher delivery-related costs from postal rate
increases in mid-2007 and 2008 and fuel
surcharges in 2008. Partially offsetting these decreases were various cost reduction initiatives,
lower performance-based employee compensation and reduced employee benefit costs related to lower
workers’ compensation and medical claims activity. Further information regarding the restructuring
charges and related costs can be found under Restructuring Costs.
The decrease in revenue for 2007, as compared to 2006, was driven by lower revenue per order
due to continued pricing pressure despite a price increase implemented in February 2007. Lower
pricing was partially offset by a 1.4% increase in order volume, as client acquisition gains and
financial institution conversion activity exceeded the impact of the consumer-driven decline in
check usage.
34
Operating income increased for 2007, as compared to 2006, given 2006 results included the
recognition of $26.4 million of the 2006 asset impairment charge related to a software project we
wrote-off. Further information regarding the asset impairment charge was provided earlier under
Consolidated Results of Operations-Asset Impairment Charges. Additionally, we benefited from
progress on our cost reduction initiatives, manufacturing efficiencies, lower amortization and
other costs related to the software project we wrote-off in 2006, increased order volume and a $4.0
million reduction in restructuring charges in 2007. Partially offsetting these operating income
increases were higher delivery costs due to a postal rate increase in mid-2007, lower revenue per
order and higher expense related to performance-based employee compensation. Additionally, 2006
results included gains of $5.5 million from sales of facilities.
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.
| Change | |||||||||||||||||||||
| 2008 vs. | 2007 vs. | ||||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||
Revenue |
$ | 187,584 | $ | 209,936 | $ | 211,727 | (10.6 | %) | (0.8 | %) | |||||||||||
Operating income |
53,616 | 62,778 | 64,922 | (14.6 | %) | (3.3 | %) | ||||||||||||||
% of revenue |
28.6 | % | 29.9 | % | 30.7 | % | (1.3 | ) pt. | (0.8 | ) pt. | |||||||||||
The decrease in revenue for 2008, as compared to 2007, was due to a reduction in orders
stemming from the decline in check usage, advertising response rates and advertising spending, as
well as the weak economy which negatively impacted our ability to sell additional products.
Additionally, a $3 million weather-related backlog from the last week of 2006 shifted revenue into
2007. Partially offsetting these declines was higher revenue per order resulting from price
increases and increased sales of fraud protection services.
The decrease in operating income and operating margin for 2008, as compared to 2007, was
primarily due to the lower order volume, higher delivery-related
costs from postal rate increases
in mid-2007 and 2008 and an increase of $2.4 million in restructuring charges and related costs in 2008.
Further information regarding the restructuring charges and related costs can be found under
Restructuring Costs. These decreases in operating income were partially offset by lower advertising
expense, lower performance-based employee compensation and our cost reduction initiatives.
The decrease in revenue for 2007, as compared to 2006, was due to a reduction in orders
resulting from the overall decline in check usage and lower customer retention, as well as lower
direct mail consumer response rates. Partially offsetting the volume decline was higher revenue per
order resulting from new accessories and services, including the introduction in October 2006 of
the EZShield product discussed earlier under Executive Overview. Additionally, revenue was
favorably impacted by approximately $3 million due to a weather-related backlog in the last week of
2006, which caused revenue to be delayed into 2007.
The decrease in operating income for 2007, as compared to 2006, was primarily due to the lower
order volume, higher performance-based employee compensation, increased delivery costs related to a
postal rate increase and the implementation of new check packaging intended to mitigate the effect
of the postal rate increase, as well as higher advertising expense related to increased
circulation. These decreases in operating income were partially offset by our cost reduction
initiatives and higher revenue from new accessories and premium features and services.
35
CASH FLOWS
As of December 31, 2008, we held cash and cash equivalents of $15.6 million. The following
table shows our cash flow activity for the last three years and should be read in conjunction with
the consolidated statements of cash flows appearing in Item 8 of this report.
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Continuing operations: |
||||||||||||||||||||
Net cash provided by operating
activities |
$ | 198,487 | $ | 245,075 | $ | 238,895 | $ | (46,588 | ) | $ | 6,180 | |||||||||
Net cash used by investing activities |
(135,773 | ) | (10,929 | ) | (32,884 | ) | (124,844 | ) | 21,955 | |||||||||||
Net cash used by financing activities |
(67,681 | ) | (224,890 | ) | (204,587 | ) | 157,209 | (20,303 | ) | |||||||||||
Effect of exchange rate change on cash |
(2,053 | ) | 1,161 | 158 | (3,214 | ) | 1,003 | |||||||||||||
Net cash (used) provided by
continuing
operations |
(7,020 | ) | 10,417 | 1,582 | (17,437 | ) | 8,835 | |||||||||||||
Net cash provided (used) by operating
activities of discontinued operations |
995 | (401 | ) | 179 | 1,396 | (580 | ) | |||||||||||||
Net cash provided by investing
activities of
discontinued operations |
— | — | 2,971 | — | (2,971 | ) | ||||||||||||||
Net change in cash and cash
equivalents |
$ | (6,025 | ) | $ | 10,016 | $ | 4,732 | $ | (16,041 | ) | $ | 5,284 | ||||||||
The $46.6 million decrease in cash provided by operating activities for 2008, as compared to
2007, was due to the lower earnings discussed earlier under Consolidated Results of Operations and
a $19.4 million increase in 2008 in employee profit sharing and pension contributions related to
our 2007 performance. These decreases were partially offset by lower income tax, interest and
contract acquisition payments in 2008.
The $6.2 million increase in cash provided by operating activities for 2007, as compared to
2006, was due to positive working capital changes, as well as the higher earnings discussed earlier
under Consolidated Results of Operations. Partially offsetting these increases was a $29.6 million
increase in 2007 contributions to our voluntary employee beneficiary association (VEBA) trust used
to fund medical benefits, as well as a $15.1 million increase in income tax payments. During 2006,
we decided that we would no longer pre-fund the VEBA trust as the tax benefit from the pre-funding
no longer exceeded the associated interest cost. As such, during 2006 we made minimal contributions
to the trust as we did not pre-fund the trust and we utilized the prepaid funds in the trust to
cover benefit payments. Beginning in 2007, we began funding the VEBA trust throughout the year as
needed to pay benefits.
36
Included in cash provided by operating activities of continuing operations were the following
operating cash outflows:
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Income tax payments |
$ | 59,997 | $ | 89,944 | $ | 74,891 | $ | (29,947 | ) | $ | 15,053 | |||||||||
Interest payments |
50,441 | 57,077 | 57,035 | (6,636 | ) | 42 | ||||||||||||||
VEBA trust contributions to fund
medical
benefits |
36,100 | 34,100 | 4,500 | 2,000 | 29,600 | |||||||||||||||
Employee profit sharing and pension
contributions |
35,126 | 15,720 | 12,000 | 19,406 | 3,720 | |||||||||||||||
Contract acquisition payments |
9,008 | 14,230 | 17,029 | (5,222 | ) | (2,799 | ) | |||||||||||||
Severance payments |
8,645 | 9,606 | 5,092 | (961 | ) | 4,514 | ||||||||||||||
Net cash used by investing activities for 2008 was $124.8 million higher than 2007 due
primarily to a $102.6 million increase in payments for acquisitions, net of cash acquired, as well
as proceeds in 2007 of $19.2 million from the sale of our industrial packaging product line. Net
cash used by financing activities for 2008 was $157.2 million lower than 2007 due to the pay-off of
a $325.0 million long-term debt maturity in 2007 and payments on short-term debt of $45.5 million
in 2007. These decreases in cash used by financing activities were partially offset by net proceeds
in 2007 from the issuance of $200.0 million of long-term notes, as well as a $10.6 million increase
in share repurchases in 2008. Additionally, proceeds from issuing shares under employee plans were
$13.1 million lower in 2008 due to fewer stock options being exercised, and borrowings on
short-term debt were $10.8 million in 2008 as we funded acquisitions and share repurchases.
Net
cash used by investing activities for 2007 was $22.0 million lower than 2006 due to
payments in 2006 for the Johnson Group acquisition, proceeds from the sale of our industrial
packaging product line in 2007 and lower capital asset purchases in 2007. Net cash used by
financing activities for 2007 was $20.3 million higher than 2006 due to the pay-off of a $325.0
million long-term debt maturity and share repurchases of $11.3 million completed in 2007. These
increases in cash used were partially offset by net proceeds from the 2007 issuance of $200.0
million of long-term notes, higher payments on short-term debt in 2006, the pay-off of a long-term
debt maturity of $50.0 million in 2006 and lower dividend payments in 2007 resulting from the
decision in the third quarter of 2006 to lower our quarterly dividend rate from $0.40 to $0.25 per
share. Net cash provided by investing activities of discontinued operations in 2006 was $3.0
million due to the sale of a facility in Europe.
37
Significant cash inflows, excluding those related to operating activities, for each year were
as follows:
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net proceeds from short-term debt |
$ | 10,800 | $ | — | $ | — | $ | 10,800 | $ | — | ||||||||||
Proceeds from sales of marketable
securities(1) |
— | 1,057,460 | — | (1,057,460 | ) | 1,057,460 | ||||||||||||||
Proceeds from issuance of long-term
debt,
net of debt issuance costs |
— | 196,239 | — | (196,239 | ) | 196,239 | ||||||||||||||
Proceeds from sale of facilities and
product line |
4,181 | 19,214 | 9,247 | (15,033 | ) | 9,967 | ||||||||||||||
Proceeds from issuing shares under
employee plans |
2,801 | 15,923 | 8,936 | (13,122 | ) | 6,987 | ||||||||||||||
Proceeds from redemptions of life
insurance policies |
— | — | 15,513 | — | (15,513 | ) | ||||||||||||||
Net proceeds from sale of discontinued
operations |
— | — | 2,971 | — | (2,971 | ) | ||||||||||||||
| (1) | During 2007, we purchased short-term marketable securities using the proceeds from the $200.0 million debt we issued in May 2007, as well as using cash generated from operating activities. On October 1, 2007, we sold our remaining marketable securities to repay a debt maturity. |
Significant cash outflows, excluding those related to operating activities, for each year were
as follows:
| Change | ||||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Purchases of marketable securities(1) |
$ | — | $ | 1,057,460 | $ | — | $ | (1,057,460 | ) | $ | 1,057,460 | |||||||||
Payments for acquisitions, net of cash
acquired |
104,879 | 2,316 | 16,521 | 102,563 | (14,205 | ) | ||||||||||||||
Cash dividends paid to shareholders |
51,422 | 52,048 | 66,973 | (626 | ) | (14,925 | ) | |||||||||||||
Net payments on short-term debt |
— | 45,460 | 99,686 | (45,460 | ) | (54,226 | ) | |||||||||||||
Purchases of capital assets |
31,865 | 32,286 | 41,012 | (421 | ) | (8,726 | ) | |||||||||||||
Payments for common shares repurchased |
21,847 | 11,288 | — | 10,559 | 11,288 | |||||||||||||||
Payments on long-term debt |
1,755 | 326,582 | 51,362 | (324,827 | ) | 275,220 | ||||||||||||||
| (1) | During 2007, we purchased short-term marketable securities using the proceeds from the $200.0 million debt we issued in May 2007, as well as using cash generated from operating activities. On October 1, 2007, we sold our remaining marketable securities to repay a debt maturity. |
We anticipate that net cash provided by operating activities of continuing operations will be
between $175 million and $200 million in 2009, compared to $198 million in 2008. We anticipate that
lower performance-based compensation payments in 2009, as well as working capital improvements,
will be partially offset by increased restructuring-related payments. We anticipate
that cash generated by operating activities in 2009 will be utilized for dividend payments of
approximately $50 million, capital expenditures of approximately $40 million, debt reduction and
possibly, small acquisitions. Our capital spending will be focused on expanding our use of digital
printing technology and investments in manufacturing productivity and revenue growth initiatives.
We have no maturities of long-term debt until 2012. As of December 31, 2008, we had $411.2 million
available for borrowing under our committed lines of credit. Effective February 5, 2009, we
terminated our $225.0 million line of credit, which was due to expire in July 2009. We believe our
remaining $275.0 million credit facility, which does not expire
until July 2010, along with cash generated by operating activities, will be sufficient to
support our operations, including capital expenditures, small acquisitions, required debt service
and dividend payments, for the next 12 months.
38
The credit agreement governing our committed line of credit requires us to maintain a ratio of
earnings before interest and taxes to interest expense of 3.0 times, as measured quarterly on an
aggregate basis for the preceding four quarters. Significant asset impairment charges in the future
could impact our ability to comply with this debt covenant, in which case, our lenders could demand
immediate repayment of amounts outstanding under our line of credit. See Business Challenges/Market Risks for information regarding asset
impairments. We would have been in compliance with this debt covenant even if our reported pre-tax
earnings for 2008 had been $52 million lower than we reported. As such, we do not consider it
likely that we will violate this debt covenant in 2009.
CAPITAL RESOURCES
Our total debt was $853.3 million as of December 31, 2008, an increase of $9.3 million from
December 31, 2007.
Capital Structure
| December 31, | ||||||||||||
| (in thousands) | 2008 | 2007 | Change | |||||||||
Amounts drawn on credit facilities |
$ | 78,000 | $ | 67,200 | $ | 10,800 | ||||||
Current portion of long-term debt |
1,440 | 1,754 | (314 | ) | ||||||||
Long-term debt |
773,896 | 775,086 | (1,190 | ) | ||||||||
Total debt |
853,336 | 844,040 | 9,296 | |||||||||
Shareholders’ equity |
53,066 | 41,107 | 11,959 | |||||||||
Total capital |
$ | 906,402 | $ | 885,147 | $ | 21,255 | ||||||
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 6.5 million shares
remained available for purchase under this authorization as of December 31, 2008. We repurchased a
total of 1.1 million shares during the first and third quarters of 2008 for $21.8 million and we
repurchased 0.4 million shares during 2007 for $11.3 million. No shares were repurchased in 2006.
Further information regarding changes in shareholders’ equity can be found in the consolidated
statements of shareholders’ equity (deficit) appearing in Item 8 of this report.
Debt Structure
| December 31, | ||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||
| average | average | |||||||||||||||||||
| interest | interest | |||||||||||||||||||
| (in thousands) | Amount | rate | Amount | rate | Change | |||||||||||||||
Fixed interest rate |
$ | 773,896 | 5.7 | % | $ | 773,646 | 5.7 | % | $ | 250 | ||||||||||
Floating interest rate |
78,000 | 0.9 | % | 67,200 | 5.6 | % | 10,800 | |||||||||||||
Capital lease |
1,440 | 10.4 | % | 3,194 | 10.4 | % | (1,754 | ) | ||||||||||||
Total debt |
$ | 853,336 | 5.2 | % | $ | 844,040 | 5.7 | % | $ | 9,296 | ||||||||||
Further information concerning our outstanding debt can be found under the caption “Note 13:
Debt” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
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.
39
As necessary, we utilize our committed lines of credit to meet our working capital
requirements. As of December 31, 2008, we had two committed lines of credit totaling $500.0
million. Effective February 5, 2009, we terminated the $225.0 million line of credit, which was due
to expire in July 2009. The credit agreement governing our line of credit contains customary
covenants regarding limits on levels of subsidiary indebtedness and requiring a ratio of earnings
before interest and taxes to interest expense of 3.0 times, as measured quarterly on an aggregate
basis for the preceding four quarters. We were in compliance with all debt covenants as of December
31, 2008, and we expect to remain in compliance with all debt covenants throughout the next 12
months. See Business Challenges/Market Risks for further
information regarding asset impairments and their impact on our compliance with our debt covenant.
As of December 31, 2008, amounts were available for borrowing under our committed lines of
credit 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 credit facilities |
(78,000 | ) | ||||||||
Outstanding letters of credit |
(10,835 | ) | ||||||||
Net available for borrowing as of
December 31, 2008 |
$ | 411,165 | ||||||||
We believe our remaining $275 million credit facility, along with cash generated by operating
activities, are sufficient to support our operations, including capital expenditures, small
acquisitions, required debt service and dividend payments, for 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.
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 $9.0
million in 2008, $14.2 million in 2007 and $17.0 million in 2006, and we anticipate cash payments
of approximately $20 million in 2009. Changes in contract acquisition costs during the last three
years were as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Balance, beginning of year |
$ | 55,516 | $ | 71,721 | $ | 93,664 | ||||||
Additions |
8,808 | 11,984 | 14,633 | |||||||||
Amortization |
(26,618 | ) | (28,189 | ) | (36,576 | ) | ||||||
Balance, end of year |
$ | 37,706 | $ | 55,516 | $ | 71,721 | ||||||
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
40
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 rather than
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. See Business Challenges/Market Risks for discussion of the recoverability of
contract acquisition costs.
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 $4.3 million as of December 31, 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 $1.2 million as of December 31,
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 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 Item 8 of this report.
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.
As of December 31, 2008, our contractual obligations were as follows:
| 2010 and | 2012 and | 2014 and | ||||||||||||||||||
| (in thousands) | Total | 2009 | 2011 | 2013 | thereafter | |||||||||||||||
Long-term debt and related
interest |
$ | 1,010,505 | $ | 43,844 | $ | 87,688 | $ | 372,063 | $ | 506,910 | ||||||||||
Amounts drawn on credit
facilities |
78,000 | 78,000 | — | — | — | |||||||||||||||
Capital lease obligation and
related interest |
1,503 | 1,503 | — | — | — | |||||||||||||||
Operating lease obligations |
19,395 | 9,119 | 9,317 | 959 | — | |||||||||||||||
Purchase obligations |
105,893 | 43,399 | 45,955 | 16,539 | — | |||||||||||||||
Other long-term liabilities |
48,816 | 35,065 | 6,959 | 1,954 | 4,838 | |||||||||||||||
Total |
$ | 1,264,112 | $ | 210,930 | $ | 149,919 | $ | 391,515 | $ | 511,748 | ||||||||||
Purchase obligations include amounts due under contracts with third party service providers.
These contracts are primarily for information technology services. Additionally, purchase
obligations include amounts due under Direct Checks
41
direct mail advertising agreements and Direct
Checks and Financial Services royalty agreements. We routinely issue purchase orders to numerous
vendors for the purchase of inventory and other supplies. These purchase orders are not included in
the purchase obligations presented here, as our business partners typically allow us to cancel
these purchase orders as necessary to accommodate business needs. Of the contracts with third party
service providers, $89.9 million of our total purchase obligations allow for early termination upon the payment of early termination
fees. If we were to terminate these agreements, we would have incurred early termination fees of
$31.6 million as of December 31, 2008.
Other long-term liabilities consist primarily of amounts due for our postretirement benefit
plans and liabilities for uncertain tax positions, deferred compensation and workers’ compensation.
Of the $98.9 million reported as other long-term liabilities in our consolidated balance sheet as
of December 31, 2008, $85.1 million is excluded from the obligations shown in the table above. The
excluded amounts, including the current portion of each liability,
are comprised primarily of the following:
| • | Benefit payments for postretirement benefit plans — We have contributed funds to these plans for the purpose of funding our obligations. Thus, we have the option of paying benefits from the assets of the plans or from the general funds of the company. Additionally, we expect the plan assets to earn income over time. As such, we cannot predict when or if payments from the general funds of the company will be required. As of December 31, 2008, our postretirement benefit plans were underfunded by a total of $64.5 million. | ||
| • | Payments for uncertain tax positions — Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of cash payments that may be required to settle these liabilities. Our liability for uncertain tax positions, including accrued interest and penalties, was $15.5 million as of December 31, 2008, excluding the tax benefits of deductible interest. | ||
| • | A portion of the amount due under our deferred compensation plan — Under this plan, some employees may begin receiving payments upon the termination of employment or disability, and we cannot predict when these events will occur. As such, $1.3 million of our deferred compensation liability as of December 31, 2008 is excluded from the obligations shown in the table above. | ||
| • | Insured environmental remediation costs — As of December 31, 2008, $8.0 million of the costs included in our environmental accruals are covered by an environmental insurance policy which we purchased in 2002. The insurance policy does not cover properties acquired subsequent to 2002. The insurance policy covers pre-existing conditions from third-party claims and cost overruns through 2032 at certain owned, leased and divested sites, as well as any new conditions discovered at certain owned or leased sites through 2012. As a result, we expect to receive reimbursements from the insurance company for environmental remediation costs we incur for these insured sites. The related receivables from the insurance company are reflected in other current assets and other non-current assets in our consolidated balance sheets based on the amounts of our environmental accruals for insured sites. |
Total contractual obligations do not include the following:
| • | Payments to our defined contribution pension and 401(k) plans — The amounts payable under our defined contribution pension and 401(k) plans are dependent on the number of employees providing services throughout the year, their wage rates and in the case of the 401(k) plans, whether employees elect to participate in the plans. | ||
| • | Profit sharing and cash bonus payments — Amounts payable under our profit sharing and cash bonus plans are dependent on our operating performance. | ||
| • | Income tax payments which will be remitted on our earnings. |
RELATED PARTY TRANSACTIONS
We have not entered into any material related party transactions during the past three years.
42
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of our financial condition and results of operation is
based upon our consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles (GAAP) in the United States of America. Our accounting
policies are discussed under the caption: “Note 1: Significant accounting policies” of the Notes to
Consolidated Financial Statements appearing in Item 8 of this report. We review the accounting
policies used in reporting our financial results on a regular basis. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that
we believe are reasonable under the circumstances, the result of which forms the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Results may differ from these estimates due to actual outcomes being different from
those on which we based our assumptions. The estimates and judgments utilized are reviewed by
management on an ongoing basis and by the audit committee of our board of directors at the end of
each quarter prior to the public release of our financial results.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
We consider the estimates discussed below to be critical to an understanding of our financial
statements because they place the most significant demands on management’s judgment about the
effect of matters that are inherently uncertain, and the impact of different estimates or
assumptions could be material to our consolidated financial statements.
Goodwill and Indefinite-Lived Assets
As of December 31, 2008, goodwill was comprised of the following:
| (in thousands) | ||||
Acquisition of NEBS in June 2004 |
$ | 492,082 | ||
Acquisition of Designer Checks, Inc. in February 2000 |
77,970 | |||
Acquisition of Hostopia.com Inc. in August 2008 |
68,555 | |||
Acquisition of the Johnson Group in October 2006 |
7,320 | |||
Acquisition of Direct Checks in December 1987 |
4,267 | |||
Acquisition of Logo Design Mojo, Inc. in April 2008 |
1,336 | |||
Acquisition of Dots and Pixels, Inc. in July 2005 |
856 | |||
Acquisition of All Trade Computer Forms, Inc. in February 2007 |
658 | |||
Goodwill |
$ | 653,044 | ||
Further information regarding the acquisitions which occurred during the past three years can
be found under the caption “Note 4: Acquisitions and disposition” of the Notes to Consolidated
Financial Statements appearing in Item 8 of this report. Goodwill and indefinite-lived assets are
tested for impairment on an annual basis as of July 31, or more frequently if events or
circumstances occur which could indicate impairment. We completed an additional impairment analysis
as of December 31, 2008 due to the continuing impacts of the economic downturn on our expected
operating results and the broader effects of recent U.S. market conditions on the fair value of the assets.
In addition to the required impairment analyses, we continually evaluate the remaining useful lives
of our indefinite-lived assets to determine whether events and circumstances continue to support an
indefinite useful life. If we determine that one of these assets has a finite useful life, we must
first test the asset for impairment and then amortize the asset’s remaining carrying value over its
estimated remaining useful life. Further information regarding the fair value measurements
completed during 2008 is provided under
the caption “Note 2: Supplementary balance sheet and cash flow information” of the Notes to
Consolidated Financial Statements appearing in Item 8 of this report.
We completed the annual impairment analysis of goodwill and indefinite-lived assets during the
third quarter of 2008. As a result of this analysis, we recorded non-cash asset impairment charges
of $9.3 million related to the two indefinite-lived trade names in our Small Business Services
segment due to the impact of the economic downturn on our expected operating results and the
broader effects of recent U.S. market conditions on the fair value of the assets. We completed an
additional
43
impairment analysis as of December 31, 2008, based on the continuing impact of the
economic downturn on our expected operating results. As a result, we recorded an additional asset
impairment charge of $0.3 million related to the NEBS trade name during the fourth quarter of 2008,
bringing the carrying value of this asset to $25.8 million as of December 31, 2008. The impairment
analysis completed as of December 31, 2008, indicated no additional impairment of our other
indefinite-lived trade name, the Safeguard trade name, which had a carrying value of $24.0 million
as of December 31, 2008. The fair value of the Safeguard trade name exceeded its carrying value by
$0.3 million as of December 31, 2008. Because of the further deterioration in our expected
operating results, we determined that the NEBS trade name no longer has an indefinite life, and
thus, will be amortized over its estimated economic life of 20 years on the straight-line basis
beginning in 2009. As such, this asset will no longer be subject to annual impairment testing, but
will be tested for impairment in accordance with our policy on impairment of long-lived assets and
amortizable intangibles, as outlined under the caption “Note 1: Significant accounting policies” of
the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
In determining the fair value of our trade names, we utilize the relief from royalty method,
which calculates the cost savings associated with owning rather than licensing the trade name. An
assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted.
As of December 31, 2008, we assumed a discount rate of 14.2% and a royalty rate of 2% for our
evaluation of the Safeguard trade name. A one percentage point increase in the discount rate would
reduce the indicated fair value of the asset by $2.1 million and a one percentage point decrease in
the royalty rate would reduce the indicated fair value of the asset by $12.1 million. As of
December 31, 2008, we assumed a discount rate of 14.2% and a royalty rate of 5% for our evaluation
of the NEBS trade name. A one percentage point increase in the discount rate would reduce the
indicated fair value of the asset by $1.7 million and a one percentage point decrease in the
royalty rate would reduce the indicated fair value of the asset by $5.2 million. In addition to the
impairment of indefinite-lived trade names, we also recorded a $0.4 million non-cash impairment
charge during 2008 related to an amortizable trade name due to a change in our branding strategy.
Due to the ongoing uncertainty in market conditions, we will perform additional impairment analyses
of our Safeguard indefinite-lived trade name if a decline in our expected operating results,
discount rate or royalty rate is indicated.
Our
impairment analysis as of December 31, 2008 indicated no impairment of goodwill. In
completing our goodwill impairment analysis, we test the appropriateness of our reporting units’
estimated fair values by reconciling the aggregate reporting units’ fair values with our market
capitalization. The aggregate fair value of our reporting units included a 25% control premium, which
is an amount
we estimate a buyer would be willing to pay in excess of the current market price of our company in
order to acquire a controlling interest. The premium is justified by the expected synergies, such
as expected increases in cash flows resulting from cost savings and revenue enhancements. Due to
the ongoing uncertainty in market conditions, we will perform additional impairment analyses if a
decline in market value or in our expected operating results is indicated. As of December 31, 2008,
the calculated fair value of one of our reporting units exceeded its carrying value of $76.9 million
by $2.7 million. Our fair value calculation was based on a closing stock price of $14.96 per share
at December 31, 2008. Both before and after December 31, 2008,
our common stock traded at prices lower than this closing price.
If such a decline in our stock price occurs in the
future for a sustained period, it may be indicative of a further
decline in our fair value and would likely require us to record an
impairment charge for a portion of the $40.2 million of goodwill allocated to this reporting unit. Accordingly, we
believe that a non-cash goodwill impairment charge related to this reporting unit and/or
further impairment charges related to our indefinite-lived trade name are reasonably possible in
the future. The calculated fair values of our other reporting units
exceeded their carrying values by amounts between $26 million and
$391 million.
The evaluation of asset impairment requires us to make assumptions about future cash flows and
revenues over the life of the asset being evaluated. These assumptions require significant judgment
and actual results may differ from assumed or estimated amounts. If these estimates and assumptions
change, we may be required to recognize impairment losses in the future.
Income Taxes
When preparing our consolidated financial statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This process involves estimating our actual
current tax obligations based on expected taxable income, statutory tax rates and tax credits
allowed in the various jurisdictions in which we operate. In interim
44
reporting periods, we use an
estimate of our annual effective tax rate based on the facts available at the time. Changes in the
mix or estimated amount of annual pre-tax income could impact our estimated effective tax rate in
interim periods. In the event there is a significant unusual or one-time item recognized in our
results of operations, the tax attributable to that item is separately calculated and recorded in
the interim period the unusual or one-time item occurred. The actual effective tax rate is
calculated at year-end.
Tax laws require certain items to be included in our tax return at different times than the
items are reflected in our results of operations. As a result, the annual effective tax rate
reflected in our results of operations is different than that reported on our tax return (i.e., our
cash tax rate). Some of these differences are permanent, such as expenses that are not deductible
in our tax return, and some are temporary differences that will reverse over time, such as
depreciation expense on capital assets. These temporary differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheets. Deferred tax assets
generally represent items that can be used as a tax deduction or credit in our tax return in future
years for which we have already recorded the expense, net of the expected tax benefit, in our
statements of income. We must assess the likelihood that our deferred tax assets will be realized
through future taxable income, and to the extent we believe that realization is not likely, we must
establish a valuation allowance against those deferred tax assets. Deferred tax liabilities
generally represent items for which we have already taken a deduction in our tax return, but we
have not yet recognized the items as expense in our results of operations. Significant judgment is
required in evaluating our tax positions, and in determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded against our net deferred
tax assets. We had deferred tax assets in excess of deferred tax
liabilities of $8.3 million as of
December 31, 2008 and $4.7 million as of December 31, 2007, including valuation allowances of $0.8
million as of December 31, 2008 and $0.6 million as December 31, 2007. The valuation allowances
relate primarily to Canadian operating loss carryforwards which we do not expect to realize.
On a regular basis, our income tax returns are reviewed by various domestic and foreign taxing
authorities. As such, we record accruals for items which we believe may be challenged by these
taxing authorities. On January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. This 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 total amount of unrecognized tax benefits as of December 31, 2008 was $11.5
million, excluding accrued interest and penalties. If the unrecognized tax benefits were recognized
in our consolidated financial statements, $6.9 million would affect our effective tax rate.
Interest and penalties recorded for uncertain tax positions are included in our income tax
provision. As of December 31, 2008, $4.0 million of interest and penalties was accrued, excluding
the tax benefits of deductible interest. The statute of limitations for federal tax assessments for
2004 and prior years has closed, with the exception of 2000. Our federal income tax returns for
2005 through 2008 remain subject to Internal Revenue Service examination. In general, income tax
returns for the years 2004 through 2008 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. The ultimate outcome of
tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular
issue would require the use of cash and could result in increased income tax expense. Favorable
resolution would result in reduced income tax expense.
Changes in unrecognized tax benefits during 2008 and 2007 can be found under the caption:
“Note 9: Income tax provision” of the Notes to Consolidated Financial Statements appearing in Item
8 of this report. Within the next 12 months,
it is reasonably possible that our unrecognized tax benefits will change in the range of a
decrease of $5.8 million to an increase of $0.6 million as we attempt to settle certain federal and
state 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 or cash flows.
We reduced our income tax provision $2.4 million in 2008 and $3.0 million in 2007 for
amendments to prior year tax returns claiming refunds primarily associated with the funding of
medical costs through our VEBA trust, as well as state income tax credits and related interest.
Also during 2008, we reduced our income tax provision $1.2 million for the settlement of amounts
due to us under a tax sharing agreement related to the spin-off of our eFunds business in 2000.
During 2006, we reduced our income tax provision $1.5 million for net accrual reversals related to
settled issues, primarily resulting from the expiration of the statutes of limitations in various
state income tax jurisdictions. Also during 2006, we reduced our income tax provision $5.0 million
for the true-up of certain deferred income tax balances. As this item was not material to 2006 or
prior periods, we recorded a one-time, discrete benefit to our provision for income taxes for 2006.
45
Postretirement Benefits
Detailed information regarding our postretirement benefit plan, including a description of the
plan, its related future cash flows, plan assets and the actuarial assumptions used in accounting
for the plan, can be found under the caption: “Note 12: Pension and other postretirement benefits”
of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Our net postretirement benefit expense was $4.8 million for 2008 and 2007 and $7.8 million for
2006. Our business segments record postretirement benefit expense in cost of goods sold and SG&A
expense, based on the composition of their workforces. Our postretirement benefit expense and
liability are calculated utilizing various actuarial assumptions and methodologies. These
assumptions include, but are not limited to, the discount rate, the expected long-term rate of
return on plan assets, the expected health care cost trend rate and the average remaining life
expectancy of plan participants. We analyze the assumptions used each year when we complete our
actuarial valuation of the plan. If the assumptions utilized in determining our postretirement
benefit expense and liability differ from actual events, our results of operations for future
periods could be impacted.
Discount rate — The discount rate is used to reflect the time value of money. It is the
assumed rate at which future postretirement benefits could be effectively settled. The discount
rate assumption is based on the rates of return on high-quality, fixed-income instruments currently
available whose cash flows match the timing and amount of expected benefit payments. In determining
the discount rate, we utilize the Hewitt Top Quartile and the Citigroup Pension Discount yield
curves to discount each cash flow stream at an interest rate specifically applicable to the timing
of each respective cash flow. The present value of each cash flow stream is aggregated and used to
impute a weighted-average discount rate. In previous years, we also considered Moody’s high quality
corporate bond rates when selecting our discount rate. However, as the number of bonds included in
this index fell significantly during 2008 and those bonds do not match the timing of our expected
cash flows as well, we no longer utilize these rates. The discount rate established at year-end for
purposes of calculating our benefit obligation is also used in the calculation of the interest
component of benefit expense for the following year. In measuring the accumulated postretirement
benefit obligation as of December 31, 2008, we assumed a discount rate of 6.6%. A 0.25 point change
in the discount rate would increase or decrease our annual postretirement benefit expense by
approximately $0.2 million and would increase or decrease our postretirement benefit obligation by
approximately $2.6 million.
Expected long-term rate of return on plan assets — The long-term rate of return on plan
assets reflects the average rate of earnings expected on the funds invested or to be invested to
provide for expected benefit payments. We base this assumption on an evaluation of our historical
trends and experience, taking into account current and expected market conditions. In measuring net
postretirement benefit expense for 2008, we assumed an expected long-term rate of return on plan
assets of 8.5%. A 0.25 point change in this assumption would increase or decrease our annual
postretirement benefit expense by approximately $0.2 million.
Expected health care cost trend rate — The health care cost trend rate represents the
expected annual rate of change in the cost of health care benefits currently provided due to
factors other than changes in the demographics of plan participants. In measuring the accumulated
postretirement benefit obligation as of December 31, 2008, our initial health care inflation rate
for 2009 was assumed to be 7.5% for participants under the age of 65 and 8.5% for participants over
the age of 65. Our ultimate health care inflation rate was assumed to be 5.25% in 2012 and beyond
for participants under the age of 65 and 5.25% in 2014 and beyond for participants over the age of
65. A one percentage point increase in the health care inflation rate for each year would increase
the accumulated postretirement benefit obligation by $2.6 million and the service and interest cost
components of our annual postretirement benefit expense by $0.2 million. A one percentage point
decrease in the health care inflation rate for each year would decrease the accumulated
postretirement benefit obligation by $2.4 million and the service and interest cost components of
our annual postretirement benefit expense by $0.1 million.
Average remaining life expectancy of plan participants — In determining the average remaining
life expectancy of plan participants, our actuaries use a mortality table which includes estimated
death rates for each age. We use the RP-2000 Combined Healthy Participant Table projected to the
measurement date with Scale AA in determining this assumption.
46
When actual events differ from our assumptions or when we change the assumptions used, an
unrecognized actuarial gain or loss results. The gain or loss is recognized immediately in the
consolidated balance sheet within accumulated comprehensive loss and is amortized into
postretirement benefit expense over the average remaining service period of plan participants,
which is currently 8.2 years. As of December 31, 2008 and 2007, our unrecognized net actuarial loss
was $128.1 million and $96.7 million, respectively, and was comprised of the following:
| (in thousands) | 2008 | 2007 | ||||||
Return on plan assets |
$ | 51,004 | $ | 9,148 | ||||
Claims experience |
20,733 | 23,938 | ||||||
Health care cost trend |
19,161 | 21,242 | ||||||
Discount rate assumption |
13,007 | 19,105 | ||||||
Other |
24,157 | 23,299 | ||||||
Unrecognized net actuarial loss |
$ | 128,062 | $ | 96,732 | ||||
See Business Challenges/Market Risks for discussion of
the risks related to our postretirement benefit plan.
Restructuring Accruals
Over the past several years, we have recorded restructuring accruals as a result of facility
closings and other cost management efforts. Cost management is one of our strategic objectives and
we are continually seeking ways to lower our cost structure. These accruals primarily consist of
employee termination benefits payable under our ongoing severance benefit plan. We record accruals
for employee termination benefits when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. As such, judgment is involved in determining when
it is appropriate to record restructuring accruals. Additionally, we are required to make estimates
and assumptions in calculating the restructuring accruals, as many times employees choose to
voluntarily leave the company prior to their termination date or they secure another position
within the company. In these situations, the employees do not receive termination benefits. To the
extent our assumptions and estimates differ from our actual costs, subsequent adjustments to
restructuring accruals have been and will be required. We reversed previously recorded
restructuring accruals of $2.4 million in 2008, $2.6 million in 2007 and $0.2 million in 2006
primarily as a result of fewer employees receiving severance benefits than originally estimated.
Further information regarding our restructuring accruals can be found under the caption “Note 6:
Restructuring charges” of the Notes to Consolidated Financial Statements appearing in Item 8 of
this report.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding the accounting pronouncement adopted during 2008 can be found under the
caption: “Note 1: Significant accounting policies” of the Notes to Consolidated Financial
Statements appearing in Item 8 of this report.
In December 2007, the 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. We are not able to predict the impact this guidance
will have on the accounting for acquisitions we may complete in future periods. For acquisitions
completed prior to January 1, 2009, the new standard requires that changes in deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement period must be
recognized in earnings rather than as an adjustment to the cost of the acquisition. We do not
expect this new guidance to have a significant impact on our consolidated financial statements.
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 company’s use of an asset. Under
the new guidance, a company
47
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. As this guidance applies only to assets we may acquire in the future, we are not
able to predict its impact, if any, on our consolidated financial statements.
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 do not expect the adoption of this statement to have a
significant impact on reported earnings per share.
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. This standard provides guidance on an employer’s disclosures
about plan assets of a defined benefit pension or other postretirement plan. Any additional
disclosures required under this guidance will be included in our annual report on Form 10-K for the
year ending December 31, 2009.
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 Annual Report on Form 10-K, 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 this report and are
incorporated into this Item 7 of the 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.
48
Item 7A. 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 2008, we used our
committed lines of credit to fund acquisitions, 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 December 31, 2008, our total debt was
comprised of the following:
| Weighted- | ||||||||||||
| average | ||||||||||||
| Carrying | interest | |||||||||||
| (in thousands) | amount | Fair value(1) | rate | |||||||||
Long-term notes maturing December 2012 |
$ | 299,250 | $ | 173,250 | 5.00 | % | ||||||
Long-term notes maturing October 2014 |
274,646 | 96,250 | 5.13 | % | ||||||||
Long-term notes maturing June 2015 |
200,000 | 106,000 | 7.38 | % | ||||||||
Amounts drawn on credit facilities |
78,000 | 78,000 | 0.91 | % | ||||||||
Capital lease obligation maturing in
September 2009 |
1,440 | 1,440 | 10.41 | % | ||||||||
Total debt |
$ | 853,336 | $ | 454,940 | 5.23 | % | ||||||
| (1) | Based on quoted market rates as of December 31, 2008, except for our capital lease obligation which is shown at carrying value. |
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.
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 $0.8 million for 2008.
We are exposed to changes in foreign currency exchange rates. Investments in, loans and
advances to foreign subsidiaries and branches, as well as the operations of these businesses, are
denominated in foreign currencies, primarily the 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.
See Business Challenges/Market Risks for further
discussion of market risks.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Accounting Firm
To the Shareholders and Board of Directors of Deluxe Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, comprehensive income, shareholders’ equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Deluxe Corporation and its subsidiaries
at December 31, 2008 and December 31, 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2008 based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express opinions on these financial
statements and on the Company’s internal control over financial
49
reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Notes 9 and 12 to the consolidated financial statements, effective January 1,
2007, the Company changed the manner in which it accounts for uncertain income tax positions and
the Company changed the measurement date it uses to measure the funded status of its defined
benefit pension and other postretirement benefit plans.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 18, 2009
Minneapolis, Minnesota
February 18, 2009
50
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
| December 31, | ||||||||
| 2008 | 2007 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 15,590 | $ | 21,615 | ||||
Trade accounts receivable-net of allowances for uncollectible accounts |
68,572 | 84,268 | ||||||
Inventories and supplies |
25,791 | 29,918 | ||||||
Deferred income taxes |
17,825 | 14,901 | ||||||
Cash held for customers |
26,078 | 23,285 | ||||||
Current assets of discontinued operations |
1,008 | 3,935 | ||||||
Other current assets |
12,222 | 14,023 | ||||||
Total current assets |
167,086 | 191,945 | ||||||
Long-Term Investments (including $1,855 and $3,025, respectively, of
investments at fair value) |
36,794 | 36,013 | ||||||
Property, Plant, and Equipment-net of accumulated depreciation |
128,105 | 138,860 | ||||||
Intangibles-net of accumulated amortization |
154,081 | 148,263 | ||||||
Goodwill |
653,044 | 584,923 | ||||||
Non-Current Assets of Discontinued Operations |
— | 2,841 | ||||||
Other Non-Current Assets |
79,875 | 107,910 | ||||||
Total assets |
$ | 1,218,985 | $ | 1,210,755 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 61,598 | $ | 78,659 | ||||
Accrued liabilities |
142,599 | 149,975 | ||||||
Short-term debt |
78,000 | 67,200 | ||||||
Long-term debt due within one year |
1,440 | 1,754 | ||||||
Total current liabilities |
283,637 | 297,588 | ||||||
Long-Term Debt |
773,896 | 775,086 | ||||||
Deferred Income Taxes |
9,491 | 10,194 | ||||||
Other Non-Current Liabilities |
98,895 | 86,780 | ||||||
Commitments and Contingencies (Notes 9, 13, 14 and 18) |
||||||||
Shareholders’ Equity: |
||||||||
Common shares $1 par value (authorized: 500,000 shares;
issued: 2008 — 51,131; 2007 — 51,887) |
51,131 | 51,887 | ||||||
Additional paid-in capital |
54,207 | 65,796 | ||||||
Retained earnings (accumulated deficit) |
12,682 | (37,530 | ) | |||||
Accumulated other comprehensive loss |
(64,954 | ) | (39,046 | ) | ||||
Total shareholders’ equity |
53,066 | 41,107 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,218,985 | $ | 1,210,755 | ||||
See Notes to Consolidated Financial Statements
51
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Revenue |
$ | 1,468,662 | $ | 1,588,885 | $ | 1,619,337 | ||||||
Restructuring charges (reversals) |
14,867 | (368 | ) | 1,942 | ||||||||
Other cost of goods sold |
551,646 | 574,972 | 598,038 | |||||||||
Total cost of goods sold |
566,513 | 574,604 | 599,980 | |||||||||
Gross Profit |
902,149 | 1,014,281 | 1,019,357 | |||||||||
Selling, general and administrative expense |
670,991 | 743,449 | 770,218 | |||||||||
Restructuring charges |
13,400 | 4,701 | 10,479 | |||||||||
Asset impairment charges |
9,942 | — | 44,698 | |||||||||
Net gain on sale of facilities and product line |
(1,418 | ) | (3,773 | ) | (4,582 | ) | ||||||
Operating Income |
209,234 | 269,904 | 198,544 | |||||||||
Interest expense |
(50,421 | ) | (55,294 | ) | (56,661 | ) | ||||||
Other income |
1,363 | 5,405 | 905 | |||||||||
Income Before Income Taxes |
160,176 | 220,015 | 142,788 | |||||||||
Income tax provision |
54,304 | 74,898 | 41,950 | |||||||||
Income From Continuing Operations |
105,872 | 145,117 | 100,838 | |||||||||
Net (Loss) Income From Discontinued Operations |
(4,238 | ) | (1,602 | ) | 116 | |||||||
Net Income |
$ | 101,634 | $ | 143,515 | $ | 100,954 | ||||||
Basic Earnings per Share: |
||||||||||||
Income from continuing operations |
$ | 2.08 | $ | 2.82 | $ | 1.98 | ||||||
Net (loss) income from discontinued operations |
(0.08 | ) | (0.03 | ) | — | |||||||
Basic earnings per share |
2.00 | 2.79 | 1.98 | |||||||||
Diluted Earnings per Share: |
||||||||||||
Income from continuing operations |
$ | 2.05 | $ | 2.79 | $ | 1.96 | ||||||
Net (loss) income from discontinued operations |
(0.08 | ) | (0.03 | ) | — | |||||||
Diluted earnings per share |
1.97 | 2.76 | 1.96 | |||||||||
Cash Dividends per Share |
$ | 1.00 | $ | 1.00 | $ | 1.30 | ||||||
See Notes to Consolidated Financial Statements
52
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Net Income |
$ | 101,634 | $ | 143,515 | $ | 100,954 | ||||||
Other Comprehensive Income, Net of Tax: |
||||||||||||
Reclassification of loss on derivative instruments from
other comprehensive income to net income |
1,383 | 2,281 | 2,559 | |||||||||
Pension and postretirement benefit plans: |
||||||||||||
Minimum pension liability adjustment |
— | — | (269 | ) | ||||||||
Net actuarial loss arising during the period |
(25,540 | ) | (6,094 | ) | — | |||||||
Reclassification of amounts from other comprehensive
income to net income: |
||||||||||||
Amortization of prior service credit |
(2,447 | ) | (2,468 | ) | — | |||||||
Amortization of net actuarial loss |
5,943 | 6,156 | — | |||||||||
Unrealized foreign currency translation adjustment |
(5,247 | ) | 3,263 | 255 | ||||||||
Unrealized gains on securities: |
||||||||||||
Unrealized holding gains arising during the year |
— | — | 268 | |||||||||
Less reclassification adjustments for gains included in
net income |
— | — | (89 | ) | ||||||||
Other
Comprehensive (Loss) Income |
(25,908 | ) | 3,138 | 2,724 | ||||||||
Comprehensive Income |
$ | 75,726 | $ | 146,653 | $ | 103,678 | ||||||
Related Tax (Expense) Benefit of Other Comprehensive
Income Included in Above Amounts: |
||||||||||||
Reclassification of loss on derivative instruments from
other comprehensive income to net income |
$ | (837 | ) | $ | (1,356 | ) | $ | (1,493 | ) | |||
Pension and postretirement benefit plans: |
||||||||||||
Minimum pension liability adjustment |
— | — | 151 | |||||||||
Net actuarial loss arising during the period |
15,757 | 3,659 | — | |||||||||
Reclassification of amounts from other comprehensive
income to net income: |
||||||||||||
Amortization of prior service credit |
1,512 | 1,491 | — | |||||||||
Amortization of net actuarial loss |
(3,666 | ) | (3,708 | ) | — | |||||||
Unrealized gains on securities: |
||||||||||||
Unrealized holding gains arising during the year |
— | — | (191 | ) | ||||||||
Less reclassification adjustments for gains included in
net income |
— | — | 63 | |||||||||
See Notes to Consolidated Financial Statements
53
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(in thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(in thousands)
| Retained | Accumulated | |||||||||||||||||||||||
| Common shares | Additional | earnings | other | Total | ||||||||||||||||||||
| Number | Par | paid-in | (accumulated | comprehensive | shareholders’ | |||||||||||||||||||
| of shares | value | capital | deficit) | loss | equity (deficit) | |||||||||||||||||||
Balance, December 31, 2005 |
50,735 | $ | 50,735 | $ | 37,864 | $ | (159,401 | ) | $ | (11,224 | ) | $ | (82,026 | ) | ||||||||||
Net income |
— | — | — | 100,954 | — | 100,954 | ||||||||||||||||||
Cash dividends |
— | — | — | (66,973 | ) | — | (66,973 | ) | ||||||||||||||||
Common shares issued |
810 | 810 | 8,126 | — | — | 8,936 | ||||||||||||||||||
Tax impact of share-based awards |
— | — | 728 | — | — | 728 | ||||||||||||||||||
Reclassification of share-based awards
to accrued liabilities |
— | — | (1,919 | ) | — | — | (1,919 | ) | ||||||||||||||||
Common shares retired |
(31 | ) | (31 | ) | (724 | ) | — | — | (755 | ) | ||||||||||||||
Fair value of share-based compensation |
5 | 5 | 6,026 | — | — | 6,031 | ||||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | — | (269 | ) | (269 | ) | ||||||||||||||||
Adoption of FASB Statement No. 158, net
of tax |
— | — | — | — | (33,373 | ) | (33,373 | ) | ||||||||||||||||
Loss on derivatives, net of tax |
— | — | — | — | 2,559 | 2,559 | ||||||||||||||||||
Currency translation adjustment |
— | — | — | — | 255 | 255 | ||||||||||||||||||
Unrealized gain on securities, net of tax |
— | — | — | — | 179 | 179 | ||||||||||||||||||
Balance, December 31, 2006 |
51,519 | 51,519 | 50,101 | (125,420 | ) | (41,873 | ) | (65,673 | ) | |||||||||||||||
Net income |
— | — | — | 143,515 | — | 143,515 | ||||||||||||||||||
Cash dividends |
— | — | — | (52,048 | ) | — | (52,048 | ) | ||||||||||||||||
Common shares issued |
767 | 767 | 15,971 | — | — | 16,738 | ||||||||||||||||||
Tax impact of share-based awards |
— | — | 297 | — | — | 297 | ||||||||||||||||||
Common shares repurchased |
(359 | ) | (359 | ) | (10,929 | ) | — | — | (11,288 | ) | ||||||||||||||
Other common shares retired |
(40 | ) | (40 | ) | (1,354 | ) | — | — | (1,394 | ) | ||||||||||||||
Fair value of share-based compensation |
— | — | 11,710 | — | — | 11,710 | ||||||||||||||||||
Adoption of measurement date provision of
FASB Statement No. 158, net of tax (Note
12) |
— | — | — | (745 | ) | (69 | ) | (814 | ) | |||||||||||||||
Adoption of FIN No. 48 (Note 9) |
— | — | — | (3,074 | ) | — | (3,074 | ) | ||||||||||||||||
Adoption of FASB Statement No. 159, net
of tax (Note 1) |
— | — | — | 242 | (242 | ) | — | |||||||||||||||||
Amounts related to postretirement benefit
plans, net of tax (Note 12) |
— | — | — | — | (2,406 | ) | (2,406 | ) | ||||||||||||||||
Loss on derivatives, net of tax |
— | — | — | — | 2,281 | 2,281 | ||||||||||||||||||
Currency translation adjustment |
— | — | — | — | 3,263 | 3,263 | ||||||||||||||||||
Balance, December 31, 2007 |
51,887 | 51,887 | 65,796 | (37,530 | ) | (39,046 | ) | 41,107 | ||||||||||||||||
Net income |
— | — | — | 101,634 | — | 101,634 | ||||||||||||||||||
Cash dividends |
— | — | — | (51,422 | ) | — | (51,422 | ) | ||||||||||||||||
Common shares issued |
380 | 380 | 2,542 | — | — | 2,922 | ||||||||||||||||||
Tax impact of share-based awards |
— | — | (2,468 | ) | — | — | (2,468 | ) | ||||||||||||||||
Common shares repurchased |
(1,054 | ) | (1,054 | ) | (20,793 | ) | — | — | (21,847 | ) | ||||||||||||||
Other common shares retired |
(82 | ) | (82 | ) | (1,639 | ) | — | — | (1,721 | ) | ||||||||||||||
Fair value of share-based compensation |
— | — | 10,769 | — | — | 10,769 | ||||||||||||||||||
Amounts related to postretirement benefit
plans, net of tax (Note 12) |
— | — | — | — | (22,044 | ) | (22,044 | ) | ||||||||||||||||
Loss on derivatives, net of tax |
— | — | — | — | 1,383 | 1,383 | ||||||||||||||||||
Currency translation adjustment |
— | — | — | — | (5,247 | ) | (5,247 | ) | ||||||||||||||||
Balance, December 31, 2008 |
51,131 | $ | 51,131 | $ | 54,207 | $ | 12,682 | $ | (64,954 | ) | $ | 53,066 | ||||||||||||
See Notes to Consolidated Financial Statements
54
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income |
$ | 101,634 | $ | 143,515 | $ | 100,954 | ||||||
Adjustments to reconcile net income to net cash provided by operating
activities
of continuing operations: |
||||||||||||
Net loss (income) from discontinued operations |
4,238 | 1,602 | (116 | ) | ||||||||
Depreciation |
21,881 | 21,786 | 25,298 | |||||||||
Amortization of intangibles |
42,079 | 45,774 | 59,237 | |||||||||
Asset impairment charges |
9,942 | — | 44,698 | |||||||||
Amortization of contract acquisition costs |
26,618 | 28,189 | 36,576 | |||||||||
Employee share-based compensation expense |
9,683 | 13,533 | 6,191 | |||||||||
Deferred income taxes |
(790 | ) | 5,280 | (37,375 | ) | |||||||
Other non-cash items, net |
21,912 | 14,772 | 3,802 | |||||||||
Changes in assets and liabilities, net of effects of
acquisitions, product line disposition and discontinued
operations: |
||||||||||||
Trade accounts receivable |
10,578 | 6,065 | (1,709 | ) | ||||||||
Inventories and supplies |
321 | (1,264 | ) | (1,234 | ) | |||||||
Other current assets |
(1,807 | ) | 3,719 | 28,728 | ||||||||
Non-current assets |
5,404 | (1,665 | ) | (6,995 | ) | |||||||
Accounts payable |
(9,768 | ) | 667 | (7,781 | ) | |||||||
Contract acquisition payments |
(9,008 | ) | (14,230 | ) | (17,029 | ) | ||||||
Other accrued and other non-current liabilities |
(34,430 | ) | (22,668 | ) | 5,650 | |||||||
Net cash provided by operating activities of continuing operations |
198,487 | 245,075 | 238,895 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||
Purchases of capital assets |
(31,865 | ) | (32,286 | ) | (41,012 | ) | ||||||
Payments for acquisitions, net of cash acquired |
(104,879 | ) | (2,316 | ) | (16,521 | ) | ||||||
Purchase of customer list |
(3,637 | ) | — | — | ||||||||
Purchases of marketable securities |
— | (1,057,460 | ) | — | ||||||||
Proceeds from sales of marketable securities |
— | 1,057,460 | — | |||||||||
Proceeds from sale of facilities and product line |
4,181 | 19,214 | 9,247 | |||||||||
Proceeds from redemptions of life insurance policies |
— | — | 15,513 | |||||||||
Other |
427 | 4,459 | (111 | ) | ||||||||
Net cash used by investing activities of continuing operations |
(135,773 | ) | (10,929 | ) | (32,884 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Net proceeds (payments) from short-term debt |
10,800 | (45,460 | ) | (99,686 | ) | |||||||
Proceeds from issuance of long-term debt, net of debt issuance costs |
— | 196,329 | — | |||||||||
Payments on long-term debt |
(1,755 | ) | (326,582 | ) | (51,362 | ) | ||||||
Change in book overdrafts |
(6,370 | ) | (3,006 | ) | 3,285 | |||||||
Proceeds from issuing shares under employee plans |
2,801 | 15,923 | 8,936 | |||||||||
Excess tax benefit from share-based employee awards |
112 | 1,242 | 1,213 | |||||||||
Payments for common shares repurchased |
(21,847 | ) | (11,288 | ) | — | |||||||
Cash dividends paid to shareholders |
(51,422 | ) | (52,048 | ) | (66,973 | ) | ||||||
Net cash used by financing activities of continuing operations |
(67,681 | ) | (224,890 | ) | (204,587 | ) | ||||||
Effect of Exchange Rate Change on Cash |
(2,053 | ) | 1,161 | 158 | ||||||||
Cash Provided (Used) by Operating Activities of Discontinued Operations |
995 | (401 | ) | 179 | ||||||||
Cash Provided by Investing Activities of Discontinued Operations — Net
Proceeds from Sale |
— | — | 2,971 | |||||||||
Net Change in Cash and Cash Equivalents |
(6,025 | ) | 10,016 | 4,732 | ||||||||
Cash and Cash Equivalents: Beginning of Year |
21,615 | 11,599 | 6,867 | |||||||||
End of Year |
$ | 15,590 | $ | 21,615 | $ | 11,599 | ||||||
See Notes to Consolidated Financial Statements
55
DELUXE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant accounting policies
Consolidation — The consolidated financial statements include the accounts of Deluxe
Corporation and its wholly-owned subsidiaries. All intercompany accounts, transactions and profits
have been eliminated.
Reclassifications — We have reclassified certain amounts presented in the consolidated
financial statements for 2007 and 2006 to conform to the current period presentation. These
reclassifications consisted of presenting restructuring charges separately in the consolidated
statements of income and reporting our Russell & Miller retail packaging and signage business as
discontinued operations (see Note 5). The reclassifications had no impact on previously reported
net income or shareholders’ equity.
Use of estimates — We have prepared the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America. In this
process, it is necessary for us to make certain assumptions and estimates affecting the amounts
reported in the consolidated financial statements and related notes. These estimates and
assumptions are developed based upon all available information. However, actual results can differ
from assumed and estimated amounts.
Foreign currency translation — The financial statements of our foreign subsidiaries are
measured in the respective subsidiaries’ functional currencies, primarily Canadian dollars, and are
translated into U.S. dollars. Assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Revenue and expenses are translated at the average exchange rates
during the year. The resulting translation gains and losses are reflected in accumulated other
comprehensive loss in the shareholders’ equity section of our consolidated balance sheets. Foreign
currency transaction gains and losses are recorded in other income in our consolidated statements
of income.
Cash and cash equivalents — We consider all cash on hand and other highly liquid investments
with original maturities of three months or less to be cash and cash equivalents. The carrying
amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair
value. As a result of our cash management system, checks issued by us but not presented to the
banks for payment may create negative book cash balances. Such negative balances are included in
accounts payable and totaled $7.1 million as of December 31, 2008 and $13.5 million as of December
31, 2007.
Marketable securities — Marketable securities which were purchased and sold during 2007
consisted of investments in tax-exempt mutual funds. They were classified as available for sale and
were carried at fair value on the consolidated balance sheet, based on quoted prices in active
markets for identical assets. The cost of securities sold was determined using the specific
identification method.
Trade accounts receivable — Trade accounts receivable are initially recorded at fair value
upon the sale of goods or services to customers. They are stated net of allowances for
uncollectible accounts, which represent estimated losses resulting from the inability of customers
to make the required payments. When determining the allowances for uncollectible accounts, we take
several factors into consideration including the overall composition of accounts receivable aging,
our prior history of accounts receivable write-offs, the type of customer and our day-to-day
knowledge of specific customers. Changes in the allowances for uncollectible accounts are included
in selling, general and administrative (SG&A) expense in our consolidated statements of income. The
point at which uncollected accounts are written off varies by type of customer, but generally does
not exceed one year from the date of sale.
Inventories and supplies — Inventories and supplies are stated at the lower of average cost
or market. Average cost approximates computation on a first-in, first-out basis. Supplies consist
of items not used directly in the production of goods, such as maintenance and janitorial supplies
utilized in the production area.
Cash held for customers — As part of our Canadian payroll services business, we collect funds
from clients to pay their payroll and related taxes. We hold these funds temporarily until payments
are remitted to the clients’ employees and
the appropriate taxing authorities. These funds are reported as cash held for customers in our
consolidated balance sheets. The corresponding liability for these obligations is included in
accrued liabilities in our consolidated balance sheets.
56
Long-term investments — Long-term investments consist primarily of cash surrender values of
life insurance contracts. The carrying amounts reported in the consolidated balance sheets for
these investments approximate fair value. Additionally, long-term investments include an investment
in a domestic mutual fund with a fair value of $1.9 million as of December 31, 2008 and $3.0
million as of December 31, 2007. Fair value is based on quoted prices in active markets for
identical assets, which is considered a Level 1 fair value measurement under Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements. Effective January 1, 2007, we elected
to report the mutual fund investment using the fair value option under SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. This investment corresponds to a liability
under an officers’ deferred compensation plan which 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, the investment is reported as a trading security,
and changes in the fair value of both the plan asset and liability are netted within SG&A expense in the consolidated statements of income. Dividends
earned by the mutual fund investment, as reported by the fund, realized gains and losses and
permanent declines in value are also netted within SG&A expense in the consolidated statements of
income. The cost of securities sold is determined using the average cost method. During 2008, we
recognized a net unrealized loss of $1.3 million on the mutual fund investment and during 2007, we
recognized a net unrealized loss of $0.1 million. Prior to January 1, 2007, the mutual fund
investment was classified as an available for sale security, and unrealized gains and losses, net
of tax, were reported in accumulated other comprehensive loss in the shareholders’ equity section
of our consolidated balance sheet. As required by SFAS No. 159, the cumulative unrealized gain
related to the 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.
Property, plant and equipment — Property, plant and equipment, including leasehold and other
improvements that extend an asset’s useful life or productive capabilities, are stated at
historical cost. Buildings have been assigned 40-year lives and machinery and equipment are
generally assigned lives ranging from one to 11 years, with a weighted-average life of 8.1 years as
of December 31, 2008. Buildings, machinery and equipment are generally depreciated using
accelerated methods. Leasehold and building improvements are depreciated on the straight-line basis
over the estimated useful life of the property or the life of the lease, whichever is shorter.
Maintenance and repairs are expensed as incurred. Gains or losses resulting from the disposition of
property, plant and equipment are included in SG&A expense in the consolidated statements of
income, with the exception of building sales. Such sales are reported separately in the
consolidated statements of income.
Intangibles — Intangible assets are stated at historical cost. Amortization expense is
generally determined on the straight-line basis over periods ranging from one to 20 years, with a
weighted-average life of 6.5 years as of December 31, 2008. Customer lists and distributor
contracts are amortized using accelerated methods. Each reporting period, we evaluate the remaining
useful lives of our amortizable intangibles to determine whether events and circumstances warrant a
revision to the remaining period of amortization. If our estimate of an asset’s remaining useful
life is revised, the remaining carrying amount of the asset is amortized prospectively over the
revised remaining useful life. As of December 31, 2008, one of our trade name assets has been
assigned an indefinite life. As such, this asset is not amortized, but is subject to impairment
testing on at least an annual basis. As of December 31, 2007, two of our trade name assets had been
assigned indefinite lives. See Note 7 for information regarding the asset that was modified from an
indefinite-lived asset to an amortizable asset. Gains or losses resulting from the disposition of
intangibles are included in SG&A expense in the consolidated statements of income.
We capitalize costs of software developed or obtained for internal use, including website
development costs, once the preliminary project stage has been completed, management commits to
funding the project and it is probable that the project will be completed and the software will be
used to perform the function intended. Capitalized costs include only (1) external direct costs of
materials and services consumed in developing or obtaining internal-use software, (2) payroll and
payroll-related costs for employees who are directly associated with and who devote time to the
internal-use software project, and (3) interest costs incurred, when significant, while developing
internal-use software. Costs incurred in populating websites with information about the company or
products are expensed as incurred. Capitalization of costs ceases when the project is
substantially complete and ready for its intended use. The carrying value of internal-use
software is reviewed in accordance with our policy on impairment of long-lived assets and
amortizable intangibles.
57
Impairment of long-lived assets and amortizable intangibles — We evaluate the recoverability
of property, plant, equipment and amortizable intangibles not held for sale whenever events or
changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such
circumstances could include, but are not limited to, (1) a significant decrease in the market value
of an asset, (2) a significant adverse change in the extent or manner in which an asset is used or
in its physical condition, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of an asset. We measure the carrying amount
of the asset against the estimated undiscounted future cash flows associated with it. If the sum of
the expected future net cash flows is less than the carrying value of the asset being evaluated, an
impairment loss would be recognized. The impairment loss would be calculated as the amount by which
the carrying value of the asset exceeds the fair value of the asset. As quoted market prices are
not available for the majority of our assets, the estimate of fair value is based on various
valuation techniques, including the discounted value of estimated future cash flows.
We evaluate the recoverability of property, plant, equipment and intangibles held for sale by
comparing the asset’s carrying amount with its fair value less costs to sell. Should the fair value
less costs to sell be less than the carrying value of the long-lived asset, an impairment loss
would be recognized. The impairment loss would be calculated as the amount by which the carrying
value of the asset exceeds the fair value of the asset less costs to sell.
The evaluation of asset impairment requires us to make assumptions about future cash flows
over the life of the asset being evaluated. These assumptions require significant judgment and
actual results may differ from assumed and estimated amounts.
Impairment of non-amortizable intangibles and goodwill — In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, we evaluate the carrying value of non-amortizable intangibles
and goodwill on July 31st of each year and between annual evaluations if events occur or
circumstances change that would indicate a possible impairment. Such circumstances could include,
but are not limited to, (1) a significant adverse change in legal factors or in business climate,
(2) unanticipated competition, (3) an adverse action or assessment by a regulator, or (4) an
adverse change in market conditions which are indicative of a decline in the fair value of the
assets.
When evaluating whether our indefinite-lived trade name is impaired, we compare the carrying
amount of the asset to its estimated fair value. The estimate of fair value is based on a relief
from royalty method which calculates the cost savings associated with owning rather than licensing
the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash
flows are discounted. Should the estimated fair value be less than the carrying value of the asset
being evaluated, an impairment loss would be recognized. The impairment loss is calculated as the
amount by which the carrying value of the asset exceeds the fair value of the asset. The impairment
analyses completed during 2008 indicated impairment of trade names in our Small Business Services
segment. See Note 7 for further information regarding these impairment charges and Note 18 for
related information regarding market risks. In addition to the required impairment analyses, we
continually evaluate the remaining useful life of our indefinite-lived asset to determine whether
events and circumstances continue to support an indefinite useful life. If we determine that the
asset has a finite useful life, we must first test the asset for impairment and then amortize the
asset’s remaining carrying value over its estimated remaining useful life (see Note 7).
When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit
to which the goodwill is assigned to its carrying amount. In calculating fair value, we use the
income approach. The income approach is a valuation technique under which we estimate future cash
flows using each reporting unit’s financial forecast from the perspective of an unrelated market
participant. Future estimated cash flows are discounted to their present value to calculate fair
value. For reasonableness, the summation of our reporting units’ fair values is compared to our
consolidated fair value as indicated by our market capitalization plus an appropriate control
premium. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the
impairment loss must be measured. An impairment loss is calculated by comparing the implied fair
value of the reporting unit goodwill to its carrying amount. In calculating the implied fair value
of goodwill, the fair value of the reporting unit is allocated to all of the other assets and
liabilities of that unit based on their fair values. The excess of the fair value of a reporting
unit over the amount assigned to its other assets and liabilities is the
implied fair value of goodwill. Since the fair value of all our reporting units exceeded their
carrying values, the impairment analyses completed during 2008, 2007 and 2006 indicated no goodwill
impairment. See Note 18 for related information regarding market risks.
Contract acquisition costs — We record contract acquisition costs when we sign or renew
certain contracts with our financial institution clients. These costs, which are essentially
pre-paid product discounts, consist of cash payments or accruals related to amounts owed to
financial institution clients by our Financial Services segment. Contract acquisition costs are
generally amortized as reductions of revenue on the straight-line basis over the related contract
term. Currently, these
58
amounts are being amortized over periods ranging from one to 10 years, with
a weighted-average life of 5.7 years as of December 31, 2008. Whenever events or changes occur that
impact the related contract, including significant declines in the anticipated profitability, we
evaluate the carrying value of the contract acquisition costs to determine if impairment has
occurred. Should a financial institution cancel a contract prior to the agreement’s termination
date, or should the volume of orders realized through a financial institution fall below
contractually-specified minimums, we generally have a contractual right to a refund of the
remaining unamortized contract acquisition costs. These costs are included in other non-current
assets in the consolidated balance sheets. See Note 18 for related information regarding market
risks.
Advertising costs — Deferred advertising costs include materials, printing, labor and postage
costs related to direct response advertising programs of our Direct Checks and Small Business
Services segments. These costs are amortized as SG&A expense over periods (not exceeding 18 months)
that correspond to the estimated revenue streams of the individual advertisements. The actual
revenue streams are analyzed at least annually to monitor the propriety of the amortization
periods. Judgment is required in estimating the future revenue streams, especially with regard to
check re-orders which can span an extended period of time. Significant changes in the actual
revenue streams would require the amortization periods to be modified, thus impacting our results
of operations during the period in which the change occurred and in subsequent periods. For our
Direct Checks segment, approximately 82% of the costs of individual advertisements are expensed
within six months of the advertisement. The majority of the deferred advertising costs of our Small
Business Services segment are fully amortized within six months of the advertisement. Deferred
advertising costs are included in other non-current assets in the consolidated balance sheets, as
portions are amortized over periods in excess of one year.
Non-direct response advertising projects are expensed the first time the advertising takes
place. Catalogs provided to financial institution clients of the Financial Services segment are
accounted for as prepaid assets until they are shipped to financial institutions. The total amount
of advertising expense for continuing operations was $110.5 million in 2008, $120.0 million in 2007
and $115.2 million in 2006.
Restructuring charges — Over the past several years, we have recorded restructuring accruals
as a result of facility closings and cost management efforts. These accruals primarily consist of
employee termination benefits payable under our ongoing severance benefit plan. We record accruals
for employee termination benefits when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. As such, judgment is involved in determining when
it is appropriate to record restructuring accruals. Additionally, we are required to make estimates
and assumptions in calculating the restructuring accruals, as many times employees choose to
voluntarily leave the company prior to their termination date or they secure another position
within the company. In these situations, the employees do not receive termination benefits. To the
extent our assumptions and estimates differ from our actual costs, subsequent adjustments
to restructuring accruals have been and will be required. Restructuring accruals are included in
accrued liabilities in our consolidated balance sheets. In addition to severance benefits, we also
typically incur other costs related to restructuring activities including, but not limited to,
equipment moves, training and travel. These costs are expensed as incurred.
Deferred income taxes — Deferred income taxes result from temporary differences between the
financial reporting basis of assets and liabilities and their respective tax reporting bases.
Current deferred tax assets and liabilities are netted in the consolidated balance sheets, as are
long-term deferred tax assets and liabilities. Future tax benefits are recognized to the extent
that realization of such benefits is more likely than not.
Derivative financial instruments — In the past, we have used derivative financial instruments
to hedge interest rate exposures related to the issuance of long-term debt (see Note 8). We do not
use derivative financial instruments for speculative or trading purposes.
We recognize all derivative financial instruments in the consolidated financial statements at
fair value regardless of the purpose or intent for holding the instrument. Changes in the fair
value of derivative financial instruments are recognized periodically either in income or in
shareholders’ equity as a component of accumulated other comprehensive loss, depending on whether
the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies
as a fair value hedge or a cash flow hedge. Generally, changes in fair values of derivatives
accounted for as fair value hedges are recorded in income along with the portion of the change in
the fair value of the hedged items that relate to the hedged risk. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are
recorded in accumulated other comprehensive loss, net of tax. We present amounts used to settle
cash flow hedges as financing activities in our consolidated statements of cash flows. Changes in
fair values of derivatives not qualifying as hedges are reported in income.
59
Revenue recognition — We recognize revenue when (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or
determinable, and (4) collectibility is reasonably assured. The majority of our revenues are
generated from the sale of products for which revenue is recognized upon shipment or customer
receipt, based upon the transfer of title. Our services, which account for the remainder of our
revenue, consist primarily of fraud prevention and payroll services, as well as web hosting and
applications services. We recognize these service revenues as the services are provided. In some
situations, our web hosting and applications services are billed on a quarterly, semi-annual or
annual basis. When a customer pays in advance for services, we defer the revenue and recognize it
as the services are performed. Up-front set-up fees related to our web hosting and applications
services are deferred and recognized as revenue on the straight-line basis over their estimated
economic life. Deferred revenue is included in accrued liabilities in our consolidated balance
sheets.
Revenue includes amounts billed to customers for shipping and handling and pass-through costs,
such as marketing materials for which our financial institution clients reimburse us. Costs
incurred for shipping and handling and pass-through costs are reflected in cost of goods sold. For
sales with a right of return, a reserve for sales returns is recorded in accordance with SFAS No.
48, Revenue Recognition When Right of Return Exists, based on significant historical experience.
At times, a financial institution client may terminate its contract with us prior to the end
of the contract term. In many of these cases, the financial institution is contractually required
to remit a contract termination payment. Such payments are recorded as revenue when the termination
agreement is executed, provided that we have no further service or contractual obligations, and
collection of the funds is assured.
Revenue is presented in the consolidated statements of income net of rebates, discounts,
amortization of contract acquisition costs and sales tax. We enter into contractual agreements with
financial institution clients for rebates on certain products we sell. We record these amounts as
reductions of revenue in the consolidated statements of income and as accrued liabilities in the
consolidated balance sheets when the related revenue is recorded. At times we may also sell
products at discounted prices or provide free products to customers when they purchase a specified
product. Discounts are recorded as reductions of revenue when the related revenue is recorded. The
cost of free products is recorded as cost of goods sold when the revenue for the related purchase
is recorded. Additionally, reported revenue for our Financial Services segment does not reflect the
full retail price paid by end-consumers to their financial institutions. Revenue reflects the
amounts paid to us by our financial institution clients.
Employee share-based compensation — Our share-based compensation consists of non-qualified
stock options, restricted stock units, restricted stock and an employee stock purchase plan. On
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective
method. Prior to this, we were applying the fair value method of SFAS No. 123, Accounting for
Stock-Based Compensation, in accounting for employee share-based awards. As such, our results of
operations for all periods presented include compensation expense for all outstanding employee
share-based awards. We elected to utilize the transition method
outlined in Financial Accounting Standards Board (FASB) Staff
Position (FSP) No. FAS123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards, in
accounting for the income tax consequences of employee share-based
compensation awards. Upon the adoption of SFAS No. 123(R), we had a
positive income tax windfall pool.
The fair value of stock options is measured on the grant date using the
Black-Scholes option pricing model. The related compensation expense is recognized on the
straight-line basis, net of estimated forfeitures, over the option’s vesting period. The fair value
of restricted stock and a portion of our restricted stock unit awards is measured on the grant date
based on the market value of our common stock. The related compensation expense, net of estimated
forfeitures, is recognized over the applicable service period. Certain of our restricted stock unit
awards may be settled in cash if an
employee voluntarily chooses to leave the company. These awards are included in accrued
liabilities in the consolidated balance sheets and are re-measured at fair value as of each balance
sheet date. Compensation expense for the 15% discount provided under our employee stock purchase
plan is recognized over the six-month purchase period. Prior to August 1, 2006, our plan contained
a “look-back” provision under which the purchase price was calculated at 85% of the lower of the
stock’s market value at the beginning or end of the six-month purchase period. We utilized the
Black-Scholes option pricing model to calculate the fair value of these awards, and the resulting
compensation expense was recognized over the six-month purchase period.
Earnings per share — Basic earnings per share is based on the weighted-average number of
common shares outstanding during the year. Diluted earnings per share is based on the
weighted-average number of common shares outstanding during the year, adjusted to give effect to
potential common shares such as stock options, restricted stock units and unvested restricted stock
issued under our stock incentive plan (see Note 10). When determining the denominator for the
diluted earnings per share calculation under the treasury stock method, we exclude from assumed
proceeds the impact of pro forma deferred tax assets.
60
Comprehensive income — Comprehensive income includes charges and credits to shareholders’
equity that are not the result of transactions with shareholders. Our total comprehensive income
consists of net income, gains and losses on derivative instruments, changes in the funded status
and amortization of amounts related to our pension and postretirement benefit plans, and foreign
currency translation adjustments. In 2006, total comprehensive income also included minimum pension
liability adjustments and unrealized gains and losses on securities. These items are no longer
included in comprehensive income due to the adoption of SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, and SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. The items of comprehensive income, with the exception
of net income, are included in accumulated other comprehensive loss in our consolidated balance
sheets and statements of shareholders’ equity (deficit).
Recently adopted accounting pronouncement — 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 SFAS No. 123(R),
Share-Based Payment. The simplified method can be used after December 31, 2007 only if a company’s
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 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. We are not able to predict the impact this guidance will have on
the accounting for acquisitions we may complete in future periods. For acquisitions completed prior
to January 1, 2009, the new standard requires that changes in deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period must be recognized in
earnings rather than as an adjustment to the cost of the acquisition. We do not expect this new
guidance to have a significant impact on our consolidated financial statements.
In April 2008, the FASB issued 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
company’s 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. As this guidance applies only to assets we
may acquire in the future, we are not able to predict its impact, if any, on our consolidated
financial statements.
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 equivalent
payments 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 do not expect the adoption of this statement to have a
significant impact on reported earnings per share.
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. This standard provides guidance on an employer’s disclosures
about plan assets of a defined benefit pension or other postretirement plan. Any additional
disclosures required under this guidance will be included in our annual report on Form 10-K for the
year ending December 31, 2009.
61
Note 2: Supplementary balance sheet and cash flow information
Trade accounts receivable — Net trade accounts receivable was comprised of the following at
December 31:
| (in thousands) | 2008 | 2007 | ||||||
Trade accounts receivable |
$ | 74,502 | $ | 91,145 | ||||
Allowances for uncollectible accounts |
(5,930 | ) | (6,877 | ) | ||||
Trade
accounts receivable – net |
$ | 68,572 | $ | 84,268 | ||||
Changes in the allowances for uncollectible accounts were as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Balance, beginning of year |
$ | 6,877 | $ | 7,915 | $ | 7,676 | ||||||
Bad debt expense |
7,756 | 8,233 | 8,732 | |||||||||
Write-offs, net of recoveries |
(8,703 | ) | (9,271 | ) | (8,493 | ) | ||||||
Balance, end of year |
$ | 5,930 | $ | 6,877 | $ | 7,915 | ||||||
Inventories and supplies — Inventories and supplies were comprised of the following at
December 31:
| (in thousands) | 2008 | 2007 | ||||||
Raw materials |
$ | 4,047 | $ | 4,510 | ||||
Semi-finished goods |
10,807 | 11,046 | ||||||
Finished goods |
6,608 | 8,271 | ||||||
Total inventories |
21,462 | 23,827 | ||||||
Supplies, primarily production |
4,329 | 6,091 | ||||||
Inventories and supplies |
$ | 25,791 | $ | 29,918 | ||||
Property, plant and equipment — Property, plant and equipment was comprised of the following
at December 31:
| (in thousands) | 2008 | 2007 | ||||||
Land and land improvements |
$ | 35,097 | $ | 35,895 | ||||
Buildings and building improvements |
133,865 | 133,664 | ||||||
Machinery and equipment |
300,029 | 295,197 | ||||||
Total |
468,991 | 464,756 | ||||||
Accumulated depreciation |
(340,886 | ) | (325,896 | ) | ||||
Property,
plant and equipment – net |
$ | 128,105 | $ | 138,860 | ||||
62
Intangibles — Intangibles were comprised of the following at
December 31:
| 2008 | 2007 | |||||||||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||||||||
| carrying | Accumulated | carrying | carrying | Accumulated | carrying | |||||||||||||||||||
| (in thousands) | amount | amortization | amount | amount | amortization | amount | ||||||||||||||||||
Indefinite-lived: |
||||||||||||||||||||||||
Trade names |
$ | 24,000 | $ | — | $ | 24,000 | $ | 59,400 | $ | — | $ | 59,400 | ||||||||||||
Amortizable intangibles: |
||||||||||||||||||||||||
Internal-use software |
315,493 | (260,320 | ) | 55,173 | 278,782 | (243,472 | ) | 35,310 | ||||||||||||||||
Customer
lists/relationships |
125,530 | (96,963 | ) | 28,567 | 110,165 | (85,199 | ) | 24,966 | ||||||||||||||||
Distributor contracts |
30,900 | (22,792 | ) | 8,108 | 30,900 | (19,016 | ) | 11,884 | ||||||||||||||||
Trade names |
54,861 | (19,920 | ) | 34,941 | 29,569 | (16,123 | ) | 13,446 | ||||||||||||||||
Other |
8,505 | (5,213 | ) | 3,292 | 7,667 | (4,410 | ) | 3,257 | ||||||||||||||||
Amortizable intangibles |
535,289 | (405,208 | ) | 130,081 | 457,083 | (368,220 | ) | 88,863 | ||||||||||||||||
Intangibles |
$ | 559,289 | $ | (405,208 | ) | $ | 154,081 | $ | 516,483 | $ | (368,220 | ) | $ | 148,263 | ||||||||||
Total amortization of intangibles was $42.1 million in 2008, $45.8 million in 2007 and $59.2
million in 2006. Of these amounts, amortization of internal-use software was $17.5 million in 2008,
$16.6 million in 2007 and $25.2 million in 2006. Based on the intangibles in service as of December
31, 2008, estimated amortization expense for each of the next five years ending December 31 is as
follows:
| (in thousands) | ||||
2009 |
$ | 40,210 | ||
2010 |
26,125 | |||
2011 |
17,217 | |||
2012 |
7,354 | |||
2013 |
4,804 | |||
We acquire internal-use software in the normal course of business. In conjunction with
acquisitions (see Note 4), we also acquired certain other amortizable intangible assets. The
following intangible assets were acquired during the years indicated:
| 2008 | 2007 | 2006 | ||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||
| average | average | average | ||||||||||||||||
| amortization | amortization | amortization | ||||||||||||||||
| (in thousands) | Amount | period | Amount | period | Amount | period | ||||||||||||
Internal-use software |
$ | 39,418 | 3 years | $ | 17,394 | 4 years | $ | 18,984 | 3 years | |||||||||
Customer lists/
relationships |
19,292 | 11 years | — | — | 4,200 | 5 years | ||||||||||||
Trade names |
1,016 | 9 years | — | — | 1,400 | 5 years | ||||||||||||
Other |
900 | 3 years | — | — | — | — | ||||||||||||
Acquired intangibles |
$ | 60,626 | 6 years | $ | 17,394 | 4 years | $ | 24,584 | 4 years | |||||||||
63
Goodwill – As of December 31, 2008, goodwill was comprised of the following:
| (in thousands) | ||||
Acquisition of New England Business Service, Inc. (NEBS) in June 2004 |
$ | 492,082 | ||
Acquisition of Designer Checks, Inc. in February 2000(1) |
77,970 | |||
Acquisition of Hostopia.com Inc. in August 2008 (see Note 4) |
68,555 | |||
Acquisition of the Johnson Group in October 2006 (see Note 4)(1) |
7,320 | |||
Acquisition of Direct Checks in December 1987 |
4,267 | |||
Acquisition of Logo Design Mojo, Inc. in April 2008 (see Note 4)(1) |
1,336 | |||
Acquisition of Dots and Pixels, Inc. in July 2005 |
856 | |||
Acquisition of All Trade Computer Forms, Inc. in February 2007 (see Note 4) |
658 | |||
Goodwill |
$ | 653,044 | ||
| (1) | This goodwill is deductible for income tax purposes. |
Changes in goodwill were as follows:
| Small | ||||||||||||
| Business | Direct | |||||||||||
| (in thousands) | Services | Checks | Total | |||||||||
Balance, December 31, 2006 |
$ | 507,935 | $ | 82,237 | $ | 590,172 | ||||||
Sale of industrial packaging product line (see Note 4) |
(5,864 | ) | — | (5,864 | ) | |||||||
Adjustment to NEBS acquisition income tax receivable and
deferred income taxes |
(915 | ) | — | (915 | ) | |||||||
Acquisition of All Trade Computer Forms, Inc. (see Note 4) |
711 | — | 711 | |||||||||
Adoption of FIN No. 48 (see Note 9) |
576 | — | 576 | |||||||||
Currency translation adjustment |
243 | — | 243 | |||||||||
Balance, December 31, 2007 |
502,686 | 82,237 | 584,923 | |||||||||
Acquisition of Hostopia.com Inc. (see Note 4) |
68,555 | — | 68,555 | |||||||||
Acquisition of Logo Design Mojo, Inc. (see Note 4) |
1,359 | — | 1,359 | |||||||||
Adjustment to NEBS acquisition uncertain tax positions |
(1,436 | ) | — | (1,436 | ) | |||||||
Currency translation adjustment |
(357 | ) | — | (357 | ) | |||||||
Balance, December 31, 2008 |
$ | 570,807 | $ | 82,237 | $ | 653,044 | ||||||
Fair value measurements - On January 1, 2007, we adopted SFAS No. 157, Fair Value
Measurements. This standard addresses how companies should measure fair value when they are
required to use a fair value measure for recognition or disclosure purposes under generally
accepted accounting principles (GAAP) in the United States. In February 2008, the FASB issued FSP
No. FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis. Because we adopted
SFAS No. 157 on January 1, 2007, the delay outlined in FSP No. FAS 157-2 does not apply to us.
On a recurring basis, we measure at fair value a long-term investment in a domestic mutual
fund using quoted prices in active markets for identical assets. This is considered a Level 1 fair
value measurement under SFAS No. 157. This investment had a fair value of $1.9 million as of
December 31, 2008 and $3.0 million as of December 31, 2007. Further information regarding this
investment is provided in our long-term investments policy in Note 1.
64
As of July 31 of each year we complete the annual impairment analysis of indefinite-lived
intangibles and goodwill. We completed an additional analysis as of December 31, 2008, based on the
continuing impact of the economic downturn on our expected operating results. Information regarding
the methodology used to determine the fair value of these assets is provided in the impairment of
non-amortizable intangibles and goodwill policy in Note 1. Also during 2008, we measured the net
assets of discontinued operations at fair value (see Note 5). Information regarding these
nonrecurring fair value measurements completed as of December 31, 2008 and July 31, 2007 was as
follows:
| Fair value measurements using | ||||||||||||||||
| Fair value | Quoted prices in | Significant | ||||||||||||||
| as of | active markets | Significant other | unobservable | |||||||||||||
| measurement | for identical | observable | inputs | |||||||||||||
| (in thousands) | date | assets (Level 1) | inputs (Level 2) | (Level 3) | ||||||||||||
2008: |
||||||||||||||||
Indefinite-lived trade
name |
$ | 24,296 | $ | — | $ | — | $ | 24,296 | ||||||||
Amortizable NEBS®
trade name (see Note
7) |
25,845 | — | — | 25,845 | ||||||||||||
Goodwill(1) |
1,306,718 | — | — | 1,306,718 | ||||||||||||
Discontinued operations |
678 | — | 678 | — | ||||||||||||
2007: |
||||||||||||||||
Indefinite-lived trade
names |
74,503 | — | — | 74,503 | ||||||||||||
Goodwill(1) |
2,494,281 | — | — | 2,494,281 | ||||||||||||
| (1) | Fair value represents the fair value of reporting units to which goodwill is assigned. Because the fair value of each of our reporting units was greater than its carrying value, the implied fair value of goodwill was not required to be calculated. |
During 2008, we recorded impairment charges related to our indefinite-lived trade names. See
Note 7 for further discussion of these impairment charges. Also, see Note 18 for discussion of
market risks related to goodwill and our indefinite-lived trade name.
Other non-current assets - Other non-current assets as of December 31 were comprised of the
following:
| (in thousands) | 2008 | 2007 | ||||||
Contract acquisition costs (net of
accumulated amortization of $99,502
and $82,976, respectively) |
$ | 37,706 | $ | 55,516 | ||||
Deferred advertising costs |
20,189 | 24,148 | ||||||
Other |
21,980 | 28,246 | ||||||
Other non-current assets |
$ | 79,875 | $ | 107,910 | ||||
See Note 18 for a discussion of market risks related to contract acquisition costs. Changes in contract acquisition costs were as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Balance, beginning of year |
$ | 55,516 | $ | 71,721 | $ | 93,664 | ||||||
Additions(1) |
8,808 | 11,984 | 14,633 | |||||||||
Amortization |
(26,618 | ) | (28,189 | ) | (36,576 | ) | ||||||
Balance, end of year |
$ | 37,706 | $ | 55,516 | $ | 71,721 | ||||||
| (1) | Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $9,008 in 2008, $14,230 in 2007 and $17,029 in 2006. |
65
Accrued liabilities - Accrued liabilities as of December 31 were comprised of the following:
| (in thousands) | 2008 | 2007 | ||||||
Customer rebates |
$ | 29,113 | $ | 20,397 | ||||
Cash held for customers |
26,078 | 23,285 | ||||||
Restructuring (see Note 6) |
20,379 | 5,050 | ||||||
Employee profit sharing and pension |
15,061 | 39,995 | ||||||
Wages, including vacation |
12,176 | 16,960 | ||||||
Interest |
5,394 | 5,414 | ||||||
Other |
34,398 | 38,874 | ||||||
Accrued liabilities |
$ | 142,599 | $ | 149,975 | ||||
Supplemental cash flow disclosures - Cash payments for interest and income taxes were as
follows for the years ended December 31:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Interest paid |
$ | 50,441 | $ | 57,077 | $ | 57,035 | ||||||
Income taxes paid |
59,997 | 89,944 | 74,891 | |||||||||
As of December 31, 2008, we had accounts payable of $2.0 million related to capital asset
purchases. These amounts were reflected in property, plant and equipment and intangibles in our
consolidated balance sheet as of December 31, 2008, 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. As of December 31, 2007, we
had accounts payable of $3.9 million related to capital asset purchases.
Marketable securities purchased and sold during 2007 consisted primarily of investments in
tax-exempt mutual funds. The 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 the
short-term duration of the underlying investments. No realized or unrealized gains or losses on
marketable securities were generated during 2007. Purchases of and proceeds from sales of available
for sale marketable securities were $1,057.5 million for 2007. We did not hold marketable
securities during 2008 or 2006.
During 2008, we completed the sale of our Flagstaff, Arizona facility, which was closed in
August 2008. Proceeds from the sale were $4.2 million, resulting in a pre-tax gain of $1.4 million.
During 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 (see Note 4).
During 2006, we completed the sale of three Financial Services facilities which were closed in 2004
and one Small Business Services facility which was closed prior to our acquisition of NEBS in June
2004. Proceeds from these sales were $9.2 million in total, resulting in a net pre-tax gain of $4.6
million.
For 2007, other investing activities reported on the consolidated statement of cash flows was
primarily comprised of cash proceeds of $1.6 million from a mortgage note receivable, benefits of
$1.2 million received under life insurance policies and cash proceeds of $1.1 million received from
the sale of miscellaneous fixed assets.
66
Note 3: 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.
| (in thousands, except per share amounts) | 2008 | 2007 | 2006 | |||||||||
Earnings per share — basic: |
||||||||||||
Income from continuing operations |
$ | 105,872 | $ | 145,117 | $ | 100,838 | ||||||
Weighted-average shares outstanding |
50,905 | 51,436 | 51,001 | |||||||||
Earnings per share — basic |
$ | 2.08 | $ | 2.82 | $ | 1.98 | ||||||
Earnings per share — diluted: |
||||||||||||
Income from continuing operations |
$ | 105,872 | $ | 145,117 | $ | 100,838 | ||||||
Re-measurement of share-based awards
classified as liabilities |
(367 | ) | (10 | ) | (584 | ) | ||||||
Income available to common shareholders |
$ | 105,505 | $ | 145,107 | $ | 100,254 | ||||||
Weighted-average shares outstanding |
50,905 | 51,436 | 51,001 | |||||||||
Dilutive impact of options, restricted
stock units, unvested restricted stock
and employee stock purchase plan |
445 | 496 | 229 | |||||||||
Weighted-average shares and potential
dilutive shares outstanding |
51,350 | 51,932 | 51,230 | |||||||||
Earnings per share — diluted |
$ | 2.05 | $ | 2.79 | $ | 1.96 | ||||||
Weighted-average antidilutive options
excluded from calculation |
3,505 | 2,124 | 3,028 | |||||||||
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 4: Acquisitions and disposition
2008 acquisitions — 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 for $99.4 million, net of cash
acquired. The transaction closed on August 6, 2008, and we utilized availability under our existing
lines of credit to fund the acquisition. Hostopia is a provider of web services that enable small
businesses to establish and maintain an internet presence. It also provides email marketing,
fax-to-email, mobility synchronization and other services and is included in our Small Business
Services segment. Hostopia’s 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 $68.6 million. We
believe this acquisition resulted in the recognition of goodwill as Hostopia provides a unified,
scaleable services delivery technology platform which we expect to utilize as we strive to obtain a
greater portion of our revenue from annuity-based business services. We plan to use Hostopia’s
technology architecture as the primary delivery platform for these business services offerings.
67
The following illustrates our allocation of the Hostopia purchase price to the assets acquired
and liabilities assumed:
| (in thousands) | ||||
Cash and cash equivalents |
$ | 23,747 | ||
Other current assets |
5,011 | |||
Intangibles |
35,000 | |||
Goodwill |
68,555 | |||
Other non-current assets |
4,104 | |||
Current liabilities |
(3,583 | ) | ||
Non-current liabilities |
(9,737 | ) | ||
Total purchase price |
123,097 | |||
Less: cash acquired |
(23,747 | ) | ||
Purchase price, net of cash acquired |
$ | 99,350 | ||
Acquired intangible assets included internal-use software valued at $17.9 million with useful
lives ranging from 3 to 5 years, customer lists/relationships valued at $16.2 million with a useful
life of 12 years and a trade name valued at $0.9 million with a useful life of 10 years. The
software and trade name assets are being amortized using the straight-line method, while the
customer lists/relationships are being amortized using an accelerated method.
We also acquired the assets of PartnerUp, Inc. (PartnerUp), Logo Design Mojo, Inc. (Logo Mojo)
and Yoffi Digital Press (Yoffi) during 2008 for an aggregate cash amount of $5.5 million. The
PartnerUp transaction includes contingent compensation payments through 2012 based on PartnerUp’s
revenue and operating margin, provided the sellers remain employed by the company. PartnerUp is an
online community that is designed to connect small businesses and entrepreneurs with resources and
contacts to build their businesses. Logo Mojo is a Canadian-based online logo design firm and Yoffi
is a commercial digital printer specializing in custom marketing material. The results of all three
businesses are included in Small Business Services from their acquisition dates. The allocation of
the purchase price based upon the fair values of the assets acquired and liabilities assumed
resulted in tax deductible goodwill of $1.4 million related to the Logo Mojo acquisition. We
believe this acquisition resulted in goodwill primarily due to Logo Mojo’s web-based workflow which
we are incorporating into our processes and which we expect will increase our product offerings for
small businesses. The assets acquired consisted primarily of internal-use software which is being
amortized on the straight-line basis over 3 years.
As our 2008 acquisitions are immaterial to our operating results both individually and in the
aggregate, pro forma results of operations are not provided.
2007 acquisition — 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. The acquisition was
funded using availability on our existing credit facilities. 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 expected to help us expand our core printing capabilities and product offerings for small
businesses.
2007 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 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.
2006 acquisition - On October 25, 2006, we acquired the assets of the Johnson Group and its
affiliated companies for $16.5 million, net of cash acquired. The Johnson Group provides prepress,
printing, mailing and fulfillment, and finishing services and is included in our Small Business
Services segment. The acquisition was funded using availability on our existing credit facilities.
The Johnson Group’s operating results are included in our consolidated results of operations from
68
the
acquisition date. The allocation of the purchase price to the assets acquired and liabilities
assumed resulted in goodwill of $7.3 million, which is deductible for tax purposes. We believe this
acquisition resulted in the recognition of goodwill primarily because of the opportunities it
provided to expand our business in the custom, full color, digital and web-to-print space with our
small business customers. Amortizable customer lists of $4.2 million are being amortized over five
years using accelerated methods and amortizable trade names of $1.4 million are being amortized
over five years on the straight-line basis. Other assets acquired consisted primarily of trade
accounts receivable and property, plant and equipment.
Note 5: Discontinued operations
Discontinued operations in 2008 and 2007 consisted of our Russell & Miller (R&MSM)
retail packaging and signage business. We evaluate our businesses and product lines periodically
for strategic fit within our operations. In December 2008, we determined that this non-strategic
business met the criteria to be classified as discontinued operations in our consolidated financial
statements. Based on the estimated fair value of this business, we reduced the carrying value of
its long-lived assets and inventories and recorded a pre-tax charge of $3.4 million, which was
included in net loss from discontinued operations in our 2008 consolidated statement of income. On
January 31, 2009, we completed the sale of this business for cash proceeds of $0.3 million plus a
note receivable. Our estimate of fair value is considered a Level 2 fair value measurement under
SFAS No. 157, Fair Value Measurements, as it was based upon the estimated realizable proceeds from
the sale less selling costs. Assets of discontinued operations are included in our Small Business
Services segment and consisted of the following at December 31:
| (in thousands) | 2008 | 2007 | ||||||
Trade accounts receivable |
$ | 852 | $ | 1,419 | ||||
Inventories and supplies |
36 | 2,361 | ||||||
Other current assets |
120 | 155 | ||||||
Property, plant, equipment and intangibles |
— | 608 | ||||||
Goodwill |
— | 371 | ||||||
Other non-current assets |
— | 1,862 | ||||||
Accounts payable and accrued liabilities |
(330 | ) | (836 | ) | ||||
Net assets of discontinued operations |
$ | 678 | $ | 5,940 | ||||
In addition to the R&M business, discontinued operations in 2006 also included the rental
income and expenses associated with a building located in the United Kingdom related to NEBS
European businesses which were sold in December 2004. The building was sold in the second quarter
of 2006 for $3.0 million, resulting in a pre-tax gain of $0.5 million.
Revenue and income from discontinued operations were as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Revenue |
$ | 14,378 | $ | 17,482 | $ | 20,368 | ||||||
Loss from operations |
$ | (3,031 | ) | $ | (2,360 | ) | $ | (226 | ) | |||
(Loss) gain on disposal |
(3,416 | ) | — | 543 | ||||||||
Income tax benefit (expense) |
2,209 | 758 | (201 | ) | ||||||||
Net (loss) income from
discontinued operations |
$ | (4,238 | ) | $ | (1,602 | ) | $ | 116 | ||||
69
Note 6: Restructuring charges
2008 restructuring charges - During 2008, we recorded net restructuring charges of $28.3
million. Of this amount, $24.0 million related to accruals for employee severance, while the
remainder included other expenses related to our restructuring
activities, including the write-off of spare parts, the acceleration of employee share-based
compensation expense, equipment moves, training and travel. Our restructuring accruals for
severance benefits related to the closing of six manufacturing facilities and two customer call
centers, as well as employee reductions within our business unit support and corporate shared
services functions, including sales, marketing and fulfillment. These actions were the result of
the continuous review of our cost structure in response to the impact a weakened U.S. economy
continues to have on our business, as well as our previously announced cost reduction initiatives.
The restructuring accruals included severance benefits for 1,399 employees. One of the customer
call centers was closed during the third quarter of 2008 and one manufacturing facility was closed
in December 2008. Three of the manufacturing facilities and the remaining call center are expected
to close in the first half of 2009, while the remaining two manufacturing facilities are expected
to close in the second half of 2009.
The majority of the employee reductions are expected to be completed by the end of 2009. As
such, we expect most of the related severance payments to be fully paid by the first half of 2010,
utilizing cash from operations. The net restructuring charges included the reversal of $2.4 million
of previously recorded restructuring accruals as fewer employees received severance benefits than
originally estimated. The severance charges, net of reversals, were reflected as restructuring
charges within cost of goods sold of $11.4 million and restructuring charges within operating
expenses of $12.6 million in the 2008 consolidated statement of income.
The other costs related to
our restructuring activities were expensed as incurred. We recorded a
$3.0 million write-off during 2008 of the carrying value of spare parts used on
our offset printing presses. During a third quarter review of our cost structure, we made the
decision to expand our use of digital printing technology. As such, a portion of the spare parts
kept on hand for use on our offset printing presses was written down to zero, as these parts have
no future use or market value. The spare parts were included in other non-current assets in our
consolidated balance sheet and the write-down was included in restructuring charges within cost of
goods sold in our 2008 consolidated statement of income. The other restructuring costs were
reflected as restructuring charges within cost of goods sold of $0.5 million and restructuring
charges within operating expenses of $0.8 million in the 2008 consolidated statement of income.
2007 restructuring charges - During 2007, we recorded net restructuring charges of $4.3
million related to accruals for employee severance benefits for employee reductions across various
functional areas resulting from our cost reduction initiatives. The restructuring accruals included
severance benefits for 217 employees. These employee reductions were substantially completed during
2008, with severance payments expected to be fully paid by mid-2009, utilizing cash from
operations. The net restructuring charges included the reversal of $2.6 million of previously
recorded restructuring accruals due to fewer employees receiving severance benefits than originally
estimated, as well as the re-negotiation of operating lease obligations. The restructuring charges,
net of reversals, were reflected as a $0.4 million reduction of restructuring charges within cost
of goods sold and an increase of $4.7 million in restructuring charges within operating expenses in
the 2007 consolidated statement of income. In addition, we recorded accruals for employee severance
benefits of $0.2 million which reduced the gain recognized on the sale of our industrial packaging
product line (see Note 4) in the 2007 consolidated statement of income.
2006 restructuring charges — During 2006, we recorded net restructuring charges of $12.4
million. Of this amount, $10.9 million related to accruals for employee severance, while the
remainder included other expenses related to our restructuring activities, including equipment
moves, training and travel. Our restructuring accruals for severance benefits related to employee
reductions within our shared services functions of sales, marketing, customer care, fulfillment,
information technology, human resources and finance, 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 and the other employee reductions were substantially completed in the fourth
quarter of 2007. These actions were the result of our cost reduction initiatives. The restructuring
accruals included severance payments for 551 employees, the majority of which were paid in 2007
utilizing cash from operations. The net restructuring charges included the reversal of $0.2 million
of previously recorded restructuring accruals. The severance charges, net of reversals, were
reflected as restructuring charges within cost of goods sold of $1.1 million and restructuring
charges within operating expenses of $9.8 million in the 2006 consolidated statement of income. The
other restructuring costs were reflected as restructuring charges within cost of goods sold of $0.8
million and restructuring charges within operating expenses of $0.7 million in the 2006
consolidated statement of income.
70
Acquisition-related restructuring — In conjunction with the NEBS acquisition in June 2004, we
recorded restructuring accruals of $30.2 million related to NEBS activities which we decided to
exit. The restructuring accruals included severance benefits and $2.8 million due under
noncancelable operating leases on facilities which were vacated as we consolidated
operations. The
severance accruals included payments due to 701 employees. All severance benefits were fully paid
by the end of
2007 and the remaining payments due under the operating lease obligations will be paid through
early 2009, utilizing cash from operations.
Restructuring accruals of $20.4 million as of December 31, 2008 and $5.1 million as of
December 31, 2007 are reflected in accrued liabilities in our
consolidated balance sheets. As of
December 31, 2008, 975 employees had not yet started to receive severance benefits. By company
initiative, our restructuring accruals were as follows:
| NEBS | ||||||||||||||||||||||||
| 2004 | acquisition | 2006 | 2007 | 2008 | ||||||||||||||||||||
| (in thousands) | initiatives | related | initiatives | initiatives | initiatives | Total | ||||||||||||||||||
Balance, December 31, 2005 |
$ | 10 | $ | 6,533 | $ | — | $ | — | $ | — | $ | 6,543 | ||||||||||||
Restructuring charges |
— | 438 | 10,701 | — | — | 11,139 | ||||||||||||||||||
Restructuring reversals |
— | — | (229 | ) | — | — | (229 | ) | ||||||||||||||||
Payments, primarily severance |
(10 | ) | (5,146 | ) | (1,086 | ) | — | — | (6,242 | ) | ||||||||||||||
Balance, December 31, 2006 |
— | 1,825 | 9,386 | — | — | 11,211 | ||||||||||||||||||
Restructuring charges |
— | — | 158 | 6,928 | — | 7,086 | ||||||||||||||||||
Restructuring reversals |
— | (656 | ) | (1,415 | ) | (562 | ) | — | (2,633 | ) | ||||||||||||||
Payments, primarily severance |
— | (1,133 | ) | (7,804 | ) | (1,677 | ) | — | (10,614 | ) | ||||||||||||||
Balance, December 31, 2007 |
— | 36 | 325 | 4,689 | — | 5,050 | ||||||||||||||||||
Restructuring charges |
— | — | 5 | 253 | 26,134 | 26,392 | ||||||||||||||||||
Restructuring reversals |
— | (1 | ) | (27 | ) | (843 | ) | (1,531 | ) | (2,402 | ) | |||||||||||||
Payments, primarily severance |
— | (16 | ) | (108 | ) | (3,764 | ) | (4,773 | ) | (8,661 | ) | |||||||||||||
Balance, December 31, 2008 |
$ | — | $ | 19 | $ | 195 | $ | 335 | $ | 19,830 | $ | 20,379 | ||||||||||||
Cumulative amounts: |
||||||||||||||||||||||||
Restructuring charges |
$ | 5,850 | $ | 30,243 | $ | 10,864 | $ | 7,181 | $ | 26,134 | $ | 80,272 | ||||||||||||
Restructuring reversals |
(531 | ) | (840 | ) | (1,671 | ) | (1,405 | ) | (1,531 | ) | (5,978 | ) | ||||||||||||
Payments, primarily severance |
(5,319 | ) | (29,384 | ) | (8,998 | ) | (5,441 | ) | (4,773 | ) | (53,915 | ) | ||||||||||||
Balance, December 31, 2008 |
$ | — | $ | 19 | $ | 195 | $ | 335 | $ | 19,830 | $ | 20,379 | ||||||||||||
71
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(1) | Services | Total | ||||||||||||||||||
Balance, December 31, 2005 |
$ | 3,835 | $ | — | $ | 10 | $ | — | $ | 2,698 | $ | 6,543 | ||||||||||||
Restructuring charges |
2,754 | 3,261 | 128 | 4,949 | 47 | 11,139 | ||||||||||||||||||
Restructuring reversals |
(4 | ) | (165 | ) | — | (60 | ) | — | (229 | ) | ||||||||||||||
Payments |
(4,281 | ) | (393 | ) | (10 | ) | (408 | ) | (1,150 | ) | (6,242 | ) | ||||||||||||
Balance, December 31, 2006 |
2,304 | 2,703 | 128 | 4,481 | 1,595 | 11,211 | ||||||||||||||||||
Restructuring charges |
2,625 | 1,049 | — | 3,412 | — | 7,086 | ||||||||||||||||||
Restructuring reversals |
(233 | ) | (471 | ) | (142 | ) | (1,236 | ) | (551 | ) | (2,633 | ) | ||||||||||||
Inter-segment transfer |
633 | 378 | 32 | (1,043 | ) | — | — | |||||||||||||||||
Payments |
(3,328 | ) | (2,706 | ) | (18 | ) | (3,554 | ) | (1,008 | ) | (10,614 | ) | ||||||||||||
Balance, December 31, 2007 |
2,001 | 953 | — | 2,060 | 36 | 5,050 | ||||||||||||||||||
Restructuring charges |
7,076 | 3,579 | 341 | 15,187 | 209 | 26,392 | ||||||||||||||||||
Restructuring reversals |
(637 | ) | (405 | ) | (2 | ) | (1,357 | ) | (1 | ) | (2,402 | ) | ||||||||||||
Inter-segment transfer |
378 | 739 | 61 | (1,178 | ) | — | — | |||||||||||||||||
Payments |
(4,844 | ) | (1,249 | ) | (249 | ) | (2,303 | ) | (16 | ) | (8,661 | ) | ||||||||||||
Balance, December 31, 2008 |
$ | 3,974 | $ | 3,617 | $ | 151 | $ | 12,409 | $ | 228 | $ | 20,379 | ||||||||||||
Cumulative amounts: |
||||||||||||||||||||||||
Restructuring charges |
$ | 39,448 | $ | 10,285 | $ | 3,051 | $ | 24,361 | $ | 3,127 | $ | 80,272 | ||||||||||||
Restructuring reversals |
(1,057 | ) | (1,465 | ) | (242 | ) | (2,662 | ) | (552 | ) | (5,978 | ) | ||||||||||||
Inter-segment transfer |
1,011 | 1,117 | 93 | (2,221 | ) | — | — | |||||||||||||||||
Payments |
(35,428 | ) | (6,320 | ) | (2,751 | ) | (7,069 | ) | (2,347 | ) | (53,915 | ) | ||||||||||||
Balance, December 31, 2008 |
$ | 3,974 | $ | 3,617 | $ | 151 | $ | 12,409 | $ | 228 | $ | 20,379 | ||||||||||||
| (1) | As discussed in Note 17: Business segment information, corporate costs are allocated to our business segments. As such, the net Corporate restructuring charges are reflected in the business segment operating income presented in Note 17 in accordance with our allocation methodology. |
Note 7: Asset impairment charges
We completed the annual impairment analysis of goodwill and indefinite-lived assets during the
third quarter of 2008. As a result of this analysis, we recorded non-cash asset impairment charges
of $9.3 million related to the two indefinite-lived trade names in our Small Business Services
segment due to the impact of the economic downturn on our expected operating results and the
broader effects of recent U.S. market conditions on the fair value of the assets. We completed an
additional impairment analysis as of December 31, 2008, based on the continuing impact of the
economic downturn on our expected operating results. As a result, we recorded an additional asset
impairment charge of $0.3 million related to the NEBS® trade name during the fourth quarter of
2008, bringing the carrying value of this asset to $25.8 million as of December 31, 2008. The
impairment analysis completed as of December 31, 2008, indicated no additional impairment of our
other indefinite-lived trade name, the Safeguard® trade name, which had a carrying value of $24.0
million as of December 31, 2008. Because of the further deterioration in our expected operating
results, we determined that the NEBS trade name no longer has an indefinite life, and thus, will be
amortized over its estimated economic life of 20 years on the straight-line basis beginning in
2009. In addition to the impairment of indefinite-lived trade names, we also recorded an impairment charge of $0.4 million during the third quarter of 2008
related to an amortizable trade name. This impairment resulted from a change in our branding strategy. See
Note 2 for further information regarding the fair value measurements completed during 2008, as well
as Note 18 for a related discussion of market risks.
72
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: Derivative financial instruments
During 2004, we entered into $225.0 million of forward starting interest rate swaps to hedge,
or lock-in, the interest rate on a portion of the debt we issued in October 2004 (see Note 13). The
termination of the lock agreements in 2004 yielded a deferred pre-tax loss of $17.9 million. During
2002, we entered into two forward rate lock agreements to effectively hedge the annual interest
rate on $150.0 million of the $300.0 million notes issued in December 2002 (see Note 13). The
termination of the lock agreements in December 2002 yielded a deferred pre-tax loss of $4.0
million. These losses are reflected, net of tax, in accumulated other comprehensive loss in our
consolidated balance sheets and are being reclassified ratably to our statements of income as
increases to interest expense over the term of the related debt.
Note 9: Income tax provision
The components of the income tax provision for continuing operations were as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Current tax provision: |
||||||||||||
Federal |
$ | 47,714 | $ | 60,454 | $ | 74,357 | ||||||
State |
7,380 | 9,164 | 4,968 | |||||||||
Total |
55,094 | 69,618 | 79,325 | |||||||||
Deferred tax (benefit) provision |
(790 | ) | 5,280 | (37,375 | ) | |||||||
Provision for income taxes |
$ | 54,304 | $ | 74,898 | $ | 41,950 | ||||||
73
The effective tax rate on pre-tax income from continuing operations differed from the U.S.
federal statutory tax rate of 35% as follows:
| 2008 | 2007 | 2006 | ||||||||||
Income tax at federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income tax expense, net of federal income tax
benefit |
2.7 | % | 2.7 | % | 0.4 | % | ||||||
Change in unrecognized tax benefits, including
interest and penalties |
1.1 | % | 0.2 | % | — | |||||||
Change in tax contingencies(1) |
— | — | 0.7 | % | ||||||||
Deferred income tax adjustment(2) |
— | — | (3.5 | %) | ||||||||
Qualified production activity deduction |
(1.7 | %) | (1.8 | %) | (1.6 | %) | ||||||
Receivables for prior year tax returns(3) |
(1.5 | %) | (1.4 | %) | — | |||||||
Other |
(1.7 | %) | (0.7 | %) | (1.6 | %) | ||||||
Income tax provision |
33.9 | % | 34.0 | % | 29.4 | % | ||||||
| (1) | During 2006, accruals related to unresolved tax contingencies more than offset net accrual reversals of $1.5 million related to settled issues, primarily resulting from the expiration of the statute of limitations in various state income tax jurisdictions. | |
| (2) | During 2006, we reduced our provision for income taxes $5.0 million for the true-up of certain deferred income tax balances. As this item was not material to our current or prior periods, we recorded a one-time, discrete benefit to our provision for income taxes for the year ended December 31, 2006. | |
| (3) | Relates to amendments to prior year income tax returns claiming refunds primarily associated with the funding of medical costs through our voluntary employee beneficiary association (VEBA) trust, as well as state income tax credits and related interest. |
On January 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes. This 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 total amount of unrecognized tax benefits
as of January 1, 2007 was $16.2 million, excluding accrued interest and penalties. As of January 1,
2007, $4.7 million of interest and penalties was accrued, excluding the tax benefits of deductible
interest. 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. Prior to the
adoption of FIN No. 48, we established reserves for income tax contingencies when, despite our
belief that the tax return positions were fully supportable, certain positions were likely to be
challenged. We adjusted these reserves in light of changing facts and circumstances, such as the
closing of a tax audit. Our effective tax rate for 2006 included the impact of reserve provisions
and changes to reserves, as well as related interest and penalties. Our reserve for contingent tax
liabilities totaled $8.9 million as of December 31, 2006.
74
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding
accrued interest and penalties, is as follows:
| (in thousands) | ||||
Balance, January 1, 2007 |
$ | 16,202 | ||
Additions for tax positions of current year |
898 | |||
Additions for tax positions of prior years |
979 | |||
Reductions for tax positions of prior years |
(1,159 | ) | ||
Settlements |
(2,131 | ) | ||
Lapse of statutes of limitations |
(394 | ) | ||
Balance, December 31, 2007 |
14,395 | |||
Additions for tax positions of current year |
975 | |||
Additions for tax positions of prior years |
3,136 | |||
Reductions for tax positions of prior years |
(2,845 | ) | ||
Settlements |
(2,291 | ) | ||
Lapse of statutes of limitations |
(1,913 | ) | ||
Balance, December 31, 2008 |
$ | 11,457 | ||
If the unrecognized tax benefits as of December 31, 2008 were recognized in our consolidated
financial statements, $6.9 million would affect our effective tax rate. Accruals for interest and
penalties, excluding the tax benefits of deductible interest, were $4.0 million as of December 31,
2008 and $4.8 million as of December 31, 2007. Our income tax provision included expense for
interest and penalties of $0.2 million in 2008 and $0.9 million in 2007.
The statute of limitations for federal tax assessments for 2004 and prior years has closed,
with the exception of 2000. Our federal income tax returns for 2005 through 2008 remain subject to
Internal Revenue Service examination. In general, income tax returns for the years 2004 through
2008 remain subject to examination by major state and city jurisdictions. In the event that we have
determined not to file income tax returns with a particular state or city, all years remain subject
to examination by the tax jurisdiction.
Within the next 12 months, it is reasonably possible that our unrecognized tax benefits will
change in the range of a decrease of $5.8 million to an increase of $0.6 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.
The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable
settlement of any particular issue would require the use of cash and could result in increased
income tax expense. Favorable resolution would result in reduced income tax expense.
75
Tax-effected temporary differences which gave rise to deferred tax assets and liabilities at
December 31 were as follows:
| 2008 | 2007 | |||||||||||||||
| Deferred | Deferred | |||||||||||||||
| Deferred | tax | Deferred | tax | |||||||||||||
| (in thousands) | tax assets | liabilities | tax assets | liabilities | ||||||||||||
Goodwill |
$ | — | $ | 26,627 | $ | — | $ | 21,793 | ||||||||
Intangible assets |
— | 26,657 | — | 24,326 | ||||||||||||
Deferred advertising costs |
— | 7,664 | — | 9,800 | ||||||||||||
Property, plant and equipment |
— | 781 | 2,840 | — | ||||||||||||
Employee benefit plans |
44,164 | — | 33,106 | — | ||||||||||||
Reserves and accruals |
13,393 | — | 10,959 | — | ||||||||||||
Interest rate lock agreements (see Note 8) |
4,535 | — | 5,279 | — | ||||||||||||
Federal benefit of state uncertain tax
positions |
4,080 | — | 4,982 | — | ||||||||||||
Inventories |
3,168 | — | 2,137 | — | ||||||||||||
All other |
4,445 | 2,953 | 4,995 | 3,040 | ||||||||||||
Total deferred taxes |
73,785 | 64,682 | 64,298 | 58,959 | ||||||||||||
Valuation allowance |
(769 | ) | — | (632 | ) | — | ||||||||||
Net deferred taxes |
$ | 73,016 | $ | 64,682 | $ | 63,666 | $ | 58,959 | ||||||||
Deferred U.S. and state income taxes have not been recognized on unremitted earnings of our
foreign subsidiaries, as these amounts are intended to be reinvested indefinitely in the operations
of those subsidiaries.
The valuation allowances primarily relate to Canadian operating loss carryforwards which we do
not expect to fully realize. As of December 31, 2008, we had Canadian operating loss carryforwards
of $3.4 million which expire at various dates between 2010 and 2015. We also had state net
operating loss carryforwards of $2.2 million which expire at various dates up to 2029.
Note 10: Share-based compensation plans
Our employee share-based compensation plans consist of our employee stock purchase plan and
our stock incentive plan. Effective April 30, 2008, our shareholders approved a new stock incentive
plan, simultaneously terminating our previous plan. Under the new plan, 4.0 million shares of
common stock were reserved for issuance, with 3.7 million shares remaining available for issuance
as of December 31, 2008. Under the plan, full value awards such as restricted stock, restricted
stock units and share-based performance awards reduce the number of shares available for issuance
by a factor of 2.29, or if such an award were forfeited or terminated without delivery of the
shares, the number of shares that again become eligible for issuance would be multiplied by a
factor of 2.29. We currently have non-qualified stock options, restricted stock units and
restricted share awards outstanding under our current and previous plans. See the employee
share-based compensation policy in Note 1 for our policies regarding the recognition of
compensation expense for employee share-based awards.
The following amounts were recognized in our consolidated statements of income for share-based
compensation awards:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Stock options |
$ | 4,296 | $ | 2,766 | $ | 2,025 | ||||||
Restricted shares and restricted stock units |
4,987 | 10,425 | 3,379 | |||||||||
Employee stock purchase plan |
400 | 342 | 787 | |||||||||
Total share-based compensation expense |
$ | 9,683 | $ | 13,533 | $ | 6,191 | ||||||
Income tax benefit |
$ | 3,475 | $ | 4,709 | $ | 1,826 | ||||||
76
As of December 31, 2008, the total compensation expense for unvested awards not yet recognized
in our consolidated statements of income was $8.1 million, net of the effect of estimated
forfeitures. This amount is expected to be recognized over a weighted-average period of 1.2 years.
Non-qualified stock options - All options allow for the purchase of shares of common stock at
prices equal to the stock’s market value at the date of grant. Options become exercisable beginning
one year after the grant date, with one-third vesting each year over three years. Options may be
exercised up to seven years following the date of grant. In the case of qualified retirement,
death, disability or involuntary termination without cause, options vest immediately and the period
over which the options can be exercised is shortened. Employees forfeit unvested options when they
voluntarily terminate their employment with the company, and they have up to three months to
exercise vested options before they are cancelled. In the case of involuntary termination with
cause, the entire unexercised portion of the award is cancelled. All options vest immediately upon
a change of control, as defined in the award agreement. The following weighted-average assumptions
were used in the Black-Scholes option pricing model in determining the fair value of stock options
granted:
| 2008 | 2007 | 2006 | ||||||||||
Risk-free interest rate (%) |
3.0 | 4.8 | 4.6 | |||||||||
Dividend yield (%) |
3.8 | 4.4 | 4.2 | |||||||||
Expected volatility (%) |
33.2 | 26.1 | 22.1 | |||||||||
Weighted-average option life (years) |
4.6 | 4.5 | 4.7 | |||||||||
The risk-free interest rate for periods within the expected option life is based on the U.S.
Treasury yield curve in effect at the grant date. Expected volatility is based on the historical
volatility of our stock. Prior to January 1, 2008, we utilized the simplified method to determine
the expected option life, based upon the vesting and original contractual terms of the option.
Beginning in 2008, we utilized a more detailed calculation of the expected option life 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.
Information regarding options issued under the current and all previous plans was as follows:
| Weighted- | ||||||||||||||||
| Aggregate | average | |||||||||||||||
| Weighted- | intrinsic | remaining | ||||||||||||||
| Number of | average exercise | value (in | contractual | |||||||||||||
| option shares | price | thousands) | term (years) | |||||||||||||
Outstanding at December 31, 2005 |
2,960,385 | $ | 38.46 | |||||||||||||
Granted |
795,700 | 25.83 | ||||||||||||||
Exercised |
(295,485 | ) | 19.19 | |||||||||||||
Forfeited or expired |
(393,642 | ) | 36.53 | |||||||||||||
Outstanding at December 31, 2006 |
3,066,958 | 37.27 | ||||||||||||||
Granted |
914,425 | 32.73 | ||||||||||||||
Exercised |
(425,777 | ) | 31.36 | |||||||||||||
Forfeited or expired |
(271,377 | ) | 37.89 | |||||||||||||
Outstanding at December 31, 2007 |
3,284,229 | 36.85 | ||||||||||||||
Granted |
662,164 | 22.15 | ||||||||||||||
Exercised |
(19,164 | ) | 20.24 | |||||||||||||
Forfeited or expired |
(821,834 | ) | 38.05 | |||||||||||||
Outstanding at December 31, 2008 |
3,105,395 | 33.50 | $ | 2 | 3.2 | |||||||||||
Exercisable at December 31, 2006 |
2,265,244 | $ | 40.46 | |||||||||||||
Exercisable at December 31, 2007 |
1,988,907 | 40.78 | ||||||||||||||
Exercisable at December 31, 2008 |
1,977,119 | 37.43 | $ | — | 1.9 | |||||||||||
77
The weighted-average grant-date fair value of options granted was $4.92 per share for 2008,
$6.01 per share for 2007 and $4.17 per share for 2006. The intrinsic value of a stock award is the
amount by which the fair value of the underlying stock exceeds the exercise price of the award. The
total intrinsic value of options exercised was $0.1 million for 2008, $3.5 million for 2007 and
$2.1 million for 2006.
Restricted stock units - Certain employees have the option to receive a portion of their bonus
payment in the form of restricted stock units. When employees elect this payment method, we provide
an additional matching amount of restricted stock units equal to one-half of the restricted stock
units earned under the bonus plan. These awards vest two years from the date of grant. In the case
of approved retirement, death, disability or change of control, the units vest immediately. In the
case of involuntary termination without cause or voluntary termination, employees receive a cash
payment for the units earned under the bonus plan, but forfeit the company-provided matching
amount.
In addition to awards granted to employees, non-employee members of our board of directors can
elect to receive all or a portion of their fees in the form of restricted stock units. Directors
are issued shares in exchange for the units upon the earlier of the tenth anniversary of February
1st of the year following the year in which the non-employee director ceases to serve on
the board or such other objectively determinable date pre-elected by the director.
Each restricted stock unit is convertible into one share of common stock upon completion of
the vesting period. Information regarding our restricted stock units was as follows:
| Weighted- | ||||||||||||||||
| Aggregate | average | |||||||||||||||
| Weighted- | intrinsic | remaining | ||||||||||||||
| Number of | average grant | value (in | contractual | |||||||||||||
| units | date fair value | thousands) | term (years) | |||||||||||||
Outstanding at December 31, 2005 |
126,101 | $ | 35.68 | |||||||||||||
Granted |
15,938 | 22.38 | ||||||||||||||
Vested |
(20,307 | ) | 35.44 | |||||||||||||
Forfeited |
(41,875 | ) | 35.23 | |||||||||||||
Outstanding at December 31, 2006 |
79,857 | 33.31 | ||||||||||||||
Granted |
10,743 | 34.71 | ||||||||||||||
Vested |
(37,490 | ) | 34.53 | |||||||||||||
Outstanding at December 31, 2007 |
53,110 | 32.73 | ||||||||||||||
Granted |
102,991 | 23.42 | ||||||||||||||
Vested |
(10,720 | ) | 25.79 | |||||||||||||
Outstanding at December 31, 2008 |
145,381 | 26.65 | $ | 2,175 | 3.8 | |||||||||||
Of the awards outstanding as of December 31, 2008, 47,495 restricted stock units were
classified as liabilities in our consolidated balance sheet at a value of $0.7 million. As of
December 31, 2008, these units had a fair value of $14.96 per unit and a weighted-average remaining
contractual term of 1.1 years.
The total intrinsic value of restricted stock units vesting was $0.1 million for 2008, $1.1
million for 2007 and $0.4 million for 2006. We made cash payments to settle share-based liabilities
of $2,000 in 2008, $0.1 million in 2007 and $0.5 million in 2006.
Restricted shares - We currently have two types of restricted share awards outstanding.
Certain of these awards have a set vesting period at which time the restrictions on the shares
lapse. The vesting period on these awards currently ranges from two to three years. We have also
granted performance-accelerated restricted shares. The restrictions on these awards lapse three
years from the grant date. However, if the performance criteria are met, the restrictions on
one-half of the awards will lapse one year from the grant date. For both types of restricted share
awards, the restrictions lapse immediately in the case of qualified retirement, death or
disability. In the case of involuntary termination without cause or a change of control,
restrictions on a pro-
78
rata portion of the shares lapse based on how much of the vesting period has
passed. In the case of voluntary termination of employment or termination with cause, the remaining
restricted shares are forfeited.
Information regarding unvested restricted shares was as follows:
| Weighted- | ||||||||
| Number of | average grant | |||||||
| shares | date fair value | |||||||
Unvested at December 31, 2005 |
82,883 | $ | 40.70 | |||||
Granted |
401,630 | 25.51 | ||||||
Vested |
(20,958 | ) | 36.90 | |||||
Forfeited |
(85,462 | ) | 28.99 | |||||
Unvested at December 31, 2006 |
378,093 | 27.52 | ||||||
Granted |
250,150 | 33.00 | ||||||
Vested |
(87,133 | ) | 29.09 | |||||
Forfeited |
(36,977 | ) | 30.10 | |||||
Unvested at December 31, 2007 |
504,133 | 29.78 | ||||||
Granted |
242,993 | 22.08 | ||||||
Vested |
(245,331 | ) | 30.46 | |||||
Forfeited |
(48,866 | ) | 27.48 | |||||
Unvested at December 31, 2008 |
452,929 | 25.53 | ||||||
The total fair value of restricted shares vesting was $5.2 million for 2008, $3.3 million for
2007 and $0.4 million for 2006.
Employee stock purchase plan - During 2008, 156,157 shares were issued under this plan at
prices of $20.69 and $12.16. During 2007, 90,452 shares were issued under this plan at prices of
$25.44 and $32.10. During 2006, 180,277 shares were issued under this plan at prices of $22.76 and
$14.45.
Note 11: Employee benefit plans
Profit sharing, defined contribution and 401(k) plans - We maintain a profit sharing plan, a
defined contribution pension plan and a plan established under section 401(k) of the Internal
Revenue Code to provide retirement benefits for certain employees. These plans cover substantially
all full-time and some part-time employees. Employees are eligible to participate in the plans on
the first day of the quarter following their first full year of service. We also provide cash bonus
programs under which employees may receive an annual cash bonus payment based on our annual
operating performance.
Contributions to the profit sharing and defined contribution plans are made solely by Deluxe
and are remitted to the plans’ respective trustees. Benefits provided by the plans are paid from
accumulated funds of the trusts. In 2008, 2007 and 2006, contributions to the defined contribution
pension plan equaled 4% of eligible compensation. Contributions to the profit sharing plan vary
based on the company’s performance. Under the 401(k) plan, employees under the age of 50 could
contribute up to the lesser of $15,500 or 50% of eligible wages during 2008. Employees 50 years of
age or older could make contributions of up to $20,500 during 2008. Beginning on the first day of
the quarter following an employee’s first full year of service, we match 100% of the first 1% of
wages contributed by employees and 50% of the next 4% of wages contributed. All employee and
employer contributions are remitted to the plans’ respective trustees and benefits provided by the
plans are paid from accumulated funds of the trusts. Payments made under the cash bonus programs
vary based on the company’s performance and are paid in cash directly to employees.
Employees are provided a broad range of investment options to choose from when investing their
profit sharing, defined contribution and 401(k) plan funds. Investing in our common stock is not
one of these options, although funds selected by employees may at times hold our common stock.
79
Expense recognized in the consolidated statements of income for these plans was as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Profit sharing/cash bonus plans |
$ | 623 | $ | 23,081 | $ | 3,825 | ||||||
Defined contribution pension plan |
11,614 | 10,761 | 11,313 | |||||||||
401(k) plan |
7,936 | 6,426 | 6,976 | |||||||||
Deferred compensation plan - We have a non-qualified deferred compensation plan that allows
eligible employees to defer a portion of their compensation. Participants can elect to defer up to
a maximum of 100 percent of their base salary plus up to 50 percent of their bonus for the year.
The compensation deferred under this plan is credited with earnings or losses measured by the
mirrored rate of return on phantom investments elected by plan
participants, which are similar to the investments available in our
defined contribution pension plan. Each participant is fully
vested in all deferred compensation and earnings. A participant may elect to receive deferred
amounts in one payment or in monthly installments upon termination of employment or disability. Our
total liability under this plan was $3.9 million as of December 31, 2008 and $7.1 million as of
December 31, 2007. These amounts are reflected in accrued liabilities and other long-term
liabilities in the consolidated balance sheets. We fund this liability through investments in
company-owned life insurance policies. These investments are included in long-term investments in
the consolidated balance sheets and totaled $14.1 million as of December 31, 2008 and $13.2 million
as of December 31, 2007.
Voluntary employee beneficiary association trust - We have formed a VEBA trust to fund
employee and retiree medical costs and severance benefits. Contributions to the VEBA trust are tax
deductible, subject to limitations contained in the Internal Revenue Code. VEBA assets primarily
consist of fixed income investments. We made contributions to the VEBA trust of $36.1 million in
2008 and $34.1 million in 2007. Our liability for incurred but not reported medical claims exceeded
the prepaid balance in the VEBA trust by $1.2 million as of December 31, 2008 and $3.1 million as
of December 31, 2007. These amounts are reflected in accrued liabilities in our consolidated
balance sheets.
Note 12: Pension and other postretirement benefits
We have historically provided certain health care benefits for a large number of retired
employees. Employees hired prior to January 1, 2002 become eligible for benefits if they attain the
appropriate years of service and age prior to retirement. Employees hired on January 1, 2002 or
later are not eligible to participate in our retiree health care plan. In addition to our retiree
health care plan, we also have a supplemental executive retirement plan (SERP) in the United States
and a pension plan which covers certain Canadian employees, both of which were acquired as part of
the NEBS acquisition in 2004. We also had a Canadian SERP plan which was settled during 2008.
On January 1, 2007, we adopted the measurement date provision of 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 2007 consolidated
statement of income is based on the December 31, 2006 measurement date.
In July 2006, we adopted an amendment to our postretirement benefit plan. The amendment limits
the total amount we will pay toward retiree medical costs. The limit was set at 150% of the average
cost per retiree in 2006. Medical costs incurred above the pre-determined limit will be paid by
retirees. We expect the cap will be reached between 2011 and 2013. We completed a plan
re-measurement as of July 31, 2006 to calculate the impact of this plan amendment. This change
reduced our accumulated postretirement benefit obligation by
$29.5 million. This amount is being
recognized as a reduction of our postretirement benefit expense over a period of 22 years, the
average remaining life of plan participants.
80
Obligations and funded status - The following table summarizes the change in benefit
obligation, plan assets and funded status during 2008 and 2007:
| Postretirement | ||||||||
| (in thousands) | benefit plan | Pension plans | ||||||
Change in benefit obligation: |
||||||||
Benefit obligation, December 31, 2006 |
$ | 119,478 | $ | 9,901 | ||||
Service cost |
156 | 222 | ||||||
Interest cost |
7,011 | 514 | ||||||
Actuarial loss (gain) — net |
15,775 | (185 | ) | |||||
Benefits paid from plan assets, the VEBA
trust (see Note 11) and company funds |
(10,779 | ) | (557 | ) | ||||
Change in measurement date |
1,664 | 338 | ||||||
Currency translation adjustment |
— | 1,095 | ||||||
Benefit obligation, December 31, 2007 |
133,305 | 11,328 | ||||||
Service cost |
94 | — | ||||||
Interest cost |
7,955 | 497 | ||||||
Actuarial (gain) loss — net |
(1,945 | ) | 248 | |||||
Benefits paid from plan assets, the VEBA
trust (see Note 11) and company funds |
(10,936 | ) | (543 | ) | ||||
Settlement |
— | (902 | ) | |||||
Medicare Part D reimbursements |
692 | — | ||||||
Currency translation adjustment |
— | (1,367 | ) | |||||
Benefit obligation, December 31, 2008 |
$ | 129,165 | $ | 9,261 | ||||
Change in plan assets: |
||||||||
Fair value of plan assets, December 31, 2006 |
$ | 88,243 | $ | 5,999 | ||||
Actual return on plan assets |
14,504 | 109 | ||||||
Company contributions |
— | 463 | ||||||
Benefits and expenses paid |
— | (234 | ) | |||||
Currency translation adjustment |
— | 1,025 | ||||||
Fair value of plan assets, December 31, 2007 |
102,747 | 7,362 | ||||||
Actual loss on plan assets |
(34,019 | ) | (113 | ) | ||||
Company contributions |
— | 299 | ||||||
Benefits and expenses paid |
— | (219 | ) | |||||
Settlement |
— | (902 | ) | |||||
Currency translation adjustment |
— | (1,215 | ) | |||||
Fair value of plan assets, December 31,
2008 |
$ | 68,728 | $ | 5,212 | ||||
Funded status, December 31, 2007 |
$ | (30,558 | ) | $ | (3,966 | ) | ||
Funded status, December 31, 2008 |
$ | (60,437 | ) | $ | (4,049 | ) | ||
Plan assets of our postretirement medical plan do not include the assets of the VEBA trust
discussed in Note 11. Plan assets consist only of those assets invested in a trust established
under section 401(h) of the Internal Revenue Code. These assets can be used only to pay retiree
medical benefits, whereas the assets of the VEBA trust may be used to pay medical and severance
benefits for both active and retired employees.
81
Amounts recognized in the consolidated balance sheets as of December 31 were as follows:
| Postretirement benefit | ||||||||||||||||
| plan | Pension plans | |||||||||||||||
| (in thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Other non-current assets |
$ | — | $ | — | $ | — | $ | 178 | ||||||||
Accrued liabilities |
— | — | 1,126 | 324 | ||||||||||||
Other non-current liabilities |
60,437 | 30,558 | 2,923 | 3,820 | ||||||||||||
Amounts included in other comprehensive loss that have not been recognized as components of
postretirement benefit expense were as follows:
| Postretirement benefit | ||||||||||||||||
| plan | Pension plans | |||||||||||||||
| (in thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Unrecognized prior service credit |
$ | (36,062 | ) | $ | (40,021 | ) | $ | — | $ | — | ||||||
Unrecognized net actuarial loss |
128,062 | 96,732 | 825 | 492 | ||||||||||||
Tax effect |
(34,403 | ) | (20,924 | ) | (261 | ) | (162 | ) | ||||||||
Amount recognized in
accumulated other comprehensive
loss, net of tax |
$ | 57,597 | $ | 35,787 | $ | 564 | $ | 330 | ||||||||
The unrecognized prior service credit for our postretirement benefit plan resulted from a 2003
curtailment and other plan amendments. These changes resulted in a reduction of the accumulated
postretirement benefit obligation. This reduction was first used to reduce any existing
unrecognized prior service cost, then to reduce any remaining unrecognized transition obligation.
The excess is the unrecognized prior service credit. The prior service credit is being amortized on
the straight-line basis over a weighted-average period of 16 years. Unrecognized actuarial gains
and losses are being amortized over the average remaining service period of plan participants,
which is currently 8.2 years. The unrecognized net actuarial loss for our postretirement benefit
plan resulted from experience different from that assumed or from changes in assumptions. This
amount was comprised of the following as of December 31:
| (in thousands) | 2008 | 2007 | ||||||
Return on plan assets |
$ | 51,004 | $ | 9,148 | ||||
Claims experience |
20,733 | 23,938 | ||||||
Health care cost trend |
19,161 | 21,242 | ||||||
Discount rate assumption |
13,007 | 19,105 | ||||||
Other |
24,157 | 23,299 | ||||||
Unrecognized net actuarial loss |
$ | 128,062 | $ | 96,732 | ||||
Amounts included in accumulated other comprehensive loss as of December 31, 2008 which we
expect to recognize in postretirement benefit expense during 2009 are as follows:
| Postretirement | Pension | |||||||
| (in thousands) | benefit plan | plans | ||||||
Prior service credit |
$ | (3,959 | ) | $ | — | |||
Net actuarial loss |
14,042 | 1,190 | ||||||
Total |
$ | 10,083 | $ | 1,190 | ||||
82
As of December 31, 2008 and 2007, the United States SERP plan and the Canadian pension plan
had accumulated benefit obligations in excess of plan assets, as follows:
| (in thousands) | 2008 | 2007 | ||||||
Projected benefit obligation |
$ | 9,261 | $ | 10,448 | ||||
Accumulated benefit obligation |
9,261 | 10,448 | ||||||
Fair value of plan assets |
5,212 | 6,304 | ||||||
Net pension and postretirement benefit expense - Net pension and postretirement benefit
expense for the years ended December 31 consisted of the following components:
| Postretirement benefit plan | Pension plans | |||||||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||
Service cost |
$ | 94 | $ | 156 | $ | 1,000 | $ | — | $ | 223 | $ | 209 | ||||||||||||
Interest cost |
7,955 | 7,011 | 7,338 | 497 | 514 | 473 | ||||||||||||||||||
Expected return on plan assets |
(8,732 | ) | (8,264 | ) | (7,690 | ) | (265 | ) | (262 | ) | (300 | ) | ||||||||||||
Amortization of prior service credit |
(3,959 | ) | (3,959 | ) | (2,841 | ) | — | — | — | |||||||||||||||
Amortization of net actuarial losses |
9,477 | 9,857 | 9,992 | 8 | 7 | 9 | ||||||||||||||||||
Total periodic benefit expense |
4,835 | 4,801 | 7,799 | 240 | 482 | 391 | ||||||||||||||||||
Settlement loss |
— | — | — | 221 | — | — | ||||||||||||||||||
Net periodic benefit expense |
$ | 4,835 | $ | 4,801 | $ | 7,799 | $ | 461 | $ | 482 | $ | 391 | ||||||||||||
Actuarial assumptions - In measuring benefit obligations as of December 31, the following
discount rate assumptions were used:
| Postretirement benefit plan | Pension plans | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Discount rate |
6.60 | % | 6.20 | % | 4.06% - 6.60 | % | 4.43% - 6.20 | % | ||||||||
The discount rate assumption is based on the rates of return on high-quality, fixed-income
instruments currently available whose cash flows match the timing and amount of expected benefit
payments. In determining the discount rate, we utilize the Hewitt Top Quartile and the Citigroup
Pension Discount yield curves to discount each cash flow stream at an interest rate specifically
applicable to the timing of each respective cash flow. The present value of each cash flow stream
is aggregated and used to impute a weighted-average discount rate. In previous years, we also
considered Moody’s high quality corporate bond rates when selecting our discount rate. However, as
the number of bonds included in this index fell significantly during 2008 and those bonds do not
match the timing of our expected cash flows as well, we no longer utilize these rates.
In measuring net periodic benefit expense for the years ended December 31, the following
assumptions were used:
| Postretirement benefit plan | Pension plans | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Discount rate |
6.20 | % | 5.75 | % | 5.50 | % | 4.43% - 6.20 | % | 4.43% - 5.75 | % | 4.50% -5.50 | % | ||||||||||||
Expected return on plan assets |
8.50 | % | 8.75 | % | 8.75 | % | 4.50 | % | 4.50 | % | 6.25 | % | ||||||||||||
Rate of compensation increase |
— | — | — | — | — | 3.50 | % | |||||||||||||||||
In determining the expected long-term rate of return on plan assets, we first study historical
markets. We then use this data to estimate future returns assuming that long-term historical
relationships between equity and fixed income investments are consistent with the widely accepted
capital market principle that assets with higher volatility generate a greater return over the long
run. We evaluate current market factors such as inflation and interest rates before we determine
long-term capital market assumptions. We also review historical returns to check for reasonableness
and appropriateness.
83
In measuring the benefit obligation for our postretirement medical plan, the following
assumptions for health care cost trend rates were used:
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Participants | Participants | Participants | Participants | Participants | Participants | |||||||||||||||||||
| under age 65 | over age 65 | under age 65 | over age 65 | under age 65 | over age 65 | |||||||||||||||||||
Health care cost
trend rate assumed
for next year |
7.50 | % | 8.50 | % | 8.25 | % | 9.25 | % | 9.00 | % | 10.00 | % | ||||||||||||
Rate to which the
cost trend rate is
assumed to decline
(the ultimate trend
rate) |
5.25 | % | 5.25 | % | 5.25 | % | 5.25 | % | 5.25 | % | 5.25 | % | ||||||||||||
Year that the rate
reaches the
ultimate trend rate |
2012 | 2014 | 2012 | 2014 | 2012 | 2014 | ||||||||||||||||||
Assumed health care cost trend rates have a significant effect on the amounts reported for
health care plans. A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
| One- | One- | |||||||
| percentage- | percentage- | |||||||
| point | point | |||||||
| (in thousands) | increase | decrease | ||||||
Effect on total of service and interest cost |
$ | 151 | $ | (135 | ) | |||
Effect on benefit obligation |
2,633 | (2,353 | ) | |||||
Plan assets - The allocation of plan assets by asset category as of the measurement date was
as follows:
| Postretirement benefit | ||||||||||||||||||
| plan | Pension plans | |||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||||
Equity securities |
69 | % | 79 | % | — | 7 | % | |||||||||||
Debt securities |
31 | % | 21 | % | 100 | % | 86 | % | ||||||||||
Cash and cash equivalents |
— | — | — | 7 | % | |||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Our postretirement health care plan and the Canadian pension plans have assets that are
intended to meet long-term obligations. In order to meet these obligations, we employ a total
return investment approach which considers cash flow needs and balances long-term projected returns
against expected asset risk, as measured using projected standard deviations. Risk tolerance is
established through careful consideration of projected plan liabilities, the plan’s funded status,
projected liquidity needs and current corporate financial condition.
For
our postretirement health care plan, we adopted new asset allocation targets in September
2007 based on our liability and asset projections. This allocation of plan assets is 80%
equity securities and 20% fixed income securities. In January 2009, the assets were re-balanced to
these allocation percentages. Within the equity securities category, the allocation is: 59% large
capitalization equities, 29% international equities and 12% small and mid-capitalization equities.
Through most of 2007 our allocation of plan assets was 76% equity securities and 24% fixed income
securities. Within the equity securities category, the allocation was: 42% large capitalization
equities, 33% small and mid-capitalization equities and 25% international equities. Plan assets are
not invested in real estate, private equity or hedge funds and are not leveraged beyond the market
value of the underlying investments. Investment risk is measured and monitored on an ongoing basis
through quarterly investment portfolio reviews, annual liability measurements and periodic
asset/liability studies.
We froze the assets of our Canadian pension plan on July 1, 2006 and this plan is expected to
be fully settled in 2009. As such, its assets as of December 31, 2008 and 2007 were invested in
fixed income investments. The investments utilized by this plan conform to our Statement of
Investment Policies & Procedures and are overseen by an investment committee.
84
The committee reviews our policies and liability structure annually and reviews the
performance of plan assets on a quarterly basis. In December 2007, we decided to terminate the
Canadian SERP plan. Benefits due under this plan were fully settled in 2008. As of December 31,
2007, one-half of the assets of this plan were held by the Canada Revenue Agency in a refundable
non-interest bearing account and one-half of the assets were invested in a global equity fund.
The plan assets of our postretirement benefit and pension plans are valued at fair value using
quoted market prices. Investments, in general, are subject to various risks, including credit,
interest and overall market volatility risks. During 2008, the equity and bond markets saw a
significant decline in value. As such, the fair values of our plan assets decreased significantly
during the year. See Note 18 for a discussion of market risks related to our plan assets.
Cash flows - We are not contractually obligated to make contributions to the assets of our
postretirement medical benefit plan, and we do not anticipate making any such contributions during
2009. However, we do anticipate that we will pay net retiree medical benefits of $10.6 million
during 2009.
We have fully funded the United States SERP obligation with investments in company-owned life
insurance policies. The cash surrender value of these policies is included in long-term investments
in the consolidated balance sheets and totaled $5.6 million as of December 31, 2008 and $5.3
million as of December 31, 2007. We plan to pay pension benefits of $6.4 million during 2009,
including final settlement of the Canadian pension plan. We plan to make contributions of $0.8
million to the Canadian pension plan during 2009.
The following benefit payments are expected to be paid during the years indicated:
| Pension | ||||||||||||||||
| Postretirement benefit plan | plans | |||||||||||||||
| Gross | Expected | Net | ||||||||||||||
| benefit | Medicare | benefit | Gross benefit | |||||||||||||
| (in thousands) | payments | subsidy | payments | payments | ||||||||||||
2009 |
$ | 11,600 | $ | 1,000 | $ | 10,600 | $ | 6,392 | ||||||||
2010 |
12,200 | 1,100 | 11,100 | 320 | ||||||||||||
2011 |
12,600 | 1,100 | 11,500 | 310 | ||||||||||||
2012 |
13,000 | 1,300 | 11,700 | 310 | ||||||||||||
2013 |
13,100 | 1,400 | 11,700 | 300 | ||||||||||||
2014 - 2018 |
64,300 | 7,500 | 56,800 | 1,460 | ||||||||||||
Note 13: Debt
Debt outstanding as of December 31 was as follows:
| (in thousands) | 2008 | 2007 | ||||||
5.0% senior, unsecured notes due December 15, 2012, net of discount |
$ | 299,250 | $ | 299,062 | ||||
5.125% senior, unsecured notes due October 1, 2014, net of discount |
274,646 | 274,584 | ||||||
7.375% senior, unsecured notes due June 1, 2015 |
200,000 | 200,000 | ||||||
Long-term portion of capital lease obligation |
— | 1,440 | ||||||
Long-term portion of debt |
773,896 | 775,086 | ||||||
Amounts drawn on credit facilities |
78,000 | 67,200 | ||||||
Capital lease obligation due within one year |
1,440 | 1,754 | ||||||
Short-term portion of debt |
79,440 | 68,954 | ||||||
Total debt |
$ | 853,336 | $ | 844,040 | ||||
85
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 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 liquidated all of the marketable securities
and used the proceeds, along with an advance on our credit facilities, to repay $325.0 million of
unsecured notes plus accrued interest. The fair value of the notes issued in May 2007 was $106.0
million as of December 31, 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. 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.
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 $96.3 million as of December 31, 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 $173.3 million as of
December 31, 2008, based on quoted market prices.
Our capital lease obligation bears interest at a rate of 10.4% and is due in 2009. We also
have operating leases on certain facilities and equipment. As of December 31, 2008, future minimum
lease payments under our capital obligation and noncancelable operating leases with an initial term
in excess of one year were as follows:
| Capital | Operating | |||||||
| (in thousands) | lease | leases | ||||||
2009 |
$ | 1,503 | $ | 9,119 | ||||
2010 |
— | 6,465 | ||||||
2011 |
— | 2,852 | ||||||
2012 |
— | 792 | ||||||
2013 |
— | 167 | ||||||
2014 and thereafter |
— | — | ||||||
Total minimum lease payments |
1,503 | $ | 19,395 | |||||
Less portion representing interest |
(63 | ) | ||||||
Present value of minimum lease payments |
$ | 1,440 | ||||||
Total future minimum lease payments under capital and noncancelable operating leases have not
been reduced by minimum sublease rentals due under noncancelable subleases. As of December 31,
2008, minimum future sub-lease rentals were $1.5 million for our capital lease and $0.4 million for
operating leases.
86
The composition of rent expense the years ended December 31 was as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Minimum rentals |
$ | 9,811 | $ | 9,143 | $ | 11,024 | ||||||
Sublease rentals |
(2,028 | ) | (2,058 | ) | (2,200 | ) | ||||||
Net rental expense |
$ | 7,783 | $ | 7,085 | $ | 8,824 | ||||||
Depreciation of the asset under our capital lease is included in depreciation expense in the
consolidated statements of cash flows. The balance of the leased asset as of December 31 was as
follows:
| (in thousands) | 2008 | 2007 | ||||||
Buildings and building improvements |
$ | 11,574 | $ | 11,574 | ||||
Accumulated depreciation |
(10,823 | ) | (9,821 | ) | ||||
Net assets under capital lease |
$ | 751 | $ | 1,753 | ||||
As of December 31, 2008, we had two committed lines of credit totaling $500.0 million.
Effective February 5, 2009, we terminated the $225.0 million line of credit, which was due to
expire in July 2009. The credit agreement governing the line of credit contains customary covenants
regarding limits on the levels of subsidiary indebtedness, as well as requiring a ratio of earnings
before interest and taxes to interest expense of 3.0 times, as measured quarterly on an aggregate
basis for the preceding four quarters. We would have remained in compliance with this debt covenant
even if our reported pre-tax earnings for 2008 had been $52 million lower than reported. As such,
we do not consider it likely that we will violate this debt covenant in 2009. The daily average
amount outstanding under our lines of credit during 2008 was $82.6 million at a weighted-average
interest rate of 3.05%. As of December 31, 2008, $78.0 million was outstanding at an average
interest rate of 0.91%. 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 an average interest rate of 5.62%. As of December 31, 2008, amounts were
available for borrowing under our committed lines of credit 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 credit facilities |
(78,000 | ) | ||||||||||
Outstanding letters of credit |
(10,835 | ) | ||||||||||
Net available for borrowing
as of December 31, 2008 |
$ | 411,165 | ||||||||||
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.
Note 14: Other commitments and contingencies
Indemnifications - 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 the 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
87
to the 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.
Environmental matters - We are currently involved in environmental compliance, investigation
and remediation activities at some of our current and former sites, primarily printing facilities
of our Financial Services and Small Business Services segments which have been sold over the past
several years. Remediation costs are accrued on an undiscounted basis when the obligations are
either known or considered probable and can be reasonably estimated. Remediation or testing costs
that result directly from the sale of an asset and which we would not have otherwise incurred, are
considered direct costs of the sale of the asset. As such, they are included in our assessment of
the carrying value of the asset.
Accruals for environmental matters were $8.3 million as of December 31,
2008 and December 31,
2007, primarily related to facilities which have been sold. These accruals are included in accrued
liabilities and other long-term liabilities in the consolidated balance sheets. Accrued costs
consist of direct costs of the remediation activities, primarily fees which will be paid to outside
engineering and consulting firms. Although recorded accruals include our best estimates, our total
costs cannot be predicted with certainty due to various factors such as the extent of corrective
action that may be required, evolving environmental laws and regulations and advances in
environmental technology. Where the available information is sufficient to estimate the amount of
the liability, that estimate is used. Where the information is only sufficient to establish a range
of probable liability and no point within the range is more likely than any other, the lower end of
the range is used. We do not believe that the range of possible outcomes could have a material
effect on our financial condition, results of operations or liquidity.
As of December 31,
2008, substantially all costs included in our environmental accruals
were
covered by an environmental insurance policy which we purchased during 2002. The insurance policy
does not cover properties acquired subsequent to 2002. However, costs included in our environmental
accruals for such properties were minor as of December 31, 2008. As such, we do not anticipate any
significant net cash outlays for environmental matters in 2009. The policy covers up to $12.9
million of remediation costs, of which $4.1 million had been paid through December 31, 2008. The
insurance policy also covers up to $10.0 million of third-party claims through 2032 at certain
owned, leased and divested sites, as well as any new conditions discovered at certain owned or
leased sites through 2012. We consider the realization of recovery under the insurance policy to be
probable based on the insurance contract in place with a reputable and financially-sound insurance
company. As our environmental accruals include our best estimates of these costs, we have recorded
receivables from the insurance company within other current assets and other non-current assets
based on the amounts of our environmental accruals for insured sites.
Self-insurance - We are self-insured for certain costs, primarily workers’ compensation claims
and medical and dental benefits. The liabilities associated with these items represent our best
estimate of the ultimate obligations for reported claims plus those incurred, but not reported. The
liability for workers’ compensation, which totaled $5.6 million as of December 31, 2008 and $9.9
million as of December 31, 2007, is accounted for on a present value basis. The difference between
the discounted and undiscounted workers’ compensation liability was $0.1 million as of December 31,
2008 and $0.8 million as of December 31, 2007. We record liabilities for medical and dental
benefits payable for active employees and those employees on long-term disability. Our liability
for active employees is not accounted for on a present value basis as we expect the benefits to be
paid in a relatively short period of time. Our liability for those employees on long-term
disability is accounted for on a present value basis and in accordance with SFAS No. 112,
Employers’ Accounting for Postemployment Benefits. Our total liability for these medical and dental
benefits totaled $5.7 million as of December 31, 2008 and $8.5 million as of December 31, 2007. The
difference between the discounted and undiscounted medical and dental liability was $1.0 million as
of December 31, 2008 and December 31, 2007.
Our self-insurance liabilities are estimated, in part, by considering historical claims
experience, demographic factors and other actuarial assumptions. The estimated accruals for these
liabilities, portions of which are calculated by third party actuarial firms, could be
significantly affected if future events and claims differ from these assumptions and historical
trends.
88
Litigation - We are party to legal actions and claims arising in the ordinary course of
business. We record accruals for legal matters when the expected outcome of these matters is either
known or considered probable and can be reasonably estimated. Our accruals do not include related
legal and other costs expected to be incurred in defense of legal actions. Based upon information
presently available, we believe that it is unlikely that any identified matters, either
individually or in the aggregate, will have a material adverse effect on our annual results of
operations, financial position or liquidity.
Litigation of income tax matters is accounted for under the provisions of FIN No. 48,
Accounting for Uncertainty in Income Taxes. Further information can be found in Note 9: Income tax
provision.
Note 15: Common stock purchase rights
In February 1988, we adopted a shareholder rights plan under which common stock purchase
rights automatically attach to each share of common stock we issue. The rights plan is governed by
a rights agreement between us and Wells Fargo Bank, National Association, as rights agent. This
agreement most recently was amended and restated as of December 20, 2006 (Restated Agreement).
Pursuant to the Restated Agreement, upon the occurrence of certain events, each right will
entitle the holder to purchase one share of common stock at an exercise price of $100. The exercise
price may be adjusted from time to time upon the occurrence of certain events outlined in the
Restated Agreement. In certain circumstances described in the Restated Agreement, if (i) any person
becomes the beneficial owner of 20% or more of the company’s common stock, (ii) the company is
acquired in a merger or other business combination or (iii) upon the occurrence of other events,
each right will entitle its holder to purchase a number of shares of common stock of the company,
or the acquirer or the surviving entity if the company is not the surviving corporation in such a
transaction. The number of shares purchasable at the then-current exercise price will be equal to
the exercise price of the right divided by 50% of the then-current market price of one share of
common stock of the company, or other surviving entity, subject to adjustments provided in the
Restated Agreement. The rights expire December 31, 2016, and may be redeemed by the company at a
price of $.01 per right at any time prior to the occurrence of the circumstances described above.
The Restated Agreement requires an independent director review of the plan at least once every
three years.
Note 16: 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 6.5 million shares
remained available for purchase under this authorization as of December 31, 2008. We repurchased
1.1 million shares during 2008 for $21.8 million and 0.4 million shares during 2007 for $11.3
million. No shares were repurchased in 2006.
On December 31, 2006, we adopted the recognition provisions of SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans. This standard requires
companies to recognize the overfunded or underfunded status of a defined benefit postretirement
plan as an asset or liability on the balance sheet and to recognize changes in that funded status
in the year in which the change occurs through comprehensive income. The adoption of SFAS No. 158
resulted in an increase in accumulated other comprehensive loss of
$33.4 million, net of tax, as of December 31,
2006.
89
Accumulated other comprehensive loss as of December 31 was comprised of the following:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Postretirement and defined benefit
pension plans: |
||||||||||||
Unrealized prior service credit |
$ | 22,858 | $ | 25,305 | $ | 28,398 | ||||||
Unrealized net actuarial losses |
(81,019 | ) | (61,422 | ) | (61,993 | ) | ||||||
Fourth quarter plan contribution |
— | — | (47 | ) | ||||||||
Postretirement and defined benefit
pension plans, net of tax |
(58,161 | ) | (36,117 | ) | (33,642 | ) | ||||||
Loss on derivatives, net of tax |
(7,498 | ) | (8,881 | ) | (11,162 | ) | ||||||
Unrealized gain on securities, net of tax |
— | — | 242 | |||||||||
Currency translation adjustment |
705 | 5,952 | 2,689 | |||||||||
Accumulated other comprehensive loss |
$ | (64,954 | ) | $ | (39,046 | ) | $ | (41,873 | ) | |||
Note 17: Business segment information
We
operate three reportable business segments: Small Business Services, Financial Services and
Direct Checks. Small Business Services sells business checks, printed
forms, promotional products, web services,
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, customer loyalty,
retention and fraud monitoring and protection services, and stored
value gift cards 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 and Europe. No single customer
accounted for more than 10% of revenue in 2008, 2007 or 2006.
The accounting policies of the segments are the same as those described in Note 1. 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, 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 primarily 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. Depreciation and amortization expense related to corporate assets which was
allocated to the segments was $31.9 million in 2008 and 2007 and $18.9 million in 2006.
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.
90
The following is our segment information as of and for the years ended December 31:
| Reportable business segments | ||||||||||||||||||||||||
| Small | ||||||||||||||||||||||||
| Business | Financial | Direct | ||||||||||||||||||||||
| (in thousands) | Services | Services | Checks | Corporate | Consolidated | |||||||||||||||||||
Revenue from external customers: |
2008 | $ | 851,060 | $ | 430,018 | $ | 187,584 | $ | — | $ | 1,468,662 | |||||||||||||
| 2007 | 921,657 | 457,292 | 209,936 | — | 1,588,885 | |||||||||||||||||||
| 2006 | 949,492 | 458,118 | 211,727 | — | 1,619,337 | |||||||||||||||||||
Operating income: |
2008 | 90,078 | 65,540 | 53,616 | — | 209,234 | ||||||||||||||||||
| 2007 | 132,821 | 74,305 | 62,778 | — | 269,904 | |||||||||||||||||||
| 2006 | 87,009 | 46,613 | 64,922 | — | 198,544 | |||||||||||||||||||
Depreciation and amortization |
2008 | 49,947 | 9,664 | 4,349 | — | 63,960 | ||||||||||||||||||
expense: |
2007 | 52,830 | 9,936 | 4,794 | — | 67,560 | ||||||||||||||||||
| 2006 | 62,879 | 14,548 | 7,108 | — | 84,535 | |||||||||||||||||||
Asset impairment charges: |
2008 | 9,942 | — | — | — | 9,942 | ||||||||||||||||||
| 2007 | — | — | — | — | — | |||||||||||||||||||
| 2006 | 18,285 | 26,413 | — | — | 44,698 | |||||||||||||||||||
Total assets: |
2008 | 785,555 | 47,872 | 100,535 | 285,023 | 1,218,985 | ||||||||||||||||||
| 2007 | 750,483 | 66,475 | 102,452 | 291,345 | 1,210,755 | |||||||||||||||||||
| 2006 | 784,815 | 90,075 | 105,041 | 287,201 | 1,267,132 | |||||||||||||||||||
Capital asset purchases: |
2008 | — | — | — | 31,865 | 31,865 | ||||||||||||||||||
| 2007 | — | — | — | 32,286 | 32,286 | |||||||||||||||||||
| 2006 | — | — | — | 41,012 | 41,012 | |||||||||||||||||||
Revenue by product for each year was as follows:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Checks |
$ | 960,837 | $ | 1,045,008 | $ | 1,041,523 | ||||||
Other printed products, including forms |
328,990 | 374,138 | 366,691 | |||||||||
Accessories and promotional products |
109,773 | 118,181 | 122,635 | |||||||||
Packaging supplies, services and other |
69,062 | 51,558 | 88,488 | |||||||||
Total revenue |
$ | 1,468,662 | $ | 1,588,885 | $ | 1,619,337 | ||||||
The following information is based on the geographic locations of our subsidiaries:
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Revenue from external customers: |
||||||||||||
United States |
$ | 1,397,759 | $ | 1,517,322 | $ | 1,550,507 | ||||||
Foreign, primarily Canada |
70,903 | 71,563 | 68,830 | |||||||||
Total revenue |
$ | 1,468,662 | $ | 1,588,885 | $ | 1,619,337 | ||||||
Long-lived assets: |
||||||||||||
United States |
$ | 1,036,140 | $ | 1,005,145 | $ | 1,052,257 | ||||||
Foreign, primarily Canada |
15,759 | 13,665 | 12,758 | |||||||||
Total long-lived assets |
$ | 1,051,899 | $ | 1,018,810 | $ | 1,065,015 | ||||||
91
Note 18: Market risks
Due to recent failures and consolidations of companies within the financial services industry
and the downturn in the broader U.S. economy, including the liquidity crisis in the credit markets,
we have identified certain market risks which may affect our future operating performance.
Economic conditions - As discussed in Note 7, during 2008, we recorded impairment charges
related to trade names in our Small Business Services segment. Our impairment analysis indicated no
impairment of goodwill. However, due to the ongoing uncertainty in market conditions, which may
continue to negatively impact our market value and expected operating results, we will continue to
monitor whether additional impairment analyses are required with respect to the carrying value of
the Safeguard indefinite-lived trade name, as well as goodwill, primarily relating to one reporting
unit whose fair value exceeded its carrying value of $76.9 million by $2.7 million as of December
31, 2008. The calculated fair values of our other reporting units exceeded their carrying values by
amounts between $26 million and $391 million as of December 31, 2008. The fair value of the Safeguard trade
name exceeded its carrying value of $24.0 million by $0.3 million as of December 31, 2008.
In completing our
goodwill impairment analysis, we test the appropriateness of our reporting
units’ estimated fair values by reconciling the aggregate reporting units’ fair values with our
market capitalization. The aggregate fair value of our reporting
units included a 25% control premium, which is an
amount we estimate a buyer would be willing to pay in excess of the current market price of our
company in order to acquire a controlling interest. The premium is justified by the expected
synergies, such as expected increases in cash flows resulting from cost savings and revenue
enhancements. Our fair value calculation was based on a closing stock
price of $14.96 per share as of December 31, 2008. Both before and
after December 31, 2008 our common stock traded at prices lower than
this closing price. If such a decline in our stock price occurs in
the future for a sustained period, it may be indicative of a further
decline in our fair value and would likely require us to record an
impairment charge for a portion of the $40.2 million of goodwill
allocated to one of our reporting units. Accordingly, we believe that a non-cash goodwill impairment
charge related to this reporting unit and/or further impairment charges related to our
indefinite-lived trade name are reasonably possible in the future.
The credit agreement governing our committed line of credit requires us to maintain a ratio of
earnings before interest and taxes to interest expense of 3.0 times, as measured quarterly on an
aggregate basis for the preceding four quarters. Significant impairment charges in the future could
impact our ability to comply with this debt covenant, in which case our lenders could demand
immediate repayment of amounts outstanding under our line of credit. We would have remained in
compliance with this debt covenant even if our reported pre-tax earnings for 2008 had been $52
million lower than we reported. As such, we do not consider it likely that we will violate this
debt covenant in 2009.
Postretirement and pension plans - The plan assets of our postretirement benefit and pension
plans are valued at fair value using quoted market prices. Investments, in general, are subject to
various risks, including credit, interest and overall market volatility risks. During 2008, the
equity markets saw a significant decline in value. As such, the fair values of our plan assets
decreased significantly during the year. Our plan assets and liabilities were re-measured at
December 31, 2008, in accordance with SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. The unfunded
status of our plans increased by $30.0 million from December 31, 2007, due in large part to the
decrease in the fair values of plan assets. This affected the amounts reported in the consolidated
balance sheet as of December 31, 2008. It also contributes to an expected increase in
postretirement benefit expense of approximately $8 million in 2009. If the equity and bond markets
continue to decline, the funded status of our plans could continue to be materially affected. This
could result in higher postretirement benefit expense in the future, as well as the need to
contribute increased amounts of cash to fund the benefits payable under the plans, although our
obligation is limited to funding benefits as they become payable.
92
Financial institution clients - Continued turmoil in the financial services industry,
including further bank failures and consolidations, could have a significant impact on our
consolidated results of operations if any of the following were to occur:
| • | We could lose a significant contract, which would have a negative impact on our results of operations. | ||
| • | We may be unable to recover the value of any related unamortized contract acquisition cost and/or accounts receivable. Contract acquisition costs, which are treated as pre-paid product discounts, are sometimes utilized in our Financial Services segment when signing or renewing contracts with our financial institution clients and totaled $37.7 million as of December 31, 2008. These amounts are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. In most situations, the contract requires a financial institution to reimburse us for the unamortized contract acquisition cost if it terminates its contract with us prior to the end of the contract term. Our contract acquisition costs are comprised of amounts paid to individual financial institutions, many of which are smaller and would not have a significant impact on our consolidated financial statements if they were deemed unrecoverable. However, the inability to recover amounts paid to one or more of our larger financial institution clients could have a significant negative impact on our consolidated results of operations. | ||
| • | If one or more of our financial institution clients is taken over by a financial institution that is not one of our clients, we could lose significant business. In the case of a cancelled contract, we may be entitled to collect a contract termination payment. However, if a financial institution fails, we may be unable to collect that termination payment. We have no indication at this time that any significant contract terminations are expected. | ||
| • | If one or more of our larger clients were to consolidate with a financial institution that is not one of our clients, our results of operations could be positively impacted if we retain the client, as well as obtain the additional business from the other party in the consolidation. | ||
| • | If two of our financial institution clients consolidate, the increase in general negotiating leverage possessed by the consolidated entities sometimes results in new contracts which are not as favorable to us as those historically negotiated with the clients individually. | ||
| • | We could generate non-recurring conversion revenue. Conversions are driven by the need to replace obsolete checks after one financial institution merges with or acquires another. However, we presently do not have specific information that indicates that we should expect to generate significant income from conversions. |
Deferred compensation plan - We have a non-qualified deferred compensation plan that allows
eligible employees to defer a portion of their compensation. The compensation deferred under this
plan is credited with earnings or losses measured by the mirrored rate of return on phantom
investments elected by plan participants, which are similar to the investments available in our
defined contribution pension plan. As such, our liability for this plan fluctuates with market conditions.
During 2008, we reduced our deferred compensation liability by $1.5 million due to losses on the
underlying investments elected by plan participants. The carrying value of this liability, which
was $3.9 million as of December 31, 2008, may change significantly in future periods if volatility
in the equity markets continues.
93
DELUXE CORPORATION
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
| 2008 Quarter Ended | ||||||||||||||||
| March 31 | June 30(1) | September 30(2) | December 31(3) | |||||||||||||
Revenue |
$ | 377,077 | $ | 363,992 | $ | 362,714 | $ | 364,879 | ||||||||
Gross profit |
234,139 | 226,832 | 212,624 | 228,554 | ||||||||||||
Net income |
27,317 | 32,617 | 13,760 | 27,940 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
0.53 | 0.64 | 0.27 | 0.55 | ||||||||||||
Diluted |
0.53 | 0.63 | 0.27 | 0.55 | ||||||||||||
Cash dividends per share |
0.25 | 0.25 | 0.25 | 0.25 | ||||||||||||
| 2007 Quarter Ended | ||||||||||||||||
| March 31(4) | June 30 | September 30(5) | December 31(6) | |||||||||||||
Revenue |
$ | 399,432 | $ | 395,312 | $ | 384,385 | $ | 409,756 | ||||||||
Gross profit |
253,120 | 255,481 | 243,815 | 261,865 | ||||||||||||
Net income |
35,228 | 35,975 | 32,160 | 40,152 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
0.69 | 0.70 | 0.62 | 0.78 | ||||||||||||
Diluted |
0.68 | 0.69 | 0.62 | 0.77 | ||||||||||||
Cash dividends per share |
0.25 | 0.25 | 0.25 | 0.25 | ||||||||||||
During the fourth quarter of 2008, our Russell & Miller retail packaging and signage business
met the criteria to be classified as discontinued operations in our consolidated financial
statements. As such, revenue and gross profit for prior periods reflect the reclassification of the
results of this business to discontinued operations.
| (1) | 2008 second quarter results include net pre-tax restructuring charges of $2.0 million related to our cost reduction initiatives. Results also include a $1.1 million reduction in income tax expense for discrete items, primarily adjustments to uncertain tax positions. | |
| (2) | 2008 third quarter results include net pre-tax restructuring charges of $21.6 million related to our cost reduction initiatives, as well as asset impairment charges of $9.7 million related to trade names in our Small Business Services segment. Results also include a $1.8 million reduction in income tax expense for discrete items, primarily related to the settlement of amounts due to us under a tax sharing agreement related to the spin-off of our eFunds business in 2000, as well as receivables related to amendments to prior year tax returns. | |
| (3) | 2008 fourth quarter results include net pre-tax restructuring charges of $5.1 million related to our cost reduction initiatives, as well as an asset impairment charge of $0.3 million related to a trade name in our Small Business Services segment. | |
| (4) | 2007 first quarter results include income tax expense of $1.2 million for discrete items, primarily the non-deductible write-off of goodwill related to the sale of our industrial packaging product line, partially offset by the final settlement of an uncertain tax position. | |
| (5) | 2007 third quarter results include net pre-tax restructuring charges of $2.1 million related to our cost reduction initiatives. Results also include a $1.3 million reduction in income tax expense for discrete items, primarily the reconciliation of our 2006 federal income tax return to our 2006 income tax provision. | |
| (6) | 2007 fourth quarter results include net pre-tax restructuring charges of $2.7 million related to our cost reduction initiatives. Results also include a $1.8 million reduction in income tax expense for discrete items, primarily adjustments to receivables related to amendments to prior year income tax returns. |
94
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
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.
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 December
31, 2008, which have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting - Management of Deluxe
Corporation is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework. Based on this assessment we have concluded that, as of December 31, 2008, our internal
control over financial reporting was effective based on those criteria. The attestation report on
our internal control over financial reporting issued by PricewaterhouseCoopers LLP appears in Item
8 of this report.
Item 9B. Other Information.
None.
95
PART III
Except where otherwise noted, the information required by Items 10 through 14 is incorporated
by reference from our definitive proxy statement, to be filed with the Securities and Exchange
Commission within 120 days of our fiscal year-end, with the exception of the executive officers
section of Item 10, which is included in Part I, Item 1 of this report.
Item 10. Directors, Executive Officers and Corporate Governance.
See Part I, Item 1 of this report “Executive Officers of the Registrant.” The sections of the
proxy statement entitled “Item 1: Election of Directors,” “Board Structure and Governance—Audit
Committee Expertise; Complaint-Handling Procedures,” “Board Structure and Governance—Meetings and
Committees of the Board of Directors—Audit Committee,” “Stock Ownership and Reporting—Section 16(a)
Beneficial Ownership Reporting Compliance” and “Board Structure and Governance—Code of Ethics and
Business Conduct” are incorporated by reference to this report.
The full text of our Code of Ethics and Business Conduct (Code of Ethics) is posted on the
Investor Relations page of our website at www.deluxe.com under the “Corporate Governance”
caption. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of the Code of Ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or controller or
persons performing similar functions by posting such information on our website at the address and
location specified above.
Item 11. Executive Compensation.
The sections of the proxy statement entitled “Compensation Committee Report,” “Executive
Compensation,” “Director Compensation” and “Board Structure and Governance—Compensation Committee
Interlocks and Insider Participation” are incorporated by reference to this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The section of the proxy statement entitled “Stock Ownership and Reporting—Security Ownership
of Certain Beneficial Owners and Management” is incorporated by reference to this report.
96
The following table provides information concerning all of our equity compensation plans as of
December 31, 2008:
Equity Compensation Plan Information
| Number of securities | ||||||||||||
| remaining available | ||||||||||||
| for future issuance | ||||||||||||
| Number of securities | under equity | |||||||||||
| to be issued upon | Weighted-average | compensation plans | ||||||||||
| exercise of | exercise price of | (excluding securities | ||||||||||
| outstanding options, | outstanding options, | reflected in the first | ||||||||||
| Plan category | warrants and rights | warrants and rights | column) | |||||||||
Equity compensation
plans approved by
shareholders |
3,250,776 | (1) | $ | 32.00 | (1) | 7,939,983 | (2) | |||||
Equity compensation
plans not approved
by shareholders |
None | None | None | |||||||||
Total |
3,250,776 | $ | 32.00 | 7,939,983 | ||||||||
| (1) | Includes awards granted under our 2008 Stock Incentive Plan and our previous stock incentive plans adopted in 2000, as amended, and in 1994. The number of securities to be issued upon exercise of outstanding options, warrants and rights includes outstanding stock options of 3,105,395 and restricted stock unit awards of 145,381. | |
| (2) | Includes 4,201,191 shares reserved for issuance under our Amended and Restated 2000 Employee Stock Purchase Plan. Of the total available for future issuance, 3,738,792 shares remain available for issuance under our 2008 Stock Incentive Plan. Under this plan, full value awards such as restricted stock, restricted stock units and share-based performance awards reduce the number of shares available for issuance by a factor of 2.29, or if such an award were forfeited or terminated without delivery of the shares, the number of shares that again become eligible for issuance would be multiplied by a factor of 2.29. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
None of our directors or officers, nor any known person who beneficially owns, directly or
indirectly, five percent of our common stock, nor any member of the immediate family of any of the
foregoing persons has any material interest, direct or indirect, in any transaction since January
1, 2008 or in any presently proposed transaction which, in either case, has affected or will
materially affect us. None of our directors or officers is indebted to us.
The sections of the proxy entitled “Board Structure and Governance—Board Oversight and
Director Independence” and “Board Structure and Governance—Related Party Transaction Policy and
Procedures” are incorporated by reference to this report.
Item 14. Principal Accounting Fees and Services.
The sections of the proxy statement entitled “Fiscal Year 2008 Audit and Independent
Registered Public Accounting Firm—Fees Paid to Independent Registered Public Accounting Firm” and
“Fiscal Year 2008 Audit and Independent Registered Public Accounting Firm—Policy on Audit Committee
Pre-Approval of Accounting Firm Fees and Services” are incorporated by reference to this report.
97
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statements and Schedules
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.
Financial statement schedules have been omitted since they are either
not required or are not
applicable, or the required information is shown in the consolidated financial statements or notes.
(b) Exhibit Listing
The following exhibits are filed as part of or are incorporated in this report by reference:
| 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 Current Report on Form 8-K filed with the Commission on October 23, 2008) | * | ||
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 Form 8-K filed with the Commission on December 5, 2002) | * |
98
| Exhibit | Method of | |||
| Number | Description | Filing | ||
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 Officer’s 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) | * | ||
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 |
2008 Annual Incentive Plan (incorporated by reference to Appendix A of our definitive proxy statement filed with the Commission on March 13, 2008)** | * | ||
10.2
|
2008 Stock Incentive Plan (incorporated by reference to Appendix B of our definitive proxy statement filed with the Commission on March 13, 2008)** | * | ||
10.3
|
First Amendment to Deluxe Corporation Non-employee Director Stock and Deferral Plan** | Filed herewith | ||
10.4
|
Amended and Restated 2000 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2001)** | * | ||
10.5 |
Deluxe Corporation Deferred Compensation Plan (2008 Restatement)** | Filed herewith | ||
10.6
|
Deluxe Corporation Deferred Compensation Plan Trust (incorporated by reference to Exhibit 4.3 to the Form S-8 filed January 7, 2002)** | * | ||
10.7
|
Deluxe Corporation Executive Deferred Compensation Plan for Employee Retention and Other Eligible Arrangements (incorporated by reference to Exhibit 10.24 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)** | * |
99
| Exhibit | Method of | |||
| Number | Description | Filing | ||
10.8
|
Deluxe Corporation Supplemental Benefit Plan (incorporated by reference to Exhibit (10)(B) to the Annual Report on Form 10-K for the year ended December 31, 1995)** | * | ||
10.9
|
First Amendment to the Deluxe Corporation Supplemental Benefit Plan (2001 Restatement) (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2001)** | * | ||
10.10
|
Description of modification to the Deluxe Corporation Non-Employee Director Retirement and Deferred Compensation Plan (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K for the year ended December 31, 1997)** | * | ||
10.11
|
Description of Non-employee Director Compensation Arrangements, updated April 30, 2008 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)** | * | ||
10.12
|
Form of Severance Agreement entered into between Deluxe and the following executive officers: Anthony Scarfone, Terry Peterson, Richard Greene, Lynn Koldenhoven, Pete Godich, Julie Loosbrock, Malcolm McRoberts, Tom Morefield and Laura Radewald (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 2000)** | * | ||
10.13
|
Form of Executive Retention Agreement entered into between Deluxe and the following executive officers: Anthony Scarfone and Richard Greene (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2000)** | * | ||
10.14
|
Form of Executive Retention Agreement between Deluxe and Lee Schram (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed with the Commission on April 17, 2006)** | * | ||
10.15
|
Form of Executive Retention Agreement, dated as of August 8, 2007, by and between Deluxe and Lee J. Schram (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the Commission on August 10, 2007)** | * | ||
10.16
|
Form of Executive Retention Agreement entered into between Deluxe and each Senior Vice President (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed with the Commission on August 10, 2007)** | * | ||
10.17
|
Form of Executive Retention Agreement entered into between Deluxe and each Vice President designated as an executive officer (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed with the Commission on August 10, 2007)** | * | ||
10.18
|
Form of Addendum to Executive Retention and Severance Agreements Relating to Section 409A of the Internal Revenue Code** | Filed herewith | ||
10.19
|
Form of Agreement for Awards Payable in Restricted Stock Units (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on January 28, 2005)** | * |
100
| Exhibit | Method of | |||
| Number | Description | Filing | ||
10.20 |
Form of Agreement for Awards Payable in Restricted Stock Units (rev. 12/08)** | Filed herewith | ||
10.21
|
Form of Non-employee Director Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2004)** | * | ||
10.22
|
Form of Agreement as to Award of Restricted Common Stock (Non-Employee Director Grants) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on October 27, 2006)** | * | ||
10.23
|
Form of Non-Employee Director Restricted Stock Award Agreement (ver. 4/07) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10Q for the quarter ended March 31, 2007)** | * | ||
10.24
|
Form of Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2004)** | |||
10.25
|
Form of Non-qualified Stock Option Agreement (as amended February 2006) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on February 21, 2006)** | * | ||
10.26
|
Form of Restricted Stock Award Agreement (Two-Year Retention Term) (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Commission on February 21, 2006)** | * | ||
10.27
|
Form of Non-Qualified Stock Option Agreement (version 2/07) (incorporated by reference to exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 2006)** | * | ||
10.28
|
Form of Performance Accelerated Restricted Stock Award Agreement (version 2/07) (incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K for the year ended December 31, 2006)** | * | ||
10.29
|
Employment Agreement dated as of April 10, 2006, between Deluxe and Lee Schram (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the Commission on April 17, 2006)** | * | ||
10.30
|
Offer letter, dated as of September 15, 2006, between Deluxe and Richard S. Greene (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)** | * | ||
12.1
|
Statement re: Computation of Ratios | Filed herewith | ||
21.1
|
Subsidiaries of the Registrant | Filed herewith |
101
| Exhibit | Method of | |||
| Number | Description | Filing | ||
23.1
|
Consent of Independent Registered Public Accounting Firm | Filed herewith | ||
24.1
|
Power of Attorney | 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 | |
| ** | Denotes compensatory plan or management contract |
Note to recipients of Form 10-K: Copies of exhibits will be furnished upon written request and
payment of reasonable expenses in furnishing such copies.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
||||
| Date: February 18, 2009 | By: | /s/ Lee Schram | ||
| Lee Schram | ||||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
on February 18, 2009.
| Signature | Title | |||||
By
|
/s/ Lee Schram | Chief Executive Officer | ||||
| Lee Schram | (Principal Executive Officer) | |||||
By
|
/s/ Richard S. Greene | Senior Vice President, Chief Financial Officer | ||||
| Richard S. Greene | (Principal Financial Officer) | |||||
By
|
/s/ Terry D. Peterson | Vice President, Investor Relations
and Chief Accounting Officer (Principal Accounting Officer) |
||||
| Terry D. Peterson | ||||||
| * | ||||||
| Ronald C. Baldwin | Director | |||||
| * | ||||||
| Charles A. Haggerty | Director | |||||
| * | ||||||
| Isaiah Harris, Jr. | Director | |||||
| * | ||||||
| Don J. McGrath | Director | |||||
| * | ||||||
| Cheryl E. Mayberry McKissack | Director | |||||
| * | ||||||
| Neil J. Metviner | Director | |||||
103
| Signature | Title | |||||
| * | ||||||
| Stephen P. Nachtsheim | Director | |||||
| * | ||||||
| Mary Ann O’Dwyer | Director | |||||
| * | ||||||
| Martyn R. Redgrave | Director | |||||
*By:
|
/s/ Lee Schram | |||||
| Lee Schram | ||||||
| Attorney-in-Fact | ||||||
104
EXHIBIT INDEX
| Exhibit No. | Description | |
10.3
|
First Amendment to Deluxe Corporation Non-employee Director Stock and Deferral Plan | |
10.5 |
Deluxe Corporation Deferred Compensation Plan (2008 Restatement) | |
10.18
|
Form of Addendum to Executive Retention and Severance Agreements Relating to Section 409A of the Internal Revenue Code | |
10.20 |
Form of Agreement for Awards Payable in Restricted Stock Units (rev. 12/08) | |
12.1
|
Statement re: Computation of Ratios | |
21.1
|
Subsidiaries of the Registrant | |
23.1
|
Consent of Independent Registered Public Accounting Firm | |
24.1
|
Power of Attorney | |
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 |
105