DELUXE CORP
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
| Minnesota | 41-0216800 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
| 3680 Victoria St. N., Shoreview, Minnesota | 55126-2966 | |
| (Address of principal executive offices) | (Zip Code) |
(651) 483-7111
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or such shorter period that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at July
21, 2010 was 51,375,871.
TABLE OF CONTENTS
Table of Contents
PART I-FINANCIAL INFORMATION
| Item 1. Financial Statements. | ||
DELUXE
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)
(Unaudited)
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 15,513 | $ | 12,789 | ||||
|
Trade accounts receivable (net of allowances for uncollectible
accounts of $4,338 and $4,991, respectively)
|
61,478 | 65,564 | ||||||
|
Inventories and supplies
|
21,331 | 22,122 | ||||||
|
Deferred income taxes
|
10,043 | 10,841 | ||||||
|
Funds held for customers
|
39,992 | 26,901 | ||||||
|
Other current assets
|
35,658 | 21,282 | ||||||
|
|
||||||||
|
Total current assets
|
184,015 | 159,499 | ||||||
|
Long-Term Investments (including $2,106 and $2,231 of investments at
fair value, respectively)
|
36,728 | 39,200 | ||||||
|
Property, Plant, and Equipment (net of accumulated depreciation of
$336,471 and $335,415, respectively)
|
119,200 | 121,797 | ||||||
|
Assets Held for Sale
|
4,527 | 4,527 | ||||||
|
Intangibles (net of accumulated amortization of $385,105 and $362,201,
respectively)
|
171,375 | 145,910 | ||||||
|
Goodwill
|
725,387 | 658,666 | ||||||
|
Other Non-Current Assets
|
95,677 | 81,611 | ||||||
|
|
||||||||
|
Total assets
|
$ | 1,336,909 | $ | 1,211,210 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$ | 65,829 | $ | 60,640 | ||||
|
Accrued liabilities
|
136,645 | 156,408 | ||||||
|
Short-term debt
|
99,000 | 26,000 | ||||||
|
|
||||||||
|
Total current liabilities
|
301,474 | 243,048 | ||||||
|
Long-Term Debt
|
747,513 | 742,753 | ||||||
|
Deferred Income Taxes
|
43,908 | 24,800 | ||||||
|
Other Non-Current Liabilities
|
81,063 | 83,399 | ||||||
|
Commitments and Contingencies (Notes 11, 12 and 15)
|
||||||||
|
Shareholders’ Equity:
|
||||||||
|
Common shares $1 par value (authorized: 500,000 shares;
outstanding: 2010 — 51,376; 2009 — 51,189)
|
51,376 | 51,189 | ||||||
|
Additional paid-in capital
|
61,429 | 58,071 | ||||||
|
Retained earnings
|
102,071 | 60,768 | ||||||
|
Accumulated other comprehensive loss
|
(51,925 | ) | (52,818 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
162,951 | 117,210 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,336,909 | $ | 1,211,210 | ||||
|
|
||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
2
Table of Contents
DELUXE
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
(Unaudited)
| Quarter Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenue
|
$ | 347,996 | $ | 332,069 | $ | 683,116 | $ | 671,589 | ||||||||
|
Cost of
goods sold, including restructuring charges
|
121,940 | 126,964 | 240,303 | 256,223 | ||||||||||||
|
|
||||||||||||||||
|
Gross Profit
|
226,056 | 205,105 | 442,813 | 415,366 | ||||||||||||
|
|
||||||||||||||||
|
Selling, general and administrative expense
|
160,685 | 151,730 | 308,730 | 310,086 | ||||||||||||
|
Net restructuring charges
|
2,151 | 292 | 1,908 | 115 | ||||||||||||
|
Asset impairment charges
|
— | — | — | 24,900 | ||||||||||||
|
|
||||||||||||||||
|
Operating Income
|
63,220 | 53,083 | 132,175 | 80,265 | ||||||||||||
|
|
||||||||||||||||
|
Gain on early debt extinguishment
|
— | — | — | 9,834 | ||||||||||||
|
Interest expense
|
(11,508 | ) | (11,627 | ) | (22,043 | ) | (24,047 | ) | ||||||||
|
Other (expense) income
|
(1,044 | ) | 207 | (1,400 | ) | 565 | ||||||||||
|
|
||||||||||||||||
|
Income Before Income Taxes
|
50,668 | 41,663 | 108,732 | 66,617 | ||||||||||||
|
|
||||||||||||||||
|
Income tax provision
|
17,054 | 13,887 | 41,334 | 26,337 | ||||||||||||
|
|
||||||||||||||||
|
Income From Continuing Operations
|
33,614 | 27,776 | 67,398 | 40,280 | ||||||||||||
|
|
||||||||||||||||
|
Net Loss From Discontinued Operations
|
— | — | (399 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Net Income
|
$ | 33,614 | $ | 27,776 | $ | 66,999 | $ | 40,280 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic Earnings Per Share:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 0.65 | $ | 0.54 | $ | 1.31 | $ | 0.79 | ||||||||
|
Net loss from discontinued operations
|
— | — | (0.01 | ) | — | |||||||||||
|
Basic earnings per share
|
0.65 | 0.54 | 1.30 | 0.79 | ||||||||||||
|
|
||||||||||||||||
|
Diluted Earnings Per Share:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 0.65 | $ | 0.54 | $ | 1.31 | $ | 0.79 | ||||||||
|
Net loss from discontinued operations
|
— | — | (0.01 | ) | — | |||||||||||
|
Diluted earnings per share
|
0.65 | 0.54 | 1.30 | 0.79 | ||||||||||||
|
|
||||||||||||||||
|
Cash Dividends Per Share
|
$ | 0.25 | $ | 0.25 | $ | 0.50 | $ | 0.50 | ||||||||
|
|
||||||||||||||||
|
Total Comprehensive Income
|
$ | 32,794 | $ | 32,577 | $ | 67,892 | $ | 47,099 | ||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
3
Table of Contents
DELUXE
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
|
Cash Flows From Operating Activities:
|
||||||||
|
Net income
|
$ | 66,999 | $ | 40,280 | ||||
|
Adjustments to reconcile net income to net cash provided by operating
activities of continuing operations:
|
||||||||
|
Net loss from discontinued operations
|
399 | — | ||||||
|
Depreciation
|
10,542 | 11,638 | ||||||
|
Amortization of intangibles
|
24,742 | 23,116 | ||||||
|
Asset impairment charges
|
— | 24,900 | ||||||
|
Amortization of contract acquisition costs
|
9,803 | 12,460 | ||||||
|
Deferred income taxes
|
6,068 | 3,826 | ||||||
|
Employee share-based compensation expense
|
3,084 | 3,464 | ||||||
|
Gain on early debt extinguishment
|
— | (9,834 | ) | |||||
|
Other non-cash items, net
|
6,188 | 9,228 | ||||||
|
Changes in assets and liabilities, net of effects of acquisitions and
discontinued operations:
|
||||||||
|
Trade accounts receivable
|
3,043 | 7,203 | ||||||
|
Inventories and supplies
|
(36 | ) | 1,065 | |||||
|
Other current assets
|
(2,131 | ) | (2,969 | ) | ||||
|
Non-current assets
|
3,029 | 5,671 | ||||||
|
Accounts payable
|
(234 | ) | 3,031 | |||||
|
Contract acquisition payments
|
(10,689 | ) | (15,456 | ) | ||||
|
Other accrued and non-current liabilities
|
(50,268 | ) | (31,763 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities of continuing operations
|
70,539 | 85,860 | ||||||
|
|
||||||||
|
|
||||||||
|
Cash Flows From Investing Activities:
|
||||||||
|
Purchases of capital assets
|
(21,066 | ) | (23,737 | ) | ||||
|
Payments for acquisitions, net of cash acquired
|
(98,621 | ) | — | |||||
|
Purchases of customer lists
|
(70 | ) | (1,639 | ) | ||||
|
Proceeds from life insurance policies
|
5,782 | — | ||||||
|
Proceeds from sales of marketable securities
|
1,970 | — | ||||||
|
Other
|
(1,748 | ) | (3,023 | ) | ||||
|
|
||||||||
|
Net cash used by investing activities of continuing operations
|
(113,753 | ) | (28,399 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Cash Flows From Financing Activities:
|
||||||||
|
Net proceeds (payments) on short-term debt
|
73,000 | (2,743 | ) | |||||
|
Payments on long-term debt
|
— | (22,134 | ) | |||||
|
Payments for debt issue costs, credit facility
|
(2,324 | ) | — | |||||
|
Change in book overdrafts
|
(939 | ) | (4,161 | ) | ||||
|
Proceeds from issuing shares under employee plans
|
1,600 | 1,042 | ||||||
|
Excess tax benefit from share-based employee awards
|
471 | 8 | ||||||
|
Payments for common shares repurchased
|
— | (1,319 | ) | |||||
|
Cash dividends paid to shareholders
|
(25,696 | ) | (25,621 | ) | ||||
|
|
||||||||
|
Net cash provided (used) by financing activities of continuing operations
|
46,112 | (54,928 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Effect Of Exchange Rate Change On Cash
|
(174 | ) | 500 | |||||
|
Cash Used By Operating Activities Of Discontinued Operations
|
— | (470 | ) | |||||
|
Cash Used By Investing Activities Of Discontinued Operations
|
— | (12 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Net Change In Cash And Cash Equivalents
|
2,724 | 2,551 | ||||||
|
Cash And Cash Equivalents: Beginning Of Period
|
12,789 | 15,590 | ||||||
|
|
||||||||
|
End Of Period
|
$ | 15,513 | $ | 18,141 | ||||
|
|
||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
4
Table of Contents
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Consolidated financial statements
The consolidated balance sheet as of June 30, 2010, the consolidated statements of income for
the quarters and six months ended June 30, 2010 and 2009 and the consolidated statements of cash
flows for the six months ended June 30, 2010 and 2009 are unaudited. The consolidated balance sheet
as of December 31, 2009 was derived from audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles (GAAP) in the United
States of America. In the opinion of management, all adjustments necessary for a fair statement of
the consolidated financial statements are included. Adjustments consist only of normal recurring
items, except for any discussed in the notes below. Interim results are not necessarily indicative
of results for a full year. The consolidated financial statements and notes are presented in
accordance with instructions for Form 10-Q, and do not contain certain information included in our
annual consolidated financial statements and notes. The consolidated financial statements and notes
appearing in this report should be read in conjunction with the consolidated audited financial
statements and related notes included in our Annual Report on Form 10-K for the year ended December
31, 2009 (the “2009 Form 10-K”).
Note 2: New accounting pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements.
This guidance requires new disclosures and clarifies some existing
disclosure requirements regarding fair value measurements. The disclosures required under this
guidance are included in Note 5, with the exception of disclosures about purchases, sales,
issuances and settlements in the rollforward of activity in Level 3 fair value measurements. Those
disclosures will be effective for our quarterly report on Form 10-Q for the quarter ending March
31, 2011.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09,
Subsequent Events
(Topic 855): Amendments to Certain Recognition and Disclosure Requirements
. This guidance removes
the requirement to disclose the date through which subsequent events have been evaluated in both
issued and revised financial statements for companies that file financial statements with the
Securities and Exchange Commission (SEC). This new guidance was effective immediately. We evaluate
subsequent events through the date our financial statements are filed with the SEC.
Note 3: Supplemental balance sheet information
Inventories and supplies
— Inventories and supplies were comprised of the following:
| June 30, | December 31, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
|
Raw materials
|
$ | 4,526 | $ | 4,048 | ||||
|
Semi-finished goods
|
8,344 | 8,750 | ||||||
|
Finished goods
|
5,078 | 5,602 | ||||||
|
|
||||||||
|
Total inventories
|
17,948 | 18,400 | ||||||
|
Supplies, primarily production
|
3,383 | 3,722 | ||||||
|
|
||||||||
|
Inventories and supplies
|
$ | 21,331 | $ | 22,122 | ||||
|
|
||||||||
5
Table of Contents
Marketable securities —
Available-for-sale marketable securities included within funds held
for customers and other current assets were comprised of the following:
| June 30, 2010 | ||||||||||||||||
| Gross unrealized | Gross unrealized | |||||||||||||||
| (in thousands) | Cost | gains | losses | Fair value | ||||||||||||
|
Corporate investments:
|
||||||||||||||||
|
Money market securities
|
$ | 1,895 | $ | — | $ | — | $ | 1,895 | ||||||||
|
Funds held for customers:
(1)
|
||||||||||||||||
|
Money market securities
|
4,738 | — | — | 4,738 | ||||||||||||
|
Canadian and provincial government
securities
|
4,761 | — | (3 | ) | 4,758 | |||||||||||
|
|
||||||||||||||||
|
Marketable securities — funds
held for customers
|
9,499 | — | (3 | ) | 9,496 | |||||||||||
|
|
||||||||||||||||
|
Total marketable securities
|
$ | 11,394 | $ | — | $ | (3 | ) | $ | 11,391 | |||||||
|
|
||||||||||||||||
| (1) | Funds held for customers, as reported on the consolidated balance sheet as of June 30, 2010, also included cash and cash equivalents of $30,496. |
| December 31, 2009 | ||||||||||||||||
| Gross unrealized | Gross unrealized | |||||||||||||||
| (in thousands) | Cost | gains | losses | Fair value | ||||||||||||
|
Corporate investments:
|
||||||||||||||||
|
Money market securities
|
$ | 3,667 | $ | — | $ | — | $ | 3,667 | ||||||||
|
Funds held for customers:
(1)
|
||||||||||||||||
|
Money market securities
|
9,522 | — | — | 9,522 | ||||||||||||
|
|
||||||||||||||||
|
Total marketable securities
|
$ | 13,189 | $ | — | $ | — | $ | 13,189 | ||||||||
|
|
||||||||||||||||
| (1) | Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2009, also included cash and cash equivalents of $17,379. |
Expected maturities of available-for-sale securities as of June 30, 2010 were as follows:
| (in thousands) | Fair value | |||
|
Due in one year or less
|
$ | 7,656 | ||
|
Due in one to three years
|
1,198 | |||
|
Due in three to five years
|
342 | |||
|
Due after five years
|
2,195 | |||
|
|
||||
|
Total marketable securities
|
$ | 11,391 | ||
|
|
||||
Further information regarding the fair value of marketable securities can be found in Note 5:
Fair value measurements.
6
Table of Contents
Intangibles
— Intangibles were comprised of the following:
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross carrying | Accumulated | Accumulated | ||||||||||||||||||||||
| (in thousands) | amount | amortization | Net carrying amount | Gross carrying amount | amortization | Net carrying amount | ||||||||||||||||||
|
Indefinite-lived:
|
||||||||||||||||||||||||
|
Trade name
|
$ | 19,100 | $ | — | $ | 19,100 | $ | 19,100 | $ | — | $ | 19,100 | ||||||||||||
|
Amortizable intangibles:
|
||||||||||||||||||||||||
|
Internal-use software
|
367,146 | (299,478 | ) | 67,668 | 341,822 | (285,181 | ) | 56,641 | ||||||||||||||||
|
Customer
lists/relationships
|
71,469 | (33,291 | ) | 38,178 | 55,745 | (25,777 | ) | 29,968 | ||||||||||||||||
|
Trade names
|
59,361 | (20,268 | ) | 39,093 | 51,861 | (20,375 | ) | 31,486 | ||||||||||||||||
|
Distributor contracts
|
30,900 | (25,495 | ) | 5,405 | 30,900 | (24,594 | ) | 6,306 | ||||||||||||||||
|
Other
|
8,504 | (6,573 | ) | 1,931 | 8,683 | (6,274 | ) | 2,409 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Amortizable intangibles
|
537,380 | (385,105 | ) | 152,275 | 489,011 | (362,201 | ) | 126,810 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Intangibles
|
$ | 556,480 | $ | (385,105 | ) | $ | 171,375 | $ | 508,111 | $ | (362,201 | ) | $ | 145,910 | ||||||||||
|
|
||||||||||||||||||||||||
Total amortization of intangibles was $14.3 million for the quarter ended June 30, 2010 and
$11.9 million for the quarter ended June 30, 2009. Amortization of intangibles was $24.7 million
for the six months ended June 30, 2010 and $23.1 million for the six months ended June 30, 2009.
Based on the intangibles in service as of June 30, 2010, estimated future amortization expense is
as follows:
| (in thousands) | ||||
|
Remainder of 2010
|
$ | 28,438 | ||
|
2011
|
39,442 | |||
|
2012
|
20,706 | |||
|
2013
|
11,433 | |||
|
2014
|
7,992 | |||
Goodwill
— Changes in goodwill during the six months ended June 30, 2010 were as follows:
| Small | ||||||||||||||||
| Business | Direct | |||||||||||||||
| (in thousands) | Services | Financial Services | Checks | Total | ||||||||||||
|
Balance, December 31, 2009:
|
||||||||||||||||
|
Goodwill
|
$ | 596,429 | $ | — | $ | 82,237 | $ | 678,666 | ||||||||
|
Accumulated impairment charges
|
(20,000 | ) | — | — | (20,000 | ) | ||||||||||
|
|
||||||||||||||||
|
|
576,429 | — | 82,237 | 658,666 | ||||||||||||
|
Acquisition of Custom Direct,
Inc. (see Note 7)
|
— | — | 65,843 | 65,843 | ||||||||||||
|
Acquisition of Cornerstone
Customer Solutions, LLC (see
Note 7)
|
— | 897 | — | 897 | ||||||||||||
|
Currency translation adjustment
|
(19 | ) | — | — | (19 | ) | ||||||||||
|
|
||||||||||||||||
|
Balance, June 30, 2010:
|
||||||||||||||||
|
Goodwill
|
596,410 | 897 | 148,080 | 745,387 | ||||||||||||
|
Accumulated impairment charges
|
(20,000 | ) | — | — | (20,000 | ) | ||||||||||
|
|
||||||||||||||||
|
|
$ | 576,410 | $ | 897 | $ | 148,080 | $ | 725,387 | ||||||||
|
|
||||||||||||||||
7
Table of Contents
Other non-current assets
— Other non-current assets were comprised of the following:
| June 30, | December 31, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
|
Contract acquisition costs (net of accumulated amortization of
$91,673 and $107,971, respectively)
|
$ | 57,483 | $ | 45,701 | ||||
|
Deferred advertising costs
|
14,938 | 14,455 | ||||||
|
Other
|
23,256 | 21,455 | ||||||
|
|
||||||||
|
Other non-current assets
|
$ | 95,677 | $ | 81,611 | ||||
|
|
||||||||
See Note 15 for discussion of the risks associated with the recoverability of contract
acquisition costs. Changes in contract acquisition costs during the first six months of 2010 and
2009 were as follows:
| Six Months Ended June 30, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
|
Balance, beginning of year
|
$ | 45,701 | $ | 37,706 | ||||
|
Additions
(1)
|
21,728 | 30,556 | ||||||
|
Amortization
|
(9,803 | ) | (12,460 | ) | ||||
|
Write-off
|
(143 | ) | — | |||||
|
|
||||||||
|
Balance, end of period
|
$ | 57,483 | $ | 55,802 | ||||
|
|
||||||||
| (1) | Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $10,689 for the six months ended June 30, 2010 and $15,456 for the six months ended June 30, 2009. |
Accrued liabilities
— Accrued liabilities were comprised of the following:
| June 30, | December 31, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
|
Funds held for customers
|
$ | 39,880 | $ | 26,901 | ||||
|
Customer rebates
|
19,681 | 21,861 | ||||||
|
Employee profit sharing and pension
|
18,322 | 36,594 | ||||||
|
Wages, including vacation
|
11,099 | 5,272 | ||||||
|
Contract acquisition costs due within one year
|
9,610 | 2,795 | ||||||
|
Deferred revenue
|
8,817 | 23,720 | ||||||
|
Interest
|
5,241 | 5,227 | ||||||
|
Restructuring due within one year (see Note 8)
|
3,819 | 11,151 | ||||||
|
Other
|
20,176 | 22,887 | ||||||
|
|
||||||||
|
Accrued liabilities
|
$ | 136,645 | $ | 156,408 | ||||
|
|
||||||||
Note 4: Derivative financial instruments
In September 2009, we entered into interest rate swaps with a notional amount of $210.0
million to hedge against changes in the fair value of a portion of our ten-year bonds due in 2012.
We entered into these swaps, which we designated as fair value hedges, to achieve a targeted mix of
fixed and variable rate debt, where we receive a fixed rate and pay a variable rate based on the
London Interbank Offered Rate (LIBOR). Changes in the fair value of the interest rate swaps and the
related long-term debt are included in interest expense in the consolidated statements of income.
When the change in the fair value of the interest rate swaps and the hedged debt are not equal
(i.e., hedge ineffectiveness), the difference in the changes in fair value affects the reported
amount of interest expense in our consolidated statements of income. Hedge ineffectiveness was not
significant for the quarter or six months ended June 30, 2010. The fair value of the interest rate
swaps was an asset of $4.8 million as of June 30, 2010, which is included in other non-current
assets on the consolidated balance sheet. As of December 31, 2009, the fair value of the interest
rate swaps was a liability of $0.2 million, which is included in other non-current liabilities on
the consolidated balance sheet. See Note 5 for further information regarding the fair value of
these instruments.
8
Table of Contents
Note 5: Fair value measurements
2010 acquisition —
During April 2010, we purchased the stock of Custom Direct, Inc. (see Note
7). With the exception of goodwill and deferred income taxes, we were required to measure the fair
value of the net identifiable tangible and intangible assets and liabilities acquired. The
identifiable net assets acquired (excluding goodwill) were comprised primarily of a customer list,
internal-use software and trade names. The fair value of the customer list was estimated using the
multi-period excess earnings method. Assumptions used in this calculation included a same-customer
revenue growth rate and an estimated annual customer retention rate. The customer retention rate
was based on estimated re-order rates, as well as management’s estimates of the costs to obtain and
retain customers. The calculated fair value of the customer list was $15.0 million, which is being
amortized over 1.3 years using an accelerated method. The fair value of the internal-use software
was estimated using a cost of reproduction method. The primary components of the software were
identified and the estimated cost to reproduce the software was calculated based on estimated time
and labor rates derived from our historical data from previous upgrades of similar size and nature.
The calculated fair value of the internal-use software was $12.6 million, which is being amortized
on the straight-line basis over a weighted average useful life of 4.7 years. The fair value of the
trade names was estimated using a relief from royalty method, which calculates the cost savings
associated with owning rather than licensing the trade names. An assumed royalty rate was applied
to forecasted revenue and the resulting cash flows were discounted. The assumed royalty rate was
based on market data and an analysis of the expected margins for Custom Direct’s operations. The
calculated fair value of the trade names was $8.9 million, which is being amortized on the
straight-line basis over 10 years.
2009 asset impairment analyses
— We evaluate the carrying value of our indefinite-lived trade
name and goodwill as of July 31
st
of each year and between annual evaluations if events
occur or circumstances change that would indicate a possible impairment. During the quarter ended
March 31, 2009, we experienced continued declines in our stock price, as well as a continuing
negative impact of the economic downturn on our expected operating results. Based on these
indicators of potential impairment, we completed impairment analyses of our indefinite-lived trade
name and goodwill as of March 31, 2009.
The estimate of fair value of our indefinite-lived trade name 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. If the estimated fair value is less than the carrying value of the asset, an
impairment loss is recognized. During the quarter ended March 31, 2009, we recorded a non-cash
asset impairment charge in our Small Business Services segment of $4.9 million related to our
indefinite-lived trade name.
A two-step approach is used in evaluating goodwill for impairment. First, we compare the fair
value of the reporting unit to which the goodwill is assigned to the carrying amount of its net
assets. In calculating fair value, we use the income approach. The income approach is a valuation
technique under which we estimate future cash flows using the 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. During the quarter ended March 31, 2009, the
carrying value of the net assets of one of our reporting units exceeded the estimated fair value.
As such, the second step of the goodwill impairment analysis required that we compare the implied
fair value of the goodwill to its carrying amount. In calculating the implied fair value of the
goodwill, we measured the fair value of the reporting unit’s assets and liabilities, excluding
goodwill. The excess of the fair value of the reporting unit over the amount assigned to its assets
and liabilities, excluding goodwill, is the implied fair value of the reporting unit’s goodwill.
Significant intangible assets of the reporting unit identified for purposes of this impairment
analysis included the indefinite-lived trade name discussed above and a distributor contract
intangible asset. The fair value of the distributor contract was measured using the income
approach, including adjustments for an estimated distributor retention rate based on historical
experience. As a result of our analysis, we recorded a non-cash asset impairment charge during the
quarter ended March 31, 2009 in our Small Business Services segment of $20.0 million related to
goodwill.
9
Table of Contents
Information regarding the nonrecurring fair value measurements completed during the quarter
ended March 31, 2009 was as follows:
| Fair value measurements using | ||||||||||||||||||||
| Fair value | Quoted prices in active | Significant other | Significant | |||||||||||||||||
| as of measurement | markets for identical | observable inputs | unobservable inputs | |||||||||||||||||
| (in thousands) | date | assets (Level 1) | (Level 2) | (Level 3) | Impairment charge | |||||||||||||||
|
Goodwill
(1)
|
$ | 20,245 | $ | — | $ | — | $ | 20,245 | $ | 20,000 | ||||||||||
|
Indefinite-lived trade
name
(2)
|
19,100 | — | — | 19,100 | 4,900 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total impairment charges
|
$ | 24,900 | ||||||||||||||||||
|
|
||||||||||||||||||||
| (1) | Represents the implied fair value of the goodwill assigned to the reporting unit for which we were required to calculate this amount. | |
| (2) | Represents the event-driven impairment analysis completed during the quarter ended March 31, 2009. This asset was reassessed during the quarter ended September 30, 2009 as part of our annual impairment analysis, at which time the fair value of the asset was estimated to be $23,500. |
Recurring fair value measurements —
We held, as corporate investments,
available-for-sale marketable securities of $1.9 million as of June 30, 2010 and $3.7 million as of
December 31, 2009. These investments are included in other current assets on the consolidated
balance sheets. The fair value of these assets is determined based on quoted prices in active
markets for identical assets. Because of the short-term nature of the underlying investments, the
cost of these securities approximates their fair value. The cost of securities sold is determined
using the average cost method. No gains or losses on sales of marketable securities were realized
during the quarters or six months ended June 30, 2010 and 2009.
Funds held for customers included available-for-sale marketable securities of $9.5 million as
of June 30, 2010 and December 31, 2009. The fair value of these assets is determined based on
quoted prices in active markets for identical assets. Unrealized gains and losses, net of tax, are
included in other comprehensive loss on the consolidated balance sheets. Realized gains and losses
are included in revenue on the consolidated statements of income and were not significant for the
quarter and six months ended June 30, 2010. The cost of securities sold is determined using the
average cost method. Funds held for customers during the quarter and six months ended June 30, 2009
did not include marketable securities.
We have elected to account for a long-term investment in domestic mutual funds under the fair
value option for financial assets and financial liabilities. Realized and unrealized gains and
losses, as well as dividends earned by the investment, are included in selling, general and
administrative (SG&A) expense in our consolidated statements of income. 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 investment in mutual funds. The liability under the plan
equals the fair value of the investment in mutual funds. Thus, as the value of the investment
changes, the liability changes accordingly. As changes in the liability are reflected within SG&A
expense in the consolidated statements of income, the fair value option of accounting for the
investment in mutual funds allows us to net changes in the investment and the related liability in
the statements of income. The fair value of this investment is included in long-term investments in
the consolidated balance sheets. The long-term investment caption on our consolidated balance
sheets also includes life insurance policies which are recorded at their cash surrender values. The
cost of securities sold is determined using the average cost method. Unrealized gains recognized on
the investment in mutual funds were not significant during the quarter and six months ended June
30, 2010. We recognized net unrealized gains of $0.4 million during the quarter ended June 30, 2009
and $0.1 million during the six months ended June 30, 2009. Realized gains and losses recognized
during the quarters and six months ended June 30, 2010 and 2009 were not significant.
The fair value of interest rate swaps (see Note 4) is determined at each reporting date by
means of a pricing model utilizing readily observable market interest rates. The change in fair
value is determined as the change in the present value of estimated future cash flows discounted
using the LIBOR rate applicable to the interest rate swaps. During the quarter ended June 30, 2010,
we recognized a gain on these derivative instruments of $2.5 million, which was offset by a loss of
$2.4 million related to an increase in the fair value of the hedged long-term debt. During the six
months ended June 30, 2010, we recognized a gain on these derivative instruments of $5.0 million,
which was offset by a loss of $4.6 million related to an increase in the fair value of the hedged
long-term debt. These changes in fair value are included in interest expense in the consolidated
statements of income for the quarter and six months ended June 30, 2010.
10
Table of Contents
Information regarding recurring fair value measurements completed during each period was as
follows:
| Fair value measurements using | ||||||||||||||||
| Quoted prices in | ||||||||||||||||
| Fair value | active markets for | Significant other | Significant | |||||||||||||
| as of | identical assets | observable inputs | unobservable inputs | |||||||||||||
| (in thousands) | June 30, 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Marketable
securities — funds
held for customers
|
$ | 9,496 | $ | 9,496 | $ | — | $ | — | ||||||||
|
Marketable
securities —
corporate
investments
|
1,895 | 1,895 | — | — | ||||||||||||
|
Long-term
investment in
mutual funds
|
2,106 | 2,106 | — | — | ||||||||||||
|
Derivative assets
|
4,817 | — | 4,817 | — | ||||||||||||
| Fair value measurements using | ||||||||||||||||
| Fair value | Quoted prices in | |||||||||||||||
| as of | active markets for | Significant other | Significant | |||||||||||||
| December 31, | identical assets | observable inputs | unobservable inputs | |||||||||||||
| (in thousands) | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Marketable securities
— funds held for
customers
|
$ | 9,522 | $ | 9,522 | $ | — | $ | — | ||||||||
|
Marketable securities
— corporate
investments
|
3,667 | 3,667 | — | — | ||||||||||||
|
Long-term investment
in mutual funds
|
2,231 | 2,231 | — | — | ||||||||||||
|
Derivative liabilities
|
152 | — | 152 | — | ||||||||||||
Fair value measurements of other financial instruments
— The following methods and
assumptions were used to estimate the fair value of each class of financial instrument for which it
is practicable to estimate fair value.
Cash and cash equivalents, cash and cash equivalents included within funds held for customers,
and short-term debt — The carrying amounts reported in the consolidated balance sheets approximate
fair value because of the short-term nature of these items.
Long-term debt — The fair value of long-term debt is based on quoted prices for identical
liabilities when traded as assets in an active market (Level 1 fair value measurement). The fair
value of long-term debt included in the table below does not reflect the impact of hedging
activity. The carrying amount of long-term debt includes the change in fair value of hedged
long-term debt.
The estimated fair values of these financial instruments were as follows:
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| (in thousands) | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||
|
Cash and cash
equivalents
|
$ | 15,513 | $ | 15,513 | $ | 12,789 | $ | 12,789 | ||||||||
|
Cash and cash
equivalents —
funds held for
customers
|
30,496 | 30,496 | 17,379 | 17,379 | ||||||||||||
|
Short-term debt
|
99,000 | 99,000 | 26,000 | 26,000 | ||||||||||||
|
Long-term debt
|
747,513 | 731,988 | 742,753 | 719,283 | ||||||||||||
11
Table of Contents
Note 6: Earnings per share
The following table reflects the calculation of basic and diluted earnings per share from
continuing operations. During each period, certain options, as noted below, were excluded from the
calculation of diluted earnings per share because their effect would have been antidilutive.
| Quarter Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands, except per share amounts) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Earnings per share — basic:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 33,614 | $ | 27,776 | $ | 67,398 | $ | 40,280 | ||||||||
|
Income allocated to participating securities
|
(173 | ) | (212 | ) | (360 | ) | (312 | ) | ||||||||
|
|
||||||||||||||||
|
Income available to common shareholders
|
$ | 33,441 | $ | 27,564 | $ | 67,038 | $ | 39,968 | ||||||||
|
|
||||||||||||||||
|
Weighted-average shares outstanding
|
51,163 | 50,824 | 51,100 | 50,767 | ||||||||||||
|
Earnings per share — basic
|
$ | 0.65 | $ | 0.54 | $ | 1.31 | $ | 0.79 | ||||||||
|
|
||||||||||||||||
|
Earnings per share — diluted:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 33,614 | $ | 27,776 | $ | 67,398 | $ | 40,280 | ||||||||
|
Income allocated to participating securities
|
(173 | ) | (212 | ) | (360 | ) | (312 | ) | ||||||||
|
Re-measurement of share-based awards
classified as
liabilities
|
(4 | ) | 97 | 51 | (63 | ) | ||||||||||
|
|
||||||||||||||||
|
Income available to common shareholders
|
$ | 33,437 | $ | 27,661 | $ | 67,089 | $ | 39,905 | ||||||||
|
|
||||||||||||||||
|
Weighted-average shares outstanding
|
51,163 | 50,824 | 51,100 | 50,767 | ||||||||||||
|
Dilutive impact of options and employee
stock purchase plan
|
222 | 66 | 200 | 39 | ||||||||||||
|
|
||||||||||||||||
|
Weighted-average shares and potential
dilutive shares outstanding
|
51,385 | 50,890 | 51,300 | 50,806 | ||||||||||||
|
|
||||||||||||||||
|
Earnings per share — diluted
|
$ | 0.65 | $ | 0.54 | $ | 1.31 | $ | 0.79 | ||||||||
|
|
||||||||||||||||
|
Antidilutive options excluded from calculation
|
2,343 | 2,315 | 2,343 | 2,315 | ||||||||||||
Note 7: Acquisitions and discontinued operations
During April 2010, we acquired all of the outstanding stock of Custom Direct, Inc. (Custom
Direct), a leading provider of direct-to-consumer checks, in a cash transaction for $97.9 million,
net of cash acquired. We funded the acquisition with our credit facility. The results of operations
of this business from its acquisition date are included in our Direct Checks segment. The
preliminary allocation of the purchase price based upon the estimated fair values of the assets
acquired and liabilities assumed resulted in goodwill of $65.8 million. We believe this acquisition
resulted in the recognition of goodwill as we expect Custom Direct to contribute to our strategy of
optimizing cash flows in our Direct Checks segment. Transaction costs related to this acquisition
were expensed as incurred and were not significant to our consolidated statements of income for the
quarter or six months ended June 30, 2010.
12
Table of Contents
The allocation of the purchase price to the acquired assets and liabilities is preliminary
pending completion of the valuation of current income taxes receivable and deferred income taxes,
as well as our analysis of the establishment of reserves for uncertain income tax positions. Our
preliminary allocation of the purchase price includes current income taxes receivable of $10.8
million and net deferred tax liabilities of $12.5 million. The following illustrates our
preliminary allocation of the Custom Direct purchase price to the assets acquired and liabilities
assumed:
| (in thousands) | ||||
|
Cash and cash equivalents
|
$ | 24 | ||
|
Other current assets
|
13,141 | |||
|
Intangibles
|
36,487 | |||
|
Goodwill
|
65,843 | |||
|
Other non-current assets
|
5,082 | |||
|
Current liabilities
|
(8,685 | ) | ||
|
Non-current liabilities
|
(13,947 | ) | ||
|
|
||||
|
Total purchase price
|
97,945 | |||
|
Less: cash acquired
|
(24 | ) | ||
|
|
||||
|
Purchase price, net of cash acquired
|
$ | 97,921 | ||
|
|
||||
Acquired intangible assets included a customer list valued at $15.0 million with a useful life
of 1.3 years, internal-use software valued at $12.6 million with a weighted-average useful life of
4.7 years, and trade names valued at $8.9 million with a useful life of 10 years. The software and
the trade name are being amortized using the straight-line method, while the customer list is being
amortized using an accelerated method. Further information regarding the calculation of the
estimated fair values of these assets can be found in Note 5.
During March 2010, we purchased the assets of Cornerstone Customer Solutions, LLC (CCS) in a
cash transaction for $0.7 million. CCS is a full-service, marketing solutions provider specializing
in the development and execution of analytics-driven direct marketing programs. The results of
operations of this business from its acquisition date are included in our Financial Services
segment. The allocation of the purchase price based upon the fair values of the assets acquired and
liabilities assumed resulted in tax deductible goodwill of $0.9 million. We believe this
acquisition resulted in the recognition of goodwill as we are offering these strategic and tactical
marketing solutions to our financial institution clients. Transaction costs related to this
acquisition were expensed as incurred and were not significant to our consolidated statement of
income for the six months ended June 30, 2010.
Net loss from discontinued operations for the six months ended June 30, 2010 represents an
additional loss on the disposal of a previously divested business.
Note 8: Restructuring charges
Net restructuring charges for each period consisted of the following components:
| Quarter Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Severance accruals
|
$ | 2,526 | $ | 824 | $ | 3,207 | $ | 977 | ||||||||
|
Severance reversals
|
(732 | ) | (967 | ) | (1,552 | ) | (1,596 | ) | ||||||||
|
Operating lease obligations
|
— | — | 415 | 865 | ||||||||||||
|
Operating lease reversals
|
(308 | ) | — | (308 | ) | — | ||||||||||
|
|
||||||||||||||||
|
Net restructuring accruals (reversals)
|
1,486 | (143 | ) | 1,762 | 246 | |||||||||||
|
Other costs
|
607 | 1,213 | 709 | 2,154 | ||||||||||||
|
|
||||||||||||||||
|
Net restructuring charges
|
$ | 2,093 | $ | 1,070 | $ | 2,471 | $ | 2,400 | ||||||||
|
|
||||||||||||||||
2010 restructuring charges —
During the quarter and six months ended June 30, 2010, the net
restructuring accruals included severance charges related to employee reductions primarily
resulting from the acquisition of Custom Direct in April 2010 (see Note 7), as well as employee
reductions in various functional areas as we continue our cost reduction initiatives. The
restructuring accruals included severance benefits for 43 employees for the quarter ended June 30,
2010 and severance benefits
13
Table of Contents
for 73 employees for the six months ended June 30, 2010. These charges were reduced by the
reversal of restructuring accruals as fewer employees received severance benefits than originally
estimated. Other restructuring costs, which were expensed as incurred, included items such as
equipment moves, training and travel related to our restructuring activities. The net restructuring
charges were reflected as net restructuring reversals of $0.1 million within cost of goods sold and
net restructuring charges of $2.2 million within operating expenses in the consolidated statement
of income for the quarter ended June 30, 2010. For the six months ended June 30, 2010, the net
restructuring charges were reflected as net restructuring charges of $0.6 million within cost of
goods sold and net restructuring charges of $1.9 million within operating expenses in the
consolidated statement of income.
2009 restructuring charges
— During the quarter and six months ended June 30, 2009, the net
restructuring accruals included severance charges related to employee reductions in various
functional areas as we continued our cost reduction initiatives. Net restructuring accruals for the
six months ended June 30, 2009 also included operating lease obligations on two manufacturing
facilities which were closed during 2009. The restructuring accruals included severance benefits
for 70 employees for the quarter ended June 30, 2009 and severance benefits for 81 employees for
the six months ended June 30, 2009. These charges were reduced by the reversal of restructuring
accruals recorded in 2008 and 2007 as fewer employees received severance benefits than originally
estimated. Other restructuring costs, which were expensed as incurred, included items such as
equipment moves, training and travel related to our restructuring activities. The net restructuring
charges were reflected as net restructuring charges of $0.8 million within cost of goods sold and
net restructuring charges of $0.3 million within operating expenses in the consolidated statement
of income for the quarter ended June 30, 2009. For the six months ended June 30, 2009, the net
restructuring charges were reflected as net restructuring charges of $2.3 million within cost of
goods sold and net restructuring charges of $0.1 million within operating expenses in the
consolidated statement of income.
Restructuring accruals of $4.0 million as of June 30, 2010 are reflected in the consolidated
balance sheet as accrued liabilities of $3.8 million and other non-current liabilities of $0.2
million. Restructuring accruals of $11.5 million as of December 31, 2009 are reflected in the
consolidated balance sheet as accrued liabilities of $11.2 million and other non-current
liabilities of $0.3 million. The majority of the employee reductions are expected to be completed
in 2010. We expect most of the related severance payments to be fully paid by mid-2011, utilizing
cash from operations. The remaining payments due under operating lease obligations will be paid
through May 2013. As of June 30, 2010, 92 employees had not yet started to receive severance
benefits. Further information regarding our restructuring accruals can be found under the caption
“Note 8: Restructuring charges” in the Notes to Consolidated Financial Statements appearing in the
2009 Form 10-K.
As of June 30, 2010, our restructuring accruals, by company initiative, were as follows:
| 2007 | 2008 | 2009 | 2010 | |||||||||||||||||
| (in thousands) | initiatives | initiatives | initiatives | initiatives | Total | |||||||||||||||
|
Balance, December 31, 2009
|
$ | 64 | $ | 2,175 | $ | 9,253 | $ | — | $ | 11,492 | ||||||||||
|
Restructuring charges
|
— | 516 | 84 | 3,022 | 3,622 | |||||||||||||||
|
Restructuring reversals
|
— | (762 | ) | (962 | ) | (136 | ) | (1,860 | ) | |||||||||||
|
Payments, primarily severance
|
— | (1,195 | ) | (5,987 | ) | (2,042 | ) | (9,224 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Balance, June 30, 2010
|
$ | 64 | $ | 734 | $ | 2,388 | $ | 844 | $ | 4,030 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Cumulative amounts:
|
||||||||||||||||||||
|
Restructuring charges
|
$ | 7,181 | $ | 27,536 | $ | 11,000 | $ | 3,022 | $ | 48,739 | ||||||||||
|
Restructuring reversals
|
(1,439 | ) | (5,647 | ) | (1,110 | ) | (136 | ) | (8,332 | ) | ||||||||||
|
Payments, primarily severance
|
(5,678 | ) | (21,155 | ) | (7,502 | ) | (2,042 | ) | (36,377 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Balance, June 30, 2010
|
$ | 64 | $ | 734 | $ | 2,388 | $ | 844 | $ | 4,030 | ||||||||||
|
|
||||||||||||||||||||
14
Table of Contents
As of June 30, 2010, the components of our restructuring accruals, by segment, were as
follows:
| Operating | ||||||||||||||||||||||||
| lease | ||||||||||||||||||||||||
| Employee severance benefits | obligations | |||||||||||||||||||||||
| Small | Small | |||||||||||||||||||||||
| Business | Financial | Direct | Business | |||||||||||||||||||||
| (in thousands) | Services | Services | Checks | Corporate | Services | Total | ||||||||||||||||||
|
Balance, December 31, 2009
|
$ | 4,745 | $ | 1,053 | $ | 116 | $ | 4,781 | $ | 797 | $ | 11,492 | ||||||||||||
|
Restructuring charges
|
346 | 64 | 2,080 | 717 | 415 | 3,622 | ||||||||||||||||||
|
Restructuring reversals
|
(591 | ) | (131 | ) | (116 | ) | (714 | ) | (308 | ) | (1,860 | ) | ||||||||||||
|
Payments
|
(3,603 | ) | (815 | ) | (1,891 | ) | (2,527 | ) | (388 | ) | (9,224 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Balance, June 30, 2010
|
$ | 897 | $ | 171 | $ | 189 | $ | 2,257 | $ | 516 | $ | 4,030 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Cumulative amounts for current initiatives (1) : | ||||||||||||||||||||||||
|
Restructuring charges
|
$ | 15,210 | $ | 5,755 | $ | 2,555 | $ | 23,418 | $ | 1,801 | $ | 48,739 | ||||||||||||
|
Restructuring reversals
|
(1,966 | ) | (1,244 | ) | (125 | ) | (4,676 | ) | (321 | ) | (8,332 | ) | ||||||||||||
|
Inter-segment transfer
|
1,552 | 739 | 61 | (2,352 | ) | — | — | |||||||||||||||||
|
Payments
|
(13,899 | ) | (5,079 | ) | (2,302 | ) | (14,133 | ) | (964 | ) | (36,377 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Balance, June 30, 2010
|
$ | 897 | $ | 171 | $ | 189 | $ | 2,257 | $ | 516 | $ | 4,030 | ||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Includes accruals related to our cost reduction initiatives for 2007 through 2010. |
Note 9: Pension and other postretirement benefits
We have historically provided certain health care benefits for a large number of retired
employees. In addition to our retiree health care plan, we also have a supplemental executive
retirement plan in the United States. We previously had a pension plan that covered certain
Canadian employees which was settled during the quarter ended March 31, 2009. Further information
regarding our postretirement benefit plans can be found under the caption “Note 12: Pension and
other postretirement benefits” in the Notes to Consolidated Financial Statements appearing in the
2009 Form 10-K. See Note 15 for discussion of the risks associated with the plan assets of our
postretirement benefit plan.
Pension and postretirement benefit expense for the quarters ended June 30, 2010 and 2009
consisted of the following components:
| Postretirement benefit | ||||||||||||||||
| plan | Pension plan | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Interest cost
|
$ | 1,820 | $ | 2,140 | $ | 45 | $ | 51 | ||||||||
|
Expected return on plan assets
|
(1,806 | ) | (1,480 | ) | — | — | ||||||||||
|
Amortization of prior service credit
|
(936 | ) | (954 | ) | — | — | ||||||||||
|
Amortization of net actuarial losses
|
1,352 | 2,096 | — | (1 | ) | |||||||||||
|
|
||||||||||||||||
|
Total periodic benefit expense
|
$ | 430 | $ | 1,802 | $ | 45 | $ | 50 | ||||||||
|
|
||||||||||||||||
15
Table of Contents
Pension and postretirement benefit expense for the six months ended June 30, 2010 and 2009
consisted of the following components:
| Postretirement benefit | ||||||||||||||||
| plan | Pension plans | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Interest cost
|
$ | 3,641 | $ | 4,184 | $ | 90 | $ | 161 | ||||||||
|
Expected return on plan assets
|
(3,613 | ) | (2,940 | ) | — | (58 | ) | |||||||||
|
Amortization of prior service credit
|
(1,871 | ) | (1,944 | ) | — | — | ||||||||||
|
Amortization of net actuarial losses
|
2,703 | 5,606 | — | 11 | ||||||||||||
|
|
||||||||||||||||
|
Total periodic benefit expense
|
860 | 4,906 | 90 | 114 | ||||||||||||
|
Settlement loss
|
— | — | — | 402 | ||||||||||||
|
|
||||||||||||||||
|
Net periodic benefit expense
|
$ | 860 | $ | 4,906 | $ | 90 | $ | 516 | ||||||||
|
|
||||||||||||||||
Note 10: Income tax provision
Our effective tax rate for the six months ended June 30, 2010 was 38.0%, compared to our 2009
annual effective tax rate of 35.9%. Our 2010 effective tax rate included discrete items which
increased our tax rate by 2.1 points, as well as lower tax credits in 2010 for research and
development. The discrete items in 2010 consisted primarily of a $3.4 million charge resulting from
a reconciliation bill, formerly known as the Health Care and Education Reconciliation Act, which
was signed into law in March 2010 and which requires that certain tax deductions after 2012 be
reduced by the amount of the Medicare Part D subsidy payments. Prior to this law change, the
subsidy was to be disregarded in all future years when computing tax deductions. This resulted in a
reduction in the deferred tax asset associated with our postretirement benefit plan.
Our 2009 effective tax rate included the non-deductible portion of the goodwill impairment
charge recorded during the quarter ended March 31, 2009 (see Note 5), which increased our effective
tax rate 2.9 percentage points. Our 2009 effective tax rate also included favorable adjustments
related to receivables for prior year tax returns, which lowered our effective tax rate 2.2
percentage points.
Note 11: Debt
Total debt outstanding was comprised of the following:
| June 30, | December 31, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
|
5.0% senior, unsecured notes due December 15, 2012, net of
discount, including cumulative change in fair value of hedged
debt: 2010 - $4,389 increase; 2009 - $254 decrease
|
$ | 284,264 | $ | 279,533 | ||||
|
5.125% senior, unsecured notes due October 1, 2014, net of discount
|
263,249 | 263,220 | ||||||
|
7.375% senior, unsecured notes due June 1, 2015
|
200,000 | 200,000 | ||||||
|
|
||||||||
|
Long-term portion of debt
|
747,513 | 742,753 | ||||||
|
Amounts drawn on credit facilities
|
99,000 | 26,000 | ||||||
|
|
||||||||
|
Total debt
|
$ | 846,513 | $ | 768,753 | ||||
|
|
||||||||
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. In addition, at any time
prior to June 1, 2011, we may redeem some or all of the notes at a price equal to
16
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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 subsequently used on October 1, 2007 as part of our
repayment of $325.0 million of unsecured notes plus accrued interest. The fair value of the notes
issued in May 2007 was $199.1 million as of June 30, 2010, based on quoted prices for identical
liabilities when traded as assets.
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 New England Business Service, Inc. in
2004. During the quarter ended March 31, 2009, we retired $11.5 million of these notes, realizing a
pre-tax gain of $4.1 million. As of June 30, 2010, the fair value of the $263.5 million remaining
notes outstanding was $252.3 million, based on quoted prices for identical liabilities when traded
as assets.
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. During the quarter ended March 31, 2009, we retired $19.7
million of these notes, realizing a pre-tax gain of $5.7 million. As of June 30, 2010, the fair
value of the $280.3 million remaining notes outstanding was $280.6 million, based on quoted prices
for identical liabilities when traded as assets. As discussed in Note 4, during September 2009, we
entered into interest rate swaps with a notional amount of $210.0 million to hedge a portion of
these notes. The fair value of long-term debt disclosed here does not reflect the impact of these
fair value hedges. The carrying amount of long-term debt has increased $4.4 million since the
inception of the interest rate swaps due to changes in the fair value of the hedged long-term debt.
As of December 31, 2009, we had a $275.0 million committed line of credit which was scheduled
to expire in July 2010. During March 2010, we cancelled this line of credit and executed a new
$200.0 million credit facility, which expires in March 2013. Borrowings under the credit facility
are collateralized by substantially all of our assets. Our commitment fee ranges from 0.40% to
0.50% based on our leverage ratio. The credit agreement governing the credit facility contains
customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures,
liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course
of business, and change in control as defined in the agreement. The agreement also contains
financial covenants regarding our leverage ratio, interest coverage and liquidity.
The daily average amount outstanding under our credit facilities during the six months ended
June 30, 2010 was $56.6 million at a weighted-average interest rate of 3.08%. As of June 30, 2010,
$99.0 million was outstanding at a weighted-average interest rate of 3.39%. During 2009, the daily
average amount outstanding under our line of credit was $69.3 million at a weighted-average
interest rate of 0.76%. As of December 31, 2009, $26.0 million was outstanding at a
weighted-average interest rate of 0.67%. As of June 30, 2010, amounts were available for borrowing
under our credit facility as follows:
| Total | ||||
| (in thousands) | available | |||
|
Credit facility commitment
|
$ | 200,000 | ||
|
Amounts drawn on credit facility
|
(99,000 | ) | ||
|
Outstanding letters of credit
|
(9,313 | ) | ||
|
|
||||
|
Net available for borrowing as of June 30, 2010
|
$ | 91,687 | ||
|
|
||||
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.
17
Table of Contents
Note 12: Other commitments and contingencies
Information regarding indemnifications, environmental matters, self-insurance and litigation
can be found under the caption “Note 14: Other commitments and contingencies” in the Notes to
Consolidated Financial Statements appearing in the 2009 Form 10-K. No significant changes in these
items occurred during the six months ended June 30, 2010.
Note 13: 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 6.4 million shares
remain available for purchase under this authorization as of June 30, 2010. We did not repurchase
any shares during the six months ended June 30, 2010. The terms of our $200.0 million notes
maturing in 2015 place a limitation on restricted payments, including increases in dividend levels
and share repurchases. The terms of our $200.0 million credit facility also limit our ability to
increase dividends or repurchase shares above certain levels.
Changes in shareholders’ equity during the six months ended June 30, 2010 were as follows:
| Accumulated | ||||||||||||||||||||||||
| Common shares | Additional | other | Total | |||||||||||||||||||||
| Number | Par | paid-in | Retained | comprehensive | shareholders’ | |||||||||||||||||||
| (in thousands) | of shares | value | capital | earnings | loss | equity | ||||||||||||||||||
|
Balance, December 31, 2009
|
51,189 | $ | 51,189 | $ | 58,071 | $ | 60,768 | $ | (52,818 | ) | $ | 117,210 | ||||||||||||
|
Net income
|
— | — | — | 66,999 | — | 66,999 | ||||||||||||||||||
|
Cash dividends
|
— | — | — | (25,696 | ) | — | (25,696 | ) | ||||||||||||||||
|
Common shares issued
|
239 | 239 | 2,089 | — | — | 2,328 | ||||||||||||||||||
|
Tax impact of share-based awards
|
— | — | (819 | ) | — | — | (819 | ) | ||||||||||||||||
|
Common shares retired
|
(53 | ) | (53 | ) | (846 | ) | — | — | (899 | ) | ||||||||||||||
|
Fair value of share-based compensation
|
1 | 1 | 2,934 | — | — | 2,935 | ||||||||||||||||||
|
Amortization of postretirement prior service credit, net of
tax
|
— | — | — | — | (1,161 | ) | (1,161 | ) | ||||||||||||||||
|
Amortization of postretirement net actuarial losses, net of
tax
|
— | — | — | — | 1,677 | 1,677 | ||||||||||||||||||
|
Amortization of loss on derivatives, net of tax
(1)
|
— | — | — | — | 660 | 660 | ||||||||||||||||||
|
Net unrealized loss on marketable securities, net of tax
|
— | — | — | — | (4 | ) | (4 | ) | ||||||||||||||||
|
Currency translation adjustment
|
— | — | — | — | (279 | ) | (279 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance, June 30, 2010
|
51,376 | $ | 51,376 | $ | 61,429 | $ | 102,071 | $ | (51,925 | ) | $ | 162,951 | ||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Relates to interest rate locks executed in 2004 and 2002. See the caption “Note 6: Derivative financial instruments” in the Notes to Consolidated Financial Statements appearing in the 2009 Form 10-K. |
18
Table of Contents
Accumulated other comprehensive loss was comprised of the following:
| June 30, | December 31, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
|
Postretirement and defined benefit pension plans:
|
||||||||
|
Unrealized prior service credit
|
$ | 16,817 | $ | 17,978 | ||||
|
Unrealized net actuarial losses
|
(68,651 | ) | (70,328 | ) | ||||
|
|
||||||||
|
Postretirement and defined benefit pension plans, net of tax
|
(51,834 | ) | (52,350 | ) | ||||
|
Loss on derivatives, net of tax
|
(5,181 | ) | (5,841 | ) | ||||
|
Unrealized loss on marketable securities, net of tax
|
(4 | ) | — | |||||
|
Currency translation adjustment
|
5,094 | 5,373 | ||||||
|
|
||||||||
|
Accumulated other comprehensive loss
|
$ | (51,925 | ) | $ | (52,818 | ) | ||
|
|
||||||||
Note 14: Business segment information
We operate three reportable business segments: Small Business Services, Financial Services and
Direct Checks. Small Business Services sells personalized printed products, which include business
checks, printed forms, promotional products, marketing materials and related services, as well as
retail packaging supplies and a suite of business services, including web design and hosting, fraud
protection, payroll, logo design, search engine marketing and business networking, to small
businesses. These products and services are sold through direct response marketing, referrals from
financial institutions and telecommunications companies, independent distributors and dealers, the
internet and sales representatives. Financial Services’ products and services for financial
instituations include comprehensive check programs for both personal and business checks, fraud
prevention and monitoring services, customer acquisition campaigns, marketing communications,
and services intended to enhance the financial institution customer experience, such as customer
loyalty programs. These products and services are sold through multiple channels, including a
direct sales force. 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.
The accounting policies of the segments are the same as those described in the Notes to
Consolidated Financial Statements included in the 2009 Form 10-K. We allocate corporate costs for
our shared services functions 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. Because we use a shared services approach for many of our functions, certain
costs are not directly attributable to a business segment. These costs are allocated to our
business segments based on segment revenue, as revenue is a measure of the relative size and
magnitude of each segment and indicates the level of corporate shared services consumed by each
segment. Corporate assets are not allocated to the segments and consist of property, plant and
equipment, internal-use software, inventories and supplies related to our corporate shared services
functions of manufacturing, information technology and real estate, as well as long-term
investments and deferred income taxes.
We are an integrated enterprise, characterized by substantial intersegment cooperation, cost
allocations and the sharing of assets. Therefore, we do not represent that these segments, if
operated independently, would report the operating income and other financial information shown.
19
Table of Contents
The following is our segment information as of and for the quarters ended June 30, 2010 and
2009:
| Reportable Business Segments | ||||||||||||||||||||||||
| Small | ||||||||||||||||||||||||
| Business | Financial | Direct | ||||||||||||||||||||||
| (in thousands) | Services | Services | Checks | Corporate | Consolidated | |||||||||||||||||||
|
Revenue from external customers:
|
2010 | $ | 193,165 | $ | 98,248 | $ | 56,583 | $ | — | $ | 347,996 | |||||||||||||
|
|
2009 | 191,938 | 100,472 | 39,659 | — | 332,069 | ||||||||||||||||||
|
Operating income:
|
2010 | 30,476 | 20,032 | 12,712 | — | 63,220 | ||||||||||||||||||
|
|
2009 | 20,589 | 19,288 | 13,206 | — | 53,083 | ||||||||||||||||||
|
Depreciation and amortization expense:
|
2010 | 11,693 | 3,068 | 5,076 | — | 19,837 | ||||||||||||||||||
|
|
2009 | 14,155 | 2,685 | 1,061 | — | 17,901 | ||||||||||||||||||
|
Total assets:
|
2010 | 778,017 | 68,335 | 185,380 | 305,177 | 1,336,909 | ||||||||||||||||||
|
|
2009 | 750,858 | 65,891 | 96,015 | 290,132 | 1,202,896 | ||||||||||||||||||
|
Capital asset purchases:
|
2010 | — | — | — | 11,267 | 11,267 | ||||||||||||||||||
|
|
2009 | — | — | — | 13,779 | 13,779 | ||||||||||||||||||
The following is our segment information as of and for the six months ended June 30, 2010 and
2009:
| Reportable Business Segments | ||||||||||||||||||||||||
| Small | ||||||||||||||||||||||||
| Business | Financial | Direct | ||||||||||||||||||||||
| (in thousands) | Services | Services | Checks | Corporate | Consolidated | |||||||||||||||||||
|
Revenue from external customers:
|
2010 | $ | 385,491 | $ | 199,693 | $ | 97,932 | $ | — | $ | 683,116 | |||||||||||||
|
|
2009 | 385,220 | 202,475 | 83,894 | — | 671,589 | ||||||||||||||||||
|
Operating income:
|
2010 | 59,545 | 44,021 | 28,609 | — | 132,175 | ||||||||||||||||||
|
|
2009 | 13,961 | 38,849 | 27,455 | — | 80,265 | ||||||||||||||||||
|
Depreciation and amortization expense:
|
2010 | 23,131 | 5,969 | 6,184 | — | 35,284 | ||||||||||||||||||
|
|
2009 | 27,502 | 5,195 | 2,057 | — | 34,754 | ||||||||||||||||||
|
Asset impairment charges:
|
2010 | — | — | — | — | — | ||||||||||||||||||
|
|
2009 | 24,900 | — | — | — | 24,900 | ||||||||||||||||||
|
Total assets:
|
2010 | 778,017 | 68,335 | 185,380 | 305,177 | 1,336,909 | ||||||||||||||||||
|
|
2009 | 750,858 | 65,891 | 96,015 | 290,132 | 1,202,896 | ||||||||||||||||||
|
Capital asset purchases:
|
2010 | — | — | — | 21,066 | 21,066 | ||||||||||||||||||
|
|
2009 | — | — | — | 23,737 | 23,737 | ||||||||||||||||||
Note 15: Market risks
Due to the downturn in the U.S. economy, including the liquidity crisis in the credit markets,
as well as failures and consolidations of companies within the financial services industry since
2008, we have identified certain market risks which may affect our future operating performance.
Economic conditions
– As discussed in Note 5, during the quarter ended March 31, 2009, we
completed impairment analyses of goodwill and our indefinite-lived trade name due to indicators of
potential impairment. We recorded a goodwill impairment charge of $20.0 million in our Small
Business Services segment related to one of our reporting units, as well as an impairment charge of
$4.9 million in our Small Business Services segment related to an indefinite-lived trade name. The
annual impairment analyses completed during the quarter ended September 30, 2009 indicated that the
calculated fair values of our reporting units’ net assets exceeded their carrying values by amounts
between $18 million and $308 million, or by amounts between 46% and 70% above the carrying values
of their net assets. The calculated fair value of our indefinite-lived trade name exceeded its
carrying value of $19.1 million by $4.4 million based on the analysis completed during the quarter
ended September 30, 2009. Due to the ongoing uncertainty in market conditions, which may continue
to negatively impact our expected operating results or share price, we will continue to monitor whether additional
impairment analyses are required with respect to the carrying value of goodwill and the
indefinite-lived trade name.
20
Table of Contents
Postretirement benefit plan
– The fair value of the plan assets of our postretirement benefit
plan is subject to various risks, including credit, interest and overall market volatility risks.
During 2008, the equity markets experienced a significant decline in value. As such, the fair value
of our plan assets decreased significantly during the year, resulting in a $29.9 million increase
in the unfunded status of our plan as compared to the end of the previous year. This affected the
amounts reported in the consolidated balance sheet as of December 31, 2008 and also contributed to
an increase in postretirement benefit expense of $2.4 million in 2009, as compared to 2008. As of
December 31, 2009, the fair value of our plan assets had partially recovered, contributing to an
$11.8 million improvement in the unfunded status of our plan as compared to December 31, 2008. If
the equity and bond markets decline in future periods, the funded status of our plan could again 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
plan, although our obligation is limited to funding benefits as they become payable. We did not use
plan assets to make benefit payments during the first six months of 2010 or during 2009. Rather, we
used cash provided by operating activities to make these payments.
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 we were to lose a significant contract and/or we were unable
to recover the value of an unamortized contract acquisition cost or account receivable. As of June
30, 2010, unamortized contract acquisition costs totalled $57.5 million, while liabilities for
contract acquisition costs not paid as of June 30, 2010 were $19.8 million. 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.
The consolidation of financial institutions may also impact our results of operations. In the
past we have acquired new clients as financial institutions that were not our clients consolidated
with our clients. When two of our financial institution clients consolidate, the increase in
general negotiating leverage possessed by the consolidated entity could result in a new contract
which is not as favorable to us as those historically negotiated with the clients individually.
However, we may also generate non-recurring conversion revenue when obsolete checks have to be
replaced after one financial institution merges with or acquires another. Conversely, we have also
lost financial institution clients when they consolidated with financial institutions which were
not our clients. If we were to lose a significant amount of business in this manner, it could have
a significant negative impact on our consolidated results of operations. In such situations, we
have typically collected contract termination payments and we may be able to do so in similar
circumstances in the future.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
EXECUTIVE OVERVIEW
Our business is organized into three segments: Small Business Services, Financial Services and
Direct Checks. Our Small Business Services segment generated 56.4% of our consolidated revenue for
the first six months of 2010. This segment has sold personalized printed products, which include
business checks, printed forms, promotional products, marketing materials and related services, as
well as retail packaging supplies and a suite of business services, including web design and
hosting, fraud protection, payroll, logo design, search engine marketing and business networking,
to over four million small businesses in the last 24 months. These products and services are sold
through direct response marketing, referrals from financial institutions and telecommunications
companies, independent distributors and dealers, the internet and sales representatives. Our
Financial Services segment generated 29.2% of our consolidated revenue for the first six months of
2010. This segment’s products and services for financial instituations include comprehensive check
programs for both personal and business checks, fraud prevention and monitoring services, customer
acquisition campaigns, marketing communications, and services intended to enhance the financial
institution customer experience, such as customer loyalty programs. These products and services are
sold through multiple channels, including a direct sales force, to 6,400 financial institution
clients nationwide, including banks, credit unions and financial services companies. Our Direct
Checks segment generated 14.4% of our consolidated revenue for the first six months of 2010,
including Custom Direct, Inc., which was acquired in April 2010. This segment is the nation’s
leading direct-to-consumer check supplier, selling under various brand names including Checks
Unlimited
®
, Designer
®
Checks, Checks.com, Check Gallery
®
, The Styles Check Company
®
, and Artistic
Checks
®
, among others. 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.
We have continued to see the negative impact of the economic environment on our results of
operations for the first half of 2010. The severe downturn in the economy and the turmoil in the
financial services industry continue to affect our operating results. Demand has fallen for many of
our Small Business Services products as we believe small business
owners have reduced their discretionary spending. Additionally, we believe interruptions and consumer
uncertainty related to financial institution consolidations and failures have led to reduced check
orders from several of our financial institution
21
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clients. During this difficult economic
environment, we have accelerated many of our cost reduction actions, and we have identified
additional opportunities to improve our cost structure. We believe we have taken appropriate steps
to position ourselves for sustainable growth as the economy recovers, including accelerating our
brand awareness and positioning initiatives, investing in technology for new service offerings,
enhancing our internet capabilities, improving customer segmentation and adding new small business
customers. We have invested in acquisitions that offer higher growth business services, extend our
direct-to-consumer offerings, enhance our cash flow generating capabilities, and bring
analytics-driven deposit acquisition marketing programs to our financial institution clients. We
are focused on capitalizing on transformational opportunities available to us in this difficult
environment and believe that we will be positioned to consistently deliver strong margins once the
economy recovers.
Our earnings for the first half of 2010, as compared to the first half of 2009, benefited from
the following:
| • | Asset impairment charges of $24.9 million in the first quarter of 2009 within Small Business Services related to goodwill and an indefinite-lived trade name; |
| • | Continuing initiatives to reduce our cost structure, primarily within manufacturing, sales and marketing and information technology; |
| • | Recognition of deferred revenue from a Financial Services contract termination settlement executed in the fourth quarter of 2009; and |
| • | Price increases in Small Business Services and Financial Services. |
These benefits were partially offset by the following:
| • | Pre-tax gains of $9.8 million in the first quarter of 2009 from the retirement of long-term notes; |
| • | Reduced volume for our personal check businesses due to the continuing decline in check usage, turmoil in the financial services industry, including bank failures, and continued economic softness; |
| • | Lower volume in Small Business Services due primarily to changes in our customers’ buying patterns, we believe, as a result of the continued economic downturn; |
| • | Increased marketing investment in brand positioning and awareness; and |
| • | Increases in delivery rates. |
Our Strategies
Details concerning our strategies were provided in the
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
section of our Annual Report on Form 10-K for the
year ended December 31, 2009 (the “2009 Form 10-K”). There were no significant changes in our
strategies during the first half of 2010.
During April 2010, we acquired all of the outstanding stock of Custom Direct, Inc. (Custom
Direct), a leading provider of direct-to-consumer checks, in a cash transaction for $97.9 million,
net of cash acquired. We funded the acquisition with our credit facility. The results of operations
of this business from its acquisition date are included in our Direct Checks segment. We expect the
acquisition of Custom Direct to contribute to our strategy of optimizing cash flows in this
segment. During 2010, the acquisition is expected to generate approximately $60 million in revenue
and $15 million of operating cash flow, including cash tax savings of approximately $10 million
from certain acquired tax attributes, although we have not completed our analysis of these income
tax positions. The acquisition is expected to be neutral to earnings per share in 2010, including
$2.5 million of severance benefits and other transaction-related costs, as well as approximately
$12 million of acquisition-related amortization.
During March 2010, we purchased the assets of Cornerstone Customer Solutions, LLC (CCS) in a
cash transaction for $0.7 million. CCS is a full-service, marketing solutions provider specializing
in the development and execution of analytics-driven direct marketing programs. The results of
operations of this business from its acquisition date are included in our Financial Services
segment as we are offering these strategic and tactical marketing solutions to our financial
institution clients.
22
Table of Contents
Update on Cost Reduction Initiatives
As discussed in the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
section of the 2009 Form 10-K, we are pursuing aggressive cost reduction and business
simplification initiatives which we expect to collectively reduce our annual cost structure by at
least $325 million, net of required investments, by the end of 2010. The baseline for these
anticipated savings is the estimated cost structure for 2006, which was reflected in the earnings
guidance reported in our press release on July 27, 2006 regarding second quarter 2006 results. We
estimate that we realized approximately $260 million of the $325 million target through the end of
2009, and we are currently on track to realize the remaining $65 million in 2010. To date, most of
our savings are from sales and marketing, information technology and fulfillment, including
manufacturing and supply chain.
Outlook for 2010
We anticipate that consolidated revenue from continuing operations for 2010 will be between
$1.390 billion and $1.415 billion, as compared to $1.344 billion for 2009, including approximately
$60 million of revenue from the Custom Direct acquisition. In July 2010, we finalized a contract
settlement with a large financial institution that previously acquired one of our clients and
recently chose to consolidate its check printing business with another provider. We have been
producing checks for a minority portion of this client’s customers. This business is expected to
transition during the third quarter of 2010 and we expect to receive contract termination payments
of approximately $24 million, which will be included in revenue in our Small Business Services and
Financial Services segments. Including the anticipated reduction in volume from the termination of
this contract, we expect a net positive impact on revenue of approximately $18 million from the
contract settlement.
Excluding the contract settlement, in Small Business Services we expect the revenue decline
percentage to be in the very low single digits to flat range as declines in core business products
are expected to be offset by growth in business service offerings, including 2009 acquisitions, and
benefits from our e-commerce investments. We expect that approximately $10 million of the net
contract settlement will be included in Small Business Services revenue. Excluding the contract
settlement, in Financial Services we expect the revenue decline percentage to be in the low single
digits to flat range. We estimate that the decline in check orders will be approximately eight
percent compared to 2009, given the continued weak economy and increases in electronic payments.
The eight percent estimated decline in check orders may not necessarily correspond to our reported
decline in orders, as it is an overall estimate, excluding the impact of client additions and
losses. We expect these declines to be partially offset by higher revenue per order from price
increases, the amortization of a past contract settlement, a new contract acquisition which will
begin to contribute volume in the second half of the year, and continued contributions from
non-check revenue streams. We expect that approximately $8 million of the net contract settlement
will be included in Financial Services revenue. Direct Checks revenue is expected to increase
approximately thirty percent driven by the Custom Direct acquisition and improved reorder volumes
stemming from past quantity reductions, partially offset by check usage declines and the continued
weak economy.
We expect that 2010 diluted earnings per share will be between $2.90 and $3.00, which includes
an estimated $0.30 per diluted share impact of the $24 million third quarter contract settlement,
as well as an estimated $0.10 per share impact of a first quarter charge to income tax expense due
to recent health care reform legislation and restructuring-related costs. Earnings per share for
2009 was $1.94, which included a $0.50 per share impact of impairment charges, restructuring and
transaction-related costs, and gains on debt repurchases. We expect that continued execution of our
cost reduction initiatives will be offset by the revenue decline, excluding the Custom Direct
acquisition, continued investments in revenue growth opportunities and increases in delivery rates.
Our outlook reflects a merit wage freeze in 2010, leaving base salary levels consistent with 2009.
We estimate that our annual effective tax rate for 2010 will be approximately 34%, excluding a
first quarter charge of $3.4 million related to recent health care reform legislation, compared to
35.9% in 2009.
We anticipate that net cash provided by operating activities of continuing operations will be
between $220 million and $230 million in 2010, compared to $206 million in 2009. We anticipate that
the increase will be driven by the third quarter contract settlement, cash flow generated by the
Custom Direct acquisition, stronger earnings, continued progress on working capital initiatives and
lower contract acquisition payments. These increases will be partly offset by higher
performance-based compensation payments for all employee levels in 2010. We estimate that capital
spending will be approximately $40 million in 2010 as we continue to expand our use of digital
printing technology, complete automation of our flat check packaging process and make other
investments in order fulfillment, delivery productivity and information technology infrastructure.
We believe our credit facility, along with cash generated by operating activities, will
be sufficient to support our operations, including capital expenditures, small-to-medium-sized
acquisitions, required debt service and dividend payments, for the next 12 months. With no
long-term debt maturities until December 2012, we are focused on a disciplined approach to capital
deployment that focuses on our need to continue
investing in initiatives to drive revenue growth, including small-to-medium-sized
acquisitions. We also anticipate that our board of directors will maintain our current dividend
level. However, dividends
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are approved by the board of directors on a quarterly basis and thus, are subject to change.
To the extent we have cash flow in excess of these priorities, our focus during the remainder of
2010 will be on further reducing our debt. During the first half of 2010, we borrowed $73.0 million
under our credit facility, primarily to complete the acquisition of Custom Direct.
BUSINESS CHALLENGES/MARKET RISKS
Details concerning business challenges/market risks were provided in the
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
section of our 2009 Form
10-K. There were no significant changes in these items during the first half of 2010.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Revenue
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands, except per order amounts) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
$ | 347,996 | $ | 332,069 | 4.8 | % | $ | 683,116 | $ | 671,589 | 1.7 | % | ||||||||||||
|
Orders
|
14,501 | 14,830 | (2.2 | )% | 28,574 | 30,127 | (5.2 | )% | ||||||||||||||||
|
Revenue per order
|
$ | 24.00 | $ | 22.39 | 7.2 | % | $ | 23.91 | $ | 22.29 | 7.3 | % | ||||||||||||
The increase in revenue for the second quarter and first half of 2010, as compared to the same
periods in 2009, was due to a revenue contribution of $18.3 million from the acquisition of Custom
Direct in April 2010 discussed under
Executive Overview
, as well as higher revenue per order in
Financial Services, sales of business services by other businesses acquired in 2009 and 2010, price
increases in Small Business Services and a favorable currency exchange rate impact of $2.1 million
for the second quarter of 2010 and $5.2 million for the first half of 2010. Partially offsetting
these revenue increases was lower order volume.
The number of orders decreased for the second quarter and first half of 2010, as compared to
the same periods in 2009, due primarily to general economic conditions which we believe affected
our customers’ buying patterns, as well as the continuing decline in check and forms usage,
partially offset by the acquisition of Custom Direct in April 2010. Revenue per order increased for
the second quarter and first half of 2010, as compared to the same periods in 2009, primarily due
to the recognition of deferred revenue from a Financial Services contract termination settlement
executed in the fourth quarter of 2009 and the benefit of price increases, partially offset by
continued pricing pressure when executing contracts within Financial Services.
Consolidated Gross Margin
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Gross profit
|
$ | 226,056 | $ | 205,105 | 10.2 | % | $ | 442,813 | $ | 415,366 | 6.6 | % | ||||||||||||
|
Gross margin
|
65.0 | % | 61.8 | % | 3.2 | pts. | 64.8 | % | 61.8 | % | 3.0 | pts. | ||||||||||||
We evaluate gross margin when analyzing our consolidated results of operations as we believe
it provides important insight into significant profit drivers. As more than 90% of our revenue at
this time is generated from the sale of manufactured and purchased products, the measure of gross
margin best demonstrates our manufacturing and distribution performance, as well as the impact of
pricing on our profitability. Gross margin is not a complete measure of profitability, as it omits
selling, general and administrative (SG&A) expense. However, it is a financial measure which is
useful in evaluating our results of operations.
Gross margin increased for the second quarter and first half of 2010, as compared to the same
periods in 2009, due primarily to manufacturing efficiencies and other benefits resulting from our
cost reduction initiatives, as well as the higher revenue per order discussed earlier and favorable
product mix. Also contributing to the higher gross margin was a decrease in restructuring charges
and other costs related to our cost reduction initiatives. Restructuring and related costs
decreased $1.4 million for the second quarter of 2010 and $3.3 million for the first six months of
2010, as compared to the same periods in 2009. Further information regarding our restructuring
costs can be found under
Restructuring Costs
. The lower charges for restructuring and related costs
contributed 0.4 percentage points of the increase in gross margin for the second quarter of 2010,
as compared to 2009, and 0.5 percentage points of the increase in gross margin for the first half
of 2010 as compared to 2009.
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Consolidated Selling, General & Administrative Expense
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
SG&A expense
|
$ | 160,685 | $ | 151,730 | 5.9 | % | $ | 308,730 | $ | 310,086 | (0.4 | )% | ||||||||||||
|
SG&A as a percentage of revenue
|
46.2 | % | 45.7 | % | 0.5 | pt. | 45.2 | % | 46.2 | % | (1.0 | ) pt. | ||||||||||||
The increase in SG&A expense for the second quarter of 2010, as compared to the second quarter
of 2009, was driven primarily by expenses from the businesses we acquired in 2009 and 2010, as well
as marketing investments in our brand awareness and positioning initiatives. These increases were
partly offset by various cost reduction initiatives within our shared services organizations,
primarily within sales and marketing and information technology, as well as lower
acquisition-related amortization related to acquisitions completed prior to 2009.
The decrease in SG&A expense for the first half of 2010, as compared to the first half of
2009, was due primarily to various cost reduction initiatives within our shared services
organizations, primarily within sales and marketing and information technology, as well as lower
acquisition-related amortization related to acquisitions completed prior to 2009. Partially
offsetting these decreases were expenses from the businesses we acquired in 2009 and 2010 and
marketing investments in our brand awareness and positioning initiatives.
Net Restructuring Charges
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Net restructuring charges
|
$ | 2,151 | $ | 292 | $ | 1,859 | $ | 1,908 | $ | 115 | $ | 1,793 | ||||||||||||
We recorded restructuring charges and reversals related to the cost reduction initiatives
discussed under
Executive Overview
. The charges and reversals for each period primarily relate to
accruals for employee severance benefits. Additional restructuring charges were included within
cost of goods sold in our consolidated statements of income for each period. Further information
can be found under
Restructuring Costs
.
Asset Impairment Charges
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||
|
Asset impairment charges
|
$— | $— | $— | $— | $ | 24,900 | $ | (24,900 | ) | |||||||
As of March 31, 2009, we completed impairment analyses of goodwill and an indefinite-lived
trade name due to declines in our stock price during the first quarter of 2009 coupled with the
continuing negative impact of the economic downturn on our expected operating results. We recorded
non-cash asset impairment charges in our Small Business Services segment of $20.0 million related
to goodwill and $4.9 million related to the indefinite-lived trade name. Further information
regarding our impairment analyses can be found under the caption “Note 5: Fair value measurements”
of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this
report.
Gain on Early Debt Extinguishment
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||
|
Gain on early debt extinguishment
|
$— | $— | $— | $— | $ | 9,834 | $ | (9,834 | ) | |||||||
During the first quarter of 2009, we retired $31.2 million of long-term notes at an average
32% discount from par value, realizing a pre-tax gain of $9.8 million. We may retire additional
debt, depending on prevailing market conditions, our liquidity requirements and other potential
uses of cash, including acquisitions or share repurchases.
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Interest Expense
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Interest expense
|
$ | 11,508 | $ | 11,627 | (1.0 | )% | $ | 22,043 | $ | 24,047 | (8.3 | )% | ||||||||||||
|
Weighted-average debt outstanding
|
838,967 | 817,448 | 2.6 | % | 800,367 | 829,625 | (3.5 | )% | ||||||||||||||||
|
Weighted-average interest rate
|
5.02 | % | 5.22 | % | (0.20) | pt. | 5.07 | % | 5.24 | % | (0.17) | pt. | ||||||||||||
The decrease in interest expense for the second quarter of 2010, as compared to the second
quarter of 2009, was due primarily to the impact of interest rate swaps. During the third quarter
of 2009, we entered into interest rate swaps with a notional amount of $210.0 million to hedge
against changes in the fair value of a portion of our long-term debt. These fair value hedges
reduced interest expense by $0.9 million during the second quarter of 2010. This decrease in
interest expense was partly offset by a higher average debt level in the second quarter of 2010 due
to borrowings to complete the Custom Direct acquisition.
The decrease in interest expense for the first half of 2010, as compared to the first half of
2009, was due to a $2.0 million favorable impact of the interest rates swaps during the first half
of 2010, as well as the lower average debt level in 2010. Additionally, due to the early retirement
of long-term notes during the first quarter of 2009, we were required to accelerate the recognition
of a portion of a previously deferred derivative loss. This resulted in additional interest expense
of $0.5 million during the first half of 2009.
Income Tax Provision
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Income tax provision
|
$ | 17,054 | $ | 13,887 | 22.8 | % | $ | 41,334 | $ | 26,337 | 56.9 | % | ||||||||||||
|
Effective tax rate
|
33.7 | % | 33.3 | % | 0.4 | pt. | 38.0 | % | 39.5 | % | (1.5 | ) pts. | ||||||||||||
The increase in our effective tax rate for the second quarter of 2010, as compared to the
second quarter of 2009, was primarily due to a higher state income tax rate in 2010. This increase
was partly offset by the higher favorable impact of discrete items in 2010. Discrete credits to
income tax expense in the second quarter of 2010 lowered our effective tax rate 2.7 points and
consisted primarily of reductions in accruals for uncertain tax positions. Discrete credits to
income tax expense in the second quarter of 2009 lowered our effective tax rate 2.0 points and
consisted primarily of receivables related to prior year tax returns.
The decrease in our effective tax rate for the first half of 2010, as compared to the first
half of 2009, was primarily due to the impact of discrete income tax expense in 2009, which
increased our effective tax rate 3.9 points for the first half of 2009. The discrete items in 2009
consisted of the non-deductible portion of the goodwill impairment charge, among other items.
Discrete income tax expense in 2010 increased our effective tax rate by 2.1 points. The discrete
items in 2010 consisted primarily of a $3.4 million charge resulting from a reconciliation bill,
formerly known as the Health Care and Education Reconciliation Act, which was signed into law in
March 2010 and which requires that certain tax deductions after 2012 be reduced by the amount of
the Medicare Part D subsidy payments. Prior to this law change, the subsidy was to be disregarded
in all future years when computing tax deductions. This resulted in a reduction in the deferred tax
asset associated with our postretirement benefit plan.
RESTRUCTURING COSTS
During the first half of 2010, we recorded net restructuring charges of $2.5 million. This
amount included expenses related to our restructuring activities, including equipment moves,
training and travel which were expensed as incurred, as well as net restructuring accruals of $1.8
million. The net restructuring accruals included charges of $3.2 million related to severance for
employee reductions primarily resulting from the acquisition of Custom Direct in April 2010, as
well as reductions in various functional areas as we continue our cost reduction initiatives. The
net restructuring accruals included severance benefits for 73 employees. Further information
regarding our cost reduction initiatives can be found under
Executive Overview
. These charges were
reduced by the reversal of $1.6 million of severance accruals as fewer employees received severance
benefits than originally estimated. The restructuring charges were reflected as net restructuring
charges of $0.6 million within cost of goods sold and net restructuring charges of $1.9 million
within operating expenses in the consolidated statement of income for the six months ended June 30,
2010.
During 2009, we recorded net restructuring charges of $12.0 million. This amount included
expenses related to our restructuring activities, including items such as equipment moves, training
and travel which were expensed as incurred, as well as net restructuring accruals of $8.2 million.
The net restructuring accruals included charges of $11.8 million related to
26
Table of Contents
severance for employee reductions in various functional areas, including the closing of one
customer call center, which was completed in the first quarter of 2010, and further consolidation
in the sales, marketing and fulfillment organizations, as well as operating lease obligations on
three manufacturing facilities closed during 2009. These actions were the result of our cost
reduction initiatives. The net restructuring accruals included severance benefits for 643
employees.
During 2009, we closed seven manufacturing operations and two customer call centers which were
located in five leased facilities and three owned facilities. The operations and related assets
were relocated to other locations. We have remaining rent obligations for three of the five leased
facilities and we are actively marketing the three owned facilities. The remaining payments due
under the operating lease obligations will be paid through May 2013. Although we closed the
manufacturing operations within our Colorado Springs, Colorado facility during 2009, this owned
location also houses administrative functions and two customer call centers, one of which we closed
during the first quarter of 2010. Once this facility is sold, we plan to relocate the remaining
employees to another location in the same area. The majority of the employee reductions included in
our restructuring accruals are expected to be completed in 2010. We expect most of the related
severance payments to be fully paid by mid-2011 utilizing cash from operations.
As a result of our employee reductions and facility closings, we expect to realize cost
savings of approximately $11 million in cost of goods sold and $21 million in SG&A expense in 2010
relative to 2009. These cost savings exclude the impact of Custom Direct employee reductions, as
Custom Direct’s results of operations were not included in our 2009 results. Expense reductions
consist primarily of labor and facility costs.
Further information regarding our restructuring charges can be found under the caption “Note
8: Restructuring charges” of the Condensed Notes to Unaudited Consolidated Financial Statements
appearing in Item 1 of this report.
SEGMENT RESULTS
Additional financial information regarding our business segments appears under the caption
“Note 14: Business segment information” of the Condensed Notes to Unaudited Consolidated Financial
Statements appearing in Item 1 of this report.
Small Business Services
This segment sells personalized printed products, which include business checks, printed
forms, promotional products, marketing materials and related services, as well as retail packaging
supplies and a suite of business services including web design and hosting, fraud protection,
payroll, logo design, search engine marketing and business networking, to small businesses. These
products and services are sold through direct response marketing, referrals from Financial
Services’ financial institution clients and Small Business Services’ telecommunications clients,
independent distributors and dealers, the internet and sales representatives.
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
$ | 193,165 | $ | 191,938 | 0.6 | % | $ | 385,491 | $ | 385,220 | 0.1 | % | ||||||||||||
|
Operating income
|
30,476 | 20,589 | 48.0 | % | 59,545 | 13,961 | 326.5 | % | ||||||||||||||||
|
Operating margin
|
15.8 | % | 10.7 | % | 5.1 | pts. | 15.4 | % | 3.6 | % | 11.8 | pts. | ||||||||||||
The increase in revenue for the second quarter and first half of 2010, as compared to the same
periods in 2009, was due primarily to sales of products and services by businesses acquired in
2009, as well as price increases and a favorable currency exchange rate impact related to our
Canadian operations of $2.1 million for the second quarter of 2010 and $5.2 million for the first
half of 2010. These increases in revenue were partly offset by the impact of negative general
economic conditions which we believe affected our customers’ buying patterns, as well as the
continuing decline in check and forms usage.
The increase in operating income and operating margin for the second quarter of 2010, as
compared to the second quarter of 2009, was due to continued progress on our cost reduction
initiatives, price increases, lower acquisition-related amortization related to acquisitions
completed prior to 2009, favorable product mix and a $2.3 million reduction in restructuring and
transaction-related costs in 2010. Further information regarding the restructuring costs can be
found under
Restructuring Costs
. These increases in operating income were partially offset by the
impacts of negative economic conditions, the continuing decline in checks and forms, marketing
investments in our brand awareness and positioning initiatives, and increases in delivery rates.
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Operating income and operating margin increased for the first half of 2010, as compared to the
first half of 2009, for the same reasons as discussed for the quarter. In addition, the increase
was due to the asset impairment charges of $24.9 million in 2009 discussed earlier under
Consolidated Results of Operations
and a $4.1 million reduction in restructuring and
transaction-related costs in 2010.
Financial Services
Financial Services’ products and services for financial instituations include comprehensive
check programs for both personal and business checks, fraud prevention and monitoring services,
customer acquisition campaigns, marketing communications, and services intended to enhance the
financial institution customer experience, such as customer loyalty programs. These products and
services are sold through multiple channels, including a direct sales force. As part of our check
programs, we also offer enhanced services such as customized reporting, file management and
expedited account conversion support.
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
$ | 98,248 | $ | 100,472 | (2.2 | )% | $ | 199,693 | $ | 202,475 | (1.4 | )% | ||||||||||||
|
Operating income
|
20,032 | 19,288 | 3.9 | % | 44,021 | 38,849 | 13.3 | % | ||||||||||||||||
|
Operating margin
|
20.4 | % | 19.2 | % | 1.2 | pts. | 22.0 | % | 19.2 | % | 2.8 | pts. | ||||||||||||
The decrease in revenue for the second quarter and first half of 2010, as compared to the same
periods in 2009, was due primarily to a decrease in order volume resulting from the continuing
decline in check usage and the weak economy. The volume decline and continuing competitive pricing
pressure were partly offset by higher revenue per order from the recognition of deferred revenue
related to a contract termination settlement executed in the fourth quarter of 2009, price
increases implemented in the second quarter of 2010 and the third quarter of 2009, and increased
non-check revenue.
Operating income and operating margin increased for the second quarter and first half of 2010,
as compared to the same periods in 2009, primarily due to higher revenue per order and the benefit
of our various cost reduction initiatives. These increases in operating income and operating margin
were partially offset by the volume decline, increased marketing investment and delivery rate
increases.
Direct Checks
Direct Checks sells personal and business checks and related products and services directly to
consumers using 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 various brand names including Checks
Unlimited®, Designer® Checks, Checks.com, Check Gallery®, The Styles Check Company®, and Artistic
Checks®, among others.
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
|
Revenue
|
$ | 56,583 | $ | 39,659 | 42.7 | % | $ | 97,932 | $ | 83,894 | 16.7 | % | ||||||||||||
|
Operating income
|
12,712 | 13,206 | (3.7 | )% | 28,609 | 27,455 | 4.2 | % | ||||||||||||||||
|
Operating margin
|
22.5 | % | 33.3 | % | (10.8) | pts. | 29.2 | % | 32.7 | % | (3.5 | ) pts. | ||||||||||||
The increase in revenue for the second quarter and first half of 2010, as compared to the same
periods in 2009, was due to the revenue contribution of $18.3 million from the acquisition of
Custom Direct in April 2010 discussed under
Executive Overview
. Partially offsetting the impact of
the acquisition was a reduction in orders stemming from the decline in check usage, as well as the
weak economy.
The decrease in operating income and operating margin for the second quarter of 2010, as
compared to the second quarter of 2009, was due to an increase of $2.4 million in
restructuring-related costs related primarily to employee reductions at Custom Direct, as well as
the lower order volume and increased delivery rates. These decreases in operating income were
partly offset by the benefit of our cost reduction initiatives.
28
Table of Contents
The increase in operating income for the first half of 2010, as compared to the first half of
2009, was due primarily to the benefit of our cost reduction initiatives, partially offset by the
lower order volume, an increase of $2.4 million in restructuring-related costs and increased
delivery rates.
CASH FLOWS
As of June 30, 2010, we held cash and cash equivalents of $15.5 million. The following table
shows our cash flow activity for the six months ended June 30, 2010 and 2009, and should be read in
conjunction with the consolidated statements of cash flows appearing in Item 1 of this report.
| Six Months Ended June 30, | ||||||||||||
| (in thousands) | 2010 | 2009 | Change | |||||||||
|
Continuing operations:
|
||||||||||||
|
Net cash provided by operating activities
|
$ | 70,539 | $ | 85,860 | $ | (15,321 | ) | |||||
|
Net cash used by investing activities
|
(113,753 | ) | (28,399 | ) | (85,354 | ) | ||||||
|
Net cash provided (used) by financing activities
|
46,112 | (54,928 | ) | 101,040 | ||||||||
|
Effect of exchange rate change on cash
|
(174 | ) | 500 | (674 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by continuing operations
|
2,724 | 3,033 | (309 | ) | ||||||||
|
Net cash used by operating activities of discontinued operations
|
— | (470 | ) | 470 | ||||||||
|
Net cash used by investing activities of discontinued operations
|
— | (12 | ) | 12 | ||||||||
|
|
||||||||||||
|
Net change in cash and cash equivalents
|
$ | 2,724 | $ | 2,551 | $ | 173 | ||||||
|
|
||||||||||||
The $15.3 million decrease in cash provided by operating activities for the first half of
2010, as compared to the first half of 2009, was due primarily to an $18.4 million increase in 2010
in employee profit sharing payments and pension contributions related to our 2009 performance, as
well as higher income tax payments. These decreases in cash provided by operating activities were
partially offset by a decrease of $4.8 million in contract acquisition payments in 2010 as compared
to 2009, as well as the higher earnings discussed earlier under
Consolidated Results of Operations.
Included in net cash provided by operating activities were the following operating cash
outflows:
| Six Months Ended June 30, | ||||||||||||
| (in thousands) | 2010 | 2009 | Change | |||||||||
|
Income tax payments
|
$ | 39,060 | $ | 31,946 | $ | 7,114 | ||||||
|
Voluntary employee
beneficiary association
(VEBA) trust contributions
to fund medical benefits
|
22,800 | 21,800 | 1,000 | |||||||||
|
Interest payments
|
22,120 | 21,985 | 135 | |||||||||
|
Contract acquisition payments
|
10,689 | 15,456 | (4,767 | ) | ||||||||
|
Severance payments
|
8,836 | 9,985 | (1,149 | ) | ||||||||
|
Employee profit sharing
payments and pension
contributions
|
29,790 | 11,430 | 18,360 | |||||||||
Net cash used by investing activities in the first half of 2010 was $85.4 million higher than
the first half of 2009 primarily due to the acquisition of Custom Direct in April 2010, partly
offset by proceeds from life insurance policies in 2010 and a $2.7 reduction in purchases of
capital assets.
Net cash provided by financing activities in the first half of 2010 was $101.0 million higher
than the first half of 2009. This was due primarily to net borrowings under our credit facility in
2010 to complete the acquisition of Custom Direct, as well as payments in 2009 of $21.2 million to
retire long-term notes and $2.7 million to repay amounts borrowed on our line of credit.
29
Table of Contents
Significant cash inflows, excluding those related to operating activities, for each period
were as follows:
| Six Months Ended June 30, | ||||||||||||
| (in thousands) | 2010 | 2009 | Change | |||||||||
|
Net proceeds from short-term debt
|
$ | 73,000 | $ | — | $ | 73,000 | ||||||
|
Proceeds from life insurance policies
|
5,782 | — | 5,782 | |||||||||
|
Proceeds from sales of marketable
securities
|
1,970 | — | 1,970 | |||||||||
|
Proceeds from issuing shares under
employee plans
|
1,600 | 1,042 | 558 | |||||||||
Significant cash outflows, excluding those related to operating activities, for each period
were as follows:
| Six Months Ended June 30, | ||||||||||||
| (in thousands) | 2010 | 2009 | Change | |||||||||
|
Payments for acquisitions, net of
cash acquired
|
$ | 98,621 | $ | — | $ | 98,621 | ||||||
|
Cash dividends paid to shareholders
|
25,696 | 25,621 | 75 | |||||||||
|
Purchases of capital assets
|
21,066 | 23,737 | (2,671 | ) | ||||||||
|
Payments for debt issue costs, credit
facility
|
2,324 | — | 2,324 | |||||||||
|
Payments on long-term debt
|
— | 22,134 | (22,134 | ) | ||||||||
|
Net payments on short-term debt
|
— | 2,743 | (2,743 | ) | ||||||||
|
Payments for common shares repurchased
|
— | 1,319 | (1,319 | ) | ||||||||
We anticipate that net cash provided by operating activities of continuing operations will be
between $220 million and $230 million in 2010, compared to $206 million in 2009. We anticipate that
the increase will be driven by the third quarter contract settlement discussed under
Executive
Overview
, cash flow generated by the Custom Direct acquisition, stronger earnings, continued
progress on working capital initiatives and lower contract acquisition payments. We expect that
these increases will be partly offset by higher performance-based compensation payments for all
employee levels in 2010. We anticipate that cash generated by operating activities in 2010 will be
utilized for dividend payments of approximately $50 million, capital expenditures of approximately
$40 million, debt reduction, and possibly additional small-to-medium-sized acquisitions. We intend
to focus our capital spending on expanding our use of digital printing technology, completing the
automation of our flat check packaging process and investing in order fulfillment, delivery
productivity and information technology infrastructure. We have no maturities of long-term debt
until December 2012. We executed a $200.0 million credit facility during the first quarter of 2010
and we had $91.7 million available for borrowing under this credit facility as of June 30, 2010. We
believe our credit facility, along with cash generated by operating activities, will be sufficient
to support our operations, including capital expenditures, possible small-to-medium-sized
acquisitions, required debt service and dividend payments, for the next 12 months.
30
Table of Contents
CAPITAL RESOURCES
Our total debt was $846.5 million as of June 30, 2010, an increase of $77.8 million from
December 31, 2009. Our capital structure for each period was as follows:
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||
| average interest | average interest | |||||||||||||||||||
| (in thousands) | Amount | rate | Amount | rate | Change | |||||||||||||||
|
Fixed interest rate
|
$ | 533,450 | 6.0 | % | $ | 533,399 | 6.0 | % | $ | 51 | ||||||||||
|
Floating interest rate
|
313,063 | 3.7 | % | 235,354 | 3.0 | % | 77,709 | |||||||||||||
|
|
||||||||||||||||||||
|
Total debt
|
846,513 | 5.3 | % | 768,753 | 5.1 | % | 77,760 | |||||||||||||
|
Shareholders’ equity
|
162,951 | 117,210 | 45,741 | |||||||||||||||||
|
|
||||||||||||||||||||
|
Total capital
|
$ | 1,009,464 | $ | 885,963 | $ | 123,501 | ||||||||||||||
|
|
||||||||||||||||||||
During September 2009, we entered into interest rate swaps with a notional amount of $210.0
million to hedge a portion of our notes due in 2012. The carrying amount of long-term debt
increased $4.4 million since the inception of the interest rate swaps due to changes in the fair
value of the hedged long-term debt. Further information concerning the interest rate swaps and our
outstanding debt can be found under the captions “Note 4: Derivative financial instruments” and
“Note 11: Debt” of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in
Item 1 of this report.
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 6.4 million shares
remained available for purchase under this authorization as of June 30, 2010. We did not repurchase
any shares during the first half of 2010. Information regarding changes in shareholders’ equity
appears under the caption “Note 13: Shareholders equity” of the Condensed Notes to Unaudited
Consolidated Financial Statements appearing in Item 1 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 and other potential uses of cash,
including acquisitions or share repurchases.
As of December 31, 2009, we had a $275.0 million committed line of credit which was scheduled
to expire in July 2010. During March 2010, we cancelled this line of credit and executed a new
$200.0 million credit facility, which expires in March 2013. Borrowings under the credit facility
are collateralized by substantially all of our assets. Our commitment fee ranges from 0.40% to
0.50% based on our leverage ratio. The credit agreement governing the credit facility contains
customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures,
liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course
of business, and change in control as defined in the agreement. The agreement also contains
financial covenants regarding our leverage ratio, interest coverage and liquidity.
The daily average amount outstanding under our credit facilities during the six months ended
June 30, 2010 was $56.6 million at a weighted-average interest rate of 3.08%. As of June 30, 2010,
$99.0 million was outstanding at a weighted-average interest rate of 3.39%. During 2009, the daily
average amount outstanding under our line of credit was $69.3 million at a weighted-average
interest rate of 0.76%. As of December 31, 2009, $26.0 million was outstanding at a
weighted-average interest rate of 0.67%. As of June 30, 2010, amounts were available for borrowing
under our credit facility as follows:
| (in thousands) | Total available | |||
|
Credit facility commitment
|
$ | 200,000 | ||
|
Amounts drawn on credit facility
|
(99,000 | ) | ||
|
Outstanding letters of credit
|
(9,313 | ) | ||
|
|
||||
|
Net available for borrowing as of
June 30, 2010
|
$ | 91,687 | ||
|
|
||||
31
Table of Contents
OTHER
FINANCIAL POSITION INFORMATION
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 $10.7 million for the first half of 2010 and $15.5 million for
the first half of 2009. We anticipate cash payments of approximately $15 million in 2010. Changes
in contract acquisition costs during the first half of 2010 and 2009 were as follows:
| Six Months Ended June 30, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
|
Balance, beginning of year
|
$ | 45,701 | $ | 37,706 | ||||
|
Additions
(1)
|
21,728 | 30,556 | ||||||
|
Amortization
|
(9,803 | ) | (12,460 | ) | ||||
|
Write-off
|
(143 | ) | — | |||||
|
|
||||||||
|
Balance, end of period
|
$ | 57,483 | $ | 55,802 | ||||
|
|
||||||||
| (1) | Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $10,689 for the six months ended June 30, 2010 and $15,456 for the six months ended June 30, 2009. |
The number of checks being written has been in decline since the mid-1990s, which has
contributed to increased competitive pressure when attempting to retain or acquire clients. Both
the number of financial institution clients requesting contract acquisition payments and the amount
of the payments increased in the mid-2000s, and has fluctuated significantly from year to year.
Although we anticipate that we will selectively continue to make contract acquisition payments, we
cannot quantify future amounts with certainty. The amount paid depends on numerous factors such as
the number and timing of contract executions and renewals, competitors’ actions, overall product
discount levels and the structure of up-front product discount payments versus providing higher
discount levels throughout the term of the contract. When the overall discount level provided for
in a contract is unchanged, contract acquisition costs do not result in lower net revenue. These
payments 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. Information regarding the
recoverability of contract acquisition costs appears under the caption “Note 15: Market risks” of
the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this
report.
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 $9.6 million as of June 30, 2010 and $2.8 million
as of December 31, 2009. Accruals for contract acquisition payments included in other non-current
liabilities in our consolidated balance sheets were $10.2 million as of June 30, 2010 and $6.0
million as of December 31, 2009.
Funds held for customers
– Funds held for customers of $40.0 million as of June 30, 2010
increased $13.1 million from December 31, 2009. The increase in funds held for customers, and the
corresponding accrued liability, was due
primarily to the timing of the end of the quarter relative to the
timing of customer payroll disbursements.
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
32
Table of Contents
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 the 2009
Form 10-K.
We are not engaged in any transactions, arrangements or other relationships with
unconsolidated entities or other third parties that are reasonably likely to have a material effect
on our liquidity or on our access to, or requirements for, capital resources. In addition, we have
not established any special purpose entities.
A table of our contractual obligations was provided in the
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
section of the 2009 Form 10-K. There were
no significant changes in these obligations during the first half of 2010.
RELATED PARTY TRANSACTIONS
We have not entered into any material related party transactions during the six months ended
June 30, 2010 or during 2009.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies was provided in the
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
section of the 2009 Form 10-K. There
were no changes in these policies during the first half of 2010.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding the accounting pronouncements adopted during the first quarter of 2010
can be found under the caption “Note 2: New accounting pronouncements” of the Condensed Notes to
Unaudited Consolidated Financial Statements appearing in Item 1 of this report.
In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements.
This guidance requires new disclosures and clarifies some existing disclosure
requirements regarding fair value measurements. The disclosure required under this guidance
regarding purchases, sales, issuances and settlements in the rollforward of activity in Level 3
fair value measurements will be effective for our quarterly report on Form 10-Q for the quarter
ending March 31, 2011.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor”
for forward-looking statements to encourage companies to provide prospective information. We are
filing this cautionary statement in connection with the Reform Act. When we use the words or
phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will
continue,” “will approximate,” “is anticipated,” “estimate,” “project” or similar expressions in
this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission,
in our press releases and in oral statements made by our representatives, they indicate
forward-looking statements within the meaning of the Reform Act.
We want to caution you that any forward-looking statements made by us or on our behalf are
subject to uncertainties and other factors that could cause them to be incorrect. The material
uncertainties and other factors known to us are discussed in Item 1A of the 2009 Form 10-K and are
incorporated into this Item 2 of this report on Form 10-Q 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.
33
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to changes in interest rates primarily as a result of the borrowing activities
used to support our capital structure, maintain liquidity and fund business operations. We do not
enter into financial instruments for speculative or trading purposes. During the first half of
2010, we used our credit facilities to fund working capital, acquisitions and debt service
requirements. The nature and amount of debt outstanding can be expected to vary as a result of
future business requirements, market conditions and other factors. As of June 30, 2010, our total
debt was comprised of the following:
| Weighted- | ||||||||||||
| average | ||||||||||||
| Carrying | Fair | interest | ||||||||||
| (in thousands) | amount | value (1) | rate | |||||||||
|
Long-term notes maturing December 2012
|
$ | 284,264 | $ | 280,627 | 3.83 | % | ||||||
|
Long-term notes maturing October 2014
|
263,249 | 252,301 | 5.13 | % | ||||||||
|
Long-term notes maturing June 2015
|
200,000 | 199,060 | 7.38 | % | ||||||||
|
Amounts drawn on credit facility
|
99,000 | 99,000 | 3.39 | % | ||||||||
|
|
||||||||||||
|
Total debt
|
$ | 846,513 | $ | 830,988 | 5.34 | % | ||||||
|
|
||||||||||||
| (1) | Based on quoted market prices as of June 30, 2010 for identical liabilities when traded as assets, with the exception of amounts drawn on our credit facility for which fair value equals carrying value due to its short-term nature. |
We may, from time to time, retire 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 and other potential uses of cash,
including acquisitions or share repurchases.
In September 2009, we entered into interest rate swaps with a notional amount of $210.0
million to hedge against changes in the fair value of a portion of our ten-year bonds due in 2012.
We entered into these swaps, which we designated as fair value hedges, to achieve a targeted mix of
fixed and variable rate debt, where we receive a fixed rate and pay a variable rate based on the
London Interbank Offered Rate (LIBOR). Changes in the fair value of the interest rate swaps and the
related long-term debt are included in interest expense in the consolidated statements of income.
When the changes in fair value of the interest rate swaps and the hedged debt are not equal (i.e.,
hedge ineffectiveness), the difference in the changes in fair value affects the reported amount of
interest expense in our consolidated statements of income. Hedge ineffectiveness was not
significant for the quarter or six months ended June 30, 2010. The fair value of the interest rate
swaps as of June 30, 2010 was $4.8 million and is included in other non-current assets on the
consolidated balance sheet. Based on the outstanding variable rate debt in our portfolio, a one
percentage point change in interest rates would have resulted in a $1.3 million change in interest
expense for the first half of 2010, excluding the impact of the interest rate swaps.
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
in Item 2 of this report for further discussion of market
risks.
Item 4. Controls and Procedures.
(a)
Disclosure
Controls and Procedures
— As of the end of the period covered by this report
(the “Evaluation Date”), we carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “1934 Act”)).
Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file or submit under the Exchange
Act is (i) recorded, processed, summarized and reported within the time periods specified in
applicable rules and forms, and (ii) accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosure.
34
Table of Contents
(b)
Internal
Control Over Financial Reporting
— There were no changes in our internal control
over financial reporting identified in connection with our evaluation during the quarter ended June
30, 2010, which have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
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 1A. Risk Factors.
Our risk factors are outlined in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2009 (the “2009 Form 10-K”). There have been no significant changes to these risk
factors since we filed the 2009 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
While not considered repurchases of shares, we do at times withhold shares that would
otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the
exercising or vesting of such awards. During the second quarter of 2010, we withheld 2,806 shares
in conjunction with the vesting and exercise of equity-based awards.
Item 3. Defaults Upon Senior Securities
.
None.
Item 5. Other Information
.
None.
Item 6. Exhibits.
| Exhibit | Method of | |||||
| Number | Description | Filing | ||||
| 1.1 |
Purchase Agreement, dated September 28, 2004, by
and among us and J.P. Morgan Securities Inc. and
Wachovia Capital Markets, LLC, as representatives
of the several initial purchasers listed in
Schedule 1 of the Purchase Agreement (incorporated
by reference to Exhibit 1.1 to the Current Report
on Form 8-K filed with the Commission on October 4,
2004)
|
* | ||||
35
Table of Contents
| Exhibit | Method of | |||||
| Number | Description | Filing | ||||
| 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 Current
Report on Form 8-K filed with the Commission on December 5,
2002)
|
* | ||||
|
|
||||||
| 4.3 |
Indenture, dated as of April 30, 2003, by and between us and
Wells Fargo Bank Minnesota, N.A. (formerly Norwest Bank
Minnesota, National Association), as trustee (incorporated by
reference to Exhibit 4.8 to the Registration Statement on
Form S-3 (Registration No. 333-104858) filed with the
Commission on April 30, 2003)
|
* | ||||
|
|
||||||
| 4.4 |
Form of 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)
|
* | ||||
36
Table of Contents
| Exhibit | Method of | |||||
| Number | Description | Filing | ||||
| 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)
|
* | ||||
|
|
||||||
| 4.9 |
Revolving credit agreement dated as of March 12, 2010,
among us, JPMorgan Chase Bank, N.A. as administrative
agent, Fifth Third Bank as Syndication Agent, U.S.
Bank National Association and The Bank of
Tokyo-Mitsubishi UFJ, Ltd. as co-documentation agents,
and the other financial institutions party thereto,
related to a $200,000,000 three-year revolving credit
agreement (incorporated by reference to Exhibit 99.1
to the Current Report on Form 8-K filed with the
Commission on March 15, 2010)
|
* | ||||
|
|
||||||
| 12.1 |
Statement re: Computation of Ratios
|
Filed
herewith |
||||
|
|
||||||
| 31.1 |
CEO Certification of Periodic Report pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
Filed
herewith |
||||
|
|
||||||
| 31.2 |
CFO Certification of Periodic Report pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
Filed
herewith |
||||
|
|
||||||
| 32.1 |
CEO and CFO Certification of Periodic Report pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
Furnished
herewith |
||||
|
|
||||||
| 101 |
Interactive data files pursuant to Rule 405 of
Regulation S-T: (i) Consolidated Balance Sheets as of
June 30, 2010 and December 31, 2009, (ii) Consolidated
Statements of Income for the quarters and six months
ended June 30, 2010 and 2009, (iii) Consolidated
Statements of Cash Flows for the six months ended June
30, 2010 and 2009, and (iv) Condensed Notes to
Unaudited Consolidated Financial Statements, tagged as
blocks of text**
|
Furnished
herewith |
||||
| * | Incorporated by reference | |
| ** | Submitted electronically with this report |
37
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
DELUXE CORPORATION
(Registrant) |
||||
| Date: August 5, 2010 | /s/ Lee Schram | |||
| Lee Schram | ||||
|
Chief Executive Officer
(Principal Executive Officer) |
||||
| Date: August 5, 2010 | /s/ Terry D. Peterson | |||
| Terry D. Peterson | ||||
| Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
38
Table of Contents
INDEX TO EXHIBITS
| Exhibit No. | Description | |
|
12.1
|
Statement re: Computation of Ratios | |
|
|
||
|
31.1
|
CEO Certification of Periodic Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
|
||
|
31.2
|
CFO Certification of Periodic Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
|
||
|
32.1
|
CEO and CFO Certification of Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
|
||
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009, (ii) Consolidated Statements of Income for the quarters and six months ended June 30, 2010 and 2009, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009, and (iv) Condensed Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text |
39
TABLE OF CONTENTS
Part I-financial InformationprintItem 1. Financial StatementsprintNote 1: Consolidated Financial StatementsprintNote 2: New Accounting PronouncementsprintNote 3: Supplemental Balance Sheet InformationprintNote 4: Derivative Financial InstrumentsprintNote 5: Fair Value MeasurementsprintNote 6: Earnings Per ShareprintNote 7: Acquisitions and Discontinued OperationsprintNote 8: Restructuring ChargesprintNote 9: Pension and Other Postretirement BenefitsprintNote 10: Income Tax ProvisionprintNote 11: DebtprintNote 12: Other Commitments and ContingenciesprintNote 13: Shareholders EquityprintNote 14: Business Segment InformationprintNote 15: Market RisksprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart Ii-other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 5. Other InformationprintItem 6. Exhibitsprint