2013.9.30 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, 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 October 22, 2013 was 50,499,763.

1

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

 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
100,040

 
$
45,435

Trade accounts receivable (net of allowances for uncollectible accounts of $3,988 and $3,912, respectively)
 
80,218

 
70,387

Inventories and supplies
 
26,825

 
23,291

Deferred income taxes
 
5,247

 
7,687

Funds held for customers
 
30,759

 
43,140

Other current assets
 
34,844

 
29,803

Total current assets
 
277,933

 
219,743

Deferred income taxes
 
1,739

 
1,662

Long-term investments (including $2,224 and $2,196 of investments at fair value, respectively)
 
44,391

 
46,898

Property, plant and equipment (net of accumulated depreciation of $359,788 and $358,580, respectively)
 
101,627

 
104,189

Assets held for sale
 
25,224

 
970

Intangibles (net of accumulated amortization of $368,934 and $472,078, respectively)
 
155,179

 
150,717

Goodwill
 
809,754

 
789,636

Other non-current assets
 
93,839

 
98,625

Total assets
 
$
1,509,686

 
$
1,412,440

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
68,875

 
$
65,107

Accrued liabilities
 
148,280

 
155,003

Long-term debt due within one year
 
499

 
—

Total current liabilities
 
217,654

 
220,110

Long-term debt
 
643,069

 
652,581

Deferred income taxes
 
78,966

 
75,147

Other non-current liabilities
 
49,671

 
31,667

Commitments and contingencies (Notes 11 and 12)
 


 


Shareholders’ equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: 2013 – 50,482; 2012 – 50,614)
 
50,482

 
50,614

Additional paid-in capital
 
32,573

 
47,968

Retained earnings
 
477,903

 
375,000

Accumulated other comprehensive loss (Note 5)
 
(40,632
)
 
(40,647
)
Total shareholders’ equity
 
520,326

 
432,935

Total liabilities and shareholders’ equity
 
$
1,509,686

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Product revenue
 
$
342,187

 
$
332,760

 
$
1,014,853

 
$
1,006,718

Service revenue
 
55,893

 
45,578

 
152,214

 
120,616

Total revenue
 
398,080

 
378,338

 
1,167,067

 
1,127,334

Cost of products sold
 
(116,721
)
 
(109,938
)
 
(340,442
)
 
(331,311
)
Cost of services
 
(25,502
)
 
(21,752
)
 
(68,625
)
 
(55,461
)
Total cost of revenue
 
(142,223
)
 
(131,690
)
 
(409,067
)
 
(386,772
)
Gross profit
 
255,857

 
246,648

 
758,000

 
740,562

Selling, general and administrative expense
 
(173,359
)
 
(171,237
)
 
(513,013
)
 
(510,786
)
Net restructuring charges
 
(2,780
)
 
(2,741
)
 
(5,075
)
 
(5,377
)
Net loss on sale of facility
 
—

 
—

 
—

 
(128
)
Operating income
 
79,718


72,670

 
239,912

 
224,271

Interest expense
 
(9,662
)
 
(11,890
)
 
(28,704
)
 
(34,944
)
Other income
 
557

 
185

 
1,048

 
541

Income before income taxes
 
70,613

 
60,965

 
212,256

 
189,868

Income tax provision
 
(23,710
)
 
(19,462
)
 
(71,326
)
 
(62,023
)
Net income
 
$
46,903

 
$
41,503

 
$
140,930

 
$
127,845

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
48,907

 
$
43,570

 
$
140,945

 
$
131,364

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.93

 
$
0.81

 
$
2.77

 
$
2.50

Diluted earnings per share
 
0.92

 
0.81

 
2.75

 
2.49

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
 
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
 
—

 
—

 
—

 
140,930

 
—

 
140,930

Cash dividends
 
—

 
—

 
—

 
(38,027
)
 
—

 
(38,027
)
Common shares issued
 
860

 
860

 
16,420

 
—

 
—

 
17,280

Tax impact of share-based awards
 
—

 
—

 
1,062

 
—

 
—

 
1,062

Common shares repurchased
 
(861
)
 
(861
)
 
(32,937
)
 
—

 
—

 
(33,798
)
Other common shares retired
 
(131
)
 
(131
)
 
(5,072
)
 
—

 
—

 
(5,203
)
Fair value of share-based compensation
 
—

 
—

 
5,132

 
—

 
—

 
5,132

Other comprehensive income (Note 5)
 
—

 
—

 
—

 
—

 
15

 
15

Balance, September 30, 2013
 
50,482

 
$
50,482

 
$
32,573

 
$
477,903

 
$
(40,632
)
 
$
520,326



See Condensed Notes to Unaudited Consolidated Financial Statements


4

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net income
 
$
140,930

 
$
127,845

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

 
 

Depreciation
 
13,443

 
15,062

Amortization of intangibles
 
34,878

 
34,610

Amortization of contract acquisition costs
 
12,633

 
12,806

Deferred income taxes
 
1,563

 
4,887

Employee share-based compensation expense
 
5,554

 
5,310

Other non-cash items, net
 
7,979

 
6,588

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

 
 

Trade accounts receivable
 
(7,492
)
 
1,326

Inventories and supplies
 
(1,541
)
 
(1,976
)
Other current assets
 
(527
)
 
(5,533
)
Non-current assets
 
(5,731
)
 
(30
)
Accounts payable
 
(2,043
)
 
2,195

Contract acquisition payments
 
(10,551
)
 
(15,038
)
Other accrued and non-current liabilities
 
(5,122
)
 
(10,897
)
Net cash provided by operating activities
 
183,973

 
177,155

Cash flows from investing activities:
 
 

 
 

Purchases of capital assets
 
(26,786
)
 
(25,562
)
Payments for acquisitions, net of cash acquired
 
(48,114
)
 
(32,632
)
Loans to distributors
 
(778
)
 
(3,237
)
Proceeds from company-owned life insurance policies
 
4,599

 
—

Other
 
2,250

 
3,538

Net cash used by investing activities
 
(68,829
)
 
(57,893
)
Cash flows from financing activities:
 
 

 
 

Payments on long-term debt
 
(1,456
)
 
—

Payments for debt issue costs
 
(236
)
 
(1,164
)
Change in book overdrafts
 
(270
)
 
(2,627
)
Proceeds from issuing shares under employee plans
 
12,881

 
9,610

Excess tax benefit from share-based employee awards
 
1,582

 
1,120

Payments for common shares repurchased
 
(33,798
)
 
(11,999
)
Cash dividends paid to shareholders
 
(38,027
)
 
(38,131
)
Net cash used by financing activities
 
(59,324
)
 
(43,191
)
 
 
 
 
 
Effect of exchange rate change on cash
 
(1,215
)
 
879

 
 
 
 
 
Net change in cash and cash equivalents
 
54,605

 
76,950

Cash and cash equivalents, beginning of year
 
45,435

 
28,687

Cash and cash equivalents, end of period
 
$
100,040

 
$
105,637


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, 2013, the consolidated statements of comprehensive income for the quarters and nine months ended September 30, 2013 and 2012, the consolidated statement of shareholders’ equity for the nine months ended September 30, 2013, and the consolidated statements of cash flows for the nine months ended September 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 completed the annual impairment analysis of our indefinite-lived trade name during the quarter ended September 30, 2013. We elected to complete a quantitative assessment of the asset, the results of which are presented in Note 8: Fair value measurements.

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 becomes 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:
 
 
September 30,
2013
 
December 31,
2012
Raw materials
 
$
5,134

 
$
4,818

Semi-finished goods
 
8,700

 
8,390

Finished goods
 
9,811

 
7,005

Supplies, primarily production
 
3,180

 
3,078

Inventories and supplies
 
$
26,825

 
$
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:
 
 
September 30, 2013
 
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Canadian and provincial government securities
 
$
10,159

 
$
—

 
$
(356
)
 
$
9,803

Canadian guaranteed investment certificate
 
5,335

 
—

 
—

 
5,335

Available-for-sale securities (funds held for customers)(1)
 
15,494

 
—

 
(356
)
 
15,138

Money market securities (cash equivalents)
 
46,900

 
—

 
—

 
46,900

Canadian money market fund (other current assets)
 
2,099

 
—

 
—

 
2,099

Total available-for-sale securities
 
$
64,493

 
$
—


$
(356
)

$
64,137


(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2013, also included cash of $15,621.
 
 
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 September 30, 2013 were as follows:
 
 
Fair value
Due in one year or less
 
$
54,355

Due in two to five years
 
3,695

Due in six to ten years
 
6,087

Total available-for-sale securities
 
$
64,137


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 2013 and the fourth quarter of 2012. 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:
 
 
September 30,
2013
 
December 31,
2012
 
Balance sheet caption
Current deferred income tax assets
 
$
1,195

 
$
—

 
Other current assets
Other current assets
 
684

 
—

 
Other current assets
Intangibles
 
24,077

 
970

 
Assets held for sale
Other non-current assets
 
1,147

 
—

 
Assets held for sale
Accrued liabilities
 
(1,015
)
 
—

 
Accrued liabilities
Non-current deferred income tax liabilities
 
(7,609
)
 
—

 
Other non-current liabilities
Net assets held for sale
 
$
18,479

 
$
970

 
 

Intangibles – Intangibles were comprised of the following:
 
 
September 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
 
330,779

 
(266,805
)
 
63,974

 
438,988

 
(376,111
)
 
62,877

Customer lists/relationships
 
67,984

 
(32,717
)
 
35,267

 
58,735

 
(30,287
)
 
28,448

Trade names
 
67,861

 
(32,562
)
 
35,299

 
68,561

 
(30,151
)
 
38,410

Distributor contracts
 
30,900

 
(30,900
)
 
—

 
30,900

 
(29,999
)
 
901

Other
 
7,489

 
(5,950
)
 
1,539

 
6,511

 
(5,530
)
 
981

Amortizable intangibles
 
505,013

 
(368,934
)

136,079


603,695


(472,078
)

131,617

Intangibles
 
$
524,113

 
$
(368,934
)

$
155,179


$
622,795


$
(472,078
)

$
150,717


Amortization of intangibles was $11,880 for the quarter ended September 30, 2013 and $11,306 for the quarter ended September 30, 2012. Amortization of intangibles was $34,878 for the nine months ended September 30, 2013 and $34,610 for the nine months ended September 30, 2012. Based on the intangibles in service as of September 30, 2013, estimated future amortization expense is as follows:
 
 
Estimated
amortization
expense
Remainder of 2013
 
$
11,472

2014
 
38,186

2015
 
26,296

2016
 
14,691

2017
 
8,926



8

Goodwill – Changes in goodwill during the nine months ended September 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)
 
18,735

 
—

 
—

 
18,735

Acquisition of Acton Marketing, LLC (Note 6)
 
—

 
1,459

 
—

 
1,459

Currency translation adjustment
 
(76
)
 
—

 
—

 
(76
)
Balance, September 30, 2013:
 
 

 
 

 
 

 
 

Goodwill, gross
 
652,611

 
28,637

 
148,506

 
829,754

Accumulated impairment charges
 
(20,000
)
 
—

 
—

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
$
632,611

 
$
28,637


$
148,506


$
809,754


Other non-current assets – Other non-current assets were comprised of the following:
 
 
September 30,
2013
 
December 31,
2012
Contract acquisition costs
 
$
38,355

 
$
43,036

Loans and notes receivable from distributors
 
16,560

 
18,162

Postretirement benefit plan asset
 
11,853

 
4,993

Deferred advertising costs
 
9,788

 
13,783

Other
 
17,283

 
18,651

Other non-current assets
 
$
93,839

 
$
98,625


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

 
$
55,076

Additions(1)
 
8,333

 
5,006

Amortization
 
(12,633
)
 
(12,806
)
Other
 
(381
)
 
(402
)
Balance, end of period
 
$
38,355

 
$
46,874

 
(1) Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $10,551 for the nine months ended September 30, 2013 and $15,038 for the nine months ended September 30, 2012.


9

Accrued liabilities – Accrued liabilities were comprised of the following:
 
 
September 30,
2013
 
December 31,
2012
Funds held for customers
 
$
30,172

 
$
42,460

Employee profit sharing/cash bonus
 
27,522

 
40,670

Customer rebates
 
22,250

 
22,164

Deferred revenue
 
14,983

 
7,825

Interest
 
11,616

 
8,465

Wages, including vacation
 
10,864

 
7,364

Contract acquisition costs due within one year
 
3,832

 
3,820

Restructuring due within one year (Note 9)
 
3,792

 
4,507

Other
 
23,249

 
17,728

Accrued liabilities
 
$
148,280

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Earnings per share – basic:
 
 
 
 
 
 
 
 
Net income
 
$
46,903

 
$
41,503

 
$
140,930

 
$
127,845

Income allocated to participating securities
 
(160
)
 
(289
)
 
(689
)
 
(865
)
Income available to common shareholders
 
$
46,743

 
$
41,214


$
140,241

 
$
126,980

Weighted-average shares outstanding
 
50,443

 
50,680

 
50,579

 
50,779

Earnings per share – basic
 
$
0.93

 
$
0.81

 
$
2.77

 
$
2.50

 
 
 
 
 
 
 
 
 
Earnings per share – diluted:
 
 

 
 

 
 
 
 
Net income
 
$
46,903

 
$
41,503

 
$
140,930

 
$
127,845

Income allocated to participating securities
 
(159
)
 
(287
)
 
(684
)
 
(861
)
Re-measurement of share-based awards classified as liabilities
 
133

 
67

 
158

 
102

Income available to common shareholders
 
$
46,877

 
$
41,283


$
140,404

 
$
127,086

Weighted-average shares outstanding
 
50,443

 
50,680

 
50,579

 
50,779

Dilutive impact of potential common shares
 
451

 
349

 
450

 
299

Weighted-average shares and potential common shares outstanding
 
50,894

 
51,029


51,029

 
51,078

Earnings per share – diluted
 
$
0.92

 
$
0.81

 
$
2.75

 
$
2.49

 
 
 
 
 
 
 
 
 
Antidilutive options excluded from calculation
 
440

 
1,118

 
440

 
1,118




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
 
—

 
—

 
(182
)
 
(2,162
)
 
(2,344
)
Amounts reclassified from accumulated other comprehensive loss
 
1,579

 
780

 
—

 
—

 
2,359

Net current-period other comprehensive income (loss)
 
1,579

 
780

 
(182
)
 
(2,162
)
 
15

Balance, September 30, 2013
 
$
(43,724
)
 
$
(1,041
)
 
$
(274
)
 
$
4,407

 
$
(40,632
)

(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 $65.

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
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2013
 
2012
 
2013
 
2012
 
 
Amortization of postretirement benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
355

 
$
764

 
$
1,066

 
$
2,291

 
(1) 
Net actuarial loss
 
(1,110
)
 
(1,469
)
 
(3,330
)
 
(4,409
)
 
(1) 
Total amortization
 
(755
)
 
(705
)
 
(2,264
)
 
(2,118
)
 
(1) 
Tax benefit
 
229

 
264

 
685

 
799

 
(1) 
Amortization of postretirement benefit plan items, net of tax
 
(526
)
 
(441
)
 
(1,579
)
 
(1,319
)
 
(1) 
 
 
 
 
 
 
 
 
 
 
 
Amortization of loss on interest rate locks
 
(418
)
 
(446
)
 
(1,255
)
 
(1,341
)
 
Interest expense
Tax benefit
 
158

 
168

 
475

 
506

 
Income tax provision
Amortization of loss on interest rate locks, net of tax
 
(260
)
 
(278
)
 
(780
)
 
(835
)
 
Net income
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications, net of tax
 
$
(786
)
 
$
(719
)
 
$
(2,359
)
 
$
(2,154
)
 
 

(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 August 2013, we acquired substantially all of the assets of Acton Marketing, LLC (Acton) in a cash transaction for $4,095, net of cash acquired. We funded the acquisition with cash on hand. Acton is a provider of direct marketing services for financial institutions. The allocation of the purchase price based upon the estimated fair value of the assets acquired and liabilities assumed resulted in tax-deductible goodwill of $1,459. The acquisition resulted in goodwill as we expect to accelerate revenue growth in marketing solutions and other services by combining the Acton business with our existing marketing solutions, bringing the best of these collective programs to both the Deluxe and Acton customer bases. 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 nine months ended September 30, 2013. The results of operations of this business from its acquisition date are included in our Financial Services segment. Acquired intangible assets consisted of customer relationships with an aggregate value of $3,600. These assets have a weighted-average useful life of 5 years and are being amortized in relation to the expected cash flows. Further information regarding the calculation of the estimated fair values of these assets can be found in Note 8.

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 allocation of the purchase price based upon the estimated fair value of the assets acquired and liabilities assumed resulted in goodwill of $18,735. This amount decreased $2,190 from June 30, 2013, as we finalized the valuation of intangibles and deferred income taxes during the quarter ended September 30, 2013. 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 statement of comprehensive income for the nine months ended September 30, 2013. The results of operations of this business from its acquisition date are included in our Small Business Services segment.

Intangible assets acquired in the VerticalResponse acquisition consisted primarily of customer relationships with an aggregate value of $9,400 and a weighted-average useful life of 9 years, as well as internal-use software with an aggregate value of $4,200 and a 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 $16,720. The assets acquired consisted primarily of customer lists which we are actively marketing and 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.


12

Information regarding interest rate swaps as of September 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

 
$
2,616

 
$
2,058

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

 
(13,729
)
 
(13,729
)
 
Other non-current liabilities
Total fair value hedges
 
$
398,000

 
$
(11,113
)

$
(11,671
)
 
 

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 annual impairment analysis – We evaluate the carrying value of goodwill and our indefinite-lived trade name as of July 31 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, 2013, we completed our annual impairment analyses.

In completing our 2013 annual goodwill impairment analysis, we elected to perform a qualitative assessment for all of our 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 most recent 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 2013 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.

In completing the 2013 annual impairment analysis of our indefinite-lived trade name, we elected to perform a quantitative assessment. The estimate of the fair value of this asset is based on a relief from royalty method which calculates the cost savings associated with owning rather than licensing the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted. Should the estimated fair value be less than the carrying value of the asset, an impairment loss would be recognized for this difference. The impairment analysis completed during the quarter ended September 30, 2013 indicated that the calculated fair value of the indefinite-lived trade name exceeded its carrying value of $19,100 by approximately $14,000. Because the estimated fair value exceeded the carrying value, no impairment charge was recorded during the quarter ended September 30, 2013.

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 associated with the acquisitions of VerticalResponse, Inc. and Acton Marketing, LLC (Note 6) and internal-use software associated with the acquisition of VerticalResponse. The fair value of the customer relationships 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 acquirees' historical information. The aggregate calculated fair value of customer relationships acquired during 2013 was $13,000. The fair value of

13

the acquired 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 calculated fair value of the acquired internal-use software was $4,200.

In addition to the VerticalResponse and Acton acquisitions, we also acquired the operations of small business distributors during 2013 for aggregate cash payments of $16,720. 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 September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2013 or 2012.

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 nine months ended September 30, 2013 and 2012, net realized gains were not significant. We recognized net unrealized gains of $140 during the nine months ended September 30, 2013 and $120 during the nine months ended September 30, 2012.


14

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
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Gain (loss) from derivatives
 
$
399

 
$
(185
)
 
$
(10,782
)
 
$
378

(Loss) gain from change in fair value of hedged debt
 
(411
)
 
(344
)
 
10,852

 
(1,113
)
Net (increase) decrease in interest expense
 
$
(12
)
 
$
(529
)
 
$
70


$
(735
)

Information regarding recurring fair value measurements completed during each period was as follows:
 
 
 
 
Fair value measurements using
 
 
Fair value as of
 September 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)
 
$
46,900

 
$
46,900

 
$
—

 
$
—

Available-for-sale marketable securities (funds held for customers)
 
15,138

 
—

 
15,138

 
—

Available-for-sale marketable securities (other current assets)
 
2,099

 
—

 
2,099

 
—

Long-term investment in mutual funds
 
2,224

 
2,224

 
—

 
—

Derivative assets
 
2,616

 
—

 
2,616

 
—

Derivative liabilities
 
(13,729
)
 
—

 
(13,729
)
 
—

 
 
 
 
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
)
 
—


Our policy is to recognize transfers between fair value levels as of the end of the reporting period in which the transfer occurred. There were no transfers between fair value levels during the nine months ended September 30, 2013.

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.

15


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 interest rate based on published bond yields, adjusted 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 September 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
 
 
September 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)
 
$
53,140

 
$
53,140

 
$
53,140

 
$
—

 
$
—

Cash (funds held for customers)
 
15,621

 
15,621

 
15,621

 
—

 
—

Loans and notes receivable from distributors
 
18,497

 
17,558

 
—

 
—

 
17,558

Long-term debt(1)
 
641,772

 
680,755

 
680,755

 
—

 
—


(1) Amounts exclude capital lease obligations.
 
 
 
 
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

 
—




16

Note 9: Restructuring charges

Net restructuring charges for each period consisted of the following components:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Severance accruals
 
$
2,512

 
$
1,649

 
$
4,386

 
$
4,685

Severance reversals
 
(210
)
 
(489
)
 
(688
)
 
(1,397
)
Operating lease obligations
 
214

 
118

 
216

 
118

Operating lease reversals
 
—

 
—

 
(157
)
 
—

Net restructuring accruals
 
2,516

 
1,278


3,757


3,406

Other costs
 
563

 
1,656

 
1,822

 
3,326

Net restructuring charges
 
$
3,079

 
$
2,934


$
5,579


$
6,732


The net restructuring charges are reflected in the consolidated statements of comprehensive income as follows:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Total cost of revenue
 
$
299

 
$
193

 
$
504

 
$
1,355

Operating expenses
 
2,780

 
2,741

 
5,075

 
5,377

Net restructuring charges
 
$
3,079

 
$
2,934


$
5,579


$
6,732


2013 restructuring charges – During the quarter and nine months ended September 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 75 employees for the quarter ended September 30, 2013 and severance benefits for approximately 125 employees for the nine months ended September 30, 2013. 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.

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 continued 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 closing of two printing facilities in the fourth quarter of 2012. The restructuring accruals included severance benefits for approximately 80 employees for the quarter ended September 30, 2012 and severance benefits for approximately 275 employees for the nine months ended September 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 expensed as incurred, included items such as employee and equipment moves, training and travel related to our restructuring activities.

Restructuring accruals of $3,851 as of September 30, 2013 are reflected in the consolidated balance sheet as accrued liabilities of $3,792 and other non-current liabilities of $59. 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 September 30, 2013, approximately 80 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.


17

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

 
283

 
4,270

 
4,602

Restructuring reversals
 
—

 
(3
)
 
(729
)
 
(113
)
 
(845
)
Payments
 
(85
)
 
(67
)
 
(3,255
)
 
(1,149
)
 
(4,556
)
Balance, September 30, 2013
 
$
—

 
$
—


$
843


$
3,008

 
$
3,851

Cumulative amounts:
 
 

 
 

 
 

 
 
 
 

Restructuring charges
 
$
9,730

 
$
9,124

 
$
7,991

 
$
4,270

 
$
31,115

Restructuring reversals
 
(1,548
)
 
(1,719
)
 
(1,258
)
 
(113
)
 
(4,638
)
Payments
 
(8,182
)
 
(7,405
)
 
(5,890
)
 
(1,149
)
 
(22,626
)
Balance, September 30, 2013
 
$
—

 
$
—


$
843


$
3,008

 
$
3,851


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
 
1,189

 
2,118

 
103

 
976

 
164

 
52

 
4,602

Restructuring reversals
 
(112
)
 
(188
)
 
(2
)
 
(386
)
 
(157
)
 
—

 
(845
)
Payments
 
(944
)
 
(1,235
)
 
(47
)
 
(2,101
)
 
(79
)
 
(150
)
 
(4,556
)
Balance, September 30, 2013
 
$
776

 
$
1,785


$
98


$
961


$
179


$
52


$
3,851

Cumulative amounts(1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restructuring charges
 
$
7,350

 
$
8,208

 
$
3,436

 
$
10,948

 
$
494

 
$
679

 
$
31,115

Restructuring reversals
 
(1,291
)
 
(973
)
 
(214
)
 
(2,003
)
 
(157
)
 
—

 
(4,638
)
Inter-segment transfer
 
309

 
50

 
(38
)
 
(321
)
 
—

 
—

 
—

Payments
 
(5,592
)
 
(5,500
)
 
(3,086
)
 
(7,663
)
 
(158
)
 
(627
)
 
(22,626
)
Balance, September 30, 2013
 
$
776

 
$
1,785


$
98


$
961


$
179


$
52


$
3,851


(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.


18

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

 
$
1,515

 
$
2,739

 
$
4,546

Expected return on plan assets
 
(2,008
)
 
(1,950
)
 
(6,023
)
 
(5,852
)
Amortization of prior service credit
 
(355
)
 
(764
)
 
(1,066
)
 
(2,291
)
Amortization of net actuarial losses
 
1,110

 
1,469

 
3,330

 
4,409

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

 
$
(1,020
)
 
$
812



Note 11: Debt

Debt outstanding was comprised of the following:
 
 
September 30,
2013
 
December 31,
2012
5.125% senior, unsecured notes due October 1, 2014, net of discount(1)
 
$
255,501

 
$
256,770

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

 
200,000

6.0% senior notes due November 15, 2020(2)
 
186,271

 
195,811

Long-term portion of capital lease obligations
 
1,297

 
—

Long-term portion of debt
 
643,069

 
652,581

Capital lease obligations due within one year
 
499

 
—

Total debt
 
$
643,568

 
$
652,581


(1) Includes increase due to cumulative change in fair value of hedged debt of $2,058 as of September 30, 2013 and $3,370 as of December 31, 2012.
(2) Includes decrease due to cumulative change in fair value of hedged debt of $13,729 as of September 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 $196,340. These proceeds were used to retire our senior notes which were due in June 2015. The fair

19

value of the notes issued in November 2012 was $205,000 as of September 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 $213,750 as of September 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 September 30, 2013, the fair value of the $253,500 remaining notes outstanding was $262,005 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 September 30, 2013, we had capital lease obligations of $1,796 related to information technology hardware. The lease obligations will be paid through August 2017. The related assets are included in property, plant and equipment on the consolidated balance sheet as of September 30, 2013.

As of September 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 nine months ended September 30, 2013 or during 2012. As of September 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 September 30, 2013
 
$
192,035

(1) We use standby letters of credit primarily to collateralize certain obligati