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Article by DailyStocks_admin    (01-21-09 05:51 AM)

The Daily Magic Formula Stock for 01/21/2009 is Deluxe Corp. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Deluxe Corporation was incorporated under the laws of the State of Minnesota in 1920. From 1920 until 1988 our company was named Deluxe Check Printers, Incorporated. Our principal corporate offices are located at 3680 Victoria Street North, Shoreview, Minnesota 55126-2966. Our main telephone number is (651) 483-7111.
COMPANY OVERVIEW
Through our industry-leading businesses and brands, we help small businesses and financial institutions better manage, promote, and grow their businesses. We use direct marketing, a North American sales force, financial institution referrals, independent distributors and the internet to provide our customers a wide range of customized products and services: personalized printed items (checks, forms, business cards, stationery, greeting cards, labels, and retail packaging supplies), promotional products and merchandising materials, fraud prevention and marketing services and financial institution customer loyalty and retention programs. We also sell personalized checks, accessories, stored value gift cards and other services directly to consumers.
BUSINESS SEGMENTS
Our business segments include Small Business Services (SBS), Financial Services and Direct Checks. These businesses are generally organized by type of customer and reflect the way we manage the company. Additional information concerning our segments appears under the caption “Note 17: Business segment information” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Small Business Services
SBS operates under various brands including Deluxe, New England Business Service, Inc. (NEBS ® ), Safeguard ® , McBee ® , and RapidForms ® . This is our largest segment in terms of revenue and operating income, and we are concentrating on profitably growing this segment. SBS strives to be a leading resource to small businesses by providing personalized products and services that help them manage, promote and grow their businesses. SBS sells business checks, printed forms, promotional products, marketing materials and related services and products to more than six million small business customers in the United States and Canada. Of these customers, four million have ordered our products or services in the last 24 months. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. We also produce computer forms compatible with accounting software packages commonly used by small businesses. Our stationery, letterhead, envelopes and business cards are produced in a variety of formats and ink colors. Acquisitions in recent years have added capabilities in the custom, full-color digital and web-to-print spaces.
The majority of SBS products are distributed through more than one channel. Our primary channels are direct mail, in which promotional advertising is delivered by mail to small businesses, and financial institution referrals. These efforts are supplemented by the account development efforts of an outbound telemarketing group. We also sell through internet websites, a network of independent local dealers and Safeguard ® distributors, as well as our field sales organization that calls directly on small businesses. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located throughout the United States and Canada.

We are investing in several key enablers to achieve our strategies. These key enablers include improving our e-commerce capabilities, implementing an integrated platform for our various brands, improving our customer analytics and focusing on key vertical segments and improved merchandising. As we focus on these key enablers, we plan to streamline and update our brand structure, as well as transition our sales model to integrate field sales, marketing and customer call centers across the company. We believe this creates more focus on customers, positions us for growth and ensures we are leveraging processes, facilities and resources to our best advantage. We have also introduced a new www.Deluxe.com website which will serve as a platform for improved e-commerce capability, and we have identified significant opportunities to expand sales to our existing customers.
Additionally, the small business customer referrals we receive from our Deluxe Business Advantage SM program, which provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses, will continue to be an important part of our growth strategy. We have acquired companies which allow us to expand our business in the custom, full color, digital and web-to-print space with our small business customers and we divested a non-strategic product line. Recently, we introduced the Deluxe Marketing Store to offer fast, hassle-free solutions for small businesses. The Deluxe Marketing Store is a website that offers products and services to help small businesses reach their customers, build customer loyalty and promote their business. Small businesses can design and create logos, websites, mailings and other promotional items. The Deluxe Marketing Store is also a resource for small businesses as it contains useful information for growing and managing a small business.

Financial Services
Financial Services sells personal and business checks, check-related products and services, stored value gift cards and customer loyalty, retention and fraud monitoring/protection services to financial institutions. We also offer enhanced services such as customized reporting, file management and expedited account conversion support. Our relationships with specific financial institutions are generally formalized through supply contracts which usually range in duration from three to five years. We serve approximately 7,000 financial institutions in the United States. Consumers and small businesses typically submit their check order to their financial institution, which then forwards the order to us. We process the order and ship it directly to the consumer or small business. Financial Services produces a wide range of check designs, with many consumers preferring one of the dozens of licensed or cause-related designs we offer, including Disney ® , Warner Brothers ® , Garfield ® , Harley-Davidson ® , NASCAR ® , PGA TOUR, Thomas Kinkade ® , Susan G. Komen Breast Cancer Foundation and National Arbor Day Foundation ® . Our strategies within Financial Services are as follows:
• Continue to retain core check revenue streams and acquire new customers;

• Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients; and

• Continue to simplify our business model and optimize our cost and expense structure.
To achieve our strategies we are leveraging our customer acquisition and loyalty programs, our Deluxe Business Advantage program and enhanced small business customer service. The Deluxe Business Advantage program is designed to maximize financial institution business check programs by offering expanded personalized service to small businesses with a number of service level options.

In our efforts to expand beyond check-related products, we have introduced and continue to pilot several new services that focus on customer loyalty and retention. Two examples are the Welcome Home SM Tool Kit and the Deluxe Impressions SM products which enable financial institutions to forge strong bonds with new customers, thereby increasing customer loyalty and retention. We also offer Deluxe ID TheftBlock ® , a set of fraud monitoring and recovery services that provides assistance to consumers in detecting and recovering from identity theft. We also enhanced our stored value gift card program and launched DeluxeCalling SM , a service providing a first point of contact with new indirect loan consumers on behalf of our financial institution clients. This service leverages our core competency of call center expertise and provides incremental revenue and increased customer retention for our financial institution clients. Providing products and services that differentiate us from the competition is expected to help offset the decline in check usage and the pricing pressures we are experiencing in our check programs. As such, we are also focused on accelerating the pace at which we introduce new products and services.
In addition to these value-added services, we continue to offer our Knowledge Exchange TM Series for financial institution clients through which we host knowledge exchange expos, conduct web seminars and host special industry conference calls, as well as offer specialized publications. Through this program, financial institutions gain knowledge and exposure to thought leaders in areas that most impact their core strategies: client loyalty, small business and retail client strategy, cost management, customer experience and brand enhancement. Our Collaborative initiative, a key component of the Knowledge Exchange Series, enlists a team of leading financial institution executives who meet with us over a one year timeframe to develop and test specific and focused solutions on behalf of the financial services industry. These findings and new strategies or services are then disseminated for the benefit of all our clients. Our Small Business Collaborative initiative grew out of our Knowledge Exchange Series and explored and identified innovative ways for financial institution clients to improve relationships with small businesses. Our current Collaborative is exploring new ways in which financial institutions can improve the customer dispute resolution process in such a way that customer loyalty is enhanced. The findings from our current Collaborative will be disclosed at a conference in May 2008.
In addition to our initiatives to retain customers and introduce new products and services, we continue our efforts to simplify processes, eliminate complexity in this business and lower our cost structure. Our efforts are focused on using lean principles to streamline call center and check fulfillment activities, redesign services into standardized flexible models, eliminate multiple systems and work streams and strengthen our ability to quickly develop and bring new products and services to market.
Direct Checks
Direct Checks is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited ® , Designer ® Checks and Checks.com brand names. Through these brands, we sell personal and business checks and related products and services directly to consumers using direct response marketing and the internet. We estimate the direct-to-consumer personal check printing portion of the payments industry accounts for approximately 15% of all personal checks sold.
We use a variety of direct marketing techniques to acquire new customers, including newspaper inserts, in-package advertising, statement stuffers and co-op advertising. We also use e-commerce strategies to direct traffic to our websites, which include: www.checksunlimited.com, www.designerchecks.com and www.checks.com. Our direct-to-consumer focus has resulted in a total customer base of over 43 million customers, the most in the direct-to-consumer checks marketplace.
Direct Checks competes primarily on price and design. Pricing in the direct-to-consumer channel is generally lower than prices charged to consumers in the financial institution channel. We also compete on design by seeking to offer the most attractive selection of images with high consumer appeal, many of which are acquired or licensed from well-known artists and organizations such as Disney ® , Warner Brothers ® , Harley Davidson ® and Thomas Kinkade ® .
Our focus within Direct Checks is to enhance our share of the direct-to-consumer channel by continuing to implement the following strategies:

Beginning in 2007, we increased our advertising circulation of free-standing inserts under a new direct mail advertising contract which will remain in effect for the next several years. This has been an effective form of new customer acquisition in this channel. We also intend to increase the portion of our advertising expense designated for customer retention by utilizing reactivation and e-mail campaigns. We continue to develop improved call center processes, provide additional products to Direct Checks’ small business customers and explore other avenues to increase sales to existing customers. In late 2006, we introduced the EZShield TM product, a fraud protection service that provides reimbursement to consumers for forged signatures or endorsements and altered checks. We have also introduced holiday greeting cards and stored value gift cards on our websites.
We remain one of the largest providers of checks in the United States, both in terms of revenue and the number of checks produced. We provide check printing and related services for approximately 7,000 financial institution clients, as well as personalized checks, related accessories and fraud prevention services directly to millions of small businesses and consumers. Checks and related services account for the majority of the revenue in our Financial Services and Direct Checks segments and represent 48.9%, 46.1% and 44.8% of SBS total revenue in 2007, 2006 and 2005, respectively.
We are a leading provider of printed forms to small businesses, having provided products to more than six million customers over the past five years. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. We produce computer forms compatible with accounting software packages commonly used by small businesses. Our stationery, letterhead, envelopes and business cards are produced in a variety of formats and ink colors. These items are designed to provide small business owners with the customized documents necessary to efficiently manage their business. We also provide promotional printed items and digital printing services designed to fulfill selling and marketing needs of the small businesses we serve.
MANUFACTURING
We continue to focus on improving the customer experience by providing excellent service and quality, reducing costs and increasing productivity. We accomplish this by embedding lean operating principles in all processes, emphasizing a culture of continuous improvement. Under this approach, employees work together to produce products, rather than working on individual tasks in a linear fashion. Because employees assume more ownership of the end product, the results are improved productivity and lower costs. We continue to see the benefit of these operational efficiencies in our results. The expertise we have developed in logistics, productivity and inventory management has allowed us to reduce our number of production facilities while still meeting client requirements. We closed six check printing facilities in 2004, and in 2006, we closed our Los Angeles, California and Athens, Ohio printing facilities. Aside from our plant consolidations, we continue to seek other innovations to further increase efficiencies and reduce costs. During 2007, we implemented a new flat check package to mitigate the effects on our customers of a postal rate increase, which demonstrates our commitment to innovative solutions.

We have a shared services approach to manufacturing through which our three business segments share manufacturing operations in order to optimize capacity utilization. This allows us to create centers of operational excellence that have a culture of continuous improvement. We have created blended sites to serve a variety of segments, brands and channels. As a result, we continue to reduce costs by utilizing our assets and printing technologies more efficiently and by enabling employees to better leverage their capabilities and talents.
INDUSTRY OVERVIEW
Checks
According to a Federal Reserve study released in December 2007, approximately 33 billion checks are written annually. This includes checks which are converted to automated clearing house (ACH) payments. Checks remain the largest single non-cash payment method in the United States, accounting for approximately 35% of all non-cash payment transactions. This is a reduction from the Federal Reserve Study released in December 2004 when checks accounted for approximately 45% of all non-cash payment transactions. The Federal Reserve estimates that checks written declined approximately four percent per year between 2003 and 2006. According to our estimates, the use of small business checks is declining at a rate of two to four percent per year. The total transaction volume of all electronic payment methods exceeds check payments, and we expect this trend to continue. We believe check usage tends to be fairly resilient to downturns in the economy, so we expect recent economic conditions to have only a minor impact on our personal check businesses in the coming year.
Small Business Customers
The Small Business Administration’s Office of Advocacy defines a small business as an independent business having fewer than 500 employees. In 2006, the most recent date for which information is available, it was estimated that there were approximately 27 million small businesses in the United States. This represented approximately 99.7% of all employers. According to the same survey, small businesses employ half of all private sector employees and generated over 60% of net new jobs created each year over the last decade.
The small business market is impacted by general economic conditions and the rate of small business formations. Small business growth continues to parallel the overall economy. The index of small business optimism published by the National Federation of Independent Business (NFIB) in December 2007 continued to be below average. We expect continued economic softness to have some negative impact on our 2008 results, primarily in the first half of the year.
We seek to serve the needs of the small business customer. We design, produce and distribute business checks, forms, envelopes, retail packaging and related products to help them grow and promote their business. The rate checks are used by small businesses has thus far not been impacted as significantly by the use of alternative payment methods. The Formtrac 2006 report from the Document Management Industries Association (DMIA), the most recent data available, indicates that the business check portion of the markets serviced by SBS declined at a rate of two to four percent in 2006. Business forms products are also under pressure. Continual technological improvements have provided small business customers with alternative means to enact and record business transactions. For example, off-the-shelf business software applications and electronic transaction systems have been designed to automate many of the functions performed by business forms products.

Financial Institution Clients
Checks are most commonly ordered through financial institutions. We estimate approximately 85% of all consumer checks are ordered in this manner. Financial institutions include banks, credit unions and other financial services companies. Several developments related to financial institutions have affected the check printing portion of the payments industry:
• Financial institutions seek to maintain the profits they have historically generated from their check programs, despite the decline in check usage. This has put significant pricing pressure on check printers in the past several years.

• Financial institutions continue to consolidate through mergers and acquisitions. Often, the newly-combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply contracts. This results in check providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other party in the merger/acquisition.

• Financial institution mergers and acquisitions can also impact the duration of our contracts. Normally, the length of our contracts with financial institutions range from three to five years. However, contracts are sometimes renegotiated or bought out mid-term due to a consolidation of financial institutions.

• Banks, especially larger ones, may request pre-paid product discounts, made in the form of cash incentives, payable at the beginning of a contract. These contract acquisition payments negatively impact check producers’ cash flows in the short-term.
The recent turmoil in the financial services industry related to subprime lending activities has not had a significant impact on financial institution check programs.
Consumer Direct Mail Response Rates
Direct Checks and portions of SBS have been impacted by reduced consumer response rates to direct mail advertisements. Our own experience indicates that the decline in our customer response rates is attributable to the decline in check usage and a general decline in direct marketing response rates. We continuously evaluate our marketing techniques to ensure we utilize the most effective and affordable advertising media.
Competition
The small business forms and supplies industry is highly fragmented with many small local suppliers and large national retailers. We believe we are well-positioned in this competitive landscape through our broad customer base, the breadth of our small business product and service offerings, multiple distribution channels, established relationships with our financial institution clients, reasonable prices, high quality and dependable service.
In the small business forms and supplies industry, the competitive factors influencing a customer’s purchase decision are breadth of product line, speed of delivery, product quality, price, convenience and customer service. Our primary competitors are office product superstores, local printers, business form dealers, contract stationers and internet-based suppliers. Local printers provide personalization and customization, but typically have a limited variety of products and services, as well as limited printing sophistication. Office superstores offer a variety of products at competitive prices, but provide limited personalization and customization. We are aware of numerous independent companies or divisions of companies offering printed products and business supplies to small businesses through the internet, direct mail, distributors or a direct sales force.
In the check printing portion of the payments industry, we face considerable competition from several other check printers, and we expect competition to remain intense as check usage continues to decline and financial institutions continue to consolidate. We also face competition from check printing software vendors and from internet-based sellers of checks and related products. Moreover, the check product must compete with alternative payment methods, including credit cards, debit cards, automated teller machines and electronic payment systems.
In the financial institution check printing business, the principal factors on which we compete are product and service breadth, price, quality and check merchandising program management. From time to time, some of our check printing competitors have reduced the prices of their products during the selection process in an attempt to gain greater volume. The corresponding pricing pressure placed on us has resulted in reduced profit margins and some shifts of business. Continuing pricing pressure will likely result in additional margin compression. Additionally, product discounts in the form of cash incentives payable to financial institutions upon contract execution have been a practice within the industry since the late 1990’s. Both the number of financial institution clients requesting these payments and the size of the payments has fluctuated significantly in recent years. These up-front payments negatively impact check printers’ cash flows in the short-term and may result in additional pricing pressure when the financial institution also negotiates greater product discount levels throughout the term of the contract. Beginning in 2006, we sought to reduce the use of up-front product discounts by structuring new contracts with incentives throughout the duration of the contract.


CEO BACKGROUND

MARY ANN O’DWYER ( Age 52 )
Director Since October 2003

Senior Vice President — Finance and Operations and Chief Financial Officer, Wheels, Inc.

Ms. O’Dwyer joined Wheels, Inc. in 1991 and has been their Chief Financial Officer since 1994. She also has held the position of Senior Vice President – Finance and Operations since 2000. Wheels, Inc. is a major provider of automotive fleet management services. Ms. O’Dwyer also serves as a director of Wheels, Inc.



MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE OVERVIEW
Our business is organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services segment generated 58.4% of our consolidated revenue for 2007. This segment sells business checks, printed forms, promotional products, marketing materials and related services and products to more than six million small businesses and home offices through financial institution referrals, direct response marketing, sales representatives, independent distributors and the internet. Of the more than six million customers we have served in the past five years, four million have ordered our products or services in the last 24 months. Our Financial Services segment generated 28.5% of our consolidated revenue for 2007. This segment sells personal and business checks, check-related products and services, stored value gift cards and customer loyalty, retention and fraud monitoring/protection services to approximately 7,000 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 13.1% of our consolidated revenue for 2007. This segment is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited ® , Designer ® Checks and Checks.com brand names. Through these brands, we sell personal and business checks and related products and services directly to consumers using direct response marketing and the internet. We operate primarily in the United States. Small Business Services also has operations in Canada.
Our net income for 2007, as compared to 2006, benefited from the following:
• Various cost reductions from previously announced management initiatives to reduce our cost structure, primarily within information technology, sales and marketing, and manufacturing;

• Lower amortization expense and project costs related to a software project written-off in the second quarter of 2006;

• Additional revenue in Direct Checks from selling additional premium features and services, as well as a weather-related backlog from the last week of December 2006;

• Lower net restructuring charges in 2007, as compared to 2006;

• Lower amortization of acquisition-related intangible assets within Small Business Services, as certain of the assets are amortized using accelerated methods; and

• An increase in order volume for Financial Services, as compared to 2006, due to net client gains and financial institution conversion activity.

These benefits were partially offset by the following:

• Higher performance-based employee compensation;

• Lower order volume for our Direct Checks segment; and

• Lower revenue per order for our Financial Services segment.
Further, our results for 2006 included a non-cash, pre-tax asset impairment loss of $44.7 million, an $11.0 million pre-tax gain on the termination of an underperforming outsourced payroll services contract and a $4.6 million net pre-tax gain on facility sales.
In May 2007, we issued $200.0 million of 7.375% senior, unsecured notes maturing on June 1, 2015. Proceeds from the offering, net of offering costs, were $196.3 million. These proceeds were used to repay amounts drawn on our credit facility and to invest in marketable securities. On October 1, 2007, we used proceeds from liquidating all of our marketable securities and certain cash equivalents, together with a $120.0 million advance on our credit facilities, primarily to repay $325.0 million of 3.5% unsecured notes, plus accrued interest. Further information regarding our debt can be found under the caption “Note 13: Debt” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.

We are investing in several key enablers to achieve our strategies. These key enablers include improving our e-commerce capabilities, implementing an integrated platform for our various brands, improving our customer analytics and focusing on key vertical segments and improved merchandising. As we focus on these key enablers, we plan to streamline and update our brand structure, as well as transition our sales model to integrate field sales, marketing and customer call centers across the company. We believe this creates more focus on customers, positions us for growth and ensures we are leveraging processes, facilities and resources to our best advantage. We have also introduced a new www.Deluxe.com website which will serve as a platform for improved e-commerce capability, and we have identified significant opportunities to expand sales to our existing customers.
Additionally, the small business customer referrals we receive from our Deluxe Business Advantage SM program, which provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses, will continue to be an important part of our growth strategy. With the acquisition of the Johnson Group in October 2006 and All Trade Computer Forms, Inc. in January 2007, we have acquired companies which allow us to expand our business in the custom, full color, digital and web-to-print space with our small business customers. Further information regarding these acquisitions can be found under the caption “Note 4: Acquisitions and disposition” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. We divested a non-strategic product line in January 2007 when we completed the sale of our industrial packaging product line for $19.2 million, realizing a pre-tax gain of $3.8 million. This business generated revenue of approximately $51 million in 2006. This sale did not have a significant impact on earnings or operating cash flow.
Recently, we introduced the Deluxe Marketing Store to offer fast, hassle-free solutions for small businesses. The Deluxe Marketing Store is a website that offers products and services to help small businesses reach their customers, build customer loyalty and promote their business. Small businesses can design and create logos, websites, mailings and other promotional items. The Deluxe Marketing Store is also a resource for small businesses as it contains useful information for growing and managing a small business.
Financial Services – Our strategies within Financial Services are as follows:
• Continue to retain core check revenue streams and acquire new customers;

• Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients; and

• Continue to simplify our business model and optimize our cost and expense structure.
To achieve our strategies we are leveraging our customer acquisition and loyalty programs, our Deluxe Business Advantage program and enhanced small business customer service. The Deluxe Business Advantage program is designed to maximize financial institution business check programs by offering expanded personalized service to small businesses with a number of service level options.
In our efforts to expand beyond check-related products, we have introduced and continue to pilot several new services that focus on customer loyalty and retention. Two examples are the Welcome Home SM Tool Kit and the Deluxe Impressions SM products which enable financial institutions to forge strong bonds with new customers, thereby increasing customer loyalty and retention. We also offer Deluxe ID TheftBlock ® , a set of fraud monitoring and recovery services that provides assistance to consumers in detecting and recovering from identity

theft. We also enhanced our stored value gift card program and launched DeluxeCalling SM , a service providing a first point of contact with new indirect loan consumers on behalf of our financial institution clients. This service leverages our core competency of call center expertise and provides incremental revenue and increased customer retention for our financial institution clients. Providing products and services that differentiate us from the competition is expected to help offset the decline in check usage and the pricing pressures we are experiencing in our check programs. As such, we are also focused on accelerating the pace at which we introduce new products and services. In addition to these value-added services, we continue to offer our Knowledge Exchange TM Series, a suite of resources and events for our financial institution clients focused on the customer experience.
In addition to our initiatives to retain customers and introduce new products and services, we continue our efforts to simplify processes, eliminate complexity in this business and lower our cost structure. Our efforts are focused on using lean principles to streamline call center and check fulfillment activities, redesign services into standardized flexible models, eliminate multiple systems and work streams and strengthen our ability to quickly develop and bring new products and services to market.
Direct Checks – Our focus within Direct Checks is to enhance our share of the direct-to-consumer channel by continuing to implement the following strategies:
• Maintain our 2007 level of marketing spend, which was increased from previous years;

• Maximize the lifetime value of customers by selling new features and accessories; and

• Continue to optimize our cost and expense structure.
Beginning in 2007, we increased our advertising circulation of free-standing inserts under a new direct mail advertising contract which will remain in effect for the next several years. This has been an effective form of new customer acquisition in this channel. We also intend to increase the portion of our advertising expense designated for customer retention by utilizing reactivation and email campaigns. We continue to develop improved call center processes, provide additional products to Direct Checks’ small business customers and explore other avenues to increase sales to existing customers. In late 2006, we introduced the EZShield TM product, a fraud protection service that provides reimbursement to consumers for forged signatures or endorsements and altered checks. We have also introduced holiday greeting cards and stored value gift cards on our websites.
Cost Reduction Initiatives
We are pursuing aggressive cost reduction and business simplification initiatives, including: reducing shared services infrastructure costs; streamlining our call center and check fulfillment activities; eliminating system and work stream redundancies; and strengthening our ability to quickly develop new products and services and bring them to market. We believe significant cost reduction opportunities exist in the reduction of stock keeping units (SKUs), the standardization of products and services and improvements in sourcing third-party goods and services. These opportunities collectively are expected to reduce our annual cost structure by at least $225 million, net of required investments, by the end of 2009. The baseline for these anticipated savings is the annual diluted earnings per share guidance for 2006 of $1.41 to $1.51, which we provided in our press release on July 27, 2006 regarding second quarter 2006 results. We expect all three of our business segments to benefit from cost reductions. We estimate that approximately 30-35% of the $225 million target will come from our shared services infrastructure organizations. We expect information technology will provide the greatest percentage of these savings through lowering data center costs, improving mainframe and server utilization and reducing the cost of networking and voice communications. We estimate that approximately 40-45% of the $225 million target will come from fulfillment, including manufacturing and supply chain, and we estimate that approximately 20-25% of the $225 million target will come from reorganizing our sales and marketing functions. Overall, approximately one-third of the savings are expected to affect cost of goods sold, with the remaining two-thirds impacting selling, general and administrative (SG&A) expense.
Through December 31, 2007, we estimate that we have realized approximately $105 million of our $225 million target. We anticipate that we will realize an additional $70 million of the $225 million target in 2008 and the remaining $50 million in 2009.

Business Challenges
The market for our two largest products, checks and business forms, is very competitive. These products are mature and their use has been declining. According to our estimates, the total number of checks written in the United States has been in decline as a result of alternative payment methods, including credit cards, debit cards, automated teller machines and electronic payment systems. According to a Federal Reserve study released in December 2007, approximately 33 billion checks are written annually. This includes checks which are converted to automated clearing house (ACH) payments. The check remains the largest single non-cash payment method in the United States, accounting for approximately 35% of all non-cash payment transactions. This is a reduction from the Federal Reserve study released in December 2004 when checks accounted for approximately 45% of all non-cash payment transactions. The Federal Reserve estimates that checks written declined approximately four percent per year between 2003 and 2006. According to our estimates, the use of business checks is declining at a rate of two to four percent per year. The total transaction volume of all electronic payment methods exceeds check payments, and we expect this trend to continue. In addition to the decline in check usage, the use of business forms is also under pressure. Continual technological improvements have provided small business customers with alternative means to enact and record business transactions. For example, off-the-shelf business software applications and electronic transaction systems have been designed to automate several of the functions performed by business forms products.
Because check usage is declining and financial institutions are consolidating, we have been encountering significant pricing pressure when negotiating contracts with our financial institution clients. Our traditional financial institution relationships are typically formalized through supply contracts averaging three to five years in duration. As we compete to retain and acquire new financial institution business, the resulting pricing pressure, combined with declining check usage in the marketplace, has reduced our revenue and profit margins. We expect this trend to continue.
Direct Checks and portions of Small Business Services have been impacted by reduced consumer response rates to direct mail advertisements. Our own experience indicates that direct-to-consumer media response rates are declining across a wide variety of products and services. Additionally, our consumer response rates are declining further due to the decline in check usage and the gradual obsolescence of standardized forms products.
We estimate that general economic conditions negatively impacted our 2007 results of operations in the latter half of the year, primarily in Small Business Services. The rate of small business formations and small business confidence impact Small Business Services. The index of small business optimism published by the National Federation of Independent Business (NFIB) in December 2007 continued to be below average. According to estimates of the Small Business Administration’s Office of Advocacy, new small business formations were down slightly in 2006 as compared to 2005, the most recent date for which information is available. Consumer spending and employment levels may also have some impact on our personal check businesses. Although both trended negatively during the last half of 2007, we did not experience a significant negative impact in our personal check businesses. We expect that general economic conditions will have some negative impact on our 2008 results of operations, primarily in Small Business Services in the first half of the year. A prolonged downturn in general economic conditions could result in additional declines in our revenue and profitability.
Outlook for 2008
We anticipate that consolidated revenue will be between $1.56 billion and $1.61 billion for 2008, as compared to $1.61 billion for 2007. Despite the decline in check usage and economic uncertainty, we expect to deliver near flat revenue performance in 2008 as compared to 2007. We anticipate that growth in Small Business Services will be in the very low single digits, while declines in Financial Services will be in the low to mid single digits and declines in Direct Checks will be in the high single digits. We expect that revenue from our expansion initiatives will grow modestly during the latter half of the year.
We expect that 2008 diluted earnings per share will be between $3.00 and $3.20, compared to $2.76 for 2007. We expect that operating income will increase from 2007 due to our cost reduction initiatives, partially offset by the impact of revenue declines in our personal check businesses, continued investments in new products and enablers, such as e-commerce, and other cost increases. We estimate that our effective tax rate for 2008 will be approximately 35%, compared to 34.1% for 2007.

We anticipate that operating cash flow will be between $230 million and $250 million in 2008, compared to $245 million in 2007. We expect that increased earnings and working capital improvements throughout the year will be offset by higher payments for employee performance-based compensation in the first quarter. We estimate that capital spending will be approximately $30 million in 2008, with investment focused on cost reduction and key enablers such as e-commerce. Our priorities for the use of cash include paying down our credit facility in 2008 and investing both organically and in acquisitions to augment growth. We will also consider other opportunities to enhance shareholder value, including modest share repurchase opportunities and evaluating our dividend policy.

The decrease in revenue for 2007, as compared to 2006, was primarily due to a $48 million decrease resulting from the sale of our industrial packaging product line in January 2007, as well as a decline in volume for our Direct Checks segment and lower revenue per order due to lower pricing in our Financial Services segment. Lower volume for Direct Checks was primarily due to the overall decline in check usage, as well as lower customer retention and lower direct mail consumer response rates. Small Business Services also experienced a slight revenue decrease in the last half of the year related to general economic conditions. Partially offsetting these decreases were revenues generated by the Johnson Group, which we acquired in the fourth quarter of 2006, and higher revenue per order for Direct Checks due to the introduction of new products and services, including the EZShield product discussed earlier under Executive Overview . Additionally, Financial Services volume increased due to client gains and financial institution conversion activity, and revenue in Canada increased due to a favorable exchange rate and increased check orders triggered by a new check format mandated by the Canadian Payments Association that drove higher volume in the first half of 2007.
The number of orders increased slightly for 2007, as compared to 2006, as the Financial Services volume increase of 1.4% exceeded the negative impacts of Direct Checks’ volume decline, the sale of Small Business Services’ industrial packaging product line and the negative economic impact experienced by Small Business Services in the last half of the year. Revenue per order decreased for 2007, as compared to 2006, as lower prices in Financial Services more than offset the impact of increases in revenue per order for Direct Checks and Small Business Services.
The decrease in revenue for 2006, as compared to 2005, was due to lower prices and a change in product mix in our Financial Services segment resulting in significantly lower revenue per order, as well as a decline in volume for our Direct Checks segment. Revenue for 2005 also benefited from $11.7 million of contract termination payments in the second quarter. Lower volume for Direct Checks was due to the overall decline in check usage, as well as lower customer retention, lower direct mail consumer response rates and lower advertising expenditures in prior periods. Partially offsetting these decreases was increased revenue for Small Business Services due to higher revenue per order and an increase in first-time buyers as we implemented our growth strategies. Additionally, Direct Checks revenue per order increased, as did Financial Services order volume. Revenue per order increased for Direct Checks due to the introduction of the EZShield product discussed earlier , as well as a decline in orders received through our mail channel, which typically result in lower revenue per order. Financial Services volume increased as the impact of net client gains exceeded the impact of the decline in check usage.

The number of orders decreased for 2006, as compared to 2005, as the negative impact of the Direct Checks volume decline exceeded the volume increases for Financial Services and Small Business Services. Revenue per order decreased for 2006, as compared to 2005, as lower prices and a change in product mix in Financial Services more than offset the impact of the increases in revenue per order for Small Business Services and Direct Checks.

The percentage of total revenue derived from the sale of checks and related services was 65.1% in 2007, as compared to 63.5% in 2006 and 64.7% in 2005. Small Business Services contributed non-check revenue of $480.0 million in 2007, $523.1 million in 2006 and $514.6 million in 2005, from the sale of forms, envelopes, holiday cards, labels, business cards, stationery and other promotional products. The decrease in Small Business Services non-check revenue for 2007, as compared to 2006, was primarily due to the sale of our industrial packaging product line in January 2007.

Gross margin increased for 2007, as compared to 2006, due to manufacturing efficiencies, including the closing of two Small Business Services manufacturing facilities in mid-2006, as well as lower material costs in 2007 related to a higher mix of check products in Small Business Services. Additionally, we benefited from increased Financial Services order volume in 2007. Partially offsetting these gross margin increases was the lower Financial Services revenue per order discussed earlier, a postal rate increase in 2007 and costs associated with the implementation of new check packaging intended to mitigate the effects of the postal rate increase.
Gross margin decreased for 2006, as compared to 2005, primarily due to lower prices and an unfavorable shift in product mix in Financial Services, contract termination payments received in 2005 and higher overall product delivery costs in 2006 due to rate increases and fuel surcharges. Partially offsetting these declines was the increase in Small Business Services revenue per order discussed earlier, as well as cost savings from closing two Small Business Services manufacturing facilities in mid-2006.

The decrease in SG&A expense for 2007, as compared to 2006, was due to various cost reduction initiatives within our shared services organizations, lower amortization expense and project costs related to a software project we wrote-off in the second quarter of 2006, investments made in 2006 related to implementing our Small Business Services growth strategies and a $5.0 million reduction in net restructuring charges in 2007. Further information regarding our restructuring charges can be found under the Restructuring Accruals section of this discussion. We also benefited from lower amortization of acquisition-related intangible assets within Small Business Services, as certain of these assets are amortized using accelerated methods. Partially offsetting these SG&A decreases was higher expense for performance-based employee compensation based on our 2007 operating performance, a gain in 2006 of $11.0 million from the termination of an underperforming outsourced payroll services contract and higher referral commissions for Small Business Services resulting from growth in our Deluxe Business Advantage financial institution referral program.
The decrease in SG&A expense for 2006, as compared to 2005, was due to cost synergies resulting from the continued integration of New England Business Service, Inc. (NEBS), which was acquired in June 2004, as well as various other cost reduction initiatives, a decrease in amortization expense resulting primarily from one of our order capture software systems being fully amortized and a gain of $11.0 million, which decreased expense, from terminating an underperforming outsourced payroll services contract in the fourth quarter of 2006. Also contributing to the decrease were lower marketing costs for Small Business Services as we increased our focus on gaining new customers through financial institution referrals. Partially offsetting these decreases were investments related to our Small Business Services growth strategies, primarily the hiring and training of call center and sales personnel, higher customer care costs and commissions for Small Business Services as a result of the increased revenue and severance charges of $9.7 million related to executing our cost savings initiatives. Further information regarding the severance charges can be found under Restructuring Accruals .

MANAGEMENT DISCUSSION FOR LATEST QUARTER

EXECUTIVE OVERVIEW
Our business is organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services segment generated 57.7% of our consolidated revenue for the first nine months of 2008. This segment has sold business checks, printed forms, promotional products, marketing materials, web services and other related services and products to more than six million small businesses and home offices in the past five years through direct response marketing, financial institution referrals, independent distributors, the internet and sales representatives. Of the more than six million customers we have served in the past five years, approximately four million have ordered our products or services in the last 24 months. Our Financial Services segment generated 29.4% of our consolidated revenue for the first nine months of 2008. This segment sells personal and business checks, check-related products and services, stored value gift cards, and customer loyalty, retention and fraud monitoring and protection services to approximately 7,000 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 12.9% of our consolidated revenue for the first nine months of 2008. This segment is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited®, Designer® Checks and Checks.com brand names. Through these brands, we sell personal and business checks and related products and services directly to consumers using direct response marketing and the internet. We operate primarily in the United States. Small Business Services also has operations in Canada.
Our net income for the first nine months of 2008, as compared to 2007, benefited from the following:
• A significant reduction in performance-based employee compensation expense;
.Various management initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing;

• Higher revenue per order in Direct Checks, primarily from price increases and increased sales of fraud protection services;

• Reduced employee benefit costs related to lower workers’ compensation and medical claims activity;

• The year-over-year benefit of a February 2007 price increase in Financial Services; and

• Lower amortization of acquired intangible assets in Small Business Services, as certain of the assets are amortized using accelerated methods.
These benefits were more than offset by the following:
• Lower volume driven by unfavorable economic conditions, primarily affecting Small Business Services;

• Restructuring charges and related costs resulting from our cost savings initiatives;

• Lower order volume in Direct Checks due to the continuing decline in check usage and advertising response rates;

• Increased manufacturing costs, including higher delivery-related costs due to a mid-2007 postal rate increase and fuel surcharges in 2008, as well as higher materials costs due to an unfavorable product mix;

• Impairment charges in 2008 related to Small Business Services trade names;

• Lower revenue per order in Financial Services;

• Lower volume in Financial Services due to the continuing decline in check usage and non-recurring financial institution conversion activity in 2007;

• Additional revenue in the first quarter of 2007 in Direct Checks due to a weather-related backlog from the last week of 2006; and

• Investments made primarily in the first half of the year to drive revenue growth opportunities, primarily within Small Business Services’ e-commerce and marketing.
Our Strategies and Business Challenges
Details concerning our strategies and business challenges were provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”). For additional information regarding recent developments, see the section entitled Market Risks within this quarterly report.

We completed four acquisitions in 2008. These acquisitions support our strategy to expand revenue from higher growth business services. In June 2008, we entered into a definitive agreement to acquire all of the common shares of Hostopia.com Inc. (Hostopia) in a cash transaction for $99.4 million, net of cash acquired. The transaction closed on August 6, 2008, and we utilized availability under our existing lines of credit to fund the acquisition. Hostopia is a provider of web services that enable small businesses to establish and maintain an internet presence. It also provides email marketing, fax-to-email, mobility synchronization and other services and is included in our Small Business Services segment. Hostopia provides a unified, scaleable services delivery platform which we expect to utilize as we strive to obtain a greater portion of our revenue from annuity-based business services. We plan to use Hostopia’s technology architecture as the primary delivery platform for these business services offerings. Hostopia’s revenue for its fiscal year ended March 31, 2008 was $27.8 million.
We also acquired the assets of PartnerUp, Inc. (PartnerUp), Logo Design Mojo, Inc. (Logo Mojo) and Yoffi Digital Press (Yoffi) during 2008 for an aggregate cash amount of $5.6 million. The PartnerUp transaction also includes contingent compensation payments through 2012 based on PartnerUp’s revenue and operating margin, provided the principals remain employed by the company. PartnerUp is an online community that is designed to connect small businesses and entrepreneurs with resources and contacts to build their businesses. Logo Mojo is a Canadian-based online logo design firm and Yoffi is a commercial digital printer specializing in one-to-one marketing strategies. The results of all three businesses are included in Small Business Services from the acquisition dates.
Update on Cost Reduction Initiatives
In the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of the 2007 Form 10-K, we discussed that we were pursuing aggressive cost reduction and business simplification initiatives which we expected to collectively reduce our annual cost structure by at least $225 million, net of required investments, by the end of 2009. The baseline for these anticipated savings was the estimated cost structure for 2006, which was reflected in the earnings guidance reported in our press release on July 27, 2006 regarding second quarter 2006 results. During the third quarter of 2008, we announced further cost reduction actions, including the planned closing of three printing facilities and one customer call center. As such, we now expect to generate $250 million of cost reductions, net of required investments, through 2010. We realized $105 million of this target through the end of 2007. We expect to realize approximately $50 million in 2008, $60 million in 2009 and $35 million in 2010. To date, most of our savings are from sales and marketing, information technology and fulfillment, including manufacturing and supply chain.
Outlook for 2008
We anticipate that consolidated revenue will be between $1.490 billion and $1.505 billion for 2008, as compared to $1.606 billion for 2007. We expect that current economic conditions will continue to adversely affect volumes in Small Business Services and drive a mid-single digit decline in revenue despite modest contributions from our e-commerce initiatives and revenue from the Hostopia and PartnerUp acquisitions. In Financial Services, we expect check usage to continue to decline 4% to 5% per year, with the related revenue pressure being partially offset by a previously planned price increase in the fourth quarter, as well as a modest contribution from several new loyalty, retention, monitoring and protection offers. We expect the revenue decline in Direct Checks to be in the high single digits, driven by the decline in check usage and the $3 million revenue benefit in 2007 attributable to the weather-related backlog at the end of 2006.
We expect that 2008 diluted earnings per share will be between $2.07 and $2.17, compared to $2.76 for 2007. We expect that the economic softness in Small Business Services and the declines in our personal check businesses driven primarily by fewer checks being written, as well as restructuring costs and asset impairment charges, will be partially offset by continued progress with our cost reduction initiatives. We estimate that our annual effective tax rate for 2008 will be approximately 34%, comparable with the 2007 rate.
We anticipate that net cash provided by operating activities will be between $185 million and $200 million in 2008, compared to $245 million in 2007. We expect that working capital improvements will partially offset the lower expected earnings and the higher payments made in the first quarter of 2008 for employee performance-based compensation related to our 2007 performance. We estimate that capital spending will be approximately $30 million in 2008, with investment focused on cost reductions and key multi-segment growth enablers, such as our e-commerce platform.
We funded our recent acquisitions through cash and borrowings on our credit facilities. Additionally, during the third quarter of 2008, we repurchased $7.9 million of common stock. Even with these actions, we continue to have reasonable access to capital in order to fund operations and execute our strategies. Our priorities for the use of cash remain investing both organically and in small to medium-sized acquisitions to augment growth. We also consider other opportunities to deploy cash to create shareholder value. We do not expect to purchase a significant amount of shares during the remainder of 2008 as we have nearly depleted our capacity for share repurchases based on limitations in the debt agreement related to our notes due in June 2015. To the extent we have excess cash, we intend to pay down borrowings on our credit facilities.
Market Risks
We recorded non-cash asset impairment charges of $9.7 million during the third quarter of 2008 related to trade names in our Small Business Services segment. Of this amount, $9.3 million related to indefinite-lived trade names. The impairment charges resulted from the effects of the economic downturn on our expected revenues and the broader effects of recent U.S. market conditions on the fair value of the assets. The impairment analysis completed during the third quarter of 2008 indicated no impairment of goodwill. However, due to the ongoing uncertainty in market conditions, which may continue to negatively impact our market value, we will continue to monitor and evaluate the carrying value of goodwill and our indefinite-lived trade names, particularly with respect to our Safeguard distributor reporting unit. The calculated fair value of this reporting unit exceeded its carrying value by $1.6 million as of the measurement date. The fair values of our other reporting units exceeded their carrying values between $32 and $482 million. If market and economic conditions deteriorate further, this could increase the likelihood of future non-cash impairment charges related to our indefinite-lived trade names and/or goodwill.
The plan assets of our postretirement benefit and pension plans are valued at fair value using quoted market prices. Investments, in general, are subject to various risks, including credit, interest and overall market volatility risks. During 2008, the equity markets have seen a significant decline in value. As such, the fair values of our plan assets have decreased significantly from December 31, 2007. As our plan assets and liabilities will be re-measured at December 31, 2008, in accordance with Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans , the decreases in the fair values of plan assets could materially affect the funded status of the plans. This would affect the amounts reported in the consolidated balance sheet, as well as increase future postretirement benefit expense, which would impact our consolidated results of operations.

We have a non-qualified deferred compensation plan that allows eligible employees to defer a portion of their compensation. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. As such, our liability for this plan fluctuates with market conditions. During the nine months ended September 30, 2008, we reduced our deferred compensation liability by $0.9 million due to losses on the underlying investments elected by plan participants. The carrying value of this liability, which was $5.0 million as of September 30, 2008, may change significantly in future periods if the equity markets continue to be volatile.

CONF CALL


Terry Peterson

Thank you, Madge. Welcome to Deluxe Corporation’s 2008 third quarter earnings call. I’m Terry Peterson, Deluxe’s Vice President of Investor Relations and Chief Accounting Officer.

Joining me on the call today are Lee Schram, Deluxe’s Chief Executive Officer; and Rick Greene, Deluxe’s Chief Financial Officer. Lee, Rick and I will take questions from analysts after the prepared comments. At that time the operator will instruct you how to ask a question.

In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe’s website. I will provide instructions for accessing the replay at the conclusion of our teleconference.

Before I begin, let me make this brief cautionary statement. Comments made today regarding financial estimates and projections and any other statements addressing management’s intentions and expectations regarding the company’s future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

As such, these comments are subject to risks and uncertainties which could cause actual future results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the news release that we issued this morning and in the company’s Form 10-K for the year ended December 31, 2007.

In addition, the financial and statistical information that will be reviewed during this call is addressed in greater detail in today’s press release which is posted in the Investor Relations section of our website, www.deluxe.com, and was furnished to the SEC on Form 8-K filed this morning.

In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release.

Now I’ll turn the call over to Lee Schram, Deluxe’s CEO.

Lee Schram

Thank you, Terry, and good morning everyone. Given the challenging economic environment, we are generally pleased with our performance in the quarter and our solid earnings per share and cash flow results.

In this tough economy we were able to weather the storm and exceed the top end of our adjusted earnings per share outlook range, and also showed improved operating margins over the prior year, excluding restructuring and asset impairment charges.

With the challenging economy and financial crisis, we focused on basic blocking and tackling in our core check businesses by continuing to extend contracts and further stabilizing margins, while at the same time we had our best quarter ever on new non-check revenue.

In early September, we announced a further cost reduction program, and have already initiated aggressive implementation actions in all targeted areas.

At the same time, we continue to invest in our future, with progress in many revenue growth initiatives, including e-commerce, where even with declining industry visitor traffic, we actually are showing growth in site visitors, plus in verticalization, loyalty, retention, fraud and security, and new business services, including payroll services, logo design, web services, and business networking.

In this difficult market, and because we already adjusted our previous outlook given projected trends, we are pleased to be able to roughly maintain our overall adjusted earnings per share outlook for the total year, even with the revenue range decline.

We are prudently managing our company, closely monitoring the small business and financial institution markets, and riveted on strong free cash flow generation, while offering a very attractive dividend.

In a few minutes, I will discuss more details around our recent progress and next steps, but first Rick will cover our financial performance.

Richard Greene

Thanks, Lee. Earlier today, we reported diluted earnings per share for the third quarter of $0.27, slightly lower than the range in our recently communicated outlook, due entirely to the unexpected non-cash asset impairment charges of $9.7 million, which were caused by the recent turmoil in the broader U.S. capital markets.

Our results also included $21.9 million of expected charges for restructuring related activities. Excluding the $0.38 per share impact of these charges, adjusted EPS of $0.65 was $0.05 favorable to the upper end of our initial outlook from July.

Revenue for the quarter came in at $366.2 million, with continued softness in Small Business Services primarily in our U.S. distributor and Canadian businesses. We also saw a slow start to the seasonal holiday card business.

Despite the revenue shortfall in SBS, our core personal check businesses met our expectations. Excluding the impact of the charges, operating margins for the quarter were stronger than expected, driven by a favorable shift in product mix, spend reductions, and earlier-than-expected savings from our cost initiatives.

Operating cash flow in the quarter totaled $79 million, which was over $20 million better than our expectation due to the timing of contract acquisition payments and favorable working capital initiatives.

In the third quarter of 2007, we reported diluted earnings per share of $0.62. The 2007 period benefited from higher revenue and lower restructuring and asset charges, partially offset by higher performance-based compensation in 2007 and additional cost savings in the 2008 period.

Adjusting for the restructuring and asset charges in both periods, earnings per share were comparable to last year.

Company-wide revenue in the third quarter totaled $366.2 million, down 5.8% from 2007. The year-over-year decline was due to weakness in the economy, primarily in SBS, as well as lower volume in our personal check businesses and lower revenue per order in Financial Services.

Gross margin for the quarter was 58.3% of revenue, down 4.8 points from 2007. The restructuring related charges reduced gross margins by 3.5 points. Lower pricing in Financial Services also impacted our gross margin.

As you may recall from our last quarterly call, we implemented a price increase in Financial Services in October, which will help going forward to offset recent rate declines.

Selling, general and administrative expense decreased $17.6 million in the quarter and was 44.9% of revenue, compared to 46.9% in the same period last year. Benefits from continued execution of our cost reduction initiatives and lower performance-based compensation contributed to the improvement.

Restructuring related costs and asset impairments for the current period were $31.6 million or $0.38 per share. The restructuring costs relate to our recently-announced plans to close three manufacturing facilities and one call center, plus streamline portions of our business support and shared services functions.

Asset impairment charges of $9.7 million relate to the write-down of three trade names, primarily due to the effects of recent broader U.S. market conditions on our assessment of fair value in relation to these assets. As a result, operating income in the quarter was $30.3 million compared to $60.7 million last year.

Next, let’s cover a few highlights in each of our three business segments. In Small Business Services, revenue of $216.4 million was down 4.2% versus 2007.

Revenue in this segment was unfavorably impacted by continued economic softness in the quarter, particularly in our core checks and forms products, partially offset by the contribution from the Hostopia acquisition and organic growth in fraud protection services.

Operating income in this segment was $10.3 million or 4.8% of revenue compared to $30.2 million in 2007. The quarter’s results include $20 million of restructuring costs and asset impairment charges which reduced operating margins by 9.2 points.

In Financial Services, revenue was $103.8 million, down 8.1% versus the third quarter last year. The decline was primarily due to lower revenue per order given the competitive pricing environment.

Check order volumes declined 3.7% year over year, although nearly half of this decline was due to one-time check conversion volume in the 2007 period.

Financial Services operating income was $7.1 million for the quarter or 6.8% of revenue, down from $16.7 million in 2007. The quarter’s results include $10.8 million of restructuring costs which reduced operating margin by 10.4 points.

Finally, Direct Checks revenue totaled $46 million, down 7.6% on a year-over-year basis, due to continuing declines in check writing. These reductions were partially offset by higher revenue per order from recent price increases.

Operating income in this segment was $12.9 million for the quarter or 28% of revenue, up slightly on a percentage basis compared to last year. Again restructuring charges of $800,000 in the quarter reduced operating margin by 1.8 points.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $885 million, compared to $844 million at the end of 2007. Cash provided by operating activities for the first nine months was $145 million.

The decrease from last year was due to a higher 2007 related incentive compensation payment earlier this year and lower net income, partially offset by lower income tax payments and progress with our working capital initiatives. Capital expenditures in the quarter were $7 million, and depreciation and amortization expense was $16 million.

Looking ahead to the fourth quarter of 2008, we expect revenue to range from $375 million to $390 million. Diluted earnings per share are expected to range from $0.64 to $0.74, including an estimated $0.03 of restructuring related costs.

On a full year basis, this would result in a revenue range of $1.49 to $1.505 billion and diluted earnings per share of $2.07 to $2.17, including an estimated $0.44 of restructuring and asset charges; $0.41 of which relate to the third and fourth quarters.

There are several key factors in addition to the impact of recent acquisitions that distinguish our 2008 outlook in comparison to the fourth quarter of 2007, including continued economic softness in the Small Business Services segment and declines in the personal check businesses driven primarily by fewer checks being written.

Project costs of $2 million related to restructuring activities; continued execution of the $250 million cost and expense reduction initiative, net of investment; and an effective tax rate of approximately 35%, which equates to a full year rate of 34%.

We expect operating cash flows to range between $185 and $200 million for the year reflecting lower earnings partially offset by continued progress on working capital initiatives. We expect contract acquisition payments to be approximately $20 million.

Capital expenditures in 2008 are expected to be approximately $30 million. And depreciation and amortization expense is expected to be approximately $65 million, including $26 million of acquisition related amortization.

Let me conclude with a few comments on our capital markets activities. As previously noted, we funded our recent acquisitions through cash and draws against our current credit facilities.

Additionally, in the quarter we repurchased $7.9 million of common stock, once again nearly depleting the capacity under our restricted payments basket.

As a reminder, this capacity rebuilds as we generate net income. Even with these actions, we believe we continue to have reasonable access to capital in order to fund operations and execute our strategies.

Our priorities for uses of cash remain investing both organically and in small to medium sized strategic acquisitions to augment growth, and we also proactively evaluate other opportunities to create shareholder value.

To the extent we have excess cash after these priorities, we intend to pay down the remaining balance on our credit facilities.

I will join Lee and Terry in taking your questions in a few minutes, but first I’ll turn the call back to Lee.

Lee Schram

Thank you, Rick. I will continue my comments with an update on what we are focused on overall, then highlight progress in each of our three segments; provide an update on our cost reduction program, and close with the perspective on where we are heading as we wind down 2008 and look towards 2009.

Especially now during these challenging economic and liquidity crisis times, we understand that it is critical for us to be able to stabilize core checks and business products, while over time, demonstrating an ability to drive sustainable revenue growth.


In order to sharpen our focus and align key leaders and capabilities, we continue to target five key areas:

First, financial institutions and our core check capabilities, plus growth outside of checks in loyalty, retention, market intelligence, and fraud monitoring and protection offers;

Second, direct-to-the-consumer and growing check share;

Third, Small Business core business products sold through enhanced e-commerce capabilities and an improved vertical customer focus;

Fourth, higher growth business services, including logo design, payroll, human resources, business networking, web hosting, and other web services;

And fifth, cost reductions and simplification, where we expect to continue the solid work already underway as part of our $250 million cost reduction initiative.

Shifting to our segments. In Small Business Services, as expected, economic softness continued to impact our business.

Shortfalls to our third quarter outlook occurred late in the quarter, primarily in Canada and in our distributor business driven by imaging and promotional products in the construction, financial services, and medical verticals.

We also saw a slower start to our holiday card season that we are now prudently forecasting will continue through the balance of the year, even though purchases may only be pushed back to later in the season.

Positively, we saw: growth in payroll services; a continued ramp in our EZShield check protection service and in logo design services; growth in e-commerce visitor traffic where we continue to add content and capability; growth in business networking members from PartnerUp; and a solid start in web services from our Hostopia acquisition, where they again grew at a double-digit rate year-over-year.

We also are already starting to see a synergistic ramp in our Deluxe customer base purchasing Hostopia web services. Hostopia also recently won a new web services order from a very large European Telco that will begin to roll out in the first half of 2009 on a pan-European basis.

Given the state of the weakening economy, where we know small businesses are being impacted, with less businesses starting up and more eliminating or delaying spending, it is clearly more challenging for us to forecast revenue, and because of this we have widened our revenue range.

For the most part, we are only seeing slightly more of a declining trend than our previous outlook right now, and principally in holiday cards and imaging and promotional products.

For these reasons, and also due to a fairly significant movement in the Canadian dollar, we are adjusting our revenue outlook for the balance of the year.

In Financial Services, we continued again this quarter to proactively extend several check contracts. We now have all but one large contract extended not only through this year but also through 2009.

Completing these extensions helps lock in annuity-based check revenue streams. It also allows us to now focus on winning several competitive national accounts which will be starting their RFP processes in the near future.

Again this quarter, we continue to see strong overall new acquisition rates, especially in the credit union space and our retention rates also remain strong in excess of 90%. We continue to simplify our processes and take complexity out of business while reducing our cost and expense structure.

Starting in early October as planned, we roll out our regular price increase that will drive both revenue growth and operating income.

The banking crisis is having some impact on our business. We did see softness in WaMu check orders starting in the middle of the quarter, most likely due to the lack of new demand deposit account holders and current ones leaving as reported externally.

But on a positive note, WaMu was purchased by another of our key customers, Chase. Given Chase’s solid reputation, we expect this exodus will settle down for WaMu demand deposit account holders, and not have a significant impact on our business going forward.

It is too early to understand any potential impacts on Deluxe from Wells Fargo’s acquisition of Wachovia, where today we have approximately 35% of Wachovia’s check business under a long-term contract. We are focused on continuing to provide exceptional client service.

We also believe that as we have become better positioned in community banks and credit unions, where it has been reported that more consumers are shifting their deposits, that this trend may have a positive impact on our check business.

In addition to our strong core check revenue, we made progress again in the third quarter in advancing new non-check revenue growth opportunities. We grew revenues sequentially over the prior quarter and over last year in our non-check loyalty, retention and fraud monitoring and protection solutions.

Building off of the Knowledge Exchange Expo and Regional Workshops, we introduced six new Internet-based offers for financial institutions that have been positively received thus far.

Although we continue to see momentum building in these new non-check revenue initiatives, we also see decisions by financial institutions taking longer, with more approval levels and a focus on spending less.

In Direct Checks, our revenue is basically in line with our expectations, and we had another solid operating margin in the quarter, coming in at 30%, excluding restructuring related items. We continue to look for opportunities to provide accessories and other non-check products and services to our consumers.

In addition to these actions in each of our segments, here is an update on our cost expense reduction initiatives. The plan has now been increased to target a $250 million reduction through 2010 where $50 million net of the restructuring charges is expected to be realized in 2008, on top of the $105 million already realized from 2006 and 2007. We expect to realize $60 million in savings in 2009 and $35 million in 2010.

Overall, we had another solid quarter delivering slightly more than expected in the third quarter and we remain on track to deliver the $50 million expected this year. As we have consistently indicated, the 2008 reductions are not linear on a quarterly basis, with 40% of the reductions in the first half of the year; 30% in the third quarter, and 30% expected in the fourth quarter, excluding the impact of the restructuring charges.

Also, approximately 50% to 60% will follow the bottom line. The percentage was lower in the first half as we more aggressively invested in new non-check revenue solutions in key enablers, but ramped in the third quarter and we’ll continue to ramp in the fourth quarter, although some duplicative costs will be incurred in the fourth quarter of 2008, as well as the first quarter of 2009 as we start to close down and transition three fulfillment centers.

Here are some highlights of the key cost reduction activities for the third quarter and continued areas of opportunity as we move forward. These are in addition to the ongoing savings there are for each quarter from previously implemented actions.

In our go-to-market sales and marketing, our focus continues to be on realigning sales in marketing, back end operations and refining our channel management structure through process centralization, simplifying business processes, platform and tool consolidation and leveraging e-commerce and vertical segmentation capabilities.

During the quarter, we completed the closure and building sale of our Flagstaff call center and we also completed smaller reductions in several other call center locations.

We also announced plans to close another call center in the first quarter of next year. Our externally led review of our call centers mentioned on the first quarter call with the objective of continuing to improve productivity, also continued in the quarter.

For fulfillment, we had a strong quarter with lean productivity improvements and direct spend reductions. We also announced in early September, the closure of three fulfillment sites, two of which are targeted to close the end of the first quarter 2009 and the remaining one late in 2009.

We continue to invest in completely automating our flat check package processing, which we expect to have completed by the end of 2009 and we expect to continue our lean product standardization and direct and indirect spend reduction initiatives, plus advance our work on realigning to a common manufacturing platform.

We also plan to initiate more strategic supplier sourcing arrangements and enhanced value stream mapping improvements and efficiencies.

Finally for shared services infrastructure, we continue to make good progress in information technology, driven by data center cost reductions and other system utilization, networking and voice communication efficiencies, as well as in finance, human resources and real estate.

For the balance of 2008 and in 2009, we expect to continue to reduce cost in all areas as opportunities exist to centralize, streamline, standardize and improve efficiencies.

In the fourth quarter, we expect the economy to be slightly more challenging than previously anticipated which is why we have reduced our revenue projections. We expect:

Continued strong execution on our cost reduction initiatives;

Stability in our core check revenues;

More meaningful revenue contributions from new non-check revenue offers and key enablers;

And some revenue growth from our logo, web services and business networking acquisitions.

We are also focused on generating strong operating cash flows.

Looking ahead to 2009, we believe that our portfolio is becoming better positioned to deliver sustainable future revenue growth opportunities through:

Stabilization in the rate of decline in our core check businesses;

Adding existing organic initiatives such as ShopDeluxe and verticalization;

And through strategic additions in new business services including payroll services, logo design, web hosting and business networking services.

In a more normal economy, we believe this would position us for a roughly flat top line in 2009 and the 5% to 9% earnings per share growth we initially indicated in our early September press release, and solidly into mid-single digit revenue growth and double-digit earnings per share growth over the medium term.

However, given the weakening economy and still looming financial crisis right now, we believe it is prudent for us to closely monitor the marketplace over the next three months before providing a firmer more accurate outlook for 2009.

As indicated in my cost reduction update, it is important to realize starting in the fourth quarter 2008 and through the first quarter of 2009, we will be transitioning and then closing several fulfillment sites and our costs will actually increase somewhat given, in effect, duplicative transition work, associated with completing these actions. There will also be one last business day in the first quarter of 2009 than the first quarter of 2008.

Right now, we believe Deluxe has demonstrated its value as a disciplined and stable company in these challenging economic times and that we have made positive strategic moves to reposition the company for sustainable longer term growth, while currently generating strong cash flows and a very attractive dividend.

Now operator, Rick, Terry, and I will open the line for questions.

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