UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-7945

DELUXE CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-0216800
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3680 Victoria St. N., Shoreview, Minnesota		55126-2966
(Address of principal executive offices)		(Zip Code)

(651) 483-7111
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at April 19, 2010 was 51,338,716.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)

		March 31,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	16,328			$	12,789
Trade accounts receivable (net of allowances for uncollectible accounts of $4,649 and $4,991, respectively)			57,576				65,564
Inventories and supplies			21,916				22,122
Deferred income taxes			10,448				10,841
Funds held for customers			45,994				26,901
Other current assets			28,044				21,282
Total current assets			180,306				159,499
Long-Term Investments (including $2,113 and $2,231 of investments at fair value, respectively)			35,389				39,200
Property, Plant, and Equipment (net of accumulated depreciation of $338,131 and $335,415, respectively)			118,901				121,797
Assets Held for Sale			4,527				4,527
Intangibles (net of accumulated amortization of $371,157 and $362,201, respectively)			143,398				145,910
Goodwill			659,613				658,666
Other Non-Current Assets			89,836				81,611
Total assets		$	1,231,970			$	1,211,210
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	59,102			$	60,640
Accrued liabilities			171,755				156,408
Short-term debt			—				26,000
Total current liabilities			230,857				243,048
Long-Term Debt			745,099				742,753
Deferred Income Taxes			29,983				24,800
Other Non-Current Liabilities			84,850				83,399
Commitments and Contingencies (Notes 11, 12 and 15)
Shareholders’ Equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: 2010 — 51,338; 2009 — 51,189)			51,338				51,189
Additional paid-in capital			59,631				58,071
Retained earnings			81,317				60,768
Accumulated other comprehensive loss			(51,105	)			(52,818	)
Total shareholders’ equity			141,181				117,210
Total liabilities and shareholders’ equity		$	1,231,970			$	1,211,210

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Unaudited)

		Quarter Ended March 31,
		2010				2009
Revenue		$	335,120			$	339,520
Net restructuring charges			621				1,507
Other cost of goods sold			117,742				127,752
Total cost of goods sold			118,363				129,259
Gross Profit			216,757				210,261
Selling, general and administrative expense			148,045				158,356
Net restructuring reversals			(243	)			(177	)
Asset impairment charges			—				24,900
Operating Income			68,955				27,182
Gain on early debt extinguishment			—				9,834
Interest expense			(10,535	)			(12,420	)
Other (expense) income			(356	)			357
Income Before Income Taxes			58,064				24,953
Income tax provision			24,281				12,449
Income from Continuing Operations			33,783				12,504
Net Loss from Discontinued Operations			(399	)			—
Net Income		$	33,384			$	12,504
Basic Earnings per Share:
Income from continuing operations		$	0.66			$	0.24
Net loss from discontinued operations			(0.01	)			—
Basic earnings per share			0.65				0.24
Diluted Earnings per Share:
Income from continuing operations		$	0.66			$	0.24
Net loss from discontinued operations			(0.01	)			—
Diluted earnings per share			0.65				0.24
Cash Dividends per Share		$	0.25			$	0.25
Total Comprehensive Income		$	35,097			$	14,522

See Condensed Notes to Unaudited Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

		Quarter Ended
		March 31,
		2010				2009
Cash Flows from Operating Activities:
Net income		$	33,384			$	12,504
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Net loss from discontinued operations			399				—
Depreciation			5,053				5,622
Amortization of intangibles			10,394				11,231
Asset impairment charges			—				24,900
Amortization of contract acquisition costs			5,007				6,333
Deferred income taxes			4,699				1,429
Employee share-based compensation expense			1,599				1,495
Gain on early debt extinguishment			—				(9,834	)
Other non-cash items, net			2,174				6,095
Changes in assets and liabilities, net of effects of acquisition and discontinued operations:
Trade accounts receivable			7,386				10,728
Inventories and supplies			(395	)			61
Other current assets			(2,589	)			(972	)
Non-current assets			1,594				3,859
Accounts payable			(573	)			2,842
Contract acquisition payments			(583	)			(14,056	)
Other accrued and non-current liabilities			(14,857	)			734
Net cash provided by operating activities of continuing operations			52,692				62,971
Cash Flows from Investing Activities:
Purchases of capital assets			(9,799	)			(9,958	)
Payment for acquisition			(700	)			—
Purchases of customer lists			(70	)			(614	)
Purchases of marketable securities			(2	)			—
Proceeds from sales of marketable securities			1,970				—
Other			(157	)			(232	)
Net cash used by investing activities of continuing operations			(8,758	)			(10,804	)
Cash Flows from Financing Activities:
Net payments on short-term debt			(26,000	)			(9,770	)
Payments on long-term debt			—				(21,654	)
Payments for debt issue costs, credit facility			(2,065	)			—
Change in book overdrafts			(1,454	)			(5,348	)
Proceeds from issuing shares under employee plans			1,357				1,016
Excess tax benefit from share-based employee awards			277				8
Payments for common shares repurchased			—				(1,319	)
Cash dividends paid to shareholders			(12,835	)			(12,811	)
Net cash used by financing activities of continuing operations			(40,720	)			(49,878	)
Effect of Exchange Rate Change on Cash			325				(359	)
Cash Used by Operating Activities of Discontinued Operations			—				(470	)
Cash Used by Investing Activities of Discontinued Operations			—				(6	)
Net Change in Cash and Cash Equivalents			3,539				1,454
Cash and Cash Equivalents: Beginning of Period			12,789				15,590
End of Period		$	16,328			$	17,044

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

Note 1: Consolidated financial statements

     The consolidated balance sheet as of March 31, 2010, the consolidated statements of income for the quarters ended March 31, 2010 and 2009 and the consolidated statements of cash flows for the quarters ended March 31, 2010 and 2009 are unaudited. The consolidated balance sheet as of December 31, 2009 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q, and do not contain certain information included in our consolidated annual financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”).

Note 2: New accounting pronouncements

     In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance requires new disclosures and clarifies some existing disclosure requirements regarding fair value measurements. The disclosures required under this guidance are included in Note 5, with the exception of disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for our quarterly report on Form 10-Q for the quarter ending March 31, 2011.

     In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This guidance removes the requirement to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements for companies that file financial statements with the Securities and Exchange Commission (SEC). This new guidance was effective immediately. We evaluate subsequent events through the date our financial statements are filed with the SEC. See Note 16 for discussion of subsequent events.

Note 3: Supplemental balance sheet information

     Inventories and supplies — Inventories and supplies were comprised of the following:

		March 31,				December 31,
(in thousands)		2010				2009
Raw materials		$	3,858			$	4,048
Semi-finished goods			9,076				8,750
Finished goods			5,404				5,602
Total inventories			18,338				18,400
Supplies, primarily production			3,578				3,722
Inventories and supplies		$	21,916			$	22,122

     Marketable securities — Available-for-sale marketable securities included within funds held for customers and other current assets were comprised of the following:

		March 31, 2010
						Gross				Gross
						unrealized				unrealized
(in thousands)		Cost				gains				losses				Fair value
Corporate investments:
Money market securities		$	1,983			$	—			$	—			$	1,983
Funds held for customers:(1)
Money market securities			4,959				—				—				4,959
Canadian and provincial government securities			4,954				1				(71	)			4,884
Marketable securities — funds held for customers			9,913				1				(71	)			9,843
Total marketable securities		$	11,896			$	1			$	(71	)		$	11,826

		December 31, 2009
						Gross				Gross
						unrealized				unrealized
(in thousands)		Cost				gains				losses				Fair value
Corporate investments:
Money market securities		$	3,667			$	—			$	—			$	3,667
Funds held for customers:(1)
Money market securities			9,522				—				—				9,522
Total marketable securities		$	13,189			$	—			$	—			$	13,189

     Expected maturities of available-for-sale securities as of March 31, 2010 were as follows:

(in thousands)		Fair value
Due in one year or less		$	7,179
Due in one to three years			1,634
Due in three to five years			880
Due after five years			2,133
Total marketable securities		$	11,826

     Further information regarding the fair value of marketable securities can be found in Note 5: Fair value measurements.

     Intangibles – Intangibles were comprised of the following:

		March 31, 2010												December 31, 2009
		Gross carrying				Accumulated								Gross carrying				Accumulated
(in thousands)		amount				amortization				Net carrying amount				amount				amortization				Net carrying amount
Indefinite-lived:
Trade name		$	19,100			$	—			$	19,100			$	19,100			$	—			$	19,100
Amortizable intangibles:
Internal-use software			348,446				(291,932	)			56,514				341,822				(285,181	)			56,641
Customer lists/relationships			57,073				(28,392	)			28,681				55,745				(25,777	)			29,968
Distributor contracts			30,900				(25,044	)			5,856				30,900				(24,594	)			6,306
Trade names			50,461				(19,417	)			31,044				51,861				(20,375	)			31,486
Other			8,575				(6,372	)			2,203				8,683				(6,274	)			2,409
Amortizable intangibles			495,455				(371,157	)			124,298				489,011				(362,201	)			126,810
Intangibles		$	514,555			$	(371,157	)		$	143,398			$	508,111			$	(362,201	)		$	145,910

     Total amortization of intangibles was $10.4 million for the quarter ended March 31, 2010 and $11.2 million for the quarter ended March 31, 2009. Based on the intangibles in service as of March 31, 2010, estimated future amortization expense is as follows:

(in thousands)
Remainder of 2010		$	29,649
2011			29,273
2012			16,109
2013			8,023
2014			4,850

     Goodwill – Changes in goodwill during the quarter ended March 31, 2010 were as follows:

		Small
		Business								Direct
(in thousands)		Services				Financial Services				Checks				Total
Balance, December 31, 2009:
Goodwill		$	596,429			$	—			$	82,237			$	678,666
Accumulated impairment charges			(20,000	)			—				—				(20,000	)
			576,429				—				82,237				658,666
Acquisition of Cornerstone Customer Solutions, LLC (see Note 7)			—				876				—				876
Currency translation adjustment			71				—				—				71
Balance, March 31, 2010:
Goodwill			596,500				876				82,237				679,613
Accumulated impairment charges			(20,000	)			—				—				(20,000	)
		$	576,500			$	876			$	82,237			$	659,613

     Other non-current assets – Other non-current assets were comprised of the following:

		March 31,				December 31,
(in thousands)		2010				2009
Contract acquisition costs (net of accumulated amortization of $89,008 and $107,971, respectively)		$	54,777			$	45,701
Deferred advertising costs			13,007				14,455
Other			22,052				21,455
Other non-current assets		$	89,836			$	81,611

     See Note 15 for a discussion of market risks related to contract acquisition costs. Changes in contract acquisition costs during the first quarters of 2010 and 2009 were as follows:

		Quarter Ended March 31,
(in thousands)		2010				2009
Balance, beginning of year		$	45,701			$	37,706
Additions(1)			14,083				29,265
Amortization			(5,007	)			(6,333	)
Balance, end of period		$	54,777			$	60,638

     Accrued liabilities – Accrued liabilities were comprised of the following:

		March 31,				December 31,
(in thousands)		2010				2009
Funds held for customers		$	45,950			$	26,901
Customer rebates			18,091				21,861
Deferred revenue			16,118				23,720
Interest			15,794				5,227
Income tax			14,659				—
Contract acquisition costs due within one year			13,370				2,795
Employee profit sharing and pension			10,115				36,594
Wages, including vacation			9,314				5,272
Restructuring due within one year (see Note 8)			7,173				11,151
Other			21,171				22,887
Accrued liabilities		$	171,755			$	156,408

     Deferred revenue consists primarily of advance billings related to Abacus America, Inc. and a contract termination settlement executed in the fourth quarter of 2009. The revenue from the contract termination settlement is being recognized over the contract’s remaining service period, which we expect to be through June 2010.

Note 4: Derivative financial instruments

     In September 2009, we entered into interest rate swaps with a notional amount of $210.0 million to hedge against changes in the fair value of a portion of our ten-year bonds due in 2012. We entered into these swaps, which we designated as fair value hedges, to achieve a targeted mix of fixed and variable rate debt, where we receive a fixed rate and pay a variable rate based on the London Interbank Offered Rate (LIBOR). Changes in the fair value of the interest rate swaps and the related long-term debt are included in interest expense in the consolidated statements of income. When the change in the fair value of the interest rate swaps and the hedged debt are not equal (i.e., hedge ineffectiveness), the difference in the changes in fair value affects the reported amount of interest expense in our consolidated statements of income. Hedge ineffectiveness was not significant for the quarter ended March 31, 2010. The fair value of the interest rate swaps was an asset of $2.3 million as of March 31, 2010, which

is included in other non-current assets on the consolidated balance sheet. As of December 31, 2009, the fair value of the interest rate swaps was a liability of $0.2 million, which is included in other non-current liabilities on the consolidated balance sheet. See Note 5 for further information regarding the fair value of these instruments.

Note 5: Fair value measurements

     2009 asset impairment analyses – We evaluate the carrying value of our indefinite-lived trade name and goodwill as of July 31^st of each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. During the quarter ended March 31, 2009, we experienced continued declines in our stock price, as well as a continuing negative impact of the economic downturn on our expected operating results. Based on these indicators of potential impairment, we completed impairment analyses of our indefinite-lived trade name and goodwill as of March 31, 2009.

     The estimate of fair value of our indefinite-lived trade name is based on a relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted. If the estimated fair value is less than the carrying value of the asset, an impairment loss is recognized. During the quarter ended March 31, 2009, we recorded a non-cash asset impairment charge in our Small Business Services segment of $4.9 million related to our indefinite-lived trade name.

     A two-step approach is used in evaluating goodwill for impairment. First, we compare the fair value of the reporting unit to which the goodwill is assigned to the carrying amount of its net assets. In calculating fair value, we use the income approach. The income approach is a valuation technique under which we estimate future cash flows using the reporting unit’s financial forecast from the perspective of an unrelated market participant. Future estimated cash flows are discounted to their present value to calculate fair value. During the quarter ended March 31, 2009, the carrying value of the net assets of one of our reporting units exceeded the estimated fair value. As such, the second step of the goodwill impairment analysis required that we compare the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of the goodwill, we measured the fair value of the reporting unit’s assets and liabilities, excluding goodwill. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities, excluding goodwill, is the implied fair value of the reporting unit’s goodwill. Significant intangible assets of the reporting unit identified for purposes of this impairment analysis included the indefinite-lived trade name discussed above and a distributor contract intangible asset. The fair value of the distributor contract was measured using the income approach, including adjustments for an estimated distributor retention rate based on historical experience. As a result of our analysis, we recorded a non-cash asset impairment charge during the quarter ended March 31, 2009 in our Small Business Services segment of $20.0 million related to goodwill.

     Information regarding the nonrecurring fair value measurements completed during the quarter ended March 31, 2009 was as follows:

						Fair value measurements using
		Fair value				Quoted prices in active				Significant other				Significant
		as of measurement				markets for identical				observable inputs				unobservable inputs
(in thousands)		date				assets (Level 1)				(Level 2)				(Level 3)				Impairment charge
Goodwill(1)		$	20,245			$	—			$	—			$	20,245			$	20,000
Indefinite-lived trade name(2)			19,100				—				—				19,100				4,900
Total impairment charges																		$	24,900

     Recurring fair value measurements – As corporate investments, we held available-for-sale marketable securities of $2.0 million as of March 31, 2010 and $3.7 million as of December 31, 2009. These investments are included in other current assets on the consolidated balance sheets. The fair value of these assets is determined based on quoted prices in active markets for identical assets. Because of the short-term nature of the underlying investments, the cost of these securities approximates their fair value. The cost of securities sold is determined using the average cost method. No gains or losses on sales of marketable securities were realized during the quarters ended March 31, 2010 or March 31, 2009.

     Funds held for customers included available-for-sale marketable securities of $9.8 million as of March 31, 2010 and $9.5 million as of December 31, 2009. The fair value of these assets is determined based on quoted prices in active markets for identical assets. Unrealized gains and losses, net of tax, are included in other comprehensive loss on the consolidated balance sheets. Realized gains and losses are included in revenue on the consolidated statements of income and were not significant for the quarter ended March 31, 2010. The cost of securities sold is determined using the average cost method. No gains or losses on sales of these marketable securities were realized during the quarter ended March 31, 2010. Funds held for customers during the quarter ended March 31, 2009 did not include marketable securities.

     We have elected to account for a long-term investment in domestic mutual funds under the fair value option for financial assets and financial liabilities. Realized and unrealized gains and losses, as well as dividends earned by the investment, are included in selling, general and administrative (SG&A) expense in our consolidated statements of income. This investment corresponds to a liability under an officers’ deferred compensation plan which is not available to new participants and is fully funded by the investment in mutual funds. The liability under the plan equals the fair value of the investment in mutual funds. Thus, as the value of the investment changes, the liability changes accordingly. As changes in the liability are reflected within SG&A expense in the consolidated statements of income, the fair value option of accounting for the investment in mutual funds allows us to net changes in the investment and the related liability in the statements of income. The cost of securities sold is determined using the average cost method. We recognized a net unrealized gain on the investment in mutual funds of $42,000 during the quarter ended March 31, 2010 and a net unrealized loss of $0.3 million during the quarter ended March 31, 2009. No realized gains or losses were recognized during the quarters ended March 31, 2010 or March 31, 2009.

     The fair value of interest rate swaps (see Note 4) is determined at each reporting date by means of a pricing model utilizing readily observable market interest rates. The change in fair value is determined as the change in the present value of estimated future cash flows discounted using the LIBOR rate applicable to the interest rate swaps. During the quarter ended March 31, 2010, we recognized a gain on these derivative instruments of $2.5 million, which was offset by a loss of $2.3 million related to an increase in the fair value of the hedged long-term debt. These changes in fair value are both included in interest expense in the consolidated statement of income for the quarter ended March 31, 2010.

     Information regarding recurring fair value measurements completed during each period was as follows:

						Fair value measurements using
						Quoted prices in
		Fair value				active markets for				Significant other				Significant
		as of				identical assets				observable inputs				unobservable inputs
(in thousands)		March 31, 2010				(Level 1)				(Level 2)				(Level 3)
Marketable securities – funds held for customers		$	9,843			$	9,843			$	—			$	—
Marketable securities – corporate investments			1,983				1,983				—				—
Long-term investment in mutual funds			2,113				2,113				—				—
Derivative assets			2,311				—				2,311				—

						Fair value measurements using
						Quoted prices in
		Fair value				active markets for				Significant other				Significant
		as of				identical assets				observable inputs				unobservable inputs
(in thousands)		December 31, 2009				(Level 1)				(Level 2)				(Level 3)
Marketable securities – funds held for customers		$	9,522			$	9,522			$	—			$	—
Marketable securities – corporate investments			3,667				3,667				—				—
Long-term investment in mutual funds			2,231				2,231				—				—
Derivative liabilities			152				—				152				—

     Fair value measurements of other financial instruments - The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.

     Cash and cash equivalents, cash and cash equivalents included within funds held for customers, and short-term debt — The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.

     Long-term debt — The fair value of long-term debt is based on quoted prices for identical liabilities when traded as assets in an active market (Level 1 fair value measurement). The fair value of long-term debt included in the table below does not reflect the impact of hedging activity. The carrying amount of long-term debt includes the change in fair value of hedged long-term debt.

     The estimated fair values of these financial instruments were as follows:

		March 31, 2010								December 31, 2009
(in thousands)		Carrying amount				Fair value				Carrying amount				Fair value
Cash and cash equivalents		$	16,328			$	16,328			$	12,789			$	12,789
Cash and cash equivalents — funds held for customers			36,151				36,151				17,379				17,379
Short-term debt			—				—				26,000				26,000
Long-term debt			745,099				722,880				742,753				719,283

Note 6: Earnings per share

     The following table reflects the calculation of basic and diluted earnings per share from continuing operations. During each period, certain options, as noted below, were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive.

		Quarter Ended March 31,
(in thousands, except per share amounts)		2010				2009
Earnings per share — basic:
Income from continuing operations		$	33,783			$	12,504
Income allocated to participating securities			(187	)			(100	)
Income available to common shareholders		$	33,596			$	12,404
Weighted-average shares outstanding			51,041				50,714
Earnings per share — basic		$	0.66			$	0.24
Earnings per share — diluted:
Income from continuing operations		$	33,783			$	12,504
Income allocated to participating securities			(187	)			(100	)
Re-measurement of share-based awards classified as liabilities			55				(160	)
Income available to common shareholders		$	33,651			$	12,244
Weighted-average shares outstanding			51,041				50,714
Dilutive impact of options and employee stock purchase plan			178				12
Weighted-average shares and potential dilutive shares outstanding			51,219				50,726
Earnings per share — diluted		$	0.66			$	0.24
Antidilutive options excluded from calculation			2,391				3,169

Note 7: Acquisition and discontinued operations

     During March 2010, we purchased the assets of Cornerstone Customer Solutions, LLC (CCS) in a cash transaction for $0.7 million. CCS is a full-service, marketing solutions provider specializing in the development and execution of analytics-driven direct marketing programs. The results of operations of this business from its acquisition date are included in our Financial Services segment. The allocation of the purchase price based upon the fair values of the assets acquired and liabilities assumed resulted in tax deductible goodwill of $0.9 million. We believe this acquisition resulted in the recognition of goodwill as we are offering these strategic and tactical marketing solutions to our financial institution clients. Transaction costs related to this acquisition were expensed as incurred and were not significant to our consolidated statement of income for the quarter ended March 31, 2010.

     Net loss from discontinued operations for the quarter ended March 31, 2010 represents an additional loss on the disposal of a previously divested business.

Note 8: Restructuring charges

     Net restructuring charges for each period consisted of the following components:

		Quarter Ended March 31,
(in thousands)		2010				2009
Severance accruals		$	681			$	153
Severance reversals			(820	)			(610	)
Operating lease obligations			415				865
Operating lease reversals			—				(19	)
Net restructuring accruals			276				389
Other costs			102				941
Net restructuring charges		$	378			$	1,330

     2010 restructuring charges — During the quarter ended March 31, 2010, the net restructuring accruals included severance charges related to employee reductions in various functional areas as we continue our cost reduction initiatives, primarily within the fulfillment function, as well as an additional charge for an operating lease related to a facility closed in 2008. The restructuring accruals included severance benefits for 30 employees. These charges were reduced by the reversal of restructuring accruals recorded in 2008 and 2009 as fewer employees received severance benefits than originally estimated. Other restructuring costs, which were expensed as incurred, included items such as equipment moves, training and travel related to our restructuring activities. The net restructuring charges were reflected as net restructuring charges of $0.6 million within cost of goods sold and net restructuring reversals of $0.2 million within operating expenses in the consolidated statement of income for the quarter ended March 31, 2010.

     2009 restructuring charges - During the quarter ended March 31, 2009, the net restructuring accruals primarily included operating lease obligations on two manufacturing facilities which were closed during the quarter ended March 31, 2009, less the reversal of $0.6 million of previously recorded restructuring accruals as fewer employees received severance benefits than originally estimated. Other restructuring costs, which were expensed as incurred, included items such as equipment moves, training and travel related to our restructuring activities. The net restructuring charges were reflected as net restructuring charges of $1.5 million within cost of goods sold and net restructuring reversals of $0.2 million within operating expenses in the consolidated statement of income for the quarter ended March 31, 2009.

     Restructuring accruals of $7.6 million as of March 31, 2010 are reflected in the consolidated balance sheet as accrued liabilities of $7.2 million and other non-current liabilities of $0.4 million. Restructuring accruals of $11.5 million as of December 31, 2009 are reflected in the consolidated balance sheet as accrued liabilities of $11.2 million and other non-current liabilities of $0.3 million. The majority of the employee reductions are expected to be completed by the third quarter of 2010. We expect most of the related severance payments to be fully paid by early 2011, utilizing cash from operations. The remaining payments due under operating lease obligations will be paid through May 2013. As of March 31, 2010, 289 employees had not yet started to receive severance benefits. Further information regarding our restructuring accruals can be found under the caption “Note 8: Restructuring charges” in the Notes to Consolidated Financial Statements appearing in the 2009 Form 10-K.

     As of March 31, 2010, our restructuring accruals, by company initiative, were as follows:

(in thousands)		2007 initiatives				2008 initiatives				2009 initiatives				2010 initiatives				Total
Balance, December 31, 2009		$	64			$	2,175			$	9,253			$	—			$	11,492
Restructuring charges			—				499				51				546				1,096
Restructuring reversals			—				(226	)			(594	)			—				(820	)
Payments, primarily severance			—				(759	)			(3,339	)			(33	)			(4,131	)
Balance, March 31, 2010		$	64			$	1,689			$	5,371			$	513			$	7,637
Cumulative amounts:
Restructuring accruals		$	7,181			$	27,519			$	10,967			$	546			$	46,213
Restructuring reversals			(1,439	)			(5,111	)			(742	)			—				(7,292	)
Payments, primarily severance			(5,678	)			(20,719	)			(4,854	)			(33	)			(31,284	)
Balance, March 31, 2010		$	64			$	1,689			$	5,371			$	513			$	7,637

     As of March 31, 2010, the components of our restructuring accruals, by segment, were as follows:

		Employee severance benefits																Operating lease obligations
		Small Business				Financial				Direct								Small Business
(in thousands)		Services				Services				Checks				Corporate				Services				Total
Balance, December 31, 2009		$	4,745			$	1,053			$	116			$	4,781			$	797			$	11,492
Restructuring charges			195				20				—				466				415				1,096
Restructuring reversals			(369	)			(39	)			(116	)			(296	)			—				(820	)
Payments			(1,949	)			(574	)			—				(1,431	)			(177	)			(4,131	)
Balance, March 31, 2010		$	2,622			$	460			$	—			$	3,520			$	1,035			$	7,637
Cumulative amounts for current initiatives(1) :
Restructuring charges		$	15,059			$	5,711			$	475			$	23,167			$	1,801			$	46,213
Restructuring reversals			(1,744	)			(1,152	)			(125	)			(4,258	)			(13	)			(7,292	)
Inter-segment transfer			1,552				739				61				(2,352	)			—				—
Payments			(12,245	)			(4,838	)			(411	)			(13,037	)			(753	)			(31,284	)
Balance, March 31, 2010		$	2,622			$	460			$	—			$	3,520			$	1,035			$	7,637

Note 9: Pension and other postretirement benefits

     We have historically provided certain health care benefits for a large number of retired employees. In addition to our retiree health care plan, we also have a supplemental executive retirement plan in the United States. We previously had a pension plan that covered certain Canadian employees which was settled during the quarter ended March 31, 2009. Further information regarding our postretirement benefit plans can be found under the caption “Note 12: Pension and other postretirement benefits” in the Notes to Consolidated Financial Statements appearing in the 2009 Form 10-K. See Note 15 for discussion of the risks associated with the plan assets of our postretirement benefit plan.

     Pension and postretirement benefit expense for the quarters ended March 31, 2010 and 2009 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2010				2009				2010				2009
Interest cost		$	1,820			$	2,044			$	45			$	263
Expected return on plan assets			(1,806	)			(1,460	)			—				(57	)
Amortization of prior service credit			(936	)			(990	)			—				—
Amortization of net actuarial losses			1,352				3,510				—				9
Total periodic benefit expense			430				3,104				45				215
Settlement loss			—				—				—				402
Net periodic benefit expense		$	430			$	3,104			$	45			$	617

Note 10: Income tax provision

     Our effective tax rate for the quarter ended March 31, 2010 was 41.8%, compared to our 2009 annual effective tax rate of 35.9%. Our 2010 effective tax rate included discrete items which increased our tax rate by 6.3 points. The discrete items in 2010 consisted primarily of a $3.4 million charge resulting from a reconciliation bill, formerly known as the Health Care and Education Reconciliation Act, which was signed into law in March 2010 and which requires that certain tax deductions after 2012 be reduced by the amount of the Medicare Part D subsidy payments. Prior to this law change, the subsidy was to be disregarded in all future years when computing tax deductions. This resulted in a reduction in the deferred tax asset associated with our postretirement benefit plan.

     Our 2009 effective tax rate included the non-deductible portion of the goodwill impairment charge recorded during the quarter ended March 31, 2009 (see Note 5), which increased our effective tax rate 2.9 percentage points. Our 2009 effective tax rate also included favorable adjustments related to receivables for prior year tax returns, which lowered our effective tax rate 2.2 percentage points.

Note 11: Debt

     Total debt outstanding was comprised of the following:

		March 31,				December 31,
(in thousands)		2010				2009
5.0% senior, unsecured notes due December 15, 2012, net of discount, including cumulative change in fair value of hedged debt: 2010 - $2,034 increase; 2009 - $254 decrease		$	281,865			$	279,533
5.125% senior, unsecured notes due October 1, 2014, net of discount			263,234				263,220
7.375% senior, unsecured notes due June 1, 2015			200,000				200,000
Long-term portion of debt			745,099				742,753
Amounts drawn on line of credit			—				26,000
Total debt		$	745,099			$	768,753

     Our senior, unsecured notes include covenants that place restrictions on the issuance of additional debt, the execution of certain sale-leaseback agreements and limitations on certain liens. Discounts from par value are being amortized ratably as increases to interest expense over the term of the related debt.

     In May 2007, we issued $200.0 million of 7.375% senior, unsecured notes maturing on June 1, 2015. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the SEC via a registration statement which became effective on June 29, 2007. Interest payments are due each June and December. The notes place a limitation on restricted payments, including increases in dividend levels and share repurchases. This limitation does not apply if the notes are upgraded to an investment-grade credit rating. Principal redemptions may be made at our election at any time on or after June 1, 2011 at redemption prices ranging from 100% to 103.688% of the principal amount. We may also redeem up to 35% of the notes at a price equal to 107.375% of the principal amount plus

accrued and unpaid interest using the proceeds of certain equity offerings completed before June 1, 2010. In addition, at any time prior to June 1, 2011, we may redeem some or all of the notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. If we sell certain of our assets or experience specific types of changes in control, we must offer to purchase the notes at 101% of the principal amount. 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 liquidated all of these marketable securities and used the proceeds as part of our repayment of $325.0 million of unsecured notes plus accrued interest. The fair value of the notes issued in May 2007 was $200.5 million as of March 31, 2010, based on quoted prices for identical liabilities when traded as assets.

     In October 2004, we issued $275.0 million of 5.125% senior, unsecured notes maturing on October 1, 2014. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the SEC via a registration statement which became effective on November 23, 2004. Interest payments are due each April and October. Proceeds from the offering, net of offering costs, were $272.3 million. These proceeds were used to repay commercial paper borrowings used for the acquisition of New England Business Service, Inc. in 2004. During the quarter ended March 31, 2009, we retired $11.5 million of these notes, realizing a pre-tax gain of $4.1 million. As of March 31, 2010, the fair value of the $263.5 million remaining notes outstanding was $242.4 million, based on quoted prices for identical liabilities when traded as assets.

     In December 2002, we issued $300.0 million of 5.0% senior, unsecured notes maturing on December 15, 2012. These notes were issued under our shelf registration statement covering up to $300.0 million in medium-term notes, thereby exhausting that registration statement. Interest payments are due each June and December. Principal redemptions may be made at our election prior to the stated maturity. Proceeds from the offering, net of offering costs, were $295.7 million. These proceeds were used for general corporate purposes, including funding share repurchases, capital asset purchases and working capital. During the quarter ended March 31, 2009, we retired $19.7 million of these notes, realizing a pre-tax gain of $5.7 million. As of March 31, 2010, the fair value of the $280.3 million remaining notes outstanding was $280.0 million, based on quoted prices for identical liabilities when traded as assets. As discussed in Note 4, during September 2009, we entered into interest rate swaps with a notional amount of $210.0 million to hedge a portion of these notes. The fair value of long-term debt disclosed here does not reflect the impact of these fair value hedges. The carrying amount of long-term debt has increased $2.0 million since the inception of the interest rate swaps due to changes in the fair value of the hedged long-term debt.

     As of December 31, 2009, we had a $275.0 million committed line of credit which was scheduled to expire in July 2010. During March 2010, we cancelled this line of credit and executed a new $200.0 million credit facility, which expires in March 2013. Borrowings under the credit facility are collateralized by substantially all personal property. Our commitment fee ranges from 0.40% to 0.50% based on our leverage ratio. The credit agreement governing the credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in control as defined in the agreement. The agreement also contains financial covenants regarding our leverage ratio, interest coverage and liquidity.

     The daily average amount outstanding under our credit facilities during the quarter ended March 31, 2010 was $17.5 million at a weighted-average interest rate of 1.20%. As of March 31, 2010, no amounts were outstanding under our credit facility. During April 2010, we drew $98 million on our credit facility to fund an acquisition (see Note 16). During 2009, the daily average amount outstanding under our line of credit was $69.3 million at a weighted-average interest rate of 0.76%. As of December 31, 2009, $26.0 million was outstanding at a weighted-average interest rate of 0.67%. As of March 31, 2010, amounts were available for borrowing under our credit facility as follows:

		Total
(in thousands)		available
Credit facility commitment		$	200,000
Outstanding letters of credit			(10,236	)
Net available for borrowing as of March 31, 2010		$	189,764

     Absent certain defined events of default under our debt instruments, and as long as our ratio of earnings before interest, taxes, depreciation and amortization to interest expense is in excess of two to one, our debt covenants do not restrict our ability to pay cash dividends at our current rate.

Note 12: Other commitments and contingencies

     Information regarding indemnifications, environmental matters, self-insurance and litigation can be found under the caption “Note 14: Other commitments and contingencies” in the Notes to Consolidated Financial Statements appearing in the 2009 Form 10-K. No significant changes in these items occurred during the quarter ended March 31, 2010.

Note 13: Shareholders’ equity

     We have an outstanding authorization from our board of directors to purchase up to 10 million shares of our common stock. This authorization has no expiration date, and 6.4 million shares remain available for purchase under this authorization as of March 31, 2010. We did not repurchase any shares during the quarter ended March 31, 2010. The terms of our $200.0 million notes maturing in 2015 place a limitation on restricted payments, including increases in dividend levels and share repurchases.

     Changes in shareholders’ equity during the quarter ended March 31, 2010 were as follows:

		Common shares								Additional
		Number				Par				paid-in								Accumulated other				Total shareholders’
(in thousands)		of shares				value				capital				Retained earnings				comprehensive loss				equity
Balance, December 31, 2009			51,189			$	51,189			$	58,071			$	60,768			$	(52,818	)		$	117,210
Net income			—				—				—				33,384				—				33,384
Cash dividends			—				—				—				(12,835	)			—				(12,835	)
Common shares issued			198				198				1,886				—				—				2,084
Tax impact of share-based awards			—				—				(1,048	)			—				—				(1,048	)
Common shares retired			(50	)			(50	)			(787	)			—				—				(837	)
Fair value of share-based compensation			1				1				1,509				—				—				1,510
Amortization of postretirement prior service credit, net of tax			—				—				—				—				(580	)			(580	)
Amortization of postretirement net actuarial losses, net of tax			—				—				—				—				838				838
Amortization of loss on derivatives, net of tax(1)			—				—				—				—				330				330
Net unrealized loss on marketable securities, net of tax			—				—				—				—				(50	)			(50	)
Currency translation adjustment			—				—				—				—				1,175				1,175
Balance, March 31, 2010			51,338			$	51,338			$	59,631			$	81,317			$	(51,105	)		$	141,181

     Accumulated other comprehensive loss was comprised of the following:

		March 31,				December 31,
(in thousands)		2010				2009
Postretirement and defined benefit pension plan:
Unrealized prior service credit		$	17,398			$	17,978
Unrealized net actuarial losses			(69,490	)			(70,328	)
Postretirement and defined benefit pension plans, net of tax			(52,092	)			(52,350	)
Loss on derivatives, net of tax			(5,511	)			(5,841	)
Unrealized loss on marketable securities, net of tax			(50	)			—
Currency translation adjustment			6,548				5,373
Accumulated other comprehensive loss		$	(51,105	)		$	(52,818	)

Note 14: Business segment information

     We operate three reportable business segments: Small Business Services, Financial Services and Direct Checks. Small Business Services sells personalized printed products, which include business checks, printed forms, promotional products, marketing materials and related services, as well as retail packaging supplies and a suite of business services, including web design and hosting, fraud protection, payroll, logo design, search engine marketing and business networking, to small businesses. These products and services are sold through direct response marketing, referrals from financial institutions and telecommunications companies, independent distributors and dealers, the internet and sales representatives. Financial Services sells personal and business checks, check-related products and services, including rewards checking programs, customer loyalty and retention programs, fraud monitoring and protection services, stored value gift cards, and direct marketing services to financial institutions primarily through a direct sales force. Direct Checks sells personal and business checks and related products and services directly to consumers through direct response marketing and the internet. All three segments operate primarily in the United States. Small Business Services also has operations in Canada and Europe.

     The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2009 Form 10-K. We allocate corporate costs for our shared services functions to our business segments, including costs of our executive management, human resources, supply chain, finance, information technology and legal functions. Generally, where costs incurred are directly attributable to a business segment, primarily within the areas of information technology, supply chain and finance, those costs are reported in that segment’s results. Because we use a shared services approach for many of our functions, certain costs are not directly attributable to a business segment. These costs are allocated to our business segments based on segment revenue, as revenue is a measure of the relative size and magnitude of each segment and indicates the level of corporate shared services consumed by each segment. Corporate assets are not allocated to the segments and consist of property, plant and equipment, internal-use software, inventories and supplies related to our corporate shared services functions of manufacturing, information technology and real estate, as well as long-term investments and deferred income taxes.

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

     The following is our segment information as of and for the quarters ended March 31, 2010 and 2009:

						Reportable Business Segments
						Small Business
(in thousands)						Services				Financial Services				Direct Checks				Corporate				Consolidated
Revenue from external customers:			2010			$	192,326			$	101,445			$	41,349			$	—			$	335,120
			2009				193,283				102,003				44,234				—				339,520
Operating income (loss):			2010				29,070				23,988				15,897								68,955
			2009				(6,628	)			19,561				14,249				—				27,182
Depreciation and amortization			2010				11,438				2,901				1,108								15,447
expense:			2009				13,346				2,511				996				—				16,853
Asset impairment charges:			2010				—				—				—				—				—
			2009				24,900				—				—				—				24,900
Total assets:			2010				783,556				66,248				94,538				287,628				1,231,970
			2009				739,800				68,768				98,448				284,230				1,191,246
Capital asset purchases:			2010				—				—				—				9,799				9,799
			2009				—				—				—				9,958				9,958

Note 15: Market risks

     Due to failures and consolidations of companies within the financial services industry since 2008, as well as the downturn in the broader U.S. economy, including the liquidity crisis in the credit markets, we have identified certain market risks which may affect our future operating performance.

     Economic conditions – As discussed in Note 5, during the quarter ended March 31, 2009, we completed impairment analyses of goodwill and our indefinite-lived trade name due to indicators of potential impairment. We recorded a goodwill impairment charge of $20.0 million in our Small Business Services segment related to one of our reporting units, as well as an impairment charge of $4.9 million in our Small Business Services segment related to an indefinite-lived trade name. The annual impairment analyses completed during the quarter ended September 30, 2009 indicated that the calculated fair values of our reporting units’ net assets exceeded their carrying values by amounts between $18 million and $308 million, or by amounts between 46% and 70% above the carrying values of their net assets. The calculated fair value of our indefinite-lived trade name exceeded its carrying value of $19.1 million by $4.4 million based on the analysis completed during the quarter ended September 30, 2009. Due to the ongoing uncertainty in market conditions, which may continue to negatively impact our expected operating results or share price, we will continue to monitor whether additional impairment analyses are required with respect to the carrying value of goodwill and the indefinite-lived trade name.

     Postretirement benefit plan – The fair value of the plan assets of our postretirement benefit plan is subject to various risks, including credit, interest and overall market volatility risks. During 2008, the equity markets experienced a significant decline in value. As such, the fair value of our plan assets decreased significantly during the year, resulting in a $29.9 million increase in the unfunded status of our plan as compared to the end of the previous year. This affected the amounts reported in the consolidated balance sheet as of December 31, 2008 and also contributed to an increase in postretirement benefit expense of $2.4 million in 2009, as compared to 2008. As of December 31, 2009, the fair value of our plan assets had partially recovered, contributing to an $11.8 million improvement in the unfunded status of our plan as compared to December 31, 2008. If the equity and bond markets decline in future periods, the funded status of our plan could again be materially affected. This could result in higher postretirement benefit expense in the future, as well as the need to contribute increased amounts of cash to fund the benefits payable under the plan, although our obligation is limited to funding benefits as they become payable. We did not use plan assets to make benefit payments during the first quarter of 2010 or during 2009. Rather, we used cash provided by operating activities to make these payments.

     Financial institution clients – Continued turmoil in the financial services industry, including further bank failures and consolidations, could have a significant impact on our consolidated results of operations if we were to lose a significant contract and/or we were unable to recover the value of an unamortized contract acquisition cost or accounts receivable. As of March 31, 2010, unamortized contract acquisition costs totalled $54.8 million, while liabilities for contract acquisition costs

not paid as of March 31, 2010 were $22.3 million. The inability to recover amounts paid to one or more of our larger financial institution clients could have a significant negative impact on our consolidated results of operations. Additionally, if two of our financial institution clients were to consolidate, the increase in general negotiating leverage possessed by the consolidated entities could result in a new contract which is not as favorable to us as those historically negotiated with the clients individually. We may also lose significant business if one of our financial institution clients were taken over by a financial institution which is not one of our clients. However, in this situation, we may be able to collect a contract termination payment. Conversely, further bank consolidations could positively impact our results of operations if we were to obtain business from a non-client financial institution that merges with one of our clients. We may also generate non-recurring conversion revenue when obsolete checks have to be replaced after one financial institution merges with or acquires another. We presently do not have specific information that indicates that we should expect to generate significant income from conversions.

Note 16: Subsequent event

     During April 2010, we acquired all of the outstanding stock of Custom Direct, Inc. (Custom Direct), a leading provider of direct-to-consumer checks, in a cash transaction for $98 million. Approximately $86 million of this amount was used to extinguish Custom Direct’s outstanding debt. We funded the acquisition with our credit facility. We expect the acquisition of Custom Direct to contribute to our strategy of optimizing cash flows in our Direct Checks segment, including cash tax savings of approximately $10 million from certain acquired tax attributes. Related transaction costs expensed during the quarter ended March 31, 2010 were not significant.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

EXECUTIVE OVERVIEW

     Our business is organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services segment generated 57.4% of our consolidated revenue for the first quarter of 2010. This segment has sold personalized printed products, which include business checks, printed forms, promotional products, marketing materials and related services, as well as retail packaging supplies and a suite of business services, including web design and hosting, fraud protection, payroll, logo design, search engine marketing and business networking, to over four million small businesses in the last 24 months. These products and services are sold through direct response marketing, referrals from financial institutions and telecommunications companies, independent distributors and dealers, the internet and sales representatives. Our Financial Services segment generated 30.3% of our consolidated revenue for the first quarter of 2010. This segment sells personal and business checks, check-related products and services, including rewards checking programs, customer loyalty and retention programs, fraud monitoring and protection services, stored value gift cards, and direct marketing services to approximately 6,400 financial institution clients nationwide, including banks, credit unions and financial services companies, primarily through a direct sales force. Our Direct Checks segment generated 12.3% of our consolidated revenue for the first quarter of 2010. 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 and Europe.

     Throughout 2009, our business was negatively impacted by the severe downturn in the economy and by turmoil in the financial services industry. Demand fell for many of our Small Business Services products as we believe small business owners reduced their discretionary spending. Additionally, we believe interruptions and consumer uncertainty related to financial institution consolidations and failures led to reduced check orders from several of our financial institution clients. We continued to see the negative impact of the economic environment in our results for the first quarter of 2010. At the same time, we accelerated many of our cost reduction actions, and we have identified additional opportunities to improve our cost structure. We believe we have taken appropriate steps to position ourselves for sustainable growth as the economy recovers, including enhancing our internet capabilities, improving customer segmentation and adding new small business customers. We have invested in acquisitions that offer higher growth business services, extend our direct-to-consumer offerings, enhance our cash flow generating capabilities, and bring analytics-driven deposit acquisition marketing programs to our financial institution clients. We are focused on capitalizing on transformational opportunities available to us in this difficult environment and believe that we will be positioned to consistently deliver strong margins once the economy recovers.

Our earnings for the first quarter of 2010, as compared to the first quarter of 2009, benefited from the following:

	•		Asset impairment charges of $24.9 million in the first quarter of 2009 within Small Business Services related to goodwill and an indefinite-lived trade name;
	•		Continuing initiatives to reduce our cost structure, primarily within sales and marketing, manufacturing and information technology;
	•		Recognition of deferred revenue from a Financial Services contract termination settlement executed in the fourth quarter of 2009;
	•		Price increases in Small Business Services and Financial Services; and
	•		A decrease of $2.0 million in restructuring and related costs in 2010, as compared to 2009.

These benefits were partially offset by the following:

	•		Pre-tax gains of $9.8 million in the first quarter of 2009 from the retirement of long-term notes;
	•		Lower volume in Small Business Services due primarily to changes in our customers’ buying patterns, we believe, as a result of the continued economic downturn;
	•		Reduced volume for our personal check businesses due to the continuing decline in check usage, turmoil in the financial services industry, including bank failures, and continued economic softness; and
	•		Increases in delivery rates.

Our Strategies

     Details concerning our strategies were provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). There were no significant changes in our strategies during the first quarter of 2010.

     During March 2010, we purchased the assets of Cornerstone Customer Solutions, LLC (CCS) in a cash transaction for $0.7 million. CCS is a full-service, marketing solutions provider specializing in the development and execution of analytics-driven direct marketing programs. The results of operations of this business from its acquisition date are included in our Financial Services segment as we are offering these strategic and tactical marketing solutions to our financial institution clients.

     During April 2010, we acquired all of the outstanding stock of Custom Direct, Inc. (Custom Direct), a leading provider of direct-to-consumer checks, in a cash transaction for $98 million. Approximately $86 million of this amount was used to extinguish Custom Direct’s outstanding debt. We funded the acquisition with our credit facility. We expect the acquisition of Custom Direct to contribute to our strategy of optimizing cash flows in our Direct Checks segment. During the remainder of 2010, the acquisition is expected to generate approximately $60 million in revenue and over $15 million of additional operating cash flow, including cash tax savings of approximately $10 million from certain acquired tax attributes. The acquisition is expected to be neutral to earnings per share in 2010, including approximately $2 million of transaction-related costs and approximately $11 million of acquisition-related amortization.

Update on Cost Reduction Initiatives

     As discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the 2009 Form 10-K, we are pursuing aggressive cost reduction and business simplification initiatives which we expect to collectively reduce our annual cost structure by at least $325 million, net of required investments, by the end of 2010. The baseline for these anticipated savings is 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. We estimate that we realized approximately $260 million of the $325 million target through the end of 2009, and we are currently on track to realize the remaining $65 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 2010

     We anticipate that consolidated revenue from continuing operations will be between $1.36 billion and $1.40 billion for 2010, as compared to $1.34 billion for 2009, including approximately $60 million of revenue from the Custom Direct acquisition. In Small Business Services, we expect the revenue decline percentage to be in the low single digits to flat range as declines in core business products are expected to be offset by the benefits of our e-commerce investments and growth in

business services offerings, including 2009 acquisitions. In Financial Services, we expect check order declines of approximately eight percent compared to 2009, given the continued weak economy and increases in forms of electronic payments. We expect these declines to be partially offset by higher revenue per order, a new contract acquisition which will begin to contribute volume in the second half of the year, and continued contributions from non-check revenue streams. Direct Checks revenue is expected to increase in the upper twenties percent range, driven by the Custom Direct acquisition and improved reorder volumes stemming from past quantity reductions, partially offset by check usage declines and the continued weak economy.

     We expect that 2010 diluted earnings per share will be between $2.45 and $2.65, which includes an estimated $0.10 per share impact of a first quarter charge to income tax expense due to recent health care reform legislation and transaction-related costs associated with recent acquisitions. Earnings per share for 2009 was $1.94, which included a $0.50 per share impact of impairment charges, restructuring and transaction-related costs, and gains on debt repurchases. We expect that continued execution of our cost reduction initiatives will be offset by the revenue decline, excluding the Custom Direct acquisition, continued investments in revenue growth opportunities and increases in delivery rates. Our outlook reflects a merit wage freeze in 2010, leaving base salary levels consistent with 2009. We estimate that our annual effective tax rate for 2010 will be approximately 35%, excluding a first quarter charge of $3.4 million related to recent health care reform legislation, compared to 35.9% in 2009.

     We anticipate that net cash provided by operating activities of continuing operations will be between $195 million and $215 million in 2010, compared to $206 million in 2009. We anticipate that higher performance-based compensation payments for all employee levels in 2010 will be offset by cash generated by the Custom Direct acquisition, higher earnings, continued progress on working capital initiatives and lower contract acquisition payments. We estimate that capital spending will be approximately $40 million in 2010 as we continue to expand our use of digital printing technology, complete automation of our flat check packaging process and make other investments in order fulfillment, delivery productivity and information technology infrastructure.

     We believe our credit facility, which was executed in March 2010, along with cash generated by operating activities, will be sufficient to support our operations, including capital expenditures, small-to-medium-sized acquisitions, required debt service and dividend payments, for the next 12 months. With no long-term debt maturities until 2012, we are focused on a disciplined approach to capital deployment that focuses on our need to continue investing in initiatives to drive revenue growth, including small-to-medium-sized acquisitions. We also anticipate that our board of directors will maintain our current dividend level. However, dividends are approved by the board of directors on a quarterly basis and thus, are subject to change. To the extent we have cash flow in excess of these priorities, our focus during the remainder of 2010 will be on further reducing our debt. During the first quarter of 2010, we re-paid $26.0 million borrowed under our credit facilities and had no remaining amounts outstanding as of March 31, 2010.

BUSINESS CHALLENGES/MARKET RISKS

     Details concerning business challenges/market risks were provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2009 Form 10-K. There were no significant changes in these items during the first quarter of 2010.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue

		Quarter Ended March 31,
(in thousands, except per order amounts)		2010				2009				Change
Revenue		$	335,120			$	339,520				(1.3	%)
Orders			14,073				15,298				(8.0	%)
Revenue per order		$	23.81			$	22.19				7.3	%

     The decrease in revenue for the first quarter of 2010, as compared to the first quarter of 2009, was due to lower order volume in each of our segments. Partially offsetting the volume declines was higher revenue per order in Financial Services, sales of products and services by businesses acquired in 2009 and 2010, a favorable currency exchange rate impact of $2.4 million, and price increases in Small Business Services and Financial Services.

     The number of orders decreased for the first quarter of 2010, as compared to the first quarter of 2009, due primarily to general economic conditions which we believe affected our customers’ buying patterns, as well as the continuing decline in check and forms usage. Revenue per order increased for the first quarter of 2010, as compared to the first quarter of 2009, primarily due to the recognition of deferred revenue from a Financial Services contract termination settlement executed in the fourth quarter of 2009 and the benefit of price increases, partially offset by continued pricing pressure within Financial Services.

Consolidated Gross Margin

		Quarter Ended March 31,
(in thousands)		2010				2009				Change
Gross profit		$	216,757			$	210,261				3.1	%
Gross margin			64.7	%			61.9	%		2.8 pts.

     We evaluate gross margin when analyzing our consolidated results of operations as we believe it provides important insight into significant profit drivers. As more than 90% of our revenue at this time is generated from the sale of manufactured and purchased products, the measure of gross margin best demonstrates our manufacturing and distribution performance, as well as the impact of pricing on our profitability. Gross margin is not a complete measure of profitability, as it omits selling, general and administrative (SG&A) expense. However, it is a financial measure which is useful in evaluating our results of operations.

     Gross margin increased for the first quarter of 2010, as compared to the first quarter of 2009, due primarily to manufacturing efficiencies and other benefits resulting from our cost reduction initiatives, as well as higher revenue per order. Also contributing to the higher gross margin was a decrease of $1.9 million in restructuring charges and other costs related to our cost reduction initiatives. Further information regarding our restructuring costs can be found under Restructuring Costs. The lower charges for restructuring and related costs contributed 0.6 percentage points of the increase in gross margin for the first quarter of 2010, as compared to 2009.

Consolidated Selling, General & Administrative Expense

		Quarter Ended March 31,
(in thousands)		2010				2009				Change
SG&A expense		$	148,045			$	158,356				(6.5	%)
SG&A as a percentage of revenue			44.2	%			46.6	%		(2.4) pts.

     The decrease in SG&A expense for the first quarter of 2010, as compared to the first quarter of 2009, was due primarily to various cost reduction initiatives within our shared services organizations, primarily within sales and marketing and information technology. Partially offsetting these decreases were expenses from the businesses we acquired in 2009 and 2010.

Net Restructuring Reversals

		Quarter Ended March 31,
(in thousands)		2010				2009				Change
Net restructuring reversals		$	243			$	177			$	66