Deluxe Solution | Cost Of Capital | Bond Credit Rating


deluxe corporation case study

Exhibit 4 Back to Roots Introduction o In the board of directors approved a stock-repurchase program. o Authorization of repurchase of up to 14 million shares of Deluxe common o Approximately 19% of shares outstanding o $ million and million shares were purchased by. Summary Deluxe Corporation is the dominant player in check-printing industry. In the past, its sales increased at a compound annual rate of 12% and occupied 49% market share in US. However, new forms of payments encroached on the demand of check-printing industry. The demand for printing check falls at 1% to 3% annually. The core business of Deluxe faces a big challenge%(54). Except: The level of flexibility or reserves The mix of debt and equity Financing requirements: 1. buyback spending 2. strategic acquisition 3. cash dividends 4. financial flexibility Question 6: What should Singh recommend? Question 1: Question 4: which rating has lowest overall.

Deluxe Corporation Case | Bond Credit Rating | High Yield Debt

Earlier in the year, Deluxe had retired all of its long-term debt, and the company had not had a major bond issue in more than 10 years. Simulta- neously, the company had been pursuing an aggressive program of share repurchases, the latest of which was nearly complete. So far, those actions had proven successful; investors had responded well to the share repurchases, and the companys stock was at its highest level in nearly 10 years.

But Singh, who had been retained by Deluxes board of direc- tors to provide guidance on the companys financial strategy, saw dangers looming for Deluxe that would require the companys managers to do more. Deluxe Corporation was the dominant player in the highly concentrated and com- petitive check-printing industry. Deluxes sales and earnings growth, however, deluxe corporation case study been in a slow decline as the company deluxe corporation case study to fight a relentless wave of tech- nological change, deluxe corporation case study.

Since the advent of online payment methods and the rising popu- larity of credit and debit cards, consumers usage of paper checks had fallen steadily. Mosner, had led a major restructuring of the firm whereby he rationalized its operations, reduced its labor force, and divested several noncore businesses. Singh sensed that those measures would only carry the company so far and that the board was looking for other alternatives.

Singh surmised that there would eventually be a tipping point at which deluxe corporation case study demand for paper checks would fall precipitously. In this challenging operating envi- ronment, Singh was convinced that Deluxe would need continued financial flexibility to fend off the eventual disintegration of its core business. Singh had already told the board that the company deluxe corporation case study probably gone as far as it could with share repurchases.

The time for a new round of debt financing was at hand. The board had asked Singh for a detailed plan in five days, and had insisted that, as part of the plan, he undertake a complete assessment of the firms overall debt policy, focusing primarily on the appropriate mix of debt and equity. In the not-too-distant future, Deluxes financial and strategic choices would be severely constrained, and Singh believed it was essential that the companys financial policies afford it deluxe corporation case study necessary funding and flexibility deluxe corporation case study steer a path to survivability.

Modest Beginnings Deluxe Corporation was founded in by a chicken-farmer-turned-printer in a one- room print shop in St.

Paul, Minnesota. Then known as Deluxe Check Printers, deluxe corporation case study, the company was a pioneer in the emerging check printing business, and specialized in imprinting personalized information on checks and checkbooks. Deluxe became a publicly traded company inand traded on the New York Stock Exchange in under the name Deluxe Corporation. The company was the largest provider of checks in the United States, serving customers through more than 10, financial institutions.

Deluxe processed more than million check orders each yearnearly half of the U. American consumers wrote more than 42 billion checks annu- ally, deluxe corporation case study check usage had declined in recent years. This rate, how- ever, had declined over the past decade as checks lost share to the electronic forms of payment, such as ATMs, credit cards, debit cards, and Internet bill-paying systems.

Deluxe competed primarily with two other companies, John Harland and Clarke American, a subsidiary of U. Recent Financial Performance With the prospect of a precipitous decline in demand for paper checks emerging in the late s, Deluxe undertook a major reorganization during which it divested non- strategic businesses and dramatically reduced the number of its employees and facilities.

The company went from 62 printing plants to 13, reduced its labor force from 15, to 7, outsourced information technology functions, improved manufactur- ing efficiencies, and divested nearly 20 separate businesses. The resulting reductions in operating expenses helped reverse Deluxes earnings slump indespite the continued softening in revenue growth. InDeluxe announced a major strategic deluxe corporation case study with the spinoff of its technology- related subsidiaries, eFunds and iDLX Technology Partners, in an initial public offering, deluxe corporation case study.

The subsidiary eFunds provided electronic-payment products and services e. While he admitted that the eventual demise of the paper-check business was a certainty, deluxe corporation case study, he insisted that there were still growth opportunities for the company: We dont want to abandon the core business too soon. Instead, you mine all you can out of the core business before [moving on].

We have a very good business, a very solid business with high levels of profitability. We feel we can generate revenues and profits on our core business not only today but over the next five years. With the spinoff of eFunds and iDLX, management abandoned its plan for Deluxe to offer products and services targeting the electronic-transfer market and refocused on its core business. Repositioning the firm as a pure-play check-printing company made sense to investors, and the companys stock price rose on the news.

Following the spinoff, Mosner reorganized Deluxes remaining paper-payments seg- ment around three primary business units. Financial Services sold checks to consumers through financial institutions, with institutional clients typically entering into three-to- five-year supplier contracts. Direct Checks sold to consumers through direct mail and the Internet. The Business Services segment sold checks, forms, and related products through financial institutions and directly to small businesses, targeting firms with no more than 20 employees.

See Figure 2 for data on Deluxes sales by segment. According to some analysts, the Business Services segment ultimately held the most promise for Deluxe because deluxe corporation case study could allow the company to bundle or cross-sell a variety of products and services to the growing small-business sector. Rather than simply grow its number of individual customers, as it had done in the past with its check business, Business Services could generate growth in the number of products or services it sold per customer.

Furthermore, there were several regional companies active in this sector that had the potential to be strategic partners for Deluxe. Over the preceding decade, however, the firms share price growth had lagged the broad market indexes. Exhibit 1 gives a year summary of the financial characteristics of the firm, including share prices and data on comparable market performance.

From toDeluxe Corporations compound annual rate of sales growth was 4. Concerns about revenue growth and declining demand deluxe corporation case study printed checks were echoed in the comments of analysts who followed the firm.

Despite a positive assessment of the firms recent ability to improve margins, one analyst covering Deluxe was guarded: We remain cautious concerning Deluxes long-term prospects for earnings growth, until the company can improve profitability in its core [Financial Services] deluxe corporation case study segment. At present, this seems like a tough proposition, given a relatively mature market, intense price competition, the growth in electronic payments, and consolidation in the banking sector.

Rajat Singh knew that Deluxes board members had many of the same concerns, but also knew that they believed the analyst community had taken a shortsighted view of the companys potential. In fact, Deluxes most recent annual report stated, While the check printing industry is mature, our existing leadership position in the market place contributes to our financial strength. The U. The companys management believed that it was well positioned to extract value from this business and to explore noncheck offerings that would closely leverage Deluxes core competencies.

Exhibits 2 and 3 give the latest years income statements and balance sheets for Deluxe Corporation. Current and Deluxe corporation case study Financing Against this backdrop, Singh assessed the current and future financing requirements of the firm. From time to time, Deluxe required additional financing for such general corporate purposes as working capital, capital asset purchases, possible acquisitions, repayment of outstanding debts, dividend payments, and repurchasing the firms secu- rities.

The risk of a downgrade of Deluxes short-term credit rating is low, Singh thought. If for any reason, they were unable to access the commercial paper markets, they would rely on their line of credit for liquidity. Duringthe company drew no amounts on its committed line of credit. At year-end, no amount was outstanding on this line of credit.

No such notes had been issued or were outstanding. This program followed a share-repurchase program initiated inwhich called for the repurchase of 10 million shares, or about Deluxe funded these repurchases with cash from operations and from issuances of commer- cial paper.

Exhibit 1 summarizes the firms share repurchase activity in recent years. Singh believed the board would continue to pursue an aggressive program of share repurchases. In addition to possible buybacks and strategic acquisitions, deluxe corporation case study, Singh reviewed other possible demands on the firms resources. He deluxe corporation case study that cash dividends would be held constant for the foreseeable future.

He also believed that capital expenditures would be about equal to depreciation for the next few years. Although sales might grow, working capital turns should decline, resulting in a reduction in net working capital in the first year, followed by increases later on. Both of those effects reflected the tight asset management under the new CEO, deluxe corporation case study. Exhibit 4 gives a five-year forecast of Deluxes income statement deluxe corporation case study balance sheet.

This forecast was consistent with the lower end of analysts projections for revenue growth and realization of the benefits of Deluxes recent restructuring. The forecast assumed that the existing debt would be refinanced with similar debt, but did not assume major share deluxe corporation case study. The forecast would need to be revised to reflect the impact of any recommended changes in financial policy.

Considerations in Assessing Financial Policy In addition to assessing Deluxes internal financing requirements, Singh recognized that his policy recommendations would play an important role in shaping the perceptions of the firm by bond-rating agencies and investors. Exhibit 5 presents the bond-rating defini- tions for this and other rating categories. Some large institutional investors for example, pension funds and charitable trusts were barred from investing in noninvestment-grade debt, and many individual investors shunned it as well.

For that reason, the yields on noninvestment-grade debt over U. Treasury securities i. For pertinent data on the rating categories, see Figures 3 and 4. The ability to issue noninvestment-grade debt depended, to a much greater degree than did investment-grade debt, on the strength of the economy and on favorable credit market conditions.

Theres a range over which the risk you take for more deluxe corporation case study is de minimus. The penalty is not only in the form of higher costs, but also in the form of possible damage to the Deluxe brand. We dont want the brand to be sullied by an association with junk debt.

For those reasons, Singh sought to preserve an investment-grade rating for Deluxe. But where in the investment-grade range should Deluxe be positioned? Exhibit 6 gives the financial ratios associated with the various rating categories, deluxe corporation case study. While the rating agencies looked closely at a number of indicators of credit quality, Deluxes managers paid particular attention to the ratio of earnings before interest and taxes EBIT to interest expense.

Singhs recommendations for the company would require the selection of an appropriate target bond rating. Thereafter, deluxe corporation case study, Singh would have to recom- mend to the board the minimum and maximum amounts of debt that Deluxe could carry to achieve the desired rating. Flexibility Singh was aware that choosing a target debt level based on an analysis of industry peers might not fully capture the flexibility that Deluxe would need to meet its own possible future adversities.

Singh said: Flexibility is how much debt you can issue before you lose the investment-grade bond rating. I want flexibility, and yet I want to take advantage of the fact that, with more debt, you have lower cost of capital, deluxe corporation case study. I am very comfortable with Deluxes strategy and internal financial forecasts for its business; if anything, I believe the forecasts probably underesti- mate, rather than overestimate, deluxe corporation case study, its cash flows, deluxe corporation case study.

Accordingly, Singhs final decision on the target bond rating would have to be one that maintained reasonable reserves against Deluxes worst-case scenario.

Cost of Capital Consistent with managements emphasis on value creation, Singh believed that choosing a financial policy that minimized the cost deluxe corporation case study capital was important. He understood that exploitation of debt tax shields could create value for shareholders up to a reasonable limit, but beyond that limit, the costs of financial distress would become material and would cause the cost of capital to rise.

Singh relied on Hudson Bancorps estimates of the pretax cost of debt and cost of equity by rating category see Exhibit 8, deluxe corporation case study. The cost of debt deluxe corporation case study estimated by averaging the current yield-to-maturity of bonds within each rating category.


Case Deluxe Corporation by Da Gui on Prezi


deluxe corporation case study


Deluxe Corporation. CASE In the late summer of , Rajat Singh, a managing director at Hudson Bancorp, was reflecting on the financial policies of Deluxe Corporation, the largest printer of paper checks in the United States. Earlier in the year, Deluxe had retired all of its long-term debt, and the company had not had a major bond issue in more than 10 years. Except: The level of flexibility or reserves The mix of debt and equity Financing requirements: 1. buyback spending 2. strategic acquisition 3. cash dividends 4. financial flexibility Question 6: What should Singh recommend? Question 1: Question 4: which rating has lowest overall. Summary Deluxe Corporation is the dominant player in check-printing industry. In the past, its sales increased at a compound annual rate of 12% and occupied 49% market share in US. However, new forms of payments encroached on the demand of check-printing industry. The demand for printing check falls at 1% to 3% annually. The core business of Deluxe faces a big challenge%(54).