2012.9.30 10-Q



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 September 30, 2012
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
(State or other jurisdiction of incorporation or organization)
41-0216800
(I.R.S. Employer Identification No.)
3680 Victoria St. N., Shoreview, Minnesota
(Address of principal executive offices)
55126-2966
(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. þYes   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).
þYes   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 October 23, 2012 was 50,902,714.

1


PART I − FINANCIAL INFORMATION
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)

 
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
105,637

 
$
28,687

Trade accounts receivable (net of allowances for uncollectible accounts of $3,660 and $4,007, respectively)
 
67,364

 
69,023

Inventories and supplies
 
24,200

 
22,043

Deferred income taxes
 
6,312

 
7,216

Funds held for customers
 
34,220

 
44,394

Other current assets
 
33,310

 
21,212

Total current assets
 
271,043

 
192,575

Long-Term Investments (including $2,154 and $2,165 of investments at fair value, respectively)
 
46,574

 
45,147

Property, Plant And Equipment (net of accumulated depreciation of $359,560 and $352,842, respectively)
 
106,492

 
113,411

Assets Held For Sale
 

 
2,741

Intangibles (net of accumulated amortization of $463,042 and $433,335, respectively)
 
155,225

 
157,339

Goodwill
 
789,653

 
776,998

Other Non-Current Assets
 
98,304

 
100,598

Total Assets
 
$
1,467,291

 
$
1,388,809

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
67,073

 
$
64,694

Accrued liabilities
 
147,571

 
150,098

Long-term debt due within one year
 
85,075

 
85,575

Total current liabilities
 
299,719

 
300,367

Long-Term Debt
 
657,247

 
656,131

Deferred Income Taxes
 
54,756

 
49,807

Other Non-Current Liabilities
 
57,579

 
79,815

Commitments And Contingencies (Notes 10 and 11)
 


 


Shareholders’ Equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: 2012 – 50,900; 2011 – 50,826)
 
50,900

 
50,826

Additional paid-in capital
 
57,832

 
55,838

Retained earnings
 
345,140

 
255,426

Accumulated other comprehensive loss
 
(55,882
)
 
(59,401
)
Total shareholders’ equity
 
397,990

 
302,689

Total Liabilities And Shareholders’ Equity
 
$
1,467,291

 
$
1,388,809


See Condensed Notes to Unaudited Consolidated Financial Statements

2


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)

 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Revenue
 
$
378,338

 
$
355,144

 
$
1,127,334

 
$
1,051,170

Cost of goods sold, including net restructuring charges
 
(131,690
)
 
(122,638
)
 
(386,772
)
 
(363,487
)
Gross Profit
 
246,648

 
232,506

 
740,562

 
687,683

Selling, general and administrative expense
 
(171,237
)
 
(162,524
)
 
(510,786
)
 
(480,868
)
Net restructuring charges
 
(2,741
)
 
(4,337
)
 
(5,377
)
 
(9,839
)
Net (loss) gain on sale of facility
 

 

 
(128
)
 
110

Operating Income
 
72,670


65,645

 
224,271

 
197,086

Loss on early debt extinguishment
 

 

 

 
(6,995
)
Interest expense
 
(11,890
)
 
(11,831
)
 
(34,944
)
 
(35,922
)
Other income (expense)
 
185

 
(301
)
 
541

 
(216
)
Income Before Income Taxes
 
60,965

 
53,513

 
189,868

 
153,953

Income tax provision
 
(19,462
)
 
(16,778
)
 
(62,023
)
 
(49,189
)
Net Income
 
$
41,503

 
$
36,735

 
$
127,845

 
$
104,764

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
$
43,570

 
$
33,812

 
$
131,364

 
$
104,292

 
 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
$
0.81

 
$
0.72

 
$
2.50

 
$
2.04

Diluted Earnings Per Share
 
0.81

 
0.71

 
2.49

 
2.02

 
 
 
 
 
 
 
 
 
Cash Dividends Per Share
 
$
0.25

 
$
0.25

 
$
0.75

 
$
0.75


See Condensed Notes to Unaudited Consolidated Financial Statements


3


DELUXE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)

 
 
Common shares par value(1)
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2011
 
$
50,826

 
$
55,838

 
$
255,426

 
$
(59,401
)
 
$
302,689

Net income
 

 

 
127,845

 

 
127,845

Cash dividends
 

 

 
(38,131
)
 

 
(38,131
)
Common shares issued
 
837

 
14,994

 

 

 
15,831

Tax impact of share-based awards
 

 
545

 

 

 
545

Common shares repurchased
 
(509
)
 
(11,490
)
 

 

 
(11,999
)
Other common shares retired
 
(254
)
 
(6,857
)
 

 

 
(7,111
)
Fair value of share-based compensation
 

 
4,802

 

 

 
4,802

Other comprehensive income (Note 12)
 

 

 

 
3,519

 
3,519

Balance, September 30, 2012
 
$
50,900

 
$
57,832

 
$
345,140

 
$
(55,882
)
 
$
397,990


(1) As the par value of our common shares is $1.00 per share, the number of shares associated with the transactions presented here is equivalent to the related par value. See Note 12 for share information.


See Condensed Notes to Unaudited Consolidated Financial Statements


4


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
127,845

 
$
104,764

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
15,062

 
16,165

Amortization of intangibles
 
34,610

 
40,297

Amortization of contract acquisition costs
 
12,806

 
12,737

Deferred income taxes
 
4,887

 
4,086

Employee share-based compensation expense
 
5,310

 
4,503

Loss on early debt extinguishment
 

 
6,995

Other non-cash items, net
 
6,588

 
8,249

Changes in assets and liabilities, net of effect of acquisitions:
 
 

 
 

Trade accounts receivable
 
1,326

 
(1,826
)
Inventories and supplies
 
(1,976
)
 
(461
)
Other current assets
 
(5,533
)
 
(5,411
)
Non-current assets
 
(30
)
 
2,429

Accounts payable
 
2,195

 
(76
)
Contract acquisition payments
 
(15,038
)
 
(9,998
)
Other accrued and non-current liabilities
 
(10,897
)
 
(11,206
)
Net cash provided by operating activities
 
177,155

 
171,247

Cash Flows From Investing Activities:
 
 

 
 

Purchases of capital assets
 
(25,562
)
 
(28,226
)
Payments for acquisitions, net of cash acquired
 
(32,632
)
 
(83,162
)
Payments on company-owned life insurance policies
 

 
(6,383
)
Loans to distributors
 
(3,237
)
 
(3,515
)
Other
 
3,538

 
740

Net cash used by investing activities
 
(57,893
)
 
(120,546
)
Cash Flows From Financing Activities:
 
 

 
 

Net proceeds from short-term debt
 

 
26,000

Payments on long-term debt, including costs of debt reacquisition
 

 
(215,030
)
Proceeds from issuing long-term debt
 

 
200,000

Payments for debt issue costs
 
(1,164
)
 
(3,470
)
Change in book overdrafts
 
(2,627
)
 
1,982

Proceeds from issuing shares under employee plans
 
9,610

 
7,597

Excess tax benefit from share-based employee awards
 
1,120

 
972

Payments for common shares repurchased
 
(11,999
)
 
(23,620
)
Cash dividends paid to shareholders
 
(38,131
)
 
(38,395
)
Net cash used by financing activities
 
(43,191
)
 
(43,964
)
 
 
 
 
 
Effect Of Exchange Rate Change On Cash
 
879

 
(1,099
)
 
 
 
 
 
Net Change In Cash And Cash Equivalents
 
76,950

 
5,638

Cash And Cash Equivalents:
Beginning Of Period
 
 
28,687

 
17,383

 
End Of Period

 
$
105,637

 
$
23,021


See Condensed Notes to Unaudited Consolidated Financial Statements

5


DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)


Note 1: Consolidated financial statements

The consolidated balance sheet as of September 30, 2012, the consolidated statements of comprehensive income for the quarters and nine months ended September 30, 2012 and 2011, the consolidated statement of shareholders' equity for the nine months ended September 30, 2012, and the consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 are unaudited. The consolidated balance sheet as of December 31, 2011 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, 2011 (the “2011 Form 10-K”).


Note 2: New accounting pronouncements

On January 1, 2012, we adopted Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the option to report other comprehensive income and its components in the statement of shareholders' equity. Also effective January 1, 2012, we adopted ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This standard temporarily defers a provision included in ASU No. 2011-05 which requires that reclassification adjustments from other comprehensive income to net income be presented by income statement line item. Our presentation of comprehensive income in this quarterly report on Form 10-Q complies with these accounting standards.

On January 1, 2012, we adopted ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRSs. The new guidance changes some fair value measurement principles and disclosure requirements. The changes in fair value measurement principles relate primarily to financial assets and did not affect the fair value measurements presented in this report on Form 10-Q. The fair value disclosures required by the new standard are presented in Note 7: Fair value measurements.

In July 2012, the Financial Accounting Standards Board issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under the new guidance, companies have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If the qualitative assessment indicates that it is more likely than not that the asset is impaired, then a quantitative assessment must be completed. The new standard is effective for us as of January 1, 2013. We had the option of adopting this standard early because the annual impairment analysis of our indefinite-lived trade name is completed as of July 31st of each year and the results of this analysis are presented in this report on Form 10-Q. Instead, we elected to complete a quantitative analysis of the fair value of this asset, which is described in Note 7: Fair value measurements.

 


6


Note 3: Supplemental balance sheet information

Inventories and supplies – Inventories and supplies were comprised of the following:
 
 
September 30,
2012
 
December 31,
2011
Raw materials
 
$
4,743

 
$
5,566

Semi-finished goods
 
8,843

 
8,273

Finished goods
 
7,476

 
5,301

Supplies, primarily production
 
3,138

 
2,903

Inventories and supplies
 
$
24,200

 
$
22,043


Available-for-sale securities – Available-for-sale securities included within cash and cash equivalents, funds held for customers and other current assets were comprised of the following:
 
 
September 30, 2012
 
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Canadian and provincial government securities
 
$
10,079

 
$
253

 
$

 
$
10,332

Canadian guaranteed investment certificate
 
5,591

 

 

 
5,591

Available-for-sale securities (funds held for customers)(1)
 
15,670

 
253

 

 
15,923

Money market securities (cash equivalents)
 
71,280

 

 

 
71,280

Canadian money market fund (other current assets)
 
2,095

 

 

 
2,095

Total available-for-sale securities
 
$
89,045

 
$
253


$


$
89,298


(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2012, also included cash of $18,297.
 
 
December 31, 2011
 
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Money market securities
 
$
3

 
$

 
$

 
$
3

Canadian and provincial government securities
 
5,172

 
243

 

 
5,415

Available-for-sale securities (funds held for customers)(1)
 
5,175


243




5,418

Money market securities (other current assets)
 
2,001

 

 

 
2,001

Total available-for-sale securities
 
$
7,176

 
$
243

 
$

 
$
7,419

 
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2011, also included cash of $38,976.
 
Expected maturities of available-for-sale securities as of September 30, 2012 were as follows:
 
 
Fair value
Due in one year or less
 
$
79,193

Due in two to five years
 
3,234

Due in six to ten years
 
5,765

Due in more than ten years
 
1,106

Total available-for-sale securities
 
$
89,298


Further information regarding the fair value of available-for-sale securities can be found in Note 7: Fair value measurements.


7


Assets held for sale – Assets held for sale as of December 31, 2011 consisted of our facility located in Thorofare, New Jersey, which was closed in April 2009. This facility was sold during the second quarter of 2012 for net cash proceeds of $2,613, realizing a net pre-tax loss of $128.

Intangibles – Intangibles were comprised of the following:
 
 
September 30, 2012
 
December 31, 2011
 
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Indefinite-lived:
 
 
 
 
 
 
 
 
 
 
 
 
Trade name
 
$
19,100

 
$

 
$
19,100

 
$
19,100

 
$

 
$
19,100

Amortizable intangibles:
 
 

 
 

 
 

 
 

 
 

 
 

Internal-use software
 
432,398

 
(368,758
)
 
63,640

 
410,905

 
(345,145
)
 
65,760

Trade names
 
68,561

 
(29,084
)
 
39,477

 
67,661

 
(25,958
)
 
41,703

Customer lists/relationships
 
58,792

 
(28,237
)
 
30,555

 
52,542

 
(26,059
)
 
26,483

Distributor contracts
 
30,900

 
(29,549
)
 
1,351

 
30,900

 
(28,198
)
 
2,702

Other
 
8,516

 
(7,414
)
 
1,102

 
9,566

 
(7,975
)
 
1,591

Amortizable intangibles
 
599,167

 
(463,042
)

136,125


571,574


(433,335
)

138,239

Intangibles
 
$
618,267

 
$
(463,042
)

$
155,225


$
590,674


$
(433,335
)

$
157,339


Total amortization of intangibles was $11,306 for the quarter ended September 30, 2012 and $12,198 for the quarter ended September 30, 2011. Amortization of intangibles was $34,610 for the nine months ended September 30, 2012 and $40,297 for the nine months ended September 30, 2011. Based on the intangibles in service as of September 30, 2012, estimated future amortization expense is as follows:
 
 
Estimated
amortization
expense
Remainder of 2012
 
$
11,082

2013
 
35,674

2014
 
23,588

2015
 
11,422

2016
 
7,732


Goodwill – Changes in goodwill during the nine months ended September 30, 2012 were as follows:
 
 
Small
Business
Services
 
Financial
Services
 
Direct
Checks
 
Total
Balance, December 31, 2011:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
621,314

 
$
27,178

 
$
148,506

 
$
796,998

Accumulated impairment charges
 
(20,000
)
 

 

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
601,314

 
27,178


148,506


776,998

Acquisition of OrangeSoda, Inc. (see Note 5)
 
12,580

 

 

 
12,580

Currency translation adjustment
 
75

 

 

 
75

Balance, September 30, 2012:
 
 

 
 

 
 

 
 

Goodwill, gross
 
633,969

 
27,178

 
148,506

 
809,653

Accumulated impairment charges
 
(20,000
)
 

 

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
$
613,969

 
$
27,178


$
148,506


$
789,653


8



Other non-current assets – Other non-current assets were comprised of the following:
 
 
September 30,
2012
 
December 31,
2011
Contract acquisition costs
 
$
46,874

 
$
55,076

Loans and notes receivable from distributors
 
17,386

 
11,148

Deferred advertising costs
 
14,170

 
15,599

Other
 
19,874

 
18,775

Other non-current assets
 
$
98,304

 
$
100,598


Changes in contract acquisition costs during the nine months ended September 30, 2012 and 2011 were as follows:
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Balance, beginning of year
 
$
55,076

 
$
57,476

Additions(1)
 
5,006

 
12,880

Amortization
 
(12,806
)
 
(12,737
)
Other
 
(402
)
 
(255
)
Balance, end of period
 
$
46,874

 
$
57,364

 
(1) Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $15,038 for the nine months ended September 30, 2012 and $9,998 for the nine months ended September 30, 2011.

Accrued liabilities – Accrued liabilities were comprised of the following:
 
 
September 30,
2012
 
December 31,
2011
Funds held for customers
 
$
33,375

 
$
43,829

Employee profit sharing/cash bonus
 
31,680

 
23,783

Customer rebates
 
21,285

 
20,969

Interest
 
13,233

 
8,760

Wages, including vacation
 
11,180

 
4,995

Contract acquisition costs due within one year
 
5,167

 
13,070

Restructuring due within one year (see Note 8)
 
3,360

 
5,946

Other
 
28,291

 
28,746

Accrued liabilities
 
$
147,571

 
$
150,098


Other non-current liabilities – Other non-current liabilities were comprised of the following:
 
 
September 30,
2012
 
December 31,
2011
Pension and postretirement benefit plans
 
$
32,714

 
$
48,859

Unrecognized tax benefits, including interest and penalties
 
6,491

 
7,570

Contract acquisition costs
 
5,045

 
7,455

Other
 
13,329

 
15,931

Other non-current liabilities
 
$
57,579

 
$
79,815




9


Note 4: Earnings per share

The following table reflects the calculation of basic and diluted earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive. 
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Earnings per share – basic:
 
 
 
 
 
 
 
 
Net income
 
$
41,503

 
$
36,735

 
$
127,845

 
$
104,764

Income allocated to participating securities
 
(289
)
 
(240
)
 
(865
)
 
(565
)
Income available to common shareholders
 
$
41,214

 
$
36,495


$
126,980

 
$
104,199

Weighted-average shares outstanding
 
50,680

 
50,889

 
50,779

 
51,112

Earnings per share – basic
 
$
0.81

 
$
0.72

 
$
2.50

 
$
2.04

 
 
 
 
 
 
 
 
 
Earnings per share – diluted:
 
 

 
 

 
 
 
 
Net income
 
$
41,503

 
$
36,735

 
$
127,845

 
$
104,764

Income allocated to participating securities
 
(287
)
 
(166
)
 
(861
)
 
(325
)
Re-measurement of share-based awards classified as liabilities
 
67

 
(77
)
 
102

 
(65
)
Income available to common shareholders
 
$
41,283

 
$
36,492


$
127,086

 
$
104,374

Weighted-average shares outstanding
 
50,680

 
50,889

 
50,779

 
51,112

Dilutive impact of potential common shares
 
349

 
314

 
299

 
431

Weighted-average shares and potential common shares outstanding
 
51,029

 
51,203


51,078

 
51,543

Earnings per share – diluted
 
$
0.81

 
$
0.71

 
$
2.49

 
$
2.02

 
 
 
 
 
 
 
 
 
Antidilutive options excluded from calculation
 
1,118

 
1,961

 
1,118

 
1,961



Note 5: Acquisitions

In May 2012, we acquired all of the outstanding capital stock of OrangeSoda, Inc., a provider of internet marketing services specializing in search, mobile and social media campaign strategies for small businesses, in a cash transaction for $26,707, net of cash acquired. We funded the acquisition with cash on hand. The allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in goodwill of $12,580. This amount decreased $155 from June 30, 2012, as the working capital adjustment required by the purchase agreement and our valuation of deferred income taxes were finalized during the quarter ended September 30, 2012. This acquisition resulted in the recognition of goodwill as we expect to accelerate revenue growth in marketing solutions and other services by combining our capabilities with OrangeSoda's solutions, tools, platform and market presence. Transaction costs related to this acquisition were expensed as incurred and were not significant to the consolidated statement of comprehensive income for the nine months ended September 30, 2012. The results of operations of this business from its acquisition date are included in our Small Business Services segment.

Intangible assets acquired in the OrangeSoda acquisition consisted primarily of customer relationships with an aggregate value of $10,200 and a weighted-average useful life of 9 years, internal-use software valued at $3,300 with a useful life of 5 years, and a trade name valued at $900 with a useful life of 5 years. Further information regarding the calculation of the estimated fair values of these assets can be found in Note 7.

During the nine months ended September 30, 2012, we acquired the operations of small business distributors for aggregate cash payments of $5,925. The assets acquired consisted primarily of customer lists, a portion of which was sold to Safeguard® distributors during the nine months ended September 30, 2012. We entered into notes receivable upon the sale of the assets, and we recognized a net gain of $875 on these dispositions.



10


Note 6: Derivative financial instruments

We have entered into interest rate swaps to hedge against changes in the fair value of a portion of our long-term debt. 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 comprehensive 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 comprehensive income. Information regarding hedge ineffectiveness in each period is presented in Note 7. The fair value of the interest rate swaps related to our debt due in 2012 is included in other current assets on the consolidated balance sheets. The fair value of the interest rate swaps related to our debt due in 2014 is included in other non-current assets on the consolidated balance sheets.

Information regarding interest rate swaps as of September 30, 2012 was as follows:
 
 
Notional amount
 
Fair value of interest rate swaps
 
Increase in debt due to fair value adjustment
Fair value hedge related to long-term debt due in 2012
 
$
84,847

 
$
595

 
$
239

Fair value hedge related to long-term debt due in 2014
 
198,000

 
4,322

 
3,861

Total fair value hedges
 
$
282,847

 
$
4,917


$
4,100


Information regarding interest rate swaps as of December 31, 2011 was as follows:
 
 
Notional amount
 
Fair value of interest rate swaps
 
Increase in debt due to fair value adjustment
Fair value hedge related to long-term debt due in 2012
 
$
84,847

 
$
1,309

 
$
780

Fair value hedge related to long-term debt due in 2014
 
198,000

 
3,230

 
2,788

Total fair value hedges
 
$
282,847

 
$
4,539

 
$
3,568


During the first quarter of 2011, we retired a portion of our long-term debt due in 2012 (see Note 10). In conjunction with this debt retirement, we settled a portion of the interest rate swaps and received cash payments of $2,548. Interest rate swaps remaining after the settlement were redesignated as fair value hedges during March 2011. In conjunction with the debt retirement, we recognized $3,094 of the fair value adjustment to the hedged debt, decreasing the loss on early debt extinguishment recognized during the first quarter of 2011. The $1,355 remaining fair value adjustment to the hedged debt as of the date hedge accounting was discontinued is being recorded as a decrease to interest expense over the term of the remaining debt.


Note 7: Fair value measurements

2012 asset impairment analysis – We evaluate the carrying value of goodwill and our indefinite-lived trade name as of July 31st of each year and between annual evaluations if events or circumstances occur that would indicate a possible impairment. As such, during the quarter ended September 30, 2012, we completed our annual impairment analyses.

In completing our 2012 annual goodwill impairment analysis, we elected to perform a qualitative assessment for all of the reporting units to which goodwill is assigned. This qualitative analysis evaluated factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the quantitative analysis we completed as of July 31, 2010, in which the estimated fair values of our reporting units exceeded their carrying values by amounts between $43,000 and $546,000, or by amounts between 55% and 442% above the carrying values of their net assets. In completing our qualitative analysis, we noted no changes in events or circumstances which would require us to complete the two-step quantitative goodwill impairment analysis for any of our reporting units.

When evaluating whether our indefinite-lived trade name is impaired, we compare the carrying amount of the asset to its estimated fair value. The estimate of fair value is based on a relief from royalty method which calculates the cost savings

11


associated with owning rather than licensing the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted. Should the estimated fair value be less than the carrying value of the asset, an impairment loss would be recognized. The impairment loss is calculated as the amount by which the carrying value of the asset exceeds the fair value of the asset. The impairment analysis completed during the quarter ended September 30, 2012 indicated that the calculated fair value of the indefinite-lived trade name exceeded its carrying value of $19,100 by approximately $29,000.

2012 acquisitions – For all business combinations, we are required to measure the fair value of the net identifiable tangible and intangible assets and liabilities acquired, excluding goodwill and deferred income taxes. The identifiable net assets acquired during the nine months ended September 30, 2012 (see Note 5) were comprised primarily of customer relationships, a trade name and internal-use software associated with the acquisition of OrangeSoda, Inc. The fair value of the customer relationships was estimated using the multi-period excess earnings method and the cost method. Assumptions used in these calculations included same-customer revenue growth rates, management's estimates of the costs to obtain and retain customers, and estimated annual customer retention rates based on the acquiree's historical information. The aggregate calculated fair value of the customer relationships was $10,200, which is being amortized in proportion to the related expected cash flows over a weighted-average useful life of 9 years. 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 $3,300, which is being amortized on the straight-line basis over 5 years. The fair value of the trade name was estimated using a relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name. 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 the acquired operations. The calculated fair value of the trade name was $900, which is being amortized on the straight-line basis over 5 years.

Recurring fair value measurements – Cash and cash equivalents as of September 30, 2012 include available-for-sale marketable securities (see Note 3). These securities consist of investments in various money market funds which are traded in active markets. As such, the fair value of these investments is determined based on quoted market prices. 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 these marketable securities were realized during the quarters or nine months ended September 30, 2012.

Funds held for customers include available-for-sale marketable securities (see Note 3). These securities consist of a mutual fund investment which invests in Canadian and provincial government securities, as well as an investment in a six-month Canadian guaranteed investment certificate (GIC). The mutual fund is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The fair value of the GIC approximates cost due to its relatively short duration. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income and were not significant for the quarters or nine months ended September 30, 2012 and 2011. The cost of securities sold is determined using the average cost method.

Other current assets include available-for-sale marketable securities (see Note 3). These securities consist of a Canadian money market fund which is not traded in an active market. As such, the fair value of this investment is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. 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 these marketable securities were realized during the quarters or nine months ended September 30, 2012 and 2011.

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. The fair value option provides companies an irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. The investment is included in long-term investments on the consolidated balance sheets. Long-term investments also include the cash surrender values of company-owned life insurance policies. Realized and unrealized gains and losses, as well as dividends earned by the mutual fund investment, are included in selling, general and administrative (SG&A) expense on the consolidated statements of comprehensive 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 value of the liability changes accordingly. As changes in the liability are reflected within SG&A expense on the consolidated statements of comprehensive 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 comprehensive income. The cost of securities sold is determined using the average cost

12


method. Realized gains recognized during the quarters and nine months ended September 30, 2012 and 2011 were not significant. We recognized a net unrealized gain on the investment in mutual funds of $114 during the quarter ended September 30, 2012 and a net unrealized loss of $226 during the quarter ended September 30, 2011. We recognized net unrealized gains of $120 during the nine months ended September 30, 2012 and $17 during the nine months ended September 30, 2011.

The fair value of interest rate swaps (see Note 6) 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. Changes in the fair value of the interest rate swaps, as well as changes in the fair value of the hedged debt, are included in interest expense in the consolidated statements of comprehensive income and were as follows:
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
(Loss) gain from derivatives
 
$
(185
)
 
$
2,866

 
$
378

 
$
2,592

Loss from change in fair value of hedged debt
 
(344
)
 
(2,792
)
 
(1,113
)
 
(3,115
)
Net (increase) decrease in interest expense
 
$
(529
)
 
$
74

 
$
(735
)

$
(523
)

Information regarding recurring fair value measurements completed during each period was as follows:
 
 
 
 
Fair value measurements using
 
 
Fair value as of September 30, 2012
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
 
 
 
(Level 1)
 
 (Level 2)
 
(Level 3)
Available-for-sale marketable securities (cash equivalents)
 
$
71,280

 
$
71,280

 
$

 
$

Available-for-sale marketable securities (funds held for customers)
 
15,923

 

 
15,923

 
$

Available-for-sale marketable securities (other current assets)
 
2,095

 

 
2,095

 

Long-term investment in mutual funds
 
2,154

 
2,154

 

 

Derivative assets
 
4,917

 

 
4,917

 

 
 
 
 
Fair value measurements using
 
 
Fair value as of
December 31, 2011
 
Quoted prices in active markets for identical assets
 
Significant other
observable inputs
 
Significant unobservable inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Available-for-sale marketable securities (funds held for customers)
 
$
5,418

 
$

 
$
5,418

 
$

Available-for-sale marketable securities (other current assets)
 
2,001

 

 
2,001

 

Long-term investment in mutual funds
 
2,165

 
2,165

 

 

Derivative assets
 
4,539

 

 
4,539

 


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 included within funds held for customers – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.

Loans and notes receivable from distributors – We have receivables for loans made to our Safeguard® distributors. In addition, during both 2012 and 2011, we acquired the operations of several small business distributors which we then sold to our Safeguard distributors. In most cases, we entered into notes receivable upon the sale of the assets to the distributors. The

13


fair value of these loans and notes receivable is calculated as the present value of expected future cash flows, discounted using an estimated interest rate based on published bond yields for companies of similar risk.

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. As of December 31, 2011, our long-term debt issued in March 2011 was not traded in an active market. As such, its fair value as of December 31, 2011 was determined by means of a pricing model utilizing readily observable market interest rates and data from trades executed by institutional investors. 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:
 
 
 
 
Fair value measurements using
 
 
September 30, 2012
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
 
 
Carrying value
 
Fair value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash
 
$
34,357

 
$
34,357

 
$
34,357

 
$

 
$

Cash (funds held for customers)
 
18,297

 
18,297

 
18,297

 

 

Loans and notes receivable from distributors
 
18,938

 
17,942

 

 

 
17,942

Long-term debt, including portion due within one year
 
742,322

 
774,187

 
774,187

 

 

 
 
 
 
Fair value measurements using
 
 
December 31, 2011
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
 
 
Carrying value
 
Fair value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash
 
$
28,687

 
$
28,687

 
$
28,687

 
$

 
$

Cash (funds held for customers)
 
38,976

 
38,976

 
38,976

 

 

Loans and notes receivable from distributors
 
11,940

 
10,616

 

 

 
10,616

Long-term debt, including portion due within one year
 
741,706

 
738,157

 
544,657

 
193,500

 



Note 8: Restructuring charges

Net restructuring charges for each period consisted of the following components:
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Severance accruals
 
$
1,649

 
$
3,011

 
$
4,685

 
$
5,834

Severance reversals
 
(489
)
 
(205
)
 
(1,397
)
 
(1,114
)
Operating lease obligations
 
118

 
52

 
118

 
52

Net restructuring accruals
 
1,278

 
2,858


3,406


4,772

Other costs
 
1,656

 
1,740

 
3,326

 
5,904

Net restructuring charges
 
$
2,934

 
$
4,598


$
6,732


$
10,676



14


The net restructuring charges are reflected in the consolidated statements of comprehensive income as follows:
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Cost of goods sold
 
$
193

 
$
261

 
$
1,355

 
$
837

Operating expenses
 
2,741

 
4,337

 
5,377

 
9,839

Net restructuring charges
 
$
2,934

 
$
4,598


$
6,732


$
10,676


2012 restructuring charges – During the quarter ended September 30, 2012, the net restructuring accruals included severance charges related to employee reductions across functional areas as we continue to reduce costs. Restructuring charges for the nine months ended September 30, 2012 also included severance charges related to the closing of two customer call centers during the third quarter of 2012 and the planned closing of two printing facilities in the fourth quarter of 2012. The restructuring charges for the quarter and nine months ended September 30, 2012 included severance benefits for approximately 80 and 275 employees, respectively. These charges were reduced by the reversal of restructuring accruals recorded primarily in previous years, as fewer employees received severance benefits than originally estimated. Other restructuring costs, which were expensed as incurred, included items such as employee and equipment moves, training and travel related to our restructuring activities.

2011 restructuring charges – During the quarter and nine months ended September 30, 2011, the net restructuring accruals included severance charges related to employee reductions in various functional areas as we continued to reduce costs. The restructuring charges for the quarter and nine months ended September 30, 2011 included severance benefits for approximately 100 and 190 employees, respectively. These charges were reduced by the reversal of restructuring accruals, recorded primarily in 2010, as fewer employees received severance benefits than originally estimated. Other restructuring costs, which were expensed as incurred, included items such as employee and equipment moves, training and travel related to our restructuring activities.

Restructuring accruals of $3,360 as of September 30, 2012 are reflected in the consolidated balance sheet as accrued liabilities. Restructuring accruals of $6,032 as of December 31, 2011 are reflected in the consolidated balance sheet as accrued liabilities of $5,946 and other non-current liabilities of $86. The majority of the employee reductions are expected to be completed by mid-2013, and we expect most of the related severance payments to be paid by the end of 2013, utilizing cash from operations. The remaining payments due under operating lease obligations will be paid through May 2013. As of September 30, 2012, approximately 130 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 2011 Form 10-K.

As of September 30, 2012, accruals for our restructuring initiatives, summarized by year, were as follows:
 
 
2009
initiatives
 
2010
initiatives
 
2011
initiatives
 
2012
 initiatives
 
Total
Balance, December 31, 2011
 
$
184

 
$
781

 
$
5,067

 
$

 
$
6,032

Restructuring charges
 
11

 
15

 
263

 
4,514

 
4,803

Restructuring reversals
 
(2
)
 
(226
)
 
(990
)
 
(179
)
 
(1,397
)
Payments
 
(183
)
 
(413
)
 
(3,945
)
 
(1,537
)
 
(6,078
)
Balance, September 30, 2012
 
$
10

 
$
157


$
395


$
2,798


$
3,360

Cumulative amounts:
 
 

 
 

 
 

 
 

 
 

Restructuring charges
 
$
11,035

 
$
9,730

 
$
9,057

 
$
4,514

 
$
34,336

Restructuring reversals
 
(1,672
)
 
(1,548
)
 
(1,601
)
 
(179
)
 
(5,000
)
Payments
 
(9,353
)
 
(8,025
)
 
(7,061
)
 
(1,537
)
 
(25,976
)
Balance, September 30, 2012
 
$
10

 
$
157


$
395


$
2,798


$
3,360



15


As of September 30, 2012, the components of our restructuring accruals, by segment, were as follows:
 
 
Employee severance benefits
 
Operating lease obligations
 
 
 
 
Small Business Services
 
Financial Services
 
Direct Checks
 
 
Corporate
 
Small Business Services
 
Direct Checks
 
Total
Balance, December 31, 2011
 
$
887

 
$
1,397

 
$
744

 
$
2,647

 
$
69

 
$
288

 
$
6,032

Restructuring charges
 
2,005

 
338

 
166

 
2,176

 

 
118

 
4,803

Restructuring reversals
 
(117
)
 
(208
)
 
(90
)
 
(982
)
 

 

 
(1,397
)
Inter-segment transfer
 
184

 
(184
)
 
(40
)
 
40

 

 

 

Payments
 
(1,891
)
 
(1,122
)
 
(540
)
 
(2,293
)
 
(67
)
 
(165
)
 
(6,078
)
Balance, September 30, 2012
 
$
1,068

 
$
221


$
240


$
1,588


$
2


$
241


$
3,360

Cumulative amounts(1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restructuring charges
 
$
11,002

 
$
6,172

 
$
3,449

 
$
12,722

 
$
364

 
$
627

 
$
34,336

Restructuring reversals
 
(1,666
)
 
(923
)
 
(282
)
 
(2,129
)
 

 

 
(5,000
)
Inter-segment transfer
 
309

 
50

 
(38
)
 
(321
)
 

 

 

Payments
 
(8,577
)
 
(5,078
)
 
(2,889
)
 
(8,684
)
 
(362
)
 
(386
)
 
(25,976
)
Balance, September 30, 2012
 
$
1,068

 
$
221


$
240


$
1,588


$
2


$
241


$
3,360


(1) Includes accruals related to our cost reduction initiatives for 2009 through 2012.


Note 9: Pension and other postretirement benefits

We have historically provided certain health care benefits for a large number of retired U.S. employees. In addition to our retiree health care plan, we also have a supplemental executive retirement plan in the United States. 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 2011 Form 10-K.

Pension and postretirement benefit expense for the quarters ended September 30, 2012 and 2011 consisted of the following components:
 
 
Postretirement benefit
plan
 
Pension plan
 
 
2012
 
2011
 
2012
 
2011
Interest cost
 
$
1,478

 
$
1,667

 
$
37

 
$
41

Expected return on plan assets
 
(1,950
)
 
(1,963
)
 

 

Amortization of prior service credit
 
(764
)
 
(936
)
 

 

Amortization of net actuarial losses
 
1,467

 
1,354

 
2

 

Net periodic benefit expense
 
$
231

 
$
122

 
$
39

 
$
41


Pension and postretirement benefit expense for the nine months ended September 30, 2012 and 2011 consisted of the following components:
 
 
Postretirement benefit
plan
 
Pension plan
 
 
2012
 
2011
 
2012
 
2011
Interest cost
 
$
4,435

 
$
5,002

 
$
111

 
$
123

Expected return on plan assets
 
(5,852
)
 
(5,888
)
 

 

Amortization of prior service credit
 
(2,291
)
 
(2,807
)
 

 

Amortization of net actuarial losses
 
4,402

 
4,061

 
7

 

Net periodic benefit expense
 
$
694

 
$
368

 
$
118

 
$
123


16


Note 10: Debt

Debt outstanding was comprised of the following:
 
 
September 30,
2012
 
December 31,
2011
5.125% senior, unsecured notes due October 1, 2014, net of discount(1)
 
$
257,247

 
$
256,131

7.375% senior notes due June 1, 2015
 
200,000

 
200,000

7.0% senior notes due March 15, 2019
 
200,000

 
200,000

Long-term portion of debt
 
657,247

 
656,131

5.0% senior, unsecured notes due December 15, 2012, net of discount(2)
 
85,075

 
85,575

Total debt
 
$
742,322

 
$
741,706


(1) Includes increase due to cumulative change in fair value of hedged debt of $3,861 as of September 30, 2012 and $2,788 as of December 31, 2011.
(2) Includes increase due to cumulative change in fair value of hedged debt of $239 as of September 30, 2012 and $780 as of December 31, 2011.

Discounts from par value are being amortized ratably as increases to interest expense over the term of the related debt.

All of our notes include covenants that place certain restrictions on the issuance of additional debt and limitations on certain liens. The notes due in 2019 and 2015 also include limitations on our ability to issue redeemable stock and preferred stock, make loans and investments, and consolidate, merge or sell all or substantially all of our assets.

In March 2011, we issued $200,000 of 7.0% senior notes maturing on March 15, 2019. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the Securities and Exchange Commission (SEC) via a registration statement which became effective on January 10, 2012. Interest payments are due each March and September. The notes are guaranteed by certain of our subsidiaries and place a limitation on restricted payments, including share repurchases and increases in dividend levels. The limitation on restricted payments does not apply if the notes are upgraded to an investment-grade credit rating. Financial information for the guarantor subsidiaries can be found in Note 14. At any time prior to March 15, 2014, we may on one or more occasions redeem up to 35% of the original principal amount of the notes with the proceeds of one or more equity offerings at a redemption price of 107% of the principal amount of the notes, together with accrued and unpaid interest. At any time prior to March 15, 2015, we may also 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. At any time on or after March 15, 2015, we may redeem some or all of the notes at prices ranging from 100% to 103.5% of the principal amount. If at any time we sell certain of our assets or experience specific types of changes in control, we must offer to purchase all of the outstanding notes at 101% of the principal amount. Proceeds from the offering, net of offering costs, were $196,195. These proceeds were used to retire a portion of our senior, unsecured notes due in 2012. The fair value of the notes issued in March 2011 was $214,000 as of September 30, 2012, based on quoted prices for identical liabilities when traded as assets.

In May 2007, we issued $200,000 of 7.375% senior 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 are guaranteed by the same subsidiaries which guarantee our notes due in 2019 and place a limitation on restricted payments, including share repurchases and increases in dividend levels. This limitation does not apply if the notes are upgraded to an investment-grade credit rating. Financial information for the guarantor subsidiaries can be found in Note 14. Principal redemptions may be made at our election at any time at redemption prices ranging from 100% to 103.688% of the principal amount. If we sell certain of our assets or experience specific types of changes in control, we must offer to purchase all of the outstanding notes at 101% of the principal amount. Proceeds from the offering, net of offering costs, were $196,329. These proceeds were used as part of our repayment of unsecured notes which matured on October 1, 2007. The fair value of the notes issued in May 2007 was $204,500 as of September 30, 2012, based on quoted prices for identical liabilities when traded as assets.

In October 2004, we issued $275,000 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 $272,276. 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, 2011, we retired $10,000 of these notes, realizing a pre-tax loss of $185. As of September 30, 2012, the fair value of the

17


$253,500 remaining notes outstanding was $270,119 based on quoted prices for identical liabilities when traded as assets. As discussed in Note 6, we have entered into interest rate swaps 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.

In December 2002, we issued $300,000 of 5.0% senior, unsecured notes maturing on December 15, 2012. These notes were issued under our shelf registration statement covering up to $300,000 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 $295,722. These proceeds were used for general corporate purposes, including funding share repurchases, capital asset purchases and working capital. During the quarter ended March 31, 2011, we retired $195,463 of these notes, realizing a pre-tax loss of $6,810. As of September 30, 2012, the fair value of the $84,847 remaining notes outstanding was $85,568, based on quoted prices for identical liabilities when traded as assets. As discussed in Note 6, we have entered into interest rate swaps to hedge these notes. The fair value of long-term debt disclosed here does not reflect the impact of these fair value hedges.

As of December 31, 2011, we had a $200,000 credit facility, which was scheduled to expire in March 2013. In February 2012, we modified the terms of this credit facility, extending its term to February 2017. Additionally, we lowered the commitment fee to a range of 0.20% to 0.45% based on our leverage ratio. Borrowings under the credit facility are collateralized by substantially all of our personal and intangible property. 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.

Daily average amounts outstanding under our credit facility were as follows:
 
 
Nine Months Ended September 30, 2012
 
Year Ended December 31, 2011
Daily average amount outstanding
 
$

 
$
21,655

Weighted-average interest rate
 

 
3.03
%

No amounts were outstanding under our credit facility as of September 30, 2012 and December 31, 2011. As of September 30, 2012, amounts were available for borrowing under our credit facility as follows:
 
 
Total
available
Credit facility commitment
 
$
200,000

Outstanding letters of credit(1)
 
(8,535
)
Net available for borrowing as of September 30, 2012
 
$
191,465

(1) We use standby letters of credit primarily to collateralize certain obligations related to our self-insured workers’ compensation claims. These letters of credit reduce the amount available for borrowing under our credit facility.

Absent certain defined events of default under our debt instruments, and as long as our ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense, as defined, is in excess of two to one, our debt covenants do not restrict our ability to pay cash dividends at our current rate, although there are aggregate annual limits on the amount of dividends and share repurchases under the terms of our credit facility, as well as a cumulative limit on such payments through the term of the credit facility. If our ratio of EBITDA to interest expense falls below two to one, there would also be limitations on our ability to issue additional debt.


Note 11:  Other commitments and contingencies

Indemnifications - In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These indemnifications encompass third-party claims arising from our products and services, including service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to

18


investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we have no reason to believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters.

Environmental matters - We are currently involved in environmental compliance, investigation and remediation activities at some of our current and former sites, primarily printing facilities of our Financial Services and Small Business Services segments which have been sold. Remediation costs are accrued on an undiscounted basis when the obligations are either known or considered probable and can be reasonably estimated. Remediation or testing costs that result directly from the sale of an asset and which we would not have otherwise incurred are considered direct costs of the sale of the asset. As such, they are included in our measurement of the carrying value of the asset sold.

Accruals for environmental matters were $8,807 as of September 30, 2012 and $8,730 as of December 31, 2011, primarily related to facilities which have been sold. These accruals are included in accrued liabilities and other long-term liabilities in the consolidated balance sheets. Accrued costs consist of direct costs of the remediation activities, primarily fees which will be paid to outside engineering and consulting firms. Although recorded accruals include our best estimates, our total costs cannot be predicted with certainty due to various factors such as the extent of corrective action that may be required, evolving environmental laws and regulations and advances in environmental technology. Where the available information is sufficient to estimate the amount of the liability, that estimate is used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range is recorded. We do not believe that the range of possible outcomes could have a material effect on our financial condition, results of operations or liquidity. Expense reflected in our consolidated statements of comprehensive income for environmental matters was $681 for the nine months ended September 30, 2012 and $234 for the nine months ended September 30, 2011.

As of September 30, 2012, $5,960 of the costs included in our environmental accruals were covered by an environmental insurance policy which we purchased during 2002. The insurance policy covers up to $12,911 of remediation costs, of which $6,951 had been paid through September 30, 2012. This insurance policy does not cover properties acquired subsequent to 2002. However, costs included in our environmental accruals for such properties were not material as of September 30, 2012. We do not anticipate significant net cash outlays for environmental matters in 2012. The insurance policy also covers up to $10,000 of third-party claims through 2032 at certain owned, leased and divested sites, as well as any new conditions discovered at certain owned or leased sites through 2012. We consider the realization of recovery under the insurance policy to be probable based on the insurance contract in place with a reputable and financially-sound insurance company. As our environmental accruals include our best estimates of these costs, we have recorded receivables from the insurance company within other current assets and other non-current assets based on the amounts of our environmental accruals for insured sites.

We also have an additional environmental site liability insurance policy providing coverage on facilities which we acquired subsequent to 2002. This policy covers liability for claims of bodily injury or property damage arising from pollution events at the covered facilities. The policy also provides remediation coverage should we be required by a governing authority to perform remediation activities at the covered sites. The policy provides coverage of up to $15,000 through April 2019. No accruals have been recorded in our consolidated financial statements for any of the events contemplated in this insurance policy.

Self-insurance - We are self-insured for certain costs, primarily workers' compensation claims and medical and dental benefits. The liabilities associated with these items represent our best estimate of the ultimate obligations for reported claims plus those incurred, but not reported. The liability for workers' compensation, which totaled $4,762 as of September 30, 2012 and $5,141 as of December 31, 2011, is accounted for on a discounted basis. The difference between the discounted and undiscounted workers' compensation liability was $24 as of September 30, 2012 and $20 as of December 31, 2011. We record liabilities for medical and dental benefits for active employees and those employees on long-term disability. Our liability for active employees is not recorded on a discounted basis as we expect the benefits to be paid in a relatively short period of time. Our liability for those employees on long-term disability is accounted for on a discounted basis. Our total liability for these medical and dental benefits totaled $4,141 as of September 30, 2012 and $3,848 as of December 31, 2011. The difference between the discounted and undiscounted medical and dental liability was $296 as of September 30, 2012 and December 31, 2011.

Our self-insurance liabilities are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future events and claims differ from these assumptions and historical trends.

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Note 12: Shareholders’ equity

Shares outstanding Changes in common shares outstanding were as follows:
 
 
Nine Months Ended September 30, 2012
Balance, December 31, 2011
 
50,826

Issued
 
837

Repurchased
 
(509
)
Retired
 
(254
)
Balance, September 30, 2012
 
50,900


Share repurchases We have an outstanding authorization from our board of directors to purchase up to 10,000 shares of our common stock. This authorization has no expiration date, and 4,748 shares remained available for purchase under this authorization as of September 30, 2012. During the nine months ended September 30, 2012, we repurchased 509 shares for $11,999.

Accumulated other comprehensive loss was comprised of the following:
 
 
Pension and postretirement benefit plans, net of tax
 
Loss on derivatives, net of tax(1)
 
Net unrealized gain on marketable securities, net of tax
 
Currency translation adjustment
 
Accumulated other comprehensive loss
Balance, December 31, 2011
 
$
(62,278
)
 
$
(2,931
)
 
$
178

 
$
5,630

 
$
(59,401
)
Current period other comprehensive income
 
1,319

 
835

 

 
1,365

 
3,519

Balance, September 30, 2012
 
$
(60,959
)
 
$
(2,096
)
 
$
178

 
$
6,995

 
$
(55,882
)

(1) Relates to interest rate locks executed in 2004 and 2002. See the caption "Note 6: Derivative financial instruments" in the Notes to Consolidated Financial Statements appearing in the 2011 Form 10-K.


Note 13: Business segment information

We operate three reportable business segments: Small Business Services, Financial Services and Direct Checks. Our business segments are generally organized by type of customer served and reflect the way we manage the company. Small Business Services promotes and sells products and services to small businesses via mail and the internet, referrals from financial institutions and telecommunications clients, a network of distributors and dealers, and a direct sales force which focuses on major accounts. These efforts are supplemented by the account development efforts of an outbound telemarketing group. Financial Services' products and services are sold through multiple channels, including a direct sales force, to financial institution clients nationwide, including banks, credit unions and financial services companies. Direct Checks sells products and services directly to consumers using direct response marketing via mail and the internet. All three segments operate primarily in the United States. Small Business Services also has operations in Canada and portions of Europe. Our product and service offerings are comprised of the following:

Checks – We remain one of the largest providers of checks in the United States, both in terms of revenue and the number of checks produced. Checks account for the majority of the revenue in our Financial Services and Direct Checks segments and represented 47.2% of our Small Business Services segment's revenue in 2011.

Forms – Our Small Business Services segment provides printed forms to small businesses, including deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. This segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Forms produced by our Financial Services and Direct Checks segments include deposit tickets and check registers.

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Accessories and other products – Small Business Services produces products designed to provide small business owners with the customized documents necessary to efficiently manage their business including envelopes, office supplies, stamps and labels, as well as retail packaging supplies. Our Financial Services and Direct Checks segments offer checkbook covers and stamps.

Marketing solutions – All three of our segments offer products and services that help small businesses and financial institutions promote their businesses and acquire customers. Our Small Business Services segment offers services such as web design, hosting and other web services, logo design, search engine optimization and marketing, and digital printing services designed to fulfill the sales and marketing needs of small businesses, as well as products such as business cards, greeting cards, brochures and apparel. Financial Services offers various customer acquisition programs and marketing communications services, while Direct Checks provides package insert programs under which companies' marketing materials are included in our check packages.

Other services – All three of our segments provide fraud protection services. In addition, our Small Business Services segment offers payroll services, and Financial Services provides financial institution profitability and regulatory compliance programs.

The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2011 Form 10-K. We allocate corporate costs for our shared services functions to our business segments, including costs of our executive management, human resources, supply chain, finance, information technology and legal functions. Generally, where costs incurred are directly attributable to a business segment, primarily within the areas of information technology, supply chain and finance, those costs are charged directly to that segment. Because we use a shared services approach for many of our functions, certain costs are not directly attributable to a business segment. These costs are allocated to our business segments based on segment revenue, as revenue is a measure of the relative size and magnitude of each segment and indicates the level of corporate shared services consumed by each segment. Corporate assets are not allocated to the segments and consist of property, plant and equipment, internal-use software, inventories and supplies related to our corporate shared services functions of manufacturing, information technology and real estate, as well as long-term investments.

We are an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and the sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating income and other financial information shown.

The following is our segment information as of and for the quarters ended September 30, 2012 and 2011:

 
 
 
 
Reportable Business Segments
 
 
 
 
 
 
 
 
Small Business Services
 
Financial Services
 
Direct Checks
 
Corporate
 
Consolidated
Revenue from external customers:
 
2012
 
$
244,461

 
$
82,843

 
$
51,034

 
$

 
$
378,338

 
 
2011
 
214,442

 
85,194

 
55,508

 

 
355,144

Operating income:
 
2012
 
39,636

 
17,693

 
15,341

 

 
72,670

 
 
2011
 
34,650

 
14,128

 
16,867

 

 
65,645

Depreciation and amortization
 
2012
 
11,081

 
2,922

 
2,235

 

 
16,238

expense:
 
2011
 
11,437

 
3,292

 
3,050

 

 
17,779

Total assets:
 
2012
 
863,015

 
84,286

 
170,660

 
349,330

 
1,467,291

 
 
2011
 
816,500

 
104,375