Vous êtes sur la page 1sur 20

UVA-F-1492

Version 2.1

DELUXE CORPORATION
In the late summer of 2002, Rajat Singh, a managing director at Hudson Bancorp, was
reflecting on the financial policies of Deluxe Corporation, the largest printer of paper checks in the
United States. Earlier in the year, Deluxe had retired all of its long-term debt, and the company had
not had a major bond issue in more than 10 years. Simultaneously, the company had been pursuing
an aggressive program of share repurchases, the latest of which was nearly complete. So far, those
actions had proven successful; investors had responded well to the share repurchases, and the
companys stock was at its highest level in nearly 10 years. But Singh, who had been retained by
Deluxes board of directors to provide guidance on the companys financial strategy, saw dangers
looming for Deluxe that would require the companys managers to do more.
Deluxe Corporation was the dominant player in the highly concentrated and competitive
check-printing industry. Deluxes sales and earnings growth, however, had been in a slow decline as
the company struggled to fight a relentless wave of technological change. Since the advent of on-line
payment methods and the rising popularity of credit and debit cards, consumers usage of paper
checks had fallen steadily. In response, Deluxes chair and chief executive officer (CEO), Lawrence
J. Mosner, had led a major restructuring of the firm whereby he rationalized its operations, reduced
its labor force, and divested several noncore businesses. Singh sensed that those measures would
only carry the company so far and that the board was looking for other alternatives.
Singh surmised that there would eventually be a tipping point at which the demand for paper
checks would fall precipitously. In this challenging operating environment, Singh was convinced
that Deluxe would need continued financial flexibility to fend off the eventual disintegration of its
core business. Singh had already told the board that the company had probably gone as far as it
could with share repurchases. The time for a new round of debt financing was at hand. The board
had asked Singh for a detailed plan in five days, and had insisted that, as part of the plan, he
undertake a complete assessment of the firms overall debt policy, focusing primarily on the
appropriate mix of debt and equity. In the not-too-distant future, Deluxes financial and strategic
choices would be severely constrained, and Singh believed it was essential that the companys
financial policies afford it the necessary funding and flexibility to steer a path to survivability.

This case was prepared from public data by Sean D. Carr, under the supervision of Robert F. Bruner and Professor Susan
Chaplinsky. Hudson Bancorp and Rajat Singh are fictional; the case is intended solely as a basis for class discussion rather
than to illustrate effective or ineffective handling of an administrative situation. Copyright 2005 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwise
without the permission of the Darden School Foundation.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-2-

UVA-F-1492

Modest Beginnings
Deluxe Corporation was founded in 1915 by a chicken-farmer-turned-printer in a one-room
print shop in St. Paul, Minnesota. Then known as Deluxe Check Printers, the company was a pioneer
in the emerging check printing business, and specialized in imprinting personalized information on
checks and checkbooks. Deluxe became a publicly traded company in 1965, and traded on the New
York Stock Exchange in 1980 under the name Deluxe Corporation. The company was the largest
provider of checks in the United States, serving customers through more than 10,000 financial
institutions. Deluxe processed more than 100 million check orders each yearnearly half of the U.S.
market. American consumers wrote more than 42 billion checks annually, although check usage had
declined in recent years.
Between 1975 and 1995, the peak years of check usage in the United States, Deluxe
Corporations revenues grew at a compound annual rate of 12%. This rate, however, had declined
over the past decade as checks lost share to the
electronic forms of payment, such as ATMs, credit
John
Harland
cards, debit cards, and Internet bill-paying systems.
25%
As those new forms of payment created a highly
Deluxe
fragmented payment industry, check printing itself
49%
remained highly concentrated, with only a few firms
controlling 90% of the market. Deluxe competed
Clarke
primarily with two other companies, John Harland
American
and Clarke American, a subsidiary of U.K.-based
26%
Novar (Figure 1). With a proliferation of alternative
Figure 1. U.S. check-printing market share. (Source of data: D.A.
payment systems, the check-printing business faced
Davidson & Co.)
an annual decline of 1%3% in check demand, a
trend that most industry analysts expected to continue.
Recent Financial Performance
With the prospect of a precipitous decline in demand for paper checks emerging in the late
1990s, Deluxe undertook a major reorganization during which it divested nonstrategic businesses
and dramatically reduced the number of its employees and facilities. The company went from 62
printing plants to 13, reduced its labor force from 15,000 to 7,000, outsourced information
technology functions, improved manufacturing efficiencies, and divested nearly 20 separate
businesses. The resulting reductions in operating expenses helped reverse Deluxes earnings slump
in 1998, despite the continued softening in revenue growth.
In 2000, Deluxe announced a major strategic shift with the spinoff of its technology-related
subsidiaries, eFunds and iDLX Technology Partners, in an initial public offering. The subsidiary
eFunds provided electronic-payment products and services (e.g., electronic transaction processing,
electronic funds transfer, and payment protection services) to the financial and retail industries;
iDLX offered technology-related consulting services to financial services companies. Deluxes

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

UVA-F-1492

-3-

CEO, Mosner, believed that Deluxe offered more value to shareholders as a pure-play company.
While he admitted that the eventual demise of the paper-check business was a certainty, he insisted
that there were still growth opportunities for the company:
We dont want to abandon the core business too soon. Instead, you mine all you can
out of the core business before [moving on]. We have a very good business, a very
solid business with high levels of profitability. We feel we can generate revenues and
profits on our core business not only today but over the next five years.1
With the spinoff of eFunds and iDLX, management abandoned its plan for Deluxe to offer products
and services targeting the electronic-transfer market and refocused on its core business.
Repositioning the firm as a pure-play check-printing company made sense to investors, and the
companys stock price rose on the news.
Following the spinoff, Mosner reorganized Deluxes remaining paper-payments segment
around three primary business units. Financial
Business
Services sold checks to consumers through financial
Services
institutions, with institutional clients typically
16%
Financial
entering into three-to-five-year supplier contracts.
Services
Direct Checks sold to consumers through direct mail
60%
and the Internet. The Business Services segment sold
Direct
checks, forms, and related products through financial
Checks
institutions and directly to small businesses, targeting
24%
firms with no more than 20 employees. See Figure 2
for data on Deluxes 2001 sales by segment.
Figure 2. Deluxe Corp. sales by segment, 2001. (Source of
data: Company reports.)

According to some analysts, the Business Services segment ultimately held the most promise
for Deluxe because it could allow the company to bundle or cross-sell a variety of products and
services to the growing small-business sector. Rather than simply grow its number of individual
customers, as it had done in the past with its check business, Business Services could generate
growth in the number of products or services it sold per customer. Furthermore, there were several
regional companies active in this sector that had the potential to be strategic partners for Deluxe.
By year-end 2001, the market had responded favorably to the spinoff and restructuring
effortsthe firms share price had grown by more than 65% over the year, outperforming the S&P
500 Index, which had fallen nearly 20%. Over the preceding decade, however, the firms share price
growth had lagged the broad market indexes. Exhibit 1 gives a 10-year summary of the financial
characteristics of the firm, including share prices and data on comparable market performance. From
1998 to 2001, Deluxe Corporations compound annual rate of sales growth was 4.0%, which
reflected the growing maturity of the market for paper checks in the United States. Consistent with

Dee DePass, Cashing Out: Even Deluxe Corp. Admits That Paper Checks Are Headed for the Dust Heap of History,
Star-Tribune Newspapers of the Twin Cities, 17 January 2002.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-4-

UVA-F-1492

the perceived maturity of the market segment, Deluxes 2001 price earnings ratio (P/E) of 11.0
hovered well below the broader markets P/E of 29.5.
Concerns about revenue growth and declining demand for printed checks were echoed in the
comments of analysts who followed the firm. Despite a positive assessment of the firms recent
ability to improve margins, one analyst covering Deluxe was guarded:
[W]e remain cautious concerning Deluxes long-term prospects for earnings growth,
until the company can improve profitability in its core [Financial Services] check
printing segment. At present, this seems like a tough proposition, given a relatively
mature market, intense price competition, the growth in electronic payments, and
consolidation in the banking sector.2
Rajat Singh knew that Deluxes board members had many of the same concerns, but also
knew that they believed the analyst community had taken a shortsighted view of the companys
potential. In fact, Deluxes most recent annual report stated, While the check printing industry is
mature, our existing leadership position in the market place contributes to our financial strength.3
The U.S. Federal Reserve Boards 2001 Bank Payment Study indicated that checks still remained
consumers most preferred method of noncash payment, representing 60% of all retail noncash
payments. The companys management believed that it was well positioned to extract value from
this business and to explore noncheck offerings that would closely leverage Deluxes core
competencies. Exhibits 2 and 3 give the latest years income statements and balance sheets for
Deluxe Corporation.
Current and Future Financing
Against this backdrop, Singh assessed the current and future financing requirements of the
firm. From time to time, Deluxe required additional financing for such general corporate purposes as
working capital, capital asset purchases, possible acquisitions, repayment of outstanding debts,
dividend payments, and repurchasing the firms securities. To meet those short-term financing
needs, Deluxe could draw upon the following debt instruments:

Commercial paper:4 Deluxe maintained a $300-million commercial-paper program, which


carried a credit rating of A1/P1. The risk of a downgrade of Deluxes short-term credit
rating is low, Singh thought. If for any reason, they were unable to access the commercial
paper markets, they would rely on their line of credit for liquidity. Deluxe had $150 million
in commercial paper outstanding, at a weighted-average interest rate of 1.85%.

David Gallen, Value Line Investment Survey, 24 May 2002.


Deluxe Corporation Annual Report (2001), 2526.
4
Commercial paper was an unsecured, short-term obligation issued by a corporation, typically for financing accounts
receivable and inventories. It was usually issued at a discount reflecting prevailing market interest rates, and its maturity ranged
from 2 to 270 days.
3

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-5-

UVA-F-1492

Line of credit: Deluxe also had $350 million available under a committed line of credit,
which would expire in August 2002, and $50 million under an uncommitted line of credit.
During 2001, the company drew no amounts on its committed line of credit. The average
amount drawn on the uncommitted line during 2001 was $1.3 million, at a weighted-average
interest rate of 4.26%. At year-end, no amount was outstanding on this line of credit.

Medium-term notes: Deluxe had a shelf registration5 for the issuance of up to $300 million
in medium-term notes. No such notes had been issued or were outstanding.

In February 2001, Deluxe paid off $100 million of its 8.55% long-term unsecured and
unsubordinated notes, which it had issued in 1991.
In January 2001, the companys board of directors approved a stock-repurchase program,
which authorized the repurchase of up to 14 million shares of Deluxe common stock, or about 19%
of total shares outstanding. By year-end, the company had spent about $350 million to repurchase
11.3 million shares. This program followed a share-repurchase program initiated in 1999, which
called for the repurchase of 10 million shares, or about 12.5% of the firms shares outstanding at the
time. Deluxe funded these repurchases with cash from operations and from issuances of commercial
paper. Exhibit 1 summarizes the firms share repurchase activity in recent years. Singh believed the
board would continue to pursue an aggressive program of share repurchases.
In addition to possible buybacks and strategic acquisitions, Singh reviewed other possible
demands on the firms resources. He believed that cash dividends would be held constant for the
foreseeable future. He also believed that capital expenditures would be about equal to depreciation
for the next few years. Although sales might grow, working capital turns should decline, resulting in
a reduction in net working capital in the first year, followed by increases later on. Both of those
effects reflected the tight asset management under the new CEO. Exhibit 4 gives a five-year forecast
of Deluxes income statement and balance sheet. This forecast was consistent with the lower end of
analysts projections for revenue growth and realization of the benefits of Deluxes recent
restructuring. The forecast assumed that the existing debt would be refinanced with similar debt, but
did not assume major share repurchases. The forecast would need to be revised to reflect the impact
of any recommended changes in financial policy.
Considerations in Assessing Financial Policy
In addition to assessing Deluxes internal financing requirements, Singh recognized that his
policy recommendations would play an important role in shaping the perceptions of the firm by
bond-rating agencies and investors.

Shelf registration was a term used to describe the U.S. Securities and Exchange Commissions rule that gave a
corporation the ability to comply with registration requirements up to two years before a public offering for a security. With a
registration on the shelf, the company could quickly go to market with its offering when conditions became more favorable.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-6-

UVA-F-1492

Bond rating6
Deluxes senior debt, which had matured in February 2001, had been rated A+ by Standard
& Poors and A1 by Moodys. (Exhibit 5 presents the bond-rating definitions for this and other
rating categories.) A+/A1 were investment-grade ratings, as were the next lower rating grades,
BBB/Baa. Below that, however,
were noninvestment-grade ratings
D e fa u lt R a te s B y R a tin g C a te g o r y (2 0 0 1 )
3 2 .5 0 %
(BB/Ba), which were often referred
3
5
.0
0
%
to as high yield or junk debt. Some
large institutional investors (for 3 0 .0 0 %
example, pension funds and 2 5 .0 0 %
charitable trusts) were barred from 2 0 .0 0 %
9 .3 5 %
investing in noninvestment-grade 1 5 .0 0 %
1 .1 9 %
debt, and many individual investors 1 0 .0 0 %
0 .3 0 %
0 .1 7 %
0 .0 0 % 0 .0 0 %
shunned it as well. For that reason,
5 .0 0 %
the yields on noninvestment-grade
0 .0 0 %
A aa
Aa
A
B aa
B aa
B aa
C a a -C
debt over U.S. Treasury securities
3. Default rates by rating category, 2001. (Source of data: Moodys Investors
(i.e., spreads) were typically Figure
Service, February 2002.)
considerably higher than the spreads
for investment-grade issues. For pertinent data on the rating categories, see Figures 3 and 4.
The ability to issue noninvestment-grade debt depended, to a much greater degree than did
investment-grade debt, on the strength of the economy and on favorable credit market conditions.
On that issue, Rajat Singh said:
Numbe r of Ne w Issue s
By Rati n g C ate gory (2005)

783
800

556

600
400

224
154

73

140

200

41

0
AAA AA

BBB

BB

CCC

Figure 4. Number of new issues by rating category, 2005.


(Source of data: Standard & Poors RatingsDirect.)

You dont pay much of a penalty in yield


as you go from A to BBB. Theres a
range over which the risk you take for
more leverage is de minimus. But you
pay a big penalty as you go from BBB to
BB. The penalty is not only in the form of
higher costs, but also in the form of
possible damage to the Deluxe brand. We
dont want the brand to be sullied by an
association with junk debt.
For those reasons, Singh sought to preserve an
investment-grade rating for Deluxe. But where in

A firms bond rating, which was based on an analysis of the issuers financial condition and profitability, reflected
the probability of defaulting on the issue. The convention in finance was that the firms bond rating referred to the rating
on the firms senior debt, with the understanding that any subordinated debt issued by the firm would ordinarily have a
lower bond rating. For instance, Deluxes senior debt had the split BBB/Baa3 rating, while its subordinated convertible
bonds were rated BB/Ba. Standard & Poors, Moodys Investors Service, and Fitch Investors Service were bond-rating
services.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-7-

UVA-F-1492

the investment-grade range should Deluxe be positioned? Exhibit 6 gives the financial ratios
associated with the various rating categories.
While the rating agencies looked closely at a number of indicators of credit quality, Deluxes
managers paid particular attention to the ratio of earnings before interest and taxes (EBIT) to interest
expense. Exhibit 7 illustrates Deluxes EBIT-coverage ratios for the past 10 years. Singhs
recommendations for the company would require the selection of an appropriate target bond rating.
Thereafter, Singh would have to recommend to the board the minimum and maximum amounts of
debt that Deluxe could carry to achieve the desired rating.
Flexibility
Singh was aware that choosing a target debt level based on an analysis of industry peers
might not fully capture the flexibility that Deluxe would need to meet its own possible future
adversities. Singh said:
Flexibility is how much debt you can issue before you lose the investment-grade
bond rating. I want flexibility, and yet I want to take advantage of the fact that, with
more debt, you have lower cost of capital. I am very comfortable with Deluxes
strategy and internal financial forecasts for its business; if anything, I believe the
forecasts probably underestimate, rather than overestimate, its cash flows. But lets
suppose that a two-sigma adverse outcome would be an EBIT close to $200
millionI cant imagine in the worst of times an EBIT less than that.
Accordingly, Singhs final decision on the target bond rating would have to be one that maintained
reasonable reserves against Deluxes worst-case scenario.
Cost of capital
Consistent with managements emphasis on value creation, Singh believed that choosing a
financial policy that minimized the cost of capital was important. He understood that exploitation of
debt tax shields could create value for shareholdersup to a reasonable limit, but beyond that limit,
the costs of financial distress would become material and would cause the cost of capital to rise.
Singh relied on Hudson Bancorps estimates of the pretax cost of debt and cost of equity by rating
category (see Exhibit 8).
The cost of debt was estimated by averaging the current yield-to-maturity of bonds within
each rating category. The cost of equity (Ke) was estimated by using the capital asset pricing model
(CAPM). The cost of equity was computed for each firm by using its beta and other capital market
data. The individual estimates of Ke were then averaged within each bond-rating category. Singh
reflected on the relatively flat trend in the cost of equity within the investment-grade range, and he
understood that changes in leverage within the investment-grade range were not regarded as material
to investors. Nonetheless, it remained for Singh to determine which rating category provided the
lowest cost of capital.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-8-

UVA-F-1492

Current capital-market conditions


Any policy recommendations would need to acknowledge the feasibility of implementing
those policies today as well as in the future. Exhibit 9 presents information about current yields in
the U.S. debt markets. The current situation in the debt markets was favorable as the U.S. economy
continued its expansion. The equity markets seemed to be pausing after a phenomenal advance in
prices. The outlook for interest rates was stable, although any sign of inflation might cause the
Federal Reserve to lift interest rates. Major changes in taxes and regulations were in abeyance, at
least until the outcome of the next round of presidential elections.
Conclusion
Rajat Singh leafed through the analyses and financial data he had gathered for his
presentation to Deluxe Corporations board of directors. Foremost in his mind were the words of the
companys chief financial officer, Douglas Treff, who had said to a group of securities analysts
barely a week earlier:
Let me anticipate a question which many of you are pondering. What now? Our
board of directors and the management team are committed to maximizing
shareholder value. Our past actions have demonstrated that commitment. We have
spun off a business, eFunds, at the end of 2000, to unleash the value of two different
types of companies. Over the past 18 months, we have returned more than $600
million to shareholders through cash dividends and share repurchases. Therefore, be
assured that we are evaluating options that will continue to create value for our
fellow shareholders.7
Clearly, Singhs plan would have to afford Deluxe low costs and continued access to capital
under a variety of operating scenarios in order for the firm to pursue whatever options it was
considering. This would require him to test the possible effects of downside scenarios on the
companys coverage and capitalization ratios under alternative debt policies. He reflected on the
competing goals of value creation, flexibility, and bond rating. He aimed to recommend a financial
policy that would balance those goals and provide guidance to the board of directors and the
financial staff regarding the firms target mix of capital. With so many competing factors to weigh,
Singh believed that it was unlikely that his plan would be perfect. But then he remembered one of
his mentors favorite sayings: If you wait until you have a 99% solution, youll never act; go with
an 80% solution.

Fair Disclosure Financial Network, transcript of Earnings Release Conference Call, 18 July 2002.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-9-

UVA-F-1492

Exhibit 1
DELUXE CORPORATION
Deluxe Corporations 10-Year Financial Summary
(in millions of U.S. dollars except per-share values and numbers of shares)
This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

1992
Selected Income Statement Information
Net sales
Operating expenses
Profit from operations
Interest expense
Net earnings

$1,534.4
$722.2
$812.2
$15.4
$202.8

Common shares, end of year (000s)


Common shares repurchased (000s)
Common shares issued (000s)
Earnings per share1
Dividend per share
Selected Balance Sheet Information
Working capital
Net property, plant, & equipment
Total assets
Long-term debt
Common stockholders' equity
Book value: LT debt/capital
Market value: LT debt/capital
Selected Valuation Information
(year-end)
Deluxe Corp. stock price
S&P 500 Composite Index

1993
$1,581.8
$739.5
$842.3
$10.3
$141.9

at fiscal years ended December 31


1995
1996
1997

1994
$1,747.9
$797.3
$950.6
$11.3
$140.9

$1,858.0
$819.4
$1,038.6
$14.7
$87.0

$1,895.7
$862.4
$1,033.3
$12.0
$65.5

$1,919.4
$806.7
$1,112.7
$9.7
$44.7

1998

$1,931.8
$805.9
$1,125.9
$9.7
$143.1

1999
$1,650.5
$688.9
$961.6
$9.5
$203.0

2000
$1,262.7
$417.9
$844.8
$10.8
$161.9

2001
$1,278.4
$421.1
$857.2
$5.6
$185.9

83,797
(2,197)
949

82,549
(1,341)
1,167

82,375
(1,191)
1,181

82,364
(1,414)
1,106

82,056
(1,715)
985

81,326
(1,833)
988

80,481
(9,573)
1,112

72,020
(48)
583

72,555
(11,332)
2,890

64,102
(3,898)
1,255

$2.42
$1.34

$2.09
$1.42

$1.71
$1.46

$1.15
$1.48

$1.65
$1.48

$2.15
$1.48

$2.34
$1.48

$2.64
$1.48

$2.34
$1.48

$2.70
$1.48

$330.9
$389.0
$1,199.6
$115.5
$829.8

$386.9
$401.6
$1,252.0
$110.8
$801.2

$224.5
$461.8
$1,256.3
$110.9
$814.4

$130.4
$494.2
$1,295.1
$111.0
$780.4

$12.3
$446.9
$1,176.4
$108.9
$712.9

$108.1
$415.0
$1,148.4
$110.0
$610.2

$131.0
$340.1
$1,171.5
$106.3
$606.6

$167.8
$294.8
$992.6
$115.5
$417.3

$14.0
$174.0
$649.5
$10.2
$262.8

$116.6
$149.6
$537.7
$10.1
$78.6

12.2%
2.9%

12.1%
3.6%

12.0%
4.9%

12.5%
4.4%

13.3%
3.9%

15.3%
3.8%

14.9%
3.5%

21.7%
5.5%

3.7%
0.6%

11.4%
0.4%

46.75
418.17

36.25
464.30

26.38
462.62

29.00
576.70

32.75
700.92

34.50
941.64

$ 36.56
1,072.32

$ 27.44
1,281.91

$ 25.27
1,364.44

$ 41.58
1,104.61

Deluxe Corp. average P/E2

17.60x

19.00x

17.40x

25.90x

20.60x

15.40x

14.30x

12.70x

10.20x

11.01x

S&P 500 Composite average P/E2


Deluxe Corp. market/book ratio
Deluxe Corp. Beta
Yield on 20 year T-bonds
Yield on 90-day T-bills
Total annual ret. on large co. stocks

24.38x
4.72x
1.00
7.67%
3.08%
7.67%

24.11x
3.73x
1.00
6.48%
3.01%
9.99%

18.36x
2.67x
1.00
8.02%
5.53%
1.31%

16.92x
3.06x
0.95
6.01%
4.96%
37.43%

20.26x
3.77x
0.90
6.73%
5.07%
23.07%

23.88x
4.60x
0.95
6.02%
5.22%
33.36%

27.45x
4.85x
0.85
5.39%
4.37%
28.58%

31.43x
4.74x
0.90
6.83%
5.17%
21.04%

26.29x
6.98x
0.90
5.59%
5.73%
-9.11%

29.50x
33.91x
0.85
5.74%
1.71%
-11.88%

Primary earnings though 1997, then diluted.


P/E ratios are computed on earnings before restructuring charges, litigation award, and other extraordinary items.
Sources of data: Standard & Poors Research Insight; Value Line Investment Survey; Datastream Advance; Ibbotson Associates, Stocks, Bonds Bills & Inflation
Yearbook 2002.

UVA-F-1492

-10Exhibit 2
DELUXE CORPORATION
Deluxe Corporations Consolidated Statements of Income
(in millions of U.S. dollars)

Years ended December 31


2001
2000
Revenue

$1,278.4

$1,262.7

Cost of goods sold


Selling, general, and admin. expense
Goodwill amortization expense
Asset impairment and disposition losses
Total costs
Profit/(loss) from operations

453.8
514.4
6.2
2.1
976.4
302.0

453.0
518.2
5.2
7.3
983.8
278.9

Interest income
Other income
Interest expense
Earnings/(loss) before taxes
Tax expense
Discontinued operations income/(loss)
Net earnings/(loss)

2.4
(1.2)
(5.6)
297.6
111.6
$185.9

4.8
1.2
(11.4)
273.4
104.0
(7.5)
$161.9

Source of data: Company regulatory filings.


.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

UVA-F-1492

-11Exhibit 3
DELUXE CORPORATION
Deluxe Corporations Consolidated Balance Sheets
(in millions of U.S. dollars)
2001
Assets
Current assets
Cash and cash equivalents
Marketable securities
Trade accounts receivable net
Inventories
Supplies
Deferred income taxes
Prepaid expenses and other
Total current assets
Long-term investments
Property, plant, and equipment net
Intangibles net
Goodwillnet
Other noncurrent assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Accrued liabilities
Short-term debt
Long-term debt due within one year
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Common stockholders' equity
Common shares
Additional paid-in capital
Retained earnings
Unearned compensation
Accum. other comprehensive income
Total common stockholders' equity
Total liabilities and stockholders' equity

2000

$9.6
37.7
11.2
11.1
4.6
9.9
84.0
37.7
151.1
115.0
82.2
67.9
$537.8

$80.7
18.5
46.0
11.3
11.8
7.4
12.0
187.8
35.6
174.0
134.5
88.4
36.2
$656.4

$52.8
162.9
150.0
1.4

$44.7
148.5
100.7

367.1
10.1
44.9
37.0
459.1

293.9
10.2
51.1
38.3
393.5

64.1
14.6
0.1
78.7
$537.8

72.6
44.2
146.2
0.1
(0.2)
262.9
$656.4

Source of data: Company regulatory filings.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

UVA-F-1492

-12Exhibit 4
DELUXE CORPORATION
Deluxe Corporations Financial Forecast, 200206
(in millions of U.S. dollars)

Annual increase in sales


Operating profit/sales
Tax rate
Working capital/sales
Dividend payout ratio
Income Statement
Net sales
Operating profit
Interest expense, net
Pretax income
Tax expense
Net income
Dividends
Retentions to earnings
Balance Sheet
Cash
Working capital (without debt)
Net fixed assets
Total assets
Debt (long- and short-term)
Other long-term liabilities
Equity
Total capital
Free Cash Flows
EBIT
Less taxes on EBIT
Plus depreciation
Less capital expenditures
Less additions to/plus reductions in workng capital
Free cash flow

Actual
2001
1.2%
23.6%
37.0%
9.1%

2002
1.4%
26.6%
38.0%
9.1%
52.0%

2003
1.6%
26.7%

Projected
2004
2.0%
26.7%

2005
2.2%
26.7%

2006
2.4%
26.7%

$1,278.4
302.0
3.2
298.8
111.6
187.1
94.9
$92.2

$1,296.3
344.8
4.0
340.8
129.5
211.3
94.9
$116.4

$1,317.0
351.6
4.0
347.6
132.1
215.5
94.9
$120.7

$1,343.4
358.7
4.0
354.7
134.8
219.9
94.9
$125.0

$1,372.9
366.6
4.0
362.6
137.8
224.8
94.9
$129.9

$1,405.9
375.4
4.0
371.4
141.1
230.3
94.9
$135.4

$9.6
116.6
151.1
277.2

$124.3
118.2
151.1
393.6

$243.1
120.1
151.1
514.3

$365.8
122.5
151.1
639.3

$493.0
125.2
151.1
769.3

$625.4
128.2
151.1
904.6

161.5
37.0
78.7
$277.2

161.5
37.0
195.2
$393.6

161.5
37.0
315.8
$514.3

161.5
37.0
440.9
$639.3

161.5
37.0
570.8
$769.3

161.5
37.0
706.2
$904.6

$344.8
(131.0)
50.0
(50.0)
(1.6)
$212.2

$351.6
(133.6)
50.0
(50.0)
(1.9)
$216.1

$358.7
(136.3)
50.0
(50.0)
(2.4)
$220.0

$366.6
(139.3)
50.0
(50.0)
(2.7)
$224.6

$375.4
(142.6)
50.0
(50.0)
(3.0)
$229.7

Source: Case writers analysis, consistent with forecast expectations of securities analysts.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-13-

UVA-F-1492

Exhibit 5
DELUXE CORPORATION
Standard & Poors Bond-Rating Definitions
Long-Term Issue Credit Ratings: Issue credit ratings are based, in varying degrees, on the following
considerations:

Likelihood of payment? Capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation.

Nature and provisions of the obligation.

Protection afforded by and relative position of the obligation in the event of bankruptcy,
reorganization, or other arrangements under the laws of bankruptcy and other laws affecting
creditors rights.

The issue-rating definitions are expressed in terms of default risk. As such, they pertain to senior
obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect
the lower priority in bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or operating company
and holding company obligations.) Accordingly, in the case of junior debt, the rating may not
conform exactly to the category definition.
AAA
An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors
capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated AA differs from the highest-rated obligations only to a small degree. The
obligors capacity to meet its financial commitment on the obligation is very strong.
A
An obligation rated A is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than are obligations in the higher-rated categories. The
obligors capacity to meet its financial commitment on the obligation, however, is still strong.
BBB
An obligation rated BBB exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor
to meet its financial commitment on the obligation.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-14-

UVA-F-1492

Exhibit 5 (continued)
BB, B, CCC, CC, and C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative
characteristics. BB indicates the least degree of speculation and C indicates the highest. While such
obligations will likely have some quality and protective characteristics, those characteristics may be
outweighed by large uncertainties or major exposures to adverse conditions.
Plus (+) or minus ()
The ratings from AA to CCC may be modified by the addition of a plus (+) or a minus () sign to
show the obligations relative standing within the major rating categories.

Source: Standard & Poors Bond Guide, 2001.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-15-

UVA-F-1492

Exhibit 5 (continued)
Moodys Bond-Rating Definitions
Aaa

Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as gilt edge. Interest payments are protected
by a large or by an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.

Aa

Bonds that are rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they compose what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater amplitude or there may be
other elements present that make the long-term risks appear somewhat larger than in Aaa
securities.

Bonds that are rated A possess many favorable investment attributes and are to be considered
upper-medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present that suggest a susceptibility to impairment
sometime in the future.

Baa

Bonds that are rated Baa are considered medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payment and principal security appear
adequate for the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and, in fact, have speculative characteristics as well.

Ba

Bonds that are rated Ba are judged to have speculative elements; their future cannot be
considered as well assured as the higher-rated categories. Often, the protection of interest
and principal payments may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes bonds in this class.

Bonds that are rated B generally lack the characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period may be small.

Caa

Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

-16-

UVA-F-1492

Exhibit 5 (continued)
Ca

Bonds that are rated Ca represent obligations that are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.

Bonds that are rated C are the lowest-rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects for ever attaining any real investment standing.

Source: Mergent Annual Bond Record, 2002.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

UVA-F-1492

-17Exhibit 6
DELUXE CORPORATION
Key Industrial Financial Ratios by Rating Categories
This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

Key Industrial Financial Ratios (Three-year medians 200002)


EBIT interest coverage (x)
EBITDA interest coverage (x)
Funds from operations/total debt (%)
Free operating cash flow/total debt (%)
Return on capital (%)
Operating income/sales (%)
Long-term debt/capital (%)
Total debt/capital, incl. short-term debt (%)

AAA
23.4
25.3
214.2
156.6
35.0
23.4
(1.1)
5.0

Investment grade
AA
13.3
16.9
65.7
33.6
26.6
24.0
21.1
35.9

A
6.3
8.5
42.2
22.3
18.1
18.1
33.8
42.6

BBB
3.9
5.4
30.6
12.8
13.1
15.5
40.3
47.0

Standard & Poor's defined these ratios based on the book value of these items as follows:
EBIT interest coverage = EBIT/interest expense.
EBITDA interest coverage = (EBIT plus depreciation and amortization)/interest expense
Long-term debt/capital = long-term debt/(long-term debt + stockholders' equity)
Total debt/capital, incl. short-term debt = (short-term debt + long-term debt)/(short-term debt + long-term debt + stockholders' equity)

Source of data: Standard & Poors CreditStats.

Noninvestment grade
BB
B
2.2
3.2
19.7
7.3
11.5
15.4
53.6
57.7

1.0
1.7
10.4
1.5
8.0
14.7
72.6
75.1

UVA-F-1492

-18Exhibit 7
DELUXE CORPORATION

60.0x

55.2x

50.0x

EBIT Divided by Interest

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

Deluxe Corporations Annual EBIT-Coverage Ratios

40.0x
32.4x

32.8x
31.0x

27.3x

30.0x
21.0x

26.3x
21.9x

20.7x

20.0x

16.1x

10.0x

0.0x
1992

1993

1994

Source of data: Company regulatory filings; case writers analysis.

1995

1996

1997

1998

1999

2000

2001

UVA-F-1492

-19Exhibit 8
DELUXE CORPORATION
Capital Costs by Rating Category
AAA

AA

BBB

BB

Cost of debt
(pretax)

5.47%

5.50%

5.70%

6.30%

9.00%

12.00%

Cost of
equity

10.25%

10.35%

10.50%

10.60%

12.00%

14.25%

Source of data: Hudson Bancorp.

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

UVA-F-1492

-20Exhibit 9
DELUXE CORPORATION
Capital-Market Conditions
(as of July 31, 2002)

U.S. Treasury Obligations


90-day bills
180-day bills
2-year notes
3-year notes
5-year notes
10-year notes
30-year notes

Corporate Debt Obligations (10-year)


AAA
AA
A
BBB
BB
B

Yield
1.69%
1.68%
2.23%
2.79%
3.45%
4.46%
5.30%

Other Instruments
Discount Notes
Certificates of Deposit (3-month)
Commercial Paper (6-month)
Term Fed Funds

Yield
5.51%
5.52%
5.70%
6.33%
9.01%
11.97%

Source of data: Bloomberg LP, S&P's Research Insight, Value Line Investment Survey, Datastream Advance

This document is authorized for use by Naike Kalemera, from 4/10/2015 to 7/10/2015, in the course:
FIN 4220: Corporate Finance - Tompkins June 2015, Kennesaw State University.
Any unauthorized use or reproduction of this document is strictly prohibited.

Yield
1.70%
1.72%
1.75%
1.78%