Business Context and Reporting Period
Company: Deluxe Corporation
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2001
Industry: Payment systems, specifically the largest provider of checks in the United States.
Operations: The company sells checks, business forms, and related products to individuals, small businesses, and financial institutions. In 2001, the company reorganized its single business segment into three: Financial Services, Direct Checks, and Business Services.
Key Financial Metrics
Note: Specific revenue, profit, cash flow, and margin figures are incorporated by reference to the Annual Report to Shareholders (pages 13-52) and are not explicitly detailed in the provided text.
- Stock Performance (2001): The common stock (NYSE: DLX) closed the year at $41.58, with a high of $42.19 and a low of $19.17.
- Dividends: Declared $0.37 per share for each quarter in 2001 and 2000.
- Market Capitalization: Aggregate market value of voting stock held by non-affiliates was approximately $3.08 billion as of March 6, 2002.
- Outstanding Shares: 64,262,626 shares as of March 6, 2002.
- Debt Facilities: Entered into a $350,000,000 revolving credit agreement in August 2001.
- Employees: Approximately 6,840 full- and part-time employees as of December 31, 2001.
Material Changes and Operational Trends
- Market Decline: The total number of checks written by individuals and small businesses declined slightly in 2001 compared to 2000, a trend expected to continue due to the rise of electronic payment methods (ATMs, credit cards, electronic bill presentment).
- Segment Reorganization: Reorganized operations into Financial Services (serving banks), Direct Checks (direct-to-consumer), and Business Services (small business forms).
- Channel Shifts: Approximately 70% of check sales to individuals and small businesses originated through financial institutions. Direct-to-consumer sales increased slightly year-over-year, with over 15% of Direct Checks orders originating from the Internet (nearly 2 million orders).
- Cost Management: Completed the closure of 25 production plants (announced in 1996 and 1998) by the end of 2000 to manage costs amidst declining check volumes. Continued outsourcing of non-strategic functions like IT and mail processing.
- Acquisitions: Acquired Designer Checks, Inc. in February 2000 to expand capacity and product configurations.
Outlook, Risks, and Management Commentary
Management Strategy
Management aims to grow revenue by leveraging core competencies in personalization, direct marketing, and e-commerce. Strategies include expanding product offerings (e.g., Disney check designs), increasing Internet presence, and investing in technology to lower the cost structure. The company seeks acquisitions that are accretive to earnings and generate cash flow.
Risks and Contingencies
- Industry Decline: Continued decline in check usage poses a long-term threat to revenue growth.
- Competition: Intense competition from other check printers and alternative electronic payment systems. Pricing pressure from financial institution consolidation has reduced margins.
- Regulatory Environment: Subject to the Gramm-Leach-Bliley Act regarding consumer privacy. Future legislation could restrict the sharing of consumer data, potentially impeding direct marketing efforts and Internet business growth.
- Intellectual Property: Reliance on licensed product designs (e.g., Disney) creates dependency on maintaining favorable license terms.
Accounting Changes
The company switched independent auditors from Deloitte & Touche LLP to PricewaterhouseCoopers LLP effective March 16, 2001, following a competitive bidding process. There were no disagreements with the former auditor regarding accounting principles or practices.
Investor Verification Checklist
- Verify the specific revenue and net income figures for 2001 in the "Five-year Summary" and "Consolidated Statements of Income" (incorporated by reference in the Annual Report).
- Review the "Management's Discussion and Analysis" (MD&A) for detailed segment profitability and cash flow data not present in this summary.
- Assess the impact of the $350 million revolving credit facility on the company's liquidity and leverage ratios.
- Monitor the rate of decline in total check volumes versus the growth rate of direct-to-consumer and e-commerce channels.
- Review the "Cautionary Statements and Risk Factors" (Exhibit 99.1) for a comprehensive list of potential legal and operational risks.