Q3.

Analyse the situation qualitatively and recommend any future action

Deluxe Corporation which was one of the largest players in printed paper checks industry in
USA, is now facing declining growth because of alternative payment options like credit cards,
debit cards etc. Because of easy availability and accessibility of Internet, the popularity of these
alternative modes of payment have been increasing rapidly, which has led to declining market
share for printed checks industry. There has been a decline of around 1-3%. Due to this decline,
they had diversified from their core business but not shut it completely. In order to mitigate from
the revenue growth decline, complete reorganization was done to reduce operating expenses.
The company had had many rounds of share repurchase, so the only option now left with them
was that of debt financing. The current debt level calculated with debt ratio (operating
income/debt service) was approximately 1.87, which indicates that Deluxe was below required
level for any rating category. The market was matured that was indicated by intense price
competition. The market decline may also be a result of consolidation of banking sector.
Following financing requirements are recommended- working capital, capital asset repurchases,
acquisitions, repayment of outstanding debt, constant payment of dividends, securities
repurchase.

2001 2002 2003 2004 2005 2006

EBIT Margin 0.2659878 0.2669704 0.2670091 0.267026 0.2670176
Net Profit Margin 0.146433 0.1630024 0.1636295 0.1636891 0.163741 0.1638097
Operating Leverage 1.6132479 1.6318031 1.6315545 1.631196 1.6307829 1.6300478
CASH/T ASSETS 0.0346195 0.3158028 0.4726813 0.5720988 0.6408423 0.6912789
$ $ $ $ $ $
DEBT 161.50 161.50 161.50 161.50 161.50 161.50
$ $ $ $ $ $
EQUITY 78.70 195.20 315.80 440.90 570.80 706.20
D/E 2.0520966 0.8273566 0.5113996 0.3662962 0.2829362 0.2286888
$ $ $ $ $
Interest Coverage $ - 86.20 87.90 89.68 91.65 93.85

Roe Five Factor

Asset/Equity 3.523507 2.0163934 1.6285624 1.4502155 1.3477575 1.2810818
Sales/Assets 4.6101695 3.2934451 2.5607622 2.1010322 1.7846094 1.5539958
$ $ $ $ $
PBIT/Sales $ - 0.27 0.27 0.27 0.27 0.27
PBT/PBIT 0 1 2 3 4 5
PAT/PBT 0.6198675 0.612819 0.6129124 0.6130471 0.6132024 0.613479
ROE based on above 0 1.0824795 1.3647878 1.4962577 1.5753329 1.6305579
ROE Check -Direct formula 2.3786531 1.0824795 0.6823939 0.4987526 0.3938332 0.3261116
 2001 $2,000.00
Total Cost/Sales 0.7637672 0.7791241
Variable Cost/Sales 0.354975 0.358755
Fixed Cost/Sales 0.4072278 0.4145086

Based on the 5-step DuPont Analysis the ROE is increasing, which is a positive factor. This is
not reflected in the calculation of ROE using the direct formula. Debt to Equity is decreasing
while the equity is increasing and the total debt (long- and short-term) is constant.

Income statement 2001 2002 2003 2004 2005 2006 CAGR

Net sales $1,278.40 $1,296.30 $1,317.00 $1,343.40 $1,372.90 $1,405.90 1.92%
Operating profit $ 302.00 $ 344.80 $ 351.60 $ 358.70 $ 366.60 $ 375.40 4.45%
Interest expense, net $ 3.20 $ 4.00 $ 4.00 $ 4.00 $ 4.00 $ 4.00 4.56%
Pretax income $ 298.80 $ 340.80 $ 347.60 $ 354.70 $ 362.60 $ 371.40 4.45%
Tax expense $ 111.60 $ 129.50 $ 132.10 $ 134.80 $ 137.80 $ 141.10 4.80%
Net income $ 187.20 $ 211.30 $ 215.50 $ 219.90 $ 224.80 $ 230.30 4.23%
Dividends $ 94.90 $ 94.90 $ 94.90 $ 94.90 $ 94.90 $ 94.90 0.00%
Retentions to earnings $ 92.30 $ 116.40 $ 120.60 $ 125.00 $ 129.90 $ 135.40 7.97%

Balance sheet
Cash $ 9.60 $ 124.30 $ 243.10 $ 365.80 $ 493.00 $ 625.40 130.56%
Working capital $ 116.60 $ 118.20 $ 120.10 $ 122.50 $ 125.20 $ 128.20 1.91%
Net fixed assets $ 151.10 $ 151.10 $ 151.10 $ 151.10 $ 151.10 $ 151.10 0.00%
Total assets $ 277.30 $ 393.60 $ 514.30 $ 639.40 $ 769.30 $ 904.70 26.68%

Debt (long and short-term) $ 161.50 $ 161.50 $ 161.50 $ 161.50 $ 161.50 $ 161.50 0.00%
Other long-term liabilities $ 37.00 $ 37.00 $ 37.00 $ 37.00 $ 37.00 $ 37.00 0.00%
Equity $ 78.70 $ 195.20 $ 315.80 $ 440.90 $ 570.80 $ 706.20 55.09%
Total capital $ 277.20 $ 393.60 $ 514.30 $ 639.30 $ 769.30 $ 904.60 26.69%