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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

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 (I.R.S. Employer
incorporation or organization) Identification No.)

3680 Victoria St. N.
Shoreview, Minnesota 55126-2966
(Address of principal executive offices) (Zip Code)

(651) 483-7111
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ü   No    

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
  Yes  ü   No    

The number of shares outstanding of registrant's common stock, par value $1.00 per share, at August 1, 2003 was 53,172,180.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELUXE CORPORATION

CONSOLIDATED BALANCE SHEETS
(Unaudited)


June 30,
2003
December 31,
2002
(dollars in thousands,
except share par value)
Current Assets:      
   Cash and cash equivalents  $            7,025   $            124,855  
   Trade accounts receivable (net of allowance for doubtful 
        accounts of $2,243 and $1,850, respectively)  46,346   32,925  
   Inventories and supplies  19,445   20,287  
   Other current assets  41,262   21,579  
 
 
 
      Total current assets  114,078   199,646  
Long-term Investments  41,060   40,205  
Property, Plant, and Equipment (net of accumulated depreciation of
   $301,107 and $295,521, respectively)		  131,679   140,042  
Intangibles (net of accumulated amortization of $153,762 and 
   $135,201, respectively)  95,052   105,976  
Goodwill  82,237   82,237  
Other Non-current Assets  140,415   100,867  
 
 
 
          Total assets  $        604,521   $            668,973  
 
 
 
Current Liabilities: 
   Accounts payable  $          47,541   $            57,857  
   Accrued liabilities  149,291   155,312  
   Short-term debt  215,195   —  
   Long-term debt due within one year  1,349   1,610  
 
 
 
      Total current liabilities  413,376   214,779  
Long-term Debt  306,076   306,589  
Deferred Income Taxes  54,530   54,453  
Other Long-term Liabilities  30,737   28,836  
Shareholders’ (Deficit) Equity: 
   Common shares $1 par value (authorized: 500,000,000 shares;
      issued: 2003 — 53,746,430; 2002 — 61,445,894)		  53,746   61,446  
   Retained (deficit) earnings  (251,573 ) 5,380  
   Unearned compensation  (10 ) (24 )
   Accumulated other comprehensive loss  (2,361 ) (2,486 )
 
 
 
      Total shareholders’ (deficit) equity  (200,198 ) 64,316  
 
 
 
          Total liabilities and shareholders’ (deficit) equity  $        604,521   $            668,973  
 
 
 

See Notes to Unaudited Consolidated Financial Statements

2


DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


Quarter Ended June 30,   Six Months Ended June 30,
2003  2002  2003  2002 
 
 
 
 
 
(dollars in thousands, except per share amounts)
 
Revenue     $ 309,556   $ 328,463   $ 626,755   $ 657,371  
   Cost of goods sold    106,718    110,560    216,542    223,655  
 
 
 
 
 
Gross Profit    202,838    217,903    410,213    433,716  

   Selling, general and administrative expense		     125,143    129,595    247,901    256,990  
   Asset impairment and net disposition (gains) losses    (129 )  31    (211 )  (710 )
 
 
 
 
 
Operating Income    77,824    88,277    162,523    177,436  

   Other (expense) income		    (595 )  983    (434 )  659  
 
 
 
 
 
Income Before Interest and Taxes    77,229    89,260    162,089    178,095  

   Interest expense		    (4,904 )  (1,173 )  (9,272 )  (2,094 )
   Interest income    116    125    233    262  
 
 
 
 
 
Income Before Income Taxes    72,441    88,212    153,050    176,263  

   Provision for income taxes		    27,548    33,503    58,179    66,998  
 
 
 
 
 
Net Income   $ 44,893   $ 54,709   $ 94,871   $ 109,265  
 
 
 
 
 

Earnings per Share: Basic		   $ 0.81   $ 0.87   $ 1.66   $ 1.72  
                                 Diluted   $ 0.80   $ 0.85   $ 1.64   $ 1.69  

Cash Dividends per Share		   $ 0.37   $ 0.37   $ 0.74   $ 0.74  

Total Comprehensive Income		   $ 44,955   $ 54,709   $ 94,996   $ 109,265  

See Notes to Unaudited Consolidated Financial Statements


3

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


Six Months Ended June 30,
2003 2002
(dollars in thousands)
Cash Flows from Operating Activities:            
   Net income   $ 94,871   $ 109,265  
   Adjustments to reconcile net income to net cash provided by operating  
     activities:  
       Depreciation    11,251    12,251  
       Amortization of intangibles    18,137    17,022  
       Amortization of contract acquisition payments    11,839    7,493  
       Other non-cash items, net    5,519    8,017  
       Changes in assets and liabilities:  
          Trade accounts receivable    (13,421 )  (10,468 )
          Inventories and supplies    718    952  
          Other current assets    (13,754 )  (12,715 )
          Contract acquisition payments    (35,930 )  (12,472 )
          Deferred advertising costs    (10,969 )  4,537  
          Other non-current assets    (6,318 )  (1,746 )
          Accounts payable    (7,186 )  (2,864 )
          Accrued liabilities and other long-term liabilities    (4,498 )  2,086  
       Net cash provided by operating activities    50,259    121,358  
Cash Flows from Investing Activities:  
    Purchases of capital assets    (10,313 )  (17,199 )
    Other    (1,035 )  (4,264 )
       Net cash used by investing activities    (11,348 )  (21,463 )
Cash Flows from Financing Activities:  
    Net borrowings on short-term debt    215,195    41,550  
    Payments on long-term debt    (814 )  (667 )
    Change in book overdrafts    (3,130 )  (4,404 )
    Payments to repurchase shares    (337,221 )  (118,377 )
    Proceeds from issuing shares under employee plans    11,348    24,705  
    Cash dividends paid to shareholders    (42,119 )  (47,078 )
       Net cash used by financing activities    (156,741 )  (104,271 )
Net Decrease in Cash and Cash Equivalents    (117,830 )  (4,376 )
Cash and Cash Equivalents: Beginning of Period    124,855    9,571  
                                              End of Period   $ 7,025   $ 5,195  

See Notes to Unaudited Consolidated Financial Statements

4

DELUXE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Consolidated financial statements

        The consolidated balance sheet as of June 30, 2003, the consolidated statements of income for the quarters and six months ended June 30, 2003 and 2002 and the consolidated statements of cash flows for the six months ended June 30, 2003 and 2002 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation 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 the consolidated annual financial statements and notes. The consolidated financial statements and notes appearing in this Report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2002.

        Certain amounts reported in 2002 have been reclassified to conform to the 2003 presentation. These changes had no impact on previously reported net income or shareholders’ equity.

Note 2: Employee stock-based compensation

        As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, we continue to account for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. All options issued under our stock incentive plan allow for the purchase of shares of common stock at prices equal to the stock’s market value at the date of grant. Accordingly, no compensation expense has been recognized for stock options. Additionally, under our current employee stock purchase plan, eligible employees may purchase Deluxe common stock at 85% of the lower of its fair market value at the beginning or end of each six-month purchase period. No compensation expense is recognized for the difference between the employees’ purchase price and the fair value of the stock. We do recognize compensation expense for restricted stock and restricted stock units issued under our stock incentive plan.

        The following table presents pro forma net income and earnings per share as if the fair value method of SFAS No. 123 had been applied to all outstanding and unvested awards in each period presented (dollars in thousands, except per share amounts):


Quarter Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
 
 
 
 
 

Net income, as reported		     $ 44,893   $ 54,709   $ 94,871   $ 109,265  
Add: Employee stock-based compensation   
expense included in net income, net of tax    230    543    474    1,117  
Deduct: Fair value employee stock-based   
compensation expense, net of tax    (1,305 )  (1,426 )  (2,408 )
(2,574
 )
 
 
 
 
 
Pro forma net income     $ 43,818   $ 53,826   $ 92,937   $ 107,808  
 
 
 
 
 
     
Earnings per share:    
   Basic – as reported     $ 0.81   $ 0.87   $ 1.66   $ 1.72  
                pro forma       0.80     0.85     1.62     1.69  
   Diluted – as reported       0.80     0.85     1.64     1.69  
                   pro forma       0.78     0.84     1.61     1.67  

5

Note 3: New accounting pronouncements

        In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures required in financial statements concerning obligations under certain guarantees. It also clarifies the requirements related to the recognition of liabilities by a guarantor at the inception of certain guarantees. We adopted the disclosure requirements of this interpretation in 2002. The recognition provisions of the interpretation are applicable only to guarantees issued or modified after December 31, 2002. Adoption of this interpretation had no impact on our results of operations or financial position.

        In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation provides guidance on how to identify a variable interest entity and addresses when the assets, liabilities and results of operations of such entities must be included in a company’s consolidated financial statements. This interpretation is effective immediately for variable interest entities created after January 31, 2003 and for variable interest entities in which we obtain an interest after that date. For interests in variable interest entities that were acquired prior to January 31, 2003, the provisions of this interpretation are applicable no later than July 1, 2003. Adoption of this statement did not result in the consolidation or disclosure of any variable interest entities in which we maintain an interest.

Note 4: Supplementary balance sheet information

        Inventories and supplies were comprised of the following (dollars in thousands):

June 30,
2003 		December 31,
2002
Raw materials     $ 2,820   $ 2,833  
Semi-finished goods    5,348    6,065  
Finished goods    850    771  
   Total inventories    9,018    9,669  
Supplies    10,427    10,618  
   Inventories and supplies   $ 19,445   $ 20,287  

        Other current assets were comprised of the following (dollars in thousands):

June 30,
2003		 December 31,
2002
Pre-payment to voluntary employee            
   beneficiary association trust   $ 26,981   $ 7,285  
Other    14,281    14,294  
      Other current assets   $ 41,262   $ 21,579  

        Other non-current assets were comprised of the following (dollars in thousands):

June 30,
2003
 December 31,
2002
Contract acquisition payments, net     $ 84,781   $ 55,259  
Deferred advertising costs    28,227    17,258  
Prepaid post-retirement asset    15,831    16,330  
Other    11,576    12,020  
      Other non-current assets   $ 140,415   $ 100,867  

6

        Accrued liabilities were comprised of the following (dollars in thousands):

June 30,
2003		 December 31,
2002
Income taxes     $ 46,955   $ 27,688  
Rebates    25,556    25,900  
Employee profit sharing and pension    16,525    49,757  
Wages, including vacation pay    13,411