UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

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)

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.

 

 

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

(in thousands, except share par value)
(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

(in thousands, except per share amounts)
(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

(in thousands)
(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

DELUXE CORPORATION
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

     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

		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

     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.

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

     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

     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.

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.

     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

     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.

     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

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.

     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

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

     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

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

     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

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.

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