2013.6.30 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 June 30, 2013
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 July 23, 2013 was 50,390,553.

1

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

 
 
June 30,
2013
 
December 31,
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
52,830

 
$
45,435

Trade accounts receivable (net of allowances for uncollectible accounts of $3,988 and $3,912, respectively)
 
75,610

 
70,387

Inventories and supplies
 
25,197

 
23,291

Deferred income taxes
 
6,503

 
7,687

Funds held for customers
 
38,640

 
43,140

Other current assets
 
30,995

 
29,803

Total current assets
 
229,775

 
219,743

Deferred income taxes
 
1,600

 
1,662

Long-term investments (including $2,222 and $2,196 of investments at fair value, respectively)
 
44,061

 
46,898

Property, plant and equipment (net of accumulated depreciation of $363,111 and $358,580, respectively)
 
100,823

 
104,189

Assets held for sale
 
10,583

 
970

Intangibles (net of accumulated amortization of $491,492 and $472,078, respectively)
 
153,446

 
150,717

Goodwill
 
810,446

 
789,636

Other non-current assets
 
97,235

 
98,625

Total assets
 
$
1,447,969

 
$
1,412,440

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
63,764

 
$
65,107

Accrued liabilities
 
138,127

 
155,003

Long-term debt due within one year
 
277

 
—

Total current liabilities
 
202,168

 
220,110

Long-term debt
 
642,167

 
652,581

Deferred income taxes
 
77,982

 
75,147

Other non-current liabilities
 
45,104

 
31,667

Commitments and contingencies (Notes 11 and 12)
 


 


Shareholders’ equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: 2013 – 50,385; 2012 – 50,614)
 
50,385

 
50,614

Additional paid-in capital
 
29,134

 
47,968

Retained earnings
 
443,665

 
375,000

Accumulated other comprehensive loss (Note 5)
 
(42,636
)
 
(40,647
)
Total shareholders’ equity
 
480,548

 
432,935

Total liabilities and shareholders’ equity
 
$
1,447,969

 
$
1,412,440


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 June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Product revenue
 
$
332,790

 
$
332,530

 
$
672,666

 
$
673,958

Service revenue
 
48,643

 
38,484

 
96,321

 
75,038

Total revenue
 
381,433

 
371,014

 
768,987

 
748,996

Cost of products sold
 
(111,450
)
 
(109,757
)
 
(223,721
)
 
(221,373
)
Cost of services
 
(22,097
)
 
(17,837
)
 
(43,123
)
 
(33,709
)
Total cost of revenue
 
(133,547
)
 
(127,594
)
 
(266,844
)
 
(255,082
)
Gross profit
 
247,886

 
243,420

 
502,143

 
493,914

Selling, general and administrative expense
 
(164,501
)
 
(167,718
)
 
(339,653
)
 
(339,549
)
Net restructuring charges
 
(924
)
 
(1,998
)
 
(2,295
)
 
(2,636
)
Net loss on sale of facility
 
—

 
(128
)
 
—

 
(128
)
Operating income
 
82,461


73,576

 
160,195

 
151,601

Interest expense
 
(9,563
)
 
(11,356
)
 
(19,043
)
 
(23,053
)
Other income
 
142

 
317

 
491

 
356

Income before income taxes
 
73,040

 
62,537

 
141,643

 
128,904

Income tax provision
 
(24,888
)
 
(20,275
)
 
(47,616
)
 
(42,563
)
Net income
 
$
48,152

 
$
42,262

 
$
94,027

 
$
86,341

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
46,788

 
$
42,183

 
$
92,038

 
$
87,793

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.95

 
$
0.83

 
$
1.85

 
$
1.69

Diluted earnings per share
 
0.94

 
0.82

 
1.83

 
1.68

Cash dividends per share
 
0.25

 
0.25

 
0.50

 
0.50


See Condensed Notes to Unaudited Consolidated Financial Statements


3

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

 
 
Common shares
 
Common shares par value
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2012
 
50,614

 
$
50,614

 
$
47,968

 
$
375,000

 
$
(40,647
)
 
$
432,935

Net income
 
—

 
—

 
—

 
94,027

 
—

 
94,027

Cash dividends
 
—

 
—

 
—

 
(25,362
)
 
—

 
(25,362
)
Common shares issued
 
652

 
652

 
10,827

 
—

 
—

 
11,479

Tax impact of share-based awards
 
—

 
—

 
669

 
—

 
—

 
669

Common shares repurchased
 
(815
)
 
(815
)
 
(31,185
)
 
—

 
—

 
(32,000
)
Other common shares retired
 
(66
)
 
(66
)
 
(2,504
)
 
—

 
—

 
(2,570
)
Fair value of share-based compensation
 
—

 
—

 
3,359

 
—

 
—

 
3,359

Other comprehensive loss (Note 5)
 
—

 
—

 
—

 
—

 
(1,989
)
 
(1,989
)
Balance, June 30, 2013
 
50,385

 
$
50,385

 
$
29,134

 
$
443,665

 
$
(42,636
)
 
$
480,548



See Condensed Notes to Unaudited Consolidated Financial Statements


4

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net income
 
$
94,027

 
$
86,341

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

 
 

Depreciation
 
9,048

 
10,130

Amortization of intangibles
 
22,998

 
23,304

Amortization of contract acquisition costs
 
8,277

 
8,546

Deferred income taxes
 
(594
)
 
4,110

Employee share-based compensation expense
 
3,611

 
3,404

Other non-cash items, net
 
4,745

 
4,885

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

 
 

Trade accounts receivable
 
(5,825
)
 
(28
)
Inventories and supplies
 
(1,153
)
 
(2,580
)
Other current assets
 
41

 
(6,257
)
Non-current assets
 
(4,896
)
 
1,295

Accounts payable
 
(3,686
)
 
(2,948
)
Contract acquisition payments
 
(5,753
)
 
(10,516
)
Other accrued and non-current liabilities
 
(18,698
)
 
(19,777
)
Net cash provided by operating activities
 
102,142

 
99,909

Cash flows from investing activities:
 
 

 
 

Purchases of capital assets
 
(16,590
)
 
(17,334
)
Payments for acquisitions, net of cash acquired
 
(35,080
)
 
(28,459
)
Loans to distributors
 
(540
)
 
(3,150
)
Proceeds from company-owned life insurance policies
 
4,599

 
—

Other
 
1,929

 
3,211

Net cash used by investing activities
 
(45,682
)
 
(45,732
)
Cash flows from financing activities:
 
 

 
 

Payments on long-term debt
 
(41
)
 
—

Payments for debt issue costs
 
(207
)
 
(1,163
)
Change in book overdrafts
 
51

 
(2,652
)
Proceeds from issuing shares under employee plans
 
9,366

 
2,873

Excess tax benefit from share-based employee awards
 
1,121

 
443

Payments for common shares repurchased
 
(32,000
)
 
(11,999
)
Cash dividends paid to shareholders
 
(25,362
)
 
(25,423
)
Net cash used by financing activities
 
(47,072
)
 
(37,921
)
 
 
 
 
 
Effect of exchange rate change on cash
 
(1,993
)
 
188

 
 
 
 
 
Net change in cash and cash equivalents
 
7,395

 
16,444

Cash and cash equivalents, beginning of year
 
45,435

 
28,687

Cash and cash equivalents, end of period
 
$
52,830

 
$
45,131


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 June 30, 2013, the consolidated statements of comprehensive income for the quarters and six months ended June 30, 2013 and 2012, the consolidated statement of shareholders’ equity for the six months ended June 30, 2013, and the consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 are unaudited. The consolidated balance sheet as of December 31, 2012 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, 2012 (the “2012 Form 10-K”).


Note 2: New accounting pronouncements

On January 1, 2013, we adopted Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard requires that companies present information about reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements, including the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the line item on the statement of comprehensive income affected by the reclassification adjustment. The disclosures required by this new standard are presented in Note 5: Other comprehensive income.

ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, became effective for us on January 1, 2013. Under this 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. We complete our annual impairment analysis of our indefinite-lived trade name during the third quarter of the year. At that time, we will determine whether we will complete a qualitative assessment of the asset.

In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This standard provides guidance regarding when an unrecognized tax benefit should be classified as a reduction to a deferred tax asset or when it should be classified as a liability in the consolidated balance sheet. The guidance is effective for us on January 1, 2014. We do not expect the adoption of this standard to have a significant impact on our consolidated balance sheet.


Note 3: Supplemental balance sheet information

Inventories and supplies – Inventories and supplies were comprised of the following:
 
 
June 30,
2013
 
December 31,
2012
Raw materials
 
$
4,717

 
$
4,818

Semi-finished goods
 
8,535

 
8,390

Finished goods
 
8,739

 
7,005

Supplies, primarily production
 
3,206

 
3,078

Inventories and supplies
 
$
25,197

 
$
23,291


6


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:
 
 
June 30, 2013
 
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Canadian and provincial government securities
 
$
9,902

 
$
—

 
$
(335
)
 
$
9,567

Canadian guaranteed investment certificate
 
5,229

 
—

 
—

 
5,229

Available-for-sale securities (funds held for customers)(1)
 
15,131

 
—

 
(335
)
 
14,796

Money market securities (cash equivalents)
 
13,501

 
—

 
—

 
13,501

Canadian money market fund (other current assets)
 
2,054

 
—

 
—

 
2,054

Total available-for-sale securities
 
$
30,686

 
$
—


$
(335
)

$
30,351


(1) Funds held for customers, as reported on the consolidated balance sheet as of June 30, 2013, also included cash of $23,844.
 
 
December 31, 2012
 
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Canadian and provincial government securities
 
$
10,371

 
$
—

 
$
(115
)
 
$
10,256

Canadian guaranteed investment certificate
 
5,544

 
—

 
—

 
5,544

Available-for-sale securities (funds held for customers)(1)
 
15,915


—


(115
)

15,800

Money market securities (cash equivalents)
 
9,350

 
—

 
—

 
9,350

Canadian money market fund (other current assets)
 
2,162

 
—

 
—

 
2,162

Total available-for-sale securities
 
$
27,427

 
$
—

 
$
(115
)
 
$
27,312

 
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2012, also included cash of $27,340.
 
Expected maturities of available-for-sale securities as of June 30, 2013 were as follows:
 
 
Fair value
Due in one year or less
 
$
21,903

Due in two to five years
 
4,057

Due in six to ten years
 
4,391

Total available-for-sale securities
 
$
30,351


Further information regarding the fair value of available-for-sale securities can be found in Note 8: Fair value measurements.


7

Assets held for sale – Assets held for sale consisted of the operations of small business distributors which we purchased during the fourth quarter of 2012 and during 2013. The assets purchased consisted primarily of customer lists. We are actively marketing the assets and anticipate selling them within one year of their acquisition dates. Net assets held for sale consisted of the following:
 
 
June 30,
2013
 
December 31,
2012
 
Balance sheet caption
Other current assets
 
$
234

 
$
—

 
Other current assets
Intangibles
 
10,313

 
970

 
Assets held for sale
Other non-current assets
 
270

 
—

 
Assets held for sale
Accrued liabilities
 
(75
)
 
—

 
Accrued liabilities
Non-current deferred income tax liabilities
 
(3,032
)
 
—

 
Other non-current liabilities
Net assets held for sale
 
$
7,710

 
$
970

 
 

Intangibles – Intangibles were comprised of the following:
 
 
June 30, 2013
 
December 31, 2012
 
 
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
 
455,991

 
(391,692
)
 
64,299

 
438,988

 
(376,111
)
 
62,877

Trade names
 
68,261

 
(31,489
)
 
36,772

 
68,561

 
(30,151
)
 
38,410

Customer lists/relationships
 
63,206

 
(31,654
)
 
31,552

 
58,735

 
(30,287
)
 
28,448

Distributor contracts
 
30,900

 
(30,900
)
 
—

 
30,900

 
(29,999
)
 
901

Other
 
7,480

 
(5,757
)
 
1,723

 
6,511

 
(5,530
)
 
981

Amortizable intangibles
 
625,838

 
(491,492
)

134,346


603,695


(472,078
)

131,617

Intangibles
 
$
644,938

 
$
(491,492
)

$
153,446


$
622,795


$
(472,078
)

$
150,717


Amortization of intangibles was $11,655 for the quarter ended June 30, 2013 and $11,315 for the quarter ended June 30, 2012. Amortization of intangibles was $22,998 for the six months ended June 30, 2013 and $23,304 for the six months ended June 30, 2012. Based on the intangibles in service as of June 30, 2013, estimated future amortization expense is as follows:
 
 
Estimated
amortization
expense
Remainder of 2013
 
$
20,620

2014
 
32,841

2015
 
20,484

2016
 
11,656

2017
 
7,842



8

Goodwill – Changes in goodwill during the six months ended June 30, 2013 were as follows:
 
 
Small
Business
Services
 
Financial
Services
 
Direct
Checks
 
Total
Balance, December 31, 2012:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
633,952

 
$
27,178

 
$
148,506

 
$
809,636

Accumulated impairment charges
 
(20,000
)
 
—

 
—

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
613,952

 
27,178


148,506


789,636

Acquisition of VerticalResponse, Inc. (Note 6)
 
20,925

 
—

 
—

 
20,925

Currency translation adjustment
 
(115
)
 
—

 
—

 
(115
)
Balance, June 30, 2013:
 
 

 
 

 
 

 
 

Goodwill, gross
 
654,762

 
27,178

 
148,506

 
830,446

Accumulated impairment charges
 
(20,000
)
 
—

 
—

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
$
634,762

 
$
27,178


$
148,506


$
810,446


Other non-current assets – Other non-current assets were comprised of the following:
 
 
June 30,
2013
 
December 31,
2012
Contract acquisition costs
 
$
40,521

 
$
43,036

Loans and notes receivable from distributors
 
17,474

 
18,162

Postretirement benefit plan asset
 
10,747

 
4,993

Deferred advertising costs
 
9,934

 
13,783

Other
 
18,559

 
18,651

Other non-current assets
 
$
97,235

 
$
98,625


Changes in contract acquisition costs during the six months ended June 30, 2013 and 2012 were as follows:
 
 
Six Months Ended June 30,
 
 
2013
 
2012
Balance, beginning of year
 
$
43,036

 
$
55,076

Additions(1)
 
6,033

 
2,668

Amortization
 
(8,277
)
 
(8,546
)
Other
 
(271
)
 
(292
)
Balance, end of period
 
$
40,521

 
$
48,906

 
(1) Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $5,753 for the six months ended June 30, 2013 and $10,516 for the six months ended June 30, 2012.


9

Accrued liabilities – Accrued liabilities were comprised of the following:
 
 
June 30,
2013
 
December 31,
2012
Funds held for customers
 
$
38,104

 
$
42,460

Customer rebates
 
21,666

 
22,164

Employee profit sharing/cash bonus
 
20,893

 
40,670

Wages, including vacation
 
11,929

 
7,364

Deferred revenue
 
10,787

 
7,825

Interest
 
8,867

 
8,465

Contract acquisition costs due within one year
 
4,029

 
3,820

Restructuring due within one year (Note 9)
 
2,213

 
4,507

Other
 
19,639

 
17,728

Accrued liabilities
 
$
138,127

 
$
155,003



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 June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Earnings per share – basic:
 
 
 
 
 
 
 
 
Net income
 
$
48,152

 
$
42,262

 
$
94,027

 
$
86,341

Income allocated to participating securities
 
(198
)
 
(287
)
 
(529
)
 
(575
)
Income available to common shareholders
 
$
47,954

 
$
41,975


$
93,498

 
$
85,766

Weighted-average shares outstanding
 
50,545

 
50,737

 
50,625

 
50,796

Earnings per share – basic
 
$
0.95

 
$
0.83

 
$
1.85

 
$
1.69

 
 
 
 
 
 
 
 
 
Earnings per share – diluted:
 
 

 
 

 
 
 
 
Net income
 
$
48,152

 
$
42,262

 
$
94,027

 
$
86,341

Income allocated to participating securities
 
(197
)
 
(286
)
 
(525
)
 
(573
)
Re-measurement of share-based awards classified as liabilities
 
(128
)
 
23

 
25

 
35

Income available to common shareholders
 
$
47,827

 
$
41,999


$
93,527

 
$
85,803

Weighted-average shares outstanding
 
50,545

 
50,737

 
50,625

 
50,796

Dilutive impact of potential common shares
 
437

 
249

 
451

 
273

Weighted-average shares and potential common shares outstanding
 
50,982

 
50,986


51,076

 
51,069

Earnings per share – diluted
 
$
0.94

 
$
0.82

 
$
1.83

 
$
1.68

 
 
 
 
 
 
 
 
 
Antidilutive options excluded from calculation
 
446

 
2,010

 
446

 
2,010




10

Note 5: Other comprehensive income

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss were as follows:
 
 
Pension and postretirement benefit plans, net of tax
 
Loss on derivatives, net of tax(1)
 
Net unrealized loss on marketable securities, net of tax(2)
 
Currency translation adjustment
 
Accumulated other comprehensive loss
Balance, December 31, 2012
 
$
(45,303
)
 
$
(1,821
)
 
$
(92
)
 
$
6,569

 
$
(40,647
)
Other comprehensive loss before reclassifications
 
—

 
—

 
(172
)
 
(3,390
)
 
(3,562
)
Amounts reclassified from accumulated other comprehensive loss
 
1,053

 
520

 
—

 
—

 
1,573

Net current-period other comprehensive income (loss)
 
1,053

 
520

 
(172
)
 
(3,390
)
 
(1,989
)
Balance, June 30, 2013
 
$
(44,250
)
 
$
(1,301
)
 
$
(264
)
 
$
3,179

 
$
(42,636
)

(1) Relates to interest rate locks executed in 2004. See the caption "Note 6: Derivative financial instruments" in the Notes to Consolidated Financial Statements appearing in the 2012 Form 10-K.
(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $61.

Reclassification adjustments – Information regarding amounts reclassified from accumulated other comprehensive loss to net income was as follows:

Accumulated other comprehensive loss components
 
Amounts reclassified from accumulated other comprehensive loss
 
Affected line item in consolidated statements of comprehensive income
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
 
2013
 
2012
 
2013
 
2012
 
 
Amortization of postretirement benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
355

 
$
764

 
$
711

 
$
1,528

 
(1) 
Net actuarial loss
 
(1,110
)
 
(1,469
)
 
(2,220
)
 
(2,939
)
 
(1) 
Total amortization
 
(755
)
 
(705
)
 
(1,509
)
 
(1,411
)
 
(1) 
Tax benefit
 
228

 
266

 
456

 
533

 
(1) 
Amortization of postretirement benefit plan items, net of tax
 
(527
)
 
(439
)
 
(1,053
)
 
(878
)
 
(1) 
 
 
 
 
 
 
 
 
 
 
 
Amortization of loss on interest rate locks
 
(418
)
 
(448
)
 
(836
)
 
(895
)
 
Interest expense
Tax benefit
 
158

 
169

 
316

 
338

 
Income tax provision
Amortization of loss on interest rate locks, net of tax
 
(260
)
 
(279
)
 
(520
)
 
(557
)
 
Net income
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications, net of tax
 
$
(787
)
 
$
(718
)
 
$
(1,573
)
 
$
(1,435
)
 
 

(1) Amortization of postretirement benefit plan items is included in the computation of net periodic benefit (credit) expense. See Note 10 for additional details.



11

Note 6: Acquisitions

In June 2013, we acquired all of the outstanding capital stock of VerticalResponse, Inc., in a cash transaction for $27,299, net of cash acquired. We funded the acquisition with cash on hand. VerticalResponse is a provider of self-service marketing solutions for small businesses, including email marketing, social media, online event marketing, postcard marketing and on-line surveys. The preliminary allocation of the purchase price based upon the estimated fair value of the assets acquired and liabilities assumed resulted in goodwill of $20,925. We expect to finalize the allocation of the purchase price during the third quarter of 2013 when our valuation of intangibles and deferred income taxes, as well as our determination of intangible useful lives, is finalized. The acquisition resulted in goodwill as we expect to accelerate revenue growth in marketing solutions and other services by adding VerticalResponse's established customer base and online promotional and internet marketing capabilities. Transaction costs related to the acquisition were expensed as incurred and were not significant to the consolidated statements of comprehensive income for the quarter and six months ended June 30, 2013. The results of operations of this business from its acquisition date are included in our Small Business Services segment.

Intangible assets recorded as of June 30, 2013 for the VerticalResponse acquisition consisted primarily of customer relationships with an aggregate value of $7,200 and a preliminary weighted-average useful life of 7 years, as well as internal-use software with an aggregate value of $3,913 and a preliminary weighted-average useful life of 4 years. The customer relationships are being amortized in relation to the expected cash flows and the internal-use software is being amortized using the straight-line method. Further information regarding the calculation of the estimated fair values of these assets can be found in Note 8.

During 2013, we also acquired the operations of small business distributors for aggregate cash payments of $7,781. The assets acquired consisted primarily of customer lists which we are actively marketing and which we anticipate selling within one year of their acquisition dates. As such, the assets and liabilities of these distributors are designated as held for sale in our consolidated balance sheets. Further information regarding net assets held for sale can be found in Note 3, and information regarding the calculation of the estimated fair values of the acquired assets can be found in Note 8.


Note 7: 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. The interest rate swaps related to our long-term debt due in 2020 meet the criteria for using the short-cut method for a fair value hedge based on the structure of the hedging relationship. As such, the changes in the fair value of the derivative and the related long-term debt are equal. The short-cut method is not being used for the interest rate swaps related to our long-term debt due in 2014. When the change in the fair value of these 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 8.

Information regarding interest rate swaps as of June 30, 2013 was as follows:
 
 
Notional amount
 
Fair value of interest rate swaps
 
Increase (decrease) in debt due to fair value adjustment
 
Balance sheet caption including interest rate swaps
Fair value hedge related to long-term debt due in 2014
 
$
198,000

 
$
2,935

 
$
2,364

 
Other non-current assets
Fair value hedge related to long-term debt due in 2020
 
200,000

 
(14,447
)
 
(14,447
)
 
Other non-current liabilities
Total fair value hedges
 
$
398,000

 
$
(11,512
)

$
(12,083
)
 
 


12

Information regarding interest rate swaps as of December 31, 2012 was as follows:
 
 
Notional amount
 
Fair value of interest rate swaps
 
Increase (decrease) in debt due to fair value adjustment
 
Balance sheet caption including interest rate swaps
Fair value hedge related to long-term debt due in 2014
 
$
198,000

 
$
3,858

 
$
3,370

 
Other non-current assets
Fair value hedge related to long-term debt due in 2020
 
200,000

 
(4,189
)
 
(4,189
)
 
Other non-current liabilities
Total fair value hedges
 
$
398,000

 
$
(331
)
 
$
(819
)
 
 


Note 8: Fair value measurements

2013 acquisitions – For all acquisitions, 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 2013 were comprised primarily of customer relationships and internal-use software associated with the acquisition of VerticalResponse, Inc. (Note 6). The valuation of these intangibles is expected to be finalized during the third quarter of 2013. The fair value of the customer relationship was estimated using the multi-period excess earnings method. Assumptions used in this calculation included same-customer revenue growth rates and estimated customer retention rates based on the acquiree's historical information. The preliminary calculated fair value of the customer lists was $7,200. 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. As the software was recently developed, the estimated cost to reproduce was based on the actual time and labor rates incurred by the acquiree. The preliminary calculated fair value of the internal-use software was $3,913.

In addition to the VerticalResponse acquisition, we also acquired the operations of small business distributors during 2013 for aggregate cash payments of $7,781. The assets acquired consisted primarily of the distributors' customer lists which we anticipate selling to our Safeguard® distributors. The fair value of the customer lists is based on the estimated future cash flows expected to be generated via the acquired customer lists. These assets are held for sale and thus, are not being amortized. Further information regarding net assets held for sale can be found in Note 3.

Recurring fair value measurements – Cash and cash equivalents as of June 30, 2013 and December 31, 2012 included available-for-sale marketable securities (Note 3). These securities consist of investments in money market funds which are traded in active markets. As such, the fair value of the securities 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 six months ended June 30, 2013 or 2012.

Funds held for customers included available-for-sale marketable securities (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 on the Canadian mutual fund investment, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income and were not significant for the quarters or six months ended June 30, 2013 or 2012.

Other current assets included available-for-sale marketable securities (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 six months ended June 30, 2013 or 2012.


13

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 method. During the quarters and six months ended June 30, 2013 and 2012, net realized gains were not significant. We recognized net unrealized gains of $145 during the six months ended June 30, 2013. Net unrealized gains recognized during the six months ended June 30, 2012 were not significant.

The fair value of interest rate swaps (Note 7) 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. The interest rate swaps related to our long-term debt due in 2020 meet the criteria for using the short-cut method for a fair value hedge based on the structure of the hedging relationship. As such, the changes in the fair value of the derivative and related long-term debt are equal. The short-cut method is not being used for our other interest rate swaps. 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 June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
(Loss) gain from derivatives
 
$
(8,536
)
 
$
322

 
$
(11,181
)
 
$
563

Gain (loss) from change in fair value of hedged debt
 
8,580

 
(288
)
 
11,264

 
(769
)
Net decrease (increase) in interest expense
 
$
44

 
$
34

 
$
83


$
(206
)

Information regarding recurring fair value measurements completed during each period was as follows:
 
 
 
 
Fair value measurements using
 
 
Fair value as of
 June 30, 2013
 
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)
 
$
13,501

 
$
13,501

 
$
—

 
$
—

Available-for-sale marketable securities (funds held for customers)
 
14,796

 
—

 
14,796

 
—

Available-for-sale marketable securities (other current assets)
 
2,054

 
—

 
2,054

 
—

Long-term investment in mutual funds
 
2,222

 
2,222

 
—

 
—

Derivative assets
 
2,935

 
—

 
2,935

 
—

Derivative liabilities
 
(14,447
)
 
—

 
(14,447
)
 
—


14

 
 
 
 
Fair value measurements using
 
 
Fair value as of
December 31, 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)
 
$
9,350

 
$
9,350

 
$
—

 
$
—

Available-for-sale marketable securities (funds held for customers)
 
15,800

 
—

 
15,800

 
—

Available-for-sale marketable securities (other current assets)
 
2,162

 
—

 
2,162

 
—

Long-term investment in mutual funds
 
2,196

 
2,196

 
—

 
—

Derivative assets
 
3,858

 
—

 
3,858

 
—

Derivative liabilities
 
(4,189
)
 
—

 
(4,189
)
 
—


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, excluding cash equivalents, 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, we have 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 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 – For those notes traded in an active market, 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, 2012 our long-term debt issued in November 2012 was not traded in an active market. As such, the fair value as of that date was determined by means of a pricing model utilizing readily observable market interest rates. As these notes began trading in an active market during the second quarter of 2013, the fair value of these notes was reported as a Level 1 fair value measurement as of June 30, 2013. 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
 
 
June 30, 2013
 
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 (excluding cash equivalents)
 
$
39,329

 
$
39,329

 
$
39,329

 
$
—

 
$
—

Cash (funds held for customers)
 
23,844

 
23,844

 
23,844

 
—

 
—

Loans and notes receivable from distributors
 
19,408

 
18,442

 
—

 
—

 
18,442

Long-term debt(1)
 
641,346

 
681,699

 
681,699

 
—

 
—


(1) Amounts exclude capital lease obligations.

15

 
 
 
 
Fair value measurements using
 
 
December 31, 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 (excluding cash equivalents)
 
$
36,085

 
$
36,085

 
$
36,085

 
$
—

 
$
—

Cash (funds held for customers)
 
27,340

 
27,340

 
27,340

 
—

 
—

Loans and notes receivable from distributors
 
19,843

 
19,170

 
—

 
—

 
19,170

Long-term debt
 
652,581

 
676,859

 
481,048

 
195,811

 
—



Note 9: Restructuring charges

Net restructuring charges for each period consisted of the following components:
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Severance accruals
 
$
884

 
$
1,044

 
$
1,874

 
$
3,036

Severance reversals
 
(179
)
 
(443
)
 
(478
)
 
(908
)
Operating lease obligations
 
2

 
—

 
2

 
—

Operating lease reversals
 
—

 
—

 
(157
)
 
—

Net restructuring accruals
 
707

 
601


1,241


2,128

Other costs
 
344

 
1,320

 
1,259

 
1,670

Net restructuring charges
 
$
1,051

 
$
1,921


$
2,500


$
3,798


The net restructuring charges are reflected in the consolidated statements of comprehensive income as follows:
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Total cost of revenue
 
$
127

 
$
(77
)
 
$
205

 
$
1,162

Operating expenses
 
924

 
1,998

 
2,295

 
2,636

Net restructuring charges
 
$
1,051

 
$
1,921


$
2,500


$
3,798


2013 restructuring charges – During the quarter and six months ended June 30, 2013, the net restructuring accruals included severance charges related to employee reductions across functional areas as we continue to reduce costs. The restructuring accruals included severance benefits for approximately 30 employees for the quarter ended June 30, 2013 and severance benefits for approximately 50 employees for the six months ended June 30, 2013. These charges were reduced by the reversal of restructuring accruals recorded in previous years, as fewer employees received severance benefits than originally estimated and we entered into a sub-lease agreement related to an operating lease obligation. Other restructuring costs, which were expensed as incurred, included items such as employee and equipment moves, training and travel related to our restructuring activities.

2012 restructuring charges – During the quarter ended June 30, 2012, the net restructuring accruals included severance charges related to employee reductions across functional areas as we continued to reduce costs, including the closing of two customer call centers during the third quarter of 2012 and the closing of a printing facility in the fourth quarter of 2012. Restructuring charges for the six months ended June 30, 2012 also included severance benefits related to the closing of an additional printing facility during the fourth quarter of 2012. The restructuring accruals included severance benefits for approximately 50 employees for the quarter ended June 30, 2012 and severance benefits for approximately 195 employees for the six months ended June 30, 2012. 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

16

expensed as incurred, included items such as employee and equipment moves, training and travel related to our restructuring activities.

Restructuring accruals of $2,239 as of June 30, 2013 are reflected in the consolidated balance sheet as accrued liabilities of $2,213 and other non-current liabilities of $26. Restructuring accruals of $4,650 as of December 31, 2012 are reflected in the consolidated balance sheet as accrued liabilities of $4,507 and other non-current liabilities of $143. The majority of the employee reductions are expected to be completed by the first quarter of 2014, and we expect most of the related severance payments to be paid by mid-2014, utilizing cash from operations. The remaining payments due under operating lease obligations will be paid through February 2015. As of June 30, 2013, approximately 45 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 2012 Form 10-K.

Accruals for our restructuring initiatives, summarized by year, were as follows:
 
 
2010
initiatives
 
2011
initiatives
 
2012
 initiatives
 
2013
 initiatives
 
Total
Balance, December 31, 2012
 
$
85

 
$
21

 
$
4,544

 
$
—

 
$
4,650

Restructuring charges
 
—

 
49

 
114

 
1,713

 
1,876

Restructuring reversals
 
—

 
(3
)
 
(601
)
 
(31
)
 
(635
)
Payments
 
(85
)
 
(67
)
 
(2,904
)
 
(596
)
 
(3,652
)
Balance, June 30, 2013
 
$
—

 
$
—


$
1,153


$
1,086

 
$
2,239

Cumulative amounts:
 
 

 
 

 
 

 
 
 
 

Restructuring charges
 
$
9,730

 
$
9,124

 
$
7,822

 
$
1,713

 
$
28,389

Restructuring reversals
 
(1,548
)
 
(1,719
)
 
(1,130
)
 
(31
)
 
(4,428
)
Payments
 
(8,182
)
 
(7,405
)
 
(5,539
)
 
(596
)
 
(21,722
)
Balance, June 30, 2013
 
$
—

 
$
—


$
1,153


$
1,086

 
$
2,239


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, 2012
 
$
643

 
$
1,090

 
$
44

 
$
2,472

 
$
251

 
$
150

 
$
4,650

Restructuring charges
 
486

 
647

 
90

 
651

 
2

 
—

 
1,876

Restructuring reversals
 
(96
)
 
(116
)
 
(2
)
 
(264
)
 
(157
)
 
—

 
(635
)
Payments
 
(811
)
 
(980
)
 
(13
)
 
(1,641
)
 
(57
)
 
(150
)
 
(3,652
)
Balance, June 30, 2013
 
$
222

 
$
641


$
119


$
1,218


$
39


$
—


$
2,239

Cumulative amounts(1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restructuring charges
 
$
6,647

 
$
6,737

 
$
3,423

 
$
10,623

 
$
332

 
$
627

 
$
28,389

Restructuring reversals
 
(1,275
)
 
(901
)
 
(214
)
 
(1,881
)
 
(157
)
 
—

 
(4,428
)
Inter-segment transfer
 
309

 
50

 
(38
)
 
(321
)
 
—

 
—

 
—

Payments
 
(5,459
)
 
(5,245
)
 
(3,052
)
 
(7,203
)
 
(136
)
 
(627
)
 
(21,722
)
Balance, June 30, 2013
 
$
222

 
$
641


$
119


$
1,218


$
39


$
—


$
2,239


(1) Includes accruals related to our cost reduction initiatives for 2010 through 2013.


Note 10: 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 2012 Form 10-K.

17


Postretirement benefit (credit) expense for each period consisted of the following components:
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Interest cost
 
$
913

 
$
1,515

 
$
1,826

 
$
3,030

Expected return on plan assets
 
(2,008
)
 
(1,950
)
 
(4,015
)
 
(3,901
)
Amortization of prior service credit
 
(355
)
 
(764
)
 
(711
)
 
(1,528
)
Amortization of net actuarial losses
 
1,110

 
1,469

 
2,220

 
2,939

Net periodic benefit (credit) expense
 
$
(340
)
 
$
270

 
$
(680
)
 
$
540



Note 11: Debt

Debt outstanding was comprised of the following:
 
 
June 30,
2013
 
December 31,
2012
5.125% senior, unsecured notes due October 1, 2014, net of discount(1)
 
$
255,793

 
$
256,770

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

 
200,000

6.0% senior notes due November 15, 2020(2)
 
185,553

 
195,811

Long-term portion of capital lease obligations
 
821

 
—

Long-term portion of debt
 
642,167

 
652,581

Capital lease obligations due within one year
 
277

 
—

Total debt
 
$
642,444

 
$
652,581


(1) Includes increase due to cumulative change in fair value of hedged debt of $2,364 as of June 30, 2013 and $3,370 as of December 31, 2012.
(2) Includes decrease due to cumulative change in fair value of hedged debt of $14,447 as of June 30, 2013 and $4,189 as of December 31, 2012.

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. If our ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense, as defined in such instruments, falls below two to one, there would be additional limitations on our ability to issue additional debt. The notes due in 2020 and 2019 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. Absent certain defined events of default under our debt instruments, and as long as our ratio of EBITDA 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, 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.

In November 2012, we issued $200,000 of 6.0% senior notes maturing on November 15, 2020. 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 April 3, 2013. Interest payments are due each May and November. 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 15. At any time prior to November 15, 2015, 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 106% of the principal amount of the notes, together with accrued and unpaid interest. At any time prior to November 15, 2016, 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 November 15, 2016, we may redeem some or all of the notes at prices ranging from 100% to 103% 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 $196,368. These proceeds were used to retire our senior notes which were due in June 2015. The fair

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value of the notes issued in November 2012 was $210,000 as of June 30, 2013, based on quoted prices for identical liabilities when traded as assets. As discussed in Note 7, we have entered into interest rate swaps to hedge these notes.

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 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 15. 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 $214,100 as of June 30, 2013, 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 2011, we retired $10,000 of these notes and during 2009, we retired $11,500 of these notes. As of June 30, 2013, the fair value of the $253,500 remaining notes outstanding was $257,599 based on quoted prices for identical liabilities when traded as assets. As discussed in Note 7, we have entered into interest rate swaps to hedge a portion of these notes.

As of June 30, 2013, we had capital lease obligations of $1,098 related to information technology hardware. The lease obligations will be paid through May 2017. The related assets are included in property, plant and equipment on the consolidated balance sheet as of June 30, 2013. As the assets have not yet been placed into service, no depreciation expense was recorded for these assets during the six months ended June 30, 2013.

As of June 30, 2013, we had a $200,000 credit facility, which expires in February 2017. Our commitment fee ranges from 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. No amounts were outstanding under our credit facility during the six months ended June 30, 2013 or during 2012. As of June 30, 2013, amounts were available for borrowing under our credit facility as follows:
 
 
Total
available
Credit facility commitment
 
$
200,000

Outstanding letters of credit(1)
 
(7,965
)
Net available for borrowing as of June 30, 2013
 
$
192,035

(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.

Note 12:  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

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including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we have no reason to believe that any possible 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 $8,426 as of June 30, 2013 and $8,446 as of December 31, 2012, 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 $750 for the six months ended June 30, 2013 and $546 for the six months ended June 30, 2012.

As of June 30, 2013, $4,640 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 $8,271 had been paid through June 30, 2013. 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 June 30, 2013. We do not anticipate significant net cash outlays for environmental matters in 2013. 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 $4,177 as of June 30, 2013 and $4,471 as of December 31, 2012, is accounted for on a discounted basis. The difference between the discounted and undiscounted workers' compensation liability was $24 as of June 30, 2013 and $20 as of December 31, 2012. 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 $3,135 as of June 30, 2013 and $3,872 as of December 31, 2012. The difference between the discounted and undiscounted medical and dental liability was $146 as of June 30, 2013 and December 31, 2012.

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 13: Shareholders’ equity

Shares outstanding – In April 2013, we issued 193 shares to the previous owners of Banker's Dashboard, LLC, a company we acquired in April 2011. The purchase agreement for Banker's Dashboard required the accelerated issuance of these shares two years after the closing of the acquisition based on the retention of certain Banker's Dashboard employees. The fair value of the shares was recorded as a component of additional paid-in capital at the time of acquisition.

Share repurchases – We have an outstanding authorization from our board of directors to purchase up to